The topic of special economic zones has gained traction over the last decade in an increasingly globalised economy. With the realisation that it would attract deeper investment if supply chains, particularly of multinational companies, were made more viable in competing jurisdictions, governments thrust towards revising their legislative frameworks on a comparative basis. This means that concessions on tax or duty, for instance, are typically conceived from a comparative context against regional or global peers.
Currently, Indonesia’s government is eyeing $7,7 billion investment in three new special economic zones with the full on support from the country’s main private sector organisations. On the other hand, the present Mexican administration is considering back tracking on SEZ promises made by its predecessor. Interestingly, the suggested direction is facing resistance from Mexican businesses that argue for the potential of up to $42 billion to be invested into seven SEZs across the country.
While there is often a generalised perception of SEZs across countries, a nuance of implementation is that current legislative frameworks usually have to be favourable to local businesses too; otherwise multinationals either derive unfair benefits, or fail to gain any utility if current legislative frameworks are inherently deficient anyway. Zimbabwe finds itself somewhere in the middle of this nuance.
A lot of local businesses struggle to be viable due to a difficult legislative environment already. It is their difficulty to thrive within the present frameworks that distances them from multinational investment. So if SEZs are to be effective in Zimbabwe, perhaps government should focus on reforming the business environment of the entire jurisdiction. This will avoid the aforementioned nuance of multinationals deriving unfair benefits to their local peers, or multinational companies failing to thrive altogether in a deficient business jurisdiction.
A significant consideration missing from the SEZ dialogue is how multinational companies function. Most multinationals, in mining for example, which is a targeted sector in the country’s SEZ strategy, are an amalgamation of vertically integrated distinct companies that specialise along the value chain. This is why most multinationals in mining take on what are called “juniors”; merely integrating and capacitating them to supply or provide whatever service it is that the junior specialises in.
Thus, in well regulated and legislatively constructed jurisdictions, mining multinationals simply invest in local suppliers or service providers. This creates a win-win, where local firms are capacitated by global investment, and global investors get their desired product or service at competitively viable costs.
In Zimbabwe, SEZs risk becoming counter-intuitive if there is no expedient improvement for the local business entity. Local suppliers or service providers are struggling to remain viable in the current legislative business environment. As long as they are unable to exist and thrive
it makes no sense to expect multinationals to risk entering such a market and try to thrive in services or products that they do not specialise in themselves. Interestingly then, shrewd multinational executives make their jurisdiction selection by evaluating how local entities fair at the standardised business environment, without the concessions and other tweak on offer in SEZs. Governments that fail to rectify the business environment for local entities further risk going downward a slope of subjective regulation which multinationals are always careful to avoid.
Consider that as large scale mining operations are typically standard across companies with thin margins of differentiation, it is difficult to invest huge sums of capital to local juniors without clear and transparent legislative guidance, especially when regulatory entities are given discretion on interchangeable laws and regulations. One junior may lobby a regulator to come to a decision that differs with another junior for concessions of a similar mineral or operation. This has huge potential competitive implications when decisions are not so favorable for one investor to another, and it is too distant an outcome from multinational governance. This is a no-go path for well governed and structured multinational companies.
Presently in Zimbabwe’s mining sector, legislative bottlenecks urgently have to be attended to. There are numerous laws and regulations that govern the mining sector, and there is frequent overlap across regulators making compliance and risk assessment difficult for the local entity. Furthermore, the Special Economic Zones regulations are only adding to the confusion of other frameworks such as beneficiation and national project concessions; neither really having clear lines of responsibilities and separation of duties. Multinational companies are not going to figure out this maze any better than local operators. In fact, they have less patience and need to do so. Therefore, perhaps it is best for the government to enhance its legislative environment to improve local entities ease of doing business first, otherwise SEZs may be counterintuitive and a waste of further legislative exertion.