Special Economic Zones Implementation; Committee Report on DTI Budget

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Trade and Industry

19 April 2016
Chairperson: Ms J Fubbs
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Meeting Summary

The Department of Trade and Industry (DTI) introduced the programme for the special economic zones (SEZs), noting that the Minister had asked for a review of the industrial development zones (IDZs) that had concentrated on the coastal areas and ports. This led to the development of a turn-around strategy and identification of for the special economic zones (SEZs). The SEZs were a part of the department’s Industrial Policy Action Plan (IPAP). It had been designed to be a partnership programme among provinces and municipalities. The SEZ programme was targeted at attracting investments in identified regions.

The list of IDZ investors in the Coega, East London IDZ (ELIDZ), Dube Trade Port IDZs (DTPIDZs), and Richards Bay IDZ (RBIDZ) were highlighted, along with the number of jobs that had been created through these IDZs; potential investments; summary of operational and secured investments; and the turnaround value on these investments. The major support measures and factors needed to create an enabling environment for the SEZ programme were noted.

The challenges being faced by the department centered on capacity building in provinces, land availability, and resources for infrastructure development.

Members raised questions and comments about the bottlenecks in the operation of the Saldanha Bay IDZ; absence of African countries from the list of investors; timelines for operational, secured and pipeline investors; calculation of tax incentives for investors; reconciliation of the DTI budget allocation with its ambition to establish new SEZs; plans for targeted training programmes for the SEZs in provinces; the guarantee that provinces would take up the operational cost of the SEZs after DTI covers the cost for three years; and the need to look into trade agreements that would not preclude investors from implementing transformative policies.

The Committee thereafter considered and adopted its Committee Report on Department of Trade and Industry 2016/17 Budget. Recommendations were received from members on pertinent factors such as pricing and tariff matters for the steel and iron industry; the need to review the incentive programme; consideration of trade agreements to ensure penalties were in place for non-compliance; accountability on incentives; and the establishment of a ministerial committee on industrialization.

 

Meeting report

Mr D Macpherson (DA) spoke about a letter from ArcelorMittal South Africa (AMSA), announcing a third price increase to their customers, despite their initial assurance to the department not to do so. This was the third consecutive time that their prices would be increasing. It was proposed that they should be invited to the Committee to explain the reasons behind the price increase, despite the tariff protection.

Mr B Mkongi (ANC) said that a structured debate was needed to discuss the crisis of steel in South Africa. 

The Chairperson said that it was indicated four weeks ago that the issues around the strategic minerals affecting production and manufacturing had to be addressed, and the topic was referred to the Manco for programming. There was no disagreement on the importance of addressing the issue. Relevant stakeholders also had to be invited to address the matter. The issue was with Manco and a meeting had already been scheduled with Manco.

Special Economic Zones Implementation by the Department of Trade and Industry (DTI)
Mr Lionel October, DTI Director General, noted that in the past three or four years, the Minister had requested an urgent strategic review of the performance of the industrial development zones (IDZs). When the Minister assumed office in 2009, he was of the view that the industrial development programme was confined to ports, and only Richards Bay, Coega and East London were IDZs. A request was made for the entire programme to be reviewed and a turn-around strategy to be developed. The department was half way through the development of this turn-around strategy. The department had recorded progress in a number of IDZs; turn-around in some IDZs; and promising new special economic zones (SEZs) had been identified.

The SEZ programme was part of DTI’s Industrial Policy Action Plan (IPAP) document. There were many tools in the toolkit that included sector programmes, such as the auto programmes, clothing programmes, phone programme, and so on. The SEZ was part of the toolkit. The biggest part of the programme was diversification in terms of its concentration. This was because the South African economy was concentrated in three cities, which were Johannesburg (Gauteng province), Durban (KwaZulu-Natal province), and Cape Town (the Western Cape province).

This programme was designed to be a partnership programme. The IDZs was controlled by the municipalities in the area, and overseen by the province. The overall guiding role was played by National government. It was therefore a three-way partnership between all three tiers of government. Successful IDZs or SEZs were a product of the cooperation between those three tiers of government.

