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1 Lessons Product: Legislation and Operation of Special Economic Zones in Nepal Lesson product 28 March 2019

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Lessons Product:

Legislation and Operation of Special Economic Zones in Nepal

Lesson product28 March 2019

Bimal WaglePioneer Law Associates

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TABLE OF CONTENTSLessons Learned:...........................................................................................................................1

Legislation and Operation of Special Economic Zones in Nepal....................................................1

Lesson product...........................................................................................................................1

28 March 2019........................................................................................................................1

TABLE OF CONTENTS..............................................................................................................2

1. INTRODUCTION..............................................................................................................5

1.1. Background...............................................................................................................5

1.2. EPI’s contribution to the institutionalisation of SEZs.................................................7

1.3. Development of Special Economic Zone in Nepal..................................................10

A. Legal Development.................................................................................................10

B. Status of the Bhairahwa SEZ..................................................................................10

C. Pipeline Projects..................................................................................................11

2. LEGAL AND POLICY REVIEW.....................................................................................13

2.1. Legal and Policy Issues..........................................................................................13

A. Positive List of Industries........................................................................................13

B. Establishment of industries inside SEZ...................................................................13

C. Mandatory export requirement............................................................................14

D. Legal harmony.....................................................................................................15

E. PPP Regime...........................................................................................................16

F. Punitive Approach...................................................................................................16

3. CRITICAL ISSUES: STATUS AND IMPEDIMENTS.....................................................17

3.1. Planning and Implementation Issues......................................................................17

3.2. Institutional, Organizational and Management Issues............................................18

A. Autonomy................................................................................................................18

B. Human Resources..................................................................................................20

C. Coordination and Communication.......................................................................21

3.3. Infrastructure Issues...............................................................................................22

A. Land acquisition......................................................................................................22

B. Electricity.................................................................................................................23

C. One Window Service...........................................................................................24

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4. CONCLUSION AND WAY FORWARD.........................................................................25

4.1. Way forward............................................................................................................25

A. Key issues and recommended actions...................................................................25

B. Action Points for BSEZ...........................................................................................31

C. Lessons for Pipeline SEZ Projects......................................................................32

D. Lessons for EPI...................................................................................................32

Schedule I: Comparison of SEZ in Nepal with International Practices..................................33

Schedule II: Comparison with Industrial Enterprise Act And Finance Act.............................39

TABLES

Table 1: Chronological evolution of SEZ in Nepal...................................................................5

Table 2: Planning and implementation issues in the BSEZ..................................................17

FIGURES

Figure 1: EPI Contribution to SEZ development.....................................................................9

Figure 2: Areas identified by GoN for establishing SEZs......................................................11

Figure 3: SEZs by Province...................................................................................................11

Figure 4: Process to establish and develop a SEZs..............................................................23

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ABBREVIATIONS

BSEZ Bhairahawa Special Economic Zone

CNI Confederation of Nepalese Industries

DoC Department of Customs

DPR Detailed Project Report

ED Executive Director

EIA Environment Impact Assessment

EPI Economic Policy Incubator

FDI Foreign Direct Investment

FNCCI Federation of Nepalese Chamber of Commerce & Industries

GoN Government of Nepal

IBN Investment Board Nepal

IEA Industrial Enterprise Act

IIPB Industry and Investment Promotion Board

IRD Inland Revenue Department

MoE Ministry of Energy

MoF Ministry of Finance

MoICS Ministry of Industry, Commerce and Supplies

MoLRM Ministry of Land Reform and Management

NEA Nepal Electricity Authority

OCR Office of Company Registrar

PSC Public Service Commission

RfP Request for Proposal

RfQ Request for Qualification

SEZ Special Economic Zone

SEZA Special Economic Zone Authority

SEZDC Special Economic Zone Development Committee

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1. INTRODUCTION

1.1. Background

The evolution of Special Economic Zones (SEZ) in Nepal started in 1998 as the then Ministry of Industry (MoI) – today Ministry of Industry, Commerce and Supplies (MoICS) – initiated various discussions and meetings for the development of Export Processing Zones. Concrete actions started in 2001, after the Government of Nepal (GoN) started infrastructural development works for an Export Processing Zone in Bhairahawa. The chronological evolution of SEZ is detailed in the table below.

Table 1: Chronological evolution of SEZ in Nepal

Year Event Description

2001 Acquisition of land for the Bhairahwa Export Processing Zone (EPZ)

The GoN acquired 35.218 Ha (87.023 Acres) of land in Bhairahawa. A study relating to the prospects of potential industries that can be set up inside the zone and its management and operational modalities was conducted. It identified 15 varieties of potential industries that can be setup in the zone. The total cost of infrastructure construction in this EPZ was calculated at Rs 512 million at 2001 prices.

2003 Budget Speech The GoN announced that it would continue to invest in the construction of SEZ and a new SEZ law would be drafted to develop industrial districts, export processing zones, recreational zones, and special trade zones. Birgunj, Panchkhal and Ratmate-Jiling-Devghat were identified as locations for SEZ in addition to Bhairahwa. A pre-feasibility study was conducted.

2005 Special Economic Zone Ordinance

A SEZ Ordinance was drafted and submitted for approval.

2006 Budget Speech The GoN made a commitment to operationalise the SEZ in Bhairahawa (BSEZ) in the running fiscal year, in addition to a feasibility study for development of SEZ in Birgunj.

2007 Budget Speech The GoN announced that a specific law for SEZ would be enacted for the development and management of industrial estates, export processing zones.

2008 Start of BSEZ Construction The construction of the BSEZ office started.

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2008 Budget Speech GoN announced that the SEZ Act would be enacted and necessary provisions would be made in the Finance Act for providing financial incentives in the SEZ.

2008 SEZ Bill The government tabled the SEZ bill to the parliament.

2009 Budget Speech GoN announced the continuity of infrastructure development in SEZ.

2010 Industrial Policy The Industrial Policy was issued, entitling industries established in SEZ to get the declared income tax exemptions, VAT related facilities and assistance, and exemptions of customs duty and local taxes.

2011 Budget Speech GoN announced that the Industrial Enterprises Act would be enacted in line with the Special Economic Zone Act and Industrial Policy 2010. In addition, the SEZ in Bhairahawa would be completed and preliminary works to establish such zones in Biratnagar, Jumla, Panchkhal would be accelerated.

2012 Budget Speech GoN made a commitment to complete the Bhairahawa SEZ within the end of the fiscal year.

2013 Special Economic Zone Development Committee

A Special Economic Zone Development Committee (SEZDC) was established under MoI. Its purpose was to prepare the SEZ law and relevant rules and regulations, to conduct a pre-feasibility and feasibility studies for the establishment of SEZ in different areas of the country, and to construct the required infrastructure in SEZ areas throughout Nepal.

2014 Budget Speech GoN first introduced the bill on SEZ to Parliament in 2008. It made a commitment to bring BSEZ into operation and announced the construction of infrastructure and access roads to proposed SEZ locations SEZs in Jumla and Bara.

2014 Completion of Construction in the BSEZ

The construction of BSEZ was completed. It was inaugurated by Deputy Prime Minister Bam Dev Gautam and MoI Minister Mahesh Basnet.

2016 Passing of Act 2016 The Special Economic Zone Act 2016 (2073) was passed.

2016 Establishment of SEZ Authority The Special Economic Zone Authority (SEZA) was established.

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2016 Notice for industries A request for proposals to establish and operate industries in BSEZ was issued by SEZA.

