With right strategy economic zones can be a success

What's so special about special economic zones (SEZs)?

These are demarcated areas with their own, unique rules of business. They provide private firms with quality, cost-effective, and reliable infrastructure, efficient customs services, regulatory predictability, and even fiscal incentives.

SEZs first appeared in industrialized countries in the 1950s, helping drive growth, economic diversification, and job creation. They were instrumental in speeding China's transformation and breakneck development beginning in the early 1980s.

In 1986, the International Labour Organization (ILO) reported 176 zones in 47 countries. By 2019, that number had soared to 5,383 active sites worldwide.

Africa has also embraced the promise of SEZs — but with varying degrees of success. Some have attracted investment, but others have not. Mauritius, South Africa, Egypt and Morocco are among the places where SEZs have flourished on the continent, supporting growth.

In Kenya, the development blueprint Vision 2030 identified SEZs as a way to support industrialisation and attract private sector investment.

The country's Special Economic Zones Act 2015 was designed to boost domestic manufacturing and services by ensuring regulatory and administrative predictability, quality industrial infrastructure, and market access, with special emphasis on the textiles and apparel, leather and leather products, agro-processing, and construction materials sectors.

The goal is ambitious: With the help of SEZs, Kenya's government aims to increase manufacturing's share of GDP from 9 percent in 2015 to 15 percent by 2022.

As of 2020, Kenya had approved and designated land for 10 SEZs, though not all are up and running. A striking success is the Tatu City SEZ, part of a 5,000-acre mixed development site. It has already attracted over 30 companies and more than $1 billion in new investment.

The Tatu City SEZ provides quality industrial infrastructure, reduced corporate taxes, customs and excise duty exemptions, VAT benefits, profit and capital repatriation at reduced rates, as well as enhanced intellectual property rights, among other benefits.

Kenya's experience with SEZs has not been all positive, however. Development in most of its licensed zones has been slow, especially compared to progress made in Ethiopia and Rwanda.

Gaps and uncertainties in Kenya's current regulatory and institutional framework are putting off some potential investors, threatening to stall the good progress Kenya has made establishing itself as a preferred investment destination.

IFC, a member of the World Bank Group, recently surveyed potential investors on behalf of Kenya's Ministry of Industrialization, Trade and Enterprise Development. Discussions with numerous domestic and foreign stakeholders revealed deep concerns around Kenya's SEZ regime and strategy.

Some potential investors noted their confusion around the rules governing enterprises operating in Kenyan SEZs, and how goods produced within the SEZs are treated compared to domestic market access within the EAC.

There were also concerns over the quality of industrial infrastructure, logistical challenges, the lack of a coherent medium- to long-term National Special Economic Zones Strategy to implement the Kenya SEZ Act 2015, and the role and capacity of Kenya's Special Economic Zones Authority (SEZA). Finally, investors struggled to differentiate between Kenya's export processing zones and its special economic zones.

To build confidence in its budding SEZ network, Kenya should move fast to reduce the confusion and strengthen communication and marketing around the long-term benefits of investing in the country. Addressing these issues will also determine how well Kenya can position itself competitively within the Africa Continental Free Trade Area.

Specifically, Kenya should establish a clearer and more stable legal and regulatory environment and ensure that the SEZA is properly equipped to run a successful SEZ regime. The rules of the game, especially those pertaining to operations of SEZ enterprises such as taxation, labor, market access, and immigration, should be more clearly defined and articulated.

The future success of SEZs in Kenya depends largely on the government's ability to fill these regulatory and institutional gaps, and to develop and sustain a coordinated approach between national and county governments.

While Kenya has undertaken important infrastructure upgrades to boost SEZ development along various corridors—including improving the rail network, developing port facilities, roads and bridges, and commissioning geothermal power plants—continued investment in infrastructure within and surrounding the designated SEZs is necessary.

Then there are the challenges—and opportunities—of Covid-19.

The disruptions in global supply chains have presented countries like Kenya the opportunity to step up and help address the global shortage of Covid-19 critical items, from masks to sanitizers, and even medical equipment.

The pandemic has opened up new production opportunities in SEZs for goods including pharmaceuticals and textiles. With the right regulatory support, Kenya could seize a portion of those manufacturing opportunities.

Furthermore, by incorporating a green, sustainable, and climate-friendly approach to SEZ development, Kenya could elevate its profile as a top investment destination for multinationals seeking a foothold in the region.

Kenya has made a good start with SEZs. But it still has some way to go before it crosses the finish line.

Jagun-Dokunmu is IFC's Regional Director for Eastern Africa, and Sarah Ochieng is Operations Officer for IFC in Eastern Africa.