Not in the zone

Thailand’s Special Economic Zones fail to meet expectations

Wannaphong Durongkaveroj

Development, Economics and finance, Trade and industry | Southeast Asia

19 March 2018

Despite lofty goals and generous government support, Thailand’s Special Economic Zones (SEZs) have been nothing but disappointing, Wannaphong Durongkaveroj writes.

Since 2015, Thailand’s military government has been in the process of rigorously reforming the country’s investment policies. One of its main reforms has been to establish Special Economic Zones (SEZs) along the country’s borders. But despite government promises, these zones will ultimately fail to bring the country or the economy back on track.

The main objective of SEZs is to attract foreign direct investment. The idea is that an influx of foreign money will boost the country’s economy, spread prosperity to provincial areas, reduce inequality, and also improve the quality of life of people in the countryside.

Thailand’s existing SEZs cover ten border areas with neighbouring countries, including Myanmar, Laos, Cambodia and Malaysia. There are at least two reasons for placing the zones at border areas. First, they aim to support Thailand’s small and medium-sized enterprises by providing them with continuous investment from neighbouring countries. Second, the SEZs serve to organise the border areas, and also help resolve such issues as illegal labour and the smuggling of agricultural products from neighbouring countries.

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National and multinational corporations investing in the zones will receive generous governmental support from the Thai Board of Investment (BOI), including tax incentives and ‘One Stop Service’ investment facilitation. For example, eligible companies will receive: an exemption from corporate income tax for eight years, with a possibility to extend for another five years; a double deduction in tax for transportation, electricity and water costs; and an exemption from import duties on machinery and raw materials involved in the manufacturing of products for export.

The SEZs aim to target 13 specific sectors: agricultural and fisheries, textiles, furniture, gems and jewellery, electronics, automotive and parts, logistics, industrial estates, tourism, ceramic industries, plastics, medicines, and medical equipment. These sectors are promoted differently in each SEZ. The total budget plan for the SEZs between 2015 and 2019 is about US $1 billion, of which infrastructure accounts for a significant share.

However, despite all these incentives, the SEZs are unlikely to succeed in driving new investments in Thailand.

The short reason why is that both Thai and foreign investors are still choosing to invest under other schemes, for example, cluster promotions. Since the beginning of the reforms in 2015, the total number of applications for SEZ investment benefits has been very low compared to total applications under all schemes – less than 1 per cent of total investment certificates in the country.

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One problem facing all SEZs is the dramatic rise in land prices since 2015 due to speculation by land owners and businessmen. Although this problem should have been easily predicted, there is no clear solution.

When investors complain about land prices, the government attempts to solve the issue by extending SEZ areas. The government might try to allocate what officials see as degraded forest land, only to have the villagers living there disagree and argue the area is a flourishing wetland. This has led to objections from villagers in several SEZ areas.

Additionally, the state of infrastructure across the ten SEZs is far from equal. In previous years, the level of development in each area depended on the volume of trade across the border. This means that some SEZs require a lot of improvement in basic infrastructure and customs utility. For this reason, some SEZs, for instance Mukdahan (bordering Laos) and Sa Kaeo (bordering Cambodia), were very quiet and received little interest from investors in the early years.

Compared to other investment schemes supported by the BOI, investment incentives in SEZs are not significantly different. Investors may not see a big profit margin in installing their new factories in distant areas – far from the capital Bangkok.

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The SEZs also face environmental issues. Even though the policy aims to promote environmentally friendly production, the tax incentives allow for a double deduction of transport, electricity and water expenses for ten years. Such a policy provides little incentive for companies to be mindful of environmental issues or economise their usage of electricity and water.

Additionally, the policy encourages labour-intensive industries. This is a sharp contrast to other investment policies and national development plans that instead encourage capital-intensive and high-technology industries. Moreover, with an attempt to attract low-skilled and cheap labour from neighbouring countries, the extent to which local people will find work in the economic zones is questionable.

Finally, Thailand is expected to hold a general election at the end of 2018, or at the latest early 2019. Under a new government, there is no guarantee that SEZs will still be encouraged. This only brings uncertainty to investors who might be considering projects in these zones. On top of this, government interest is now turning to another mega-project – the ‘Eastern Economic Corridor’.

The SEZs policy was promoted as a new engine of growth and a strong foundation to make Thailand a ‘high-income country’. Generous investment incentives and improved infrastructure have been used as a key strategy to attract investors worldwide. However, due to competing investment schemes, the distance from the main centres of Thailand’s economy, and an unclear political future, this mega-project is unlikely to live up to expectations.

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