Economic Zones: We must emphasise quality and not quantity

Dr Syed Akhtar Mahmood, economist and former Lead Private Sector Specialist in the World Bank Group was involved in the original planning of the economic zones programme as a representative of the Bank. Here he explains why various Bangladeshi economic authorities' prioritisation of quantity over quality in setting up economic zones may not eventually pay off.

TBS: In a recently published article, you advised that instead of creating 100 economic zones as the government plans to do, the focus should be more on quality than quantity. Could you elaborate? 

Not only is selecting appropriate land for economic zones complicated but there is also the matter of developing land and infrastructure and finding investors. Factory building of Asian Paints, Mirsarai, Chattogram. Photo: Abdul Quader Khan/BEZA

Dr Syed Akhtar Mahmood: I would like to begin by stating that the economic zones programme is one of the most important programmes undertaken by the government, it has the potential of transforming both the manufacturing and the export sector of Bangladesh. But the programme has to be implemented strategically if that potential is to be realised. 

I was involved in the original planning of the economic zones programme and the early days of its implementation as a representative of the World Bank. I thus have a deep personal interest in the success of the programme, in addition to my general interest as a conscious citizen who wants to see a transformation in our economy. 

The development of [economic] zones is not an easy task. Firstly, land has to be identified and acquired. Then a set of feasibility studies have to be carried out, both on economic feasibility as well as environmental feasibility. 

Not every site is suitable for [economic] zone development. Even if a site is suitable from an economic point of view, it may not be so from an environmental point of view. For example, you do not want to have industrial activities, especially those which are polluting, close to wildlife habitats or water bodies. 

So even selecting the land for an economic zone is a complicated task. Then you have to develop the land and infrastructure. Finally, and this is very important, you not only have to get an adequate number of tenants, i.e. investors who would set up factories or other facilities within the zones, but also the right ones. 

In fact, the task does not end there. You have to maintain the zones and oversee the operations of the tenants so that they are compliant with the country's regulations. 

So that is a lot of responsibility for the zone authority, i.e., BEZA. Even though the BEZA has turned out to be fairly dynamic and has advanced the programme considerably, it does not have unlimited capacity or funding. 

Going for too many zones right now would mean that their limited resources and attention span would be spread thin. Thus, even if we get a large number of zones, we may not get many well-developed zones and/or the right kind of investors.

TBS: Did the 60 or so industrial parks in bad shape across the country under BSCIC contribute to your observation regarding the BEZA's target? Last February, the BSCIC chairman also revealed that they want to set up 100 industrial parks in 20 years. Why do all the authorities target such large numbers, or the proverbial century? 

Dr Mahmood: I guess the authorities are all cricket fans; hence, the penchant for centuries. Scoring centuries is good but you need a lot of patience to do so. 

All of us who are cricket fans can give numerous examples of players who have tried to rush towards a century and got out either being caught, bowled or run out before reaching their targets.

We do not want that to happen to the economic zones programme or the industrial parks programme. You are right in thinking that the bad shape of the industrial parks contributed to my observation about BEZA's economic zones programme. 

Industrial parks were developed in Bangladesh starting in the late 50s and picked up steam in the 1960s. We had a small number of industrial parks which were fairly well managed. 

But I think it was in the 1980s that we went on a mad rush to expand the number of industrial parks. That was not consistent with the capacities and resources that the BSCIC had. As a result, a lot of the parks were either located in the wrong places or managed poorly. 

I remember seeing pictures of cows grazing on empty land that was supposed to be an industrial park in the newspapers of those days. Even if the industrial parks attracted a lot of tenants, their maintenance was poor, and the facilities gradually withered away. 

By the time the economic zones programme was conceived, the industrial parks in Bangladesh were not in a good shape and there is a risk that the economic zone programme may end up with the same fate if we do not implement it with the strategic focus and patience that I am talking about. 

I was not aware of the plan to build another 100 industrial parks. This sounds like a slogan to me. And slogans can be very dangerous, because if you start talking about 100 industrial parks then a lot of people across Bangladesh would develop an interest in seeing an industrial park in their own localities. 

