here are zones, and then there are zones.
Thousands of special economic zones (SEZs) now populate the globe, offering companies the business-operations equivalent of an all-inclusive resort — the beeline to and from the port; the enticing array of amenities; sometimes even the fine dining and recreation.
As more companies seek to take advantage of such specially demarcated areas, those areas likewise seek to expand their boundaries. In some places it’s not a reach to say the whole jurisdiction is one big SEZ, places such as Shenzhen, where the 30th anniversary of the zone is being celebrated by extending to the entirety of the city; or Singapore.
"In some ways any country that sits inside an integrated regional territory but stays legally ‘outside’ of it becomes in certain ways a free zone," says Thomas Farole, a senior economist in the International Trade Department of The World Bank. "For example, I would argue Switzerland has this benefit, as of course do all the ‘offshore’ locations — Jersey, Bahamas, Belize. Another example might be Lesotho, at least for export manufacturing activities. Investors get duty-free, tax-free anywhere they locate in the country. And Dubai is pretty close to being one big SEZ these days, as the restrictions on foreign ownership are limited … and there is a free zone on just about every corner."
But just because the zones are ubiquitous doesn’t mean the data about them is likewise. A scan of the rapidly aging literature and of the experts reveals a maddening dearth of apples-to-apples comparison data, making it difficult to develop a proper matrix, and next-to-impossible to perform any sort of ranking.
"Zones come in different forms and with different mandates," says Farole’s World Bank colleague Etienne Raffi Kechichian, an investment climate consultant. "And with so many zones in the world it’s hard to study all of them. Turkey has four frameworks. Just Vietnam has 200 to 300 zones. The U.S. has just over 200. There is so much out there, and it’s changing. Is it something with a special regulatory regime? There’s even a discussion when it comes to definition — for example, do we consider an industrial estate a zone?"
Others agree that data is poor, inconsistent or non-existent — a fact that is itself partially determined by the nature of special economic zones, which traditionally have sought to lift the economies of under-performing regions. Those that have, take time to measure. Those that don’t, don’t bother.
"There is a lack of systematic data-driven analysis on the performance of economic zones around the world," writes Farole in a new report. "Policymakers are forced to rely on the same small handful of case studies (some now 10 or 20 years old) when considering or assessing SEZs."
So the best way to digest the subject is in bite-size pieces, via snapshots, case studies or region-focused reports.
New Research, Familiar Issues
Farole, who has more than 15 years experience working with the public and private sectors in Southern Africa, the Middle East, Europe and Asia on issues of export competitiveness, trade facilitation, and regional economic development, has co-authored one such study on sub-Saharan Africa due for release by year’s end. It draws on research conducted across 10 countries, focusing on six in Africa (Ghana, Kenya, Lesotho, Nigeria, Senegal, and Tanzania); and four cases of established zones programs from other regions (Bangladesh, Dominican Republic, Honduras, and Vietnam).
The research included two components per country: a case study, based on secondary research and interviews with investors, zone developers and operators, regulatory authorities, government and other stakeholders; and surveys of investors operating in the zones.
Among the conclusions of past SEZ research by bodies such as the International Labor Organization has been a relatively dismal wage and working conditions picture. But the new World Bank report concludes, "Zones have made progress in meeting international norms for labor standards. In almost all the zones studied, wages for unskilled labor were greater inside the zones than outside, and anecdotally at least, working conditions were said to be favorable inside the zones."
Farole is quick to point out that this doesn’t mean the inside-the-zone wages and conditions are sparkling, just better than the alternative, which often means the informal economy.
"Bangladesh is a good example," he says. "Wages in the zones are very low, at around US$35 a month. But we know from reports that outside the zones, they’re $20 to $25 a month."
The biggest news over the past year involving working conditions, wages and zones was labor unrest and worker suicides in China, particularly at the mega-complexes operated by Foxconn parent company Hon Hai Precision Industry. Asked whether those events have caused a reassessment by zones and their tenants, Farole says, "I think there is a bit of that." Then he offers an observation befitting a graduate in economic geography from the London School of Economics.
"The spatial effect you have in these zones, which are enclosed, means that whether you have unions or not, things move very quickly inside," he says. That’s to the good for such touted zone advantages as efficient operations. But greased skids can move problems too.
"There’s a problem, and a factory down the road senses that," says Farole. "In a way, when you cluster everything together, if you light a fire, everything gets burned."
But Farole thinks the bigger reassessment is related to the brands occupying the zones.
