* U. - gA L '4X K X a t ' j\s %a iF -sE -~ - -Sr L- ~ ~ - - _ _ a- ~Ui -c v -f f~~~~~~~~~~~~~~~i.X, - _ ___| X ii - X O R I SS A INVESTMENT CLIMATE ASSESSMENT 2005 Towards a nIiqh-rPerforming State I~~ Finance and Private Sector Development Unit South Asla Reglon The World Bank TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS .................................................................... i ACKNOWLEDGMENTS ................................................................. ii FOREWORD ................................................................. iii EXECUTIVE SUMMARY ................................................................. iv AT A GLANCE: INVESTMENT CLIMATE IN ORISSA ................................................................. ix MAP OF ORISSA ..................................................................x Chapter 1: ORISSA. BUILDING BLOCKS FOR REALIZING THE STATE'S POTENTIAL ..................................................................1 Introduction ..................................................................1 Performance and Structure of Industry ..................................................................2 Investment and Productivity ..................................................................4 Turning Over a New Leaf: Orissa Reform Vision and Strategy ..............................................................6 Investment Climate Assessment ..................................................................6 Chapter 2: OVERVIEW ANALYSIS OF ORISSA'S INVESTMENT CLIMATE ................. 10 Introduction ................................................................. 10 Overview of Orissa's Investment Climate in Comparison with the Rest of India ............................. 11 Governance and Regulation ................................................................. 12 Provision of Infrastructure ................................................................. 15 Access to Finance ................................................................. 17 Chapter 3: REDEFINING THE ROLE OF THE STATE .................................................... 22 Introduction .... 22 Access to Land: Environmental and Social Considerations .23 Skills and Training.24 Quality Standards.25 | ~~Technology Acquisition and Development.26 Calibrating the Role of the Government in the Economy.26 Conclusion.27 Chapter 4: CONCLUSION AND POLICY RECOMMENDATIONS.31 Introduction.31 Policy Recommendations I:.32 I ~~~~Streamline and Modernize Regulations and Improve Governance.32 j ~Improving Infrastructure.34 t ~Access to Finance.36 Policy Recommendations II: Rolling Back the State and Leveling the Playing Field.38 I ~~~Rolling Back the State from the Remaining Sectors.38 j ~Leveling the Playing Field.41 Policy Recommendations III: Strengthening State's Regulatory and Strategic Role.41 Resolving Enviornmental and Social Issues.41 Establishing Credibility and Tracking Reform Efforts.42 Annex 1: Orissa Investment Climate Survey ...................... :44 Annex 2: Industry and Services in Oris sa: A Sectoral Profile ...................... 46 A n nex 3: Orissa IC Summary Tables.5............................................ 1 BIBLIOGRAPHY .65SAPC C E I.................................. 31 _~ ~ ~ ~ ~ ~I t o u to ........................................................................................................ 3 _~~~~~~~~~~~~- - - -------- - ---- - -- ------------- ------------------ ACRONYMS AND ABBREVIATIONS ARR Annual Revenue Requirement NCDS NabhaKrushna Choudhary ASI Annual Survey of Industries Institute of Development BDS Business Development Services Studies CAGR Compound Annual Growth NGOs Non-Governmental Rate Organizations C:D credit:deposit ratio NHAI National Highway Authority of CIFA Central Institute of Freshwater India Aquaculture NSIC National Small Industries CII Confederation of Indian Corporation Industry OERC Orissa Electricity Regulatory CMIE Centre for Monitoring Indian Commission Economy OHPC Orissa Hydro-Power CRZ Coastal Regulation Zone Corporation CSO Central Statistical Organization OMC Orissa Mining Corporation DFID UK Department for OSCHC Orissa State Cooperative International Development Handicrafts Corporation DPRP Drugs and Pharmaceuticals OSEB Orissa State Electricity Board Research Program OSFC Orissa State Financial EDB Economic Development Board Corporation FDI Foreign Direct Investment OSIC Orissa Small Industries FRAC Food Research and Analysis Corporation Centre OTDC Orissa Tourism Development GDP Gross Domestic Product Corporation Gol Government of India PPI Private Participation in GoO Government of Orissa Infrastructure GRIDCO Grid Corporation of Orissa PPP Public-Private Partnership GSDP Gross State Domestic Product PSU Public Sector Undertaking GVA Gross Value Added R&D Research and Development ICA Investment Climate Assessment R&R Resettlement and Rehabilitation ICS Investment Climate Survey RBI Reserve Bank of India IDA Industrial Development RRL Regional Rural Laboratory Authority SCB Scheduled Commercial Bank IDCO Industrial Development SEZ Special Economic Zone Corporation of Orissa SIDBI Small Industries Development IMFA Indian Metals and Ferro Alloys Bank of India IPICOL Industrial Promotion and SME Small and Medium Enterprise Investment Corporation of SOE State-Owned Enterprise Orissa SSI Small-scale Industry IPR Industrial Policy Resolution SWA/OSS Single-Window Agency/One- MIDA Malaysian Industrial Stop Shop Development Authority TD Tourism Department MMTC Minerals and Metals Trading TFP Total Factor Productivity Corporation TISCO Tata Iron and Steel Company MOU Memorandum of Understanding TYFP Tenth Five-Year Plan MPEDA Marine Products Export UNIDO United Nations Industrial Development Authority Development Organization NALCO National Aluminium Company ACKNOWLEDGMENTS The authors gratefully acknowledge the support (DECRG); and Pooja Churamani (SASPR), and inputs received from the Department of who contributed to the design of the survey and Industries, Government of Orissa, the Utkal its implementation and write-up; and Varsha Chamber of Commerce, and the Confederation Marathe, who provided inputs at the write-up of Indian Industry (CII), Orissa State Office, stage. Other staff who contributed to the report Bhubaneswar, during the implementation of the were Radha Singla and Anton Dobronogov Orissa Investment Climate Survey (ICS) and the (SASFP). Simon Bell and Joseph Del Mar subsequent stakeholder consultation workshops Pernia (SASFP) provided overall guidance and held in Bhubaneswar. The report is based on support. Giovanni Tanzillo prepared the ICS the Orissa ICS, carried out jointly by CII and data summary tables. The team gratefully the World Bank Group. The CII team was led acknowledges the excellent administrative by G. Srivatsava; the Handicrafts survey was support provided by Maria Marjorie Espiritu undertaken by G. C. Kar; and a background and Heather Fernandes (SASFP). Useful Orissa note was prepared by Amit Ray. An comments on the report were provided by V. J. array of sector-specific studies and related Ravishankar, Marina Wes, Dilip Ratha, Richard secondary literature informed the work. The Damania, Kseniya Lvovsky, Esperanza team benefited from close dialogue and Lasagabaster, Priya Basu, and Deepak Mishra. collaboration with the Department for Lili Liu and Magdi Amin were the peer International Development's Orissa team, led reviewers. by Meenakshi Nath. Lastly, we would like to acknowledge the The task team was led by Asya Akhlaque, support of the World Bank Institute (WBI) Finance and Private Sector Unit, South Asia particularly, Qimiao Fan's and Une Lee's Region (SASFP). Core team members were collaboration in the dissemination workshop Syed Mahmood (SASFP); Taye Mengistae, held in Bhubaneswar in May 2005. ii r - - - -- -- - - -- - --------- - FOREWORD Orissa Investment Climate Assessment focusing in depth on particular states, as they (ICA) is the first full-fledged subnational ICA are predominantly diagnostic in nature. The report undertaken by the World Bank (see box). value of a state-level ICA is that it provides the The demand for a state-level ICA in India flexibility to use a mix of instruments to reflect emerged out of the private sector development the particular characteristics and needs of the dialogue being carried out under the state, and allows in-depth analysis leading to a programmatic Orissa Development Policy richer menu of policy options for reform. It Lending. The state-level counterparts are should be noted that Orissa was not covered in increasingly seeking the World Bank's assistance the previous two nationwide ICAs. in developing investment climate strategies that offer a more comprehensive road map for reform. The nationwide India ICAs, covering a wide range of states, do not lend themselves to Disclaimer: The Government of Orissa's reform program under implementation is dynamic and evolving, and the document may not fully capture the most recent developments by the time it goes for publication. What Is an Investment Climate Assessment? Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to pinpoint the areas where reform is most needed to improve the private sector's productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to give greater impetus to policy reforms that can speed the private sector's growth, leading to faster economic growth and poverty reduction. Produced by the World Bank Group in dose partnership with a public or private institution in each country, the investment climate assessments are based on a survey of private enterprises to find out what difficulties they encounter in starting and running a business-and, if the business fails, in exiting. The survey captures firms' experience in a range of areas: financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, supplies and marketing, technology, and training. All these are areas where difficulties can add substantially to the cost of doing business. The survey attempts to quantify these costs. Using a standard methodology, the assessment then compares the survey findings with those in similar countries to evaluate how the country's private sector is faring and how well it can compete. The findings of the survey, combined with other relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The assessments look in detail atpoli,y, regulatoy, and institutionalfactors that hamper the provision of good- qua#it infrastructure semces and the funcioning ofprodut, finandi4 and other markets, linking the constraints to firms' costs andproduaioy. In each country/region, the investment climate assessments draw on the guidance and expertise of local partners in govemment and the business community. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. Updates of the assessment can help track progress in improving the investment climate. iii Indi, cnsidredby any riinggiant, has exprenced remarkable growth over the past two decades. Wihile some states-sue as Gujarat, Andhra Pradesh, and Karnataka-bave grownast' others, like Orissa, Uttar Pradesh, and Bihar, have lagged Tegap between thefaster and slowerg in states is idening o tme. vin thi trnd as ecoe acenralocus of the Indian growth strategy. This requires a thoroug nesadngo h atr (mthis atnd haneonmeacetrall)rsucsfrsin oprbet hs of undrstndncom cofuneatoris(al that are holding back the slow-growing states. Focusing on Orissa, one of the majorpoorest state, the study attepts to contribute to this understanding. This is the first subnational investment climate assessment (ICA) undertaken by the World Bank. Byfocusing on the dynamics of growt and the development of regions within a countdy, it may hed (1) shed h,ght on the kind of policies that can assist in the development of other laggin states in India, and (2) provide insights and lessons for subnational work in other countries. EXECUTIVE SUMMARY 1. Orissa is a land of unrealized potential. metric (inldence of poverty, infant mortaity, iteracy, Situated along the eastern coast of the Indian and sanitation), Orissa's fortunes are at variance with peninsula, the state is endowed with rich mineral those of high-performning states in India and (metals and nonmetallic) resources, pristine comparable to those of low-income countries (table beaches, forests and biodiversity, and a rich 1). Orissa is one of the least industrialized states in cultural heritage. Compared with many parts of India and would be even less industrialized if not for India, Orissa enjoys political stability and law and a number of large mineral-based enterprises in the order - critical factors for potential investors, state. Orissa's manufacturing growth story is also one Fig. I Growth Diverence - Orissa vs. Fast Growing States (1980.2003) 400 300 Z 200 a. ~- 0 .-.- . g9~' %9P swo 1 O - 0 , - Gujarat Andhra radesh H aryana -x-- RaJasthan - Rinjab o Orissa Source: Orissa Investment Climate Survey, The World Bank, 2004 2. Despite its promise, Orissa has the dubious of being left behind (figure 2). Investment and distinction of being one of the poorest state in productivity remain low, with new private sector India. Half of Orissa's population of 37 million investments as a proportion of gross domestic lives below the official poverty line. Annual per product (GDP) much lower in Orissa compared with capita income in the state (about US$250) is not other Indian states. An average firm in Orissa is less much different from what it was 20 years ago. productive than an average Indian firm, with the Many states that were equally poor in the early average manufacturing worker in the state earning 24 1980s have marched ahead, leaving Orissa far percent less than the average worker elsewhere in behind (figure 1). On almost every development India. iv Fig. 2 Manufacturing GSDP: Orssa vs. Other States 5. Kyfindings: Like its counterparts in other states in (1980l812002103) India, Orissa's business community is most concerned about the governance and regulatory 20 aspects of the investment climate. More than half of the respondents in the Orissa survey identified i 15 regulation and corruption as major or severe bottlenecks to business operations or expansion. Poor u0 infrastructure and problems of access to finance are s - next in order of importance as impediments to business operation and growth. A significant o - -, proportion of respondents complained about AllSectors Food Processing Metal Work problems of access to land and skill shortages, which a Rest of India * Orissa are compounded by the associated spillover effects that lead to a divergence between the private and Source: Onssa ICS, The World Bank, 2004 social costs for firms (see figure 3). 3. There are many explanations for why Orissa Fig. 3 Orissa - Major Bottlenecks In Investment Climate lags behind other states. It suffers from disadvantageous initial conditions: poor social indicators, weak entrepreneurship skills, underdeveloped institutions, and the "bad 40 neighborhood" effect of being surrounded by other lagging states. The effects of poor initial 30 conditions have been compounded by deficiencies 20 in the investment climate that affect industrial growth and development through their influence 10 on firm performance. This report focuses on this important determinant of Orissa's future. ° Although the term "investment climate" is often 0 , , used broadly, here it is taken to mean the policy, / { / regulatory, institutional, and governance -RW.1 h*s environment that supports (or fails to support) Source: Onssa ICS, The World Bank, 2004 entrepreneurship and efficient markets. 6. The sector-specific analysis reveals that the 4. To better understand the factors that make it Government of Orissa (GoO) maintains a significant difficult for firms to do business in Orissa and role in the ownership and management of commercial that affect their productivity, the assessment uses and industrial enterprises in the strategic sectors of micro-level data from a survey of more than 260 the economy. In addition, GoO attempts to provide firms conducted in six urban centers in Orissa in many services that are not strictly of a "public good" 2004. The urban-based survey covered formal nature. Such an extension in the role of the establishments, of which 90 percent were small government has been motivated by a need to address and medium-sized enterprises (SMEs), in the divergence between the interests of industry and manufacturing (food processing, mineral those of society as a whole. Because of Orissa's processing, metal work and other industries) and natural resource endowments and backward economy, the tourism sector. A separate survey of the spillover effect of an individual firm's actions on handicrafts, covering the informal sector, was also other firms and stakeholders outside the industry is undertaken. The assessment of Orissa's likely to be even more pronounced. For example, investment climate draws upon these surveys as exploitation of mineral resources has significant well as sector-specific studies that provide further environmental and social implications. Similarly, a insight into investment climate issues. supply of poor-quality products by one firm may v adversely affect the prospects of an entire natural or historical advantages that make them industry, especially in a sector such as food attractive to domestic and foreign investors. The case processing, where quality considerations are for improving the investmnent climate in low-growth paramount. The backwardness of the Orissan or low-FDI (foreign direct investment) states is economy means that there is much need for strong not only because their investment climate is innovative activities (e.g., new products, new bad but because IC improvements are the only way to processes, and new markets) that could have offset inherent disadvantages over which they have significant positive spillover effects. However, no control. firms are often reluctant to pursue innovative activities because they have to bear all the risks of 9. Poligy recommendations. To achieve an economnic failure and then share the benefits of success with growth target of over 6 percent, a much higher level many others; this attitude results in a lack of of private investment would be required; for that, entrepreneurship. Firms have little or no significant improvements in investment climate compulsion to protect the environment, maintain would be a prerequisite. Recently, there has been product quality, and upgrade technologies. increased private sector interest in large-scale 7. In the past, GoO has attempted to address investments, primarily in steel and other mineral 7. In the past, GoO has attempted to address based manufacturing. The most notable example of this challenge-to limit negative spillover and this being the planned US$ 12 billion investment by generate positive spillover-through direct the South Korean steel company POSCO - the largest participation in the productive sectors and by ever foreign direct investment project in India. The using the mechanism of direct support to private real challenge is to sustain and manage the growing firms via protection and subsidies. But this model private investor interest towards achieving broad- has been roundly discredited. Moreover, the based and inclusive economic growth. This would significant role of the state in commercial activities require addressing the barriers to investment faced by has compromised the level playing field. For small and medium-scale enterprises (SMEs). example, the differing rules of the game being Cognizant of this, GoO has initiated reforms in some applied to state-owned enterprises (SOEs) and key areas of IC constraints, including govemance and private sector enterprises in mining may lead to regulation, and in the power sector. Some progress is crowding-out of the private sector. Moreover, the being made but the initiatives are still at an early stage government involvement in running commercial of implementation. Much more work needs to be enterprises (managing hotels, for example) may done to build investor confidence. not be the most optimal use of scarce public sector resources and capacity. At the same time, 10. Improving the investment climate will the regulatory role of the state to limit negative involve change in a comprehensive manner across spillover has not been discharged effectively sectors and institutions. In making investment and because of weak implementation capacity and operational decisions, investors look at the package of poor performance of environmental protection reforms, not just individual actions or reforms. The institutions. analysis suggests that IC reforms in Orissa will have to be guided by three fundamental objectives: (1) 8. The casefor investment climate reforms. The analysis reducing the regulatory uncertainty and the cost of shows that the performance gap between industry doing business; (2) making the playing field more in Orissa and its comparators has a great deal to level; and (3) strengthening the state's regulatory and do with differences in investment climate (IC). strategic role. Adverse geography and the legacy of history partly explain Orissa's laggard status. But, as the Reducing the regulatory burden and the cost of experiences of other places show, these doing business disadvantages can be offset by aggressive improvements in the investment climate. The 11. Streamline and modernirZe regulations and improve policy message is clear. As one of the poorest governance. Priority areas for action include (1) making state, Orissa cannot afford myriad and severe procedures for entry and exit of firms simpler and deficiencies in its business environment, especially more transparent; (2) increasing accountability of when it is compared with regions that possess govermment institutions and departments that enforce vi and regulate industry in Orissa; and (3) > In parallel, strengthening business modernizing and streamlining sector-specific development services and market linkage regulations and laws. programs for SMEs, thereby helping SMEs improve their profitability and competitiveness, Improving infrastructure, particularly the and become more creditworthy. reliability of power supply, roads, rural connectivity, railways, and port facilities. This is Making the playing field more level critical to reduce the cost of doing business and increase market access. Priority areas for action 12. To ensure that the private sector plays the are (1) finalizing the draft policy framework for central role in investment and growth, direct state public-private partnership (PPP) that is currently participation in economic activity needs to be further under preparation; and (2) encouraging PPP in curtailed, through privatization, divestments, and/or infrastructure, ownership, and management. withdrawing from the management role. In areas However, the experience of PPP in other where public investments are deemed necessary (for countries is mixed. Reducing regulatory instance, infrastructure-related enterprises), efficiency uncertainty, particularly concerning the tariff needs to be increased through private participation in regime, and strengthening independent regulators infrastructure (PPI), an enhanced regulatory are the key policy reform areas for the medium framework, and private management contracts. term. 13. Because govemment's role in commercial Improving acress to finance. While many of activity affects market competition, it is important to the policy recommendations relating to access to have greater transparency in the role of the finance are dealt with at the central government government. Clear business objectives of government level, particularly with regard to the enterprises reduce conflicts of interest and increase policy/regulatory and institutional framework for the effectiveness of management. It would also help SME financing, several enabling policies can be private sector businesses in Orissa if public sector taken up at the state level to create a more competitors do not have any artificial cost advantages conducive environment for market-based and there were more direct competition between the financing to SMEs by the formal financial sector. public and private sectors. International experience Possible medium- to long-term actions involve the suggests that advocacy by govemrnment, civil society, following, and private sector participants, and the use of > Improving the credit evaluation and risk competition law are some of the ways that efficient management skills of banks and other and fair competition can be encouraged between financing institutions to improve lending public and private sector businesses. A detailed practices. This will involve building analysis of the role and interaction of the public institutional capacity to reduce transaction enterprises with their private sector counterparts will costs and reduce/manage risks related to help in designing specific solutions for improving the SME lending. A risk-sharing facility to competitiveness, fairness, and, therefore, efficiency of accelerate commercial bank lending to SMEs businesses in Orissa. could be explored wherein the facility could provide partial credit guarantees for Strengthening the state's regulatory and strategic commercial bank loans to SMEs. role > Improving credit information (positive and negative information) on SMEs through 14. The rationalization of the role of government assistance to commercial banks and financial will also involve strengthening capacity in a number institutions to verify and collate historic data of areas related to public policy formulation and on SMEs. implementation. A major objective of this effort will > Addressing the problem of collateral by be to encourage entrepreneurship, with firms having improving and updating land and property an incentive to protect the environment, maintain records, which currently impede the use of product quality, and upgrade technologies. land as collateral, and promoting the use of collateral substitutes. vii 15. New and dynamic mechanisms for investments will be key to creating a more addressing the issue of technological, balanced and stable economy. informational, and coordination externalities need to be devised. As opposed to the earlier model of * While there is a need for a comprehensive action direct support to firms in the area of skills plan, both the implementation capacity of development, technology upgrades, and quality government and the political economy of reforms assurance, the state must play a more strategic role will require appropriate prioritization of reforms in coordinating and bringing together different with a clear identification of short-, medium-, and public and private stakeholders to address these long-term actions. Building capacity in the public issues. sector to analyze IC issues and formulate and implement policies will have to be an integral part 16. Building capacity for effective of the reform process. enforcement of environmental protection legislation and regulations, and the adoption and * Since investment decisions have long-term implementation of clear resettlement and implications, the credibility of policies and reform rehabilitation (R&R) policies are needed, especially programs is key. The investment decisions of if investment is to be encouraged in the sectors in firms are affected by their confidence in which Orissa is deemed to have a comparative government policies. Thus, the po]icymakers advantage (i.e., mining, mineral-based must put their full force behind a speedy and manufacturing, tourism, and marine-based robust implementation of the reforms, by industries). Based on dose stakeholder developing a credible action plan with time- consultation and consensus, GoO needs to bound outcomes and a monitoring mechanism to finalize and implement the draft R&R policy, and track reforms. When a government effectively raise the capacity and performance of delivers what it promises, public trust and the environmental protection institutions. legitimacy of the government are fostered, and this influences the location decisions of firms. By 17. In carrying out the program of focusing on picking the "low-hanging fruit," investment climate reform, three things will have GoO can regain credibility that has eroded over to be kept in mind: time, with both the private sector and the public at large. Obtaining feedback from the private * While it is important to reduce the costs, risks, sector in both the reform formulation stage and and barriers faced by private investors, it is the implementation stage, and acting on this also critical to strike the right balance between feedback, is very important for credibility. private and social interests so that both Strengthening capabilities in government to interests are mutually reinforced and growth is administer and guide reforms will underpin equitable and inclusive. The task of balancing successful implementation. private and social interests is a particular challenge for Orissa because of its legacy of 18. To catch up with the high-performing states mining and industrial development in the and counter its "image" problem, Orissa must step up 1 960s-1 970s, which caused significant its reform efforts and establish credibility. With a environmental degradation and social renewed mandate to reform and consensus among deprivation and continues to cause doubts key players to capitalize on the state's rich potential, about the broad-based benefits of the the timing is right to forge ahead. investment and growth agenda. Demonstrating the ability of government institutions to resolve this conflict for future viii AT A GLANCE: INVESTMENT CLIMATE IN ORISSA Orissa India Macro environment GSDP/GNP per capita, 2002 (USS) 250 470 Population, midyear 2000 (millions) 37 1016 GDP growth, 1991-2000 (avg %) 4.1 6.1 Social indicators Poverty headcount, 1999-00 (%) 47 26 Infant mortality rate, 1999-00 (per 000 live births) 81 68 Prevalence of underweight children, 1999-00 (%) 54 47 Access to water, 1999-00 (°/) 65 78 Literacy rate, 1999-00 (%) 64 65 FDI inflows, 2000-01 (net, %GDP) 0 0.7 Govemance Number of visits by govemment officials, average per year 12 1 6.7 % of senior manager time with govemment officials (SMEs only) 13.3 11.9 Infrastructure Share of firms with own generator, % 60 61 Telephone lines, March 2003 (per 1,000 people) 2.2 5.1 EntrylExit and Operation Median number of days to start a business (January 2004) 79 89 (Mumbal) Ix MAP OF ORISSA . _ .