Report on Fostering Sustainable Development through Chinese Overseas Economic and Trade Cooperation Zones along the Belt and Road —Analysis and Practical Guidelines from Economic, Environmental and Social Perspectives
[Author] Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce of China, United Nations Development Programme in China
[Summary] This report aims to offer a basic guiding framework for the development of Chinese Overseas Economic and Trade Cooperation Zones (COCZs), which covers relevant policy supports, theories, case studies, and practical suggestions. Through this report, relevant personnel are expected to build their overall understanding of the common practices and standards in the design and operation of sustainable economic zones around the world and thus strengthen efforts for the achievement of 2030 Agenda in the countries along the Belt and Road.
Based on responses received to the survey, COCZs are predominantly economically sustainable with 12% of the zones making substantial proﬁts, 33% being proﬁtable and 19% operating on a cost covering basis. However, 36% of COCZs are not yet proﬁtable. COCZ operators highlighted financing as their major challenge. This includes both the 39% of respondents that said that they received financial support from financial institutions, Chinese commercial banks or local banks as well as the 61% of respondents that said they have not received any type of ﬁnancial support. Some COCZ operators pointed out that it was difﬁcult to access ﬁnancing from multilateral ﬁnancial institutions and that cooperation with such institutions should be strengthened in the future.
Most of the zones rely on self-operated industries and the rent of land and factory buildings. The following aspects are the most important for attracting companies to invest in their zones: low labor costs, preferential investment and tax policies, and low raw material costs, followed by conducive infrastructure, low business risk and location.
Many COCZs highlighted site selection as a key aspect of the sustainable economic development of the zone. The availability of land, labor and related facilities as well as infrastructure connectivity to national and international transportation routes and related logistics costs were highlighted as important factors in the selection process, which have been identiﬁed by over 50% (multiple-answer question) of surveyed COCZs.
Infrastructure investment in the COCZs can help accelerate development of transportation, energy and communication infrastructure, reducing the infrastructure costs for the tenants and contributing to the economic and social development of the host countries. At the same time, it can provide ideal conditions for tenants to conduct business, which helps shorten the investment cycle and improve economic efﬁciency. The survey results are as follows.
Figure 1: Ancillary facilities of the COCZs (multiple-answer question)
The localization of procurement and sales is an important feature of enterprises carrying out foreign investment and production. By localizing procurement and increasing the local market share, the tenant enterprises in the cooperation zone can be better integrated into the local economy and drive the economic growth of the host countries. COCZs established by Chinese enterprises have effectively boosted the needs of the host country’s upstream industries. But at the same time, when trying to purchase local products and services, respondent enterprises face challenges, such as higher prices, unavailability of products or services, quality issues or insufﬁcient quantity.
[Guidelines for Sustainable COCZs]
The successful development and operation of any COCZ requires a long-term stable investment environment, a comprehensive legal basis, and strong institutional arrangements that are able to ensure that political commitment and legal provisions are realized at the zone level. It is important to ensure support from the various national and local authorities that is required for the development and operation of a COCZ, including relevant Ministries, utility service providers, customs and immigration authorities, training institutions, and universities among others. It is also important for providing conﬁdence to international investors.
Host countries will often identify priority sectors during the design of the development strategies of cooperation parks or SEZs based on their economic structure, comparative advantage and demands from international and domestic markets in order to create a good business environment and attract foreign investors.For example, there are specific types of incentives, local supply chains and training and research institutes to promote the development of the textile industry.
Fiscal incentives and tax holidays are the most common measures taken by the host government for economic parks and cooperation zones to attract foreign direct investment. Import tax credits, income tax reductions, VAT exemptions, and preferential land use policies are also common forms of fiscal incentives. However, fiscal incentives and tax exemptions will cause the government to lose some of its tax sources in the short-term and may also have an impact on the economy and even lead to unfair competition among enterprises inside and outside the zones. Tenant companies that rely heavily on ﬁnancial incentives may even leave when incentives are reduced or cancelled.
Appropriate site selection ensures the availability of land, labor, related facilities and connectivity to national and international transportation routes. Good spatial planning enables the COCZ to make maximum use of external existing resources, reduces its own infrastructure investment, minimizes resettlement and avoids geographic limits for future zone expansion or slum formation in the neighborhood. For factories in COCZs, the production costs are lower due to the availability of specialized resources, such as industrial support, skilled labor, and infrastructure. An appropriate site selection requires clear and objective criteria and a comprehensive feasibility study.
There are diverse models to develop and operate SEZs around the world. According to the motives of the developers and the political and economic context of the country, the SEZs can be divided into three different types: government-backed, business-driven and public-private partnership (PPP), each with different focuses.
