Free zones need to become as well known for e-government as they are for tax incentives.
Building successful Special Economic Zones (SEZs) is extremely difficult. The 2020s have been a bad decade for many SEZs.
The Indian government recently announced an overhaul of its current zone regime specifically “to address the shortcomings of SEZs.” India’s neighbors have had similar issues. For example, the Port of Gwadar, in Pakistan, only logs 22 ships per year despite a $300 million investment from China. Bangladeshi advisor for shipping and former General Shakhawat Hossain writes, “The introduction of the special economic zone concept has brought little success in attracting the private sector investment in the country.”
2024 was a difficult year for SEZs everywhere from Saudi Arabia to Tanzania to Brazil. Even repressive regimes such as Cuba have started openly admitting that their SEZs have not succeeded in attracting significant investments.
The problems vary extensively by region, but some patterns are consistent.
Historically, many SEZs have simply competed by offering low tax rates. Once SEZ planners had the hammer of tax incentives in their toolbox, all problems started looking like nails. Want to attract textile manufacturers? Tax credits. Want to attract renewable energy? Tax credits. Want to attract tech companies? Tax credits.
Indiscriminately handing out tax credits does not make for good policy. First, all zones have tax rates that are near 0%. This means that zones can still use taxes to compete with non-zone destinations, but are no longer competitive relative to each other. Second, the OECD’s 15% global minimum corporate tax rate is removing this tool from the arsenal of many zones. Finally, and most important, tax credits do not address the underlying social and economic issues that prevent growth.
SEZs that succeed focus on measures that go beyond policy. Instead, they attract investment by offering top notch customer service, are home to universities, and build places where innovative people want to live.
As U.S. Foreign Trade Zones draw more interest in the current trade war, adding e-government services to the normal incentives may distinguish some FTZs from others.
Map images courtesy of author and Open Zone Map
I remember speaking to the tenants of an SEZ in Dubai, and I asked them what they liked the most about working with their zone. “Customer support!” they told me. They proceeded to explain that the property managers were incredibly competent. They could have gone to a dozen other zones in Dubai, and enjoyed identical tax rates. But instead, they chose that particular zone because it was efficient.
One of the most important things that SEZs can do is offer competent e-government services.
A Necessity, Not a Status Symbol
E-government has become just as necessary for free zones as tax incentives.
Like everyone, I live online. Using my laptop, I can order a very special low-carb pizza for my wife, work from home, get a book published, chat with friends, buy parts to build my daughter a playhouse, get instructions on how to build my daughter’s playhouse, talk to a doctor for grandmother, and learn how to play the bassoon.
However, when I interact with the government, I often need to do things the old fashioned way. I need to wait in line in an overheated room, wait for the listless officials to do what I need, and file a small mountain of paperwork. Even when I can use government websites, they are usually broken. Buttons fail to submit forms properly, chatbots give me stupid answers, and pages randomly reload causing me to lose all of my progress. I’ve seen this same phenomenon in almost every country where I have lived or worked.
Imagine being the owner of an SME. Because your business is small, it doesn’t pay many taxes anyways. You don’t care about whether the top tax rate is 15% or 20%, because you aren’t even close to making that. Would you rather move to an SEZ where paying taxes is difficult and time consuming or an SEZ where you can file taxes instantly?
The UAE offers a plethora of free zones in a Middle East region studded with them.
E-government refers to a group of technologies that aims to replace brick-and mortar government services with leaner digital alternatives. E-government allows SEZ tenants to interact with the government online. This might include:
- Paying taxes
- Finding out what permits are needed
- Filing for permits
- Appealing decisions
- Contacting customer support agents for help
- Finding good maps, surveys and land assessments
- Accessing property records
E-government isn’t a toy. It isn’t a gimmick that SEZs can use to virtue signal about how high-tech they are. It is a necessity. A zone without a proper e-government infrastructure is a zone that is stuck in the past.
The Best Economic Zones Already Have Top Notch E-Government
Many jurisdictions have started to take note and area now using the same approach.
