Undertones of Raiply export processing zone

 

On the M1 tarmac that splits Viphya Plantation, it is unmistakable why Malawians think Africa’s largest manmade forest is going, going, going—almost gone.

In the scenic shadow of Elephant Rock in Mzimba, signs of the times flash past: enormous stretches with no trees; no replanting over deforested hills and valleys; sights of sooty stumps; heaps of saw dust, logs and tree branches left to rot or burn; and newly replanted trees going up in smoke.

The fragmentary reforestation and vanishing tree population on the roadside aptly sums up greater devastation beyond ‘the curtain’.

Just when onlookers think there can never be a worse raw deal, the sense of loss is deepening and fingers of blame point to brains behind wanton logging, timber making, summer fires, lax law enforcement and exporting of truckloads of timber for looting the national treasure.

The country’s vastest timber producer has been on the wane since government abandoned plans to carve a paper-making industry in preference for timber making.

Suprisingly, not many mention parts of felled trees which are left to rot or burn when sawyers go making timber.

 Green export zone

However, not all is doom and gloom.

At Raiply Malawi’s headquarters in Chikangawa, a modern factory offers a lot of lessons on what to do to increase export of finished products, not raw materials. Interestingly, the Export Processing Zone (EPZ) exemplifies how to reduce wastage of trees as well.

Foresters at Nthungwa described the loss as immense, but avoidable, saying the unwanted branches, timber and deformed tree might as well account for up to 50 percent of the trees harvested so far.

Rough logs spilt in the background. Scents of freshly crashed pine, hums of heavy machines. A mini-tremor emanating from the factory.  People at work. People at work. These are some of the sensual encounters at Raiply’s EPZ factory.

In their minds, Raiply owners envisaged the factory manufacturing quality products for exports, a vital investment to transform the country from a predominantly consuming agricultural economy to a net exporter of value-added goods.

“We invested about $14 million in setting up the factory and nearly everything manufactured here goes for export,” says Raiply chief executive officer Thomas Oommen

The desire to broaden the country’s export base led became a national agenda in 1995 when the Export Processing Act and its cocktail of tax breaks were enacted.

With its chimneys towering into the sky, the EPZ section could be an imposing monument proclaiming how the envisioned export arrangement is going up in smoke two decades on.

Factory manager Meher Prasam took us through a guided tour of the production chain, a journey of value addition which stretches 500 metres—the size of five football grounds.

At the beginning of the giant machines are mounds of vigwagwa (residual timber), twisted trees, branches and other forest material sawyers usually throw away as garbage.

“This is latest technology, the fourth of its kind in Africa,” said Meher. “The machine takes any type of wood material, even waste timber. Presently, timber makers throw away almost half the tree, but the so-called unwanted material is wasted resource.”

Just like that, the sawyers’ rejects become EPZ raw materials.

They so-called waste is tipped into a machine which chops them into chips that are later ground and digested into fibre. As the journey continues, the fibres are moistened and mixed with glue to form wet boards as thick as king-size mattresses.

In the process, the ‘wooden mattresses’ are cut to size, dried accordingly and pressed to become what blackboards are meant to be—with their thickness varying from nine to 24 millimetres. The end result subjected to sanding for a smooth finish and others go on to be laminated with a diversity of colours: white, cherry and beach.

As the heavy-duty machines roared on and folk lifts hauled finished block boards onto stacks awaiting orders, Oommen could not help one more detail: “About 95 percent of the products are exported to South Africa, Zambia, Kenya, Mozambique, Botswana and other countries. Only five percent is sold locally—usually on order.”

According to Meher, the factory produces nearly 2 000 block boards per day.

“The entire factory employs about 350 Malawians. Their jobs range from chipping the raw materials to digesting, auto-grading, grinding mixing with glue, cutting the mattresses, pressing them and finishing the block board,” said the factory manager.

Truly, there are people all over the plant, Malawians that brace the heat, fumes, grinding sounds and dust that are typical of the workplace to improve their income, livelihood and country’s standing on the export market.

 No gain

However, the success story is not without a downside.

Underneath the highly praiseworthy jobs and quality goods that have been unlocking new export markets since its opening in September 2011 lies the official lie called EPZ.

Oommen and company are candid about it.

“We have not benefited from the EPZ system,” said Oommen.

This follows what he terms a silent withdrawal of the promised tax breaks under the export processing arrangement.

He explained: “When we were getting loans for the EPZ factory, government promised that we will be exempted from taxes imposed on profits and raw materials, but we are currently operating like an ordinary factory.