Controlling the starting scale of the zone helps to avoid large-scale resettlement and immense construction investment upfront. A speedy and cost-efﬁcient start of the zone leads to a healthy evolution. Since the development of a COCZ is a comprehensive project, it needs sufﬁcient time and extensive coordination to adapt to the local economy and society. Therefore, it may be easier for COCZs to begin with the development of a relatively small area of land, for example 100 to 300 ha, and a modest amount of investment. The increase of investors and workers in the surrounding area will gradually transform the area and merge with the broader regional development. Incremental development is more likely to succeed and more likely to developed in sustainable way than monumental projects.
Own industrial operations as well as rent of land and factory buildings are the most common sources of income for COCZs. However, due to the huge upfront investment and limited allocated land of COCZs, it is important to diversify income sources.
Incentive structures within COCZs often result in favoring quantity of investors over quality. However, given that the capacity and resources of COCZs are limited, it is advisable to rather focus on choosing suitable anchor investors in line with pre-identiﬁed priority sectors for the zone. These anchor investors play an important signaling role to other potential investors and often bring with them a network of suppliers and partners, which lays a solid foundation for the long-term healthy development of the COCZ.
Local linkages are key for value chain integration between the companies within and outside a COCZ. Policy and ﬁscal incentives are common measures taken by host governments for COCZs to attract FDI and promote exports. However, there is a risk for COCZs to become enclaves, without linkages with the local economy, relying heavily on local ﬁscal incentives. Such enclave-style zones have a very limited role in driving the country’s industrialization and are likely to cause unfair competition.
Based on responses received to the global survey of COCZs, 93% of the zones have conducted a comprehensive Environmental and Social Impact Assessment (ESIA) prior to the zone development and zone companies are required to conduct one as part of their approval to join the zone. Most of the COCZs have fully complied with requirements and recommendations for improvement deriving from the ESIA or are in the process of addressing such recommendations. In those cases where an ESIA has not yet been completed it is due to the early stage of planning that the respective zones are currently in. In 82% of the 42 surveyed COCZs, the ESIA was carried out by a third-party agency and in about half of those cases the third-party agency was selected by the host country. The strong commitment of COCZs to environmental matters is underlined by the fact that 86% of the surveyed zones have a full-time professional or team in charge of environmental aspects. 20% of the responding COCZs have obtained third-party certiﬁcation for environmental management standards. With regard to measures taken by the COCZ to ensure environmental protection, the vast majority highlighted conducting regular inspection of the zone companies, having established an environmental management system in line with international standards or requirements of the host country, and having in place wastewater and solid waste treatment facilities.
In addition to possible environmental pollution problems, COCZs also focus on the protection of local biodiversity. Among 42 respondents, 69% indicated that the protection of biodiversity is an important reason for their location. 92% have taken measures to mitigate the negative impacts of construction and production activities on biodiversity.
A coherent and consistent approach to ensuring environmental sustainability of the development and operation of a COCZ requires its own environmental policy and strategy. The environmental policy should be an integral part of the COCZ Master Plan as environmental aspects are most effectively and efficiently addressed from the outset. The environmental policy needs to be accompanied by a respective strategy or action plan that spells out speciﬁc targets and actions to minimize, manage, measure and monitor impacts on the environment over a certain period of time. Ideally, the policy and strategy are developed in a way that facilitates the establishment of an environmental management system that is compliant with the internationally recognized ISO 14000 standards. Key requirements for meeting these standards are adherence to local and national environmental policies and an environmental policy and environmental management system that fosters continued performance improvements. An environmental management system is a tool used to manage the impact of a company’s activities on the environment. It provides a structured approach to planning and implementing environment protection measures. Ideally, COCZs should put in place an environmental management system that is compliant with ISO 140011 and provide support for their companies to follow suit. ISO 14001:2015 is the latest and most commonly used international standard for such systems, which is increasingly becoming a requirement for entering global supply chains.
COCZ are places of high energy consumption due to the needs for lighting, heating and cooling of the zone facilities, the transportation of workers and goods, and, especially, due to the high amount of electricity required by COCZ companies for powering their production processes. Taking measures to improve the energy-efficiency of COCZ operations can significantly reduce energy consumption. Ideally, the COCZ will establish an energy management system in line with the internationally recognized standard ISO 50001:2011.
The choice of energy sources has a major impact on the environmental footprint of a COCZ. If fossil fuel-based energy is commonly used, the COCZ contributes directly (GHG emissions, air pollution from burning of fossil fuels) and indirectly (sourcing, transportation and processing of fossil fuels) to environmental degradation. COCZs should therefore strive towards fulﬁlling their energy needs from clean and ideally, renewable, sources. COCZs are well situated to generate their own energy from renewable energy sources, for example, from solar photovoltaic panels or waste heat recovery. Roofs of production facilities in COCZs offer an ideal space for the installation of solar panels, in particular if the roofs are designed in a way that allows for the panels to be installed at an ideal angle to, and orientated towards, the sun. Furthermore, many industrial processes produce a signiﬁcant amount of heat that goes unused. Therefore, waste heat recovery can be another suitable source for COCZs to reduce their external energy demand.
