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

Government heeds the call – Tax Holidays for SEZs

Minister Pravin Gordhan and his 'budget team' on their way to parliment [Picture credit-SARS]

Minister Pravin Gordhan and his ‘budget team’ on their way to parliament [Picture credit – SARS]

After more than a decade of fruitless marketing and billions spent on capital investment, Budget 2013 brings some hope of a turn-around and better fortunes for economic development zones in South Africa.

Minister of Finance, Pravin Gordhan announced, what is an unprecedented move. to bolster support for government’s Special Economic Zone (SEZ)programme. Investors in such zones are expected to qualify for a 15% corporate tax rate, and in addition, a further tax deduction for companies employing workers earning less than R60,000 per year.

This is a significant development in that the previous dispensation under the Industrial Development Zone (IDZ) programme only afforded prospective investors a duty rebate and VAT exemption on imported goods for use in the Customs Controlled Area (CCA) of an IDZ. The reality is that these benefits were simply not enough to woo foreign company’s to set up shop in our back yard, let alone existing big business in South Africa to relocate to these zones. Mozambique, next door, has had much success as are other African countries through the offering of company tax holidays with the introduction of export-focussed special manufacturing facilities.

The SEZ (so it would seem) differs little from the IDZ approach save the fact that the former does not require the location of the economic zone at an international airport, seaport or border crossing. As such, an existing IDZ may ‘house’ a special economic zone, thus maximizing return on investment.

Recent developments in SA Customs realise a provision permitting foreign entities to register as importers or exporters under the ‘foreign principal’ clause in the Customs and Excise Act. Approval of such is dependant on the foreign principal establishing a business relationship with a South African ‘Agent’. This ‘agent’ is required to be registered with the SA Revenue Service as the party representing a ‘foreign principal’ in customs affairs. At this point, the provision is being applied to business entities in BLNS countries who import or move bonded goods into or from South Africa.

Future global application of this provision could boost the possibilities of a broader range of investor to favourably consider SEZ opportunities in South Africa. This option will, no doubt, not go unnoticed by the big audit firms seeking to broker ‘cross-border’ customs facilities for their multi-national clients. I perceive that more introspection is still required concerning ‘non-resident’ banking facilities and transfer pricing issues to enable the global application of the foreign principal concept. But after all this seems a good case for trade liberalisation. Add to this the forthcoming launch of Customs new integrated declaration processing system that will (in time) offer simplified electronic clearance and expedited release facilities for future SEZ clients.

IDZ – the ‘BS’ marketing approach continues

Saldanha Fabrication Centre, Port of Saldanha

Saldanha Fabrication Centre, Port of Saldanha

After all the negative criticism of the South African IDZ programme over the years, its remarkable that the latest offering situated at Saldanna Bay is plagued by the same misrepresentations as preceding zones. When will the IDZ Operators and their marketing/communication teams learn that the South African government does not provide ‘free ports’ within its IDZ programme. For that matter neither does the Special Economic Zone (SEZ) facility. Such statements are misleading and in effect only create confusion for investors.

Ports.co.za recently reported that, as a result of the sub-lessees failing to secure any business (lack of business benefits and government incentives?), the facility that was built as the Saldanha Fabrication Centre in 2007 is now to be converted into a multi-disciplinary facility to support the sectors of Oil & Gas; Petrochemicals; Renewable Energy Power; Desalination; Mineral Mining, Environmental & Chemical Industries.

This facility will be in the Customs Controlled Area (CCA) and will therefore enjoy ‘free-port’ status. The CCA will then be extended as the IDZ phases in the port’s hinterland come into being. Oh really?

KNM Grinaker-LTA will be retaining a certain area including the 25 metre high Bay 1 and Bay 2 workshops. This is intended to house equipment for the Oil & Gas majors which will require the height to be increased. Their work will be fabrication.

The facility has its own dedicated jetty, ideally for loading large diameter, heavy and long vessels, jackets and modules. KNM Grinaker-LTA Fabrication remains the sole local fabricator for the untapped market of pressure vessels above 100mm thicknesses.

