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Planning and managing the SEZ feasibility process

A presentation at the 2011 African Free Zones Association Convention

Claude Baissac

May 12 2011, Dar es Salaam

The presenter

Claude Baissac is Secretary General of the World Economic Processing Zones Association, a

body founded by UNIDO in 1978, and managed by The Flagstaff Institute for over 25 years –

most of these under the enlightened and inspiring leadership of Richard L. Bolin. Claude is a

self-described zone ‘buff’, infected by the zone virus in his childhood in Mauritius. While he

has other professional pursuits and act as advisor on strategy and risk for mining and

investment companies throughout Africa, he has remained dedicated to advancing

knowledge creation and sharing on zones. He is currently involved in a number of projects in

Africa, mostly through the World Bank. He is also working with Jean-Paul Gauthier on a new

business in spatial economic development instruments, a firm called Locus Economica.

Introduction

This conference is my first African zone conference since an event back in 2004. Back then,

African zone programmes were few, and represented marginal efforts at growth and

transformation. Back then, zones weren’t very popular.

What a difference 7 years make!

For a long-time zone advocate like me, writing on zones since 1993 and researching how the

Mauritius model could change Africa, this change is extremely rewarding; particularly so

when so much support is being providing by previously more sceptical international

organisations.

Yet, while I am genuinely enthusiastic about the wave of new projects and the restructuring

of existing zone programmes, I am experiencing doubt about this wave. I am concerned

about its sustainability, notably over fundamentals. Looking at the figures shared by other

presenters, it appears to me that while it is true that Africa has taken off, we are not seeing

a commensurate growth in long term value adding activities, be they in services, industry or

the primary sector. Our boom, it would seem, is primarily rent-based, pulled by the

extractive sector, and the growth in services is consumption- rather than production-driven.

Our boom depends on external demand, which is fuelling internal consumption.

Special economic zones represent an ideal instrument to correct this bias, and create the

foundation for virtuous growth by attracting more sustainable economic activities, notably

those who employ more labour, equip it with transferable skills, and generate a

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manufacturing and world class services culture. SEZ, if adequately used, can be instruments

of structural economic transformation.

Yesterday I raised a question over the odd capital intensity of Africa’s zones. That capital

intensity is a clear indicator of the region’s lack of comparative advantage in the types of

activities that pulled most of Asia and part of Latin America out of poverty and rent-based

economies. This capital intensity tells me that zones in Africa have not acted as they should.

They are not agents of structural change. Rather, they serve niche markets, regional and

international. As such, they simply cannot provide the foundation for sustainable

continental growth.

We must take the opportunity given to us, as zones are embraced, to ensure that they fulfil

their potential.

The topic of my presentation may appear disconnected from this imperative. Far from it!

Planning and managing the SEZ feasibility process is a vital part in the establishment of a

zone programme. It should act as the crucible through which a successful is prepared,

cooked and presented to the market. For, we must never forget, zones are commercial

products offered to buyers who have ample choice. No one has to buy that product if it does

not provide value.

My work for today has been made easy by the IFC’s excellent work in drafting the

Practitioner’s Toolkit, a very comprehensive didactic product which will provide a normative

framework on which we can base our work. Having had the privilege to study and use the

Toolkit, I wish to congratulate Gokhan, his collaborators and some of my eminent colleagues

from Deloitte and elsewhere for this excellent of contributions to our field. The Toolkit, in

my mind, is a foundation around which more products dedicated to improving in planning

and managing of zones establishment should be built.

Core definitions

SEZ programme: the decisions, strategy formulations, feasibility processes, and legislative

and administrative acts that form part of the policy to develop a zone regime and establish

one or several special economic zones, and the operation of that programme through the

development and operational life of zones. An SEZ programme is multi-generational,

spanning decades.

SEZ project: the activities that are undertaken – including strategy, planning, partnering,

funding, establishment of legal entities, signing of MOUs, agreements and contracts,

securing of land and associated titles, construction, commissioning, marketing, selling or

leasing of land – in order to develop an SEZ up to its operational start.

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SEZ strategic framework: the first phase of a zone programme, which defines the

programme’s core socioeconomic development goals, determines if the programme and SEZ

projects are feasible, defines the regime, and establishes the programme’s delivery schedule.

SEZ regime: the legal, regulatory and institutional framework that establishes the zone

policy in law and equips it with the administrative structure for its governance. This includes

the zone law or laws, the regulations that set out how the law is implemented, and the

government institutions that are created to administer the laws and regulations.