2017 Passing of SEZ Regulation The Special Economic Zone Regulation 2017 (2074) was passed.

2017 Budget Speech The GoN announced that Special Economic Zones would be brought into operation. Studies would be conducted to establish additional industrial zones. Access roads, electricity transmission lines and other infrastructure would be developed for cement, iron and copper industries and mines.

2018 Budget Speech The GoN announced in the budget speech that the necessary budget would be allocated for conducting feasibility studies, infrastructure development to establish at least one industrial zone, one economic zone, and one SEZ in each province in coordination with the provinces and both, private and public sectors.

2019 Amendment to SEZ Act 2016 The Federal Parliament approved the first amendment to SEZ Act 2016 in March 2019.

1.2. EPI’s contribution to the institutionalisation of SEZsThe DFID-funded Economic Policy Incubator (EPI) supports the GoN to develop better policies in order to attract investment, create quality jobs and achieve sustainable economic growth.

To achieve these objectives, the programme has put an important focus on SEZ. It played a significant role in passing the SEZ Act and its relevant rules and regulations, supporting the operationalisation of the first SEZ in Bhairahawa and amending the SEZ Act.

For the enactment of the SEZ Act and its relevant rules and regulations, EPI provided expert support to Parliamentary Committee on Industry, Trade, and Consumer Welfare decision makers in order to improve the technical quality of the Act. It did so by translating economic data, analysis and international best practices into relevant and practical recommendations, thereby filling a key information gap. In addition, EPI convened key stakeholders in policy dialogues to discuss and identify common views and positions, build consensus and ensure political buy in.

After the enactment of the SEZ Act, EPI responded to a request by MoICS to support in drafting the SEZ regulations. For this, EPI facilitated inter-ministerial consultations, ensuring understanding and alignment on the content of the draft SEZ Regulations. EPI also ensured the views of the private sector were taken into consideration by facilitating their participation into the drafting process.

For the laws and regulations to be implemented smoothly, EPI undertook a detailed organisation and management (O&M) survey for the creation of departments within SEZA and assessed the

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required manpower for individual SEZ offices. In addition, EPI developed criteria for issuing environmental clearance certificates for factories, supported SEZA with the development of a framework for public-private partnership (PPP) and privately-owned SEZ, and assisted SEZA in developing standard operating procedures (SOPs).

With the objective of bringing the BSEZ into operation, EPI facilitated policy discussions and convened various stakeholders.

EPI organised several consultations and focus group discussions with investors who applied for plots in the BSEZ, the Federation of Nepalese Chambers of Commerce & Industries (FNCCI), the Confederation of Nepalese Industries (CNI) and other private sector representatives to understand their perceptions and expectations on the BSEZ, as well as to resolve the issues of investors. For example, EPI organised roundtable discussions between investors, SEZA, the Ministry of Energy (MoE) and the Nepal Electricity Authority (NEA) to expedite the electricity connection to the BSEZ.

Consultations with GoN authorities included MoICS, the MoICS task force –created with the support of EPI-, SEZA, the Office of Company Registrar (OCR), the Inland Revenue Department (IRD), and the Customs Department to assess their preparedness and requirements.

In addition, EPI supported the Chair and members of the Parliament Committee on Industry, Commerce and Consumer Welfare (PC-ICCW) to expedite the SEZ legislation process and ensure the technical quality of its contents.

Lastly, EPI conducted the BSEZ applicant survey detailing labour and electricity requirements, conducted a perception survey with the local community, and facilitated the engagement of donors.

The below figure details key events on EPI’s contribution to the passing of SEZ legislation and its implementation.

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Figure 1: EPI Contribution to SEZ development

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22 investors who had been awarded licenses to open industries within BSEZ have initiated construction of their factories, 1 of which has been completed with trial production run successfully (April 2019)

As a result of learning from BSEZ experience, SEZA plans to transfer the entire budget of NPR 750 million for electricity provision to NEA for the speedy construction of a substation in the Simara SEZ.

At the Nepal Investment Summit, IFC entered into an agreement with SEZA to participate in the operation of the Simara SEZ as a PPP, a direct result of the PPP policy developed by EPI (March 2019).

Revised SEZ Act 2019 passed (January 2019), with support from EPI

EPI facilitated several roundtables to resolve issues related to electricity provision and import duties among BSEZ investors, SEZA, NEA, MoE, MoICS, OCR, IRD, with support from SEJON

EPI conducted a BSEZ application survey on labour and electricity requirements.

EPI conducted a roundtable with FNCCI, CNI and representatives of other investment groups to understand their perception of BSEZ

EPI supported the development of SEZ policy guidelines for privately owned and PPP-managed SEZ. (DATE?)

EPI conducted an O&M Survey, developed criteria for issuing environmental clearance, and supported the drafting Standard Operating Procedures, including the operation of one-stop services (adopted in November 2018)

SEZ Regulations passed (September 2017), with support from EPI

To achieve agreement on the draft SEZ Regulations, EPI facilitated inter-ministerial consultations, with engagement of the private sector and international experts

EPI prepared a Roadmap of future work for MoICS including the upscaling of SEZ in multiple provinces. (November 2016)

SEZ Act 2016 passed (October 2016)

EPI conducted a perception survey with the local community in Bhairahwa and initiated engagement of the private sector for the passing of a private sector-friendly SEZ Bill.

EPI initiated consultations with parliament committee members, provided technical support, garnered support for the SEZ Bill among MPs

EPI started supporting the MoI task force on Industrial Policy for the promulgation of the SEZ Bill.

2018 –

2019OPERATIONALIS

ING THE

BSEZ AND LESSON

LEARNING

2016 –

2017PASSI

NG OF SEZ

LEGISLATIO

N

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1.3. Development of Special Economic Zone in NepalA. Legal Development

The GoN first institutionalized the concept of SEZ on February 11, 2013 (19-10-2069 B.S.) through the Special Economic Zone Formation Order 2012 (2069 B.S.) (“Formation Order”). As a result, the SEZDC was established under MoI to conduct pre-feasibility and feasibility studies for the establishment of SEZ in different areas of the country. SEZDC was also mandated with the construction of the required infrastructure in the SEZ areas.

The primary laws specifically dealing with SEZ are: (a) The Special Economic Zone Act, 2016 (2073 B.S.) (the "Act") which came into effect in October 4, 2016 (08-18-2073 B.S.) which repealed the Formation Order. The Special Economic Zone Regulation, 2017 (2074) which came into effect in September 25, 2017 (09-06-2074 B.S.) ("Regulation"). In addition, SEZA has internally prepared (a) Employee Bylaws, (b) Finance Bylaws, (c) Standard Operating Procedures for SEZA, and (d) Operation and Management Guidelines for the effective operation of SEZ, Environmental Clearance Guidelines, and Guidelines for developing entirely private sector-developed and PPP SEZ.

In February 2018, the amendment bill to the Act (“Amendment”) was tabled in the parliament. The same has been approved by Parliament in March 2019 and was soon sealed by the President.

B. Status of the Bhairahawa SEZ (BSEZ)

The construction of the BSEZ started in 2008 and was completed in 2014. The BSEZ occupies a total land area of 35.218 Hectares, with 69 plots, ranging from 1,439 square meters to 3,737 square meters. 14% of the land area is kept aside as greenery and another 13% as open space. All the plots of BSEZ have already been booked by domestic firms, but the BSEZ has not been able attract a single foreign investor.

As of April 2019, Shakti Minerals turned out to be the first industry to have completed construction in the BSEZ occupying an area of 18,468 square meters and has already started operations through the completion of trial productions. 22 other industries have now initiated construction. Electricity has been provided from the Dhakdhahi Station.