-.-_ -._ . . h-.. _. j* , _. J U-AI.j4Jd PJ re -' r2x8 , -. ;- C- Sr C -O ERE .,~~~~ _ £ ,,,, A 'I / , . - ,_ t..dAtT1H , t _ , ,, .*^,Or * i,W - | (, <''".' ,"- -''fr,.. ' rb ADM-A INDIA . DIST. . - r r NRiCS COVERED ' IN \ 3 llTHE SURVEY .. t ' --@'-- Owimao Shloi ,r .fl p A.re * >h- w . _ . ~I ANt3fARA PES. ----'Ia c __ __. _ ._____'. - -.______ ._____.__1_____ x CHAPTER 1 ORISSA: BUILDING BLOCKS FOR REALIZING THE STATE'S POTENTIAL With its abundance of mineral resources, long coastline and inland waters, the biodiversity of its forests, and a rich cultural heritage, Orissa ought to become a privileged destination for industrial investment. Industrial Policy of Orissa, Government of Orissa, 2001 I. INTRODUCTION Annual per capita income in the state (about US$250) is the same as that in Andhra Pradesh 1.1 Land of plenty yet poor outcomes. The and Gujarat almost 20 years ago. The state lags the striking and paradoxical feature of India's rest of the country on most indicators of human eastern coastal state of Orissa is its development and is comparable to a low-income overwhelming poverty and low growth rate, country. Regional disparity is marked, with a juxtaposed with its rich endowments that relatively well-off coastal area that has historically remain largely untapped. Orissa is rich in benefited more from trade and public investment mineral resources,' possesses significant and an extremely poor and isolated interior, tourism potential,2 and has promising populated largely by tribal forest dwellers. prospects in marine-based and agro-processing industries. Some would also argue that the 1.3 Despite recent improvements,' the state's geographic proximity to Southeast Asia, challenges remain significant. As table 1.1 combined with its low-wage labor, could make indicates, the overall gross state domestic product it an attractive platform for export-oriented (GSDP) growth rate falls far short of the 6.2 growth. Compared with many parts of India, percent target set for the 2002-07 period by the the state enjoys political stability and law and Government of Orissa (GoO)4 and the all-India order-critical factors for potential investors. average target of 8 percent GDP growth per year Yet new private sector investment as a over the next decade. Growth is also linited to a proportion of GDP is much lower in Orissa few sectors. Given the disparity within the state, than in other Indian states. broad-based growth is key. This will require 1.2 Botom of the rung among Indian Table 1.1 Orissa Real GSDP Growth Rates(%) states. Orissa is one of the poorest states in India, with a growth performance that 199334 11718 11W3134- continues to lag behind the all-India average a 117 20 2603/4CAGR (figure 1.1). Half of Orissa's population of 37 allied 1.6 0.7 1.1 million lives below the official poverty line. Agriculture 1.0 0.5 0.7 Forestry and logging 2.1 2.5 2.3 Fishing 9.2 1.4 4.5 Fig 1.1 Real GSDP Growth Rates: 1993/94-2002/03 Indstry 9 4 4.8 Kamataka 7.1% Mining and quarrying 13.2 6.9 9.4 West Ben6at 7.0% 1 43 All=adla-GD5fc -- Manufacturing 3.1 5.1 4.3 Haryane L. . 81 . Gujerat Registered 1.3 8.1 5.3 TRajnd thranra Unregistered 8.5 -5.1 0.1 amal Nadu S 0 Construction 2.8 1.3 1.9 M aharashtra 0 Kerala = 4.0% Electricity, gas Madhya Pradesh JDividad and water supply -1.0 4.4 2.2 LlttarPradesh Dlvidedg - ' Services 7.3 6.5 6.8 Uttaranchal State domestic 4.5 4.2 4.3 Chattisgarh 4.5 product Source: Central Statistical Organization Source: CSO, CAGR estimates I 1~~~~~~~~~~~~~~~~~~~~~~~~ growth in agriculture, among other things.5 itself in low-equilibrium outcomes and a vicious However, the prospects for agriculture to grow cycle of poverty. Although the term "investment at a dynamic and sustainable rate are not climate" is often used broadly, here it is taken to particularly bright, given the state's mean the policy, regulatory, institutional, and vulnerability to droughts and floods.6 Many govemance environment that supports (or fails to argue that Orissa should strive to reduce its support) entrepreneurship and efficient markets. dependence on agriculture, but given the When making investment decisions, firms of all current level of dependence, any vision of types and sizes look at these measures as part of overall growth cannot discount the importance an overall package- including regulation and of this sector. A key element of the strategy for taxation, provision of infrastructure such as agricultural growth may involve diversification electricity, telecommunications, and roads; the away from water-intensive rice cultivation to functioning of markets for finance and for labor; cash crops and horticulture, and enhanced and governance, including corruption- that focus on the development of agro-processing shapes the attractiveness of a particular investment industries, removal of regulatory constraints on opportunity. These factors affect the opportunities private investment in marketing yards and and incentives facing a firm through their storage facilities, investment in irrigation, and influence on three key but interrelated dimensions: better roads.7 costs, risks, and barriers to competition. All three matter for firms-and for growth and poverty 1.4 A more dynamic and sustainable (WDR 2005). strategy for getting Orissa out of the poverty trap calls for creating opportunities away from 1.6 Section II of this chapter provides a brief agriculture and toward the nonagricultural background on the performance and structure of sector, particularly industry. Sustained industry in Orissa, and the role of the private agricultural growth itself may require growth in sector in the state's economy. The focus of the industry; this is particularly true if a strategy of discussion in section III is on private sector agricultural diversification is to be followed, investment and productivity levels in Orissa in including the development of an agro- comparison with the rest of India. Section IV processing industry. More significantly, spells out the state's vision and strategy for broad- industrial growth may be needed to raise based growth, given the multifaceted challenges at overall productivity in the state. hand. Section V sets the investment climate framework. 1.5 Mirroring the overall growth trends in Orissa, the industrial development record has I. PERFORMANCE AND STRUCTURE OF INDUSTRY been less than stellar, with low investment and productivity levels.8 Why Orissa's potential has 1.7 Orissa is one of the least industrialized not been effectively realized is a puzzle that states in India and would be even less so if it were plagues government and researchers alike. not for a number of large mineral-based There is no dearth of explanations, ranging enterprises in the state (table 1.2). from disadvantageous initial conditions of poor social indicators, weak entrepreneurial skills, underdeveloped institutions,9 and the Table 1.2: Orissa: Less Industrialized Than the Rest of India "bad neighbor" effect of being surrounded by p har of GDP other lagging states.10 The effects of poor 2000-01 initial conditions have been compounded by Agncultur 24.7 22.2 deficiencies in the investment climate that affect industrial growth and development Mining and quarrying 8.0 2.3 through their influence on firm performance. Manufacturing 9.5 17.2 This report focuses on this important Trade, hotels and 10 1 determinant of Orissa's future, and argues that restaurants the key economic institutions and policies Source: Ofssa iCS, The Wotd Bnk 2004 shaping the investment climate in Orissa have led to a pattern of development that manifests 2 r _- -- 1.8 Industnal growth and structure. Industrial industry. After rising in the 1970s and 1980s, the growth in Orissa was modest to poor during share of industry in GSDP in Orissa stagnated in the 1960s and 1970s, but it accelerated in the the 1990s at around 27 percent. 1980s. Cognizant that relying on agriculture alone could not possibly get Orissa out of its Table 1.4: Orissa's Economic Growth, 1980s and 1990s (%) cycle of abject poverty, successive Annual Growth Contrbuon to governments actively encouraged industrial GowtD growth through a succession of industrial policies," and campaign slogans such as "1000 1980489 1991-00 1980-89 1991400 industries in 1000 days using 1000 crores."''2 Primary 2.8 2.0 41 20 The state-led industrialization strategy was Agriculture and 3.1 0.5 35 1 based on liberal provision of a variety of livestock incentives-mainly in the form of subsidized capital and power-and administrative fish d2 measures to expedite assistance to large and medium-scale industries through various Mining and 9.7 11.6 6 15 promotional agencies. The strategy did not encourage sustainable industrial growth but led Industry 7.1 3.7 22 20 to rent-seeking by influential firms and public Services 7.5 6.6 37 60 officials, and consolidation of the power of Total GSDP 5.0 4.1 100 100 vested interests. The growth that ensued was predominantly artificial or inefficient. No Notes: 'Trend rates using a semi-log regression on GSDP data at predominantly ~~~~~~~~~~~1993/94 prIces surprise then, that after the onset of Source: CSO data liberalization in the 1990s, industrial growth slowed down considerably,'3 and many 1.10 Mining and nonagricultural primary industrial units were declared "sick" (table 1.3). activities-which include forestry, fishing, and aquaculture-are the only subsectors of the Table 1.3: Small Scale Industries in Orissa economy that grew faster in the 1990s than in the (1995-2003) previous decade. Limited backward linkages of some of these subsectors have restricted the Number of SI impact on employment and poverty in the state. Yw t81 UnIb Set Up hwautmmnt (Rs. Units Idd (cmuae) Incrr) Sck'6n 1.11 The slow growth of industry is confirmed by the firm-level Orissa Investment Climate 1995-96 49,589 74.82 1,458 Survey (ICS) carried out for this report (annex 1).14 1996-97 52,687 104.53 1,464 The average manufacturing business covered by 1997-98 55,873 134.09 1,489 the Orissa ICS grew at an annual rate of only 4.6 1998-99 59,057 190.06 1,493 percent in the two years leading up to the survey, 1,508 against a corresponding growth rate of 9.6 percent 1999-00 62,530 162.94 1,508 in a similar survey that covered 12 other Indian 2000-01 66,206 153.18 1 519* states (figure 1.2). Similar gaps are observed even 2001-02 70,125 165.23 1,524 when the comparison is confined to the two 2002-03 74,133 155.14 1,527 industries covered commonly by the two surveys. of Orssa 2003/04, Directorate of Industries, Thus, the differences in growth rates cannot be Orissa explained by sector-specific variables but by state- specific ones. The IC work shows that differences in rate of investment in fixed assets have less to do 1.9 The slowdown in growth in the 1990s with the contrast between the growth performance was widespread, with the broad sectors of the of industry in Orissa and that in the rest of India state's economy-agriculture, industry, and than with differences in total factor productivity services- all registering lower growth (table (IFP) growth rates. 1.4). The decline was sharpest in the case of 3 Figure 1.2 Annual business sales growth rates (): reduce poverty indirectly in two ways: (1) by SMEs only catalyzing growth in downstream (e.g., sponge iron) and upstream (e.g., mining equipment) industries; and (2) by generating revenues that can 20 - be used by government to improve the investment 15- _ climate; for example, by funding infrastructure development. Successive governments in Orissa 10- have taken the view that mining is not an industry that can make a direct significant contribution to Orissa's growth and poverty alleviation, and that o5L _r___ mining development would be of little benefit for AllSectors Food Processing Metal Work the development of the state unless it is directly linked to downstream industrial activities. * Rest of India * Orissa However, these expected activities have not materialized on a significant scale. Backward links Source: Orssa ICS, The World Bank, 2004. have been limited partly as a result of the central government's freight equalization policy, which subsidized buyers of mineral inputs for transport 1.12 Narrow industrial base. Orissa's costs, thus inadvertently encouraging them to set dependence on its rich mineral resource up mineral-processing units near market centers endowments and its failure to diversify are outside Orissa. With the removal of this freight reflected in its industrial structure. A few equalization, there is now greater incentive for sectors account for the bulk of industrial private mining investors to set up processing units activity. In 1996-97, basic metals and alloys led near the mines in the state.'8 the list, accounting for 48 percent of gross value added (GVA). The top five two-digit 1.15 The emphasis on the development of categories accounted for as much as 89 percent ancillary industries has led to the neglect of of GVA.is another route through which the mining sector could have an impact on growth and poverty 1.13 Signficance of mines and minerals. Orissa reduction. An aggressive desire to catalyze has significant geological potential and is sixth ancillary industries may have prevented the in overall production of minerals in India.16 development of a political will that was necessary The state accounts for almost all of India's to reform the mining sector. Without this reform, chromite production and a little less than Orissa lacks the appropriate environment to three-fourths of its bauxite output. Orissa has attract the private investment badly needed for the important reserves of manganese ore and mining sector to become a driver of development nickel and is likely to have major resources of in the state. However, with such large mineral base metals and diamonds. The mines and reserves, mining occupies an important position in minerals sector has grown fairly rapidly in the state's growth vision. Despite its mining recent years; between 1991-92 and 2000-01, tradition, Orissa is still a relatively unexplored the annual growth rate of this sector was 10.4 state. percent, compared with 4 percent for the rest of India.17 III. INVESTMENT AND PRODUCTIVITY 1.14 Even though Orissa is richly endowed 1.16 Private investments low. A major factor in minerals, the mineral riches have not helped explaining the poor industrial growth performance development in the state. Like other extractive in Orissa is low levels of investment and industries, mining tends to be capital-intensive, productivity. Figure 1.3 suggests that new private to rely on a small number of skilled workers, sector investment in medium-to-large projects in land to be geographically concentrated. Hence, the industry and service sectors, as a proportion of it cannot have much direct impact on poverty GDP, is much lower in Orissa compared with reduction. However, mineral riches can help otherIndian states. 4 Fig. 1.3 Private Investment in New Medium and Large activity in Orissa occurs in resource-based or low- Project (1997-2002) tech industries to the exclusion of the medium- to high-tech industries that may have pulled up 12- 10 average productivity for the 12-state survey Is l0 -sample. However, a comparison of sales per | g 8 - worker between the Orissa ICS sample and the 12- at 6 - state ICS sample in industries covered by both l4X . surveys suggests that this factor is not likely to E 2 | | | | | account for the entire productivity gap between V, _ O * _* ___________ the two samples. One indication is that, for the > food processing sector, sales per worker in Orissa are about half that of the 12-state sample. Labor productivity in metal works is far closer between the two samples, but in this case also, sales per worker are 12 percent lower in the Orissa sample. Source: CMIE, includes projects wdit project costs above Rs 10 million only. Primarily includes investment in industry and some in services sector 1.18 Part of Orissa's labor productivity shortfall reflects the lower capital-intensity of 1.17 Poor produitiov levels. However, few production in Orissa. However, this factor is now accept the simplistic view that greater unlikely to fully explain the shortfall, as production investmnent levels alone will lead to higher is more than 90 percent as capital-intensive in the growth; instead, the prevailing emphasis is on Orissa sarnple as it is in the all-India sample. On building a productive environment in which the assumption of a relative share to capital of | private businesses can flourish. An average output per worker of 30 percent to 70 percent, | firm in Orissa is less productive than an this would leave a significant part of Orissa's sales average Indian firm. The average productivity per worker unexplained by shortfall in capital per of the firms responding to the Orissa ICS was worker. Economists often refer to this three-fourths that of the sample covered by a unexplained component of labor productivity as similar all-India survey (figure 1.4).19 Thus, in total factor productivity (TFP) or overall the survey year, sales revenue per worker (an productivity. admittedly crude indicator of productivity) averaged Rs528,000 for the Orissa sample against Rs710,000 for the sample for the all- shortfall on its competitiveness relative to the rest India survey. Part of the productivity shortfall of India and to other countries is to some extent could reflect differences in the structure of compensated by Orissa's lower wages. The average industry between Orissa and the rest of India. manufacturing worker in Orissa earns 24 percent As indicated above, much of the industrial less than the average worker in the rest of India. Only to the extent that Orissa manages to bridge Fig. 1.4 Indicators of Productivity In Rs '000: annual its TFP gap with other regions in India can its (SMEs only) businesses afford to pay their workers as well as ' 1200 their counterparts in the other states do. A key 4~ ~ ~~~~~w 1oo premnise of thins report is that improving Ortssa's investment climate is one of the ways in which this -6 can be done. 200 - 1.20 The Government of Orissa (GoO) is r 8 200 _ cognizant of the importance of a sound 0 - investment climate for attracting private sector Ail Secbs Food Piucessing MebWl Vtk investment and accelerating economic growth and poverty reduction. We now briefly present the key elements in GoO's ongoing reform program, as Source: Orissa ICS, The World Bank 2004. articulated in its Industrial Policy Resolution 5 (IPR) 2001, the Tenth Five-Year Plan (2002- 07), and the draft Orissa Vision 2020. Strategy articulated in its draft Vision 2020, Tenth Five-Year Plan (2002-07), and IV. TURNING OVER A NEW LEAF: ORISSA Industrial Policy Resolution 2001 REFORM VISION AND STRATEGY . Encourage private sector growth in economic sectors in which Orissa has strategic comparative 1.21 Facing up to its multifaceted advantages (e.g., tourism, mineral processing, 4 development challenges, the GoO since early horticulture, marine products, high-quality rice, development challenges, ~~~~~hsndicrafts). 2001 has put in place economic and Strenthne institutional reforms that aim to establish the * Stregthen ntetion ong regions of the state fondatittonsa sod wit thenretmofethnworld foundations of an open, modern, and * Enhance the quality and quantity of public prosperous state through broad-based growth investment in human and social capital so that the by (1) increasing per capita income in Orissa so benefits of income growth are more equitably that the widening gap between the state per distributedthaninthepast. capita income and the national average is first Industrial Policy Resoluion 2001 arrested and then reduced; and (2) ensuring With the goal of harnessing its vast natural resources, equitable distribution of the benefits from generating employment, developing the backward economic revival to reduce interregional, regions, and promoting rural development, the gender, and other interpersonal differences (see Government of Orissa, in its 2001 Industrial Policy box 1). Resolution (IPR), articulated its wish to create a ;bDOX 1), condudve business climate for attracting investment and establishing competitive industry. The main 1.22 At the core of the government's IPR objectives to achieve these goals are to 2001 and Vision 2020, the private sector is envisaged as the main vehicle for growth, with . Encourage private initiative and restrict state the state providing a level playing field and Interetto arease facilitator, strategy ~~comparative advantage acting as facilitator. The strategy aims at * Invite private investment for the development and achieving faster growth in sectors such as operation of quality infrastructure. mining, tourism, handicrafts, and other * Promote the image of Orissa as an attractive manufacturing subsectors, with a significant destination for investment and tourism. presence of small and medium-scale producers, * Assume a proactive role in selected sectors, such and where Orissa has potential comparative as o mineral-based industries; advantage. Historical experience (i.e., the failed o craft products; attempts at industrialization through liberal o agro- and marine-based industries and provision of subsidies) and the private sector's industries based on medicinal herbs and minor assessment of the critical bottlenecks suggest forest produce; that, to be effective, the strategy will have to o trism and o electronics, information technology, and address deficiencies in Orissa's overall biotechnology. investment climate. * Encourage the creation of small-scale industry dusters in similar lines of business. V. INVESTMENT CLIMATE ASSESSMENT . Proceed decisively with the restructuring and consolidation of sick industrial units. 1.23 The objective of the Orissa c Leverage the potenial in Special Economic Zones Investment Climate Assessment (ICA)20 is to to build a concentration of tehologicaly systematically identify and analyze the IC bottlenecks that deter investment and Somr#: Gonme,t of O&ssz productivity growth in enterprises in the state.2i Understanding firms' perceptions of the major business obstacles they face provides a for investment. Drawing on the experience of solid basis for examining Orissa's prevailing local entrepreneurs, the Orissa Investment Climate investment climate. Entrepreneurs and Survey (ICS) highlights the key constraints in prospective entrepreneurs make decisions investment climate in Orissa that may help explain depending on how they perceive the climate the state's shortfall in the level and growth of 6 productivity in industry and services.22 1.24 The following chapters are organized as Information on firms' perceptions is follows: chapter 2 reviews and analyses the nature complemented by data on a wide range of of Orissa's investment climate issues, based objective measures that allow us to assess the predominantly on the findings of the IC survey; burden imposed by these constraints on firm chapter 3 discusses some issues related to performance. Drawing on the analysis, the externalities that are an important aspect of the report provides specific policy investment climate, especially in a backward, recommendations to assist the Government of natural-resource-rich economy such as that of Orissa in its ongoing efforts to address these Orissa. Finally, chapter 4 makes specific policy constraints and develop a more investor- recommendations to improve the investment friendly policy and regulatory environment to climate. enhance investment and growth rates, as articulated in the state's Tenth Five-Year Plan, 2002-47 (TFYP) and the draft Orissa Vision 2020 strategy.23 7 ENDNOTES: 1 Orissa has 26 percent of India's iron ore, 23 percent of its coal, 70 percent of its bauxite reserves, and 90 percent of its chrome. 2 Orissa has long, unspoiled stretches of beach, as well as ecotourism potential along the coast and in its forests. It also has the cultural attraction of indigenous crafts, arts, and heritage sites. The state has extensive craft- based industries, with a heritage of over 100 living crafts. 3 The reform measures put in place by the government are beginning to show some initial results in terms of increased growth rate and enhanced private investor interest, including the largest foreign direct investment proposal in all of India by the South Korean steel company Posco. 4 The Tenth Five-Year Plan (TFYP) seeks to achieve a GSDP growth rate of 6.2 percent during the 2002-07 period. 5 The state is predominantly rural-about 85 percent of the population (and a similar proportion of the poor) lives in the countryside-and most of the labor force depends on agriculture. 6 The state is highly disaster-prone, with cyclones and floods regularly inundating the coastal areas while drought and famine threaten the tribal belt. 7 Orissa Socio-Economic Development Program Document, September 2004. h Details discussed in the next section. 9 Differences in institutions are considered one of the fundamental causes of differences in economic development (North and Thomas, 1973). Economic institutions determine the incentives and constraints on economic actors and shape economic outcomes (Acemoglu, Johnson, and Robinson, April 2004). 10 The team thanks Deepak Mishra for raising this point and coining the phrase. 1 The first industrial policy was developed in 1980. Changes were made or new polices developed in 1986, 1989, 1996, 1992, and 2001. 12 One crore is equivalent to 10 million Indian rupees. 13 India's overall growth performance improved following the initiation of economic reforms in the early 1990s. However, the aggregate growth masks increasing divergence in per capita incomes, poverty, and other social indicators between richer and poorer states. From 1990-91 to 2000-01, for example, Orissa grew at 4.1 percent per year, compared with an all-India growth rate of 6.1 percent. As a result, per capita income in Orissa decreased as a proportion of the national average, from 62 percent in 1993-94 to 52 percent in 1999- 2000. 