Special economic zones a refinement of strategy

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The special Economic Zones (SEZ) Bill, which is being tabled today, aims to support a broader-based industrialisation growth path, balanced regional industrial growth and the development of more competitive and productive regional economies with strong up and downstream links in strategic value chains.

Adoption of this bill will be a significant milestone in pursuit of the aspirations expressed in the National Development Plan (NDP), New Growth Path (NGP) and Industrial Policy Action Plan (IPAP).

SEZs are defined as geographically designated areas of a country set aside for specifically targeted economic activities, supported through special arrangements and systems that are often different from those that apply in the rest of the country.

Preceding the SEZ Bill, the Department of Trade and Industry (dti) initiated the industrial development zone (IDZ) programme under the Manufacturing Development Act (MDA) in 2000. The focus of the IDZ programme was largely to attract foreign direct investment, increase exportation of value-added manufactured products and create linkages between domestic and zone-based industries. To date, five IDZs have been designated (Coega, East London, Richards Bay, OR Tambo and Saldanha Bay.

I can confidently indicate that there are already eight investors in the oil and gas sector that are signing to invest at Saldanha Bay IDZ. Three of the five IDZs – in Coega, East London and Richards Bay – are fully operational. While these have achieved some major successes (42 operational investments worth R4 billion created with over 5 000 direct jobs and 43 000 construction jobs), some weaknesses on the implementation were identified during the IDZ policy review, which include:

- Weak governance;

- Lack of IDZ incentives;

- Poor stakeholder co-ordination; and

- Lack of integrated planning.

Most importantly, the criteria for IDZ designation were biased towards the development of coastal regions and ignored the economic potential in the inland regions. IDZs are by nature export oriented and being close to the sea or an airport become strategic for logistics purposes.

Due to the identified weaknesses, the programme could not assist the country to unlock the long-term development potential of all regions and reverse the process of economic marginalisation and the perpetuation of spatial inequalities.

Confronted with these challenges (especially the concentration of economic activity around metropolitan areas in the three regions of Gauteng, KwaZulu-Natal and Western Cape), including the economic crisis that started in 2008, the dti recognised that measures responding to both global and domestic economic conditions required a focus on new sources of competitiveness. These lie in innovation and productivity, with an entrenched base in skills, infrastructure and efficient responsive state action – that is, more versatile policy instruments.

The dti has, therefore, identified the SEZ programme as one of the appropriate mechanisms that will contribute towards the realisation of economic growth and development goals as envisaged in the IPAP, NGP and NDP. Besides the SEZ Bill serving as an enabler for the government to effectively regulate all SEZs, including IDZs which are a category of SEZ, it also proposes an internationally competitive SEZ value proposition that will assist in attracting domestic and foreign direct investments into the zones.

The intention is that industrial production in the SEZs will focus on the manufacture of value-added goods.

Once designated, it is expected that each SEZ will have strong backward and forward links with other sectors in its locality, building and strengthening localisation through supplier development programmes – a departure from the traditional SEZ model in you had SEZs as separate enclaves.

SEZs offer a potentially valuable tool to overcome some of the existing constraints to developing industrial capabilities, attracting investments and growing exports.

The bill builds on the experience that we have gained from the IDZ programme and introduces a number of new measures that take into consideration input by the general public and social partners at Nedlac, the government, labour and business negotiating chamber. The SEZ Bill thus provides for the:

- Designation, promotion, development, operation and management of SEZs.

- Determination of SEZ policy and strategy.

- Establishment of the SEZ advisory board and fund.

- Regulatory measures and incentives for SEZs to attract domestic and foreign direct investment.

- Establishment of a single point of contact or one-stop shop to deliver government services.

The bill introduces a variation of SEZs, to cater for the various socio-economic and regional/spatial planning considerations of the various spheres of government at local, provincial and national level. In particular, the SEZ Bill provides for the designation of the following types of SEZs:

- Free ports: Duty-free areas adjacent to a port of entry where imported goods may be unloaded for value-adding activities, repackaging, storage and subsequent re-export, subject to special customs procedures.

- Free trade zones: Duty-free area offering storage and distribution facilities for value-adding activities within the SEZ.

- IDZ: A purpose-built industrial estate that leverages domestic and foreign fixed direct investment in value-added and export-oriented manufacturing industries and services.

- Sector development/specialised zones: Zones focused on the development of a specific sector or industry through the facilitation of general or specific industrial infrastructure, incentives, technical and business services primarily for the export market.

By making it possible to have different categories of SEZ we aim to address the previous challenges experienced within the IDZ programme, allowing for the tailoring of the individual SEZ strategies to fit individual needs and demands.

The National Assembly’s trade and industry committee invited written submissions from stakeholders. Submissions were received from Business Unity SA, the Centre for Development and Enterprise, the Chemical and Allied Industries’ Association, the East London IDZ, the Free Market Foundation, the Minerals Processing and Beneficiation Industries Association of Southern Africa, Paul Hjul and the Richards Bay IDZ.

Some of the issues addressed, which have further been elucidated on and addressed in the bill, include the following:

- Defining the composition and nature of the SEZ advisory board, members’ terms of office and removal of the advisory board.

- Describing the roles and functions of, and the relationships between, the various structures created in the bill.

- Clarifying how the one-stop shop will operate in order to streamline approval processes and reduce red tape.

- Providing for a public consultation process prior to the minister making certain decisions.

- Explaining details on the IDZ transitional arrangements.

After the committee supported the bill, it was then tabled, where it was supported and referred to the National Council of Provinces (NCOP) for concurrence. Through the NCOP, the bill was presented to eight out of nine provincial legislatures and at 16 provincial public hearings. The level of support accorded to the bill by all parties involved is a clear indication that South Africa wants to realise a higher industrial path and an improvement in the livelihood of its citizens.

The consultation processes resulted into an improved formal regulatory framework supporting the SEZ programme. Furthermore, extensive regional and international benchmark studies were conducted to determine the appropriate support measures for the SEZ programme that would allow for South Africa to compete in the international SEZ environment.

The following support measures were put in place to enhance the SEZ value proposition including:

- A broader SEZ incentives strategy allowing for 15 percent corporate tax, building tax allowance, employment tax incentive, customs controlled area (VAT exemption and duty-free) and accelerated 12i tax allowance.

- An enhanced funding strategy, including a comprehensive SEZ fund, mix of funding instruments, public private partnership arrangements, and so on.

- Infrastructure strategy. Accommodation of bulk infrastructure requirements by the government through the SEZ fund, greater SEZ location considerations, and greater involvement of various stakeholders’ roles in providing infrastructure in and out of zone.

- Skills and supplier development. Skills development strategies and frameworks for SEZs are being formulated jointly by the dti and relevant international experts and national authorities. These include supplier development programmes to develop our local businesses in and around SEZs, as well as the continuous training of civil servants on SEZ in partnership with Chinese and other international partners.

- One-stop shop strategy. To reduce the bureaucracy and red tape (cost of doing business) of government approvals and applications processing, a single point of investor contact will be implemented within each SEZ. This platform aims to reduce information search and transaction costs for investors located within SEZs, to facilitate permits and licences for investors, to reduce steps in approvals and to provide a more effective and sustainable investor aftercare service.

The department is in the process of finalising the one-stop shop delivery model, which will be rolled out soon.

The designation of new SEZs will take place once the new SEZ Act and regulations are in place.

It is imperative that the SEZ Bill is expediently considered in order to take advantage of this huge imminent interest and opportunity. Support for the SEZ Bill would be greatly welcomed.

* Rob Davies is the Minister of Trade and Industry


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