Thursday, March 28, 2024

 Accelerating Africa’s Industrialization through successful SEZs

More articles

[divider style=”solid” top=”20″ bottom=”20″][dropcap]W[/dropcap]hile the size of the global chocolate market is valued at more than $100bn, only ~5% of this market is captured by Africa; whereas 70% of the world’s cocoa production comes from the African continent, namely from Cote d’Ivoire, Ghana, Nigeria and Cameroon.

This example emphasizes the crucial role of industrialization in boosting economic activity along value chains; shifting from over dependence on raw material to higher value-added goods. Furthermore, industrialization is closely linked to economic and social development: it enhances productivity, innovation and economic diversification, and contributes to a rise in the workforce education as well as formal employment.

As of 2019, industry generated on average $700 of GDP per capita in Africa, less than 30% of Latin America’s output ($2,500) and c. 20% of East Asia’s one ($3,400). Nonetheless, African economies have the opportunity to foster industrialization by capitalizing on two decades of steady GDP growth, along with an increasing young workforce, rapid urbanization, and technological development.

To do so, Special Economic Zones (SEZs) have the right ingredients to achieve rapid and scaled industrialization of the African continent. SEZs are demarcated geographical areas within a country’s national boundaries, which benefit from a distinct regulatory regime. They generally provide four types of advantages to investors: (i) an access to reliable infrastructures and utilities, (ii) attractive customs regimes, (iii) fiscal incentives such as corporate taxes exemptions, and (iv) enhanced regulatory and administrative frameworks.

From ~500 in 1955, SEZs’ number has risen to ~5,400 in 2019 worldwide, with Asia counting for three quarters of all SEZs (and China for 47% by itself). SEZ’s development is relatively recent in Africa, where most programs were adopted in the 90s and 2000s following governments’ ambition to replicate the East Asian economies’ rapid development. As of 2019, 237 SEZs were established in the African continent, with Kenya (61), Nigeria (38), Ethiopia (18) and Egypt (10) representing the top 4 countries, according to the United Nations Conference on Trade and Development (UNCTAD).

Despite a growing number of SEZs in Africa, such projects have a mixed history of success. SEZs in early-stage bear multiple risks, including a significant ramp up period before reaching full commercialization (i.e. full occupancy of the zone) and consequently stable and predictable revenues (mostly derived from leasing the plots and pre-built facilities to tenants, selling utilities, and offering services such as logistics, warehousing or raw material sourcing).

Preferred financing sources for SEZs in Africa should hence come from lending institutions able to provide long term maturities and grace period on capital repayment during the project’s initial years. Developers should also target lenders with specific mandate for industrialization, likely to provide optimized financing terms. Furthermore, it appears reasonable to limit the initial size of the zone and adopt a phased investment approach, whereby capital expenditures are incurred gradually over time as the SEZ attracts investors and requires additional plots’ development.

Besides, if choosing the appropriate financing structure for SEZs enhances their viability, these projects are mostly dependent on non-financial factors such as strong institutions and robust legal and regulatory frameworks. Their planning should be fully part of the governments’ industrial policies and development agenda, and they should be designed to bolster identified strategic sectors and maximize spillover effects on the overall country and regional economy.

A review of SEZs’ successful experience worldwide[1] also emphasizes the importance of (i) a strategic location choice close to main commodities flows, workforce pools, export channels and internal markets; (ii) solid institutions providing one-stop-shop administrative and customs services to the customers; along with (iii) plans to address environmental and social concerns and ensure sustainable operations. Moreover, a key challenge to SEZs’ success relates to zone developers’ frequent lack of operational know-how in zone management.

In respect of these challenges, Arise Integrated Industrial Platforms (Arise IIP), a developer of industrial and logistics ecosystems in Africa, has adopted a holistic approach to SEZ’s development. In addition to providing world-class infrastructures and industrial land for companies, Arise IIP’s unique model is to cover all the industry needs across the value chain: from the competitive supply of industrial inputs (e.g. raw material), to the provision of logistics services and the marketing and commercialization of the tenants’ manufactured products.

This tailor-made solution has proven to be successful, as illustrated by the Nkok Special Economic Zone in Gabon, a c. 1,100 ha zone primarily focused on timber processing and developed through a long-term PPP between Arise IIP and the Gabonese Republic.

Initially set up in 2010, Nkok SEZ has managed to attract over 105 industrial players in 10 years and has been categorized as the Best Free Zone for SMEs in Africa and the 3rd Best Free Zone in Africa in the FDI Intelligence 2016 report. Additionally, the SEZ has dramatically impacted the country’s wood sector and overall economy: Gabon has become the 3rd veneer exporter worldwide (as compared to the 18th position in 2010), and the sector’s contribution to Gabon GDP doubled.

The number of jobs in the timber sector also doubled, reaching 17,000 jobs in 2019 (from c. 8,400 in 2010). Such successful project also relies on the close collaboration between Arise IIP and the government of Gabon, which implemented a ban on raw wood exports along with a sound legal framework for SEZs (cf. Gabon Law n°010/2011).

Rightly implemented, SEZs can thus scale up industrialization in Africa and provide opportunities to the rising workforce on the continent. Finally, while the trade slow-down due to the covid-19 pandemic has strengthened the case for shortening supply chains and reducing dependency on Asian manufacturing; the growth of the African middle class and the associated shift in consumption patterns[2], coupled with the rising intra-African trade[3], suggest plenty future opportunities for SEZs in Africa.

Melina Enoh is an Investment associate at ARISE IIP, a pan-African infrastructure and logistics solutions company specialized in integrated industrial zones.[divider style=”solid” top=”25″ bottom=”25″]

[1] Farole (2011), Douglas Zhihua Zeng (2019)

[2] Consumer goods represent a market worth $250 billion in Africa, expected to grow at a 5% rate p.a. by 2025 (AfDB, 2019)

[3] While intra-African exports represent c. 17% of total African exports, well below the intra-European and intra-Asian rates of 69% and 59% respectively (AfDB, 2019); the recent African Continental Free Trade Area (AfCFTA) seeks to change that.

Also Read

China, African countries need to build stronger community with shared future: Chinese FM

Amadou Diallo: Africa, now is your time!

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Top News

Travel

The Africa Logistics

The Africa Logistics is a print and online portal that offers latest news and firsthand information in the logistics industry.

More

NEWS

Social

© Copyright 2024, The Africa Logistics. All Rights Reserved