Special Economic Zones Policy and Bill, 2011: briefing by Department of Trade and Industry

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Meeting Summary

The Department of Trade and Industry briefed the Committee on the policy development of Special Economic Zones (SEZ) in SA. A SEZ was a geographically designated area of a country set aside for specifically targeted economic activities. SEZs were tools for long-term industrial and economic development targeted at building industries whilst creating a sustainable environment for foreign and domestic direct investment to thrive.  Examples of SEZs included Industrial Development Zones (IDZ), free ports and industrial parks/estates. East Asia had many success stories on the use of SEZs. Some background was that Industrial Development Zones was introduced at around the year 2000 to promote value-added exports and export-oriented industries. Four IDZs were designated ie Richards Bay, East London, COEGA and OR Tambo. A Saldanha IDZ was still underway. Due to changes and developments in SA’s national economic policies and strategies as well as developments in the global economic environment it was felt that the IDZs were underperforming, hence the introduction of SEZs. The fastest growing economies of the world such as India, China, and Brazil have used SEZs as instruments to accelerate industrial development.

In as much as the DTI explained that the current policy on SEZs was to rectify or not to repeat the mistakes made with the current IDZs members still had a few concerns. Members were concerned that once again industrial investment and development would be focussed on the golden triangle regions ie Western Cape, Gauteng and Kwazulu-Natal. What about the other provinces? Another concern was that much of the success stories on SEZs were associated with the Brazil, Russia, India, China and South Africa countries. The concern was that what worked for SA’s BRICS partners would not necessarily work for SA. Why was SA not focussing on Africa itself? There were huge trade opportunities for SA in Africa. The huge amount of bureaucratic tape which investors had to go through to invest in SA was another concern. The DTI gave assurances that the concerns raised were being addressed.

Members asked about the OR Tambo IDZ, the Richards Bay IDZ, the proposed SEZ Board and the red tape in establishing businesses. They further asked about regional development, financing for IDZs and what model South Africa should follow.


Meeting report

Department of Trade and Industry Briefing
The Department of Trade and Industry (DTI) briefed the Committee on the policy development of Special Economic Zones (SEZ) in South Africa. The delegation from the Department comprised of Mr Tumelo Chipfupa, Deputy Director General: The Enterprise Organisation, Mr Kaya Ngqaka, Chief Director: Special Projects, Mr Dumisani Sombinge, Director: Legal Unit and Mr Warren Smith, Deputy Director: Industrial Development Zones. Mr Chipfupa undertook the briefing.

In November 2011 Cabinet approved the SEZ Policy and plans were made for the bill to be published for public participation. A SEZ was a geographically designated area of a country set aside for specifically targeted economic activities. SEZs were tools for long-term industrial and economic development targeted at building industries whilst creating a sustainable environment for foreign and domestic direct investment to thrive. Examples of SEZs included Industrial Development Zones (IDZ), free ports and industrial parks/estates. East Asia had many success stories on the use of SEZs. Some background was that Industrial Development Zones was introduced in 2000 to promote value-added exports and export-oriented industries. Four IDZs were designated ie Richards Bay, East London, Coega and OR Tambo. A Saldanha IDZ was still underway. OR Tambo was the only IDZ that was not operational. Total investment amounted to R11.8bn and more or less 33 000 jobs had been created. Due to changes and developments in SA’s national economic policies and strategies as well as developments in the global economic environment it was felt that the IDZs were underperforming, hence the introduction of SEZs. The fastest growing economies of the world such as India, China, and Brazil used SEZs as instruments to accelerate industrial development. There were challenges with the existing IDZs. IDZ planning was done on an ad hoc basis and therefore was not long term. Often IDZs would compete amongst themselves instead of competing with foreign IDZs. The ad hoc financing of IDZs also made it impossible to long term planning. There was also insufficient coordination amongst IDZs in investment promotion.

The new SEZ Policy aimed to provide a clear framework with respect to development, operations and management of SEZs. It would provide a systematic planning framework for development of a variety of SEZs that would support implementation of the Industrial Policy Action Plan (IPAP) and the National Growth Path (NGP). A predictable financing framework would be developed that would enable long term planning. One of the key objectives of the Policy was to support the development of targeted industrial capabilities, and attraction of foreign direct investment within IPAP and the NGP framework.

