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An Evaluation of Tanzanias EPZ Programme Challenges and Prospects

Charles T L T Domician*

August 2009

2009 by Charles T L T Domician. All rights reserved. Sections of this paper can be quoted without

explicit permission from source, only that reference to author is requested. Any views expressed in this

document are entirely the authors, and should in no way be associated to any other institution

whatsoever. The UNCTAD Virtual Institute should be acknowledged for support in making this

publication possible.

*The author is SecretaryGeneral to Tanzania Trade Experts Association (TRADEXA); a non-for-profit

organisation dealing mainly in trade-related research, consultancy as well as technical advice, in current

trade and business negotiations. Domician was, until 30 April 2009, Assistant Lecturer at the University

of Dar es Salaam Business School (UDBS), where he taught and administered lectures and seminars in

finance and international trade courses.

Contact:

Tel: +255-784-334-960; Email: [email protected]; [email protected]

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ABSTRACT

This study employs OECD-DAC criteria to evaluate the Tanzania Export Processing Zonesprogramme over the 2006 to May 2009 period. It finds that the programme is relevant for the

country and global developmental orientations, although some respondents had a misguidedopinion. On the other hand, the programme remains largely ineffective and inefficient due to theprevailing risks, including heavy hard and soft infrastructural challenges as well as the existingburden of the fiscal incentive regime. The study notes, however, that if properly handled, thediscovery of uranium is potentially key to transforming the countrys energy and industrialsectors for domestic and international competitiveness. It is further suggested that unlessnecessary socioeconomic interventions are made well in time, the identified weaknesses stand tothreaten the programmes envisaged developmental impact and sustainability. Therefore, it isrecommended that the government (through the Export Processing Zones Authority), incollaboration with all relevant EPZ stakeholders, devise an efficient and effective mechanism forfinancing export-enhancing infrastructures; and that special purpose vehicles in public-private

partnership arrangements provide one such option. Other policy measures should include areview for streamlining the incentive regime, addressing inefficiencies at the Dar es Salaam port,financial empowerment for domestic export-oriented SMEs, enhanced stakeholder awareness ofEPZ legislation and practices, and regional and global marketing of the programmesproduction/exports.

Key words: Tanzania, EPZ Programme Evaluation, OECD-DAC Evaluation Criteria

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ACKNOWLEDGEMENTS

This study cannot be regarded a success unless the valuable contributions by key individuals andinstitutions are put forth in the first place. First and foremost is UNCTAD, which provided theresearch funding through its Virtual Institute (Vi). In this regard, I particularly thank Vlasta

Macku, Chief of the Vi, together with her competent team, for always supporting myprofessional efforts to-date. Of particular mention among the team are Anna Stefanizien, JosephClements, Mohan Panicker and Fleur Claessens.

I am also highly indebted to my professional mentor for this project, Professor Dr Hans-RimbertHemmer, a seasoned development economist and project/programme evaluation expert from theGerman University of Giessen. Rimbert tirelessly took me through this demanding and yetinteresting piece of learning experience, which involved adapting to his professional and deeplythought recommendations and comments.

Thirdly, I appreciate the assistance of institutions and individuals who made data availability and

collection possible. They include Dr A Meru (Director General, EPZA), Zawadia Nanyaro(Director of Development Projects, EPZA), Lameck Borega (Investor Facilitation Officer,EPZA), Ernest Mnzava (Acting Chief Planning Officer, NDC), Nilesh Bhalt (Director, AfricanPride Textiles Mills), Mwasiti Msonga (Secretary, Millennium Business Park), Rahim(Administrator, Global Vehicles Limited), Sunday Ngwananogu (Administrative Assistant,Kibo Trade Textiles), Toon Vandamme (Managing Director, CAMI Apparel/Textiles Group), DrEsther Ishengoma (Associate Dean, Research & Publications, UDBS), and my colleagues atUDBS, namely Sauti Petro Magai and Chacha Ryoba. Their efforts have resulted in this valuablepiece of research work.

Lastly, but by no means least, I recognise the valuable boost provided by my close family

members and friends who always supported me through my work on the preliminary drafts to thefinal compilation of this report.

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TABLE OF CONTENTS

Abstract.......................................................................................2

Acknowledgements.......................................................................3

Table of contents..........................................................................4

LIST OF FIGURES...........................................................................5

List of tables................................................................................5

ACRONYMS...................................................................................7

SECTION 1: INTRODUCTION TO TANZANIAS EPZ PROGRAMME.........81.1 Background information.................................................................81.2 Statement of the problem.............................................................101.3 Objectives of the study.................................................................101.4 Significance of the study..............................................................11

SECTION 2: LITERATURE ON SOCIO-ECONOMIC ASPECTS OF EPZs...122.1 Theoretical justification for EPZs..................................................122.2 Theoretical weaknesses in the justification of EPZs .......................132.3 Empirical aspects of (non-Tanzanian) EPZs....................................132.4 The Tanzanian experience of EPZs................................................17

SECTION 3: METHODOLOGY OF THE STUDY...................................193.1 Analytical framework...................................................................203.2 OECDDAC Evaluation Criteria as Goal/Objective Oriented GapAnalysis............................................................................................213.3 Evaluation ratings and overall assessment....................................223.4 Data type, collection methods, instruments and sample size..........26

SECTION 4: RESEARCH FINDINGS.................................................274.1 Building the Gap Analysis.............................................................274.2 Analysing performance indicators in the EPZ logical framework......304.3 Evaluation of Tanzanias EPZ programme using OECD-DAC criteria. 324.4 Overall final assessment of the evaluation ...................................50

SECTION 5: CONCLUSION, POLICY IMPLICATIONS ANDRECOMMENDATIONS...................................................................52

5.1 Conclusion and policy implications................................................525.2 Lessons and recommendations for Tanzanias EPZ programme.......52

REFERENCES...............................................................................58

Appendices.................................................................................61Appendix A1: The S-S-S model building sustainable-self-sufficiencyfrom external and domestic resource bases........................................61Appendix A2: OECD-DAC evaluation criteria checklists.........................66

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LIST OF FIGURES

Abstract.......................................................................................2

Acknowledgements.......................................................................3

Table of contents..........................................................................4

LIST OF FIGURES...........................................................................5

List of tables................................................................................5

ACRONYMS...................................................................................7

SECTION 1: INTRODUCTION TO TANZANIAS EPZ PROGRAMME.........8

SECTION 2: LITERATURE ON SOCIO-ECONOMIC ASPECTS OF EPZs...12

SECTION 3: METHODOLOGY OF THE STUDY...................................19

Figure 1: Proposed logical framework for Tanzanias EPZ programme

..................................................................................................25

SECTION 4: RESEARCH FINDINGS.................................................27

Figure 2: Gap Analysis for Tanzanias EPZ programme..................27

Figure 3: The SWOT analysis for Tanzanias EPZ programme.........48

SECTION 5: CONCLUSION, POLICY IMPLICATIONS ANDRECOMMENDATIONS...................................................................52

REFERENCES...............................................................................58

Appendices.................................................................................61

Figure 4: The S-S-S model...........................................................63

LIST OF TABLES

Table 1: Incentive packages in Tanzanias EPZ and non-EPZinvestment regimes....................................................................17

Table 2: The meaning of SMART requirements..............................20

Table 3: Definitions and Content of OECD-DAC Evaluation Criteria. 21Table 4: Six-stage scale for assessing the developmentaleffectiveness of Tanzanias EPZs.................................................22

Table 5: Four-stage scale for assessing sustainability of EZPprogramme.................................................................................22

Table 6: Steps in the evaluation of Tanzanias EZP programme......23

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Table 7: Summary evaluating Tanzanias EPZ programme by therelevance criterion......................................................................33

Table 8: Summary evaluating Tanzanias EPZ programme by theeffectiveness criterion................................................................35

Table 9: Summary evaluating Tanzanias EPZ programme by theefficiency criterion......................................................................37

Table 10: Summary evaluating Tanzanias EPZ programme byoperational activities..................................................................40

Table 11: Summary evaluating Tanzanias EPZ programme by theimpact criterion..........................................................................43

Table 12: Summary evaluating Tanzanias EPZ programme bysustainability criterion................................................................45

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ACRONYMS

AfT Aid for Trade

AGOA Africa Growth Opportunity Act (Africa-US Generalised System of Preferences)

BOT Build, Operate and Transfer (related to infrastructure development)

CTI Confederation of Tanzania Industries

EAC-EU East African Community European Union

EPZ Export Processing Zone

EPZA Export Processing Zones Authority (Tanzania)

FDI Foreign Direct Investment

GVCs Global Value Chains

ILO International Labour Organisation

MNC Multinational Corporation

ODA Official Development Assistance

OECD-DAC Organisation for Economic Cooperation & DevelopmentDevelopment AssistanceCommittee