Mr Alfred Tau, DTI Chief Director: Regional and Spatial Economic Development, said that the aim of the SEZ programme was to attract investment into the targeted regions. The result of the turn-around strategy (the new policy and support measures introduced after shifting from the IDZs to the SEZ programme) was highlighted through the number of companies that had invested (see page 4 of document). These companies served as proof of the operation of the SEZs.

In the past, the Coega IDZ was mainly filled with logistics companies, but the situation had changed. Energy companies, Chinese automobile companies, and other global companies were beginning to invest in Coega. More than 33 companies were active and operational in Coega. The list of investors in the East London IDZ (ELIDZ) was highlighted (page 5). ELIDZ was predominantly filled with auto-component manufacturers. The list of investors in the new Dube Trade Port IDZ (DTPIDZ) was highlighted also highlighted (page 7).

A summary of operational investments, secured investments, and the number of jobs that had been created from the IDZ programme were highlighted (page 8). An average of 75 000 direct and indirect jobs had been created over time. 33 companies were listed under Coega. 29 of those companies had begun preparations to set up, while 5 other companies had begun negotiations to set up. ELIDZ had 28 operational companies. Four new investors had shown interest, while ten other companies were discussing their prospects of locating in the zone. Richards Bay IDZ (RBIDZ) had remained an underperforming IDZ for a long time. However, it was already preparing to locate nine investors, and negotiations with nine other companies had commenced. The figures for DTPIDZ were also highlighted. R6.4 billion had been invested in Coega till date, while R1.8 billion, R820 million, and R372 million had been invested in ELIDZ, RBIDZ, and DTPIDZ respectively.

A huge turn-around in the value of investments coming into the various IDZs was identified. R6.8 billion worth of investment was already coming into Coega, while ELIDZ, RBIDZ, and DTPIDZ already had R1.2 billion, R10.2 billion and R1.7 billion worth of new investments, respectively.

The value of potential investments expected in these IDZs was identified. Coega had an opportunity to attract R46.3 billion worth of investments, while ELIDZ and DTPIDZ could attract R13.7 billion and R1.8 billion respectively. RBIDZ was excluded because their figures were currently being audited.

Coega had created over 7 000 direct jobs; ELIDZ had created almost 2 000 jobs, while RBIDZ and DTPIDZ had created 300 and over 500 direct jobs already. Total construction and indirect jobs so far was 68 000.

The new investment pipelines currently being negotiated included:
- The investment value for Musina was $3.6 billion, which would amount to a minimum of R40 billion.
- Atlantis already had a R300 million investment.
- Upington would attract R800 million worth of investment.
- Ekurhuleni already had R1.2 billion worth of investment.
- The R60 billion worth of investment in the steel plant at Richards Bay had been suspended till stability was restored to the steel market.
- The new Maluti-a-Phofung SEZ already had a minimum of R2 billion worth of investment.

The objectives of the SEZ programme were to attract foreign and domestic direct investment; build additional industrial hubs; and build strategic industrial capabilities. The expected outcomes of the programme were an increase in stock and quality of direct investments; an accelerated growth; increased value-added exports; job creation; and regional diversification.

The major support measures for the SEZ incentives package included the 15% corporate tax rate; infrastructure development provided through the IDZs; enhanced 12i; as well as duty free and value added tax (VAT) free arrangements on imports.

The differences between the IDZs and the SEZs were:
- While the IDZs focused on coastal regions or regions with international ports, the SEZs focused on regions with significant growth potential.
- The IDZs had no meaningful incentives package, but the SEZs came with competitive incentives package.
- Incentives in the past, revolved around infrastructure development. However, the SEZ programme would take into consideration all elements of the industrial ecosystem. 

