SA Trade Policy Goes Against Integration Tide

South African Trade & Industry Minister Rob Davies

South African Trade & Industry Minister Rob Davies

South Africa has adopted a new trade policy approach aimed at looking at its own interest first, despite a drive for more regional integration to sustain Africa’s trade growth with the rest of the world. Importers of several products have been experiencing dramatic increases in tariffs from South Africa, as well as an increase in anti dumping and safeguard measures aimed at protecting South African industries.

Trade and Industry Minister Rob Davies this week approved the increase of tariffs on frozen poultry following an application by the local poultry industry. George Geringer, a senior manager at PwC, said regional trade relations had been put on the back burner in favour of measures to protect South African manufacturing industries against cheaper imports.

“Government realised that manufacturing as a percentage of gross domestic product has declined from about 40% to about 12% in the past 20 years,” Mr Geringer said at the 16th Africa Tax and Business Symposium hosted by PwC in Mauritius.

Trade between Africa and the rest of the world has increased by more than 200% in the past 13 years, with optimism from the World Bank that Africa could be on the brink of an economic takeoff, similar to that of China and India two decades ago.

A key element for Africa to sustain the trade growth is regional integration to build economies of scale and size, in order to compete with other emerging markets – but limited resources, internal conflict and the lack of a mechanism to monitor the integration process is blocking it, says trade analyst from PwC.

South Africa has been regarded as the “champion” of the Southern African Development Community (Sadc). Sadc member countries eliminate tariffs, quotas and preferences on most goods and services traded between them. The member countries include Mauritius, Mozambique, Namibia, Swaziland, Botswana and the Democratic Republic of Congo.

The assistant manager at PwC’s international trade division, Marijke Smit, said less than 10% of African nations’ trade was with each other, compared with 70% between member states of the European Union. Benefits of regional integration include increased trade flows, reduced transaction costs, and a regulatory environment for cross-border networks to flourish. Ms Smit said an unsupportive business environment and cumbersome regulatory framework, weak productive capacity, inadequate regional infrastructure, poor institutional and human capacity, and countries’ prioritising their own interests stood in the way of integration.

Mr Geringer referred to the new action plan endorsed by leaders from the African Union in January last year. The plan will see the creation of a continental free-trade area by 2017. The enlarged free-trade area will include Sadc, the East Africa Community and the Common Market for South and East Africa (Comesa). The trade bloc will include 26 nations in three sub-regions. Source: BDLive.com

SACU in danger of collapse

Rob Davies Frustrated with lack of progress (Business Day)

Rob Davies Frustrated with lack of progress (Business Day)

Trade & industry minister Rob Davies did not mince his words when he briefed parliament late last month on the Southern African Customs Union (Sacu), the world’s oldest. The union was formed in 1910 and comprises SA, Botswana, Lesotho and Swaziland.

Exasperated, Davies complained to MPs that SA’s partners were hardly moving in the direction of harmonising trade and industrial policies. He said if this did not happen soon, the viability of Sacu itself might be called into question.

Sacu was initially formed as a colonial-era instrument to control the flow of goods into and out of the then British colonies, an arrangement that was retained with a new agreement in 1969. In essence, SA collects customs and excise revenue on behalf of all four countries and distributes 98% of all this money to the three other members as a form of aid, retaining only 2% that should accrue to itself. It is a formula that has both worked and been fraught with difficulties over the past century.

The agreement was modified with a more distributive formula in 2002 which came into effect into 2004. Under the new agreement the most vulnerable countries, Swaziland and Lesotho, would get a larger share of the excise portion.

The Sacu distributions are also the instrument through which Swaziland was to get R2,4bn in assistance from SA in 2011. Under that agreement SA would have advanced the landlocked kingdom the money from its future Sacu distributions, but it came with fiscal and technical conditions from SA.

In January 2013, Swazi finance minister Majozi Sithole said the loan arrangement was “not working out”. He complained about additional conditions set by SA before the first tranche of R800m could be paid to Swaziland.

The kingdom’s financial woes arose mainly from reduced customs and excise collections in 2010 which reflected reduced trade to and from the region. With up to 60% of Swaziland’s national budget dependent on Sacu funds, the reduction from a total pool of R27bn to just over R17bn left Swaziland cash strapped.

Though he didn’t explicitly say so in his briefing to parliament, Davies’ frustration with the Sacu arrangement was palpable. He took particular issue with the Sacu payments merely serving as a guaranteed source of revenue for the treasuries of Sacu member states. “There are no cross-border development initiatives out of the revenue collected when there are opportunities for the members to invest in joint projects,” he told parliament.

Sacu has other problems. While the 2002 agreement calls for harmonised trade and industrial policies, it also makes provision for the countries to have different fiscal and other regimes. As a consequence Sacu members’ corporate and personal income tax rates are different. This means some members realise lower internal tax revenues than they otherwise could, increasing dependency on the Sacu distributions.

A sense of entitlement has also crept into the arrangement. In a case that generally escaped media attention, in 2009 the other members asked for an international tribunal to seek arbitration on what they believed to be “short” payments from SA. The tribunal convened in the supreme court of Namibia in Windhoek.

