WCO – Free Zones and the Necessity for Enhanced Customs Involvement

Coega SEZ, South Africa

The expansion of Free Zones has been mainly driven by political decisions closely affiliated with national economic development strategies. In some countries Customs is the primary governmental authority that regulates and governs Free Zones, while in others Free Zones are governed by other authorities, with less involvement from Customs. Depending on the institutional set-up, the scope and degree of Customs control in Free Zones and the economic operations carried out there varies considerably from one Free Zone to another. 

Existing literature reveals that Free Zones attract not only legitimate business but also illicit trade or other illicit activities that take advantage of the regulatory exemptions of Free Zones. 

Numerous papers have outlined the risks associated with Free Zones, along with economic benefits. Most of them deal with the legality of Free Zones policies, particularly in relation to export subsidies as governed by the WTO Agreement. Several other papers have dealt with illicit activities that have been perpetrated by exploiting characteristics of Free Zones. Such illicit activities include money laundering, tax-evasion and trade in counterfeit goods or other illicit goods. 

The WCO research paper deals with Customs-related aspects of Free Zones, considering both the associated benefits and risks. The risks primarily concern illicit trade that exploits key aspects of Free Zones. 

Literature that focuses on risks associated with Free Zones, particularly illicit trade or other illicit activities, have several things in common. They tend to highlight the fact that supervision over cargoes/companies in Free Zones is somewhat relaxed in comparison with other parts of the national territory. The following factors have been pointed out or quoted, although details are rarely provided due to the technical nature of the topic. 

  • Relaxed controls inside Free Zones 
  • Insufficient Customs’ involvement in the operation of Free Zones 
  • Ease in setting up companies inside Free Zones 
  • Insufficient integration of Information Technology(IT) systems by governmental agencies inside Free Zones 

The WCO research paper’s key observations fall in line with those outlined above. It describes the low-level involvement of Customs in monitoring cargo movement and companies’ activities inside Free Zones. This includes Customs’ low-level involvement at the establishment phase of Free Zones, at the approving companies permitted to operate in Free Zones pahse, and during the day-to-day monitoring of cargoes in Free Zones. Limited Customs’ authority inside Free Zones is also mentioned. This paper touches upon relaxed Customs procedures/controls related to Free Zones and observes that they stem from Customs’ limited involvement and limited authority inside Free Zones. These limitations, combined with insufficient integration and utilization of IT, result in a lack of the requisite data concerning cargoes inside Free Zones, and render Customs’ risk-management-based controls – conducted for the purpose of preserving security and compliance without hindering legitimate cargo flows – virtually useless. 

The research paper considers the concept of ‘extraterritoriality’ concerning Free Zones, stemming from a misinterpretation of the definition of Free Zones contained in the WCO Revised Kyoto Convention (RKC), to be behind the aforementioned limited involvement by and limited authority of Customs. The definition within Annex D, Chapter 2 of the RKC does not state that Free Zones are geographically outside the Customs territory. The definition means that the Free Zone itself falls within the Customs territory. ‘Goods’ located in Free Zones are considered as being outside the Customs territory for duty/tax purposes only. 

WCO Research Paper No. 47 – ‘Extraterritoriality’ of Free Zones: The Necessity for Enhanced Customs Involvement

Source: WCO, Kenji Omi, September, 2019

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Rwanda banks on special economic zones to attract investors

Rwanda - WikipediaRwanda is wooing investors to invest in the country through building special economic zones. The Rwanda Special Economic Zones (SEZs) is a programme within the Rwanda Development Board that is designed to address domestic private sector constraints such as availability of industrial and commercial land, availability and the cost of energy, limited transport linkages, and market access among others.

Francois Kanimba, Rwandan minister of trade and industry told Xinhua on Sunday that the country was ripe for investments especially in manufacturing, service industry, tourism and hospitality, skills development among others.

