Kenya's new plan for special economic zones

The pilot phase of Kenya’s special economic zones (SEZs) is expected to be in force in the first quarter of 2016, after President Uhuru Kenyatta signed the law in September 2015. The government aims to set up the first three zones in Kisumu, Mombasa and Lamu. In June 2015 Cabinet Secretary of the National Treasury Henry Rotich stated in his 2015/16 budget statement that the government had allocated KSh3bn ($33m) for industrial development, including SEZs. Diversifying manufacturing and creating jobs is core to the Vision 2030 national development strategy.

Definition

SEZs are designated areas with special laws and can include manufacturing, trade and services, and produce for domestic or export markets. Kenya has already set up export processing zones (EPZs), which SEZs will complement. The new law calls for setting up an SEZ Authority, which has a mandate to identify and map proposed SEZs, as well as procure developers and operators for an economic zone. A total of 3400 sq km of land has been set aside for SEZs and is specially located so as to make it easier to export and access inputs, including raw materials. The first three zones to be set up will have access to an agro-processing zone for blending and packaging of fertilisers, teas and coffees, as well as a processing facility to encourage offshore fishing.

Moses Ikiara, managing director of the Kenya Investment Authority, told OBG that the likely fourth SEZ would be in Naivasha, near the Olkaria geothermal power plant. Manufacturers in the SEZ will be offered discounts on their power bills because of lower transmission costs from nearby power plants.

Incentives

All supplies of goods and services to companies and developers in SEZ are exempt from value-added tax (VAT). The corporate tax rate for enterprises, developers and operators is 10% for the first 10 years and 15% for the next 10 years, compared to 30% in the rest of Kenya. The 2015/16 Finance Act, signed in September 2015, also retains a 150% investment deduction allowance for investments of KSh200m ($2.2m) or more outside the cities of Nairobi, Mombasa and Kisumu. SEZ enterprises, developers and operators are free from taxes and duties payable under the Customs and Excise Act, the Income Tax Act, the EAC Customs Management Act, and stamp duty, advertisement and licence fees levied by county governments.

The government is also planning to provide work permits for up to a fifth of those who work full-time in the SEZs, particularly in specialised sectors. The law waives foreign exchange controls as well, stating, “A licensed SEZ enterprise shall enjoy the right to fully repatriate all capital and profits, without any foreign exchange impediments.” Kenya is following other countries in setting up SEZs in part because of the limited results of its EPZ programme. It intends to monitor progress carefully before rolling out any further plans. Penalties for those who misuse SEZ privileges may include a fine of KSh20m ($220,000) and three years in jail, as well as forfeiture of goods.

Apples & Oranges

EPZs are different from SEZs as they are usually centred on only manufacturing enterprises set up to boost exports. They offer fewer special incentives and tax benefits than SEZs, which are typically larger geographical areas. There are currently 58 designated EPZs ranging from specialised one-factory sites to the oldest such zone, a 12-year-old site with five exporters exporting horticulture, PCs and garments. Overall, EPZs host approximately 120 companies. Tax benefits for the zones include: a 10-year corporate-tax holiday and a 25% tax thereafter; a 10-year withholding tax holiday; stamp duty exemption; 100% investment deduction on initial investment applied over 20 years; and VAT exemption on industrial inputs. Several EPZ enterprises are now approaching the deadline for when they will be required to pay tax. They can also relocate or reapply to be recategorised for further investment as SEZs.