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Who SEZ it’ll work?

Windmills near Atlantis, Western Cape. Windmills near Atlantis, Western Cape.

The South African government has bet much of its economic growth on its Special Economic Zones (SEZs.) These precincts have been rolled out with varying levels of success across the world, offering lessons on successful and failed SEZ policies. China’s SEZs have largely been a success and it credits around 10% of its exponential growth in the last decade to these zones, whereas India’s SEZs are more than half empty and seen as havens for tax dodging tech companies. So what’s the difference and what can they teach us?

Let’s start by looking at what an SEZ is and why government mentions them in the National Development Plan (NDP), the New Growth Plan and the nine-point plan. In short, SEZ’s are defined business hubs that operate within a distinct sector outside the country’s normal tax and trade tariff rates. With world-class industrial infrastructure (roads, electricity, ports, rail access and/or internet) they should be centres of excellence. Industrial Development Zones (IDZs) are basically SEZs with a port (or airport.)

The DTI intends for these precincts to generate the kind of growth seen in China. To incentivise global (and more recently local) companies to set up shop in the SEZs, government offers a blanket 15% corporate tax rate – as opposed to the national 28% corporate tax – as well as building, greenfield and employment tax incentives and VAT and duty-free zones and warehousing facilities. All this on top of the superior infrastructure and red-tape support from the management structures of the zones.

Sounds great, what could go wrong?

We must question the relevance of this policy in South Africa. China is a heavily controlled, centralised economy that would find it difficult to blanket change its policies without jeopardising its communist ethos. Its SEZs therefore offer an open, less regulated market, making it easy for companies to operate in an otherwise tricky business landscape. India and South Africa are democracies that can negotiate trade agreements and set tax policies with much less fuss – and this is the main reason for Indian SEZs’ failure.   

India approved hundreds of SEZs, around two-thirds of which have never even broken ground. They didn’t have much structure to who could invest in the zones and who would run it, so they sold much of the land to private developers, who in turn sold space to the tech and IT companies (who don’t generate much foreign investment and very few jobs.) The country then negotiated free-trade agreements with many of its export markets and managed to make it more profitable to manufacture and export goods outside of the SEZs than inside of them.

So would the DTI be better off de-regulating and cutting red tape across the board, rather than offering preferential treatment to global companies and local manufacturers able to relocate into these centres?

It’s been a tough time for South African manufacturers since 2008. They need governmental support, and offering extraordinary tax breaks and infrastructural support to the few could see many of these long established South African companies close. It is imperative that they aren’t abandoned in the rush to attract foreign investors.

Another unintended consequence of the SEZs that has negated the tax breaks is that these incentives break the World Trade Organisation’s rules that bar financial contributions by governments. India has had 33 countervailing duty measures slapped against them, second only to China’s 42. There is no such regulation on infrastructural support though, which can also significantly cut production costs, giving investors a global advantage.

South Africa has its own challenges. Our IDZs favour coastal areas (around ports) many of which are already big employers. They have not stimulated growth and jobs in poorer areas inland, so the SEZ policy has been revised to include sector specific SEZs that are less dependent on export infrastructure. These smaller zones seek to change the country’s export basket through the beneficiation of primary commodities – or “let’s sell iron instead of iron-ore and orange juice instead of oranges.”

The average age of a South African artisan 55 years old and training the youth will benefit both public and private sectors. The DTi have reintroduced and funded the apprentice training project, but it still hinges on private company’s giving apprentices work opportunities.

The most successful SEZs are centred around Johannesburg, Durban and Cape Town, as more remote areas battle to attract foreign investors. What would an investor from London do in rural Limpopo? Where would he send his children to school and what would he and his family do over the weekend? And where would he find skilled labour? Until we can answer these questions we need to expect mixed results from SEZs.

Atlantis was built in the 70s to provide jobs for coloured workers away from Cape Town. 50 companies were incentivised to set up in the area and it prospered until the incentives dried up. Thousands lost their jobs and the locals where left isolated and poverty stricken. Recently over R1bn has been invested in the area. It is now a designated SEZ (focusing on Green Tech and renewable energy) and the local government has padded the SEZ incentives with extra tax cuts and proactively works with investors to cut red tape.

Successful SEZs must rolled out prudently with very clear goals, cognisant that local, established companies cannot compete in local markets without intervention. Incentives must be within the bounds of what the World Trade Organisation will allow (or overlook) and free-trade agreements must be available within the SEZs.

Global case studies show that SEZs can be an excellent tool to attract local and foreign investment. Yet, it isn’t a fix-all solution. SEZs probably won’t thrive in very isolated, rural settings and if these precincts are not maintained as centres of excellence, managed well and eventually self-sustaining, we too will be stuck with hundreds of white elephants, sustained unemployment and a big fat bill.  

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