“We are planning to construct SEZs economic zones across the country where investors will have the opportunity to explore the untapped potentials in Rwanda,” he said.

Kanimba said that Rwanda’s business environment is secure and the cost of doing business is friendly and the World Bank’s doing business reports have for several occasions ranked Rwanda among fastest growing economies in world that have eased the cost of doing business.

The small East African nation has so far constructed Kigali Special Economic Zone (KSEZ) located in Gasabo District within the country’s capital Kigali with phase one and two occupying 98 and 178 hectares of land respectively.

The government is now planning for phase three, which is expected to occupy 134 hectares. Phases one and two of the zone cover a surface area of 277 hectares while the third phase will cover approximately 134 hectares.

The trade zone is well equipped with tarmac roads, water and electricity rollout in all designated plots and a waste water treatment plant.

Kanimba continued that the commercial zones are designed to provide investors with industrial and commercial land, improve availability of electricity and transport linkages.

Official data show last year Rwanda attracted 500 million U.S dollars worth of investments and the government is targeting to double the investments in 2015.

According to 2014 World Bank’s Doing Business ranking, Rwanda was ranked 46 out of 189 economies surveyed globally registering improvements in the ease of obtaining construction permits, getting electricity and getting credit. Source: http://www.xinhuanet.com

Mozambique – conditions ideal for ‘Chinese model’ of Special Economic Zones

Maputo1Mozambique has the necessary conditions to successfully adopt the Chinese model of Special Economic Zones, which helped to boost the Chinese economy, according to researchers Fernanda Ilhéu and Hao Zhang.

In the study “The Role of Special Economic Zones in Developing African Countries and Chinese Foreign Direct Investment (refer to link below),” researchers from the Lisbon School of Economics and Management noted that over 35 years, the Special Economic Zones have had “a decisive role in the development of places like Shenzhen, Zhuhai, Xiamen, Shantou, Hainan and Shanghai, and that African countries can leverage this experience.

In 2006, the Forum on China-Africa Cooperation gave “significant priority” to creating up to 50 SEZs abroad, which are being implemented, with US$700 million invested by Chinese companies in 16 EEZ, according to information from China’s Trade Ministry.

Increasingly focused on business abroad, China needs raw materials and African markets to which to export its products, but can also benefit from shifting some of its industries to Africa, as the cost of Chinese labour increases.

The approach to Africa has involved through loans and financing for the construction of infrastructure, and “the development of African countries requires China’s increasing involvement,” including “collaborating in the development of SEZs,” the authors argue.

Regarding Portuguese-speaking countries, the average annual growth of trade between 2002 and 2012 totals 37 percent, turning China into the largest trading partner and largest export market for those countries.

The relationship has proved to be “dynamic in both directions,” they added, with hundreds of companies from Portuguese-speaking countries operating in China and Chinese investment in those countries of around US$30 billion, according to China’s Trade Ministry.

As for the SEZ, the two researchers focused their attention on the Mozambican Manga-Mungassa (Beira, Sofala province) SEZ, established in May 2012, under the management of China’s Dingsheng International Investment Company (Sogecoa Group), which has plans to invest close to US$500 million.

Nearing completion, the first phase includes the construction of warehouse units, followed by the “operational” phase, with construction of additional infrastructure such as hotels and housing, and finally the free industrial zone, where high tech units will be installed.

“In terms of knowledge transfer, Mozambique has made active steps in learning from the experience of Chinese SEZs and using this model to attract foreign investment,” they said.

In 2012 the Mozambican government created the Office for Economic Areas with Accelerated Development (Gazeda) that in addition to Manga-Mungassa, is responsible for the projects of the Belulane Industrial Park, the Locone and Minheuene Free Industrial Zones and the Crusse and Jamali integrated park.

On 6 May, 2014 the Mozambican government approved the establishment of the Mocuba SEZ, a sign of the “determination to create more conditions and to look for more opportunities and economic measures to create jobs and generate wealth,” in the country, the study said.

