Gitahi Gachahi, CEO, EY Eastern Africa: Viewpoint

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Gitahi Gachahi, CEO, EY Eastern Africa

Viewpoint: Gitahi Gachahi

Special Economic Zones (SEZs) are proliferating across the globe. Countries around the world are increasingly exploring the possibilities presented by SEZs and attempting to harness their potential to catalyse economic development and structural transformation.

A recent World Bank study of six African zone programmes (Ghana, Kenya, Lesotho, Nigeria, Senegal and Tanzania) in comparison with four non-African countries (the Dominican Republic, Honduras, Vietnam and Bangladesh) shows that success in African zones is limited to a few countries with relatively better performances, such as Kenya and Ghana.

Setting up SEZs can boost economic diversification and promote manufacturing. China’s experiences indicate that for zones to succeed, governments must improve infrastructure and technology, and employ an efficient and effective administration. The country must also have an educated and competent labour force. Henry Rotich, the cabinet secretary of the National Treasury, said in his FY 2015/16 budget statement that the government had allocated KSh3bn ($29.3m) for industrial development, including SEZs.

Preparations for SEZs are in high gear, and are expected to attract FDI and encourage the export of value-added commodities. The SEZs will give impetus to the economic development of the country since they encompass a large range of activities. The government ought to closely monitor and facilitate the development of the SEZs, since it is a tool that promises great potential in the economic growth of the country.

Employment opportunities are expected to be created with the establishment of the zones, hence reducing unemployment. The SEZs are expected to result in other social infrastructural developments as well, such as hospitals, schools and townships in the areas where such establishments will be set up.

The law on SEZs provides incentives for industries to operate in designated areas, including Naivasha near the Olkaria geothermal power plants. Manufacturers in the SEZs in Naivasha will, for instance, be offered discounts on power bills because of lower transmission costs from the power plants to the industrial hubs.

Furthermore, the government introduced an array of tax incentives available to investors who operate in the SEZs. Such enterprises will be exempt from all taxes and duties payable under the Excise Duty Act, EAC Customs Management Act and the Value-Added Tax Act. Companies will also be exempt from stamp duties on the execution of any instrument relating to the business activities of an SEZ. Moreover, licensed SEZ entities are entitled to work permits for up to 20% of their full-time employees, with the possibility of additional work permits.

The SEZ Act established the SEZ Authority, which is the body mandated to licence SEZ developers, operators and enterprises. The authority is required to render a decision on an application for a licence to become an SEZ entity within one month following submission of the application and accompanying documentation. The government has already shown a willingness to pursue industrial development, and policy frameworks and infrastructure are under way to accomplish it.

The popularity of SEZs is growing globally, but to be successful, SEZs must be implemented properly and carefully tailored into each country’s specific requirements. Given the complex and heterogeneous environments in which SEZs operate, a clear framework is needed to guide the operations of SEZs in Kenya. Such a framework should include the clear roles and responsibilities for the government and private sector.

Key issues are establishing the necessary legal and regulatory frameworks, undertaking needed strategic planning and assessing business feasibility, while finding ways to ensure the provision of adequate infrastructure, and the creation of responsible social and environmental standards. By and large, SEZs are one of the ways of fast-tracking industrialisation and economic diversification in line with Kenya Vision 2030.

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The Report: Kenya 2017

Tax chapter from The Report: Kenya 2017

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