Should private companies manage SEZs or cities?

The writer is an SEZ specialist and senior adviser at DGA-Albright Stonebridge Group.

One of the defining narratives in the evolution of special economic zones in recent decades is the increasing role of private, for-profit entities in their development and management. Zones, and even entire cities, run by these groups often outperform their government-run counterparts in the quality and efficiency of their services, and sometimes in social and environmental metrics.

The shift towards private management of SEZs gained traction in the 1990s with the free trade zones of Latin America. Countries like the Dominican Republic and Panama empowered companies to own, develop and operate these zones, which led to dramatic increases in investment.

Privately-run cities have a rich history, from medieval merchant-run city-states to 19th century company towns. As Yue Li and Martin Rama’s insightful book Private Cities: Implications for Urban Policy in Developing Countries from 2022 highlights, we’re now witnessing a resurgence of privately governed urban areas, with examples like Gu’an in China and Phu My Hung in Vietnam.

In both SEZs and cities, private companies often develop and operate infrastructure through public-private partnerships. They offer greater expertise and more efficient management structures than government agencies, leading to better service delivery.

In some cases, private companies even effectively assume the role of municipal government, whether through delegation from the nominal city authorities or by statute. Perhaps the most striking example is Honduras’s Zones for Employment and Economic Development, better known as ZEDEs. ZEDEs allow privately managed cities like Próspera’s on the island of Roatán to enact their own laws in place of the ordinary national laws, a feature that has resulted in legal and political challenges.

There are certainly examples where private governance has been horrible. The so-called “company states” of the 16th and 17th centuries, like the British and Dutch East India Companies, were commercial monopolies with state powers. They wielded that power to plunder societies and violently suppress the formation of free markets, leading to permanent and devastating economic, social and environmental consequences.

What distinguishes good private governance from bad? The pivotal factor is incentive alignment. The more power a company has over society, the more important it is to ensure their profit is linked to societal wellbeing.

Requiring land value capture can get us some of the way there. If a private company has a strong incentive to increase land values for an entire zone or city over the long term, they will probably aim to improve economic and social conditions there. Other ways of aligning a company’s private interests with a society’s include third-party performance monitoring, performance-based payment and legally binding minimum standards.

In short, effective private governance depends on having a framework in which legal guardrails and economic incentives channel private powers towards the public good.