Special Economic Zones for South Africa
Paul Kruger, tralac Researcher, discusses Special Economic Zones for South Africa
On Monday Rob Davies, Minister of Trade and Industry announced plans to introduce special economic zones (SEZs) in South Africa. In his statement, the Minister said that the SEZs programme is one of the most critical instruments that can be used to advance government’s strategic objectives of industrialisation, regional development and job creation. He added that the development of these zones can help to improve the attractiveness of South Africa as a destination for foreign direct investment.
The new initiative aims to improve on the concept of industrial development zones (IDZs) which have enjoyed mixed success since being introduced in December 2000 through the Manufacturing Development Act. An IDZ is a purpose-built industrial estate linked to an international airport or seaport which is tailored for the manufacturing and storage of goods. It offers investors certain rights within the zone, in addition to incentives such as customs duty and VAT relief. One important priority of the IDZs is to boost job creation and skills in underdeveloped regions. The IDZ programme led to the establishment of five zones – Mafikeng, OR Tambo International Airport, Richards Bay, East London and Coega. The Richard’s Bay IDZ only commenced its first phase of development in September last year while OR Tambo International Airport is not yet fully operational. The Industrial Policy Action Plan, issued by the Department of Trade and Industry in February 2011, has also identified, as a key milestone, the establishment of an additional IDZ at Saldanha Bay. According to the Minister’s statement, the achievements of the IDZ programme include a total of 40 investors with more than R11.8 billion worth of investments and 33 000 jobs (both construction and direct) being created. These IDZs would continue to exist as SEZs under the newly planned regulatory framework.
The Minister conceded that the IDZ programme did not have the anticipated effect and that more could have been achieved. He cited the following challenges with the IDZs: a design structure that favoured a few regions, support that focused narrowly on the provision of infrastructure, planning done on an ad-hoc basis, inadequate coordination among key government agencies and stakeholders, financing arrangements that made it impossible to do long term planning, and inadequate targeting of investments. Another aspect being criticised as being prohibitive to prospective investors is the refusal of government to make concessions on the strict labour regulations of South Africa. Although national laws may be suspended inside industrial zones, government is currently not offering regulatory incentives to derogate from labour rules, a concession which is seen by some as crucial to stimulate investment in special zones. It is however unlikely that a relaxation of labour laws will be considered under the SEZ initiative. Benefits are rather expected to come in the form of enhanced incentives for labour intensive projects and additional tax relief for investors.
The development of the SEZs is an attempt to address certain planning, regulatory and institutional inefficiencies of the older IDZ model, while broadening the scope of the zones to include more activities. IDZs are export-oriented and only found near airports and seaports but the SEZs are expected to cover a wider range of sectors that could be developed anywhere in the country. Possible initiatives mentioned by the Minister include the establishment of special science parks, technology parks and sector specific hubs. The department is working with various provinces, and potential SEZs in the areas of light-manufacturing, agro-processing, renewable manufacturing and platinum beneficiation have been identified. Other activities being considered by the department includes aquaculture, mineral sands, gas and oil.
The draft Bill on SEZs will provide a dedicated legislative framework for the development of these zones. The main objectives of the SEZ Bill are to provide for the designation, development, promotion, operation and management of Special Economic Zones. A strong institutional setup is foreseen as the Bill provides for the establishment of a Special Economic Zones Board which will advise the Ministry of Trade and Industry on policy, strategy and other related matters. Under the Manufacturing Development Act the Minister was responsible for issuing operating permits but under the newly proposed Bill, the SEZ Board will have responsibility for the application and issuing of permits. The Bill also allows for the establishment of the Special Economic Zones Fund to provide for a more coherent and predictable funding framework that enables and facilitate long-term planning. The Minister invited the public to make comments on the draft Bill which is due to be published shortly.