Nepal needs SEZ booster for its floundering economy

It is eight years now since the Nepal government mooted the idea of introducing special economic zones (SEZs) in the country to boost its sagging exports and attract foreign investment. To this end, the SEZ Bill was tabled in Parliament two years ago, but it is yet to be approved. As a result, SEZs remain a concept on paper.

The government has proposed SEZs in eight districts in the country. Work on developing SEZ infrastructure, such as roads, water supply and electricity lines, is nearly complete in Bhairahawa, identified as a model SEZ; feasibility study for two SEZs in Panchkhal and Dhangadhi and pre-feasibility study of other five remaining SEZs in Jhapa, Kapilvastu, Biratnagar, Simara and Jumla is in progress. Delay in the approval of the SEZ Bill has, however, led to uncertainty about the future of these zones.

According to Yam Kumari Khatiwada, joint secretary with the Ministry of Industries (MoI) who is also heading the country's SEZ project, the initial feasibility study conducted in three proposed SEZs –– Jumla, Kapilvastu and Biratnagar –– showed that the mentioned sites are viable to be developed as SEZs if the government provides necessary land and encourages local-based products.

“Majority of SEZs identified by the government consists of the land owned by the government. Therefore, land acquisition will not be a big problem in institutionalising SEZs,” she says.

Since 2003, the government has been putting SEZ in its priority list in the annual budget programme. But lack of political support has put the SEZ Act on the back-burner.

The general perception is that political parties with leftist ideology are against the SEZ bill, which proposes more flexible industrial and labour laws that will be exclusively governed by the proposed SEZ Act.

The bill has included the establishment of an autonomous corporation that will be responsible for managing and monitoring SEZs and the UCPN-Maoists, the largest party in the country, are against it, saying SEZs will violate labour rights of workers.

The bill does protect interests of residents near SEZs in that it states any private national and international company interested in investing in different industries in SEZs, must provide for 30 per cent domestic value addition (rules of origin) in order to avail 'zero-tariff facility' (customs duty exemption) on exports.

Nepal witnessed a trade deficit of Rs 317 billion in the fiscal year 2009-2010. For this reason, setting up of SEZs is crucial for the country's economy. With significant decrease in export-oriented products due to host of problems—loss of competitiveness and manufacturing base among the private sector, labor dispute, lack of investment due to political instability and policies—the country's trade deficit is growing. An indicator of things going wrong is the recent closure of a garment unit in Biratnagar, owned by Surya Nepal Private Limited, a subsidiary of ITC Ltd of India.

Shankar Prasad Koirala, secretary in the ministry of industries says the government has given top priority to developing SEZs. “Now the challenge for the government to ensure secure environment for investment for both local and foreign investors,” says he. Meanwhile, the government is planning to organise an international investment forum in Kathmandu by the end of this fiscal year and also developing the concept of celebrating year 2012 as “investment year” to attract investments in different development projects, including SEZs.

Senior economist at the Tribhuwan University in Kathmandu, Pitamber Rawal says effective establishment of SEZs in the country could provide a leeway to the private sector to contribute in the country’s economy.

Due to poor planning, low industrial base, poor infrastructure, lack of appropriate legislation limited foreign direct investment and unfavourable investment climate, the private sector is failing to perform competitively like its neighbour countries, says he.

Along with the institutionalization of SEZ, the implementation of SEZ Act will be crucial to enforce the effective establishment of export-related processing sector, special trade sector, tourism/recreational sector and banking sector, which are envisioned under the SEZ.

“The incentives, subsidies and facilities of infrastructures provided for the industries in SEZs will encourage private sector to increase their competitiveness and help in improving the manufacturing base,” said Rawal.

“In Nepal, the agro- and forest-based industries are the potential areas where the interested national and multinational companies could invest,” Rawal says.

In a related development, the Nepal government recently endorsed a new industrial policy that promises easy exit to the investors, recognizes subcontract manufacturing, and promises tariff protection to local industries with high value addition. The policy serves as a stepping stone towards implementation of SEZ in the country. It is still a first step and a long and arduous way ahead, since everything rests on the combined will of the political parties.