"Owners are really getting more closely involved in standards inside their factories," he says, noting Foxconn’s fast reaction was motivated in large part by major client Apple being negatively affected. "In a lot of the zones I was looking at, the workers were in the garment sector," he says. "The demand for a living wage is coming not from government and zones, but from The Gap, Nike and other companies, because they have a stake in making sure their brand is seen to be relatively ethical. We heard people, regulators, saying that in a sense they’ve been superseded by the brands — they are the inspectors."
Having anchor tenants with big brand names is "absolutely critical," says Farole. "It’s definitely something that attracts other firms. Talk to any investor, and that’s what they want to do — talk to who’s there." But it’s not always a fellow foreign firm that demonstrates a zone’s worthiness, he says, citing the string of small industrial parks that comprise a zone near Puerto Cortez near San Pedro Sula, Honduras. "When they got their zone going, it wasn’t foreign but domestic investors, with their own garment companies. It signaled to the foreign investors, ‘Look, if these guys are going to take a gamble, then we can too.’ "
Links Zone Denizens
The domestic investors in India’s suddenly blooming garden of SEZs are not so small: Among the recent anchors of 11 new zones cleared by the Indian government were BPO giants Infosys and Wipro. And the nation’s largest company, Reliance Industries, is setting up a 1,500-acre (607-hectare) SEZ in Gurgaon after meeting land acquisition resistance to a much larger proposal. India has approved 576 different SEZ proposals in the past five years.
Among the BPO giants benefiting is Mahindra Satyam, the new name of the re-formed (and reformed) Satyam Computer Services, which in April 2010 launched its SEZ at the Mahindra Satyam Infocity Campus at Hyderabad. The 26-acre (10-hectare) SEZ will feature 400,000 sq. ft. (37,160 sq. m.) of built space. The first phase, expected to be complete this fall, will seat approximately 5,000 associates.
The new SEZ came just months after the company had taken advantage of another SEZ, Malaysia’s Cyberjaya ICT corridor, for the launch of its new global solution center strategy at a 15-acre (6-hectare) site. The new facility has 18 configurable Offshore Development Cener blocks, a 1,100-seat development block and a data center to host 1,100 servers. It will serve as Mahindra Satyam’s largest technology development and delivery facility outside of India.
"Selecting Malaysia to launch our international expansion underscores the faith we continue to have in Malaysia’s advanced infrastructure, rich ICT talent pool, and competitive cost environment," said Rohit Gandhi, Mahindra Satyam’s senior vice president, Asia Pacific. "The country’s favorable corporate environment, backed by unwavering government support, also were factors behind the further commitments we are making to the country. Furthermore, our presence in Malaysia allows Mahindra Satyam to leverage on numerous advantages of language and time zone to service our Asia Pacific customers, a market segment that we intend to grow moving ahead." Malaysia’s Multimedia Super Corridor, a government-designated high-tech zone, encompasses 289 square miles (750 sq. km.).
The new China-ASEAN free trade area, which removed tariffs on 90 percent of traded goods at the beginning of 2010 for a market of 1.9 billion people, is supported by an infrastructure of SEZs likely to be familiar to companies investing from one Asian nation into another.
Back in India, as reported by B. Nitin Rao in these pages in September 2010, "the existing SEZs have attracted investments of more than $35 billion and have resulted in the generation of over half a million jobs. Exports from the 114 SEZs grew by 120 percent last year to about $50 billion."
"They’ve opened it up, and there are a lot of speculators," says Farole of the zone proliferation in India. "It’s a very federalist system, and each state has its own projects going on."
While some land issues have arisen and incentives have been scaled back, new IT-focused SEZs in particular are moving forward. So is the zone in Hyderabad developed around the new airport there.
"In India there are so many different models going on," Farole says. "You have your traditional zones, then you have agro-industrial parks, where the zone is on farmland, and there is a contract with farmers. That’s an interesting model for Africa."
Best Foot Forward: Infrastructure
In Africa, where most SEZs got going as recently as the 1990s, the consensus from previous research is that zones have generally underperformed, writes Farole in the forthcoming World Bank report, "with the significant exception of Mauritius and the partial exception of Kenya, and possibly Madagascar and Lesotho."
In terms of investment, employment and exports, "most African programs are not fulfilling their potential and are underperforming relative to the Asian and Latin American programs included in the study," says the report, which focused on manufacturing. "With the possible exception of Ghana, African zones show extremely low levels of investment and exports, and their job creation impacts have been limited — African zones are surprisingly capital intensive. However, most of the programs are still in the early stages of development and some show signs of promise."
