Special Economic Zones Bill: public hearings Day 1; B-BBEE Amendment Bill: flagged matters

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Trade and Industry

21 May 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee heard submissions on the Special Economic Zones Bill from the Richards Bay Industrial Development Zone, Chris Hani District Municipality, Business Unity South Africa and the Free Market Foundation. It also deliberated on outstanding issues around the BBBEE Amendment Bill that needed to be finalised by Thursday 23rd May.

The Richards Bay IDZ said a key weakness of the Bay Industrial Development Zones (IDZ) had been the lack of incentives but this was being addressed by the Bill. However, electricity, the lack of container cranes in Richards Bay harbour, competition from Tanzanian and Mozambican ports, environmental impact assessments and land designated ‘irreplaceable agricultural land’ remained challenges. It raised concerns about the composition of the Advisory Board, the separation of the Zone and its operator, the catch 22 situation concerning funding and expertise, the fact that the Minister had to give approval for all locators, the facilitation of a one stop shop to reduce bureaucracy, the question of ownership and control of land in SEZs, lengthy Environmental Impact Assessment studies and its impact on potential investment, issues such as rentals versus profits of operators, the marketing of SEZs, portions of the Act that were in conflict with PFMA regulations, and challenges faced by Public Private Partnerships. It also suggested a number of additional clauses which should be considered for inclusion in the Bill.
 
Members asked about SEZs being able to compete amongst each other in marketing. Members asked what level of incentives was needed to compete against global business. Members asked about the employee tax rebate as an additional and attractive incentive and whether the 15% tax structure was operational already.

Chris Hani Municipality District made a case for it to be considered as a SEZ focused on agro –industrial industries which sought to play a role in the upliftment of the area through the development of local beneficiation and infrastructure. In this regard it called for the revitalization of three irrigation schemes in the Ncora, Qamata and Engcobo areas. It said Qamata had 4000ha of land available. In Cradock a biofuels plant had been established while the area also supported livestock and poultry production and coal mining. There were plans for agri-parks in Ncora and Qamata and the municipality had been in contact with provincial authorities and with the private sector and would apply for SEZ status as soon as the Bill was passed.

Members said the area was rich in many ways but investments were not made in the area. Members said the municipality’s submission validated why the Bill had to be passed as soon as possible as rural areas needed investment. Members said the Committee was not the correct forum for making an application; it should be done to the Minister. Members asked if their projects had been costed and whether they had access to finance. Were there developed markets for the products it planned to produce? Members said the municipality had great vision but questioned the practicality of the plans.

BUSA said it represented business at the NEDLAC forum, which forum had prepared a report on the Bill. BUSA welcomed and supported the Bill as it believed it could enhance South Africa’s global competitiveness and felt that there was room for an increased role for the private sector given that the investment in SEZs would be driven by the private sector. South Africa’s gross value add to the GDP had been in decline for at least the last six years and South Africa needed to increase its exports and decrease its imports. If this was not done it would affect South Africa’s balance of payments and create a risk of inflation. Incentives should be benchmarked against successful SEZs elsewhere.

BUSA was concerned over the definition of ‘port of entry’, it did not support constituency based representation on the advisory board of the SEZ, it wanted to see it comprised of experts, it argued that the support measures should be tested against global best practice first before being finalized, felt that including municipalities would have a negative impact on business outside of the SEZ as they were already challenged without having to take on additional responsibilities. Were municipalities to be included, only those that demonstrated clean audits the preceding year should be considered. A major issue was the situation of businesses that were already established outside of the SEZ which would have to relocate. BUSA believed the guidelines should be applicable to all and should be gazetted for public comment and not merely for information.

Members said the previous submission had shown how municipalities had problems. Municipalities needed to have a tax revenue base. If the municipalities could prove its case, why was there a concern over it being run excellently? Members asked how the education and skills training problem would be solved if businesses relocated to new premises where it might be difficult to train people.

