Special Economic Zones (SEZs) come in a variety of forms, names and functions – Free Trade Zones, Free Zones, Export Processing Zones, Enterprise Zones, etc. These reflect a government’s priorities and positioning of its economy. However, what unifies them all is that they are development tools used by governments to attract, and facilitate investments that act as catalysts to diversify whole or targeted segments of their economies.
Special Economic Zones Defined
While Special Economic Zone (SEZ) come in a variety of configurations they generally have six common features:
- A geographically defined area that is usually fenced in.
- Is under a single management or administration.
- Flexible and streamlined business regulations.
- Businesses operating within the zone are eligible for benefits (tax incentives) from being located in the zone.
- Support infrastructure that is designed to optimize the operations of businesses. Additionally zones are located proximate to key transport infrastructure such as port, airports, highway interchanges, that are used to facilitate the business operation of the zones.
- The zone is considered a separate customs area.
The general positioning of modern special economic zone regimes is their use by governments as a strategic tool in a larger economic development strategy or plan. SEZs, for Jamaica, are a tool within a larger logistics hub development model that is being used to grow the economy through industrialization. As a tool within a larger growth strategy, Jamaica’s SEZ regime is designed to improve Jamaica’s competitiveness and create jobs, attract business and capital.
The activities within the SEZs are aimed at fully integrating the Jamaican economy into the global production and distribution systems that rely on global value and supply chains. This complex and dynamic system, at the heart of globalization, places Jamaica at a critical intersection of global trade, investment and services. In a globalized environment companies face several conflicting demands simultaneously, for example there is an equal drive to both centralize and decentralize production and distribution. Additionally, companies must balance global and local demands at the same time in the sense of being able to produce and distribute worldwide but at the same time adjusting product specifications through postponement to meet the local taste of consumers through customization.
Jamaica’s Global Logistics Hub, largely through its SEZs, creates a platform where global trade, investment and services will intersect and interact. The SEZs provide the ideal one stop shop location for meeting the simultaneous, and often conflicting, demands of the marketplace in a flexible, efficient and reliable manner.
Free Zone to SEZ: a new policy direction
The name change from Free Zone to SEZ is not a simple matter of form over substance. The SEZ concept is a deliberate policy break away from past policy and is intended to send a clear signal to the investor community (domestic and international); the multilateral lending agencies; and the WTO that Jamaica is moving in a new policy direction.
The Free Zones of the past were largely export processing zones reliant on non-World Trade Organization (WTO) compliant export performance fiscal incentives, the SEZ on the other hand move beyond export processing and is fully WTO compliant.
The Jamaica SEZ model
SEZs are purposed built and fully serviced sites aimed at improving the competitiveness of manufacturing and services. They are founded on the principles of improving efficiency, clustering of complementary value added services, and seamless integration into the global value chains, low corporate taxation and a business friendly environment.
These principles, however, are not self-applying. They have to be implemented systematic and this is where the Jamaica Special Economic Zone Authority (JSEZA) comes into play. JSEZA is the government body charged with regulating, monitoring, supervising, promoting and facilitating investments in SEZs in Jamaica. Through the work of JSEZA SEZs investors will facilitate and be facilitated by:
a. Developing world class industrial infrastructure, supported by world class transport infrastructure (road, rail, airport and ports) that function as trade facilitators;
b. Competitively priced energy;
c. Increase cargo flows through increased transshipment throughput; increased imports as inputs into production (SEZ and domestic); and increased exports as semi or finished goods (SEZ or domestic) that have the Made in Jamaica label;
d. Optimize and analyzing cargo flow information to seek out, attract and manage higher value-added logistics activities; and
e. Create backward linkages to the rest of economy through our Micro, Small, Medium Enterprises (MSMEs) through the sourcing of domestics raw materials as inputs into production and by subcontracting of local service providers.
As such Jamaica’s SEZs will be focused less on fiscal incentives and more on providing a platform to meet the efficiencies demanded by the global marketplace. Central to this are ‘soft’ -using government services as – incentives inherent in regulatory relief such as expedited investment, construction, work permit approvals, and streamlined and efficient Customs inspection. The move to place greater reliance on business and trade facilitation reflects not only international best practice but also reflect a growing global trend of governments using their regulatory functions as services to investors, in effect non-fiscal incentives.
The WTO prohibits subsidies in particular export performance and local content subsidies. Under its WTO obligations Jamaica has phased out its offending subsidies and has gone as far as repealing its Export Free Zone Act and replaced it with the Special Economic Zone Act, 2016.
Generally the incentives offered under a SEZ regime will not be considered to be subsidies provided that the benefits are not focused on export performance, the use of domestic content, not set up to primarily benefit a specific industry or business, nor for the maintenance of foreign exchange balances. The new SEZ regime’s fiscal incentives focus therefore includes lower corporate income tax, duty free importation of raw materials and no General Consumption Tax (GCT) on electricity and telephone services. Jamaica has gone further and followed global best practice and included performance based mechanism such as employment tax credits for job creation that facilitate the lowering of the corporate income tax rate.