On the Proposed Bill of Establishment of Special Economic Zone Act, 2008

(This is excerpt of opening remarks given by Dr Bipin Adhikari as Chairperson of Nepal Constitution Foundation at the bill review programme on the Bill providing for the establishment of Special Economic Zone Act, 2065 organised on November 21, 2011)

This Bill has been drafted to make laws to enable the establishment of Special Economic Zone (SEZ) in order to expedite industrialization of the country and its economic progress. SEZs are made with the intention to encourage certain kinds of industries by providing a more free-market-oriented legal regime than the country's other national laws. This practice has been followed in many countries already. Though preparations have been made in various parts of Nepal in creating such areas, the lack of a proper legislation in this regard is being sought to be remedied.

The present draft is said to be devised by the SEZ Project of Nepal government. The project is in operation since 2060 under the Ministry of Industry, Commerce and Supply (MOICS). Apart from this Bill, the project has been playing crucial role in pursuing feasibility study for the identification of sites, infrastructure development and design and cost estimates of the establishment of SEZ at Birgunj, Panchkhal of Kabhre and Ratmate-Devighat Areas of Nuwakot Districts and land acquisition in those areas, detailed engineering survey and design of facilities to be established inside export processing zone at Bhairahawa, infrastructure development of Bhairahawa Export Processing Zone (BEPZ).

International Context
The Bill has special international context as well. Many countries have come up recently developing zones like free trade zones, export processing zones, free zones, industrial parks and urban enterprise zones in order to increase foreign direct investment, typically an international business or a multinational corporation. Both the countries in our neighborhood, China and India, have employed special economic zones to contribute tremendously to their ongoing industrialization, boosting exports and substantially improving economic conditions in regions hosting the zones.

China started SEZs as early as 1980s. This allows SEZs to utilize an economic management system that is especially conducive to doing business that does not exist in the rest of mainland China. Special tax incentives are given for foreign investments in the SEZs. They offer Greater independence on international trade activities. Economic characteristics are represented as "4 principles": construction primarily relies on attracting and utilizing foreign capital; primary economic forms are Sino-foreign joint structure and partnerships as well as wholly foreign-owned enterprises; products are primarily export-oriented; economic activities are primarily driven by market forces. SEZs are listed separately in the national planning (including financial planning) and have province-level authority on economic administration. SEZs local congress and government have legislation authority.

The Government of India announced the introduction of Special Economic Zones Policy in 2000. The SEZ Act, 2005, was an important bill that India passed in order to instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through their establishment. The major incentives and facilities available to the developers in India include exemption from customs/excise duties for development of zones for authorized operations, income tax exemption on income derived from the business of development of the zones in a block of 10 years in 15 years; exemption from minimum alternate tax; exemption from dividend distribution tax; exemption from Central Sales Tax; exemption from Service Tax, etc.

These zones have been implemented using a variety of institutional structures across the world ranging from fully public (government operator, government developer, government regulator) to 'fully' private (private operator, private developer, public regulator). In many cases, public sector operators and developers act as quasi-government agencies in that they have a pseudo-corporate institutional structure and have budgetary autonomy. They are often developed under a public private partnership arrangement, in which the public sector provides some level of support (provision of off-site infrastructure, equity investment, soft loans, bond issues, etc.) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels).

The Bill providing for the establishment of Special Economic Zones in Nepal must be analysed in the context of the development across the world, and Nepal's own requirements.

Provisions of the Bill
Section 3 of the Bill states that the government of Nepal on the recommendation of the Authority mentioned in Section 13 of the proposed Bill can declare any place as a Special Economic Zone. Special provisions can be made regarding supply, business, tourism and entertainment on the SEZ. The SEZ Authority can recommend the establishment of such a SEZ after conducting a survey on the particular area as per Section 4. Section 5 states that the Authority shall make public the list containing the industries that may be established within the SEZ. The government can use the private sector for developing, managing and running the infrastructure of a SEZ.

