In the Zone
An “industrial park on steroids”—that’s what U.K.
tech entrepreneur Jean-Paul Gauthier calls special
economic zones (SEZs). The zones have become
a favorite development tool in countries eager
to jump-start fledgling economies. But globally
only about half of 4,300 existing SEZs—which are
geographically bound and tend to contain factories—have been successful, according to Banobras,
a state-owned development bank in Mexico. The
reason? Many face funding challenges and public
backlash, says Mr. Gauthier, whose organization
specializes in SEZ development projects. He’s the
CEO of Locus Economica, London, England.
Yet governments all over the world sponsored
SEZ projects in 2016: Mexico decided to launch
three SEZs in its impoverished southern states.
Zimbabwe named three locations for pilot SEZs to
spark investor interest and job growth. And Tanzania approved development of six new SEZs as part
of the government’s five-year development plan.
The zones don’t come cheap: Most cost
north of US$1 billion, says Mr. Gauthier.
Success Not Guaranteed
SEZs offer a variety of incentives to busi-nesses, including tax breaks and trade-focused infrastructure (such as direct
access to ports or airports). The idea is to
offer benefits to foreign companies while
also generating value for the host country by attracting foreign direct investment and creating new revenue streams,
foreign exchange earnings and opportunities for local workers to gain new
skills, says IHS Global Insight economist
Phil Hopkins, Philadelphia, Pennsylvania,
USA. “SEZs can be a way for developing
countries to have it both ways,” he says.
But that’s only if project teams can
deliver ROI. SEZs are multiyear programs
that require substantial upfront investment in land, infrastructure (such as
Pulling the Plug
Cost overruns can be a death sentence for capital projects. To
ensure hard decisions are made as soon as possible, organizations often have someone other than the original project
sponsor make funding decisions during the execution phase. It
seems like common sense: The person who originally gave the
green light will be more attached—and therefore less likely to
kill project funding when things go awry.
But new research discredits this line of reasoning. A study
published in the May issue of The Ac-
counting Review suggests that if teams
know the same person will be at the
helm from start to finish, they’re less
likely to provide cost underestimates
during the planning phase.
“The prospect of a new, noncommitted, critical superior making the continuation decision could decrease subordinates’ expectations of continuation
funding and/or increase their uncertainty
about this funding. As a result, subordinates … focus primarily on gaining
initial funding by understating costs,”
wrote the authors, Alexander Brüggen of
Maastricht University and Joan L. Luft of
Michigan State University.
During the study, participants were told to propose an initial cost estimate for a capital project to their superior. Half
the group was told that midproject funding decisions would
be made by the original superior, while the other half was told
these choices would be made by a new superior. The results?
The biggest cost understatements occurred among participants who believed a new noncommitted executive would
make the continued funding decision. —Kelsey O’Connor
If teams know
person will be
at the helm
from start to
less likely to