A new report by the Centre for Development and Enterprise (CDE) proposes radical new measures to turn South Africa’s Special Economic Zones (SEZs) into powerful instruments that drive new investment and create jobs.

ACTION NINE: Use the private sector to turbocharge the SEZ programme is the latest report in CDE’s Agenda 2024 series – a set of catalytic actions to get the country back on track after 15 years of stagnation and decline.

South Africa is stuck in a low-growth, high unemployment permacrisis. A meagre average annual growth rate of 0.8 per cent over the past decade means that there are a staggering 12.3 million South Africans who want to work but cannot get a job.

SEZs are geographic zones where regulations differ from the rest of the economy—hence the term ‘special’. Most successful SEZs focus on labour-intensive, export-driven manufacturing activities. Bringing in foreign capital, technology, and skills—managerial, operational, or entrepreneurial—contributes enormously to the success of SEZs.

However, in South Africa—despite government spending some R25 billion on SEZs since 2001—only four of the 12 designated zones have attracted meaningful commercial activity: Coega, East London Industrial Development Zone, Dube TradePort, and Tshwane Automotive SEZ. Some R31 billion in investment has taken place resulting in 27 000 jobs.

“South Africa’s SEZ programme has done very little to revitalise the manufacturing sector, to promote export-oriented industries, or to generate sufficient jobs to make even a small dent in the country’s unemployment crisis,” said Ann Bernstein, executive director of CDE.

South Africa should draw inspiration from places like China and Mauritius that used their SEZs to enable localised reforms at a time when country-wide changes were ideologically unpalatable and politically unfeasible.

“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,” said Bernstein.

“What if, in South Africa, we permitted lower wages and more flexible employment arrangements in a single experimental zone to see how investors responded to these changes?” asked Bernstein.

“The existing Coega SEZ is ideally situated for a pilot project to test whether and to what extent South Africa could create labour-intensive manufacturing that might absorb unskilled workers,” added Bernstein.

CDE makes the following proposals to establish an experimental SEZ at Coega:

•   Allow wages, working conditions, piecework, productivity bonuses, and shift hours to be negotiated at factory level. This would reduce the impact of high sectoral minimum wages, particularly for smaller firms in the Coega SEZ, while still requiring compliance with the national minimum wage and adherence to health and safety regulations.

•    All goods made in the zone must be for export and firms must be engaged in new activities. To prevent existing firms from simply relocating, all firms in the Coega SEZ must be NEW investments. To prevent disadvantaging other firms in SA, zone-based firms will be required to export 100 per cent of their output.

•    Make all imports duty-free (rather than subject to rebates). This would simplify processes, lower costs, and improve competitiveness by eliminating the time-consuming rebate process for firms in the SEZ.

•   Relax rules governing movement and employment of skilled foreign entrepreneurs and managers. By easing the restrictions on skilled foreign managers, firms in the SEZ would be able to bring in expertise to help manage factories and insert South African exports into global markets. Much of the know-how needed to navigate these highly competitive markets is not available in SA, so immigrant managers might be necessary to make these businesses competitive.

•   Allow the SEZ to be operated as a commercial entity by the private sector. Allowing an entrepreneur or private firm to manage the Coega SEZ would create a more effective environment for investors with potential revenue for the government and efficient operation.

“CDE is not calling for sweeping national labour law reform, nor are we pushing for the establishment of unsafe sweatshops exempt from health and safety laws,” said Bernstein.

“The national minimum wage will prevail while the Employment Tax Incentive (hopefully expanded) will lower employer’s wage costs. If our proposals are implemented, we believe that globally competitive low-skill manufacturing in Coega is possible,” she added.

“The GNU has committed to prioritising faster economic growth. It’s a good time for a GNU experiment that tests the potential for labour-intensive manufacturing in South Africa,” she added.

To inject new vigour into the national SEZ programme as a whole, CDE proposes that we follow global trends by giving the private sector a much more prominent role. This reform has produced positive results in many countries, including Colombia, Turkey, and the Dominican Republic.

“International research suggests that private zones are less expensive to develop and operate than public zones and yield better economic results,” said Bernstein.

To unleash private sector energy, know-how, and risk appetite, the following steps must be taken:

•    Reconstitute the SEZ Advisory Board. The Board should be restructured to include mostly independent experts and private sector entrepreneurs, with some government officials, to ensure a fair and balanced decision-making process.

•    Open up to a variety of privately run SEZs. Private companies should be allowed to propose and run SEZs on both public and private land, assuming financial risks while attracting new investments focused on export production and job creation.

•    Adopt new, more flexible criteria for approval. New zones should be approved based solely on their potential to increase investment and create jobs, rather than detailed and often unrealistic government imposed criteria.

•    Provision of reliable power, water, and other services. SEZ operators should be allowed to generate renewable energy and water from alternative sources, and contract with private transport operators.

“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.

“South Africa’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 learned could be applied to the overarching SEZ programme and, eventually, to the economy as a whole,” Bernstein concluded.

For media enquiries and interview requests, please contact Siya Tshabalala: media@cde.org.za | 011 482 5140

ABOUT AGENDA 2024: PRIORITIES FOR A NEW GOVERNMENT
AGENDA 2024, based on CDE’s extensive policy work and recent consultations with experts, business leaders, former public servants and academics, sets out to answer what is by far the most important question facing South Africa: what can a new government do to get the country back on track after 15 years of stagnation and decline?

Agenda 2024 sets out a series of carefully selected and crafted actions to signal a new approach to reform. The priority areas for action are: fix the state; drive growth and development by freeing up markets and competition; build a new approach to mass inclusion; deal with the fiscal crisis; and strengthen the rule of law.

ABOUT THE CENTRE FOR DEVELOPMENT AND ENTERPRISE
CDE is an independent policy research and advocacy organisation. It is South Africa’s leading development think tank, focusing on critical development issues and their relationship to economic growth and democratic consolidation. Through examining South African realities and international experience, coupled with high-level forums, workshops and roundtables, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges.