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September 23, 2018

Unlocking the Potential of Special Economic Zones

Transport CS James Macharia with Kenya Railways Corparation MD Atanas Maina at the Standard Gauge Railway Athi River Super Grand Bridge after addressing journalists touring the project, Athi River, Makueni County on Thursday. Along the project the state plans to build an Inland Container Terminal at Nairobi, Special Economic Zone in Naivasha and a Port at Kisumu/FILE
Transport CS James Macharia with Kenya Railways Corparation MD Atanas Maina at the Standard Gauge Railway Athi River Super Grand Bridge after addressing journalists touring the project, Athi River, Makueni County on Thursday. Along the project the state plans to build an Inland Container Terminal at Nairobi, Special Economic Zone in Naivasha and a Port at Kisumu/FILE

As highlighted last week, the Government of Kenya has earmarked trade as a key factor towards the achievement of the Big 4 Agenda, and ultimately the realisation of Vision 2030. With a view toward harnessing Kenya’s trade potential, Kenya seeks to unlock the tried and tested economic benefits offered by Special Economic Zones (SEZ), as evidenced by the largely successful SEZ regimes of India and China. This in itself indicates a shift from reliance on Export Processing Zones (EPZ) which failed to attain the desired economic impact.

Special Economic Zones, established and defined by the Special Economic Zones Act 2015 (The Act), refer to designated geographical areas where business-enabling policies are implemented and sector-appropriate on-site and off-site infrastructure and utilities are provided for by the Kenyan Government. Under the SEZ regime, participating investors stand to benefit from a trade enabling environment. Notably, the Act highlights integrated infrastructure facilities, access to business and economic incentives as well as removal of trade barriers and impediments as being key benefits accorded through the SEZ regime.

Drilling down to the incentive angle of SEZs, the major selling point of SEZs in Kenya are the tax shields offered within the confines of an SEZ. Particularly, from a tax perspective, SEZs are considered to be outside the customs territory of Kenya, thereby operating within a jurisdictional bubble that shields them from taxes and similar regulatory hurdles that directly or indirectly impede trade. Consequently, licenced SEZ enterprises, developers and operators benefit from various tax rebates such as exemption from excise duty, customs duty, value added tax and stamp duty, advantageous corporate income tax rates and preferential withholding tax rates, especially in relation to profit repatriation.

With a raft of tax and non-tax benefits, GoK expects that not only will foreign investors be encouraged to invest in Kenya, but that local industry players will also be afforded an opportunity to competitively access international markets.

The above notwithstanding, Kenya should be cautious in her handling of SEZs. Particularly, we should be willing to learn from the teething problems experienced in other jurisdictions that operate SEZs. High risk issues that may impede the success of SEZs in Kenya include regulatory and legislative issues surrounding labour, transportation networks and logistical hubs as well as institutional and governance challenges.

Singling out transportation networks and logistical hubs, a good transportation network plays a significant role in the success of SEZs. This is particularly important in relation to high-tech, modern and high value sectors as businesses and companies in these sectors are often very time-sensitive. With this in mind, projects targeted at unlocking Kenya, such as the SGR, are of critical importance toward the overall success of the SEZ regime in Kenya.

 

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