Special Economic Zones – how special?

Despite having burned its fingers with Industrial Development Zones (IDZs), which involved a few fiscal benefits (shrouded in legalese) and billions in infrastructure, Trade and Industry has gone into overdrive to push its new policy on special economic zones (SEZs). It has relaxed ‘locality’ for one, i.e. such zones need not be located in close proximity to an international port or airport. Moreover, SEZs are now being promoted to ‘compliment’ existing IDZs and not replace them as was erroneously suggested in an earlier post.

While the South African Department of Trade and Industry (the dti) is conducting public hearings on the matter, it is perhaps relevant to consider what the Free Market Foundation (FMF) – a think-tank on limited government and economic freedom – has to say on the matter. The content of the report might well attract support from some in the business community involved with manufacturing, distribution and logistics. Read the FMF’s evaluation of the dti’s SEZ Policy here!

While there are not many trade remedies available to local business many prospective requests have over the last decade been presented to establish so-called distribution centres/hubs and ‘virtual bonded warehouses’, which have not borne much fruit mainly due to the lack of a legal framework for their operation. Moreover, in government there is always a cautious resistance to liberalisation in customs and trade laws (they directly impact the fiscus) in the absence of viable risk mitigation strategies or remedies. Perhaps it has something to do with the dwindling public sector skills and experience levels available to conduct effective audits; although, the big audit firms would readily contest this and advocate the outsourcing of such function to the private sector. As the development of more sophisticated systems in SARS come on stream, ICT will no longer be an obstacle. Through increased automation comes the availability of additional human resources who can be up-skilled to perform audit work. Both Tax and Customs Modernisation programmes bare testimony to this.

The establishment of the IDZ programme (circa 2000) was fraught with inter-departmental tensions around the so-called benefits and concessions to be made available to foreign investors. The lack of a clear framework did not allow for much ‘liberalisation’ of controls and fiscal benefits. In fact the customs dispensation offered procedures and facilities to IDZs identical to that available in the national customs territory. Tax holidays and relaxed red tape are characteristic of some of the more successful SEZs around the world, as the article will attest. The dti’s latest SEZ Bill and Policy do not hint to any great length how things will be different this time round. There is however some firm calls within government to consider relaxed labour regulations – the test however lies in whether the policy makers have the appetite (or vision) to permit liberalisation in this area. I have a simple view on this matter – (i) create a favourable economic environment focusing development on SMMEs and entrepreneurship, and (ii) get the standard customs procedures and controls right through modernisation and there will be no need for ‘tax holidays’ and economic zones in this country!

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Having difficulty understanding economic zones?

You can be forgiven if you have a clouded understanding of what an economic zone is. Countries develop different types of free economic zones (FEZs) as a tool to generate employment opportunities, promote and diversify exports, increase technology transfer and attract investment flows. Developing and emerging economies use FEZs as “economic laboratories”, “incubators” or showcases of a generally strong enabling environment and a competitive market for investment. In order to achieve the intended objectives of zones, governments offer a range of incentives from fiscal to regulatory such as export duty exemptions, streamlined customs and administrative controls and procedures, liberal foreign exchange policies and income tax incentives. Governments have been experimenting with the use of policy tools in ensuring the effectiveness of their zones; however they have not always been successful. Nowadays, governments are trying to move away from the traditional zones with the traditional set of objectives and policy tools to either more comprehensive or sector specific zones. In addition, they are trying to incorporate other development policy instruments to their policy packages to tackle other issues such as skills development, rural development and green growth while achieving the traditional objectives.

The first type of FEZs mostly took the form of free ports – customs free areas within seaports offering little more than warehousing and trade facilities. Over time, some free ports developed into customs-free zones in which light manufacturing and other processing took place. The next step was the development of export processing zones, which encourage more complicated manufacturing operations with the purpose of exporting. Later, special economic zones (SEZs) and specialized zones (SZs) evolved. SEZs offer a wider array of sectors including manufacturing and services that target both foreign and domestic markets. In addition, they permit on-site residence and provide all facilities to employees and hence could be viewed as standalone cities. On the other hand, specialized zones (SZs) focus on specific industries by providing the appropriate infrastructure and building on the concepts of clusters.

The terminology applied to free economic zones, in literature and common usage, is highly confusing. Words like “free zones”, “free trade zones”, “customs-free zones”, “special economic zones”, “export processing zones”, etc. are in practice used almost interchangeably. This reflects the implementing authorities’ linguistic preferences as much as functional differences between different kinds of zones.