Observations from the field

As Tom Farole’s seminal contribution has clearly demonstrated, Africa’s longstanding

relationship with zones has not yielded much in terms of static and dynamic economic

benefits. To a few notable exceptions, mostly outside of Sub-Saharan Africa, zones have

brought little in terms of investment, employment, foreign exchange, economic value

added, and structural transformation of economies away from over-exposure to commodity

and aid dependency. Here, Tom’s policy learning is crucial:

1. There are no fundamental economic obstacles to zones being able to decisively

contribute to the region’s transformation into a budding centre of the global

economy. While there is no denying the very significant competitive pressures the

region faces from emerging markets, its staggering natural endowment, burgeoning

human capital and pivotal geography could be harnessed through an adapted zone

concept that could serve its enormous needs with great effectiveness and lead to a

progressive shift in its international standing.

2. The most fundamental obstacle to this is self-inflicted: zone programmes have

suffered from weak design, uneven and inconsistent implementation, and have not

been adapted to keep up with the dynamic ecology of the international economy –

let alone be leaders in innovation and reinvention. As shown by Tom, political

support has been chronically insufficient, the quality of the infrastructure provided

has been characteristically low, the investment climate has been uncompetitive –

notably in terms of the failure to provide a compelling advantage to firms in relation

to the cost-effective and smooth operation of business over the long term. One stop

shops are not the be all and end all of zones!

In my wanderings from East to West and North to South, my observation is that most

governments at once overestimate and underappreciate what establishing zones signify.

They overestimate their ability to establish successful programmes, and display what I can

only call a casual commitment – political, administrative, regulatory and financial – to them.

They underappreciate the sheer magnitude of what is required, and the consistency at

which it is required. Not over the next two years, not over the passing of legislation or the

sod turning ceremony, not the first investor, or even the first ten, but the continuous,

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disciplined, adaptive, dedication required over the ten, fifteen and twenty years that will

represent the first few phases of what is in fact a multi-generational commitment.

As a result, I have found that most governments take a casual view of the initial few steps

toward the establishment of zones, and thus insufficiently engage themselves to the

essential task of committing the political, administrative, regulatory and financial capital.

Yet, and this is inescapable, without this engagement, without these resources, zone

programmes cannot succeed. There is no counterfactual case here, no lucky break.

Of course, there are no guaranties: even the best-laid plans, the most dedicated efforts, the

most consistent endeavours can lead to failure or ambivalent results. Zones are market-

augmenting policy instruments, not market-displacing ones. Competition to attract that

most sought after prize, the employment-creating, export-generating, value added-

producing economic operator, is intense and permanently evolving. International economic

conditions are harsh and unstable. Technology changes occur at an increasing rate, and

production and consumption patterns are experiencing historic shifts.

But, once a country is engaged on the track of wilful economic transformation, economic

obstacles are turned into opportunities to discover new sources of advantage. In this

virtuous circle of creative destruction, I can only make reference to my own place of origin,

Mauritius – which I covered in Tom’s upcoming collection of zone case studies. I will quote

A. Subramanian, who wrote the following in 2009:

“(…) the question often posed is: what will Mauritius do next? What industries or services will replace the inevitable decline of sugar and clothing? While these may be interesting questions, they are almost certainly the wrong ones for outsiders to ask? The key point is that Mauritius has reached a stage of development and maturity and sophistication that, long before the outside world had even recognized the looming challenges, the Mauritian domestic system had started the necessary processes to confront them. Whether Mauritius upgrades into high-value added financial services or information technology (this is already happening), one can be confident that Mauritius will figure out a way. The world can, in fact, stop worrying about Mauritius because it has demonstrated the ability to worry for itself ”.

Are there any implications of this for planning and managing the establishment of zone

programmes and their adaptation to new challenges and opportunities?

Planning and managing the establishment of an SEZ programme as a national interest

imperative

I see plenty of significant implications:

Firstly, the process of setting up a zone programme is not something that should be

seen by governments as yet another externally imposed requirement to which they

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will comply through a nominal commitment in order to secure funding, technical

assistance or a developer. They need to see it as the quintessential expression of the

national interest and as the prime instrument through which that interest is fulfilled.

Secondly, and consequently, governments should not externalise the process to

anyone, be they donors, consultants or developers. These are partners, not

surrogates. No matter how well intended, no matter how competent or well

equipped to assist, their interests are not necessarily aligned with the national

interest, and their commitments are objective- and time-bound.

Thirdly, and to the contrary, governments should extensively invest in the process

through their own means, no matter how limited these are. The principle of action

here should be the establishment of the comprehensive ownership of the process,

through a sustained commitment to an objective, principled, efficient set of tasks

designed – at the very least – to identify achievable socioeconomic goals, set a

realistic programme strategy and test the feasibility of identified options. This

“endogenous anchoring” is a sine qua non condition for success, no matter how

small, no matter how technically limited.

