TRALAC - Trade Law Centre

Kenya: Industrialists see fortune in special economic zones

Wednesday, 09 June 2010

Source: Business Daily (Kenya)

Jas Bedi of Bedi Investments — a Nakuru-based textile manufacturing company — waits for the day the government will convert the country’s Export Processing Zones (EPZs) into Special Export Zones (SEZs), which will allow his firm to sell products locally.

Currently Bedi Investments’ textile products, which include high quality blankets, are largely for export especially to the United States under the African Growth and Opportunity Act (AGOA) programme.

“EPZ is largely apparel -based, which is denying other critical sectors of the economy such as business process outsourcing (BPO) and other information technology related businesses the opportunity to be established in such zones,” said Mr Bedi.

All textile manufacturing firms based in EPZ enclaves export their goods as they are not allowed to sell them locally.

Given that the companies enjoy numerous tax incentives including a 10-year corporate tax holiday, withholding tax holiday, excise duty and value added tax (VAT) exemption, and repatriation of profits — other players in the manufacturing industry argue that allowing them to sell locally would be disadvantageous to them.

But experts argue that Kenya’s plan to convert EPZ enclaves into special export zones will open up the economy and benefit the country.

EPZs focus largely on the production of export bound goods and their operations are located in exclusive zones supplied with good infrastructure, reliable power, and easy administrative procedures.

Special export zones, on the other hand, are broader and open to local economies, hence goods produced are consumed both internally and externally.

The SEZs will allow for a wider range of commercial ventures, including primary activities such as farming, fishing and forestry, and will not be restricted to the enclaves, experts said.

The conversion will allow for a more flexible market orientation with higher domestic sales, in addition to the focus on exports.

The establishment of special export zones will also allow for the existence of free ports and trade zones across the coastal strip, science and technology parks, agricultural free zones and tourism development zones, experts said.

A few African countries have successfully implemented the SEZs concept, leading to an increase in export earnings, diversification of manufactured goods, and linkages of various sectors of their economies.

Countries such as Mauritius, Namibia, and South Africa have integrated the SEZs into their economies, improving their overall performance.

Mauritius has opened up access to the country’s markets, put in place efficient border administration, and a conducive regulatory environment that facilitates trade.

However, the country faces challenges especially its transport facilities, making tracking and tracing of goods difficult and leading to delays in shipments.

“The change from EPZs to SEZs has allowed us to integrate the export drive to the overall economy by eliminating EPZ enclaves, thereby creating more jobs and ease of technology transfer,” said Ali Mansoor, Mauritius’ Financial Secretary.

Other countries such as Namibia and South Africa have successfully implemented the SEZ programme, opening up their economies to increased international trade, hence more foreign exchange earnings.

For instance, Namibia has favourable international market access due to a high share of duty free imports, which lowers the cost of raw materials allowing high margins for exporters.

Additionally, the country’s strengths include a well-developed transport system and a regulatory environment that is more efficient and transparent than that of most of its neighbours.

In the case of South Africa, a well developed transport and communications infrastructure and easy border administration procedures have enhanced its export oriented economy.

The country also boasts of efficient infrastructure and a solid institutional framework, including efficient government structures.

Besides opening up Kenya’s entire economy to the export drive, special economic zones would allow for the development of better infrastructure across the economy.

But Kenya, together with her neighbours Tanzania and Uganda, have not managed to transform their EPZs into special export zones.

In Kenya’s case, the effort is likely to be hampered by lack of good infrastructure in the other parts of the country compared to what is provided in EPZ enclaves.

Infrastructural bottlenecks

Trade experts said infrastructural bottlenecks are the main hurdle standing in the way of upgrading EPZs into SEZs.

“Lack of infrastructural facilities such as reliable power, a good road network, and ease of administrative procedures similar to those existing within export processing zones will affect the roleout of the special economic zones in Kenya,” said Thomas Farole, a senior trade specialist at the World Bank.

He said the infrastructural gap that exists outside the EPZs needs to be addressed if the transformation is to be successful. EPZs, which were created to attract foreign direct investment, have good road networks, reliable power supply and streamlined business procedures such as one-stop licensing and easy export clearance units.

Mr Farole said a new study by the World Bank on SEZs shows that foreign investors prefer regions that have world class infrastructure beyond EPZs, expedited customs and administrative procedures, and fiscal incentives.

However, failure of EPZs to attract the much needed FDI, create jobs and enable technological transfer has led to the drive to transform them into special economic zones.

In addition, the success of SEZs in export based business and massive job creation in Asia and Latin America has forced most Sub Saharan African countries to transform their EPZs.

Many incentives

On their part, local industrialists have called for quick transformation of EPZs into SEZs to allow for investment beyond the largely textile based model being pursued.

“The drive to transform EPZs into SEZs is to allow for faster diffusion of technology to the overall economy, create jobs, and allow for a complete backward and forward linkage with the overall economy,” said Adelhelm Meru, the director general of the Tanzania Export Processing Zone Authority.

Mr Meru said the many incentives provided to players in EPZs had not borne the required fruits, hence the need to transform them.

Like Kenya, Tanzania’s planned conversion of EPZs to SEZs will have to contend with burdensome customs and border administration procedures, a significant hindrance to exporters.

Similarly, poor infrastructure and lack of reliable transport services deny the country the opportunity to harvest benefits of increased international trade.

Other African countries that have successful special export zones include Senegal, which is credited with having a secure and open business environment and relatively simple and fast import and export procedures.

The country has simple tariff structures too.



“ Latest AGOA Trade Data currently available on AGOA.info


Click here to view a sector profile of Kenya's bilateral trade with the United States, disaggregated by total exports and imports, AGOA exports and GSP exports.


Other regularly updated trade statistics on AGOA.info include: (click each link to view)

  • AGOA-Beneficiary Countries’ AGOA and GSP Trade Aggregates

  • AGOA Trade by Industry Sector

  • Apparel Trade under AGOA’s Wearing Apparel Provisions

  • Latest Apparel Quotas under AGOA

  • Bilateral Trade Data for all AGOA-eligible countries individually.