Common to most FEZs is the fact that they are ring-fenced enclaves (with the exception of Single Factory/Private EPZs) that enjoy special regulatory, incentive and institutional frameworks that are different from the rest of the economy. The different classifications of FEZs are as follows:

  1. Free trade zones (FTZs; also known as commercial free zones): are fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, trans-shipment, and re-export operations.
  2. Export processing zones (EPZs): are industrial estates aimed primarily at attracting export-oriented investments. They cover usually a wide array of manufacturing industries.
  3. Private zones/Single factory processing zones: provide incentives to individual enterprises regardless of location.
  4. Special economic zones (SEZs): are larger estates and could be considered cities on their own. They usually cover all industrial and service sectors and target both foreign and domestic markets. They provide an array of incentives ranging from tax incentives to regulatory incentives. In addition, they permit on-site residence.
  5. Specialized zones (SZs): targeted at specific sectors or economic activities. Examples of SZs include science/technology parks, petrochemical zones, logistics parks, airport-based zones, and so on. They may restrict the access of companies in non-priority sectors, and their infrastructure is mostly tailored according to their sectoral targets.

The distinction between the different kinds of zones must involve an element of judgment and sometimes zones fall in between categories. South Africa’s Industrial Development Zones (IDZs) combine elements of both 1 and 2 above. Most free zones restrict the access of certain categories of investors, without necessarily being classified as specialized zones. Also, it is not very clear how “special” a free zone’s regulatory environment must be before it can be classified as a SEZ. FEZs in their general definition can include a combination of characteristics from all the previously identified FEZs. I guess that while you still dont have a clear understanding of what an economic zone is, I hope the above has shed a little more light on the subject?

IDZs to be replaced with SEZs

Department of Trade and Industry (South Africa)Heard this before? In line with the Industrial Policy Action Plan and the New Growth Path, the Department of Trade and Industry (the dti) aims to continue fostering its efforts to create employment and economic growth by establishing a strong industrial base in South Africa. The new initiative aims to improve on the concept of industrial development zones (IDZs) which have enjoyed mixed success since being introduced in December 2000 through the Manufacturing Development Act. 

An IDZ is a purpose-built industrial estate linked to an international airport or seaport which is tailored for the manufacturing and storage of goods. It offers investors certain rights within the zone, in addition to incentives such as customs duty and VAT relief. One important priority of the IDZs is to boost job creation and skills in underdeveloped regions. The IDZ programme led to the establishment of five zones – Mafikeng, OR Tambo International Airport, Richards Bay, East London and Coega. The Richard’s Bay IDZ only commenced its first phase of development in September last year while OR Tambo International Airport is not yet fully operational.  The Industrial Policy Action Plan, issued by the Department of Trade and Industry in February 2011, has also identified, as a key milestone, the establishment of an additional IDZ at Saldanha Bay. 

The Special Economic Zones (SEZs) programme is one of the most critical instruments that can be used to advance government’s strategic objectives of industrialisation, regional development and job creation. Moreover, the programme can assist in improving the attractiveness of South Africa as a destination for foreign direct investment.

In order to ensure that the SEZ programme is an effective instrument for industrial development, the dti has developed the SEZ Policy and Bill. Through the Bill there will be a dedicated legislative framework for special economic zones.

The main objectives of the SEZ Bill are to provide for the designation, development, promotion, operation and management of Special Economic Zones; to provide for the establishment of the Special Economic Zones Board; to regulate the application and issuing of Special Economic Zones operator permits; to provide for the establishment of the Special Economic Zones Fund; and to provide for matters incidental thereto.

Furthermore, the SEZ Bill will enable government to move towards a broader Special Economic Zones Programme, through which a variety of special economic zones can be designated in order to address the economic development challenges of each region and address spatial development inequalities.

Although national laws may be suspended inside industrial zones, government is currently not offering regulatory incentives to derogate from labour rules, a concession which is seen by some as crucial to stimulate investment in special zones. It is however unlikely that a relaxation of labour laws will be considered under the SEZ initiative. Benefits are rather expected to come in the form of enhanced incentives for labour intensive projects and additional tax relief for investors. A further question arises – just how flexible an inventive will the customs and VAT requirements be allowed to be?

The key provisions include the establishment of a Special Economic Zones Board to advise the Minister of Trade and Industry on the policy, strategy and other related matters; establishment of the Special Economic Zones Fund to provide for a more coherent and predictable funding framework that enables long-term planning; strengthening of governance arrangements including clarification of roles and responsibilities of key stakeholders. Source: Department of Trade and Industry.