Since their inception as a part of South Africa’s post-1994 industrial development policy, the country’s industrial development zones (IDZs) have seen some success. But a Department of Trade and Industry (DTI) review of the policy surrounding IDZs has prompted discussion about which aspects of the IDZ model should be adapted to better attract investors to these zones.
The DTI has indicated that the current policies governing IDZs do not offer sufficient direct legislative support and the need for a tighter policy framework was what prompted the review.
Trade and Industry Minister Dr Rob Davies is expected to present the review to Cabinet in the near future, once discussions around the current policy and proposed amendments have been completed.
Other relevant parties have seen the review as an opportunity for government to take a significant step towards adapting the IDZs to the export processing zone (EPZ) model used in other parts of the world.
But how likely is this? Business Leadership South Africa (BLSA) CEO Michael Spicer says that it is difficult to be overly prescriptive about the outcome of the review, but suggests that the incentive adaptations considered in the review will be modest and may not be sufficient to encourage investment and increase employment opportunities in the IDZs at the required levels.
The current IDZ model offers infrastructure incentives and tax incentives for investors, with government having invested significant amounts of money in the existing IDZs, such as the Coega and East London (EL) IDZs, which are up and running.
However, critics have indicated that the other incentives associated with these types of zones are not sufficiently in line with international standards and may not encourage foreign direct investment at the desired levels.
DTI IDZ director Antoinette Baepi says that the DTI has no intention of adapting South Africa’s IDZs to the EPZ model.
“From government’s perspective, the IDZ policy review is mostly intended to ensure the alignment of the programme with the National Industrial Policy Framework, which was established after the IDZ programme was promulgated in terms of industrial and sector priorities,” she says, adding that it will also seek to expedite the implementation through an improved legislative framework, better coordination among relevant government spheres and agencies, and to offer a competi- tive value proposition for the South African IDZ programme.
The IDZ incentives that are managed by the DTI are crosscutting and based on sectors. However, as part of the review proposals, the DTI will advocate investigating the addition of other incentives.
Baepi cautions, though, that the proposed incentives must not disadvantage other industries that are outside the IDZs. “There has been an understanding that we need to investigate incentives for those industries that are dedicated to the IDZs,” she says.
The current state of IDZs in South Africa is not all doom and gloom. The return on investment figures that are coming out of the functioning IDZs are impressive. About R200-million has been invested in the EL IDZ and there has already been just under R1-billion in return, says consultancy firm Frost & Sullivan research analyst Laura Peinke.
She says that there are a number of attractive aspects to South Africa’s IDZs that have already encouraged investors and will continue to do so.
Most of the IDZs have been located around a specific transportation hub, such as an airport or a harbour, which is positive for investors who want to manufacture products for export. Peinke says that, while there is some concern that the country’s ports will need to be upgraded in the next five to ten years, the current infrastructure at these transport hubs supports the IDZs well.
South Africa’s established trade agreements and trade relations with other countries are also positive for investors.
Peinke says that the structure of South Africa’s IDZ tax incentives is also good. Although the time limit on such tax incentives could negatively affect the sustainability of investment in the IDZs, most countries with EPZs have limits on their tax incentives.
“Because our tax incentives are well structured, they make our IDZs competitive. In other countries, such as China and India, their tax incentives don’t continue indefinitely either,” she adds.
The intentional structuring of IDZs around manufacturing industries relevant to the regions in which the zones are located is another well-designed component of the country’s current model.
The EL IDZ targets the automotive and electronics industries and has attracted 22 new registered suppliers.
The specification of targeted sectors for IDZs will also create opportunity for local manufacturers, particularly small and medium- sized enterprises (SMEs), to develop local manufacturing capabilities.
The Mafikeng IDZ, in the North West province, has indicated that it intends to focus on the three sectors of electronics manufacturing, agriprocessing and minerals beneficiation.
Peinke says that minerals beneficiation will include a focus on jewellery making, which could contribute significantly to the development of much-needed value-adding manu- facturing capabilities in South Africa. Jewellery making is also a growing SME sector in South Africa and encouraging development of this industry in the IDZs is positive.
Multinational or foreign investors will need to support SMEs in the IDZs for this model to develop, but Peinke says this is unlikely to deter investors who are usually willing to accept the need to develop local business relationships when registering with IDZs.