According to the authors, Mozambique has a strategic location, the ability to attract investment through the diaspora, as well as its model of economic growth and development in its favour, although there remain difficulties in infrastructure and technological development.

“The Chinese SEZ model can be successfully applied to the Manga-Mungassa area,” they concluded. Source: macauhub / MZ

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Special Economic Zones roll-out

SEZ-economist.comThe roll-out of special economic zones is under way, with the first two in KwaZulu-Natal and the Free State to be proclaimed shortly, Trade and Industry Minister Rob Davies said yesterday.

The Dube trade port and the Tshiame industrial development zone in Harrismith would both be transformed into special economic zones as soon as the regulatory framework had been established, which the minister said would take place within the next 100 days.

The regulations and guidelines would be finalised. The special economics zones board would be established, as would a one-stop-shop for fast-tracked support to investors.

The Dube trade port industrial development zone will specialise in high-value, niche agricultural and horticultural products, as well as manufacturing and value-addition for the automotive, electronics and clothing industries.

The Tshiame industrial development zone at Maluti-a-Phofung near Harrismith in the Free State will focus on automotive, clothing and agro-processing activities.

Mr Davies said the department was evaluating the feasibility of special economic zones focusing on the beneficiation and value-addition of platinum in Limpopo and North West. These zones would be used to encourage investors in beneficiation to locate their plants close to the mineral deposits.

“What we know is that significant opportunities to partner with international producers of fuel cells are available, and that these partnerships have the potential for SA to become an established hub for the production of fuel-cell components,” Mr Davies said.

“This would be a very significant development because fuel cells are new technology used for back-up power generation in telecommunication masts, base-load power generation in rural areas, and fuelcell passenger vehicles.

“This technology is fast becoming the subject of intense international competition for investment and is also a technology well suited to SA’s comparative advantage in platinum mineral resources.”

The department was assessing the feasibility of a solar industrial development zone in Upington in the Northern Cape.

“We have no doubt the support available through the special economic zones programme will lead to increased investment by the private sector and contribute to building new economic infrastructure in provinces,” the minister said.

The Saldanha Bay industrial development zone was well positioned to become a hub for oil, gas and marine repair, engineering and logistics. “An application to operate as a Customs Control Area to service the West and East African offshore oil and gas industry is being finalised. To date 18 companies, nine local and nine foreign, have signed nonbinding expressions of interest.”

The Coega, Richards Bay and East London industrial development zones had together generated R3.4bn in investments and created more than 67,000 direct and indirect jobs. A number of new investments worth several billion rand were also under negotiation. Source: SAnews.gov.za

Poland SEZs – Case Study 20 years after

CASE Study - SEZs in PolandIn “Special Economic Zones – 20 years later” Camilla Jensen and Marcin Winiarczyk offer a panel data evaluation of the effectiveness of Poland’s regional policy since 1994. The policy was originally initiated to foster new economic activity in designated greenfield zones in high unemployment areas at the beginning of Poland’s transition. Over time the policy has evolved and many areas including areas that encompass economic activities from the socialist period have been adopted into the scheme.

The main incentive tool for new investors to locate in the SEZs are income tax reductions. In exchange Poland is expected to get new, environmentally friendly and export oriented investments that offer additional job placements. The econometric evaluation shows that the policy has been successful mainly on one criteria which is to attract foreign direct investment into the Polish SEZs. More qualitative and long-term development oriented targets such as instilling environmental friendly behaviour are lagging behind.

Comparing the wage developments in and out of the zones also suggests that industries and activities located in the zones are less skill intensive and therefore also less prone to catapult Poland into its next developmental phase, which is a skill-intensive innovation driven economy. Therefore, the authors conclude that to instil among investors in SEZs better behavioural models that will lock investors into a future oriented development path, it is necessary to consider other incentives and initiatives. Read the full report at this link! Source: CASE Research

Government SEZ Bill will support economic growth and opportunities

sez.jpgThe Special Economic Zones (SEZ) Bill 2013, according to the government will support a broader-based industrialisation growth part and be a significant milestone in pursuit of the aspirations of the National Development Plan (NDP).

