COSATU submission on the

Industrial Development Zone Programe Draft Regulation

Submitted to the Department of Trade and Industry, 30 November 1999

Table of Contents

  1. Introduction

  2. Summary of Recommendations

  3. COSATU’s vision of industrial development

  4. Our overall approach to IDZs

    5.

  1. COSATU’s concerns with the Draft Regulation

    1. The roles of the public and private sectors
    2. Labour market issues
    3. Incentives and attractions of IDZs
    4. Relocation of enterprises to IDZs
    5. Problems with the Manufacturing Development Board
  2. Miscellaneous issues of concern

  1. Introduction

COSATU welcomes the opportunity to submit our comments on the Draft Regulation to be published in terms of the Manufacturing Development Act No 187 of 1993 on the Industrial Development Zone Programme [No. 20590] ("the Draft Regulation") to the Department of Trade and Industry(DTI).

The Draft Regulation emanates from a protracted policy formulation process in which labour has engaged at various times. Government has made several presentations to NEDLAC, from earlier stages when an Industrial Development Zones (IDZ) Act was envisaged, to more recent discussions on government’s latest thinking. This process has not been without its problems, including a lack of sufficient information being availed to the labour and business constituencies, a lack of labour participation in parallel discussions in the Manufacturing Development Board (MDB), and changes in the government approach to IDZs. It is also unfortunate that the NEDLAC process has not been allowed to run its course before the Gazetting of the Draft Regulation. As reflected in the NEDLAC report, both business and labour expressed concerns about the rushed nature of the interaction on IDZ policy, and the subsequent limited potential for substantive social dialogue on the issue.

Notwithstanding the above concerns around process, COSATU is optimistic that we will be able to participate in the process through this submission, and that DTI will take on board our concerns and recommendations in their redrafting of the Regulation before submitting it to the MDB. Our submission focuses on our overall approach to industrial development and to IDZs, and our concerns with the Draft Regulation. Instead of raising our concerns with the Draft Regulation on a clause-by-clause basis, we have organised them into themes and we refer to the relevant clauses under each theme.

  1. Summary of Recommendations

    1. Our key recommendation is for a fundamental reconceptualisation of the running of IDZs, to reduce the central role of private companies as IDZ operators and to make the IDZ programme more state-driven. If the DTI is willing to engage on our principled objection to the private operation of IDZs and to consider an alternative approach, COSATU would be available for further engagement on what the substance and detail of such an alternative could be.

    2. The relevance of some our subsequent recommendations is largely contingent on the above point. We are tabling proposals on the detail of the Draft Regulation, despite our principled objection to aspects of it. Even if the DTI does not see fit to reconceptualise the private operation of IDZs, we hope that the following points will be taken on board.

    3. The regulation should specifically provide for the stimulation of domestic SMMEs, both as suppliers of inputs to IDZ enterprises and as beneficiaries of cheaply produced goods.

    4. In its approach to IDZs the state should actively support South African companies moving up the value-adding chain.

    5. The Regulation needs to set out a clear role for parastatals in relation to IDZs. Specific focus needs to be placed on the role of both parastatals and government in infrastructure provision in IDZs, which could serve as the key attraction for investment in these areas.

    6. If the establishment of any IDZ may result in the use of current state assets and/or services under "privatised" conditions, (via concessioning, sale, leasing, public-private partnership, etc) then these issues should be processed via the NFA process first.

    7. The list of requirements for applying for a provisional IDZ operator permit should be expanded to include a demonstrated commitment to best practice labour standards, the development of the area around the IDZ, and to substantial employment generation. The business and other plans stipulated in the Draft Regulation should also provide for the concrete meeting of these commitments.

    8. An additional requirement of the comprehensive feasibility study required in the application for an IDZ operator permit should be projections of direct and indirect employment generation arising from the IDZ. These projections should also include a breakdown of the types of jobs, their sustainability, and the proportion of jobs expected to go to women. The existing provision for the withdrawal of an IDZ operator permit if any of the milestones set out in the business plan are not reached should also apply to failure to meet the employment generation projections.

