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Free Trade Zones In Africa Will Equate To Mass Disablement Of The African Economies And Nationals Unless The Current Configuration Is Addressed V2

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Free Trade Zones in Africa will equate to mass disablement of the African economies and nationals unless the current configuration is addressed. Version 2

Free Trade Zones In Africa Will Equate To Mass Disablement Of The African Economies And Nationals Unless The Current Configuration Is Addressed V2

  1. 1. 2011 Free Trade Zones in Africa will equate to mass disablement of the African economies and nationals unless the current configuration is addressed. Version 2 Ben Oguntala, LLB Hons. LLM (LONDON) Ben.oguntala@dataprotectionofficer.com 3/19/2011
  2. 2. Contents Executive summary ....................................................................................................................................... 3 What does this paper propose as a solution: African opportunity............................................................... 4 African opportunity....................................................................................................................................... 4 What is a Free Trade Zone? .......................................................................................................................... 5 Ireland Shannon Free Zone ....................................................................................................................... 5 TAZARA Railway ........................................................................................................................................ 5 The problem with Africa: lack of systemic capacity building .................................................................... 5 What is the problem with African Economies? ............................................................................................ 6 Deficient self sustainable continuity capability ........................................................................................ 6 Government officials risk exposure .......................................................................................................... 6 Bribery and corruption: “Oiling the wheel” .............................................................................................. 6 Lack of direct consumer interactions........................................................................................................ 6 What is the current plan in Africa for Trade Free Zone? The FTZ Nigerian plan .......................................... 7 Consequences of the current FTZ configuration in Nigeria .......................................................................... 8 About the Author: Ben Oguntala ................................................................................................................ 11
  3. 3. Executive summary Free Trade Zones (FTZ) are concepts that can only create mutual benefits if other key relevant factors are in place to ensure effective operation. Africa does not need to go out of its way or create unreasonable and outrageous offers to Multi National Enterprises (MNE) as a means of attracting new investors because it has in abundance the resources and markets for profitability already in place, the question is: what is the right level of Governance that can be used to ensure mutual benefit. As of 2011, most of Africa lacks the right Governance framework in place to benefit from the mutual effects of FTZ and therefore FTZ that are designed to benefit the communities are fast becoming factors that disable local developments and impede the promotion of local economies. Eventually, this will lead to significant tensions between the two sectors. China has demonstrated its interest in assisting Africa, but the lack of adequate Governance is leading Chinese firms to focus on their narrow objectives rather than consider supplementary add-on services or corporate social responsibilities which ultimately put Chinese firms offering FTZs in direct competition with the local market thereby creating an atmosphere for friction or exploitation. China’s efforts need to be commended due to the fact that they have taken considerable risks in engaging African countries. China is using its own initiative to engage Africa and it is bringing to the forefront the many reasons why MNEs are left with no choice but to focus on their own priorities due to the weakness of Governance and efficiency in Africa. The diagram below describes how FTZ in the wrong environment can be problematic:
  4. 4. FTZ can be better designed to resolve the vast array of Africa’s problems if it is configured in the right manner and the right engagement is employed with commensurate Governance. Significant part of the work starts from Africa admitting that it has a problem and needs the right kind of partnership to improve as opposed to hand outs. What does this paper propose as a solution: African opportunity The solution for Africa needs to be incubated in an environment that is competing with the best, i.e. it can not be based in Africa but needs to interface with Africa. African opportunity The aim of the African opportunity is multifaceted and can be summarized as follows: 1. Sourcing International business for Africa – opportunities and reporting - Engage UK and International businesses with products and services that are needed in Africa to promote economic improvement and services to the communities as well as improve their operational performance in accordance with internationally acceptable standards. These businesses would be SMEs that are interested in Exporting their products are services and such a service would be beneficial to them in light of the current economic depression across the world and the appetite for diversification. 2. Engage Africa – a platform whereby African communities across the continent can engage directly with international businesses in (1) that are interested in engaging them to form business partnership for the resolution of the community issues and working towards a framework that promotes mutual benefits.