14 The Orissa ICS sample was drawn from Bhubaneswar and five other urban centers that account for the bulk of industrial activity and tourism in the state (annex 1, table Al). A little over a fifth of the sample are hotels and restaurants, the remainder are manufacturing establishments drawn mainly from food processing, mineral processing, and metal work (annex 1, table A2). Although they are only a fraction of the sample in the 12-state survey, the manufacturing industries of the Orissa survey are covered sufficiently in the other survey to facilitate comparison of responses. As in the 12-state survey, the vast majority of respondents to the Orissa survey are small and medium-sized enterprises (SMEs), which we define as those with fewer than 150 workers. Some 90 percent of the SMEs employed 10-100 workers (annex 1, table A3). This assessment is one of the first to take a comprehensive look at a country's business environment by including an analysis of entrepreneurship in the formal manufacturing sector along with sector-specific case studies in the informal rural sector. The two rounds of investment c]imate surveys carried out for India did not cover Orissa. 15 Industrial Policy Resolution 2001 of the State of Orissa, vol. II: Industrial Growth and Socioeconomic Progress in Orissa. UNIDO.2001. 16 Study on Issues of Mining in Orissa, Verve Consulting Private Limited, draft report submitted to the World Bank, 2003. 17 Orissa l/'ision. Ravishankar, Wes, and Churamani. November 18, 2004. 18 This may have been a factor behind a renewal of interest in the sponge iron sector in the state. The other factor may be the recent firming of intemational steel prices. Reportedly, the state government has received inquiries from some 29 sponge iron concems. According to a Centre for Monitoring the Indian Economy (CMIE) report, investment projects (public and private) accounted for 10.6 percent of GSDP in Orissa during 1997-2001, compared with 6 percent for all of India. 19 The AU-India Investment Climate Survey- like the Orissa ICS- was carried out jointly by the World Bank and the Confederation of Indian Industry (CII). About 1,900 manufacturing businesses in 11 of India's major states and Delhi were surveyed, using a similar instrument and sample design, from March through July 2003. In both surveys, the instrument was a written questionnaire administered to business managers and accountants in face-to-face interviews by trained enumerators. Some items of the questionnaire sought to gauge the 8 - - - - - - _- - - - - - _ _ _ _ __- - _ _ _ _ _ _ _ _ __ _ _ _ _ __ _ _ manager's evaluation of the business environment across states. A second set of questions generated data on a wide range of objective indicators of investment climate and financial variables at the establishment level. The other states covered by the 12-state ICS are Andhra Pradesh, Gujarat, Haryana, Karnataka Kerala, Madhya Pradesh, Maharashtra, Punjab, Tamil Nadu, West Bengal, and Uttar Pradesh. Throughout this section, and the whole report the phrase "rest of India" is used with apologies as shorthand to refer to the 12 states in the survey. 20 Despite greater awareness of the importance of the investment climate, little work has been done until recently to systematically gather objective measures of the investment climate or to link these measures directly to firm performance. Together with govemments in Asia and in other regions and development partners, the World Bank is undertaking a series of investment climate assessments (ICAs) based on a representative survey of national enterprises. The ICAs measure how conducive a country's investment climate is to the creation of economic growth and benchmark the climate against those of its neighbors and competitors. 21 The report is based on an IC survey undertaken in Orissa in 2004 that focused predominantly on the manufacturing sector and the tourism industry. The report does not deal directly with investment climate issues pertaining to the agricultural sector, although agro-processing and fisheries and marine food processing are included as part of the manufacturing sector in the survey. Rural areas are partially covered through a separate handicrafts study. 22 The focus is on the manufacturing sector and the hotel and restaurant industry. 23 The report is being undertaken at the request of the Government of Orissa and will serve as a timely input for the Orissa Vision 2020 document to be completed by October 2005. 9 CHAPTER 2 OVERVIEW ANALYSIS OF ORISSA'S INVESTMENT CLIMATE 1. INTRODUCTION state ICS both asked managers to identify the factors they thought were the strongest obstacles 2.1 The investment climate influences to the growth of their businesses. As we can see investor behavior by affecting the costs and from figure 2.1, enterprises in all manufacturing risks of doing business and the competitive sectors identify investment climate elements that pressure that creates incentives for innovation affect uncertainty (macroeconomic instability, and productivity improvement. The Orissa regulations, corruption and tax/customs Investment Climate Survey (ICS) covered eight administration) as the most problematic. More important dimensions of the investment than 40 percent of the respondents cited these climate; they can be categorized into three factors as posing a major or severe constraint for groups, depending on whether their most them. By contrast, only about 20 percent of the significant impact is on (1) entry, which affects hotels and restaurants covered by the survey the degree of competitive pressure; (2) identify these factors as important constraints. operations, growth, and profitability (affecting, for example, the average rate of retum); or (3) Fig. 2.1 Percent of Respondents Identifying Bottlenecks uncertainty (affecting the variance in, rather than average rate of retum). Table 2.1 summarizes these categories. The categorization is inevitably arbitrary-many elements of the investment climate affect 50 0401- enterprises through more than one channel. An 30L example is access to finance, which affects 20 - i7 7 ]J entry, operations, and growth prospects. 10. Nonetheless, as we shall see below, the [ categories can help us detect useful pattems. . Table 2.1. The Effect of Investment Climate Factors *Enty NOperaftnr C3Unceralnty on Firms Access to and Entry Source: Onlssa ICS, The Wodd Bank, 2004 External finance Entry, growth inlrastructure Growth. pitabii0ty# 2.3 Factors that affect entry (access to land 'SkDIl shortages Growth, profitablity and extemal finance) are the least problematic for i ~~~~~~~High taxes Profltbblllty all sectors except food processing, where these l Regulation/corruption Uncertainty factors constitute the second most important Tax/custors Uncertainty category of investment climate constraints. Nonetheless, these are important issues for the Macroeconomic Uncertainty other manufacturing sectors, where at least one stability out of four respondents reported them as a major 2.2 While the investment climate in a or severe constraint. Entry issues appear to be country or region has several dimensions, firms much less a problem for hotels and restaurants. typically reveal overriding concern with just a Here the most important constraints are those that few bottlenecks. In order to identify these affect operations (infrastructure, in particular). priority constraints, the Orissa ICS and the 12- 10 II. OVERVIEW OF ORISSA'S INVESTMENT Fig. 2.2: Managers Identifying Factor as Major or Severe CLIMATE IN COMPARISON WITH THE REST OF INDIA Bottlenecks: all Survey Sectors, all Business Sizes 60 - 2.4 The snapshot data above suggest several problems with the investment climate 40 - in Orissa. The rest of the chapter explores - h L these problems, staring with a comparison of 20- * i * - - - I Orissa and the rest of India. This comparison * * * * - - - is important, as much of the potential , investment in Orissa is likely to originate out of state, and whether these investors are attracted ,o 0 V \ , or not will depend to a great extent on how they see Orissa's investment climate vis-a-vis orissa M ast of kdia those of other states. Figure 2.2 indicates that Source: Onissa ICS, The Wodd Bank, 2004. on all dimensions studied, investors give lower marks to Orissa than to the average Indian Fig. 2.3: Managers Identifying Factor as Major or Severe state. The relative importance of the various Bottlenecks: All Survey Sectors, SMEs constraints does not differ much, except that poor access to finance ranks higher as a problem in Orissa than in the average Indian 40 state. Like its counterparts in other states in India, Orissa's business community is most 20 * *- -I concerned about governance and regulation. More than half of the respondents in the ° Orissa survey identified regulation and corruption as a major or severe bottleneck to ; business operations or expansion. A little over 40 percent had the same view of tax and *oo"$| *R.Rtofindi customs administration. Poor infrastructure and problems of access to finance are next in Source: Onssa ICS, The WorldBank, 2004. j order of importance as impediments to attention to responses of managers of small and business operations and growth. Then follow medium-sized enterprises (SMEs), which high taxes and macroeconomic instability, constitute nearly 90 percent of the survey sample which are rated as major bottlenecks by a 2 quarter to a third of the respondents. Skill (figure 2.3). shortages and problems of access to land are 2 . N also mentioned by a significant proportion of . P respondents. The order of importance of governance and regulation seem to be far more of respondents. Thne order ofrirnportance of a problem than infrastructure in the foodI bottlenecks does not change if we confine our a Table 2.2: Respondents Identifying Factor as Major or Severe Obstacle: Orissa, SMEs Food Mine Metal work Other Manufacturing Hestand Processing restaurants Regulation/corruption 58.1 65.0 57.4 55.0 27.3 Infrastructure 25.8 45.0 41.0 38.3 36.4 Tax/customs admin 41.9 40.0 41.0 51.7 16.4 High taxes 31.0 17.6 38.5 40.4 18.2 External finance 54.8 55.0 32.8 45.0 12.7 Access to land 20.7 5.9 17.6 9.8 3.0 Skill shortages 25.0 29.4 15.4 19.2 24.2 Macroeconomic stability 33.3 26.7 29.5 29.2 18.8 Source: Onssa ICS, The World Bank, 2004. l~~~~~~~~~~~~~~~~~~i -~~~~~~~~ ~ ~ ~ - -- - - - ------- - - - - - --- - -- - - --------------------------- - - - - - - processing industries in Orissa than in metal complained about and labor regulation and works. Governance and regulation are also licensing procedures attracting the fewest perceived to be serious obstacles by more complaints (table 2.3). However, the incidence of a businesses in manufacturing than in the hotel particular problem may differ significantly across and restaurant industry (table 2.2). Likewise, sectors. Thus, corruption is a major issue in the access to land does not seem to be as serious a mineral processing sector, where more than three problem in mineral processing and hotels and out of four (77 percent) managers identify it as a restaurants as it is in food processing and metal major or serious bottleneck. By contrast, only 40 work. These issues are explored in greater percent of managers of hotels and restaurants cite detail below. corruption as a serious or major obstacle. For the other factors, too, there are fewer complaints from lll. GOVERNANCE AND REGULATION this sector than others. Less than 20 percent of respondents rate labor regulation, licensing, and 2.6 In the category of regulation and tax and customs administration as major or serious governance, corruption is by far the most obstacles to business growth in the hotel and serious problem cited by businesses in Orissa. restaurant industry, in contrast to 27-40 percent of Almost two-thirds of the managers (62 respondents in food processing, mineral percent) rate corruption as a major or severe processing, and metal work. Interestingly, labor obstacle to business operations and business regulation is not cited by any firm in the mineral growth (figure 2.4). About 45 percent put the processing sector as a major or serious problem. bureaucratic hassle associated with tax and In the handicrafts sector, there are complaints customs administration in the same category, about harassment by government offcials and the followed by the delays and hassle of licensing difficulty of interpreting policies and regulations procedures (32 percent) and those of labor (see box 2.1) regulation (22 percent). This relative ranking of the governance/regulation-related constraints Table 2.3 Managers Rating Regulation/Corruption as Major is more or less similar to that of India as a Obstacle: Orissa SMEs(#) whole. However, a significantly higher Percentage Ratng as Major or Severe proportion of firms in Orissa than in India Obstacdle overall cite all factors as serious problems, with Tax/ the most striking differences in the categories Labor customs C . . . ~~~~~~~~~~~~~~~~reguation Licensing admin. corruptionl of corruption and llcenisin. Food processing 33.3 28.6 41.9 50.0 Fig. 2.4. Managers IdentIfyIng Regulation as a Major or Mineral Severe Obstacle to Growth: SMEs in all Survey Sectors Metal work 26.9 30.8 41.0 61.5 Other manufacturing 19.2 35.3 51.7 63.5 Corruption - Hotels and Tax/customs _ restaurants 15.2 15.6 16.4 39.4 44.8 adnSource: Onssa ICS, The Wodd Bank, 2004. Licensgs 3t8 Labor regulatbn 2.8 Regulatory inspections. A proxy for the magnitude of the overall burden of regulation on 00 20.0 40.0 600 80.0 industry is the frequency of inspection visits that *Or ssa *Rastof hd a government officials make to business premnises as part of the enforcement process. Many of the Source: Onssa ICS, The World Bank, 2004 rules and regulations that the inspections are supposed to enforce are probably not much 2.7 The relative rating of these various different from those that governments in the components are more or less similar across developed economies implement routinely. industries, corruption being the factor most However, in India, as in much of the rest of the 12 with businesses in mnineral processing faring Box 2.s f Regulatory Hassles Faced by Soha Players: The Case of Handicrafts signficantly worse than others. In the handicrafts sector, some of the surveyed trader Fig. 2.5 Inspections Per Year: SMEs and artisan entrepreneurs complain about hassles involved in export, not being well versed in export management, and customs duties. They also Ie6t Of hdb ES complain about harassment by Oiroi and lower-level Al sectors 12.1 police functionaries when bringing raw materials O,ernunufscurng from, or sending finished products to, other places. _roressing___ 0h,erw procesing w4e The artisan and trader entrepreneurs do not see any serious problems in interpreting most government 1a3wori is policies; however, there are exceptions. Some survey Food processing 120 respondents were unsure when the tax exemption FIotet anod restuarents 53 announced by the government on all handicrafts would go into effect and what it would cover. The 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 exemptions from entry tax and sales tax were meant for cooperatives and artisan entrepreneurs who were Source: Onssa /CS, The World Bank, 2004 procuring raw materials (such as silk yarn and cane) and were paying taxes. It is, therefore, necessary to issue a notification immediately exempting a Fig. 2.6 Management Time Dealing with Regulations (%) handicrafts from sales tax and eliminating the entry tax on raw materials meant for the production of est of hdia 132 handicrafts. Al sectors i2.7 Sounne: Survy of artisans and traders in the handicrafts sector Fbb s and restuarnts Its camed outfor this study, 2004. Other rrenufactsing _ s .0 ___________________________________ tal Iwork lt 1 developing world, individual government nieral prc.ssing 1554 officers often have too much discretion in Food processing 12.0 deciding which rules to enforce, on whom, 0.0 ° s 10.0 15.0 20.0 when, and sometimes how. In many cases, inspection visits are arbitrary or too frequent Source: Orissa /CS, The World Bank, 2004 and are viewed by businesspeople as a veiled demand for a bribe as the price of avoiding demad fo a bibe s th prie ofavoiing 2.10 Labor regulation. It is not surprising that future visits. Often the bribe is worth paying, since visits can disrupt plant operations and cost valuable staff time, including that of bteneck lo gulatio As a majo orsevere senior management. bottleneck to growth. As is the case elsewhere in India, the labor market in Orissa has always been 2.9 Respondents to the Orissa ICS heavily regulated on the basis of three federal laws: reported an average of 12 inspection visits in the Industrial Employment Act of 1946, the the year leading up to the survey. ~s is Industrial Disputes Act of 1947, and the Contract the year leading up to the survey. This is almost double the overall India average of 6.5 Labor Act of 1970. All three severely limit the visits a year (figure 2.5). As indicated above, autonomy of management in hiring, firing, and , such visits can be costly. Managers in Orissa workforce deployment decisions in businesses that report spending, on average, 13 percent of employ more than 100 workers. The first law reor spnig on average, 13 pe'rcn of effectively requires that all significant changes in their time dealing with such visits (figure 2.6. ,.,, , . ........... ..the allocadon of employees among tasks or This is not too different from the all-India Iaverage but quite high by international locations be subject to collective bargaining. The average r 1 7^ second law gives state governments the power of standards, comparing, for instance, with 7.8 [ percent for SMEs in China and 7.2 percent for veto over management decisions to dose plants or , . . ., , , . ., ~~~~~~cut workers. The third law empowers state those in Brazil. There are also significant differences among industries within Orissa, governments to disallow contract labor in any differences among industries Witrlln Orissa, industry or locality. 13 2.11 The outcome of the implementation profitable to incumbents. In this situation, that of these acts and the supporting legislation has line of business is less productive from the point been to restrict the ability of businesses to of view of the state economy, because the entry flexibly adjust the size and composition of barriers protect high-cost incumbents from their workforce in response to developments in potentially lower cost competitors. Ironically, exit products, markets, or technology. Businesses barriers also function as a form of entry barrier: are believed to have responded to the Potential investors are less likely to commit restrictions by concentrating their resources on resources to currently profitable activities if they activities of low economies of scale, by run the risk of tying up assets should the activities operating at suboptimal scales, or by retaining become unprofitable. This risk would be higher a larger workforce than can be justified by the longer bankruptcy procedures last. business cycle contingencies. Because the labor legislation is national law, these effects are 2.14 Often businesses respond to high private observed throughout India. However, the costs of registration or exit as formal entities by discretion with which state governments operating informally. Thus, the social cost of high enforce individual provisions and the Contract entry or exit barriers may not be as high as it Labor Act has produced significant variation would be if barriers completely deterred new across regions in the degree of flexibility of the entry. The social cost is nonetheless significant to labor market. the extent that informal firms may incur costs to avoid detection by government agencies (e.g., tax 2.12 Unfortunately, in Orissa's case, agencies). Even in the absence of risk of detection government discretion has historically been by authorities, informality often means operating used to increase rather than lighten the burden at suboptimal scales. of labor regulation on business. In the only major amendment that the State of Orissa 2.15 Weak property rights. A sector-specific made to the Industrial Disputes Act, it example of a poor regulatory regime is provided extended the rule requiring state government by the mining sector, where investor interest is permission for layoff, retrenchment, and significantly affected by the nature of mining closure to smaller firms and gave power of rights.4 In Orissa, mining rights are overly appeal to workers to overturn a management constrained by the state through (1) discriminatory decision to close down a firm. Besley and eligibility criteria for the granting of mining rights; Burgess (2002) compared the amendments (2) limitations in the transferability and made to the Industrial Disputes Act since 1967 mortgageability of mining rights; and (3) a by a number of states; they dassify Orissa as a cumbersome permitting process for exercising "pro-worker" state, along with Gujarat, West mining rights. The existing system for accessing Bengal, and Maharashtra. These states have and exercising mining rights in Orissa does not adopted labor policies that increase compliance encourage private investment.5 costs to business. In contrast, the "pro- employer" states of Andhra Pradesh, 2.16 Other constraining factors indude the Karnataka, Kerala, Madhya Pradesh, Rajasthan, granting of discretionary power to the central and and Tamil Nadu have made amendments that state governments to terminate mining rights for lowered compliance costs to business. In their safety or environmental reasons or other analysis of the economic performance of undefined purposes. A private company's mining India's states from the late 1950s to the early lease may also be terminated if the holder fails to 1990s, Besley and Burgess show that industry undertake mining operations for a period of two grew more slowly in pro-worker states because years. By contrast, large amounts of land have of the greater burden of labor regulation in been reserved for state-owned enterprises (SOEs) those states.3 to mine in the future; SOEs have no obligation to commence mining within a specified period.6 2.13 Enty regulation. The longer it takes to Holders of mining rights require approval from formally register a business, the higher the state and central governments to transfer or barrier to entry to lines of business that are mortgage their mining rights, or to have third 14 parties as major suppliers of funds in their Fig. 2.7: Managemr Raing Infrastructure Problems as mining undertakings. The approval processes Major/Severe Bottienecks (%): SMEs are usually as onerous as those for acquiring mining rights in the first place.7 These restrictions conflict with the financial and technological requirements of the modem " 360 global mining industry and the fact that mining Tympt 193 is a highly capital-intensive industry. Tow= 2.17 GoO's policy is that private mining 00 '°0 200 00 *Z0 should be instrumental in establishing value- *O *M ' added activities in the state. As a result, mining Source: Onssa ICS, The World Bank, 2004 rights are not granted to applicants who have not already set up a processing or finishing (Government of India 2004) also reflects the plant in the state, or committed to do so. The relatively low ranking of Orissa on account of insistence on value-added activities poor access to physical infrastructure (table 2.4). discriminates against foreign mining investors who specialize in the production of mineral Table 2.4. Infrastructure Index: Ranking of Indian States products or commodities that are sold or processed in the global economy. This policy High also has a significant effect on the Goa, Maharashtra, Punjab competitiveness of domestic producers. In High middle several cases, Indian companies are obstructed Gujarat, Haryana, Kerala, Tamil Nadu by this policy in the efficient use of their own Middle facilities set up in other states.8 Small and Andhra Pradesh, Kamataka medium-size mining companies, which are Lower middle crucial for the development of a dynamic Himachal Pradesh. Madhva Pradesh. Orl. domestic sector, are mostly left out because Low they lack the financial capacity and Low they ~ ~ .. lac th nca aact n Arunachal Pradesh, Manipur, Meghalaya,! technological capabilities to build value- Jharhan Prae Mapur, Assam,yl addition facilities. In addition, the playing field . Chhadisgarh, Sikkim Tripura, J&dK,Bihar,s is uneven, since these restrictions do not apply Rajasthan to SOEs. In brief, the policy of treating mining Source: Report of the Twelfth Finance Commission, as an ancillary industry may compromise the 2005-10. development of a dynamic privately led mining industry in Orissa. 2.19 At the moment, the basic power supply problem in Orissa, as in the rest of India, is one of IV. PROVISION OF INFRASTRUCTURE shortages and unreliability, reportedly stemming more from deficiencies in the transmission and 2.18 The lack of adequate infrastructure is a distribution system than in generation. One major bottleneck that constrains private indicator of a power shortage is the average investment in Orissa. As in other states in number of days it would take a business to get India (and in most developing countries), firms connected to the public grid. In the two-year in Orissa cite inadequate infrastructure as a period preceding the Orissa ICS, it took the serious bottleneck to business operations and average SME 48 days to get connected the public growth. Figure 2.7 shows how they rate power grid (figure 2.8). This is not too bad by Indian supply, transport, and telecommunications as standards-the all-India average is 52 days-but is problem areas. Some 36 percent of the outrageous by the standards of other large managers surveyed cited power supply developing economies. Average connection times problems as a major or severe obstade to are reported to be about 21 days for SMEs in business growth. The infrastructure index China and 23 days for those in Brazil. computed by the Twelfth Finance Commission 15 Fig. 2.8: Days to Get Connected to the Public Power could pose a significant barrier to the potential Grid: SMEs implementation of large investment projects in the mining and metal processing industries.10 This situation makes more urgent the advancing of Rst o IndI8 52.3 initiatives in the port sector laid out in the Allsectors 475 framework of the port policy announced in 2003. Metal mok 53.1 2.22 Telecommunications is a distant third as a Other manufacturing 52.5 bottleneck, drawing complaints from just under 5 Minalprocessing 45.0 percent of respondents. Again, the key problem is Hotels and retu.rmde 35.0 one of access or shortage rather than the quality of Food processing 30.0 existing services. A new SME start-up can expect a waiting period of about 32 days in Orissa to get a 0.0 11.O 20.0 30D0 40D0 60.0 t0.0 fixed line phone connection (figure 2.9). This is only about 5 days longer than the average for the Source: Onssa ICS, The World Bank, 2004 rest of India but four times as long as the waiting time in China. At 2.22, the teledensity in Orissa 2.20 NKext in importance to power supply in ranks in the lower half of the states in the the infrastructure bottleneck is transport. This country,'" with urban teledensity at 11.33 and rural is cited as a major or severe obstacle to teledensity at 0.87. business operations or growth by 19 percent of the ICS respondents (figure 2.7). As in the rest Fig. 2.9: Days to Get Phone Connection: SMEs of India, road transport is the dominant transport mode for both passenger and freight traffic in the State of Orissa. Capacity and Rest of India 27.0 quality constraints on road transport in Orissa A' sectors 3 are indicated by the fact that the state has one Hotels and resturants 46.0 of the least developed road networks (especially Metalwork 37.1 in terms of paved roads) in India, with only about 22 percent of the total road length being Othermanufectutlng 36.3 paved, compared with the all-India average of Food pmocessing 19.0 58 percent. For a population close to 40 million Minral processing 185 over a territory of 155,707 square km, Orissa has a road network of only 32,500 km. Of 30.0 these roads, only 67 km are expressways; 1,625 Sour,: Onssa ICS, The WorldBank, 2004 km are national highways; and 4,014 km are state highways. Inadequate density and carrying capacity of the road network, combined with 2.23 While all sectors are affected by persistent maintenance funding shortages, have infrastructure bottlenecks, the nature of the led to a significant deterioration in riding problem differs by sector. For the mining sector, quality. Orissa currently spends less than 50 power and telecommunications are less of a percent of what it should on required road problem than transportation. Lack of railroads and maintenance, according to Tenth Finance highways with several tracks/lanes have raised the Commission norms. costs of transporting minerals. Cheaper and more efficient alternatives, such as river-based 2.21 A second dimension of the transport transportation, have not been exploited despite bottleneck in Orissa is the inadequacy of the their potential. Another important area of concern port facility. With a 480-km coastline at its for mining companies is telephone connectivity.t2 disposal, Orissa should be a major maritime state, but it has only one major port at 2.24 Tourism infrastructure, especially air and Paradeep and one minor active port.9 The port road connectivity, is very poor in Orissa, resulting at Paradeep faces serious congestion, which in serious under-utilization of Orissa's tourism 16 potential.13 There are hardly any proper highly sophisticated machines. However, the international air links to Orissa. Indian Airlines, handicrafts sector did voice a need for centralized the only domestic airline that operates flights facilities. The dispersed nature of handicraft to Orissa, does not offer concessional fares as clusters often makes it difficult to supply services it does to some other destinations. Private and raw material in a cost-effective manner. airlines do not have good links to Orissa because of the lack of corporate and tourist V. ACCESS TO FINANCE traffic. Road connectivity is poor, too. For example, lack of proper road connectivity to 2.28 Access to finance should be as important neighboring centers have prevented places like a concern for policymakers in Orissa as the Gopalpur or Sadpada (in Chilika) to realize deficiencies in the provision of physical their enormous tourism potential. infrastructure. Inadequate access to finance is a common complaint all over India, with 20 percent 2.25 Besides air, road, and rail connectivity, of firms surveyed citing this as a major or serious the state also needs to invest in water, power, obstacle to growth. The problem seems more sanitation, and environmental management, all severe in Orissa, where 41 percent of SMEs of which will benefit tourism. Municipalities responding to the Orissa ICS consider it a major should focus on services to areas that affect to severe bottleneck to business growth (figure tourism. Inadequate public investment in basic 2.10). Firms in Orissa identify access to finance as infrastructure has discouraged private the second most serious constraint after investors.'4 The tourism-related service regulations/corruption. In Orissa, the problem is industry identified poor infrastructure as the most acutely felt in the mineral processing and most important constraint on its operations. food processing industries. 