PPP Public-Private Partnership

R&D Research and Development

S-S-S Sustainable self-sufficiencySustainable self

SADC Southern Africa Development Community

SEZs Special Economic Zones

SFZs Specialised Free Zones

SMART Specific, Measurable, Attainable, Relevant, Timely or Time-bound (indicators/targets)

SMEs Small- and medium-sized enterprises

SPF Strategic partnership fund

SPV/E Special Purpose Vehicle/Entity

SWOT Strengths, Weaknesses, Opportunities and Threats

TANESCO Tanzania Electric Supply Company (Limited)

TCCIA Tanzania Chamber of Commerce, Industry and Agriculture

TRADEXA Tanzania Trade Experts Association

UDBS University of Dar es Salaam Business School

UNCTAD United Nations Conference on Trade and Development

Vi Virtual Institute (UNCTAD)

WTO World Trade Organisation

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SECTION 1: INTRODUCTION TO TANZANIAS EPZ PROGRAMME

1.1 Background information

Tanzanias Export Processing Zones (EPZ) programme effectively took off in 2006 after the

amendment of the original EPZ Act in 2002, and with the establishment of Tanzanias ExportProcessing Zones Authority (EPZA), as an autonomous government agency under the Ministryof Industry, Trade and Marketing (MITM), for spearheading the EPZ programme in the country.According to Lim and World Bank (2008, p.7), as of April 2008, the EPZA had issued licencesto eight EPZ developers and 18 EPZ operators. However, only three EPZ infrastructuredevelopers were in operation by that time (Millennium Business Park and Hifadhi EPZ in Dar esSalaam, and Kisongo EPZ in Arusha). Others operated as single factory EPZs, offering no sitesto interested potential investors. Of the 18 EPZ operator licences, three were not in operation. Ayear later, in April 2009, this study found through interviews with EPZA management that 11licences had been issued for EPZ infrastructure development (four being actively operational including the newly established Benjamin William Mkapa Special Economic Zone (SEZ) in the

Mabibo area of Dar es Salaam). It was also noted that EPZ manufacturing/operator licences hadincreased to 22 (with 19 being active or in business set-up phases) by April 2009.

Conceptually, an EPZ can be defined as a geographically or jurisdictionally bounded area, inwhich free trade, including duty free import of capital and intermediate goods, is permitted,provided that all or a significant share of the goods produced within the zone are exported(Johansson and Nilsson, 1997). The World Bank (1998) sees the EPZs as industrial zones withspecial incentives to attract foreign investments, in which imported materials undergo somedegree of processing (value-addition) before being re-exported again. ICFTU (1996) describesthe EPZ as a clearly demarcated industrial zone, which constitutes a free trade enclave outside acountrys normal customs and trading system, where foreign enterprises produce principally for

export and benefit from tax and other financial and non-financial incentives. On the other hand,the World Export Processing Zones Association identifies EPZs as all government authorisedareas, such as free trade zones, customs free zones, industrial free zones and foreign trade ones.In practice, however, the types of EPZ activities vary from bonded warehouse, export processingand assembling, border or port trade, and high tech R&D, to trade-related transportation orfinancial services (Ge, 1999). Despite these variations, export-oriented manufacturing activitieshave been the main focus of most EPZs. Based on the amended EPZ Act (2002, p.5), TanzaniasEPZ programme was put in place with the intention of achieving the following:

(i) Attracting and promoting investments in the export sector;

(ii) Creating and expanding foreign exchange earnings;

(iii) Creating jobs, thus improving employment in the economy;

(iv) Enhancing the value of exports by promoting domestic value addition throughprocessing of local raw materials and intermediate goods before export;

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(v) Promoting industrialisation with a view to diversifying and facilitating thecountrys exports and promoting international competitiveness;

(vi) Developing human capital (highly skilled labour);

(vii) Encouraging transfer of new technology from foreign EPZ firms/multinationalcorporations (MNCs) and its absorption by local businesses (especially SMEs);

(viii) Fostering linkages between the local economy and the international markets.

For the purpose of this study, items (i) to (iv) are termed objectives (short- to medium-termtargets); and items (v) to (viii) are classified as goals (long-term targets). This classification ismeant to fit the study methodologically into the OECD-DAC evaluation system becauseattracting export-oriented investments in the short term would over time result inindustrialisation and competitiveness in export markets. It can also, in the long term, fosterlinkages between the local economy and foreign markets.

The creation of foreign exchange earnings can, in the long term, form sustainable foreignexchange reserves, which again are critical for preparing a favourable local environment forinvestments and business (i.e. for necessary infrastructure, human capital development, financialempowerment in own or joint-venture EPZ projects, etc). These are, in the long term, vital forexport-oriented industrialisation, technology transfer/absorption and linkages between domesticand foreign economies. Job creation can be a short-term measure to fight poverty and enhancepeoples livelihoods. This can, however, build workers experiences in the long term, which canassist in the achievement of human capital development goal. Processing locally available rawmaterials for export can be a key preliminary step towards achieving long-term targets, such asindustrialisation, as well as competitiveness in international markets.

In order to achieve the above objectives and goals, the 2006 EPZ Amendments Act (p.4-5)mandates the EPZA to initiate, develop and manage operations of the publicly owned EPZs. Tothis end, the EPZA is meant to perform the following activities:

(i) In consultation with the minister responsible for lands and the local governmentauthority, acquire land in its name and erect thereon industrial and commercialbuildings and lease such buildings to investors for undertaking thereon the EPZlicensed businesses;

(ii) Provision of basic infrastructure for purposes of operations in the EPZs;

(iii) Provision within the EPZs of utilities and sewerage and drainage systems forremoval of refuse and waste for the benefit of EPZs and other users;

(iv) Preparation of national and international programmes for appropriate promotionof EPZs;

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(v) Ensuring the provision of security and surveillance, property and equipmentmaintenance and availability of restaurants and food services;

(vi) Provision of commercial information for the benefit of investors in the EPZs;

(vii) Provision of any other public utility as may be necessary for the betterment ofoperators and investors within the EPZs or consumers of products and/or servicesfrom the EPZs.

1.2 Statement of the problem

Despite the efforts to establish the EPZ programme in Tanzania with targets and activities forpromoting exports, the programme has until now (2009) registered inadequate successes since itseffective inception in 2006. The economic contribution of the EPZ programme remainsinsignificant in terms of the size of investments, jobs created and value and volume of exports.

Lim and World Bank (2008, p.7) point out that total investments in the Tanzanian EPZs werevalued at US$ 150 million in April 2008; and employment in the EPZs stood at a mere 6,522jobs in 2008. By the same account, the EPZs recorded just US$ 35 million in exports in 2007,thus accounting for only 1.7 percent of total exports and 11.3 percent of manufactured exports.During an interview with EPZA management, exports and investments in EPZs were estimatedto have reached US$ 50 million and US$ 247 million, respectively, by May 2009. Availablerecords show no change on 2008 employment figure. Despite these improvements, the level ofexport performance is inconsistent with a key target of Tanzanias National Trade Policy (URT2003, p.37) that aimed to raise annual absolute merchandise exports to US$ 1.7 billion by 2008.

Based on these circumstances, it is therefore imperative to assess and evaluate various aspects ofthe countrys EPZ programme, so as to ascertain what went or keeps on going wrong, and tosuggest possible remedial actions. This study attempts this challenging task.

1.3 Objectives of the study

The main aim of this study is to evaluate Tanzanias EPZ programme since its effectiveinception in 2006 to date (2009), in order to determine its current challenges and possible futuredevelopment trajectory. The derived specific objectives of the study are the following:

(i) To ascertain the extent to which the EPZ programme attained its predetermined targetsduring the three years of operations (the gap analysis);

(ii) To determine the challenges and/or constraints that could limit the smooth attainment ofthe predetermined targets, as well as the existing potential for success (the SWOTanalysis);

(iii) To derive lessons for building a vibrant EPZ programme in Tanzania (policyimplications and recommendations).

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1.4 Significance of the study

This study contributes insights for the extent to which the Tanzania EPZ programme has attained

its predetermined targets during its first three years of operations. It determines the constraintsthat have influenced the attained level of performance. The resulting policy guidance andrecommendations for remedial actions are meant to contribute to building a robust andsustainable EPZ programme in Tanzania.

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SECTION 2: LITERATURE ON SOCIO-ECONOMIC ASPECTS OF EPZs

2.1 Theoretical justification for EPZs

According to Matambalya (2007, p.7), openness is a necessary condition for economic

development and competitive integration in the global economy. There can be at least twooptions for openness: one is the best solution, involving countrywide reforms for attainingcomprehensive economic liberalisation within the multilateral context. The other is the secondbest solution, characterised by spatially- and sectorally-restricted economic reforms. The EPZmodel of economic development provides a second best solution. This is because EPZstechnically involve partial or restricted liberalization; and that the advent of EPZs has manifesteda major paradigm shift from restrictive economic policies, largely based on import substitutionstrategies, to liberalization. The main features of EPZs include fiscal and non-fiscal incentiveswhereby an EPZ investor (usually an MNC) is granted tax holidays, exemptions from customsduties and free repatriation of profits. Other features of EPZs include access to infrastructure andbusiness services, exemption from labour laws, right to strategic locations and relaxation of

immigration regulations.