The matters in dispute were resolved with the signing of the latest agreement in 2009, but the fundamental complaint demonstrated both the entitlement and the vulnerability of the most dependent members.

At the time SA was expected to make four quarterly distributions which were based on an estimate of revenues collected. As often happened, there was an overestimation which resulted in a payment surplus of just over R2bn, which SA deducted from future payments. This precipitated a dispute which, given the vulnerability of Swaziland and Lesotho, was almost inevitable as their entire fiscal planning for that year had been premised on the inaccurate Sacu estimates.

SA’s counsel in the hearing, Michael Kuper, argued that the arrangement was so inefficient that it forced SA to sometimes look for alternative sources of funding just to fulfil the Sacu revenue-sharing formula.

Officials of the department of trade & industry and national treasury have for some time been unhappy about the disruptive nature of the formula, given the volatility of customs revenue. Davies alluded to this in parliament, using the wild fluctuations in revenue before, during and after the global financial crisis.

Now Davies wants the union to shape up or make a decision on its future. He told parliament that Sacu had to live up to the outcomes of its second summit, held in 2011, where member states undertook to work on cross-border industrial development, development of Sacu institutions, unified engagement in trade negotiations and a review of the revenue-sharing arrangements.

As if to emphasise its historical and present inertia, Davies said that not much work had advanced in this regard – such as the formation of national tariff bodies, a Sacu tariff board, common antitrust regulations and co-operation in agriculture.

“Some members have proposed that the Sacu tariff board be formed even if the states’ national tariff boards have not been formalised yet,” he said, in an indication that some of the members do not have the technical wherewithal to install the necessary institutions.

Lesotho and Swaziland in particular are hampered by structural economic difficulties, including low prospects for meaningful economic growth and reliance on external aid. A recent IMF report on Lesotho complimented the new government on its fiscal discipline and recommended further aid. It also noted new measures to improve supervision over the financial and other sectors.

As Africa’s last remaining absolute monarchy, known for its profligate spending on the comforts of its king, Swaziland remains a political hot potato which has increased pressure on the SA government to attach conditions to any assistance given. Though written in diplomatic language, the 2011 IMF report on Swaziland also listed a number of areas that needed strengthening.

It recommended the cutting of public-sector wages to ease fiscal pressures, a decision that brought the kingdom to the brink of instability, precipitating the appeal to SA for help. MPs raised the Swaziland loan issue with Davies, demonstrating the internal and regional political difficulties of the arrangement.

While SA remains determined to assert its voice over its junior partners in Sacu, it still has to tread carefully lest it be seen as a bully. Providing some cover have been the conditions set by the IMF before Swaziland can receive further assistance. Some of these common conditions include the protection of the peg between the Swazi ilangeni and the rand, the implementation of a fiscal adjustment roadmap and a prioritisation of social spending over the reported excesses of King Mswati III.

Early this month Australian newspapers reported the arrival of several of King Mswati’s queens and their aides in Australia on an apparent shopping trip. It is such extravagance that has put both SA and the kingdom in a difficult position – the former in its internal political environment and the latter through the loss of credibility with international development finance institutions.

It now appears that SA is choosing the route of common economic development over the aid-like structure of the Sacu payments. It remains to be seen whether the partners will be in a position to make good on Davies’ intentions or keep talking as the member states have been doing for over a decade. Source: Financial Mail

SA identifies ten potential ‘special economic zones’

sez-figure-1The Minister of Trade and Industry, Dr Rob Davies says ten potential Special Economic Zones (SEZs) have been agreed upon with provinces. He told the Portfolio Committee on Trade and Industry in Parliament on Friday, that these potential SEZs must still go through a feasibility study to determine their viability. The Department of Trade and Industry was presenting the Special Economic Zones (SEZs) Bill to the Portfolio Committee.

The main objectives of the SEZ Bill, amongst others, are to provide for the designation, development, promotion, operation and management of Special Economic Zones; and to provide for the establishment of the Special Economic Zones Board. The SEZs are designed to promote socio-economic benefits and creation of decent work.

The purposes of the SEZs include facilitating creation of an industrial complex with strategic economic advantage for targeted investment and industries in manufacturing sector and tradable services. This will also focus on developing infrastructure to support development of targeted industrial activities and attracting foreign and domestic direct investment.

There are different categories of the SEZs that South Africa will make use of, namely:

  • A free port;
  • A free trade zone;
  • An industrial development zone; and
  • A sector development zone.

Hopefully Trade and Industry will clarify for both public and investors the differentiation between the four options. From a Customs and Tax perspective there could be divergent legal requirements, formalities and processes. The sooner that this can be finalised all the better for the various ‘zones’ to commence with their vigorous marketing campaigns.

Davies told the Committee that the Industrial Development Zones (IDZs) will continue to be one of the elements of the Special Economic Zones (SEZs). The IDZ programme was initiated in 2000 and four zones were designated, with three currently operational: Coega (Port Elizabeth), East London and Richards Bay. The IDZs including the current ones are types of the SEZs and once the new the Act is passed they will form part of the Special Economic Zone programme, according to the minister.