The Foundation was excited about the SEZ Bill which would attract investment and develop growth points. The kind of SEZ that would be developed was important. It was not just about its geographic position because in Ghana there were companies which could be registered as SEZs. The huge investments by business would put pressure on South Africa to have effective operational SEZs. South Africa was a late starter in SEZs with those in China, India, Ethiopia and Ghana already operational.

SEZs were seductive to foreign investors because they were free trade zones where the countries policies were not applicable. South Africa’s labour policies were too cumbersome and onerous and it stopped investments being made and should not be entertained in the SEZs. SEZs had to be able to guarantee security and thus a strong culture of the rule of law and contracts had to be enforced. Investors needed to know that policies would not change overnight as they were there for the long term. Foreign exchange controls had to be relaxed and red tape had to be eliminated as a bureaucracy with discretionary powers was open to exploitation or corruption. He listed the reasons why SEZs have failed and said South Africa needed a radical new model as it was competing against countries with track records. The Bill had to consider the SEZ to be a geographic duty free area with a ten year exemption and exemption on Capital Gains Tax and that labour disputes in SEZs be speedily resolved. He acknowledged that these would call for real political will to effect these.
 
Members said SEZs were places where one could experiment, but that South Africa was bound by its history and was therefore looking for labour intensive industries rather than capital intensive industries and would experiment to find out what worked. There was a shortage of executives which led to their salaries increasing. How would SEZs be used to enhance competition. Members said BUSA’s submission emphasized that the laws of the country should prevail and BUSA was the spokesperson for business, yet the Free Market Foundation wanted to do away with laws while at the same time asking for it to be enforced. Members said that if labour’s rights were ditched, would this not produce the uncertainty that investors did not want. Members said the financial meltdown of 2008/9 was because of the absence of laws which allowed the financial sector to do as they pleased. Members said SEZs were there to draw capital investments, to relax compliance elements and to do business in an easier way.

BBBEE Amendment Bill: The Committee looked at three areas that had been flagged in Clauses 6, 8 and 10. The Chairperson noted a letter from a Democratic Alliance member who had indicated his concern in the way the Bill was being handled. She pointed out that the Bill had not been adopted yet by the Committee.
 

Meeting report

Richards Bay Industrial Development Zone (IDZ) submission
Mr Mohlomi Nkopane, Acting CEO, said the Richards Bay IDZ was a licensed IDZ wholly owned by the KwaZulu Natal (KZN) provincial government with one major tenant, Tata Steel. A key weakness of the IDZ had been the lack of incentives but this was being addressed by the Bill. Electricity, the lack of container cranes in Richards Bay harbour, competition from Tanzanian and Mozambican ports, environmental impact assessments and land designated ‘irreplaceable agricultural land’ remained challenges.

Advisory Board
Adv Keith Harvey, the RBIDZ Legal Manager, said the areas of weakness it had identified in the Bill were the composition and powers of the Special Economic Zones (SEZ) Advisory Board. It was highly likely that meetings would fail to achieve a quorum if the Board comprised high powered members. A conflict of interest would exist if members could approve its own locators and disapprove those of its competitors. It felt ex officio members should not be disqualified from being members. The Board was of an advisory nature only and had no executive power and was scheduled to meet only quarterly.

The Zone versus The Licensee
An organ of State or a Private Public Partnership (PPP) (the Licensee) could apply for SEZ designation (the Zone) which was a separate legal entity. A zone did not have a license, only a different shareholder entity could hold a license. The duties which would normally fall on a legal entity would now fall on the shareholder of the entity and this was in conflict with the Public Finance Management Act (PFMA) statutes. This separation was confusing. RBIDZ was concerned that the Minister had the right to appoint an administrator to take over the administration of the licensee where the licensee was a Department and not a zone.

Ownership versus Operation
In clause 30, it felt that the word ‘must’ should be replaced with ‘may’, as it would be a problem for existing IDZs which owned and operated zones. There was a duplication of administration as the zone had to comply with PFMA and administer the zone board while the operator had to supply information and manage the zone. The Bill presumed that an in house manager with no profit motive would be more expensive than an operator with a profit motive. It questioned why a zone which was a PPP and had the expertise to operate the zone should have to appoint an operator. The short term nature of the contracts, of five years as envisioned in the Bill would not encourage investment by an operator looking for security of tenure and long term contracts.

