/ 24 February 2012

Development zones left out in the cold

Development Zones Left Out In The Cold

It appears that the government is in no rush to get the mooted special economic zones (SEZs) up and running and properly funded, despite it trumpeting the role they can play in beneficiation and job creation.

With the government trying to transform the country into an industrial state, a great noise has made about the Industrial Policy Action Plan and the new growth path. But a budget allocation of less than R2.3-billion to special economic zones does the hullabaloo little justice.

The economic zones are meant to replace the widely criticised industrial development zones (IDZs). The department of trade and industry (DTI) undertook a comprehensive review of these with an aim to improving their infrastructure, attracting foreign and domestic investors, developing structured financing and establishing incentives to achieve the outcomes of the industrial policy action plan and the new growth path.

But it is unclear how such ambitions can be achieved with minimal funding. An industrial policy expert, who did not wish to be named, said that the allocation was probably a “place-holder allocation”. “If DTI wanted funding for SEZs but could not provide details on where these zones would be located or how they would be structured, the treasury would be concerned that none of the money would be spent and would be reluctant to allocate much money,” he said. “To allocate money when there isn’t a plan is a bit silly. The problem is that DTI announces these big things but then they haven’t secured the budget and it ends up creating disillusion.”

Designated special economic zones, announced earlier this year and for which a draft Bill has been published for comment, will build on industrial development zone policy to improve governance, streamline procedures and provide more focused support to businesses operating in these zones.

The allocation for them is R2.3-billion over the medium term but includes more than R1-billion for three existing industrial development zones:

  • Coega has been allocated R726-million over the medium term, down from almost R2-billion over the past three years.
  • East London will receive R250-million in the medium term, down from R725-million over the past three years.
  • Richards Bay, which received more than R60-million last year, will have to make do with R72-million for the following three years.
  • But a treasury official said the programme was certainly not being phased out. “We have incorporated IDZ funding into the SEZ funding as they will both fall into one policy framework.”

    Garth Strachan, chief director of industrial policy in the department, said it was important not to see funding in isolation. Besides the industrial development zone funding, there were many other mechanisms to provide financial support. Strachan said, for example, funding could be secured from a municipality or the Industrial Development Corporation.

    “It’s problematic to see SEZ or IDZ funding as stand-alone funding,” he said.

    The other two zones, Saldanha and OR Tambo (which has yet to become operational), have not been allocated any funds for the medium term. But the official said they were not being scrapped — the department was simply “not funding specific projects in these two zones at the moment”. They could well become special economic zones once the legislation came into effect, the official said.

    The industrial policy expert said it was “very odd” that no money had been allocated to the Saldanha and OR Tambo zones as they more than any required funding, but he concurred that it could be for legal reasons, that neither was fully operational and had not been officially declared as yet.

    Since the inception of the industrial development zones programme in 2001, 38 investors have invested R12.8-billion and are on site in the three industrial development zones and 41 451 jobs have been created. But even the department itself has admitted that more could have been achieved and that the challenges they posed needed to be addressed urgently.

    The good news from the budget is that tax incentives, which were never introduced for the industrial development zones, would be considered this time around. Possible tax breaks in the budget include: a reduction in the headline corporate income tax rate for businesses in selected zones, an income tax exemption for the operators of special economic zones, and an additional deduction from taxable income for the employment of workers earning below a predetermined threshold.

    The zones are expected to promote exports and widespread industrialisation by providing high-quality infrastructure, incentives and support services, with minimal red tape to attract investors.

    But detractors of the scheme fear that, without labour reform, an issue the department is not willing to tackle, the new zones may be as ineffective as the IDZs.