Oral Evidence on Special Economic Zones

21 May 2013
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SEZs presentation

 

  • SEZ initiative to be commended
  • The Free Market Foundation (FMF) has been a pre-eminent protagonist of SEZs for many years – has written extensively on the subject, studied SEZs around the world
  • FMF part of network market oriented think tanks in Africa
  • FMF also part of Economic Freedom Network comprising think tanks spread throughout the world and co-publishing the Economic Freedom of the World study
  • All this means a tremendous resource that can be tapped into
  • SEZs covers whole range of dedicated, special zones – designed to attract investment, stimulate employment, economic growth & development
  • Historically – apartheid ‘growth points’, ‘border industries’, ‘ IDZs’, ‘temporary removal of restrictions zones’‘Koega’, ‘Richards Bay’, ‘EL’, ‘OR Tambo’
  • Most of these failured as a) they have not attracted substantial profitable investment b) have consumed more wealth than produced as – sustainable profit
  • PH D Economics student, Laurence Wise-Samson (B/Day 17 May 2013) reports:
  • “South Africa’s own experience with various industrial decentralisation schemes since the 1960s, and the more recent industrial development zone (IDZ) programme, have borne little fruit.
  • “While cases such as the Richards Bay IDZ have been characterised by the government as a moderate success, it is not immediately obvious that R331m in government transfers for a total of 180 jobs (about R1.8m per job, before things like interest expenses) represents a good return relative to alternative uses of the money” (Lawrence Wise- Samson)
  • Paradigm shift required so SEZs to be seen as ‘offshore’ i.e. not being in the host country and not only just as geographical locations

 

  • For SEZs to be taken seriously, both by those who create them and those who invest in them, they must be informed by an unambiguous acceptance that they are “offshore”, which means that they should not be subjected to laws, policies and taxes that discourage, in the country as a whole, the kind of investment envisaged for SEZs. This is the most difficult reality for a government in any country to come to terms with. It is especially difficultin democraciesto get popular support for the fact that foreign exchange controls, labour laws, taxes, immigration controls, minimum standards, and the like, cannot be applied in SEZs if they are to be successful.

 

  • With unemployment rate of 36 %, numerically 7.6 million unemployed.The combined populations of Durban and Cape Town and people under 35 years comprising 70% of the figure.It is a serious crisis

 

  • SEZ administration and management is best outsourced or left to private competitive enterprise. There is every reason to believe that officialdom and bureaucracies are unlikely to be good at either identifying the ideal locations for SEZs or running them efficiently

 

  • New SEZs at a disadvantage – have to compete with established ones that have a track record.Thus new ones have to be more investor-seductive

 

  • Investors will not do SA favours because we had achieved a political miracle.

 

  • The bottom line will be which is the best destination in order to realise the best returns on investment

 

  • SA losing investment also to other Sub-Saharan markets.Projected that Nigeria will overtake SA as the biggest economy within 4 years if not less

 

  • Within SA from region to region and at various tiers of government SEZs the bill should such that it encourages competition.Demonstration effect of the most attractive SEZ will be that it will be emulated

 

  • There are only two serious issues to be taken into consideration: (1) Whether we, as a country, are serious about wanting SEZs, in which case we should not beat about the bush and adopt timid measures which, it can be said with great certainty in advance, will not only fail, but will be a massive net drain on the country’s wealth in that substantial initial resources will be invested followed by further investments in a desperate attempt to bring success where there is failure. (2) The fact that, as new kids on the block, we will have to compete with existing flourishing and popular SEZs. Investors will ask a simple and obvious

 

  • Guarantees of security. Investors need to know that South Africa means business, that promised benefits will be enduring and sustainable, and that they will not be victims of undisclosed constraints. A novel way of providing such security was conceived by the FMF and successfully adopted by Lloyds of London, namely, to provide international offshore insurance against harmful changes of policy.

 

  • Substantial relief from measures that prevent targeted investors from investing already. This requires a serious and honest critical review of existing policies especially:

  1. Foreign exchange controls. The total abolition of forex control is, in our view, long overdue for South Africa as a whole. At the very least, no-one will take South African SEZs seriously unless they are totally and unambiguously exempted from exchange control.

