In the Singapore-Suzhou Industrial Park (SIP), the revenue sharing model, however, failed to give the appropriate incentives to local government to ensure their commitment (see Box 5). In Aqaba, the incentives were generally well aligned, but the local authority found that revenue streams were insufficient to support growth and development in the long-term, and that they had limited flexibility to raise additional revenue streams<sup>18</sup> .

# **Box 5: Challenges of partnership alignment in the Singapore-Suzhou industrial zone**

<mark>The Singaporean partners focused on using SIP as a platform to transfer developmental experience, and so they intended to build SIP infrastructure to international standards, which implied high development costs. By the end of 2000, infrastructure investment in the 9 sq km developed at SIP totaled RMB 7.8 billion (US$1.14b), while in the other four state-level development zones in Suzhou 50 sq km was developed with an investment of only RMB 6.9 billion (US$1.01b)</mark><sup>19</sup> <mark>– i.e. infrastructure investment in SIP was 6 times more intensive (expensive) than in the other parts of the zone. As a result, the land needed to be sold or rented at a rate high enough to recover this development cost.</mark> <mark>But for local government, which had only a minor share of the project, the incentives were quite different. They cared less about commercial returns more about the social and economic returns including job creation, GDP, and perhaps most importantly, tax revenue. In China, local government is responsible for the provision of most public goods and services, and its main source of revenue is the value-added tax paid by industrial firms. Thus, the incentive for local government is to attract as many industrial investors as possible, as quickly as possible. Land rents / prices that are too high to attract industrial investors results in less tax revenue and fewer jobs. Thus, there was a clear misalignment of incentives between the Singaporean majority stakeholders and the local government. This was exacerbated by the fact that the central government made a commitment in the initial project agreement to allow SIP to keep all tax revenues generated in the zone. Thus, local government had no incentive to invest in the critical connecting infrastructure to SIP.</mark> <mark>Perhaps to the most significant difficulty in the partnership was the fierce competition that arose between SIP and neighboring industrial parks promoted by the Chinese partner. Before the launch of SIP in 1994, there were already four state-level economic development zones (EDZs) in Suzhou Administration – Suzhou New and Hi-Tech Development Zone (located west of the old Suzhou city)</mark><sup>20</sup> <mark>, Kunshan Economic and Technological Development Zone (30km away from SIP), Zhangjiagang Bonded Area (90km from SIP), and Suzhou Taihu National Tourism and Vacation Zone – as well as numerous provincial-level EDZs. Most of these zones targeted industrial investors. As the other industrial parks were all government sponsored, land developers in those industrial parks were usually state owned enterprises. Their interests were naturally much more closely aligned with local governments. Attracting investors, rather than short or medium term commercial returns, were top on their agenda. Industrial land was therefore rented to industrial investors at subsidized rate, creating serious competition for SIP and making it almost impossible to maintain rents at the levels that could deliver a commercial return.</mark> <mark>Moreover, free-riding could hardly be avoided. As SIP is an open area, roads built inside or connecting to SIP could also be used by users outside of SIP, including in adjacent industrial zones. At the time SIP attracted interested investors with the help of Singapore’s promotion, other industrial parks and neighborhood villages and towns watched and learned from SIP, recruited staff who received on-job training in SIP, and even lobbied to attract investors away from SIP. The competition with Suzhou New and High-tech Development Zone drew the most attention and criticism from Singaporean partners.</mark> _Source: Zhao and Farole (2011)_

> 18 As a result the 75% local retention was extended.

> 19 Data source: Suzhou Statistical Yearbook, various issues.

> 20 This was the site that was initially offered to Singapore for development of SIP

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