  5. 5. What is a Free Trade Zone? A free trade zone (FTZ) is an area of a country where some normal trade barriers such as tariffs and quotas are eliminated and bureaucratic protocols are lowered in the aspiration of attracting new business and foreign investments. Free trade zones can be described as labor intensive manufacturing centers that involve the import of raw materials or components and the export of factory products. This theory makes perfect sense in mature economies but can be hazardous in immature economies due to the asymmetry of governance level between the two. In a mature economy, FTZ can promote export and allow SMEs to develop their businesses further as well as expand. In an immature economy, the converse would be the case, where competition is non-existent and unfair trading conditions take advantage of weaknesses in the local economies. Ireland Shannon Free Zone FTZ was implemented in Ireland, Shannon, Co. Clare, Ireland Shannon Free Zone, whereby the Irish Government promoted employment within a rural area, making use of a small regional airport and generate revenue for the Irish economy. It was hugely successful, and is still in operation today, its benefits to the communities are self evident. TAZARA Railway Ireland Shannon Free zone can be contrasted with the TAZARA Railway built between 1970 and 1975 by the Tanzania-Zambia Railway Authority to give landlocked Zambia a link to the Tanzanian port of Dar es Salaam, as an alternative to export routes via rail lines to Zimbabwe, South Africa and Mozambique. The railroad was a turnkey project financed and executed by the People's Republic of China. Total costs were about US $500 million, making it at that time the largest foreign-aid project ever undertaken by China. The railway has fallen into difficult times however ironically the trade in the area has seen significant growth. The problem with Africa: lack of systemic capacity building Africa has always been renowned for opportunity but several factors keep contributing to ineffective management mostly starting from an ineffective systemic capability. African communities need a major overhauling of their systemic capability in almost all sectors; the focus needs to be on driving self sustainable development that is capable of creating services. Almost 90% of Africa’s problem since their independence seems to revolve around direct or indirect maintenance capability, self-motivation, path for development, services delivered without the capability to maintain. All these and many more seem to be a re-occurring theme across Africa. Using the TAZARA Railway as an example, delivery of a railway system that did not cater for Tanzanian companies’ capability to manufacture the spare parts needed meant it was one of the facts that crippled the development. In Hospitals across Africa, donations of state of the art equipments are delivered but no maintenance and support provided, meaning the minute the machines develops a problem they are rendered obsolete.
  6. 6. What is the problem with African Economies? Deficient self sustainable continuity capability There is a significant deficiency in sustainable continuity capability right across Africa and FTZ in its current nature is significantly worsening the situation. The absence is not pronounced but profound as significant failures in Africa today across most sectors are related to this particular point. If a machine is installed without sustainable continuity plan it will eventually stop working, if the parts and expertise to fix it are not readily available, the resulting effect would be a halt in the service. By way of example, FTZs are going to be machines operated and managed by MNEs, domestic businesses are external to this machine and simply supply raw materials, and they don’t participate in the business services. FTZ’s current configuration disables them from being able to participate or develop. Government officials risk exposure At the forefront of African Economies are Government officials at various levels who often have a belief that unlawful enrichment is an inherent right therefore the community benefits are often farfetched consideration that is rarely considered and even if it is there is a further hindrance brought to bear by the depth of poverty that makes the average African in Africa neglect the community benefits. The Government officials are a reality of life in Africa, their financial situations and hardships are equally a reality of life that ought to be considered as a risk, this paper does not seek to portray Government officials as corrupt but rather to take an objective assessment of the risk their predicament poses to any potential investment which they play a role in. The likelihood of exploiting the opportunity is high with Government officials and therefore the original intention of assisting communities may never be realized if it is implemented via this channel. Bribery and corruption: “Oiling the wheel” By the time MNEs get into most African countries, unspoken amount of funds would have been spent “Oiling the wheel “, this is euphemism for bribery and corruption. By the time the MNEs get into the reality delivering their services, it is inevitable that their focus would have been stripped of all community based initiatives and simply focus on making a return on their investment at all costs. “Oiling the wheel” is a shadow operation that is as secretive as most Cartels. Lack of direct consumer interactions Most consumers in African economies are often unable to participate in any MNE initiative where the Government agencies playing a role due to the bias role they play and therein exists the aforementioned Government officials problem and “Oiling the wheel” scenario. MNEs with all the best intentions will face an insurmountable challenge if they are attempting direct consumer interaction.
