Special Economic Zones Bill [B3-2013]: public hearings Day 2

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Trade and Industry

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

The Chemical and Allied Industries Association  raised concern over the definition of the term ‘port of entry’. They welcomed the attempt to streamline the provision of government services in a one-stop shop but felt that it would not address the key challenges faced by industry. They felt Clause 2(f) and Clause 34(k) should be aligned. The Advisory Board should be comprised of experts rather than constituency representatives. Incentives had to be competitive and be reviewed against international examples before being finalised and private sector companies should be permitted to apply for licences. The intention to designate should be gazetted for comment as areas could have private enterprise that could benefit from being located close by. Existing Industrial Development Zones (IDZs) should also be considered for licensing. The Minister’s authority to grant a licence should be delegated. 

Members asked for clarification on why the Minister’s authority to grant licences should be delegated. Was a Special Economic Zone (SEZ) geographically limited? Members asked why the advisory board should not comprise constituency representatives. Was it correct that the existing industrial development zones should be recognised by the Bill? Members asked for clarification on the concerns expressed over the Advisory Board. Members asked what study review said that the private sector should play a strong role.

The Centre for Development and Enterprise said that a workshop had been held on SEZs and the proceedings had been summarised in a report. SEZs should be seen in the context of the crises of mass unemployment and unskilled workers in South Africa. Thus South Africa should focus on two, low skill, labour intensive SEZs. SEZs were in competition for Foreign Direct Investment (FDI) and thus needed to be special as far as labour costs and flexibility of employment was concerned. SEZs were not suitable as an instrument for uplifting poor regions and did not work unless the whole government collaborated in getting them to work. It listed ten areas for policy reform amongst which were that government had to offer credible guarantees that policies would be sustained over time and that government reduced red tape by establishing a genuine one-stop shop. CDE said a bold paradigm shift was required to seize the opportunity SEZs offered and avoid the waste of resources and energy that the IDZs had done.

Members asked about the Bata factories that were located in rural areas as this appeared to be the kind of place South Africa needed. Members said a review had been done of IDZs which identified its weaknesses. What should be in the Bill to address the ten points that had been mentioned? Members said workers’ rights needed to be entrenched as evidenced by the recent deaths of more than a 1000 workers in Bangladesh. What type of incentives was needed to make it viable and successful? Members asked for an indication of failed SEZs. Members asked about international best practice on labour costs and flexibility of employment as the presentation had focused more on the manufacturer’s requirements. Could CDE expand on the comment that SEZs were badly suited for uplifting poor regions?

The East London Industrial Development Zone said the Bill treated the developmental aspect lightly and requested that this matter be re-looked at as it was clearly stated in the Preamble to the Bill and in Department policy. A key theme of developmental planning was that the public sector response be integrated and holistic across spheres of government and this issue of inter-governmental collaboration needed to be addressed. It questioned the role and the level at which the Advisory Board would operate. It raised the issue of concurrent interests in developing infrastructure that fell outside of the zone which would influence the zone. It said that uncertainty in legislation affected the value proposition of a zone. Zones needed a high level of scalability, flexibility and adaptability which should be assured by legislation. The Bill should avoid imposing limitations that preclude optimal developmental support from the provinces.  The SEZ delivery model should deal with the balance between developmental orientation and short term opportunistic incentivised industrialisation.  It wanted to see project specific transitional measures to take into account each IDZ’s individual developmental path. The SEZ Fund was welcomed but there was lack of clarity in the legislation as to what industrialisation would be supported.

Members said that in the past the problem with the IDZs was that no one was responsible for them and to correct that, responsibility had been vested in the Minister. Members asked whether the Bill addressed the issues of ownership and managing the zone. Members asked for clarification of the concurrency issue.

Meeting report

Chemical and Allied Industries Association (CAIA) submission
Dr Laurraine Lotter, Executive Director of CAIA, said she was also representing Pharmisa, the association of domestic pharmaceutical manufacturing. She said the chemical industry was important because it provided inputs into various other sectors involved in the export value chain. She said the manufacturing sector’s value add to the GDP of South Africa had been in constant decline since 2002. South Africa had a vibrant local pharmaceutical industry which was essential to health policy as it manufactured critical drugs such as antiretrovirals. However the growth in basic chemicals lagged behind world growth and its contribution to manufacturing was declining resulting in it being a major contributor to the trade deficit.
 
