Special Economic Zones

[16th April 2014]

Special Economic Zones

Advertisements have recently appeared in the press announcing a workshop which the Government will be holding on the re-establishment of Special Economic Zones [SEZs] in Zimbabwe. These zones, according to the advertisement, will be designated geographical regions where enterprises can be established operating under special regulations; the zones are intended to enhance competitiveness and job creation and promote foreign direct investment in Zimbabwe.

The stated purpose of the workshop is to bring together Ministers, Parliamentarians, senior civil servants, parastatals, bankers, industrialists, diplomats, academics, representatives of the private sector, investors, the media, and international experts on the development of SEZs. According to a statement posted on the Government website, the Government has decided that SEZs are a way to encourage exports and foreign exchange earnings while addressing the massive unemployment rate, broadening the economic base and attracting development and new technologies [statement available from addresses at the end of this bulletin].

The purpose of the workshop is to discuss how best to establish and operate SEZs in Zimbabwe, drawing on the experience of other countries and to draw up recommendations and implementation timeframes for the establishment of SEZs.

Notable for not being included in the published list of invitees, were the representatives of labour. Nor among the international bodies listed such as World Bank, Africa Development Bank, etc., was the International Labour Organisation [ILO] mentioned. This may have been rectified, but if not it may be in labour’s interest to closely monitor the recommendations arising from the workshop.

Note: The flighted advertisements did not mention dates or venues. Veritas only received its invitation [dated 4th April] today 16th April, giving the dates as 16th to 17th, i.e. today and tomorrow, in Harare.

History of SEZs in Zimbabwe

This will not be the first time that the Government has turned to SEZs as a means to attract investment and accelerate the economy out of stagnation.

At first, SEZs were established under the Income Tax Act; they were then called Export Processing Zones [EPZs]. Exporters who operated within them were given tax exemptions but otherwise they enjoyed, no special exemptions from the ordinary laws of Zimbabwe. Later, in 1995, the Export Processing Zones Act was promulgated which established a parastatal authority responsible for establishing export processing zones, attracting investment to the zones, and issuing licences for businesses to operate within them. Section 56 of the Act stated that the Labour Relations Act [now the Labour Act] would not apply within export processing zones; but this section was repealed in December 2005. In 2007 the Export Processing Zones Act was repealed by the Zimbabwe Investment Authority Act, though industries that were licensed to operate in the zones continued to enjoy certain tax advantages. [Export Processing Zones Act available from addresses at the end of this bulletin]

A feature that may have reduced the effectiveness of the Export Processing Zones Act was that any premises or place could be declared an export processing zone; even single rooms could be so declared. Virtually any manufacturing business which was export-oriented to at least some degree could get a licence under the Act, and many did. They did not have to move to a special zone to get the tax benefits accorded to them under the Act, but could remain where they were. Hence the Act did not lead to the establishment of separate zones where export businesses were concentrated: exporters were dispersed as before, but enjoyed tax breaks.

Nevertheless, the Act did encourage economic development. According to a paper quoted on the Government website, by 2004 projects in export processing zones had created over 32 000 jobs and US$172 million worth of investments. Small wonder that the Government is seeking to reintroduce the zones.

What are SEZs?

SEZs can be defined as zones which enjoy special regulatory and institutional incentives which distinguish them from the rest of the country. They are larger than export processing zones and in some countries are considered town/cities on their own. They usually cover all industrial and service sectors and target both foreign and domestic markets. They provide an array of incentives for businesses, ranging from tax incentives to regulatory incentives. In addition, they permit on-site residence.

For SEZs to be Effective

The only feasible way out of Zimbabwe’s dire economic straits, in particular its very high rate of unemployment, is to encourage economic activity by increasing national production and productivity, and this in turn requires investment which must come from foreign sources. Clearly the Government has recognised this by its renewed interest in SEZs.

But, for SEZs to be effective, the following conditions should be met:

• Excellent infrastructure must be provided within the zones so that businesses can operate with maximum efficiency. If for example the zones suffer the same power cuts as the rest of the country, or their roads are as bad or the supply of water is as erratic, then investors and industrialists will take their business elsewhere.

• Involvement of the private sector in developing the zones should be encouraged.

• The zones must have close links with the rest of the country’s economy, for example through sub-contracting, the supply of goods and services or the provision of research and development, so that the country’s industrial and business sectors can benefit from economic activity within the zones. As a World Bank publication puts it: “the idea of the SEZ as an oasis in the desert may be a mirage—an SEZ’s value appears to be intrinsically linked to the landscape in which it is situated.”

• Setting up business in a SEZ should be as simple as possible.

• They should be seen as pilot projects to try out reforms which will later be applied to the country as a whole.

• Last, but by no means least, the regulatory regime must be clear and secure. Investors must be able to settle their legal disputes quickly and fairly, and must be confident that the Government will protect their rights, particularly their property rights, and will not change the rules arbitrarily.

It is open to doubt whether our Government will be able to meet all, or indeed any, of these conditions in its planned SEZs.

SEZs Have Drawbacks:

• Labour issues. There has been a tendency worldwide for labour conditions to be regulated less rigidly in SEZs than in the rest of the countries where they are situated. As noted earlier, our Export Processing Zones Act stated specifically that the Labour Act would not apply within export processing zones. This may encourage businesses within SEZs to increase employment, since the costs of shedding unproductive labour are reduced, but it can also lead to the unjustified exploitation of workers and unsafe conditions of work.

• Environmental issues: A government may be tempted, in its zeal to enhance economic development through SEZs, to ignore potential dangers to the environment. Setting up an SEZ in Victoria Falls, where it has been suggested the first SEZ should be established, is a case in point. The Falls are a tourist attraction largely because of the unspoilt natural environment in which they are situated, and siting an SEZ there will endanger that environment. Tourists are unlikely to come and watch industrial effluent thundering into the gorge, particularly if they have to peer through industrial smog to watch it.

• Tax incentives: Among the incentives governments offer potential investors in SEZs are reductions in taxes and duties. Once granted, however, these incentives may be difficult to withdraw, particularly if the investors have political influence. Businesses in SEZs may continue to enjoy the incentives long after they have become established and no longer need them.

Conclusion

As so often in Bill Watches and Constitution Watches, we come to the rule of law. One aspect of the rule of law is that laws must be applied equally to everyone. Laws of general application, once enacted by Parliament, should apply throughout the country. It is inconsistent with the rule of law for special zones or areas to be set up which will be outside the reach of some laws.

If our labour laws are so rigid that they discourage employment then they should be modified for the whole country. If our environmental laws are so vaguely drafted and far-reaching that they allow development to be stopped at the whim of junior officials, then the laws should be amended so as to clarify them for the whole country. And if our indigenisation law discourages foreign investment, then it should be amended throughout Zimbabwe. If we have bad laws, it is not an adequate remedy to set up special zones where the laws do not apply.

Veritas makes every effort to ensure reliable information, but cannot take legal responsibility for information supplied