Exploiting FDI Opportunities: Administration and facilitation of Swaziland s investment regime 23 May 2011 Thomas Farole Senior Economist, International Trade Department, World Bank
Issues we will discuss in this presentation 1. Promoting more effective FDI administration 2. SEZs as a catalyst for policy reform
TEXT Proximity to Markets or Customers 22% Domestic Market Growth Potential 29% Skilled Worker Availability 10% Regulations or Business Climate 6% Infrastructure and Logistics 6% Lower Costs 6% Industrial Cluster / Critical Mass 3% IPA Gov t Support 2%
FDI determinants by key categories
The importance of SIPA in a challenging context SIPA is now an established institution in Swaziland o Well regarded by investors responsive and trying hard o Several important successes in recent years But the environment in which they operate has become increasingly challenging: o Changing international and regional investment patterns o The global economic crisis o Investor perceptions and deteriorating investment climate Selling a small country with limited brand recognition is a hard job therefore, critical for SIPA to communicate its product clearly and deliver it as effectively as possible
Narrow the mandate SIPA s mandate is stretching its ability to deliver resources are severely constrained o Small team and limited budget by global standards (scale) o Too many non-core activities and more planned o Contributes to delays in delivery e.g. Investor Roadmap and one-stop shop Recommended actions based on global best practice 1. Short term priorities: policy advocacy (investment climate) and aftercare 2. Match the mandate with a sustainable budget: avoid the distraction of income generating activities
The investment promotion cycle Investor Aftercare Policy Advocacy Policy Advocacy Investor Servicing Investor Facilitation Investment Climate Investment IP Strategy Image Building Investment Generation Targeting Strategy Mega-projects Factory shells Export promotion SME support Linkages e: FIAS
Tighten the priorities Lack of prioritization in sectors and markets compounds the resource constraints and pressure of non-core activities o At least 7 priority sectors identified covers most o Market priorities also cover the large majority of global trade Recommended actions based on global best practice 1. Focus: on sectors with comparative advantage + on South Africa 2. Balance: anchor investors good but avoid chasing trophies 3. Realistic and focused performance measurement: strategic plan should reflect realistic goals and the prioritized focus areas / actions
Strengthen authority and improve coordination The institutions exist to attract investment but the problem is that government can overlook these institutions SIPA lacks authority to coordinate and compel Ministries / agencies Limited private sector interaction outside the investment process Recommended actions based on global best practice 1. Institutional realignment: potential for SIPA to report through Prime Minister or other central Ministry 2. Transparent communication with investors: make clear the processes and who is responsible at each step 3. Greater private sector voice: through consultative fora and formal institutional roles 4. Service-level agreements: MOUs with implementing agencies
Land and factory shells Factory shells program has been a success story for SIPA but need to be wary of long term impact on property market For attracting investment, however, access to land a barrier for some investors, particularly in agriculture: ownership and zoning / land use issues Recommended actions based on global best practice 1. Commercialize factory shells program: shift away from SIPA alternative models of subsidization (e.g. vouchers) 2. Consider the potential for Special Economic Zones (SEZs)
1. Promoting more effective FDI administration 2. SEZs as a catalyst for policy reform
What are the typical aims of SEZs? Attract FDI Increase exports + forex earnings Diversify exports Create jobs Trade and investment policy (STATIC) Generate spillovers of knowledge / technology to support upgrading Facilitate development of clusters Laboratories for reform Regional development (?) Spatial industrial policy (DYNAMIC)
How do SEZs achieve these aims? Overcoming constraints to serviced industrial land Concentrating investments to overcome infrastructure gaps Improving the regulatory and administrative environment Streamlining trade procedures Facilitating agglomeration Which of these are barriers to attracting FDI in Swaziland?
Many different forms of zones Industrial park EPZ Free Trade Zone Agri-zones Typical Objective Size Manufacturing < 100 Export manufacturing Location hectares Various < 200 Ports, hectares airports Support trade < 50 hectares Agriprocessing SEZ/Freeport Integrated development > 50 km2 > 100 km2 Ports, airports Rural; urban fringe Mixed Eligible Markets Activities Mostly Domestic, manufacturing export Mostly manufacturing Export Mostly traderelated Reexport, processing domestic and services Agriculture and processing Multi-use Domestic, internal, export Domestic, internal, export Swaziland already has several of these, at least in practice. Repacking v introducing a new instrument? Which is most relevant to the challenges of attracting FDI in Swaziland?
The experience in Africa has been somewhat disappointing to date Mauritius + more qualified successes: Kenya, Madagascar, (Lesotho) Most have not lived up to potential why? PLANNING Lack of well-articulated legal and institutional framework Poor location choices Lack of strategic planning (incentives + preferences v CA) DOING BUSINESS WIDER COMPETITIV- ENESS Infrastructure shortfalls Administrative weaknesses / failure to reduce red tape Ineffective management / poor or no M&E Policy uncertainty / lack of long-term government commitment Poor domestic business climate (unable to fully shield SEZs) Lack of competitiveness as an export platform
Starting points for improving potential to attract and retain investment in SEZs Improved strategic planning and a transparent, robust legal and regulatory framework Address infrastructure gaps inside and beyond the gates: integrated approach linking to trade gateways Utilities Road connections and port improvements Soft infrastructure and public / club goods Social infrastructure Improve zone management through: Stronger and more consistent government policy support Institutional improvements authority and coordination Private sector participation
Linkages are critical to achieving dynamic benefits Worldwide, zones struggle to shift from being enclaves to integrated contributors of wider economic growth Risk of entrenching a two-tier economy Traditional EPZ models work directly against integration need to promote domestic investment and open up potential for exchange between zones and local markets But improving linkages require actions outside zones alone Access to finance and entrepreneurship Training and skills development Open labor markets Public-private institutions to promote inter-firm coordination and information exchange
Can Swaziland use SEZs to pilot investment climate reforms? This is the real success story of China and also Mauritius Given the regulatory and wider investment climate constraints to competitiveness in Swaziland, using SEZs as a way to pilot reforms may be most effective Government willingness to pilot reforms through zones has proven a useful litmus test as to whether they have the commitment and capacity to follow-through with a successful zone program If the flexibility and willingness to experiment exists in the Government of Swaziland, then SEZs may be a valuable instrument of reform
THANK YOU 1. Copies of the book are available through the World Bank website (http://publications.worldbank.org/) free e-version available at http://issuu.com/world.bank.publi cations/docs/9780821386385 2. A second book an edited collection of papers Special Economic Zones: progress, emerging challenges, and future directions to be published at the end of June 3. Study on FDI linkages beginning