The Special Economic Zones Act, which came into force on December 15 2015, has elicited much speculation about whether it is the right tool to promote Kenya's economic development. This update considers the act's provisions and the incentives that it offers to investors, its possible impact on foreign direct investment and how it might conflict with World Trade Organisation (WTO) requirements.

Special Economic Zones Act

The act seeks to revolutionise trade in Kenya by creating an enabling environment for investment. Section 3 of the act reiterates this with additional principles of openness, transparency and competitiveness. Its implementation is pegged to regulations which are due to be published by June 15 2016.(1) These regulations relate to the process of application, issuance, suspension, revocation and appeal on licensing of special economic zones.(2) Prospective developers and operators of special economic zones must first apply for a licence issued by the authority established under the act.(3)

Further guidelines (known as the Special Economic Zones (Land Use) Regulations) are to be enacted at the same time as the act's regulations.(4) These will govern how land and premises are owned or leased by special economic zone developers. The regulations touching on land issues are important, because the Land Control Act provides that the Land Control Board may refuse consent to non-citizens in certain dealings relating to agricultural land.(5) In reality, a private company with any foreign shareholding cannot obtain consent from the board.(6) To obtain consent, a viable option is to convert into a public company.

Special economic zones

Under the act, 'special economic zones' are defined as selected geographical regions where certain policies that enhance business are put in place. As far as import duties and levies are concerned, these regions are regarded as being outside the customs territory.(7) Some of the zones considered in the act comprise:

  • free trade zones;
  • industrial parks;
  • free ports;
  • information communication technology parks;
  • science and technology parks;
  • agricultural zones;
  • tourist and recreational zones;
  • business service parks; and
  • livestock zones.(8)

The magnitude of trade and its relevance to the economy is dictated by various factors, including:

  • proximity;
  • trade policy;
  • cultural affinity; and
  • openness to trade and investment.(9)

Kenya appears to have realised the truth in this statement, because some of the inspired policies behind special economic zones are that goods ought to be produced near raw materials, leading to a reduction in subsequent costs (eg, transport and communication).

Foreign direct investment

The criteria for an entity to qualify as a special economic zone developer includes the condition that the entity be a company incorporated in Kenya.(10) Considering the amendment made to the Capital Markets (Foreign Investors) Regulations 2002 by Legal Notice 113 of 2015, which lifted the 75% restriction on foreign equity participation in local companies,(11) an entity fully owned by foreign investors can apply to be granted a licence as a special economic zone developer or enterprise. In fact, under Section 29(2)(a) of the act, the authority is mandated to grant a licence to an applicant whether or not it is 100% foreign owned. It is therefore apparent that investment in activities to be carried out in special economic zones targets global entrepreneurs. It has been contended that the act was aimed at encouraging foreign direct investment.(12)

Incentives for investors

In order to attract both local and foreign investors, there are certain enticements. For instance, the act provides for exemptions to a levy on work permits for up to a 20% foreign work force(13) and additional permits for specialist sectors.

The tax exemptions envisaged under Section 35 of the act will incentivise foreign direct investment and boost Kenya's venture profile:

"All licensed special economic zone enterprises, developers and operators shall be granted exemption from all taxes and duties payable under the Excise Duty Act, the Income Tax Act, East African Community Customs Management Act and the Value Added Tax Act, on all special economic zone transactions." (14)

Suffice it to say, the goods manufactured or produced in the special economic zones will enjoy a wider market. This is because the integration process is aimed at providing a customs-free East African Community Market.(15) Transport to the wider East African market will not be a problem because of the upcoming Standard-Gauge Railway and the Lamu Port Southern Sudan-Ethiopia Transport Corridor that will link the region.(16) Further, the Great North Road continues to provide fluid road transport of goods throughout the expanse. In essence, there is a ready market for goods to be produced in special economic zones.

WTO requirements

The Special Economic Zones Act came into force on December 15 2015 – the day that the 10th WTO Ministerial Conference commenced in Kenya. This is paradoxical because whereas the WTO advocates for globalisation and liberalisation of trade, special economic zones may be viewed as protectionist and individualistic. If well scrutinised, they might pass as subsidies under Sections 1 and 2 of the Agreement on Subsidies and Countervailing Measures as read with Article 16(1) of the General Agreement on Tariffs and Trade.

Be that as it may, special economic zones have been used to spur the economy of many countries, including China, India and North Korea.(17) Kenya should thus be lauded for realising that the solutions to its poverty-related problems lie in institutional innovation suited to local conditions and for attempting to devise its own path out of poverty. If well managed and properly implemented, special economic zones can grease the wheels of trade in Kenya and accelerate economic growth.

Comment

Trade is one of the key contributors to a country's economic development; with an improved economy, the livelihoods of its citizens will follow the same course. The adoption of the act is a step towards encouraging foreign direct investment, which will in turn spur economic development. It is hoped that the implementation of the act will be conducted strictly in order to achieve Kenya's vision for 2030.

For further information on this topic please contact Kevin Walumbe at Njoroge Regeru & Company by telephone (+254 020 261 2531) or email (info@njorogeregeru.com). The Njoroge Regeru & Company website can be accessed at www.njorogeregeru.com.

Endnotes

(1) The regulations are to be published by the cabinet secretary dealing with matters relating to industrialisation.

(2) Section 27(7)(b) of the Special Economic Zones Act.

(3) Section 27(1) of the Special Economic Zones Act.

(4) Section 28(c) of the Special Economic Zones Act.

(5) Chapter 302 Laws of Kenya, Section 9(c) of the Land Control Act.

(6) Section 9(c)(ii) of the Land Control Act.

(7) Section 4(4) of the Special Economic Zones Act.

(8) First Schedule to the Special Economic Zones Act.

(9) S Lester, B Mercurio, A Davies, K Leitner, World Trade Law: Text, Materials and Commentary (Oxford and Portland, Oregon: Hart Publishing: 2008) 10.

(10) Section 28(a) of the Special Economic Zones Act.

(11) See Regulation 3(1) of the Capital Markets (Foreign Investors) Regulations 2002, as amended by Legal Notice 113.2015.

(12) See www.trademarkea.com/news/kenyas-special-economic-zones-to-attract-more-fdis/.

(13) Section 35(3) of the Land Control Act.

(14) See www.industrialization.go.ke/index.php/media-center/blog/310-kenya-to-roll-out-special-economic-zones-in-first-quarter-of-2016.

(15) See http://ecdpm.org/great-insights/trade-and-development-making-the-link/east-african-integration-achievements-challenges/.

(16) See www.president.go.ke/2015/09/29/president-invites-us-firms-to-kenyas-special-economic-zones/.

(17) Lester, et al (Note 9), Page 26, quoting D, Rodrik, "Globalization for Whom? Time to Change the Rules and Focus on Poor Workers" (2002) 104(6) Harvard Magazine, pages 29 to 31.

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