Since their early inception in 1959 in Ireland (Madani, 1991), EPZs as typical export-orientedundertakings have had potential social economic benefits that may accrue to host countries.These include technological spillovers, increased investments, increased competition, high factorproductivity, economies of scale and scope, and the transformation of the economic structurefrom inward-oriented towards outward-looking. The developmental orientation of EPZs has itsroots in their ability to complement or supplement domestic capital formation because adiversified and solid base for export economy is a necessary condition for competitiveness.Moreover, developing countries in particular lack a diversified and solid base for an export-driven economy. The EPZ development model stands to enable these countries to circumvent

this challenge, because EPZs are by design export-oriented. In this way, a foreign exchangeearning strategy through EPZs is superior to a foreign exchange savings strategy through importsubstitution (Matambalya 2007, p.14).

Export Processing Zones have been considered to be catalysts for export promotion in hosteconomies. This may arise due to the fact that the attraction of foreign firms into EPZs mayencourage local firms to export over time as a result of imitation, competition and even learning.This interaction between foreign and local firms stands to bring about technology transfer, whichmost developing economies lack, for their future development. As a result, EPZs help tostimulate the development of a local/indigenous entrepreneurial base by means of practicallearning, sub-contracting and formal education/training (Matambalya 2007, p.17). EPZs can also

benefit the local economy when local firms become suppliers to EPZ firms. Domestic firms canthus develop their capacity to produce quality products, and consequently their internationalcompetitiveness. In this way, employment through the creation of new jobs can be enhancedbecause, in theory, every EPZ job creates one non-EPZ job (Matambalya 2007, p.16).

However, in order to tap into the benefits that may arise with the EPZ model, host countries havealways been expected in the first place to set up an attractive environment for investment thatcould result in lower production costs for investors in the EPZ sectors. In this regard, host

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economies could end up offering incentives such as: lower levels of importrestrictions; less restrictive labour requirements; liberal tax, ownership andforeign exchange regulations; and access to superior infrastructure,transport and communications technologies, compared with the rest of theeconomy (Virgill 2009, p.2-3).

2.2 Theoretical weaknesses in the justification of EPZs

Drawing from section 2.1 above, the potential benefits from an EPZ programme do not freelyaccrue to host economies. Rather, they do so at a price. For instance, although the offeredeconomic incentives enhance the business performance of beneficiaries (EPZ investors) throughcost savings, they may drain from the host countrys internal resource mobilisation (e.g. lowerrevenue collection due to tax holidays and/or exemptions), hence constraining the welfaregeneration for its citizens through the provision of public goods and services.

However, it should also be noted that the portrayed benefits are by no means automatic. Hostcountries that stand to gain most from the EPZ model are those that are best prepared in terms ofinternal policies and strategies. Therefore, one cannot expect effective technology transfer unlesstechnological absorptive capacities exist in the local economy (through purposeful human capitaldevelopment programmes). Vibrant backward and forward linkages between local and foreignEPZ firms would at a minimum require the existence of a growing entrepreneurial mindsetamong the host countrys businesses especially SMEs to take the opportunities presented tosupply inputs to, and trade in outputs from, producers in the EPZs.

Firms in EPZs are typical businesses whose motives, among other things, are not expected to fallshort of profit maximization. Along with this motive is the possibility of unfavourable

socioeconomic outcomes, such as higher pollution levels than the limits set under environmentalstandards, low wages/poor benefits to workers and non-recognition of trade unions leading to alack of collective bargaining among workers. Also, because human capital development is poorin most EPZ host developing countries, the majority of workers in EPZs are likely to be medium-or low-skilled, and sometimes unskilled. This is usually regarded as cheap labour, based on theassociated wage levels. It is, however, worth noting that cheap labour does not necessarilyimply low productive labour. Differences in wage levels between developed and developingcountries do not mirror differences in productivity levels, which further increases the competitiveadvantage of producers in EPZs in developing countries (LaRRI 2000, p.17). This may result inthe creation of jobs with less socioeconomic or developmental impact than anticipated.

The preceding analysis of weaknesses associated with the EPZ model points to the urgent needfor policymakers, and other key stakeholders in potential EPZ host economies, to alwaysexercise care in balancing postulated EPZ benefits with possible welfare losses that maypotentially accrue from investments and operations in the EPZ sector.

2.3 Empirical aspects of (non-Tanzanian) EPZs

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Available empirical studies indicate that EPZs can result in both beneficial and non-beneficialsocio-economic effects. Using cost-benefit analysis to evaluate the impact of EPZs in hostcountries, Warr (1990) arrives at compelling findings. He compares the economic performanceof an economy with EPZs against the hypothetical performance of the economy without EPZs,while assuming that EPZs are enclaves within each host country, and that there is a transfer of

funds and resources between these enclave EPZs and the economy of the host country. The netestimated benefits include the net gain to the host country with respect to employmentgeneration, foreign exchange earnings, greater utilization of local materials, additional capitalequipment and additional tax revenues collected from MNCs (when applicable). The costsinclude administrative and maintenance costs of the EPZs, and the required additional physicaland administrative infrastructure.

Warr (1990) concludes that infrastructure costs were a major determinant of outcomes. In thePhilippines, infrastructure costs in the Bataan EPZ were very high, because the governmentchose an isolated area that required operations from grounding all the way up to buildings andprovision of utilities. On the other hand, the EPZs in Masan (Korea) and Penang (Malaysia) used

existing infrastructure or selected the locations near pre-existing industrial areas, which keptthese costs at a minimum. Foreign exchange earnings steadily increased and employmentcreation was substantial. All three zones (Masan, Bataan and Penang) were projected to furthercontribute to foreign exchange earnings and employment creation. As for business linkages, thelocal suppliers to Bataan and Penang did not appear to have expected to increase their linkageswith MNC operations in the EPZs, as they offered few inputs. In the case of Masan, localsuppliers were projected to increase over time because they supplied a significant share of rawmaterials to the EPZ production processes.

Regarding the pronounced infrastructural challenges in the EPZ project, Chowdhury (2006) andDomician (2006, p.6-10) call for concerted efforts from the government and private sector including the development of special purpose vehicles (SPVs) 1 for the successful undertakingand financial control of specific infrastructure-related public-private partnership (PPP) projects.Under this arrangement, financing of infrastructure projects depends on the anticipated financialperformance (cash flows) of the return-generating projects managed under the SPV mechanism.It is thus noted that the overambitious and improper setup of an SPV may cause damage to theproject, force the restructuring of debt mechanisms and even bankruptcy/losses to involvedstakeholders mainly the government and private companies. Chowdhury (2006) finds, further,that more efficient SPVs, with respect to the financial framework for infrastructure projects,require strong and reliable financial bases, a legal and regulatory environment for theenforcement of contracts/agreements and sovereign (government) support.

As for job creation, ILO (2003) argues that there has been a systematic growth of the (absolute)numbers of employees in EPZs worldwide from around 50,000 in 1970 to about 41.9 million in2003; and that EPZs account for substantial shares of industrial and total employment in somecountries. For instance, EPZs account for more than 75 percent of industrial employment in

1 An SPV is a special company formed by a consortium of private firms to develop, build, maintain and operate aninfrastructural asset for the contracted period. In cases where the government has invested in the project, it istypically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a buildingcontractor, a maintenance company and one or more bank lenders. It is the SPV that signs the contract with thegovernment and with subcontractors to build the facility and then maintain/manage it.

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Macao; 20 percent of total employment in Mauritius in 1970; 10 percent of employment inMexico; and in Guatemala, the number of EPZ employees rose from 6,500 in 1986 to 70,000 in1992 (Matambalya 2007, p.28). In the above cases, more women than men were employed inEPZs. In Mexico, Blanco de Armas and Sadni-Jallab (2002, p.21) argue that the maquila industryhas been successful in its initial aim, which was to alleviate unemployment; and has also been

crucial in weakening the devastating impact of the economic crisis in 1994-95.

Kokko (1992) and Blanco de Armas and Sadni-Jallab (2002, p.7) argue that EPZs have in somecases bridged the knowledge gap and thus stimulated economic growth. For this to come about,however, the extent of spillover depends on the technology gap between local and foreign firms.They find that spillovers are most likely to occur where domestic firms have a level oftechnology similar to that of the MNE and where market conditions encourage competition. It isunderlined that these necessary conditions are often not met by many EPZs in developingcountries. For instance, if the Mexican maquila industry is to serve as a source of modernisationand technology upgrading of the industrial structure in the future, it will have to change some ofits features, like the skill composition of its labour force, given its mainly assembly-type

activities; and it will also have to create more backward (through increasing the productionstages being undertaken in Mexico and increasingly relying on local suppliers), as well asforward, linkages (Blanco de Armas and Sadni-Jallab 2002, p.21).