C. Pipeline Projects

GoN has conducted a pre-feasibility and feasibility studies for the establishment and operation of SEZ in 14 locations throughout Nepal.

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SEZA reports that the 19 industries initially awarded licenses to operate in the BSEZ require 7.3 MW when at full capacity. The estimated total fixed investment for 19 industries is over NPR 4 billion, generating employment for 2490 workers, an expected annual revenue of NPR 5.5 billion and expected annual exports of NPR 4.1 billion.

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Figure 2: Areas identified by GoN for establishing SEZs

GoN’s priority has been set to establish one SEZ in each province: Biratnagar in Province 1, Simara in Province 2, Panchkhal in Province 3, Gorkha in Province 4, Bhairahwa in Province 5, Jumla in Province 6 (Karnali) and Dhangadhi in Province 7.

Figure 3: SEZs by Province

Among the seven planned SEZs, the SEZ in Bhairahawa was the first one to be completed. The Panchkhal SEZ and Simara SEZ are under construction. Lessons on zoning from the BSEZ have been taken up in the Simara SEZ, and works are being carried out to start the distribution of plots to garment industries in the largest block of the Simara SEZ. Construction is due to commence after the completion of a detailed project report (DPR) and an environmental impact assessment (EIA) in the Panchkhal SEZ.

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Bhairahawa SEZ (Coming into

operation soon)Simara SEZ Panchkhal SEZ Biratnagar SEZ Kapilvastu SEZ

Jumla SEZ Dhangadhi SEZ Nuwakot SEZ Nepalgunj SEZ Jhapa SEZ

Dhanusha SEZ Rautahat SEZ Siraha SEZ Gorkha SEZ

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2. LEGAL AND POLICY REVIEW

2.1. Legal and Policy IssuesThe concept of the SEZ and enactment of the Act are in line with a number of other acts and policies. SEZ is focused on export-oriented industries. SEZs were entitled to facilities and assistance on customs duty, excise duty and value added tax (the "VAT"). The Industrial Enterprises Act 2016 (“IEA”) has also recognized the establishment of SEZ for operation of industrial activities in an intensive manner.

A. Positive List of Industries

The Regulation in Schedule 3 has set out the list of industries that can be established and operated inside SEZs. In addition to the industries included in the "positive list", the Act has authorized SEZA to provide approval for the establishment of industries of special nature inside the SEZ, even if such industry has not been included in such list.

The approach of positive list was a deterrent for investors, as it limits the scope of new businesses. The Amendment to the Act has incorporated the concept of a “negative list”, meaning the list of industries such as cigarettes and alcohol that would not be permitted to be established in SEZs.

In Bangladesh, a negative-list approach has been followed under which only prohibited activities are referred. This approach will allow all other businesses except the ones prohibited by the law to be established in SEZ. In other jurisdictions like in India and Cambodia, the Boards have been vested with power to approve the industries in SEZ. They are guided by the objectives of establishment of SEZ and they are able to assess the potential for the industries through the application submitted by the industries.

B. Establishment of industries inside SEZ

The Act has restricted the relocation of any existing industries inside SEZ which are already established and operating outside the SEZ at the time of the commencement of a SEZ. An exception to such restriction is for industries of special nature as published in the Nepal Gazette. The GoN has not published any Gazette notification in this regard till date. Other countries (India, Bangladesh, Cambodia) are however flexible on the relocation of industries into SEZs.

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C. Mandatory export requirement

As per the SEZ Act 2016, all industries established inside SEZs were required to mandatorily export 75% of their total production or service, with the objective to increase exports.

On the contrary, in other countries no such mandatory export requirements are prescribed in the law itself of other jurisdictions of SEZ. Many have categorized economic zones into several areas: (a) Export Processing Area; for export-oriented industries, (b) Domestic Processing Area: to meet the demand of the domestic market, (c) Commercial Area: for business organizations, banks, warehouses, etc., (d) Free Trade Areas.

For example, in Cambodia, there is no such requirement in the law, but according to the Australian National University1, SEZs in Cambodia are exporting 70.3% of their total production. In India, there are no export requirement but industries are required to achieve positive net foreign exchange earnings. Net foreign exchange earnings2 are calculated for 5 years cumulatively.

1 Australian National University, “Working Papers in Trade and Development”, number 14/2015.

2 The total value of exports in foreign exchange should be higher than the incurred cost in foreign exchange for products and services like raw materials, consumables and spares, dividends payable in foreign currency, royalties, payments to foreign technicians, training to employees abroad, insurance and freight costs, foreign travel, design fees, capital goods and such other expenses.

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Members of the Siddhartha Chamber of Commerce and Industry, Rupandehi including its former chair are doubtful that the mandatory export requirement provides any attractiveness to investors. Many investors have regarded the SEZ law 2016 as a disappointment and see the punitive action of de-registration in case of failure to meet the requirement as excessive.

The lack of foreign markets for Nepalese products, unavailability of local raw materials, highly competitive and unpredictable foreign markets are some of the major factors which impact investors’ ability to comply with the mandatory export requirement.

The requirement has been a major setback for most investors to invest in SEZs.

At least two industries intended to relocate their industry and existing equipment to the BSEZ, but the inflexibility of the law did not permit them to do so.

The Kathmandu Municipality is developing a plan to remove all industries from the Kathmandu valley, and industrialists are looking into options to relocate their industries outside the valley. SEZs are being considered as potential areas for the relocation.

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The 2019 Amendment to the Act has reduced the export requirement to 60%. In addition, industries can sell all of their products or services in the domestic market for up to one year from the date of operation without availing tax exemptions and concessions provided by the Act. This may ease the concern of some investors to a certain extent.

D. Legal harmony

The passing of the SEZ Act is the undisputed beginning of a new era of industrialization in Nepal. However, government officials as well as private investors have raised concerns regarding legislative and practical conflicts and contradictions among the SEZ law, Industrial Enterprise Act (IEA), IBN Act, and Fiscal Act.

SEZA is highly concerned that the benefits and concessions provided under IEA to industries established outside SEZ could be eroding the margin of incentives over those provided to SEZ industries. For instance, export_ based manufacturing industries are provided with a 25% income tax exemption in perpetuity under IEA whereas under the SEZ Act, 2016; all industries are provided with 100% tax exemption for first 5 years, 50% for following 5 years and 50% for following 10 years subject to conditions. The benefits and concessions provided to industries in SEZs is not much attractive in comparison to those provided by IEA. More detail is provided in Schedule II.

Industries inside SEZ are entitled to customs duty exemption under bank guarantee and other facilities in the following order: (a) raw materials, auxiliary raw materials, packaging and other materials used for producing export products, and (b) plants, machineries, equipment, tools and spare parts and maximum of three vehicles per factory depending upon the nature and size of the industry. However, inconsistency among laws has prevented this provision from being implemented.

A few investors have withdrawn their application for establishing industries in BSEZs as they are unsure about the benefits and concessions guaranteed by the Act and Regulations being implemented. Therefore, they are following "wait and see" approach regarding the performance of SEZs.

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Shakti Minerals is the first company to establish its factory inside the BSEZ. It faced formidable challenges to get the benefits assured by the Act. So far, the Company has been unable to get its cash deposit released from the Bhairahawa Customs Office, which had to be provided while importing machineries in place of a bank guarantee. However, the customs office denies the request for release underpinning the Act, since the Customs Act and its amendment under the Fiscal Act are silent on the process of releasing bank guarantees. They have assured to release the guarantee after there is clarity in the law itself.