Their concerns were that the definition of the term ‘port of entry’ referred to the immigration of people rather than the place designated as a place of entry for control purposes. They welcomed the attempt to streamline the provision of government services in a one-stop shop but felt that it would not address the key challenges faced by industry. Clause 2(f) and Clause 34(k) should be aligned. Clause 2(f) was for lodging applications not for adjudication. She said the Advisory Board should be comprised of experts and not contain any constituency representatives. She said incentives had to be competitive and be reviewed against international examples before being finalised. A review of international practice had shown that the private sector could play a strong role, so private sector companies should be permitted to apply for licences. The intention to designate should be gazetted for comment as areas could have private enterprise that could benefit from being located close by. She said the Bill offered a lot of promise and potential but there were a few areas where collaboration with the private sector could encourage private sector investment. Existing Industrial Development Zones (IDZs) should also be considered for licensing. The Minister’s authority to grant a licence should be delegated to the Department for example. 

Discussion
Mr G Mackintosh (COPE) asked for clarification on why the Minister’s authority to grant licences should be delegated. Was a Special Economic Zone (SEZ) geographically limited or could it be scattered around the country.

Mr N Gcwabaza (ANC) asked why the advisory board should not comprise constituency representatives. Was it correct that the existing industrial development zones should be recognised by the Bill?

Mr B Radebe (ANC) asked for clarification on the concerns expressed over the advisory board as no two SEZs were the same and therefore the advisory board was important. Regarding the comment that the private sector should play a strong role, he asked what study review was being referred to.

Ms Lotter replied that the Minister would be getting information from a number of different boards and it might be wise to make provision for the delegation of his authority. SEZs would be the new form of the old IDZs and it needed to be regulated. It was geographic in nature and a standalone plant was not a SEZ. She said existing IDZ would be recognised. She said the board members’ primary mandate should be to the board not to the constituency they represented. She said she did not think the labour laws would be totally collapsed in SEZs. Once foreign investors made an investment decision they wanted it implemented as quickly as possible and so government processes needed to be streamlined.

Centre for Development and Enterprise (CDE) submission
Mr Antony Altbeker, Research Director, said that a workshop had been held on SEZs and the proceedings had been summarised in a report. SEZs should be seen in the context of the crises of mass unemployment and unskilled workers in South Africa. South Africa’s employment rate stood at 40% compared to a global norm of 60% and it was not creating jobs fast enough. Existing policies favoured capital intensive and skills intensive industries. Thus South Africa should focus on two, low skill, labour intensive SEZs. There were 3000 SEZs in 135 countries.  In 2004 they attracted 32% of all Foreign Direct Investment (FDI) and were the source of 41% of all manufactured exports, manly in the East. There have been many failures thus one needed to look at international best practice. SEZs were in competition for FDI and thus needed to be special as far as labour costs and flexibility of employment was concerned. Manufacturers had to be able to adjust rapidly to changing market conditions. SEZs were not suitable as an instrument for uplifting poor regions and did not work unless the whole government collaborated in getting them to work. A leading economist had said that a significant proportion of China’s light industrial jobs might move to other countries and South Africa should compete to get some of these jobs. He then listed ten areas for policy reform amongst which were that government had to offer credible guarantees that policies would be sustained over time, that government reduce red tape by establishing a genuine one stop shop and not a one more stop shop and that government orient local education and training institutions to provide for the skills needed in SEZs. He concluded by saying that a bold paradigm shift was required to seize the opportunity SEZs offered and avoid the waste of resources and energy that the IDZs had done.

Discussion
Mr Mackintosh asked about the Bata factories that were located in rural areas as this appeared to be the kind of place South Africa needed.

Ms S van der Merwe (ANC) said a review had been done of IDZs which identified its weaknesses. What should be in the Bill to address the ten points that had been mentioned?

Mr Radebe said workers’ rights needed to be entrenched as evidenced by the recent deaths of more than a 1000 workers in Bangladesh. What type of incentives was needed to make it viable and successful?

The Chairperson asked for an indication of failed SEZs. She asked what the international best practice regarding labour costs and the flexibility of employment was as the presentation had focused more on the manufacturer’s requirements. Could he expand on the comment that SEZs were badly suited for uplifting poor regions?

Mr Altbeker replied that he did not know of the Bata factories. In Mauritius factories could be declared as SEZs. It would not work if one gave exemptions to factories for not being in a geographic zone and then did not give them to others, as the focus was to target the export market.

Two zones had been put forward so that the energy and resources could be focussed on them.

