Special Economic Zones (SEZ) Programme implementation: Department of Trade and Industry and the Industrial Development Zones (IDZ) readiness: briefings

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Trade, Industry and Competition

22 May 2012
Chairperson: Mr F Adams (Western Cape, ANC) (Acting)
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Meeting Summary

Members of the Portfolio Committee on Trade and Industry were present as guests at these briefings, in which the Department of Trade and Industry (DTI) told Members that the Industrial Development Zone (IDZ) programme had been established to attract foreign direct investment, create jobs, and increase exports, particularly in areas that did not necessarily have prior exporting industries.  Since the programme began ten years ago, three IDZs had been established and were fully operational (Coega, East London, and Richards Bay).  Others had been planned but not yet functional, and some remained to be designated.  Total expenditure was R7.6 billion in the three functioning IDZs, R5.4 billion coming from the Department and R1.7 billion from provincial governments. IDZs had attracted 44 investors, resulting in total investments of R12.3 billion and 38 794 jobs created, direct and indirect. 

The current funding model for IDZs was not conducive to efficiently attracting investors, as it did not cater to the dynamic needs of investors.  Funding allocations were characterised by inconsistencies and inflexibilities.

As for challenges, with the exception of Customs Controlled Areas that were not yet functional and higher Section 12I tax allowances, the IDZs lacked specific incentives to attract investors. The marketing of IDZs was insufficient, as the lack of clear roles designated for the national marketing agencies and the IDZs themselves resulted in poor performance in attracting foreign investors.

In terms of remedies, the DTI would be devising a new policy framework and a new, more efficient funding model.  The Department would also modify the business model and look to reduce bureaucratic red tape to cater to the needs of investors. 

The Coega Development Corporation faced challenges of inconsistent funding, and its inability to borrow funds limited their flexibility to accommodate investors.  As a result of its challenges, opportunities in economic development, investments and jobs had been missed.  Overall, however, Coega was ready to implement the Special Economic Zones (SEZ) policy, as Coega was fully functional and compliant, with the necessary infrastructure in place

The East London IDZ (ELIDZ) had been slow to gain traction due to logistical issues of marketability and lack of clarity over its executive authority.  The lack of adequate coordination resulted in missed opportunities as investors were weary of foundational policies.  Cohesion and central planning was necessary for the ELIDZ to proceed in one direction.  ELIDZ was ready and moving in the right direction.

Members expressed their concerns and asked a wide variety of questions.  These included matters such as the efficiency and sustainability of IDZs, the sustainability of jobs created, concerns over plans of developing nuclear and gas power plants, and devising a cohesive policy directive.

Meeting report

 

Introduction
Members of the Portfolio Committee on Trade and Industry were present as guests at these briefings, in which the DTI presented its achievements and challenges, followed by the Coega and East London IDZs, which presented their own individual briefings.  The Delegation from Richards Bay IDZ was absent.  The DTI’s Director- General was not present.

Department of Trade and Industry IDZs Readiness for SEZ Implementation Presentation
Mr Tumelo Chipfupa, DTI Deputy Director-General (DDG): The Enterprise Organisation, said that the IDZ programme had been established to attract foreign direct investment, create jobs, and increase exports, particularly in areas that did not necessarily have prior exporting industries.  Since the programme had begun ten years prior, three IDZs had been established and were fully operational (Coega, East London, and Richards Bay).  Others had been planned but not yet functional, and some remained to be designated.  Total expenditures were R7.6 billion in the three functioning IDZs (Coega, East London and Richards Bay), R5.4 billion (72%) coming from the DTI and R1.7 billion (28%) from the provincial governments.  The three functioning IDZs had attracted 44 investors, resulting in total investments of R12.3 billion and 38 794 direct and indirect jobs created. 

Coega was the biggest IDZ in terms of land and infrastructure, followed by the East London IDZ (ELIDZ) and then Richards Bay IDZ (RBIDZ).  Coega and ELIDZ were the more advanced and had begun to become independent due to increased revenue.  Coega had been increasing its own revenue at an annual average of 20.1%, contributing 8.6% to its total budget, whereas ELIDZ had posted a 80.1% annual average increase in revenue, contributing 5.7% to its total budget.  RBIDZ, the newest IDZ, was currently only contributing 1.9% to its total budget.

Basic infrastructure in Coega was fully in place, hence the drop in funding for the Coega IDZ over the last two years.  Operational investments in Coega totalled 20 investors for R11.6 billion, which created 3 340 jobs.  ELIDZ had secured 23 investors for R1 billion, which created 1 223 jobs.  Lastly, RBIDZ had secured one investor for R650 million, which created 300 jobs.

