Special Economic Zones Policy and Bill: briefing by the Department of Trade and Industry

Meeting report

Briefing by the Department of Trade and Industry on the Special Economic Zones Policy and Bill
Mr Lionel October, Director-General, DTI presented the briefing to the Committee (see attached documents).  Approval for the publication of the Special Economic Zones (SEZ) policy and Bill was given by the Cabinet in November 2011 and the required public participation process was currently in the planning phase.

The presentation included a definition of an SEZ; the uses of SEZ’s; the types of SEZ’s and examples of successful SEZ’s in China, Malaysia and Oman.  Industrial Development Zones (IDZ) were introduced in South Africa in 2000 with the aim to promote value-added exports and export-oriented industries. The key criterion was proximity to an international airport or sea port.  Five IDZ’s were designated, i.e. Richards Bay, East London, Coega, Saldanha and OR Tambo International Airport.  The DTI contribution to the development of the Richards Bay, East London and Coega IDZ’s amounted to R5.3 billion as at December 2011.  40 investment projects totaling R11.8 billion were initiated and 33,000 jobs were created.  The Saldanha IDZ was underway and the OR Tambo International Airport IDZ was not yet operational.

The rationale for the review of the IDZ programme included developments in national economic policies and strategies, developments in the global economic environment, the international experience in using SEZ’s as economic drivers and the disappointing performance of the existing IDZ’s.

Challenges with the existing IDZ programme included the design, the nature of the support provided, ad-hoc planning and a lack of long-term planning, financing, inadequate targeting of investments, governance arrangements and inadequate coordination amongst government departments and agencies. 

The new SEZ policy aimed to address the weaknesses identified with the existing IDZ programme by strengthening governance arrangements for the management of SEZ’s, expanding the range of support measures, developing a financing framework that would enable long-term planning and strengthening the support system for SEZ’s to enable the Zones to become effective tools for industrial development.

The objectives of the proposed policy and legislation included supporting industrial development in order to promote economic growth, creating sustainable jobs, promoting the development of a regionally diverse industrial economy, promoting beneficiation of the country’s mineral resources and developing world-class infrastructure to support the targeted industries in each region.

Key provisions of the proposed Bill included the establishment of an SEZ Board and an SEZ Fund, allowing for diverse SEZ’s that catered for regional needs and ensuring that long-term strategic planning took place.  Applications were limited to the three tiers of government (i.e. the national, provincial and local government authorities) but provision was made for public/private partnerships (PPP’s).  The proposed legislation included provision for the relevant executive authorities to be held responsible for the effective operation and functioning of SEZ’s.

The briefing was concluded with an overview of the implementation of the legislation and the transitional arrangements.  Immediate action steps included the finalisation of the policy and legislative frameworks, undertaking public consultation on a national basis, identifying new SEZ’s in partnership with provincial authorities and strengthening the current IDZ’s.

Discussion
Mr B Radebe (ANC) observed that the briefing and the draft Bill addressed the issues raised during a recent oversight visit of the Committee to the Eastern Cape.  He noted that the SEZ Board membership excluded representatives of civil society and organised labour organisations.  He asked what the rationale was for the omission of these stakeholders as one of the main objectives for the SEZ’s was the creation of jobs.  He said that the tendency to relax labour regulations for SEZ’s was not desirable.

Mr G McIntosh (COPE) welcomed the objective to develop both ‘hard’ and ‘soft’ infrastructure, which incorporated existing facilities in the area, such as schools, golf courses and game parks.  He said that the Richards Bay IDZ had all the potential for exceptional performance yet financial support from government had been pathetic.  There were lessons to be learnt from previous successes and failures of industrial development projects.  He singled out the developments in Newcastle and Bronkhorstspruit as prime examples.  He welcomed the new SEZ approach to industrial development in the country.

Mr M Oriani-Ambrosini (IFP) agreed that the lessons learnt from previous experience must be taken into account.  The current investment in the IDZ’s was not sustainable in the longer term.  The focus should be on the support provided for the product rather than on marketing.  Incentives such as tax breaks were not always successful and have been the subject of constitutional challenges in Europe.  The Bill made no statutory provision for incentives.  Long term planning was essential.  Funding for the SEZ’s would come from public money and the SEZ’s must therefore be economically viable.  He asked if it would not be preferable to allow market forces to determine which industries were established in the regions earmarked for development.

Mr X Mabaso (ANC) asked how it would be ensured that as many people as possible benefited from the SEZ’s and how the exploitation of labour would be avoided.

Mr T Harris (DA) welcomed the provisions requiring the cooperation of the three tiers of government in the development of SEZ’s.  He doubted the effectiveness of the central marketing concept and felt that competition should be encouraged.  The Bill was vague on many issues and he warned against the danger of the Committee approving legislation that was effectively a ‘blank slate’.  The existing IDZ’s lacked any incentives such as tax breaks and labour market reforms.  The National Treasury was disinclined to grant tax breaks and organised labour resisted any labour reforms.  The estimated cost to create a new job was R160,000 and he asked if the DTI had any plans to reduce the job creation cost to the employer.

