Why Special Economic Zones Present Invaluable Business Opportunities

By 2030 Kenya has ambitious plans to become a provider of manufactured goods to East and Central Africa; to increase value in agriculture, be a destination for business process outsourcing and to develop technology and innovations to support economic developments. These plans require expertise, time and resources which are limited. With this realization the Government began putting in place strategies to woo investors. They created a mechanism through which designated geographical areas could be developed with public or public-private partnerships. Within these geographical areas business enabling policies and incentives are to be adopted such as lower taxes and elimination of certain business operating licenses/permits. These geographical areas are known as Special Economic Zones and are provided for in the Special Economic Zones Act No.16 of 2015.

Special Economic Zones (SEZ’s) can be designated for various uses such as industrial parks, science and technology parks, livestock parks, tourist & recreational zones, free ports etc. They provide considerable tradeoffs where the government can benefit from expertise, and development of infrastructure, industry and local communities while the investors can enjoy tax breaks, capital and profits repatriation and protection of property rights. This article will discuss how SEZs come into being, who can carry out business in an SEZ and the benefits of operating a business in one.

What is a Special Economic Zone?

Section 4(4) of the Special Economic Zones Act defines an SEZ as a designated geographical area where business enabling policies, integrated land uses and sector specific infrastructure and utilities are provided, or can be developed on a public or public-private partnership basis.

SEZ are unique in that they are considered to be outside the customs territory. Section 2 of the SEZ Act defines a customs territory as the geographical area of the Republic of Uganda, Kenya and Tanzania and any other country granted membership to the East African Community. Being outside of the customs territory means in the SEZ certain laws and regulations that apply in the customs territory do not apply in the zones as such they are able to enjoy certain benefits which we shall discuss later on.

Because SEZs are considered to be out of the customs territory, any goods or services provided from Kenya or other part of the customs territory to the SEZ are deemed to be exports. Similarly, goods taken out of an SEZ or services provided to any part of the customs territory from the SEZ are deemed to be imports.

Section 4(6) of the SEZ Act provides that a special economic zone maybe designated a single or multiple sector zone and may include but are not limited to the following:

  • Free trade zones
  • Industrial parks
  • Free ports
  • Information communication and Telecommunication Parks
  • Science and Technology Parks
  • Tourist and Recreational Zones
  • Agricultural Zones
  • Business Service Parks
  • Livestock zones
  • Convention and conference Facilities

Kenya has already designated Special Economic Zones in various areas in the country such as:   

  • Kiambu – Tatu city 4734 acres which is being developed as a multiple sector zone to include manufacturing, sports & entertainment, business complexes etc. (May 2017)
  • Nakuru County – 1000 acres. This zone is close to the Geothermal Power Plant and the Standard Gauge Railway and is expected to provide manufacturers’ cheap power and transport to the Mombasa Port. (July 2019)
  • Mombasa County (Dongu Kundu) – 3000 acres. This SEZ is designed to be a multi-sectoral zone to include; a free trade zone, industrial parks, tourism and business service parks it is expected to create 100,000+ jobs. (July 2019)

Criteria for Designation of a SEZ

Section 10(1) of the Special Economic Zones Regulations provides that any person may submit a proposal for the designation of a particular area as an SEZ to the Special Economic Zones Authority.

The proposal needs to be accompanied by a feasibility study report, containing market-demand analysis, economic impact assessment, strategic environmental and social-impact assessment etc.

Section 5 of the Special Economic Zones Act provides that in determining whether to approve a particular proposal for an SEZ, the following will be taken into account;

  1. Nature of the proposed project
  2. Intended size and perimeter of the proposed special economic zone;
  3. Availability of land and unencumbered land titles
  4. Geographical location and topography
  5. Proximity to natural resources, population centers and infrastructure
  6. Infrastructure and other utility requirements from national and county governments including water, power, sewage, telecommunication, solid waste and waste water management;
  7. Provision of medical, recreational, security fire safety, customs and administrative facilities;
  8. Impact on off-site infrastructure, utilities and services;
  9. Approvals of land uses and zoning requirements to facilitate the special economic zones; and
  10. Environmental standards and requirements

If the Special Economic Zones Authority is satisfied with the proposal they forward it to the Cabinet Secretary for industrialization recommending that a particular area be Gazetted as an SEZ. Upon reviewing the Proposal the CS may approve and the area is Gazetted or reject the proposal in writing giving reasons/suggesting modifications.

How to operate a business in an SEZ

In order to carry on business in an SEZ one must apply to the Special Economic Zones Authority for a license. You can run a business either as: 

  1. Special Economic Zone Developer – a corporate body which is engaged in or plans to develop the SEZ and may/may not plan to operate/manage it.
  2. Special Economic Zone Operator – a corporate body engaged in the management of the Special Economic Zone
  3. Special Economic Zone Enterprise – a corporate body licensed under the Special Economic Zones Act to carrying out activities eligible in a particular SEZ.

