The push to cordon off the Illawarra as a "special economic zone" with tax and financial incentives for business has been deflated after a parliamentary committee found the zones were not justified in NSW.
Wollongong MP Noreen Hay was a member of the committee investigating how the zones could boost growth, employment and investment in regional NSW.
But rather than bolstering lagging economies, it found localised tax and financial incentives could create new border issues within NSW.
Arguments against special economic zones, or SEZs, included that they could disadvantage neighbouring regions, evidence of their success overseas was "mixed and inconclusive", the types of incentives on offer might be ineffective, and they could also promote inefficiency.
The finding came as a blow to Illawarra groups that had argued the region was an ideal candidate for extra support.
Regional Development Australia Illawarra and the Southern Councils Group said the Illawarra was "poised to take advantage" of an SEZ because of its diverse manufacturing base, ports, proximity to major cities, vibrant tertiary sector and "can do" attitude.
RDA Illawarra said the roll-out of the National Broadband Network - now taking place in Wollongong - was another competitive advantage.
Wollongong, Shellharbour and Kiama councils are members of the Southern Councils Group.
"The reason that [the finding] would be a blow to us is that we believe the Wollongong, Shellharbour, Kiama area in particular was investment-ready, and while we didn't want to play on it, we believe that that particular region and the wider southern councils region has experienced a particularly heavy buffet over the past few years," executive officer Lesley Scarlett said yesterday.
The committee examined arguments for and against SEZs in border regions, disadvantaged regions and growth regions like the South Coast.
It said existing initiatives and recent reforms like the creation of a cross-border commissioner and overhaul of the planning system provided greater opportunities to promote investment and economic development.
Recommendations included working towards state tax rates that were equal to or more competitive than other states.
Ms Hay yesterday said she had initially supported SEZs but, based on the evidence, had agreed that "perhaps economic zones were not the answer".
She also agreed special assistance could help the Illawarra.
"I wholeheartedly support the suggestions of government investing in regions through economic investment proposals," she said.