Public-Private Partnership in EPZs/SEZs/SIZs: A growth strategy

The concept of Export Processing Zone world-wide has been undergoing rapid transformation in respect to its institutional framework, management pattern, and area of operation including service standards. The Zones are no more a traditional narrow enclave rather it is becoming more integrated with the economic development process of the country.
The new zone(s) can be planned by adaptation of Public-Private Partnerships for development, its operation and related infrastructure services. The joint venture may be run on commercial pattern with the following four possible options: Government may acquire and develop the land. The Private entrepreneurs may develop infrastructural facilities with their own innovative ideas and run these on commercial principles. Conversion of loss making SOEs and vacant land of the government into EPZs. Normally state owned enterprise is denationalized on public bidding system. Bidder may enter into an agreement with Government to have EPZ facilities and services. Bidder may invest in the zone as Single Factory EPZ or can invite others to invest in the zone. Zone may be operated by EPZA. State enterprises or Corporations may also directly hand over their loss making units to EPZA to convert into EPZ on profit sharing basis.
Development of Zone by the entrepreneurs Model, EPZA may acquire the land. Enterprises may be given the allotment of land. They may develop the land and create all necessary infrastructures on co-operative basis. The development cost may be adjusted against rental.
• Land acquisition and development of zones by private sector having regulatory control with EPZA. Developed land may be arranged by the investors. EPZA/Private Entrepreneurs may create all infrastructures. Regulatory functions may be made by EPZA as per existing norms.
The better developed zones can be ideal places of investments not only for foreign investors but also local ones to take advantage of the various facilities. With bureaucratic handicaps reduced, these zones may be in a position to benefit from maximum self-help and the same in turn would facilitate more and more investments in them. Particularly, foreign investors who may likely to set up their own specialise state of the art facilities in these EPZs. The booming EPZs may generate employment and earnings for the local population; create a ground for new technologies as well as for technology transfer.
With the Public-Private Partnerships a country/economy can get the different benefits from it:
-- Speedy, efficient and cost effective delivery of projects, Value for money for the taxpayer through optimal risk transfer and risk management,
-- Efficiencies from integrating design and construction of public infrastructure with financing/operation and maintenance/upgrading,
-- Creation of added value through synergies between public authorities and private sector companies, in particular, through the integration and cross transfer of public and private sector skills, knowledge and expertise,
-- Alleviation of capacity constraints and bottlenecks in the economy through higher productivity of labour and capital resources in the delivery of projects,
-- Competition and greater construction capacity (including the participation of overseas firms, especially in joint ventures and partnering arrangements).
-- Accountability for the provision and delivery of quality public services through a performance incentive management/regulatory regime.
-- Innovation and diversity in the provision of public services, and;
-- Effective utilisation of state assets to the benefit of all users of public services.
A success story of PPP in the EPZ regime is Bangladesh, whose EPZ exports have grown to U$23961 million (February'2011). The Export Processing Zones (EPZs) in Bangladesh have proved to be useful drawing mainly foreign investors and contributing to the country's export earnings. The EPZs are located on public lands and government is responsible for providing infrastructure facilities in them. But providing these infrastructure facilities the Government of Bangladesh is facing the problem of scarcity of funds for development, expansion/up-gradation of various facilities for the enterprises located in EPZs.
In order to overcome the above operational problems the concept of Public-Private Partnership for development of EPZ has been introduced. Government, of course, would continue to have control in the establishment and management of EPZs under the PPP model. Preferences have been given to self-sufficient bodies generating their own power and other facilities for smoother operations. The Bangladesh Export Processing Authority (BEPZA) is now inviting bids from local and foreign investors to invest in the building and maintenance of infrastructures of the EPZs. Both foreign and local investors would be encouraged in finding gainful investment outlets in building and in many cases retaining rights to operation of the EPZ infrastructures. But the greatest benefit of the scheme would be achieving acceleration in the establishment and streamlined operation of a greater number of EPZs in the country. The faster pace in setting up new EPZs with world class infrastructures, will also lead to substantial increase in investment operations both in the area of EPZ infrastructures and from the enterprises to be set up in these EPZs.
