Special Economic Zones need action, not rhetoric

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Almost a decade after the enactment of the Zimbabwe Indigenisation and Economic Empowerment Act, there is no doubt that the piece of legislation has been at the centre of repelling potential investment which could have benefitted the country.

By Daniel Ngwira

In his presentation to the Institute of Chartered Accountants of Zimbabwe (ICAZ) Winter School 2013 held in Victoria Falls, Canaan Dube, a senior partner at Dube, Manikai & Hwacha Commercial Law Chambers, argued that “Zimbabwe is not the first country to implement an indigenisation and economic empowerment programme. Almost all the rich countries of the world have done it in various forms at one time or another, e.g. United States. Japan, France, China, Finland, Norway, Italy, Austria, Taiwan, Singapore, South Korea and South Africa.”

Despite Dube’s observation, the piece of legislation has not lived up to the success it was meant to bring to the indigenous people of Zimbabwe who are defined by the act as “any person who, before the 18th April, 1980, was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person, and includes any company, association, syndicate or partnership of which indigenous Zimbabweans form the majority of the members or hold the controlling interest.”

While calls to get the act repealed have not been heeded, government has silently accepted that some sections of the economy were too sensitive to grossly apply the piece of legislation. This included the banking sector where central bank governors have always had their way to protect the sector given its sensitivities and also given that the financial services sector tends to be at the centre of any given economy.

In 2015, when the minister in charge of indigenisation pushed for the financial sector to be affected by the piece of legislation, both the Minister of Finance and Governor of the Reserve Bank of Zimbabwe stood firm in arguing that the sector was best dealt under the relevant acts including the Banking and RBZ Acts. This position was later supported by the President after a heated exchange of words. Indeed, the position taken by the Office of the President brought relief to both the banking public and investors.

It does appear that upon realising the shortcomings of the indigenisation law, government decided to put in place a piece of legislation that would respond to the queries arising from the populist legislation.

According to the Special Economic Zones Authority Act, the board shall be dominated by the appointees from the private sector who can be six in number in an eleven-member board. The skill set of these board members shall be law, investment analysis, information technology, accounting, economics and human resources. This in a way shows the focus intended for this authority; that talented individuals from the multi-disciplines should be included in the board to give proper guidance to ensure the success of the Special Economic Zones programme.

Among other functions of the authority are “to establish special economic zones wherein export-oriented industrial activities will take place whether by way of manufacturing, processing or assembling goods or providing services or otherwise for the purpose of selling domestically or exporting such goods or services; to attract foreign direct investment into special economic zones; to grant investment licences for investment in special economic zones and to constitute a single institution through which applications for the approval of investment in special economic zones shall be made and through which all necessary approvals, licences and permits may be granted or issued in respect of approved investments.”

Interestingly, Zimbabwe has what is called the Zimbabwe Investment Authority, The Zimbabwe Investment Authority (ZIA) states on its website that it “is the country’s investment promotion body set up to promote and facilitate both foreign direct investment and local investment. ZIA is an institution born out of the merger of the Export Processing Zones Authority (EPZA) and the Zimbabwe Investment Centre (ZIC). This was done to create a one stop Investment shop for quicker and easier facilitation of investment.”

Given the sharp similarities between the Zimbabwe Investment Authority and the Special Economic Zones Authority, government needs to clarify how it hopes the latter will be more effective than the former. The country failed to attract meaningful foreign direct investment with the ZIA. How is foreign direct investment going to be achieved with SEZA? There is no doubt that the country needs foreign direct investment and even local investment to stimulate growth but when one layer of bureaucracy fails, does it mean that we need to put in another layer or we should understand how we failed and implement corrective measures?

Special economic zones do come with incentives which could be a game changer regarding the decision by a potential investor to plough their capital in the country or otherwise. But these incentives must be properly defined. The act states that “Any investment licence shall be valid for a period of ten years from the date of issue, during which period the licensed investor shall implement the proposed investment.” It should be noted that the period of ten years for some projects could be way too short given that some investments have longer pay back periods.

In his December 2014 statement, Nigel Chanakira said “the introduction of Special Economic Zones (SEZs) is critical to attract investment as it comes with a number of incentives which are considered by investors as they make investment decisions. We are therefore pleased to note that work in this regard is at an advanced stage. The Authority will continue to participate in and spearhead doing business reforms initiatives, to ensure that the country improves in Doing Business and Global Competitiveness rankings. The overall level of investment activity in Zimbabwe remains low compared to the expected annual amount of $5,6 billion as per the ZimAsset plan and is punching below its regional peers.”

We cannot run away from the fact that there is need to embark upon substantial policy reforms in order to attract foreign direct investment. In addition, there is need to streamline the cost of doing business. Recently Pretoria Portland Cement (PPC), the country’s largest cement manufacturer, raised a red flag when it indicated that it could close its plant in Collen Bawn near Gwanda. The plant is used for the manufacture of clinker, a key input in the manufacture of cement.

PPC is only one of the many local businesses which are facing stiff competition from imports which come in cheaper than the local products. The reason is simple; the cost of producing in Zimbabwe is way too high. If this is left to continue, the few manufacturing jobs remaining could be lost, thereby enhancing the country’s position as a supermarket of other countries.

PPC cites the cost of energy as a key driver of costs in their case. In order to make clinker, the rotary kilns must burn at high temperatures of nearly 1 500 degrees Celsius. Brick makers must run their kilns at around 900 degrees. All this entails that power is required in abundance and as such it is a huge cost driver.

While government has challenged PPC to export clinker to other markets outside Zimbabwe, it needs to be noted that it would not be possible when costs are too high. Government must therefore come to the party regarding that. In addition, ZESA needs to be challenged to be efficient in its operations.

Further allegations of corruption in the awarding of tenders must be investigated” and dealt with as corruption raises the cost of doing business. Moreover, those “tenderpreneurs” who get tenders must be followed up for performance, short of which penalty clauses should be invoked.

While PPC has requested for protection, government should appreciate that should this be granted, it does not leave the final consumer any better off. Besides, it would be difficult for local industry to compete internationally should we not address the cost of doing business. The governor of the central bank recently presented a monetary policy review in which he emphasised boosting exports.

The bond notes as export incentives are meant to help drive exports but there is also need to look after manufacturers who may not be producing for the export market. One way is to deal with the ease of doing business. This can easily drive domestic growth as well as export led growth. We have seen the country importing bricks from other countries in the region.

This has mainly been on the basis of both aesthetic appeal as well as price which is invariably determined by costs.

It could be high time government gets aggressive regarding the involvement of private players in the energy sector. This will increase competition and thus drive down prices. This needs no further explanation. Going on the global stage it is easy to notice that the price of oil would have been substantially higher were there no other players apart from OPEC members.

All said, the extent of incentives that will be associated with the special economic zones can only be in the context of the operating environment and this includes how much sacrifice the government is willing to make today in order to achieve a successful future filled with growth and development. In making future long-term investment decisions, taxation and customs duties are key considerations. The act says “the Minister may subject to the approval of the Minister responsible for finance, prescribe general fiscal and non-fiscal incentives to licensed investors operating in a special economic zone.”

Thus Zimbabwe needs more than a single act or authority erected through an act of parliament; it needs a paradigm shift at government level to support the initiatives that are evidenced by laws. Highly experienced and qualified people are in ZIA and SEZA but without the necessary support their efforts would come to nothing.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com/ cell: +267 73 113 161.

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