In addition, Shakti Minerals had to make cash deposits of around NPR 10 million for the release of the machinery, causing great frustration and undoubtedly affected the project cost and timeline milestones set by the company to start operating the business.

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The Investment Board Act 2011 has also provisioned that approval is required from IBN for the development of SEZ. Though this has not yet created any practical implication in the regulatory aspect however, legal harmony in this regard is also important.

The SEZ Act has guaranteed the stability of the tax incentives, benefits and other concessions provided under the Act and other laws. The Act states that provisions made in other Acts will not apply to industries established under the SEZ Act.

Generally, the relevant tax laws and industrial enterprises law provide tax incentives and benefits, subject to review and change through the Finance Act, which is published each Fiscal Year. As the SEZ Act has guaranteed the stability of the tax incentives and benefits provided under the Act and other laws, such incentives and benefits cannot be taken away by the Finance Act. Nevertheless, the Income Tax Act 2002 (2058) contains superseding provisions, meaning incentives provided under a different Act can be withdrawn by the provision of this 2002 Act.

Each government body is governed by its own specific law. The lack of legal harmony among the laws has created a state of confusion between government officials to implement the provisions of the laws. Government officials seem to prioritize the laws governing their bodies over other prevailing laws. Likewise, debate among government officials for not conforming to the benefits and concessions provided by the SEZ Act has created a practical conflict between the SEZ Act and Finance Act. Please refer to Schedule II.

E. PPP Regime

A number of factors have made the regime of public- private partnership for SEZ in Nepal less attractive for investors. Developers are required to transfer the SEZ to GoN after a period of 30-35 years of operation. In addition, the governance of the SEZs including monthly lease to be paid by industries within SEZs is administered by SEZA (including rent amount and labour costs). Investors find it difficult to develop SEZ as factors like land acquisition to develop SEZs is not an easy task if it is to be done by the private investors.

In India and Bangladesh, the government acquires the required land as per the project proposal and leases the same to SEZ developers. This greatly relieves the hassles of a developer.

F. Punitive Approach

According to the SEZ Act, if an industry exceeds the permitted domestic sales percentage (25% of the total production), the industry is exposed to legal consequences: (a) a fine equal to the amount of local sales, and (b) removal of the tax incentives and benefits for the relevant fiscal year. In addition, SEZA may also cancel the license or close the factory.

The approach towards closing factories and the cancellation of licenses for non-compliance is punitive. This has raised red flags among prospective investors as it reduces their confidence in fulfilling the mandatory export requirements.

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3. CRITICAL ISSUES: STATUS AND IMPEDIMENTS

This chapter deals with various problems that the BSEZ had faced since the conceptualization phase to the start of operations. The major issues faced by BSEZ and investors plus the problems they may encounter in the future are covered under three categories;

(1) Planning and Implementation issues

(2) Institutional and organizational issues

(3) Infrastructural issues.

3.1. Planning and Implementation IssuesThe following table outlines a chronology of events experienced by BSEZ.

Table 2: Planning and implementation issues in the BSEZ

Timeline Event

2001 Land Acquisition for BSEZ.

2003 Allocation of budget for the construction of SEZ.

"A Report on Development of Special Economic Zones in Nepal"

Tentative time schedule for implementation of infrastructure development of BSEZ starting from 2001 with expected completion by 2007.

2008 Draft Bill submitted to Parliament.

2012 Government committed to complete the construction of the BSEZ within fiscal year 2012/13.

2014 Completion of BSEZ Physical infrastructure.

2014 BSEZ was inaugurated by DPM Bam Dev Gautam and MoICS Minister Mahesh Basnet.

2016 SEZA Act passed.

2016 A notice for request for proposal to establish and operate industries in BSEZ issued by SEZA.

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2017 SEZA Regulations passed.

2017 Second inauguration by MoICS Minister Nabindra Raj Joshi.

2019 First amendment to SEZ Act 2016

From the above table, it can be deduced that the plan made by the GoN was never implemented timely, leading to a very slow pace in the development of the BSEZ.

A case in point is the fact that the SEZ Act was passed in 2016, 8 years after the SEZ bill was tabled in the parliament in 2008.

Likewise, the construction of the BSEZ started in 2001 and it took 17 years to bring the BSEZ into operation, which is still not operating at full capacity. This resulted in the loss of opportunities, for example in the utilisation of land and employment for the country.

In the international context, Cambodia started constructing its first SEZ in 2005 and by to 2015 had constructed 36 SEZs. Between 1983 and 2018, Bangladesh has constructed a total of 88 SEZs. In 2005/06, a total of USD 112.9 million was invested in SEZs in Bangladesh. In 2012, SEZ in Bangladesh exported a total of USD 4,240 million.

Had GoN completed the BSEZ as planned, the Nepali economy would have reaped immense socio-economic benefits in terms of employment, foreign exchange earnings and other domestic value additions which are now foregone.

3.2. Institutional, Organizational and Management IssuesThe Special Economic Zone Authority was established under the SEZ Act 2016, which mandated a legal basis to establish, operate, and manage SEZs with the objective of accelerating export promotion through the process of industrialization in Nepal.

The Act entrusted SEZA with the right to establish, operate and manage SEZs. SEZA is governed by administrative tiers. At the apex, there is a Board chaired by the Secretary of Industry for policy and executive decisions. The Board is supported by a secretariat, headed by an Executive Director who functions as the administrative head. Then, in each SEZ, there is a separate office for overall administration and management of the respective SEZs, such as the BSEZ office.

A. Autonomy

SEZA serves as the primary regulator for the operation and management of industries inside SEZs as per the Act. SEZA has dual roles: as a regulator of the industries established inside the SEZs and as an operator of the SEZ.

However, its autonomy is largely compromised on the following grounds:

i. Composition of the Board

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The board chaired by the Secretary of Industry is composed of 19 members representing key stakeholders from the Government, private sector associations and experts. It is the top body to exercise the authority of SEZA as stated in the Act. Most of the members are ex-officio members of the different Governmental ministries and departments. This kind of representation has compromised the capability of the Board to exercise autonomy.

It is also perceived that due to large number of members of the Board, on the one hand it is hard to convene meetings and on the other hand, the decision-making process has become time-consuming. In the last fiscal year, a total of 9 meetings were convened, it was a very crucial year for operation of the BSEZ.

The First Amendment to the SEZ Act recently passed by the Parliament has lowered the number of Board members to 9.

ii. Representation of the Board

In comparison to other boards, such as IBN, which is chaired by the Prime Minister; the Industrial Promotion Board, chaired by the Minister of Industry, Commerce and Suppliers; and NEA chaired by the Ministry of Energy, the Board of SEZA seems to be politically less empowered. SEZA needs to garner cooperation and involvement of various other government agencies to operate. SEZA is directly accountable to the private investors and has huge responsibilities towards them. In view of this, political representation in the Board could add clout of the SEZA Board in terms of effectively enforcing decision.

iii. Function of the Board

The most important function of the Board is to carry out all the activities prescribed under the Act and Regulations. This means that all the decisions to be made by SEZA, even minor decisions (licensing industries, publication of industry lists, issuing requests for proposal and requests for qualification (RfQs, RfPs), renewal of licenses, etc.) are to be done by the Board. The decision-making power in SEZA has been conferred to the Board by law. Section 54 of the Act gives room for the Board to delegate some of its power to the SEZA Executive Director on a needs basis. As a result, the CEO is constrained in taking quick decisions; and has to first get decisions approved by the Board.

iv. Function of the Executive Director

The Executive Director is the administrative chief of SEZA’s office. As per the Act, the function, duties and responsibilities of the Executive Director (ED) is limited to implementing the decisions made by the Board, running the daily administration of the office and implementing the instructions of the Board.

