OBG talks to Lionel October, Director-General, Department of Trade and Industry

Interview: Lionel October

How will the Special Economic Zones (SEZs) improve upon the Industrial Development Zones (IDZs)?

LIONEL OCTOBER: Currently, we have three operational IDZs that, since early 2000, have not met expectations in terms of attracting investments. Following assessments of the strengths and weakness of each, we are developing new legislation and funding models to address the issues. The lack of coordination and unanimity between the government at the municipal, provincial and national levels was a major obstacle for the original IDZs. Therefore, the new legislation provides for an IDZ board that represents all levels of government, as well as relevant departments, such as revenue services and the state utility and freight logistics providers, so that investors have a single point of contact. We also needed specific incentive schemes to encourage companies to locate in the IDZs. The new legislation includes a range of tax breaks and has also created an IDZ fund with tailored incentives that companies can propose and apply towards specific investments. Lastly, and this is where SEZs come into play, previous legislation limited IDZs to geographical areas in proximity to cargo ports or airports. We realised the need for free zones to serve not only international markets, but also the growing regional market. SEZs allow us to set up zones in places like the Free State and the North-West to serve neighbouring southern African markets that are experiencing growth rates of close to 10%.

What steps can South Africa take to promote and support labour-intensive industries?

OCTOBER: We find that countries that position themselves as offering discounted and deregulated labour regimes attract footloose investors in increasingly margin-squeezed and mobile industries. Pre-democracy, the apartheid government attracted inexpensive textiles and plastic industries by offering non-unionised, cheap labour in the Bantustans(black homelands). This was a very narrow form of industrialisation, and as soon as things changed, these companies quickly relocated to places like Lesotho and Swaziland. We do not believe that suppressing labour costs is a viable means for attracting credible and long-term investment.

We are not a big country population-wise, and a key to making our manufacturing sector competitive is to encourage economies of scale by increasing the domestic market and promoting regional integration. Keeping wages low does not encourage consumption as it suppresses aggregate demand. Certain industries, like automotives and food and beverages, have seen huge growth as black consumption has risen from 10% to 60% of total consumption since the fall of apartheid.

We want to play a similar role in Africa that Germany plays in Europe as the industrial engine of the continent. Germany’s success is attributed to its focus on value-added industry, as well as a mature industrial relations framework with a proper and representative system of collective bargaining. Although we do face strikes at times, we have also seen huge progress, such as a recent decision among textiles unions to take lower pay in order to save jobs. So long as individuals’ rights are respected, the system will mature and flourish.

In terms of investment inflows, which markets are being targeted by South Africa?

OCTOBER: We are not concerned with which country a company comes from, but on whether or not that company is willing to co-locate production. Historically, 70% of our foreign direct investment has come from the EU, and we will continue to focus on this market as these investors tend to bring both technology and access to global supply chains. Through BRICS we are now seeing increased investments from China and India. However, similar to Brazil, we stress that the investment and trade structure must change from one of exporting raw materials into one where value-added production takes place in-country. Fortunately, we are seeing more commitment towards “real” investments, with Chinese and Indian companies recently investing in the automotives sector and mineral beneficiation projects.