    9. The considerations which the MDB should have regard to in considering IDZ operator and enterprise applications should be expanded to include substantive criteria which articulate the objectives of IDZs. In particular, permits should not be granted unless the MDB is satisfied that a large number of sustainable and quality jobs will be created.

    10. We propose the addition of a clause in the Regulation which specifies that IDZ enterprises will be subject to all relevant bargaining council agreements and that will be no downward variations in labour standards.

    11. The list of applicable laws which a prospective IDZ operator would be required to commit to compliance with should explicitly include labour legislation.

    12. COSATU proposes that health and safety standards should be jointly formulated and agreed to by the IDZ operator and the relevant trade unions, obviously in compliance with the relevant legislation, rather than being the sole responsibility of the IDZ operator as is currently envisaged in the Draft Regulation.

    13. In attracting overseas investors to IDZs, prior notice should be given to these potential investors of the operation and functioning of the South African industrial relations system. No enterprise locating itself within an IDZ can be the recipient of supply-side measure support and or any IDZ "privilege" should it not comply with any material aspect of South Africa's labour legislation. In this regard specific checks should be made to see whether an enterprise is registered with (and is contributing to) the Unemployment Insurance Fund; the Compensation Commissioner; the appropriate Training Board / SETA; and, whether the enterprise is complying with the material conditions of any applicable Labour Order, or Sectoral Wage Determination, or Bargaining Council agreement(s).

    14. The provisions for entry to IDZs should be amended to explicitly guarantee uninhibited and unrestricted access of trade unionists to IDZs, both in order to recruit and to organise existing members.

    15. Any incentives provided to IDZs (or elsewhere) should have clear and direct employment creation effects. Revenue losses arising from incentives provided to IDZ operators and enterprises should not lead to a shifting of the overall tax burden onto individuals.

    16. "Best practice" customs and excise standards should apply not only to IDZs, but there should be a general upgrading and tightening of South African customs. This should not be compromised by a concentration of scarce resources at IDZs, but instead further resources should be released to fund this general upgrading.

    17. We propose the tightening up of eligibility requirements for IDZ enterprises to avoid the mere relocation of existing enterprises.

    18. COSATU recommends that a nominee from the labour constituency at NEDLAC should immediately be accepted onto the MDB. We would also support overall restructuring of the MDB to increase labour’s representation. Furthermore, provision should be made for representatives from the local labour movement (and from the local community) to sit on the supervisory boards of the approved IDZ zone operators.

    19. The criteria for designation of an area as an industrial development zone should include a criterion of underdeveloped areas which have development potential.

    20. COSATU proposes that trade union and other relevant structures in the area should be consulted before the declaration of an area as an industrial development zone. Furthermore, the views of affected representative national industry bodies (e.g. employer bodies; trade unions) should be solicited prior to determining the focus of an IDZ.

    21. We propose a tightening up of the reporting requirements for IDZ operators (while cognisant of the fact that individual IDZ operator permits should spell these requirements in further detail), to stipulate the required frequency and content of reports. In particular, IDZ operators should be required to report on jobs actually created by the IDZ vis-à-vis projections submitted in the application and feasibility study.

    22. We seek clarity on the rationale for IDZ service providers qualifying for the same benefits as IDZ enterprises. In the absence of an adequate explanation we propose the amendment of this provision.

  2. COSATU’s vision of industrial development

As tools of industrial policy, IDZs need to be located within an overall industrial policy paradigm. We would thus like to take this opportunity to lay out our overall approach to industrial development, which informs the stance taken on IDZs.

There is a close relationship between the industrial policies pursued by a government and the nature and pace of a country's developmental path. It can be argued that no country in the world - no matter how "free market" it may now appear to be - has developed without an active industrial policy, in which the state has played a driving role. Whether one considers Britain in the nineteenth century, the Soviet Union in the middle of this century, or the "East Asian tigers" over the past few decades, their respective states have largely shaped their industrial development.

