Many of SA’s special economic zones (SEZs) have failed for the same reasons the public sector and state-owned enterprises (SOEs) have failed: corruption, incompetence and ideology trumping reality.
SEZs are geographically demarcated areas governments dedicate to specific industrial development by giving fiscal incentives, regulatory exemptions and public infrastructure support that is not available to domestic sectors.
The idea is to concentrate limited public funds, resources and infrastructure to establish new industries with the help of private sector investment, skills and technology. Importantly, SEZs are generally established when governments lack the skills, resources and capacity to establish a conducive environment for investment attraction, industrial upgrading and infrastructure development.
Governments also establish SEZs because they lack the capacity to tackle vested interests, incompetence and corruption, so they implement industrialisation on a protected, smaller scale in a ring-fenced zone. They can also concentrate working public infrastructure in SEZs when they do not have the capacity to deliver it countrywide.
The aim is for the state’s investment in the SEZ infrastructure to pay off in terms of new private sector investment, new businesses and new jobs, which has a spillover effect on the rest of the economy.
Because of the large public investment required and the significant benefits to investors that are not available to companies outside an SEZ, they should only be used to tackle market failures or structural constraints that cannot be addressed through normal policies, laws or sector-wide incentives.
There are several critical factors for SEZs to be successful: they need to be part of the overall national industrial strategy of a country, rather than stand-alone projects. There has to be a solid business case for an SEZ, and they cannot be established based on political, ideological or interest group considerations.
Unfortunately, SA’s SEZ policy outcomes have been mixed at best. Many SEZs take too long to established, and by the time they are up and running the opportunity is gone. Governance and management structures tend to be run solely by the state, one of the reasons the corruption, incompetence and mismanagement of SOEs are so often replicated in SEZs.
Most of the SEZs that have been set up created only temporary construction jobs and not new export manufacturing industries — the SEZs became glorified warehouses. They should not be called SEZs, and businesses there should not be getting the incentives they are receiving.
In 2001 the government established the Coega Industrial Development Zone, a type of SEZ, in Gqeberha in a bid to create an integrated steel producing hub. But it was unable to attract anchor investors because there was no viable business case for a steel hub. The global demand for steel was uncertain, and the SEZ was not integrated into a long-term regional development plan, nor linked sufficiently to local suppliers.
The German Submarine Consortium — HDW, Thyssen Nordseewerke and Ferrostaal — which sold SA submarines as part of the controversial late-1990s arms deal, was supposed to be an anchor tenant at Coega as part of the deal. Submarine components were supposed to be built in an industrial cluster project earmarked for the SEZ.
The intention was that the infrastructure the German Submarine Consortium built would be used to upgrade local industry, and local companies would become suppliers and subcontractors, with an accompanying knowledge transfer. But the consortium did not make the investment. The arms deal proved to be irredeemably corrupt, and the postapartheid ANC government did not find replacement anchor investors for Coega.
Then trade & industry minister Rob Davies subsequently announced the formation of the Musina-Makhado SEZ in Limpopo in 2017. However, the project has yet to get off the ground, and in March 2021 the Limpopo department of economic development & tourism suspended work on the project, saying its environmental impact assessment was “insufficient”. The project was also deemed not to have consulted widely enough with local communities, traditional authorities and farmers.
The business case for the Musina-Makhado SEZ is also not clear. It is supposed to be an energy metallurgical cluster centred on coal, comprising of 20 interdependent industrial plants including ferrochrome, ferromanganese, stainless steel, high manganese steel, vanadium steel, thermal and coking plants, as well as a coal washery and lime & cement plants.
The Limpopo provincial government said 11 memorandums of understanding had been signed with the Chinese government for investments totalling $1.1bn, and that 70% of what would be produced would be exported to China. Indeed, the plan is for the Musina-Makhado SEZ to be managed by Chinese company Shenzhen Hoi Mor Resources. But its CEO, Yat Noi Ning, is on an Interpol watch list, accused of fraud by Zimbabwean-owned London-listed mining company Bindura Nickel Corporation and Freda Rebecca Gold Mine group.
This issue aside, there is a real danger that the Musina-Makhado SEZ will not align with global demand. In September 2021 President Xi Jinping told the UN General Assembly that China will not build any new coal-fired power projects overseas and would instead pursue a low-carbon energy footprint in developing countries.
Environmental civil groups have warned that the Musina-Makhado area already suffers from water scarcity and does not have enough water for this water-intensive project, does not include a credible plan to deal with toxic waste, and the province does not have the management skills in the public sector to run or regulate the SEZ properly.
Similarly, the Dube TradePort SEZ in KwaZulu-Natal struggled with governance issues from its inception. Its first CEO was suspended because of alleged corruption. Though a business case was made with the help of development aid organisations, many of the projects that were approved for inclusion did not align with it, and there have been allegations that kickbacks were the deciding factor. As a result, the Dube Port has not attracted enough industrial investors to justify the state's considerable capital expenditure.
It did later attract tenants seeking office and light industrial premises, which should not qualify for inclusion in an SEZ. Local communities also protested against being relocated to make way for the SEZ without being properly consulted or compensated.
The Tshwane Automotive SEZ launched in 2019 appears to have better prospects. It was secured and driven by a private sector anchor, Ford Motor Company, which has invested more than R15bn to produce the next generation of Ford Rangers there. The government has spent R2bn on the project.
Ford, the national and provincial governments and the city of Tshwane are cogoverning the SEZ in a public-private partnership. Ford is represented on the SEZ management board, which includes representatives of the department of trade, industry & competition, the Gauteng department of economic development, and Tshwane. The SEZ has been given clean audits since its inception.
Ford is also committed to developing a rail-to-port corridor for vehicle and components exports in co-operation with Transnet, which will link Tshwane and Gqeberha in the Eastern Cape. The completion of this corridor is critical to the ultimate success of the SEZ.
• Gumede is associate professor at the University of the Witwatersrand School of Governance, and author of ‘SA in Brics’
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