Special Economic Zones Bill [B3-2013]: dti response to submissions & input by Parliamentary Legal Adviser; Committee Report on Industrial Policy Action Plan

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Trade and Industry

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

Members were presented with a copy of the Committee's report on the adoption of the Broad-Based Black Empowerment Amendment Bill.

The Department of Trade and Industry briefed the Committee on the contents and objectives of the Special Economic Zones Bill.  A number of comments had been received from business organisations and the existing Industrial Development Zones.  In most cases, the Department felt that the matters raised were answered in the Bill.  Some clarity was needed in certain clauses, and there were cases where there was some confusion over the roles to be played by the board of a Special Economic Zone, the licensee and the operator.  Some amendments would be made.  Incentives might be needed for investors, but such arrangements should be concluded with the respective Departments, rather than be included in the Bill.

The Parliamentary Legal Advisor raised a number of issues.  She raised concerns about the relationships and roles of the different control bodies, and over the procedure for removing the board from office.  The need for consultation should be emphasised more in the Bill.  These zones would have special regulations, but should not be seen as offshore enclaves within the borders of South Africa, where South African law would not apply. 

Some amendments were needed in the definitions, and in the appointment processes.  Many of the governance practices specified in the Bill could be removed and placed in Codes of Conduct, or simply be left to the normal governance procedures.  Issues regarding funding belonged in regulations.  A policy was needed on the consolidation of zones, and what procedure would ensue if a business within a zone no longer contributed to its objectives.  The possibility of administrative penalties should be considered as a lesser form of sanction for minor transgressions.

Member said that it was clear that a lot of work was still needed on the Bill.  The Department was given some time to ponder the points raised at the meeting.

A report from the Committee on the Industrial Policy Action Plan was adopted.
 

Meeting report

Committee Report on the Broad-Based Black Economic Empowerment Amendment Bill
The Chairperson welcomed those present and noted some apologies.  She felt it would not be correct to discuss the Industrial Policy Action Plan (IPAP) issue if the people who had worked on it were not present.  For clarity, she had asked the Secretary to prepare the report on the Broad-Based Black Economic Empowerment Amendment Bill overnight.  Members were given a copy of the report.

Mr G Hill-Lewis (DA) thought that the definition in the Bill was for 'black people' and not just 'black'.  This would be amended in the report.

Mr N Gcwabaza (ANC) said that the report reflected the previous day's proceedings.

Ms S van der Merwe (ANC) said that the amendments proposed by the FF+ should also be included in the report.

The Chairperson said that Adv A Alberts (FF+) had proposed his own amendments, but there had not been a seconder. Similarly, the Member for COPE had withdrawn his proposal in favour of that of the DA.  Members would be sent a corrected copy before the report went to the House.

Presentation by Department of Trade and Industry
Mr Tumelo Chipfupa, Deputy Director-General (DDG), Department of Trade and Industry (dti), said that the dti had looked at the comments made on the Special Economic Zones (SEZ) Bill.  The Bill had followed all the regular processes, including submission to Parliament and being open for public comment.  The Bill looked to establish an Advisory Board, consisting of 15 people.  Of these, nine would be from government, three independent experts, and the remainder representing labour and civil society.

Applications for designation as an SEZ would be made to the Minister.  The criteria were contained in Clause 22 (2).  On the recommendation of the Board, the Minister might designate an area as an SEZ and grant a licence.  Once this happened, an SEZ would be established as an entity, governed by a Board.

Mr Chipfupa described the functions of an SEZ Board.  If an SEZ failed to comply with prescribed conditions or to perform its functions, the Minister had the power to appoint an administrator.  An operator would be appointed following a fair and transparent procurement process.  A permit was needed to develop, operate or manage an SEZ.  This would be issued by the Minister. 

Any business planning to operate within an SEZ must apply to the Minister.  It would have to provide information on the nature of the business and the extent to which it would achieve the purpose of the SEZ.

