Submission on the Special Economic Zones Policy & Bill

The government’s initiative to create Special Economic Zones (SEZs) is particularly welcomed by the Free Market Foundation (FMF) which has distinguished itself during its 37 year history as the pre-eminent protagonist of SEZs. We have written extensively on the subject, studied SEZs around the world, and made submissions to successive South African governments.

A number of basic points are essential for any serious consideration of the matter:

1. Most SEZs – there are thousands – are failures
“SEZ” is used here to connote all kinds of special zone and status intended to create especially attractive conditions that are distinguished from what otherwise applies in a host country.

2. This includes South Africa’s failed attempts at SEZs over the past half century
South Africa has had many SEZs such as apartheid “growth points”, “border industries”, industry-specific “export incentives”, “temporary removal of restrictions” zones, and Industrial Development Zones (IDZs). Recent variations on the theme include Koega, Richard’s Bay, East London and OR Tambo. These are all failures in that none have (a) attracted substantial profitable investment, and (b) most have consumed more wealth in the form of infrastructure, subsidies and concessions than they have produced in the form of genuine and sustainable profit.

3. SEZs must be thought of as “offshore”, that is, for relevant purposes, as not being in the host country
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 difficult in democracies to 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.

4. SEZs are not necessarily a geographic concept; it should be thought of as a status that can be conferred on any enterprise, whether in or out of a physical “zone”
Once the essential nature and purpose of SEZs is properly understood, it becomes clear that the crude concept of a physical place with fences and border controls, and teams of bureaucrats and consultants, is misplaced. All necessary controls to facilitate that from which SEZs are exempt, can quite adequately be achieved administratively at minimal cost by, for example, the requirement of specialised audits.

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. Even if, as is typical in South Africa, they are run by government structures, many or most of the administrative and managerial functions can and should be outsourced. Needless to say, allowing private businesses to establish and administer SEZs, or undertake specified SEZ functions, entail ideal BEE and
B-BBEE opportunities.

5. New SEZs are at a conspicuous disadvantage being preceded by thousands of others, some of which have impressive track records and have gained the confidence of local and international investors
Only a small proportion of SEZs established in modern times have been successful in any meaningful sense. Most have been forgotten or abandoned. More seriously, most have been a substantial drain on the host country’s resources because (a) a considerable initial investment in infrastructure, administration and marketing is required, and (b) there is a reluctance to accept failure, which induces governments to make increasingly wasteful investments in a desperate attempt not to lose face. This has been a singular characteristic of South Africa’s experience from apartheid “growth points” to Koega.

We appreciate that enormous investments have been made in South Africa’s failed SEZs from homelands to harbours and that current policy will be heavily influenced by a desire for these investments to be vindicated. If it is at all possible, policymakers need to liberate themselves from this constraint, stand back, and look at the big picture with political will and vision. This may involve swallowing some bitter pills and locating SEZs in places that make objective and business sense, on one hand, and providing for SEZ status anywhere in the country, on the other. This is not to say that existing initiatives need to be abandoned. They may well, on purely objective grounds, be ideal. The point is that policymakers should be free from an assumption that they must be successful regardless of cost or other rational considerations.

A dimension to politics and discourse in South Africa that may fatally undermine a truly successful SEZ policy is the ease with which ideas can be proposed and taken seriously. This would be anathema to SEZ investors. Recent examples include the debate on nationalisation, the proposed prohibition of labour brokers, compromised property rights, erosion of the rule of law and the continuedde factoprohibition of efficient energy markets.

Another big problem South Africa faces is a “one-size-fits-all” mindset. The notion that there must be policy uniformity throughout the country is a tragic legacy of apartheid. The apartheid regime established Bantustans on the pretext that there would be sovereign countries for each “nation” along the lines of Europe’s “nation states” (France for French, Germany for Germans, Spain for Spaniards, Italy for Italians, etc). No sooner had the Bantustans been established, than the regime created costly “multilateral secretariats” with the principal purpose of enforcing uniformity, especially through centralised fiscal and monetary control. Whatever other flaws there might have been in grand apartheid, this aspect alone meant that it was an inherently dishonest policy, doomed to failure.

Post-apartheid South Africa is technically a “federation” in that it has exclusive and concurrent powers constitutionally devolved to provinces and municipalities. Yet, the apartheid mindset continues to dominate in that the idea of multiple systems within one country is completely alien to South Africans, notwithstanding a much vaunted Constitution to the contrary. Not only is there scarcely any diversity of substance regarding constitutionally exclusive powers and functions, but it is presumed that concurrent functions fall under central government rather than within the domain of provincial and local government.

The purpose of this point is to draw attention to the fact that most other federations of the world truly embrace the concept of federalism and regard the idea of multiple systems within a single country not only as acceptable, but as a distinctive strength, to such an extent that some second and third tier structures are essentially themselves SEZs. Zug in Switzerland, for example, is a tax haven; the entire Chinese province of Hainan is an SEZ; some major cities such as Rotterdam and Singapore are SEZs.

The FMF’s full submission can be read here.

This policy bulletin is an extract from FMF’s 2012 submission on the Special Economic Zones Policy & Bill and may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

 FMF Policy Bulletin

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