In creating an enabling environment for SEZ development, DTI had worked on the legislation and regulation. A SEZ advisory board had been established to assist the Minister on policy, strategy and any other issue around SEZ implementation. Support services such as setting up project management units, planning, feasibility studies, as well as provision of project managers, were provided to provinces. There was an SEZ forum where all SEZ chief executive officers (CEOs) met periodically to share experiences, challenges being faced, and offer solutions where the need arose. A capacity building programme had been developed, and was currently implemented through a partnership with the Chinese government. DTI had to work on marketing and promotion. SEZ investment seminars would be organised in a number of key investor hubs around the world. DTI also conducted monitoring and evaluation on the IDZs and SEZs alike. A lot of work was being done on coordination between departments and across the spheres of government, to ensure that all government agencies were playing their part in this process.

A joint task team had been created between the DTI, National Treasury, South African Revenue Service (SARS), and Hi-tech, to look into SEZ implementation, customs, taxes, and other related matters.

The industrial ecosystems that needed to be strengthened required industrial infrastructure; social infrastructure; education and training; research and development; business incubation programme; marketing; investment facilitation; logistics; productivity support programme; innovation and technology; financing and incentives; and a one-stop shop.

As far as key indicators were concerned, the DTI had insufficient data to report on exports.

There were seven designated zones at the moment: Coega, Dube Tade Port, East London and Richards Bay were already operational. OR Tambo, Maluti-a-Phofung and Saldanha Bay were at different phases of setting up their operations. Applications were still under assessment from Atlantis, Bojanala, and Musina/Makhado zones. The application from Musina/Makhado would be finalised soon.

A total of 69 investors were already on site in all the SEZs; 47 new investors had been secured but were yet to be operational, while 29 investors were in the pipeline.

In terms of progress made since 2013 when implementation of the programme commenced, R19.9 billion worth of investments had been secured, amounting to an increase of 111.7%. The value of investments in Coega had increased by 105.3%, RBIDZ by 1000%, and DTPIDZ by 456%.

The challenges faced by the DTI include capacity building in provinces, as well as resources for infrastructure development; the need for acceleration of infrastructure development; and land availability. DTI was working with the Department of Rural Development and Land Reform to solve the issue of land availability in many of the regions.

The goals of DTI for the SEZ programme were to increase and diversify investments in designated zones through marketing and promotion; to increase impact of SEZ investments on host regions and communities; and to improve sustainability.

Mr October said DTI’s priorities for this year were to finalise regulations, implement the incentives, and work on ten new economic zones in partnership with the provinces. Three out of the ten new zones had been designated already. They were Saldanha, Dube Trade Port and Maluti-Phofung (part of the ten new identified zones), and they would move into operational phase in the course of the year. Work had already begun on Atlantis, Bojanala and Musina. Feasibility studies would be developed for the remaining new zones which were Upington, Wild-Coast, and the one in Mpumalanga. An improvement had been recognised in the SEZs, but the department was only half-way through the turn-around strategy. The plan in terms of the new regulations, was to help provinces in the first three years, with project managers, feasibility studies, and operational start-up costs. The provinces would be left to take care of the operational expenses after three years. DTI would only continue to provide infrastructure and marketing support.

Discussion
The Chairperson raised the Saldanha Bay issue where the Minister welcomed the Public Protector’s report that exonerated him from allegations of unethical conduct. MPs were advised to be more careful in making such allegations in future.

Mr G Hill-Lewis (DA) said that although the Public Protector’s report exonerated the Minister, it did not exonerate the Department. Instead the report proposed a further investigation into the Department by the DG, as some of the things that happened at the launch were unacceptable. He objected to being impugned at the meeting for making allegations against the Minister.

Mr Mkongi said that the official launch of Saldanha Bay IDZ was in 2013, and the Committee was later informed that the IDZ was yet to be operational. He wanted to know what the bottlenecks surrounding the operation of Saldanha Bay IDZ were, since the region was targeted because of the massive unemployment of people there. He asked for clarification on the bottlenecks in the operation of the IDZ in Atlantis; reasons for the absence of African companies as part of the investors in the SEZs; whether the operation of the SEZs was a one-stop shop as announced by the President and the Minister or an ad-hoc arrangement; and the percentages for the increases mentioned.