Despite the positive aspects of the current IDZ model, a major policy issue that needs to be reviewed is the subject of labour laws and what can be done to improve employment figures in these zones.
The difficulties of hiring and firing employees are seen by some as onerous, but government is reticent in acknowledging that some of South Africa’s labour laws might be perceived as restrictive on multinationals investing in the country.
Spicer says that delinking wage structures for IDZs from industries that are directed at the domestic market could contribute to the solution.
Peinke argues that, overall, South Africa is not cost competitive compared with low labour-cost countries, such as China and India, but that the issue of labour should not deter investors in light of the other advantages of the IDZs; and this can be achieved by moderating the intensity of hiring and firing restrictions, in particular, in these zones.
The Congress of South African Trade Unions has resisted the proposal that IDZs have labour incentives as this could expose workers to exploitation, but Spicer says that the onus is also now on unions to propose alternative solutions to increase the benefit that South Africa reaps from the IDZs.
He says that, in South Africa, in particular, mass job creation has to be a significant focus of IDZs. There is a significant opportunity to create jobs but the current IDZ policy has had limited success in this area.
Although several thousand jobs have been created in the functioning IDZS, he says South Africa should be looking to create more job opportunities from these areas.
The Coega and EL IDZs have been respons-ible for the creation of 2 622 and 1 313 direct jobs respectively.
BLSA and the Centre for Development and Enterprise have developed the Five-Million Jobs initiative, which cites IDZs as one of the areas that have significant potential to contribute to job creation in the country.
Opposition party the Democratic Alliance (DA) trade and industry shadow Minister Kobus Marais says that the DA advocates the conversion of IDZs into export processing and job creation zones (EPJZs) that must encourage labour-intensive manufacturing with the aim of encouraging exports.
“EPJZs have been enormously successful internationally in building industrial development,” he says. Malaysia, Mauritius and Ireland are cited as countries that have employed the EPJZ model as a tool to develop their economies.
Marais adds that the relaxation of some labour laws is a viable option in South Africa, where employers could be offered the oppor- tunity of subsidised assistance in labour relations that would otherwise have incurred a cost to their businesses. The main focus with regard to labour in IDZs should, however, be on labour-intensive manufacturing to add value to exportable products.
Spicer says that the jobs created in the IDZs will most likely not be highly skilled or high-wage jobs, depending on the manu- facturing industries promoted by the IDZs, but adds that many unemployed people are not highly skilled.
Employment in IDZ manufacturing facilities would, therefore, serve the dual purpose of providing unemployed people with a job and an opportunity to gain skills that can be developed over time to improve their future job opportunities and subsequent wage intakes.
Peinke says that a possible solution to improve the job opportunities created by IDZs is to introduce a local content policy, once companies have established themselves in the IDZs, requiring them to use the local workforce and local components manu- facturers for a defined percentage of their business practices.
“Although it may seem that this could deter investors, a lot of companies would see the benefit of using the local workforce because, although it is not necessarily cost competitive, compared with India and China, it is still cheaper than importing knowledge capital into the country,” she adds.
The IDZ policy review is complex as it involves the coordination of a number of government departments that are, currently, collectively responsible for the policies that influence IDZ governance.
Baepi says that there has been a misunderstanding about the complexity of the policy environment relating to IDZs and that the review of the framework has to be discussed in several governing spheres.
The IDZs are currently governed by the Manufacturing Development Act, which deals with incentives, but the IDZs are more complex than just incentive schemes and require a clear set of policy measures.
Baepi says that there has also been mention of the possibility of developing a new Act that will focus exclusively on the IDZ programme and will focus on getting all departments to deliver on their mandates regarding this programme.
“The IDZs cannot be promoted individually outside of the broader investment facilitation strategy of the country, which falls under the DTI, but there has to be coordination of investment promotion, generally, between national government, the provinces and local government,” she adds.
While the review of IDZ policy has been welcomed, once coordination of the different aspects has been completed, the outcomes could have a significant impact on the success of these zones for both fixed direct investment and job creation in South Africa.
Incentives in these zones are not without their difficulties and need to be navigated with caution. But, if new incentives are introduced, there could be significant benefits. Countries such as India, where IDZs have been successfully implemented, have reported that IDZs have contributed to over 100% growth in manufacturing and exports over the past four years.