Funding and Expertise Catch-22
Clause 22(3) stated that the applicant should have access to financial resources and expertise for the development, operation, management and administration of the SEZ. Thus a zone would be reliant on the SEZ fund receiving assured funding even before it applied for the zone to be declared a SEZ. The zone entity would have to be established before a tender was issued for an operator; otherwise it would only be able to prove access to expertise after being licensed and appointed as operator.

Ministerial approval of all locators
He felt that the need to get Ministerial approval might cause the process to be slowed down. This approval process included the zone board and Advisory Board which only met quarterly and would result in a nine to 12 month delay and this was excluding EIAs. It suggested that the Minister delegate this power.

Facilitation of a one-stop shop
He said there was little provision for a one stop shop to reduce red tape and facilitate investment. The focus was on the national level while most of the issues occurred at local level.

Ownership and control
With respect to clause 22(c), SEZs had to have ownership and control of the lands. This was critical for the RBIDZ where Tata Steel had bought land directly from municipalities on the understanding that it would be in an IDZ. There was a need to reduce the cost of acquiring land and that expropriation had to be reviewed.

Environmental Impact Assessments
EIAs impacted on the length of time taken to process applications as EIA took a minimum of 18 months to process, where investors were looking for a two month turnaround time. At issue was also land designated as ‘irreplaceable agricultural land.’

Inexpensive rentals versus profits
The WTO allowed for reduced rentals in SEZs. If an operator was appointed, they would have to build risk and profit into their prices, whereas the primary purpose of the SEZ was growth created by the locators not the profits of the operators. He quoted the Hsinchu Park SEZ which took 15 years to generate a profit but now contributed 10% of Taiwan’s GDP. SEZs took a long time to become sustainable.

Marketing
Section 34 indicated that the zone operator would market the zone in consultation with the advisory board. RBIDZ felt that a national marketing strategy was needed to promote all zones and said operators might be deterred if it could be constrained by the advisory board.

Anomalies such as attracting locators to areas with no supplier base should be avoided and the Bill should not be too prescriptive as other countries such as Mozambique posed a threat.

Conflict with the PFMA
He said the Bill was in conflict with the PFMA because zones would be subject to the PFMA which gave two months for the submission of documents for auditing while clause 27(1)(c) of the Bill gave three months.

Private Public Partnership (PPP)
He said Treasury regulations included tender procedures for the selection of private sector partners while the Bill allowed PPPs to apply for SEZ designation. In this scenario government would have to embark on the PPP tender process before an application was even made for the designation of an SEZ. The PPP tender process would be undertaken in the hope that the SEZ would be declared. Apart from this anomaly, RBIDZ questioned why the PPP had to appoint a zone operator.

Suggested additional clauses
RBIDZ suggested that a clause similar to clause 10 of the Kenyan SEZ Bill be inserted which would require that all payments be made through local banks and also one similar to clause 37 of the Kenyan Bill setting out the rights of locators. It would like to see a clause similar to regulation 3C of the IDZ regulations providing for the amendment of designation of SEZs. It suggested a clause to short circuit EIA process for locators in SEZs. It wanted a clause included which would deal with whether land in SEZ could be sold or only leased. It suggested a clause around what happened to a locator who no longer qualified for location in an SEZ; whether it had to move out or remain but lose out on its benefits such as discounted rentals or incentives. It wanted a clause included which would exempt SEZs from the Competition Act. It wanted a clause similar to clause 28(a)(1) of the IDZ regulations which provided that no enterprise locate and operate in an IDZ without written agreement between the enterprise and the zone or operator. It wanted a clause similar to clause 22 of the RBIDZ regulations allowing the zone or operator to enforce sanctions for noncompliance through penalties.

