IDZs seen as key in job creation

The 2011 budget gave away few details about tax cuts for businesses in industrial development zones (IDZs) and the department of trade and industry is keeping any preliminary results from the reviewed IDZ policy under wraps.

The IDZ programme was started 10 years ago but experts believe these zones are yet to receive the prominence they deserve. South Africa currently has three IDZs in operation: Coega in Port Elizabeth, one in East London and one in Richards Bay.

An IDZ is an industrial estate often linked to an international airport or seaport. It has customs-controlled areas that exempt investors from duties, VAT and import duties on capital machinery and assets.

In the past eight years R4,8-billion has been allocated to these zones. Since the programme’s inception 38 investors with an investment value of R12,8-billion have been secured and 41 451 jobs have been created.

The budget has now allocated a further R1,6-billion to the three zones over the medium term. Coega will receive R1,1-billion, East London R421,3-million and Richards Bay R132,7-million.

Finance Minister Pravin Gordhan in his budget speech on Wednesday made mention of the R20-billion manufacturing tax allowance. It will grant relief to businesses making greenfield or brownfield investments.

Greenfield investments in IDZs qualify for additional relief. To qualify for this allowance, the minimum investment must be R200-million for new projects and R30-million for expansion and upgrades.

A first for IDZ tax incentives
Laura Peinke, Frost and Sullivan’s industry analyst, said that this is the first tax incentive that is specific to IDZs. “It is considered the best of the lot at the moment.”

Peinke said that tax breaks associated with the IDZs do not necessarily have to go to capital investments. Tax breaks can be granted for using local labour, she said, as long as it supports the national and regional objectives outlined by the new growth path.

Gordhan said consideration will be given to expanding tax incentives for labour-intensive projects in IDZs.

According to Craig Parker, Frost and Sullivan economics research analyst, incentives specific to IDZs are “the availability of preferential electricity rates for qualifying industries, duty-free imports for all inputs used in the manufacture of exports and a zero VAT rating on inputs procured in South Africa destined for exports”.

Gordhan listed the R20-million tax incentives as one measure to “accelerate employment creation over the period ahead”.

Tax break benefit contested
But Kobus Marais, the Democratic Alliance’s shadow minister of trade and industry, said these tax incentives will be of no benefit to entrepreneurs and will apply only to large investors who will not necessarily create employment opportunities. “Employers won’t employ unless it is beneficial to them.”

The treasury has said that one of the requirements of the IDZ programme is that companies in these zones have to employ a minimum number of people.

Peinke said that an IDZ does not function primarily to create employment. “It aims to bring about two things — foreign direct investment and to generate export competitiveness to create a favourable trade balance.” Job creation, she said, comes after these.

Peinke said that previously there had been a reluctance to propose tax incentives for IDZs because of concerns that they would create economic development centres. “There was resistance within national government. They did not want to create unequal investment opportunities.”

But, she said, without tax incentives, South Africa will not be able to compete with international markets.

Learning from other countries’ mistakes
Trudi Hartzenberg, the executive director of the Trade Law Centre for Southern Africa, said South Africa has a long history of IDZs and can learn from past mistakes and from other countries.

“Experience of IDZs in various countries has been mixed,” she said. Mauritius is one of many countries that has had a very positive experience with IDZs. “But there are always pros and cons. In some countries they haven’t worked well at all.”

South Africa, she said, used to locate IDZs in areas bordering homelands to absorb labourers but not all IDZs pre-1994 attracted investors.

Hartzenberg said the government needs to look at how investors in different sectors choose to locate.

Peinke said there are two things that have to be taken into account when looking at investors — external factors and tax incentives. External factors such as economic and political stability attract investors — “those are things you can’t really influence. The second factor, all things being equal, are tax incentives.”

Marais agreed: “Notions of nationalisation could dissuade foreign direct investment.” Government has to make it cheaper and easier to invest in these zones, he said. ‘We need investment incentives. Additional to that there must be incentives specific to business and specific to sectors.”

He said the Coega IDZ is not working well. “Why is there vacant land there?” he asked. “Somehow it is not attractive enough.” He said the IDZs are still a viable option “but only if they are done the right way”.

Peinke said South Africa is at a critical juncture when it comes to the future of IDZs — if they are created in line with national and regional developmental objectives, the future looks bright. “If not, IDZs need to be phased out, and other levers for economic development and job creation will have to be looked at.”

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