Special Economic Zones (SEZs) are well-established mechanisms for increasing exports, simplifying imports, and fostering economic advancement in host countries. SEZs are defined as « geographic areas within a country’s national borders where business standards differ from those within the national territory ».
While SEZs can be structured in a variety of ways (from private homes to entire cities and regions, including assets for a variety of uses), they have one common characteristic: the establishment of regulatory and policy regimes to stimulate investment by businesses and other investors in SEZs.
Capmad examines the factors that contribute to the success of SEZs. In this case study, SEZs include Free Trade Zones (FTZs), Free Zones, Free Processing Zones (EPZs), Industrial Estates, Free Ports, Economic Free Zones and Urban Enterprise Zones.
Overview of SEZs
As of 2021, according to the Organization of African Economic Areas, there are approximately 203 SEZs in Africa, of which 73 are under development.
SEZ Structure and Key Actors
SEZs have five key stakeholders:
- Government
- Zone Authority (Regulator)
- Developer or Investor
- Operator
- Licensees and Companies Operating in the SEZ
Other stakeholders include employees of the various entities and the host communities in which the SEZs are located. SEZs are either public (owned, developed and operated by the state) or private. Given that SEZs are subject to different regulatory regimes, delegating the regulation of SEZs to quasi-governmental bodies helps avoid confusion resulting from a single entity applying multiple regulatory regimes.
It is not uncommon for a SEZ to be developed by a private investor under a public-private partnership and for it to revert to the government once the concession period has expired.
The Benefits of Establishing SEZs
For African governments seeking to promote foreign direct investment (FDI) and economic diversification and growth, SEZs can be very beneficial. The benefits include:
- Direct employment and revenue generation in SEZs
- Export growth and diversification
- Attraction of FDI
- Increased government revenue
- Skills upgrading
- Retention of domestic talent
- Technology transfer
Attracting Investors Through Regulatory Incentives
Typically, SEZ regulatory and policy regimes focus on investment conditions, international trade, customs duties, taxation, and the availability of work and residence permits for foreigners.
In regions where SEZs are more prevalent, competition can be fierce both among SEZs within a country and across countries. Thus, one of the most common causes of SEZ failure is the lack of a competitive value proposition for investors. To this end, investors will come where regulatory laws and other incentives and concessions are more attractive to them.
Furthermore, governments that fail to implement competitive regulatory laws and policies will not be able to attract investors. This makes their SEZ initiatives particularly prone to failure.
Determination of processing zones
From a regulatory perspective, the degree of government control within the SEZ depends on the source of raw materials and the destination of finished products and services. For example, a SEZ with local objectives such as job creation or improving socio-economic conditions may make sense if the raw materials are sourced and sold locally.
There are three types of SEZs with an international dimension, briefly described below.
1. SEZ: raw materials imported from abroad and finished products sold in the local economy
In the second type, raw materials and components are imported from abroad and the finished products are sold in the host economy. In this case, the product is assembled in the SEZ and customs duties are paid only once for the finished product when it enters the host market. This simplifies traditional customs formalities by eliminating the need to pay customs duties on each imported component of a product.
2. SEZs: raw materials imported from abroad and finished products exported
In the third type, raw materials and components are imported from abroad and the finished product is exported. This model does not compete with local companies, which is a criticism of poorly designed SEZs. It is also a particularly useful tool for countries seeking to attract highly skilled or wealthy expatriates. Indeed, this type of SEZ generally attracts sophisticated companies.
3. SEZs: raw materials and components purchased locally
One of these is a free industrial zone in which raw materials and components are purchased locally, processed and/or manufactured in the SEZ, and then exported. In this case, the regulatory provisions of the SEZ are aimed at attracting companies that undertake these activities.
Many African SEZs follow this model. Notably, South Africa’s Industrial Development Zones (IDZs) established in Ngqura, as well as Lesotho’s Mafeteng SEZ, which focuses on the production and export of cannabis products.
