An in-depth analysis of Special Economic Zones in Zimbabwe—will they ever pay off?

KINGSTONE ZIMUNYA

HARARE – When China introduced Special Economic Zones in 1978 under the guidance of Deng Xiaoping, the country was looking to reform and open up its economy to the world. Today, 53% of the world’s economic zones are in China, a Top 2 largest economy commanding an annual Gross Domestic Product (GDP) of roughly USD19 trillion.

3D Renders or Subway City Industrial Park, unveiled in 2015

Under President Xi Jinping, the strategy has since been accelerated and further transformed to focus on the free trade area (FTZ) model of special economic zones.

China and Zimbabwe have been close allies since the 1970’s, during the protracted struggle for Independence. It’s therefore unsurprising to see Zimbabwe taking a leaf from its longtime ally and establishing SEZs for the sake of much needed economic development.

While SEZs have been heralded as a critical catalyst for economic development, Zimbabwe has struggled to fully utilise the over fifteen SEZs that have been registered so far. Some experts believe the lack of comprehensive guidelines and a clear regulatory framework has also been the reason for lacklustre performance of SEZs in Zimbabwe.

On 14 November 2023, The Ministry of Finance gazetted new Special Economic Zones (SEZ) regulations outlining the framework for the establishment, operation and management of SEZs. The regulations are outlined in Statutory Instrument 226 of 2023, which repeals Statutory Instrument 154 of 2018.

But, what exactly are Special Economic Zones?

Special Economic Zones: An Introduction

Special Economic Zones (also referred to as free zones) in Zimbabwe represent designated geographical areas within an economy, where business activity is subject to different regulations from those prevailing in the rest of the economy. The regulations are aimed at creating a policy environment and associated infrastructure that are exporter friendly, both for local and foreign entities.

These rules pertain to investment conditions, trade, customs and taxes. The most common objective of SEZs is to attract foreign direct investment (FDI), as a means of boosting exports, links to global value chains and structural transformation of the economy.

Sunway City Special Economic Zone

In Zimbabwe, both foreign and local investors are legible to invest in the special economic zones.

A 2021 UNCTAD handbook on SEZs in Africa reports that although they were adopted late in Africa, they are now gaining traction, with at least 37 of the 54 countries having established at least one. The number of SEZs on the continent rose from around 20 in 1990 to 237 in 2020, driven mainly by the need for nations to attract FDI and promote industrial growth.

Economic Zones in Zimbabwe: A brief history

The concept of Special Economic Zones follows a similar concept to the Export Processing Zones, established in 1987 through an Act of Parliament. The EPZ programme was managed and administered by the Export Processing Zones Authority.

By 2004, projects under EPZ created over 32 000 jobs and US$172 million worth of investments. Incentives under EPZs utilised four instruments of the Finance Act: the Income Tax Act, Customs and Excise Act, Capital Gains Act and Value Added Act.

The formation of the Zimbabwe Investment Authority through the ZIA Act in January 2007 repealed the EPZA Act, which was the legal instrument governing the operations of EPZA. The move meant that, administratively, the programme could not continue to run.

In November 2016, The Special Zones Act was gazetted as part of the government’s efforts to engage foreign investors and revitalise industry. Through this Act, the Zimbabwe Special Economic Zones Authority was established to oversee and assist companies/investors keen to conduct business in these areas.

The main functions of the Authority included administering and controlling SEZs, granting investment licences, and monitoring activities of approved investments. In June 2017, former Reserve Bank Governor Gideon Gono was appointed chairman of the Special Economic Zones board.

Subsequently, Statutory Instrument 154 of 2018 was gazetted in August 2018 , which stipulated the fees for every application for a developer, operator, investor permit or licence. SI-154 effectively brought SEZs into operation.

Enter ZIDA

In an effort to streamline the legal framework surrounding SEZs, the Zimbabwe Investment and Development Agency Act was gazetted in February 2020. It effectively replaced the Special Economic Zones Act and the Joint Ventures Act of 2016; and The Zimbabwe Investment Authority Act of 2007.

