Special Economic Zones (SEZs) are often touted as the panacea for all of the economic problems that a country might face. Seldom does the reality of an SEZ live up to the hype.
SEZs are geographically designated areas of a country set aside for specifically targeted economic activities, supported through special arrangements (that may include laws) and systems that are often different from those that apply in the rest of the country. Various iterations of Special Economic Zones include Free Economic Zones, Export Processing Zones (EPZs) and Free Trade Zones (FTZs).
SEZs are typically located in areas with particular resources and historical sectoral strengths. The relevant SEZ is geared to serve, support and encourage development of those resources and sectors.
The African Economic Zones Organization (AEZO)¹, the continental body representing the public and private institutions which run and promote SEZs in Africa, reports that in 2021 there were about 203 SEZs in Africa with a further 73 under development. Zones are present in 47 of the continent’s 54 countries, with the largest number of zones in Morocco, Nigeria, Egypt, Ethiopia and Kenya.
SEZs are now firmly established across Africa and experience shows that they can succeed.
Many countries have coordinating bodies for SEZs such as the Nigeria Economic Zones Association (NEZA), the Special Economic Zones Authority (SEZA) of Kenya, the Special Economic Zones Authority of Rwanda (SEZAR) and SEZA Botswana. Kenya has no fewer than eight types of SEZ, ranging from ICT Parks and Science and Technology Parks to Free Trade Zones and a Free Port Zone.
Clearly defined goals
An SEZ could have any one of a number of primary goals. These include: to increase foreign direct investment (FDI); to link local firms to the operations of foreign investors through the supply chain; to boost exports; to beneficiate a country’s natural resources on home soil or to develop local manufacturing capacity.
Probably the main reason that some SEZs achieve a measure of success is that the chief goal, as outlined above, is clearly identified and articulated. Where the goal is not properly described and defined, it is much more likely that the SEZ will end up achieving very little of anything.
Key to supporting the definition of an SEZ’s objective is national policy. Where an SEZ fits logically into a country’s industrial policy, then the articulation of the SEZ’s goal becomes easy.
Probably the main reason that some SEZs achieve a measure of success is that the chief goal [of the SEZ ] … is clearly identified and articulated.
South Africa’s Industrial Policy Action Plan (IPAP) identifies SEZs as key contributors to economic development. They are growth engines towards government’s strategic objectives of industrialisation, regional development and employment creation.
Rwanda and Mauritius were singularly successful in achieving clearly articulated aims with their first SEZs. Rwanda wanted to boost employment by producing goods for export. Within three years, 3% of its workforce was employed in the newly established SEZ while Mauritius succeeded spectacularly in processing and selling sugar to the EU, boosting both export income and employment (Inclusive Society Institute²).
A key distinguishing feature of the Mauritian story was the fact that European processing companies led the process. The government leaned heavily on the private sector to achieve its national development goals and research supports the idea that the best model for ownership or management of SEZs is a combination of public and private.
Since Rwanda’s first SEZ, Kigali Special Economic Zone, Bugesera SEZ and a further eight industrial parks have been gazetted in Rwamagana, Muhanga, Nyagatare, Musanze, Huye, Nyabihu, Rusizi and Rubavu.
Many ownership options are available, running the whole gamut from wholly government controlled to a licensing arrangement with a private entity. One option is for a private investor responsible for the establishment of the SEZ to be given a lease of a set number of years, after which the facility reverts to the government.
The government leaned heavily on the private sector to achieve its national development goals and research supports the idea that the best model for ownership or management of SEZs is a combination of public and private.
Government’s main roles are to provide legislative certainty and good infrastructure. Where both are present, SEZs are far more likely to succeed. A failure to provide adequate transport or power infrastructure will deter private investors, as will a legislative framework that changes every few years.
The other key government role is to determine the level of incentives available to investors in an SEZ.
An Occasional Paper published by the Inclusive Society Institute in 2023, “Leveraging special economic zones for growth”, notes the fiercely competitive environment in which SEZs operate globally. Morocco’s successful policy is highlighted in this regard. Investors in any one of the country’s seven SEZs paid no corporate taxes for five years and pay reduced rates after that. Various other low rates of tax and generous exemptions are applied. Morocco’s exports are now valued at over $2-billion, with international aeronautics companies now manufacturing in the country for export.
Also cited in the paper is the Hamriyah Free Zone in Sharjah in the United Arab Emirates where a business license can be granted within 24 hours of application.
By contrast, the laws applicable in some SEZs are barely distinguishable from the laws that apply in the host country.
Local pressures
Which is not to suggest that SEZs should be a free-for-all zone where labour practices are regressive, environmental protections are ignored and the wishes of local residents are overruled.
Indeed, the failure of some SEZs can be put down to a failure to balance the needs of labour, the environment and local communities with the desire to pursue exports or some other aspect of national economic policy.
Consultation with local communities is likely to improve the chances of success of any SEZ. In the same way, linking local businesses and suppliers to the economic activity happening within the SEZ will not only make for a happier community, but also help to achieve the economic aims of the host country.
South Africa’s Coega SEZ has progressively increased the procurement participation of local SMMEs, with the figure for 2015-2020 reaching 35% (Inclusive Society Institute).
…the failure of some SEZs can be put down to a failure to balance the needs of labour, the environment and local communities with the desire to pursue exports or some other aspect of national economic policy.
If local firms are supported through policies such as those adopted by the Coega SEZ, the chances of the SEZ bringing benefits to the local economy are much higher. By contrast, illogical political posturing without reference to the facts on the ground can have a chilling effect on investment.
A case in point was a large retailer which intended to build a supermarket in a country with a large population which had showed a willingness to spend their money on this retailer’s wares. The host government told the prospective foreign investor that shelving had to be purchased from local suppliers. No problem, said the retailer, just point us to the local shelf builder. Large problem, there was no such thing. So the desire of the government to protect a local industry came up against the inconvenient fact that no such industry existed.
A failure to plan resulted in confusion and frustration.
Not all failures are quite as glaringly obvious but making sure that policy lines up with practical reality is certainly one of the most important lessons that African countries can learn from the first three decades of SEZ development on the continent.
In 2022 the 5th African Union Symposium on Special Economic Zones doubled up as the 7th AEZO Annual Meeting, with the additional celebration of 30 years of SEZs in Africa. Mauritius was the first mover, in 1970, followed by Ghana and Senegal.
SEZs are now firmly established across Africa and experience shows that they can succeed.
¹ African Economic Zones Organization (AEZO)
² Inclusive Society Institute