The Indian experiences in the FTZ concepts have grown from EPZs to SEZs. In the last ten (10) years there has been tremendous growth. SEZs have taken exports of India from U$340 million to a tremendous growth of over U$40 billion. In India, SEZs are created by the Government and run by Government-Private or solely private ownership, to provide special provisions to develop industrial growth in that particular area. The government of India launched its first SEZ in 1965, in Kandla, Gujarat. As on October'2010 there are 114 SEZs operating throughout India in the different states. Most of them are operating under PPPs concepts and are running successfully in Karnataka (18), Kerala (6), Chandigarh (1), Gujarat (8), Haryana (3), Maharashtra (14), Rajasthan (1), Tamil Nadu (16), Utter Pradesh (4) and West Bengal (2).
Additionally, more than 500 SEZs are formally approved in October'2010 by Government of India in the states of Andhra Pradesh (109), Chandigarh (2), Chhattisgarh (2), Dadra Nagar Haveli (4), Delhi (3), Goa (7), Gujarat (45), Haryana (45), Jharkhand (1), Karnataka (56), Kerala (28), Madhya Pradesh (14), Maharashtra (105), Nagaland (1), Orissa (11), Pondicherry (1), Punjab (8), Rajasthan (8), Tamil Nadu (70), Uttarankhand (3), Utter Pradesh (33) and in West Bengal (22).
A recent example of such PPP is the China-Nigeria refinery in Lagos Free Trade Zone (LFTZ). The project is be co-funded by a Chinese consortium called the Chinese State Construction Engineering Corporation who will put up 80 percent of the capital, and the Nigerian National Petroleum Corporation (NNPC) stumping up the rest. The Lagos State government will provide necessary infrastructure including land, new roads and an adequate electricity supply. The joint venture of eight billion dollar refinery will be located in the south-eastern state's Lekki Free Trade Zone. NNPC will support the LFTZ by assisting with the arrangements for the supply of natural gas feedback to the zone for the manufacture of petrochemicals, fertiliser and other much desired industrial products. The memorandum was signed in May 2010, proposed the building of three refineries at a total cost of U$25 billion. The refineries run by the Chinese consortium to build and run the refinery, is a good example of Public-Private Partnership (PPPs) in Nigeria.
Generally, a private-sector forms a consortium or a special company called "Special Purpose Vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it typically allots an equity share in the SPV. The consortium is usually made up of a building contractor or a maintenance company. It is the SPV that signs the contract with government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows and make PPP projects prime candidates for project financing. The private entity is made up of any combination of participants who have a vested interested in working together to provide core competencies in operations, technology, funding and technical expertise. Capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may be in kind of the transfer of existing assets.
In projects that are aimed at creating public goods like infrastructure, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some cases, the government may also supports the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.
PPPs are vibrant mechanisms, but no single PPP model works for every country. In general, PPPs lead to longer-terms contracts for service delivery and transfer project risk from the Government to the private sector. Yet they also provide public oversight to ensure that social objectives receive the highest priority during implementation. PPPs enhance efficiency by co-ordinating projects with the Government. In addition, PPPs can be useful where the public and the Government believe that delivery of public services should remain within Government ownership.
Greater involvement of the private sector in the development and management of zones should be encouraged. This reduces the burden placed on public resources and increases the efficiency of zones by allowing them to operate under market mechanisms. International experience reveals that a significant number of governments developed and managed zones have been less effective than their private counterparts.
In order to facilitate private development of zones, an appropriate legal, regulatory and institutional framework has to be in place based on the following guidelines:
a. Legal framework, to clearly outline selection criteria, incentives and privileges of private zone developers and operators;
b. Public-Private Partnership (PPP) frameworks for development of zone(s) should be encouraged;
c. Public provision of off-site infrastructure and facilities (utilities, connections and roads) while private funding is targeted towards on-site infrastructure and facilities;
d. BOT and BOO approaches to on-site and off-site infrastructure and facilities with government guarantees and financial support;
e. Contracting private management for government owned zones or of government zone assets by the private operator (beneficial ownership);
f. Equity shifting arrangements whereby a private contract manager of a government.
Government may formulate a policy for setting-up EPZ(s) with the collaboration of private sector with the aims to balance it's desire to stimulate innovation and to create new opportunities for the private sector, with the need to ensure that the Government and consumers may get better value for money in PPP transactions. Genuine effort, reasoned analysis and a demonstrated appreciation of the requirements of the public sector may be the minimum considerations before a public sector entity, let alone provides any rewards or incentives.