But while all countries have pursued some sort of industrial policies, the content of these obviously vary tremendously. Furthermore, the content of industrial policies has a great impact on which social classes are strengthened and which weakened in the process of economic development. This can be in relation to patterns of ownership and control, to income distribution, to the demand for different types of labour, to the nature of goods produced for consumption, etc. Industrial development thus impacts not only on the balance of political and economic power at a macro level, but also at the micro/household level. Different industrial policies can have different impacts on gender relations, either empowering women or further marginalising them.

The strategic objectives of industrial policy can be seen at different levels. It needs to expand the capacity of the forces of production, to enable the economy to produce more. This is obviously not only a quantitative issue (size alone), as the nature of the accumulation process is very important. A simultaneous challenge is transforming the balance of economic power in society. The economy’s industrial base and productive capacity need not only be increased, but also molded into a form appropriate for South Africa, which prioritises maximising sustainable employment opportunities and meeting the needs of the poor.

Expanded production levels to meet new or increased domestic or export market demand can lead directly to increased job creation. Employment can furthermore be indirectly increased through growth in the service sector arising out of manufacturing growth. Industries such as marketing and retailing, distribution, financial services and banking – which tend overall to be more labour intensive than the primary or secondary sectors – would all benefit from an increase in industrial production. A further indirect effect of industrial development on employment can come through the impact of improved living standards on changes in leisure preferences, for example increased domestic demand for tourism services – which are highly labour intensive.

A condition for strategic objectives to be met is a driving role by a strong and developmental state. Clearly, the state is far from being neutral, heterogeneous, and autonomous. Many of the debates over appropriate industrial policies for South Africa appear to be underpinned by contention over the role of the state. This is often framed as a dichotomy between activities which are seen to be the proper domains of the state and market respectively. Defining semi-exclusive "territories" effectively constrains the state from playing a more direct and driving role in all aspects of industrial development. Furthermore, it is important that the debate is not reduced to one over the relative sizes of the public and private sectors. What is more important is the qualitative nature of the state’s activities, and the extent to which it is able to frame and co-ordinate even private sector activities.

A basic strategic requirement for progressive industrial policy measures could thus be for the state to play a planning, coordinating, and propelling role in developing industries towards the meeting of basic needs. While industrial policy measures would have a protective component, more importantly would be their proactive role in identifying and dealing with blockages or opportunities.

The importance of planning has been accepted by government. It is, of course, necessary to distinguish "good planning" from "bad planning". For example, a situation would have to be avoided where promotion of particular industries - sectoral, regional, or on some other basis - effectively amounted to a subsidy from taxpayers. Any planning exercise needs to have a clear picture as to who the beneficiaries are - the owners of particular industries, consumers in particular income brackets, society broadly, etc.

This in turn relates to structures of ownership and control in the economy. Where workers in a particular enterprise, communities, or the state have very little control over how surplus is distributed, there is a good chance that the "winners" of a targeted policy will just be the owners and/or managers. Considering the current structures of ownership and control, any planning exercise should thus explicitly ensure that society more broadly benefits and workers in particular.

According to our vision of appropriate industrial policy, IDZs could potentially be an important tool in government’s planning. IDZs could be utilised to promote particular geographic areas, particular sectors targeted as key for industrial development, and particular types of production processes which foster job creation. We are not, however, convinced that the conceptualisation of IDZs set out in the Draft Regulation facilitates these objectives.

  1. Our overall approach to IDZs

IDZs could – theoretically - have great potential for the fostering of forward and backward linkages between and within industries, and ultimately for substantial job creation1. This could be particularly in terms of spatial prioritisation, stimulation of local economies, and inducing greater integration of related economic activities.

Investment in industries which are highly linked to other up- and down-stream industries in the domestic economy will have higher "multiplier effects" on other sectors. These multiplier effects could be in the form of investment flows, increased demand through sourcing of supplies, lower cost inputs, and more employment. The promotion of sectors exhibiting high linkages also relates to beneficiation. The active cultivation of linkages is more likely to keep production circulating within South Africa, rather than to have primary products being exported for the next stage in the production process.

The NEDLAC report reflects the agreement between NEDLAC parties that IDZs should be considered within the broader planning of sectors in South Africa, which would facilitate the backward integration of companies located within an IDZ with the rest of the South African economy.

