Upload
claude-baissac
View
218
Download
5
Embed Size (px)
DESCRIPTION
A reflection into the role of the feasibility cycle in fostering strategic ownership of SEZ projects in African states.
Citation preview
1 | P a g e
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
2 | P a g e
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.
3 | P a g e
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,
4 | P a g e
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
5 | P a g e
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
6 | P a g e
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
7 | P a g e
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.
8 | P a g e
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
9 | P a g e
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
10 | P a g e
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!