Pursuant to Section 54 of the Act, the Board has discretionary power to delegate minor authorities (as listed under the above point) to the ED. However, the absence of statutory power has impeded the ED from being accountable and results oriented.

v. BSEZ Office

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While the SEZA Head Office is located in Kathmandu, every SEZ unit is required to have its own office on-site, as it is the case with the BSEZ office in Bhairahawa. So far, the powers and responsibilities for the functioning of each SEZ offices seem to have been centred only in the Head Office.

At present, the BSEZ is the only operational SEZ. All of the plots within it have been leased and investors have gradually established their units. Shakti Minerals, one of the industries in the BSEZ, has completed its infrastructure and trial production, and will imminently start commercial production.

At this stage, it is but natural to have a full-fledged BSEZ office for the operation and management of the BSEZ in a seamless way. The private sector investors expect the service by the BSEZ office to be prompt and responsive. However, the BSEZ office is run by a non-officer level employee and a couple of messengers without authority and capability to carry out the administrative functions of the office. All kinds of correspondence including the local correspondence with the investors and other relevant agencies are required to be routed through the head office. This has made the BSEZ office redundant due to inadequate human resources, lack of proper planning, and lack of authority.

All in all, the prevailing laws have constrained the independence and self-governance of SEZA.

The inadequate delegation of authority from the Board to the ED and similarly from ED to the Head of BSEZ Office, has put in question the functionality of the BSEZ.

SEZA is required to request approval from the Ministry of Finance (MoF) to make any decisions that result in any amount of extra burden on the national treasury. This requirement prevents SEZA from being able to make decisions on the recruitment of employees required to operate and manage SEZs. Such provision has constrained the internal administration of the SEZs too.

SEZA appears to function more like as a department under ministries for carrying out the GoN’s normal administrative work than as an independent Authority.

B. Human Resources

SEZA has prepared an Operational and Management Survey Report inclusive of an organisational structure, function, and duties and responsibilities of each employee. This yet remains to be fully implemented by SEZA.

Currently, 35 employees are working in the SEZ offices (including 4 in BSEZ). But SEZA does not have its own staff; at present, employees have either been transferred from other government agencies or recruited on a contract-basis by SEZA in consultation with MoICS. Since contract-based employees change from time to time, the staff turnover has increased and the efficiency of the work has also been affected. Due to the insufficient working staff in SEZA, the BSEZ office is being administered by non-officer level staff.

SEZA can have its own employees governed by the terms and conditions of the service of its own. Similarly, the government is supposed to avail the required number and types of employees from other government agencies on deputation until SEZA procures its own employees. However, SEZA

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at present is facing severe HR inadequacies, despite having approached the government for assistance.

As mentioned previously, in order to hire its necessary employees, SEZA needs to obtain approval of the needed positions from MoF. Accordingly, SEZA had presented the list of positions required for SEZs to MoF, through MoICS. After a series of discussions over 8 months, MoF finally approved 59 employees out of the proposed 75 employees. SEZA is of the view that there is a gap between the levels of the approved positions, which may obstruct the career development and progression of the employees.

Moreover, SEZA has to recruit its employees through the Public Service Commission (PSC) after undertaking the required regulatory procedures. For this, SEZA first needs to obtain approval of scope of work of the employees from PSC and then adhere to PSC’s recruitment schedule. This is a time-consuming process which may take up to a year.

Considering the growing number of factories being set up in the BSEZ, SEZA is expected to make the regional BSEZ office a self-contained and fully functioning office, with an adequate number and level of employees to match the current phase of operation.

C. Coordination and Communication

SEZ, as a part of GoN, can only work through the collective effort of other government agencies such as MoICS, MoF, Department of Customs (DoC), NEA, MoE, and others. All these ministries and agencies are important for the establishment and proper functioning of SEZs. The effective SEZ implementation requires a close collaboration, coordination and communication with and between government bodies for issues related to budget, land, forest, custom duty exemption on imports, electricity, one-window services, among others.

Close coordination and collaboration is currently not the case. The Board has authority to exercise its power within its jurisdiction under the SEZ Act and is represented by senior officials from key government ministries. However, the Board is not in a position to implement its decisions independently. In practice, the SEZA Secretariat is required to send a letter to the concerned ministry through MoICS for final approval stating the decisions made by the Board. This has raised a question over the gap between the authority conferred to the Board and its real strength to exercise authority.

To build a sub-station at BSEZ, SEZA sought the support of NEA, with little success. This proves that government agencies are reluctant to undertake collective efforts. In addition, SEZA communications proceed through MoICS. The tendency of other ministries to think that SEZ falls

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For the construction of an electricity sub-station as well as the repair and maintenance of electrical equipment, the recruitment of an electrical engineer is a must for the functioning of the BSEZ. SEZA had proposed the position of electrical engineer in its recruitment list to MoF, however, the positions approved by MoF do not include that of an electrical engineer.

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under the sole responsibility of MoICS, with no other Ministries and agencies being accountable for the success of the SEZs, has also played an important role in the ineffectiveness and slow progress of SEZs.

The unwillingness of other government agencies to honour the decisions made by the Board has made its practically void. Likewise, the fact that communications issued by SEZA are not entertained properly has caused all issues being routed through the longer channel of MoICS.

If one considers that moving from the phase of conceptualization of SEZs to their practical implementation has taken over a decade, the issue of lack of coordination and collaboration is a vital setback for the timely and effective implementation of SEZs.

3.3. Infrastructure Issues

A. Land acquisition

According to SEZ Act, 2016; SEZA has to fulfil the following processes to establish and develop a SEZ:

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In Panchkhal, the Department of Forests took a year to grant approval for the clearance of trees for the purpose of land acquisition and establishment of a SEZ.

Similarly, the issue faced by Shakti Minerals with the Bhairahawa Customs for its import duty exemption is a classic case of coordination failure among government agencies.

Despite the SEZA Board including representation from MoF as well as DoC, the Board could not resolve the issue faced by Shakti Minerals. Even when decisions are made, they are not effectively entertained by other government agencies.

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Figure 4: Process to establish and develop a SEZ

The legality of the establishment of a SEZ is formalised through the publication of a notice in the Nepal Gazette.

The first phase of land acquisition started around 2001 for the purchase of 35.218 hectares of land. Around 2003, additional land was acquired for the construction of a 30 feet wide access road connecting the BSEZ to the Bhairahawa - Sunauli highway. In 2009, more land was purchased to widen the access road from 30 feet to 100 feet. It took almost 9 years to complete the land acquisition process for the BSEZ.

It was expected that the survey report would cover all the aspects of the development of SEZs including land and access requirements. However, in the case of the BSEZ, deficient analysis and the lack of proper planning on the land requirements for access roads resulted in the dissatisfaction of local communities with the BSEZ and GoN.

GoN paid locals for the land acquired in 2001 and in 2009 at 2001 prevailing prices. The land prices had greatly escalated by 2009. The local community perceive that GoN has not paid fair prices prevailing in 2009. The claim of compensation from locals over the land acquired for extension of the access road is still ongoing.

B. Electricity

The BSEZ came into operation with a call for applications from interested industries on 25 th May 2016. However, the BSEZ had not arranged the provision of electricity as required by investors, which has caused some applicant investors to withdraw their application.