As for challenges, with the exception of Customs Controlled Areas that were not yet functional and higher Section 12I tax allowances, the IDZs lacked specific incentives to attract investors.  Investors did not care about location, whether they would be in Coega or ELIDZ or elsewhere.  Other countries had different programmes with very strong IDZs with very good incentives.  In order to compete, South African IDZs had to offer greater incentives to investors.

The current funding model for IDZs was not conducive to efficiently attracting investors.  IDZ funding disbursement was largely dependent on the allocation over the Medium Term Expenditure Framework (MTEF) period.  The funding allocations were characterised by inconsistencies and inflexibilities and, thus, did not cater to the dynamic needs of investors.  The current model did not provide the required flexibility to cover the cost of new unexpected projects.  Investors could arrive any time during the year and propose certain investments, which required expedient decision-making.  For instance, IDZs might have to spend money on infrastructure (e.g. roads, electricity) to convince investors to invest, but under the current model the IDZs would have to wait for the inflexible funding cycle. Therefore, the DTI would make efforts to modify the current funding model. 

Also, the marketing of IDZs was insufficient.  The lack of clear roles designated for the national marketing agencies and the IDZs themselves resulted in poor performance in attracting foreign investors. 

Further, the current planning and regulatory framework was insufficient to guide the long-term planning in IDZs to coordinate and harmonise their plans and facilitate integration into key national, provincial and regional strategies.  There needed to be a higher level of coordination within Government departments to help IDZs thrive. 

In terms of remedies, the DTI would be devising a new policy framework and a new, more efficient funding model.  The Department would also modify the business model that assisted IDZ operators to achieve their strategic objectives.  Also, the DTI would look to reduce bureaucratic red tape by instituting a one-stop-shop model so that decisions could be quickly implemented once investors were secured.  Further, the DTI would seek expert advice to address the current weaknesses of IDZs.  Lastly, the DTI was working to develop a new strategy to market IDZs and SEZs.

Coega Development Corporation Presentation
Mr Fezile Ndema, Manager: Office of the CEO, Coega Development Corperation (CDC), said the CDC attracted investments in several sectors:  petrochemical, automotive, agro-processing, renewable energy, business process outsourcing (call centres), among others.  The CDC had 21 operating investors, with investments of R1.24 billion in the metals, agro-processing, manufacturing, renewable energy and service sectors. To date, 3 208 operational direct jobs and 25 963 indirect and induced rural jobs (from agro-processing) had been created.  In construction, over 40 000 jobs had been created.

CDC investors were from a variety of nationalities and industries.  For instance, CDC hosted companies like General Motors (USA), Boson Brick (Germany), and Agni Steels (India).  Also, the CDC had attracted several South African companies, such as Discovery, Coega Dairy, Cape Concentrate, and the National Tooling Initiative Programme.  Additionally in the Nelson Mandela Bay Logistics Park (NMBLP), eight operational investors, foreign and domestic, had invested R697 million.

The CDC had a number of transformational projects that, if realised, would significantly advance the CDC.  These included an oil refinery, a ship repair yard, a transshipment hub, a gas terminal, and a seawater intake, among others. 

In the CDC power point presentation, in the IDZ Road Map slide, Zone 8 and below represented the least developed zones, which still required significant constructive development.  The Destiny Table slide listed key programmes and showed the specific areas that required development.  The red boxes indicated areas where the enablers were not yet in place, whereas the green boxes indicated areas where enablers were already in place.

Regarding challenges and barriers to performance (in addition to those shown in the DTI presentation), the CDC faced inconsistent funding from year to year, which made it difficult to predict how much funding would be available in the future.  This was problematic for attracting investors.  The CDC’s inability to borrow funds limited their flexibility to accommodate investors.  The ability to borrow would allow IDZ to deal with infrastructure projects as necessary.  If the challenges identified were not addressed, the CDC would likely lose opportunities in economic development, investments and jobs.

Mr Siyabonga Simagi, Manager, CDC, said that the CDC was ready to implement the SEZ policy, as the CDC was fully functional and compliant, with the necessary infrastructure in place.  The CDC also engaged in investment promotion, domestically and internationally.  The CDC had designed a customs control area, although it was not fully operational yet.  The CDC had already ascertained its status as a permit holder, considering that the CDC had several business lines outside of the Coega IDZ.  The CDC was operating as an IDZ, but needed to work with the DTI to form the SEZ board as well as to identify the subcommittees proposed and identify what class of SEZ the CDC would be classified as.