Many developing countries are experiencing increasing water stress, which is likely to intensify as a result of climate change and population growth in the coming years. Secure access to water is a key requirement for the successful operation of COCZs, in particular for zones focusing on the agricultural, leather, paper and garment and textile industries. Water security can be signiﬁcantly improved by ensuring the efficient use of water, reusing water, recycling wastewater and harvesting rainwater.
Waste management is another important area through which COCZs can significantly reduce their environmental impact. Waste management should be guided by waste prevention, waste reduction, reuse and recycling of materials, and the proper disposal of remaining waste. As the majority of a COCZ’s waste will be generated by COCZ companies, the COCZ operator should ensure that waste management responsibilities are part of any tenant agreement. Furthermore, the COCZ operator should foster industrial symbiosis by facilitating the use of unused or residual resources of one company for use by another company, thereby diverting waste from landﬁlls and reducing costs for companies.
Many companies have understood that taking action on climate change and its adverse impacts is not only in the interest of the planet, but also in the interest of maximizing proﬁts by improving operations and making them more resilient. In addition, such actions help companies to get ahead of the curve as environmental regulations are tightening around the world following the adoption of the Paris Agreement within the United Nations Framework Convention on Climate Change.
The development of COCZs, in particular if it is a greenﬁeld development, has a huge potential for negatively impacting biodiversity. The COCZ site selection therefore needs to strongly factor in ecosystem losses, in particular as regards to environmentally signiﬁcant areas such as wetlands. Wetlands are a signiﬁcant resource in terms of the ecological goods and services they provide, including flood attenuation, habitat provision for floral and faunal species, pollution and soil erosion control and carbon sequestration. If it is unavoidable to develop a COCZ in such areas, rehabilitation and restoration aspects need to be an integral part of the COCZ Master Plan with the goal of a zero-net-loss of biodiversity.
88% of respondents to the global survey of COCZs states that they mostly hire local employees and that the relationship to local workers and their communities is of great importance to them. A number of zones indicated that they are employing local talents for managerial positions. More than 90% of responding zones said that they require their companies to ensure that labor contracts, wages and other beneﬁts are provided to employees in line with host country regulations. Most of the COCZs consider training for local employees very important as it can help improve cross-cultural understanding, safeguard labor rights, establish harmonious labor relations, and improve the welfare, safety and compensation systems of local employees. At the same time, such training opportunities help local employees understand the corporate culture of Chinese and other foreign companies.
In order to establish good relations with the local community and promote joint development, COCZs interact with local communities in various ways. 93% of the 42 parks have strengthened their ties with the community through the employment of local employees, 79% have donated funds to local community development projects, 71% communicated with local communities on major issues in the construction process, and 43% have actively connected with residents and enterprises in the local community to become suppliers of products and services to enterprises in the zone.
Despite the efforts of the tenant enterprises in the zones, more than half of respondent COCZs indicated that due to language, management methods and cultural differences, conﬂicts between Chinese and local employees are identified as the most common labor problem. Most COCZs are taking various actions to help solve these and other labor-related problems.
In the process of identifying a suitable location for a COCZ, all efforts should be undertaken by the developer to avoid resettlement and other negative social impacts for the local community. However, as COCZ development usually takes up considerable amounts of land, resettlement is often unavoidable. Hence, a detailed and well-structured resettlement plan should be created from the beginning that involves all affected persons and institutions and creates trust and transparency. Failing to have such a type of resettlement plan can lead to project delays and rising costs as well as to social tensions, putting the entire project at risk. A resettlement plan should identify all persons affected by the project, establish a clear cut-off date to allow for adequate calculation of compensation and to avoid settlement of new persons in the development area after a decision has been taken. A well-thought-out resettlement plan further highlights how the detailed measurement of assets to be compensated will be undertaken and deﬁnes the cost for developer as well as for persons to be resettled based on the calculation of relocation and entitlement costs (IFC 2012a, IFC 2012b). If a resettlement plan is developed in consultation with the community, it will considerably contribute to the success and sustainability of the COCZ.
