The SEZ is becoming an important feature in many economies
Barely a month to the December 2020 polls in Ghana, and in line with calls for issues-based electioneering, the logic and operation of Special Economic Zones (SEZs) or Free Zone enclaves in Ghana, their fiscal regimes and the wellbeing of the Ghanaian worker within them, need to make it to the economic and political basket of issues that must attract the attention of the political contenders.
This is especially so in the wake of the Covid_19 Pandemic which has exposed sharply the vulnerabilities of the Ghanaian economy, just like other economies depending on raw materials exports, with limited diversification.
The pandemic has, once again, highlighted the enduring features of the Ghanaian economy: weak productive capacities, less value capture domestically, low-quality jobs, foreign capital dominance and integration into the global economy as raw materials-dependent country.
Again, pressing is the range of the promises to offer stimulus packages to businesses–small and medium enterprises– as well as promises to provide some free essential services like education, health etc. These are captured in the manifestos of the political parties.
Special economic zones, trends and role in economic development
Special economic zones are delineated geographical areas by governments to facilitate industrial activity through fiscal (taxation and expenditure) and regulatory incentives and infrastructure support like roads, water, electricity, communication facility, etc. to those areas.
In Ghana, the number of firms operating as free zones companies has been rising. It was only 8 in 1997 but by 2013, the number of registered companies had grown to two hundred and forty (240) and then to three hundred and fifty-two (352) by 2015 according to figures from the Ghana Free Zones Board[ This was taken from Research findings on tackling tax incentives commissioned by Public Services International and supported by FES.
Globally, there are nearly five thousand four hundred (5,400) free zones across one hundred and forty-seven (147) economies today, up from about four thousand (4,000) five years ago. But there are a lot more in the pipeline [ World Investment Report by the United Nations Conference on Trade and Development (UNCTAD), 2019].
This means SEZ is becoming an important feature in many economies.
In terms of the policy logic, it is Foreign Direct Investment (FDI) driven. That is, the host state provides incentives and the support infrastructure with the expectations that benefits in terms of employment, revenue, technological transfer etc. will compensate for the incentives offered.
These economic zones can make important contributions to economic growth. However, they are much more meaningful where there is a strong domestic private sector which the foreign investments complement[ Strengthening linkages between domestic and foreign direct investment in Africa
Note by the UNCTAD secretariat for the Trade and Development Board meeting in June 2013]. In that sense, the domestic firms can dictate the pace and direction to create meaningful jobs and boost exports – both directly and indirectly where they succeed in building linkages with the broader economy. The zones can also support domestic and regional value chain participation, industrial upgrade and diversification.
However, SEZs are neither a precondition nor a guarantee for development. Where they contribute to raise the level of economic growth, the stimulus tends to be temporary (World Investment Report by UNCTAD, 2019.)
A study by PSI on tackling tax incentives in Ghana, presentations at workshops on tax incentives in Ghana organised by PSI and supported by FES.
After the build-up period, most zones grow at the same rate as the national economy. And too many zones operate as enclaves with limited impact beyond their confines and become a drain on the national purse because of the special incentives offered them.
Ghana’s generous incentives to SEZs
Ghana, in the quest to attract foreign capital, created and designed free zone enclaves/special economic zones and offered juicy investment incentives as baits.
These are underpinned by the expectation of the benefits of FDI though evidence of FDI-led development remains patchy. The country went ahead to create the Ghana Free Zone Board to oversee the regulation of these zones since 1995.
Fiscal incentives, which are grounded in-laws and treaties (trade, tax, investment, etc.), have been a feature of Ghana’s quest for FDI. For instance, free zone enterprises in Ghana have exempted 100 per cent from payment of direct and indirect taxes and duties on all imports for production and exports from free zones.
Also, the companies enjoy a hundred (100) per cent exemption from payment of income tax on profits for up to 10 years from the date of commencement of operation. They have relief from double taxation for foreign investors and foreign employees. Shareholders are exempted from the payment of withholding taxes on dividends arising from free zone investments.
Again, within the free zones, both foreign and domestic investors have equal rights to take and hold a maximum of 100 per cent of shares in any free zone enterprise. No restrictions on total foreign or local ownership of free zone enclaves and enterprises and there are minimal customs formalities.
Furthermore, the laws also shield these enterprises from nationalization and expropriation. There are no conditions or restrictions on repatriation of dividends or net profit, payment for foreign loan services, payment of fees and charges, for technology transfer agreement and remittance of proceeds from sale of any interest in a free zone investment. Free Zone investors are permitted to operate foreign accounts with banks in Ghana.
Admittedly, tax and broader fiscal incentives are instrumental in reducing the cost of investment and raising the output of beneficiary firms and could contribute to economic growth. However, the economic development impact of such fiscal incentives hinges on other factors such as industrial, trade, finance and technology policies by the host state.
What can Ghana show for the incentives offered over the years?
