BY ANTONY MUTUNGA
Africa has had a rising financial crisis that has caused the African governments to find other means of bringing in more investors and businesses to boost their economies. As a result, Africa has looked to Asia, for example China and Singapore that have prospered due to the development of economic zones.
In 2006, china established the Going Global policy whereby one of its main objectives was to support the establishment of economic and trade cooperation zones abroad. With the information on how the economic zones were prosperous in Asia, the African states went on a mission to attract China in a bid for them to create special economic zones (SEZs) in Africa.
This proved successful as China created various SEZs in five different countries, which include Egypt, Ethiopia, Mauritius, Nigeria and Zambia. This was a turning point as the zones helped the countries to be able to boost their economies through an increase in investors and capital.
Kenya has followed suit by creating economic zones to attract international organizations, which means more and a rise in the economic growth rate. In June 2015, the Cabinet Secretary of the National Treasury, Henry Rotich stated in his 2015/16 budget statement that the government had allocated Sh3bn for industrial development, including SEZs.
Industry, Investment and Trade Cabinet Secretary Adan Mohamed said in a press statement, “We are keen to fast track the implementation of the SEZs to uplift the industrial sector, which despite its potential, has not been dynamic enough to function as an engine for growth for the Kenyan economy as has been the case of newly emerging economies.”
SEZs are zones that liberalise a country’s ability to integrate into the global economy, offering special tax rates, business laws, and financing terms to attract investment and commerce into specific geographic regions. They are specifically demarcated areas within the country where raw materials and capital goods can be imported duty-free from abroad or the domestic market and a special package of tax holiday and incentives are given with view to boost exports from the country.
Kenya, before the decision to create the SEZs was already home to some zones which are referred to as export processing zones (EPZs) but they were limited to manufacturing, commercial and service activities only. The government reported that the EPZs were not impressive with the World Bank saying this was due to the fact that they were set up at the wrong time hence the need for creating the special economic zones arose.
The SEZs would be an added advantage to the country as they are not limited like EPZs hence they will be able to handle much more activities, for example, agricultural activities. The government also plans to freeze new investments within its EPZ before the end of year as it takes up the SEZs model. It has put in plans to create three different SEZs and possibly a fourth after the three are put up and are operational. It also aims to set up the first three zones in Mombasa, Kisumu and Lamu.
Moses Ikiara, managing director of the Kenya Investment Authority (KenInvest), said the fourth SEZ would likely be set up in Naivasha, near the Olkaria geothermal power plant
The first three zones being set up will have access to an agro-processing zone for handling fertilizers, teas and coffees, as well as a processing facility to encourage offshore fishing.
The fourth zone being near Olkaria promises to offer manufacturers who will be in the SEZ, discounts on their power bills because of lower transmission costs from the nearby power plants.
With the creation of the first SEZ already underway in Dongo Kundu, Mombasa, Kenyans should be overjoyed as it will eventually increase the economic growth rate. Eng.
Jean-Baptiste Gasangwa, the Private Sector Federation (PSF) resident representative in Mombasa said, “For our country and the region, this also is good news indeed.”
“Our importers will not need to go very far to buy whatever they need with expensive visa, flights and accommodation expenses,” he added. The economic zone is going to ease up business due to the decrease in expenses and hence the people will be able to earn more, leading to a boost in the country’s economy,” he added. The special economic zones are going to create employment opportunities as, for example, the Mombasa zone is planned to host almost 30,000 workers which will increase over time and if the rest of the zones are to host up to the same number, the rate of unemployment is to decrease at an unimaginable rate. The zones will also assist people by giving them opportunities to generate new skills as they will have a number of different industries in them.The zones are also platforms where the indigenous companies could collaborate with foreign companies to import business and technology to the country. The interaction between the two will not only create a better relationship between them but the local organizations will get new ideas and innovations that will assist in the easy running of business thus leading to high profits.
With the SEZ enterprises, developers and operators who are licensed will also profit from the zones, as they will be allowed to repatriate all the capital and profits they have without any foreign impediments. This is likely to attract more corporation as most of them are searching for ways to reduce their expenses and increase their profits whereby this is the best option they can get. In this, Kenya will profit as well from more and new corporations being introduced into the country.
The SEZs in Kenya will be under the Special Economic Zone Act 2015 and will be controlled by SEZ Authority as stipulated in the Act. According to the Act, all licensed special economic zone enterprises, special economic developers and operators are to acquire more benefits in terms of exemption from the following:
- All taxes and duties payable under the Excise Duty Act, the Income Tax Act, East African Community Customs management Act and the Value Added Tax Act, on all special economic zone transactions.
- Stamp duty on the execution of any instrument relating to the business activities of special economic zone enterprises, developers and operators;
- The provisions of the Foreign Investments and Protection Act relating to certificate for approved enterprise,
- The provisions of the Statistics Act
- The payment of advertisement fees and business service permit fees levied by the respective County Governments’ finance Acts
- General liquor license and hotel liquor license under the Alcoholic Drinks Control Act, 2010;
- Manufacturing license under the Tea Act
License to trade in unwrought precious metals under the Trading in Unwrought Precious Metals Act
- Filming license under the Films and Stages Plays Act
- Rent or tenancy controls under the Landlord and Tenant (Shops, Hotels and Catering establishments) Act
- Any other exemption as may be granted under this Act in consultation with the Cabinet
Secretary for that matter, by notice in the Gazette.
The benefits apply on all special economic zone transactions.
However, on the same day the Special Economic Zone Act was assented another Act was also assented, the Finance Act 2015 which created an inconsistency between the two. This was due to the fact that the Finance Act limited the tax incentives that the SEZ Act was offering by changing the income tax and value added tax (V.A.T) as follows:
- Dividends received by licensed SEZ enterprises, developers and operators are exempt
- SEZ enterprises, developers and operators will be subjected to reduced corporate rates of 10% for the first 10 years of operation and 15% for the next 10 years
- The supply of taxable goods to special economic zones enterprises, developers and operators licensed under the SEZA are exempt from VAT
- Withholding tax on professional services and interest (other than dividends) by a SEZ enterprise, developer and operator to nonresidents to apply at 10%
The government needs to address this issue before the establishment of the Special Economic Zones because if left like that it is to create problems in the future. This inconsistency needs to be rectified so as to avoid the failures that the other SEZs are experiencing in Africa. With mismanagement and corruption being the top reasons why the SEZs have failed in Africa, Kenya needs to also ensure the same situations do not occur in the country so that the economy can grow and surpass its forecasted rate.