East London IDZ Presentation
Mr Thando Gwintsa, Executive Manager: Office of the CEO, conducted the presentation for East London IDZ.  He first identified the evident return on investment on the Government’s financial investment. From a total infrastructure investment of R1.6 billion by the Government, ELIDZ had attracted 30 (approved) investors that had invested a total of R3.7 billion.  To date, the 21 operational investors had created a total of 1 569 jobs in manufacturing and supporting services. 

Approximately 45% of the investments had been in the automotive sector.  The ELIDZ had also received investments in agro processing, energy, general manufacturing among other sectors.

Funding had been received both from the provinces and from the DTI.  As for expenditures, 72% of the budget had been spent on infrastructure.  ELIDZ had also begun to see expenditures in zone operations increasing as a percentage of the budget, which attested to the fact that there were investors operating on the ground. 

Revenue for 2011/12 reached R43 million, which represented 33% of the R136 million in operational costs for that year.  This trend showed a consistent increase in revenue as a percentage of operating costs, which indicated that, over time, ELIDZ would be able to cover its operational expenses.

Regarding challenges, the ELIDZ had been slow to gain traction.  Initially there were logistical issues to market products.  Also, it was unclear who the executive authority was.  The ELIDZ had two masters, the provincial and the national governments, each with different — often conflicting — objectives.  Cohesion and central planning were necessary for the ELIDZ to proceed in one direction.  This lack of adequate coordination resulted in missed opportunities as investors were weary of foundational policies.  Investors tended to question the sustainability of the programme given the lack of support and policy cohesion.  It was necessary for the Government to clearly state the impact it was looking for and to coordinate with the provinces to devise a cohesive policy.  This would provide ELIDZ a coherent bar to measure and evaluate its performance, which was necessary to achieve progress and accomplish its goals.  Legislation must deal with collaboration at high level. 

One of the biggest issues that had hindered expansion was timely release of land.  Sometimes investors wanted a particular piece of land, but timeliness issues blocked these opportunities because there was no set process to address this issue efficiently. 

Regarding ELIDZ’s readiness to implement the SEZ programme, ELIDZ was ready and moving in the right direction but clarification was needed from the national Government.  ELIDZ needed clarification as to what type of SEZs would be accommodated in order to avoid creating its own competition and, thus, hinder progress.  Policy intentions had been defined in the provinces, but they had not been clarified in the bill.  Implementation without clarity would create confusion and delays. 

Discussion
Dr W James (DA) asked whether Coega had a measure of efficiency in terms of attracting investment against the use of public funds and whether it was attracting the level of investments that legitimated the level of expenditure.  He also asked whether Coega’s plans for a nuclear power station related to the nuclear goals of the country as a whole. 

Mr B Radebe (ANC) suggested that the Committees visit Coega so both Committees could share views.  This would help them coordinate to devise the coherent policy directives that IDZs needed (e.g. who would be the final arbiter).  

Ms B Abrahams (Gauteng, DA) asked how sustainable were the 40 000 construction jobs created thus far.

Ms E van Lingen (Eastern Cape, DA) expressed concern over the gas generation plant and asked where the gas would originate.  Also, once refined, where would the oil be sent? She also expressed concern for the lack of a budget for a new pipeline, as this showed potential short-sightedness by the Department and the IDZs. 

Regarding Coega IDZ, given that its revenues were only contributing 8.6% to its total budget, Ms Van Lingen asked whether the programme was sustainable at this stage.  Regarding transport of imports and exports, she asked if connections were in place for distribution at the Coega harbour.  Lastly, regarding customs, she suggested that the delegation should inquire from the boating industry about the customs at Port Elizabeth and how awful this port was in treating the boating industry, prompting them to come to Cape Town harbour instead.  This was a situation that needed to be addressed.

Ms J Fubbs (ANC) asked how come, after two years, investment had not led to significant employment.  She expressed concern over the absence of lessons learned in the last two years and for the lack of results in labour despite the significant investments. 

She also asked for proposals from the delegation as to what they were looking for to overcome the challenges identified, explaining that the delegation mentioned challenges in terms of funding, long-term planning, marketing models, but the delegation failed to propose adequate solutions of their own. 

Lastly, she asked why after two years the delegation could not provide an answer as to why ELIDZ had been unable to progress at similar rates than Coega despite what appeared to be a better location.