The above points are not theoretical. They are pragmatic and strategic. This much will be

illustrated by another point of experience over what happens when this endogenous

anchoring does not take place:

Public-private partnerships are the order of the day. There is much to rejoice about this, as

PPPs are an effective model toward the development, financing and operation of SEZs; one

which balances risks and rewards according to capabilities, means and appetite; one which

brings complementary of expertise and experiences; one which efficiently harnesses private

utility for public outcomes; one that brings the flexibility required to adapt to economic and

market conditions; one which brings innovative, bankable approaches and concepts that will

give a zone a competitive edge.

There is, however, a very serious possibility that some types of PPPs could deliver negative

returns.

I see from the field evidence that this is the case in some countries currently developing or

restructuring zones. In these countries, and in many more I am sure, there is very little

endogenous anchoring. In the most extreme cases, governments seem to have externalised

the entire responsibility of the development process to their partners, including the

definition of socioeconomic objectives (beyond fairly trivial generalities), the conduct of

feasibility studies, and key decisions such as zone location, size, sectoral focus, and so on. In

these cases, governments are simply hosts, purveyors of whatever their partners have

identified is a comparative advantage to them. Government’s main deliverable, as it were, is

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usually reduced to the provision of a legal framework with generous tax incentives and

other concessions.

Some would say this is just fine, that the global market for zone developers and operators is

simply at play, that market forces are doing their things, and that governments are acting

wisely. Yet, there is little evidence from the cases I have seen that market forces are at play.

To the contrary, often market forces are avoided through non-competitive practices that

eliminate the possibility of choice and bypass open bid processes.

These projects, in my view, fail to pass the test of public utility because such utility cannot

be demonstrated ex ante through an objective, independent, iterative process of goal

definition, configuration and validation. The country gets selected, for reasons often

unknown and unquestioned, and gets whatever it can get. The absence of a formal

framework of evaluation means that government does not have a benchmark against which

to test and validate the project, and has no tool to assess whether it is getting a fair deal out

of it or not. This is all the more concerning because zone projects tend to come with high

direct costs to governments, as they usually come with requests for infrastructure

investment, population resettlement, utility subsidies, tax incentives, and the likes.

Zone projects also come with high opportunity costs: there is rarely the economic space for

more than one or two zones, and poor cost-benefit performance will have a very negative

impact on the economy, the political economy, and future efforts at developing similar

projects – even if properly structured. Stated simply: zone projects are too strategic to be

allowed to fail through a lack of endogenous anchoring and the absence of a proper

planning and validation process.

These projects also are highly likely to fail. The quid pro quo between governments and

developers is usually untenable because it is usually based on unacknowledged, unspoken,

contradictions in goals and means. Often, terms of understanding are loosely defined,

without appropriate performance benchmarks, be it in terms of timelines, sums invested,

sectors targeted, infrastructure delivered, investment promotion, and so on. Where

benchmarks are defined they often cannot be executed because contracts are inadequate.

Exit clauses either do not exist or are not enforceable.

Today’s model zones in Asia, Latin America and the Middle East are the very illustration of

the power of endogenous anchoring. These zones took the best other zones in other parts

of the world had to offer, hired the best advisors they could get, and combined these with

their own best technocratic capabilities driven by a clearly expressed and sustained political

commitment from the top. These then newcomers set their own sovereign socioeconomic

objectives, and devised zone development processes that best fulfilled these objectives.

More often than not this was a slow, time consuming, and laborious process. I am sure

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many of my colleagues here can tell “war stories” that will be both entertaining and

illuminating.

Progressively, though, they filled their knowledge and competence gap, and over time

became experts in their own right. They also acquired some financial capabilities. With

success came recognition, and through divers formats, they in turn became purveyors of

expertise and funding. They became leaders. They changed their countries.

The feasibility process

This lengthy preliminary to the feasibility study – I should rather use the term feasibility

cycle – makes it clear that I see this discrete technical step as much more than a simple

discrete technical step. The feasibility cycle is a fundamental component in the zone

development process. Technically, its importance cannot be overstated. In terms of creating

endogenous anchoring, it is a crucial step, and should be seen as both a manifestation of

that anchoring and a tool in the service of its consolidation.

It needs to be clear in everyone’s mind that one cannot possibly seek to successfully attract

private sector partners without having conducted the necessary feasibility analysis.

Developing zones today is in a large extent a commercial proposition. Going to the market

or the bank without a business case is a recipe for failure. Seeking to attract private sector

partners, and seeking to develop a zone programme effectively, without a proper business

case, is a recipe for failure.

Locating the feasibility cycle in the zone development process

The feasibility cycle forms part of the SEZ strategic framework. As highlighted in Slide 1 on

the screen, strategy represents the first of four broad phases in the development process.

Depending on one’s approach, strategy either encompasses the decision to establish the

programme, and the creation of the programme governance and management structure, or

it precedes it. In my view, these two phases precede strategy, which is an activity of the

programme, and is undertaken by its governance and management structure. This is

reflected in Slide 2.

