A clearer path to development

The development of free zones in Africa, whether export processing zones or special economic zones, has not progressed very far. Compared to free zones in Asia and Latin America, many in Africa have performed poorly.

Africa’s free zones originated in Egypt in the 1970s, and Senegal, Liberia, Mauritius and Tangiers were also early starters. In Morocco and Tunisia, many garment manufacturers from France and Italy used local sub-contractors (although these were not free zones as such). Brands such as Christian Dior were produced in these countries because their lower wage levels meant European manufacturers could compete with south-east Asian exporters.

Free zones developed in Kenya and Nigeria only in the 1990s, and several other countries have tried to attract FDI and new employment through the establishment of free zones.

Delayed opportunity

A remarkable example of a free zone opportunity took place in what was then Zaire, between 1976 and 1980 at the site of the Inga Dam on the Congo River, south of Kinshasa. At Inga, four massive generators were built to take advantage of the six-metre drop in the river level. Italian and French companies installed the machinery, financed by the EU, which held project reviews in Brussels every year and invited a large Zairean contingent to attend.

Most of the time only one generator operated, as this was enough to provide power to Kinshasa and its surrounding region. The plan was to use the other three to transmit power to the Copper Belt, but the transmission lines were not completed despite financial assistance from the EU.

It was then decided to create the Inga Free Zone to attract investors who required large quantities of power. One study selected ferro-silicium (an expensive additive in the production of steel) as a suitable product as it requires large volumes of high voltage power to produce.

UN development bodies Unido and UNDP put in a team to develop this project, and the EU also supplied finance and a project director. Unfortunately, by 1983 there was so much guerrilla activity in the area that it became impossible to continue. In 2007, however, the EU resumed its interest in the project.

Lack of authority

A major anomaly among free zones is that not all countries have a central general authority. Egypt, for example, has its General Authority for Investment and Free Zones, which oversees one privately financed and six publicly owned free zones. Mauritius’s Central Zone Authority issues licences to approved factories. A free port was established in 1992 with an international trade-merchandising centre.

However, Kenya lists 40 and Nigeria 17 free zones. Many of these are just individual factories or mini industrial estates that have applied for free zone status mainly to avoid paying taxes. Individual manufacturers can obtain free zone status providing that they export, preferably 100%, and providing they abide by regulations such as the current minimum salary and the avoidance of pollution.

This granting of free zone status on a random and regional basis leads to confusion. Many so-called ‘zones’ are poorly managed, and when they fail and investors pull out, new investors do not apply. Any expenditure on marketing or advertising such zones is thus wasted.

The next steps

African governments that issue free zone licences need to have clear, transparent policies. To allow local manufacturers that export little or nothing to have free zone status is merely to allow tax evasion.

Governments could also offer free zone licences to private sector entrepreneurs. This has been done successfully in Egypt and is being attempted in Nigeria and Kenya.

Training for customs officials is also necessary so they can adapt to the free zone methods of trading, which involve large quantities of imported parts and raw materials.

Customs officials are generally trained to prevent smuggling and tax evasion – but in free zones, their function is mainly to assist the smooth running of transport in and out of the zone. Since shipping is containerised, control has to be mainly by documentation only. Stopping and opening containers would slow down and disrupt free zone factory production. Shipping and delivery are based on orders transmitted by e-mail that require a rapid response, so if goods are held up by customs this can cause exporters to lose both orders and customers. In practice, free zone customs officials rapidly get to know which company is importing what material. Free zone laws will allow them to make random inspections if there is reason for suspicion, and any smuggling has to be punished by removing the guilty company’s licence and evicting them from the zone. In practice, however, smuggling is rare as companies do not want to lose their valuable investments in the zone.

Retraining necessary

Free zone authorities should also offer specific training courses for the departmental managers who will be dealing daily with private sector foreign investors. As most free zones are located on government land, and it is governments that must draft and ratify new free zone legislation, there has been a tendency to manage zones using civil servants.

Unfortunately, most civil servants have no commercial experience and lack the skills to deal with free zone owners and managers who are, by definition, from the private sector. This has been problematic, making retraining necessary.

Free zone administrative staff should be permitted to accept offers of employment from investors as this creates a healthy atmosphere of co-operation.

Management needed

A major factor behind the slow development of free zones in Africa is the shortage of well-qualified and experienced managers. This is due partly to low salary levels and partly to the ‘brain drain’ from Africa, which has severely reduced the availability of good managers.

Free zone investors provide their own factory managers at start-up stages, but the authority that administers the zone must ensure it employs an experienced, multi-lingual chief executive, who has a team of departmental managers, engineers, accountants, IT and logistics specialists, and workforce trainers.

On their first visit to a new free zone, potential investors will look for the signs of a competent and efficient team of managers that constructs and equips rentable factory buildings and looks after services, repairs and maintenance. Investors can easily find out how the host government relates to the free zone authority, and how the FZA relates to new investors just by asking existing investors.

The free zone CEO must have a large amount of autonomy and not be restricted by investment limits or complex paperwork and regulations. Investors expect that the CEO can agree the main investment principles – investment incentives, rental of factory space and minimum wages – at their first meeting. There should not be a long delay while investment committees consider each and every investment proposal – a firm reply should only take about one working month.

Department heads must be motivated on private sector lines, promoted on merit and paid bonuses when appropriate. (Quite often new investors will offer supervisory jobs to local nationals they consider effective managers.)

It is this management element which is in short supply in many African countries, and often means that expatriates are employed at least in the first few years of an investment.

Other effects

It has been noted that free zone staff often learn management techniques while working in a free zone and then leave to set up their own small businesses. Another feature is the rapid development of small service industries around the free zone site. This takes the shape of buses and mini-buses, fast-food kiosks and small retail outlets, which can soon grow. The World Bank says that two jobs are created outside a free zone for every one inside the zone.