To this effect, the Zimbabwe Investment Development Agency was created in December 2020, heralded as a one-stop investment services centre that would cut the red tape typical of the investment process, as well as craft attractive incentives for potential investors. Chief Executive Officer of United Refiners, Mr Busisa Moyo, was appointed board chair.

A key function of the Agency as outlined in the Act is the establishment and regulation of SEZs.

The agency says there are currently four types of zones in operation: the state-owned (public) SEZs, privately-owned SEZs, premise-based SEZ (individual businesses operating under an SEZ regime) and industrial areas designated as SEZs. To date, there are about fifteen SEZs in total, all at varying stages of operation.

Bernard Development Corporation runs the Bernard Diamond and Jewelry Centre Special Economic Zone, while Surewin Pvt Ltd operates the Sunway City Technology Park Special Economic Zone. Southpole Consulting Pvt Ltd is the main investor in the Victoria Falls Special Economic Zone, and Tradekings Zimbabwe are main investors in the Workington Tradekings Special Economic Zone.

Incentives and Regulations: An Attempt To Foster Investment

Companies operating in SEZs benefit from several fiscal and non-fiscal incentives. These incentives are designed to attract foreign direct investment, especially from investors who normally operate in countries with stringent tax conditions.

Companies operating in SEZs enjoy a plethora of tax benefits like zero-rated Capital Gain, a USD50 physically challenged persons employment tax credit and a youth employment tax credit of ZWL1500 per month for each additional employee.

Raw materials imported for use by companies set up in the SEZs shall be imported duty free. The duty exemption will, however not apply where such raw materials are produced in Zimbabwe.

The graphic below outlines additional incentives offered to operators in SEZs.

Image: Further Africa

To whom much is given, much is regulated. To enjoy these incentives, companies operating under SEZs are subject to certain regulations and pay licenses to ZIDA. SEZs are thus a form of income generation for government, an employment creation conduit and an export promotion tool. The criteria, regulations and fees governing SEZs in Zimbabwe are outlined below.

Individuals and entities eligible to apply for SEZ permits should be owning land or holding leases of not less than 25 years. The expansion of the eligibility criteria is expected to broaden the scope of potential applicants, whilst harnessing the potential of underutilised land.

Permit holders are prohibited from selling land within the SEZ.

If an SEZ was designated before these regulations came into effect, the SEZ owner must submit an application for the developer’s permit or operator’s permit within 180 days.

The permit may be issued for a new business, an expansion of an existing business, or the relocation of an existing business from one SEZ to another. It may also be issued for the expansion of an existing business outside SEZ boundaries.

SEZ licenses and permits shall be valid for ten years.

Applicants should demonstrate the availability of sufficient access to financial resources and expertise for establishment of the SEZ, as well as operation and development. They are also required to demonstrate and guarantee compliance with a set of mandatory requirements.

They must also provide the proposed geographical location, boundary specifications and map coordinates of the SEZ and a statement of the availability and accessibility to infrastructure, as well as topographical and construction constraints.

A comprehensive market-demand analysis; to identify strengths, weaknesses, opportunities, and threats; is required. The analysis should include information on local and foreign clients, potential markets, competitors, future prospects and the attractiveness of the SEZ to potential investors.

A schematic master plan must be provided, along with a prospectus for an initial environment and social impact assessment approved by the Environmental Management Energy. 

Upon commencing operations, a SEZ licensee is expected to manage waste produced as a result of its activities within the zone in compliance with the applicable environmental laws and any other national laws.

 In the case of manufacturing, SEZ’s must prioritise export-oriented manufacturing activities, with a minimum of 80 percent of finished products exported from the zone.

Investments in SEZs must involve the establishment of modern manufacturing plants tailored to specific economic sectors, ensuring competitive and efficient production processes.

SEZs operators must incorporate mechanisms for technology transfer, including agreements and training programmes to enhance the skills and knowledge of local human resources. Employment of local human resources must be prioritised, the ideal being a 90 percent local workforce.

Additionally, 100 percent of finished products must be derived from raw materials sourced within Zimbabwe. 

