Conducive business environment for SEZs will uplift the economy
Since China established the first special economic zone (SEZ) in 1979, many other countries have adopted the model to drive their economic growth, expand exports and create jobs.
The economies of India, Dubai, Korea, Mauritius, Singapore and others that have created new investment opportunities in exclusive business zones have benefitted from rapid economic growth. Even though there are a few classic cases of failure, newcomer Kenya hopes to use SEZ to achieve economic transformation where other policy prescriptions have failed.
The most captivating story about SEZ is how China transformed Shenzhen from a small fishing village with a population of 30,000 to a cosmopolitan of more than 12.5 million people with a gross domestic output of over $330 billion by 2017 estimates.
The “miracle” city is now the fourth-largest (after Shanghai, Beijing and Tianjin) population-wise but has the second-highest per capita income of $2,100 — just short of Guangzhou, the fifth-largest but with the highest per capita GDP of $2,200.
China being so dominant in Kenya’s development process, the Chinese SEZ experience is likely to strongly influence a Kenyan clone of Shenzhen. The favourite proposed SEZ sites include the sea ports of Lamu and Mombasa, primarily because of their unique location as gateways to the world through the Indian Ocean. Kisumu is also favoured as the inland port connecting Kenya through the waterways of Lake Victoria to the other East African Community countries.
The three hubs have a rich hinterland with huge fishing, agriculture, horticulture and mining potential.
Like the 3,500 SEZs around the world, the Kenyan one promises investors a comprehensive range of incentives — tax and duty exemptions, ease of repatriation of profits, liberal labour laws and flexibility in other regulations. The business focus envisaged in the SEZ Act includes agriculture, livestock, science and technology, business process outsourcing, manufacturing, logistics and tourism.
The integrated development of the SEZ, with industry clusters and value chains supported by services such as housing and financial services, has strong potential for expanding opportunities for the government’s ‘Big Four’ agenda.
But the government needs to clarify how the investments that fit into the SEZ model would be treated. These include the areas under the Export Processing Zones Authority (EPZA) and the Konza Technopolis, which, together with the agencies, would best be merged as SEZs.
Moreover, Kenya’s experience with the EPZ model should provide important lessons for the SEZ strategic plan. The EPZA was launched with much fanfare in 1990 as the primary vehicle for expanding and diversifying Kenya’s exports.
Its latest report shows that the 65 gazetted zones generated a turnover of Sh68.5 billion in 2016 and employed more than 53,000 people. A four-year trend from 2012 shows a modest growth of key indicators of the EPZ segment. Even though the business continues to grow, its contribution to the economy was less than one per cent of GDP. Its momentum was less spectacular than anticipated.
The SEZ should adopt a transformative strategy to attract quality investors to build Kenya’s base for expanding value-added manufacturing, scaling up innovation and technology and diversifying exports. It should follow China’s example of commitment to delivery and results.
Studies show that, in the past three decades, Shenzhen’s GDP multiplied a hundredfold. Moreover, SEZ contributed 22 per cent of China’s GDP, 45 per cent of foreign direct investment and 60 per cent of exports, according to a World Bank report. They also generated over 30 million jobs.
Essentially, the government should implement the SEZ as a vehicle for accelerating industrial development, modernising agriculture and deepening technology adoption.
The launch of the SEZ should be the next big thing on Kenya’s road to Vision 2030. But it shouldn’t overshadow the major challenges that the government should deal with to uplift the stressed sectors, particularly agriculture and manufacturing. Domestic and foreign investors should be protected from dumping and counterfeits.