Where’s the Romance? Special Economic Zones and Cities

SEZs and cities are often wed in a marriage of convenience. SEZs have a basic need for what cities can offer: deep and specialized labor pools; specialized suppliers and business services; connectivity to national and global markets; and favorable lifestyles for potential investors. Where SEZs find themselves isolated from cities, they are often barren of firms, empty of investors, and die a lonely death. Most SEZs can’t give birth to jobs unless they are fertilized by cities.

But can SEZs and cities achieve more if they get beyond a physical relationship? What kind of problems can they solve by talking and collaborating together? Can they help achieve each other’s long-term goals?

There are surprisingly few examples of romantic partnerships. Indeed, the relationship between SEZ and city can even be adversarial. SEZs may think their beauty depends on their tax-free status, often including exemptions from municipal taxes. Once they become pregnant with firms and jobs, SEZ developers and operators are (understandably) loath to get involved with municipal projects beyond those necessary to help their tenant companies be operational.

A city meanwhile — with multiple spending obligations and often carrying the baggage of a difficult past — may see a successful SEZ as a cash cow to pay for its own projects. Yet cities tend to provide relatively few direct services to the SEZ that would justify these taxes. Trash collection, internal infrastructure maintenance, and security are usually provided by the SEZ management itself. SEZs sometimes even find themselves paying for and building the core infrastructure that they were expecting a city to provide. The marriage can turn into a nightmare, characterized by repression and abuse.



One of the few examples of an evolving relationship between an SEZ and the municipality is between the Suzhou Industrial Park (SIP) and Suzhou municipality in China. SIP initially made losses of US$90 million in 5 years, partly owing to disinterest from the city, which was more interested in the Suzhou New District on the other side of the river. Subsequently, the central government restructured the tax-sharing formula for SEZs, allowing the Suzhou municipal government to get a 10% share in all taxes collected from the zone; majority ownership was transferred from Singapore to Suzhou; and Suzhou’s vice-mayor became chief executive of the SIP. This alignment of incentives contributed to a sea-change in the relationship between the zone and the city; investments rose by more than 150 percent in a single year (2000 to 2001) and the park made its first net profit of US$3.8 million.

So, what would a marriage counselor recommend for SEZs and cities to get their relationship working really well? An enhanced and fuller relationship can help them both achieve their goals.
 

• Align strategic objectives. Do both partners share a compatible vision for growth and prosperity? SEZs and cities are ‘better together’ if they want to address the following objectives: (i) regional infrastructure and planning; (ii) job creation strategies; (iii) lagging neighborhoods and worker residences; (iv) place marketing; (v) lifestyle issues for investors, and (vi) security.

• Facilitate business linkages between SEZs and cities. Are SEZs and cities exploring the full richness of their endowments, qualities and characteristics? Beyond the direct benefits of jobs and tax revenues, city-based firms can act as suppliers to SEZ-based firms; and city-based firms may also enjoy lower costs from SEZ-based firms. These linkages are maximized if the regulatory regime allows SEZ-based firms to sell to or buy from the city market with easy, streamlined procedures. SEZs and cities may also establish active programs to encourage linkages, such as supply chain development programs, supplier databases, supplier matching, and supplier training and quality initiatives.

• Create institutional structures to increase the interaction. Marriages work best with open channels of communication. A regular steering committee for each SEZ can institutionalize contact with city management, permit open discussion of problems, and involve other key stakeholders such as labor unions and the local private sector. Of course there is a danger that the marriage could become crowded with too many relatives and family members; but they can provide guidance and help problem-solve at key moments of difficulty.

• Realize the limitations of the relationship. It doesn’t always have to be about “us”. Sometimes the SEZ and city must get on with doing what they do best individually, focusing on their own priorities and special talents. The SEZ will be nurturing its tenant firms with infrastructure and services; and the city will be sowing its oats, seeking new contacts and fresh pastures, and looking after its own flock of businesses and citizens located in the city.

The chances are that jobs and firms are likely to be more rounded and sustainable when they grow up in happier marriages. Indeed the happiest marriages of SEZs and cities are beyond romance: they allow SEZs and cities to develop to their full potential in partnership.