Tuesday, January 17, 2023
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Money TalksEthiopia’s late steps to join industrial countries with Special Economic Zones

Ethiopia’s late steps to join industrial countries with Special Economic Zones

The significance of industrial parks was one of the economic concerns that received the most attention in the arena of policy discussion. From how they have been established to the incentives used to attract foreign investors, this issue has generated the most economic controversy. The authorities have exhausted all of their options in an effort to find a use for the sheds that they have constructed in the industrial parks.

In order to woo multinational investors from all over the world, the government has enacted a number of policy reforms, including lowering the minimum salary to as little as USD 30 and reducing the price of electricity to below USD 0.02 per KWH.

Special Economic Zones (SEZs) look to be the next vehicle for attracting foreign investment.

SEZs may not be new to the world, but they have just recently made their way to Ethiopia, decades after countries in Asia such as China, India, and others used the establishments as a way to entice investment even in regions that did not previously have a track record in the industry sector. China, for example, transformed Shenzhen, a fishing village in the southeast of the country, into an industrial powerhouse in less than 30 years.

Around the world, there are 5,383 special economic zones (SEZs), with over 75 percent of these situated in Asia, as stated in a report that was published in 2019 by the United Nations Conference on Trade and Development (UNCTAD). Over 47 percent of the entire numbers of SEZs are located within China alone.

Since 2014, when the report was first made public, and through 2019, more than 1,000 of these special economic zones have been established. At that point, nearly 500 were being developed, and an equal number were planned to be constructed in various locations across the world.

Despite the fact that numerous industrialized nations have established economic zones, China’s success is seen in the country’s increased trade power and the number of zones it has established since the 1970s, when it established its first four zones.

Ethiopia is in the final stages of finalizing legal frameworks before private, governmental, or public-private investors participate in the development of SEZs, having learned from the experiences of these countries.

After the Council of Ministers (CoM) already approved a policy on the national special economic zones during the middle of last August, and government offices in charge of attracting investment have drafted a law, which they have named the Special Economic Zone Proclamation. The development of the legal framework was driven by a number of factors, including the need to reform the export trade, increase Foreign Direct Investment, enhance the export trade capacity, and generate more jobs in the sector.

The Ethiopian Investment Commission (EIC) and its supervising body, the Ethiopian Investment Board led by Prime Minister Abiy Ahmed (PhD), will give designation of the Special Economic Zone to applicants, according to the proclamation. Developers could be regional or federal government bodies, private investors, or public-private partnership investors.

Existing industrial parks are granted the privilege, as a result of the proclamation, of not having to go through the process of applying for the designation of being an industrial park unless they wish to expand or acquire additional land. In such a circumstance, 13 industrial parks held by the government and seven industrial parks owned privately will be designated as such.

Officials at the state-owned Industrial Parks Development Corporation (IPDC) welcome this development. The continuation of existing parks as part of the SEZs, according to Fitsum Ketema, the Chief of Staff at the IPDC, will provide more benefits.

“What are expected following its implementation are policy reforms, flexibility in regulations, more attention in foreign currency allocation and improvement in service provisions from government offices to the investors. Through a center, all the related services will be provided together,” he said.

Even though the main focus of IPDC has so far been attracting foreign investors, its officials are now giving further attention to attracting local investors and substituting imports, Fitsum explained. Through such a vast plan for expanding the investment environment, more local investors are also expected to flourish.

The minimum area of land and capital requirements for the zones to be developed undermine the plan to build massive zones at prime locations. Investors willing to develop a SEZ will have to commit a minimum of USD 75 million and request a minimum of 75 hectares of land for the development and designation.

However, it is to be determined by the directives and circulars the Board issues on the maximum and minimum capital and area of land requirements, depending on the nature of the investment and the zone’s intention. The Board will also determine through directives whether the lease should be at the general price and minimum, or even free for the SEZ developers.

A senior official who has been working on the preparation and consultation of the proclamation from the Commission spoke with The Reporter on condition of anonymity. His office did not plan to make the minimal criteria the actual amount of money required to build SEZs; if they did, the actual amount would be significantly more than what was set as the threshold.

“Of course, there is no assumption that economic zones of such scale would be built with USD 75 million. We have to have a way to filter and assure whether the investors are committed or not,” the official said. “We shouldn’t block the chance from the get go.”

Once coming to effective, this proclamation would repeal the Industrial Park Proclamation and Industry Park Regulation, making the existing industrial parks be governed under this one. All the industrial parks, the information park, the regional-owned agro-processing parks, and the zone development projects will be designated as SEZs.

Even though his parks vary in performance, with a few of them like Hawassa Industrial Park reaching the targeted level and others still struggling, Fitsum of the IPDC welcomes the plan. He attributes the sluggish performances to the parks’ age, location, and other related factors.

“The investors’ preference, the COVID-19 pandemic, instability, and the revocation of Ethiopia from the African Growth and Opportunity Act (AGOA) have all contributed to the meager number of investors in the parks,” he said.

Seven years since its formation and six years since it began operations, the IPDC now oversees all 13 parks, where over 120 investors and 85,000 employees are stationed. This includes the first and highly preferred one by the investors, Hawassa Industrial Park. “Its relative peace and security in the area and precedence is what made investors choose it more,” Fitsum said.

Yared Hailemeskel, board member for several local companies and investment advisor managing a local consulting firm YHM, cautions authorities to carefully select locations of such zones as one of the main things investors observe is proximity to trading areas of products and access to the export corridors.

“One of the best benefits of distributing the SEZ in various parts of the country is that it would create a competitive advantage to manufacture in different places. However, with example on Hawassa park, some of the parks built don’t have feasibility as they are far from the ports,” Yared said.

For investors, they might prefer to manufacture in areas like Kombolcha or Dire Dawa as transportation costs can be very high in other places, Yared believes. He applauds the general idea of developing the zones with the country’s tax law, bureaucracy, and related regulations eased and making the environment conducive for individuals willing to do economic activity in the zones.

“If it means developing the country economically, why not create as many SEZs as possible,” he said. His only fear is that political decisions will get in the way, while he hopes that private investors building the zones would prefer to invest in areas of their preference, free from pressure.

As announced last August, the country’s first zone is to be built in an area of 301 hectares of land between Adama and Bishoftu, towns in Oromia Regional State. The regional government, which has a plan to construct similar zones across the region on 24,000 hectares of land, allocated 1.6 billion birr budget to commence construction of this site. 

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