Find us on Google+

Saturday, 3 January 2009

Government policy on MFEZs

The latest Report of the Committee on Economic Affairs and Labour - November 2008 (reproduced below) touches on one of the most discussed topics on this blog - the Government policy on MFEZs. The policy position as directly stated by government is somewhat unclear, so its useful to see the Parliamentarians attempt to get through the mud, but inevitably they come short. Excerpt:

9.2 The role of the MFEZ in improving the competitiveness of Zambia’s industries

Your Committee was informed that the establishment of MFEZs in Zambia was meant to stimulate industrial development as laid out in the Fifth National Development Plan (FNDP). In this regard, the Government would offer fiscal incentives as provided for in the ZDA Act. The incentives would be as follows:

a) 0% tax rate on dividends of companies operating under the MFEZ for a period of five years of first declaration of dividends;

b) 0% tax on profits made by companies operating in the MFEZ for a period of five years from the first year profits were made. From the sixth to the eighth year, only 50% of the profits would be taxed while for the ninth and tenth year, 75% of the profits would be taxed;

c) 0% import duty on raw materials, capital goods and machinery, including trucks and specialised motor vehicles for the first five years; and

d) deferment of VAT on machinery and equipment, including trucks and specialised motor vehicles for investment in the MFEZ.

9.3 Benefits of MFEZ to ordinary Zambians

Your Committee were informed that the vision of the Government was to establish MFEZs in all districts in the country. Once fully operational, some benefits that the Government envisaged from the MFEZ included:

(a) improved infrastructure, such as telecommunications, schools and medical facilities in thezones;

(b) higher foreign exchange earnings;

(c) increased tax revenues after the expiry of the tax holiday provided under the ZDA Act; and

(d) attracting Foreign Direct Investments (FDIs).

9.4 Committee’s Observations and Recommendations

After careful consideration of the various submissions from witnesses, your Committee wish to make the observations and recommendations set out here under.

i) The operationalisation of MFEZs across the country is not an easy task. It requires vast amounts of resources, land and infrastructure. Your Committee recommend that care is taken to ensure that the land acquired is not used by communities for farming or any other social, religious and economic activity.

ii) Industries operating in MFEZs have the ability to potentially affect the companies that are operating outside MFEZs. This is because they will be enjoying incentives which will reduce their cost of production. Your Committee, therefore, recommend that the operations of MFEZs should not be to the detriment of firms that are operating outside the MFEZs.

iii) The incentives to operate in an MFEZ as provided for in the ZDA Act are very generous. In the past, companies which were given such incentives relocated to other countries when the tax holiday came to an end. Your Committee urge the Government to avoid a repeat of such unfortunate situations.

iv) The MFEZ is an important initiative that will improve the competitiveness of Zambia’s industries. However, there are no other companies that have applied to operate in the MFEZs apart from those of Chinese origin. They, therefore, recommend that other companies, particularly citizen influenced and citizen empowered companies, be allowed to compete freely in the Chambishi MFEZ area.

I recently asked whether it was the government's policy to turn all of Zambia into an MFEZ. Well that atleast is answered by the call for "MFEZs in all districts". It also appears to have noted the issue relating to land. But other than that, I found the report shockingly poor, particularly in three aspects.

First, it ignores the fundamental issues. I would have like the MPs to have focused on three critical questions which have been raised before. The first issue relates to the lack of economic analysis that has underpinned the government MFEZ policy, or atleast the fact that if such analysis exists it has not been made available to ordinary Zambians. It would be good to know just how government reached the decision that MFEZs are good value for money. The second issue is whether MFEZs the right way to attract investment and can they really make any serious dent on poverty? I was particularly hoping that Parlimentarians would atleast be interested in looking at whether MFEZs have been successful in other countries in achieving objectives. Finally, and perhaps more importantly, how does the government vision of MFEZs in every district fit in within the current environment of a slow down in global economic growth? Simply put, is MFEZ policy still viable? and should we rely on a such a policy that may well be overrated?

Secondly, the assessment is wholly lacking in a clear exposition of the costs. While the report is keen to highlight the "benefits" it falls far short in discussing the costs. It seems to me that the key issue regarding MFEZs is whether the public is fully aware of the costs and benefits associated with it. I do not think the report has done a good job at clarifying what those costs are and whether in general the MFEZ policy as it stands constitutes a net benefit to Zambia in the short to medium term (say over the minimum period of 10 years). The key direct costs of course is the forgone tax revenue that may have accrued to GRZ without the MFEZ policy. A key element of the analysis is the issue of what would happen if the tax breaks and concessions are not made. Would Zambia get the investment anyway from other players, with the additional tax revenue? That is certainly possible if one believes there are credible alternatives to encouraging FDI divorced from the large tax breaks Government has offered. I have previously suggested that what we should focus on is to develop a bureaucratic hands-off approach, the freedom to invest across sectors, and promote contestable markets (with import competition, and privately financed infrastructure being two of the key factors - see the blog here).

