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Special Economic Zone programme important to facilitate industrialisation in SA

by Media Xpose

South Africa continues to be beset by the triple challenges of poverty, unemployment and inequality, notwithstanding government’s best efforts. The general concurrence among the policy authorities is that the prevalence of the foregoing socio-economic challenges can be best curtailed by propelling the country into an industrialisation path that will broaden its export base of value-added goods and tradable services.

To this end, a concerted effort is being made by the country’s economic policy authorities to systematically respond to the challenge of the declining sectoral contribution by the manufacturing sector towards South Africa’s GDP.

In his keynote address at the launch of the book Structural Transformation in South Africa: The challenges of Inclusive Industrial Development in a Middle-Income Country, in September 2021, the Minister of Finance noted that manufacturing contributes around 12% of GDP. This is down from a high of around 22% of GDP in the late 1980s to the early 1990s. The country’s economy is instead mostly dominated by (credit-driven) consumption-based sectors, which are often characterized by limited multipliers, especially where job creation opportunities are concerned.

Based on the lessons learnt from the experience of international countries, one of the key policy levers that has proven to be a key catalyst in the development of a number of developing economies – through promoting industrial upgrading and allowing for greater access to global value chains – is the Special Economic Zones (SEZs) programme. Correspondingly, SEZs are increasingly becoming an economic tool of choice for most governments, with an estimated 5 400 SEZs that span more than 140 economies (World Investment Report, 2019).

Scaling up regional production of value-added and export-oriented goods

In line with the global trend, South Africa has also opted to adopt the SEZ programme as one of the critical tools for driving regional industrial development policy. The specific aim of the programme is to scale up regional production of value-added and export-oriented goods by leveraging on the country’s comparative and competitive advantages.

The key objectives of the programme are to attract foreign and domestic direct investment, build additional industrial hubs and to build strategic industrial capabilities and further promote regional diversification.

The programme is at a full implementation phase with designated SEZs continuing to show positive progress in terms of their contribution to the economy. To-date, South Africa has 10SEZs, which host approximately 169 operational investments with an estimated cumulative investment value of R22 062 billion (as of the end of Q4:2021/22FY).

The biggest sectors represented in the zones are logistics, automotive, general manufacturing, agro-processing and chemicals. What is worth noting is that a concerted effort is being made to unlock an additional 85 of secured but not yet operational investment pipeline, which is approximated to be valued in excess of R40 168 billion (as of the end of Q4:2021/22FY).

The benefits of locating in an SEZ

The benefits of locating in an SEZ include the provision of customised or general infrastructure built within the confines of a safe and secured environment. Moreover, SEZs in SA offer land that is serviced along with reliable utilities. Facilities within the zones are world-class, equipped with the latest information and communications technologies.

Close distance to target markets and major transport nodes are additional benefits. The regulatory and administrative environment allows for streamlined processes, which are meant to reduce the costs of doing business. Some SEZs, such as the OR Tambo SEZ, Coega SEZ and Dube Trade Port SEZ, have one-stop-shops that assist new enterprises in starting operations by facilitating the acquirement of licenses or even grants and loans. 

Fiscal incentives are also available to qualifying enterprises. This includes a 15% corporate income tax concession, a building allowance  rate of 10% per annum, a special customs and VAT regime and an employment tax incentive designed to encourage the employment of youth. Fiscal incentives are administered by the South African Revenue Services.

It is also worth mentioning that other sector specific incentives are also applicable within the SEZ context. The aim is to offer an attractive business environment with significantly better operating conditions.

Still room for improvement

Whilst SEZs have continued to maintain their momentum in attracting new investments as well as managing to retain most of their tenant industries during the challenging Covid-19 period, there is still room for improvement.

Further opportunities exist to entrench backward linkages that create an avenue for township and rural based SMMEs to partake meaningfully in the existing value-chains linked to the core economic activities undertaken within SEZs.

To this effect, the dticis in the process ofdeveloping an expanded and inclusive approach to industrial development, with the intention to achieve three overarching outcomes:

  1. industrialisation to promote jobs and rising incomes.
  2. transformationto build an inclusive economy; and
  3. a capable stateto ensure improved impact of public policies.

The intended consequence of this expanded approach is to streamline all spatial industrial development support measures under a single plan within each district municipality in the country, using the District Development Model (DDM) as a point of reference.

In 2019, the South African government introduced the District Development Model as the means to address the weak coherence in planning and implementation amongst all the spheres of government. Years of operating in silos has resulted in poor service delivery, exacerbating, rather than diminishing the threefold challenge of poverty, inequality and job creation.

The District Development Model is process based in that cooperative and shared planning takes place at the local, district and metropolitan level. The objective being to develop one purposefully designed strategy for each of our districts and metros.

Success of integrated approach to planning and development of SEZs proven

SEZs can play a key role in the materialisation of the DDM goals by its ability to work with all spheres of government and local communities to find sustainable ways to improve the quality of their lives. 

SEZs such as Coega, the East London IDZ and Dube TradePort have already demonstrated the success of an integrated approach to the planning and development of SEZs.  They have further revealed that national government needs to play a strong, decisive role in supporting provinces and municipalities.

For SEZs that are still to become operational and for the planned new ones, national government is now actively involved in their planning and development. This means a greater involvement of the dtic in the development of SEZs, through shared ownership. Accordingly, the dtic will no longer simply be a regulator and adjudicator of applications, but will be an active participant in the planning, development and management of the zones. The intention is to create a platform through which national government can influence the strategic direction of SEZs.  

In conclusion, SEZs serve as an efficient tool for not only enhancing South Africa’s production capacity, but also can equally crowd-in the much-needed private sector foreign direct investment, whilst simultaneously facilitating technology transfer from international companies. This in turn will enable the country to effectively establish linkages within critical global value chains.

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