Balancing incentives for domestic investment and FDI

The 2023 Zimbabwe National Chamber of Commerce (ZNCC) Annual Congress was held from June 28-30, 2023 in the resort city of Victoria Falls at the ceremonial home of high level conferences, the Elephant Hills Resort.

The Annual Congress is a private sector flagship event for the chamber, whose main thrust is to facilitate dialogue between the various stakeholders that include Government, investors, the business and diplomatic community, civic society and the academia on issues pertaining to the Zimbabwean economy.

Resolutions emanating from the congress’ deliberations are presented as part of ZNCC’s lobbying and advocacy, input into policy formulation and implementation to enhance business viability and foster accelerated business growth.

The Congress was running under the theme: “Transforming Economic Realities into Market Opportunities”. Resilient and adaptive organisations do take full advantage of economic realities, challenges and problems, by transforming them into opportunities.

The theme is a successor to the 2022 theme: “Bolstering Resilience and Innovativeness for Sustainable Growth”, which guided the activities and discussions in the previous year.

Investment, be it domestic or foreign, is regarded as one of the key engines to economic growth and prosperity. African economies continue to face stiff competition and several challenges to attract foreign direct investment (FDI).

Several efforts made have been futile because of numerous factors that play against the business environment for both domestic and foreign investments.

On one hand, investment incentives are expected to attract new investments while contributing to economic development and livelihoods. On the other hand, investment incentives imply costs to the taxpayer.

There has been disgruntlement among the intended beneficiaries of the investment incentives in Special Economic Zones, Industrial Parks and specific sectors such as tourism, health, and manufacturing, among others, on the incentive structure for domestic and foreign investors.

The Panel Discussion on this topic takes an in-depth exploration on the influence of monetary and non-monetary incentives to attract both domestic and foreign investors to invest in different sectors and strike for a balance on the two groups of investors.

TIn his opening remarks, Mr Chawoneka highlighted that we can overemphasise the importance of investment, be it foreign or domestic. Further, he stressed on the impact that Covid-19 and the geopolitical developments have had on the world economy.

As a result, different jurisdictions have adopted a number of incentives to entice both internal and external investors to bring about recapitalisation of businesses that were negatively affected by the pandemic.

Accordingly, the environment was said to determine the narrative that could be pursued at any given point in time.

Various sectors such as energy, manufacturing, construction, education and mining, among others, do require different and specific incentives with other narratives like job creation.

In Zimbabwe, the proliferation of statutory instruments (SIs) is a key factor and the legal framework allows the Ministers and the Executives to come up with SIs whenever the need arises.

For example, the Zimbabwe Investment Authority Act Chapter 24 allows the Minister to come up with SIs and it does speak about incentives also.

The Eurozone has put in place a Euro 1,8 trillion in terms of tax rebates and incentives to industries that are not increasing the carbon print and investing in emissions reduction technology.

According to Mr Matsekete, incentives encourage investment and policymakers need to be conscious of what they are trying to achieve. First, in encouraging the right investment, there is need to be wary of the cost of incentives to society as the lack of careful consideration can result in a burden to the economy in the long-run.

A misalignment of the existing real disadvantage and the level of incentive to be put forward will result in information asymmetry in terms of access to markets, and resources.

This can also create inefficiencies in terms of business models by incentivising inefficiencies or suboptimal productivity and ill-practices where beneficiaries can extract profits by manipulating the incentives system.

All being said and done, incentives ought to be purposeful, ought to always keep the bigger/common good at the centre.

Mr Chawoneka added that the key question is on why incentives. For example, for Zimbabwe to record enhanced technology transfer through foreign investors coming in and training locals, in a world where countries are competing for investment, the creation of an environment, which attracts investors will also aid in decision-making.

Mr Chinamo chipped in with some of the approaches that the ZIDA takes when dealing with both domestic and foreign investors. ZIDA is inundated on a daily basis by investors seeking incentives in national project status, Special Economic Zones (SEZs), and Industrial Parks.

There are five key things that investors, both domestic and foreign, will be looking at to reach to a decision to invest in a country, and these are: the business operating environment, business and investment facilitation, the rules of the games, costs of new investment, and Three main types of investors include the resource seeking investors which may not necessarily need incentives, market seeking investors, and efficiency seeking investors.

Each investor has quite different needs and by looking at incentives, there is need to take a good consideration of each group of investors’ needs.

He provided that when we talk of investment, it should not really matter whether it’s domestic or foreign direct investment. For the mining sector in Zimbabwe, investors are coming regardless of the business operating environment and if there aren’t any incentives in that area, investors are going to come anyway.

Loading incentives into the mining sector will not really reap the benefits to society but costs to the taxpayer. The incentives can be put to encourage processing and mineral beneficiation rather than the lower end of the value chain.

As the moderator, Mr Chawoneka chipped in to reflect on the submissions by the ZIDA CEO highlighting that incentives are not a must and before moving forward, there is need to balance between the costs and benefits of the incentives for investors.

He questioned if it would be better to offer incentives for the value addition of lithium rather than banning the exports of raw lithium since incentives can be used as instruments to promote certain behaviours as opposed to the wide use of SIs.

In picking from Mr Chinamo, Mr Guracha Adi Bidu added that from the three key motivators for investment destinations as mentioned earlier, the fourth aspect has to do with strategic asset seeking investors.

Accordingly, the highest number of investors that require incentives are the efficiency seeking investors because they are looking at the destination, the costs involved (power, corporate income tax, and labour), access to raw materials, and the rule of law.

In the Republic of Kenya at the moment, the Kenya Investment Authority have quite a number of incentives in place through the SEZs and the Export Processing Zones (EPZs).

The EPZs are seeking and targeting export oriented investment came into being in the early 1990s and has been in existence since then. All products that are manufactured in the EPZs are destined for the export market.

However, this is quite similar to the Zimbabwe’s SEZs Act which states that only export-oriented firms can benefit from the incentives that accrue in such an economic zone. This is attributable to the low uptake of the SEZs initiative in Zimbabwe.

Mr Guracha Adi Bidu stressed that the Government need to look at the cost and benefit of the incentive structure and this is in line with the submissions by Mr Matsekete. In relation to the submission by Chawoneka on grants by the European Union, Mr Garucha Adi Bidu highlighted that the developing world does lack in terms of capacity to provide such grants and bailouts to industry but can offer tax holidays and tax breaks.

The procedural and doing business environment are at the forefront for incentivising one to invest in any location or jurisdiction. The preliminary infrastructure like roads, network connectivity, railways and airports are also part of the determining factors for one to consider investing in a country like Kenya or Zimbabwe rather than Germany or Japan.

In his remarks, Mr Gwanyanya highlighted that the question of currency comes into play as African economies open up and the era of protectionism is fading away.

The industrial policies in place are not necessarily reflecting well on the approach the continent is taking with respect to free trade. In his own words, Mr Gwanyanya indicated that for an average investor in Zimbabwe, the greatest incentive is macroeconomic stability.

Businesses are operating in an environment of instability and this has been going on for a considerable amount of years which has been disincentivising both domestic and foreign direct investment.

In conclusion, solving regulatory complexities and macroeconomic stability is critical in incentivising both domestic investment and foreign direct investment. In balancing both domestic investment and foreign direct investment, the fiscal, monetary and regulatory frameworks need to tick all the boxes for a pro-market economy.

Incentives should have a sunset close in that they should not be there for infinity but for an agreed period of time. There is a need for public evaluation of all the policies or the costs to the taxpayer for the incentives that are put in place to encourage investments from time to time.

The article was prepared by the ZNCC for Business Weekly