New economic zones are no cure-all for manufacturing

Stumbling blocks for the success of special economic zones include legislation and alignment with other policy decisions and incentives, writes Amanda Visser

09 MARCH 2018 - 05:52 AMANDA VISSER

The approval of six special economic zones (SEZs) in the 2018 budget has been welcomed, but some industry players warn they are not a panacea to restore manufacturing to its rightful place in the economy.

Issues that remain stumbling blocks for the success of SEZs include legislation, consistency and alignment with other policy decisions and state incentives.

According to the Manufacturing Circle, which represents medium to large manufacturing companies, SA lost almost 400,000 manufacturing jobs during the 2008-09 financial crisis.

In its Map to a Million document, which looks at manufacturing’s contribution to GDP, the organisation’s chairman, Andre de Ruyter, says it declined from more than 15% during the financial crisis to just under 13% in 2017.

International experience shows that, at SA’s stage of economic development, manufacturing should contribute close to 30% of GDP.

In the early 1980s, manufacturing contributed 24% to GDP.

The aim of these economic zones is to increase trade, investment and jobs through special incentives and trade laws that differ from the rest of the country.

In SA, companies that invest in an SEZ are eligible for a preferential 15% corporate tax rate, employment incentives and relief from value-added tax and customs and excise duties.

Duane Newman, joint MD of Cova Advisory and Associates, says the SEZ incentives may look attractive, but they are location bound. He says the government does not want companies to shift their existing activities to the zones to reduce their tax liabilities.

The approved zones include Coega near Port Elizabeth, Dube Trade Port in KwaZulu-Natal, East London, Maluti-a-Phofung in the Free State, Richards Bay and Saldanha.

Treasury said in the 2018 budget review that legislation would be reviewed to ensure the granting of additional tax incentives did not create opportunities for local firms to shift their activities to the zones to pay less tax.

Newman, who is also chairman of the tax incentives work group at the South African Institute of Tax Professionals, says that to qualify for the reduced tax rate, 90% of the revenue generated has to come from activities within the SEZ.

If more than 10% comes from outside the zone, firms may be disqualified from the tax benefits.

He believes the biggest flaw in the legislation is statutory principles governing doing business with companies connected to SEZs.

If more than 20% of the business is between connected parties, the reduced tax rate benefit will be forfeited.

"In today’s world of integrated supply chains, this is a real barrier to the SEZs’ success," Newman says.

In a submission to the government on behalf of the South African Institute of Tax Professionals, Newman said that while the 20% allowance gave companies some space to buy from connected parties, it could not be fixed.

Many companies have invested large amounts of money in their plants and infrastructure, yet do not benefit because they are not operating in a SEZ

Uncertainty is created when taking measurements over the tax incentive period and, for this reason, many potential investors would rather not locate any of their operations in a SEZ.

Manufacturing Circle executive director Philippa Rodseth says the country requires three key factors to grow manufacturing.

This includes sector competitiveness; a supportive international trading position, especially where SA competes against unfairly incentivised imports; and the promotion of locally manufactured products.

She says the Manufacturing Circle has been advocating for "single-site SEZs" outside the designated zones.

These are areas where there is infrastructure, but where deindustrialisation has become rampant. The Vaal Triangle is such an area with two big industrial value chains, steel and petrochemicals.

Rodseth believes the SEZ benefits should be extended to these areas to rejuvenate industries. In every province there is an area that falls outside the designated SEZs.

Many companies have invested large amounts of money in their plants and infrastructure, yet do not benefit because they are not operating in a SEZ.

"There has to be a way of focusing on existing industrial areas where there is already stock and infrastructure which simply needs upgrading. From a cost-benefit analysis, this would surely get the country a better bang for our buck," Rodseth says.

Newman says "nonlocation-bound" incentives are vital and should be available and accessible to investors, such as the tax incentive for new industrial projects, expansions or upgrades of existing industrial projects.

He believes a further R5bn should be made available. The expiry date for the incentive has been extended to March 2020, but the budget allocations have been concluded.

"It is not wise to be marketing an incentive which has exhausted its R20bn budget. This can only end in tears with unhappy investors," Newman says.

Rodseth says that when a policy decision is made, the question should be whether it will benefit manufacturing. After there is an improvement in economic growth, there will be space to address multiple government objectives.

A World Bank investment forum held two years ago in Ethiopia concluded that special economic zones on the continent were "missing the basics" such as power, water and one-stop services and were not aligned with national development strategy.