SEZ who?: Special economic zones are being used to attract foreign firms

The special economic zones (SEZs) of Guangdong are often referred to as the birthplace of the Chinese economic miracle. These export-oriented havens for foreign investment attracted multinational companies to the country with substantial provision of inexpensive labour and tax holidays. They also created jobs and, through the transfer of technology, helped move Chinese manufacturing up the value chain.

While Libreville is a far cry from Shenzhen, Gabon is looking for a similar economic outcome as it establishes SEZs at Libreville and Port-Gentil. The Gabonese government is hoping that incentives, coupled with access to Gabon’s natural wealth, will encourage foreign investors to set up manufacturing plants to help the country add value to its natural resources before they are exported. With the promise of increased investment and employment, SEZs are a key plank in the country’s ambitious economic diversification strategy.

ADDING VALUE: The first two SEZs will be located near Libreville, in the village of Nkok and on Mandji Island near Port-Gentil. The Nkok SEZ will be dedicated primarily to the processing of timber, Gabon’s third-largest export after oil and manganese. The Mandji Island SEZ will target the oil and gas industry, which is based largely in and around Port-Gentil. The first project there will be a fertiliser plant that aims to use natural gas recovered from oil wells as its feedstock.

The government has partnered with the Singaporean firm Olam International to realise these projects. Olam is the technical partner and part owner of Mandji Island and Nkok. The company is helping to manage construction, management and investment for the projects.

The overall goal of the SEZs is to encourage greater value-added processing of Gabon’s natural resources. This is the principal aim of the government’s Emerging Gabon project. In order to diversify the economy away from its dependence on crude oil exports, the government is promoting a number of initiatives that will not only enable the production of downstream hydrocarbons products, but will add value to timber output and support new industries as well. Given the relatively small size of the country’s domestic market – Gabon’s population is about 1.5m – a focus on exports is necessary to attract the scale of investment desired.

Most of the finished products will be bound for markets in Asia, Europe and North America, as regional trade linkages are currently underdeveloped. However, a portion of the output from the SEZs is also intended for domestic consumption.

INCENTIVES: The SEZs will offer a variety of incentives to attract foreign investors to Gabon. Companies will receive an initial tax holiday for 10 years followed by a five years of 10% taxation. The import of production materials and the export of finished materials will not be subject to Customs duty. Moreover, no duties will be levied on the import of machinery or replacement equipment. Finally, economic activity in the SEZ will not be subject to the country’s value-added tax.

To speed-up the business registration process, the government has created a single-access window, called the Centre for Enterprise Development (Centre de Developpement des Entreprises, CDE), which is designed to coordinate permits, visas and other legal formalities required of investors. Registration for visas and other services will also be available online and there will be a CDE office on site at Nkok.

The SEZs are going to provide incentives with regard to production inputs; for instance, electric power to the Nkok SEZ will be subsidised. Olam estimates that rates available to SEZ tenants be significantly lower than the present market at about $0.06-0.08 per KWh. Labour laws are also going to be relaxed within the zones. For example, employers will have increased flexibility with regard to the issue of entry visas and work permits for expatriate staff. This will grant investors considerable leeway with regard to the country’s Gabonisation policy, which mandates that a certain percentage of all workers at a firm must be Gabonese nationals.

The incentives are just one part of a bigger package. “It is not just subsidies that are attracting companies to Gabon,” Gagan Gupta, the country head of Olam Gabon, told OBG. “Investors go to Africa for long-term access to raw materials. While tax incentives help, most companies will not be profitable right away.”

NKOK: The Nkok SEZ lies approximately 27 km east of Libreville, near the roads leading to the nation’s major timber production areas. Nkok will eventually occupy 1146 ha of land, of which 40% will be dedicated to the processing of timber. The project was initiated in August 2010 when the government and Olam signed an agreement to cooperate on the development of the SEZ. Olam hold 60% of the capital in the SEZ, with the government holding the remainder.

The project will be constructed in three phases. The first phase, a 393 ha development, was inaugurated in September 2011. It is divided into two zones with approximately 75% of the land area dedicated for industrial development, while the remaining 25% will be comprised of the residential, commercial and leisure parts of the zone. The total cost of the first phase of the project is estimated at roughly $480m.

The master plan for the project calls for a variety of infrastructure, including a joint log park and kiln drying facility, fibre-optic cables, and road and rail connections. The total estimated electric power needs of the zone are about 220 MW and could rise to 500 MW. This level of demand far exceeds the country’s current generation capacity. Consequently, a new 75-MW plant in Libreville has just been constructed to serve Nkok. Power lines connecting the plant to nearby Nkok and gas feedstock lines have yet to be installed, however. The Indian industrial firm, Abhijeet Group, has also said it will build a gas-fired power plant at Nkok.

According to Olam, 85% of the land for the first phase of the project has already been sold and paid for by some 58 companies. Olam will be constructing a sawmill at Nkok, as it also has large timber concessions across the country. Shainago will also be investing in timber processing at the zone, while Ellora Papermills is expected to finance a paper pulp facility. Interest in the zone goes beyond just timber products, however. A local company called CDG is also investing in scrap metal processing. Abhijeet said it is planning to invest $800m over the next 36 months for the construction of an iron alloy processing facility. Overall, over $900m year of investment is expected over the next three years.

MANDJI ISLAND: Located alongside the city of PortGentil is the Mandji Island SEZ, the main purpose of which is to help diversify the economy of Gabon’s second major city, which currently relies almost exclusively on the oil sector for revenue and jobs. Similar to Nkok, Olam is the technical partner of the SEZ and will own 36% of the development. The state will retain 24% and the remaining 50% of the venture will be owned by private Gabonese companies. The zone will provide investment opportunities in oil service industries, timber processing activities and training.

The marquee project of the planned 1500-hectare development is a fertiliser plant, which will be built through a partnership between Olam and Indian group, Tata. The $1.5bn contract was signed in 2010. The factory will produce up to 3m tonnes of urea per year and create approximately 300 to 400 jobs in the region. The plant will be supplied with natural gas from nearby oil wells. Tata plans to train 200 Gabonese nationals in India for two years to operate the plant.

CHALLENGES: Meeting the electricity demand required for increased industrialisation remains a challenge. While the government has built a power plant near Libreville and is starting construction of another in Port-Gentil, it is unclear if either facility will have the necessary feedstock to operate efficiently. Both plants have the capacity to run on diesel fuel, however, this is an expensive, back-up option, particularly in light of the zone’s subsidised electricity offering. While hydroelectric power remains a long-term solution, projects under development are far away from the SEZs and will require expensive connections to supply power to the zones.

Human capital is another major challenge the government is looking to solve. It is estimated that the Nkok project alone could create over 22,000 jobs. There are questions as to whether there are sufficient skilled workers in Gabon to meet supply requirements. If not, companies will have to resort to expatriate workers, a move which could have significant political ramifications in a country rife with unemployment.

NATURAL CHOICE: Unlike China, Gabon’s SEZs will not soon be producing screens for the next iPad. For companies that are interested in exploiting Gabon’s abundant natural wealth, however, the new SEZ will help to build a compelling investment case. In addition to generous incentives, Gabon offers political stability and a currency fixed to the Euro. While challenges, specifically with regard to power and human resources, remain, planned investment and training programmes should eventually help to address this.

Indeed, the speed with which sales of the land earmarked for development at the Nkok SEZ were executed demonstrates that there is significant demand for a platform that is safe and incentivised, which grants access to the domestic and Central African markets.