In addition, there has been some evidence of knowledge leaks associated with Koreaninvestments in Bangladesh (Matambalya 2007, p.29); and econometric estimations suggestingthat where EPZs substantially contribute to exports (e.g. in Macao, Mauritius, Korea andTaiwan), they also stimulate economic growth. Since EPZs and SEZs attract export-orientedforeign direct investment (FDI), they also have the potential to promote other forms ofcollaboration between local firms and MNCs. Thus, EPZs and SEZs can facilitate the insertion ofdomestic SMEs into global value chains by offering them an enabling investment climate(Gereffi et al. 2005).

Despite the preceding largely favourable empirical analysis, EPZs have had a record of lowerthan expected performance; and negative effects in some cases. Kusago and Tzannatos (1998,p.13) note non-uniformity and low upgrading among EPZ factories in terms of technologytransfer resulting from training practices. Matambalya (2007, p.31) highlights the footloosenature of EPZs in terms of the high propensity of short-term investments, little backward/supplylinkages with the domestic economy and no or limited transfer of skills/knowledge andtechnology. In the same line of argument, EPZs have also been blamed for tending to crowd outdomestic investments, especially in developing countries.

Export Processing Zones have been associated with the creation of enclaves in host countries.These are characterised by weak backward (i.e. supply) linkages where domesticentrepreneurship is underdeveloped and/or EPZ firms continue to rely on foreign supplies. Also,where the EPZ project is not properly managed in terms of government policies and regulations,EPZ firms may continue to import even those materials that are locally available. However, hostcountries vary with respect to local sourcing (the share of domestic raw materials to total rawmaterials used by firms in EPZs). Kusago and Tzannatos (1998) argue that some EPZ hosteconomies have high levels of local sourcing, such as the Republic of Korea, Taiwan (China)

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and Malaysia, while others have low, such as Sri Lanka, China, and Mexico. Interestingly, thecountries with a higher ratio of local content experienced a leap from low levels of local sourcingto high levels over a short period. This happened over four years (3.3 percent in 1971 to 24.4percent in 1975) in the Republic of Korea; and over 5 years (2.7 percent in 1982 to 17.7 percentin 1987) in Malaysia. Limited local sourcing was (is) largely due to lack of information linking

potential buyers (in EPZs) and sellers/suppliers, low delivery, high prices and poor quality.

Focusing on a limited product range, as well as light products, is documented as a shortcoming inEPZ and SEZ operations, especially in most developing economies. Researching on the impactof SEZs in India, Aggarwal (2007, p.47) notes that the zones contributions as an engine forpromoting new knowledge, technologies and innovations through technology transfers andtechnology creation has been quite limited. SEZs are dominated by medium tech activities andmost firms are involved in contract manufacturing, which leaves little scope for R&D activities.The technology-related activities of SEZ units have been found to be no different from those ofexport-oriented domestic units outside SEZs. The zones did thus not fulfil the role of promotinginnovation systems in the economy. This is despite the fact that the knowledge spillover potential

of zones is rather high in the economy. ILO (1996) and Matambalya (2007, p.32), find that onaverage, textile and clothing constitute a large portion of EPZ production: 70 percent overall inAfricas EPZs, 80 percent in Sri Lanka and over 90 percent in Tanzanias EPZs.

Human capital development and employment creation is another area where EPZs have beencriticised. Although some EPZs run short-term focused and employer-driven training sessions toimpart necessary skills to workers, Kusago and Tzannatos (1998) find that this type of trainingdoes not help the workers develop the skills needed to pursue better career prospects after theircareer ends in the EPZ. Matambalya (2007, p.35-37) notes that EPZs have had poor labourconditions such as compulsory overtime in Mauritius, low health and safety standards, curtailingfreedom of association and high turnover due to low job satisfaction. Regarding low labourskills, focus has been on products that can be produced with relatively low labour skills andinvestors have not shown interest in long-term education and training. In some placesemployment in EPZs has been insignificant, such as in Brazil, where EPZs accounted for only1.5 percent of jobs in the manufacturing sector. Employment in EPZs in Mauritius fell from 20percent of total employment in 1970 to just 3 percent in 1990, possibly due to the footloosenature of EPZs. The first EPZ in Kenya became operational in 1993, but by 2003 EPZs onlyaccounted for about 27,000 employees in Kenya, which had a population of 30 million that year.

Some research indicates that since EPZs make use of unskilled and/or low-skilled workers,goods and services produced are likely to be of low quality and hence will not be able to sell wellin global markets, thus resulting in insignificant export revenues (World Bank 2001;Matambalya 2007, p.38). For instance, only about 2.7 percent of Indias trade in 1993 wasattributable to EPZs. Central America is no exception in this regard: while reviewing the role andimpact of EPZs on Mexicos external trade, Blanco de Armas and Sadni-Jallab (2002, p.21) findthat the maquila industry has been less successful in its role as a source of foreign exchangeearnings due to its high import composition of exported products; and this may largely beresponsible for the 1994-95 economic crisis. As a result, the maquila is likely to face difficultiesin its attempts to change the industrial infrastructure in Mexico.

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2.4 The Tanzanian experience of EPZs

Generally speaking, Tanzania is no different from the rest of the world in its experience of EPZs.It shares most of the experiences discussed above. As documented in the EPZ Act (2002) and its

amendments, Tanzania established the EPZ programme in order to gain from job creation,foreign exchange earnings arising from EPZ exports, technology transfer and human capitaldevelopment, to enable local technology absorption and domestic industrialisation forinternational economic competitiveness.

One area that has recently attracted attention among Tanzanias policymakers and public alike isthe high cost of the existing incentive regime package. Rolfe et al. (2004) and Matambalya(2007, p.41) find that commitments to EPZs are increasingly associated with high costs.Tariff/tax revenue reductions associated with EPZs reduce the welfare of the host economy; andnet costs may outweigh net gains, leading to a win-lose situation (the host economy loses; theforeign investor gains). This has prompted a policy proposal to replace the existing EPZ

incentive package with a service-based package (Lim and World Bank, 2008, p.8).

2

TheTanzania Revenue Authority was recently quoted in the media as saying that tax exemptions costthe country about US$ 451 million in the ten-month period running from July 2008 to April2009.3 This loss makes up 6.4 percent of the total 2009/10 national budget, and 9.6 percent of theprojected domestic revenue collections for the budget.4

In Tanzania, however, fewer firms have registered in the EPZ programme due to, among others,the lack of justifiable competitiveness of incentives in the EPZ over those offered in the non-EPZsector. For instance, in 2006, a Pakistani textile investor (NIDA Textiles) pulled out of the EPZscheme and joined the non-EPZ status mainly on these grounds. The firm had managed to securea ministerial permit to import (free of duty) locally available materials from a daughter firm inPakistan, hence weakening the backward linkages between foreign investments and the domesticeconomy (Matambalya, 2007, p.40). Table 1 below compares investment incentives in the EPZand non-EPZ regimes.

Table 1: Incentive packages in Tanzanias EPZ and non-EPZ investment regimes

Tanzanias EPZ incentive package Tanzania's non-EPZ investment incentives

S/N Export Processing Zones Act (2002) S/N Tanzania Investment Act (1997)

1 Exemption from foreign exchange controls orRestrictions (e.g. repatriation of profits or

gains)

1 Exemption from payment of corporate taxfor up to 5 years

2 The EPZA strategic plan (p.25) states that the EPZ programme in Tanzania has largely been used by investors toenjoy tax holidays, with a very limited contribution towards export growth, job creation and developing linkageswith the domestic economy. This is set to change to an environment that provides backbone utility and businessservices that attract investors in EPZs for quality services rather than fiscal incentives.3 The East African Newspaper, 8-14 June 2009, p.9.4 The total national budget of Tanzania for 2009/10 is TZS 9.5 trillion (about US$ 7.05 billion). Of this, 33.4 percentis from foreign loans and grants, while 66.6 percent is raised domestically.