  7. 7. What is the current plan in Africa for Trade Free Zone? The FTZ Nigerian plan The facts below demonstrate the unilateral nature of the benefits of FTZs in Nigeria, it demonstrates that there is no plan for skills transfer or direct improvement of local economies but rather a complete exploitation of local economies and resources mainly for the advantage of the MNE, which begs the question of what the benefits of such deals are to the community. Below is a proposal from the Nigerian offering: 1. Large domestic market for the 25% of production that FTZ producers can sell in the Customs Territory. 2. Favorable quotas on certain products exported from Nigeria to the European Union (EU) and the United States. 3. Made in Nigeria products enjoy preferential tariffs concessions in the EU. 4. Abundant supply of skilled labor at very competitive rates. 5. Nigeria's FTZ regulatory regime is liberal and provides a conducive environment for profitable operations. 6. The incentives available are among the most attractive in Africa and compares favorably with those in other parts of the world. 7. Exemption from all federal, state and local government taxes, levies and rates. 8. Approved enterprises shall be entitled to import into a zone, free of customs duty on capital goods, consumer goods, raw materials, components and articles intended to be used for purposes of and in connection with an approved activity. 9. Freedom from legislative provision pertaining to taxes, levies, duties and foreign exchange regulations. 10. Repatriation of foreign capital on investment in the zone at any time with capital appreciation of the investment. 11. 100% foreign or local ownership of factory allowable. 12. One stop approvals which grant all licenses whether or not the business is incorporated in the Customs Territory 13. Unrestricted remittance of profits earned by investors. 14. Permission to sell 100% of total production in the domestic market. 15. No import or export license. 16. Rent free land at construction stage, thereafter rent shall be as determined by the management of the zone. Foreign managers and qualified personnel may be employed by companies operating in the zones. 17. Operations within a zone shall commence on the date when the constructions of the perimeter fence and gate have been completed and the Authority has declared it so.
  8. 8. Consequences of the current FTZ configuration in Nigeria 1. Large domestic market for the 25% of production that FTZ producers can sell in the Customs Territory. a. This seems to be a one way streak of benefit mainly to the MNE and no exchange of ideas or improvement of methods to the local businesses. b. The large domestic market is merely providing raw materials and quite often unaided in the manner they make the acquisition and when MNEs create local businesses they get rid of the local competitors in the market. c. Raw materials often involve manual labor and MNEs are not engaging the local labor force in a manner that creates self sustainability and development. d. In some instances, MNEs can create their own organization to compete directly with the small local businesses that are already struggling to exist which creates an unfair advantage. e. Even though an increase in sales may be experienced by the domestic market, this equates to giving them a fish as opposed to teaching them how to fish. f. Should the demand from the MNE dry up, the domestic market is left in the old position they were in prior to MNE intervention and from a development point of view stagnant. 2. Favorable quotas on certain products exported from Nigeria to the European Union (EU) and the United States. a. These provisions should be made available to domestic businesses as a means of encouraging them to produce products that are capable of supplying the EU and US markets. b. Such increase will drive technology developments, standard improvement, quality of service development and so on. 3. Made in Nigeria products enjoy preferential tariffs concessions in the EU. a. There is no facility to improve the quality of products being made in Nigeria therefore the demand in the EU still remains stagnant or non existent b. The ability of Nigerian products to compete internationally is still low due to the fact that the facilities are nonexistent to compete internationally c. Preferential tariffs therefore more or less a red herring from a demand that is stagnant due to the lack of local businesses exposure to International requirements. 4. Abundant supply of skilled labor at very competitive rates. a. Skilled labor in Nigeria exhibit a significant level of immaturity when compared with performance and competence when compared with their international counterparts due to the disparity that exist in the level of education received. b. Asymmetry of standards emanating Cultural work ethic between skilled domestic labor and MNEs c. No incentive to transfer work ethics across to domestic labor
