Special Economic Zones (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 the zones.

However, in South Africa — despite the government spending more than R25-billion on SEZs since the inception of Industrial Development Zones in 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. Most of the more than R25-billion spent has come from the Department of Trade, Industry and Competition, mainly towards infrastructure. The cumulative private investment is R31-billion, creating 27,000 jobs.

These numbers need to be treated with caution. No one knows whether the investments and jobs within the SEZs would not have existed anyway, even if the subsidised infrastructure and tax breaks available in the zones had not existed. In fact, many companies relocated from other parts of South Africa to the zones.

It is widely accepted that the current SEZ programme has failed to make a meaningful impact on growth, development and industrialisation. And, in its current form, it is unlikely that the programme will ever succeed. That is because none of the zones is particularly “special”.

SEZs frequently fail in other parts of the world. However, the spectacular successes of some SEZs demonstrate that a reinvigorated SEZ programme could help jolt the economy out of its current paralysis and jump-start much-needed jobs.

Transformative levels of job creation

In countries as different as China and Mauritius, SEZs have helped spark transformative levels of job creation. In both cases, the success resulted from zones providing a different environment for business than that which prevailed in the country as a whole.

South Africa’s approach misunderstands the role of SEZs, which, at their best, are like a greenhouse in an arid, windswept plain — a carefully sealed-off patch where the rules of the outside world bend just enough to let new industries take root, grow fast, and maybe, just maybe, seed the whole economy with their resilience

To have any chance of success we would have to follow the same approach. Critically, we would need to see SEZs as a place to experiment with policy to see what effects these changes might have. The Centre for Development and Enterprise is, therefore, proposing that South Africa reconceive the Coega SEZ as an experimental zone in which firms are exempted from some provisions of the labour laws in an effort to attract labour-intensive manufacturing activities.

Firms operating in the experimental Coega SEZ would be required to comply with the national minimum wage, and they would have to ensure safe and healthy working environments, as required by national legislation.

However, instead of wages and employment conditions being determined by industry bargaining councils, these would be negotiated at factory level in the zone. This would exempt SEZ-based firms from the outcomes of negotiations typically driven by the interests of large, relatively capital-intensive firms and large unions.

The Employment Tax Incentive would be used to make firms more competitive. The rebate that the incentive offers employers could compensate for our relatively high minimum wages. Thus, the rules governing the Employment Tax Incentive would apply to all first-time SEZ workers, regardless of age. The incentive  should also be amended so that within this SEZ it extends beyond the current two-year limit.

New activities

All goods made in the zone should be for export only, and firms must be engaged in new activities. By making the exemptions available in the new SEZ conditional on a firm exporting 100% of its output, firms based on the SEZ would not have an unfair advantage relative to other South African firms operating in the domestic market. And by ensuring that only new activities qualify, the SEZ would encourage investments that would not otherwise have happened.

Finally, we are proposing that all imports should be duty-free rather than subject to rebates; that the rules governing the movement and employment of skilled foreign entrepreneurs and managers should be relaxed; and that the SEZ should be operated by a private commercial entity.

The “special” SEZ at Coega would then be a laboratory of sorts. By testing whether a modified labour market regime can lead to the establishment of labour-intensive, export-oriented production on South African soil, we will learn whether deeper and broader reform of the labour market would generate rapid employment growth.

South Africa’s SEZs are primarily state run, which has led to inefficiencies and missed opportunities. The second way to turbocharge SEZs as catalysts of change is to give private companies the principal role in the establishment and management of SEZs, as has been successfully spearheaded in the likes of Colombia, Turkey and the Dominican Republic. In these countries, private companies establish zones that have resulted in millions of dollars in foreign direct investment.

Private-sector involvement would allow for more dynamic, more competitive zones better tailored to the needs of businesses and investors. Private companies would be incentivised to create zones that meet the demands of global markets, while also driving innovation and job creation. This has generated positive results in countries across the globe, including in African countries such as Kenya and Ghana.

Local and global firms and specially constituted corporate entities specialising in setting up and managing successful SEZs should be allowed to propose specific sites for privately run SEZs on private or public land. They would need to produce a plan as to how they intend to attract investors who would develop factories for labour-intensive goods for export. Other than minimal subsidies and temporary tax breaks, it would be private money at risk if the zone did not succeed.

New zones should be approved on the recommendation of a reconstituted SEZ advisory board with much more private-sector representation on the sole basis of whether they meet minimal conditions for operation.

Time for action

The time for bold action is now. South Africa’s economic challenges are deep, but not insurmountable. Everyone wants growth and jobs, but the government has so far avoided the tough decisions and refused to initiate the changes that could really make a difference.

SEZs, if reimagined and effectively implemented, could become powerful tools for change. An experimental SEZ at Coega would offer a unique opportunity to test policies that could help South Africa compete in the global economy, especially in labour-intensive industries essential for absorbing unemployed, low-skill workers.

At the same time, giving the private sector a larger role in managing SEZs across the country could unlock the potential of these zones, turning them into dynamic hubs of innovation and jobs.

The Government of National Unity must grasp the nettle. South Africa’s economy needs a paradigm shift — one that prioritises the creation of jobs for the workforce we have, rather than focusing mainly on high-skill, high-wage industries. DM

Ann Bernstein is executive director of the Centre for Development and Enterprise (CDE). This article is based on CDE’s new report, “ACTION NINE: Use the private sector to turbocharge the SEZ programme”, part of the AGENDA 2024 series. www.cde.org.za

This article was published on the Daily Maverick