News Column

Boosting the Country's Manufacturing Exports

July 14, 2014

Paul Kibuuka

THROUGHOUT the world, governments have adopted several strategies and policy directions in a bid to enhance the inflow of Foreign Direct Investments ("FDIs").

One such policy is the Export Processing Zones ("EPZs"). But what are EPZs? According to the World Bank, EPZs refer to fenced-in industrial estates specializing in manufacturing for exports that offer firms free trade conditions and a liberal regulatory environment.

Although still a subject of criticism by the labour movement, EPZs have been implemented successfully in the Asian Tiger and Latin American economies to promote value-added exports and generate foreign exchange earnings. As early as 1966, Taiwan was taking strong steps to meet the requirements of its economic development of that period.

By 2009, there were a total of 355 enterprises in 9 EPZs with invested paid-in capital of US$538 million, and accumulated turnover for the year 2008 amounted to US$1.06 billion. The strategy helped Taiwan to attract FDIs and increase value- added exports, ultimately creating GDP growth and employment.

In China alone, there are 124 EPZs, complete with modern and reliable infrastructure such as education, transport and social services, according to the International Labor Organization (ILO). Malaysia, Pakistan, Sri Lanka and Bangladesh have extensively relied on EPZs.

Closer to home, there are 14 EPZs in Kenya; and in Mauritius, the entire island is an EPZ. Yet, for the past several decades, Tanzania has lagged behind most countries in manufacturing and exports. But the trend is changing with the enactment of the Export Processing Zones Act ("EPZ Act") in 2006, which paved way for the implementation of the EPZ model in 2007.

Managed and administered by the Tanzania Export Processing Zones Authority ("EPZA"), the central vision behind the setting up of the model is to boost Tanzania's economy by attracting export-oriented manufacturing investment within zoned boundaries.

It is also meant to enhance foreign direct investments, encourage the transfer of new technology, create new jobs, and transform Tanzania into a true industrial-cum-commercial hub for East and Central Africa. By this development agenda, Tanzania opted to further enhance its economic liberalization programme that began in earnest in the mid-1980s by offering both fiscal and non-fiscal incentives to EPZ investors.

The typical EPZ incentive package in Tanzania includes, 10 years' tax holiday; exemption from taxes (and duties) on capital goods and raw materials; exemption from VAT on utility services and construction materials; and exemption from withholding tax on rent, dividends and interests - all meant to boost the country's competitiveness.

The rationale behind these generous incentives is to support successful exportled growth. But is the attempt by Tanzania to follow the positive experiences of Asia and Latin America in using EPZs bearing fruits? According to the 2011/2012 EPZA Annual Report, Tanzania registered a total of 20 EPZ projects which brought into the country a capital of US$142.2 million, with projected annual revenues of US$83.2 million and 2,605 opportunities in direct employment and more than 10,000 indirect jobs.

EPZA Director General, Dr Adelhelm Meru, said during a recent interview that within six years of its operation, more than 60 companies have been registered by the EPZA. Most of these have invested a total capital of more than US$913 million, and have created over 21 million new direct jobs."

This is all encouraging - except that the existing EPZs are small in size. And with the discovery of huge reserves of natural gas in Tanzania, these numbers are expected to rise as more and more foreign enterprises from the UK, Norway, Brazil, China, Japan, Malaysia, Qatar, and India continue to show their interest to set up manufacturing operations in Tanzania.

This increased investor interest is mainly due to the country's peace and political stability; the natural resources and raw materials that remain largely untapped; the over 40 million hectares of fertile land suitable for agro-production and processing; and the wider export market through numerous preferential trade agreements like AGOA and EBA. Likewise, Tanzania has close proximity to 8 countries, 6 of which are landlocked neighbours.

This means that trading with Uganda, for example, leads to trading with all. Close proximity assists, although it is not extremely necessary. After all, Mauritius is located quite a distance from key markets like the USA, but it has been very successful with textile and clothing exports.

Be that as it may, all the above underlying strengths should help Tanzania rank high in the attraction of EPZ foreign direct investments. However, there are many challenges in developing and implementing EPZs. The biggest challenge facing Tanzania now is that of inadequate infrastructure, including power supply.

According to the 2011/2012 EPZA Annual Report, "High costs of operation and production due to unreliable supply of electricity and water made the EPZ operating enterprises uncompetitive in the international markets". Investors are looking for production cost reduction, safety and security of investments; as well as, good return-on-investment (ROI) in a bid to break-even and compete favorably in the international markets.

In a World Bank working paper on EPZs in Africa, Peter Watson pointed out, "China, Hong Kong, and South Korea are doing well in EPZ because of well-designed infrastructure. "These countries have excellent airports, roads, electricity and water supply.

The presence of this infrastructure attracts competitive enterprises in EPZs since the infrastructure facilitates exportation of goods from EPZs to other countries." The infrastructure and power supply challenge can be overcome through public-private partnership (PPP) initiatives.

Well-managed PPPs will encourage investments in infrastructure and the development of privately owned EPZs. According to Steven Gadelet of the Harvard Institute for International Development, "publicly owned EPZs tend to be run less efficiently than privately owned EPZs, although numerous well run publicly owned EPZs have been significantly successful in Asia."

He adds that, "In most countries, such as the Dominican Republic, privately owned zones EPZs are much better managed, and offer better facilities and a wide variety of services. Private EPZs tend to cost more, but many enterprises are willing to pay for the improved service.

"Privately owned and managed EPZs generally relieve the government of the burden of initial investment costs and on-going management, therefore there's a strong case in favour of privately owned EPZs." Despite constraints and challenges, Tanzania's EPZ programme has provided some tremendous opportunities for the country.

These achievements could be seen in the areas of employment creation, export diversification, and higher exports earnings for the country.

As Tanzania's reputation continues to soar as a viable investment destination, and as President Kikwete's government seeks ways to diversify the economy and move up the export value chain, EPZs will become even more important than ever before; provided, the infrastructure and power supply challenges are addressed; otherwise the noble objective stated in the Tanzania Development Vision 2025 of transforming Tanzania from an agricultural to a semiindustrialized economy will take a long time to realize.

The author is the Managing Partner of Kibuuka Law Chambers. He can be reached at paul.kibuuka@kibuukalaw. com

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Source: AllAfrica

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