Some of the key provisions of the Policy were the establishment of an SEZ Board to advise the Minister on policy, strategy and other matters. An SEZ Fund would be established to provide for predictable long term financing. The Minister would also develop an SEZ Strategy every five years to guide long term planning.

The DTI in conjunction with other departments and agencies in implementing the Policy would have a national marketing strategy to promote SEZs internationally and domestically, world class infrastructure would be provided together with effective and efficient logistics. Skills development strategies would also be put in place to support the medium to long term skills needs in the regions.
At present there was finalisation of the policy and the legislative framework as public consultations in the provinces were beginning.

Discussion
Mr K Sinclair (DA, Northern Cape) stated that the DTI placed a great deal of emphasis on the Brazil, Russia, India, China and South Africa (BRICS) concept. In as much as it was beneficial for the country to be part of BRICS it was necessary to take the broader development of the world economy into consideration. He noted that South Africa had a fixation with China. The Chinese model would not always work in South Africa as the Chinese did certain things differently to SA. He was convinced that the BRICS partners would start to feel greater strain as processes rolled out further. Challenges would be cropping up. Other models like for example Malaysia should also be considered. The Dubai model was also successful. In Dubai businesses were established as quickly and efficiently as possible. It took a mere 48 hours to establish a company. In South Africa there was too much bureaucratic red tape. South Africa’s internal processes did not make it easy for foreign investors to invest in the country.
He pleaded that DTI take into consideration broader economic development in South Africa. Investment could not only take place in the golden triangle of the major three cities of South Africa -ie Cape Town, Johannesburg and Durban. Other areas needed to be developed as well. An infrastructure network was needed in the west of South Africa as well. South Africa needed to look at business in Europe, the US and South America where other hubs could be identified. It should be made easier to do business in the country. Investors would only invest if there were benefits attached to the investment.

Mr Chipfupa stated that the delegation would do its best to answer most of the questions. Unanswered questions and comments would be taken back with them and put into the process.
The BRICS example was used to symbolically show the shift in economic power. Relating to SEZs specifically, in the foreseeable future the reality was that growth was taking place in the East. It was true that trade in Africa should be considered as well but the fact was that trade with the East should be taken more seriously. He agreed that South Africa was a liberal democracy unlike China and hence it was not about simply transplanting the Chinese model in SA. South Africa had more in common with India than China. South Africa was different to even Malaysia and Dubai. South Africa was truly unique.
He agreed that on IDZs things needed to be done faster. There was a great deal of bureaucratic red tape in establishing businesses and companies in the country. South Africa considered many things in allowing a business to be established. For example there were perhaps environmental impact studies that were done. Communities in surrounding areas were also perhaps consulted.
The proposed policy and legislation were by no means perfect but it was hoped that it could serve to be an enabler. He noted that it was not the intention of DTI to only focus on the golden triangle provinces ie Western Cape, Gauteng and Kwazulu-Natal. Other provinces would be considered as well. Eighty percent of economic activity was however at present concentrated in the golden triangle. It was hoped that the proposed legislation would look at opportunities in other provinces as well.

Mr Ngqaka addressed the issue of red tape and stated that the Department had looked at overseas models. In Ireland red tape was cut down and now the country was considered the gateway to Europe. Their corporate tax level was also below that of the European Union. The Policy document did speak to quicker process times and less red tape. Key government departments had been drawn in to make decisions quicker. Talks with Eskom, National Treasury and Transnet had taken place.

Ms B Abrahams (DA, Gauteng) asked what the delays at the OR Tambo IDZ were. How many jobs would it create? She also asked how consultations in the provinces were taking place.

Mr Chipfupa stated that OR Tambo IDZ would be operational in 2012. The focus at the IDZ would be jewellery and the Gauteng Province would be inviting operators to come on board.

Mr A Nyambi (ANC, Mpumalanga) asked for elaboration on what was expected in terms of the role of provinces. What submissions had the provinces made? The Committee supported the industrial development agenda but the concerns of Members should be addressed. He felt that the SEZ Board could face challenges in the manner in which it would be constituted. If the Minister was to appoint the Chairperson of the Board, would the Chairperson be chosen from all members of the Board or from government representatives only?
He noted that there was clarity on the criterion for those provinces that qualified for SEZs, but what about those provinces that did not qualify. The issue of skewed development was a concern.

