Special Economic Zones in the OIC Region:
Learning from Experience
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business environments for investment. A typical vehicle for delivering these services is through
the provision of a ‘one-stop-shop’ which provides the link between investment and government.
Incentives and Free Trade Agreements / Customs Unions
When developing incentive regimes there may also be conflicts between free trade agreements
or customs unions and fiscal incentives which are still subject to regional trade framework
agreements. This can lead to overlapping trade environments and increased complexity which
can erode the attractiveness of the investment climate.
Conflicts have also been identified with regards to the creation of an uneven investment
landscape if investors are able to leverage incentives on offer within an SEZ whilst
simultaneously ‘exporting’ their products and services to the Regional Trade Agreement (RTA)
under the preferential market access terms of the specified trade area. 21 This can lead to
conflicts between RTA producers and SEZ producers.
Potential conflicts may also arise between SEZ programmes and RTAs with regards to ‘trade
triangulation’. This occurs where goods produced outside of the SEZ host country are imported
into the SEZ under a preferential duty scheme and are then exported from the SEZ into the RTA
customs territory free of duties and taxes. This can lead to foreign companies exploiting the SEZ
and RTA frameworks by importing goods and adding minimal local value added.
Economic Effectiveness of Incentives
It has been noted that in some circumstances, such as within the African context, incentives have
typically been deployed to compensate for an overall lack of competitiveness in the form of
extended tax holidays, subsidised real estate and utilities and direct financial incentives to
individual investors to attract investment.22 This can lead to a ‘race to the bottom’ and result in
SEZs becoming tax havens for companies which may have invested in the host country in the
absence of a zone programme. Critics of SEZs states that they can often result in resource
distortion and are thus a sub-optimal strategy for development compared to country wide or
regional economic reform programmes. 23 The deployment of incentives should be carefully
considered from the outset to ensure that they incentivise investment at a reduced cost when
compared to the deployment of alternative incentives and achieve policy objectives with a
minimum leakage of tax revenue.24
21 DLA Piper, (2017) Special Economic Zones Best Practice Guide and Case Study Booklet, manuscript.
22 ADBG (2015) Special Economic Zones in Fragile Situations: A Useful Policy Tool?
23 Engman, M, O, Onodera and E, Pinali (2007) Export Processing Zones: Past and Future Role in Trade and Development.
24 Tuomi, K (2012) Review of Investment Incentives: Best Practice in Attracting Investment. ICG, London.