3 Perspectives on Economic Zones & Industrial Parks
And how to make them Successful…
The impact of the pandemic is expected to be deeper and longer on trade flows and freight movement. Now that most businesses have handled many of their immediate challenges, its time to think about their return to the next normal.
Business leaders while managing the disruption to their lives and livelihoods need to also think about how to win in the next normal of trade flows and freight movement.
Based on my experience, assessments and interactions with the leadership of several special economic, free zones and industrial parks over the years, am sharing my perspective to trigger further conversation..
What are SEZs, EPZs, Free Zones?
Wikipedia defines these as an area, where the business and trade laws are different from the rest of the country. While countries define special economic zones formally in their legislation, these zones essentially have geographically separated-fenced area and customs, tax and other benefits for units located in the area, usually a single management or administration, streamlined procedures etc.
Who sets these up and why?
Special Economic Zones (SEZs) or Export Processing Zones (EPZs) and other such areas are set up by governments primarily to increase trade, attract foreign and domestic investments and create jobs. Then developers, co-developers, unit holders and other stakeholders, build on the country comparative advantages and contribute to the success of the zones.
From a supply chain perspective, whereas ports are gateways to and from the hinterland and, focus on enabling cargo and passengers to move in and out as efficiently as possible, economic zones and industrial parks are focused on generation and aggregation-dis-aggregation of cargo. Hence, the approach towards development of ports and parks are similar and yet complimentary.
What are some of the models of economic zones?
While there are several successful models of economic zones globally including Free Trade & Warehousing Zones (FTWZs), Export Processing Zones ( EPZs), Free Port & Special Economic Zone ( SEZ) and Coastal Economic Zones ( CEZs), for better understanding one could group these together as:
— The traditional model, focusing on manufacturing and storage largely for export eg FTWZs, EPZ etc
— The relatively recent and larger model, that include manufacturing, logistics , commercial and residential activities eg SEZs, CEZs etc
The above groups usually have strong logistics linkages including access to ports. Further, they are non-exclusive ie FTWZs could be and, often are part of SEZs.
On the other hand, Industrial parks focus around manufacturing. These manufacturing enclaves may have tax and duty incentives for investors and may or, may not be part of SEZs, which focus on exports and imports.
1. Some learning from the Chinese model: Continued growth, moving inland…
Reflecting on my visits to several Industrial Parks and SEZs including the Shuzou Industrial Park, which was set up in partnership with the government of Singapore, the Lingang Industrial Park near Shanghai, to the Yangshan and Shanghai ports and Shenzhen SEZ , including one of its 6 FTWZs-Futian Free Trade Zone, think their success is significantly due to active government support; experimenting different models; ensuring competition between zones and gradually upgrading technology and providing autonomy etc.
China’s investment led growth policies, including in SEZs, China itself significantly benefited from the success of special economic zones and industrial clusters in terms of increase in FDI, exports, job creation and their contribution to the GDP.
With China’s manufacturing moving from the coast to inland, expect new zones to continue to develop, as the existing ones transition to more technology assisted manufacturing of high-tech products and, the consumption story picks up again…
2. The India story: The best is yet to come…
While SEZs have been an important element of India’s commercial policy, failed implementation of a significant part of these zones is often cited as a county case study towards policy predictability. The learning(s) from the failure include disconnect in their relationship with the domestic trading area ( DTAs) for job work and sales, imposition of minimum alternate tax ( MAT) and Income Tax, leading to lack of investor confidence, the state (local) governments not supporting this scheme, which is perceived as a central ( federal) government initiative and non-availability of ECB and refinancing options etc.
While the government of that day had perhaps imposed (backtracked on) some of the incentives, to avoid distortions in the local economy and the possibility of money laundering through under-invoicing of imports in these zones, the result is that huge parcels of land- estimated at over 25,000 hectares and capacity created are lying underutilized ..and has perhaps contributed to non-performing assets (NPAs) of banks.
On the other hand, there are examples of several successful EPZs and FTWZs in India, where there are now multiple models including National Investment & Manufacturing Zones (NMIZ), Textile Parks, Food Parks besides, SEZs, FTWZs, SEPZs etc.
Industrial land is available around major ports, where plug and play facilities can be created for light manufacturing and assembly. Manufacturers looking to quickly diversify their supply chain sourcing could benefit from the same.
India’s post-pandemic consumption story remains optimistic. With the thrust of the present government towards manufacturing with the Make in India and other initiatives, improving Ease of Doing Business and, the ability to manage change based on feedback, expect a revival in the SEZ story sooner than later.
