POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise MARCH 2010 · Number 5 53682 China's Investment in African Special Economic Zones: Prospects, Challenges, and Opportunities Deborah Brautigam, Thomas Farole, and Tang Xiaoyang1 China's recent moves to establish special economic zones (SEZs) in several African countries can make a significant contribution to industrialization in Africa. But the success of these projects is by no means guaranteed. Meeting the objectives of both China and African countries will require an active partnership and a framework for collaboration that includes engagement from host governments, processes for phasing-in local control, communication and enforcement of standards, and support for integration with local economies. Growing Manufacturing Trade and Investment 5 are in Sub-Saharan Africa: in Ethiopia, Mauritius, Nigeria between Africa and China (two), and Zambia.2 (See table 1 for a description of the zones.) Trade between China and Sub-Saharan Africa has grown over 100-fold since 1990. Although there has been much Weak Industrial Competitiveness in Africa focus on China's interest in securing supplies of natural re- and Relatively Poor Experience with sources from Africa, trade in the manufacturing sector is also Zones to Date growing dramatically (see figure 1). This trade is also opening the door to increasing direct Accelerating industrialization is critical for African countries investment in manufacturing on the continent, as Chinese to reduce poverty and meet their Millennium Development exporters look to supply African markets and take advantage Goals. Most of the continent remains stuck in established of low-cost labor. A potentially important channel for this trading patterns that rely on exports of raw materials. investment is through industrial parks or SEZs. In 2006, the African industries have largely struggled to reach scale and Chinese government announced that it would support the to compete in global markets: firms in Africa are almost 20 establishment of as many as 50 overseas "economic and percent less competitive than firms in other regions (World trade cooperation zones." Of the 19 zones approved so far, Economic Forum, World Bank, and African Development 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 1. Total Trade between Africa and China, 1990­2008 Bank 2009). Factors that contribute to weak industrial com- 50,000 petitiveness include lack of policy stability, poor infrastruc- 45,000 ture, and high indirect costs related to a poor business 40,000 environment. SEZs offer a combination of world-class infrastructure, 35,000 expedited customs and administrative procedures, and (usu- US$ millions 30,000 ally) fiscal incentives that overcome barriers to investment 25,000 in the wider economy. SEZs have been used successfully in 20,000 many developing countries (particularly in East Asia) to fa- cilitate competitiveness, foster export-oriented production, 15,000 and promote wider economic reforms. Although some 10,000 African countries--notably, Mauritius, and to a lesser extent, 5,000 Kenya and Madagascar--have had success with zones, many 0 of the problems that plague the wider investment environ- ment in Africa have also hindered development of most SEZ 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 2 03 20 4 20 5 20 6 20 7 08 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 19 20 projects on the continent (FIAS 2008). These problems in- minerals and fuels manufactures clude infrastructure shortfalls, administrative weaknesses, in- Source: COMTRADE via WITS. effective management, policy uncertainty, and poor strategic Note: Data illustrate the total value of exports from China to Sub-Saharan African countries plus the total value of imports into China from Sub- and operational planning. Saharan African countries. Table 1. Overview of Trade and Economic Cooperation Zones in Africa Approved by the Chinese Ministry of Commerce Total Start of Country and zone investment Size planning Status Chinese developers Industry focus 2 Zambia, Chambishi US$410 11.58 km 2003 In operation China Nonferrous Metal Copper and copper mining­ (7.98 km2); and construction Mining Group related industries start-up 2.00 km2 Zambia, Lusaka Subzone 5 km2 Not Construction China Nonferrous Metals Garment, food, appliances, available Corporation tobacco, and electronics Nigeria, Lekki US$254 30.0 km2; first 2003 Construction China Civil Engineering Transportation equipment, million for phase 10.0 km2; Construction, Jiangning textile and light industries, 2­3 years; start-up 3.5 km2 Development Corp., home appliances, and Y 2.52 billion Nanjing Beyond, China telecommunications (US$369 Railway million total) Nigeria, Ogun Y 1.5 billion 100.0 km; first Early Construction Guangdong Xinguang, Construction materials (US$220 phase 20.0 km2; 2004 South China Developing and ceramics, ironware, million) for start-up 2.5 km2 Group furniture, wood processing, start-up; medicine, computers, and US$500 lighting million for whole first phase Mauritius, originally Y 1.5 billion 2.11 km2; start-up 2006­07 Construction Shanxi-Tianli Group, Manufacturing (textile, Tianli but renamed (US$220 0.75 km2 Shanxi Coking Coal garment, machinery, high- Jinfei million) for Group, Taiyuan Iron tech), trade, and living and first phase; and Steel Company service (tourism, finance) US$720 Ethiopia, Oriental Y 690 million 2 km2; start-up 2006­07 Construction Yonggang (quit), Qiyuan Electric machinery, steel (eastern) (US$101 1 km2, with 10 km2- Group, Jianglian and metallurgy, and million reservation area International Trade, construction materials Yangyang Asset Manage- ment, Zhangjiagang Free Trade Zone (not a shareholder) 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Why Might China Be Different? of the zones. Some Chinese provinces offer