In ensuring labor rights and promoting safe and secure working environments for workers, particularly for female workers, COCZs can become important accelerators for the achievement of a number of SDGs. In creating jobs with high labor standards, COCZs can further help combine decent work with economic growth within the country in which they operate. In the past, SEZs and invested companies have often been associated with a lack of adequate labor standards and other social challenges affecting workers and the surrounding communities (ILO 2005). Therefore, COCZs should follow national labor laws, and where national laws are not sufﬁcient, internationally accepted standards and best practices should be used as a benchmark to establish sustainable working practices in the zone.Furthermore, COCZs should have a code of conduct and a feedback system in place that helps address work-related grievances effectively, allowing workers to avoid exposure to unfair work practices and any workplace related harassment. COCZs should also have regulations on working hours in place that allow for sufﬁcient recreational time for workers. The arrangement on working hours should ideally be included in the contract of the worker to avoid misunderstandings, including for short-term assignments. It is mandatory that zone invested companies are complying with pre-agreed working hour regulations, and where necessary, they should implement shift systems to avoid overtime working. Adequate labor standards also entail that there is no gender-related discrimination in the workplace, allowing men and woman to work freely.
Availability of adequate housing for workers is essential for COCZs to function properly. Oftentimes, zones are constructed away from city centers, making commuting and accommodation a tremendous challenge many zone workers face. This results in higher transaction cost for workers, making working in the zone less attractive. Therefore, from the onset of the implementation of the COCZ project, zone operators should consider the provision of adequate housing for workers.
Zone operators should strive to introduce safety and health measures to protect workers, to allow smooth operations and to support the community at large. In this regard, working closely with zone invested companies allows the identiﬁcation of internationally accepted technical standards to solve health and safety issues in the zone that are beneﬁcial to zone management, invested companies and workers. Due to increased market demand, particularly private companies have developed an interest in providing goods that have been produced under sustainable and ethical working conditions. The availability of a medical center and ﬁ reﬁghting squad is essential for the functioning of the zone. Investment in this infrastructure should not be done only by the zone operator alone and is best addressed in collaboration among the zone operator, government authorities and invested companies.
To ensure sustainability of the zone operations, adequate security measurement should be put in place to protect operations inside the zone as well as workers who live outside the zone. Especially in cities in developing countries that are growing very fast due to demand for workers, security issues may become a problem as city authorities may not be ready to cope with the changing dynamics within the city. While security of the zone can be easily ensured, for example through entrance controls at the zone gate, it is more challenging to establish security for workers that are leaving the zone late in the evening. Solutions could be offered through dedicated transportation of workers from the zone to a pre-agreed drop-off point or through increasing security patrols along the main roads leading towards the areas where workers live. To increase the safety of the workers, internal grievance mechanisms should be installed where workers can report any workplace related safety issues.
Wage structures have often been an area of contestation within COCZs. It is evident that there is no “one size ﬁts all” approach to determine the level of adequate payment as it mostly depends on the particular local context and the sectors operating in the COCZs. Therefore, sustainable COCZs should always follow minimum wage standards applicable in the country in which they operate and provide a transparent wage structure for their workers. In addition, sustainable COCZs should be used as incubators to introduce adequate work-related incentive systems to increase wages for workers.
The establishment of an adequate social infrastructure through COCZs, such as recreational places, medical facilities, dormitories, restaurants and cafeterias, banks and postal services can help increase the success rate of such zones in attracting high-performing companies. Provision of free transportation can also increase the appeal of the zone for companies and workers alike. Establishing this social infrastructure is connected to additional upfront costs for the zone developer. However, having this infrastructure in place provides a long-term advantage through creating a diversiﬁed income stream for the developer.
Ensuring a steady supply of trained workers that can fulﬁll the requirements of the zone-invested companies is a critical component to make the COCZ economically viable and sustainable at the same time. Especially in areas where new zones have been developed, due to infrastructure that is still under development, the proper identifying and training of workers plays an important role. Oftentimes, the identiﬁcation of the right workforce and the constant turnover of workers due to work-related problems, i.e. low wages, long working hours and general unfamiliarity with factory work has been a constant problem for companies. In this regard, zone operators should provide assistance to zone-invested companies in solving labor-related issues, for example through the creation of dedicated human resource management services.
To ensure that operations of the zone are sustainable and in line with development plans of the surrounding community, an adequate community engagement plan is necessary. The zone management and zone-invested companies should work with communities around the zone, especially in areas where the interests of zone-invested companies and those of the community meet, such as land use rights, environmental issues, transportation, housing, etc. To avoid friction, there should be a regular and formalized exchange of information between zone management, zone-invested companies and community stakeholders, creating linkages between the needs of the community and the zone companies.
This report’s recommendations are as follows: to establish demonstration center for sustainable COCZ models. The development of a model sustainable COCZ that demonstrates how to successfully integrate various aspects of economic, environmental and social sustainability could serve as concrete reference and inspiration for other zones to follow; to create an experience and knowledge sharing mechanism for COCZs under the Belt and Road Initiative to ensure that sustainability approaches are reﬂected in the zone design and operation from the outset; to identify new paths for COCZ ﬁnancing. For example, zone operators should consider triangular cooperation by engaging with development agencies or multilateral funds that aim to foster low-emission and climate-resilient development in the respective host countries.