Mr Chipfupa moved on to some issues that had been raised.  The definition of 'point of entry' would be amended according to the agreement at the National Economic Development and Labour Council (NEDLAC).  Industrial Development Zones (IDZ) were part of the SEZ framework.  A second issue raised was that the Board should not be advisory only, but should be empowered to make decisions. 

There was a feeling that the Board should consist of more persons from the private sector.  There was a concern that Board members might battle to attend meetings due to other commitments.  The dti responded that it was not the intention that the Board should have an executive function.  The Bill provided for constituency-based representation, but members should have knowledge and experience of SEZs.  The functions of the Board were regulatory in nature.  Government officials would be well placed to provide this knowledge.  The decisions made by the Minister regarding designation would be related mainly to infrastructure, such as power supplies and logistics.  There would have to be good co-ordination between different spheres and departments of government in order to make the concept successful.  The quorum would be set at 50% plus one, and he did not think that this would prove to be an issue.  Alternates could also serve on the Board, and technology could also be used to enable physically absent members to take part in meetings.

Mr Chipfupa said another issue was that the Bill should provide for private sector owned SEZs.  The dti responded that the Bill did make provision for this.  The private sector could apply for designation as an SEZ as part of a private-public partnership (PPP) arrangement.  Operators could be appointed from the private sector.  The private sector had good experience of management.  The location of SEZs could impact on municipal resources, and hence the dti thought it better to follow the PPP model. 

Business Unity South Africa (BUSA) and the Richard's Bay IDZ (RBIDZ) had proposed that unsolicited deeds be made available.  The dti supported Treasury regulations on PPPs.  The measures already used by government were internationally acclaimed, and made adequate provision for the private sector.

The next issue was that the Bill confused an asset, such as a geographic area, and the entity, which was a juristic person controlling the asset.  It did not make sense that the shareholder of the zone should not be the licensee.  Duties that world normally fall on the legal entity fell on the shareholder.  The dti responded that Clause 24 provided that upon designation as an SEZ, the licensee must establish an entity.  The licensee was the shareholder and must appoint a board to manage the business affairs of the SEZ.  The relevant clauses should refer to the SEZ Board and not the licensee.

Another issue was that existing sites should be considered for designation.  The Minister should publish his intention to designate an SEZ for public comment.  The RBIDZ had felt that the Bill did not provide for the amendment of the designation, should the boundaries of the SEZ change.  The response of the dti was that Clause 22 did not preclude the application for designation of an existing site, providing that the criteria were met.  The Minister was not prohibited from publishing his intention to designate an SEZ for public comment.  This was already being done, but the Bill could be amended to enable the Minister to publish his intentions.  The Bill would be amended to make provision for the amendment of boundaries.

Mr Chipfupa said that RBIDZ had commented that existing IDZs should own and operate zones.  They felt that the Bill prevented such an arrangement.  The dti responded that the operator must have a permit to operate an SEZ.  It could both operate and own an SEZ, but would have to make separate applications.

BUSA and others had submitted that the Bill should provide details of incentives.  The Bill should also ensure labour flexibility as an incentive to investors.  The response of the dti was that incentives should be agreed between the dti and other relevant departments.  The rules for incentives were detailed, and should not be contained in the Bill.  The dti was engaging with theTreasury and the South African Revenue Service (SARS) on incentives.  Benchmarking had been conducted in different parts of the world.  There were a number of preferential tax rebates.  There was no “one size fits all” approach.  SEZs had been introduced in China in a vastly different market climate to the South African situation.

Mr Chipfupa said that labour flexibility was not the only factor for investors to consider.  The concept of the “sweatshop” was losing favour internationally, and investors were in fact imposing pressure to dismantle such facilities.

Several organisations had felt that the Bill should specify mechanisms to streamline the approval process and reduce “red tape”.  The dti responded that the Bill did facilitate a “one stop shop” concept.  The mechanisms could include representatives of the different government departments involved, who would be empowered to make decisions. 