Mr Chipfupa stated that there were submissions from the provinces but they were not detailed. The DTI had set aside funding for provinces to develop their technical capacity so as to be able to put their plans together. The same was being done for municipalities.
It was correct that the Board was constituted of both government officials as well as outside experts. The fact was that SEZ Board was primarily a government function.
He noted that Transnet and Eskom were being brought on board. Labour and business was being brought on board as well. Forums were already in place to achieve this.
He asked members to consider the proposed legislation and to identify areas where it fell short.

Mr B Mnguni (ANC, Free State) asked about regional development. He referred to the poor performance of Development Finance Institutions (DFIs) and asked how financing would take place. How was progress linked to the 2012 State of the Nation Address (SONA) of the President? He asked whether the IDZs formed part of the infrastructural development spoken about in the SONA.

Mr Chipfupa agreed that regional development was important and that Africa was experiencing high growth even though South Africa was not. The DTI was prioritising Africa and even the Minister was involved. The DTI in its incentives division was supporting a great deal of trade missions.
The SONA did tie in with IDZs. The focus was to reduce the cost of doing business. For example to reduce port charges, electricity costs and transport costs. DTI was engaged with National Treasury to discuss funding.  DFIs would also provide funding.

Mr Ngqaka stated that the DTI was all for balanced regional development. There were huge economic potential in provinces other than the Western Cape, Gauteng and Kwazulu-Natal.
On funding the DTI was considering a broader funding model. In the past DTI had relied on funding from National Treasury which was received once a year. Now bridging finance, equity funding and DFIs would be sources of funding.

The Chairperson referred to the Richards Bay IDZ situated in Kwazulu-Natal and stated that it had been in existence for 10 years but he saw no progress. For the past 3 years funding at the Richards Bay IDZ had decreased. How was the IDZ going to be turned around? For the DTI to say that three IDZs were operational needed to be looked at deeper. The DTI allocations to IDZs were Coega R3.6bn, East London R1.1bn and Richards Bay R88m. He asked what the aim of the Richards Bay IDZ was.
Did the SEZ plans of the DTI talk to the plans of Transnet? Transnet did not speak about the Richards Bay IDZ. It was something that needed to be considered.
How were municipalities to make applications for SEZs when they were already under so much strain? The core function of municipalities was service delivery. How could municipalities compete with applications from provinces?
He asked whether the DTI had the budget to implement the SEZs.
Africa was the richest continent in the world. Why was South Africa concentrating on the East and the West? Africa should be looked at first.
He considered incentives to be very important to attract investors. Incentives should be clearly set out even in the bill itself.
SEZs required good roads and rail infrastructure. Has DTI met with other departments to address the issue? How were things going to be transported from SEZs?
 
Mr Chipfupa conceded that the Richards Bay IDZ took much longer than what it should have. It should also have progressed much faster. The problem at Richards Bay was coordination with national and local governments. In Richards Bay the industrial system was in place already, it had a port and it had roads. It was truly a missed opportunity. At Coega the DTI had spent more because water and electricity had to be brought in. Hopefully the legislation would prevent the repeating of the mistakes made at Richards Bay at other areas. There were municipalities that were weak but they were nevertheless critical players. Their electricity and water was used at IDZs. What the DTI was saying was that when provinces apply for SEZs they must have worked it out with municipalities already.
The challenge with including incentives in the proposed bill was that incentives needed to be dynamic as they changed all the time with changing economic trends. Permanent incentives could not be included in the bill. A mechanism was needed that would allow incentives to be changed when needed.

Mr Ngqaka stated that DTI saw South Africa as the gateway of trade to the rest of Africa. The DTI also wished to drive the beneficiation of raw materials.

The Chairperson reminded Members that the present meeting was only an initial briefing and that a great deal of interaction was yet to come. He hoped that the DTI would speedup the hearings process in the provinces. Members must be kept abreast of where public hearings were taking place.
He expected the DTI to take action in Richards Bay.

The meeting was adjourned.


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