(Graphic: John McCann/M&G)
Special economic zones (SEZs) in South Africa have not fully lived up to their potential — as has been the case in many African countries — to create jobs, beneficiate raw materials, develop new industries and transfer skills and technology from foreign companies.
There are aspects of South Africa’s SEZ model that clearly need to change, one being that the zones must be made to fit within a long-term development plan rather than be ad hoc projects, which many of the country’s SEZs are.
Before special economic zones are considered as a catalyst for development, it is critical to assess the country’s comparative advantages. In other words, what it can do with domestic resources, capital and skills, and what will need to be built with outside help. As part of this, a comprehensive analysis of the country’s position in the global economy, trade and supply chains is required.
There must also be a business case for establishing SEZs. If the intention, for example, is to attract foreign direct investment, the objective must be integrated into a long-term national development plan.
This means there must be a global demand and market for the products manufactured in these zones, and they must be embedded in the country’s comparative advantage. An SEZ cannot be established based on political, ideological and interest-group considerations — as many special economic zones in South Africa have been.
There must also be pragmatic and credible laws, regulations and institutional frameworks to govern SEZs. And governments must implement these consistently, honestly and competently to foster investor, market and society confidence that SEZs are not simply another avenue for corruption, self-enrichment and failure. The business environment must be conducive, efficient and friendly. The costs of doing business — registration, logistics and customs — should be conducive to companies setting up.
Public infrastructure — power, rail and water — for SEZs must be working, reliable and cost effective. Poor, unreliable or no infrastructure is a significant factor increasing the costs of doing business, global pricing competitiveness of products manufactured and of labour.
Sound infrastructure is a vital competitive advantage for investors to set up shop. The neglect and collapse of infrastructure linked to power outages, the broken rail system and port delays have undermined the competitiveness of South Africa’s SEZs.
The zones could be fully government-owned — as is the case with many in South Africa — or privately owned or public-private arrangements.
In developing countries, the state-owned SEZs have mostly failed because the public sector’s governance failures such as corruption, incompetence and red tape are repeated in these zones. Public-private arrangements, in which the private sector co-govern and co-manage, have generally been the most successful.
The problem is that South African national, provincial or city governments often do not have an adequate understanding of the requirements of businesses that want to invest in the SEZ.
As a result the government services provided for special economic zones are also frequently not tailored for the investors they want to attract.
An effective, competent and pragmatic management structure is crucial in managing SEZs. Many of South Africa’s state-owned special economic zones fail because of the same lack of implementation and execution management capacity in the public sector — especially if the same incompetent public sector managers are operating the SEZs.
There must be clear monitoring, evaluation and assessment mechanisms to ensure that SEZs are on track to meet their stated objectives and to intervene if the zone is in danger of veering off course. There must also be benchmarking of SEZs against comparable successful ones elsewhere.
China, for example, in 1996 issued an official administrative decree for the compulsory regular evaluation of SEZ performance: those that are poorly managed, not meeting their development targets, and growing too slowly lose their special economic zone status. Chinese SEZs are evaluated based on several performance indicators, including knowledge creation and technological innovation, research and development expenditure and the number of R&D institutions and technology innovation incubators established.
The sluggish bureaucracy, red tape and incompetence seen in the public service has undermined the creation of competitive SEZs. The South African government often takes a long time to put legal, regulatory and institutional structures in place for special economic zones — and sometimes even longer to operationalise.
For example, then trade and industry minister Rob Davies announced the formation of the Musina-Makhado SEZ in 2017. But the project has yet to get off the ground.
When finally in operation, business procedures are slowed down by red tape, and special customs and tax regimes are incoherently applied. In comparison, the Hamriyah Free Zone in Sharjah, in the United Arab Emirates, could grant a licence to establish a business within 24 hours of submitting all the required documents.
Many South African SEZs do not have a clear strategy of how local firms will be linked to the supply chains of the global firms. African and South African SEZs also often do not integrate the boosting of research and development into the industrial value chains of companies.
The technical learning, knowledge transfer and industrial upgrading in South African special economic zones is therefore not as effective as it has been in many Chinese, South Korean or Singaporean SEZs.
Another point is that SEZs are often giant industrial structures that could damage the environment significantly. The construction and management of these zones must be done in such a way that it protects the environment and investors must be required to report on environmental, sustainability and governance performance.
Many of the first generation SEZs’ construction also rarely consulted local people, civil society and interest groups. It is essential that new special economic zones do not repeat this mistake. If a site chosen to construct the SEZ involves uprooting residents, acquiring their land and property, the process must be done in consultation with them, fairly and compassionately.
Special economic zones can play a role in developing new industries, beneficiating raw materials, and diversifying South Africa’s exports if they are linked to the national development strategy, done in partnership with business and freed from the public sector’s governance problems that have stymied SEZs up to now.
William Gumede is an associate professor at the School of Governance, University of the Witwatersrand. This is an edited extract from his Inclusive Society Institute occasional paper, Leveraging Special Economic Zones for Growth.