A proposal had been made that the Board and not the Minister should approve the businesses to be located in an SEZ.  The East London IDZ (ELIDZ) had noted that the Bill did not provide for a stipulation that a business might no longer remain within an SEZ, and whether it should then remain or be removed.  A proposed solution was that a business might remain within the SEZ, but not receive the related benefits.  The response of the dti was that businesses were entitled to support measures to control the SEZ, and it was appropriate that the Minister should exercise this power.  It did not agree that the Board should approve businesses.  Approved businesses should be part of the objectives of that SEZ.  The Minister was allowed to impose conditions when approving a licence.  The Minister could stipulate a condition that a business which was no longer part of the objectives of the SEZ should either exit the zone or re-negotiate the approval.

ELIDZ and RBIDZ had proposed that the Bill should provide for specific transitional arrangements.  The dti felt that the transitional arrangements for IDZs generally should be appropriate.
BUSA and others had proposed that guidelines should be published for public comment, and must be binding on the dti.  The Department responded that guidelines were not subordinate legislation and were provided as assistance for potential applicants.  Guidelines were dynamic in nature.

Mr Chipfupa said the final issue raised by the two current IDZs was a concern that the Minister might not have enough time to perform his functions, resulting in delays in decisions.  The dti responded that the Minister would be able to perform his duties.  A turnaround time of 11 days was likely to be achieved.  International experience indicated that there would not be an excessive flow of applications, and the Minister could also delegate certain functions.

Comments by Parliamentary Legal Advisor
Adv Charmaine van der Merwe, Senior Parliamentary Legal Advisor, Constitutional and Legal Services Office (CLSO), had not had much time to consider the public comments on the Bill.  She had not had a chance to discuss the issues with either the dti or the State Law Advisor.  Her biggest concerns were the relationship between the SEZ Board, the licensee and the operator.  The second concern was not serious, and concerned the removal of the full board if it were not functioning properly.  Consultation would be important on the roles, and this was not specified enough in the Bill.

Adv Van der Merwe said it must be clear what dti envisaged with the transitional arrangements for the current IDZs.  Many of the public submissions dealt with policy.  The first public concern was over government funding and support.  She felt that there was sufficient provision for this.  There was a request for the SEZs to be separated from the rest of the country.  This could not be done, as a criminal attraction zone would be created because no laws of the country would apply.  She thought what was meant was that there should be exemptions from certain laws.  The SEZ could not function as an offshore company.  There did need to be some exemptions.  She asked whether such exemptions should be in the SEZ Bill, or in other relevant legislation on labour, tax or other issues.  She did not think that this issue should be in the SEZ Bill.  There was nothing to hinder free trade.  The offshore option would not work.

Mr G McIntosh (COPE)  felt that there needed to be a common understanding of the term 'offshore'.  He felt that this was simply an indication that special conditions would apply to an SEZ. 

Adv Van der Merwe said that there must not be an over-emphasis on the 'offshore' nature of an SEZ.  The Bill was not the appropriate place at present for exemptions.  Dispute resolution could be done by agreement, once the roles and relations were sorted out.  Regarding policies and attitudes of the Minister in aligning with the National Development Plan (NDP), this would be a matter to be sorted between the Committee and the Minister. 

Labour issues should not be contained in the Bill.  A number of definitions had been questioned, but she felt that the definitions were clear enough.  The definition of 'person' might be a problem, as it was used both for natural and juristic persons in different parts of the Bill.  This would need to be corrected.  There was a similar concern over the definition of 'ports of entry'.  She proposed a technical change.  The Companies Act clearly defined a 'director' with a specific meaning.  The dictionary definition of 'director' was wholly appropriate, but was not a crucial aspect.  The definition could be changed, but she did not feel it necessary.  In terms of 'support measures', the definition could be made a bit clearer.  However, the proposed wording suggested by RBIDZ was not appropriate, and the specific words used in the Bill should be used.