additional in- centives. China is also offering increasingly preferential trade There are several reasons to believe that Chinese SEZ proj- terms for African countries: at the 2007 Forum for China- ects in Africa might succeed where others have failed. First, Africa Cooperation, China extended duty-free access to 440 China is the world's foremost success story in using SEZs as products for African least-developed countries; at the 2009 a tool for attracting foreign direct investment and promoting forum, it announced an extension of this access to 95 per- export-oriented industrialization. Starting in 1979, with the cent of products.5 The combination of incentives and trade establishment of 4 SEZs in the southeastern coastal region preferences may open up significant opportunities for Chi- of China,3 the country has established more than a 100 nese firms to use African zones as an export platform back zones of various kinds. These zones have become one of the into the Chinese market. principal means by which the Chinese government at local, Finally, despite the substantial government incentives, the provincial, and national levels provides preferential policies Chinese zones in Africa are profit-driven initiatives, led by to foster the development of technology and industry. China private sector consortia (although many of the lead firms are learned from the experiences of the Republic of Korea and national or provincial state-owned enterprises). The Chinese Singapore, and experimented with different zone models government designed the program to ensure that developers across the provinces. Over time, China's national and provin- have a profit motive because they view this as critical to en- cial governments and its private zone developers have built sure sustainability. This is in line with international experi- up substantial expertise in planning, developing, and oper- ence, which suggests that private sector SEZs tend to ating SEZs. operate more effectively than government-led zones; in Second, the effort to establish the zones in Africa is part Africa, however, such private sector projects have been rare of an important Chinese government initiative, the aim of (FIAS 2008). All the zones are being developed by Chinese which is as much political as it is economic. In 2006, the consortia, sometimes in joint ventures with local interests, Chinese government announced that it would establish as as in Nigeria and Zambia. (In Ethiopia and Mauritius, there many as 50 overseas "economic and trade cooperation is no local partner.) Experienced operators of China's zones." These serve several economic objectives as part of SEZs--Tianjin Economic-Technological Development Area, China's "going out" (zou chuqu) strategy: increasing demand Nanjing Jiangning Development Zone, and Zhangjiagang for Chinese-made machinery, reducing trade frictions and Free Trade Zone--are involved in several African zones. formal barriers imposed on Chinese exports to Europe or North America, assisting China's domestic restructuring by , Projects Are Still in Their Infancy But Many sending mature industries offshore, and creating economies Challenges Have Arisen of scale for overseas investment. But in the process of trans- ferring one element of China's own industrial development China's initiative to develop SEZs in Africa is still in its very success to other developing countries, the zones play an im- early days. Of the five zones, only the Chambishi Zone in portant political role as part of China's extension of "soft Zambia6 is operating. The SEZs in Nigeria (Lekki Free Zone power" on the continent. As such, there is great political and Ogun Guangdong Free Trade Zone) and Mauritius are pressure to ensure that these projects succeed. This pressure in relatively advanced stages of construction, and the Ori- can be seen, for example, in President Hu Jintao's interven- ental Zone in Ethiopia remains in the planning stages. To ing to move forward the project in Mauritius and his pre- date, some high-level knowledge sharing and training of local siding at the opening ceremony of the Chambishi Zone in managers has taken place; but local employment, supply Zambia. chain links, and technology transfer remain limited. As of Third, the high-profile nature of this initiative has trans- November 2009, the most advanced zone--Chambishi in lated into a package of generous financial and nonfinancial Zambia--has attracted 11 companies and US$760 million support for the zone projects from the Chinese government. in investment, with 5 additional companies expected in The Ministry of Commerce established a competitive tender 2010. It employs about 4,000 workers (80 percent of whom process for zone projects, under which winning bids are el- are local). However, most of the 11 companies invested thus igible to receive incentives that include grants, long-term far are subsidiaries of the developer China Nonferrous Metal loans of as much as Y 2 billion (US$294 million) and subsi- Mining Group (CNMC) and already were present in 2006. dies to cover up to 30 percent of some preparation costs, re- Moreover, of the 4,000 workers employed, only 600 are in bates on interest for Chinese bank loans, and diplomatic the zone itself, with the majority in the mines or at other support in working with host governments.4 The China- CNMC subsidiaries.7 Africa Development Fund (a fund of US$5 billion set up by Although it is premature to draw any conclusions, it is the Chinese State Council) has taken equity shares in three clear that some positive progress is evident but its pace is 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise slow, and the challenges that have arisen suggest that suc- "one-stop shops" can fail to materialize (for example, in cess is by no means guaranteed. Indeed, these projects not Ethiopia). Even