Last chance saloon for SA’s special economic zones

Critics are enthused that the government wants to allow greater private sector participation in running its special economic zones, but say a deeper strategic rethink of the entire programme is needed


17 JUNE 2021 - 05:00 CLAIRE BISSEKER

The government is considering freeing up its special economic zones (SEZ) programme to encourage greater private sector participation. It’s not a moment too soon, according to critics, who say the programme has overburdened the fiscus and has underdelivered, especially in terms of job creation.

According to the department of trade, industry & competition (DTIC), about 145 firms have invested about R20bn across SA’s 11 SEZs, creating 15,301 direct jobs. The government has spent another R20bn in building world-class SEZ infrastructure over the past 20 years, which makes the programme extremely expensive in terms of the number of jobs created.

"SA has the world’s deepest unemployment crisis and the 11 SEZs that have been established are not making a meaningful impact," says Ann Bernstein, executive director of the Centre for Development & Enterprise (CDE).

In a recent report, the CDE argues that SA’s SEZs "are nothing more than industrial and office parks in which the infrastructure is partially subsidised". They do not provide investors with an environment that is much different from what exists in the rest of SA; nor do they address the real constraints on business, especially those that create lots of low-skilled jobs.

Claude Baissac, CEO of risk consultancy Eunomix, agrees, saying: "SA has some of the best SEZs in the world for infrastructure, but some of the worst in the world in terms of their economic impact."

He strongly urges the DTIC to pause the programme — especially the plan to build two zones in each province — until it has subjected it to a full cost/benefit analysis, something he says has never been done. But he is enthusiastic about the proposal to encourage greater private sector participation in SEZs’ development and management, saying they have become overly bureaucratised.

Globally, most successful export processing zones are public-private enterprises, where the private sector management receives incentives to attract and retain tenants. However, in SA, all SEZs are state-owned enterprises that rely entirely on the state for funding and, as they are not run on commercial lines, are unlikely to ever wean themselves off that dependence.

Even though SEZ legislation allows for private operators, the regulations are such that many operational decisions require ministerial approval, causing business to shy away.

Pierre Voges, CEO of the Atlantis SEZ, has pushed the envelope in bringing in the City of Cape Town as a minority equity partner in exchange for a R60m parcel of land. He is now in talks with the Industrial Development Corp, hoping to convince it to take a R40m-R50m equity stake.

Voges is encouraged that the DTIC appears to be moving in the direction of allowing greater private-sector participation, saying it is imperative for SEZs to be run on more commercial lines and to crowd in more private investment, including by allowing the sale of equity stakes to private firms.

"Some SEZs have great infrastructure, but no investors — why?" he asks. "If SEZs don’t become more commercial and crowd in more private investment it won’t happen. But it requires a major shift in thinking by the government to accept that the private sector is the main generator of jobs and that it must create a conducive environment through legislation to crowd in private participation."

Tumelo Chipfupa, joint MD of Cova consulting and, from 2006 to 2012, head of the department’s then industrial development zone programme, advises firms considering investing in SEZs. He has a clear handle on their frustrations, most of which are to do with inefficient implementation of the incentives on offer.

The chief gripe is that the main tax incentive that was promised and enacted in 2014 — a reduction in the corporate tax rate from 25% to 15% — was implemented only in 2019. It will now expire in 2031.

SEZ investors have also found it onerous to claim other tax and duty incentives back from the SA Revenue Service, as it has lacked dedicated capacity to deal with SEZ firms, he says.

Chipfupa has always been a big proponent of giving the private sector a bigger role. "We have the necessary skills to roll out a programme like this," he says. "I don’t think the framework provides for us to get those skills into the programme and, given the fiscal situation, it might also be useful to get private funds into the programme to speed up the pace of the rollout."

The DTIC held a confidential briefing with the heads of SEZs and some private consultants last week on the proposed legislative changes. It is not ready to go public with its proposals yet — but these don’t appear to involve a fundamental strategic rethink.

Baissac argues that this is exactly what is required. He says the current model should be turned on its head and the entire programme reconfigured so that it becomes a significant contributor to growth and development, especially employment.

This means the capital-intensive bias of the SEZ programme (nonsensical given SA’s energy crisis) needs to change, and the focus shift to courting labour-intensive firms, he says.

In short, the programme should be subsidising wages, not infrastructure costs.