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2 Exemption from payment of corporate tax forinitial 10 years

2 Corporate tax not exceeding 40% after 10years

3 Corporate tax not exceeding 35% after 10years

3 Zero customs duty and deferred VAT forinvestments in targeted sectors (i.e.mining, EPZs, infrastructure, etc); and 5%duty and deferred VAT for other sectors

(i.e. banks, Human ResourceDevelopment, etc)

4 Exemption from payment of withholding taxon dividends and interest for initial 10 years

5 Exemption from all types of local governmenttaxes

6 Remission of customs duty, VAT and othertaxes paid for purchase of inputs (goods andservices); excluding motor vehicles, spareparts and consumables

4 Fast-tracking of processing of visa andresidence permits:

Resident Permit Class A: 14 days;

Resident Permit Class B: 14 days;

Special Pass: 1 day

7 Exemption from pre-shipment inspection 5 Income tax benefits:

Permission of interest deduction on

capital loans Unrestricted carrying forward of

losses;

100% capital allowance deduction for

targeted sectors

8 Access to high quality infrastructure

9 On site customs inspection of goods10 Provision of temporary visa at entry point for

key staff for a period of 30 days

11 Allowance to sell up to 20% of producedgoods in the local market

Source: author, from EPZ Act (2002) and Tanzania Investment Act (1997).

Eligibility criteria for an EPZ investment in Tanzania include: (i) be a new investment; (ii) atleast 80 percent of produced/processed products should be exported; and (iii) annual exportturnover should not be less than US$ 500,000 for foreigners (TZS 675 million) and US$ 100,000

for local investors (TZS 135.0 million).

5

These requirements have been considered tomarginalise micro and small businesses, which constitute the majority of business firms inTanzania and are defined in the National Small and Medium Enterprise Development Policy(URT 2003, p.5) as those with capital investments ranging from below TZS 5 million (aboutUS$ 3,700) to TZS 200 million (about US$ 148,150). Given their infancy in terms of low capitaland local market bases, as well as the difficulties faced when initially attempting to enter exportmarkets, it is unlikely that micro and small firms can capably meet the EPZ criteria, particularlythe sales value/volume and the 80 percent export mark.

Tanzanias EPZ Programme is not without challenges. As documented in Lim and World Bank(2008, p.65), the most recent challenges faced were highlighted during a stakeholder workshop

on 13 June 2008. They included:

(i) Little public awareness of EPZs, mainly due to inadequate publicity and lack ofcoordination with other investment agencies. For instance, as of 18 March 2009,the EPZA website was not linked to the Tanzania Investment Centre website orthe Tanzanian government website;

5 It is assumed that at the time of this report in May 2009, the exchange rate averaged 1US$ = TZS1,350

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(ii) Inadequacy of physical infrastructure, including serviced land and factorybuildings for leasing to potential investors, i.e. EPZ developers and operators;

(iii) Unreliable supply of backbone utilities such as power/energy/electricity, water,telecommunications and transport links (roads, railways, airports, ports);

(iv) Inefficiencies/delays during clearance of imported and exported goods, forexample due to administrative constraints at the port of Dar es Salaam;

(v) Inadequate supply of human capital (highly skilled labour);

(vi) Inadequacy of funds to run EPZ operations, for example the absence of a one-stopservice centre.

The infrastructural challenges [items (ii), (iii) and (v)] stand out as the most expensive becausethey require huge sums of capital investment at early stages. This problem is not exclusive to

Tanzania and is a common challenge in EPZ programmes elsewhere, especially in thedeveloping world. For instance, using Warrs (1990, p.151) net benefit analysis framework,Kusago and Tzannatos (1998, p.8) find that infrastructure costs and the extent of use of domesticraw materials were major determinants of outcomes in EPZs in Korea, Malaysia and thePhilippines. The government, private sector and other EPZ stakeholders should thus act seriouslyon these challenges for the enhanced socioeconomic performance of EPZs.

In a bid to improve its efficiency and effectiveness in meeting infrastructural needs, thegovernment has decided to restructure the Ministry of Infrastructure Development into four newdivisions, namely transport infrastructure; transport; technical services; and safety andenvironment.6 Activities under the transport infrastructure division will include building andmaintaining trunk roads and ports, regional roads, railways, airports and aerodromes. Thetransport division will oversee the management of surface (road) transport, marine transport, airtransport and meteorology. The technical services division is set to deal with infrastructuralneeds related to mechanical, electrical and public buildings services. The last division, on safetyand environment, will be designed to manage the operation of infrastructure and transport, aswell as the environment. It is not yet clear whether the new setup will improve the existinginfrastructural bottlenecks. While it may form one of the missing links in Tanzaniasinfrastructural requirements (including those in the export sector or EPZs), the governmentshould also think about addressing the resource inadequacy in the countrys infrastructuraldevelopment equation.

The above literature points to the fact that EPZs can potentially offer both socio-economicpositives and negatives depending on the policy and institutional environment in which theyoperate. It is on this basis that this study attempts to evaluate the performance of Tanzanias EPZprogramme since its effective operationalisation in 2006. A methodology for carrying this out isdevised and presented in the following section.

SECTION 3: METHODOLOGY OF THE STUDY

6The Guardian newspaper, Wednesday 26 August 2009, p.5.

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3.1 Analytical framework

In theory, EPZs offer opportunities for firms to participate in worldwide markets at their ownlevel of strength. This is possible because firms in EPZs can acquire new technology, and learn

new production methods and know-how, as well as marketing skills, which are important inovercoming barriers to entry into global markets. In practice, however, it is often extremelydifficult for a firm, including those in EPZs, to secure an initial international order, and only if afirm has a proven track record with a (foreign) buyer is it likely to win a key contract. Thisexperience coincides well with the disappointing performance of Tanzanias EPZs over the pastthree years of their operation (2006 to May 2009). This study therefore sets out to evaluate theactivities of Tanzanias EPZ programme over this period, in order to ascertain the factors thathave influenced such a performance.

The necessary details and information gathered to build a gap-analysis matrix of Tanzanias EPZprogramme, based on the three-year timeframe it has been in operation, show us the inputs,

outputs, outcomes and the extent of impacts; and enable us to compare the (planned) aspirationlevels and actual results registered on the ground to-date. This information includes:

(i) Predetermined goals (long-term targets) at the inception of the EPZ programme;

(ii) Predetermined objectives/purposes (short- to midterm- targets);

(iii) Established assumptions for attaining the above goals and objectives;

(iv) Projected resource needs (human, financial and material inputs);

(v) Planned activities that are meant to produce outputs;

(vi) The extent of outputs used for determining the fulfilment level of the objectivesand goals;

(vii) Expected outputs and the corresponding (measuring) indicators for evaluationpurposes. Indicators are defined at the output, outcome and impact levels whichmeet the SMART requirements (see Table 2 below for details);

(viii) Aspiration levels which are also linked to indicators for the set goals,objectives and outputs in order to enable a gap analysis process.

The above information [(i) to (viii)] is used to carry out a Gap Analysis that in turn helps in theassessment of future prospects of the EPZ programme through SWOT analysis. The EPZprogramme is evaluated basing on OECD-DAC (2002) Evaluation Criteria, as documented inGOPA Working paper No.1 by Hemmer et al. (2007, p.15) and explained in the followingsection.

Table 2: The meaning of SMART requirements

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SMART

Requirement

Meaning

S = Specific The indicator should be a true translation of the concerning target, so that thechanges measured by it express the respective target achievement.

M = Measurable The indicator must be (slightly) measurable and deliver reliable data, nomatter whether in the course of time different people have carried out the

measurements.A = Achievable or

attainableThe specified quantitative and qualitative indicator values of the target mustbe accessible. Suitable indicators must be fixed with special circumspection.However, too deeply set aspiration values of the indicators can suggest resultsare of little use for the success measurement of the programme or projectunder consideration. Fulfilling an indicator should require a special effort.

R = Relevant The information that is produced by the indicator must deliver importantinformation for the decision-makers. Only those indicators can have anyinfluence on the project or programme performance.

T = Timely or time-bound

The indicator must be available in time to be able to identify the effects of theprogramme or project.

Source: Consultations with evaluation experts.

3.2 OECDDAC Evaluation Criteria as Goal/Objective Oriented Gap Analysis

The evaluation criteria of OECDDAC are extensively used in development policy arenas andinternationally as a basis for evaluating development projects and programmes (Hemmer et al.2007, p.15). The developmental assessment includes the following criteria: relevance,effectiveness, efficiency, impact and sustainability. OECD-DACs definition of each of thesecriteria is presented in Table 3 below, according to OECD-DAC (2002) as adopted fromHemmer et al (2007, p.15); and a detailed checklist of issues addressed for each criterion isexpanded in Appendix A2.

Table 3: Definitions and Content of OECD-DAC Evaluation Criteria

Evaluation

criterion

Definition and/or content

RelevanceKey question: Are we doing the right thing?

This measures the extent to which the objectives and goals of Tanzanias EPZprogramme are consistent with the beneficiaries requirements, country needs, globalpriorities (e.g. MDGs) as well as partners and donors policies.

EffectivenessKey question: Are we achieving the objectives of the EPZ programme?

This measures the extent to which the objectives of Tanzanias EPZ programme were

achieved, while considering their relative importance.

Efficiency

Key question: Are the objectives of the EPZ programme being achieved

economically?