when express registration of investments has only face many of the typical difficulties that afflict large been set up, obtaining licenses and work permits has caused infrastructure projects, particularly in Africa; they also delays (in Nigeria and Zambia, for example). must confront additional issues of cross-cultural commu- African governments and civil societies also have raised nication, governance, political factors, and power relation- concerns on a number of levels. One of the biggest issues re- ships. (See box 1 for an example of the challenges faced in lates to lack of transparency and poor communication. Al- one project.) though governments are privy to the contracts signed for Based on their experience at home, Chinese developers these zones (in most cases), the contracts have not been expect host governments to actively support zone develop- published. This lack of transparency is not problematic only ment; instead, they are finding in some projects (such as in for civil society, but also contributes to misunderstandings Ethiopia) that governments allocate land to developers and among the partners themselves (see box 1). Some of these do little else. Developers have also been frustrated by the lack problems relate to language. For example, at one of the of progress or poor quality of infrastructure provided by zones, African officials report that relationships improved some local governments outside the zones. In addition, many when their Chinese partners brought in a couple of high- of the projects have faced difficulties related to land acquisi- level officials who were fluent in English. Some African of- tion and compensation. Although these issues have normally ficials also worry that Chinese companies may use the zones been the responsibility of host governments, they have con- to bring in Chinese goods for re-export with African labels tributed to project delays and friction with the local com- into areas where African exports receive special incentives, munities (Lekki is an example). Finally, although the political and to enter local markets without paying duties (as has situations in the countries hosting zones are generally stable, been an issue in Sierra Leone). The use of Chinese rather abrupt policy changes and conspicuous gaps between de jure than local materials and labor also has been a concern in cer- policy and de facto implementation have been problematic. tain projects (such as the one in Mauritius). Chinese nation- Chinese companies have found that promises of services like als also tend to take most of the management and technical Box 1. The Lekki Free Zone in Nigeria Nigeria's Lekki Free Zone (being developed by a consortium of from the Chinese partners about infrastructure responsi- Chinese investors1 in partnership with the state government of bilities of the Nigerian partner (for example, access to Lagos) is perhaps illustrative of some of the challenges facing the gas for the power plant). Chinese partners also have both sets of partners in executing joint-venture SEZs in Africa. raised concerns over the Nigerian partner's potential to The project, an ambitious effort to create a "model city" on 30 ensure that the enabling policies critical to the success square kilometers just east of Lagos, has been in the planning of the zone actually will be implemented by the Nigerian stage since 2003. Although it has made significant progress, federal authorities. and initial investors are expected to be in place in the first half · Local community disputes--Local communities around of 2010, the development path of the project has faced many the project protested over resettlement terms, the con- obstacles along the way. Among those obstacles are these: struction of utility lines through their communities, and · Financing constraints and partnership disputes--Con- the employment of Chinese workers for construction. This struction was delayed for a period because of financial protest caused project delays and resulted in transferring constraints on the part of the Chinese consortium; this 5 percent of the Nigerian partner's shares to the local apparently was linked to a dispute over partnership terms community. In addition, negotiations resulted in increas- within the Chinese consortium. ing employment opportunities for workers from local communities. · Miscommunication over partnership terms--The Niger- ian partner expected the Chinese consortium to deliver Note its share of investment in capital, whereas the Chinese partners expected to deliver it in-kind through infrastruc- 1. The Chinese investors are CCEC-Beyond Consortium, led by ture development. In addition, there have been concerns the China Civil Engineering Construction Corporation. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise positions, at least in the initial project stages. For unskilled gradually increase local management and shareholding jobs, concerns about wages and working conditions have can help ensure ongoing learning, while maintaining been raised--although most of these concerns are theoreti- efficiency. cal at this early stage of development. Finally, there are con- 3. Ensuring the provision of good-quality off-site infrastruc- cerns that the zones will become Chinese enclaves, ture­Worldwide, getting zones off the ground has unconnected with the rest of the domestic economy. Al- proved difficult partly because of infrastructure inade- though all the zones are open to any foreign and (with the quacies (power, roads, water, and sanitation). Public- exception of the Mauritius zone) domestic investors, and private partnerships or other models, such as independ- there is no explicit preferential treatment given to Chinese ent power producers, are options that can accelerate this investors, the reality to date in most of the zones is that