Applicants must provide proof of an initial investment of at least $50,000 and demonstrate their intention to establish linkages within the domestic economy, fostering broader economic growth and development.

According to the regulations, the developers are responsible for providing the offsite infrastructure to enable the SEZ’s activation. This includes boundary fencing, security access control and exit points, security systems, firefighting systems, and a police post.

In addition, developers must provide a minimum 33kVA power line, a minimum 100mm portable water supply line, and a minimum 18m dual=lane access road at the SEZ boundary and tarmac-paved internal road network.

An SEZ licensee is required to establish and implement the investment in compliance with the laws of Zimbabwe. This includes commencement of business activities no later than 60 days after the SEZ license is issued, unless otherwise stated in the license.

SEZ licensees are also expected to maintain company records, books of accounts, and financial statements in accordance with international financial reporting standards. They must also have their company activities independently audited annually and submit the audit reports to the Zimbabwe Investment Development Agency.

In terms of SEZs fees, applicants are required to pay a designation fee of USD50,000, a developer application fee of USD20,000, and an operator permit fee of USD20,000. That’s a staggering USD90,000 just to get your SEZ operational. An annual fee of USD1,000 shall be paid by holders of developer and operator permits.

An investor license fee is set at USD10,000, while an investor annual fee is USD2,500.

It must be noted that this SI provides for definition of general investment licence and registered investor which were previously not defined in the Act or any regulations relating to the Act. Previously, the Act only defined an investor not a registered investor. It did not provide whether the investor was registered by the Agency or not.

There is an application fee pegged at USD1,000 for every stage from designation, to the developer and operator permit. The application fee for an investor license is also USD1,000.

Will The New Regulations Pay Off?

The new guidelines stipulated in SI 226 provide a more transparent and predictable regulatory framework for SEZ investors. They define the rules of operation and bring clarity to potential investors on the opportunities, incentives and expectations upon them.

However, the incentives stipulated in the SI 226 are not the only consideration made in making an investment decision. Few investment decisions are made on the basis of fiscal incentives alone. Investors also consider macroeconomic stability, location, market access and logistics, labour market prices, and favourable regulatory framework among others.

The current performance of existing SEZs can also be used as an indicator of whether SEZs in Zimbabwe are a worthwhile investment. Companies operating in SEZs have not been spared by the general performance of the economy, which has not provided the necessary enabling operating environment for them to perform.

A major factor towards a decision is the financial sunk cost of investment. In this regard, the fees and licenses outlined in SI 226 can be considered as excessive. 

A potential investor may be dissuaded by the almost USD100,000 required just to get the SEZ delegation, plus application fees, annual fees, alteration fees, renewal fees, and late payment fees required to keep an SEZ operational.

One might be led to believe that government is simply trying to fundraise through SEZs. However, the government does hold a watertight argument—it was imperative to lay out a clear framework. But the work does not stop there.

In addition to promoting FDI through SEZs, government should also ensure that these investments generate tangible benefits for the country such as job creation, value addition, import substitution, export promotion, and broader economic benefits including the involvement of SME’s in supply chains, skills development and technology transfer.

In the same vein, the development of SEZs should not overshadow the empowerment of indigenous business. Government should not neglect it's support of local businesses considering that they are under different tax regulations from SEZs. Therefore, government's overall fiscal and monetary policy should serve the interest of local businesses.

For SEZ to achieve the desired results, there is need for strong leadership and high levels of political oversight. 

International best practice for successful SEZs models involves strong linkages and co-operation between the public and private sectors and as such, government should formulate policy to encourage Private-Public Sector Partnerships (PPPs), which are very vital for the growth of the economy.

It remains to be seen whether SEZs will be the elixir to the economic quandary that has been bedeviling Zimbabwe for the past two decades. 

One thing is for sure—the government of Zimbabwe now has a clear picture of how it intends to regulate SEZs. 

Thus, SI 226 becomes a crucial reference point, and a prospectus to potential investors. It is now up to ZIDA to attract the sorely needed foreign direct investment using SEZs as an alluring launchpad.