Are EPZs living upto the Expectations?

Kenya is losing billions of shillings in revenue through the EPZ’s which have brought little benefit to the East African nation in the way of jobs, industrialization and technology transfers, experts have said. Early in the year, workers of Hela Company,a garment company that manufactures lingerie for European and United States markets downed their tools over new payroll from management.

“I have worked for this company for seven years. I am now being forced to be enrolled in a new payroll under a new company brand. This is a gimmick to deny us our service pay as stipulated in law,” said Mr Shadrach Oguto, a Hela company employee.

They accused the company for illegally transferring them and unlawfully sacking some of them.The firm is said to have planned an ownership change and made changes to their contract without workers’ knowledge.It is alleged that the targeted workers in the ongoing reforms at the firm were due for service benefits after serving the company for years.They also allege that the company had been sacking employees who question certain decisions made by the management.

“We are undergoing lots of problems in this company. When women report to work from maternity after three months, they are exposed to machines without the company’s management minding whether they underwent CS during delivery,” Metrin Changalwa told the press.

Recently there have been reports of irregular recruitment process at the MAS Intimates Kenya where corruption, tribalism and nepotism took centre stage. A source within the Sri Lankan apparel and textile manufacturing firm divulged how top officials from the EPZA influenced the whole process by compromising greedy recruitment managers into favouring members of certain communities.This mismanaged process was attributed to strong political interests within the government authority where senior staff members want to please their local people at the expense of qualified job seekers.

MAS Intimates Kenya produces clothing brands such as Calvin Klein and Tommy Hilfiger.It set shop in Kenya in 2020 to complement Hela Clothing as the largest apparel and textile manufacturer, investing more than $7 million.

Kenya’s revenue loss due to tax competition and corporate incentives remains sizeable, with Oxfam putting the amount at close to three per cent of the country’s Gross Domestic Product (GDP). “While Kenya, may have some of the highest standard corporate income tax (CIT) rates in the East African region, it offers some of the most permissive incentives,” reads part of The Kenya Fair Tax Monitor Report compiled by Oxfam and Tax Justice Network.

Catherine Ngina Mutava of Oxfam Kenya says wealthy taxpayers possess power and influence that allows them to block efforts to impose tax on their incomes and use their economic resources and political connections to push for tax incentives that benefit them. The tax incentives, they argue are necessary to create an attractive business environment.

“This is despite lack of evidence on the effectiveness of tax incentives to attract investments in isolation. Further, social benefits from the investments are rarely commensurate to the tax revenues lost”, she said.

The 2022 Economic Survey estimates the country’s nominal GDP at Sh12 trillion, meaning at least Sh360 billion of tax revenue is lost every year. The study conducted in partnership with the Tax Justice Network and The Institute for Social Accountability (TISA) under the Okoa Uchumi banner scores Kenya lowest among nine Africa countries surveyed on tax competition.

According to a East African Tax and Governance Network report National Economic Pressures,The Hidden Cost Of Tax Expenditure in Kenya. EPZs and SEZs act as enterprises that facilitate production of goods and contribute to growth in the manufacturing sector.

Despite these zones enjoying preferential tax treatments, the National Treasury does not consider them as tax expenditures. Incentives to EPZs and SEZs however ought to be considered and accounted for as tax expenditures considering that SEZs and EPZs are believed to account for a significant proportion of revenue losses incurred by government in the manufacturing sector and in the overall tax regime.

“Kenya Revenue Authority estimates that Kenya lost up to 5.15 per cent of its GDP in 2017 and 2.96 per cent in 2020 through generous tax incentives.Tax holidays and incentives specific to Export Processing Zones are considered the most harmful.”This puts to question the cost-effectiveness of tax incentives in such zones, Kenya continues to pursue the use of free zones to attract foreign investment by establishing Special Economic Zones, “says the report.

With the enormous opportunity that Kenya has; a duty-free market access to USA, U.K, Europe, Africa among others with an approximately combined USD 50 trillion GDP, why haven’t we been able to take the opportunity to industrialize, create many needed jobs, boost our forex reserves and in turn grow our economy?,Wonders Pankaj Bedi,the Chair of Apparel Exports Sub-sector at the Kenya Association of Manufacturers.

The textiles and apparel sector is the third largest exporter in Kenya after horticulture and tea.It is a contributor to the nation’s economy – representing 0.6% to GDP and accounting for 6% of the manufacturing sector – earns 7% of country’s total export earnings.

There are no restrictions on who can invest in Export Promotion Zones (EPZs) firms. An EPZ firm may be 100% foreign owned,100% Kenyan owned or any combination of foreign/Kenyan ownership. An EPZ firms is allowed to bring in foreign workers for training, technical and managerial categories. 

The EPZs contribute to Illicit Financial Flows(IFFs) through public procurement, real estate,importation, manufacturing and banking sectors and are predominantly a result of corruption mainly originating from public procurement and businesses that are influenced by well-placed individuals and politically exposed persons. 