in- development, bringing employment and other benefits vestor interest has come primarily from Chinese companies. online earlier. Involving the local private sector, in addi- Thus, in the absence of proactive efforts to promote inte- tion to Chinese investors, will be critical. gration, Chinese enclave zones are a real risk. 4. Communicating and enforcing standards--Local job cre- ation, environmental sustainability, and labor standards A Collaboration Framework to Support all depend on African governments enforcing existing Win-Win Partnerships standards and regulations. It may help to have these standards and regulations translated into Mandarin, as The practice of partnering to develop of SEZs is part of a Mozambique has done for its labor regulations. long-term process of strategic engagement between Africa 5. Implementing programs to promote links with domestic and China. It offers a significant opportunity to contribute markets--African countries will not profit from the to job creation, industrialization, and poverty reduction in dynamic benefits of SEZs without ensuring closer links the region. To fulfil this potential, however, the projects between the (mostly Chinese) foreign investors in the must be successful from business, social, and environmental zones and the domestic private sector. Supplier devel- perspectives. Such success will require a partnership frame- opment programs and initiatives to help local compa- work that includes the following elements: nies set up operations inside the zones can play an 1. High-level commitment and active engagement from host important role in creating these links. The recently an- governments--As noted earlier, China itself learned nounced funding from the Chinese government to many aspects of SEZ management through building support African small and medium enterprises and zones with overseas partners. These lessons were plans to help these enterprises invest in the zones widely applied throughout China's SEZs, and they could provide a foundation for improving links. have become common practice today. African govern- 6. Transparency and community relations--When con- ments have been less strategic at managing the projects tracts and agreements for these important zones are as learning experiences. Few of the governments par- not made public, suspicion can fester. For the zones to ticipate actively in the management of the projects or be sustainable, they need to have buy-in from local have set up specific programs aimed at developing communities. These communities need to understand SEZ expertise over the long term. Assigning specific the nature of the agreements. In the Lekki project, for individuals (preferably Mandarin-speaking people) to example, transferring 5 percent of the shares of the work with Chinese development teams can help, as Nigerian consortium to the local community was one can high-level participation on boards. way to address some of the local concerns. 2. Phasing-in local control--China's experience with Sin- gapore followed a phased model where Singapore in- Notes terests held control for the first stage of the project, and then Chinese interests took over. In the African 1. This Economic Premise is based on a more detailed zones, Chinese companies have been granted conces- note on the subject produced by the authors in December sions of 50­99 years, and there appears to be no clear 2009. It is available from the International Trade Depart- plan for phasing-in local control when local manage- ment of the World Bank. To request a copy, please send an ment has mastered the zone skills. It is sometimes a email to tfarole@worldbank.org. difficult balance, because too much local involvement 2. China's definition of "Africa" includes the entire con- can hinder the operational processes in the early stages tinent, not just the sub-Saharan portion. Under China's def- before skills, trust, and understanding have developed inition, two additional zone projects are ongoing in between the partners. Having a systematic plan to Africa--in Algeria and Egypt. In addition, there are other 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Chinese industrial zones that are private initiatives without About the Authors any "official" support from the government (for example, in Botswana, Sierra Leone, and South Africa). Deborah Brautigam is Associate Professor at the School of Inter- 3. A fifth zone was added later on Hainan Island. national Service, American University, Washington, DC. Thomas 4. As reported in the 2008 document from the Ministry Farole is Senior Economist, International Trade Department, of Commerce and the Ministry of Finance, "Temporary World Bank, Washington, DC. Tang Xiaoyang is a doctoral re- methods to manage the development funds for overseas eco- searcher at the New School for Social Research, New York. nomic cooperation zones." These were, however, defined as "tentative" in the document; and the actual incentives pack- References age being executed has not been confirmed by the Ministry FIAS (Foreign Investment Advisory Service). 2008. "Special Economic of Commerce. Zones: Performance, Lessons Learned, and Implications for Zone De- 5. This enhanced access would be phased in, starting at velopment." Working Paper 45869, World Bank, Washington, DC. 60 percent in 2010. World Economic Forum, World Bank, and African Development Bank. 6. The Chambishi Zone is a mining and minerals-process- 2009. The Africa Competitiveness Report 2009. Geneva, Switzerland: ing project that began in 2003. A subzone of Chambishi, de- World Economic Forum. signed for traditional light manufacturing industries, is now under planning and construction near Lusaka. 7. The mining activities and the CNMC subsidiaries are not technically considered part of the zone. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.