By: Tumelo Chipfupa
The poor State of South Africa’s public finances and the fragile condition of the global economy will, for the foreseeable future, make tackling South Africa’s twin challenges of stimulating faster growth and reducing inequality more difficult.
Now more than ever South Africa’s economic policymakers need to keep in mind the adage of Deng Xiaoping, the great Chinese reformer, of “crossing the river by feeling the stones”. Open-mindedness to new approaches, flexibility and experimentation can allow us to make progress even in these challenging times.
One area that calls for a new approach as we contemplate the deteriorating policy context is the government’s special economic zone (SEZ) programme, which is aimed at achieving export orientation and a geographically balanced growth trajectory for the domestic economy.
The way things are going financially in South Africa, with not much cash sloshing around in the public coffers and tough demands on the fiscus from all quarters, our existing model of SEZs might experience tough challenges ahead.
The SEZ programme is one of this country’s main programmes for attracting both local and foreign investment. SEZs are areas designated by the government within which industry can enjoy lower tax rates and other advantages.
SEZs have been shown to be successful in many other countries, such as China in the past 40 years and Ireland and the Asian Tigers in an earlier period.
South Africa has been experimenting with SEZs since 2001 but we have yet to adapt the global experience and develop a model that rewards us with the pay-offs that we desperately need such as increased investment, jobs and inclusive economic growth.
The Department of Trade and Industry (dti) has, with the new SEZ Act of 2013, revised the model that it has been following since 2001. The changes mainly involve creating greater clarity about the roles of different state institutions and broadening the range of SEZs that can be designated.
One constraint that still remains in the legislation is the dominant role of the state in setting up the infrastructure in an SEZ, with the act providing for private sector participation only in the form of a very rigid public-private partnership framework. Effectively the framework provides that private investors wanting to invest in the infrastructure of an SEZ can only do so in a joint venture with a state organ.
The proposed model may work in theory but the probable result is that the private sector will simply walk away and pursue other ventures where the risks are better understood and shareholders have more control over their investment.
The trend internationally is for increased private sector participation in conceptualising and investing in an SEZ infrastructure. A comprehensive study by the World Bank in 2008 found out that between 1983 and 2008 the percentage of privately owned SEZs worldwide had gone up from 25 percent to 65 percent.
Where private sector developers had been given a freer hand in the development and ownership of zone infrastructure, there was a realisation that zone facilities could be operated profitably. This in turn reduced the burden such SEZs placed on government resources.
In the last three years, the South African government has designated three new SEZs. It is also conducting detailed feasibility studies on nine additional new sites. This begs the question whether the government would be able to simultaneously and meaningfully fund 12 new SEZs if the feasibility studies are successful.
The restrictive nature of the legislation has also kept the private sector out, or at best discouraged it from meaningfully participating in the process of searching and discovering which geographic areas and sectors of the economy are likely to profit the most from being given special attention in the form of an SEZ.
A more permissive regulatory environment would encourage private sector developers to spend their own funds on feasibility studies, thereby ultimately giving the government a broader menu of possible sites on which to designate SEZ’s and invest scant public resources.
Giving the private sector a freer hand in the ownership and development of zones, while still reserving government’s responsibility of regulating and incentivising the business environment within these zones, will bring in additional funds to invest in the infrastructure, as well as much-needed skills and networks of local and international private developers necessary to make the programme a success.
Another possible reform to the model that could pay rewards is the concept of single-site zones, which is increasingly being adopted by other developing countries. Under the current model, no existing manufacturer can access SEZ benefits unless they establish a new factory in an SEZ or relocates an existing factory to an SEZ.
The SEZ envisaged by the model is a geographic area spatially removed from the existing domestic economy. It is a model more suitable for a low-income economy with stunted manufacturing capabilities than a middle-income country, such as South Africa of today, which has pockets of manufacturing excellence such as mining capital equipment, pharmaceuticals and automotive assembly.
A revised SEZ model needs to solve the problem of how to incentivise existing manufacturers that have the potential, with the right support, to become export leaders. Last year Cova Advisory conducted research for the Manufacturing Circle that catalogued the increasing number of countries that have chosen to award SEZ firms on single sites rather than to an area. The results were largely confirmed by a non-related study by the dti’s research wing.
South Africa is in a situation where we need to find out new ways of accelerating growth. Everyone talks of how many billions of uninvested capital the private sector is sitting on. Maybe with the right attitude and some creativity some of those sums could be used for investment in SEZs?
It’s time to cross Deng Xiaoping’s metaphorical river. Fortunately the Vaal is not as treacherous as the Yangtze. With the right attitude we should prevail.
Tumelo Chipfupa is a partner at Cova Advisory, and will be addressing the Manufacturing Indaba in Cape Town in November on SEZs.