The electricity in the BSEZ is provided by NEA. The electricity line that is directly provided to Shakti Minerals comes from the Dhakdhahi Station which is currently the only working energy dispatched in the BSEZ, providing 1 MW of electricity to Shakti Minerals.

The total electricity requirement for the industries to be operated in the BSEZ, as per their initial applications, is about 10 MW. However, BSEZ does not have its own sub-station to supply electricity for more than 8 MW complying with safety measures. In order to distribute electricity with full security and ensure a stable power supply, the BSEZ requires its own sub-station.

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Identification

of Location (by Authority/Inve

stor)

Pre-feasibility study

Establishment of SEZ

Feasibility report

Approval of feasibility report by

Board

Survey

Approval of Survey report

by GoN through SEZA

Board

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Two methods are available to enable the construction of a sub-station within the BSEZ:

By SEZA itself through an open tender, which would theoretically not require a long period or be costly. However, since SEZ lacks an electrical engineer and other necessary resources, the tentative time period may take up to 5 years depending on the power requirements.

Through NEA, with construction works taking a minimum of two and half years. This would be the necessary period for ensuring a smooth good selection of contractors, right of way, proper line management, etc.

SEZA has been corresponding with NEA on this matter. After several consultations and discussions, NEA has committed to support SEZA with the construction of a sub-station. The choice of method would largely depend on the prospects for positive collaboration between SEZA and NEA.

The unavailability of electricity remains the serious concern for investors.

C. One Window Service

The concept of one-window service has been adopted all across the world within SEZs to provide prompt and investor-friendly services under one roof. A provision for its incorporation has been included under the Act. Services provided would include tax concessions and other benefits, company and industry registration, renewal, administrative formalities for investors, and support with industry and visa requirements to operate industries.

However, as of today, SEZA has not been able to establish a functioning one-window unit or committee in SEZA. Given that the one-window service is one of the major attractions for investors in SEZs, its absence also limits a full-fledged operation of the SEZs.

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4. CONCLUSION AND WAY FORWARDDespite SEZ being a priority project of the GoN, it has taken almost two decades to complete the construction and bring the first SEZ in Bhairahawa into full operation. This has largely been caused by the initial uncertainty from investors about its effective operation and the lack of essential services provided in the BSEZ. Though all plots of land have now been allocated to investors, only one industry is close to starting production and 21 others are in the construction phase. No foreign investor has applied for a license to establish an industry in the BSEZ.

The various factors that are attributable to these delays in bringing the BSEZ into operation include:

(a) Lack of capacity for proper planning,

(b) Delays in the formulation and revision of legislation (SEZ Act 2016, SEZ Regulations, SEZ Act Amendment 2019), to ensure investor-friendly provisions and legal harmony;

(c) Weak institutional structures

(d) Weak mandate for the speedy provision of essential services such as electricity,

(e) Lack of concerted and targeted marketing and promotion activities at national and international level.

Three factors are indispensable for ensuring the effective operation of the BSEZ and other SEZs:

Ensuring the autonomy and competence of SEZA,

Adequate human and financial resources to operate SEZ offices, with both sufficient human and financial resources and the formation of a one window service unit.

Overcome coordination failures to provide essential infrastructure and services, such as electricity and banking.

4.1. Way forward For the BSEZ to become fully functional, an action plan with clear roles and responsibilities should be adopted and implemented. In the following section, a list of recommendations has been provided with related actions for GoN to take forward.

A. Key issues and recommended actions

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N. Issue Impact Recommendation/Action Concerned Government Authority

Instrument

Legal and Policy Issues

1 Relocation of Industries inside SEZ: The Act has restricted the relocation of already established industries. An exception to such restriction is that some industry of special nature as published in the Nepal Gazette can be relocated in a SEZ. The GoN has not published any Gazette notification in this regard till date.

The potential industries interested in investing inside SEZ are barred from doing so due to prohibitive provision on relocation of industries inside SEZ.

Relax the provision of prohibition on relocation of the industries in SEZ.

PARLIAMENT/ SEZA/ MoICS

Amendment to SEZ Act. /Gazette notification.

2 Mandatory Export Requirement: Even though the Amendment to the Act has reduced the mandatory export requirement to 60%, this is still not rational with Nepal’s level of industrialization and exports.

Investors lack confidence to meet the mandatory export requirement

It would be more practical and industry-friendly to impose a minimum export requirement on the basis of the nature and export potential of a particular industry and to enhance such export requirement progressively. While issuing licenses, the Board can determine such minimum export requirement.

PARLIAMENT, SEZA, MoICS, MoF

Amendment to SEZ Act

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3 Guarantee of benefit: The Customs Department and other tax agencies are reluctant to provide tax benefits and concessions on the basis of the provisions of the SEZ Act and without having specific provisions in other tax laws such as Customs Act and Income Tax Act.

Investors do not have confidence that the special tax benefits and concessions will be provided by the tax authorities.

The Ministry of Finance as a line ministry for all tax agencies should issue a circular requiring all such agencies to accord benefits as set out in the SEZ Act to the industries inside the SEZ, to ensure the administrative convenience and clarity. Other government agencies such as Department of Customs, and One-Stop-Service-Centre including Company Registrar’s Office should recognize the benefits and concessions to be provided to the investors under SEZ Act.

Ministry of Finance Issuance of circular

Planning and Implementation Issues

4 Proper planning: MoICS and SEZA have not prepared a detailed plan for the establishment and operation of the BSEZ with a clear budget, specific milestones and timelines.

This has resulted in time and cost excesses depriving the country from reaping the benefits of timely development and operation of the BSEZ and other SEZs.

a. A detailed project plan to be prepared by Executive Director and be approved by the Board.

b. The Board shall conduct periodic review of the progress made. This should also form a key parameter of the performance appraisal of the ED.

SEZA BOARD, SEZA CEO

Detailed project plan

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Institutional and Organizational Issues

5 Lack of political representation in the Board. The current Board structure includes bureaucrats from the government side and lacks political representation.

Inter-governmental coordination and communication is poor. The Board does not have the sufficient strength to execute its decisions for which it has to seek co-operation from other ministries and departments.

Two tiers of decision making in the Board should be devised.

The upper level of the Board shall act as Governing Board which shall be chaired by the Prime Minister with other 4 members (such as ministerial representation from MoF, MoICS and one expert).

The second tier of the Board shall act as the Executive Board (Chaired by the Minister from MoICS with other 6 members who are closely related to the operation of SEZs, such as secretary of MoICS and other representatives of MoF, MoE, MoLRM)

The Parliamentary Committee on Industry, Commerce, Labour and Consumer Welfare (PC-ICLCW) at Parliament, Officer-in-charge of SEZA at MoICS,

Amendment to SEZ Act

6 Lack of autonomy and adequate authority to the SEZA ED: The existing SEZ legislations do not provide sufficient authority to the ED, who has to rely on the delegation of authority by the SEZA Board

The concentration of the power in the Board has resulted in slow decision making. As the ED cannot act as chief executive officer will full managerial and functional power, accountability of the ED is also an issue.

The existing SEZ Act and Regulations should be amended to accord full functional authority to the ED. Such authority should include (but not limited to) issuance of the license, award of contracts, hiring of key staff for the head office as well as SEZ offices.

The ED should function as Chief Executive Officer (as it would in the private sector), providing all the authorities required for the operation and management of the SEZ at

Parliament, Minister, Secretary and SEZA-in-Charge Joint Secretary at MoICS,

Amendment to SEZ Act

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administration level. The ED should be made more accountable and be monitored by the Board. The appointment should be on a performance-based contract, with financial incentives and benefits tied with performance.