Section 7 provides that application for license to establish any industry must be made to the SEZ Authority. Investors can apply to set up an industry not included in the list under Section 5 if such industry is appropriate environmentally, economically and business wise. No industry which has already been running can shift to the SEZ based on its existing license or registration. Section 8 stipulates that the licensee has to enter into an agreement with the authority regarding - buildings, land and services necessary for the industry, date of establishment and running of the industry, quantity of supply of the product, subject of technology transfer in case of foreign investor and other matters. The maximum validity period of the license is stipulated to be 30 yrs and may be renewed (Section 9). Section 11 provides that the licensee must supply the entire products or services but may sell twenty five per cent of the total produce in Nepal's domestic market. Section 12 provides for conditions when the license may be cancelled- when the license is not renewed, when the licensee does not follow the relevant laws or rules, or abuses the privileges etc.

Section 13 establishes the SEZ authority which responsible for - the building and maintaining of infrastructure, monitoring and regulating the industries, and providing services to the established industries. Section 14 declares the authority to be an autonomous organized body. Section 15 provides the functions, duties and powers of the authority. The authority has an advisory function regarding government's policy on SEZs and facilitative and regulatory function regarding the establishment of industries and supply of goods and services in the SEZ. Section 16 establishes the board of directors for the authority. This is followed by provisions regarding the meetings of the bard, salaries of the directors and provisions regarding the staff.

Section 20 provides that special treatment shall be given to the industries in the SEZ by excluding them from the jurisdiction of taxation. Section 21 provides that such industries shall not be nationalised. Section 23 provides various tax benefits on the income of the investors or the licensees. Section 24 provides VAT concessions on machinery, raw materials and transport vehicles necessary for an industry. There are further concessions on excise and customs. Section 29 allows foreign investors take back their investment outside Nepal with respect to sale of shares, profits, principle and interest. Section 30 enables licensee to open account on the Authority's recommendation and carry business in foreign currency. Non-tourist Visa is also obtainable for foreign investors.

Section 35 stipulates that the licensee must employ Nepali citizens to fulfill the staff requirements. Otherwise, permission from the Authority must be obtained. The Authority shall specify the salaries of the workers in any industry in the SEZ but other matters will depend upon the agreement between the workers and the industry. Section 38 provides for establishment of a grievance committee for the workers and staff who are barred from causing any negative effect upon the production.

Section 40 prescribes punishment for various offences and Section 41 provides appeals for the Authority's decision. Section 44 enables a licensee to sell the shares and ownership of the company to another person after notifying the Authority. The environmental impact assessment of any industry will be done according to the parameters set by the Authority. Section 47 enables the authority to monitor and supervise the industries in the SEZ. Section 48 stipulates that the licensee must present an annual report within three months after end of the financial year describing the details of business. The government can give necessary directions to the Authority and the Authority must contact the government through the Ministry of Industry, Commerce and Supply.

Some considerations
Regarding Section 5 and Section 7 (3) and (8), it has been commented that though the Authority publishes a list of industries fit to be established in the SEZ, it also has the power to include other industries not on the list for valid reasons. This level of flexibility is rather undefined. A better way would be to revise the list every five years or so. Though Section 7 (9) prohibits an already established industry to shift to the SEZ based on its original license, sub clause (10) enables the government to handpick industries that can make such a shift. This provision gives the government unbridled discretion. Proper standards of choosing such industries must be developed.

Regarding the environmental impact assessment of the industries, it has been commented that it should be conducted according to the Environment Protection Act, 1997 and the Environment Protection Rules. Section 11 enables twenty five percent sales of the production in the domestic market of Nepal. This percentage might be a little too high since this venture is a costly one intending to bring foreign investment and Nepal already has a trade deficit with most of its trading partners. Therefore the SEZs must be made more export-oriented by reducing the concession to perhaps ten percent of the total production. Additionally, it must be clearly pointed out that no tax concessions shall be provided in the sales of the products in the domestic market of Nepal.

The investors for long have complained the lack of stability in the legal regime in this field, especially in laws related to taxation and other charges. Internal problems regarding tax and concessions might have a negative impact on the investment in the SEZs too. Therefore, the government's policy in these matters must be more stable and comprehensible. Provisions regarding workers and staff must meet the international labour standards. In this regard, industrial dispute resolution mechanism must be properly established in accordance with Section 53.

It is also important for us to look into these statutory provisions in the context of women, Dalits, indigenous communities, Madhesis, youths and other marginalized communities. It is the time to see if the proposed arrangements help the constitutional aspiration of creating an inclusive Nepalese society and decision making structures.

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