This would lead to political pressure to build industrial parks, including in places where it may not be justified to have a park. But, more importantly, the BSCIC has access to fewer resources compared to the BEZA. If I am concerned about BEZA's capacity to build a hundred economic zones in a short time, then I am three times more concerned about BSCIC's capacity to build a hundred industrial parks, even though the parks would be smaller than a typical economic zone. 

So if the BSCIC does go for additional industrial parks, it should start on a small scale and build high-quality parks first. It is reassuring that the BSCIC chairman talked about this as a 20-year programme but there is always a risk of political pressure to do this within a much shorter period and that would be problematic.    

TBS: The World Bank's 2007 report advocated for an enabling environment along with an argument for allowing varying degrees of private sector participation in EZs. It has been more than a decade ever since, where are we today in terms of 'an enabling environment'?

Dr Mahmood: Considerable progress has indeed been made in creating an enabling environment. We have an Economic Zones Act. We have a policy for private economic zones. Moreover, rules and regulations for private development and management of zones have been enacted. 

BEZA has also acquired some capacity to negotiate with private developers and regulate private economic zones. 

However, there are some concerns about BEZA's pricing policy. Land in BEZA's economic zones is being offered at highly subsidised lease rates. Such a policy may have been appropriate 30 years ago when we were not sure if foreign investors would be interested in coming to the EPZs and thus land lease rates were kept low to attract them. 

But now there is a significant demand for land, including from domestic investors. Therefore, I do not see the logic of offering land leases at subsidised prices and not at market rates. I think we should set rates higher and see if investors are indeed discouraged. 

Now, because BEZA's lease rates are heavily subsidised, the private economic zones are finding it difficult to get tenants because the latter are more attracted by the cheaper land in BEZA's zones. The private zones will not be commercially viable at those subsidised rates.

In short, we have created an enabling environment for private zones to some degree but we left some contradiction in the policies which is making it difficult for private zones to attract investors. I think this is something that needs to be sorted out. 

TBS: The WB report also suggested developing some large-scale regional economic zones, covering an entire district or more. Why are such EZs important? 

Dr Mahmood: These are important because of the potential to generate synergies. Such large-scale regional zones may have different clusters within them. Many of them would be manufacturing zones but others may be dedicated to logistics, IT or even tourism. 

You would have space for different kinds of professional offices as well as other amenities such as housing, hospitals, recreational facilities, and even schools and colleges. These colleges may be specialised in producing the skilled labour needed by the industrial and service enterprises located in the zone. 

There would be a lot of synergy and agglomeration benefits if these diverse types of entities are located side-by-side in a planned way with due consideration of environmental issues.

There can also be special types of zones where you have a very large company such as Samsung or Intel coming in to set up a large electronics plant. Around it would be dozens of smaller firms that supply parts, logistics and accessories to the larger firm. So the large firm will be the anchor tenant in that particular zone with its vendors located close by. 

That is another kind of synergy that may be exploited. All these are only possible when you have a large-scale, regional economic zone.    

TBS: In your article, you said that the investments that come should "truly help diversify our exports and lay the basis for a skill-based manufacturing sector that will compete globally based on knowledge, not cheap labour." Do you think our workforce is ready to embrace such challenges? 

Dr Mahmood: I would say that they are half-ready. We do need to put a lot of emphasis on building the skilled workforce needed for such industries. But let us start with what we already have.

We do have a lot of well-qualified and motivated engineers. Many such engineers, especially the younger ones, are very creative and well-plugged in with global developments. They are eager to innovate and learn. 

We always talk about competing based on cheap labour. But we also have relatively cheap engineers and we should put them to good use. 

Also, once the kind of investors I am talking about start coming in, they will create a demand for skilled workers. We just have to ensure that our universities and colleges are then ready to respond to such demand.  

TBS: You advised that the EZs should not be used for developing traditional goods such as jeans and shirts. What should be produced in the EZs then? 

Dr Mahmood: I said that because the land and other facilities we are offering in the zones are scarce resources and such scarce resources should be used to attract investors who can bring in something new, something that helps diversify our manufacturing base and our exports. In particular, I would like to see us moving towards more complex products such as electronics. Within the more traditional products, such as ready-made garments, there is scope to move towards more value-added products as well as producing textiles from man-made fibres. There is also scope for agro-processing, energy-efficient products and IT-based services, to name a few.