7 Human Resources: SEZA and BSEZ have a problem of understaffing both in terms of number and required skill sets.

Lack of sufficient and trained human resources has had an impact on the development of the BSEZ, the delivery of services to investors and the smooth operation of the SEZ.

SEZA should have authority to create positions as per their requirement. The MoF shall provide budgetary allocation to meet the staffing needs of SEZA and SEZ offices.

SEZA, MoF Internal Guidelines

Infrastructure Issues

8 Invitation to establish industries without the provision of essential infrastructure: SEZA has invited industries to be established inside the BSEZ without arranging and completing essential infrastructure.

Investors are aware of the lack of provision of the required infrastructure, leading to a decline in confidence of investors and withdrawal of applications in some cases.

SEZA should invite applications from investors only upon completion of the development of all the essential infrastructures.

MoF, SEZA, Nepal Electricity Authority, Nepal Telecom Authority and other concerned government authorities

Order/Circular

9 Provision of electricity: BSEZ does not have its own sub-

Investors were not certain that BSEZ would be able to

BSEZ should determine and provide the total amount of electricity required

SEZA, NEA

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station to supply electricity of more than 8 MW complying with safety measures.

supply electricity uninterruptedly as per their requirement, leading to their hesitance in establishing industries.

for the industries to NEA.

SEZA should immediately commence the construction of its own sub-station.

10 Delay in the establishment of a one-window unit: Though the SEZ Act requires a one-window unit to provide all the required services to the investors/industries, no such unit has been set up so far.

Investors face administrative hassles.

One-window unit should be made functional immediately after the issuance of license to industries.

SEZA, Cabinet, MoICS, and Chief Secretary, with initiative to be taken by MoICS Minister

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B. Action Points for BSEZ

Based on the recommendations set out in Section A above, below are the immediate specific action points that should be carried out to bring the BSEZ into full operation and provide all the necessary assistance and facilitation to such industries:

N. Area Responsible Agency Action

1. Infrastructure SEZA and BSEZ A. Build a sub-station for supply of electricity: As the energy load of industries can become very high depending on voltage issues and safety measures an independent sub-station would be required to handle the energy load of BSEZ. Therefore, BSEZ should immediately commence the construction of its own sub-station.

B. Arrange essential services to be provided within BSEZ: Services which are essential to operate the industries such as banking, insurance, telecommunication, etc. should be at hand of investors. For this, SEZA should quick start the processes and enter into contract with the service providers.

2. Institutional MOICS and SEZA A. Availability of skilled human resources: considering the requirement to recruit personnel through the Public Service Commission, it may take up to one year for SEZA to fulfil its position requirements as per its approved O&M survey. In order to meet the immediate staffing need of SEZA and the BSEZ, the Government should depute the required staffs from other agencies as set out in Section 18 of the SEZ Act until SEZA procures its own staff.

B. Formation of One-window Units: SEZA CEO and Board should remind and follow up with MoICS to make recently established One-window unit fully functional.

C. Establish Investor Friendly Offices: The BSEZ should arrange for the provision of clear office maps and maintain navigation guides for service seekers at the BSEZ office entrance.

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3. Promotion SEZA and BSEZ Office A. Dissemination of information among investors and industrialists: SEZA should organize programs for investors. A proper information dissemination mechanism should be established to enable investors to be up to date with latest news and opportunities.

B. Build relation with Local Governments: A good rapport should be maintained with the local government. Local government can facilitate the creation of ownership by local community and opportunities to establish essential services in and around the SEZ.

C. Lessons for Pipeline SEZ Projects

BSEZ can be considered as pilot project. Other pipeline projects, such as the Simara SEZ and Pachkhal SEZ can draw lessons from the recommendations and action points set out in Section (A) and (B) above.

Lessons learnt from the development and operation of the BSEZ will need to be documented and disseminated to the Government agencies and other stakeholders. Consultative meetings may be organized with participation of all the stakeholders to share the lessons and collect feedbacks for a clear way forward.

D. Lessons for EPI

EPI has made a visible contribution to the SEZ policy making process, the institutional set up for SEZs and in bringing the BSEZ into operation.

Moving ahead, the major function of SEZA is to manage the BSEZ in an effective and efficient manner. For this, EPI can support the institutional strengthening of SEZA, BSEZ and support the establishment of a one window unit at BSEZ through technical support and recommendation of best practices.

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Schedule I: Comparison of SEZ in Nepal with International Practices

Parameters Country Description

1. Regulating Structures of Special Economic Zone (“SEZ”).

Nepal Special Economic Zone Authority, Executive Director and One-window unit.

India Special Economic Zone Authority, Board of Approval, Development Commissioner, and Approval Committee.

Bangladesh Bangladesh Economic Zones Authority, Governing Board, and Executive Board.

Cambodia The Cambodian Special Economic Zones Board, Special Economic Zones Administration, and Special Economic Zones Trouble Shooting Committee.

2. Establishing an industry/unit in the SEZ.

Nepal Application to be submitted to SEZ Authority.

India A proposal to be submitted to the Development Commissioner on the basis of authorized operations prepared by the Board of Approval.

Bangladesh Licensing requirement ("Economic Zone User Permit").

Cambodia All the required documents to be submitted to SEZ Administration after completing the required formalities.

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3. Export Requirements to be followed by industries in SEZ

Nepal 75 % mandatory export.3

India No direct export requirement but industries are required to achieve positive net foreign exchange earnings.4

Bangladesh No specific investor obligation has been mentioned in the governing legislation.

Cambodia No specific investor obligation has been mentioned in the governing legislation.

4. Fiscal/Financial benefits

Nepal The following table provides the basic fiscal benefits provided to the industries within SEZ.

Tax Rent VAT Custom

- 100% income tax exemption for first five years from commencement of commercial transaction,

- 50% income tax exemption for the following 5 years.

- 50% exemption for the following 10 years if the industry utilizes a minimum of 60% domestic raw materials,

- 50% concession in the first year,

- 40% in the second year and

- 25% in the

- Full exemption

- Full exemption under bank guarantee.

3 lowered to 60% by 2019 amendment to SEZ Act, 2016.

4 Net foreign exchange earnings are calculated for 5 years cumulatively. The total value of export in foreign exchange should be higher than the incurred cost in foreign exchange for products and services like raw materials, consumables and spares, dividends payable in foreign currency, royalty, payment to foreign technicians, training to the employees in abroad, insurance and freight costs, foreign travel, Design fees, capital goods and such other expenses.

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- 100% income tax exemption for first 10 years for the industries inside SEZ of Himalayan Region and Government specified Hilly regions,

- 50% income tax exemption for the following 10 years.

third year.

India The following table entails the basic fiscal benefits provided to the industries within SEZ.

Income Tax Rent VAT Custom

- Exemption from Central Sales Tax on all inter-state sale of goods.

- 100% exemption of profits and gains tax from business for the first 5 years.

- 50% exemption on profits and gains tax from business for the next five years.

- - - Full exemption (without any approval requirements)

Bangladesh The following table entails the basic fiscal benefits provided to the industries within SEZ.

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Tax Rent VAT Custom

- 100% tax exemption for first 3 years,

- 80% tax exemption for 4th year,

- 70% tax exemption for 5th year,

- 60% tax exemption for 6th year,

- 50% tax exemption for 7th year,

- 40% tax exemption for 8th year,

- 30% tax exemption for 9th year, and

- 20% tax exemption for 10th year.