The CDE had not done much work on the Bill itself although one of its consultants, a Canadian Jean Paul Gaultier, had commented on an earlier version of the Bill. Overall, the concerns were over whether the Bill was transparent enough and whether the Bill was special enough to attract foreign investment. Their consultants had been insistent that the best run zones were Public Private Partnerships (PPP). The later versions of the bill did allow for PPP involvement but no zone would be successful without the support of the local government. He said one wanted to transfer as much risk as possible in the operation of a SEZ to the private sector. In this regard the governance structures of SEZs did not provide the space for PPP participation.

Regarding the question of worker rights, he said some standard of worker rights needed to be set particularly on health and safety. In the Bangladesh case, the country’s own labour laws were not complied with by the owner of the property. The developing world needed to offer a competitive advantage over the developed world as far as labour costs were concerned. He said their consultants had advised that incentives matter but not as much as one thought as the business environment mattered most.  Incentives did not attract multinationals in the first place but could tip the scales right at the end when the decision was being made. Whether SEZs were successful or not depended on what extent the business environment was better inside the zone than outside the zone. For example it had more or better access to electricity, fewer outages and better access to the world. Coega was an example of an over capitalised zone running ahead of itself and not succeeding.

He said that by flexibility of employment he meant the ability of manufacturers to be able to grow and shrink their workforce according to demand. It could be described as the casualisation of labour. SEZs would not be viable in poor regions without massive sustained subsidies and these SEZs would fall apart if the subsidies were withdrawn.

East London Industrial Development Zone (ELIDZ) submission
Mr Thando Qwintsa, Executive Manager, said the ELIDZ covered 460 hectares and was licensed in 2006. Government had invested R1.3b. The Zone had leveraged investment of R4b from 24 investors, 60% of which were FDI and this had created 2000 jobs. The Zone expected the Bill to have a developmental perspective yet found that the developmental aspect was treated lightly and requested that this matter be re-looked at as it was clearly stated in the Preamble to the Bill and in Departmental policy. If it was not expanded in the legislation, the matter would be left to the regulations, where it could be interpreted either narrowly or expansively.

A key theme of developmental planning was that the public sector response be integrated and holistic across spheres of government. The issue of inter-governmental collaboration was one of the key issues that needed to be addressed and had been partially dealt with through the creation of the Advisory Board.  He questioned whether the Board was at the right level however. If it was to be at the operational level dealing with operational matters, then it would appear to have executive powers.   Intergovernmental collaboration was important because while there were infrastructure developments taking place in the zone, there were concurrent interest in developing infrastructure that fell outside of the zone which would influence the zone, such as a port or rail infrastructure. So provinces would have to be taken into account and this would mean that the variable development imperatives of provinces and municipalities be accommodated.

He said that uncertainty in legislation affected the value proposition of a zone. Zones needed a high level of scalability, flexibility and adaptability which should be assured by legislation. The Bill should avoid imposing limitations that preclude optimal developmental support from the provinces because there were out of zone factors that needed to be taken into account. The SEZ delivery model should deal with the balance between developmental orientation and short-term opportunistic incentivised industrialisation. Certainty and robust legislation would make investment decisions easier to make in favour of South Africa and different criteria had to apply to different zones. It wanted to see project specific transitional measures to take into account each IDZs individual developmental path. The SEZ Fund was welcomed but there was lack of clarity in the legislation as to what industrialisation would be supported and it had implications for the transitional period of existing zones. Some decision approval structures appeared to duplicate work and were redundant causing delays in the turnaround times of applications.

Discussion
Mr B Radebe said that in the past the problem with the IDZs was that no one was responsible for them and to correct that, responsibility had been vested in the Minister. He asked whether the bill addressed the issues of ownership and managing the zone.

The Chairperson asked for clarification of the concurrency issue.

Mr Qwintsa said concurrency implied that provincial planning was taken into account and certain planning aspects were devolved to the provinces for execution. If concurrency issues were sent to a higher level and provinces were subsumed in the process, then he doubted it would find favour at the provincial level as it would not be aligned with provincial plans and the out of zone needs of the zone would not be incorporated into the regional plans.

Regarding responsibility and ownership, he said the Advisory Board operating at the level of operations would be an extra level of bureaucracy. Its role needed to be clarified as to whether it was advisory in nature or whether it had executive powers. In addition, one could not have a one-stop shop but then add another level of bureaucracy at higher level.

The meeting was adjourned.

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