Rob Davies, Department of Trade and Industry Minister says, “The bill aims to support a balanced regional industrial growth path, along with the development of more competitive and productive regional economies.”

SEZs are defined as geographically designated areas of a country set aside for specifically targeted economic activities, supported through special arrangements and systems that are often different from those that apply to the rest of the country.

Says Davies, “The aim of the SEZ Bill seeks to boost private investment (domestic and foreign) to labour-intensive areas to increase job creation, competitiveness, skills and technology transfer along with exports of beneficiated products.”

The Bill introduces a variation of SEZ’s to cater for the various spheres of government at local, provincial and national level.

It also provides for the designation of the following types of SEZs:

  • Free Ports: duty-free areas adjacent to a port of entry where imported goods may be unloaded for value-adding activities, repackaging, storage and subsequent re-export, subject to special customs procedures.
  • Free Trade Zones: a duty-free area offering storage and distribution facilities for value adding activities within the SEZ.
  • Industrial Development Zone: a purpose-built industrial estate that leverages domestic and foreign fixed direct investment in value-added and export-oriented manufacturing industries and services. (To date there are five Industrial Development Zones (IDZs) – Coega, East London, Richards Bay, OR Tambo and Saldanha Bay).
  • Sector Development / Specialised Zones: a zone focused on the development of a specific sector or industry through the facilitation of general or specific industrial infrastructure, incentives, technical and business services primarily for the export market.

Source: Transport World Africa

Special Economic Zones and Regional Integration in Africa

SEZ and Regional Integration in AfricaOne of the most prominent features of the global trading landscape in recent years has been the worldwide proliferation of bilateral and regional trade agreements. Africa is no exception to this pattern. Another prominent development in Africa over the last couple of decades has been the increasing use by many countries in the region of various types of special economic zones (SEZ). These zones are more and more being viewed in the region as important mechanisms for attracting foreign investment, creating jobs, boosting manufacturing production and manufactured exports and contributing to much-needed industrial and economic development.

This paper – Click here for access – does not seek to provide an evaluation of the performance of the various special economic zone programmes established in Africa in recent years, but instead seeks to explore the various issues, challenges and opportunities that arise when countries – and especially developing countries – use special economic zones while simultaneously pursuing regional integration initiatives. This is a particularly important subject in the context of the COMESA-EAC-SADC T-FTA as a large number of the countries involved are actively using special economic zones or are currently in the process of establishing zone programmes. Source: Tralac

Jamaica plans global logistics hub

The Port of Kingston – ripe for development

The Port of Kingston – ripe for development

The Government of Jamaica has revealed ambitious plans to turn the Caribbean island in to a global logistics hub – and high level talks have already begun with the aim of increasing volumes of sea cargo.

Projects under discussion include developing the Port of Kingston ahead of the expansion of the Panama Canal and the development of a new commodity port to be built in eastern Jamaica which will specifically handle petroleum products, coal, minerals and grain.

At the same time, there is talk of constructing an air cargo airport to help with increased volume of boxes and the construction of large scale ship repair docks to service the increasing volume of post-panamax vessels.

Dr Eric Deans, chairman of the Logistics Task Force, said a market of 800 million people, including the USA and Brazil, can be accessed readily from Jamaica. He said trade opportunities are due to “burst wide open with the expansion of the Panama Canal scheduled to be completed in 2015; the multi-billion stimulus package by Brazil for World Cup 2014 and Olympics 2016; and the growing middle class in Latin America.”

He added that a critical aspect of the global logistics hub initiative is the broadening of bilateral collaborations with Jamaica’s global partners, and encouraging private sector investment and financing through private-public partnerships (PPPs).