Discussion
Mr G Hill-Lewis (DA) asked about marketing and SEZs being able to compete amongst each other in marketing. He asked what level of incentives was needed to compete against global business.

Adv Harvey replied that SEZs all had their positive and negative points and so the marketing should be focused on marketing South Arica rather than a SEZ. The Minister of Finance had already indicated that the tax rate would decrease from 28-15% in SEZs. Another incentive would be the removal of red tape.

Mr Hill-Lewis asked about the employee tax rebate as an additional and attractive incentive. He asked if the 15% tax structure was operational already.

Adv Harvey said that it had not been implemented yet.

Chris Hani District Municipality submission
Mr Mxolisi Koyo, the executive Mayor, said that they were making a case for Chris Hani Municipality District to be considered as a SEZ which focused on agro –industrial industries and sought to play a role in the upliftment of the area through the development of local beneficiation and infrastructure. In this regard it called for the revitalization of three irrigation schemes in the Ncora, Qamata and Engcobo areas.

An official from the Municipality said Qamata had 4000ha of land available. In Cradock a biofuels plant had been established while the area also supported livestock and poultry production and coal mining. There were plans for agri –parks in Ncora and Qamata and the municipality had been in contact with provincial authorities and with the private sector and would apply for SEZ status as soon as the Bill was passed.

Discussion
Mr N Gcwabaza (ANC) said the area was rich in many ways but investments were not made in the area.

Mr B Radebe (ANC) said the municipality’s submission validated why the Bill had to be passed as soon as possible as rural areas needed investment. However, he said the Committee was not the correct forum for making an application.

Ms S van Der Merwe (ANC) asked if their projects had been costed and whether they had access to finance. Were there developed markets for the products it planned to produce?

Mr Mackintosh (COPE) said the municipality had great vision but questioned the practicality of the plans.

Mr Koyo said it had identified that investment in the area was lacking. It had held its own summit asking countries such as China, India, UAE and Turkey what they were looking for. They were seeking to revitalise the small towns of the district. The rail links and road infrastructure needed upgrading.

Free Market Foundation submission
Mr Temba Nolutshungu, a Director of the Foundation, said he was doing the submission in the absence of Mr Leon Louw who was scheduled do it. He said the foundation was excited about the SEZ Bill which would attract investment and develop growth points. He said what kind of SEZ would be developed was important. It was not just about its geographic position because in Ghana there were companies which could be registered as SEZs. The huge investments by business would put pressure on South Africa to have effective operational SEZs. He said South Africa was a late starter in SEZs with China, India, Ethiopia and Ghana already operational.

SEZs were seductive to foreign investors because they were free trade zones where the countries policies were not applicable. South Africa’s labour policies were too cumbersome and onerous and it stopped investments being made and should not be entertained in the SEZs. SEZs had to be able to guarantee security and thus a strong culture of the rule of law and contracts had to be enforced. Investors needed to know that policies would not change overnight as they were there for the long term. Foreign exchange controls had to be relaxed and red tape had to be eliminated as a bureaucracy with discretionary powers was open to exploitation or corruption. He listed the reasons why SEZs have failed and said South Africa needed a radical new model as it was competing against countries with track records. China’s first SEZ in Shenzhen in Guangdong province close to Hong Kong which had a population of 300,000 in 1970 when the SEZ was established now boasted a population of 12 million with an average per capita income of $8000 as compared to the country’s average of $2000.

The Bill had to consider the SEZ to be a geographic duty free area with a ten year exemption and exemption on Capital Gains Tax and that labour disputes in SEZs be speedily resolved. He acknowledged that these would call for real political will to effect.
 
Discussion
Mr James said SEZs were places where one could experiment, but that South Africa was bound by its history and was therefore looking for labour intensive industries rather than capital intensive industries and would experiment to find out what worked. There was a shortage of executives which led to their salaries increasing. How would SEZs be used to enhance competition.

