Economists (like the author) and lawyers can be dull; get them together to make laws about economics and be ready to roll your eyes and yawn.
In 2024, Zanzibar signed into law An Act to Repeal the Zanzibar Investment Promotion and Protection Authority Act, No.14 of 2018 and enact the Zanzibar Investment Act, and Provide for Other Matters Therewith. A title like that won’t attract many casual readers, but this is the most important law in Zanzibar.
With an average income of around $1,200 per person, Zanzibar has achieved lower middle-income status. In its Vision 2050 document, the government has targeted upper-middle-income status, defined in terms of average incomes being at least $4,500. Trebling average incomes is ambitious; to achieve this, Zanzibar needs to sustain average annual economic growth of about 7.0% for the next three decades, which is herculean task.
Why is this important Act so important? Economists have discovered hundreds of factors that can influence economic growth, weather, taxes, culture, the price of oil, and many more, but they are agreed, none is more important than investment. To achieve Vision 2050 Zanzibar needs more investment, more productive investment, and to sustain that investment over three decades. This is the Act on which Vision 2050 is founded, the Act that sets the legal and governance framework for investment.
The 2024 Act is well-crafted; only 36 pages long compared to the 46 pages of its 2018 predecessor, and puts that brevity to good use. The 2024 Act has cleaned out ambiguities, leaving it much clearer and more concise.
Central to both the 2018 and 2024 Acts, was to confirm the importance of the Zanzibar Investment Promotion Authority (ZIPA) as the agency responsible for approving and regulating investment.
The 2018 Act meandered through lengthy and confusing lists related to “objects and purposes,” “functions,” and “powers” of ZIPA. In the 2024 Act ZIPA is given legal “powers” and is required to utilize them to achieve its clearly stated “functions” namely: to “promote Zanzibar to be an attractive destination for investment and business.”
Tax Incentives: So Far and No Further!
In one respect, there is little change from the 2018 to the 2024 Act, Zanzibar remains committed to providing generous tax incentives to domestic and foreign investors. In both Acts, firms locating in Free Economic Zones (FEZs) in Zanzibar – since 2024 renamed Special Economic Zones (SEZs) – receive a raft of incentives related to customs duty, value-added tax, among others, and a juicy extra 10-year tax holiday on corporate taxation if they export at least 80% of their production.
Numerous economic studies have shown that these kind of tax concessions have no long-term positive impact on the performance of firms located inside an SEZ. Economists would prefer that such tax incentives be phased out.
The political realists would point out that reneging on promises of tax concessions would drive investors elsewhere. There are some worrying signs. The 2024 Act extended further tax concessions relative to the 2018 Act. For those investors declared to be ‘Strategic Investors’ the 2024 Act extends a 50% exemption from corporation tax to a 100% exemption for 5 years and 50% exemption for the next 10 years.
An informal survey conducted by the author (February 2024) on tax incentive regimes, in eight comparable countries – South Africa, Tanzania, Kenya, Mozambique, Uganda, Zambia, Cambodia, and Vietnam – showed that the tax concessions offered by Zanzibar are a little bit more generous, but very similar to those offered in other countries. Zanzibar should stop here.
The World Bank conducted a wide-ranging survey in 2009 of more than 600 firms located in SEZs across 10 countries, including Tanzania. The survey found that the level of corporate taxes was only the fifth most important factor cited by African SEZ firms in their choice of investment location.
More important were the provision of utilities (electricity, water), access to transport infrastructure, and the business environment. The government of Zanzibar should listen to investor priorities, and focus their efforts on making sure the non-tax incentives, the provision of reliable utilities, transport connections, and the business regulatory environment are functioning well.
The Private Sector is Back in Business but Back Business
The basic economic philosophy of the government of Zanzibar shines through the Zanzibar Investment Act, 2023 Act, a commitment to promote domestic and foreign investment in Zanzibar.
The world has changed from the 1970s, when state investment and state-owned enterprises dominated the economy. Today, drawing on the best of contemporary economic thinking, the state proposes for itself a supportive and catalytic role.
While the 2018 Act protected a small number of sectors, such as “guest houses, ice cream shops, small scale fishing, and beauty salons” as “businesses reserved for Zanzibaris” this distinction is not included in the new Act. Zanzibar has taken another step forward in signaling its hospitality to global investors.
Zanzibar needs to go further. The only private sector involvement on the ZIPA board is a representative from the Zanzibar National Chamber of Commerce. A cursory glance across famously successful small-country investment authorities reveals that the private sector typically has a much stronger presence.
In Costa Rica, the Coalicion Costarricense de Iniciativas de Desarrollo (CINDE) was founded in 1983 as a private, non-profit organization. Today, its membership is still dominated by the private sector.
In Ireland, the board of the Industrial Development Agency (IDA) contains a chairperson, a Chief Executive Officer, and ten ordinary members, almost all of whom have a private sector background, in consultancy, manufacturing, and finance.
In Mauritius, the current chairperson of the Economic Development Board (EDB) has 33 years’ experience in private sector manufacturing, and eight other members of the board come from the private sector.
In Rwanda, the chairperson of the Rwanda Development Board (RDB) has a background in private sector equity, the vice-chairperson and seven ordinary members have backgrounds in private sector banking, investment, agriculture, venture capital, and consultancy.
A One-Stop Shop: A Transformative Proposal
Offering tax incentives and assistance to investors won’t work if those investors have to conduct a lengthy application-form and themed tour of government offices to obtain them. The Zanzibar Investment Act, 2023 promises that it will be followed by regulations to establish a One-Stop-Shop (OSS) under the authority of ZIPA.
An OSS is a single clearance-window where potential investors can submit documentation and obtain all the necessary permissions to invest. An OSS is typically focused on helping investors obtain business and import licenses, work permits, health and safety certificates, visa clearances, environmental clearances, tax incentives, and other authorizations.
To make sure the incentives contained in the Act have economic bite, those forthcoming regulations must ensure that the OSS is autonomous, that it hosts decision-making officers from all the Ministries relevant to investors, that it streamlines the customs clearance process, and is committed to timely decisions concerning investor applications.
Finally as earlier stated, The Zanzibar Investment Act 2023 Act is woven within and around Vision 2050 and is an impressive piece of legislation and provides a huge chance for Zanzibar to change.
But this article has issued a warning about tax incentives, a call to further embrace the private sector, and provided a roadmap for the next round of investment reform.
Africa Urban Lab (AUL), Zanzibar