Mr K Sinclair (Northern Cape, COPE) suggested elevating debate over incentives and suggested the DTI come up with specific proposals in this regard.  He also asked the delegation for its opinion on the value of the investments the Government had made in the IDZs given the figures presented.

Mr G Selau (ANC) asked whether there was a benefit to implementing the SEZs over improving the current IDZs.

Mr Chipfupa responded that there was no single measure of efficiency when evaluating the DTI funding.  Before designating IDZs, the DTI required provinces to do a cost-benefit analysis in terms of jobs, investments, exports, and impact on regional and provincial economy and compare these factors to the costs.  The DTI could do another cost-benefit analysis to assess current efficiency.  Overall, the DTI could have done much better.

In response to Ms Abrahams, the 40 000 jobs created included around 5 000 operational jobs that were more sustainable.  The remaining construction jobs typically ended once construction was completed. 

In response to Ms Fubbs’ question on the labour-capital ratio, most of the money was invested in infrastructure (e.g. roads, electricity, water).  This infrastructure would last into the future and would not require additional investment.  Therefore, as jobs were created, Mr Chipfupa expected the labour-capital ratio to decrease.

Regarding Mr Sinclair’s question, the ability to offer incentives needed to be included in the legislation, and the DTI was working to identify what kinds of incentives could be available but the political principals had not yet made that decision.

He agreed that the DTI should not be focusing solely in the automotive industry.  There were decent investments with high potential in other industries, such as agro-processing.

Additionally, as compared to IDZs, SEZs should help improve issues of coordination and incentives, and funding, among other benefits.

Mr Kaya Ngqaka, DTI Chief Director: Special Projects, said the funding challenges were mostly due to issues of inflexibility.  Investors generally preferred specific destinations.  When they realized the IDZ did not have a budget and needed to wait several months until the National Treasury budget came out in July, opportunities would be lost.  The DTI was proposing a wide range of instruments to deal with this issue

He suggested the full involvement of financing institutions.  Mr Ngqaka also proposed that the Government should establish a fund that would provide certainty in terms of long-term planning and operation.  The funding model had led to much uncertainty.  Investors could not plan five to ten years in advance because they could not know whether conditions would be adequate then.  A pre-approved funding model would offer the necessary clarity and stability for an investment friendly environment.

Mr Alfred Tau, DTI Chief Director: Regional and Spatial Economic Development, said ministers were working together on the identification of new zones across the country.  Discussions were on-going regarding what the focus for each new zone would be and how they would be integrated into the overall scheme.

Mr Pep Silinga, CDC Chief Executive Officer, said, in response to Mr James, that discussions were under way regarding the development of a nuclear plant, and the representatives had attended meetings regarding environmental assessments and processes.  Coega would form a skills development centre to collaborate with local labour so they could use platforms already in place.  Discussions were progressing quite well.

Regarding the gas power plant, Coega had the infrastructure that would enable the entities with the capacity to develop the power plant to actually develop it.   Notably, transnational companies ranging from the Middle East to Russia had shown interest in the plant.

As for the oil refinery, there had been a recent agreement to conduct a detailed study to devise an engineering design and assess the economics of the project.   Preliminary estimates for oil demand show that there would be a surplus of oil beginning in 2023.  Assuming a growth rate of around 4%, the surplus would not create problems of feasibility.  The only other refinery looking strong was one proposed in Ghana.  In the next eight or nine years, there would not be any new refineries in Africa.  Meanwhile, trends showed that several countries in Africa were increasing the demand for oil.  Additionally, a pipeline would be the most efficient way to supply the south-western part of South Africa, so a pipeline should be included in the plan. 

In comparing the capital and operating expenditures and the revenue increases over the last two years, Coega had been showing exponential growth.  Thus Mr Silinga felt comfortable about the sustainability of the
CDC.

In terms of logistics, Coega’s area amounted to around 11 000 hectares, and NMBLP occupied 300 hectares. Much of the initial expenditures were the result of the lack of synergy in the different levels of Government.  For instance, around R400 million were spent just to acquire the land from the private sector.  An additional R200 million were spent on a road that was not a national road, but a provincial road.  Since these assets were not the property of the DTI or the IDZs and were, thus, not in the control of the national Government, it could not capitalise on its own balance sheet.  This had a distorting effect on the expenditures when compared to the revenue and job creation figures. 

The Acting Chairperson said that the meeting had to adjourn because the time allotted had expired and another meeting was scheduled to begin in that room.  Therefore, the delegation would have to submit their responses to the questions that went unanswered in writing.  The Committee Secretary would distribute them accordingly.  

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