The Rise of Special Economic Zones in ... - The World Bank



Bangladesh Policy NotesThe Rise of Special Economic Zones in Bangladesh Key issues and challengesThe government recognizes that inadequate basic infrastructure and a severe shortage of accessible land discourages greenfield investments and industrial development. Bangladesh has one of the world’s most cost competitive, sizeable supply of labor, ideal for labor-intensive production in sectors such as garments, footwear, leather products and toys. However, despite large development success fueled by RMG, microfinance, and remittances, three out of five Bangladeshi workers still find themselves in vulnerable employment. The country also has one of the world’s highest population densities and some of the land is either occupied or inundated by water. Coupled with an underdeveloped power sector, a challenging land records and titling system, and the uncertainty associated with regulatory red-tape, investors seek safe havens with quality infrastructure and services for their investments. Bangladesh has a disappointing track record of attracting foreign direct investment (FDI), especially compared to countries in East Asia. The supply of serviced land with improved governance could potentially help attract more investment.The Bangladesh Export Processing Zones Authority Act of 1980 was aimed to boost industrialization and job creation through the promotion of trade and investment and it has had some success. The Act led to the establishment of the semi-autonomous Bangladesh Export Processing Zones Authority (BEPZA), which leases serviced land to industrial tenants in eight export processing zones (EPZs) across the country, primarily focused on the garment sector. Investors enjoy several incentives of a fiscal (tax holidays, duty free imports, exemptions of dividend tax, etc.) and non-fiscal (100 percent foreign ownership permissible, full repatriation of capital and dividend, etc.) nature in addition to a host of support services aimed to help investors navigate the formidable bureaucracy linked to doing business. In July 2017, BEPZA hosted 463 tenants in both RMG and non-RMG sectors (like chemicals and footwear) —56 percent of which were fully foreign-owned, 16 percent were joint ventures between foreign and domestic investors and the remaining were local ventures. BEPZA estimates that in the two decades until FY2017, the EPZs attracted US$4.3 billion of investment (average annual FDI inflows in Bangladesh are about US$2 billion), contributed to US$59.4 billion of exports earnings (19 percent of the total in FY2017) and employed 481,000 direct workers. The trend now is to move away from the EPZ model, because it has weaker domestic linkages and instead cater both to the domestic and the export market. The goal is also to crowd in more private participation in developing and operating zones.The Bangladesh Economic Zones Authority Act and the Bangladesh Hi-Tech Park Authority Act—both of 2010—created two more agencies like BEPZA and these three agencies have overlapping mandates. The two new acts led to the creation of two new semi-autonomous agencies—the Bangladesh Economic Zones Authority (BEZA) and the Bangladesh Hi-Tech Park Authority (BHTPA)—tasked to oversee the expansion of economic zones (EZs) and hi-tech parks (HTPs) in the country. These new types of zones operate under different regulatory regimes from BEPZA, and allow for production aimed both for domestic and foreign markets. BEZA aims to develop 100 EZs by 2025, including in underdeveloped regions. Unlike the EPZs that are publicly owned and operated by BEPZA, BEZA and BHTPA would rely mainly on private capital and expertise to build and operate the new zones but with important government oversight. Thus, Bangladesh has today got three agencies that sometimes compete for the same investors although they come with somewhat different rules and have different offerings. In addition, other agencies like the Bangladesh Small and Cottage Industries Corporation also develops some industrial infrastructure for manufacturers.Bangladesh’s development agenda using special economic zones is affected by internal and external challenges that the government will need to address. These include:Legal and regulatory mandates: The multitude of public agencies with sometimes overlapping mandates offers choices to prospective investors but it is a complex and sub-optimal approach to development. The legal framework for public private partnership based institutional arrangements will need to be carefully laid out with a clear perspective on fiscal contingent ernance and technical capacity: Apart from BEPZA that has nearly four decades of experience, the new agencies tasked with the expansion of industrial infrastructure are young institutions and it will take time to build the technical capacity to be effective regulators and partners in negotiations with leading industry groups and foreign multinationals. Political interference in site selection can be a threat to investment decisions and the ability of senior management to handle such pressure will be crucial. Safeguards management: Social and environmental safeguards management is constantly in the focus and an area where the agencies and ministries will need to strengthen technical capacity, probity and enforcement. The destructive forces of climate change are also having an increasingly negative impact along rivers and coastal areas where many SEZs are situated due to land scarcity. Connections to the national investment climate: The attractiveness of Bangladesh as an investment destination is dependent on the stability of its economic policies, the playing field that the government offers investors, the overall governance situation outside the SEZs, and the efficiency of transport and logistics networks connecting the SEZs to air- and sea-ports. Policy RecommendationsTo address these issues, in the short term, the government needs to:Establish an internal government task force, including select international experts, to annually review progress of the agencies with regards to site selection and public investments decisions. The aim would be to avoid mission creep, wasteful investment decisions, and encourage compliance of private concessionaires.Establish an environmental panel to review and propose initiatives to bring existing, and new, common effluent treatment plants and other joint/shared environmental infrastructure in the right hands and with the necessary finances.Standardize requirements and incentive structures across SEZs to ensure a level-playing field.To address these issues, in the medium to long term, the government needs to:Integrate SEZ development plans better with national plans around transport and logistics corridors (road, rail, sea, air), human resources development, trade and investment policies (multilateral, regional, bilateral when relevant), support institutions linked to the protection of intellectual property rights, national quality infrastructure (testing, certifications), and fiscal policy.Conduct a strategic review of the regulatory environment and public agency setup, including BEPZA, BEZA and BHTPA to propose coherent joint visions and policy reforms that would bring synergies, capacity transfers and potential mergers of agencies. At a minimum, this exercise would spell out clear operating guidelines/rules to avoid duplication and wasteful competition.Allow for full autonomy in recruitment decisions so the agency(ies) can adopt human resource (HR) policies beyond government HR policies. This would aim to ensure that positions are filled with motivated technical people possessing the required legal, financial, engineering and planning expertise. ................
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