Integrated and Comprehensive SEZ Strategic & Master Plans Jean-Paul Gauthier, SG of WEPZA, for Deloitte Consulting 17 September 2014, 11:45am – 12:30pm.

Integrated and Comprehensive SEZ Strategic & Master Plans

Jean-Paul Gauthier, SG of WEPZA, for Deloitte Consulting17 September 2014, 11:45am – 12:30pm

2014 NATIONAL SEZ CAPACITY BUILDING SEMINAR, 16 – 18 SEPTEMBER 2014

(DAY 2: KEY DETERMINANTS FOR A SUCCESFUL IMPLEMENTATION OF THE SEZ PROGRAMME: INTERNATIONAL BEST PRACTICES)

EAST LONDON IDZ, EASTERN CAPE PROVINCE, SOUTH AFRICA

Defining SEZ goals, priorities, vision

• Policymakers are too ambitious in setting objectives– Objectives are too broad to offer meaningful guidance– Often there are clear conflicts (e.g., technology incubators

unlikely to lead to much employment; employment intensive manufacturing target scale and cost efficiency rather than innovation)

• Set your goals with the “SEZ hardware” in mind:– Alignment with country advantages

“You are not Dubai” –Chuck Heath, Former CEO of JAFZA– Have the long-term in mind (10+ years)– M & E

The importance of location and transport connectivity for an SEZ

• Don’t let engineers or urban planners choose the SEZ site –they don’t “do” economics

• SEZs should be:– Demand driven and responsive to market

requirements (i.e., located where investors want them)

– Sited with transport economics (e.g., labor, markets, logistics, road congestion) in mind

– Viable (short and long-term)– Positive in terms of economic-impacts/costs

Site selection “long-listing” criteria

Industrial economics and dynamics

Presence of potential project partners and anchor tenants (e.g., multiple enterprises engaged in formal, registered economic activity, within 10km), including historical presence of relevant sectoral activity in the area and scope for backward and forward linkages

Declared private sector support

Accessibility and connectivity(existing or reliably planned)

Access to major motorways and roads (<2km)Access to appropriate airports, railways / dry-ports, and/or border posts (<50km)Access to labour and consumption markets (<50km)Proximity (<50km) to upstream raw materials and/or distribution centre for semi-finished inputs (sector-specific)Proximity (<150km) to downstream processing and/or distribution points

Infrastructure(Existing or reliably planned)

Social infrastructure : schools, hospitals, hotels, retail business, places of worship, etc. (<50km)Access to water (<2km) In terms of access to fresh surface-water or aquifers (possibility of boreholes), or distribution networksAccess to power grid (<15km)Access to telephony networks, earth-stations and/or cell towers (<15km)

Environmental conditions Whether or not a Protected Area

Micro-siting criteriaAvailability of land

Immediate and verifiable availability of land of appropriate scope and dimensions

Availability of expansion land capacity

Topographical and construction constraints

Acceptable level and grading conditions

Acceptable soil and subsidence conditions

Acceptable erosion conditionsAcceptable drainage conditions

Acceptable soil contamination conditions

Acceptability of other construction constraints

Infrastructure(Existing or reliably planned)

Access to waste water treatment and sewerage infrastructure (<15km)

Existence and reconversion possibilities of existing structures

Presence of External and Internal roads

Distance (1km) from dangerous infrastructure (e.g., power station and high-tension lines etc.)

Environmental conditions

Climate (sector specific)Flood area

Human conditions

Appropriate and usable site from cultural standpoint - Tribal areas and rights, social sustainability to be taken into account

Sufficient consumer purchasing power (only applicable for local market -oriented projects)

Security (minimal legal distance from military installations to be respected)

Presence of significant archaeological, religious, cultural or other assets

Absence of health risks (e.g., malarial zone)

Socio-economically acceptable population relocations

Cost-acceptable economic relocation of any agricultural, commercial, or other industrial activities

Development influence

Positive impact on infrastructure planning

Coherence with other development projects in area

Coherence with land-use master-plans

Spatial analysis of Botswana locations meeting long-list criteria

How important is infrastructure to SEZs?• Key for industrial zones or parks• Not the only or main consideration for SEZs –given issues of:

– Macro and political-economic issues– Existence of markets / market access– Location / Transport economics– Factor Costs– Policy compliance costs– Knowhow to regulate and operate SEZs– Quality of Life– Country image

• On the other hand…– Visible and irreversible commitment – “open for business”– Integrates and Promotes efficiency– Movement of Goods– Sector Specialization

Sustainable yet flexible Master plans responding to changing local and regional economic conditions

• Emphasize goals and guidelines as opposed to planning prescriptions

• Allow for flexible land use and zoning• Phasing and Options• Private sector SEZ development and the profit

incentive• Ongoing monitoring of economic conditions and

benchmarking of competitor SEZ responses

Land use planning

• Type of land uses permitted: Problem of industrial focus

• Lack of control over the process and SEZ approaches to:– Planning department consents under City Master

Plan– Development/Construction Approval Processes– Zoning Regs., and Urban Building & Design

Codes/Guidelines

Apply for Construction Permit

Professional Designers for DrawingsInvestors

Construction underway (supervision/site inspection)

Construction completed(site inspection)

Apply for Occupancy/Operating Permit

Apply for Construction Permit

Local Government

Environment Authority Zoning AuthorityPublic Health TransportCulture and Antiquity Water/SewageAgriculture ElectricityLabor Authority TelephoneIndustry Neighborhood org.Tourism, etc.. Fire Department, etc..