Mr J Esterhuizen (IFP) spoke about companies having to import some of their components and he wanted to know how such companies would factor in the import parities. He asked if the tax incentives for SEZ companies would be for 13 or 10 years as it says DTI assists in the first three years. Many companies use an address in the zone companies but conduct their manufacturing elsewhere; how will the 90% rule of having to derive 90% of your income from business in the SEZ, affect them?

Mr N Koornhof (ANC) asked what the timelines for the operational, secured and pipeline investors were.

Mr Hill-Lewis asked how DTI would reconcile its budget allocation that had been significantly reduced and was not sufficient for the existing SEZs, with its ambitions to establish new SEZs.

Ms P Mantashe (ANC) asked if there was a targeted training programme for SEZs that would operate in the provinces, in order to ensure sustainability of the programmes. She expressed delight at DTI’s transition from coastal regions to the interior areas to set up the SEZs.

Mr Macpherson asked if there was any guarantee that the provinces would pay for costs after the first three years of operation of the SEZs as proposed by DTI; was DTI certain that provinces would budget for the SEZs; and did the DTI have a binding agreement with provinces on this?

Mr F Shivambu (EFF) noted that there was a problem with the way industrial expansion was being dealt with. He remarked that there should be a dedicated discussion on the means to expend money on labour absorptive sectors of the economy, identifying such sectors, and investing the available resources into such sectors. Trade agreements with foreign countries should be looked into, to ensure that they do not preclude DTI from imposing transformative interventions in such companies. A thorough political discussion should be organised on the conceptualization of industrial policies. He asked how much money was spent on the R10 billion investments, and how much tax was foregone to attract the R10 billion on infrastructure, used in creating direct jobs.

Mr October replied that the SEZs were long term investments. The first few years would require setting up infrastructure in the various zones. Getting access and control of the land was another important factor to be considered. Saldanha was currently engaged in these preliminary processes. The basic infrastructure had been laid down; a proper operational management company had been set up; and it had attracted significant investment that would allow it build a broad infrastructure and eventually become an oil and gas hub, as originally designated.

DTI had established a full-time team to concentrate on SEZ broadening participation programme. Half of the team was working on the SEZs. The day-to-day company in charge of operations of the zones was a provincial company, Wesgro, and the board was selected by the province. The SEZ programme had adopted a partnership approach, involving the provinces and the municipalities that owned the land.

The strategy that would be used for Atlantis was to develop the old infrastructure, and create new ones. The fortunate thing about Atlantis was that it had been able to attract Hi-sense, a Chinese multi-national. DTI was looking into long-term investors, unlike what obtained in the apartheid era. A big part of Atlantis would be built around Hi-sense electronics. The feasibility studies for Atlantis and Musina had been completed. This proved that Atlantis had the potential for long term investments, and was a fulfillment of the condition of the Act to the effect that a board could only recommend an IDZ or SEZ for approval if such zone had a long term economic potential.

The observation made on the companies mostly emerging from European or America was correct. However, it did not apply only to IDZs. 90% of South Africa’s entire foreign direct investment (FDI) was sourced from America and Europe, and this was a global phenomenon. The reason for this was because the most industrialized countries were all western economies. Industrialization could only be achieved by building on the investments of these western economies.

A presentation on the one-stop shop would take place on 20 April 2016. However, it was noted that the one-stop shop had been launched, and was known as Invest SA. All services to attract investments had been packaged into one and all departments had been urged to direct people to DTI or the one-stop shop. DTI would be rolling out a one-stop shop in each zone.

The IDZs were mainly located in coastal regions, because South Africa’s economic development was mainly based on mining and the export of raw commodities. However, the aim of the SEZ was to shift focus from reliance on coastal areas. Limpopo would probably be the biggest zone because it opened up to the whole Southern African region that would be used as a major export hub.

IDZs and SEZs alike needed start-up costs for feasibility studies, setting up offices, and so on. DTI would offer start-up costs to all new SEZs, until they were designated. After the SEZs had been designated, DTI would only cover their operational costs for three years before provinces take over. As mentioned earlier, the programme was a partnership with the provinces. The zones were therefore selected by the provinces, and not DTI. The guidelines for the programme were developed together with the provinces. Provinces also had to budget for the SEZs, and they had a long time to gather their resources together while the department helped with the feasibility study phase and the three-year operational costs. The department would still provide infrastructure support, alongside provinces, as provinces played a big role in providing infrastructure and they had massive budgets for that purpose. In Coega, East London and Western Cape, the provinces were already carrying the operational and infrastructural costs.

