EPZs and SEZs

The transformation of the policy, legal and regulatory framework of Export Processing Zones (EPZs) in Kenya will see them converted to Special Economic Zones (SEZs) and replicated in all 47 counties in the country. See more here.

The SEZ concept has evolved globally to include a wider range of economic activities with the aim of accelerating growth and development as opposed to only focusing on manufacturing for export. SEZs have been adopted in other countries such as China, Mauritius, Egypt and India and have widened the range of activities included in the economic zones to also accommodate companies with a domestic market orientation and those in the services industry. In Kenya the SEZ will widen the domestic market to include the EAC. 

The move from EPZ towards economic zones in Kenya will require the current EPZ Act to be amended. Further, there will be a need for the harmonization of the new Act with other government Acts and policies that may be hindering investment and effective investor facilitation in the zones.  A sound legal and regulatory framework is a necessary first step for a successful zone program, particularly one designed around private sector development and operations.

According to previous article found here on SEZs, China used a number of policies to ensure that technology transfer would take place domestically through the SEZ, through joint ventures between foreign investors and local firms and that strong domestic players would emerge. In fact, 100% foreign owned firms were a rarity among the leading players in the industry in China and the goverment can be applauded for a determined effort to capture and acquire domestic capabilities to build modern industries. 

According to the World Export Processing Zones Authority (WEPZA) zones have generally failed to have a catalytic effect in most African countries in part because they have been disconnected from wider economic strategies; they are often put in place and then left to operate on their own, with little effort to support domestic investment in the zones or to promote links, training, or upgrading. Unlocking the potential of zones appears to require clear strategic integration of the program as well as active government leadership to facilitate the positive impact of the zone.  According to the WEPZA, in Africa few, if any, appear to treat the zone programs as an important pillar of wider economic growth, industrialization, and trade strategy.

In addition, high-level, active government commitment to zone programs is a significant contributor to their success. This support must be consistent over the long term: The evidence from even the most successful zone programs suggests that it normally takes 5–10 years after zones launch (thus, possibly 15 years or more from when a project was first conceived) before a zone begins to show signs of success. In analyzing the East Asian successes with economic zones, the role of political leadership— in terms of both vision and active support along the path of planning, implementation, and operation—is clear. African zone programs have largely failed to secure this kind of consistent and active commitment from senior political leaders. 

 

In cclosing, successful programs such as those in Mauritius, Malaysia, and China use their zones as part of a group of instruments designed to promote wider economic policy reform, diversification, and upgrading. They also have strong governmental leadership.

For previous post on EPZs in Kenya see here

Export Processing Zones in Kenya

Kenya’s Export Processing Zones (EPZs) have failed to meet expectations on wealth and job creation, the World Bank (WB) says in a new report as the government prepares to reform the model which has lagged behind what Asian and Latin American countries offered.

Incentives provided through export processing zones and special economic zones should be compatible with World Trade Organization specifically the Subsidies and Countervailing Measures Agreement including timelines on export promotion instruments; otherwise host countries may face retaliatory actions by importing countries.

According to the Kenya Export Processing Zones Act Article 9 replicated below these are the regulations that apply to EPZs in Kenya.

Subject to subsection (1) and without prejudice to any other written law, the export processing zone enterprises, export processing zone developers and the export processing zone operators shall be granted the following exemptions—

(a) exemption from registration under the Value Added Tax Act;

(b) exemption from the payment of excise duties as specified in the Customs and Excise Act (Cap. 472);

(c) exemption from the payment of income tax as specified in the Income Tax Act (Cap. 470) for the first ten years from the date of first sale as an export processing zone enterprise, except that the income tax rate shall be limited to twenty-five percent for the ten years following the expiry of the exemption granted under this paragraph;

(d) exemption from the payment of withholding tax on dividends and other payments made to non-residents during the period that the export processing zone enterprise is exempted from payment of income tax under paragraph (c);

(e) exemption from stamp duties on the execution of any instruments relating to the business activities of an export processing zone enterprise;

(f) exemption from quotas or other restrictions or prohibitions on import or export trade with the exception of trade in firearms, military equipment or other illegal goods;

(g) exemption from exchange controls on payments for—

(i) receipts of export processing zone exports;

(ii) payments for raw materials, intermediate goods, tools, and spares, supplies, construction equipment and construction materials, capital equipment, office equipment, repatriation of royalties, management fees, technology transfer fees, profits, dividends, advertising expenses, inspection fees for quality control, debt service and any other legitimate business expenses; and

(iii) capital transactions, except on capital funds raised form Kenya residents subject to exchange control in which case remittance of dividends, profits, debt service and any other returns to such capital invested shall be subject to the Exchange Control Act (Cap. 113);

(h) exemptions from rent or tenancy controls; and

(i) any other exemptions as may be granted by the Minister for the time being responsible for finance by notice in the Gazette.

