Well-designed SEZs hold jobs and investment potential

South Africa is moving to include special economic zones (SEZs) in its industrial and economic development toolbox in the hope that they will help stimulate fixed investment, particularly investment that can contribute to the country’s reindustrialisation thrust.

SEZs have been widely used internationally and typiaclly have clear mandates and focus industries. Under South Africa’s Industrial Policy Action Plan (Ipap), the main aspiration is to create regional and industry-specific hubs in an effort to strengthen and diversify the industrial sector by attracting foreign and domestic direct investment, create jobs and provide a platform for skills and technology transfer.

Trade and Industry Minister Rob Davies says the aim is to foster enabling environments conducive to the development-targeted industrial activities and to attract domestic and foreign direct investment in the manufacturing and tradable services sectors. The aim is also to use industrial parks to stimulate a regionally diversified industrial economy, particularly in underdeveloped provinces.

“The purposes of the SEZs include facilitating the creation of an industrial complex, with strategic economic advantages for targeted investment and industries in the manufacturing sector and tradable services.

“This will also focus on developing infra- structure to support the development of targeted industrial activities and to attract foreign and domestic direct investment,” says Davies.

The Department of Trade and Industry (DTI) has followed up on this vision with a legislative framework, which is currently in Bill form. The SEZs Bill 2013 was gazetted for public comment on March 1 and was introduced in Parliament on March 5. The DTI presented the Bill and a background Bill before the legislature on April 26.

It has called for public comment and the Parliamentary Portfolio Committee on Trade and Industry has been hosting public hearings on the proposed legislation.

The Bill provides for the designation, promotion, development, operation and management of SEZs, as well as for the establishment and functioning of the SEZs Advisory Board and the appointment of members.

PULL FACTOR?
With the establishment of SEZs, the South African government aims to promote targeted industrial capabilities within the framework of Ipap, the New Growth Path (NGP) and the National Development Plan (NDP).

Frost & Sullivan public-sector analyst Shakira Maharaj beleives there are many potential benefits for enterprises operating within SEZs, such as competitive positioning; access to state-of-the-art infrastructure; proactive marketing; incentives such as tax benefits and access to affordable land; support by strong champions who are empowered to lobby government; and enhanced ease of doing business, such as faster approvals of government processes.

It is hoped that, with so much work and effort being put into the SEZs, the desired outcome will be achieved once the zones have been established. There is a lot of pressure on the DTI to deliver on the SEZs to solve various challenges, such as unemployment, inequality and economic disadvantages that are rife in South Africa.

Democratic Alliance shadow Deputy Minister of Trade and Industry Geordin Hill-Lewis notes that SEZs create a pull-factor area for the creation of economic opportunities that currently do not necessarily exist, adding that SEZs are a seeding opportunity for South Africa.

Centre for Development and Enterprise (CDE) executive director Ann Bernstein concurs, adding that the SEZs could help the country deal with its massive unemployment challenge.

“As China develops, some of its labour- intensive industries are going to move, as some already have, owing to the increasing growth of industries. This is a good opportunity for South Africa to see an increase in foreign investment and job creation opportunities,” Bernstein argues.

“There are 85-million manufacturing jobs in China. One of South Africa’s national priorities should be to attract a few million of the jobs that China is destined to shed through the establishment of the zones,” she says.

The key to getting the right conditions for such an opportunity is to get businesses and entrepreneurs involved in the designing and running of SEZs. It is vital that the structures that govern the SEZs are strongly represented by small and medium-sized business and potential investors.

“Only 40% of South African adults work and unless we fix that, the country will not make social and economic progress. We can’t afford to set up SEZs that are as ineffective as the industrial development zones (IDZs). South Africa needs to focus on building SEZs that will attract labour-intensive businesses,” adds Bernstein.

Hill-Lewis also notes that the setup of the SEZs should not be wall-to-wall. It is all very well to identify two projects per province but there should be a focus on highly competitive sectors that have the potential to bring about high-growth potential and job creation.

IDZs & SEZs
Before identifying SEZs, the South African government adopted the idea of IDZs. The main aim of the IDZs was to promote the competitiveness of South African enterprises through leveraging investment in export- orientated manufacturing industries and promoting the export of value-added manufactured goods.

For the most part, South Africa’s IDZs have failed to live up to expectations, or have not even materialised. Critics even argue that they seem to have had little impact, particularly on expanding or diversifying South Africa’s manufacturing sector or export performance.

Limited new investment suggests that the programme has failed to create investor-friendly environments, notes University of the Witwatersrand PhD candidate in the sociology department Crispen Chinguno in a report titled ‘Neither Fish nor Flesh: A Review of South Africa’s Version of the Export Processing Zones’. Moreover, most of the investments, thus far, are capital sintensive and have, therefore, generated relatively few jobs.

“Unlike some SEZs worldwide, investors in South Africa’s IDZs receive no special incentives. The zones also do not deviate from the social, labour and environmental legislation in force elsewhere in the country.

“The stated reason for this was an unwillingness to distort the economy, but it has meant that IDZs have not been able to offer investors a more attractive environment,” he adds.

Having reviewed the performance of IDZs, government has acknowledged that, owing to several critical design weaknesses, the IDZ programme did not have the expected impact and did not fulfil its potential of promoting investment and job creation – hence, the SEZs Bill and policy put forward by the DTI, notes nonprofit organisation Tralac researcher Sean Woolfrey.

