The concept of Special Economic Zone means defining certain regions and giving it special tax subsidies, fully facilitated buildings and physical infrastructures with all necessary services, providing necessary procedural service systems through a one door system, establishing an export oriented industry and importing FDI and modern appropriate production technology. Experiences from various countries have shown that SEZ can be established in an area thousands of square km wide or even just a few acres. Likewise industries with full foreign ownership or also with joint investment are also found in SEZ.
SEZs have manufacturing industries, tourism, entertainment, banking services among others. In some SEZ all of the above mentioned professions are found while in others only one or limited types of businesses may be allowed. China, India and other growing Asian economies have all exercised the concept of SEZ as a new opportunity for growth.
Objective and Reason
The fact that this bill is being made to establish Special Economic Zones, provide special facilities and subsidies to industries established in such SEZs in order to aid in the social and financial growth of the country through industrialization is enthusiastic. Although physical infrastructures necessary for an SEZ has already been completed since a long time in Bhairahawa, land has already been acquired in Paanchkhal, initial studies to establish SEZ in Kakadvitta and Dhangadi have already been carried out, extensive surveys have already been carried out in Trishuli, Jumla, and Biratnagar, and steps taken to transform the current industrial zone in Rajbiraj to a SEZ, due to the lack of an Act there is seen to be a lack of commitment as well as a government policy in this direction. As SEZs mainly focus on export market and the investments in physical infrastructure as well as industry and business is very large, it is not only this Act that is needed but also necessary the commitment. The Acts provisions have been analyzed as per this condition.
In this Bill analyzing the provisions related to the provided system where there are 54 Articles, 17 provisions have “appointed or as appointed” in them. Before this there were no SEZs in Nepal or any provisions for such, and even until a few years back this was a relatively new subject in the financial sector, and neither were there any provisions related to it in other financial, industrial Acts or laws. As this is coming up as a new concept through a special Act and decisions regarding practical matters when implementing the bill will have to be taken on time, the provisions that are appointed by the Nepal government can be a little practical. However this can also portray the Acts provisions as unclear, changeable, and too affected by executive decisions. This might lead to investors being uncertain and decision makers in the government agencies under pressure to change all the time. In order to give the clarity and the stable investment environment necessary for investors as well as government agencies these provisions needed to be defined as far as possible.
The motive of establishing SEZs is not just to extend the process of industrialization but also to promote export. As the major objective of investment in this sector is to export it might be necessary to ad “export promotion” in the preamble as well.
4. Article 5 – prepare a list of industries
There are two different opinions regarding preparing a list of industries that can or cannot be established in SEZs. The first is that the SEZ authority itself prepares a list of industries and updates it from time to time. The second way is to prepare a list of industries that cannot be established due to the current Acts, laws, financial and social environment of the country and other issues and leave everything else as open. Looking at the current industrial climate in the country, while preparing the second (exclusion list) there is no possibility of keeping some sectors as probable for opening. The authority must therefore periodically study the current financial and industrial situation and prepare an updated list to encourage the investment environment.
However subsection 3 and 8 of Article 7 allows for the investor to propose industries that are excluded from the list or treat such as being in the list. The adoption of this principle means that a very flexible approach has been taken while creating the industry list. It is worth questioning how flexible the preconceived estimate and base was while establishing a SEZ after extensive studies by qualified consultants. Therefore instead of adopting so much flexibility while preparing the list it might be more practical for the authority to not change the list of probabilities for at least five years. Provisions must be kept in the Act to review the list every five years.
Article 7 – Provision related to permit papers
SEZs established under subsection 9 of Article 7 provides for the possibility of industries established outside the area to come inside the SEZ attracted by the services and facilities available within the area. This might raise issues of investment in relocation, limitations of the SEZ, questions of productivity behind opening it [inside the SEZ] and limitations of new technologies entering the SEZ, which is probably why internal relocating. However the phrase “any special type of industry mentioned by the Nepal Government” in Article 7 sub section 10 shows that the government is trying to keep certain rights to it. Doing so will allow certain industries to define themselves as special. Therefore the “special type of industry mentioned by the government” must be more defined studying the overall financial and industrial state e.g. woolen carpets, pashmina, readymade garments, and herbal processing.
Article 7 subsection 4 attempts to shorten the length of the time taken for environmental impact and environmental impact assessment. EIA is conducted while establishing the SEZ. It is also kept in consideration while preparing the list of industries. However whatever is mentioned in the proposal of the industry depends on the specific type of industry it is important to have its environmental impact and impact assessment. If the authority itself does this it will make the process simpler. For this in subsection 4 “as per the evaluator provisions mentioned in the Environment Protection Act 2053, Environment Protection Regulation 2054,” should be added.
