In public policy, it is important to remember that ‘A followed by B is not the same as B followed by A’, which means that public policies should seek to address the economic and development needs of the country for the benefit of Emaswati.
In this respect, the government of Eswatini continues to make significant investments to spur economic growth and ensure better livelihoods for Emaswati. One such investment is the establishment of special economic zones (SEZs) that are expected to attract foreign direct investment (FDI), create employment opportunities, and contribute to the development of local small and medium enterprises (SMEs).
The Eswatini Economic Policy Analysis and Research Centre (ESEPARC) recently hosted an in-house seminar where Research Fellow Tengetile Hlophe delivered a presentation on ‘Special Economic Zones: What Should We Consider?’ Present at the seminar were ESEPARC researchers as well as guests from the Eswatini Investment Promotion Authority and the private sector.
Tengetile explained that SEZs, which are established by governments, industry or universities, comprise of a cluster of diverse firms or a single domain that is meant to drive progress in spaces neglected by national policies or to fix barriers affecting business. She noted that SEZs, which should have strong linkages with universities, act as an incubation for innovation and new industries, and also encourage export trade and promote industrialisation.
If implemented properly in the right context, she said, SEZs can be an effective instrument to promote industrialisation. Adding, Tengetile said SEZs have the potential to draw in FDI, create employment, increase export driven trade, and industrial activity.
The research fellow noted that SEZs provide infrastructure for business convenience systems and services which are an enabler for a conducive business environment that is intended to be more liberal and effective from an administrative perspective. Tengetile emphasised that SEZs should be a ‘nursery’ for pioneering companies to grow and promote industrialisation.
“Eswatini already has the supporting infrastructure and good roads, so we stand a good chance for success. When we formulate our policies we need to consider how development takes place and what we want to achieve as an economy. For instance, if we need to build capacities, our policies should speak to that.
“Our government has made substantial investments into establishing SEZs through world-class infrastructure, good roads, and improving the cost of doing business, such as reduced time for obtaining licences. Let us make sure we reap the benefits of these investments and learn from past policies. We need to operationalise our SEZs in such a way that they benefit Emaswati.”
The research fellow acknowledged however that the country is failing to support innovative initiatives within companies, which is one of the challenges that need to be addressed for Eswatini to achieve its development goals. She said studies have shown that there are low linkages between foreign companies and local small and medium enterprises (SMEs), as well as weak linkages between research and development (R&D) and firms, which therefore leads to low transfer of knowledge and skills.
“SMEs also lack capital investment, so how do we ensure that they benefit from the special economic zones? How are we going to create the necessary linkages to encourage knowledge transfer between FDIs and local SMEs? We need to consider the skills available in the country and how these can support investment. We also need to consider how we can support local firms so that they derive benefit from the SEZs,” suggested Tengetile.
One of the incentives offered to foreign investors (as per the Special Economic Zones Act, 2018) is an exemption from corporate tax for an initial period of 20 years, with subsequent tax charged at 5%. The legislation also allows for unrestricted repatriation of profits by the foreign companies. One participant at the seminar wondered what the justification for a 20-year tax holiday for FDI companies is and how the repatriation of profits by these companies benefits Eswatini.
“Does a 20-year tax exemption make sense though? If these companies do not pay tax for 20 years, who will be paying for the maintenance of the roads and infrastructure they will be using? Besides, 20 years from now the industry would have undergone so many changes, so what benefits do Emaswati and the country derive from such investments?”
Another researcher argued that “we need to think about emphasising industrialisation first, which will then inform the agenda to establish special economic zones such as the science and biotechnology park, to drive innovative ideas and partnerships between local enterprises and foreign investors.”
The researcher noted that the problem in Eswatini is conceptualisation of what the country wants to achieve versus the agenda of foreign direct investors. “Do we understand the kind of skills we have and the knowledge we want to gain as a country? The development agenda should include the development of SMEs,” added the research economist.
So, what needs to be done now considering the huge investments that have already been made into the two SEZs in Eswatini, that is, the Royal Science and Technology Park (RSTP) and King Mswati III International Airport?
The participants felt there is a need for a total overhaul of mind-sets and the way Emaswati do things. “We should not start from a point of vulnerability where we seem desperate for foreign investment. The country’s policymakers need to understand that FDI does not bring development but rather, development is what attracts FDIs. So, let us focus on developing the local industry first then the rest will follow.”
Adding, Tengetile noted that the sustainability of SEZs requires more than investment in infrastructure. She said there is a need to learn from previous policies to ensure that they address the country’s developmental and economic needs.
“Knowledge is an essential resource for industrial growth, competitiveness and innovation. We need to interrogate what will stimulate incremental or radical innovations, the orientation of domestic or foreign companies, our knowledge suppliers, and how we can support new firm formation and enhance the innovation capabilities of existing companies. We also need to remember that in public policy, ‘A followed by B is not the same as B followed by A’,” she added.