The other areas, workshops, etc, are available for leasing on a long-term basis and the rental rates will be determined by the size of area required and the length of the lease. Saldanha Freight Services (SFS) are working with KNM Grinaker-LTA in searching for potential lessees. The screening of lessees will be intensive as the core activities must fit with the KNM Grinaker-LTA vision.

This facility is leased from and located in the Transnet National Port Authority (TNPA) zone designated primarily for the oil & gas sector. West of this facility (off-picture) is an area earmarked for a large graving dock, should such a dock be deemed sustainable in the long-term. East of the facility is open land also designated by TNPA for Oil & Gas developments.

This is the area where the Oil & Gas Base will be established. It will be linked to the shore-front with workshops and other facilities as well as deep-drafted quayside (berths) and lay-down areas suited to the maintenance & repair of vessels in the oil & gas industry.

The roads to the 4-berth multi-purpose terminal (MPT will be upgraded in the short-term to facilitate handing of imports & exports over this terminal. This land is available for leasing from TNPA and SFS is in a position to facilitate this for interested parties. These developments are planned for the 0-5 year and 6-10 year period commencing in 2013.

Special Missing Zones

Since the publication of the draft bill, there has been much comment on the advantages and disadvantages of the new Special Economic Zones (SEZ) policy and process in the country. Given the renewed emphasis in economic policy debates on industrial policy and regional integration in the wider Southern Africa context, the article “Special Missing Zones in South Africa’s Policy on Special Economic Zones“, published by Tralac, serves to add to the debate by introducing some hitherto neglected aspects pertinent to the debate on the subject.

A good companion to this article (and perhaps essential prior reading) is the CDE’s “Lessons for South Africa from international evidence and local experience” which I posted on 31 May 2012 (see link under related articles below). There has essentially been little movement on the subject, yet it is clear that South Africa is losing lucrative opportunities in the global warehousing and distribution business to its neighbours. Unless government acknowledges that it has to involve business in the creation of such SEZ’s, the white elephant syndrome which befell IDZs will no doubt plague the latest programme.

 

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

Global Free Zones of the Future 2010/11 Winners

Dubai Airport Free ZonefDi Magazine’s first global ranking of economic zones has awarded Shanghai Waigaoqiao Free Trade Zone the title of Global Free Zone of the Future 2010/11.

Shanghai Waigaoqiao Free Trade Zone (WFTZ), the largest free-trade zone in China, has been recognized by fDi Magazine as the ‘Global Free Zone of the Future 2010/11’. This is in part due to the large number of companies that have set up operations in Shanghai WFTZ; more than 9000 companies – accounting for one-third of all foreign companies moving into Shanghai – have set up in this zone. Shanghai WFTZ also came top in the categories of ‘Best Facilities’ and ‘Best Port Zone’.

Economic zones based in the United Arab Emirates dominated the Free Zones of the Future 2010/11 ranking, with seven of the top 25 zones coming from the UAE. Not only did Dubai Airport Free Zone rank as second overall, it also ranked second in the ‘Best FDI Promotion Strategy’ and ‘Best Transportation’ categories.

The top three in the ‘Best Economic Potential’ category was led by the city of San Luis Potosi in Mexico, followed closely by Industrial Estates in Thailand and the Jebel Ali Free Zone in the UAE. Clark Freeport in the Philippines, Togo Export Processing Zone, and Chittagong Export Processing Zone in Bangladesh were the top three in the ‘Best Cost Effectiveness’ category.

fDi Magazine’s rankings, which took more than four months to compile, ranked eight UAE zones in the ‘Best Transportation’ top 10, with Jebel Ali Free Zone and Dubai Airport Free Zone taking the top two positions and Dubai Media City and Dubai Knowledge Village ranking joint in third position. Dubai Media City, Dubai Airport Free Zone and Dubai Knowledge Village also claimed the top positions in the ‘Best FDI Promotion Strategy’ category.

The independent judging panel scored Dubai Knowledge Village, Dubai Media City and Ajman Free Zone (UAE) as the top three zones in ‘Best Incentives’.

South Carolina Foreign Trade Zones 21 & 38, topped the ‘Best Airport Zone’ category, followed by Aqaba Special Economic Zone (Jordan), Tanger Free Zone (Morocco), El Paso FTZ 68 (US) and Bahrain International Airport. Source: FDIntelligence.com

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!

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.