Vince Musewe
SPECIAL Economic Zones (SEZs) have been gaining increasing attention from policymakers in Africa as a means to attract private sector and foreign direct investments (FDI).
However, for many reasons, the results have been somewhat mixed across the continent, with some doing quite well while others have dismally failed to achieve the intended objectives. Zimbabwe, for example, has established about 15 SEZs with very limited impact on FDI and job creation.
The economic logic behind SEZs is attractive in theory. Basically, a country establishes special areas and/or incentives for investment in specific sectors of the economy, mainly targeting manufacturing and export growth. The idea is for SEZs to act as a catalyst for private sector-led development and FDI by providing incentives and better business operational conditions.
SEZs are defined broadly as specific geographical areas within a country where incentives are provided for investment and have more attractive investment rules compared to the rest of the country. SEZs come in a number of distinct forms, such as an export-processing zones (EPZ), industrial zones, or a free port. According to the ILO, SEZs today may account for around 130 million jobs worldwide, approximately 7 – 8 percent of total global exports.
Most SEZs offer four main advantages to investors relative to what they could normally receive in the domestic environment, these include; infrastructure, an improved regulatory and administrative regime, a special customs regime, and an attractive fiscal and monetary regime. In some instances, as is the case with Zimbabwe, company based SEZs are also offered, meaning that, private companies can apply for an SEZ license and do not necessarily have to be in a demarcated geographical area. Zimbabwe has a few of these.
According to research done by the African Development Bank (AfDB) across Africa on the impact of SEZs, the key objectives of setting up SEZs include the following:
Attracting FDI – SEZs can present investors with a more attractive investment offer in fragile situations, including through improved security (both economic and physical), support for local financial intermediation, improved access to serviced land and/or buildings and protection of land rights, catalyzing the rebuilding of the business environment, linkages to local economies, and reliable electrical supply.
Establishing growth poles – SEZs are established as growth poles, i.e., integrated regional growth initiatives based on domestic industry clusters and local labour markets and around key trade infrastructure (ports, roads, power projects). This allows governments to better integrate their national economies.
Encouraging private sector investment – Successful SEZs depend on private sector participation in the management of the zone, which can also lead to a broader engagement of the private sector in the economic, social and political development of countries.
Supporting SMEs – SEZs also have the potential to support local SMEs by either encouraging them to enter the zone directly by lowering entry costs or facilitating these local companies becoming suppliers to firms in the zone by making procurement processes easier and more competitive. Hereby, SMEs can become catalysts for a broader entrepreneurial culture.
Expediting wider private sector development – Successful SEZ programmes in the past have targeted specific sectors and investors with the potential to become a catalyst for wider private sector development. This allows governments to address sector-specific economic, political and social sensitivities with a view to improving the governance environment.
Supporting economic diversification – SEZs, particularly those that are mixed-use zones, can provide an avenue for a gradual emergence of a services and export-oriented manufacturing sector.
Fostering institutional strength and capacity – A successful SEZ program requires extensive regulatory and institutional coordination. If implemented successfully, this can strengthen institutions’ capacity and skills in the specific task it is assigned in the process of developing and implementing an SEZ strategy. Additionally, efficient zone management requires significant collaboration between different institutions and non-state actors. Such collaboration helps foster policy coherence, policy stability, and, ultimately, state
capacity.
According to the AfDB research, SEZs can provide an avenue for a gradual emergence of a large manufacturing sector focused on export-oriented industries (rather than being focused on simply exporting natural resources) and services sectors. However, a lack of policy clarity, political involvement in the decision-making process and insufficient technocratic capacity have presented significant hurdles to most SEZs in Africa. SEZs were positioned as the solution to lack of investment without taking into consideration the necessary supporting governance environment for their success.
For example, Zimbabwe has a total of 15 SEZs, and very few are fully operational with the remainder in limbo due to a lack of interest from investors, especially the lack of appropriate infrastructures and inconsistent policy implementation, especially around tax incentives.
The prerequisites for a successful SEZs have been identified as: adequate state capacity, private sector-led investment and effective SEZ policy design and implementation. SEZs require;
• A regulatory regime that enhances the business climate and decreases the cost of doing business;
• An efficient governance structure which provides a solid development strategy and implementation; and
• A strong infrastructure offering combining world-class business/technology/ industrial/commercial park(s) and transport nodes.
In our case in Zimbabwe, SEZs have not delivered according to intent and expectations. Only a few companies are operativeunder SEZs licenses, while most area-based SEZs are lying idle. For those companies that are operating, their major concerns have been inadequate infrastructure, high energy costs, high cost of doing business, inconsistent policy application, especially when it comes to stated and actual benefits (for example, tax incentives) and the dominance of the informal sector has also posed significant challenges for the formal sector.
There is therefore a need to recalibrate and rethink Zimbabwe SEZs strategy and state implementation capacity if we are to see increased investment by both the private sector and foreign investors. This will require:
• Significant investment in appropriate infrastructures;
• Improved state capacity;
• Consistent policies; and
• Increased private sector participation at all levels.
SEZs can indeed work, but what is important is to ensure that SEZ policy design and implementation is an inclusive process which brings together policy makers, the private sector and development partners at inception. There is therefore much to be done in this sector so that we can re-industrialise the economy, diversify our exports and create jobs.
Musewe is an economist and advises clients on socio-economic developments and opportunities within African economies. He is also a business development strategist and does economic and business research for investors and entrepreneurs.