This measures economically how resources/inputs into the EPZ programme aretransformed into results. This can be extended such that: inputs/outputs = productionefficiency; and inputs/outcomes = allocation efficiency. Outcomes show the extent towhich objectives have been fulfilled.

Key question: To what extent has the EPZ programme attained its long-term

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Impact developmental targets (goals)?Here details are sought as to whether Tanzanias EPZ programme has directly orindirectly (intended or unintended) brought up positive and negative, primary andsecondary, long-term effects.

SustainabilityKey question: Will the positive effects or benefits last?

This assesses the likelihood (probability) of whether the benefits (if any) of the EPZ

programme will continue in the long term. It attempts to measure the resilience of theEPZ programme to the risk associated with net benefit flows over time.

Source: Adopted and adapted from Hemmer et al (2007, p.15).

3.3 Evaluation ratings and overall assessment

This study borrows from the German Development Cooperations six-stage scale in assessing theoverall developmental effectiveness of the Tanzania EPZ programme in terms of the fiveevaluation criteria detailed in Section 3.2 above except for sustainability. The six stages areexplained in Table 4 below.

Table 4: Six-stage scale for assessing the developmental effectiveness of Tanzanias EPZs

Stage Assigned

weight*

Details / definition

Stage 1 5 Very good result; clearly exceeds expectations

Stage 2 4 Good result; fully meets expectations; no major shortcomings

Stage 3 3 Satisfactory result; falls short of expectations; positive results predominate

Stage 4 2 Non-satisfactory result; falls well short of expectations; some recognisablepositive results, but negative results predominate

Stage 5 1 Clearly unsatisfactory result; some positive partial results, but negative results

clearly predominateStage 6 0 The (EPZ) development intervention is useless, or has made the situation worse

Source: Adopted and adapted from BMZ (2006) as in Hemmer et al. (2007, p.16).Note that (*) indicates an innovation by the author innovation.

Stages 1 to 3 denote positive or successful assessment; whilst stages 4 to 6 denote non-positiveor non-successful assessment. However, for the purpose of this study, weights 4 to 5 (stages 1 to2) will denote real achievement of predetermined objectives/goals; weight 3 (stage 3) will denotesatisfactory performance/achievement; and weights 2 and below will denote non-achievement ofthe objectives/goals. Sustainability is evaluated on a four-stage scale, as shown in Table 5 below:

Table 5: Four-stage scale for assessing sustainability of EZP programme

Stage Assigned

weight*

Details / definition

Stage 1 5Very good sustainability:

High probability that the EPZ developmental effects, which have been positiveso far, will continue unchanged, or even increase

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Stage 2 4Good sustainability:

High probability that the EPZ developmental effects, which have been positiveso far, will only decline slightly and will remain distinctly positive

Stage 3 3

Satisfactory sustainability:

High probability that the EPZ developmental effects, which have been positiveso far, will decrease considerably, yet still remain positive; or an insufficient

result will turn sufficient in the near future

Stage 4 1

Insufficient sustainability:

High probability that the EPZ developmental effects, which were not sufficientat the time of evaluation, will not improve to the extent that positivedevelopmental effectiveness can be achieved; or positive effects which havebeen found during the evaluation will not continue to exist in the future

Source: Adopted and adapted from BMZ (2006) as in Hemmer et al. (2007, p.17).Note that (*) indicates authors innovation.

The overall assessment on the six-stage and four-stage scales is obtained by weighting the

individual evaluation criteria for each developmental intervention or activity undertaken inTanzanias EPZ programme. According to Hemmer et al. (2007, p.17), stages 1 to 3 denotesuccess, whereas stages 4 to 6 (weights below 3) denote non-success. In developmental terms,therefore, a successful EPZ programme must score a satisfactory score (stage 3/weight 3) orhigher in terms of its effectiveness (the extent of attaining objectives), its effects in terms ofgoals (higher-ranking developmental impact) and its sustainability.

In summary, the following steps (Table 6) were employed in evaluating Tanzanias EPZprogramme:

Table 6: Steps in the evaluation of Tanzanias EZP programme

Step Activity Details of activity

Step 1 Controllingand ifnecessarypreparinglogframe

Setting strategic goals and the whole target function used for thepurpose of the evaluation

Establishing the EPZ programmes results chain for attaining thedesired goals/objectives, including the underlying assumptions andimplementation risks

Defining SMART indicators to check whether objectives, goals andthe planned outputs are being attained

Setting aspiration levels

Step 2 Determinationof results

Determining the inputs, outputs, outcome and impact that arerelevant for evaluation using indicators except for the inputswhich require no specific application of indicators

Step 3 Carrying outcomparison

Comparing aspiration levels (step 1) and results (step 2), hence thegap analysis

Step 4 Carrying outthe evaluation

Preparing a developmental evaluation of Tanzanias EPZprogramme using the criteria, namely: relevance, efficiency,effectiveness, impact and sustainability

Source: Adopted and adapted from Hemmer et al. (2007, p.18).

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As a general rule, the first task of an evaluation is to establish whether a logical frameworkexists. At the time of this study, however, the EPZA had not prepared a formal logframe forTanzanias EPZ programme. The available strategic plan document sponsored by the WorldBank which could give an impression of a clear and formal EPZA logframe was still in draftform and was undergoing stakeholder opinion surveys. This study therefore undertook to

formulate its own logframe (Figure 1 overleaf) for the countrys EPZ programme, based oninterviews with key EPZA officials, as well as a review of available relevant documents.Envisaged inputs/resources into the logframe include financial and human capital, land rights,production facilities and equipment. It should nevertheless be noted that the logframe formulatedis suggested based on the authors impression after compiling available facts and information.This should in no way limit EPZA from making any value-adding improvements and changes inorder to attain its desired framework.

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Figure 1: Proposed logical framework for Tanzanias EPZ programme

Source: Author, format adopted and adapted from Hemmer et al. (2007, p.8).

25

Tanzania EPZ Goals

To promote industrialisation with a view to diversifying and facilitatingthe countrys exports and promoting international competitiveness

To develop human capital (highly skilled labour)To encourage transfer of new technology from foreign EPZ

firms/MNCs and absorption of the same by local businessesespecially SMEs

Fostering linkages between the local economy and internationalmarkets

Indicators for achieving goals 1 to 4

1. An average of 10 EPZ factories established peryear starting 2007/08 to 2011/12

2. 85-90% local experts in EPZs3. More TZ SMEs in EPZ operations and exports

4. 25% GDP in exports (Development Vision 2025)

Assumptions for achieving goals 1 to 4

1. Consistent and effective domestic, regional andinternational campaigns to promote investmentsin the Tanzanian EPZs

2. Favourable and stable local, regional and globalsocioeconomic conditions (trade & investments)

Indicators for achieving objectives 1 to 4

1. At least 6 investors registered in EPZs in2008/09

2. At least US$70 million in EPZ exports in2008/093. 7,000 jobs in EPZs in 2008/094. Improved content of local materials in EPZ

exports

Assumptions for achieving objectives 1 to 4

1. Consistent demand and prices in foreign markets2. Stable and attractive local investment climate3. Enhanced backward and forward linkages

between local SMEs and EPZ producers

Output 1

EPZ related infrastructures /utilities are put in place

Output 2

Increased investments inEPZs

Output 3

Increased export volumesand earnings from EPZs

Output 4

Low, mid & highly skilledworkers for EPZs/non EPZs

Assumptions for achieving

activity performance

1.1 Adequate funding andfacilitation from Govnt

1.2 Coordination betweenGovernment and privatesector to build theinfrastructures/ utilities



2.1 Adequate Govnt fundingand facilitation

2.2 Proactivity of privatesector (EPZs) to build onGovnts regional andinternational promotionefforts



3.1 Growing base ofcompetent local suppliers

3.2 Efficiency andeffectiveness attained atkey import/export points:airports, seaports/ borders



4.1 Flexibility of relevantGovernment agencies andtraining institutions

4.2 Local workers adapted toEPZ working standards atacceptable low cost

Activity 1.1

Land acquisition for EPZpurposes/operations

Activity 1.2

Setting up necessary inf-rastructures and utilities

Activity 4.1

Use international normsin training TZ workforce

Activity 4.2

Encourage EPZ firms tohire competent locals

Activity 3.1

Encourage use of locallyavailable material inputs

Activity 3.2

Improve export /importprocedures e.g. at ports

Activity 2.1

Enhance favourable localinvestment climate

Activity 2.2

Promote EPZs nationally& globally

Tanzania EPZ Objectives

To attract and promote investments in the export sectorTo create and expand foreign exchange earnings

To create jobs, thus boosting employment in the economyTo enhance value of exports by promoting domestic value addition

through processing of local raw materials and intermediate goodsbefore exporting

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3.4 Data type, collection methods, instruments and sample size

The study used field interviews and structured checklist questions or questionnaires to obtainnecessary information from selected stakeholders in the EPZ sub-sector. Questions werecarefully prepared from the OECD-DAC evaluation criteria checklists, as detailed in Hemmer et

al. (2007, p.15, 35-45) and summarised in Appendix A2. Of the 11 licensed EPZ infrastructuredevelopers, only Millennium Business Park and Hifadhi EPZ in Dar es Salaam; and KisongoEPZ in Arusha were significantly active enough for inclusion in the sample. Also sampled wereseven active EPZ industrial operators (out of the licensed 22), as well as two relevantgovernment bodies dealing directly with EPZ matters.