2.26 The fisheries industry also suffers from indqut inrsrcue Whil four fisin Fig. 2.10 ManagemsRating Problems of Access to inadequate infrastructure. while four fishing Finance as Major/Severe Obstacle to Business harbors, 66 fish landing centers, and 23 jetties Expansion: SMEs (%) have been established along the coastline in Orissa, most of them are not well maintained. Rest of India 19.1 Only one major fishing harbor, Paradeep, is Allsectors 40.9 functional and is being used by trawlers and other fishing boats. Most of the remaining Mineralprocessing 64.7 harbors, landing centers, and jetties are not Foodprocessing 46A properly operated due to lack of Other manufacturng 442 complementary infrastructure, such as approach roads, drinking water, and power Metalwork 269 supply. Lack of quality road and rail facilities Hotels and restuarants 2t2 hinders the development of the shrimp I | 1 * * * * ~~~~~~~~~~~~~~~~~~~~0.0 20.0 40.0 60.0 8t0.0 processing industry, as the output is tradable, with much of its final market outside the state. Souse: Onssa ICS, The Wofld Bank, 2004 | 2.27 The various players in the handicrafts 2.29 One (admittedly rough) indicator of ease sector do not cite public utilities (such as of access to formal extemal finance is the electricity, telephone, and transport services) as proportion of businesses that have active bank a major problem. Telephone services are credit lines. According to the Orissa ICS, this available in most of the artisan clusters or close figure is 44 percent for SMEs among the Orissa by. The few complaints about utility services survey respondents (figure 2.11). This percentage reflect the unsophisticated nature of handicraft is significantly smaller than that for the rest of producton in Orissa rather than high India (54 percent) and compares even more standards of utility provision. Demand for unfavorably with the 72 percent reported for utility services is low because artisans typically manufacturing SMEs in Brazil.'5 use very little power, modem equipment, or 17 Fig. 2.11 Business with Active Bank Credit Line(%): an all-India SSI credit growth rate of 7 percent a SMEs year for commercial banks and 5 percent a year for public sector banks. Orissa performs better than Restofkdia 54.1 only Bihar among the 14 states covered by the data. It is not surprising that Orissa's share of All sectors 442 credit to the all-India SSI sector has fallen since Other' 8 1996, while the shares of states such as Maharashtra, Rajasthan, Punjab, and Tamil Nadu Mstalgerk 4S have increased. M Inralnm 45.0 1Xoc..shug 2.31 Yet another indicator of low credit flows Hotuarand. 355 8 in Orissa is that the state has one of the highest Foodprocessng 29.0 deposit ratios among major states in India but the lowest credit ratios. On the other hand, states such 0.0 V00 20.0 30.0 40.0 50.0 8 00 as Maharashtra, Tamil Nadu, and Rajasthan Source: Onssa ICS, The World Bank, 2004 received a greater share of all-India credit during the 1990s. To illustrate, the credit:deposit (C:D) ratio increased from 42:51 in 1998-99 to 47:75 in 2.30 Twice as large a proportion of March 2003, which is much less than the all-India businesses rate lack of access to credit as a arch 20038 It is muchrestinghao noteathatnthe major bottleneck in Orissa as in the rest of average of 59:38. It is interesting to note that the major bottleneck of public sector banks contribute to most of the India. This is consistent with the small-scale activity in the banking sector in the state. This is industry (SSI) sector credit flow data in figure evident from the higher deposit figures as well as 2.12. The data covers credit to SSI units in 14 the higher C-D ratio (Rs 17,156.57 crore in !major states by all scheduled commercial banks deposits and C:D ratio of 52:12). Private sector and public sector banks for the peniod 1991-92 banks account for only Rs 691.31 crore in deposits to 1999-2000. It is worth noting that in spite and have a C:D ratio of only 11:48, indicating that of a 3 percent annual average growth rate of the credit activity of the private/foreign banks in industrial output in Orissa during the period, Orissa is at a very low level. credit from public sector banks actually contracted and commercial bank lending rose I ~~~~~~~~~~~~~~~~2.32 Another indicator related to access to by only 1.2 percent a year. This contrasts with finance is the relative contribution of different Fig. 2.12 Growth in Credit and Industrial Output In Indian States (1991/92 - 1999100) X # / av o X .5 4~~~~~~~~~~~~~~~~~~~~~~~. .54~~~~~~~~~~~~~~~~~~~~ 2 Ai SCB Public socDr -xK- industial growth rafB Soume: Onsse ICS, The World Bank, 2004 18 sources of financing. The Orissa ICS asked be attributed to the high transaction costs and firms to rank different source of funds used for greater default risk associated with bank loans to working capital and new capital investmnents small enterprises. The transaction costs related to from among sources such as internal SME lending are high, as most banks use the same resources/retained earnings, banks, and public lending technologies for small business financing equity; and informal sources such as money as they do for large corporations but do not have lenders (table 2.5). On average, internal funds the necessary credit information on SMEs to constituted 43.7 percent of financing for assess credit risk. Also, credit shortages can be working capital over the period of one year. exacerbated by lenders' perception that the default Local commercial banks are the second largest risk associated with lending to small business is source at 21.4 percent for working capital high, as these firms often lack collateral to secure needs, but they contribute only 14 percent of loans. Problems in using land as collateral (lack of new investment. The contribution of foreign updated land records and titles), nonrecognition banks at only 0.7 percent is not entirely by lenders of other types of collateral, difficulty in unexpected given the high levels of sickness collateral enforcement and loan recovery, and a among the small firms in Orissa compared bankruptcy framework that does not allow for the with firms in other states. Family and friends easy exit of troubled firms further drive up the risk rank third in terms of contribution, and trade of default. All these factors lead to higher interest credit is fourth. It is apparent from table 2.5 costs for borrower and are perhaps behind the that the leasing industry is far from developed: lower credit flows to SMEs in Orissa by lending Only 0.4 percent of the firms' working capital institutions. Further study of the constraints in the needs are met through leasing arrangements. financial sector may provide greater clarity regarding whether these are supply side constraints Table 2.5 Average Contribution from Different Sources of or demand side issues. Either way, improving Financing for Working Capital and New Investment access to finance should be one of the priority Requirements of the Firms Surveyed (%) reforms on the Government of Orissa's policy Source ~~~~~~~ ~ ~ agenda. Source of FundsWokn ragd. Capbl Investmnt 2.34 One indicator of the ease of enforcement Internal funds or retained of credit contracts in the Doing Business database earnings 43.7 15,4 (World Bank, 2005) is the time it takes to recover , Local commercial banks 21.4 14.0 a debt through the courts or an equivalent Foreign-owned commercial administrative procedure. For Orissa, the number banks 0.7 0.2 of days to recover a debt of about Rs 18,000 is Leasing arrangement 0.4 0.0 765. This is a shorter time than recovery of the Investment funds/special same debt would take in some states in India but development funds/state nearly twice as long as the time for Maharashtra services 1.2 0.4 and significantly longer than in high-growth states Trade credit 3.4 0.5 such as Andhra Pradesh, Karnataka, and Tamil Credit cards 0.2 0.0 Nadu.16 Longer duration of payment disputes indicates higher average cost of credit per | ~~~~~~Equity, sale of stock 0.6 0.5 Equity, sale of stock 0.6 0.5 transaction, which has the effect of a higher risk Family, Mends 4.9 5.5 premium on interest rates. Informal source (e.g., moneylender) 0.9 2.3 2.35 While poor access to credit affects all Other 3.8 6.4 sectors, it hits the shrimp fishing and processing Source: Staff calculations from the Orissa ICA, The sector especially hard. In that sector, the inability World Bank, 2004. to resolve moral hazards regarding disease and infection has reduced the supply of formal credit 2.33 To the extent that low credit flows are (box 2.2). a supply side problem, they reflect the financing constraints faced by SMEs and can 19 handicrafts, particularly those with more aesthetic Box 2.2. Problems in Access to Finance in the and artistic value, must be stocked and displayed Shrimp Industry in wide varieties to cater to the varied needs and tastes of potential buyers.17 With inadequate In the shrimp industry, credit is constrained partly by access to formal sources of credit, artisans typically the existence of serious moral hazard problems. fall back on these three options: (1) costly Lenders cannot ascertain whether default by prospective borrowers (entrepreneurs) is due to informal financing sources that keep them negligence in ensuring disease-free farming or exposure perpetually in debt; (2) trade advances from to infection beyond the control of the entrepreneur. middlemen or business houses; and (3) receiving Experimentation by banks in this regard has failed their inputs in kind from the middlemen."5 This mniserably, resulting in bad loans. Thus, erring on the side of caution, the banks now practice rationing as far creates a dependence on the middlemen and as credit provision is concemed. reduces the artisans' bargaining power relative to the intermediaries, in turn affecting their vertical Lack of credit to the fishers and entrepreneurs when it mobility (from artisan worker to artisan is needed is a major factor constraining growth in the sector. The credit need is high for both investment and working capital. Formal sources currently account for only about 20 percent of credit and are characterized by 2.37 The analysis in this chapter, based procedural delays. Informal sources, which account for primarily on the findings of the ICS, underlines 80 percent of credit, are easier to access, have very good the need for GoO to step up its efforts to improve outreach, and provide timely and adequate credit for the investment climate in the state if private sector consumption, contingencies, and social functions. Traders charge interest on loans indirectly by buying investments are to be increased. Chapter 3 fish at a lower price than the prevailing market price. expands on the IC framework, drawing on sector Lack of liquidity and nonavailability of loans in studies to discuss issues related to externalities that adequate quantity is a major reason why very few local entrepreneurs have come forward to set up processmg resparculri mportan in a backad natural resource-rich economy such as that of Orissa. units. Fig. 2.13 Access to Credit in the Handicrafts Sector 2.36 The inadequacy of working capital is a major hurdle in both the production and 120 marketing of handicrafts (see figure 2.13). E 80 Artisans, traders, and especially artisan 80-* entrepreneurs lack an asset base to offer as 40 - collateral to banks. Because of the small _ __E_o__, _ _ , average size of these businesses, banks are Bfss& Cane& Ar Silver Sbne reluctant to grant cash-credit loans against Bel Mebl Bamboo Textles Flee Carving hypothetical stock. The inadequate supply of working capital forces many artisans to remain * Arisan enrepreneur * Trader entrepreneur underemployed (i.e., working at suboptimal capacity) and affects their ability to market Source: Onssa Handicrafts Survey, The World Bank, 2004 their products. In particular, it limits the ability to stock a large variety of crafts for long periods of time-a serious constraint, because 20 ENDNOTES: I Specificaly, respondents were asked to rate each item in a long list of possible candidates on a scale of 0 no obstacle) to 4 (= severe obstacle). 2 Orissa has predominantly SMEs; this was reflected in the Orissa ICA sample in which 87 percent of the firms are SMFs and only 13 percent are large firms. 3 For details, see Besley and Burgess (2004). 4 Mineral processing is the sector in which respondents to the investment climate survey complained most about regulations and corruption (76% cited this as a major or severe constraint). This may have quite a bit to do with the mining rights allocation regime in Orissa. 5 It very much resembles the mining sector regimes prevailing in Latin America up to the early 1990s. As happened in Latin America, if Orissa is to tap into its significant geological potential to reduce poverty by fostering economnic growth, it must reform its mineral sector. 6 Even though the Orissa Mining Corporation (OMC) is not a fiscal burden, private investment in it will encourage an optimal allocation of its resources. It has benefited from the reservation of large areas with significant geological potential and laws that permit it to mine exclusively without any obligation to undertake value-added activities. 7 Accessing mining rights and, particularly, executing a mining lease is a protracted and cumbersome process. A mining investor needs to obtain 28-40 clearances, which usualy takes three to four years. Currently, GoO is considering the adoption of a single-window clearance system that may significantly streamline this process. However, obtaining clearance from the Indian Forest Department may still delay the mining permitting process, because the Forest Department must first identify comparable land for reforestation. 8 This would be the situation of Tata Steel, for example. 9 The port at Paradeep was set up in 1966. The only active minor port in Orissa is Gopalpur, which is a fair- weather anchorage port operating from mid-October to mid-March. Preliminary development work is also in progress at Dharmna. Ten other port sites have yet to be developed: Palur, Bali-harichandi, Asarang, Bahuda Muhan (Sonepur), Chudamani, Inchuri, Chandipur, Subarnakeha Mouth (Kirtania), Bahabalpur and Jatadhar Muhano Jagatsinghpur (Port Policy, Government of Orissa, 2003. 10 These include those that are reported to be entertained by Posco, the Australian company BHP Bilhiton, and Mitsui of Japan. In addition, over a dozen Indian companies, including the Tata Iron and Steel Company, have submitted proposals to set up a steel plant. 11 Other states that have a teledensity of less than 5 are Uttaranchal (3.95), West Bengal (3.72), Rajasthan (3.40), Madhya Pradesh (2.88), and Uttar Pradesh (2.13). Assam, Jharkhand, Chattisgarh, and Bihar have a teledensity of less than 2. 12 However, significant improvements in the telecommunications system have taken place in the past few years. 13 Although Bhubaneswar and some other places have the potential to become major Buddhist tourist spots, the tourism industry has failed to exploit Orissa's Buddhist connections and bring Orissa into the "Buddhist circuit." 14 The other point of concern is the lack of maintenance of historical monuments, beaches, and other natural tourist spots. Hardly any concerted effort on the part of the government or the industry is put forth toward their upkeep. 15 The investment climate survey also asked firms to estimate the contribution of various sources of funds for working capital and new capital investments from among sources such as internal resources/retained earnings, banks, and public equity, and informal sources such as moneylenders. It was found that, on average, internal funds constituted 43.7 percent of the source of financing over the period of one year. Local commercial banks are the second largest source, at 21.4 percent for working capital and 14 percent for new investment. The smal contribution of foreign banks (0.7%) is not entirely unexpected given the high levels of sickness among the smal firms in Orissa compared with firms in other states. Family and friends rank third as a financial resource, and trade credit is fourth. It is apparent from table 2.5 that the leasing industry is far from developed-only 0.4 percent of the firms' working capital needs are met from leasing. 16 This is on the assumption that "the plaintiff has fuly complied with the contract [when filing] the lawsuit to recover the debt, the debtor attempts to delay and raises opposition to the complaint, the judge decides every motion for the plaintiff [and] there are no appeals." The reference venue for the Orissa estimate is Bhubaneswar; the figures for Maharashtra, Andhra Pradesh, Karnataka, and Tamil Nadu refer to Mumbai, Hyderabad, Bangalore, and Chennai, respectively. 17 Except for the utility items, most crafts are pieces of art. The greater the number and variety that can be displayed, the greater the attraction for the customer and, hence, the more sales. Lack of space to display large and varied stock results in lower turnover and, hence, lower profits. 18 In cane and bamboo, access to capital has not been reported as a serious problem by artisan entrepreneurs, because the supply of raw material (cane) is totally controlled by a syndicated group functioning as a cooperative. 21 l - CHAPTER 3 REDEFINING THE ROLE OF THE STATE 1. INTRODUCTION 3.4 The backwardness of the Orissan economy means that there is a great need for 3.1 This chapter goes beyond the innovative activities (e.g., new products, new investment climate survey for an in-depth look processes, and new markets) that could have at some sectoral issues. A sector-specific significant positive spillover effects on other firms. analysis reveals that GoO still maintains a However, firms are often reluctant to innovate, significant role in the ownership and because they will bear all the risks of failure only management of commercial and industrial to possibly share the benefits of success with many enterprises in the strategic sectors of the others. In the industrial sector, backwardness is economy, and attempts to provide many reflected in many ways, including the range of services that are not strictly of a "public good" productive activities pursued, the technologies nature. used, and the markets exploited. As discussed in Chapter 1, Orissa's industrial sector is relatively 3.2 Such an extension in the role of the undiversifed, and many products are either not government has been motivated by a need to produced at all or produced in small amounts. The address the divergence between the interests of use of modem technology is limited, and most industry and those of society as a whole. products are sold in local markets. In such a Because of Orissa's natural resource situation, the actions of a prime mover (be it a endowments and backward economy, the product or process innovator) or the discovery of spillover effect of an individual firm's actions new markets may have tremendous effects. In on other firms and stakeholders outside the Bangladesh, for example, spillover effects from the industry is likely to be pronounced. For first garment factory established in the early 1980s example, exploitation of mineral resources has led to the development of a substantial industry significant environmental and social within a short period of time. In an area of scarce implications. The negative extemalities arising skills, investment in worker training is often from mining activities need to be addressed constrained by the fear of rapid turnover. adequately, and the efficiency of govermment regulations, procedures, and institutions 3.5 In the past, GoO has attempted to dealing with environmental and social address this challenge (i.e., limit negative spillover considerations has a strong impact on and generate positive spillover) through direct investment and is therefore an integral aspect participation in the productive sectors and direct of the investment climate. support to private firms via protection and subsidies. However, this model has been roundly 3.3 Similarly, poor-quality products from discredited. Moreover, the inordinately large role one firm may adversely affect the prospects of of the govenmment has compromised the level an entire industry. If the pioneering exporters playing field. For example, in mining, the from a country or state compromise on the application of different rules to state-owned quality of a product, that may significantly set enterprises (SOEs) and private sector enterprises back the prospects of other potential exporters may lead to a crowding-out of the private sector. of the same or similar products from that Also, government involvement in running country or state. Such negative externalities are commercial enterprises (managing hotels, for particularly pronounced in sectors in which example) may not be the optimal use of scarce quality is critical, such as food processing. public sector resources and capacity. At the same time, the regulatory role of the state to linit negative spillover has not been discharged 22 - - - - - - - - - ---- - ---- --- -- -- - ----- -- ------ - - - - - - - - - ------------- - - --- - - effectively because of weak implementation are inadequate and that employment in this sector capacity and the poor performance of will benefit only a few members of the local and environmental protection institutions. tribal communities.2 3.6 This chapter discusses issues related to access to land, skills and training, quality Box 3.1. Social Resistance to Large-Scale Investments standards, and technology acquisition and development that affect private sector Even when the amount of land lost is not too great, displaced people often protest about other investment and growth in Orissa. inconveniences caused by the newly established industrial plants. For instance, when the National II. ACCESS TO LAND: ENVIRONMENTAL AND Aluminum Company (NALCO) acquired a fairly SOCIAL CONSIDERATIONS long stretch of land to set up its own rail line from the mines to the plant, the company faced allegations from the displaced villagers that the 3.7 About 14 percent of the Orissa ICS new railway tracks were causing waterlogging in respondents cite access to land as a major the remaining portions of their cultivable fields, obstacle (table 2.2). From this, it would appear adversey affecting their livelihood. Similarly, when that allotment of land for industrial use is not a NALCO took water from the Brahmani River for its water supply, locals alleged that this had a major concern for small enterprises, except negative impact on their water supply and possibly in the food processing and metal work demanded compensation. When they were refused sectors, where a larger proportion (21 percent extra compensation in both cases, the villagers and 18 percent, respectively) cited this as a protested by sitting on the railway tracks and stopping water flow by breaking pipes and closing major problem. However, land access and sopnwtrfovb ran ic n om major problem However, lad access andvalves. These protests caused great inconvenience allotment procedures are more complicated for to the company. large players in Orissa. Here, environmental and regulatory procedures, such as forestry Yet another roadblock is presented by the public clearance and the public hearing process, and hearigs organie by the relvan ment of the state government for environmental/cultural unclear resettlement and rehabilitation (R&R) heritage clearance involving district and taluka- policies often impede the process of land level functionaries, panchayats, and local people. acquisition for industrial purposes. Industrial Various objections are raised at these meetings. In | growth has been inhibited by social resistance an effort to solve this problem, NALCO has growth ~~~~~~~~~~~~~resorted to the ingenuous practice of mobilizing I to initiatives that harm the environment, local people before the meeting, tating them in displace people, disrupt the traditional way of good hotels, explaining the issues to them, and living, and block income-earning opportunities. generally making them understand that raising objections will benefit neither party. NALCO takes these steps in the hope that if people understand 3 .8 Such concerns are not unjustified, as the situation, they will abstain from agitating and large industrial projects typically require the let the project proceed unhindered. acquisition and consolidation of the private land holdings of many poor people, causing widespread loss of livelihood. Industrialists are required to pay full compensation according to rates set by the government. This, by itself, is seispbm in thin s H large not necessarily a problem for investors as long pro blem in the need to b e late l as the requirements are reasonable, well- projects, which typically need to be located onl defined, and enforced transparently. However, forest land, often face fierce opposition from local industrialist complain that demands are often and tribal people.3 Clearance from local authorities industrialists complain that demands are often excessive and unpredictable (see box 3.1).' is required before any mining lease is granted. This Lack of clear rule s and government reluctance has become increasingly hard to obtain and is l,ack of clear rules and govemment reluctance to arbitrate has often forced industrialists to provig to be a major impediment to investment in the sector. Sometimes, social resistance to accept,such demands, leading to deterioration industrial initiatives persists beyond the stage of in performance. At the same time, opponents t of such projects complain that the land acquisition; in this case, investors may compensation packages from mining projects 23 abandon a project after the land has been Box 3.2. Regulatory Framework for Environental acquired.4 Protection:Too strong or too ineffective? 