The existing industrial development zones (IDZs) were beginning to gain traction because of the way they were managed and promoted. He cited the example of the East London IDZ, which had a private sector investment of R600 million in 2009 compared to R4bn in 2012/2013.

Work under the current IDZ regulations include the Saldanha Bay which is about to be designated. The Saldanha Bay Feasibility Study published in October 2011, found that there was sufficient non-environmentally sensitive land upon which an IDZ development could take place. Total direct and indirect jobs are expected to amount to 4 492 in the first year, 8 094 in the second year, 7 274 in the third year, 10 132 in the fourth year and 14 922 in the fifth year. From the seventh year around 14 700 direct and indirect jobs would be sustained in the province as a result of the IDZ. Saldanha Bay is an ideal location for the development of an Oil & Gas and Marine Repair Cluster. The Port of Saldanha Bay is also competitively located between the oil and gas developments on the West Coast of Africa, as well as the recent gas finds on the East Coast of Africa.

The SEZ bill would provide a legal framework for the zones and for granting special incentives for businesses operating there such as duty free inputs. He said major areas of agreement had been reached between business‚ labour and community representatives in the National Economic Development and Labour Council. Labour wanted to have three Nedlac representatives on the 15 member SEZ boards and the department had agreed to this on condition they met the criteria in terms of qualifications and knowledge. Nine representatives would be from government and there would be three independent experts.

Business argued against municipalities having the right under the bill to propose SEZs as it said this was not their core business and they lacked the capacity for this. The department however decided to retain this clause‚ October said‚ because there were municipalities which did have this capacity and in any event the applications for SEZs would undergo rigorous evaluation.

The department also decided to go ahead with the idea of these SEZs being operated on a triple PPP basis (public private partnerships) even though labour disapproved of this on the grounds that it would be a form of private ownership. Sources: Engineering News & businessnews.howzit.msn.com

SEZ – Lessons for South Africa from international evidence and local experience

A bold paradigm shift in South Africa’s economic policy is required to ensure the success of the country’s new special economic zones (SEZs) programme, according to Centre for Development and Enterprise (CDE) executive director Ann Bernstein.At the launch of the new CDE report on SEZs, she explained that South Africa’s current economy favoured skill and capital-intensive industry, which was not making the cut in terms of job creation.

“South Africa needs to create the right kind of environment for the emergence of businesses that can employ large numbers of unskilled people. That is what we should use the SEZs to do.“This will require bold leadership and engagement with the difficult choices on labour costs and flexibility that must be made. The alternative is to waste resources and energy yet again on a policy that fails,” Bernstein urged.

The report, titled ‘Special Economic Zones: Lessons for South Africa from international evidence and local experience’ suggested that South Africa should establish at least two large SEZs that were focused on low-skill, labour-intensive industries such as the clothing and textile sectors and enable them to compete globally. “Without reform, the only way South African companies can compete with Chinese, Vietnamese and Indian companies is by mechanisation, which results in fewer people being employed, and a greater reliance on skills,” Bernstein pointed out. “International evidence shows that the most successful SEZs were public–private partnerships,” Bernstein noted. Further, the report showed, as recognised by government, that South Africa’s industrial development zones (IDZs) that include Coega, East London and Richards Bay, had largely failed to boost economic growth, create jobs, promote industrialisation or accelerate exports.

Bernstein attributed this to the lack of a clear definition for what these zones should entail, as well as a strategy for attracting investors. “The IDZs are basically just industrial parks – it’s no wonder they have not been successful in attracting new investors and creating jobs.” Although the Department of Trade and Industry (DTI) had spent R5.3-billion on developing these zones, the vast majority of the 33 000 jobs created were short-term construction jobs, with only 5 000 permanent jobs created.

Bernstein said countries such as China, Costa Rica, Mauritius and Latin America countries could be viewed as benchmarks for South Africa in terms of IDZs. Rising costs in Asia, especially China, where labour-intensive firms were looking for new regional locations, were creating opportunities for IDZs in South Africa. The CDE argued that South Africa should seize the opportunity to compete for a sizable portion of the jobs that could sprout from this.

“A bold new SEZ strategy could become a platform for new companies and new investors that use unskilled labour rather than machines,” Bernstein indicated. “South Africa’s new SEZ programme needs to be a presidential priority. The DTI needs to be fully supported by all other departments of government. Unless the whole of government gets behind the effort, we’re not going to see the kind of investor uptake that would actually make a difference,” CDE research and programme director Antony Altbeker said. Trade and Industry Minister Rob Davies is set to table the draft SEZ Bill in Parliament later this year, while Finance Minister Pravin Gordhan announced that R2.3-billion would be allocated to the establishment of SEZs were in the 2012/13 Budget.

However, the CDE’s report warned that the Bill provided no clarity about what would differentiate SEZs from industrial parks, its envisaged governance arrangements for SEZs was confusing and said the role of the private sector was unclear. Source: Engineering News