Special Economic Zones – An efficient instrument to increase industrialisation

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04 Feb 2016

Special Economic Zones (“SEZs”) are geographically designated areas within a country that are set aside for specifically targeted economic activities, supported through special arrangements (that may include laws) and systems to promote industrial development.

An SEZ is meant to be an economic development tool to promote rapid economic growth by using various support measures to attract targeted foreign and domestic investments and technology. President Jacob Zuma stated in his recent speech at the Forum on China-Africa Cooperation that the government intends to enhance collaboration in the development of industrial production capabilities and value addition by establishing industrial parks and clusters, technology parks, SEZs and engineering centres, as well as providing training for engineering and technical personnel and managers. Certainly, SEZs will focus highly on the government’s agenda going forward.

South Africa, like many developing countries, faces a series of daunting socio-economic challenges, including high levels of unemployment, income inequality, subdued economic growth, an amalgamation of previously racially defined areas, abject disparity, as well as special development challenges and regional differences. This situation calls for urgent policy initiatives from the government that will propel the country into a higher growth trajectory and improve the livelihood of South Africans.

The South African policy for economic growth and development recognises that it must respond to these rising challenges. The existing global and domestic economic conditions demand a focus by the government on new sources of competitiveness that are based on innovation and productivity, with an entrenched base in skills development for its citizens, as well as infrastructure development and efficient, responsive state action. The government also recognises that it needs to take drastic measures to implement and enhance local and regional demand, increase foreign direct investment, and to extend export promotions to rapidly growing economies in the region and, ultimately, to other parts of the world. Linkages with the local economy will allow SEZs to build on comparative advantages in the regions in which they operate and will also allow for participation by local suppliers/clusters in the respective value chains.

In order to raise levels of direct investment by domestic and foreign investors to accelerate growth, employment and re-integration into the global economy, the government initially introduced the concept of Industrial Development Zones (“IDZs”) in 2000. Five IDZs were subsequently designated, namely Coega (2001), OR Tambo International Airport (2002), East London (2002), Richards Bay (2002) and Saldanha Bay (2013). The intention is to integrate these existing IDZs into some of the SEZs in the country once the legal frameworks are put in place.

Government has been inspired by developments in Europe and Asia, which have provided valuable lessons and examples. The benefit of long-term industrialisation and a strong manufacturing base has long been an attraction for the South African economy, and by strengthening and expanding the manufacturing sector, an anchor for long-term economic prosperity can be established. This, coupled with the right legislative framework and commitment by the necessary spheres of government, can lead to economic growth and development that will ultimately create much-needed jobs in South Africa. Going forward, South Africa has promulgated the Special Economic Zones Act, 2014 to  address its socio-economic challenges. Unfortunately, the Act has not yet come into effect, but the current benefits on offer are:

  • 15% corporate tax benefit in comparison to other regions in the country;
  • building allowances;
  • employment incentives;
  • customs controlled areas; and
  • 12i tax allowances (designed to support greenfield investments).

Besides the Act serving as a medium for the South African government to effectively regulate all SEZs and IDZs (which are now one of the categories of SEZ in terms of the Act), it also proposes an internationally competitive SEZ value proposition and standard aimed at assisting and attracting both domestic and foreign direct investments into the various SEZs. The intention is that industrial production in the SEZs will focus largely on the manufacture of value-added goods and services. Once designated and established, it is expected that each SEZ will have strong backward and forward linkages with other sectors in its locality, thus building and strengthening the region through supplier development programmes. This should ultimately translate into the socio-economic development so desired for many parts of the country. This approach is a slight departure from the traditional SEZ models employed by other countries, where SEZs are treated as separate enclaves.

There are a number of questions that the government still needs to address: Who owns land on which the SEZ will be situated? What of new businesses with no track record – will they be allowed to locate into an SEZ? Is the reliance on tax incentives really the key to make SEZs flourish? What are the types of incentives to be offered by a local government in which a SEZ is located?

The concept of SEZs is still relatively new to South Africa. The approach that the government has adopted is to focus on the socio-economic and development challenges unique to the region in which the specific SEZ is located. Although the implementation of the SEZ strategy appears to be flexible, it does bring about additional problems that will only be ironed out through time and experience. The World Bank already recognises the success of the SEZ initiatives in China and has recommended suitable SEZs as an effective instrument for African countries to achieve industrialisation. With a little more time, dedication and effort, SEZs are potentially successful projects that the government should invest in that could bring about unrivalled rewards for the country as a whole.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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