Economic Zones as tools of development strategy in Iraq

Asif Hasnain, Senior Economic Development Expert, UNIDOThomas Flynn, MENA-OECD Investment Programme28-29 April 2013, Cairo

Economic Zones as tools of development strategy

United Nations Industrial

Development Organization

UNIDO Iraq Programme Office

Why Presentation

• Align government thinking on economic zones • Define different levels of issues in the overall strategy for economic zones

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UNIDO Iraq Programme

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Content and Structure Presentation

• Development Goals• Policies• Tools• Technical Issues

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Iraq’s Development Goals and Policies and Tools

• Iraq’s National Development Goals (Objectives)– Employment – Economic Diversification– Private Sector Development – Technology Development – Regional Development

• Policies (Means)– Private Sector Development– Trade – Technology Transfer– Human Resources Development – Etc.

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What are the tools to realise goals?

• Fiscal and budgetary tools• Trade policy• Investment policy

– Economic Zones

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Economic Zones

• Purpose of Economic Zones – What are Economic Zones?

● Geographically delimited area, usually physically secured (important in post-crisis contexts)

● They offer benefits based on physical location within the zone (and can have a separate customs area and streamlined procedures - World Bank 2009)

● Designed to stimulate domestic and/or foreign investment and production● Provide a range of incentives and services to hosted companies ● Poles of growth● In Iraq’s case, all should be aligned to work towards fulfiling development goals

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Context in Iraq

• Why Economic Zones? Why different types?– Shift from a state-based approach to work with private

sector and local institutions– Can support economic diversification efforts– Address weaknesses in economy– Different kinds of zones, depending on policy objectives

● Industrial zones, investment zones, Export processing zones, Free Zones, Technology Parks

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USAID 2012

JAPU Iraq

Economic Zones

• Zones share many things– Security, infrastructure, and licensing– In many successful instances, similar legal regimes

• Policy defines the different kinds of zone – Investment Zones offer incentives oriented to attract foreign investors

● Sector targeting, developing new industries, and attract FDI● Close collaboration with an anchor tenant

– Industrial Zones: both domestic and foreign investors● Especially in manufacturing and support services

– Export Processing and Free Zones work under specific customs regimes to facilitate regional/international trade

– In other countries, technology parks and business incubators are focused (sectoral) facilities designed to facilitate technological diversification

– None of these different types of zone are competitive as concept

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Investment and Industrial Zones (Suggestions)

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Extent of support services and incentives providedLeve

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lUNIDO Iraq Programme

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Industrial Zone

Technoparks and Incubators

Independent Enterprises or

Clusters

Investment Zone

Current issues in Iraq vis-à-vis zone development

• Advantages: – Growing market – Certain potential advantage for trade – strategic location (East-West corridor)– Land and natural resources availability– Oil and gas sectors offer opportunities for diversification

● Provide capital for investment

– Skilled labour force

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Current issues in Iraq vis-à-vis zone development (cont.)

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Current issues in Iraq vis-à-vis zone development

• Challenges:– Co-ordinate stakeholders (central and local governments, private sector…)– Develop zone administration and legislations to allow for flexibility

● One-stop shop, how to delegate authority?

– Weak level of infrastructure– Undefined financing options for zone development – Productivity gaps between hydrocarbons and the rest of the economy– Dependence on SOEs– Risk of ventures into new sectors and costs of self-discovery

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Moving forward with industrial and investment zone development

• Unified SEZ Strategy, connected with an overall industrial development plan– Streamlined legal and regulatory framework, work with what is there– Co-ordination amongst stakeholders – creation of zones in Iraq should not be the

work of one institution only, can have multiple institutions

• Development approach: regulatory or administrative approach?

• Involvement of the private sector in the design and management of zones– Management contracts, then direct investment infrastructure and services, then

PPP?

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Moving forward with industrial and investment zone development (cont.)

• Approach to development – decentralisation and clear sharing of roles and responsibilities

● Central Government: Legal/regulatory framework, land allocation, incentives, investment promotion, financing, sovereign investment guarantees

● Local Governments: Zone management, licensing, infrastructure and security provision, services, land, holding municipal authority (construction permits etc. …)

• Where do we start? – Key is to define different policy objectives for different kinds of zone– Mechanisms of developing and administering zones can be relatively the same

across the types● Many models of: contracting to private providers of support services to privately developed and

managed zones● Iraq? State defray risk

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Economic Zones in Poland

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Source: PWC


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SEZ Attractiveness

• Location: Heart of Europe– Access to Germany, Russia, and former USSR

• Cost: Low labour costs, but skilled– 750 EUR avg. monthly remuneration

• Structural funds and national programmes intended for investment grants and creation of new jobs– Offered to Polish enterprises

• Infrastructure

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Katowice SEZSource: Gilwice.eu

Source: DAFZ.ae


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●Problem identified locally (e.g. collapse of the main employer)

●Awareness raising and mobilisation of local stakeholders

●Negotiation locally and co-ordination with central government

Political initiative

●Allocation of land

●Special Economic Zone status granted

●Financing of main infrastructure/utilities

●First investors attraction (role of domestic investors)

Zone development

●Support to develop further investment projects

●Provision of business support services to hosted companies

●Zone promotion and expansion (geographical or thematic expansion, e.g. from SEZ to technological park)

Zone management and

promotion

Polish Model of SEZ Development

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Results

• 14 SEZs in 143 cities and 203 municipalities• 1222 companies operate in the zones based on 1466 permits • The value of carried out investments is 27 billion USD

– Micro-economic value

• State aid via tax exemptions (company tax – CIT) from the beginning of the functioning of zones until the end of 2011 was 4 billion USD which is 13.2% of the incurred investment costs

• 250,000 persons are employed in SEZs, of which 183,000 are newly created jobs

Source: Polish Ministry of Economy.

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Lessons learned from the Polish Experience

❧ A specific, reviewed legal regime to ensure successful and sustainable development

❧ Have a clear policy objective❧ Role of Polish domestic companies/SMEs ❧ Co-ordination amongst stakeholders❧ Relevance of the Polish “bottom-up”/decentralised approach ❧ Relevance of having a clear and appropriate incentive system.

– Financial incentives in Poland, in Iraq? ❧ Relevance of a clear investment promotion strategy and an institutional

support framework – – One stop shop and business support services

❧ Zone development revitalisation of State-Owned Enterprises and support the transition from planned economy to market economy

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Moving forward with zone development

• Must move the effort forward to develop SEZs forward– Look to governorates What role NIC can play? What role can the PICs play?

● Poland example

• Emphasise the commonalities between zones– Flexibility of zones– Possible: Take advantage of organic growth possibilities, what can the Iraqi private

sector offer? then, work with foreign investors– Need for a successful example – develop a zone, see what works, trial and error

• Need for co-ordination amongst stakeholders• Possibilities for a single legal framework, but can still have multiple zone

authorities

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Marketing

Economic Zones as tools of development strategy in Iraq