THE WORLD BANK

Speakers:

Jean-Paul Gauthier: Deloitte / WEPZA

Claude Baissac: Eunomix / WEPZA

Angelica Bertoli Lawson: London & Regional (Panama)

Discussant:

Ganesh Rasagam: AFTFP

International Trade Department BBL Series

World Bank, Washington DC, 14 March 2011

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LESSONS IN SEZ IMPLEMENTATION:

Stories from the trenches

Pet peeves of a Zones Junkie:

Behind the Data,

Beyond the Toolkits and Templates

Jean-Paul Gauthier, Esq., Deloitte Consulting LLP

Dep. Secretary Gen., WEPZA

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Jean-Paul’s Pet Peeves

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• Can you “fix” a small area in a “big,

messed-up country”?

• Is just any Zone, anyplace enough?

• Should the Law come first?

• What does it really take to make a Zone a

Special Economic Zone?

• Some controversial parting thoughts

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Can you “fix” a small area in a “big, messed-up

country”?

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• Legally, zones are by nature “porous” with areas of shared jurisdiction

• Physically, zones – Do not always have direct access/egress to trade infrastructure

– Are “last mile” tools, but require connections to transport and other public service grids

– Serve domestic as well as internal and external markets

• From a capacity perspective, zones are wholly a part of the larger country in which they are located as regards:– Governance

– Corruption risk

• Zones work best in cohesive political systems (often, small countries)

• Zones are multiplier tools; “Garbage in = Garbage out”

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Is just any Zone anyplace enough?

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• Location, location, location… and logistics

• Zones form part of an overall economic ecology, with established logistics infrastructure, patterns and options, distribution nodes, consumption/resource/labor markets, etc.

• In poor-infrastructure environments, the transaction costs of a 50km, 30km or even 15km additional movement can easily outweigh the benefits provided by new serviced plots

• Do not forget the white elephants (Tinapa, IDZs, Most Bangladeshi EPZs, Afghan IPs, Batam in terms of RoI…)

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Should the Law come first?

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• A zone’s USP depends on the ranking of investment challenges:– in the country

– in the broader region

• In Panama Pacifico, a successful Bank-assisted zone project, Labor Law was the No.1 investment constraint but powerful unions could politically at best be persuaded to test innovations in a small lab

• Elsewhere, the No.1 issue may not be an issue which the Law can fix (factor inputs, access, infrastructure, etc.) and the Law may be a guarantor of merely marginal change

• Laws & Regulations with proper “ownership,” that will get implemented, take a long time to prepare and pass

• Laws (and Master-plans!) should not be “designed in a vacuum” –they are purpose-built tools for specific industries, specific companies, specific problems –and should depend on a sound understanding of the business ecology

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What does it really take to make a Zone a Special

Economic Zone?

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“I don’t want a sorta special economic zone,

I don’t want a kinda special economic zone,

I want a SPECIAL economic zone!”

– Muntasser Okla, Former Head of the Jordan

Investment Promotion Corporation (now JIB),

Regarding plans for Aqaba SEZ circa 1999

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Jean-Paul’s Check-List

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• A business case (markets, products, effective demand): A “there, there” vs. “build it and they will come”

• A unique or inspirational vision, and excitement

• A long-term view by all stakeholders– Willingness to get the planning right

– 10 years+ of reserves of patience

– Commitment to a participative, highly visible, national process

– Willingness to relentlessly go back again and again, and refight lost battles

• Clear, high-level political commitment to change at least a couple of (2+) things that rank at the top of investors’ concerns

• The right site… maybe even the best site

• Money (infrastructure costs)

• Lobbying

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Case study match-ups

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Panama

Pacifico SEA

Aqaba SEZ Dhaka EZ Tinapa Biz.

Park

Botswana

Innovation

Hub

Biz. Case √ √ √ X √

Vision √ X √ √ √

L-T Commit √ √ √ X X

High-level

Commit

√ √ ? √ X

Commit to

2+ Key

Reforms

√ √ √ X X

Right Site √ √ √ X √

Pub. Money √ √ √ √ √

PPD/PR √ √ √ X √

How do Athi River SEZ, N’Sele SEZ, Banjul J22 Gateway match up?

