Review special economic zone idea


Naivasha Special Economic Zone located next to Naivasha dry port in this photo taken on September 27, 2022. PHOTO | JEFF ANGOTE | NMG

The latest special economic zone (SEZ) the government has gazetted is measuring about 64 acres along Limuru Road. It means that companies operating in this zone will be entitled to privileges and liberal tax incentives.

The operator of the zone will be a new entity by the name Two Rivers International Financial Centre, which is controlled by the investment conglomerate Centum Ltd.

I found the name of this new entity to be strangely similar with the National Treasury-based Nairobi International Financial Centre (NIFCA) that runs and licenses a similar regime that also comes complete with tax incentives under a separate Act of Parliament.

As we all know, we have a Special Economic Zones Act and a Nairobi International Financial Centre Act, the latter executed by the Treasury and the former by Trade and Industry.

What is to prevent regulatory arbitrage? What is to stop an investor from registering under both legal frameworks so he can enjoy double incentives and render the taxpayer to suffer double jeopardy?

Yesterday, James Mworia, the CEO of Centum, explained to me that his project has been designed to attract all investors, including financial institutions coming in under NIFCA.

In retrospect, it seems to me that the framers of the Special Economic Zones Act foresaw the loophole and the risk of arbitrage and double incentives.

It is clear that even though we have parallel incentive regimes for investors, a Cabinet Secretary cannot just wake up one morning and proceed to dole out privileges to his cronies.

The power remains in the hands of the Treasury through a Finance Bill.

While the tax incentives in both Acts of Parliament grant privileges such as tax holidays, work permits and concessions around payment of capital gains tax to investors, the legislature retains the whip hand.

The policy implications are clear. We must rethink the wisdom of having multiple tax incentive regimes. We just have too many entities in this space, namely KenInvest and the export promotion agency.

We need to start debating the case for a single consolidated investments promotion agency.

After tracing where we have come since 2015 when we passed the SEZ Act, I am inclined to hold the view that Kenya is yet to fully appreciate the strategic importance of this phenomenon known as special economic zones and how these enclaves can be applied to spur industrialisation.

Yet in recent history special economic zones are the main tool that emerging markets have employed to industrialise and restructure their economies.

Japan after World War II, China, South Korea, Thailand and Malaysia are good examples. And, countries like Vietnam have been rolling out special economic zones fast.

I read somewhere that in just 10 years, Vietnam had built 30 special economic zones. This is the level and pace of execution that we need here.

Dongo Kundu has been on the cards for more than 15 years. Indeed, many of our economists and policy makers still have doubts about the whole concept, clusters and tools for industrialisation.

Special economic zones are our best bet at achieving a truly robust manufacturing sector.

Where did the idea of SEZ originate from and why has it come to occupy a special place in manufacturing strategies of many emerging market economies?

From what I read, it would appear that the first best and purest application of the SEZ concept as a tool for industrialisation was by Chinese leader Deng Xiao Ping. Starting in 1978, China designated five areas to be exclusively devoted to special economic zones.

Secondly, the government offered extensive tax and customs incentives, including 10-year tax holidays, VAT and customs exemptions and expedited approvals of licences and permits.

Housing workers

Indeed, China went beyond your usual tax incentive regimes to offer special features. Instead, of small isolated zones, then called export processing zones, China offered large enclaves on the scale of entire cities or regions that were then dubbed special economic zones.

To ensure a sufficient supply of cheap labour, China built massive dormitories and residential units to house workers.

The third innovation the Chinese introduced was to build industry-specific SEZ instead of general purpose enclaves.

Thirdly, to make their SEZ absolutely competitive, they tossed in extensive subsidies on power, water and other inputs.

The game will only start to changing when Dongo Kundu comes to pass.

The writer is a former managing editor of The EastAfrican.

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