In the past, provinces received money directly from the National Treasury for infrastructure for the IDZs. The result of this was that there was more concentration on the infrastructure than the industrial development. The SEZs were different in the sense that DTI would provide money for the basic infrastructure, but it would only provide more funds for the top structure of investments that had been identified in a zone. This would create an incentive for provinces to attract investors. The main reason why provinces had to bear the cost of operations was because the companies belonged to these provinces.

The employment rate so far stood at 75%. DTI still battled with the challenge of the remaining 25% unemployment rate. However, what was important was for the industrial development to commence, knowing full well that it would take time. The one-stop-shop would help with expediting the process for the investment pipeline. DTI was doing its best to increase the pace for the prospective investments.

There was always a need for the Department to ask for more money to provide infrastructure in the IDZs, for top structures, and for some of the feasibility studies mentioned earlier. DTI had been promised an increase in its budget for the two outer years. The current fiscal consolidation issue was responsible for the reduction in the departmental budget for the year. Nevertheless, DTI still had over R1 billion.

The Department had created a full ecosystem that included training programmes. About 100 people had been sent to China for training. Negotiations were ongoing with an Indian multi-national pharmaceutical company to invest in Dube Trade Port. The company would not only start a world-class pharmaceutical company, but it would create an ecosystem around it through training programmes in the pharmaceutical sector.

Mr October concluded his response by saying the industrialization journey started late, due to a prolonged reliance of the economy on the mining and steel industry. It was admitted that South Korea was a good model, from which lessons could be learnt in their growth in industrialization. Industrialization was a long journey but the department was keen on starting the journey properly.

Mr Tau said that although Richards Bay began to go down ten years ago till around 2013/14, when it left with two investors at the time, the situation had changed in the past two years. It had turned itself around and was beginning to locate numerous investments. The value of the investments it had already located was on the same level as that of ELIDZ and Coega. There is a still long way to go for all South African zones, especially in reducing unemployment in those areas significantly.

On incentives, DTI was engaged in ongoing discussions with National Treasury. Treasury expects DTI to make a business case that it is worthwhile to keep the incentives that they have agreed to. What existed at the moment was an agreement on the current arrangement of providing incentives for 10 years, within which period the DTI would demonstrate that the SEZs are working. Once it had been confirmed that the SEZs were working, and any other strategic review had been carried out, the arrangement would be revisited to consider a new incentives package. On the 90% rule, it might not be perfect, but the idea was that in engaging with investors there is the realisation that there is a big danger when moving people around the country, that one needs to manage that better. As we ensure we can block people who are just crossing fences to pick up on incentives and the country gets nothing, these current arrangements will be revisited and improved on as we go along. At the moment, DTI is concerned with the implementation of these SEZs and their impact on the economy. Improvement strategies will be developed as time goes by.

Mr Macpherson asked if there were binding agreements or a memorandum of understanding with the provinces for them to take up operational costs after the three years of DTI intervention were up; and whether DTI was aware of any provincial budgets in place for that purpose.

Mr Esterhuizen asked what percentage of local labour was being used in the developing the SEZs.

Mr October said that provinces had already budgeted for the SEZs. He repeated that DTI would be providing funds for start-ups and for the first three years of operational costs.

There was no legal minimum on the percentage of local labour that should be employed in implementing the SEZs. However, the reason for locating the SEZs in the various zones was for them to take on local labour.

Committee Report on Department of Trade and Industry 2016/17 Budget
The Chairperson asked MPs if proposed recommendations, apart from the one already included in the report, had been sent to the Committee Secretary.

None of the political parties represented had sent in proposed recommendations.

Mr Mkongi proposed that the introduction of the report be re-written.