That said, some already show signs of stagnation, which may have little to do with the zone itself, says the World Bank report.
"Results from the surveys underscore the importance of the national investment climate," it says, "providing quantitative evidence to what has been observed anecdotally — that the success of SEZs is closely linked to the competitiveness of the national economy."
However, some concrete findings can apply to the investment climate in the zones themselves. Notably, the World Bank survey found that the "one-stop shop" concept that expedites licensing and regulatory matters, while helpful, was not critical. More correlated to success were trade facilitation and infrastructure quality. On these points African SEZs are helping significantly.
"For example, data from the surveys shows that on average across the African SEZs, firms inside the zones report more than 50 percent less downtime resulting from electricity failures than exporters based outside the zones," says the report. "Customs clearance times are reported to be 30 percent faster."
But even that improvement still lags the comparison zones in Vietnam and elsewhere.
"Despite the 50-percent reduction in electricity-related downtime in the African zones, reported average downtime (44 hours per month) only reaches the average level of the non-African countries outside their zones," states the report. "Non-African SEZs showed an average 92-percent reduction in downtime, bringing it to only four hours per month."
While national policy can set the tone for SEZ success, it’s the hum of electricity and smooth traffic that will ensure it. While most African zones offer infrastructure quality superior to outside the zones, "in some cases infrastructure inside the zones is a mirror of the worst experiences in the country more widely," says the report, "including water shortages, electricity failures, and health, safety, and environmental shortfalls." Connectivity is the main problem: "A problem common to many zones in low-income countries is that quality infrastructure stops at the zone gates," the report says, citing poor road connectivity and "serious" port-related delays.
Thus development of new zones, it says, should focus wherever possible on locations that are within or adjacent to major ports, airports or other key trade infrastructure. In fact, tying SEZs to major infrastructure projects may prove to be one way to overcome some of the political obstacles slowing economic progress in zone areas in the past. The Ghana Gateway is one model, they say.
"There’s been a lot of focus on making registrations simple with one-stop shops," says Farole. "But for a big multinational, if it takes you one month or six, it doesn’t really matter. What matters is if you can’t run your factory for six hours a day because there’s no power, or you can’t get your goods to the port." If a zone or government has $100 to spend, he suggests, "spend $95 on that."
Five of the zones in sub-Saharan Africa are backed by the Chinese government, part of a program established by China in 2006 to back 19 such zones outside the People’s Republic. China is the undisputed leader in SEZ success, having followed the models of South Korea and Singapore, then grown from four in 1979 to more than 100 now.
"Experienced operators of China’s SEZs — Tianjin Economic-Technological Development Area, Nanjing Jiangning Development Zone, and Zhangjiagang Free Trade Zone — are involved in several African zones," wrote Farole and others in another recent report. But that has not meant rapid scale-up such as the world has seen in China itself. "Of the five zones, only the Chambishi Zone in Zambia is operating. The SEZs in Nigeria (Lekki Free Zone and Ogun Guangdong Free Trade Zone) and Mauritius are in relatively advanced stages of construction, and the Oriental Zone in Ethiopia remains in the planning stages."
"They have the potential to transfer the knowledge to Africa," says Farole. "But from what we’ve seen so far, it’s not happening on the ground. That’s partly the fault of the developer, and partly of the African governments."
Ultimately the African zones are making progress. It’s just not enough to truly compete. "Look at Vietnam," Farole says. "The situation outside the zone is not great, but not bad. And inside, it’s absolutely world class. That’s what you need to be."
In the U.S.,
FTZs Stretch Out
World class is one phrase that might describe the zones overseen by Hillwood, the developer behind the successful AllianceTexas and AllianceCalifornia mega-developments. Alliance Foreign-Trade Zone No. 196 in north Texas admitted US$5.357 billion in foreign products in fiscal year 2008, tops in the U.S. among general-purpose FTZs, and was joined in the top five by fellow Texas zones in Houston and El Paso. The state is home to 31 of the nation’s 164 general-purpose FTZs, with half of the top 10 by foreign goods value located there. According to Hillwood, "in large part due to its role in handling imports, AllianceTexas has had an economic impact of $36.4 billion on the North Texas economy.