To be licensed as a Special Economic Zones Developer or Operator the following criteria must be met in additional to any others the Special Economic Zone Authority may prescribe:

  1. Be a company incorporated in Kenya, for the purpose of undertaking special economic zone activities;
  2. Have the financial capacity, technical and managerial expertise, and associated track record of relevant development or operational projects, required for developing or operating the special economic zone; and
  3. Own or lease land or premises within the special economic zone

The Special Economic Zones Authority will grant a license for a SEZ Enterprise if it:

  1. Is incorporated in Kenya whether or not it is one hundred per cent foreign owned;
  2. Proposes to engage in any activity or activities eligible to be undertaken by a special economic zone enterprise in the special economic zone;
  3. Does not have a negative impact on the environment or engage in activities impinging on national security or presenting a health hazard; and
  4. Conducts business in accordance with the laws for the time being in force save for any exemptions under this Act.

Section 29 of the SEZ Act provides that benefits shall not accrue to SEZ developers, operators or enterprises without valid licenses.

Rights of SEZ Developers, Operators and Enterprises

SEZ Developers have the right to;

  1. Lease, sub-lease or sell land or buildings to licensed special economic zone operators and, enterprises, and charge rent or fees for other services that may be provided;
  2. Acquire, dispose or transfer special economic zone lands or other assets;
  3. Develop, operate and service special economic zone lands and other assets in conformity with applicable law and its license;
  4. Provide utilities and other services in and outside the special economic zone, in accordance with its license, and to charge fees for such services;
  5. Enter into contracts with private third parties for the development, operation, and servicing of special economic zone lands and other assets, including on-site and off- site infrastructure.

SEZ Enterprises have the right to;

  1. Full protection of its property rights against all risks of nationalization or expropriation;
  2. The right to fully repatriate all capital and profits, without any foreign exchange impediments;
  3. Protection of industrial and intellectual property rights, in particular patents, copyrights, business names, industrial designs, technical processes and trademarks;
  4. The right to transact and carry on business with a non-special economic zones enterprise;
  5. Admit into the SEZ for which it is licensed, to export and sell in the customs territory all classes or kinds of goods and services in accordance with the custom laws of the East African Community;

Benefits for SEZ Developers, Operators and enterprises

SEZ Developers, Operators and Enterprises are exempt from the following;

  1. Stamp duty on the execution of any instrument relating to the business activities;
  2. The payment of advertisement fees and business service permit fees levied by the respective County Governments’ Finance Acts;
  3. General liquor license and hotel liquor license under the Alcoholic Drinks Control Act, 2010;
  4. Manufacturing license under the Tea Act;
  5. Rent or tenancy controls under the Landlord and Tenant (Shops, Hotels and Catering establishments) Act;

In addition to the above exemptions licensed SEZ Developers, Operators and Enterprises shall be entitled to work permits of up to twenty per cent (20%) of their full-time employees.

Tax incentives in SEZs

  1. Income Tax – 10% for the first 10 years of operation, and 15% for subsequent years;
  2. Value Added Tax – supply of taxable good and services to SEZs is zero rated from VAT;
  3. Import Declaration Fees – goods destined to SEZs are exempt from Import Declaration Fees;
  4. Excise Duty – importation of goods and services exempt from excise duty;

SEZ developers, operators and enterprises are also allowed to deduct 100% of their capital expenditure on buildings and machinery in the first year of use.

Conclusion

It has been 11 years since Kenya started its journey towards Vision 2030 and there are exactly 11 more years left till 2030 meaning we are at the half-way mark. We have made commendable steps towards creating a foundation to actualize the goals. One of those steps was enacting the Special Economic Zones Act to attract both local and foreign investments and partnerships so as to develop various areas in Kenya with great potential for growth. Since the SEZ Act was enacted 4 years ago at least 6 SEZ have been designated in various parts of the country. From Kiambu to Uasin Gishu to Mombasa and Kajiado. The Government also plans to develop the Lamu port with an SEZ opening up Kenya to more trade opportunities along the Coast. Unfortunately, the Government is not shouting loud enough since most people are not aware of SEZs or how to conduct business in them.

The great thing about SEZs is that they have capacity to attract both large scale investors as well as SME’s. Large Scale investors can develop the zone by erecting buildings, subleasing land and setting up utilities and charging a fees, while SME’s and Large Enterprises can easily set up business within the zones provided they incorporate a company and carry out activities compatible with the goals of a particular SEZ. They can also supply goods/services to the custom territory at competitive rates given the incentives enjoyed in the zones.

Sources:
Special Economic Zones Act No.16 0f 2015.
Special Economic Zones Regulations 2016.
Kenya Vision 2030, the popular version.
The Kenya Gazette Vol CXXI – No.93, 26th July 2019.
Parliamentary Service Commission, Eye on the ‘Big Four’ Budget Watch for 2018/19 and the Medium Term. http://www.parliament.go.ke/sites/default/files/2018-09/Budget%20Watch%202018.pdf
Africa Legal Network, Special Economic Zones, What you need to Knowhttps://www.africalegalnetwork.com/wp-content/uploads/2017/07/SEZs_alert_final.pdf
Ernst & Young, Kenya Enacts the Special Economic Zones Act. https://www.ey.com/Publication/vwLUAssets/Kenya_enacts_Special_Economic_Zones_Act_2015/$FILE/2015G_CM6017_Kenya%20enacts%20Special%20Economic%20Zones%20Act%202015.pdf https://www.businessdailyafrica.com/markets/marketnews/Naivasha-Konza-City-named-special-zones/3815534-5213450-c4xsdaz/index.html
https://www.businessdailyafrica.com/economy/Chinese-firm-close-to-Sh250bn-Lamu-port-SEZ-deal/3946234-5223668-mjt19ez/index.html

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