Government-led infrastructural development can also facilitate the crowding in of related industries. In addition, the locational targeting of IDZs can be instrumental in development plans for particularly depressed areas, as is currently planned for the Eastern Cape. If high multiplier effects of IDZ production are actively induced, gains from these initiatives should ripple far and deep. This would include stimulating economic development in the rural areas in the vicinity of IDZs.

Correctly conceptualised and implemented, IDZs could offer significant opportunities for a more coordinated and state-driven industrial policy. There could be both direct and indirect contributions to job creation: in the initial development of an IDZ there could potentially be substantial job opportunities in the construction of both public infrastructure and private enterprises, with more jobs materialising over time as linkages materialise and production increases. However, for reasons which are set out in later sections of this document, COSATU has serious reservations about the possibilities of this potential being fully realised.

"Mega-projects" generally tend to be highly capital-intensive. With regards the type of investments that should be attracted to IDZs labour has long been concerned about previous trends to encourage large scale/mega-project investments - and then to let market forces drive other forms of especially "down-stream" investment. The market has proved remarkably inefficient in this regard.

Capital intensive anchor type projects within IDZs should only be accepted on the basis of clearly specified projections of "up-stream" and "down-stream job creation, and measures to realize these projections. Monitoring mechanisms must be put in place to see that these project projections are met.

If not properly conceptualised and implemented, IDZ initiatives could actually lead to a "crowding out" of enterprises in the same sector as are targeted in the IDZ elsewhere in the country. Special concessions – such as no import duties – afforded to industries in IDZs could potentially lead to the failure of competing industries which are not in the IDZ. Non-IDZ South African companies will have to unfairly compete with IDZ companies who can average production prices when they export and supply the local economy. Furthermore it is possible considering the fact that significant proportions of IDZ enterprise output will find its way into the non-IDZ South African economy that there may be other job losses in non-IDZ enterprises.

Maximum compatibility of the IDZ initiative with other DTI priorities should be encouraged. In the absence of a clear conceptualisation in the Draft Regulation of how small, medium and micro enterprises (SMMEs) are to benefit, there is a danger of them being further marginalised. The Draft Regulation should explicitly provide for the stimulation of domestic SMMEs both as suppliers of inputs to IDZ enterprises and as beneficiaries of cheaply produced goods. This should of course be of the basis of adequate wages and working conditions for employees in these SMMEs.

A challenge for industrial development in South Africa and for the IDZ initiative in particular is to move domestic production up the value adding chain. A situation should be avoided where South African companies are just suppliers to multinationals in the IDZs which then beneficiate our goods and repatriate the profits to their home countries. A creative and dynamic approach to IDZs would see the state actively supporting South African companies moving up the value-adding chain.

The concept of IDZs has undergone considerable evolution since it was initially mooted. In our view, the conceptualisation of IDZs which is articulated in the Draft Regulation and in the discussion document represents a considerable downscaling from earlier thinking. We suspect that this downscaling has largely been brought about by fiscal pressures on the DTI, which have led to a lower state capacity to drive the IDZ programme.

Specifically, fiscal pressures could possibly account for an apparent lack of commitment to infrastructure development in IDZs and for the greater role expected to be played by the private sector. The potential of IDZs to act as tools for integrated planning by the state has been eroded. The focus on IDZs as privately operated areas (of undefined size) which rely primarily on tax incentives to attract investment could limit their capacity to act as the flagships of an active industrial policy.

We are cognisant of the changing international economic and regulatory climate – including the World Trade Organisation (WTO) talks which are currently proceeding - and the possible implications for initiatives at a national level such as IDZs. We share the concerns of the DTI around the extent to which the hands of national governments may become increasingly tied in pursuing active industrial policies.

Our approach to such developments would be twofold. Firstly, South Africa needs to maximise the available space for promoting domestic industrial development. This would include the involvement of a strong developmental state in shaping and advancing industrialisation, as well as protecting our domestic industry as far as possible from destructive international competition. Secondly, we need to contest the rules of the international game, to ensure that the space for active domestic industrial policy is not further circumscribed. In this regard a coordinated effort with like-minded developing countries would be of the utmost importance.