Ms C Kotsi (COPE) asked if the DTI interacted with the Department of Higher Education (DHE) to ensure that the necessary skills development took place.  During the Committee’s oversight visit to Coega it was found that the steel company operating there was importing iron ore rather than using South African iron ore for local steel production.

Mr October explained that the intention was to establish an SEZ Board that would be solely dedicated to matters concerning the SEZ.  Board representation by civil society organisations and organised labour would detract from the functioning of the Board.  Membership of the Board would be limited to representatives from die DTI, the South African Revenue Service (SARS), the National Treasury, Eskom and Transnet.

SEZ’s established in Mexico and certain Caribbean countries had failed because industries relied on de-regulated labour dispensations and cheap imported labour forces.  Products were mainly exported to the United States of America (USA).  However, these industries could not compete with the even cheaper products exported by China to the USA.  In South Africa, the Taiwanese companies operating in Botshabelo before 1994 ceased operations when the new political dispensation withdrew special labour incentives.  The main focus of the new SEZ policy was on long-term sustainability and the production of quality products that was not reliant on cheap labour.  Social engineering of an IDZ should not be attempted.  The labour force could not be exploited and labour reforms would not be necessary.

Mr October agreed that SEZ’s should be integrated in the local economy and lifestyle concepts such as golf courses and other leisure facilities should be included in development plans.  The creation of a differential regime for IDZ’s posed a dilemma as the National Treasury was averse to granting tax breaks.  Industrial policy required the favouring of productive sectors over unproductive sectors.  The issue had been debated with the National Treasury and consensus had been reached over offering preferential tax incentives to companies if the organisation was located in an SEZ.  Discussions with the National Treasury were ongoing.

The broader benefits of SEZ’s included high quality jobs, an expanded production base and providing more opportunities for graduates.  The DTI was responsible for promoting the country and the marketing activities of the national, provincial and local authorities would have to be balanced.  Each SEZ would have a different focus, for example the Free State province would focus on the agricultural sector, which was labour-intensive.  Conversely, the petrochemical sector required substantial investment and provided fewer, highly skilled jobs.  The intention was to create a broader manufacturing base for the country.  The market rather than government would determine which industries would be established.

Mr October agreed that skills development was a critical issue.  He said that the scrapping of the apprenticeship system had been detrimental to skills development in the country.  The steel and chemical industries were dominated by monopolies but the Department intended to bring in a Chinese steel producer that would provide more competition.  The Chinese company demanded security of supply of electricity and iron ore as a prerequisite.

Mr Tumelo Chipfupa, Deputy Director-General: The Enterprise Organisation, DTI said that the existing three operational IDZ’s had generated 33,000 jobs of varying levels.  Further infrastructure development would be necessary, which would result in more jobs.  He said that the cost per job created was not considered to be a guide for investment.

Mr G Selau (ANC) said that the establishment of a new SEZ would create buying power in the region and the focus should not be entirely on producing products for export.  He asked if it was feasible to exclude the private sector from the decision-making process by limiting Board membership to representatives from government and parastatals.  He asked if the implementation plan was linked to the government’s beneficiation policy.

Mr Harris said that the granting of tax incentives for SEZ’s was an accepted international practice, which should be taken into account by the National Treasury.  He asked how the SEZ Fund would be capitalised.  He asked for clarity on the restriction of applications to government structures.  He asked if the production of products for export purposes would be a precondition.

Mr Radebe advised that any relaxation of labour legislation was not envisaged by government.  Benefits to the people must be at the centre of the country’s development plans.  The unemployment situation must be addressed by ensuring that SEZ’s were established in all the provinces.

Mr McIntosh said that there had been examples of developing IDZ’s without making provision for housing for employees.  He suggested that the DTI involved the Department of Human Settlements to avoid a proliferation of squatter camps near the SEZ’s.

Mr Oriani-Ambrosini said that the same rationale for the establishment of SEZ’s was used for the Coega IDZ.  He asked what type of infrastructure was envisaged by the DTI for the new SEZ’s.  ‘Islands of subsidies’ had to be avoided.  He asked if the policy included the utilization of South African funding to benefit foreign investors.

Mr Harris quoted the recent editorial comment in the Business Day newspaper, which stated that it was essential that government clarified exactly what it was trying to achieve with SEZ’s.  The Bill was vague on this point.  He asked for an explanation of which objectives would be achieved by the new policy and legislation on SEZ’s.

Mr Selau asked what the DTI planned to do about the IDZ’s that were established by the previous government in various homelands.  An example was the infrastructure developed at Babelegi.

