With just four of SA’s 12 special economic zones (SEZs) performing under state control private sector expertise should be brought in to run them, a think-tank has recommended.
The recommendation is made in a report by the Centre for Development and Enterprise (CDE), titled “Use the Private Sector to Turbocharge the SEZ Programme”. The report is the ninth in the CDE’s Agenda 2024 series on the catalytic actions needed to get SA back on track after 15 years of stagnation and decline.
The priority areas identified in the series are fixing the state; driving growth and development by freeing up markets and competition; building a new approach to mass inclusion; dealing with the fiscal crisis; and strengthening the rule of law.
SEZs are incentivised geographic zones where regulations differ from the rest of the economy. The CDE notes that the most successful ones focus on labour-intensive, export-driven manufacturing activities.
The CDE report says the government has spent about R25bn on SEZs since their inception in 2014 but the results have been “extremely disappointing”. Just four of the 12 designated zones have attracted meaningful commercial activity: Coega, the East London Industrial Development Zone, Dube TradePort and Tshwane Automotive SEZ.
The CDE estimates those four SEZs have attracted about R31bn in investment, resulting in 27,000 jobs — or 90% of the total rand value of investments and jobs generated by all SEZs in 2022.
“SA’s SEZ programme has done very little to revitalise the manufacturing sector, to promote export-orientated industries, or to generate sufficient jobs to make even a small dent in the country’s unemployment crisis,” CDE executive director Ann Bernstein said.
“For an SEZ to be successful, it needs to truly be special. It needs to offer investors different rules from the rest of the economy.”
The report said SA should draw inspiration from places such as China and Mauritius, which used SEZs to enable localised reforms when countrywide changes were not possible. It should follow global trends by giving the private sector a much more prominent role.
“International research suggests that private zones are less expensive to develop and operate than public zones and yield better economic results,” said Bernstein.
Experimental zone
The first recommendation of the CDE’s latest report is the use of the Coega SEZ as an experimental zone where lower wages and more flexible employment arrangements are permitted to test investor responses.
“The existing Coega SEZ (which has a pool of available labour and decent logistics infrastructure) is ideally situated for a pilot project to test whether and to what extent SA could create labour-intensive manufacturing that might absorb unskilled workers,” Bernstein said.
Such an experiment should allow wages, working conditions, piecework, productivity bonuses, and shift hours to be negotiated at factory level to reduce the impact of high sectoral minimum wages negotiated in bargaining councils, particularly for smaller firms. Compliance would still be necessary with the national minimum wage and with health and safety regulations.
Another requirement should be that all goods made in the zone must be for export and firms must be engaged in new activities to prevent existing firms simply relocating to the zone. To prevent zone-based firms disadvantaging others in SA because of their incentives, they should be required to export all of their output.
All imports should be duty-free to simplify processes, lower costs, and improve competitiveness and rules governing the movement, and the employment of skilled foreign entrepreneurs and managers should be relaxed.
The CDE further recommended the experimental SEZ be operated as a commercial entity by the private sector.
“If our proposals are implemented, we believe that globally competitive low-skill manufacturing in Coega is possible,” Bernstein said.
“SA’s greatest challenge is creating jobs for millions of unskilled, inexperienced workseekers. A new experimental SEZ would be a kind of laboratory. If it works, the lessons learnt could be applied to the overarching SEZ programme and, eventually, to the economy as a whole.”
As part of the broader reform of the zones the CDE proposed that the SEZ Advisory Board be reconstituted to include mostly independent experts and private sector entrepreneurs, with some government officials.
A variety of privately run SEZs should be opened up and new, more flexible criteria for approval should be adopted. New zones should be approved based solely on their potential to increase investments, the CDE said.
“The dissatisfaction with the existing SEZ programme inside the state has, predictably, led to calls by some for more centralised control. But the better solution is to open the programme to market forces and private sector expertise,” said Bernstein.
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