Talks regarding the set-up of special economic zones are already underway with local and foreign investors.

The Jamaica Ministry of Industry, Investment and Commerce, which is spearheading the initiative, says that it will help give the country a global logistics supply chain that is able to compete with the likes of Singapore, Dubai and Rotterdam.

Perhaps this initiative could spur on our local authorities to actually move on ‘logistics hubs’ here in South Africa. While the huge expansion plans for our existing harbours, railroads are pursued, it is high time that the likes of Tamboekiesfontein, for instance, and other privately initiated transit hubs are taken seriously, and in an integrated manner to benefit commerce and trade in the Southern African region.

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News from Angola

SEZ for Cunene Province

The government of Cunene province in southern Angola, has chosen the border town of Calueque, in Ombadja municipality, to set up the province’s Special Economic Zone (ZEE), the province’s governor, António Didalelwa said in Ondjiva speaking to Angolan news agency Angop. At the end of a meeting of the provincial government, the governor said that Calueque had been chosen due to its potential to drive agri-livestock activities based on the Cunene River’s hyrodgraphic basin and the Calueque hydroelectric facility. Its proximity to Namibia, its conditions in terms of available electricity and water, as well as access roads make it possible to set up economic and administrative facilities in order to drive production and job creation. The entities that attended the provincial government meeting concluded that the existing conditions at the new ZEE would attract investments and drive production by installing factories, retail and services areas. This follows last year’s fomalisation of the Luanda-Bengo Special Economic Zone (SEZ) between the towns of Viana and Cacuaco in Luanda province and the towns of Icolo-e-Bengo, Dande, Ambriz and Namboangongo in Bengo province. Watch a short video on the Luanda-Bengo ZEE here! Source: Macauhub.com.

Customs Modernisation

The Programme to Expand and Modernise Customs Services (PEMA) in Angola, which began in 2002 and officially ended Monday 21 May, cost US$315.5 million, Angolan weekly newspaper Expansão reported. The newspaper added that in a 10-year period the PEMA had led to US$17.7 billion going to the State’s coffers and thus the cost of the programme was just 1.8 percent of the revenues that it had made possible.

During the ceremony to mark the end of a partnership with Crown Agents, a UK company that specialises in modernising public services, the assistant director general of the National Customs Service, Maria da Conceição Matos, said that whilst the programme was being implemented customs revenues had increased steadily and significantly. Matos said that the Programme for Expansion and Modernisation of Customs Services had reformed the institution structurally across the whole of Angola, based on international best practices for the customs sector.Source: Macauhub.com.

SEZ – Lessons for South Africa from international evidence and local experience

A bold paradigm shift in South Africa’s economic policy is required to ensure the success of the country’s new special economic zones (SEZs) programme, according to Centre for Development and Enterprise (CDE) executive director Ann Bernstein.At the launch of the new CDE report on SEZs, she explained that South Africa’s current economy favoured skill and capital-intensive industry, which was not making the cut in terms of job creation.

“South Africa needs to create the right kind of environment for the emergence of businesses that can employ large numbers of unskilled people. That is what we should use the SEZs to do.“This will require bold leadership and engagement with the difficult choices on labour costs and flexibility that must be made. The alternative is to waste resources and energy yet again on a policy that fails,” Bernstein urged.

The report, titled ‘Special Economic Zones: Lessons for South Africa from international evidence and local experience’ suggested that South Africa should establish at least two large SEZs that were focused on low-skill, labour-intensive industries such as the clothing and textile sectors and enable them to compete globally. “Without reform, the only way South African companies can compete with Chinese, Vietnamese and Indian companies is by mechanisation, which results in fewer people being employed, and a greater reliance on skills,” Bernstein pointed out. “International evidence shows that the most successful SEZs were public–private partnerships,” Bernstein noted. Further, the report showed, as recognised by government, that South Africa’s industrial development zones (IDZs) that include Coega, East London and Richards Bay, had largely failed to boost economic growth, create jobs, promote industrialisation or accelerate exports.