A report by Christian Aid “Use and Abuse of Tax Breaks: How Tax Incentives Become Harmful” points to glaring loopholes in the legal regime that govern gazetting of such zones and granting of exemptions. Section 29 of the EPZ Act provides the benefits to any firm that is licensed to operate within the zone. However, Section 29(2) (i) gives the Cabinet Secretary, “Finance powers to grant any other exemptions in addition to the ones that have been clearly stipulated.” This creates room for the Cabinet Secretary to arbitrarily choose who benefits from incentives. This discretionary power creates opportunities to abuse the incentives regime through lobbying and rent seeking. 

This is often through the use of public-private partnerships, nominee relationships and front companies to disguise the identity of the players during bidding, the use of rotational tenders,licence or lease renewals, direct embezzlement, as well as tax evasion.

Kenya loses revenue from key tax heads such as income tax and customs duty, forcing the government to impose higher taxes in the recent Finance Bill signed into law by president William Ruto.

Kenya is estimated to be losing an average of Ksh 40 billion every year since 2011 through Illicit Financial Flows (IFF).In fact, the UNCTAD’s Economic Development in Africa Report 2021 estimated the losses to be nearly half of Kenya’s domestic revenue.

Destinations of IFFs are often listed to tax havens like Mauritius, Nigeria and the UAE-used as transit points before they are moved internationally.

Export Processing Zones Authority(EPZA) is a parastatal mandated to attract export-oriented manufacturing by setting aside physical areas where investors are given a range of incentives. The benefits include tax breaks, waivers of industry regulations, exemptions from import and export duties, suspension of rules requiring foreign investors to make investments in conjunction with local partners, strict guarantees against expropriation, assurances of physical security and infrastructure.

The EPZs are managed by the EPZA whose board of directors comprises members appointed from the private and public sectors. Board chairman is appointed by the President. The Trade Cabinet Secretary on the recommendation of the Authority, appoints a chief executive of the Authority.Construction of the first EPZs was done by companies linked to former president and his vice and minister of finance.

Last year an IMF  report identified gaps in Kenya’s existing anti-money laundering law concerning financial transactions by politically exposed persons, their families, and allies.PEPs include the president, ministers, MPs, parastatal CEOs, high-ranking judges, high-ranking military officers, and board members of top firms.

Many of the garment manufacturing firms are not Kenyan owned and repatriate most of their profits to their countries of origin in China, India , Sri Lanka and Pakistan from which cotton is sourced as are buttons, zippers and thread which are then assembled in the EPZs.

Most transactions are in foreign currency deposited in foreign banks. Only money meant for local expenses are deposited in local currency in local banks. 

The EPZs and their affiliates get money out of Kenya undetected through trade misinvoicing by overpricing of imports, the underpricing of exports and the balance of their true value is paid into foreign private accounts. For example,Kenya imports about USD $ 833,000,000 of textiles and apparel with apparel being about 30% of this value.On the other hand, Kenya exports textiles and apparel worth about $500,000,000 with the bulk of this being Apparel Exports under the Africa Growth Opportunities Act (AGOA).

Big fashion and sports apparel  brands are among the over 20 US fashion houses that order directly from companies like New Wide Apparel. The EPZ firm controls the entire value chain, from making the yarn in China, Taiwan, Cambodia and Vietnam. The garment sector within the EPZs constitutes 16% of enterprises, 80.3% of total local semi-skilled jobs, 61.2% of exports and 21.3% of private investment according the EPZA.

EPZA indicates the value of exports expanded from $358 million in 2021 to $395.78 million in 2022. Dr Bitange Ndemo, a diplomat and a former Permanent Secretary in the Ministry of Information and Communications, once said that Kenya needs abetter way of dealing with the EPZ which has been riddled with dishonesty.’We have to leverage big data to track. Meaning, if they say they shipped one million T-shirts, we must look at the capabilities that they were produced here and not produced in China and then routed through here’; laments Ndemo who believes that some of the manufacturing is not done in Kenya.

As reported by the Kenya Human Rights Commission in the book “Manufacturing Poverty:The Story of EPZs in Kenya,one of the chief attractions of EPZ firms is a cheap, brutalized and controlled workforce. Most EPZ firms are Asian investors on the run from escalating wages in their home countries.Wages in EPZs are rock bottom, and conditions are oppressive. EPZ workers – mostly women – work in unsafe, dirty factories, and are forced to work at high speeds with supervisors who abuse them.

EPZ investors see the absence of trade unions as a major advantage of the zones, and their preference for women workers is a deliberate part of their anti-union policy. The firms thrive on workers intimidation and coercion in disregard of the labour laws. Worker’s rights have been infringed in totality with workers being subjected to long hours of unpaid overtime.

– Peter Ongera

This story was produced by Peter Ongera. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.