Mr Radebe said BUSA’s submission emphasized that the laws of the country should prevail and BUSA was the spokesperson for business, yet the Free Market Foundation wanted to do away with laws while at the same time asking for it to be enforced. He said that if labour’s rights were ditched, would this not produce the uncertainty that investors did not want. He said the financial meltdown of 2008/9 was because of the absence of laws which allowed the financial sector to do as they pleased.

Mr Mackintosh said SEZs were there to draw capital investments, to relax compliance elements and to do business in an easier way.

Mr Nolutshungu replied that South Africa did not have the leisure of time to experiment and could use instead case studies to find out what worked and what did not.

To increase employment in the country a more relaxed labour policy was needed which did not deter investors as South Africa was losing out to Nigeria and Kenya.

Encouraging competition allowed skills to be picked up. The laws and regulations were too onerous to attract people to go in to business. It was not the red tape that caused the banks in the US to collapse. It had occurred because of government interference in the financial affairs of banks putting pressure on them to give home loans even to those that could not affords it. Competition amongst SEZs could be stimulated by encouraging more areas to be recognised as SEZs.

BBBEE Amendment Bill: flagged matters
The Chairperson said that three issues regarding the Amendment Bill needed to be discussed urgently. She noted that she had received a letter from Mr Mackintosh (COP) who indicated his concern in the way the Bill was being handled. She stressed that the Bill was not yet adopted by the Committee.

Clause 6(1) and (2)
Adv Johan Strydom, the dti Legal Advisor, said that it had been suggested in deliberations that the phrase ‘as far as reasonably possible’ in Clause 6(1) be omitted from the principal act and from the Amendment Act, because it had been felt that this was an escape clause’ and allowed public entities not to apply the codes and the Committee had been clear that this phrase be omitted.

Adv Strydom said that Clause 6(2) allowed for when cogent, practical reasons existed where the Minister might, after consultation, exempt the entity from a requirement or allow deviations if particular circumstances necessitated an exemption or deviation.

Adv Swartz, the State Law Advisor, concurred.

Mr Radebe said the insertion provided for the concerns that had been expressed.

Mr Mackintosh said his concern in the matter was on the procedure being followed. His understanding had been that the Committee had agreed ‘as far as reasonably possible’ to take into account precisely those occasions where an escape clause was needed. Now it was the Minister who had the discretion to decide and he was very surprised at the procedure which had resulted in this amendment.

Clause 8
Adv Strydom said it concerned the occasion when the Commissioner or Deputy Commissioner was unable to perform and that provision be made for an acting Commissioner to be appointed to fulfil the Commissioner’s functions.

Adv Swartz said that the Minister might determine the functions of the acting Commissioner in that particular time period.

Mr Mackintosh said that this was only an administrative issue; the main issue was that the Minister not be able to act unilaterally.

Clause 10(4).
Adv Strydom steered the Committee to the trumping clause which stated that if the Act was in conflict with any Act promulgated prior to the date of commencement of the BBBEE Act then the BBBEE Act would prevail if the conflict dealt with a matter in the BBBEE Act.

In a meeting held the previous week, it had been decided that there should be an extension to this provision. This would allow other departments to ascertain whether the legislation applicable to them contained provisions that were in conflict with the BBBEE Act. This would allow them time to make the necessary legislative amendments. This was where clause 10 came into play. With the exception of clause 10(3)(b), the Act came into effect on the day set by the President and clause 10(3)(b) came into effect one year after the date of commencement of the Act. This would allow other departments one year to amend legislation

Adv Swartz said, regarding the window period, that the Act made provision in amendments to section 9(6) that if there was conflict between Acts that the relevant Minister could apply to the Minister of Trade and Industry to have their criteria be different.

The Chairperson then raised the matter of Mr James’ proposal on the definition of the word ‘black’.

Mr James said he had proposed an amendment which used terminology that was non-racial in character yet still had the same effect and remained consistent with the naming conventions used by the dti in the Credit Act.

The Chairperson said that the issues had been raised to ensure that a clean copy of the amendments were available when these issues were discussed in the coming Thursday night’s meeting.

The meeting was adjourned.
 

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