No pulling SEZ power

A’s Special Economic Zones Bill is designed to fix the problems inhibiting industrial zones. But the bill fails to adequately consider lessons of the past, says Centre for Development & Enterprise (CDE) executive director Ann Bernstein

Special economic zones (SEZs) have to be “special” to succeed. But SA may miss that opportunity. Better infrastructure offered to companies in SA’s three operational industrial development zones has not been enough to attract investment.

National treasury has already set aside R2,3bn for the establishment of zones in this year’s budget. But the bill provides no clarity on what will make them special, and assigns no executive powers to the department to ensure that things will be done differently in zones, compared to the rest of the country. It is also unclear on the role of the private sector.

The bill suggests small, geographically scattered SEZs that could be based on a particular industry such as platinum. Critically, it is silent on incentives to attract foreign investment.

The CDE released a report on SEZs last month. It recommends SA establish two large zones that focus on low-skill, labourintensive industries. Labour flexibility, it believes, lies at the core of a successful SEZ policy.

Bernstein says manufacturing costs in Asia are rising, because of higher labour costs. It is possible labour-intensive firms may relocate. SA could compete for these jobs if it adopted a bold new approach to job creation and industrial development.

Contrary to perceptions, the local manufacturing sector’s share of GDP in SA is fairly high, according to UCT economics professor David Kaplan, a former chief economist at the department of trade & industry However, SA’s share of labourintensive industries like clothing and footwear is too low.

“Our manufacturing sector has become excessively capital-intensive and we underperform in sectors that use a lot of labour. For our level of per capita GDP, textile output should be three times higher than it is. The same is true for footwear.”

The reason for this does not lie with a failure of industrial policy, Kaplan believes. He says it is a direct result of labour market policies, especially wage policies and labour practices. When he was at the DTI it asked clothing firms in the US under what circumstances they would consider buying clothing from SA. They said they wanted flexible working arrangements; to be able to employ people when there were orders, and let them go when there weren’t.

The world’s leading SEZs also offer incentives like corporate tax and import duty exemptions, discounted personal tax for zone employees, less red tape, and discounted land and rental rates. SA offers just zero-rated value added tax and conditional exemptions from import duties.

There are an estimated 3000 SEZs in 135 countries. Research suggests that they account for 68m direct jobs and US500bn in trade-related added value.

For SA to compete, it will have to improve its offering. Thus far, government’s investment in IDZs has not yielded much. According to a DTI presentation to parliament in May, government spent over R7,6bn on the three functioning IDZs between 2002 and 2011. Of this, 72% came from the DTI, while the rest was paid for by the host provincial governments.

But the zones’ revenue generation is extremely low. Coega has increased its revenue collection by an annual average of 20%. But it contributes just 5,7% to its total budget and Richards Bay contributes just 1,9% (an annual average drop of 56,8%). IDZs have managed to attract a total of only 44 investors, investing just over R1,3bn. The DTI says 38794 direct and indirect jobs (including the construction phase) have been created.

The CDE’s report comes after it held a conference on special economic zones with international experts last year. Contributors to the report include East London IDZ CEO Simphiwe Kondlo, who has said repeatedly the performance of such zones will be limited without incentives, as well as Claude Baissac, secretary-general of the World Economic Processing Zones Association.