  9. 9. d. MNEs are therefore forced to bring in their own unskilled labor to counter the deficiency in local 5. Nigeria's FTZ regulatory regime is liberal and provides a conducive environment for profitable operations. a. The profitability is significantly to the detriment of the domestic market and does not offer a bilateral benefit capable of improving the local economies b. MNEs are constantly in search of problems in order to apply their solution, therefore there is little need for over liberalization that is detrimental to the economy 6. Exemption from all federal, state and local government taxes, levies and rates. a. Over liberalization in a sector that is driven by supply and demand b. If exemptions are put in place, this implies oiling the wheel becomes the next unofficial source of revenue c. FTZ activities are not supposed to be altruistic therefore this concept is at odds with commerce 7. Approved enterprises shall be entitled to import into a zone, free of customs duty on capital goods, consumer goods, raw materials, components and articles intended to be used for purposes of and in connection with an approved activity. a. No transparency on approval process therefore capable of incubating “oiling the wheel” principles b. Lack of governance means there would be conflicts of interest and inability to enforce strict accountability principles 8. Freedom from legislative provision pertaining to taxes, levies, duties and foreign exchange regulations. a. Understandable incentives to attract MNEs however over liberalization can create platform for abuse b. In the absence of other measures, the benefits become acutely unilateral 9. Repatriation of foreign capital on investment in the zone at any time with capital appreciation of the investment. a. An incentive for MNEs but no commensurate benefit to domestic business b. Not an incentive that supports domestic business or technology transfer 10. 100% foreign or local ownership of factory allowable. a. Detrimental to domestic businesses b. Creates direct competition with domestic business with little return c. No incentive for domestic partnership d. No incentive for technology or business process improvement 11. One stop approvals which grant all licenses whether or not the business is incorporated in the Customs Territory a. Lack of governance b. Lack of transparency c. Potential to incubate corruption 12. Unrestricted remittance of profits earned by investors.
  10. 10. a. No commensurate incentive to the benefit domestic business rendering the incentive exploitative 13. Permission to sell 100% of total production in the domestic market. a. Creating direct competition for domestic businesses b. Lack of governance c. Unilateral benefit 14. No import or export license. a. Unfettered ingress and egress license should be aligned with commensurate social benefits to the local economy. 15. Rent free land at construction stage, thereafter rent shall be as determined by the management of the zone. Foreign managers and qualified personnel may be employed by companies operating in the zones. a. This measure will create a competitive disadvantage to local businesses and expertise b. MNEs already have more significant financial firepower will now be aided to enter a market c. No incentive for local partnership
  11. 11. About the Author: Ben Oguntala Ben Oguntala is London based Lawyer and Business consultant that provide Advisory, regulatory and compliance services to MNEs, FTZ implementation, creation of policies and procedures for MNE engagement as well as matching FTZ to MNEs. Specialties include: Competition Laws, Contract Laws, business development, Compliance and Governance implementation. His idea of “African opportunity” will provide a conduit for British businesses to export their products and services to African communities via the right governance that will create mutual benefits for the UK and international businesses and the African communities in need to direct foreign investment. The African opportunity will create an open platform whereby businesses and African communities can engage and create partnerships for mutual developments. To request a copy of the Afrcian opportunity, please email ben.oguntala@dataprotectionofficer.com The African opportunity aims to work in collaboration with Chambers of commerce across the UK, international chambers of commerce, DFID, BIS, UKTI, CBI, IOD, commonwealth, UN, EU agencies in the development of the capacity.

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