Now Hillwood is bringing its Alliance brand to the Jacksonville, Fla., area, where it will serve as master developer of the 4,474 acres (1,810 hectares) at Cecil Commerce Center, which is a portion of the former Naval Air Station Cecil Field. During the term of the agreement, the development is projected to add at least $425 million to the city’s tax base, which could generate $50 million to $88 million in new tax revenue for the city over the 25-year term of the agreement. The cost to develop the 2,800 developable acres (1,133 hectares) is estimated at more than $1.3 billion.
The news comes at the same time that the Jacksonville Port Authority, grantee of Foreign Trade Zone No. 64, is pursuing the U.S. Foreign Trade Zones Board’s alternative site framework, which allows for fast expansion of an FTZ and the establishment of multiple "magnet" sites in a region that come under the approval of the board and U.S. Customs. Among its benefits is the acceleration of new-user approval from between six and nine months to 30 days.
A Region Opens Up
The current FTZ in Jacksonville would expand by nearly 50 percent to 2,000 acres (809 hectares). Alliance Florida would be one of the magnet sites that the port authority is trying to establish in each county in Northeast Florida.
"It’s a no-brainer, because it opens up more geographical areas to be able to deliver the incentive," says T. Preston Herold, vice president of Hillwood Investment Properties and the leader of the company’s new project in Florida. "We’re a big believer in foreign trade zones. If you can save money on a site on the left side of the road and you can’t save money on the right side, you’re going to pick the left side of the road. It’s not something we try to profit from. We try to pass it along to our customers."
Hillwood is negotiating the lease of the former Navy bowling alley, which Northrop Grumman had occupied for several years, to function as its office and marketing center. Other first-year performance hurdles are installation of signage, and site applications for an initial 400,000-sq.-ft. (37,160-sq.-m.) building. Herold says a couple prospects are already in discussions.
"We’re excited about the level of activity we’re seeing right now," he says. "Last summer was one of the deadest I’ve ever seen, and ever since Labor Day we’ve seen a resurgence of activity nationwide and in Jacksonville. We’re thinking we timed this about right."
The current FTZ in Jacksonville, third in Florida in value of merchandise moving through, is home to the worldwide distribution headquarters for Coach, as well as operations of Bacardi and Mazda, among others. Deborah Lofberg, JAXPORT director of marketing services and Foreign Trade Zone, says the application for a magnet site for Hillwood was completed fast, and the notice in the Federal Register was expected this fall. What’s more, two sites on the I-10 corridor in neighboring Columbia County and Baker County have been identified.
"A lot of the traffic that comes from overseas travels west of here, so those corridors are important," says Lofberg of the "inland port" concept, which is also taking hold in various forms in competitor states such as Georgia and South Carolina.
"We’re looking at the port using unit trains to move cargo containers when they come in for processing, and to use the FTZ to do any value-added services that can be done before products enter the U.S. market as taxable products," says Jim Poole, executive director of the Columbia County Industrial Development Authority, of his county’s 800-acre (324-hectare) site, just outside Lake City. The area is home to the Employ Florida Global Logistics Banner Center at Florida Gateway College, and an academy certification program in warehouse work at Columbia High School. Poole thinks there would be a lot of interconnectivity between his county’s site and the other ports and inland ports in the multi-state region. "We’re also trying to help our existing companies come up with export programs, so we can turn around and ship stuff back out of the port," he says.
Lofberg says alternative site framework applications from across the U.S. are keeping the FTZ Board busy. She points out that the alternative site framework also makes things less expensive for the occupier, because of the removal of the need for so much documentation. She says quite a few corporate decision-makers are surprised to find out what they’re spending on import duties and fees by filing a nearly $500 entry fee for every shipment. "When they realize they can reduce it to one fee per week" by being in an FTZ, she says, "a lot of them realize that’s all the savings they need."
Among the lesser-known provisions for manufacturers is one that allows production equipment that’s going to be used to be duty-free right up until the time it is up on the line and producing. "That’s a huge benefit for manufacturers starting up those businesses," says Lofberg, noting the headaches sometimes associated with finding out equipment is defective or excess, then having to go through a protracted duty drawback process. "The cash savings can be substantial."
Lofberg says there are limits to what U.S. zones can do in competition with other SEZs in the world, led by cheap labor abroad.
"That’s out of our control here in the U.S. What can you do? We can only offer within the legal limitations. But I think we’re not maximizing the benefits currently, because companies are just not aware of what they can get here. There’s no reason they shouldn’t be taking advantage of these benefits. Then let’s see in five years — we could be competing globally in a bigger way."