  1. COSATU’s concerns with the Draft Regulation

5.1 The roles of the public and private sectors

One of COSATU’s major concerns with the Draft Regulation is the centrality of the private sector’s role. Possibly the most important shift reflected in this Draft Regulation is that private companies are now envisaged as actually running the IDZs in their capacity as IDZ operators. The Draft Regulation provides that each IDZ must be developed and operated by a company specifically established for that purpose.

Functions of IDZ operators include the following:

As can be seen from the above (non-exhaustive) list, the responsibilities of these private companies are wide-ranging and significant and this is a point of concern for COSATU. There also appears to be considerable scope for conflicts of interest arising from the extensive nature of the IDZ operators’ responsibilities. These operators are first and foremost private companies which seek to maximise their profits from running the IDZs. In the light of this we consider it to be inappropriate to delegate them with full or partial responsibility for issues such as monitoring the movement of goods into and out of the IDZ, monitoring compliance of IDZ enterprises with the Regulation and other legislation and standards, and so on. The IDZ operator could be less than zealous in ensuring compliance of enterprises with labour, environmental, and other standards.

In principle we oppose the delegation of the effective running of these key industrial policy initiatives to private companies. Whilst there may be some role for the private sector in assisting government where necessary, we firmly believe that government should be the driver of IDZs. The rationale for the approach of the Draft Regulation is unclear – for IDZ operators to pay the required application fees and undertake the extensive responsibilities accorded to them, they will obviously have to be fairly confident of the potential for gaining substantial profits from the running of IDZs. If this is the case, the question arises as to why this function should be "privatised" in the first place.

COSATU proposes that the Draft Regulation be fundamentally reconceptualised in this respect, to remove the "privatisation" of IDZ operations. This would obviously have major implications for the architecture of the Draft Regulation, and if necessary we could provide concrete alternatives to the approach currently taken.

Notwithstanding this opposition, we have attempted to engage with the Draft Regulation as it currently stands. Consequently, in later sections of this document we do propose amendments on detail around the role, selection, accountability etc. of IDZ operators. This engagement on the detail of the Draft Regulation should be taken in the context of our principled opposition to the concept of private IDZ operators.

In some cases the responsibilities as set out in the Draft Regulation actually take over what are generally regarded as responsibilities of the state. COSATU is concerned that these clauses de facto legislate the outsourcing of certain local government functions to private companies. A function such as waste removal is a municipal competency and privatising this would exacerbate the fragmentation of services and standards and could also have implications for wages and employment security and quality for the workers involved. A situation where the IDZ operation further delegates these functions to individual IDZ enterprises, provided for in section 23(c) of the Draft Regulation, heightens the fragmentation of service delivery and the difficulty in monitoring standards. The NEDLAC agreement also articulates the concerns of both business and labour that many of the coordinating activities allocated to the zone operator are in the realm of government’s responsibility.

No strong, driving role is envisaged in the Draft Regulation for the state itself in terms of actively developing the IDZs. Furthermore, we would have anticipated a central role for parastatals yet this is not clearly spelt out. COSATU has raised concerns in various forums2 on declining spending on infrastructure by government, and on projections for further real cuts in this expenditure category. A regulation on IDZs should set out the role of infrastructure development in industrial development. Capital spending by government would have an important function of "crowding in" private expenditure within IDZs.

In recognising that some "incentives" do need to be offered to companies to induce them to invest in these zones, COSATU would have preferred a situation where the public provision of optimum infrastructure - rather than fiscal incentives - serves as the main attraction. Infrastructure development should not focus solely on providing a conduit to the points of exit from IDZs, which would tend to further gear the IDZs towards an export orientation. Infrastructural linkages with surrounding areas and industries would promote forward and backward linkages with the domestic economy.