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By the way…

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• You can have more than one Zone regime in certain circumstances

• The private sector cannot regulate and some Middle-Eastern public zones do pretty well

• Charter Cities are just a theoretical idea to get us thinking but imperialism is of course dead

• China’s SEZs are not really SEZs as the term is used elsewhere

• If One-Stop-Shops are real, they are meaningful

• Smart tax incentives are revenue-generating

• TTLs should be neither too dogmatic nor too willing to please their client Governments

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Acknowledgements to some of my “Zones Junkies”

mentors

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• Kishore Rao

• Keith Molkner

• Santosh Hejmadi

• John Arnold

Claude Baissac, Eunomix

Secretary General, WEPZA

World Bank, Washington DC, 14 March 2011

The Purgatory of SEZ Project Initiation, Planning and Programming

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• Zones work: if they contribute only about 1 % of global employment, they contribute almost 20 % of exports

• In some countries (China, Korea, Mexico, Malaysia, Mauritius, etc.), they have been transformational

• However, our perspective on zones is fundamentally biased by the fact that the world is littered with failed zones – and Africa notably

• We thus derive the mistaken lesson that, on the whole, zones have been an ambivalent policy tool to achieve static economic benefits and encourage broad reforms

Introductory statement

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• Most zone projects fail to achieve their

objectives

• Most of these failures are attributable to human

error, versus market forces (in the latter case)

• Most of these human errors occur upstream, in

the policy and programmatic phase of projects

• Most of these errors are a direct manifestation of

broader political economic realities, and notably:

Human error versus market forces

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i. State autonomy from vested interests – the

ability to formulate and implement policies that

are not aligned with vested interests

ii. Catalytic policy leadership – the presence of

policy champions that have enough political

clout to see a project through

iii. Administrative capacity - the presence of

bureaucracies to transform the policy into a

project and deliver its implementation

The political economy of success

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• The implications of the above are sobering

• Indeed, there is ample evidence from the trenches and from data that zone projects are simply beyond the reach of countries that do not possess the necessary political economic attributes –there is likely to be a strong correlation between state strength and zone success

• The notion that zones would represent an achievable policy options in states where “everything else has failed” is thus problematic

The political economy of failure

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• Yet, these factors have systematically been

underestimated, both ex post and ex ante

• The emphasis has usually been on economic, site,

regulatory and broad institutional fundamentals

• Most projects are designed as “plug and play”,

ignorant of, and indifferent to crucial political

economic factors that condition feasibility

• This undetected misdiagnosis, in more fragile

states, introduces a great risk to project viability

From Unknown Unknowns…

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• One of the ways to decrease project risk has been to bring in the private sector through PPPs

• But the private sector does not get involved until implementation, and, the state still needs to act as project initiator and create key project goods:

I. Decision to launch SEZ programme

II. Strategic planning

III. Study phases

IV. Regulatory and institutional phase

V. Engagement with potential partners

(The paradox of private sector involvement)

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• The private sector cannot, and should not, be charged with these tasks, for obvious reasons

• So, there is a bit of a paradox here: the private sector is expected to decrease the burden of the state, but cannot intervene if the state is too fragile.

• The state is to act as a catalyst, so the private sector can act as a catalyst, because the state cannot act as a catalyst for economic transformation in the first place…

(The paradox of private sector involvement)

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• First, we need to recognise upfront, and properly document, the obstacles that will confront a project in strategy, design and implementation

• Second, we need to determine whether these obstacle can be addressed with a sufficient degree of confidence

• Third, we need to determine whether we have the will, lasting power, and capacity to assist

How do we decrease initial project risk?

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• It is generally tempting to outsource all key deliverables to external agents – consultants, donor experts, etc. – to bypass critical weaknesses in government

• It is also tempting to concentrate key strategic capabilities outside of, and over-assist government. A typical way is to give figurative roles to oversight and technical committees. The real job is done outside

• Worse still, all key strategic decisions are made on behalf of government, usually through the careful pre-selection of strategic options that reduce the range of what is feasible

Deadly sins of early project support

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• It is tempting, and reassuring, to follow a mechanical “best practice” approach to the sequential flow of phases and steps. This tends to mask the real issues that need to be addressed by the project, and removes contextual requirements. It also allows strategic decisions to be fed pre-digested to government

• It is also tempting to attach oversized importance to isolated symbols of progress, like the creation of an oversight committee, the selection of a site, or a law. Often this is done by external agents to consolidate support, and can backfire

Deadly sins of early project support

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• If we are to assist, we must align our own indicators of success to the long term indicators of the project: we must align cycles to the medium and long term

• We must conduct upfront thorough political will and administrative capacity due diligences to identify the critical vulnerabilities and strengths that will condition success

• We must support the development of core capabilities within government to think, learn, decide, plan, execute. This requires patience on the part of the parties. Government will expect the usual

Improving the odds

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• If government is not willing to go through this

preparatory phase, we must consider the

likelihood of success of the project as being

extremely low, and probably withdraw support

Improving the odds

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Acknowledgements to my “Zones Junkies” mentors

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• Richard Bolin

• Robert Haywood

• Peter Ryan

• Jim O’Gara