The strategy phase comprises the following broad steps (Slide 3):

1. Defining the socioeconomic objectives of the programme.

2. Determining the broad principles of programme development, and notably assigning

the key institutional roles in managing and implementing the programme.

3. Proposing the programme’s configuration in terms of its key attributes, and testing

this configuration for validation. This is the feasibility cycle proper.

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Components of analysis

While the content of the feasibility cycle is fixed, its structure depends largely on the type of

zone programme that is to be established, the roles that will be shouldered by government

and the private sector, and by the number of zones intended to be developed. In most

African zone programmes currently under way, there is a clear distinction between the

establishment of the regime and the development zones, with the regime preceding, and

one or two pilot zone projects being considered with private sector participation.

In this particular model, the feasibility cycle is broken down in two stages:

1. The prefeasibility stage, which in most zone projects is undertaken by or on behalf of

government.

2. The feasibility stage, which in projects with significant private sector capital

participation is undertaken by the developer, or in cooperation with the developer.

The feasibility cycle serves the double purpose of validating the programme strategic

intention and configuring it according to the results of core studies. It thus represents an

essential activity in the strategic process, and one which will in a large part determine the

success of a programme.

The feasibility cycle must thus provide detailed answers to three crucial questions:

1. What are the specific socioeconomic objectives that are allocated to the

programme?

2. On that basis, what type or types of zones, what regime and what location or

locations, and in what basic configuration, are the most likely to deliver?

3. Given the ex-ante performance of the proposed configuration, economically and

financially, what are the most effective respective roles for the public and private

sector in the implementation of the programme, and specifically of individual zone

projects?

In principle, thus, at the end of the feasibility cycle government should be in possession of a

blueprint for its zone programme, containing key answers to key questions, proposing key

structural features of the programme and its pilot project or projects, having at least a draft

of the regulatory and administrative regime, including a law or set of laws, a PPP framework,

the financing structure, and a fairly detailed delivery plan.

To answer these questions, the cycle will encompass a number of interlocking, heuristic and

iterative steps. It is essential for me to emphasise here the fact that the cycle must be an

open process focused on learning, where each new step is used as a tool to interrogate and

build on the previous steps. This is easier said than done, given the often witnessed

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disconnect that exists between the political governance structure of the programme and the

technical structure. Governments want zones tomorrow, and put constant pressure to get

there. This is where the trade-off between good and not so good political support needs to

be managed effectively. Managing this is the role of the Steering Committee, who needs to

ensure that the technical process is sufficiently sheltered from unreasonable political

pressure to go fast and burn the stages.

The feasibility cycle must therefore be objective, independent, transparent and open. It

must be based on hard facts, be they of economic, fiscal, financial, legal, institutional,

geospatial, social or environmental. It must look at these facts independently from whatever

other agendas exist – public or private – and feedback the results into the design of the

programme. It must be transparent, from government to the public, from the developer to

government, and from the experts to government. The process must not simply tolerate

robust exchanges of perspectives and ideas and debates. It must foster them in order to

take full benefit of the varied objectives, perspectives and interests that are at play. This is

critical.

In terms of steps, the feasibility cycle must begin through a series of economic analyses who

will interrogate the socioeconomic objectives and calibrate these according to results. These

analyses will ultimately deliver the economic configuration of the programme, assisting in

defining its key characteristics, such as: economic activity and sectoral focuses, size of the

market for zone operators and thus for zone developers, best potential locations for zones

in the national territory, and

Usually, it is once these economic analyses are completed that key strategic decisions on the

configuration of the programme are confirmed, and notably whether:

the programme makes economic sense or not

there is enough prospects for private sector participation in the financing,

development and management of zones

one or more pilot zones projects are warranted

where these projects should be located

Assuming the programme is validated and a pilot zone project is retained, these economic

studies will thus form the foundation on which other key processes and documents. These

will be produced in parallel but mutually informed tracks:

1. Firstly, the legal and institutional work that focuses on establishing the zone regime,

and which contains a series of well-defined steps such as legal and institutional due

diligence, followed by the preparation of a legal and institutional action plan which

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should lead to the passing of a law or several laws, the creation of the appropriate

institutions for the governance of the programme, and the framework agreements

between government, regulator, developer and manager. This will be covered by my

colleague and friend Jean-Paul.

2. The detailed work of zone planning, which involves master plan, infrastructure plan,

environmental and social mitigation, financial modelling, and so on. My colleague

Chuck Heath will discuss this.

Conclusion

I apologise to the audience if my presentation sounded like a pep-talk. But that is what it

was meant to be.

Technical issues are critical, and there is ample room for improving how we conduct the SEZ

feasibility cycle, for instance. But technical assistance is amply available, facilitated by the

international community.

What is crucial for success is to understand that nothing meaningful will happen without

endogenous anchoring.

I wish you all success. I wish you all endogenous anchoring!