  2. Labour law. South Africa’s SEZs must be exempted from onerous labour law. The most elementary and non-debatable law of economics is that all benefits have costs (“there is no such thing as a free lunch”). The cost of benefits conferred by labour law is, as with all benefits, imposed elsewhere. The most direct and obvious victims of making the hiring of people costly, risky and difficult, are the unemployed. Another substantial group of direct victims are, unlike the unemployed, invisible, namely investments that have not been made because cost-raising labour law renders them “marginal”.Exemption from labour law will attract massive labour-intensive investments. (In this context, comments are a reference to economic aspects of labour law rather than social aspects such as safety and “decent” treatment according to law.)

  • Red tape. There are thousands of statutes, regulations, ordinances, by-laws, proclamations, directives, guidelines, and the like, that are inappropriate in an SEZ. They are found in laws governing insurance, banking, companies, immigration, customs, transport, energy, skills and communications. SEZs should be exempted from these. We mention only three illustrative examples below. What the following measures have in common is that they are intended to benefit and protect consumers. They may well do so, but what is not generally recognised is that they do so by radically reducing consumer rights, namely, the right of consumers to negotiate and enter into whatever agreements they wish.

  • Why many SEZs fail:
  1. Inefficient land acquisition.
  2. Political instability.
  3. African countries EPZs.
  4. High crime rate.
  5. Excessive corruption and administrative burdens (Hainan, China).
  6. Administrative delays (Ghana, Senegal).
  7. Failure to develop backward linkages (Ghana).
  8. Lack of reliable infrastructure (Dominican Republic).
  9. Macroeconomic policy failure (Egypt, Kenya).
  10. Poor location (Bataan, Philippines).
  11. Poor infrastructure.
  12. Bureaucratic bottle-necks.
  13. Frequent changes in policy.

 

  • Successful implementation of SEZs China, Mauritius, Emirates
  • SEZ success case study:
  • During the 1970s, Shenzhen was a small town by Chinese standards with 300,000 residents. It now has a population of 12 million with average incomes of over US$8,000 compared with a national average of US$2,000. Its GDP of around US$100 billion is nearly a third of South Africa’s of some US$350 billion. In other words, a single China-type SEZ could absorb all our unemployment and increase the living standards and incomes of our poor and unemployed compatriots to more than our national average of around US$5,000.

 

  • Ghana one of growing number of countries outsourcing and decentralising SEZs. Investors can obtain ‘ free zone’ status for business wherever or in designated zone

 

  • Empirical study by Rajendra Singh, Executive Chairman, SKIL and Maha Mumbai on requirements for successful SEZs – India information technology – mainly in Bangalore & Hyderabad lists the following critical regulatory requirements:
  1. An SEZ is a “specifically delineated duty-free enclave ... deemed to be a foreign territory for the purposes of trade operations, and duties and tariffs”.7
  2. 100 per cent income tax exemption for 10 years.
  3. Duty free imports.
  4. Access to cheaper global capital.
  5. Exemption from income / capital gains tax.
  6. Retail investment tax rebate.
  7. Special courts.
  8. Dedicated police.
  9. Speedier labour dispute resolution.
  10. No customs on raw materials, capital goods, etc.
  11. 25 year tax exemptions from state and regional taxes (turnover tax, sales tax, value added tax, entertainment tax, excise tax, etc).
  12. External Commercial Borrowings (ECBs) allowed.
  13. Freedom to retain or trade foreign exchange earnings.
  14. 100 per cent income tax exemption for first 5 years, 80 per cent thereafter forever, for Offshore Banking Units (OBUs) in SEZ.
  15. 100 per cent FDI allowed through automatic approval route.
  16. Sub-contracting allowed to units in Domestic Tariff Area (DTA).
  17. One-stop shop regulatory system.
  18. Freedom to trade power without going through State Electricity Boards.

 

  • Political will required for ensure that SEZs are properly conceptualised and executed.Vested interests such as organised labour will be oppose
  • Lesson to be learned from Deng Xiaoping, late leader of Communist Party and President of Communist China who had said that the colour of the cat did not matter so long as it caught the mice.
  • With that radical market reforms were implemented in Guangdong province that emulated the example Hong Kong, the freest economy in the world
  • It was only the successful implementation of targeted SEZs and not the whole country that accounts for the fact that China has emerged to be the second biggest economy

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