Industrial zones can play an important role in attracting Foreign Direct Investment (FDI). The lack of ‘public goods’, including - industrial land, roads, water, waste disposal have been identified as constraints to investment in Sri Lanka. Within a limited area of an industrial zone, these constraints can be easily addressed at a lower cost than building infrastructure on a wider scale.
Sri Lanka has 10 export processing zones (EPZs) and two industrial parks (IPs) - all of which are government owned and managed.
Should the government allow privately managed industrial zones as well? This may sound a radical idea, but many countries, including Thailand, Vietnam and India have successful privately managed zones.
The zones managed by Japanese industrial zone developers are particularly impressive; if we are to learn new ideas, we may as well as learn from the best. Japanese zones offer a prospective investor a total solution – a range of services and the physical infrastructure. The services range from company incorporation, tax registration, advice on visas for expats to introducing accounting and law firms.
Complete ‘hard’ infrastructure
Apart from the basics: land, power, water and waste disposal that are generally offered, Japanese developers offer housing (flats for expats), clinics, schools, banks, shops even a Japanese restaurant (or canteen offering Japanese food), sometimes, even a golf course.
Reliable power is critical, so the zones either have special arrangements to guarantee continuous power or have a private power producer as a tenant in the zone. For example, in the Amata Nakorn Industrial Estate, Thailand, the developer has group companies that provide power, water, natural gas, logistics and transportation services to other clients within the zone.
Support services
In typical Japanese fashion, the developers provide end-to-end services starting with continuous support during factory construction. This continues with ongoing operational support when the factory is running. Support services include logistics, customs, recruiting, banking, courier service, security guards and fire brigade.
To deal with problems, the zones provide a 24-hour, 365-day help-desk. They also disseminate information on changes in laws and wage levels and hold a monthly meeting with tenant firms to discuss any problems.
The soft services are provided by Japanese staff (or fluent Japanese speakers who understand the Japanese business mindset). Japanese investors tend to be more risk-averse than others and Japanese SMEs even more so.
The advantage is that if a zone is developed with the Japanese, the standards of service would be to such exacting levels that any other investor would find it a breeze. Even Sri Lankan businesses which are used to battling the red-tape may find these zones attractive.
The idea is to provide a model in which client companies can start operations almost on a plug-and-play basis.
Land
A recent paper notes that access to land is one of the biggest problems faced by investors. Some 80 percent of the land is owned by the Government and difficulties in obtaining land combined with uncertainty over land policy (constantly changing tax rates, ownership restrictions) act as a deterrent.
Industrial zones offer easy access to land – but all the 12 zones are full.
The other problem is red-tape: getting approvals, unclear or contradictory rules, multiple agencies and delays. The current zones offer some blanket approvals: environmental and land clearance, electricity, water and telecoms.
However, site, building plan, environmental protection licence and certificate of conformity, all need separate approval, though the EPZs do offer an expedited process.
A further gamut of paperwork must go through the normal approval processes; preliminary investment clearance; work permit and visa; tax registration; import and export registration; import and export licence; rules of origin certificate; chemical materials approvals and company registration (which, incidentally, are all handled by the zone developer in the Japanese model).
This is the red-tape that is difficult to cut on a broader basis. It may be possible to work out simplification of processes or speeding of approvals for the specific zone with a private developer together with the BOI.
Even if the red tape is minimised, it will still be a problem. From an investor perspective, leaving the developer to deal with an unfamiliar bureaucracy, in a foreign language, in a strange country is a huge plus.
The Japanese philosophy is to create the environment where the investor can focus on his business, leaving all the hassle to be sorted out by the developer.
Policy environment and fiscal incentives
Policies in Sri Lanka are driven by short-term political considerations - which cause uncertainty. Ad-hoc changes in rules and tariffs deter investors. An export zone can be better insulated from domestic policy upheavels as it has minimal local market impact.
Industrial zones in Thailand and Vietnam offer a complete waiver of all import tariffs and VAT and time-bound income tax holidays. Sri Lankan exporters are offered similar terms only for raw materials. Both countries provide for import of all construction material for factories in zones free of tax.
On capital goods, Sri Lanka charges PAL, NBT and excise duty. Key construction materials are on a ‘negative’ list meaning that they are subject to all the normal tariffs. This causes a significant increase in the cost of building a factory, leading to a lower return for investors and a relative disincentive to locate in Sri Lanka.
It should be possible to offer a wide range of waivers of tariffs without affecting any domestic industry within the industrial zone.
Sri Lanka is only one among many destinations for FDI. Unless investors are offered a competitive package, they will go elsewhere.
Marketing
A key advantage is that the zone developer not only develops but also markets the zone, thus relieving the BOI and EDB of some of the burden in looking for and convincing investors. The developer earns a return by renting the land in the industrial zone and through fees for ancillary services that they provide. They have a string of incentives to ensure the zone is filled-which is exactly what the country needs.
A well-connected developer has contacts with potential clients-in other countries. They can encourage their clients from other countries to extend their production networks to Sri Lanka. This can be useful in attracting investment in new sectors.
One of the problems faced by Sri Lanka is the lack of diversification in exports. Exports grow not only because of volumes but also because new products being added to the basket. Between 2000-2015, Sri Lanka added seven new products worth US$ 0.1 billion to its export basket while Thailand added 70 worth US$ 21.8 billion and Vietnam 48 worth US$ 50.4 billion. The possibilities of exporting related products within the existing basket are exhausted. The country needs to target new sectors. Attracting investment into a sector in which the country has little experience is difficult, but a good zone developer with clients in new sectors, eg: electronics, may do the trick. The secret is getting a good anchor tenant.
The Thang Long Industrial Park in Vietnam managed to attract Canon. Canon was followed by several dozens satellite Japanese businesses. Today, the park hosts 98 businesses, 78 of which are Japanese.
Ownership model
There are many ownership options for industrial zones public, private or joint ventures, but the model best suited at the initial stage is a public or foreign joint venture.
The Government, represented by the BOI provides the land and the private developer invests in the infrastructure. As the BOI has a stake in the venture, it has an incentive to make it work. The BOI works with the developer to secure all approvals and streamline the processes. The developer is usually a construction firm in partnership with a trading company.
The developer manages the zone, renting the properties and providing services, and the government takes a share of this.
In Vietnam, as of September 2016, there were 220 zones in operation with a further 105 under construction. In Thailand, the central agency operates nine estates, plus 39 more in conjunction with the private sector, while 50 more zones are private owned and operated. Sri Lanka is taking steps in the right direction. A logistics and industrial zone is being developed in Hambantota with Chinese investment, while Rojana Corporation of Thailand, a joint venture with Nippon Steel and Sumikin Bussan Corporation of Japan, is setting up an industrial zone in Kalutara.
To work best, they should follow the full service model described and offer a competitive fiscal package.