Over the past 30 years, there has been a proliferation of special economic zones under a myriad of names: “free zone”, “free trade area”, “export-processing zones”, and “special economic zones”, amongst others. A special economic zone, or “SEZ”, is defined as an area within the boundaries of a country where favorable regulatory, fiscal, and financial incentives are applied preferentially to the rest of the country. SEZs can vary in scale from small enclaves within or near a major city or port, to planned metropolitan centers like Economic Cities. Shenzhen and Jebel Ali are considered to be two of the most famous and successful SEZs. Shenzhen in China had a 15% year-on-year GDP growth in 2006, the highest mainland GDP/capita, and the economic added value of a midsize Chinese province. Jebel Ali is Dubai’s thriving equivalent. In 2004, it accounted for approximately 36% of Dubai’s export/re-export activity. Jebel Ali has attracted significant investments, increasing its number of tenants by 25% year-on-year since its establishment in 1985.
SEZs are traditionally established to boost economic development through the attraction of foreign investment, leveraging the competitive advantage of the country or region over its neighbors. However, the rapid growth of SEZs has translated into competition over capital and consequently to increased startup costs. These large initial expenditures, which have been magnified with the increasing scale of SEZs, are heightening investment risk.
In this article, we outline seven key enablers for the success of a Special Economic Zone.
First — In order to achieve a competitive edge, a Zone should focus on a limited number of sectors, which define its main objectives and vision. Establishing an industry focus enables synergies between different tenants and ensures a competitive edge over other Zones offering similar services. The target industries or sectors should have a natural fit with the comparative advantages of the country: natural resources, human capital, access to markets, etc.
Second — A development blueprint, also know as a Master Plan, is then needed to guide construction planning and urbanization of the Zone, identifying the various Zones and the key elements required to operationalize its industrial, business and tourist zones, and to populate its residential neighborhoods. Specific sections of the Master Plan would translate the high-level industry or sector focus into concrete industry targets by mapping the competitive landscape and evaluating industry or sector attractiveness and profitability. The specific sections would then form bankable business proposals to secure financing and attract potential tenants. The Master Plan would also be used as a marketing tool used to communicate the Zone’s capabilities and competitive advantages to potential investors and residents. It helps the responsible entities deliver a consistent message to potential investors and residents by communicating the Zone’s advantages clearly and concisely.
Third — As part of its competitive offering, the Zone requires world-class infrastructure and utilities. A number of questions must be addressed to determine these requirements:
• How will the Zone be accessible (proximity of sea/airport, highways, railways, etc.)?
• How will fuel and feedstock be distributed to tenants?
• How will electrical power and water capacity be provided?
• What type of telecommunication services will be provided?
While most of the Zones aspire to have the best-in-class infrastructure needed by the tenants, the challenge lies in the financing of these capital-intensive projects. For example, Jebel Ali Free Zone relied extensively on government support until the zone became self-sufficient. Recent Zones have increasingly relied on the private sector to finance these projects.
Fourth — Civil and Public Services must be provided to meet the needs of the Zone’s investors and residents, and fall into seven main service categories; Security, Civil and Judicial, Municipal, Commercial, Education, Healthcare, and Social and Religious services.
Fifth — Fiscal and financial incentives are used as an additional tool to attract investors to set up operations in the Zone. The incentives take on the form of low tax rates, low customs tariffs, investment incentives (mainly for R&D), and attractive loan programs.
Sixth — A proper Governance Model should be set up to define the distribution of roles and responsibilities between the multiple government and private stakeholders of the Zone. The model describes four interlinked levels of governance:
1. Policy Setter(s): Set the overall policies to shape the Zone’s direction over the medium and long term, and approve the regulations detailing such policies;
2. Regulator(s): Issue, monitor and enforce the Zone’s regulations and bylaws, set Zone tariffs, approve plans and partnerships, monitor competition and resolve conflicts between service providers and consumers;
3. Developer(s): Develop the Master Plan, infrastructure and superstructure to fulfill the Zone’s vision and attract potential anchor investors;
4. Operator(s): Operate and maintain the Zone’s infrastructure and superstructure and manage the provision of civil and public services.
Each of the Zone’s key services must have responsible entities at each of the four levels described above; these entities can belong to the Central Government, the Zone Authority or the private sector. The key to design an effective Governance Model is to achieve the “right” balance between the various entities. For example, the decision about which entities are best suited to administer the Zone’s Commercial Services should be based on whether Commercial Services are a competitive advantage for the Zone, and if the desired quality of service can be provided through the existing entities in the country.
Seventh — Finally, the successful implementation of the governance model depends on the relationships between the three entities mentioned above, and the parameters that define their cooperation. Zones usually outsource the provision of non-core services, in order to focus on administration, land lease and key port services.
The seven key enablers outlined above combine to define the Zone’s Value Proposition to all the concerned stakeholders, including Central Government and Zone Authority, Zone developers and service providers, and the Zone tenants and residents. The Value Proposition defines the Zone’s development plan and industrial focus, and its required capabilities/services and the means of their provision; it also describes how the Zone is governed and monitored throughout its development.
Nadim Batri and Jonathan Fisk are senior associates, Ali Habbtar is an associate at Booz Allen Hamilton.