3.10 Another industry constrained by The need to make environmental institutions, problems with access to land is shrimp processes, and procedures more effective and farming/procesing, an indutry in whichefficient appears to be more urgent in Otissa than i farmninglprocessing, an industry in which many other states, since much of its comparative Orissa should have a comparative advantage advantage lies in activities with potentially serious because of its extensive coastline.5 Vast environmental implications, such as mining and stretches of land are available along the entire shrimp processing8. Given the long stretch of coastal coastline of Orissa, but they are owned in small land and large pockets of forestand in Orissa, the most relevant laws are the two acts of the central plots by poor farming households. Such government: the Environmental Protection Act, households find it difficult to enter into shrimp incorporating the Coastal Regulation Zone (CRZ) farming because of lack of affordable credit clause, and the Forest Act.9 In February 1991, under and the riskiness of the venture.6 At the same Sections 3(1) and 3(2) V of the Environmental Protection Act, the government declared certain time, huge transaction costs (both in terms of stretches of the coast to be CRZs and regulated money and effort) have discouraged the industrial activities in these areas'°. Setting up new acquisition and consolidation of small plots. industries and expanding exising industries are Efforts to consolidate farmland also attract prohibited in these areas, except for those directly the ~~related to waterfront and requiring shoring activities, l opposition from NGOs protesting against the reland projects of the Department of Atomic Energy. displacement and loss of livelihood of local The CRZ regulation was amended by the inhabitants, as well as environmental Government of India in 2002, establishing Special degradation. This situation is exemplified by Economic Zones (SEZs) within the CRZs. The the case of TISCO's Chilika project, a joint amendment spedfies that nonpolluting industries such as information technology and other service venture with an Orissa public sector unit in industries can be established within the CRZs. This which attempts to establish a large-scale amendment has potential to encourage states like integrated hatchery-farming-processing unit Orissa to diversify into service activities of a were abandoned because of huge protests.7 nonpoluting nature; however, it has atttacted sharp criticism from several environmental groups. Conflicts and public htigation over the interpretation 3.11 Access to land for the tourism sector is and itnplementation of environmental regulations also affected by environmental regulations. For often discourage investors from investing in instance, development of beaches as tourist industrial projects that might conflict with these spots runs the risk of violating the Coastal regulatons and thus ultimatey be abandoned. Ensuring greater regulatory clarity and certainty with Regulation Zone (CRZ) clause of the respect to environmental legislation is critical for an Environmental Protection Act, while improved investment cimate in Orissa. development of forests as wildlife sanctuaries and national parks may run into problems vis- management capacity, incduding greater efficiency la-vis the Forest Act (box 3.2). and transparency in applying existing regulations. 3.12 It is important to note that Ill. SKILLS AND TRAINING environmental legislation is national, and Orissa's regulations closely follow national 3.13 Among the Orissa firms that responded guidelines and are similar to those adopted to the ICS, about one in five reported a shortage elsewhere in the country, including "good of skilled workers. This is worse than the all-India investment climate" states. However, figure of one in eight (figure 3.1).1" In Orissa the implementation of these regulations appears to mineral processing, food processing, and hotel and be particularly difficult in Orissa. The state has restaurant sectors seem to be facing a shortage of significant environmental problems and a high skilled labor, which could be part of the reason for level of environmental activism, but the lower productivity. Overall, except for the hotel capacity of its regulatory institutions is weak. industry, the time it takes to fill a vacancy is about The success of sectors such as mining and fish the same in Orissa as in India: about three weeks processing rests, to a substantial extent, on (figure 3.2). Sectoral studies confirm the need for strengthening the state's environmental skilled workers. For example, in the handicrafts 24 sector, most artisans emphasized the need for much shortage of trained manpower, at least at the skill upgrading through training, although there level of supervisors and operators. In the shrimp are differences in the preferred mode of business, graduates and postgraduates in fishery training. A large number are not keen on courses are employed as supervisors to oversee institutional training and would prefer on-the- experimental processes as well as daily operations. job training or training after a normal day's Plenty of local labor, amenable to training, is work so that they do not lose earnings. available for the labor-intensive parts of the production process, and some workers are given Fig. 3.1 Managers Rating Skill Shortages as short-term training by the firms. MajorlSevere Obstacle (%): SMEs IV. QUALITY STANDARDS Rest of India 12A 3.15 The government provides little in the way _ 20.1 of quality control and testing facilities, and there is Mineral processing 29A no separate legal and institutional framework at 25.0 the state level for quality assurance-the national Hbotis and restiaranrs 242 and intemational quality frameworks are applicable 192 to Orissa. Globally, quality assurance systems and Metl wo*k iSA standards are becoming increasingly important for all sectors, but they are particularly critical for food 0.0 10.0 20.0 30.0 40.0 and other agro-based industries. Orissa's ability to develop its agro-based and fishery industries will Source: Onssa ICS, The World Bank, 2004 be severely constrained in the absence of a good quality assurance system. Quality is also a factor in the handicrafts sector. The special survey of the Fig. 3.2 Weeks to Fill a Skilled Vacancy: SMEs handicrafts sector carried out for this report revealed that most entrepreneurs consider craft lRest ofhdia _ 3.0 quality a major determinant of demand (figure , . _ 32 3.3). Entrepreneurs engaged in the various crafts ' HoW31s and nestuarants *__________ _ (other than cane and bamboo work) feel the need Ho.ls and mstuamnts 7,8 for quality control through quality certification.13 5.5 Ohier manufacturing 33 Fig. 3.3 The Impact of Quality on Sales 2A Mehl work 2.0 120 - 0.0 2.0 4.0 6.0 8.0 10.0 i L 1 , Source: Orissa ICS, The World Bank, 2004 2 a L erass&eel Cane& A4tTexs Shyer Sbn I Mme sBnboo F5gme Cagvki 3.14 Orissa has many technical training U nAu wftM~ a Trader sh"w institutions, including some accredited engineering colleges that produce high-quality Source: Onssa lCS, The World Bank, 2004 engineers who are subsequentlv employed all over India. However, there are also many low- 3.16 There is some minor interface of the quality training institutes, both government and industry with government agencies such as the private, that offer training courses that are out Regional Rural Laboratory (RRL) in Bhubaneswar, of line with industry requirements. Many the Marine Products Export Development lindustrial houses provide in-house training.'2 Authority (MPEDA), and the Central Institute of Firms in certain industries-such as shrimp Freshwater Aquaculture (CIFA). RRL processing, metals, and minerals-do not face Bhubaneswar is mandated to provide testing facilities, especially mineralogical and physico- 25 chemical testing facilities, while MPEDA is Bank of India (SIDBI), the National Small responsible for quality control in aquaculture. Industries Corporation (NSIC), the Orissa State In particular, MPEDA monitors seafood Financial Corporation (OSFC), the Industrial quality in landing and preprocessing centers, Promotion and Investment Corporation of Orissa and provides infrastructure facilities such as (IPICOL), cooperative banks, commercial banks, preprocessing centers and mini-laboratories for and statutory financial institutions. Firms are the purpose of quality assurance. It also encouraged to obtain accreditation from evolves standards for compliance regarding the international quality testing agencies to make export of fish and fishery products to various themselves internationally competitive. Additional developed countries based on plans include strengthening the technology cell standards/norms stipulated by those countries. (TBIIP) that has been set up in OSFC with the However, these facilities are inadequate. help of the United Nations Industrial Development Organization (UNIDO). 3.17 In the absence of adequate government provision of testing facilities in the 3.19 In the absence of a formal state state, industries have set up in-house quality technology policy, large and successful enterprises control facilities. For the most successful have set up businesses with the help of imported industrial units, quality assurance does not technology, mostly through collaborations with appear to be a problem. In addition to their foreign partners. A number of them have also world-class in-house facilities, certain export- established in-house research and development oriented firms also enjoy the benefits of (R&D) setups for adaptive and absorptive privately owned accreditation, quality capability-building. Small industries, however, are monitoring, and testing facilities (mostly usually technologically backward because of the commissioned by the foreign buyers) at exit financial constraints that stand in the way of points like Vizag and Paradeep. However, technology upgrading.14 other local entrepreneurs face problems in maintaining and upgrading quality standards VI. CALIBRATING THE ROLE OF THE GOVERNMENT because of financial constraints. Barely IN THE ECONOMY managing to break even, these firms lack the time or resources to focus on quality upgrading 3.20 Extemalities or spillover effects often and are, consequently, trapped in a vicious imply the need for collective action, although, as cycle of low-quality production, restricted Coase (1937) famously argued, private actors can markets, and limited prospects for sales and sometime negotiate deals among themselves to growth. The lack of testing facilities in Orissa's address externality issues. Collective action need core competence sectors poses a serious not be driven exclusively by public intervention constraint in exploiting to the fullest extent the but may be carried out by private sector collective comparative advantages of the state. Common bodies, such as chambers of commerce or industry testing facilities are required. associations. However, there is inevitably some role for public intervention to address V. TECHNOLOGY ACQUISITION AND externalities. DEVELOPMENT 3.21 Orissa, like other states in India, has tried 3.18 Like many other states, Orissa does to address some of these extemality issues through not have a separate policy framework for a proliferation of public sector agencies. One technology. Technology policy is governed by approach has been direct ownership of the Ministry of Science and Technology, commercial enterprises. Thus, for example, the Government of India, and is applicable to all largest player in the mining sector is the state- states uniformly. However, Orissa's Industrial owned Orissa Mining Corporation (OMC). Jointly Policy Resolution 2001 explicitly addresses the established by the central and state govemrments in issue of technology generation and upgrading, the first decade of the country's independence, perhaps for the first time, under modernization OMC was the first public sector undertaking in schemes for the Small Industries Development Orissa. By 1962, OMC was wholly state-owned. A 26 I ~~~~~~ r- - - - - - - - - - - - - - - - - - - - - - - - - ------------ - - - - - - - - - - - - - ~ ~ - - - ~ -~ --- - -------- --- - I number of other public and private companies and operates 30 hotels, either directly through its are operating in the mining sector. These tourism department (17 units) or indirectly companies have taken up leases of various through the Orissa Tourism Development minerals for their captive production as well as Corporation. (13 units).16 Established in 1979, export through the Minerals and Metals OTDC operates with partial managerial and Trading Corporation (MMITC). The public financial independence under India's Companies sector also dominates in fisheries. There are Act of 1956. Its mandate is to promote the 108 fish farms in the government sector, of development of tourism, to establish and run which about 80 percent are currentdy commercial ventures related to tourism activities, operational. About a quarter of the operational and to help the state implement its policies farms have been leased out to the private concerning the tourism sector. OTDC is expected sector; the rest are with the fisheries to operate its facilities on a commercial basis and department of GoO. to generate profits. In fact, in the aggregate, its hotels have posted losses since 1998. Despite the 3.22 Government is also active in the activities of OTDC in travel and transportation, marketing and procurement of inputs. An tourism-related services and facilities (restaurants, example is the handicrafts sector, where the travel agencies, currency exchange and banking giant Orissa State Cooperative Handicrafts facilities, car rental and other transportation Corporation (OSCHC) was created to deal services, Internet cafes, and centers for with procurement and marketing of recreational and cultural activities) are limited for handicrafts produced in the state, in the major national visitors and inadequate or nonexistent for cities of India as well as overseas. There are intemational tourists, even in the capital city of currently nine government-owned sales centers Bhubaneswar. known as Utkalika in the state and eight in various large cities of the country. This public VIl. CONCLUSIONS enterprise does not appear to have played any significant role in the sales of handicrafts, 3.24 The analysis in this chapter reinforces the leaving the crafts in the hands of middlemen. investment climate assessment (ICA) finding that For example, in 2001-02, OSCHC sold only substantial work needs to be done to improve the Rs 306 lakh worth of handicrafts-barely 3 investment climate in Orissa. While the percent of the total reported output for that investment climate survey results reported in year (Rs 9,892 lakh). OSCHC sits at the apex of chapter 2 have pinpointed firm-level perceptions a cooperative system that has been used by the of business constraints, this chapter has helped government to deliver direct support to shed light on the broader issue of the role of the artisans.15 This has not proved to be an state in addressing the divergence between private effective arrangement. It is widely known that and social returns. Four major conclusions cooperatives often are run by big emerge. intermediaries or artisan traders, with membership confined to their own cronies, 3.25 First, the significant role that GoO family members, or artisans with little voice in maintains in the ownership and management of the affairs of the cooperative. Most of these commercial and industrial enterprises in all the cooperatives have become the monopoly strategic sectors of the economy compromises the suppliers of raw materials and monopoly level playing field. For example, as discussed, the buyers of the handicrafts, and the government application of different rules to SOEs and private benefit packages intended for the welfare of sector enterprises in mining may lead to crowding- the artisan workers are siphoned off by those out of the private sector. Moreover, government who control the cooperatives. Artisan workers involvement in running commercial enterprises and small artisan entrepreneurs seem to have (managing hotels, for example) may not be the no faith in the cooperatives. optimal use of scarce public sector resources and capacity. 3.23 Government also has a strong presence in the services sector. The state owns 27 3.26 Second, attaining balance between its state to intervene and support firms and growth agenda and environmental and social entrepreneurship, its role needs to be redefined to considerations is a critical challenge for the make it more sustainable and dynamic (Rodrik, state. Weak implementation and enforcement 2004).18 of environmental legislation, and unclear resettlement and rehabilitation policies may be 3.28 Fourth, because both direct govetnment seriously impeding growth in the very sectors ownership/management and the old model of in which Orissa has a comparative advantage: direct business support have proved ineffective, mining, tourism, and shrimp farming/ the state may need to spell out a vision and processing. strategy for each of the strategic economic sectors. While market forces and private entrepreneurship 3.27 Third, the model used in the past for would be in the driver's seat of this agenda, providing direct support to firms has been a "governments would also perform a strategic and failure. With liberal financing and preferential coordinating role in the productive sphere beyond procurement policies to encourage industrial simply ensuring property rights, contract development-especially the establishment of enforcement and macroeconomic stability" small and medium-sized enterprises-the state (Rodrik, 2004). attracted hordes of individuals who set up manufacturing business without having the 3.29 On the basis of the analysis undertaken in necessary entrepreneurial competence or chapters 2 and 3, and the feedback we received commitment. Not surprisingly, these firms felt from discussions with govemment and private little or no compulsion to ensure product sector stakeholders in Orissa,19 we now tum to quality, upgrade technologies, or maintain price policy recommendations in the conduding competitiveness.17 While there is scope for the chapter. 28 ENDNOTES: ' Social resistance often is more than just a demand, justified or not, for compensation. There appears to be a strong resentment in Orissa against outsider initiatives to set up industries. This resentment is often observed in natural-resource-rich economies. There is a fairly widespread view that such large-scale investments will result in the exploitation of Orissa's natural resources and will drain away of her wealth, with very modest benefits to the local people either in terms of direct employment or growth of local, small-scale manufacturing units through ancillarization. Local sentiment strongly favors the concept of Bhumiputra (son of the soil) to take the lead in establishing industries. Such biases in favor of local entrepreneurs and resentment against outsiders send a negative signal to nonlocal industrialists, both national and international, and undermine Orissa's investment climate. 2 These concerns are further exacerbated by painful displacement experiences in hydroelectric projects, which rarely gave rise to township growth or expansion of employment opportunities. 3 It is alleged that resentment is often whipped up by local vested interests to create a volatile atmosphere and that demonstrations may be politically instigated for the purpose of securing the popular vote. In any case, the demonstrations have a negative effect on the investment cimate of the state. It is also claimed that political and other vested interests often exploit the communication gaps that exist among the various parties-namely, the private sector, citizens, and the government-to further their own interests without any concern for the state's welfare. 4 Unclear property rights and the lack of a well-functioning land transaction market may exacerbate the problem of access to land. Aspects of governrment policy (such as high taxes on land transfers) and institutional deficiencies (such as underdeveloped land registries) may impede land transfers. However, these issues were not investigated for this report. s The ICS identified access to land as an important problem in the food processing sector, which indudes shrimp processing. 6 Individual small-scale shrimp farming has thus not taken off in Orissa. 7 Indeed, this is how social friction and resistance have consistently undermined the prospects for this industry. The hostile attitude of the local people toward outsider industrialization efforts has been instrumental in the failure of large industrial projects in this sector. It also appears that local entrepreneurs might have a vested interest in keeping large investors out of this sector and may instigate citizen and NGO protests against the investors. 8 For example, the prawn industry requires the construction of artificial ponds by destroying mangroves, reed bed, and farmland, and causing serious damage to the ecosystem. Also, processed feed and chemical additives pollute the sea and groundwater and reduce the volume of fresh fish caught. There have been violent protests by the local population, particularly the fishermen, against prawn farms that operate around Chilika. 9 The Environment Protection Act (1986) enables the central government to prohibit the establishment and location of industries in any part of the country on the grounds of topographical and dimatic features of an area, the net adverse impact on the environment likely to be caused by the location of the project or its operation, and various other considerations. 10 CRZs include coastal stretches of seas, bays, estuaries, rivers, creeks, and backwaters that fall between the low and high tide lines. |I The extent to which firms view skill shortages as a problem depends on their horizons: If a firm expects to move into more sophisticated products or more competitive markets, it places a greater premium on skills. 12 Some enterprises, such as Indian Metals and Ferro Alloys (IMFA), were started with the help of a handful of tribal members who had been trained to run the factory with imported raw materials, equipment, and technology. The tribal population tumed out to be highly trainable, and these ventures have been quite successful in the long run. 13 The majority would like this certification to be given by a government agency or by a competent private agency. There is little confidence in NGOs' ability to do this. 14 The Regional Research Laboratory (RRL) in Bhubaneswar has initiated an industrv-institute interface to come up with new technologies appropriate for Orissa's profile. However, it is only the larger industries that come forward to tie up with the RRLs. 15 The proportion of artisans enrolled in some kind of cooperative structure varies by sector art textiles (36%), stone carving (30%), brass and bell metal (22%), silver filigree (7%), and cane and bamboo work (4%). 16 In general, the tourism department operates facilities of lower standard and those located in areas with limited tourism demand. These facilities are considered public services and are offered at rates that barely cover staff 29 salaries. Lack of funding and lengthy bureaucratic procedures prevent appropriate maintenance, so many of these hotels are in a state of serious disrepair. 17 An overwhelning proportion of these industrial units belonged to the ferrous metal sector. In fact, in 1981-82, according to Annual Survey of Industries (ASI) data, as much as 70 percent of the fixed capital in manufacturing in Orissa in the 241 registered factory units was accounted for by this sector. (See UNIDO, 2001.) 18 Technological externalities, either static or dynamic, in the form of learning-by-doing that is external to firms is one type of market failure that calls for intervention. Rodrik (2004) emphasizes two other kinds of market failure that are more rampant: ". ..informational externalities entailed in discovering the cost structure of an economy, and coordination externalities in the presence of scale economies." Unless these market failures are addressed, they can result in the under-provisioning of entrepreneurship in pursuit of structural change. 19 The initial findings of the ICS and the sectoral work were discussed with public and private sector stakeholders in two workshops held in Bhubaneswar in November 2004. The recommendations suggested are informed by this consultation with stakeholders. In May 2005 the final revised draft report was disseminated in Bhubaneswar. 