Do Industrial Development Zones (IDZs) have sufficient ability to support the Industrial Policy Action Plan and create jobs?

Export Processing Zones/ Industrial Development Zones (IDZs) have traditionally been regarded as the most effective way to boost manufacturing capacity of a country, and attract Foreign Direct Investment (FDI). Successful examples can be found in India, China and Mauritius. In India alone, IDZs have contributed to over 100% manufacturing and export growth over the past four years.

The recently released Industrial Policy Action Plan places a strong emphasis on the development of South African inputs in manufacturing processes, and therefore the development of the IDZ’s could play a large role in achieving this. In addition, major new developments at Coega IDZ augur well for the creation of additional jobs, and refining capacity. The planned Mthombo refinery will be the largest of its kind in  Africa, create over 8,000 direct jobs and save the local economy over R18 billion a year in imports.

However, at present, there are only two IDZs that are currently up and running, despite favourable industrial policy that promote their development. These are the East London and Port Elizabeth IDZs. In East London, the focus has been on developing capabilities in electronics and automotives. The cost of developing the EL IDZ has been in the region of R200 million, but has already seen results, with 14 major investors and a total investment of R920 million. Of particular importance, is that the Coega and EL IDZs have been responsible for the creation of 2622 and 1313 direct jobs respectively. Considering one of the main objectives of the IPAP2 is to create additional jobs, surely it makes sense that government should fast-track licensing permits and reduce bureaucracy delays for the development of the remaining 3 IDZs.

The East London IDZ has also been the centre of increased investor interest from the Asian market, particularly for automotive manufacturers. Government needs to work on encouraging these investors, making use of the multi-OEM facility that has been established there. This could help increase the local manufacturing competitiveness and trade with the Asian market.

One of the biggest constraints to attracting investors into the local IDZs has been labour regulations in South Africa. The labour regulation has been regarded as an inhibitor to progress in developing sustainable IDZs. The refusal of government to introduce concessions on labour regulations has been criticized as the single biggest reason restricting investment growth. What people need to realize is that IDZs are not just about the infrastructure development, and the historically poor success rate is generally attributed to investor perception that these regions still result in underperformance of growth.  It is entirely reasonable to implement a different system of labour regulation, particularly ensuring that firms are allowed to be exempt from the more onerous labour laws.

Traditionally, export processing zones in Sub-Saharan Africa have not been successful, apart from those in Mauritius and Madagascar. These countries have managed to establish solid brand reputations, with a sound level of service commitment from the local governments and business community. South Africa has the competitive advantage of better tax incentives then either of these countries. If government focuses on rethinking the IDZs to incorporate labour-intensive industries with quality administration and developing economies of scale, the IDZs could see increased investment and sustainable contribution.

The effects of the infrastructure and investment developments from IDZs are often felt beyond the current five manufacturing zones. Spin-offs and indirect job creation from these developments have impacted the local economy; however the impact has not reached the level it should as yet.

Frost & Sullivan believes that despite fears that investors may look to regions where it is cheaper to produce, such as the East African Trade Zone. However, South Africa has already proven the ability to create sustainable IDZs, and are further progressed then the EATZ, and therefore have the ability to sustain their competitive advantage from emerging countries in Sub-Saharan Africa.

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