Finally, the assumed benefits appear misguided or at worst intentionally misleading. Let us be clear from the start. All the stated benefits to "ordinary Zambians" are not actually "benefits" there are possible intermediate means for achieving some increase in welfare to ordinary Zambians in the future. They are therefore means to an end, not ends or benefits in themselves.

I was particularly struck by the bizarre "benefit" of "foreign exchange earnings". May be its my holiday season, but just how is this a benefit?

Moving from the bizarre to the misleading, I really don't understand how the MPs concluded that there are benefits in terms of "improved infrastructure, such as telecommunications, schools and medical facilities in the zones". I found this difficult to reconcile with previous government statements as discussed on two previous blogs - A Zambian Shenzhen or just another DA? and A Lumwana MFEZ? In both instances the government makes it clear that it will provide the infrastructure . In particular as part of the Chambishi MFEZ, the government has promised to "build roads and set up telecommunications, and water facilities in the [multi - facility economic] zone".

Then there's the speculative benefit of "increased tax revenues after the expiry of the tax holiday provided under the ZDA Act". Its quite interesting that the government has never really stated public that this as a key benefit. The reason is quite obvious. The Chambishi zone will roughly cost the companies $800m, with a profit of $900m annually. In short, they will get back the money from a single year of operation. After that the issue of whether they remain or leave is really down to market conditions, and of course whether after year 10 they can get better deals elsewhere. There's really nothing to stop these companies from abandoning ship like others did under the Chiluba era. To speak of tax revenue benefits is therefore highly speculative.

Surprisingly the MPs ignored the "employment" and "diversification" angles, which has been central to the Government's public case. It cannot be ignored that the main benefits appear to be coordinated employment creation and diversification of the Zambian economy. Indeed beyond the economic zones, there are will be a host of firms providing services to those firms within the free tax zone (generating catalytic employment). However, the extent to which this employment is really additional is debatable. Also as we have discussed previously, diversification is a complicated process. The existing empirical consensus is that it is difficult for emerging economies, like Zambia, to extract potential benefits of spillovers when a large technological gap exists between domestic and FDI firms operating in the MFEZ. If government wants to use MFEZ as diversification tool, it needs to put the MFEZ policy within a broader economic policy context. The government has to take the necessary steps to invest in basic non-MFEZ infrastructure, education and training, and above all encourage Zambian firms to invest in technological development. These policies will do a great deal in increasing Zambian firms technological capability, and hence make it easier for firm outside the MFEZ to benefit from spillovers of foreign firms within the MFEZ. But even then, the road is still uncertain as discussed in the blog - FDI and domestic spillovers...





14 comments:

  1. The biggest benefits of MFEZs I see are jobs. There is a competition all over the world to attract companies to establish operations because they create jobs. For example in America, many governors of the individual states travel overseas to attract businesses to set up operations in their states.

    http://www.ocm.auburn.edu/clippings/2006/061606.html#15326221

    Cho,
    "I have previously suggested that what we should focus on is to develop a bureaucratic hands-off approach, the freedom to invest across sectors, and promote contestable markets (with import competition, and privately financed infrastructure being two of the key factors "

    Unfortunately a hands-off approach is not enough because of the previously mentioned competition for foreign companies and the jobs they create. Therefore incentives need to be given to attract them. Now if foreign mining companies are ruining the roads because of their heavy trucks, then the solution is to charge the trucks tolls for roads usage.

    Some of the foreign countries can also fund some of the MFEZ infrastructure, as they are doing in the case of the Chambishi MFEZ.

    Another major reason for creating MFEZs is that foreign companies are able to access more capital and thus create more jobs than local ones.

    MFEZs should be just one part of an integrated approach to creating jobs. For example, the government could set up small business incubators to encourage Zambians to get together and provide training to them at low cost to help them start their own businesses.

    ReplyDelete
  2. Kafue,

    "a bureaucratic hands-off approach" does not mean "no government intervention". I would sure have have said that if thats what I meant!

    There's a role for government to play in creating wealth, and this is blog is littered with many of the areas we have identified where for example government could act to eliminate coordination failures and so forth. As it turns out the example I give of private led finance of infrastructure requires a "legislative framework" that realigns the incentives accordingly.

    The emphasis is therefore on HOW government acts, rather that IF government should act at all.

    You are correct to note that Zambia is competing against other countries to attract foreign capital. The question is what attracts foreign direct investment. My view is that there are many ways that could occur rather than through MFEZ. Case in point is the evidence discussed on the blog In praise of larger and larger firms...

    In terms of job creation as a benefit. I assume you mean the "personal income tax" that flows from this and some form of "multiplier effect" through the additional income in the economy. The point here is that this benefit is likely to be small and may not make a discernible impact on economic growth. This is why the macro evidence on MFEZs and economic growth is mixed.

    ReplyDelete
  3. Cho,
    "In terms of job creation as a benefit. I assume you mean the "personal income tax" that flows from this and some form of "multiplier effect" through the additional income in the economy."

    No, what I mean is that people who did not have jobs, now have jobs. Those who had very low incomes now have higher incomes. There tends to be an underestimation on how easy it is to create sustainable good jobs. MFEZs are a good tradeoff between creating many higher income jobs and the ease of creating them.