A final point with respect to the role of the public and private sectors relates to the possibilities of restructuring of state assets being occasioned through IDZ development. Our position on the restructuring of state assets has been articulated in other forums, notably in the structures of the National Framework Agreement (NFA). If the establishment of any IDZ may result in the use of current state assets and/or services under "privatised" conditions, (via concessioning, sale, leasing, public-private partnership, etc) then these issues should be processed via the NFA process first.

5.2 Labour market issues

5.2.1 Employment

The massive jobs deficit facing South Africa and the ongoing job losses make the employment situation a national crisis. COSATU believes that any policy initiatives, whether new or ongoing, need to be assessed in terms of their impact on employment. Whilst this clearly cannot be the only criterion for evaluating policy, it does need to be a central consideration. We are thus disappointed that employment retention and creation does not feature more prominently in the Draft Regulation. In fact, the Draft Regulation seems to be silent as to how workers and their communities will benefit directly from IDZs, over and above incidental spin-offs such as human resource development.

Specific aspects of the Draft Regulation which we regard as being problematic in terms of maximising job creation and which we propose be amended accordingly are as follows:

5.2.1.1 Section 10 – In an application for a provisional IDZ Operator Permit, a list of requirements is set out in the Draft Regulation. COSATU proposes that an applicant should also be required to demonstrate a commitment to best practice labour standards as well as to the development of the area around the IDZ, in particular to employment generation. The business and other plans stipulated in the Draft Regulation should also provide for the concrete meeting of these commitments, in particular employment generation targets.

5.2.1.2 Section 16(c)3) – The comprehensive feasibility study required in the application for an IDZ operator permit makes no mention of employment generation, although this is presumably one of the key objectives of the IDZ programme. COSATU recommends that an additional requirement of the feasibility studies be projections of direct and indirect employment generation arising from the IDZ. These projections should include a breakdown of the types of jobs, their sustainability (how long the jobs are expected to last for), and the proportion of jobs projected to employ women. Section 17(k)(1) provides that the Board may withdraw an IDZ operator permit once granted, if the IDZ operator fails to accomplish any of the milestones set out in their business plan. The amendment referred to above would also imply the possible withdrawal of an operator permit if employment projections are not met.

5.2.1.3 Section 17 sets out the considerations which the Board shall have regard to in considering an IDZ Operator Application. These considerations tend to be formalistic in nature. They do not give a meaningful sense of the substantive criteria the Board would take into account in deciding whether to issue an IDZ operator permit, particularly in terms of adjudicating a situation where more than one applicant is applying for the same permit. COSATU proposes that this section should set out more substantive criteria with reference to the objectives of an IDZ.

An objective which is of particular concern to us, in the light of the unemployment crisis, is employment generation. An IDZ operator permit should not be granted unless the Board is satisfied that the IDZ will generate a large number of sustainable and quality jobs. This should be made explicit in the Draft Regulation. More broadly, we propose that the Draft Regulation spells out the substantive criteria for evaluating applications for both prospective IDZ operators and enterprises.

5.2.1.4 A similar point applies with respect to Section 28, which deals with the consideration of an IDZ enterprise application by the Board. We propose that the criteria be made more substantive and that a particular emphasis be placed on employment generation.

5.2.1.5 COSATU is concerned that the incentives provided for in the Draft Regulation will tend to encourage capital intensive production at the expense of job creation. In particular we refer to Section 37(a) of the Draft Regulation which exempts imports to a customs secured area from outside the customs territory, and exports from a customs secured area to a destination outside the customs territory, from all customs duties, levies, fees, or similar financial obligations. The Draft Regulation speaks specifically about inter alia capital equipment, construction equipment, machinery, tools, spare parts, raw materials, intermediate goods, and operations-related transportation equipment.

This exemption shifts relative factor prices in favour of capital inputs, lowering their price relative to labour inputs. This is likely to promote capital intensive production methods within IDZs – the very opposite of what South Africa needs in the face of the unemployment crisis.

A further concern with this clause is the potential negative effects on domestic suppliers. The fact that foreign suppliers will now be able to export capital equipment, machinery, intermediate goods etc. to the customs secured areas of IDZs without paying customs duties and other financial obligations will lower the price of these goods at the expense of domestic producers. On the other hand, sales from the rest of South Africa to a customs secured area of an IDZ are treated as exports from South Africa, putting these suppliers at a competitive disadvantage vis-à-vis foreign suppliers.