As reported by Site Selection Magazine last year, Ohio Lieutenant Governor Jon Husted took the exact same approach that many of these economic zones have taken. He explained the miraculous results:
“Mostly through automation. We took a paper process and turned it into a digital one that allowed us to turn a people process into a digital one. We were able to cut the business licensing fees by 21%. We now have lower rates than almost any state. For many business owners, this is their first interaction with the state government. We continue to try to build on that. We use technology to improve the way we serve our customers. Every year after we launched this new digital application, we saw record-setting filings for new businesses in the state of Ohio. The more friction you take out of the process, the more businesses will prosper.
“Think about how the process used to work,” Husted continued. “You would fill out a form and mail it in with a check. By turning this into an exclusively digital process, we turned a 4-day process into a 4-hour process. It led to a change of culture on how we do so many other things. We did this across all of the state government. Instead of having to show up in person in an office, you can now do everything remotely, digitally, and that alone has saved hundreds of thousands of hours and tens of millions of dollars in costs. That is creating some amazing results across the board. To get your driver’s license, you would have to go to the DMV. Nobody likes that. Now you don’t have to do that in Ohio anymore. We have moved that entirely to a digital process.”
Digital ID: The Most Important Component of E-Government
If e-government is the key to making zones more competitive, then the natural next question is “What is the most important component of e-government?”
Over the next five years, one technology will come to define e-government: digital identity.
Digital identity is the big bottleneck that is currently holding e-government from reaching its true potential. Once again, special economic zones are at the forefront of the adoption of digital identity.
When we think of digital identity, we usually imagine identity documents for individual humans such as passports or driver’s licenses. This is only a very small part of the whole picture.
E-government requires proving the identity of a lot of moving parts. SEZs need to know that they are dealing with the right legal entity, and a duly authorized employee or agent of that entity. SEZs that handle customs need to prove the identity of the ships, trucks and cars delivering goods — as well as the identities of the goods themselves. If taxes are paid online, then individual tax receipts also need unique digital IDs. This makes matters even more complicated — all of these IDs need to be mutually interoperable and secure from attacks.
Digital ID is the technology at the core of e-government for SEZs. It is a technology that allows you to securely identify people, legal entities, employees, legal representatives, vehicles, animals, goods, devices, contracts, receipts and government workers.
A visualization of all digital ID projects in the world
Graphic courtesy of author
Key State Capital, a venture syndicate that invests in digital identity, recently published the Web of Trust, a global map of every government-backed digital identity initiative. Key State Capital’s data reveals that once again, the best SEZs are at the forefront of digital identity technology. [The author is a partner at Key State Capital, a venture capital consortium that invests in digital identity technology. — Ed.]
Thailand is currently piloting its national digital ID system in its economic zones. Thailand’s digital ID system aims to make 80% of its government services fully digital by the end of 2025. Ras Al Khaimah Economic Zone, in the UAE, created a digital ID system that will allow tenants to cryptographically sign all government documents online.
In addition to creating zone-specific digital ID systems, other SEZs are becoming early adopters of international protocols. The Dubai International Financial Center (DIFC) and Shanghai Pilot FTZ are early adopters of the vLEI. The vLEI is a technology that can help users quickly identify legal entities and their authorized representatives. (Read more about the DIFC and digital nomads in this Site Selection report from May 2024.)
The age where SEZs could compete effectively by offering low tax rates is over. Lowering taxes fails to address fundamental economic issues such as over-regulation or government inefficiency.
Instead, zones need to compete by offering good customer service, human-level infrastructure and online e-government portals.
Thibault Serlet is a partner at Key State Capital, a venture capital consortium that invests in digital identity technology. He previously served as the president of the Adrianople Group, a business intelligence firm which helped investors finance the creation of new special economic zones. He led the creation of several large scale datasets including the Web of Trust, a global database of decentralized digital identity projects; Open Zone Map, the world’s first global map of free zones; and the Charter Cities Institute’s New Cities Map. Read Thibault’s 2021 Site Selection Online Insider on the promise of Rwanda.
