In almost every developing nation, Special Economic Zones (SEZ) or Free Trade Zones have been used as a tool for economic growth. From Singapore to Dubai, Ethiopia to Colombia, SEZ’s have been tailored to provide foreign businesses with an ease of doing business, facilities and financial incentives. In Africa, the concept is being embraced as never before.
SEZ’s offer the prospect of renewed economic growth to many parts of Africa through the attraction of foreign direct investment (FDI), particularly countries whose economies have been damaged by the long-term collapse of oil prices. Multiplier effects are bountiful: capital inflow, the creation of new, skilled jobs in manufacturing and logistics, the maturation and growth of local and regional supply chains; and sustainable businesses built on need. The extraordinary socio-economic impact that SEZ’s can have on a country’s attractiveness to foreign companies and on local economies is especially noticeable in countries like South Africa, China and the Middle East and their experience in industrial development through the special economic zones offers valuable lessons.
The government’s motivation for creating manufacturing centres has always been to further the industrialisation of the country, draw in foreign capital (known by the acronym FDI), and bolster export-focused manufacturing.
FDI in Africa
FDI flows have shifted across the world over recent years, including in the Middle East. In Africa, FDI has slowed. In January 2017, Ernst & Young (EY) released a report that said FDI in Africa is slowing down and will continue to do so in to 2018. The report blames softening investor sentiment for major SSA economies that have downgraded their own growth forecasts – including the continent’s two largest economies, Nigeria and Angola. Despite this, Asia-Pacific investors have become more prominent. China and Japan lead the way, with Chinese investment soaring by 209% in the first quarter of 2016 (EY report). It should be noted however that a great deal of Chinese money is flowing in to important infrastructure works that are a crucial component in the region’s economic development.
Whilst SEZ’s are designed to attract FDI, providing a base for companies seeking geographical expansion in a light-touch regulatory and low tax environment, they also need infrastructure – particularly nearby industrial facilities and transport links. The $600 million deep water port currently under construction in Angola – Porto de Caio – could be a game changer for the continent’s trade balance and a major boost for African companies seeking faster, cheaper and more reliable access to world markets. The project, which is being part-funded by the Government of Angola and the China Road and Bridge Company (CRBC), will boost cargo-handling capacity, making exports easier and more cost effective – and it has already created around 1,600 new jobs.
Importantly, the port is complemented by the addition of new SEZ’s and the new Fútila Industrial Park. The economic zones – some designated for international companies and others for domestic and international firms, will provide investors and foreign companies with a highly efficient, light-touch regulatory environment and financial incentives. Fútila’s industrial complex, which resulted from a partnership between the Angolan government and private contractor Benfin, will enable local entrepreneurs and growing businesses to take advantage of favourable financial terms and contribute to the creation of a diverse trading ecosystem.
With a total of 2,344 hectares, the first phase of the Fútila Industrial Park project will be completed by October 2018. Strategically positioned within close proximity of the new port and the Malongo oil field, it will provide Angola with a new interconnected ecosystem of manufacturing, logistics and access to global markets. For importers, they open up the entire continent. However, to make these large-scale investments happen, African policymakers need to clear the decks of regulation and high taxes.
Working for all
SEZ’s only work when they are truly ‘special’ – they need to act as an oasis of ease with light-touch regulation, simplified procedures and low taxes. These crucial components require careful planning and high-level political leadership because SEZ’s are a long-term goal. Government departments need to align spending and planning strategies to ensure that a zone actually works in the best interests of investors and the local population. That means developing new customs procedures, transport links, a completely new tax system, immigration rules and the protection of local workers’ rights.
It is also important for policymakers to realise that SEZ’s can only be sustained if they interact with the local environment. They cannot stand alone as isolated enclaves. They must play to a country’s natural advantages such as proximity to oil fields, international trade flows and growing populations. They must also physically and economically interact with those living outside of the zone by supporting the domestic supply chain and employing locals. SEZ’s must work for the many.
As the world’s markets and geopolitics move through a period of significant uncertainty and increasing competition, SEZ’s can change the mood music in Africa. This is critical in encouraging more investors and business leaders to invest on the continent and most importantly, in building robust, diverse economies that sustain jobs and growth for the long-term.
Author: Robert Dovlo, Responsible for Commercial Development of SEZ Porto de Caio