Ghana, after operating the free zone model, over almost three decades, cannot be said to be fully achieving or benefiting from the purpose for which the Special Economic Zones were established.
A number of challenges have emerged and demanded immediate attention following research conducted on the operations of the Free Zone companies[ Research commissioned by Public Services International (PSI) and supported by FES on tackling tax incentives in Ghana].
They relate to employment, working conditions and revenue issues, the capacity of the state, technology transfer issues and abuses by the companies and the contextualization of the SEZ logic to development.
Using the employment indicator, Free Zone com panies altogether employed a total of twenty-seven thousand two hundred and thirty-five (27,235) workers as of December 2018. This, in terms of formal employment, it is about 0.02 per cent.
This means that in spite of the many incentives and the cost to the coun try for providing generous incentives to the Free Zone companies, they are not contributing sufficiently to the objective of creating employment. Additionally, the few jobs that have been created have often been described as low-quality jobs.
Also, there have been reports about abuses of the country’s generosity. They relate to the relocation of companies to neighbouring countries after establishing their businesses at the expense of Ghana’s taxpayer’s money. Others are liquidation after the 10 years tax holiday and coming back in a different form and new business name, poor linkage to the rest of the economy, and low quality of employment conditions.
Again, the whole country has been declared a Special Economic Zone but the capacity of state cadres to monitor effectively is lacking. This results in ineffective monitoring of imports of raw materials, capital goods, equipment and machinery, and vehicles by Free Zone companies.
This is partly due to the inadequate customs resident officers at these companies leading to ineffective monitoring of production and sales volumes. Challenges in escorting imports from harbours to their factories i.e. tracking devices not adequate and effective thereby aiding diversion of imported raw materials into the domestic market.
These result in revenue loss to the state. In 2017 alone, tax exemptions granted by government amount ed to US$475 million. And this was a year when the government had promised to review the exemp tions regime and to tighten the screws on tax ex emptions.
The government had planned to abolish the use of special import permits that allow com panies in the free zones, for example, to import without paying the required customs duties.
When fiscal incentives are loosely applied to firms, they can upend entrenching historic structures of dominant firms rather than transcend those historic structures of imbalances, to create and generate dynamic domestic ones.
It can also be a form of extra surplus transfer to those who get it only because they are powerful enough to grab it. Thereby worsening the challenges of financial flows, both licit and illicit.
Also, the conditions of the Ghanaian worker in the zones demand attention from the political contenders. Though there are sterling examples of companies in the zones that allow unionization, others do not allow unionization and collective bargaining.
There are also irregular in the payment of Pay As You Earn (PAYE) and Social Security and National Insurance Trust (SSNIT) for their employees.
The above goes against Section 24 (3) of Ghana’s Constitution which provides that “every worker has a right to form or join a trade union of his choice for the promotion of his economic and social interests”. In addition, Section 70 (1) of the Labour Act (Act 651) also guarantees workers the right to form or join trade unions.
A 2012 Annual Survey of Violations of Trade Union Rights conducted by the International Trade Union Confederation (ITUC) indicated the per sistent violations in EPZ as one core issue of its survey in Ghana.
The above challenges and abuses corroborate the 2019 World Investment Report, produced by the United Nations Conference on Trade and Development (UNCTAD), which shows that the performance of many zones remains below expectations.
Looking forward to rebuilding the Ghanaian economy in the wake of COVID-19 pandemic
In the wake of the above and in the drive to rebuild the Ghanaian economy post-Covid Pandemic, three main solutions are proffered. First of all, the model of the SEZ, as a model for economic development, needs to go hand in hand with a clear industrial path with tighter and appropriate trade, finance, investment and technology policies.
Policies that prioritise the creation and nurturing of domestic firms even as foreign firms complement their efforts. This will ensure that FDI operations interact meaningfully with the rest of the Ghanaian economy by ensuring backward and forward linkages in the wider economy.
Secondly, it is long overdue to review the incentives regime offered to Free Zone enterprises and link them to clear measurable indicators such as employment, technology transfer, market to local producers. All over the world countries are rebooting their economies and seeking to capacitate the locals to take a commanding role in the economy.
Last, but not least, powers of the state to ensure that workers are treated properly, fairly and their economic rights enhanced within the Free Zones should be exercised.
This will give a clear signal to companies operating there that the Ghanaian workers’ rights are as inalienable as those of workers anywhere in the world.
Commissioned by Public Services International (PSI[ PSI Affiliates in Ghana are Local Government Workers’ Union of Ghana (LGWU); Health Services Workers’ Union of TUC (HSWU); Public Services Workers’ Union of TUC (PSWU); Public Utility Workers’ Union of TUC (PUWU); Teachers & Educational Workers’ Union (TEWU); Ghana Registered Nurses’ Association (GRNA); Civil and Local Government Staff Association of Ghana (CLOGSAG); Federation of Universities Senior Staff Associations of Ghana (FUSSAG) and the Union of Industry, Commerce and Finance Workers (UNICEF).