The Committee went through the report and several substantive amendments were suggested such as the
inclusion of the key sectors where incentives had been targeted, the amount of money for these incentives, and the role of SEZs and IDZs. The inclusion of ‘skilled jobs’ and the broad based black industrialist programme, along with the unskilled jobs, provided by the economy. The inclusion of the specific strategic objectives and interventions.

Mr Mkongi asked for the impact of the budget in real terms, especially in terms of creating jobs.

The Chairperson said that the impact of the inflation had been noted. There would be a decline in the budget over the medium term expenditure framework (MTEF), in both nominal and real terms.

Mr October noted that at the moment, the number of applications exceeded the money at hand. The pipelines were being worked on, but there was no money for incentives. There was a need for an increase in investments if focus would be shifted to industrialization.

Mr Mkongi said the report should capture the attitude of MPs towards the declining budget, especially as it would be impossible to achieve the strategic goals and number of jobs already targeted with this continuous decline in the budget. The sustainability of the incentives in broadening participation and transforming the economy, was another issue that should be noted in the report.

On the sustainability of incentives and the budget cut, Mr October said that the department was cutting costs from other items like catering, travel, as well as reduction of overtime. Nevertheless, 85% of DTI’s budget was directly allocated for infrastructure or private investment.

Mr Kalako said that the issues raised by Mr Mkongi should be noted in the ‘Observations’ part of the report.

Other observations made were:
- Mr Shivambu said that the incentives should be properly structured, as they were currently not structured in a way that could assist DTI in fulfilling its mandate. The approach towards agriculture should be restructured in a way that would subsidize the entire food economic chain, rather than focusing on agro-processing that was not labour absorptive.

- The Chairperson proposed, “The current structuring of the incentives should be reviewed in line with a sector specific approach”.

- Mr October was in support of Mr Shivambu’s proposal for a focus on labour intensive sectors, as well as merging the incentives for agro-processing with those for the agriculture sector. No tax incentives had been given to the IDZs in times past. Incentives would only come into effect this year. The DTI was in need of additional support for its tax incentives programmes.

- Mr Macpherson said he was happy that the targets set were equitable to the investments that had been made.

- Mr Mkongi said that the aims and objectives of the South African fiscal policy should be interrogated to see if it spoke to industrialization.

- Mr Shivambu said that there was a need for accountability in terms of the incentives and the reinforcement of R1 billion into the black industrialist programme. Coordination among government departments and other entities was very important.

- Mr Macpherson said that the continual increases in steel tariffs should be included in the concluding part of the report.

- The Chairperson replied that including the above issue in the concluding part would require it to have been raised in the body of the report, and this was not the case.

- Mr Mkongi asked if the proposal made at the colloquium on the lobbying of Cabinet and the President to establish an inter-ministerial committee on industrialization had been officially recommended.
-The Chairperson replied that the recommendation had been made but there were still challenges around the implementation.

The Committee noted the establishment of the inter-ministerial task force process, given the strategic nature of the iron and steel industry.

Mr October however mentioned that the iron and steel industry was currently facing a global crisis due to oversupply. The old steel pricing committee handled the prices when the steel price was high. Right now, steel prices had fallen.

Mr Macpherson said that tariffs had been imposed on steel in South Africa and the agreement was that there would be no price increase as long as the tariffs were in place. However, prices had been increased consecutively. The international pricing had nothing to do with South Africa’s iron and steel industry, since the iron ore was manufactured in South Africa. The discussion that should be had on this issue was the tariff protection and increase in pricing for steel to the detriment of South Africa.

Mr Shivambu said that the department should enforce agreements such as the one on the increase in the price of steel.

Mr October noted that no country had a law with which it could regulate the prices charged by its private sector. Instruments could be used to influence private sector behaviour.

Mr Shivambu noted that the EFF was not in support of the budget vote.

The proposed recommendations by Adv Alberts were highlighted by the Chairperson.

Adv A Alberts (FF+) said that the recommendations he made could be moved to the concluding part of the report, since they had already being brought up in the body of the report, except for the issue of the steel industry.

The Committee adopted its Committee Report on Department of Trade and Industry Budget

The meeting was adjourned. 

 

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