30 CHAPTER 4 CONCLUSION AND POLICY RECOMMENDATIONS A reforrn program is a marathon, not a 100-metre sprint. Michael Porter, 2004 1. INTRODUCTION 4.3 In carrying out the program of IC reforms, three things will have to be kept in 4.1 Compared to many other better mind: business climate states of India and the overall Indian investment climate scenario, there seems * While it is important to reduce the costs, to emerge a strong case for improvement in risks, and barriers faced by private investors, Orissa's investment climate, especially if the it is also critical to strike the right balance GoO wishes to lure higher private investment between private and social interests, so that and sustain it over the long run. To achieve the these interests are mutually reinforced and targeted economic growth rate of over 6 percent, growth is equitable and inclusive. The goal a much higher level of investment is required of balancing private and social interests is a than currently exists; for that to happen, particular challenge for Orissa, with its significant improvement in the investment legacy of mining and industrial development climate is a prerequisite. Reforms are in the in the 1 960s and 1 970s that caused works in some key areas, from governance and significant environmental degradation and regulation to the power sector. While the social deprivation and that continues to initiatives are at an early stage of implementation, cause doubts about the broad-based benefits some advances in the investment climate can be of the investment and growth agenda. The gauged by the fact that very large investment ability of government to resolve this conflict proposals - albeit predominantly in steel and for future investments will be key to creating ferro-chrome sector - are already beginning to a more balanced and stable economy. emerge.' The proposed US$12 billion investment by the Korean steelmaker Posco is * While there is need for a comprehensive said to be the largest investment in India by any action plan, both the implementation country so far. Not surprisingly, apart from capacity of government and the political seeking an assurance for long-term lease for the economy of reforms will require appropriate coal and iron ore supplies, the Korean company prioritization of reforms and clear has underlined the need for a hassle-free identification of short-, medium-, and long- approval.2 term actions. Building capacity in the public sector to analyze investment climate issues 4.2 Improving the investment climate will and to formulate and implement policies will involve comprehensive changes across sectors be an integral part of the reform process. and institutions. In making investment and operational decisions, investors will look at the * Since investment decisions have long- package of reforms, not just individual actions or term implications, the credibility of policies reforms. The analysis suggests that IC reforms in and reform programs is key. The confidence Orissa will have to be guided by three firms have in govemment policies affects fundamental objectives: (1) reducing the their investment decisions.3 Thus, the regulatory uncertainty and the cost of doing policymakers must put full force behind a business; (2) making the playing field more level; speedy and robust imple-mentation of and (3) strengthening the state's regulatory and reforms by developing a credible action plan strategic role. with time-bound outcomes and a monitoring 31 mechanism to track reforms. When Orissa; and (3) modernizing and streamlining governments effectively deliver what they sector-specifc regulations and laws. promise, public trust in the government is fostered, which influences the location 4.6 Reform in this key area is under way. In decisions of firms. By focusing on picking November 2004, the state assembly approved the low-hanging fruit, the state can help the Industries Facilitation Bill, which seeks to restore the credibility of its institutions, establish "single-window" agency. The bill aims which has eroded over time, among the to establish a single point of contact for new private sector and the public at large. businesses (see box 4.1). The Industrial Soliciting feedback from the private sector in Promotion and Investment Corporation of both the reform formulation stage and the Orissa (IPICOL) is expected to be the nodal implementation stage-and acting on the agency for large and medium-sized projects in feedback-are very important for credibility. the range of Rs 500 million to Rs 10 billion. For projects with investment below Rs 500 million 4.4 Building on the discussion in chapters 2 (small units), the District Industrial Centers have and 3, this chapter focuses on the way forward been designated as the point of single contact. by providing policy recommendations for For mega projects over Rs 10 billion, the Orissa addressing both cross-cutting and sector-specific Government has constituted a High-Level constraints. In each case, the recommendations Clearance Committee which is chaired by the are discussed in the context of (1) the ongoing Chief Minister and has the ministers of the reform policies and programs of the Orissa Cabinet and principal secretaries of key Government of Orissa, and (2) policy priorities departments as its members. Once the bill is for the short and medium term. In some cases, implemented it should help reduce regulatory the recommendations highlight areas that delays associated with setting up a new business government has yet to address effectively; in in Orissa. Reducing the number of application other cases, the recommendations echo forms from over 16 to 1 combined application government's ongoing reform efforts. However, form; introducing time-bound clearances; even in the latter case, the report provides streamlining inspection procedures; and reducing government with a concrete evidence base for its the plethora of registers and returns that must be policy direction. By carefully weighing the maintained are some of the essential features of potential costs of delaying the implementation this bill. Putting application forms on a website and the potential benefits to be derived from could save time and reduce transaction costs. forging ahead, these findings can be powerful Eliminating unnecessary inspections would also arguments to convince those who might resist go a long way in tackling corruption and easing reform. the regulatory burden in terms of management time. A. POLICY RECOMMENDATIONS 1: REDUCING THE REGULATORY BURDEN AND THE COST OF DOING 4.7 Although the Industries Facilitation Bill BUSINESS has been approved, its provisions have yet to be operationalized. The key to improving the STREAMLINE AND MODERNIZE REGU- investment climate would be to ensure that the LATIONS AND IMPROVE GOVERNANCE provisions of this bill are implemented, so that the time it takes to establish a new business in 4.5 Regulation and corruption have been Orissa is considerably reduced. A key identified as the most severe constraints by firms requirement for effective implementation of the in Orissa and need to be addressed immediately. Industrial Facilitation Bill 2004 would be to Priority areas for action indude (1) making ensure that time-bound clearances are received procedures for the entry and exit of firms and inter-departmental approvals are simpler and more transparent; (2) increasing the expeditiously granted. In cases in which approval accountability of government institutions and is vested with the central government, such as departments that enforce and regulate industry in mining rights and forest clearance, the state and the central government should work in tandem 32 ,~ ~ ~ ~ ~ ~~~ ---- ---- ---- Box 4. 1. International Experience with Single-Window Agencies/One-Stop Shops Experience shows that, even in the best circumstances, the creation of a single-window agency/one-stop shop (SWA/OSS) will not automatically result in a streamlined and efficient process of implementing investment projects. Clearly, no agency can just take charge of all the various administrative procedures and simply shorten the time frame and procedural steps. Instead, an OSS must work closely with all the other authorities to carefully adjust and reengineer the individual processes so that they are less burdensome for investors without compromising other policy objectives. This is a time-consuming political process that cannot be accomplished overnight. However, a strong OSS can serve as the key catalyst in such a policy reform process. The most outstanding and well-known examples of a successful OSS system are (1) the Economic Development Board (EDB) of Singapore; (2) the Malaysian Industrial Development Authority (I\DA); and (3) the Industrial Development Authority (IDA) of Ireland. In all three cases, investors can rely on the agencies to provide practically all the approvals and clearances needed. In fact, the EDB and IDA managed to obtain direct control over a number of approval procedures so that investors must deal directly with only a small number of separate authorities; and even then, the OSS agencies are highly effective in ensuring cooperation. MIDA, on the other hand, started as a pure coordination mechanism and experienced the typical start-up problems of an OSS. But it has the strong and direct support of the prime minister, and its involvement on behalf of an investor effectively guarantees that approvals and permrits will be forthcoming without difficulties. Strong political support is key. An OSS/SWA derives its power and effectiveness not through a strong and all-embracing legal mandate, but rather through political clout and seniority. Common to these three successful agencies is that they received full support from the most senior levels of government and that all three governments made the attraction of foreign direct investment a central pillar of their economic development strategies. Thus, when these agencies approach particular authorities on behalf of investors, it amounts to a direct request from the prime minister's office, making the handling of these applications an immediate priority. In addition, these agendes also benefited from an environment in which fewer licenses, approvals, permits, and dearances were necessary to begin with. To create this environment, the governments had already introduced a series of other reform measures, all geared toward eliminating obstacles to investment. Thus, establishing an effective OSS requires the full attention and support of senior government officials. Only then can the agency effectively design a streamlined process to implement investment projects without becoming immersed in and distracted by intragovemmental politics. Source: Foreign Investment Advisory Services, World Bank Group, 2000. to find appropriate solutions to expedite regulatory systems and identify actions to clearances for applicants who want to set up streamline the system businesses. > Medium to long term, sector-specific: > Short term: Operationalize the single- * Modernize the mining rights and fiscal window agency by July 2005. Although the rules regime in Orissa. Mining requires large for the single-window agency were set in March im 2005, the organizational structure, staffing, and investmnents and, therefore, entails large sunk costs that take several years to recover. If budgeting within IPICOL to handle single- regulatory weaknesses are not dealt with, window clearances are not yet in place. It is penl inesto s w remn cautious. important to establish a dear flow for the Modernization ultimatelywill require reform application process-for both the government of the Indian Mines and Minerals Act of officials and entrepreneurs-to enable quick and 1957.4 Orissa can proceed with its own efficient adaptation of the new procedures. reforms while it also promotes the reform of the Indian Mines and Minerals Act by the > Medium to long term: (1) Facilitate entry by central government. establishing online registration processes; (2) * GoO should adhere to the principle reduce the number of inspections from 12 to 6 established in the law of granting mineral per year; (3) undertake process reengineering in rights on the basis of "first come, first tax administration to simplify procedures and . A d i reduce public-private interface by 2005-06; and cervafo Ant mining ts-such as (4) establish an institutional process to review teaicant's a iit o comtment to the applicant's ability or commitment to ____ _ _ _ _ _ _ __33 establish downstream industrial facilities- that investments in the tourism and shrimp should be avoided. This policy adjustment sectors are not throttled when will establish a level playing field for environmental concerns are adequately potential investors and will foster the growth addressed. For instance, quite a few of small and medium-sized private domestic Indian states are currently promoting eco- mining companies as part of mining friendly tourism. The objective of development. ecotourism is to ensure the sustainability of tourism- making efforts to ensure that * The consent of the GoO required by the needs of today's visitors are not met at law for the transferability and the expense of future generations. The mortgageability of mining rights and for state of Kerala is a typical example in this raising a major portion of the investment regard.7 Orissa has tremendous potential funds from sources outside the mining that can be hamessed in the area of rights holder should not interfere in the ecotourism. This will require a decisions of investors. This adjustment comprehensive industrial policy complements that of avoiding framework that explicitly addresses the discrimination in granting mineral rights. regulatory norms in that area. The state Indeed, because of both adjustments, government may consider obtaining market forces will allocate mining rights expert input to draw up a blueprint for and resources for mining development. potential investments in Orissa that are This has been a key feature in the reform compatible with environmental of the minerals sector in Argentina, regulations. Bolivia, Chile, Ecuador and Peru in Latin America.5 IMPROVING INFRASTRUCTURE * Procedures related to accessing 4.8 Improving infrastructure-especially the mineral rights-particularly during the reliability of power supply, roads, rural development and implementation of connectivity, railways, and port facilities-is mining projects-should be streamlined to critical for reducing the cost of doing business encourage investment. The government and enhancing market access. should consider initiating further research and consultation with important 4.9 In India, Orissa was the first state to stakeholders to further develop guidelines initiate power sector reforms to deal with in the mineral sector, to provide a shortages. The state government was a pioneer foundation for sustainable development of in unbundling and privatization of electric power minerals based on transparency and distribution. Reforms included the following: consistency. The single-window clearance system included in Industrial Policy * In 1996, GoO established the Orissa Resolution 2001 must be supported, as Electricity Regulatory Commission (OERC), well as the efforts of the Orissa regional India's first state-level regulatory office of the Confederation of Indian commission in the power sector. Industry (CII) to expedite this change. * The state restructured the former Orissa This may still leave the forest clearance State Electricity Board (OSEB) through issue unresolved, which will significantly corporatization into its new form as the affect the timing for permitting mining Grid Corporation of Orissa (GRIDCO), and projects.6 put it in charge of transmission and distribution. * Orissa should increase the efficiency * The hydropower-generating stations of implementing environmental owned by the government were transferred regulations and procedures, and facilitate to the Orissa Hydro-Power Corporation more outreach and consensus-building (OHPC). efforts among all stakeholders to ensure 34 * In 1999, the govemment-owned has only one major port at Paradeep and one GRIDCO spun off its distribution business minor active port.8 The port at Paradeep is into four separate distribution companies, of facing serious congestion, which could pose a which three were sold to the Bombay significant barrier to the implementation of large Suburban Electric Supply Company and the investment projects in the mining and metal fourth to AES. processing industries.9 It is urgent that initiatives in the port sector be advanced. The framework 4.10 Unfortunately, progress has not been of the port policy announced in 2003 sets the satisfactory, and the power sector continues to development of ports in the context of a broader face financial distress. Natural calamities such as strategy for industrial and infrastructure the super-cydone in 1999 and the severe drought development, including inland waterways. The in 2002-03 have adversely affected the policy also proposes setting up an Orissa transmission and distribution infrastructure. Maritime Board to act as the single-window These natural events-coupled with high agency to facilitate access to land, water, and accumulated losses and debt on the GRIDCO power for potential investors in the development balance sheets, delays in tariff revision that affect of ports and related infrastructure. The GoO has cost recovery, inefficiencies in billing and taken initiatives to develop ports through public- collection, unchecked power theft, nonpayment private partnership (PPP) arrangements. These of government electricity dues, and other include the Dhamra and Gopalpur ports. inefficiencies-exacerbated the financial distress of the power sector in Orissa, with the result that 4.12 Established in 1981, IDCO is the nodal service delivery continues to be poor. The agency for land and infrastructure development private sector operators have not brought in the in Orissa.10 The Ministry of Industries and expected level of commercial management and Commerce also has identified Paradeep as the resources. In addition, the total withdrawal of site of a Special Economic Zone (SEZ). India government support to the sector-in terms of has not had much success with the development subsidy and support for theft control-has of SEZs and parks, with the exception of some adversely affected the sector's performance. information technology (1T) parks. Inefficient Indeed, this is a good demonstration of the fact public sector management, uncertain land pricing that private participation in and of itself is not and capital gain tax regimes, and a lack of sufficient to improve the ills of a sector. There incentive and accountability for operation and must be an effective enabling environment and maintenance are among the contributing factors. sufficient incentives for the private sector to Intemational experience shows more failures operate efficiently. To address these issues, GoO than successes in this area. It may be prudent for is developing a medium-term business plan for GoO to start small and expand if the the sector. The companies have made undertaking proves successful, and to take submnissions to OERC and a regulatory order has advantage of the experience of other states. In been issued, but no further progress has been this context, it may be mentioned that the GoO made toward implementation. has set up an IT park ("InfoCity" in Bhubaneswar) which has already attracted, as > Short term: GoO, GRIDCO, and the tenants, some well-known companies such as distribution companies should take the necessary Infosys and Satyam. action for immediate and successful implementation of the business plan to effect a 4.13 The National Highway Authority of tumaround of the financial crisis in the sector India (NHAI) has taken on the job of four- and thus improve the quality of the power laning the highway from Chandikhole to supply. Paradeep (77 km) to improve the road connectivity to the port. Paradeep Port is 4.11 A key dimension of the transport participating in this project through an equity bottleneck in Orissa is the inadequacy of port amount of Rs 40 crores, for which Gol approval facilities. With a 480-km coastline at its disposal, has been obtained. The work on the project has Orissa should be a major maritime state. Yet, it 35 begun and is likely to be completed within the policy, institutional, and regulatory framework next three years. for the development of infrastructure projects on a PPP basis. > Short term: While the port policy has been implemented and the Orissa Maritime ACCESS TO FINANCE Board has been set up, the board's role and functions have not yet been clearly defined. This 4.16 The small and medium industries sector is critical, as the board is meant to facilitate the in India faces a broad range of constraints. development of ports through public-private Primary amongst these constraints is access to partnerships. finance for SMEs. This coupled with poor technology, project management skills and > Medium to long term: The state marketing arrangements (market access) pose government should work toward setting up all- significant constraints to SMEs leading to high weather, fully mechanized ports at Dhamra and sickness levels. The ICA for Orissa concludes Gopalpur. To develop these ports, GoO should that firms find access to finance among the more focus, over the long term, on building rail serious constraints in the investment climate. connectivity from the proposed sites to the This constraint is an issue with 42 percent of the hinterland and on building an inland container managers of the firms surveyed, compared with depot in Orissa, in addition to other efforts to 19 percent in the all-India survey. Access to develop the infrastructure sector through the formal sector credit (measured through access to public-private partnership mode. a bank credit line) is lower in Orissa (44 percent) compared with the national average (54 percent). 4.14 Developing a good railway network, The ICA also found that the average value of especially from the mining regions to the port, collateral required by banks and financial would help improve access to Southeast Asian institutions is highest for SMEs at 111 percent markets and improve the prospects for exporting (as a percent of the loan) as compared to large to these regions. The bulk of Orissa's exports to industries at 73 percent. It would be helpful to other countries are metallurgical and mineral look at improvement of credit performance in products, but Orissa has only one major port other states and learn from their experience, that handles large mineral-based shipments. since lending to the SME sector faces similar Developing additional port facilities that are well problems across India. connected with the interior would significantly improve profitability for firms. 4.17 While several factors constrain the growth and competitiveness of SMEs, the key 4.15 Improving air links is important for constraint is accessing adequate, timely financing business, particularly for tourism. Establishing on competitive terms. This situation has held air connections from Bhubaneswar to Varanasi back the establishment of small units, their and Gaya, both with international airports, growth to medium enterprises, and the overall would complete the "Buddhist triangle" and growth and development of the SMF, sector. offer a great tourist attraction. However, this The problem is attributable to a combination of undertaking falls within the purview of the factors that are rooted in (1) a legal/regulatory central government, and GoO has thus far been framework that makes recovery of bad loans to unable to influence the Civil Aviation Ministry to SMEs, bankruptcy, and contract enforcement make the change. difficult for creditors; (2) institutional weaknesses, such as the absence of good credit > Short term: Finalize and implement the appraisal and risk management/monitoring draft policy framework for public-private tools, that increase banks' transaction costs in partnerships (PPPs)."1 dealing with SMEs; (3) the absence of reliable credit information on SMEs; and (4) lack of > Medium to long term: Encourage PPPs in sufficient market credibility in the SME sector. It infrastructure and, where possible, in ownership is difficult for lenders to assess risk premiums and management. There is a need for a clear properly, creating differences in the perceived 36 - -- -- - - - -- - -- -- - -- - - - - - - - - -- - - - -- --- - - --- -- - -- - -- - - - - - - - - --- - --- - - - versus real risk profiles of SMEs and resulting in credit guarantees for commercial bank untapped lending opportunities to SMEs. loans to SMEs. Improving credit information (both > Short term: The particularly high level of positive and negative) on SMEs by nonperforming assets of financial helping commercial banks and financial institutions in Orissa in lending to both institutions verify and collate historic priority and nonpriority sectors warrants data on SMEs. closer examination, as do the relative roles * Addressing the problem of collateral played by public sector undertaking (PSU) by improving and updating land and banks, private banks, regional rural banks, property records (the state of which IPICOL, the Small Industries Development currently impedes the use of land as Bank of India (SIDBI), and GoO's special collateral), and promoting the use of financial institutions (the Orissa State collateral substitutes. In this context, an Financial Corporation and the Orissa State electronic collateral registry could be Cooperative Bank) in credit flows to the encouraged. This enables a lender to state. A further study needs to be check for existing rights to the collateral undertaken to identify the current structure, as well as its priority. relative roles, and performance of the * Leasing finance could be an various financial institutions in the state with attractive source of finance for SMEs as regard to financing businesses (SMEs as well it provides access to long-term finance as large enterprises) in Orissa. Such a study required for capital investment with will help determine whether there an fewer constraints related to collateral adequate flow of credit to firms and help etc. This could also help in being identify the bottlenecks on the supply and developed as a complementary tool to demand sides to accessing finance at bank loans. Further with appropriately competitive terms. In any case, improving structured tax benefits, leasing finance access to finance should be a priority policy could prove to be a very efficient source agenda for the Government of Orissa. of financing for SMEs. * Apart from improving the credit > Medium to long term: While many of the appraisal skills of banks to lend to policy recommendations relating to access to SMEs, bankers in Orissa also believe finance must be dealt with by the central that SMEs require capacity building government-particularly with regard to the assistance and hand-holding in policy/regulatory and institutional preparation of pre-feasibility studies to framework for SME financing-the state approach banks for financing. This can establish policies to create a more could include a wide range of issues conducive environment for market-based from assessing financial needs, methods financing to SMEs by the formal financial of payment and financing techniques to sector. Medium- to long-term actions could negotiating short-term credit, loans and involve the following: legal documentation. In parallel, strengthening business development * Improving the credit evaluation and service (BDS) and market linkage risk management skills of banks and programs for SMEs, thereby helping other financial institutions to improve them to improve their profitability and lending practices. This will involve competitiveness and to become more building institutional capacity to reduce creditworthy. The existing DFID transaction costs and reduce/manage technical assistance to SIDBI at the risks related to SME lending. A risk- national level could be leveraged to sharing facility to accelerate commercial reach SMEs in Orissa. This would bank lending to SMEs could be include selecting clusters and building established that would provide partial capacity of BDS providers and financial institutions in each duster; developing 37 links among large corporations and role in investment and growth, state participation SMEs; working through the major SME in economic activity needs to be further business associations; developing high- curtailed, through privatization, divestments, and quality, affordable technical and withdrawing from the management role. In areas management training for local SMEs; where public investments are deemed developing entrepreneurship training necessary-for instance, infrastructure-related programs; and so on. enterprises-efficiency can be increased through Cluster financing approach: private participation in infrastructure (PPI), an Cluster development for SMEs has enhanced regulatory framework, and private another benefit in terms of cluster management contracts. financing. This enables member firms to seek finance together, provide collective > Short termn: (1) Complete the guarantees or even set up their own privatization of 10 enterprises that was initiated financial body. The threat of expulsion in 2004-4 enterprises by September 2005 and from the cluster ensures that promises the remaining 6 by December 2005; and (2) are kept, which allows the network to review the state role in various sectors-starting overcome shortcomings in the legal with mines and minerals, fisheries, tourism, and system. Frequent interaction with handicrafts-and develop an action plan to limit financial authorities and government, as the state role to that of facilitator. well as the role that reputation plays in the cluster, can greatly increase > Medium to long term: (1) Implement the confidence between firms and financial action plan mentioned above; (2) restructure a institutions and thus make it easier to number of the large public enterprises, including get loans and lower rates of interest. the Orissa State Road Transport Corporation, Working together also means firms can the Orissa State Financial Corporation, the get supplier credits and can borrow Orissa Life Insurance Company, and the Orissa from each other when necessary, which Seed Corporation; and (3) treat the state-owned reduces general costs. This approach Orissa Mining Corporation (OMC) like any could be pursued for a few select other investor.'2 cdusters in Orissa along with public and private sector commercial banks such as 4.19 While skill shortage is not identified SBI and ICICI Bank. among the top investment climate constraints in Orissa, it is not a trivial problem when analyzed B. POLICY RECOMMENDATIONS II: ROLLING through the sector-specific lens. An important BACK THE STATE AND LEVELING THE PLAYING FIELD element in tackling poor productivity in the mineral processing, food processing, and hotel ROLLING BACK THE STATE FROM THE and restaurant