Selecting the Appropriate Tools and Instruments
At a Glance
- Infrastructure is one of the main tools used to attract SEZs and generally includes access to serviced land, utilities, transport infrastructure, top structures, shared infrastructure and, increasingly, broadband infrastructure.
- A streamlined bureaucracy gives firms a single contact point to deal with all government licensing and administration. This often involves long lead times, however, because establishing a ‘one stop shop’ or ‘single window’ system is itself a major bureaucratic undertaking.
- Customs areas offer firms duty-free imports and exports which often involve stationing customs officers inside or at the gate of the zone to offer onsite clearance to speed up import and export procedures.
- Fiscal incentives can take the form of special tax incentives, direct subsidies, ease in profit repatriation, and ease in currency restrictions.
Several tools that are available to improve the attractiveness of an SEZ are:
- Infrastructure is often used as one of the main tools to attract SEZ and generally includes some of the following: Access to serviced land, utilities (electricity grid access can be particularly important in countries with low grid availability), transport infrastructure (eg. road, rail, port or airport access to major trading areas), top structures (e.g. warehousing), or shared infrastructure (e.g. research facilities). Broadband infrastructure is also becoming the norm. Although typically contributed by government, in countries with lower government budgets and lower capacity extractive companies might also provide infrastructure, especially if there is a long-term operational stage expected during which they can recoup the costs.
- Streamlined bureaucracy: Many SEZs offer one stop shops, which gives firms a single contact point to deal with all government licensing and administration. Note that creating a one stop shop is itself a major bureaucratic undertaking which can have a long lead time. Other operational and licensing incentives can include alternative labor and environmental requirements. For example, firms in Philippine SEZs face lower environment clearances.
- Customs areas offer firms duty free imports and exports. This can involve stationing customs officers inside or at the gate of the free zone to offer onsite clearance to speed up import and export procedures. It is usually combined with other privileges, including the ability to move and hold goods in bond, and the removal of financial requirements for bonded and duty-free inputs.
- Other specialist services: these could include help in finding skilled staff (providing skills databases or setting up a labor marketplace within the zone), specialist training for the workforce in the zone, helping to find schools and housing for expat’s families, security services, business or technology incubators, and IT value added services.
- Fiscal incentives can take the form of special tax incentives (e.g. lower company tax rates, higher rebates on specific activities such as R&D), direct subsidies, ease in profit repatriation, and ease in currency restrictions. In India and Thailand firms operating in the SEZs are exempt from sales tax and service tax, while Gabon offers a tax holiday for the first 10 years. Research has found that the provision of corporate tax breaks has only been of marginal importance to the success of the SEZ.
These tools and instruments all have a cost attached to them. Achieving an appropriate budget balance between creating an attractive SEZ and overspending can be tricky for host countries. This balance will ultimately determine the success of the zone (even if a zone is able to attract investment it should be measured against the opportunity cost of the budget spent to attract this investment). Care should be taken to determine the cost of these tools, particularly when it requires massive government capital outlays (for onsite or offsite infrastructure development).
- Poland: A True Special Economic Zone (Ernst and Young Global Limited)
- Establishing and Efficiently Running a One-Stop-Shop (Investment Development Authority of Lebanon)
- Special Economic Zones: Performance, Lessons Learned, and Implication for Zone Development (Gokhan Akinci, James Crittle)
- The Implications of Successful SEZs in Northeast Asia: Opportunities for Developing SEZs in Mongolia (Tsolmon Tsagaach)
This four-page document discusses the one-stop shop approach, explaining its implementation, advantages, and pitfalls. ...
This report provides an in-depth case of SEZ establishment in Poland and all factors considered when developing an SEZ. ...
The Implications of Successful SEZs in Northeast Asia: Opportunities for Developing SEZs in Mongolia
This resource provides insight on an Special Economic Zone (SZE) programme that is struggling to attract investment. Using the case of ...