The sample comprised 12 EPZ stakeholders in total. Seven stakeholder responses were receivedin time for the preparation of this report (i.e. 58.3 percent), from two government agencies(policymakers, i.e. EPZA and NDC officials),7 one EPZ infrastructure developer and four EPZindustrial operators. Respondents evaluated Tanzanias EPZ programme by assigning weights(Tables 4 and 5 above) to each of the checklist questions presented in Appendix A2. Relevant

literature also provided another source of comparative data and information, including fromtextbooks and websites, especially from studies on EPZ cases in Africa and in the world. Thedata and information gathered were analysed to obtain concrete answers to the objectives of thisstudy.

7 Before the EPZA came into being in 2006, Tanzanias EPZ programme had been under the National DevelopmentCorporation, by government directive, since 2000.

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SECTION 4: RESEARCH FINDINGS

4.1 Building the Gap Analysis

Figure 2 below summarises the relationship between nominal values in the logframe (Figure 1

above) and the actual values (results), whilst taking into account aspiration levels and indicators.

Figure 2: Gap Analysis for Tanzanias EPZ programme

Source: Author, format adopted and adapted from Hemmer et al. (2007, p.14).

27

Logframe-nominalvalues

Measuring indicator(s) Aspiration levels Resultsactual values

Goals

Industrialisation for exportdiversity & internationalcompetitiveness

Highly skilled humancapital for absorption oftransferred technology

Linking local economy tointernational markets

Note:

The logframe essentially follows the causal chain namely Resources Activities Outputs asprovided in the underlying project feasibility study, and checks for its correctness. The desiredattainment /aspiration levels of objectives and goals within the stipulated measure lie beyond thedirect control of the responsible bodies like EPZA. In other words, these have mere expectancyvalue, hence termed hypothetical values. Assumptions on necessary conditions for the attainmentof the predetermined objectives and goals feed into this Gap-Analysis framework. In this setting,outcome and impact are given by the level of attainment of objectives and goals respectively.

For the purposes of logical and more meaningful presentation, the author has merged goals 2 and 3in the logical framework (fig.1) into bullet 2 (see goals box in fig.2). In the same way, objectives 1and 2 in the logical framework (fig.1) have been merged into bullet 1 (see objectives box in fig.2).

At least 10 EPZ factoriesper year since 2007/08

Local experts to constitute

>=85-90% of expertneeds in EPZs

Exports to become 25%*12bn GDP=US$3bnexports

10 EPZ factories establishedin 2007/08; and 12 byMay in 2009

Non-achievement investorsstill training ownadditional workforce

US$50m EPZ exports only0.42% of GDP-May2009records

Objectives

Promoting export-orientedinvestments forenhancing foreignexchange earnings

Creating more jobsProcessing local inputs

(value addition)for export

Increased number of factoryestablishments in EPZs

Decreasing trends in imported

expertise in EPZsIncreasing share of exports

towards 25% TZ-GDP-Vision 2025

At least 6 investors in EPZs& exports US$70 m bothin 2008/09

7,000 jobs in EPZs in2008/09

Increased content of localmaterials in exported EPZ

products

5 investors in EPZs; &US$50 m exports recorded

by May 20096,522 jobs in EPZs 08/09Low local content due to

lack of information onpotential domestic

suppliers (as in literature)

Outputs

Needed EPZ relatedinfrastructure/utilities in

placeGrowth of EPZ sector

Attracting more EPZ firms& increased foreignexchange earnings (US$exports)

Increased employmentIncreased content of local

materials in exported EPZ

products

13 feasibility plans, 7 landuse plans and 3 basicinfrastructures in EPZs in2008/09

7000jobs,$70m exports

Only 1 feasibility plan and 1land use plan completed.Infrastructure not put in

place in EPZs in 2008/096522 jobs, US$50 mill

Activities

Get needed resourcesProvide EPZ related

infrastructure/utilitiesPromote EPZ programme

Number/quantity ofinfrastructures put in place

Number of licensed EPZoperators and value of EPZexports

Resources

Financial/capitalHuman capitalLand rightsEquipment/facilities

Comparison

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The Gap Analysis above (Figure 2) informs the reader about the level of actual results ofTanzanias EPZ programme versus the desired performance targets. Note that the programmefailed to achieve most of its aspiration levels: from goals, down to objectives and outputs, with abreakthrough in getting 10 EPZ factories established in 2007/08 followed by a furtherimprovement to 12 factories during the 11-month period ending May 2009. One EPZ firm had

improved its production standards to a level at which it was pursuing SA 8000 certification,which is globally recognised and hence a potential boost to reaching out to global markets for itsproducts. Generally, this mixed, but largely unfavourable, picture was replicated in the responsesobtained from stakeholders in the EPZ sector during the fieldwork; specific details are providedin the following paragraphs.

There have been some good strides in the EPZ programme including the issuance of licences to22 EPZ industry operators and 11 EPZ infrastructure developers; EPZ exports of about US$ 50million by April 2009 (up from US$ 35 million in 2007); some 6,522 jobs created; and valueaddition to locally sourced (raw) materials before exporting but they fall short ofpredetermined performance levels, as provided in the logical framework. More work needs to be

done to put infrastructure in place that attracts EPZ investments, as well asencouraging/empowering local suppliers in order to improve the proportional content of localmaterials in exports. In this way, export earnings would increase, along with local employment.The preceding statistics on the number of EPZ operators, export values and jobs were providedby the EPZA, based mainly on phone or physical contact with EPZ operators. However, as ofMay 2009, the EPZA had not established a section for systematically collecting EPZ industrydata and information on export revenues, volumes, jobs, the value of exemptions offered versusgains registered per EPZ firm (beneficiary) and other key statistical variables. This lack of acomprehensive and reliable EPZ industry database limits, among others, the monitoring andevaluation processes during the implementation of EPZ programme activities.

Government coordination and facilitation in funding EPZ-enhancing infrastructures, utilities andservices has been inadequate, thus resulting in a costly and less conducive business environmentfor EPZs. Stemming from this are the erratic supply of power/electricity, water and otherutilities; and an unsatisfactory level of locally available skills, hence limiting the speed ofdomestic learning and technology absorption. In addition, inefficiencies at the Dar es Salaamport have been causing loss of sales (due to delays in bringing imported raw materials to factory,as well as in delivering goods to customers abroad) and loss/theft of goods or parts of importeditems (e.g. motor vehicle spares). The current global economic downturn has pushed the demandfor exports further down, including those originating from Tanzanias EPZs. The above shortfallsadd production and operational costs to EPZ investors and they stand to further erode Tanzaniascompetitiveness as an attractive investment destination. The government and its relevantagencies should view this matter with urgency and thus coordinate stakeholders in the EPZindustry for a timely redress. Possible solutions include special purpose vehicles to undertakePPPs in infrastructural development, temporary insurance covers for imported/exported goodsbefore reaching their final destinations in their intact forms, as well as exploring regionalmarkets rather than depending largely or entirely on developed world markets.

Inconsistencies between the provisions in Tanzanias EPZ Act (2002, amended in 2006) andindustry practices form another lesson derived from the fieldwork. There are claims that while

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the Act provides for an array of incentives in the form of tax exemptions, relevant tax authoritieshave been following up tax collections from EPZ firms. This study reveals that some EPZoperators may have a wrong understanding that local sales (of up to 20 percent) also qualify forexemptions. On the contrary, that part of the EPZ production that is consumed locally should beregarded as imports into the domestic economy and thus be subject to other general measures

such as VAT and corporate taxes. The EPZA should therefore emphasise this knowledge in itsnationwide awareness campaigns covering EPZ stakeholders and the general public.

Tanzania is still negotiating its way in the global trade and investment arena. It has a lot ofunexploited potential, including in its strategic geographical location. The countrys positioningin East, Central and Southern Africa makes it a strategic regional major gateway for importsfrom and exports to the rest of the world. With key ports along the coast of the Indian Ocean(Dar es Salaam, Tanga, Mtwara and Zanzibar), the country (potentially) becomes even morecompetitive in this regard. To fulfil this potential, roads and railway networks should beconstructed to connect these ports especially Tanga and Mtwara with neighbouringlandlocked countries. Modern airports at or near these ports could also play a key role in regional

and international trade and investment flows, including the attraction of further investment intoEPZs. Once these facilities are in place, competitiveness would be increased by having efficientand effective business facilitation services, such as timely registrations and clearances at portsfor imports and exports.