This calls into question the potential of IDZs, as conceptualised in the Draft Regulation, for developing downstream linkages with the domestic economy and stimulating local production. This is especially problematic given that one of the key challenges of our industrial development is building up our productive capacity in these very goods. This is also important in relieving balance of payments pressures on our economy.

5.2.2 Labour standards and collective bargaining issues

COSATU remains opposed to any industrial strategy that is wholly or in part premised upon the undermining of labour rights, standards and normal practices. Thus the commitment that enterprises in IDZs will have to fully comply with labour standards and regulations is welcomed. We note that the proposed approach represents a fundamental break from the traditional EPZ model, which is generally premised upon suspending or undermining a wide range of labour rights.

5.2.2.1 While COSATU notes that the commitment to full compliance with labour standards and regulations, we would like the DTI to address a concern that many/all IDZ enterprises may enjoy exemptions (permitted in terms of the LRA) merely on the basis that they are located in IDZs (or that they may be "new" enterprises).

In this regard COSATU is especially concerned that bargaining council agreements concluded in existing statutory centralised bargaining forums may not be extended to enterprises operating in IDZs. Furthermore there is a fear that newly created centralised bargaining forums may not be given jurisdiction over the geographic areas where IDZs are located. (Other pieces of labour legislation (e.g. the BCEA) may also be similarly affected.)

COSATU would require a firm undertaking that there will be no "special arrangements" for enterprises that operate in IDZs just because they exist in IDZs (or because they are "new" establishments). In this regard we propose the addition of a clause in the Regulation which specifies that IDZ enterprises will be subject to all relevant bargaining council agreements and that will be no downward variations in labour standards.

5.2.2.2 Section 16(c)(8), which deals with requirements for an application for an IDZ operator permit, requires a "demonstration that the development and operation of the IDZ will comply with applicable laws, including amongst others those governing zoning, land use, public health and safety, infrastructure requirements and environmental protection." While we recognise that this list is not exhaustive, we are surprised and concerned that labour legislation is not mentioned. COSATU proposes that full compliance with all labour legislation is included under this point.

5.2.2.3 Section 18(a)(10) allows the IDZ operator to adopt and apply rules within the IDZ to promote its safe, healthy and efficient operation in terms of all applicable legislation. While noting that this right is circumscribed in terms of existing legislation, COSATU would still be opposed to IDZ operators having the sole mandate to set health and safety rules within the IDZ. As a private company deriving profits from production in the IDZ, the IDZ operator would have a vested interest in undermining health and safety standards in the workplace. COSATU proposes that these standards should be jointly formulated and agreed to by the IDZ operator and the relevant trade unions.

5.2.2.4 COSATU is committed to the development of sound industrial relations and rapid conflict resolution. COSATU also takes note of the fact that the DTI envisages working within the framework of existing labour legislation and principles; and that it has also expressed a specific desire to work in consultation with stakeholders.

COSATU is of the view that the existing primary statutory framework for dispute resolution and for bargaining - which includes the CCMA and the bargaining councils system - is sufficient. Our assumption is that IDZs will be part of existing bargaining and labour relations systems.

In order to further improve industrial relations it is proposed that :

5.2.3 Trade union access to IDZs

Section 25 of the Draft Regulation sets out strict entry/exit procedures for IDZs. We are concerned about possible implications of this for trade unionists, a concern which is also reflected in the NEDLAC report. We are confident that restricted access for unionists is not the intention of the Draft Regulation, given the commitment to labour standards and to conformity with the law of the land.

As section 25 currently stands it is the responsibility of the IDZ operator to control entrance and egress to an IDZ. IDZ operators may have vested interests in limiting access of unionists to IDZs, and delegating operators this control may prove problematic. Uninhibited and unrestricted access of trade unionists to IDZs, both in order to recruit and to organise existing members, needs to be made explicit in the Draft Regulation If operators are to retain control over entry/exit (as it currently stands), this control should be subject to this.