- 50% exemption on income tax on salary of Foreign employee having technical expatriates for 5 yrs.

- 100% exemption of income tax on dividend, capital gains from transferring of shares, royalty/technical know-how/technical assistance for 10 yrs.

- 100% exemption of tax, sub-tax, rate, toll, fees levied by Local Government Act.

- 100% exemption of Land Development Tax.

- 100% exemption of registration fees on registration of land transfer,

- 50% exemption of stamp duty.

- Exemption of VAT on utilities amounting 80% in gas, 80% in water, 80% in electricity, 100% in procurement provider.

- Full Exemption.

- For materials/inputs full exemption under bond.

Cambodia The following table lists the basic fiscal benefits provided to the industries within SEZ.

Tax Rent VAT Custom

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- 100% exemption of export tax.

For further information: https://www.jica.go.jp/cambodia/english/office/topics/c8h0vm000001oaq8-att/investment_01.pdf

- - Full exemption (with recording for every import).

- Full Exemption.

5. Non-Fiscal benefits The following table gives a summarized view on the non-fiscal benefits provided to the industries within SEZ.

Non-fiscal benefits

Countries

Nationalization Repatriation Visa Bonded Ware House

Protection against Change in Law

Guarantee of the Benefits

One-window Service

Nepal √ √ √ √ √ √ √

India More Focus has been given to fiscal benefits than Non-fiscal benefits such as (FDI under the automatic route, sub-contracting, Off-shore Banking Unit and International Financial Services Centre etc.,)

Bangladesh Non-fiscal benefits are more concentrated toward foreign investment such as (no ceiling on FDI, full foreign currency account opening facility to non-resident, foreign shareholder jointly with local person, resident visa for an investor making an investment of 75000 USD or more and a citizenship to an investor making an investment of in excess of 500,000 USD.

Cambodia √ √ √ Besides, different benefits are provided are (non-discrimination among investors, no price control, allowed foreign labor on 10 % of its total employee’s basis.

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7. One window service The

following table states an institution authorized to provide one window services:

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Nepal One-window unit.

India An ‘approval committee’ for one-window service.

Bangladesh The Bangladesh Special Economic Zone Authority for one-window service.

Cambodia The SEZ Administration for one-stop mechanism.

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Schedule II: Comparison with Industrial Enterprise Act and Finance Act.

Comparison of Special Economic Zone Act, 2016 AND Industrial Enterprise Act, 2016

Parameters Act Description

Exemptions SEZA The major exemptions provided are detailed in table below:

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Income tax Concession

All industries - 100% income tax exemption for first 5 years from commencement if commercial transaction of the products.

- 50 % income tax for the following 5 yrs

- 50 % exemption for the following 10 yrs if the industry utilizes a minimum 60% raw materials.

Industries inside SEZ of Himalayan region and government specified hilly regions

- 100% tax exemption for first 10 yrs commercial transaction of the products.

- 50% exemption for the following 10 yrs

VAT exemption

0% VAT on goods and services exported by Industries

0% VAT on raw materials and finished goods imported by Industries.

Custom Duty exemption

Industries are entitled to custom duty exemption under Bank Guarantee and other facilities in following goods:

1. raw materials, auxiliary raw materials, packaging and other materials used for producing export products;

2. plants, machineries, equipment’s, tools and spare parts and max. 3 vehicles depending upon nature and size of industry.

Custom Duty paid on the Goods imported by any importer is refunded if such goods are sold to industries inside SEZ under prescribed conditions

Products of sold to other industries established in SEZ will be treated as export and customs concession will be provided.

Dividend

100% exemption in dividend distribution by industries for the first 5 yrs from the date of commencement of commercial transaction

50% exemption in the following 3 yrs

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IEA The major exemptions provided are detailed in table below:

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Income Tax Concessions

Industries Concessions

Manufacturing Industries 20% exemption on the rate of tax imposed on the income earned from such industries.

Manufacturing Industries except those producing fruits-based cider, brandy or wine established in Underdeveloped, Undeveloped and Less Developed Region

90%, 80% and 70% exemption on rate of the income tax for up to 10 yrs from the date of commencement of commercial production or transaction.

Manufacturing Industries producing fruit-based cider, brandy or wine established in any Underdeveloped Region

40% exemption on the income tax for up to 10 yrs from the date of commencement of business

Manufacturing Industries set up with the investment of at least 1 billion rupees and providing direct employment to more than 500 individuals throughout the year

100% income tax exemption for first 5 yrs from the date of commencement of business.

50% exemption on the income tax for next 3 yrs.

Industries already in operation are entitled to the above stated exemption in case such industries enhance their installed capacity by at least 25%, increase investment to 1 billion and provide direct employment to 500 individuals throughout the year.

Manufacturing Industries exporting goods or commodities produced

25 % exemption on the rate of tax imposed on the income earned.

VAT exemption

All industries VAT imposed on production is reimbursed if such goods are exported, based on the quantity of export.

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Income Tax Concessions

Industries Concessions

Manufacturing Industries 20% exemption on the rate of tax imposed on the income earned from such industries.

Manufacturing Industries except those producing fruits-based cider, brandy or wine established in Underdeveloped, Undeveloped and Less Developed Region

90%, 80% and 70% exemption on rate of the income tax for up to 10 yrs from the date of commencement of commercial production or transaction.

Manufacturing Industries producing fruit-based cider, brandy or wine established in any Underdeveloped Region

40% exemption on the income tax for up to 10 yrs from the date of commencement of business

Manufacturing Industries set up with the investment of at least 1 billion rupees and providing direct employment to more than 500 individuals throughout the year

100% income tax exemption for first 5 yrs from the date of commencement of business.

50% exemption on the income tax for next 3 yrs.

Industries already in operation are entitled to the above stated exemption in case such industries enhance their installed capacity by at least 25%, increase investment to 1 billion and provide direct employment to 500 individuals throughout the year.

Manufacturing Industries exporting goods or commodities produced

25 % exemption on the rate of tax imposed on the income earned.

VAT exemption

All industries VAT imposed on production is reimbursed if such goods are exported, based on the quantity of export.

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Generally, matters related to income tax, value added tax (VAT) and customs duties are governed by the Fiscal Act. In light of the above, the following table presents the benefits incorporated under Finance Bill, 2075/76 related to the SEZ Act.

Benefits and Concessions SEZ Act, 2072 Fiscal Act, 2075/76

Income tax Concessions

All industries - 100% income tax exemption for first 5 years from commencement if commercial transaction of the products.

- 50 % income tax for the following 5 yrs

- 50 % exemption for the following 10 yrs if the industry utilizes a minimum 60% raw materials.

√ √

Industries inside SEZ of Himalayan region and government specified hilly regions

- 100% tax exemption for first 10 yrs commercial transaction of the products.

- 50% exemption for the following 10 yrs

√ √

VAT Exemption

0% VAT on goods and services exported by Industries

√ √

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0% VAT on raw materials and finished goods imported by Industries.

√ √

Custom Duty exemption

Industries are entitled to custom duty exemption under Bank Guarantee and other facilities in following goods:

1. raw materials, auxiliary raw materials, packaging and other materials used for producing export products;

2. plants, machineries, equipment’s, tools and spare parts and max. 3 vehicles depending upon nature and size of industry.

√ X

Custom Duty paid on the Goods imported by any importer is refunded if such goods are sold to industries inside SEZ under prescribed conditions

√ X

Products of sold to other industries established in SEZ will be treated as export and customs concession will be provided.

√ X

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