COLUMNS - 22 JUN 2017

Nigerian Free Trade Zones: As Simple as SEZ

Nigerian Free Trade Zones: As Simple as SEZ
Acting President Osinbajo recently passed an order aimed at promoting transparency in the business sector.

In May 2017, Acting President Yemi Osinbajo signed an executive order on the "Promotion of Transparency and Efficiency in the Business Environment". Though the title is a mouthful, the order aims to make things simpler for businesses who have to apply for permits, licences, waivers, etc. from Federal ministries, departments and agencies (MDAs). The goal here is to move Nigeria up 20 places on the World Bank's Ease of Doing Business ranking within two years and attract more foreign direct investment (FDI).

Bureaucratic delays are just one of many hurdles that hamper business growth in Nigeria. Other main ones being inadequate infrastructure and weak contractual enforcement. But rather than trying to tackle individual issues, the government could focus on addressing the most pressing challenges for a few industries at a time to speed up their growth in the short-term. This is where Special Economic Zones come in. 

 

Simple as SEZ 

A Special Economic Zone (SEZ) is a broad term for industrial parks, free trade zones, export processing zones, etc. The common denominator is that the government demarcates a physical area where businesses receive "special treatment" of some form – different regulations, infrastructure, tax regimes, etc. Governments often opt for SEZs to support industries that would typically find it hard to operate, attract foreign businesses to locate in an otherwise unfriendly climate or to encourage clusters of businesses who benefit by locating near each other by access to standard inputs at lower cost (economies of scale).  

For example, Lekki Free Trade Zone is serviced by an independent power project that should provide better electricity to businesses in the zone than the rest of Lagos enjoys. This would be ideal for manufacturing plants that could not otherwise survive in the face of erratic or costly power supply. Also, businesses in this free zone also do not need to pay any federal, state or local taxes or apply for import or export licenses, and can import raw materials duty-free, among other incentives

SEZs are not new in Nigeria – with 33 free trade zones designated since 1992 – but their contribution to FDI and industrialisation has been minimal. The policy has proven successful all over the world, and as is so often the case, poor implementation appears to be holding Nigeria back.

 

Nothing Measured, Nothing Gained 

What is wrong with Nigeria's approach to free zones? The truth is that we do not know because we lack reliable data on the performance of SEZs. The paucity of data is a primary hurdle here for a number of reasons. First, potential investors want to know whether locating in an SEZ suits their interests. Second, governments are then able to analyse the impact of the zone and draw lessons on what to do next. 

We learn a lot from successful zones, in particular, as they point to potentially scalable nationwide solutions. For example, in its transition to a market economy, China used its Shenzhen SEZ to test whether trade liberalisation would be a sound development strategy. Japan took it a step further and used SEZs to test hundreds of policies proposed by municipalities that were competing to attract investment. In both cases, the data was key to understanding what worked and what didn’t. Until Nigeria takes data collection seriously, we won't know what we don't know. For now, we can only scrutinise individual zones to elicit information on how to deal with SEZs going forward. 

 

Infrastructure Over Incentives

Although SEZs are supposed to be conducive to the business growth, many of them still suffer from the infrastructural deficiencies that plague the rest of the country. The Kano industrial cluster, which specialises in leather production, faces high indirect costs due to the absence of quick and reliable transportation facilities to deliver their products from the hinterland to finished leather goods producers in other parts of the country or port cities for export. Similarly, one of the most cited barriers to the growth of the Calabar free trade zone has been the lack of investment in dredging the Calabar port.

Rather than tackle these challenges, Nigeria’s SEZ approach has so far relied on tax incentives to attract investors. But the subsidies implied by these tax breaks are insufficient to overcome a fundamental lack of public goods provision for most industries. And where the incentives have been "successful", it is not immediately apparent that they were necessary to begin with. That the most active free zones in the country are oil-related is telling, because the economic viability of the oil & gas industry has never been at issue. Therefore, it is possible that companies in these zones would thrive even if they didn't receive any incentives.

 

Breaking Old Customs

When the infrastructure exists, administrative hurdles still loom large. TINAPA is a poster child for Nigeria's failures in this regard. Ten years and ₦60 billion later, investments have dwindled to a bare minimum. TINAPA's experience is not merely a cautionary tale against undertaking white elephant projects, it also teaches a valuable lesson that the way the Nigeria Customs Service (NCS) currently operates may be incompatible with business growth in SEZs and perhaps, other parts of the country as well.

TINAPA was initially marketed under the agreement that domestic consumers could each make purchases valued up to $5000 from the zone without having to pay an import duty. However, after the project was already far along in development, this allowance was decreased to $330. Obviously, this significantly reduced patronage to businesses located there.

This situation is not unique to Tinapa, and the Nigerian Export Processing Zones Authority (NEPZA) continues to battle the NCS over its treatment of businesses in other SEZs. For instance, although an incentive of locating in a free zone is the ability to import raw materials and sell repackaged items to the domestic market without restriction, the Comptroller-General of NCS recently issued a directive to the contrary for rice producers. This is part of a continued bid to conserve scarce forex by stopping rice importation by land. However, this sort of administrative inconsistency is the bane of any investor.

 

Smarter SEZ Strategy 

Like most things in Nigeria today, the success of our SEZs boils down to political will. Given that NCS generates high revenues for the government, it is understandable that any government would be loathe to check its activities. However, if the drive to collect more taxes comes at the expense of business growth and economic diversification, we could be sacrificing significant future gains for a marginal increase in revenues today. 

Furthermore, if SEZs are to form a meaningful part of Nigeria's industrial policy, we will need to take a closer look at each zone's specific needs. Whether it is railways for Kano or a deep sea port in Calabar, the missing link for growth will likely differ by industry. Figuring out what that element is and how to deliver it is precisely why we have SEZs. 

 

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Ebehi Iyoha

Ebehi Iyoha

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