Special Economic Zones an engine to stimulate growth
In the South African context, Covid-19 is threatening to exacerbate the already entrenched socio-economic challenges of poverty, unemployment and inequality that epitomised the country before the virus affected the world.
The Covid-19 pandemic will adversely affect the manufacturing industry in South Africa. No one knows when this pandemic will end, and the extent of the impact it would leave on the economy. But, certainly, whenever it ends, the impact would be significant in many industries, with jobs being affected in some of the sectors.
There are measures that government has taken to avoid massive job losses in the country. These include the notable R500 billion stimulus package that was announced by President Cyril Ramaphosa.
The Department of Trade, Industry and Competition (the dtic) has also decided to channel some of its programmes towards responding to the Covid-19 crisis. Key among these is the use of Special Economic Zones (SEZ) to stimulate industrialisation in the country.
The SEZ Programme has been prioritised as one of the instruments used by the government to attract foreign direct and domestic investments, integrate local firms into global value chains, increase exports, develop local industrial capabilities, accelerate the beneficiation of natural resource endowments, accelerate the development of the country’s lagging regions and create decent jobs.
SEZs are defined as a geographic area of a country or region allocated for specific activities that are supported through special measures that are not available to the country’s wider economy. These special measures may include discounted tax rates, infrastructure support and reduction of administrative red tapes.
According to the UN Conference on Trade and Development (Unctad) report published in 2019, almost 5400 SEZs have been established in 146 countries around the world and more than 500 new SEZs are in the pipeline.
This increase is an integral part of the global new shift in industrial policies and stiff competition for foreign direct investments.
In countries such as China, SEZs have been the main driver for growth and development. The World Bank has reported that 22percent of China’s gross domestic product, 45percent of total national foreign direct investment, and 60percent of exports are generated by Special Economic Zones.
SEZs in South Africa
Countries such as South Africa have introduced programmes such as SEZs within a context of multiple challenges such as being a developing country with a small population (small market) size, economic inequalities, high unemployment, historical injustices and over-reliance on commodities.
To make the country's programme more competitive and attractive, a number of fiscal and non-fiscal incentives were introduced for companies that are located in SEZs.
Key among them includes the 15percent corporate tax incentive, employment tax incentive, VAT and duty free for companies located in custom controlled areas, increased depreciation allowance on buildings, infrastructure development support and efficiency in processing the permits (visas, and land related approvals).
Since the introduction of the SEZ Programme, 11 SEZs have been designated in seven provinces. The latest SEZ is the Tshwane Automotive Special Economic Zone that was recently launched by President Ramaphosa. This programme has been shaping, and continues to shape, spatial and economic planning of the country.
Progress to date
The SEZ Programme has to date attracted (operational investments and non-operational) a head-count of approximately 264 investors, with an estimated investment of more than R56 billion. About 129 of these companies are already operational on site with 15 882 jobs created in factories. There are 135 companies that are still at different levels of development, with most of them either at the construction phase or finalising the land preparation issues such as environmental authorisation, building permits or designs.
Challenges and opportunities
The success of the SEZ Programme is currently hindered by a number of challenges. Some of these challenges have now become part of our daily lives. Majority of investments, especially heavy industries are discouraged by instability in energy supply.
The load-shedding that the country has endured in recent years has negatively affected investor confidence, with some of the companies deciding to scale down. The availability of land for the development has also been a challenge in some provinces. Provinces such as Gauteng do not have enough industrial land, while other provinces such as Limpopo have a challenge of accessing communal land. Most of the proposed developments get blocked due to the unavailability of land. Global warming has also done a serious damage to the rain patterns in the country, resulting in a shortage of water for industrial development.
There is also a concomitant prevalence of poor industrial infrastructure to support SEZ development in some of the hosting regions, which eventually leads to low attraction and retention of investments. Lack of sufficient appreciation of business development services, governance, compliance and regulatory framework further present unnecessary bureaucratic challenges. The efforts of a pursuing a co-ordinated framework through the newly adopted state District Model Approach presents an opportunity for the creation of a balanced ecosystem for integrated development.
Many economies have been affected adversely by Covid-19, and their businesses have been affected, with their market shares reducing and unemployment increasing.
Most countries will look at measures to protect their economies, some of these measures will certainly include import substitution. South Africa businesses will not be immune to these challenges, as many South African businesses are involved in exports market.
Some of the measures that will be undertaken to reactivate the economy will include the designation or approval of new special economic zones such as Bojanala in North West to drive the industrialisation in regions with massive economic potential. In order to have maximum impact, the SEZ programme has to be scaled-up to include more SEZs in areas that have maximum potential, including the upgrading of the old and strategic industrial parks such as Vaal Triangle, Ekaindustria and Babelegi in Gauteng.
Evidence demonstrates that the SEZ Programme could be utilised to increase the number of investments and job creation. South Africa is in a better position given its relatively good infrastructure base and the high skills level.
Great effort will be made in attempting to operationalise the already committed investments. The SEZ Programme has a long list of investments that have been secured and need to be operationalised. The dtic and provinces will have to dedicate their resources to ensure that these investments are operationalised and jobs are created. These investments also present an opportunity to accelerate the development of the infrastructure development, which has multipliers with regards to stimulating other manufacturing activities. Construction of these factories and other supporting industrial infrastructure such the extension of rail infrastructure will also create more jobs for the unemployed.
Fikile Majola is the Deputy Minister of Trade, Industry and Competition.