Making Strategic Choices

There are many types of SEZs to choose from, including free trade zones (also known as commercial free zones), export processing zones, enterprise zones, freeports, and single factory free trade zones.^[1] Each type has a distinct design and different goals and requirements (although in practice there are often overlaps). To boost extractive industries’ local content, the potential types of SEZs include supplier parks, offshore oil and gas servicing hubs, gas to power, and value added logistics.

Policy makers also need to determine the level of government and private sector participation in the management and ownership of SEZs. Choices include government entities owning and operating the SEZ (as is the case of successful SEZs in China and Mauritius), public-private partnerships (often with the government as owners but managed on contract by private parties), or full private sector ownership of management and operations (the turnaround performance of Latin American SEZs in the 1990s is partly attributed to the greater role given to the private sector). Ultimately, this decision is informed by the objectives, capacity, and incentive structure of the entities who run the program.^[2] Care needs to be taken to understand the extractive industry development pipeline and to forecast project lifespans when determining the operating model of an extractive industry-focused SEZ, as this time frame may affect the risk profile for SEZ operators.

The most appropriate location for an SEZ needs to be chosen, as this is critical in determining a zone’s effectiveness and impact. Evidence suggests that zones located away from industry or markets—with the aim of developing low-income regions, for example—tend to perform poorly. The exception is when these zones are based around a specific comparative advantage, as may be the case for the downstream processing of minerals or for onshore activities related to the exploration and production of offshore oil and gas. Ultimately, the location should be chosen based on the quantity, quality, and price of the critical factors of production: land, labor, utilities, business services, and international connectivity.^[3] It may be challenging to locate extensive supplier parks close to mineral or oil and gas extraction sites, however. And in some cases project lifespans may be too short be viable in the long term.

Finally, the instruments and tools available to SEZs need to be determined. These often include tax incentives—which need to be budgeted for—as well as support for increased trade (e.g., a customs area) or improvements to the business environment (e.g., reduced red tape). Each instrument is likely to require several processes, many of which can have a long lead time.