Statistically, there are about 4,300 SEZs across the globe, which means that three out of every four countries has at least one SEZ, and more are constantly being added. Now even the Cayman Islands have a new SEZ. In the CEE region, only a few countries have opted to not develop zones. Why Emerging Europe speaks to Deborah S. Porte, a Special Economic Zone expert with over 25 years experience in the comprehensive design and development of various types of economic zones, transport and cargo hubs and technology parks in developing and post-conflict countries. She has worked for governments and institutions such as the World Bank, IFC, DFID, EU, ADB and USAID.
Where does this global craze about SEZs come from?
Currently, economic zones is kind of a trend in developing countries, as it is a tool that is being used by governments to help jump start economies, increase exports, create employment opportunities, transfer knowledge and reduce poverty. Zones have been successful in many different places in the world, but they have also failed in some locations. The design and implementation of a zone regime is critically important.
Today, governments tend to use an SEZ regime as a policy instrument and as such, SEZs are often introduced as part of the country’s national five/ten-year plans. However, governments rarely introduce SEZs strategically. When I say this, I mean that governments want many large-scale zones throughout their country, rather than choosing a location wisely (in a location with existing market demand, infrastructure and labor pools etc.) and rolling out a zone program slowly to ensure success.
Zones should be built to support 15-20 year investor demand. SEZs should always be developed in phases so the zone is more viable and sustainable in the long term. We need to remember that bigger is not always better. Governments should know their competitive and comparative advantages and should not just build zones that are bigger and with more incentives than their competition. The key to a good zone programme is to have a streamlined enabling environment, which will allow investors to start operations in a zone quickly.
But isn’t it usually the case that when a government comes up with the idea of SEZs their major goal is to develop a poorer and less developed area?
Absolutely, but this is the wrong way to use a zone regime. If you look at the zone failures around the world, almost 85 per cent of them happen because zones were placed in the wrong location. Governments often want zones to be located where there is high unemployment, poor or non-existing infrastructure and no investor demand. If an investor does not want to be located in a region, they will not set up business there — no matter how many incentives or tax breaks they are offered. We see this again and again throughout the world, in countries like Bangladesh, Thailand, South Africa etc.
The truth is that sometimes governments do not do the necessary project preparation or due diligence and as such, they set up zones in these poorer regions with very poor results. Time and time again we see failures. This is an expensive type of project to become an unnecessary failure. As such, it is important to always perform site assessments and feasibility studies on potential zone locations to ensure that this type of project is both sustainable in the long-term and situated in a location where there is market demand.
So we have the right location, access to power and labour force. What else is significant when setting up new zones?
There are a number of important elements apart from these that are necessary to make a good zone regime. It is critical to have a comprehensive legal, regulatory and institutional framework but one of the most important aspects of this is to make sure the regime is streamlined and transparent for investors. Every time I talk to investors, they say they want to know all the rules of the game upfront. They do not want surprises in a regime. They do not want to negotiate with governments. They do not want to enter into MoU agreement. They want it all to be very clear and transparent and they want a dispute-resolution mechanism in place. Companies invest a lot of money in a zone, so they want security and predictability.
Creating SEZs is not cost free and, sometimes, if governments grant incentives or create better conditions in special economic zones they don’t bother to improve the business environment in other parts of the country. How to avoid that?
SEZs are inherently used to jumpstart economies and promote economic growth. They are often used as pilot projects within a country to test policy changes. One of the main purposes of an SEZ is to create a better business environment within a contained area that is not considered part of the domestic territory or domain. However, an SEZ program is not an alternative for a new strategic national policy or improved national trade facilitation. I should mention that international best practice and lessons learned over time have shown that companies/investors do not come to a country or to an SEZ for fiscal incentives. Incentives are very low on the priority list for investors. As such, SEZ experts suggest to governments to not provide fiscal incentives in their new zone’s programmes but to create a transparent legal, regulatory and institutional framework and to offer a streamlined and fast track enabling environment instead. Investors will still come and the battle over lost taxes or an uneven playing field for existing companies can be avoided.
What is the best model of managing SEZs within a country? Should they have an integrated investment policy or should they compete with one another? What is the best practice here?
Ideally, all zones in a country should be regulated and monitored by an autonomous Special Economic Zone’s Authority. This authority should license zone developers and from lessons learned, we know that the best, most profitable and sustainable zones are developed, managed and operated by the private sector. In some countries where the private sector is concerned about investing, Public Private Partnerships are recommended. This is when the government provides the land and off-site infrastructure and the private sector is responsible for funding and constructing the zone itself, its plots and on-site infrastructure. There should always be just one integrated investment policy in the country and the SEZ Authority and the investment agency should work together to promote zones.
Now, with such a large number of zones to is really hard to choose which zone to invest in. How to compete with other SEZs?
It is always a hard choice for investors to decide where to locate. It is often done strategically depending on a number of economic, operating and quality of life factors. But I have seen through the years, that transparent zone regimes with well-managed zones that are properly branded, do very well to attract new investors. Branding can be very important and is something that is not often thoroughly developed by zones.
If you look at the zones that have been more successful through the years, they are often well branded. I believe in branding. I also believe in the importance of design guidelines to keep the quality of the zone’s physical environment high. I think branding can help a zone get initial interest from investors. I mean if a zone’s online presence is eye-catching, the website is easy to navigate, it will keep an investor’s interest and make them investigate the location further. Branding can be a calling card for zones.
I think every zone should have a unique twist and that can be based on what the purpose and the focus of the zone is. This can be done differently for every zone, but I think it is important to have a memorable logo, clear presentation materials and a sharp and energetic management group to promote a zone. For example, if you go to Malaysia there is an area called Iskandar. It is a zone concept that includes residential, entertainment and health facilities etc, as well as an economic zone. Iskandar is impressively branded, making the region a live, work, play environment that is very attractive to a wider range of investors. The management team promoting the zone is young and enthusiastic and they provide a very positive message. They have materials that are very well organised, very sleek and attractive. As an investor, when you go there, you want to be a part of it, you want your business to have that same modern image.
The interview took place during the Political Economy of Place-Based Policies with a Focus on Special Economic Zones conference organised by the Centre for Social and Economic Research (CASE) in Warsaw, Poland.
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