"Where it is capital intensive, make it labour intensive; where it is relatively expensive, make it cheap," he says. And lighten the regulatory burden inside SEZs as much as possible.

For instance, Baissac would like to see the ease of hiring and firing, and obtaining skilled visas, greatly improved; BEE requirements bypassed; and the scrapping of exchange controls for import/export transactions.

The CDE suggests that SA should make a special test case of the Coega SEZ to find out if suspending SA’s normal rules would allow low-cost, labour-intensive manufacturing to flourish — essential if SA is ever to get on top of its unemployment crisis.

It proposes an experiment in which Coega investors are exempted from collective bargaining agreements. Instead, working conditions and wages (which would have to conform to the national minimum wage and basic health and safety rules) would be negotiated at factory level.

In addition, everything made in the zone would have to be exported to avoid prejudicing existing local firms, and skilled foreign managers brought in for their expertise in low-skilled, labour-intensive manufacturing.

"Done this way, an SEZ might become a kind of policy laboratory-cum-shop window in which the impact of proposed reforms can be tested, and their benefits showcased to sceptics," says Bernstein.

According to the CDE, the most successful SEZs are those that combine foreign companies’ technology and know-how with the local labour force. In this way they become instruments for accelerated integration into global trade, vastly increasing their job-creating potential and spillovers into the rest of the economy.

But SEZs are no panacea for SA’s economic ills, Bernstein concedes: "For every Shenzen success story, there is an expensive white elephant."

When zones fail, it is generally because they were the wrong instrument. In SA, many have been established in marginalised areas where infrastructure and support are limited, in the hope that they will become the catalyst for local development.

"The ambition for SA to have one or two zones in each province is unlikely to work," says Bernstein. "Not only are zones’ prospects maximised when they are near a port, but the forces that shape the spatial distribution of economic activity are not easily manipulated."

Baissac is more blunt: "The notion that each province must have two SEZs is not based on proper economic analysis, it’s just central government fiat — a decision that is far more political than economic."

But the case for the Coega SEZ is strong, says UCT economics professor emeritus David Kaplan. It already has extensive infrastructure, access to a deep-water port and a large industrialised but mostly unemployed workforce on its doorstep in Motherwell. This makes it "uniquely placed to generate what SA most needs: labour-intensive activities focused principally on the export market".

What is needed is an incentive-based proposition for a private investor, with experience in managing export processing zones, to run Coega so that it could attract this type of firm.

The main challenge is likely to be the high cost of SA labour since the national minimum wage makes labour-intensive activities for the global market uncompetitive in the absence of a wage subsidy.

Though SEZ firms can already take advantage of SA’s existing wage subsidy, the employment tax incentive, it runs out after two years and would need to be extended for several years to attract long-term, labour-intensive SEZ investors.

Trucks from Hong Kong drive into the Chinese border town of Shenzhen, China’s first special economic zone. Once farmland, the Chinese city of China after more than twenty years of economic change. The special economic zone of Shenzhen has developed from a vast farmland into one of the most has become one of the most modern cities in China.
Image: AFP via Getty Images/Thomas Cheng

But this raises a second problem. If an SEZ has a special, extended wage subsidy and its tenants are producing solely for export, it would fall foul of World Trade Organisation regulations that prohibit export subsidies. On the other hand, if SEZ firms were able to sell to the domestic market they would probably undercut local firms located outside the SEZ, creating an unfair playing field.

Possible solutions would be to suspend the minimum wage inside the SEZ but confine tenants to new firms producing solely for export; extend the special employment tax incentive to all firms across SA; or allow SEZ firms to also sell into the domestic market. None, however, is without drawbacks.

Another problem, raised by the CDE, is that the potential to use low-skilled manufacturing to drive SA’s development is diminishing as automation and digitisation make manufacturing less reliant on human labour.

"This means SA has to act urgently," says Bernstein, who thinks this may be SA’s last chance to create significant numbers of new industrial jobs.

But Baissac fears SA is already out of time.

"We don’t have time to experiment, because the house is on fire," he says. "We know what we’ve done for the past 20 years doesn’t work, we are very limited in our energy supply, and foreign direct investment isn’t coming any more. So we need to start supporting and incentivising where we’re going to get the most bang for our limited bucks — and that’s labour-intensive industrialisation."