Article 11 – Import
The main purpose of establishing SEZ is to promote export, encourage foreign investment and import technology and encourage other sectors of the country. This policy is seen in Nepal as well. In a low productive country like ours which has trade imbalance with most other countries, permitting upto 25 % of the products manufactured in an expensive well facilitated area such as the SEZ will adversely affect the objective behind the establishment of the SEZ and affect industries outside the SEZ negatively. This must be limited to 10 %.
It is also necessary to clearly state through Article 11 and Article 4 that subsidies given by this Act for products services produced in the SEZ that are authorized to be sold in the internal market will not be given. Otherwise this will create unhealthy competition between industries inside the SEZ and those outside.
Article 20-34 define different subsidies and facilities that can be received by industries inside the SEZ. The reason behind providing such facilities is to attract foreign investment and technology, promote export, develop industrial technology and create an able human resource. Most investors interested in investing in Nepal complain of the constantly changing policies and laws. Specifically policies related to tax and fees change every year with changes in financial laws which show a lack of stable sustainable financial policies. As SEZs are established with an export oriented market in mind, unstable tax policies and other facilities create difficulties. In order to give stability to provisions provided in this Act policy makers must be committed and convince investors that adverse environment will not be created through other laws that can impact their business.
Paragraph 7 - Regarding employees and workers
As SEZ are export oriented the international quality of products, level of production, export timing, and services and facilities provided to workers and employees must be clearly stated. Most buyers will search for whether international standards have been met and producers will also have kept this in mind. Therefore everyone must be committed to implementing all the provisions mentioned here. Provisions mentioned in Article 53 must be effectively used for this purpose.
IN the present context of the global economy where any country’s economic growth depends on its export, this bill though late is finally here. However it is necessary to take this bill together with other financial policies. Because SEZ is directly related to the international market there needs to be proper coordination regarding workers rights and facilities and services for investors. Are provisions mentioned in this protecting the rights of workers? There are provisions allowing the private sector to also be involved in the infrastructure development of SEZ, its management and operation. As there are many of the provisions related to [ad-hoc] management the government is likely to have more control leading to misbalance, this must be reduced.
There was concern expressed over the percentage of permitted industries and businesses manufacturing goods and services. Many expressed concern that availing goods and services manufactured inside the SEZ could create pressure on industries and businesses outside the SEZ and spoil the market. This must be made effective in relation to the various tax subsidies and other services provided and the seriousness of investors must be kept in mind.
Many also had concerns regarding women workers and most experts were of the opinion that although there were some positive things regarding women workers there must be special provisions.
Some also pointed out that as workers are an important part of the production process they too must have representation in the management committee.
What benefits will establishing a SEZ bring to the local people? This must also be thought of.
Questions were also raised regarding the future of this policy at a time when federalism is being discussed.
There were opinions with regards to whether currently established industries should be allowed to relocate inside the SEZ and whether domestic investment will get a place or not.
While some of these issues have been addressed above others need to be more clearly defined.
As workers play an important role in the production process the rights of the workers must be kept in mind. As the SEZ is export oriented the pay and salary of the workers must also be fixed accordingly. International buyers and sellers both have their own biasness’s towards proper workers policy. Therefore it is expected that there shall be no controversy regarding workers pay and facilities and management in the SEZ. Likewise the international market runs on punctual timing and if this timing is not met the industry may have to bear huge losses. That is why cordial relations between workers and the management are integral. By allowing provisions for the SEZ authority to fix minimum wages, ensure that all facilities as promised by the contract are met, facilities are fixed by the industry itself, and any issues that come up to be resolved by the management committee, it is expected that there shall be cordial relations between workers and management. By also providing for a representative from the Ministry of Labor in the management committee of the SEZ, it is expected that there will be no conditions for adverse environments to be created and workers can rest assured.
This investigate suggestion paper was prepared by former secretary Niranjan Baral for the Nepal Constitution Foundation with inputs from women, indigenous groups, Dalit, Madhesi, youth and concerned pressure groups. The Foundation is grateful to Prof. Amuda Shrestha, Dr. Harisharan Chakku, Sambojan Limbu, Shri Krishna Shrestha, Gopi Biswakarma, Shantaman Tamang, Kiran Gupta, Bharat Gautam, Dr. Bhim Neupane, Santosh Rai, Gyan Shakya, KP Pande, Dr. Chiranjibi Nepal, Rudra Pathak, Ramesh Badaal, Phurpa Tamang, and Dr. Bipin Adhikari.
This research has been supported by The Asia Foundation and opinions expressed in this report are of the authors and don't necessarily reflects of The Asia Foundation.