International best practice has shown that consistent high-level political commitment is vital if SEZs are to succeed. South Africa’s IDZs have not enjoyed such commitment and, instead, have faced ideological contestation within government and among stakeholders.

Hill-Lewis says IDZs have not been very successful “because we have not been able to compete with IDZs in other countries, owing to the fact that we do not have adequate incentive programmes to find new investors”.

Four IDZs have been proclaimed in South Africa − Coega, in Port Elizabeth, in the Eastern Cape; East London, also in the Eastern Cape; Richards Bay, in KwaZulu- Natal; and OR Tambo International Airport, in Johannesburg.

“The formal designation of an IDZ at Saldanha Bay, in the Western Cape, is imminent and development is planned for 2013/14.

“The Coega, East London and Richards Bay IDZs, as well as the planned one in Saldanha Bay, form four of the top ten investment projects for 2013, marketed by the DTI’s Trade and Invest South Africa,” says Frost & Sullivan head of public-sector growth solutions Adri Grobler.

As South Africa transitions from the IDZ to the SEZ model, the existing IDZs can apply for SEZ status, she adds. It is, however, still unclear whether or not the DTI 12-I incentive will be applicable to companies operating from SEZs in the way it currently benefits companies operating from IDZs.

The selected priority sectors for the Coega IDZ, in the Eastern Cape, range from the automotive value chain; aquaculture; agro-processing, including food and beverage manufacturing; ferrous metal processing and fabrication; chemicals; logistics; energy and fuel; services and business-process outsourcing; as well as call centre operations.

The East London IDZ caters for aquaculture; agroprocessing, including food and beverage manufacturing; information and communication technology and electronics; renewable energy; as well as pharmaceuticals and general manufacturing.

The Richards Bay IDZ focuses on timber beneficiation, mineral beneficiation, com- ponent manufacturing and granite pro- cessing, as well as food and beverage manufacturing.

The future Saldanha Bay IDZ is designed as a cluster catering for the upstream oil and gas sector, including logistics, the fabrication of structures and parts, and marine repair activities.

Hill-Lewis notes that, even though the focus has shifted to SEZs, several IDZs are already operational. “Neither the Richards Bay IDZ nor the East London IDZ has been particularly successful, with much lower-than-expected locator investment.”

Davies, however, argues that the IDZ programme has delivered good results, parti- cularly the East London IDZ, with private- sector investment increasing from R600-million in 2009 to R4-billion in 2012 and 2013.

Given that South Africa’s SEZs focus on various sectors, there is an immense amount of potential that can be exploited to move the country forward, like other countries that have SEZs.

A CDE research report, ‘Special Economic Zones: Lessons for South Africa from international and local experience’, published in 2012, notes that 3 000 SEZs were established in 135 countries and they made a significant economic contribution.

And in 2008, SEZs accounted for more than 68-million direct jobs and $500-billion in trade-related value-add.

In 2004, they attracted 32% of all manu- facturing foreign direct investment and were the source of 41% of the world’s manufacturing exports.

REINDUSTRIALISATION GOAL
The South African reindustrialisation vision, as set out by the NGP, the NDP and Ipap5, aims to create an inclusive, strengthened economy that is driven by job creation and export- orientated manufacturing.

According to Maharaj, SEZs have the potential to support this vision because they promote export-driven manu- facturing through targeted infrastructure provision, industrial clustering, the attraction of foreign and domestic investment, as well as relaxed regulations and tariffs.

SEZs can also potentially support large-scale job creation because of the expansion of targeted industrial sectors and the potential for the relaxation of certain regulations within these zones.

In addition, Maharaj states that the reindustrialisation vision also aims to diversify the industrial sector. The prospective ten SEZs would specialise in supporting different industries, thereby promoting not only a diverse industrial sector but also regional economic development.

They create an advantage that stimulates an area or specific sector. This must be sustainable. The stimulation should, therefore, be regarded as a catalyst for that sector or area.

IMPLEMENTATION PLAN
The DTI is investigating the feasibility of ten future SEZs. Many of them promote beneficiation and value addition in the country’s minerals and other natural resources, in line with the targeted sectors for growth in Ipap5.

The announcement that ten potential SEZs have been identified, in conjunction with the provinces, could be a game-changer for South African manufacturers.

Maharaj states that, to achieve this, each of the ten proposed SEZs has a focused set of priorities. Atlantis, in the Western Cape, will focus on renewable energy; the Solar Corridor, in the Northern Cape, will focus on solar compo- nents and electronics; Mafikeng, in the North West, will focus on agroprocessing and mixed manufacturing, and on becoming a platinum hub; Burgersfort/Tubatse, in Limpopo, will focus on platinum, other platinum-group metals and beneficiation; and Saldanha Bay, in the Western Cape, will service the growing oil and gas industry on Africa’s west coast while expanding iron-ore exports.

Such zones are intended to bring mainstream economic activity to poor and isolated parts of South Africa by leveraging the commercial potential of a particular region. This will include industry clustering or targeted development.

Speaking to the portfolio committee on trade and industry at a meeting held in April, Davies said that SEZs would be categorised as free ports, free-trade zones, IDZs, or sector- development zones.

“Once the new Act is passed, the existing IDZs will form part of the SEZs,” he concluded.