    ReplyDelete
  4. Jobs in themselves are not a benefit (actually in cost benefit analysis they are treated as a cost, but I won't go into that).

    My basic point is that what matters is the income generated, that is somehow captured in those jobs.

    On an individual level, it means the additional pay tax to government plus what remains to the worker to inject in the local economy...and any multiplier effects from that.

    Jobs for themselves are meaningless because if people chose one job they give up another activity (presumably one that sustains them in someway, assuming it is not stealing)- so jobs have "opportunity cost".

    The key therefore is to create jobs that are truly additional and with significant multiplier impacts.

    Now on MFEZs...you raise an interesting point actually....if we take Solwezi as an example. You will see that the boom in mining has not necessarily benefit the locals in terms of jobs...the employment has gone to people outside...but the INCOME spent has has helped the town boom...even local AIDs has increased...

    See Solwezi's double boom...

    ReplyDelete
  5. Cho,
    "Jobs for themselves are meaningless because if people chose one job they give up another activity "

    How about those who are without jobs? They have no activity to give up, just inactivity.

    Cho,
    "You will see that the boom in mining has not necessarily benefit the locals in terms of jobs...the employment has gone to people outside."

    Why does it matter that Zambians from other areas of the country are hired for the mining jobs? Maybe they have mining expertise that the locals do not. The overall number of unemployed Zambians has decreased.

    ReplyDelete
  6. Kafue,

    "How about those who are without jobs? They have no activity to give up, just inactivity."

    Those without jobs either have very high reservation wages (which is extremely unlikely) or at the very bottom of the wage scale (which is very likely).

    Job creation therefore adds very little, it moves people up the ladder...and allows the very bottom in society to take up jobs....but for the very bottom and inactive...their new wages are minimal...and the multiplier effect basically zero...at the national level...unless you created many many of these poor paid jobs...

    What drives growth is productivity...not employment...

    Employment is the politicians way of selling it to the public who often never think through the pitch..

    "Why does it matter that Zambians from other areas of the country are hired for the mining jobs? Maybe they have mining expertise that the locals do not. The overall number of unemployed Zambians has decreased."

    You have a point. I was merely pointing out that it can even have negative impacts on the local area. It is distributional issue.

    In terms of national decrease in unemployment....as I say above...that may be true but the impact is minimal because the marginal change (from the national perspective) is usually through less valued employment..

    ReplyDelete
  7. An example of American states attracting foreign companies to invest in them:

    http://finance.yahoo.com/real-estate/article/106412/America's-Foreign-Automaker-Capitals;_ylt=ArtGFZzegmF8tTFHNRerFhhO7sMF

    ReplyDelete
  8. Kafue,

    That link didn't work for me, but when I shortened it to: http://finance.yahoo.com/real-estate/article/106412/ then it works fine.

    ReplyDelete
  9. Yakima,

    Thanks for the corrected link.

    ReplyDelete
  10. IDE DISCUSSION PAPER No. 134
    Unlocking the Potential of Zambian
    Micro, Small and Medium Enterprises

    “Learning from the international best practices – the Southeast Asian Experience”
    Chibwe CHISALA*

    Also check out the Local Economic Development Network Africa:

    This is an excellent page with links to papers on SMEs, incubators, etc.

    On the importance of SME's in job creation and wealth creation in the UK:

    Accelerating the SME economic engine: through transparent, simple and strategic procurement
    November 2008

    On latest figures, Small and Medium Enterprises (SMEs) constitute 99.9 per cent of businesses in the UK, employing 59 per cent of the private sector workforce and making up 52 per cent of business turnover. They are potentially major suppliers to government but often SMEs face substantial hurdles in winning contracts.

    This is our goal, and what we should aim for. Already, the marketeering sector employs 17 times more people than the entire mine sector (1,000,000 versus 58,000), so there is no excuse. We need to take money from the mines and put it into agriculture and infrastructure.

    ReplyDelete
  11. Stakeholders worry about minimum investment threshold in EPZ
    By NKOLE CHITALA

    MOST stakeholders have expressed concern at the US$ 500,000 minimum investment requirement in the Multi Facility Economic Zone (MFEZ) saying the amount will bar local entrepreneurs from operating in the zones.

    Minister of Commerce, Trade and Industry Felix Mutati said under the reform process Government had realised that there were 520 licenses some of which were forgotten and continued to increase.

    “If you want to set up a hotel you need to have 21 licenses, and five per cent of turnover is attributable to licenses, so we are reforming the system,” he said.

    He said 226 licences were irrelevant and creating fatigue and bureaucracy hence the need for change.

    ReplyDelete
  12. There is a reason for licenses, safety and standards come to mind. However duplication, irrelevancy and slow processing of licenses should be avoided. Take a look at what other countries require to get an idea of what is needed and why.

    ReplyDelete
  13. Here is the website for licenses in Singapore, an economic success story, to get an idea of what is needed:

    https://licences.business.gov.sg/SHINE/sop/WebPageHandler?p=OASIS&pn=SelectLicences

    ReplyDelete
  14. Article on attracting investment to Africa:

    http://www.lusakatimes.com/?p=12878

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.