Export Processing Zones (EPZs) have mushroomed across Africa. Their logic is to attract export-oriented manufacturing investment to boost economies. EPZs, although they create controversy in certain circles, have been highly successful in Asia, central and Latin American countries. Is the attempt by Africa to follow suit bearing fruits?
African states, from Egypt in the north to Ghana in the west, have embraced EPZs as a strategy to attract foreign investment. Also known as special economic zones, industrial development zones or free trade zones, the EPZ aims to attract export-oriented manufacturing investment by setting aside enclaves where investors receive a wide range of incentives and developed infrastructure.
They have been very successful in Asia. Industrialisation in countries such as China, Taiwan, Hong Kong and Singapore was propelled by implementing policies that promoted the creation of special investment and export processing zones.
Dr Kwabena Duffuor, Finance Minister
China, for instance, established – between 1979 and 1988 – five major special economic zones (SEZs), and opened a further 14 coastal cities to investors. The strategy helped to attract foreign direct investment into industry and increased manufactured exports, ultimately creating GDP growth and employment.
While most nations were developing the foundations of an export-based economy which focused on the development of a manufacturing sector, Africa stagnated, relying on the export of raw materials. But the trend is gradually changing with countries adopting strategies and policies that will improve their standing on the world economic stage.
The establishment of EPZs is one such strategy. A sweeping wave of EPZ legislation in the early 1990s enabled over 20 countries to establish zones which offer exemption from normal tax codes, custom, duty and labour restrictions. These exemptions have allowed businesses to flourish. Tax exemptions include:
* Kenya provides EPZ investors with a 10-year tax holiday
* Egypt offers entities operating in free zones a life-long exemption from all taxes
* Mauritius’ EPZs offer a flat 15% corporate tax rate and dividends tax free for 20 years
* Cameroon’s zones give investors 100% tax exemption for 10 years, followed by a 15% tax and free repatriation of profits. Investors also have “flexible labour laws”, and an exemption from the standard wage classification scheme.
* South Africa’s industrial development zones (IDZ) offer direct links to an international port or airport, good infrastructure, a zero rate of VAT on supplies bought locally, latest ICT, and duty free importation of production-related raw materials and inputs.
Nigeria, Ghana, Tanzania, Uganda, Zambia, Morocco, Senegal, Tunisia, Namibia, Mozambique and the Ivory Coast offer similar incentives packages.
Ghana has established a number of Export Processing Zones with the aim of promoting the processing industry and the development of trade and services. The Tema EPZ is the only one of four planned Export Processing Zones that is currently up and running.
Tema is home to Ghana’s biggest port and is only 25 km away from Accra. The EPZ in Tema covers an area of 480 hectares, is readily accessible and is managed by a dedicated one-stop shop called the Ghana Free Zones Board (GFZB).
However, companies that are located outside the Export Processing Zone can also benefit from the relevant incentives. To be included in the EPZ regime, a company must export at least 70% of its annual production.
Export Processing Zone incentives includes exemption from all direct and indirect customs duty and taxes on both exports and production-related imports, exemption from all forms of income tax for 10 years, subsequently limited to 8%, exemption from capital gains tax on dividends from investments in the Export Processing Zone. No double taxation of foreign investors and salaried personnel, no import licences are required, bare minimum in terms of customs formalities, no limit as regards the volume of shares held by foreigners in companies within the Export Processing Zone, free transfer of capital in and out of the Export Processing Zone, companies from the Export Processing Zone can hold bank deposits in foreign currencies at domestic banks.
The Ghana Free Zones Board is responsible for all matters relating to the Export Processing Zones and acts as a one-stop shop for investors who qualify for the EPZ incentive scheme.
However, attempts in Africa to follow on the successes of Asia in developing free trade zones for kick-starting industry and diversifying the economic base have seen less success. A number of factors including inadequate infrastructure and entrepreneurial capacity, institutional challenges, political aspects, and even investor ignorance, have made the implementation of most EPZs sluggish.
Ron Sandrey, a research associate at the Trade Law Centre (Tralac) says the concept can work in Africa, but must be implemented under the correct circumstances.
‘With the right enabling environment the effects of SEZs can be positive and stimulate greater foreign exchange earnings, while promoting strong backward and forward linkages within national economies and regions.’
Sudir Chuckun, an advisor at NEPAD Planning and Coordinating Agency (NPCA), concurs: ‘EPZs should be part of a country’s economic strategy and not the basis of strategy. Africa will first need to address internal challenges; otherwise we cannot emulate Asia’s success.’
EPZ investors, like their counterparts operating in African countries which are signatories to the AGOA act, have benefited immensely from the Act that offers preferential, duty-free access to the US market for more than 6000 goods and services from Africa.
Minimal local ownership in Africa’s EPZs has been a big issue with domestic investors complaining some governments invest too much in the development of free trade zones and forsake to create infrastructure and more jobs for the same amount of money to benefit businesses outside the special zones.
‘The idea is to strike a balance between infrastructure development in FTZ with a commensurate upgrade and maintenance for areas outside the zones. FTZ infrastructure plans should be integrated within the broader regional and national infrastructure master plans in order to complement the overall need and goal for infrastructure development,’ says James Chakwizira, senior researcher in the built infrastructure department of the Council for Scientific and Industrial Research (CSIR).
Nigeria is serious about enticing domestic investors to set up in its free trade zones. Ananda Sivaram, the Managing Director of the Lagos Free Trade Zone Company, says domestic investors could avoid the bureaucratic bottlenecks associated with getting approvals from various government ministries and agencies if they invested in a free trade zone, where decent infrastructure exists.
The biggest challenge facing developing economies today is that of infrastructure and Ghana is not an exception. Investors are looking for production cost reduction, safety and security of their investment as well as good return on investment in their bid to break even and compete favourably in the international market.
The Jebel Ali Free Trade Zone in the United Arab Emirates was key to that country’s successful diversification of the economy from the oil sector. Ghana, in a bid to boost its manufacturing capacity, followed suit and developed about 4 free trade zones (only 1 is functioning), most of them situated in ports so access to regional and international markets is maximised.
Now the focus of government is increasingly on areas where every kind of infrastructural support is put in place to support manufacturers. A wide range of tax holidays, customs incentives and other special concessions apply to investors operating in the FTZs, especially if they use locally sourced raw materials and export the end product.
Ten years after they were born, South Africa’s five industrial development zones continue to attract investment. Although the country is a favourite investment destination, many investors have kept away from the IDZs due to the government’s refusal to back down on labour regulations.
ARTICLE: BY SAMUEL KOFI AMPAH & NELLY NYAGAH