sectors is to improve the supply REMAINING SECTORS of skilled labor. GoO investment in building human capital by establishing training institutes 4.18 GoO has made progress on public and better educational institutions would enterprise reform - a key element of its overall improve the quality of the workforce in the state growth vision. Ten public enterprises have been and thus improve labor productivity and the identified for privatization. One has already been competitiveness and profitability of firms in handed over to the private owners and another Orissa. three are at an advanced stage of privatization. There are also plans to restructure some > Short term: Carry out an assessment of important public enterprises. Nonetheless, there the performance of the public sector training are still commercial and industrial enterprises in institutes; in particular, their ability to meet the which government plays a significant role, with skill requirements of the private industry and consequent distortion of the playing field and a services sectors. This assessment should review crowding-out effect for the private sector. To private provision of training services, explore the ensure that the private sector plays the central 38 reasons behind inadequate provision of training, (see box 4.2 for an example of such a facility). and suggest remedial mechanisms. Mega-industrial projects that exploit backward and forward links with smaller firms would also > Medium to long term: Create an enabling ensure that the quality of the latter's products environment to encourage private sector were monitored by the larger partners. provision of training. Increase private sector involvement in the public sector training 4.21 Tecbnology: The technology policy infrastructure. This could include private sector framework in India is determined at the national participation in the design of curricula, private level and often in a sector-specific manner. The management of training institutes, and state governments do not usually have specific strengthening of apprentice programs. In technology policies. addition, there should be greater emphasis on vocational education. There is scope for 4.22 Orissa's lack of private initiative in combining public funding and private training, technology development and adoption can be including through output-based aid approaches addressed by strengthening public-private in which public funding is disbursed according partnerships. One successful model of PPP in to the achievement of certain predefined technology development is the Drugs and outcome targets. Pharmaceuticals Research Program (DPRP) of the Department of Science and Technology, 4.20 Quality standards, testing, and Government of India, from which useful lessons certification: Independent testing facilities, in the can be derived (see box 4.3). form of well-equipped scientific laboratories catering to mineral-based and aquacultural 4.23 Like most other state governments, industries, should be set up, perhaps one in each GoO has attempted to support private enterprise industrial cluster. This could be done through growth-including issues related to technology public-private partnerships, including joint upgrading, quality, and standards-through the ventures and perhaps with foreign collaboration direct provision of business development Box 4.2. Food Research and Analysis Centre (FRAC) FRAC is an independent, autonomous, and nonprofit organization registered under the Indian Societies Act. It is sponsored by FICCI and CIFTI, and supported by the Ministry of the Food Processing Industry. Currently, FRAC's main purpose is to help more than 300 member companies, government institutions, exporters, importers, traders, and consumers get their food products tested against national and international specifications. It offers advice and assistance, as wel as sophisticated chemical and microbiological analysis FRAC offers the following services: 1. Analytical services 2. Training in quality control 3. Product development 4. Consultancy services 5. Mobile sample collection facility 6. Preexport inspection and certification 7. Training of technical staff in advanced instrumental analysis and microbiological testing 8. Trouble-shooting for the food processing industry in India. For a decade, FRAC has provided a broad range of high-quality analytical services and interpretative support for its nationwide list of clients in the food industries. FRAC is continually expanding its analytical capabilities and the scope of its services in response to clients' needs and new regulatory requirements. The organization has done a great job in offering analytical services in the areas of physiochemicals, mycotoxins, vitamins and other micronutrients, sensory evaluation, and shelf-life studies. It has helped the domestic industry by extending benefit-of-scale economies in the face of limited research and development scope and infrastructure. 39 Box 4.3. Public-Private Partnership: The Drugs and Pharmnaceuticals Research Program The process of drug development is risky, resource-intensive, and time-consuming. Recognizing the need for systematic government intervention to promote the growth of the Indian drug industry, the Government of India launched the Drugs and Pharmaceuticals Research Program (DPRP) in 1994-95. The program provides a great opportunity for effective industry-institution interface in the drugs and pharmaccuticals sector, largely to overcome problems involved in the process of drug discovery and development. The program aims to promote a public-private partnership (PPP) through collaborative research and development (R&D) with the following spedfic objectives: * Synergizing the strength of public R&D institutions and the Indian pharmaceuticals industry. * Creating an enabling infrastructure, mechanisms, and links to fadlitate new drug development. * Stimulating skill development of human resources in R&D for drugs and pharmaceuticals. * Enhancing India's self-reiance in drugs and pharmaceuticals, especially in areas critical to national health requirements. DPRP supports research in all aspects of medicine, including setting up fadlides and joint industry- institution research projects. Generally, the partners share the costs 50-50. Research undertaken at the industry is fully funded by the industry, research at an institution is supported jointly by the government and the industry. Capital expenditure is fully supported by the government; for recurring expenditures, the government pays 70 percent and the industry pays the rest. The success of the program can be judged by its contribution to clinical trials and filed patent applications in India and abroad. A peptide-based drug for the treatment of colorectal cancer has been synthesized at Centre for Biotechnology and is poised for human trials by the Dabur Research Foundation. Three product patent applications based on two projects and 12 process patent applications based on four projects have been filed in India and abroad. services. An example of this, as described earlier, them. These could include research and training, is the provision of marketing assistance to the and strengthening of institutions with public- handicrafts sector through the state-owned good missions. But even here, it is important marketing agency. As has been the case that the subsidies are transparent and are linked elsewhere in India, the public provision of BDS to results, perhaps through output-based has been ineffective. This is not surprising in the financing disciplines. Cost-effective evaluation light of worldwide experience, which suggests methods should be built into subsidy-dependent that such services need to be market-driven. In programs so that it is possible to determine the recent years, a consensus has emerged in the subsidy-equivalence or subsidy-dependence of SME practitioner community that traditional such schemes. approaches to supporting these enterprises should be replaced by more effective > Short term: The government needs to interventions. The new approach discourages the reexamine its strategy in the area of business use of interest rate subsidies and argues for support services, moving away from the public subjecting BDS to market discipline. It calls for provision of these services, including marketing redirecting efforts away from helping SMEs assistance, to facilitating the development of directly to developing financial and consulting markets for the services. markets that will serve SMEs.13 |> Medium to long term: Implement the new 4.24 Thus, in Orissa, the government's role BDS strategy by involving public and private should be restricted to establishing a suitable collaboration and forging a partnership. Services environment for market transactions and that may lend themselves to such partnerships avoiding the crowding-out of private providers include research and development, skills through direct provision of competing services. development, information provision, and Certain activities may qualify for subsidies if certification. Forms of public-private partnership there are strong externalities associated with that may be considered include public 40 subsidization combined with private provision of provisioning of entrepreneurship, with firms market related information and contracting out having little or no incentive to protect the service delivery tasks to the private sector or environment, maintain product quality, upgrade non-government or membership organizations technologies, and retain price competitiveness. It financed by a combination of public funding and is particularly important for Orissa to counter private payment. these externalities to shed its laggard state image. LEVELING THE PLAYING FIELD RESOLVING ENVIRONMENTAL AND SOCIAL ISSUES 4.25 There are several ways in which the public sector distorts market competition; for 4.28 The government has attempted to instance, through certain financial advantages address the issue of acquisition of land (both (tax benefits, lower cost financing) over private private and government) for large and small- competitors, through subsidies for meeting scale industry through the Industrial public service obligations that they can use to Infrastructure Development Corporation of cross-subsidize their competitive activities, and Orissa (IDCO). Going through IDCO has the through procurement regulations and product following advantages: (1) rates for government standards that favor public sector enterprises. land are predetemtined, so precious time is saved in appraisals that might otherwise take years to 4.26 Because government's role in complete; (2) rates for private land are negotiated commercial activity affects market competition, through the government; (3) legalities of it is important to have great transparency in the registration and leasing are smoothed out; and role of the government. It would help private (4) quite often, zone-wise land can be obtained sector businesses in Orissa if public sector at a concessional rate. To avoid unnecessary competitors did not have any artificial cost hassles, large industries prefer to deal with the advantages and there was more direct government to sort out legalities and paperwork competition between the public and private rather than getting involved with a large number sectors. Intemational experience suggests that of small land owners. Almost all huge projects in efficient and fair competition can be encouraged recent years have acquired land through IDCO. between public and private sector businesses However, IDCO has often shied away from through advocacy by government, civil society, acquiring land for industrial purposes, fearful of and private sector participants, and through the social resistance and of violating environmental use of competition law. A detailed analysis of the regulations. This is especially true in the case of roles and interactions of the public enterprises mineral industries. It has been observed that with their private sector counterparts will help in even companies that offer very liberal designing specific solutions for improving compensation packages often fail to escape competitiveness, fairness, and efficiency of social resistance. The experience of Sterlite in businesses in Orissa. Lanjigarh is a case in point. In addition to offering a good price for land, the company had C. POLICY RECOMMENDATIONS III: to offer a lucrative package, including setting up STRENGTHENING THE STATE'S REGULATORY AND rehabilitation colonies equipped with all STRATEGIC ROLE necessary amenities and offering training for all able-bodied men between 18 and 35 years of age 4.27 As the sectoral analysis in chapter 3 for future employment when the plant is showed, since the earlier model of direct support operational. The transfer of land from small land through provision of protection and subsidies owners to industry is an important issue, and this has been discredited, the state may need to play a is where the mediating role of government and coordinating role and devise new and sustainable other collective organizations such as industry mechanisms for addressing the issue of associations is important. technological, informational, and coordination externalities. Unless market failures in these 4.29 It is critical to establish a formal areas are addressed, they can result in the under- framework of compensation and benefit-sharing 41 and to have a trilateral dialogue among the ESTABLISHING CREDIBILITY AND TRACKING government, the local/tribal community, and the REFORM EFFORTS mining company, so that joint efforts drive development in communities where mining 4.31 Reform efforts aimed at improving operations are set up. Enhancing the role of the Orissa's investment climate will have to be mining investor as a development promoter in credible in the eyes of private investors. local and tribal areas will help to dampen Investors would like to see that good intentions resistance. Many large private mining companies are translated into actual policies, that display good corporate citizenship. For example, announced policies are implemented, and that, mining companies are voluntarily establishing once implemented, they are not unduly reversed. trusts for local development. The Orissa Mining They would also like to see policies that reflect Corporation conducts ongoing informal their concerns. Thus, the government needs to discussions with locals in which their concerns systematically obtain feedback on policies from emerge and are addressed by the company. The the private sector during both the formulation company also makes contributions for hospitals, and implementation stages. The government schools, and so on. needs to balance the interests of various groups; private sector inputs will be a subset (although > Short term: Take action to increase the an important subset) of the many inputs that will capacity of the environment regulatory bodies go into the decision-making process. (Orissa Department of Environment and Forests, and Pollution Control Board), and the 4.32 It is important to develop institutions efficiency and accountability of their processes and processes that will (1) enhance the analytic and procedures capacity needed in the private sector to underpin its advocacy role; (2) enable systematic and > Medium to long term: Develop and adopt ci g efeciv copnaoyadbnfts. credible government-business consultation; and effective compensatory.andbenefit-sharng (3) monitor the delivery of government policy mechanisms based on best practices from c a t p o re s Orissa, other parts of India, and relevant international experience. international experience. 4.33 Formulating and updating a clear vision for strategic sectors would reduce risk and 4.30 DCO as reentl forulate, though uncertainty for the investors and lead to greater consultations with stakeholders including local trans y in the sectors. H evr ti not NGOs, a comprehensive rehabilitation and transparency in these sectors. However, it is not NGOs,a coprehnsiv rehbiliatio and sufficient to draft policies; the real test of resettlement (R&R) policy to tackle the problem credibilitytliesain howiwell the polices ar , of compesation andredress. Te new R&R credibility lies in how well these policies are of ompenisunrcsationandredress. ThenewR&R implemented. The key areas of growth in Orissa-such as mining and mineral processing, > Short term: Finalize the draft R&R fisheries, tourism, forestry, and the handicrafts policy by October 2005. sector-would benefit from such policy documents wherever they do not exist or need to > Medium to long term: Approve and be updated implement the R&R policy. This would be a key step in hastening the process of land allotment in 4.34 To catch up with the high-performing Orissa and would go a long way toward states and counter its laggard image, Orissa improving the investment climate by needs to step up its reform efforts, reduce streamlining regulatory procedures and ensuring uncertainty, and establish credibility. With a smooth transfer of land after complete renewed mandate to reform and consensus compliance and appropriate compensation to the among key players to capitalize on the state's poor forest dwellers. rich potential, the timing is right to forge ahead and build on the ongoing reform process 42 END NOTES: 1 According to the CMIE measure of investment projects under implementation, Orissa has accounted for 10% of foreign direct investments in India during recent months, ahead of other Indian states. 2 The Hindu, 31 March, 2005; and Asia Pulse, 31 March 2005. 3 Indian states with more credibility (such as Tamil Nadu, Karnataka, Gujarat, Maharashtra, and other better performing states) have succeeded in attracting greater investments, especially FDI. 4 Indian Bureau of Mines (2003a). See Remy Felix (1996). 6 GoO should contact the Indian Forest Department or the forest central authority to coordinate actions that could simplify and reduce the time needed for mining and other industrial projects to obtain forest clearance. 7 The tropical ecosystem of the Western Ghats in Kerala has been identified as an ideal location for promotion of ecotourism. Kerala has identified 15 tourist spots, mostly sanctuaries and national parks, which are being promoted. Similar efforts are being made in the state of Uttaranchal. 8 The port at Paradeep was set up in 1966. The only active minor port in Orissa is the Gopalpur Port, which is a fair weather anchorage port operating from mid October to mid March. Preliminary work development work is also in progress at Dharma. There 10 other port sites, but these have all yet to be developed. They include Palur, Bali-harichandi, Asarang, Bahuda Muhan (Sonepur), Chudamani, Inchuri, Chandipur, Subarnakeha Mouth (Kirtania), Bahabalpur and Jatadhar Muhano Jagatsinghpur. (Port Policy, Government of Orissa, 2003. 9 These indude those that are reported to be entertained by Posco, the Australian company BHP Billiton, and Mitsui of Japan. In addition, over a dozen Indian companies, including the Tata Iron and Steel Company have submitted proposals to set up a steel plant. 10 While IDCO constructs the basic infrastructure for power, water, and so on as part of a package deal, the connections for these utilities are often provided by individual agencies or obtained only after approval is granted. Thus, accepting a package deal from IDCO does not necessarily reduce the lengthy procedural mechanism involved in setting up a fully equipped industrial park. 1 It is being prepared by Ernst and Young under the DFID's Industrial Policy Resolution (IPR) project. 12An advantage of OMC is that is not a burden for Orissa's budget. In the future, OMC's challenge is to maximize its contribution to the development of Orissa through the most efficient use of the mineral resources under its control. 13 Geeta Batra and Syed Mahmood, "Direct Support to Private Firms: Evidence on Effectiveness," World Bank Polcy Research Working Paper 3170, November 2003. 43 g~~~~~~~~0 r ~~~~~ 19 ~~~~~~~~~~~~~~~az. 7 c 00 CO~~~~~~~~~~~~ 5-~~~~~~~~~~~~2 n U~~~~~~~~~~~~~~20c 0 i Cta m l. a i Ca l. 0f U) E a i 0 3~~~~~~Urf 0 CD ~ ~ ~ 0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I - -. =~~~~~~~a -Lc r.CD w coa C CD 0) O-. .0 M Ul~~~~~~~~~ N _ F---~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~------ ANNEX 2 INDUSTRY AND SERVICES IN ORISSA: A SECTORAL PROFILE 1. This annex provides a sectoral profile of employment nor a catalytic effect on other firms. the industrial and service sector in Orissa, A third group consists of enterprises that have focusing on some of the key sectors. A sectoral no significant direct effect on growth or perspective is useful for at least three reasons: (1) substantial catalytic effect on other enterprises richer insights about the working of the but generate considerable employment. Many investment climate are often obtained at a small firms fal into this category. sectoral rather than an aggregate level; (2) different sectors appear to play different roles in 3. The Orissa investment climate survey contributing toward growth of the economy and covered four manufacturing sectors: food the poverty reduction agenda of the government; processing, metal work, mineral processing, and and (3) the Government of Orissa's (GoO's) "other" manufacturing; and a service sector, Growth Vision 2020 envisages private growth in hotels and restaurants. In addition, a separate sectors in which Orissa has strategic comparative survey was conducted on the handicrafts sector. advantages, including tourism, mineral The choice of sectors reflects the structure of the processing, horticulture, marine products, and manufacturing sector in Orissa as well as the handicrafts. The choice is reflective of Industrial government's vision for growth. Mineral Policy Resolution (IPR) 2001, which was processing, food processing (in particular, fish formulated after intensive collaborative dialogue processing), and tourism are sectors in which with the private sector.' By undertaking an Orissa is believed to have a comparative analysis in these sectors, the report aims to advantage and that figure prominently in the uncover identify the most significant obstacles to development vision set out in IPR 2001 and dynamic growth and restructuring. Vision 2020. Handicrafts are an important activity for some segments of the poor The Enterprise Spectrum: Different Roles of population, especially the tribal population. Different Sectors and Types of Enterprises While handicrafts are not expected to be a major driver of growth, they have an important place in 2. All enterprises may contribute to the the development vision because of the state's overarching goal of broad-based growth, but well-known cultural heritage and their potential they may take different approaches. Some to provide livelihoods for poor people. enterprises may not have a substantial direct impact on employment or growth but may have 4. Mineral processing firms may not have a a very substantial catalytic effect on other significant impact on employment but have a enterprises. The catalytic effect may come growth-enhancing effect, especially through their through backward and forward links, catalytic effect on other firms. Tourism is also dissemination of good practices (in technology, likely to have a catalytic effect on other firms, product quality, production methods, and more by improving the image of Orissa and by organizational practices), or through a signaling some backward link effects than through any effect (e.g., a successful large venture may knowledge spillover. Tourism may not be a provide positive signals to other investors). significant contributor to growth but may have a Many large capital-intensive enterprises fall in large employment effect. The other this category, as do some dynamic medium-sized manufacturing sectors in Orissa, including fish firms, especially export-oriented firms. A second processing, are likely to have a moderate growth group of enterprises are those that have a and employment effect and may have some substantial direct effect on growth; however, modest catalytic effect. In the light of this they may not have a substantial effect on analytic classification, we now look at some of 46 the important sectors in Orissa in greater depth. transport costs, thus inadvertently encouraging A sectoral profile based on the surveyed firms them to set up mineral-processing units near only is provided in box 3.2 at the end of the market centers outside Orissa. With the removal annex. of the freight equalization policy, private mining investors have more incentive to set up SECTORAL PROFILES processing units near the mines, in the state.4 Mines and Minerals Fisheries 5. Orissa has significant geological 8. Orissa also has vast potential in both potential and stands 6th in overall production of marine and inland fishery resources. It has a 480- minerals in India.2 The state accounts for almost km coastline and the largest brackish water all of India's chromite production and a little less lagoon in India, Chilka Lake, which measures than three-fourths of its bauxite output. Orissa 79,000 hectares. These resources produced about has important reserves of manganese ore and 0.26 million tones of fish during 2000-01, of nickel, and is likely to have major resources of which 0.12 million tones were marine and 0.14 base metals and diamonds. The mines and million tones were inland. The state contributes a minerals sector has grown fairly rapidly in recent little less than 5 percent of India's total fish years; between 1991-92 and 2000-01, the annual production. growth rate of this sector was 10.4 percent, compared with 4 percent for the rest of India3. 