Utilizing Special Economic Zones to Boost Economic Development

Since the beginning of time, communities, countries and regions have adopted trade and exchange, to access goods and services, forge strong ties and partnerships and harness value addition. The practice, in essence, has contributed to the establishment and growth of various sectors while driving the prosperity of economies globally. With the simultaneous development of trade frameworks that govern the flow of goods and services across countries, policies have been modelled to nurture the supply and demand dynamics and collectively contribute to economic growth. In Kenya, one of these policies was Vision 2030 which in particular, aimed at unlocking the tried and tested economic benefits offered by Special Economic Zones (SEZs). Special economic zones are compliment instruments to export processing zones and are meant to create an enabling environment for businesses more so those in the manufacturing space. In countries such as China and India, SEZs have been gradually designed and modified to leverage on their geographical location and economies of scale, maximize on available and affordable capital, talent and technology which ultimately supported the graduation from developing countries to developed countries status. If this is the case, why is it that the success stories of Kenyan Special Economic Zones are inaudible and infinitesimal? Are their efforts insignificant or could it be that their shortcomings are due to the unfamiliarity of running the modalities of SEZs?

T. Farole defines Special Economic Zones as demarcated geographical areas in a country where the rules of business operations are different from the other prevailing, by virtue of investment conditions, international trade and customs, taxation and the general regulations. The objective being to offer a conducive, liberal business environment from a policy and administration perspective, to promote efficiency, geared towards the attraction of foreign direct investments. Subsequently, businesses established in Special Economic Zones are able to produce goods and services at a competitive price, without cumbersome formalities and restrictions, giving them an advantage in global markets. In light of this, Kenya enacted the Special Economic Zones Act of 2015, to provide for the establishment, governance and operationalization of Special economic zones.

Developing countries are often characterized by their apparent technical and financial deficiency in construction, operation knowhow and FDI performance. In view of this, Kenya’s position of gazetting only about 23- Special economic zones since the inception of this pursuit in 2015 is vividly concerning. Four of these are government-owned (Konza Technopolis, Naivasha SEZ, Dongo Kundu SEZ and Miritini SEZ) while a good number are privately-owned such as Tatu City. Pertinently, their performance has been grossly underwhelming. The influence that SEZs contribute to the overall Kenyan economy is an abstract concept that has not yielded substantial benefits, and this can be attributed to a number of reasons.

First, special economic zones in the country appear to be stand-alone initiatives which have no vivid connection to other economic sectors. In most cases, the Government allocates geographically delimited areas, labels them as special economic zones and hopes to attract investors. In reality, it is imminent that this is an impractical approach because land alone cannot be a sufficient incentive for investors to setup in special economic zones. Surrounding ecosystem contributes immensely to the enrolment of businesses to SEZs and this includes establishment and empowerment of an independent and vibrant administrative centre, closeness to international markets through air and seaports, labour mobility and facilities that enhance skills and knowledge capabilities and efficient and cost-effective access to technology and digital instruments that can support continuous research and development. Without these bare minimums, an unfavourable business environment would exist hence making it difficult to reap from SEZs.

Secondly, physical infrastructure is needed to enhance the attractiveness of special economic zones in Kenya. The construction of roads, electricity grid lines, internet fibre connectivity, sewer lines and settling all land compensation disputes with original settlers falls in the purview of the Government and not potential investors. These public goods can only be offered by the Government unless it expressly relinquishes it to the private sector which will definitely charge substantially higher prices to consumers of such amenities. Dongo Kundu SEZ is a worthy example of an SEZ that has the potential to create a positive socio-economic ripple effect to Mombasa County and the Country at large but it’s choked by internal wrangles among stakeholders and resettlement disputes of squatters.

Thirdly is the low sensitization of the benefits and incentives of setting up in SEZs among investors (both local and international) and the country in general. Should the governance and operational framework of special economic zones be executed seamlessly and the loopholes tightened, foreign and local direct investment may bring additional benefits to Kenya, such as advancement of superior technology, managerial and technical know-how, value-addition in terms of optimal capital utilization and employment capacities. However, due to low sensitization, stakeholders do not understand the full spectrum of SEZs value proposition hence opt to stay away.

Best practices

Our policy structure needs to adopt new measures aimed at resolving past mistakes and inefficiencies. The Special Economic Zones Authority needs to figure out how to connect established special economic zones to other economic entities. This can be achieved by relying on professionals who possess strong research and development skills and legal and policy formulation abilities to conduct benchmarking exercises in countries such as China, India and Ethiopia and develop an implementation and sensitization strategy that picks from best practices.

Policy implementation would ideally mean the development of clear and strong structures that allow room for the ultimate utilization of special economic zones for economic development. This cuts across communication frameworks, financial support for infrastructure and an unwavering value addition framework that does not allow revenue spillage from tax incentives. Pragmatic, multi-faceted governance approaches stand to work for the betterment of this pursuit.

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