B. (EIA) Environment Impact Assessment

Investors

Prepare EIA Report

Local EnvironmentAuthority

Ministry of EnvironmentApply for EIA Approval

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A. Site ElectionCentral Government

Line Ministries and Authorities

C. Construction Permitting Operation Permitting

Apply for Construction Permit

Professional Designers for DrawingsInvestors

Construction underway (supervision/site inspection)

Construction completed(site inspection)

Apply for Construction Permit

Construction Permitting AuthorityZoning AuthorityTransportationWater/SewageElectricityTelephoneFireEnvironmentNeighborhoodEtc..

Districts Counties Etc. Etc.

INVESTORS

State Land Authority

LandRegistration

Dev

elop

men

t Con

trol

Pro

cess

es

Fast-track development control

• GIS for underlying information needs• Reengineered processes• Certified Architect/Engineer/QS responsibility• OSS (ex: GIC in Gauteng)• eLand Management solutions– Titles– Permits– Valuation & tax management– Utilities management– Mortgages and hypothecation

Aqaba SEZ GIS

Mitigating risks in infrastructure development

• Serious (not “stacked”) feasibility studies – Multiple site options– Market testing– Sensitivity analysis

• Leverage existing infrastructure• Designate SEZ land before awarding any contracts for related infrastructure

construction to minimize risk to cities of borrowing for infrastructure construction that may not be recovered from land sales

• Factor in off-site costs (ex: DRC, Baikal)• Phase site development to minimize the financial risk• Serious transaction advisors and good contracts• Transparent procurements, proper due diligence• Carry out the approved projects efficiently • Plan for developer default and the manner in which the land will be disposed of

Illustrative Risks & Solutions at Construction Stage

Risks Solutions

Completion Delays Experienced Turn-key contractorPenaltiesLiquidated DamagesCompletion / Performance Guarantees

Cost Overruns Fixed Price / Lump Sum contractStand-by Credit FacilityIncreased Equity

Force Majeure Insurance

Country Risk GuaranteeExport Credit Agency Cover

Illustrative Risks & Solutions at Operation Stage

Risks Solutions

Raw Material Supply Feedstock contracts

Market Market StudyOff Take Agreements

Performance / Technical Proven TechPerformance Guarantees

Operations / Maintenance Experienced Operator

Foreign Exchange Flexible Tariff FormulaForeign Exchage GuaranteeEscrow Accounts

Mitigating Risk Through“Contract Networks”

Risk Management in SEZ Contracts

• Clear definition of assets• Clear definitions of roles and responsibilities of parties• Periodic testing/benchmarking and re-pricing mechanisms or

Phased Development Options• Liability caps• Insurance / Bond / Contingency Fund requirements• Step-in rights• Subrogation rights• Legal Stability Clause• Contract and Legal Primacy• Choice and Language of Law & Jurisdiction• Fast-Track Dispute Resolution Mechanism

Importance of secure and financially sustainable utilities supplies

Source: World Bank (Farole, 2011)

Soft infrastructure

• Human capital– Public– Private

• Finance• Social Infrastructure & Suprastructure– Community infrastructure– Inside vs. Outside?– Green Space

Relationship of physical planning to financial and economic analysis

• Zones should show net socio-economically and financially positive returns

• Siting, scope, scale, length of development, and design impact NPV and RoR financials –where the RoI is below 10-15% it is not bankable

• Economic analysis generates EVA and ERR –which are largely conditioned on (opportunity) cost of development (as well as of regulation, operation, training) vs. economic returns –and determine whether SEZs are the optimal policy tool to achieve economic goals

• South Africa is considered a case study in IDZ infrastructure over-scoping

Anchor Tenants

• High-profile multinational enterprises acting as anchor tenants demonstrate attractiveness of SEZ and draw in other new tenants, linkages

• Allow Anchor Tenants to influence SEZ design• Representation on Board• Concessions, with special, differentiated

incentive packages• Choice to build their own factory/warehouse or

lease an SFB

Infrastructure for sector development

• Why are zones so generic?• Provide specialised vertical public goods,

policy risk mitigation and other enablers:– Infrastructure and Facilities – R&D, Production and Delivery Services– Training and Knowledge Sharing Platforms– Incentives– Business Policies

The need for a public role

• The issue of regulation• Long-term infrastructure investment is not an attractive private

sector investment• Large scale infrastructure investment requires vision and the

ability to reap economic as well as financial benefits• Accepted norm that nationally shared infrastructure is

bankrolled or guaranteed by Government• The need to ensure the convergence of public and private

sector interests– Measurement of ALL costs and benefits to all parties (environmental,

social, etc.)– Examination of the counterfactual – what would happen if the public

investment were not made• Adjacent use issues

Institutional arrangements and the role of different spheres of government in SEZ infrastructure

• Existing Metropolitan or Regional Authority runs SEZ (ex: China, Aqaba)

• New SEZ City (Subic Bay, Panama Pacifico)• New, multi-stakeholder Development

Corporation• Coordination Councils

Generating spill-overs into the local economy

• Site SEZs where there is an existing economic and skills base

• Use PPPs• Also:

– Avoid minimum export requirements– Avoid minimum capital requirements– Avoid capital controls– Supplier & Buyer Linkage, Incubation and Training programs– Accord constructive/deemed export status of supplies to SEZ

buyers– Complement SEZ policies with national reforms