Monday, July 14, 2003
Seal Loopholes to Avoid Misuse of Industrial Zones, WB Tells Uganda
THE EASTAFRICAN
THE WORLD BANK has advised Uganda to be cautious in implementing its policy on industrial zones, which Finance Minister Gerald Sendawula announced would be established in the country for the first time this financial year.
The World Bank and the International Monetary Fund are having discussions on how the system can be successfully implemented, while avoiding misuse by investors and government officials. The donors were also planning to ask the Ministry of Finance to furnish them with a report on how the system will be implemented, as Mr Sendawula did not spell this out in his budget speech on June 12.
The Finance Minister announced that industrial zones for the production of exports would be set up and investments in these zones provided with a wide range of tax incentives. Among them are a 10-year corporate tax holiday; duty exemption on raw materials, plant and machinery and other inputs; and stamp duty exemption.
In addition, duty drawback would apply on import of goods from domestic tariff areas and there would be no export tax on goods exported. There would also be exemption of withholding tax on interest on external loans, and dividends repatriated would get relief from double taxation.
Sudharshan Canagarajah, the World Bank's senior country economist for Uganda, told The EastAfrican that they would hold discussions with the government on how to smoothly implement the export processing zones (EPZs). He said the donors were aware that implementing the industrial zones would not be easy.
"There will be start-up costs and the country will need capacity to handle the programme. If the Uganda Investment Authority, which does not get many requests, is still struggling to cope, then, with the industrial zones, which could get 10 times more requests, you need institutions and capacity," he said.
Most countries give corporate tax exemptions of five years to companies in export promotion zones, but Uganda has offered a 10-year holiday. Officials said, however, that since this was the first time and Uganda was a landlocked country with defective utilities and poor infrastructure, it needed to offer attractive incentives in order to attract investors.
Mr Canagarajah said the Finance Ministry planned to give incentives to some firms that were not located in the industrial zones, which could potentially open the programme to abuse. "We need to know who will implement the EPZs programme and how to ensure that it is not misused."
During the May 2002 donors consultative conference in Kampala, Uganda's donors said that while they supported the government's objective of boosting exports and encouraging private-sector investment, "We believe that this should be done in a more transparent manner."
"In the past two years, more than Ush100 billion ($50.5 million) has been allocated to strategic exports, resources that have a high opportunity cost in terms of achieving other Poverty Eradication Action Programme targets, and which we fear will provide poor value for money," the donors said in a report.
They said Uganda should set out clear principles to guide its interventions in the export sector and avoid handing out subsidies like cheap loans, tax breaks and subsidised rail freight on a selective basis to individual investors.
Donors have asked the government to provide a "full and transparent accounting" for all the funds provided through the budget or through the Uganda Development Bank to private companies such as those in the textile and clothing sector.
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