Building special economic zones

Building special economic zones 

Special Economic Zones have become the darling of the developing world. Across Asia, the Middle East - and now increasingly in Africa - these engines of economic growth have been springing up to catalyze national economies and drive social change.

The argument for Special Economic Zones (or SEZs) is hard to refute. Singapore's meteoric development was built on the back of SEZs. Today, China and India, the two global powerhouses of the emerging markets, are making them a cornerstone of their growth agenda.

Not a simple recipe

But developing a successful SEZ can be a significant challenge for national governments. For one, SEZs generally require a unique policy framework that encourages investment and removes barriers to growth. India's 'basket' of incentives includes the duty free import of goods for development, 100 percent Income Tax exemption for some businesses and a 'single window' clearance process for Central and State level approvals. In other jurisdictions, policy frameworks also include relaxed tariffs, fast-tracked immigration and financial guarantees.

This leads to the second major challenge for governments: demonstrating value and competitive advantage. Governments and SEZ planners must be able to articulate a strong value proposition to potential investors. Often, this centers on proximity to either raw materials or market access points that can deliver a clear competitive advantage.

But equally important is what is offered within the ecosystem itself: a secure and low-cost supply of power, effective waste management, and reliable water supplies to name just a few.

Which, of course, leads us to infrastructure; the third major challenge for SEZs. Obviously, these ecosystems require efficient, effective and sustainable infrastructure that matches the unique needs of the industrial sector that they plan to attract. Petrochemicals, for example, require large ports, railheads and lots of power. Technology focused SEZs will want to prioritize communications networks and airports.

Managing the demand risk

But matching up industries to infrastructure is relatively straightforward stuff. The real challenges come in delivering that infrastructure in a well-planned, carefully integrated and financially sustainable way.

Probably the biggest complexity facing governments comes down to demand risk. SEZs require a massive amount of base infrastructure to be developed, and often before a single tenant even moves in. This not only means a tremendous outlay of capital to finance, but also a long-term outlook and innovative approach to managing risk.

Particularly in the case of 'Greenfield' developments, governments may inevitably need to underwrite a level of risk in order to successfully deliver the basic underlying infrastructure necessary to support industry. In some cases, governments may consider creating a special-purpose fund that can act as a government guarantee against these risks.

SEZs are also significantly different from conventional city infrastructure developments in that they require a high degree of integration and vision to successfully deliver. Whereas urban infrastructure generally deploys in a very 'siloed' fashion (where different government departments hold responsibility for different parts of the urban infrastructure puzzle), SEZs can only be successful when overlaid against a Master Plan and delivered along a strict timeline.

The role of private investment

While governments will undoubtedly need to take on some of the financing and oversight, there is still a significant role for private enterprise in the development of infrastructure. In this, however, governments and SEZ planners will need to be pragmatic. Certain areas of infrastructure development can realistically be transferred to the private sector (such as ports, telecommunications and even the day-to-day operations and management of the SEZ). Others will often stay the remit of government - either because returns can be slow to generate (as with basic underlying systems), or because of political sensitivities (such as land acquisitions).

That said, there have been a number of examples of 'Private SEZ' developments throughout the world that have met varying degrees of success. But some have also been severely hampered by a perceived mismatch between government policy and private objectives. And since SEZs rely on incentives such as special tariffs, streamlined regulations and access to markets these disconnects can very quickly stall or derail promising development.

If these challenges can be mitigated, then governments should find that Public Private Partnership models provide a number of benefits; not only as a method for mitigating risk and reducing cost, but also as a way to tap into sources of expertise, technical know-how and structures that can help bring new ideas and approaches to SEZ development.

Exporting SEZs to the Western World

Following the global financial crisis, many western governments may be seriously considering the benefits of SEZs in their own countries. The crisis quickly demonstrated the acute need for some economies to diversify beyond their traditional industries and to put a greater focus on competing on the world stage for Foreign Direct Investment.

And while the value proposition for an SEZ in the US will be very different from one in China (which leverages low-wage and low-cost resources), governments in the western world still have a number of levers that can deliver significant incentives to foreign companies.

Western governments may want to look to Poland for inspiration. The only EU country to successfully deliver a SEZ, the country now has fourteen that span a number of industrial sectors. Interestingly, Poland was the only EU country to avoid a decline in GDP during the recent recession (in fact, it had the highest GDP growth in the EU in 2009) and is considered to be one of the healthiest economies to come out of the post-communist bloc.

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