Adv van der Merwe raised the wording of two clauses, which she felt was inconsistent.  The Bill would establish a framework.  Strategy and policy would flow from the Bill, and would be subject to oversight.  The clause on functions used the word 'include', and an exhaustive list was not needed.  The Minister would have to make policies in consultation with the Board.  There was no need to amend this clause.  She did not understand how the Board could be termed an executive body.  Their resolutions would not have an impact on the outside world, and despite being advisory in nature, decisions would still be needed.  The Departments needed to be represented on the board.  She disagreed with the proposal made in the public comments.

Adv van der Merwe was concerned with ex officio members.  There would need to be two different appointment and re-appointment processes.  This clause did need some attention.  The departments or entities that would be represented on the Board were already specified.  Members would know how difficult it was to get high-level persons to attend meetings.  The Committee might need to consider ways to encourage Board members to attend meetings.  Re-nomination of private representatives was another concern.  If good governance was in place, there would be performance appraisals.  The Minister must have the discretion to re-appoint or not.  It must also be made clear whether the two terms allowed would be consecutive, or could be non-consecutive.  It was clear that if an entity did not comply it could not be a member, but the Committee could consider making this explicit in the Bill.

Adv Van der Merwe discussed the issue of conflict of interest.  She did not think there would be anyone other than the Director-General of a Department nominated to serve on a board.  There would certainly be consultation if this was not so.  Board members would not vacate office.  Instead, their membership would cease.  There were some technicalities on the wording of the clause.  The dti had told her that the rest of the Bill spoke to vacating office, and the wording could be left consistent with that.  It would be prudent to remove the whole board if it was not functioning.

Where there was a conflict of interest, the person involved should remove him or herself from that discussion.  Standard corporate governance practice should be sufficient.  It might be a problem if the conflicting interest stretched over a period of time.  A clear distinction was needed on a decision impacting outside the board, which would be in the form of advice to the Minister.  On fidelity, honesty and integrity, there was no legal impediment to inserting such a clause, but this should be covered by a Code of Conduct.  The provisions were broad and might include an employer.  Minutes of meetings was a corporate governance issue, and failure to do this would fall foul of King III.  It was not necessary to have this in the Bill.

Funding mechanisms should be included in the regulations.  Targets could be set for specific years and incentives.  Some flexibility was needed for this, and it would be better if this was included in the regulations.  On page 15 of the Bill, incentives were discussed.  This should rather be in the regulations, including the concept of green or brown fields. 

Adv Van der Merwe said that on the question of allowing municipalities to apply for licences, it had been put forward that this could compromise service delivery.  The municipality would have to prove to the Minister that it had the capacity to run an SEZ.  There were sufficient requirements for the approval of a licence.  The clause was clear that one or more spheres of government could make a joint application.  There was sufficient explanation of why PPP was preferred to private ownership.

Public consultation was essential before the designation of an SEZ.  This had to be catered for in the Bill.  On page 18, the expansion of an SEZ was a policy matter and should be made clear in the Bill.  There was a duplication of clauses which would have to be resolved.  The dti should clarify its policy on the consolidation of an SEZ, and if a fragmented SEZ would be allowed.  This must be specified in the Bill.

Adv Van der Merwe continued with page 19.  The board would consider an application, and the Minister would issue a licence after consideration.  The licensee was the first entity, which would establish the SEZ as a national or provincial entity, or a municipal entity.  The Board would be established as the third entity and the operator as a fourth entity.  It was clear that something was not right in this area, and the dti might have made an error in this aspect.  This might be corrected, with small changes.

There were requirements for a government business entity to be a company.  What might be better is that the licensee should apply to Treasury for establishment.  Treasury might stipulate that a company must be formed.  This would depend on current Treasury policy, and should not be in the Bill.  She had more comments on the roles of the different entities.  She had not found any constitutional issues in the public comments.  One had been reported.  People often raised constitutional concerns which proved to be non-existent.  The State Law Advisor had certified that there were no such concerns.