Joint ventures in EPZ firms between Tanzanians and foreigners have been difficult to forge,mainly due to a lack of key resources in the domestic market. These resources include partnerswith adequate financing for capital investments in EPZs, as well as human capital resources withadequate state of the art training for the easy operation of machinery with advanced technology.This has been limiting technology transfer followed by domestic learning and absorption. Theseweaknesses should be tackled through government and stakeholder efforts to produce world-class science, engineering and business graduates who can meet the demands of global EPZoperators; and through a purposeful financial empowerment programme to enable TanzanianSMEs to enter joint ventures with foreign EPZ firms. To this end, the government-sponsoredSME Financing and Export Guarantee Schemes at the Bank of Tanzania (the central bank)should contribute to meeting this challenge. In cases where capital financing needs exceed thelimits of the existing facilities, the government should consider the feasibility of guaranteeingalternative funding.

Backward and forward linkages have also been derailed, in part due to little, or a total lack of,public information regarding the existing local potential suppliers of various materials and/orservices required in EPZ operations. For instance, one EPZ textile firm has been importing fabricmaterials, including cotton, which could be supplied by local producers. This poses a challengeto the EPZA and Tanzanias industry associations, such as TCCIA, CTI and TRADEXA, tomarket/publicise what their professional members can capably produce and offer, especially inEPZ industry markets.

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4.2 Analysing performance indicators in the EPZ logical framework

In this section, the study attempts to analyse the performance indicators used for each of thepredetermined targets (objectives and goals) of Tanzanias EPZ programme. Specifically, thesection tries to find out whether the indicators meet the SMART requirements (see Table 2

above). This approach forms a way of developing well-written targets and their respectiveperformance indicators that show a clear picture of the results expected from EPZ programmeactivities. The key questions in this regard include: SpecificWhat exactly are we going to dofor whom? MeasurableIs it quantifiable and can we measure it? Attainable/AchievableCanwe get it done in the proposed timeframe with the available resources and support? Relevant

Will this objective or goal have an effect on the desired overall development? Timely or time-

boundWhen will this objective be accomplished? These questions are addressed for eachindicator in the following performance targets of Tanzanias EPZ programme.

(i) Attracting and promoting investments in the export sector

The performance indicator for this target was to carry out local and international EPZ promotion

campaigns so that at least six investors are registered in EPZs in 2008/09. For the eleven-monthperiod ending May 2009, five investors were registered in EPZs, and the EPZA was upbeat thatthe target would be surpassed by the year-end, on 30 June 2009. This target clearly meets theSMART requirements that it is specific, measurable, attainable and timely or time-bound.Although the target seems attainable, interviews and field responses indicate that the EPZA hasbeen receiving inadequate funding from the government for promoting the EPZ programme bothnationally and internationally. This needs a timely solution, but the EPZ operators and other keystakeholders should in the meantime devise ways of continually promoting the EPZ programme.As for relevance, the targets effect on the overall growth of the export sector depends on theexisting investment climate, namely infrastructural needs and other costs of doing business.Therefore, attracting investments in EPZs is a necessary condition, but not a complete solution,to creating a vibrant and development-oriented export sector.

(ii) Creating and expanding foreign exchange earnings

The indicator for expanding the foreign exchange base was set at achieving at least US$ 70million in EPZ exports in 2008/09. By May 2009, the EPZA had only recorded US$ 50 millionin EPZ exports; and with only one month remaining to 30 June 2009, the chance of meeting thedesired target were slim. Apart from that, as it stands the indicator is specific, measurable andtimely or time-bound. It is also relevant, insofar as it is geared towards achieving TanzaniasDevelopment Vision for 2025, which aims to see exports constituting at least 25 percent of GDPby 2025.

(iii) Creating jobs for increasing employment in the economy

Tanzanias EPZ programme had set a performance indicator of 7,000 jobs in EPZs in 2008/09. InMay 2009, 6,522 EPZ jobs were recorded, representing a 93 percent achievement. The EPZAbelieved the target could be reached by the year-end, on 30 June 2009. Therefore, the targetindicator meets all the SMART requirements as defined above; and it derives its relevance fromthe fact that job creation forms one of the key aspects of poverty alleviation and development.

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(iv) Promoting the processing of local raw materials for value-added exports

Increasing the content of local materials in EPZ exports was set as an indicator for this target.However, the information obtained from the field suggests that some EPZ operators have beenimporting locally available inputs (e.g. cotton for EPZs in the textile business) because of lack ofinformation to connect EPZs with local cotton producers/suppliers. Based on this finding, the

performance indicator may not have met the desired achievement. More importantly, theindicator does not specify the extent or percentage of desired local content in exports, and it doesnot state a timeframe for achieving the target. It is therefore not measurable, attainable andtimely or time-bound. The indicator is both specific and relevant as it is meant to improve thebackward linkages between EPZ firms and potential local suppliers. The EPZA should thusimprove this performance indicator, in order to make it completely SMART for enhancing itsimplementation and evaluation process. The government could also give this a boost by settingminimum local content requirements in locally produced exports; this could be arrived at afterundertaking a comprehensive survey of the domestically available inputs or raw materials thatare critical in exported goods.

(v) Promoting industrialisation for diversifying and facilitating exports and enhancinginternational competitiveness

The performance indicator for this target was to have an average of 10 EPZ factories establishedper year starting from 2007/08 to 2011/12. Exactly 10 factories were established during 2007/08,and, for the 11-month period ending May 2009, 12 factories had been set up, hence surpassingthe target. The challenge remains as to whether this will be sustained until June 2012 when theproper evaluation of the target is to be done (based on its timeframe). The relevance of the targetis such that increased EPZ factories are a good indicator of growth in the export sector, as theybring about positive externalities including job creation, generation of export earnings, payingtaxes, and technology transfer followed by absorption in domestic SMEs. Judging by its currentstatus, the performance indicator meets all the SMART requirements.

(vi) Developing human capital (highly skilled labour)

The indicator for this target is for local experts to constitute at least 85-90 percent of expertneeds in EPZs. Evidence from the field indicates that EPZ firms have continued to rely onforeigners, especially for advanced technology-related skills, which are highly lacking from thedomestic market. Low and medium skills are being sourced from graduates from localeducational institutions, including the University of Dar es Salaam College of Engineering andTechnology (UDSM-CoET), Dar es Salaam Institute of Technology (DIT), University of Dar esSalaam Business School (UDBS) and Vocational Education and Training Authorities (VETA).The indicator is specific, relevant and timely or time-bound; but it is limited by the lack of dataon the extent of local experts employed in EPZs, and hence by the difficulty of measuring itsactual attainment. Also, the above field evidence points to a low probability of achieving theindicated target.

(vii) Attracting/encouraging the transfer and domestic absorption of technology

The performance indicator for this target is to see an increased number of local SMEs involvedin EPZ operations and exports. This builds on the preceding target (vi), since strong SMEscapable of effectively absorbing technology from MNCs and undertaking business operations(e.g. in EPZs) are those formed by and comprised of capable human resources with advanced

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skills. As it stands, the indicator lacks some SMART requirements, as it does not have ameasuring base; and its attainment is questionable based on the fact that Tanzania lacks, for themoment, a critical mass of people (human capital) who can adequately and effectively absorbtechnology for establishing competitive and export-oriented SMEs. The indicator is also nottimely or time-bound; therefore it is not possible to establish its lifespan. However, it is highly

relevant, in that only by absorbing technology can the country and its people have control inshaping their future development path. The EPZA should review the above performanceindicator and strive to make it SMART compliant.

(viii) Fostering linkages between the local economy and international markets

The performance indicator for this target is achieving growth in EPZ exports towards meeting 25percent of the value of GDP by 2025, as per Tanzanias Development Vision 2025. Roughestimates place Tanzanias current GDP at US$ 12 billion; and for the 11-month period to May2009, exports from the EPZs were recorded at US$50 million. Therefore, for the 2008/09 period,EPZs exports amounted to approximately 0.42 percent of the countrys GDP astronomically farfrom the desired contribution of 25 percent by 2025. The indicator is specific, measurable,

relevant and timely or time-bound; but it falls short of convincing an observer that the desiredperformance level will be attained by 2025. If this is to come about, purposeful and radicalreforms need to be instituted to cover the whole export sector. The reforms should emphasise thesize and competitiveness of the sector in domestic as well as regional and international markets.

4.3 Evaluation of Tanzanias EPZ programme using OECD-DAC criteria

This section presents an evaluation of Tanzanias EPZ programme for all five OECD-DACcriteria used in this study, namely relevance, effectiveness, efficiency, impact and sustainability.These criteria are designed to cover all eight targets of Tanzanias EPZ programme. The reader

will note that because there are seven respondents and eight EPZ targets (i.e. four objectives andfour goals), there can be a maximum of s

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