“We are being taxed on nearly everything while repaying bank loan which are billed in dollars, meaning we have to pay back more following the devaluation and floatation of the local currency in 2012.”

In an interview, Ministry of Finance spokesperson Nations Msowoya expressed surprise at the claims.

Having asked for more time to consult, Msowoya stated: “I have cross-checked with relevant officials and I am informed nothing has changed. The EPZ arrangement is still on.”

But the Raiply CEO billed the missing tax holiday a major setback as the company faces competition from other export processing zones across Southern African Development Commission (Sadc) region and beyond.

In the region, Malawi, Mozambique, Zimbabwe and Namibia have embraced the arrangement which harnesses tax relief to encourage value addition, production of export-quality goods and job creation.

The country’s EPZ facilities are regulated by section 21 of the EPZ Act passed 20 years ago.

In 2012, the Ministry of Trade and Industry put an advert on the Sadc website marketing the EPZ facility as one of the reasons to invest in Malawi. According to the dossier, the incentives for investors include zero-percent corporate tax rate; 100 percent duty-free status for capital, equipment and raw materials; no duty on dividends and no taxes on purchases of locally made raw materials and packaging accessories.

“The country’s aim on the incentives is to encourage development that will enhance gross domestic product to the nation’s foreign exchange reserves and expand employment opportunity. The main thrust of investment incentives comes through the tax system directly or indirectly,” reads profile dating back to 2012 when Raiply opened its multimillion kwacha investment.

 Race to the bottom

Raiply—a wood processing firm with its headquarters at Chikangawa in Mzimba and shops in Lilongwe and Blantyre—signed a logging concession with government in 1999.

The firm’s products include plywood, block boards, flush doors, cornices and assorted furniture. However, the block boards from the new factory which are the only offering which was supposed to enjoy the EPZ tax breaks championed by the World Bank in 1991 to wean ailing economies from depending on farm produce to exporting manufactured goods.

Apart from wood wares, other industries under the country’s EPZ included textiles and garments, hides and skins as well as macadamia nuts.

Over the years, Sadc countries have come to regard the EPZ concept a suitable strategy for finding a niche in the global economy and a shift to become internationally competitive and export-led.

Some commentators call this a desperate attempt to create the much-needed jobs and exports—with Namibia and Zimbabwe drawing criticism from trade unions and rights activists having suspended labour laws in preference for EPZ.

In October 1995, the contentious concessions got a backing from Namibia president Sam Nuyoma who described them as “necessary” to allay investors’ fear of possible industrial strikes and lock-outs.

The Namibian quotes Nuyoma as saying: “The non-application of the Namibia’s Code in the EPZ regime is a delicate compromise which is necessary to achieve the larger goal of job creation.”

Interestingly, Malawi and Mozambique—with high poverty and unemployment rates as well as low unionisation—do not impose any exceptions to labour laws.

In random interviews, Raiply, the workers spoke of good pay and strictness on occupational health standards.

The workforce churning out block boards were clad in requisite protective wear—helmets, work suits, masks and gloves—during the visit.

This is contrary to proclamations of Herbert Jauch, who once headed Labour Resource and Research Institute.

At the height of the industrial unrests, the labour said export processing zones provide little prospects for addressing southern economic problems while threatening not only labour standards but also regional competition.

Jauch describes a “race to the bottom” as governments in the region compete for foreign firms by lowering labour standards and offering costly incentives to the investors. These greatly limit the net benefit of new investments to national economies while providing considerable benefits for foreign investors and shareholders, he writes.

His cost-benefit analysis shows the loss is two-fold: First, the direct costs for establishing EPZ infrastructure and subsidised services. Second, the indirect, cost of foregone government import and export duties.

But three years ago, the country amended its EPZ legislation with the then Minister of Justice Ralph Kasambara and his Economic Planning counterpart Atupele Muluzi telling Parliament that the zones were “very important” and “catalytic of positive change” if the country  was to realise the desired export-led economic rise.

According to the ministers, the EPZ supplements the 2011 National Export Strategy to ensure the country can attract more investment in key export sectors other than just agriculture which contributes over 80 percent to the economy.

They envisaged the changes making the country more competitive and encourage liberalisation in line with the General Agreement on Tariffs and Trade (Gatt) as well as the World Trade Organisation (WTO) standards.

It is, therefore, surprising why there seems to be little if any engagement with players on the production chain, including Raiply which ostensibly feels cheated.