See related article here on the Kenyan experience on EPZs.

Meanwhile Mauritius can be considered one of the most successful stories in the context of the African continent on EPZs. In the past Mauritius has grown on average by 6 per cent, relying on several growth engines which include export processing zone (EPZ), the sugar sector, tourism and the emerging financial services sector. The EPZ can be credited with diversifying the Mauritian economy from the traditional sugar sector and leading to the industrialization of the country.

Made in Africa

November 20th marked yet another “Africa Industrialization Day” by the United Nations. There have now been 25 such events, and they seem to have come and gone with relatively little notice. This year may be different: Africa’s failure to industrialize has come to the attention of a growing number of observers, noting with some alarm at the fact that many African countries are de-industrializing while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.

By any measure Africa’s failure to industrialize is striking. In 2013 the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, half of what would be expected from the region’s level of development. Moreover, it has not changed since the 1970s. Africa’s share of global manufacturing has fallen from about 3 percent in 1970 to less than 2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries and manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low income countries.

This lack of industrial dynamism is a growing matter of concern to Africa’s political leaders, as well. Historically, industry is the sector into which resources have first moved in the course of economic development. Industry is the pre-eminent destination sector at early stages of development because it is a high productivity sector capable of absorbing large numbers of moderately skilled workers. Between 1950 and 2006, about half of the catch-up by developing countries to advanced economy levels of output per worker was explained by rising productivity within industry combined with labor moving out of agriculture into manufacturing. 

The objective is clear—Africa needs more industry—but the path forward, remains 'more a marathon than a sprint'. One of the major constraints to Africa’s industrial development is a lack of the “basics”—infrastructure, skills and institutions. While industrialization cannot succeed without these, they are not enough. Three closely related drivers of firm-level productivity—exports, agglomeration and firm capabilities—have been largely responsible for East Asia’s industrial success, and their absence goes a long way toward explaining Africa’s lack of industrial dynamism. For example, in Tanzania, special economic zones (SEZs), which are export-oriented industrial clusters, contain about 40 firms, employing around 10,000 people. Vietnam on the other hand has 3,500 firms in its export processing and industrial zones, employing 1.2 million workers. Putting policies in place that promote manufactured exports, encourage the development of industrial clusters and attract more capable foreign direct investors outside of the natural resources sector are essential first steps in reversing Africa’s industrial decline.

Joint Ventures Key in China’s Export Growth

Foreign investors have played a key role in the evolution of China’s exports of consumer electronics. Over the past few decades, foreign investors in China were found to be the most productive of the producers, they were the source of technology, and they dominated exports. China’s openness to foreign investment and its willingness to create Special Economic Zones (SEZs) where foreign producers could operate with good infrastructure and with minimum hassles must therefore receive considerable credit. But if China has welcomed foreign companies, it has always done so with the objective of fostering domestic capabilities. To that end, China used a number of policies to ensure that technology transfer would take place and strong domestic players would emerge. Early on, reliance was placed predominantly on state-owned national champions. Later, the government used a variety of carrots and sticks. Foreign investors were required to enter into joint ventures using the Law of the People;s Republic of China on Joint Ventures Using Chinese and Foreign Investment with domestic firms (for instance in mobile phones and in computers).

There was also a role for tariffs. Domestic markets were protected to attract market-seeking investors, in addition to those that looked for cost savings. Weak enforcement of intellectual protection laws enabled domestic producers to reverse engineer and imitate foreign technologies. And localities were given substantial freedoms to fashion their own policies of stimulation and support, which led to the creation of industrial clusters in particular areas of the country.

On acquiring technology transfer and building local supply linkages, China’s strategy was clear: It allowed foreign firms access to the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry. Most of the significant firms tended to be joint ventures between foreign firms and domestic (mostly state-owned) entities. A strong domestic producer base has however also been important in diffusing imported technologies and in creating domestic supply chains. Facilitating technology transfer requires a strong focus on Research and Development by the State. Without state support and publicly funded R&D, a company like Lenovo (previously known as Legend) which became large and profitable enough to purchase IBM’s PC business would never have come into being.

In sum, China has benefited both from good fundamentals—low labor and materials costs, “outward orientation” in the form of SEZs, large market size—and from a determined government effort to acquire domestic capabilities and build a modern industry. The large size of the economy has allowed policy experimentation. It also has allowed the government to use the carrot of the internal market to force foreign investors into joint ventures with domestic producers. If China is producing an increasingly sophisticated set of consumer electronics for instance, it would appear that this is due as much to the policy environment as it is to the free play of market forces.

For more on Special Economic Zones see here.