Creating the conditions for SEZ economic success
Successful SEZs share several key characteristics:
- Offer a value proposition to investors
- Aligned and integrated with national development strategies
- Have high standards of governance and be well managed
- Have world-class infrastructure and services
- Located in a location that enables their success (e.g. in or near a port, or with easy access to a key resource)
- Carefully planned, with appropriate land use rights and zoning
- Designed to meet the demand for products and services manufactured in the SEZ, target markets (international or domestic)
- Have access to a skilled workforce, preferably local, but expatriate if necessary
- Offer expatriate workers (and their families) acceptable living conditions
- Synergistically connected to the host economy outside the SEZ
- Form clusters of firms with similar needs and characteristics
Furthermore, for SEZs to be effective, there is a need to balancing the economic benefits to host countries against the costs incurred. The balance must be acceptable to the government and other local stakeholders who may impact on SEZs, including host communities.
These costs include, among others, government contributions to the development of the SEZ, salaries of staff assigned to work in government functions in the zone, and taxes and customs duties collected or not collected, including for local companies setting up in the zone.
Investing in Free Zones in Africa: An Emerging Opportunity
Africa, often perceived as a developing continent, is in reality a fertile ground for investment, particularly thanks to the emergence of free zones. These zones, which offer tax and regulatory advantages, are increasingly attracting foreign investors.
Growth of Free Zones in Africa
According to the report of the United Nations Conference on Trade and Development (UNCTAD), the number of free zones in Africa has increased significantly over the last decade. This growth is fueled by the desire of African governments to attract foreign direct investment (FDI) to boost economic development.
Benefits of Investing in Free Zones
- Tax Benefits: Companies operating in free zones often benefit from tax exemptions on profits, imports and exports. In Morocco, the Tangier Free Zone offers a corporate tax exemption for the first five years of operation.
- Market Access: Free zones provide companies with easy access to regional and international markets. The Djibouti Free Zone, located at a strategic crossroads between Africa, Asia and Europe, is a key entry point for trade.
- Developed Infrastructure: Many free zones have modern infrastructure, including transport facilities, warehouses and logistics services. This reduces operating costs for companies.
- Abundant Labor: Africa has a young and dynamic workforce. Free zones often attract companies looking to leverage this human resource at a competitive cost.
Examples of Successful Free Zones
- Tangier Free Zone (Morocco): This zone has become a model of success in Africa. In 2021, it generated more than 1.5 billion USD in exports and created more than 75,000 jobs. Automotive, aeronautics and electronics companies are particularly well represented.
- Djibouti Free Zone: With its strategic location, this zone has attracted massive investments in the logistics sector. In 2022, it handled more than 1.2 million containers, making Djibouti a key logistics hub for the region.
- Nacala Free Zone (Mozambique): This zone is booming thanks to the exploitation of natural resources. In 2023, it attracted investments of more than USD 500 million in the mining and energy sector.
Investing in Free Zones in Madagascar
Investing in free zones in Africa represents a unique opportunity for investors looking for new markets. With attractive tax benefits, easy access to markets and a dynamic workforce, these zones are becoming poles of attraction for foreign investment.
Types of Free Enterprises in Madagascar
Free enterprises in Madagascar are classified into three main categories.
- Industrial Transformation Enterprises: Engaged in the transformation of products for export.
- Service Enterprises: Offering services mainly for export.
- Intensive Basic Production Enterprises: Focused on basic production for export.
Eligible sectors of activity include textiles, IT, services, mining processing, chemicals, agri-food, crafts and mechanics. The textile sector is particularly dominant, representing approximately 70% of exports.
Regulations and investment opportunities in Madagascar
Capmad devotes a special and unique Report on the SEZs/Free Zones of Madagascar. With the contribution of economic experts, research centers or regulatory authorities, any economic player will be able to obtain premium information to guide them.
From companies already present, to regulations on site, including the available workforce or the latest figures to exploit… This SEZ/Free Zones MADAGASCAR Report is the ATLAS of economic opportunities in the Big Island.
Sources :
https://unctad.org/system/files/official-document/diaeia2021d3-overview_fr.pdf
https://www.africaeconomiczones.com/wp-content/uploads/2023/12/Focus-ZES-Africaines.pdf