Bernstein attributed this to the lack of a clear definition for what these zones should entail, as well as a strategy for attracting investors. “The IDZs are basically just industrial parks – it’s no wonder they have not been successful in attracting new investors and creating jobs.” Although the Department of Trade and Industry (DTI) had spent R5.3-billion on developing these zones, the vast majority of the 33 000 jobs created were short-term construction jobs, with only 5 000 permanent jobs created.

Bernstein said countries such as China, Costa Rica, Mauritius and Latin America countries could be viewed as benchmarks for South Africa in terms of IDZs. Rising costs in Asia, especially China, where labour-intensive firms were looking for new regional locations, were creating opportunities for IDZs in South Africa. The CDE argued that South Africa should seize the opportunity to compete for a sizable portion of the jobs that could sprout from this.

“A bold new SEZ strategy could become a platform for new companies and new investors that use unskilled labour rather than machines,” Bernstein indicated. “South Africa’s new SEZ programme needs to be a presidential priority. The DTI needs to be fully supported by all other departments of government. Unless the whole of government gets behind the effort, we’re not going to see the kind of investor uptake that would actually make a difference,” CDE research and programme director Antony Altbeker said. Trade and Industry Minister Rob Davies is set to table the draft SEZ Bill in Parliament later this year, while Finance Minister Pravin Gordhan announced that R2.3-billion would be allocated to the establishment of SEZs were in the 2012/13 Budget.

However, the CDE’s report warned that the Bill provided no clarity about what would differentiate SEZs from industrial parks, its envisaged governance arrangements for SEZs was confusing and said the role of the private sector was unclear. Source: Engineering News

Draft Taxation Laws Amendment Bill, 2011 – Impact on Customs

As if the myriad of changes affecting the Customs industry are not enough, there’s some more important considerations for customs traders and practitioners, soon, posed by the Draft Taxation Laws Amendment Bill [2011].

Goods Sold in Bond. For the purposes of the VAT Act, the Bill proposes that ‘the value to be placed on the importation of goods into the Republic which have been imported and entered for storage in a licensed Customs and Excise storage warehouse but have not been entered for home consumption shall be deemed to be the greater of the value determined in terms of subsection (2)(a) or the value of acquisition determined under section 10(3) if those goods while stored in that storage warehouse are supplied to any person before being entered for home consumption.’

Duty free goods imported on a temporary basis. Goods imported in terms of Rebate Item 470.03, which are duty free, will in future have to be declared under a specific rebate sub-item for duty free goods. In addition, provision is also to be made for the importer of duty free goods, where the importer is contractually entitled to keep a portion of the goods manufactured, processed, finished, equipped or packed in lieu of payment for the operations carried out, that importer must:
a) export those goods within the 12 month period, or
b) process a goods declaration for payment of the VAT on the goods retained and pass a voucher of correction amending the quantity and value of the original declaration.

New tax incentives for Industrial Development Zones. Government is seeking to renew its efforts to enhance the Industrial Development Zone (IDZ) regime to encourage industrial development within certain geographical areas. The main focus of the incentive is to promote capital expenditure. Greenfield projects receive an additional 55% allowance and brownfield projects receive a further 35% additional allowance. The additional allowance for greenfield projects located in IDZ’s will be increased to 100% (instead of the current 55%) and to 75% for brownfield projects (instead of the current 35%).This change will be welcomed by IDZ Operators that are constantly looking for ways to make IDZ’s more attractive. In terms of the Customs and Excise Act, it should be noted that duty rebate and VAT dispensations ONLY apply to entities establishing licensed premises within the customs controlled area of an IDZ.

For more information on the above please click here!

The Draft Taxation Laws Amendment Bill, 2011 is available on the SARS website.