9. Dominance of public sector: There are However, since this sector accounts for less than 108 fish farms in the government sector, of a tenth of gross state domestic product (GSDP) which about 80 percent are currently operational. (8 pecent in 2000-01), it has not had much of an About a quarter of the operational farms have impact on the growth of the overall economy. been leased out to the private sector; the rest are However, with such large mineral reserves, with the fisheries department of GoO. About mining occupies an important position in the two-thirds of the fishing craft in the state are state's growth vision. Despite its mining traditional; there are about 2,500 motorized and tradition, Orissa is still a relatively unexplored 1,300 mechanized boats. There is one major state. fishing harbor at Paradeep; three minor fishing harbors at Gopalpur, Dhamra, and Astrang; and 6. The biggest player in the sector is the 66 fish landing centers on the coastline of Orissa. state-owned Orissa Mining Corporation. Jointly established by the national and state 10. The majority of the fishery population in governments in the first decade of the country's the state is engaged in marine fishing and post- independence, OMC was the first public sector harvest activities. However, the inland sector, undertaking in Orissa. By 1962, it was wholly involving fish and shrimp farming in freshwater state owned. A number of other public and and brackish water, as well as fishing activities in private sector companies are operating in the reservoirs, holds immense potential of sector. These companies have taken up leases of employment for the local people. During the various minerals for their captive production as 1990s, marine fish production in Orissa increased well as export through the Minerals and Metals at an annual rate of 5.5 percent against the Trading Corporation (MMTC). national rate of 2.2 percent; while the corresponding growth rates for inland fish 7. The mining sector's impact on Orissa's production were 6.8 percent and 6.5 percent. growth has been less than its potential, partly because of limited backward links of mining Handicrafts operations, despite a policy stance favoring the growth of ancillarization. These weak backward 11. Although the contribution of links in the past were in part a result of the handicrafts to Orissa's gross domestic product central government's freight equalization policy, (GDP) is not significant, it is an important which subsidized buyers of mineral inputs for source of livelihood for many of Orissa's poor 47 people.5 There is also an expectation that the packages intended for the artisan workers are handicraft sector has the potential to grow.6 The often siphoned off by those who control the government views the growth of this sector as an cooperatives. Artisan workers and small artisan important part of its pro-poor growth strategy. entrepreneurs appear to have no faith in the However, to realize this vision, the handicrafts cooperatives. At the apex level (state level), a sector has a long way to go. Total handicrafts giant body called the Orissa State Cooperative exports from Orissa have been hovering around Handicrafts Corporation (OSCHC) was created Rs 1 crore for the past several years. Currently, to look into procurement and marketing for all only 10 exporters in Orissa deal with the handicrafts in the state to the major cities of handicrafts.7 India as well as overseas. Currently, nine sales centers known as Utkalika are operating in the 12. The artisans engaged in handicraft state and eight are operating in big cities production are mostly poor and illiterate. They elsewhere in the country. However, this public are diffused, operating from households, and are enterprise does not appear to have played any heavily dependent on middlemen for inputs, significant role in the procurement and sale of marketing, and advice. They have very little handicrafts, leaving the artisans at the mercy of direct contact with final consumers, even within middlemen. For example, in 2001-02, OSCHC Orissa, and very little knowledge about market procured only Rs 306 lakh worth of handicrafts, demands and tastes. The artisan entrepreneurs which was barely 3 percent of the total reported and trader entrepreneurs are small in size (in output for the year (Rs. 9,892 lakh). terms of capital investment) and not well infomned about markets and marketing Tourism strategies; they depend on middlemen to dispose their stocks. The degree of dependence varies by 14. With over 3.4 milion arrivals in 2002, craft but is generally high.8 Excessive tourism in Orissa is a significant activity. dependence on small intermediaries with very However, it is dominated by domestic travel (99 low capital bases has affected the artisans in percent), caters mainly to low-income visitors, terms of income and employment. In art textiles, and contributes only modestly to the local no large middlemen or marketing intermediaries economy (2.7 percent of GSDP). Intemational have emerged. There is a large number of small arrivals declined from a peak of 35,000 in 1997 middlemen (trader entrepreneurs) who are not to 23,000 in 2002. Although Orissa has many artisans themselves and do not own any cultural and natural attractions, private showrooms. They operate with very low investment in the sector has been discouraged by establishment costs and have kept the entire limited air connectivity, poor internal marketing process on a relatively small scale. communications, inadequate tourist services, and Recently, the handicrafts sector in Orissa has the absence of a well-defined and proactive seen the emergence of some dynamic promotional strategy. entrepreneurs in some of the crafts, but their number is still very small. 15. Tourism is a priority sector for the Government of Orissa. It wishes to help 13. Government in marketing and accessing diversify business tourism through the inputs: In the handicrafts sector, direct support promotion of conventions, fairs, and other has been largely delivered through cooperatives.9 business activities; better exploit pilgrimage This has not proved to be an effective tourism by enticing its upper-end clientele; foster arrangement. The cooperatives are run by big domestic vacation tourism; and attract intermediaries or artisan traders with international tourism. The implementation of membership often confined to their cronies, this strategy includes marketing Orissa as the family members, or artisans with little voice in "Soul of India"; developing tourism products the affairs of the cooperatives. Most of these better suited to its potential clientele; exploiting cooperatives have become the monopoly its natural and cultural resources; improving air suppliers of raw materials and buyers of the connectivity, local road connections, and public handicrafts, and the govemment benefit transportation services; improving the beaches at 48 r~~~~~~~~~~~~~~~~~~~~ - ---- Gopalpur, Konark, and Puri; and developing a fact, in the aggregate, its hotels have posted losses Special Tourism Area on an unspoiled beach from 1998 onward. next to the city of Puri. Notwithstanding its ambitious plans, GoO has limited human 18. Restaurants, travel agencies, currency resources to manage tourism development and exchange and banking facilities, car rental and limited financial means to make the related other transportation services, Intemet cafes, and infrastructure investments. centers for recreational and cultural activities are critical elements for the development of tourism. Tourism-related Services Despite the presence of OTDC in travel and transportation, the availability of these services 16. The tourism industry mainly consists of and facilities appears limited for national visitors local entrepreneurs involved in hotels, and inadequate or nonexistent for international restaurants, and related services. It is fragmented tourists, even in the capital city of Bhubaneswar. and lacks adequate national and intemational connections. There are about 800 hotels in the state, less than 10 percent of which cater to high income groups and another 20 percent to middle Box Annex 2A: Sectoral Profile from Survey Data income groups." According to available data, average occupancy rates are below 50 percent in In the absence of more comprehensive information, we most locations and in many barely reach 35 can analyze data from the surveyed firms to obtain additional ideas about sectoral characteristics. This percent. Representatives of the Hotel and analysis, which is limited to sectors with a reasonable Restaurant Association of Orissa and a number number of respondents (at least nine), tells us the of hotel managers confirmed that low occupancy following about various sectors: rates are a serious problem and jeopardize the financia viabilty of th entire sector. Metal works (66 firms): 28% of the firms are medium-sized financia viabilty of te entir sectr. or large, compared with 36Yo for the aggregate sample. Representatives of the State Bank of India rThe sector is less export-oriented than the average Oissa indicated that 50 percent of the bank's hotel firm (only 5% of the metal works firms are exporters, portfolio is nonperforming and that the bank compared with a sample average of 11%) and is had to restructure or reschedule a large portion predominantly private (only 2% of the respondents are . . . . ~~~~~~~~~~~~state-operated enterprises). of its lending to this industry. Mineral processing (30 firms): The mineral processing firms 17. The State of Orissa owns and operates 30 appear to be at the other end of the spectrum from the hotels, either directly through its tourism metal works firms in terms of size distribution-almost department or indirectly through the Orissa 75% of the surveyed firms are either large or medium- sized (one-third are large). 20% of the firms are export- Tourism Development Corporation (OTDC). In oriented but, in two-thirds of the cases, the exports are to general, the tourism department operates the South Asia. In other words, barely 7% of the firms in this facilities of lower standard or those located in sector export outside South Asia. 7% of the firms are areas with limited tourism demand. These state-owned. facilities are considered public services and are offaciliati rates arehconseredy p icseraiestf sanaries. Agro-processing (14 firms): There are no large firms in the offered at rates that barely coverage staff salaries. sample for this sector, but 43% are medium-sized; in other Lack of funding and lengthy bureaucratic words, an average agro-processing firm is larger than an procedures prevent appropriate maintenance, so average finn in Orissa. None of the firms in the sample are many hotels are in a state of serious disrepair. exporters. 7% are state-owned. Established in 1979, OTDC operates with partial Marine-food processing (9 firms): Firms in this sector are managerial and financial independence under the the most export-oriented (78%), with fairly diversified Companies Act of 1956. Its mandate is to export destinations (22% each to North America and promote the development of tourism, to India; 11% to the Middle East, and 44% to "other" establish and run commercial ventures related to countries). The firms are, on average, larger than the average Orissa firm: 56% are medium-sized; another 22% tourism activities, and to help the state are large. None of the firms in the sample for this sector implement its policies concerning the tourism are publidy owned. sector. OTDC is expected to operate its facilities on a commercial basis and to generate profits. In I 49 END NOTES: I See UNIDO 2001. The IPR 2001 was informed by the consultative process supported by UNIDO. 2 Study on Issues of Mining in Orissa, Verve Consulting Private Limited, submitted to the World Bank. 3 Ravi- Marina Orissa Vision, November 18, 2004; growth data- Pooja Churamani. 4 This may have been a factor behind a renewal of interest in the sponge iron sector in the state. The other factor may simply be the firming of international steel prices. Reportedly, the state government has received inquiries from 29 sponge iron concerns. According to a CMIE report, completed investment projects (public and private) averaged 10.6 percent of GSDP in Orissa during 1997-2001, compared with 6 percent for all of India. 5 For example, in 2001-02, the total production of handicrafts was about Rs 30 crore and sales were about Rs 34 crores. Orissa's handicrafts-once an organic part of its sociocultural and economic life-started declining during the British regime and after the Industrial Revolution because of an inflow of cheap, machine-made substitutes. Handicrafts can be broadly divided into three categories: those with utility, those with aesthetic and artistic value, and those that combine utility and artistry. Today, a handicraft item is more likely to be an artistic item than a utility item, and handicrafts are sought mostly by relatively wealthier people in the society. 6 Prospects of Orissan Silver Filigree Products. 7 Handicraft exports make up a mere 2.7 percent of the total production value of craft goods in the state, while the value of such exports at the national level is 20.2 percent of the total export value. 8 An exception is silver filigree and stone carving, in which the trader entrepreneurs are jewelry shops and stonework showrooms. 9 The proportion of artisans enrolled in some kind of cooperative varies by sector: art textiles (36%), stone carving (30%), brass and bell metal (220/%), silver filigree (7%), and cane and bamboo work (40/0). 10 StafisficalBul/etin. Orissa Department of Tourism and Culture. 2002. 50 l ____________________- _____________________________________ ___________________ ____________ _________________________________________ ANNEX 3 ORISSA IC SUMMARY TABLES - - - - - - - - ---- - - Tabl iNOCATOR CORE DIFINION Table A3.1 ICA Survey Sample Structure Low capacity 50 Low capecljf firm with less than 75% capacity utilzation High capacity 50 High capacity: firm with 75% or more capacity utlizaton Size: SmaN 62 Small: firm with lss than 50 employees Size: Medium 62 MAfeum: firmfwAth 50-149 employees Size: Large 62 Lag: firn with 150 or more employees Market orientation: Exporter 11 Exporthr firm with 10% or more of sales exported Market orientatlon: Non-exporter 11 Non-exporer: firm with lss than 10% of sales exported Ownership: Domestic 3 DomestIc: firm with a private domestic capital share that Is (1) higher than the govemment capital share and hgher than the foreign capital share; and (2) the government share, and the foreign share if applicable, Is less than 10% Ownership: Foreign 3 Foreign: firm with foreign capital share that is (1) 10% or more and (2) higher than the govemment capital share Ownership: State 3 Sbb: firm with government capital share that is (1) 10% or more and (2) higher than the foreign capital share (for the purpose of this classification, the private domestic capital share is irrelevant when the govemment capital share is 10% or more) Ownership: Other 3 Oer: residual category Firm activity Sector of activity Firm location Geographical location of firms Table A3.2 Globalization of Markets and Inputs Percentage of sa/es: Domestc sales 11 Percentage of total sales sold domestically (average value) Exported directy 11 Percentage of total sales exported directly (average value) Exported indirectly 11 Percentage of total sales exported indirecy (average value) Percntage of Inputslsuppll.s: Purchased from domestic sources 12 Percentage of raw materials purchased from domestic sources (average value) Imported directly 12 Percentage of raw materials imported directly (average value) Imported indirectly 12 Percentage of raw materials Imported indirectly (average value) i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -l-- -- (SeS.IAB) Uoqouuoo (siesA oN4 Isel :sww4 ewu) pepieDBasp OCL ueu4 Js3eJSB sonISA :Buiueep iguoIlppv Ot1 jlmM B ul1qo 0l sAsp p JBqWnN (eBBJfAB) UOqeUUODI (sisoA Oq 1sul :eLUP ew4 ) pWiePOJsBip 08L U8EL us 1j1e5B sonoA :Bujusep IBUopIPPV Off A1 pJpee Us uie1qo 01 eAsp JeqWnN (QBsOeA) uoqpeuuoo (sieeOA 1 ssel :swi4 ewI) pepisBeJsip OCL ueSt .50e06 sonIeA :BuiuBBp leuOIppV 0t Buo4deeO S U!s3qo 0I sASp jo jBqWnN (enlsA eiueAe) (%) wuewd!qs U! ISol UoqfnP0Jd |lsm e UMO Wtfl SUULw JO Oib1UOOlBd 1Z 118M UMO GASH J o1S.euefB e UMO 38qi SwUg JO OSUOOJBd OZ s.ueB6 UMO BASH (enIeA eSeJJBA) 61 (%) seaefno jeMod 01 enp B sol UolnPOJd (issA (enieA aBteIA) 61 3sel sewri) saBosino jemod lo Aouenba.s saj"put ainion4sewul gp pue vv,v s'eiq' 91 uoflB pDJUuoO/wOj.UAs196e91 91 seSRssd IeSUJOJU 10 JAI1GdWoo)-liuV 91. JSpJOS!p pUB '4UL B'WW 91. uoqdrujo) 3Cs 91. A#j!qe3su! a!woUooo=eVy 91 AIuISIoun AoliOd AJo0ejl0n&r 91. Bupueug oi soSGv 91 sliLued Bu1le edo pue Buisuesol sseuisng 91 S 9)OM elqLISBAe B U0 UOionpe pus 9IPIS 91. osuonenBei sp4 pue siuoqsno 91. U[OSJ49SUiWPe XSj 8[ se~~~~~~~~~~glei XB.L| 81 ~~~~~~~puel 01 ss=sVI 91. uo 0391 osuJ. 91. UOjlS3lOdSUSJJ 91. A3ioW9IS3 (t JOc J£ps IsamuR) ,uASS AJOA,* JO jofIw. US IUI84suO0 400O JOPPUO P 4a Suug JO *B6U*OJd 9 SUOIBoiUnWwoosIl uoRwJedo oJ Ssuie,suoo ewJaueg JO uopenlalSA_,suopuodU0 f £W£ te,q&w NWWNI3 N iUO± NVWM L - - - - - - - - - - - - - - - - - - - - - - - ---- ----- ----- -- -- - -- - -- -- -- -- -- -- - ---- --- - - -- -- - -- -- - -- - -- IF____________ _________ __________ _ ! -- - - - - - -- - - - - - -- - - - - - - -- - --- -- -- -- Tabl INDI TR CORE DEMTIO Table A3.5 Sources of Finance Retained eamings 27 (average % value) Banks, other financial institutIons 27 (average % value) Trade credit 27 (average % value) Equity 27 (average % value) Informal sources 27 (average % value) Other 27 (average % value calculated on all remaining categories) | ~~~~Table A3.6. Credits, Loans, and LlabillUies Share dth overdraf or line of credit 28 Percentage of firms that have an overdraft or line of credit Percentage of credit that Is currently 28 (average value) unused Share with a loan from a bank or financial 29 Percentage of firms that have a loan from a bank or other financial Institution (Indirect institution estimation based on answes to question 29) Share that requires collateral 29 Percentage of firms that provide collateral for loans Average value of collateral required (as % 29 of the loan) Average interest rate on loan 29 Average durabon of the loan (months) 29 Share of total borrowing denominated in 30 (average value) foreign currency Share of long-term (one year or more) 82 Ratio of long-term liabilites to total liabifflies (average value). The value of total long-terml liabilities In total liabilities liabilties Is calculated as the sum of long-term 'foreign currency denominated" and "domestic currency denominated' when not directly reported. Share of short-term liabilities in total 82 Ratio of short-term liabilfles to total liabilities (average value). The value of total short- liabilities term liabilitles is calculated as the sum of short-term "foreign currency denominated' and "domestic currency denorinated" when not direcly reported. Share of equity (or share capital) and 82 Ratio of equity and retained eamings to total liabilities (average value). retained eamings In total Nabiliffies Table A3.7 Financial Sector- Auditng, Transaction Costs, and Property Rights Share of firms whose financial statements 32 are audited by outside auditors Number of days to clear through a flnancal lInstitton: ------- - --------------------------------------- - - - - - -------------------------------- - -------------------- - - - --- - - --- - -- ------------- -------------------------- --------------------------- --- --~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Table INDICATOR DEFIIO Check 31 (average value) Domestic currency wire 31 (average value) Foreign currency wire 31 (average value) Table A3.8 Regulatory Burden and Administrative Delays by Country Interpretations of regulations are 35 Percentage of firms that disagree with the statement that official interpretations of consistent predictable regulations are predictable (answer either 1 or 2) Senior management's time spent dealing 38 (average % value) with regulations Peroentage of revenues typically paid to 39 (average value) officials to "get things done" Percentage of firm revenues typically 41 (average value) reported for tax purposes hnspecdons: Total days spent in inspecions or required 42 Additional cleaning: values greater than 365 disregarded (Utme frame: last year) meetings with aMdals (average) UI mPercentage of meetingsrffspecons by 42 (average value) local authodties Total cost of fines or seized goods (% 42 74 Ratio of 'cost of fines or seized goods' to total sales' (average value) sales) Percentage of interacUons in which 42 (average value) informal payment is requested Value of hnformal payments (% sales) 42 74 Ratio of "value of informal payment" to "total sales" (average value) Imports: Average number of days to dear customs 36 Addional deaning: values greater than 365 disregarded (time frame: last year) Longest number of days to clear customs 36 Additional cdeaning: values greater than 365 disregarded (time frame: last year) (average) Expors: Average number of days to dear customs 36 Additlonal deaning: values greater than 365 disregarded (time frame: last year) Longest number of days to clear customs 36 Additional deaning: values greater than 365 disregarded (time frame: last year) (average) Share of exporslssales 11 (average value) Table A3.9 Governance- Uncertainty and Corruption How consistent/predictable are 35 Percentage of firms that disagree wfth the statement that official interpretations of goverment interpretations of regulations? regulations are predictable (answer either 1 or 2) TabS. INDICATOR QUESTIDONVM Share of profits reinvested in the firm 52 (average value) Confidence in the judiciary 46 Percentage of firms that disagree with the statemrent ' am confident that the judicial system will enfbrce my contractual and property rights in business disputes (answer either I or 2) Percentage of payment disputes resolved 47 (average value) in the courts Planning horizon for Investments (months) 55 (average value) Percentage of revenues that are needed 39 (average value) for informnal payments Pnrcentge of finns saying that a gnitlspaynm Is required fori A mainline telephone connection 40 (average value) An electrical connection 40 (average value) A construction permit 40 (averag value) An import license 40 (average value) An operating license 40 (average value) Percentage of revenue reported by typical 40 (average value) establishment for tax purposes Table A3. 0. Labor and Training in Intematonal Comparison and by Firrn Characteristc Share of workers who are permanent 62, 63 Ratbo of permanent employees to total employees (permanentMtemporary) (average value) Share of permanent workers who are 62 (average value) female Share of temporary workers who are 63, 63 Ratio of number of female temporary workers to number of temporary workers (average female value) Share of permanent skilled workers who 64 (average value) are foreign nationals New employees as a share of total 65, 62 Ratio of new employees to total number of permanent employees (average value) Employees who left as share of total 65, 62 Ratio of employees 'dismissed or laid off' and left due to sickness or died' to average number of permnanent employees (average value) Average time to fill skilled technician 66 Additional cleaning: values greater than 104 disregarded (time frame: lest two years) vacancy (weeks) Average time to fill production/service 66 Additional cleaning: values greater than 104 disregarded (time frame: lest two years) worker vacancy (weeks) Excess workforce due to regulatory 37 (average value) -------------I---------- - - --------------- ----- ------ ---- ------------- - ---------------------- -- ----------------------- --------- l----- - - -- -- -- --- - - - - --- - - - - - --- - - ---- - --- ----- ------ T INDCATOR CORES DEFINION restrictions (%) Share of workforce with less than six 70 (average value) years of schooling Share of workforce with more than 12 70 (average value) years of schooling Share of firms offering formal training 67 Share of skilled workers receiving training 67 (average value) Total days lost to labor disputes or civil 69 Sum of 'days of production lost due to strikes or other labor disputes' and 'cvil unrest" unrest (average value) U' l l~~~C - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - F - - - - - - - - - - - - - - - - - - - - - - - Table A3.1: ICA Survey Sample Structure Firm Size Firm Activity Sample Population Sample Populatlon Small 174 Food/Agro processing 25 Medium 45 Marine food processing 9 Large 24 Electrical goods 8 Metal work 66 Plastlc/Rubber/Chernicals 38 Market Orientation Mineral processing 30 Sample Population Hotels and restaurants 58 Exporter 19 Other industry 27 Non-Exporter 173 Firm Ownership Firm Location Sample Population Sample Population Domestic 248 Orlssa 261 Foreign 0 State 1 1 Other 0 Table A3.2: Globalizations of Markets and Inputs Orlssa2003 dI c Percent of Sales: Sold Domestically 93.1 96.3 89.6 80.8 93.6 30.3 100.0 91.0 95.2 Exported Directly 6.2 2.9 10.3 17.3 5.8 62.4 0.0 7.3 4.5 Exported Indirectly 0.8 0.8 0.1 2.0 0.6 7.4 0.0 1.7 0.2 Percent of inputslSuppiles: From Dom. Sources 97.0 97.1 97.2 94.6 97.4 88.9 97.8 96.4 97.5 Imported Directly Imported Indirectly 57 Table A3.3: Respondent's Evaluation of General Constraints to Operation Firms evaluating constraint as "major' or "very severe" (%) E c.9 0~~~ E Orlbsa2003 E L I C 3o zO U i~~~~~~~~1 ~o -1 C Telecommunications 3.8 3.5 8.3 0.0 11.1 3.3 4.0 2.0 5.1 Electricty 37.1 40.4 25.0 38.1 22.2 37.3 37.0 44.9 36.8 Transportation 19.2 17.7 25.0 23.8 27.8 19.3 19.0 16.3 18.4 Access to Land 10.8 9.2 19.4 4.8 16.7 12.7 10.5 8.2 13.2 Tax rates 31.0 32.6 25.0 33.3 27.8 34.0 31.0 32.7 28.7 Tax administration 44.6 44.0 47.2 38.1 38.9 48.7 46.5 42.9 42.6 Customs and trade regulations 23.5 27.7 19.4 9.5 33.3 24.0 24.5 18.4 25.0 Labor regulations 20.2 21.3 13.9 23.8 11.1 22.7 21.0 26.5 18.4 Skills and education of available workers 21.1 19.1 30.6 23.8 27.8 18.7 21.5 18.4 21.3 Business licensing and operating permits 27.7 29.8 19.4 28.6 33.3 30.0 29.0 24.5 26.5 Access to financing 38.0 36.9 38.9 47.6 50.0 39.3 39.5 28.6 36.8 Cost of Financing 33.8 39.0 25.0 23.8 27.8 37.3 34.5 28.6 33.8 Regulatory policy uncertainty 23.5 28.4 13.9 14.3 16.7 25.3 24.0 26.5 19.1 Macroecomonic instability 21.6 28.4 2.8 23.8 27.8 22.7 22.0 12.2 :22.8 Corruption 57.3 58.2 61.1 57.1 61.1 62.0 58.5 57.1 54.4 Crime, theft and disorder 21.1 25.5 16.7 14.3 22.2 21.3 22.0 16.3 19.1 Anticompetiive or informal practces 23.9 29.1 11.1 23.8 38.9 23.3 24.5 22.4 20.6 Legal systemn/conflict resolution 58 - ~~ - - - - -- - -- - - - - - - -- - - - - - - - - -- - - -- ---- - -- - '-o in:Dh. 0. 0. c M. c aa a Ia a 82 a Doosa _ O f~~~~~~~~~~~~~~~~c M4 M b§ I io - Elpb i O~~~~~~~~~~~~~~~~~~~~~~~~c O) I Q O xpr I to g $ S 2 O Low~~~~~~~~~~~~~~~~~~~~~to 0 0 o ° X, X Capac WF 1 I v 0 $ ¢ °' a Hlgh~~~~~~~0) l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~g : _ _ ___ __ _ _ _ _ _ _ __~~~~~~~~~~~~~~~~ Table A3.5: Sources of Finance Orlssa j i c 2003 E U I j Share of working capital from: Retained eamings 53.8 54.9 57.4 39.6 68.2 49.1 54.3 44.7 60.8 Banks, other financial institutions 27.1 25.2 28.0 39.8 31.8 30.3 26.5 30.7 26.3 Trade credit 4.3 3.5 5.0 8.8 0.0 5.7 4.5 4.1 4.6 Equity 0.8 0.6 0.0 5.2 0.0 1.1 0.8 0.0 1.3 Informal sources 1.1 1.4 0.6 0.8 0.0 1.3 1.2 1.4 0.9 All other 12.9 14.4 9.0 5.8 0.0 12.5 12.7 19.1 6.1 Financing of new investments fom: Retained eamings 32.9 32.2 43.4 19.4 37.9 38.1 35.6 34.0 36.5 Banks, other financial institutions 32.2 30.3 24.1 65.6 56.4 32.7 31.5 35.0 31.8 Trade credit 1.1 0.0 1.9 6.3 0.0 1.7 1.2 0.0 1.7 Equity 1.1 0.1 1.3 0.0 0.0 0.5 1.2 0.0 1.7 Informal sources 5.1 1.2 16.9 1.3 0.0 8.0 5.5 2.8 4.8 All other 27.6 36.2 12.5 7.5 5.7 18.9 25.0 28.3 23.4 60 o o m ~~~~~- _ -~~ -~~~ --.- a 3 ~ 2-2 0 P ~~~~~~~z 0 g5,N CD 19~~~~~~~~~~( ~~~~~~~~ 2 ~~~~~~~~~~~~~~~~~~~~-. 03 . . r a 3 0* ~ -= i~i c ~FM,-0 N 0~~~~~ A 0 0 c 3. CD co h )O PI PI 0) bo~~~~~~ ... in) 0P co b0 Co 0 ~ ~~~o - I a c~Small -'4 Co .A. ioa .aCO i 0. ~~~~Small CA~~~~~~ 50 P p N -1 p ~~~~~Medium a C* 4 CA)~~~~~~ 0 co CA -4 c N ~~Medium ~0 o . ~0 .4 a ~~~~~~~~~~~~~~~~~~0 -.3~~~~~~~~~~~~~~~~~~~~- Lage 3 ..4 G4O Q 04 (A 0 b* 0~~~~ o W i- Lag p a c Fo n 010Lrege NI 0 01~~~~~~~~~~~~~~~~~~~~~~ a o 0 CD & ooesi Non- : 01 w c, o ;P ; Dmeti CA U)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 t o Exporter Domestic ~ ( o . Co~~~~~~~~~~~~~~~~o Foreign CA 0 -4 oP Exorte NI 0) .a *O3 Exporter b L bi LOW ON-4 Capacity .a - - O 0 01N30 CPO CD 9C Caact CD -j 0) 0 NI co 4 *C K Caacit High Capacity CO CII .a a .~~~~~~~~~~~~~~~~~~. ~~High 01 a ~~~~~~ 0 ~~~~ 0 ~~ Capacity 4 r~~~~~~~~~~~~~~~ S a 5. ~~~~~~~~~. ~ ~ ~~ "see ~ ~ ~ ~~L g la qz o (A 'A0 . 0 5 0 0 01 (0 0)~~C Ca a)' 1~ ~ 'p p ¼wt co Z.~~~~~~~~~~~~~~~~~~~~~a tIc N t "-I CD ~~~~~~~~~~~Medium COO Ca) 0 5.) -& 0 -J~~~~~~~~~~~~~~~~~~~~9 Large 9(0 0)* * p & Domestic (.30 ".~~-41 N ) iN CA) I5 Foreign oon 01 4 0! Ni A ~~~~~~~~~~~Exporter c 0 a a~~~~b 0o~ co 0D to . a a a a a a .p. ~~~~~~~~~~Low k 0nb Capacity a a a a a ~~~~~~~~~~~~~~~~High ~~~ 'p. b ~~~~~~~Capacity A ~ ~ ~ ~ ~ --- - - - - --- - - - - - - - - - - - - - -- - - - - - --- - --dm -- - - - - - - -- - - - - - - -- - - - - - -- - - - - - - - qOIH -UON ~ N 0 E jeiJodxI wnjp.w o 0 go 0 LOn 0~~~~~~~~~ C8 - - -------- ----- - -- -- _ Table A3.10: Labor and Training in International Comparison and by Firm Characteristic I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ C Orlssa2003 a . Labor Composition Share of workers that are permanent 73.0 66.8 89.2 87.9 71.1 65.2 73.0 86.4 68.4 Share of permanent workers that are female 6.3 5.8 5.3 9.7 18.5 6.8 5.8 9.7 3.7 Share of temporary workers that are female Share of perm. skilled wkrs. that are foreign nationals 1.2 0.6 0.8 2.5 0.4 1.5 1.2 0.8 1.5 Labor Turnover New employees as a share of total 19.9 23.5 15.3 6.7 12.7 24.9 20.6 15.8 21.5 Employees that left as share of total 2.7 3.2 0.3 3.5 0.1 3.8 2.8 1.2 3.0 Avg. tme to fill a skilled techn. vacancy (weeks) 25.5 22.1 35.5 22.8 35.2 23.4 25.4 23.9 27.4 Avg. time to fill a prod/service wkr. vacancy (weeks) 22.8 19.6 33.3 20.9 27.7 19.5 22.4 20.1 26.3 Desired level of woikforce as % of current level 102.2 96.0 115.2 89.8 91.3 100.3 102.9 103.8 102.2 Training and Education Share of workforce with less than 6 years schooling 31.5 30A 29.2 33.5 30.7 32.6 32.1 32.4 29.8 Share of workforce with more than 12 years schooling 16.7 16.4 17.4 19.2 19.8 15.2 16.3 19.5 15.6 Share of skilled workers receiving training Share of firms offering formal training Labor Unrest Total days lost to labor disputes or civil unrest […_ BIBLIOGRAPHY Besley, Timothy, and Robin Burgess. 2002. 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