Firms operating in SEZs are supported through infrastructure (e.g., serviced land, buildings, and utilities), fiscal incentives (e.g., reduced taxes), a special customs regime (e.g., duty-free access to imports), or a streamlined regulatory regime (e.g., improved procedures to start a company, invest, or obtain licenses).
SEZs have a mixed record of success. They have played an important role in boosting economic growth and improving lives in China, the Republic of Korea, and Singapore. However, in many more cases they have resulted in unused (or underused) infrastructure, or even economic harm stemming from misdirected incentives that failed to motivate beneficiary firms to integrate into the local economy. SEZs in Africa, for example, have largely failed to deliver significant benefits to date.[1]
Most SEZs do not focus specifically on supplying the extractive industry value chain. However, in countries with major oil and gas or mineral exploration and development activities, an SEZ can be a useful means to attract investment and to develop economies of scale. When considerable capital investment and equipment imports are required, efforts to foster local content tend to focus on creating an environment that enables joint ventures, local partnerships, local maintenance and repair, and local labor (some of which may be suited to an SEZ). On the other hand, in countries with mature or declining petroleum production, the quality of the resource generally drives investor decisions; typically, incentives are provided via the applicable mining or oil and gas conventions or codes. As part of these agreements, foreign investors may develop—and in some cases operate—infrastructure in places where infrastructure and government budgets are more limited. Furthermore, some countries that depend heavily on minerals or oil and gas tend to use SEZs to foster economic diversification into other areas that use similar skills or processes, such as manufacturing and logistics.
Where SEZs are developed around the petroleum industry, they are generally used to leverage competitive advantages among upstream suppliers (backward linkages) or downstream processing (forward linkages). For example, the free zone in the oil-rich Nigerian Delta’s Port Harcourt was designed to reduce upstream costs and attract investment into the upstream supply sector; it now employs more than 20,000 workers.[2]
Policymakers need to carefully consider if an SEZ is the right policy instrument. To decide if an SEZ is appropriate for a given economy, policy makers would do well to weigh its potential benefits against the associated constraints and risks (which will be specific to the local context). Next, policymakers must consider the various strategic choices available, including the SEZ type, scope, ownership model, and how the location is selected. Finally, detailed planning and design should guide the implementation of an SEZ. The final design of an SEZ needs to offer investors a strong value proposition, but also ensure long-term sustainability.
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[1] See for example: Thomas Farole, Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience (Washington, DC: World Bank, 2011).
[2] Farole, Special Economic Zones in Africa