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Government takes past lessons to heart in SEZ implementation

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Government takes past lessons to heart in SEZ implementation

11th October 2018

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Government is keeping a close eye on the implementation of South Africa’s Special Economic Zones (SEZs) and showing a willingness to adapt elements of the SEZ regulatory framework that may be proving ineffective or unnecessarily complicated.

An indication of how closely the Ministry of Trade and Industry is watching the progress of the SEZ programme – which has replaced the former Industrial Development Zone (IDZs) programme – is the recent publishing of the draft Amendment Regulations on the Governance and Composition of SEZs.

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In inviting the public and interested parties to comment on the draft Regulations by the deadline of 14 September 2018, Trade and Industry Minister Rob Davies noted that the intention was to “remedy the complexities in the administration and implementation of the SEZ Act”.

As the Minister explained in a media statement in early August this year, the existing governance arrangements for the management and operation of SEZs had in some cases resulted in more implementation complexities. These arrangements were also “not adding much value”.

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The Minister was referring to the existing requirement for the separation of the operation and management of SEZs, resulting in an SEZ “entity” and an SEZ “operator”. The SEZ entity had to be an existing state-owned company with its own board, its role being to manage the SEZ operator.

The draft regulations seek to do away with such complexities and lack of value add by providing for more options in the governance and composition of SEZs.

Separation no longer the only option

In essence, the management and operation of an SEZ can either be carried out by a single entity and not two separate ones; or there could still be management and operational separation.

With the first option, no separation, it appears that the entity concerned would be a state-owned company licensed both to manage and operate. With the second, separation of management and operational functions, the management entity would be a state-owned company and the operator a private company.

International experience demonstrates that the most successful SEZs are public-private partnerships (PPPs). The private sector has limited skills in relation to SEZs, while foreign direct investment (FDI) is locked in certain international networks. Access to these networks is an important factor in securing FDI. Therefore, PPPs are essential for the success of SEZs in South Africa.

The mechanics of the management and operation of SEZs is important, but what is also striking about the draft regulations is their responsiveness: an apparent stumbling block to the smooth implementation of SEZs has been identified and a solution proposed.

The reason for this responsiveness is that Government is well aware that SEZs, if properly planned, funded, managed and marketed, could be powerful growth engines supporting industrialisation, regional development, export promotion and job creation. SEZs could also significantly enhance the attractiveness of South Africa for FDI whilst being a critical driver for resolving the country’s triple challenges of unemployment, poverty and inequality.

Lessons learnt from IDZs

The primary purpose of replacing the former IDZs with SEZs was to capitalise on the successes of the IDZ programme and eliminate the weaknesses and shortcomings which had been identified.

The IDZ policy review, which began in 2007, showed that whilst there were some successes the performance of the IDZ programme was fundamentally modest and fell short of the expectations of all stakeholders.

The policy review pinpointed a number of weaknesses and challenges with the IDZ programme, notably weak governance, the lack of IDZ incentives, poor stakeholder coordination, a lack of integrated planning, dependence on government funding, lack of targeted investment promotion measures and inadequate coordination across government agencies.

Lessons have been learnt, as is clear from the array of SEZ incentives, which include preferential 15% corporate tax for designated companies, business allowances subject to the Income Tax Act, an employment tax incentive for eligible employees, a tax allowance for greenfield and brownfield investments, and tax relief under the VAT Act, Customs and Excise Act, Customs Duty Act and Customs Control Act.

In addition, structures such as an SEZ advisory board and SEZ fund have been established to ensure proper designation, operation, promotion, management and development of SEZs.

Other lessons learnt from the IDZ era were that sufficient policy and legislative support is a critical success factor. The latest draft regulations on the governance and composition of SEZs indicate that Trade and Industry is keeping its eye on the ball in this respect.

Written by Trudie Nichols, partner in Bowmans Litigation Practice – Trudie was also recently elected to South Africa’s Legal Practice Council.

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