Special Economic Zones (SEZs) have long been recognised as one of the best methods of boosting industrial production in the face of infrastructural constraints in host countries. They offer tax concessions and other benefits often not available elsewhere locally and are designed to enable knowledge transfer between international companies and domestic partners.
Afreximbank has therefore identified them as a key method of attracting foreign direct investment (FDI) and building African supply chains.
It is hoped that SEZs can help drive industrialisation and diversification by keeping more of the benefits of raw material production within Africa. Boosting industrial, manufacturing and processing capacity within the continent reduces both the length of supply chains and costs for customers.
SEZs catalyse industrialisation
World Economic Forum research demonstrates that such zones can catalyse African industrialisation and boost extra- and intra-regional trade.
The first SEZs were developed in East Asia and Latin America in the 1950s. Shenzhen is often cited as the world’s most high profile SEZ, with a fishing village now transformed into one of the world’s most important manufacturing centres, creating huge Chinese corporations such as Huawei and Tencent in the process. By the end of 2020 Shenzhen had attracted $300bn investment from more than 90,000 foreign companies keen to take advantage of lower wage costs and tax incentives.
According to the UN Conference on Trade and Development (UNCTAD), the first African SEZ was created in Mauritius in 1970 and there are now 237 spread across the continent, including 61 in Kenya and 38 in Nigeria. However, UNCTAD argues that African SEZs have generally failed to generate the same benefits as those in Southeast Asia in terms of FDI, employment and supply chain development.
Although such zones are treated differently in terms of their tax arrangements and some other regulations, they are still heavily dependent on the wider environment within which they operate. Most rely on external power production and rail, road and port infrastructure, and are vulnerable when this is unreliable. Above all else, the smooth operation of new commercial operations needs the support of all relevant government ministries and regulators but this is not always forthcoming because of a lack of coordination across the relevant authorities. It is here that Afreximbank can make a big difference by offering technical advice as well as financing.
Afreximbank is currently working with African governments on projects worth $900m to develop and expand SEZs and industrial parks, including two in Malawi and one in Côte d’Ivoire, with talks ongoing on others in Botswana, Kenya and Rwanda.
According to UNCTAD, power supply problems are much less frequent for companies operating in Kenya’s existing SEZs than for those operating elsewhere in the country.
The two Malawian projects, the Magweru and Matindi industrial parks, hope to attract agro-processing, manufacturing, chemical, pharmaceutical, light engineering, mineral processing and construction material investment that can take advantage of the emerging African Continental Free Trade Area (AfCFTA).
Crucially, the projects aim to support small and medium sized Malawian companies as well as foreign investors. Many SEZs are designed solely to attract foreign investors focused entirely on exports. Afreximbank, however, is keen to encourage both domestic and foreign companies to invest in the zones it is supporting.
Malawi’s Minister of Industry, Mark Katsonga Phiri said the SEZ would help in transforming Malawi to an industrialised exporting nation to regional and international markets, “capitalising on the preferential market access privileges that Malawi can enjoy such as the African Continental Free trade Area”.
Automotive supply chains
In April, Afreximbank and the UN Economic Commission for Africa (UNECA) signed framework agreements to set up SEZs in Democratic Republic of Congo (DR Congo) and Zambia dedicated to hosting battery electric vehicle (BEV) sector producers of battery precursors, batteries and electric vehicles, among other parts of the supply chain.
Afreximbank will be the projects’ financial partner, with UNECA taking on the role as technical advisor and pan-African infrastructure developer Arise Integrate Industrial Platform undertaking pre-feasibility studies on both projects. Operating companies for each project will be created by consortia of public and private sector investors alongside international investors, such as Afreximbank’s impact fund subsidiary, the Fund for Export Development in Africa (FEDA).
It is hoped that the two SEZs will capture more of the supply chain for batteries and EVs as global production ramps up. DR Congo and Zambia have substantial mineral resources that are needed in EV manufacture: DR Congo accounts for 88% of global cobalt exports, while they jointly account for 11% of global copper supply.
Afreximbank is prioritising financing for EVs and battery energy storage within its support for the energy transition. Speaking to the African Union annual conference in December 2022, Afreximbank President Benedict Oramah noted that the fact that there are more than 30,000 parts in a typical vehicle provides a good opportunity for building regional value chains and driving industrialisation.
Afreximbank’s Director of Export Development, Oluranti Doherty, commented: “At Afreximbank, we are firmly convinced that industrial parks and special economic zones are critical tools the continent can deploy to fast track its industrial infrastructure development, promote intra-African trade, accelerate the implementation of the AfCFTA and facilitate export development.”
This intervention also demonstrates Afreximbank’s commitment to promoting climate finance solutions that will reduce carbon footprints and create “a pan-African narrative around encouraging a just, sustainable and responsible energy transition”, she added.
Other zones have had success by focusing on particular sectors. The Nkok SEZ in Gabon was created in 2010 by Olam International (40.5%), the government of Gabon (38.5%) and the Africa Finance Corporation (21%) to promote timber processing in the country, while attracting manufacturers that could make use of the timber.
Afreximbank has provided financing while the Gabonese government has supported the project by following Mozambique’s example among other African countries, by imposing a ban on the export of unprocessed logs.
A total of 160 companies now employ more than 4,000 people in the zone, which is located just east of Libreville, with its port and airport facilities. The success of Nkok has now persuaded Olam and the government of Gabon to develop another SEZ at Mpassa-Lebombi in the south-east of the country, again to support not only timber processing and manufacturing but also agricultural supply chains.
Apart from supporting specific industries, some zones can leverage their locations. One of the best known African projects is the Musina-Makhado SEZ in South Africa’s Limpopo Province, on the border with Zimbabwe. Located close to Africa’s busiest border crossing, Beit Bridge, it makes use of transport connections to target the entire South African Development Community.
Partnership with Arise
In June 2022, Afreximbank signed a cooperation agreement with Arise, which specialises in financing, developing and operating SEZs across the continent, under which it will offer financial and other support to investors in Arise industrial parks. The bank is providing trade finance, project finance, project preparation support, SME development capabilities and advisory services. In addition, the partners are to set up African Quality Assurance Centre (AQAC) testing and inspection laboratories to ensure that goods are produced to meet international standards.
The Bank said: “Both institutions recognise that Africa’s industrial potential continues to be hampered by issues such as the non-conformity of African goods with international standards and technical regulations, as well as the inability to test and certify local produce for export.”