Adv Van der Merwe said that parliamentary legal advisers sat in Committees in order to evaluate constitutionality.  Even the Constitutional Court was not always unanimous in its decisions.

A concern had been raised that the Auditor-General (AG) would have to audit the books of SEZs.  The legislation regarding the AG included the possibility that the AG should conduct the audit for these bodies.  The Committee should discuss the desirability of including this in the Bill.  The current wording implied that the AG must conduct the audit.

There were more areas where there was some confusion in the roles.  There could be a constitutional challenge based on the wording of the Bill, rather than on practical situations.  The role of the licensee should be limited to setting up the SEZ and appointing the Board, which would then appoint the operator and run the SEZ.  This could be considered during deliberations.  Consultation would be extremely important.  On withdrawal or suspension, every party should be consulted.  It had been proposed that the word 'substantial' should be included in the compliance clause.  She disagreed with this proposal.  Either an SEZ would comply or not.  An SEZ must have a perimeter fence, for example.  Any gap in the fence would be a failure in compliance.  Unfair decisions could be reviewed.

Adv Van der Merwe agreed that there must be compliance with the Companies Act.  The administration for an SEZ was not the same as in the Companies Act.  It must be clear that the concepts were different.  The concept of 'furthering government objectives' could be made clearer. This was again an area for consultation and compliance.  The introduction of the legislation indicated that this was a government priority.  Consultation would be needed in the event of the withdrawal of a designation.

The proposal that the Minister should give notice of the withdrawal of a designation had merit.  It would not be sufficient to impose a moratorium on locators.  The next issue was the operator being the same person as the licensee.  This was a policy decision and the roles would have to be clarified.  There was a proposed draft that would not really answer the question.  The dti would have to consider this.  Once the confusion over roles was eliminated, many of the issues would be resolved.

There was a proposal that the right to trade might be infringed on, if conditions were imposed on trading.  There would be requirements with any application for a licence.  If the strategy did not match the objectives, the designation could be withdrawn.  This implied a limit on applications, and should not be included in the Bill. 

The next concern was the access to capital required of an applicant.  Capital was money in the bank or some other readily available asset.  The wording should be changed to 'access to funding' so that guaranteed future funding could be included.  There was the same argument regarding expertise.  An applicant should be able to specify who would be managing their operations, with their experience.  There was a proposal that an SEZ should not be liable.  Such considerations should be included in the operator agreement.  There was no need for this to be in the Bill as it was an operational matter.

Clause 34 listed what must be done by an operator.  On leases to businesses, it would be risky not to enter into an agreement with an operator, but there might not need to be a compulsion.  Leases had a specific meeting.  The licensee might sell locations to a business.  She suggested the use of 'agreement' rather than 'lease'.  If consultation was done beforehand, there should not be a problem. 

There should be a contract with the licensee, which would specify what would happen if the designation or operator's license was withdrawn.  These provisions should not be in the Bill.  The next issue was administrative fines.  This was a policy decision, but the Minister's hands would be tied if withdrawal of a licence was the only option.  There should be provision for other remedies in the Bill, such as administrative penalties.  There should be transitional arrangements in the event of a withdrawal or suspension of a designation or licence. 

The next issue raised was over the power to the Minister to withdraw a licence over a small infraction of laws relating to customs.  She did not think that a small infraction would be reported to the Minister, but it might be wise to use 'request' in this regard.

It was absolutely necessary for there to be consultation.  Regarding the enterprises locating themselves in a zone, there should be consultation with the Minister.  The Minister might locate a business in a zone that would compromise the achievement of its objectives.  On automatic absorption of IDZs, a lot of consultation would be needed.  An IDZ might already include enterprises which would not qualify for inclusion in the SEZ.  The dti already knew which existing enterprises would qualify.  It had to be clear in the Bill that the classification would also not be automatic.

