Kenya needs policy reset to kickstart special economic zones sector

Trade Cabinet Secretary Lee Kinyanjui during a tour of Mai Mahiu Special Economic Zone where 19 investors are already on the ground. [File, Standard]

The government’s strategic effort to establish Special Economic Zones (SEZs) was first proposed in the 1980s but gained momentum only in the 1990s.

The strategic shift was meant to promote industrialisation and attract investment.

The Export Processing Zones (EPZs) were designed to attract foreign investors through tax holidays, reduced customs duties, and incentives for exporting goods.

However, the success of EPZs was limited due to policy inconsistencies, infrastructure deficits, and bureaucratic challenges. This saw the introduction of a SEZ framework in 2012, with the country adopting SEZs as part of its long-term Vision 2030 economic blueprint.

The move was driven by the realisation of the then-President Mwai Kibaki’s government that SEZs offer broader investment opportunities compared to EPZs, allowing for more diverse sectors, including manufacturing, logistics, and services.

The government formalised the SEZ framework through the SEZ Act in 2015, providing a legal and regulatory foundation for its establishment. It then identified strategic locations for SEZs, which are positioned near major infrastructure projects.

These include the Mombasa SEZ located near the Port of Mombasa to boost trade through the region’s busiest seaport; the Lamu SEZ, which is part of the Lapsset (Lamu Port-South Sudan-Ethiopia Transport Corridor) project critical for connecting Kenya to Ethiopia and South Sudan; and the Naivasha SEZ, an inland SEZ connected to the Standard Gauge Railway, which leverages proximity to energy projects, such as the Olkaria geothermal plant.

Others include Tatu City, a private SEZ; Vipingo Development in Kilifi County, specialising in manufacturing and large-scale industrial projects; Two Rivers International Finance and Innovation Centre, a business-focused SEZ targeting service-oriented firms; and Northlands, a privately managed SEZ.

Despite significant progress in the actualisation of the SEZ dream, it is important to acknowledge the sector’s quantitative footprint in Kenya’s economy.

The Kenya National Bureau of Statistics Economic Survey 2023 reports that Kenya’s SEZs attracted investments worth Sh135 billion between 2016 and 2022, creating over 22,000 direct jobs.

According to the Export Processing Zones Authority (EPZA), EPZ and SEZ exports accounted for about 12 per cent of Kenya’s total exports in 2022.

Like many other African countries, however, the SEZ sector faces a myriad of challenges, such as infrastructure gaps and delays in infrastructure projects, including roads, energy, and water systems.

According to the African Development Bank 2022 report, Kenya’s infrastructure financing gap is estimated at $2.1 billion (Sh273 billion) annually. The SEZ Authority’s latest annual report, on the other hand, notes that at least five designated SEZs are still awaiting full operationalisation due to a lack of reliable utility connections, particularly electricity and water.

This is on top of bureaucratic hurdles, including administrative bottlenecks that hinder the quick operationalisation of SEZs.

But an even bigger hurdle has been the fact that 11 years after the SEZ framework was formalised, there haven’t been any meaningful policy adjustments to match the sector’s changing needs and trends. 

The only recent notable change was the introduction of the Business Laws (Amendment) Act, 2024, which took effect on December 27, 2024. The Act introduced a 10-year guarantee for incentives from the date of licensing and established a one-stop shop to streamline approvals.

A lot has changed in the sector since the last policy review, with several reports, including those by the World Bank, highlighting that while Kenya’s SEZ policy is ambitious, a number of structural and systemic gaps continue to stall progress.

This has been compounded by global challenges such as the ongoing geopolitical tensions in the Middle East, as Israel and the US wage war on Iran and its allies in the region, and global trade fragmentation creates new economic pressures.

According to the Kenya Private Sector Alliance (Kepsa), Kenya’s SEZ policy, while commendable for offering competitive tax incentives, such as 10 per cent corporate tax, is crippled by structural gaps, including regulatory instability, slow implementation, lack of integration with local industries, and weak infrastructure.

Frequent changes in licensing and fiscal policy, for instance, hinder long-term investor confidence and predictability, while slow operationalisation of gazetted zones and a lack of a one-stop shop service result in administrative bottlenecks.

As we gear up for the Kenya International Investment Conference this week, the Association of Special Economic Zones calls for urgent fixing of these challenges if Kenya is to continue attracting SEZ investments amid rising competition from other African countries, such as Rwanda, South Africa, and Egypt.

It calls for legal harmonisation, improved administrative efficiency, and better logistical connectivity.

There is also an urgent need to address the issue of conflicting policies between the SEZ Act and the EPZ Act to allow for maximum exploitation of incentives.

Another way of fixing structural gaps amid a changing operating environment would be the strengthening of institutional autonomy by empowering the SEZ Authority with greater capacity for licensing and faster resolution, effectively rolling out the one-stop shop approach.

Global sharks are aligning their policy frameworks with digital trends, such as the artificial intelligence boom, to improve efficiency of their supply chains, and Kenya cannot run the risk of falling behind.

As such, it must move beyond mere tax breaks for the sector to be integrated, well-connected hubs anchored in legal and policy certainty.

The writer is the Vice Chairman of the Association of Special Economic Zones