Mr October responded that there was a misconception that the SEZ’s would be entirely focused on production for export purposes.  Organised labour was against an export focus.  Before products could be exported, it had to be produced.  Labour needed to be employed before products could be produced.  The reality was that the South African market was too small and it was necessary to export products for an industry to be financially viable.  An example was the Toyota factory in East London, which produced vehicles for the local market as well as for export to the African continent.  In certain instances, incentives were offered to such an extent that it would have been unfair for companies to sell products to the domestic market.  An example was the incentives offered to Taiwanese companies operating in South Africa.  The products had to be exported to the USA and were not sold in South Africa.  The companies did not diversify their markets and the result was closure when the USA market failed.

Mr October said that the aim of the new SEZ policy was to attract private sector investment.  The role of government was to provide the necessary infrastructure.  It was not desirable to have certain private sector representatives on the SEZ Board whilst excluding others.  The Board would be restricted to government and government agency representation.  Organised labour had the opportunity to provide input to the legislation as the Bill would be presented to NEDLAC.  The SEZ Board would focus on the running of the SEZ’s and was not intended as a forum for debate on labour issues.  There were existing forums where labour matters could be addressed.  Provision was made for PPP’s.  There were many examples of successful PPP’s, particularly in the establishment of techno parks.  Private ownership of IDZ’s was not desirable.

Mr October reiterated that the issue of tax incentives was being debated with the National Treasury.  The Minister of Finance had been involved in the formulation of the Bill, which had been approved by the Cabinet.  The Cabinet agreed that SEZ’s were effective tools for economic development.  Incentives were not considered to be the driver for investment but the provision of quality infrastructure was a key criterion.  Investors saw South Africa as the gateway to the African continent. 

Mr October confirmed that the policy on beneficiation was incorporated in the implementation of the policy on SEZ’s.  Beneficiation of only the country’s mineral resources would take place.  Platinum was only produced by South Africa and Zimbabwe and would attract investors in the beneficiation of this mineral.  The criterion for establishing industries was long term economic viability rather than political considerations.  The decision to develop Saldanha Bay as the port for the export of iron ore from the Sishen mines was politically motivated.  The alternative was Coega, which was a labour-rich area.  It was essential that the SEZ’s were situated in the same areas where the resources and labour force were.

Mr Chipfupa advised that agreement in principle had been reached with the Minister of Finance that funds would be made available to capitalise the SEZ Fund.  The amount of funding was in the process of being determined.

Prof Paul Benjamin, Cheadle Thompson and Haysom Attorneys Inc (legal advisors to the DTI) advised that the existing IDZ’s would be incorporated in the new SEZ’s.  Section 35 of the draft Bill made provision for the transitional arrangements of the IDZ’s, which currently operated under the regulations promulgated in 2000.

Mr Oriani-Ambrosini requested further clarity on exactly what government had in mind for the new SEZ’s.  It had been stated during the proceedings that the existing IDZ’s would be incorporated in the new SEZ’s and that a platinum beneficiation plant would be established.  He asked what the business plan was behind the new SEZ policy as the briefing lacked specific detail on this aspect.

Mr Selau repeated his earlier question about the IDZ’s established by the previous government in the homeland regions.  Most industries had closed down after the ANC government withdrew support but the infrastructure remained in place.  He asked if the DTI had any plans to re-develop these facilities, many of which were situated in poor areas of the country.  He asked what platform for interaction between government and the private sector on SEZ’s was in place.

Mr October responded that feasibility studies and consultation with the private sector would be included in the long term planning process.  For example, Anglo Platinum was the only supplier of platinum ore and the company would be involved in the development of the platinum beneficiation industries planned for the particular SEZ.  Arcelor-Mittal and the mines owned the land earmarked for the Saldanha SEZ and would be involved in the development process.  Of necessity, the private sector was involved in the establishment of SEZ’s and interaction would have to take place with all the stakeholders.  Some of the IDZ’s established by the previous government would be incorporated, for example the IDZ’s established in Atlantis, the North West province and the Free State province.  Others were situated too far from the industrial hubs to be economically viable.  The three tiers of government needed to agree on the sites for the new SEZ’s to be established in each province.  The feasibility studies would indicate which viable industries could be established in each SEZ.  In order to ensure long term viability, support services such as a reliable electricity supply had to be in place.  The SEZ Fund was intended to provide funding for infrastructure and to top up any incentives.  The three tiers of government had to prepare a business plan for each SEZ, which had to be presented to government for approval.  The private sector would decide where investment would be made.  The legislation should therefore not be too prescriptive.

The Chairperson thanked the Department for the briefing, which was the first step of a lengthy process involving the Committee.  Members had the opportunity to study the draft Bill and other supporting documents provided by the DTI before the formal deliberations on the Bill were held.

Mr Oriani-Ambrosini suggested that the Committee met to hold an informal discussion on the Bill before the formal processing of the Bill commenced.

The Chairperson said that it would appear that there was broad consensus on the proposed legislation.  Informal discussion of the Bill and its implications could be held.

Other Committee business
The Committee approved the minutes of the Committee meeting held on 18 January 2012 and a minor change to the Committee schedule.

The meeting was adjourned.