Adv Van der Merwe raised more issues over automatic transitional arrangements.  The dti should explain their reasoning to the Committee, so that the Bill reflected what the Department wanted.  The IDZ regulations were issued under the Manufacturing and Development Act.  The regulations to this Act were specified in the Act as notices, rather than as regulations.  Any repeal should be under this Act.  The dti must decide how they wanted to do this.  These regulations were under an incentive programme.  The current Bill did not provide for enterprises to be approved automatically.  The guidelines were not appropriate in the Bill, especially if the Minister was not bound to follow them.  It was not necessarily wrong to have them in the Bill, but she did not see the reason for them

Adv van der Merwe referred to a court ruling.  If a court ruling had been made, then there was not unfettered scope for the legislation.

Discussion
The Chairperson felt that the Advocate qualified for the 'legal Kyalami', given the speed with which she had presented.  Members had now heard the comments on the public comments from both the dti and the legal advisers.  There were now just two core Members of the Committee present, and one alternate Member.  It was unfortunate that it had not been possible to deal with the SEZ Bill the previous evening, but Members would not have been able to do justice to this Bill.  She thanked the dti for their presence, but the Committee would not go into a huge engagement at present.  She would allow Members to make some brief general comments.

Ms S van der Merwe said that it had become clear in the public hearings and the detailed legal comments that a lot of work still had to be done on the Bill.  The dti must respond on the major issues raised, which were the composition of the board, the roles of the different bodies, the consultation issues and the 'one stop shop ' matter.  The SEZ would have to be different and act effectively.  She did not think that these concepts had been incorporated sufficiently.  She did not think that a board meeting four times a year would be sufficient.  There would be a flood of applications initially.  She proposed that the dti consider all that had been said and come back with concrete proposals.

The Chairperson said that some serious core issues had been raised.  The Committee would deal with all issues, but the essential issues needed to be addressed first.  The dti could liaise with various colleagues.  There were references to guidelines all over the Bill.  The essence of the Bill must be achieved.  She suggested that the meeting scheduled for 29 May should start earlier than planned to accommodate the discussion, and requested the dti to provide the documents in time for Members to consider the documents before the meeting.  Members would be occupied with the budget vote for the rest of the following week.  The Bill should not be pushed beyond its boundaries, and there was a need to proceed with other business.  She thanked the Members for their attendance.

Report on Industrial Policy Action Plan (IPAP)
The Chairperson thanked the dti for their informative input.  She did not want to see the issue of administrative prices becoming a public relations (PR) exercise for BHP-Billiton.  They had received a special contract, and seemed to be doing well in terms of beneficiation.  She reviewed the report on IPAP with specific reference to the impact of administered prices on manufacturing.  The core issues raised were reflected in the report, but some of what she described as “PR bumf” would be removed. 

The Committee had included a reference to the Billiton training academy, which was shared with other players in the industry.  This was a positive contribution by the company.  Transnet had been encouraged to provide preferential tariffs for manufacturers.  In the conclusion there were no changes.  Mr Hill-Lewis had raised a valuable point on the electricity tariffs.  The inputs of NEDLAC had now been captured.  Acknowledgements had been restricted.  The substance of the report had not changed.   She asked if the dti still stood by the recommendations made.

Mr B Radebe (ANC) understood the issue of the acknowledgement.  The German Embassy should also be included, as they had taken great efforts to assist the Committee. 

The Chairperson said that this could be done.  Ford and the American Embassy should also be included, with a statement appreciating the inputs made by the dti and the manufacturing industry.  It was not actually the embassy, but a trade attaché.  Diplomatic protocols must be observed.

Mr McIntosh proposed that the report be adopted, with Mr Radebe seconding the motion.  The report was adopted.

The meeting was adjourned.
 

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