Ministry of Commerce And Supplies - Enhanced Integrated ...

N T I S2010Industrial Parks and SEZ InfrastructureThe GoN is implementing an ambitious SEZ programme to boost trade and investments and has taken concretesteps towards that end. A draft SEZ Bill is before Parliament and is expected to be on the top of the agenda ofParliament for the next legislative session. Construction work has started already at Bhairahawa, where thefirst phase of the zone is almost complete. Preliminary groundwork has started in Birgunj and various othersites, all in expectation of the law being adopted. The impact of these SEZs should ultimately be measured bythe amount of new investments brought to the country, the increase in exports from the country, new tradelinkages between Nepalese and foreign firms, and the number of new jobs created as a result, both direct andindirect.However, these desired impacts will largely depend on the political, legal, and regulatory frameworks thatinfluence potential investors’ decisions to locate in the zones. In the case of Nepal, the combination of politicalinstability, a rigid labour regime, and a lack of industrial security is undermining the short-term potential ofattracting significant flows of foreign investment to the planned SEZs. Development of zones cannot be donein isolation of these major issues.Some countries have successfully used SEZs as a pilot and testing ground for broader economic reforms inthe country. China, Jordan, and others have shown that SEZs can offer a short- to medium-term solution inaddressing economy-wide infrastructure or regulatory constraints and can be catalytic in attracting investors,bringing new technologies, and linking the country to global markets.The draft SEZ Bill in Nepal does not intend explicitly to pilot any reforms in relation to the most critical labourrelatedinvestment climate barriers. However, discussions are underway between the GoN and labour unionsabout increased labour flexibility in return for increased social protection. Pending the outcome of thesediscussions, the short-term attractiveness of the zones to foreign investors remains in doubt.The current draft SEZ Bill has two main critical weaknesses in relation to export requirements for the firmsoperating in the zone and the sectors allowed to operate in the zone. Addressing these two shortcomingswould render the law more attractive for potential developers, users of SEZs, and the GoN. Specifically, thedraft bill should be modified as follows:1. Replace the current rigid 75 per cent export requirement by 0 per cent entry export requirement andpro rata incentives (Article 11 (1) and (2), 12 (2) c) and Article 34). Nepal’s SEZ programme is likely tobest succeed if the SEZ infrastructure can be used by exporters and non-exporters alike. Incentivesand tax holidays could be provided to only those companies that export, or solely on the basis of thequantity of exports. The current proposed ‘Export Processing Zone model’ is considered outdated,and most countries, including China, no longer use it. International SEZ developers also feel that thecurrent 75 per cent export requirement is too stringent. It will result in situations where companiescome to the zone and are able to export now, but may not be able to export in the future. We haverecently seen the effects of the global economic crisis. Private developers felt that there should be noexport requirement at all. ‘Let the individual companies decide how much they can or want to export.’The law should state, however, that all duties, tariffs, and taxes must be paid on the value of importedinputs sold within the domestic territory of Nepal.Domestic companies (exporters and non-exporters) are also in urgent need of serviced industrial landthroughout Nepal as most of the industrial districts have no space in them. Since infrastructure is amajor investment climate constraint to all companies in Nepal, it would be good to offer such advanced150NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT