INVESTMENT

China’s thriving special economic zones show way forward for SA

29 JANUARY 2018 - 06:08 TUMELO CHIPFUPA

Amid all the political and economic noise, it is important to remember that business goes on. It is encouraging to see the positive reception new ANC president Cyril Ramaphosa has received at the World Economic Forum in Davos. It is also only fair to praise the new Eskom chairman, Jabu Mabuza, for cancelling his plans to attend the gathering to focus on healing a major national sore.

As SA’s deputy president, Ramaphosa has been leading the investment drive in Davos and has spoken of a new positive sentiment among potential investors.

Certainly, the recent upswing in the rand indicates that the mood is shifting. However, with serious budgetary challenges facing the government and the need to prop up ailing parastatals — from Eskom to South African Airways and the South African Broadcasting Corporation — it is clear the country must seek new injections of capital expenditure.

It will not be a smooth process. Sometimes a few steps back have to be taken to make a few strides forward, and that was the case in the car sector. There was much frenzy in 2017 when General Motors (GM) announced it was leaving SA, but a large chunk of its business has been taken over by Isuzu, and the departure was not because of any false perception that the country was falling apart, but more because GM wasn’t doing very well here.

It provoked a lot of negative media coverage, and it is always a challenge to get the same scale of interest when there is good news.

In contrast to GM’s departure, one of China’s largest car makers, BAIC, is making the largest-yet car investment in SA with a new R11bn plant
at Coega.

Why Coega? A major reason for the choice of location is that Coega is a special economic zone (SEZ). Companies that invest there receive
special treatment, including tax breaks, less customs red tape and other advantages. There are carrots aplenty.

I visited China in 2017 where I attended a conference on SEZs and was able to swap notes on how the SEZ model is working there. It is impressive, and there is a lot SA can learn from.

I had first visited China 20 years before, when I saw the Shenzhen SEZ, which was established in 1980. It was useful to see just how key this SEZ strategy has been to the country’s development and industrialisation.

The SEZ roll-out was a key factor in China’s phenomenal economic miracle, its move towards a more mixed-economy model and its emergence as a giant among the emerging economies. These special zones in China have proved themselves.

In SA, the SEZs are not demonstrating as much success, although there are beacons of excellence such as the BAIC move into Coega. It is therefore instructive to consider what the Chinese have been doing right and to learn whatever lessons might be applicable to SA.

The biggest difference is one of scale. The first Chinese SEZs were more like cities. Shenzhen is a city. SA’s IDZs are more like industrial parks compared with those in China. The Chinese SEZs go beyond factory buildings to include residential areas and shopping areas.

The Chinese SEZs were part of a broader reform process that introduced private enterprise to parts of the country where it was a foreign concept, attracting foreign investment.

The SEZs in China have helped to boost the economy. Few would argue with the notion that SA’s economy could use a boost

In a way, they were also controlled experiments. The Chinese government was experimenting in a limited area and did not want to widely ditch the communist system. It therefore tried out things in the SEZs that would have been politically unacceptable in the wider country. One reform that accompanied SEZs was fiscal. SEZs had to raise their own revenue. Local officials could keep part of the revenue for development in the area. People who were successful in building the SEZs received promotion in the party and the leadership. Success therefore bred success, there were rewards for excellence and incentives to reach that excellence.

So, what’s the picture in SA? The original industrial development zones (IDZs), which are evolving into SEZs, were based on the idea that SA’s manufacturing sector had developed in the interior of the country, around the mines. The government wanted to spread it out and change the economy to be more export-oriented. Therefore, the IDZs were initially all located close to a port, to facilitate exports.

Industrial development

The government has now broadened the approach and is locating SEZs in all the provinces. The unifying thread behind SEZ policy is that they are located in areas where SA wants to see industrial development, attracting businesses by offering a range of incentives.

In China, they didn’t have a private sector at all when they introduced SEZs. They needed to resolve the problem of acquiring knowledge, or know-how, and were willing to experiment. They devolved decisions to officials in the provinces. They even asked Singapore to establish an SEZ in China, because Singapore had the knowledge of how to do so successfully.

SA has companies with knowledge about international markets. They should be brought into the SEZ programme. SA should make them want to locate inside the SEZs, to boost investment, employment, training and exports. The more attractive SA can make it, the more successful this SEZ programme will be. That is good for the firms — and great for the country.

The SEZs in China have helped to boost the economy. Few would argue with the notion that SA’s economy could use a boost.

The big constraint is that SA’s SEZs tend to be ring-fenced clusters of factories in an area identified, financed and developed solely by the state. But they don’t need to be.

The skyline at Bejing's central business district in China.     Picture: 123RF/SEAN PAVONEThe skyline at Bejing's central business district in China. Picture: 123RF/SEAN PAVONE

There is considerable development taking place along the R21 corridor from Pretoria to OR Tambo International Airport. This lends itself to the SEZ model, but SA has created a programme that doesn’t allow them in.

Why restrict the SEZ programme to the state? SA could and should be getting more participation by the private sector in the programme.

Having a more spread-out SEZ area such as the ones in China is worth considering. A physical boundary fence around an SEZ is not even required, as implementation of customs controls increasingly relies on information technology-based risk models rather than fences and other physical barriers.

SA can think outside the box by getting rid of the box. A physical fence is not always needed. There are customs-bonded warehouses throughout the country located in single factories.

The Manufacturing Circle’s blueprint to create 1-million manufacturing jobs in the next decade by, for example, converting the Vaal Triangle into an SEZ accords well with this proposal.

Another innovation would be to allow the private sector to propose, set up and manage industrial parks aligned to the objectives of the SEZ, with the factories therein being incentivised.

Private funding could finance the internal infrastructure of such SEZs, set up in areas that are already well connected to the national logistics infrastructure.

The private sector developers working with the government could also use their connections to promote and bring investment projects into the SEZ industrial parks.

The government could still regulate the business environment within these SEZs to ensure policy objectives are met.

One consequence of the current set-up is that the SEZs are not drawing in as much investment as they could. SA ought to tinker, as the Chinese do; not be too ideologically tied to one particular model. The country must find the way that works.

If SA made it easy for the private sector to participate and it did not participate, the country could then conclude that it had got something wrong. But if private enterprise is locked out, surely SA is stretching the state too much?

This is too much for the government to do alone. Even the Chinese have realised this. A new partnership on SEZs could see them flourish, expand and meet real needs.

Surely, if the Chinese were prepared to give it a go, SA could as well?

• Chipfupa is a founding partner of Cova Advisory.