3. Middle East: Similar objectives, different strategies…
Middle Eastern Countries like UAE, have leveraged SEZs to drive their core economic policies. Dubai for example has over 20 Free Zones, with over 15000 companies and 200,000 jobs have been created. The success of Jafza has been spectacular and the model of the first free zone at Jebel Ali with a port plus, SEZ plus, airport has been replicated by other countries, even outside the region.
One of the learnings from Dubai is the government’s strategy of seeking ecosystems that need facilitation to come together by clustering. We have the Dubai Media City, Dubai Finance Centre , Dubai Design District, Dubai Internet City etc which create their own growth momentum and free zones promote clusters.
Abu Dhabi has established its financial and media zones and is promoting the strategically located Abu Dhabi and Al Ain Industrial Cities, under Zones Corp. While Saudi Arabia’s King Abdullah Economic City continues to grow, it has recently publicised plans for the mega city NEOM as a part of the vision 2030. Other GCC countries including Oman, Qatar and Bahrain continue to pursue their economic zone initiatives aggressively.
While SEZs in the middle east region continue to support diversification of the economy and promotion of non-oil revenues, strategic planning and implementation of these projects would differ based on the overall job creation objectives .
Most businesses (unit holders) in SEZs seek to leverage lower cost foreign labour, which could result in slower job creation for the host country. An alternate approach is to focus on attracting talent and visitors, some of whom set up competitive businesses, which then create jobs…The strategy needs a re-look considering the impact of the pandemic.
So, what could make these successful?
Am outlining a few key areas to facilitate conversations among stakeholders
- Clear purpose, vision, active government support and commitment, leading to location selection, strategic planning and cluster identification, based on local comparative advantages and linkages
2. Quality infrastructure and multi-modal connectivity to domestic and international trade lanes and, innovative and thoughtful service design, implementation and monitoring
3. Relationship with the ecosystem — continued stakeholder management including among the government-ministries, with trade, industry, workers and academia at home and abroad and, building brand awareness and recall.
4. The ability to experiment and change based on feedback of what is working, from the global value chain or trade (FTAs) perspective, taking into account the fast changing post-pandemic world
While providing certain exemptions and duty benefits for exports from SEZs and EPZs, governments need to also be mindful not to create distortions in trade, as some cases have attracted the WTO dispute resolution mechanism..
On the other hand manufacturers in the SEZs can not avail of the anti-dumping laws of the country, since they are tax and duty resident outside the country..there is no ‘injury price’ calculation to be taken up for trade consultations…
You will notice that Soft infrastructure, thus contributes significantly to the success of SEZs, FTWZs and Industrial Parks
How do we approach Implementation?
Towards a full cycle business implementation, at f Apex Group we advise clients on the need to simultaneously and continuously work along the five radials :
1. Validate and update strategy- stakeholder alignment, demand assessment, planning and cluster definition
2. Customer acquisition and brand building including, marketing, sales and service
3. Attracting the right talent as future competitiveness is about talent, training and engagement
4. Operating efficiently-integrating USPs, building SOPs, leveraging technology
5. Preparing for future with reviews, reporting and M&A, feeding into the strategy
What is changing?
Global trade continues to evolve in a way that may not support the traditional export oriented, free zone model. Hence building economic zones for export only may not the answer, these need to have local linkages in manufacturing as well as trade, based on comparative advantages of the region.
from the governance perspective, there is a need to strike a balance between intrusive oversight and unaccountable autonomy.
Government commitment and willingness to learn and experiment with new Trade Facilitation Agreements and the ability to change strategies, based on evolving country comparative advantages, is becoming important. Government leaders can’t simply set up a zone , allocate land and consign it to successfully govern and grow itself for the next decades. On the other hand from the governance perspective, there is a need to strike a balance between intrusive oversight and unaccountable autonomy.
Building only clean-tech industries (Hi-tech, Edu-tech. Med-tech) may not work…some one has got meet the non-clean-tech demand as well.
Soft infrastructure and ICT is as important to leverage the hard infrastructure
With the 4 th industrial revolution changing us…, more businesses would perhaps like to operate in such zones with liberalized regulations, incentives , quality infrastructure including ICT, leveraging the local comparative advantages.
I see a bright future for economic zones and industrial parks as this is where infrastructure development, consumption and trade are coming together and, new cities-including some smart cities are emerging and these would contribute to lift economies of countries
So, what do you think are the other success factors for the success of Free Zones ?
Have authored an earlier version of this article on LinkedIn and in The Global Maritime Hub…
