Sonia Hoque (Programme & Operations Manager, ODI)
24 August 2017
In the quest for faster industrialisation and economic transformation, governments in Sub-Saharan Africa (SSA) have established a number of special economic zones (SEZs) and industrial parks. At the ACET-ODI Light Manufacturing in Africa Chapter launch on 5 June 2017 (part of the Pan-African Coalition for Transformation, PACT), these zones were a hot topic. Given past stigma around the quality and attractiveness of these zones to foreign investors, participants from around SSA were keen to learn from each other, and in particular from Ethiopia. The ‘immediate success’ of Huajian Shoe Factory in Ethiopia’s Eastern Industrial Park and sustained high growth in foreign direct investment (up 46% to $3.2bn in 2016, despite a fall of 3% in total in Africa in the same year) has caught the attention of peers in the region.
It is easy to see why – when turning a corner in the developing city of Hawassa, the last thing an unknowing visitor would expect to see is a brand-new modern manufacturing fortress. Boasting over 400,000m² of factory floor space, and expected to generate 60,000 jobs and $1bn in exports by the end of 2018, the flagship Hawassa Industrial Park of the Ethiopian Industrial Parks Development Corporation (IPDC) is a shining example of how to do SEZs well. International investors are attracted to Ethiopia, keen to take advantage of its cheap labour costs and modern technological resources which are needed to produce low-cost, high-quality garments and textiles competitively for export. Hawassa Industrial Park, which was up-and-running in just nine months, offers important lessons on how to set up successful SEZs: namely that financial incentives alone are not enough to attract investors – coordination of various aspects on both practical and institutional levels, by a government committed to a broader vision of industrialisation and manufacturing growth, is key.
Getting the conditions right
Two years ago at the Investing in Africa Forum in Addis Ababa, Minister Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia, stated past SEZs in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategies.” Representatives from government and the private sector in African countries agreed on a number of conditions that need to be met to successfully attract investment, create productive jobs and generate positive spillovers into the local economy. These included a clear strategy integrated with national development goals, careful planning, and high-level leadership and coordination. In Ethiopia, the IPDC has visibly strived to meet these and is rewarded in Hawassa Park with full utilisation of its 52 factory sheds by 17 companies including investors from Hong Kong, China, India, Bangladesh, Indonesia, Spain and the USA. After beginning with 37 sheds, 15 additional sheds were built in response to high demand. Prospective new investors are carefully selected by the Ethiopian Investment Commission (EIC). The demonstration effect is undeniable too – the presence of PVH, a producer of iconic American luxury apparel, signals to other investors that this Park is capable of supporting high-quality light manufacturing.
Hawassa Industrial Park is made up of four main elements which are carefully planned and integrated with 50km of underground piping: factories, housing units for expats, a water treatment plant and a textile mill (currently the largest in Ethiopia) which will eventually supply 100% of the textile needs for the Park’s incumbent companies. The latter is a key aspect of the Government’s plans for vertical integration and will benefit the country’s textile industry overall.
Reliable energy supply continues to be a major challenge for African industrialisation – average downtime in African SEZs is reportedly 11 times higher than non-African ones. To meet energy demands, the Hawassa Industrial Park is currently served by a 19-MW mobile substation, but it will eventually be supplied directly to the Park via a dedicated 200-megawatt (MW) substation (in comparison to the power supply for the rest of the city which totals just 75-MW).
However, modern and advanced facilities are not enough to attract manufacturing companies to African SEZs. At the PACT launch event, Pan Li, COO of the Made in Africa initiative, stated that prospective manufacturing investors want clarity on policies, strong commitment from country governments, and dislike uncertainty. To this end, the EIC is solely responsible for selecting investors and drawing up a strategy for all industries in the Park, and works closely with the Prime Minister’s office, which shows commitment at the highest levels to investors considering Ethiopia as their next manufacturing location. “Investors are attracted by strong institutions in Ethiopia, rather than just financial incentives” stated the EIC’s Deputy Commissioner, Belachew Fikre at the PACT event.
It is also well-known that simpler processes for setting up operations are attractive to foreign investors. Mindful of this, Ethiopia has created a one-stop institutional service with the EIC supporting new companies with banking, visa and immigration facilities, import/export licenses, work permits, and customs clearance, all of which helps speed up decision making and can reduce set-up costs.
Location, location, location
At almost 300km south of Addis Ababa, the selection of Hawassa, a relatively remote city, for an industrial park may be surprising to some. An environmentally-concerned observer may be troubled by the potential for contaminating the adjacent Lake Awassa, but the eco-friendly Park operates a zero-liquid discharge facility and strict conservation principles. Rather, the main pull of the city was the availability of the final factor for production that manufacturers need – labour. With 5 million people living within a 50km radius of the city (mostly of working age), manufacturers setting up in the Park can draw on an abundant supply of labour, something that is often challenging outside of capitals in large, sparsely populated African countries. The Park will generate approximately 60,000 jobs in Phase 1 and approximately 80% of those employed in the Park are women, which is significant from a social development impact perspective.
Challenges remain for investors and factory managers
Perhaps unsurprisingly, under the impressive veneer of the Hawassa Industrial Park, teething problems exist. Foreign factory managers have faced on-going issues with power failures and complain of difficulties sourcing essential supplies locally, such as stationery, instead choosing to import them (potentially at a higher cost). The cost of transport to and from the Park is also high, with one factory manager claiming the cost of transporting goods from the port in Djibouti to Hawassa is twice that of shipping across the Indian Ocean. But perhaps most concerning are the reported labour issues: high absenteeism as workers (reportedly) take unreasonable advantage of labour regulations favouring employees (taking bereavement leave for very distant acquaintances, leave for national exams they are not really sitting etc.), high turnover as workers move to other factories once sufficiently skilled, and even issues with ‘work ethic’ of employees who are unfamiliar with formal working practice and etiquette (‘soft skills’). The biggest qualm seems to be the compulsory hiring process – whereby workers sourced through a government job centre in the catchment area are sent to work in factories, and managers have little or no choice in selection beyond filtering workers by the simple skills ‘grade’ assigned at the job centre. If unaddressed, this presents a real risk to the long-term success of Hawassa Industrial Park – cheap labour may be attractive to garment manufacturers, but workers must also be productive and adequately skilled. The commitment shown by the Ethiopian Government so far must continue to ensure the quality and supply of labour meets the new demand by foreign companies.
The fact remains however, that Ethiopia has demonstrated that coordination and the presence of a long-term vision are important ingredients for building high-quality SEZs quickly. These, in turn, can create high numbers of transformational jobs, whilst also generating crucial positive spillover effects to benefit the local economy. To this end, other governments in SSA could already learn much from the Ethiopian experience to date.
Sonia Hoque is the Programme & Operations Manager of the Supporting Economic Transformation programme at ODI.
On 5 June 2017, ODI and ACET convened a meeting on Light Manufacturing in Addis Ababa, Ethiopia. An event report can be viewed online.
Photo credit (all rights reserved): Hawassa Industrial Park, SET Programme, Overseas Development Institute ©