It’s easier said than done, SEZ the dti

Dti gives the lowdown on special economic zones.

The designation of certain areas as Special Economic Zones (SEZ) has long been one of the Department of Trade and Industry’s (dti’s) strategies to stimulate economic growth. And, with R37 billion in pipeline investment already identified for the Musina SEZ alone, there is a lot riding on the successful execution of these projects.

The SEZ programme includes ten projects located throughout the country, with at least one in each province. But the question still arises whether these will simply be more ineffective industrial parks. By introducing various tax breaks and other financial incentives, the dti hopes to distinguish this initiative from less fruitful versions that have come before them.

These projects include an ICT hub to be located in Nasrec (2010 World Cup legacy project), a renewable energy and clean technology park in Atlantis near Cape Town, a beneficiation hub in Rustenburg for platinum group metals and the aforementioned Musina project, which will focus on farming and mining.

SEZs in the pipeline

Province

Town

Core activities

Western Cape

Atlantis

Renewable Energy, Clean technologies (e.g. fridges)

Northern Cape

Upington

Solar energy technology manufacture and maintenance, Aircraft manufacture and maintenance

Eastern Cape

Mthata

Agro-processing, including food processing and medicine manufacture

Kwa-Zulu Natal

Dube Trade Port (complete)

Electronics, agro-processing, and (possibly) automobile component manufacture

Free State

Harrismith

Maluti-a-Phofung – Logistics, pharmaceuticals and food processing

North-West

Rustenburg

Platinum Valley – Beneficiation of platinum group metals, and production of mining inputs

Gauteng

Nasrec

Smart City – ICT hub, which will include data centers business process outsourcing, film and electronics industries

Mpumalanga

Nkomazi

Agro-processing

Limpopo

Musina

Will have to strike a balance between farming and mining, given the former is a dominant sector already, while the area is also well endowed with mineral resources

Limpopo

Tubatse

Beneficiation of platinum group metals, and production of mining inputs

Source: Department of Trade and Industry

“For all of them, with the exception of Gauteng, we have completed technical feasibility studies where we have made an economic case to determine their long-term feasibility,” says the dti’s deputy director general Alfred Tau.

However Tau says that, while much progress has been made in some provinces (ie in Gauteng, Western Cape and Kwa-Zulu Natal), the lack of support systems in other areas means the pace of development will be hindered. The lack of skills is particularly troublesome because attracting key people to work in these areas is a challenge in itself.

Says Tau: “In Durban, Cape Town and Johannesburg, there are plenty of universities and technical colleges, but if you look at Musina, for example, there are no FET colleges and no universities. There are no reasonably equipped hospitals or clinics…. How then, do you go about attracting investors from, say, London to such a place? There needs to be schools (and good ones at that) for the children of those SEZ employees to go to, and malls and activities to keep their families occupied.”

Standing in the way of progress is electricity security, which currently cannot be guaranteed, while the progress on these projects is also dependent on municipalities playing their part. For instance, things have been able to move faster in Atlantis because the City of Cape Town had been able to provide added incentives, and at the Dube TradePort because the municipality had put together a team specifically tasked with expediting red tape and other administrative aspects of the process.

Next step: regulatory sign-off

Legally, the minister has to designate a place as a SEZ – without it, it doesn’t exist. But the dti has begun encouraging investors to set up shop in areas close to where those zones might be, stating that they will not subsequently be blocked from receiving benefits and incentives owed to them if they eventually end up outside a designated area.

“Ordinarily, an investor that locates in that space now … would not qualify for the tax breaks and incentives associated with being in a SEZ. But we’ve decided to facilitate an agreement between the department and those investors that allows them to ‘locate now’ and, if they comply with the relevant requirements, [they] will not be excluded,” says Tau, adding that being located within a SEZ does not in itself qualify as grounds to receive incentive benefits. The companies have to comply with certain criteria. One such requirement is that companies must be setting up new operations as they cannot qualify for exemptions for relocating to a SEZ.

South Africa’s SEZ incentives

Preferential 15% Corporate Tax

Businesses and operations will receive a 13% discount on the 28% corporate tax that they would otherwise have to pay. This, according to Tau, is the biggest incentive for investors.

Building Allowance

Businesses and operations will be eligible for an accelerated depreciation allowance of 10% for buildings.

Employment Incentive

All employers employing low-salaried employees (below R60 000 per annum) will be entitled to the employment tax incentive.

Customs Controlled Area

Businesses operating with in customs controlled areas will qualify for VAT and customs relief, similar to those currently enjoyed in IDZs.

12i Tax Allowance

The 12i Tax Allowance incentive is designed to support greenfield investments (i.e. new industrial projects that utilize only new and unused manufacturing assets) as well as brownfield investments (i.e. expansions or upgrades or existing industrial projects).

Source: Department of Trade and Industry

But before any of these incentives can come into play, the SEZ regulations, which are open for public consultation until May 7, will have to be approved by Minister of Trade and Industry Rob Davies, and then later signed into law by the president.Source: Department of Trade and Industry

“We hope that by June or, at the latest, July the Act will come into force and the benefits of investing in SEZ will become effective. At this point, they are not as yet in effect,” says Tau.

Little difference between SEZs and IDZs

Though it is different, the DTI’s SEZ programme is not unlike its Industrial Development Zone (IDZ) programme. The latter also sought to boost national economic growth by providing support measures that would attract targeted foreign and domestic investments, skills, and technology. However the IDZ programme was biased towards the development of coastal regions and ignored inland economic potential.

Between 2002 and 2014, six IDZs had been designated, namely Coega, East London, Richards Bay, Saldanha Bay, OR Tambo and the Dube TradePort, which was most recently designated in July last year.

As of August 2014, 73 000 jobs had been created in the IDZs, of which 6 896 (9.6%) were direct and 65 637 (90.4%) indirect. Signed, but not yet operational investors are expected to create over 2 194 direct jobs in the zones.

Last year there was also a landmark deal wherein Eureka Capital signed a R160 million-lease agreement with Dube TradePort Corporation to develop a seven-storey building that will house a state-of-the-art innovation hub and an office block. It will be at the heart of Dube City, adjacent to King Shaka International Airport.

Cases like the Dube TradePort, where Tau says there has already been investment in excess of R900 million, prove that there is a strong case for SEZs. But the converse is true when looking at what has become of the OR Tambo IDZ (ORTIDZ).

The ORTIDZ, located within the Airports Company of South Africa allotted land, had been on the verge of losing its operating licence when it failed to blossom into the jewellery hub it was intended to be. But now the Gauteng government is considering the space for other activities, such as mineral beneficiation.

“It was designated around 2002/2003 but it was never really operationalised. But the Gauteng government has now advanced the process….” says Tau.

“At this stage, there are other debates about whether the location is right, and how to expand the core function to include other industries. Right now there are discussions around the manufacture of locomotives and railway equipment.”

But these are far grander designs that make it necessary to rethink the entire concept of the ORTIDZ, says Tau, meaning all the efforts made thus far have counted for very little in its regard.

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