5.2.4 Human Resource Development

COSATU sees the upgrading of appropriate education and skills levels of the workforce as a priority. We support the intention to improve skill of workers in IDZs. In fact, if IDZs are to be premised on "best practice" as opposed to downward variation, investing in people would need to be one of the central planks of the IDZ initiative.

The broad approach adopted by the DTI may lead to a situation whereby disproportionate amounts of "public" training resources are channeled to enterprises or employees located within IDZs at the expense of enterprises or employees located elsewhere. We believe that establishments in IDZs should use the generic training resources and standards developed and set by Sectoral Education and Training Authorities (SETAs) and the National Skills Board (NSB). Should special consideration be needed to address the training needs of enterprises in IDZs then attention should be given to raising the contribution ceiling of the compulsory training levy.

SETAs are the institutions that regulate training in specified sectors of the economy. At all times the authority and integrity of the stakeholder structures that govern the statutory training system must be respected.

The learnerships system proposed in the discussion document should not be abused in order to pay workers lower pay.

5.3 Incentives and attractions of IDZs

The key import/export incentives offered to IDZ operators and enterprises are as follows:

5.3.1 Fiscal implications

Generally, it is undesirable to fall into the trap of competing for capital as this tends to naturalise and entrench the power of capital, which leads to a race to the bottom. Conditions are always being put for more investment – ranging from more flexible labour markets to lower taxes and so on. Even if such conditions are met, other prerequisites for elusive "business confidence" are put forward. Basing government policy on meeting such conditions in order to successfully compete for capital not only puts ongoing pressure for further downward bargaining, but it restricts government’s autonomy and capacity to pursue a transformative industrial policy.

Notwithstanding the above, the fiscus is one of the crucial tools at the disposal of the government in pursuing an active industrial strategy. Broadly speaking, fiscal measures give government the capacity to influence the economic behaviour of other players in ways that it deems desirable, without resorting to more coercive methods.

The ways in which fiscal tools are used to advance industrial development rest largely on political and economic choices. The emphasis could be laid on a "carrot" approach, relying largely on incentives – as in the approach of the Draft Regulation. Alternatively, a "stick" approach would impose fiscal penalties such as higher taxes on players which do not act in the desired manner.

Within the "carrot" approach, there are two broad ways in which government can use fiscal incentives to promote its objectives – in this case the primary objective apparently being the promotion of private investment. One slant would be a generalised lowering of corporate tax rates in the hope that this would promote more investment. An alternative would be higher across-the-board corporate tax rates which would then cross-subsidise lower corporate tax rates for particular type of enterprises or activities, particular geographic areas etc which are targeted for development. Both approaches have their advantages and disadvantages – whilst the latter increases and hones government’s capacity for shaping industrial development, it can also potentially increase the potential for tax avoidance and evasion and arguably creates the scope for the emergence of "crony capitalism".

South African business is able, in many senses, to both "have their cake and eat it". On the one hand nominal company tax is by no means high – with effective rates being far lower – and the corporate sector benefited from a further cut of 5% in this year’s budget. On the other hand, there are various tax incentives and exemptions available – such as those provided for in the Draft Regulation – which allow businesses to further avoid paying their fair share of the tax burden. We would have better understood a situation where government opts for the use of tax incentives to promote certain types of production (such as labour intensive production in sectors which meet basic needs) in particular undeveloped geographic areas, and subsidises such incentives by increasing the general rates of company tax. Instead, business seems to be enjoying the best of both worlds. This is heightened by the absence of a capital gains tax and the fact that Secondary Tax on Companies (STC) has been halved in recent years.

The obvious revenue-loss implications of this combination of policies could be dealt with in various ways – none of which we consider to be acceptable. These would include lower levels of delivery, or attempting to recover lost revenue by increasing other forms of tax. Any loss of revenue from the corporate sector would also amount to a further shifting of the overall composition of the tax burden away from the corporate sector onto individuals. This trend needs to be reversed rather than deepened. Tax incentives can also exacerbate the fragmentation of the tax base, undermining the uniformity of the national taxation system.

COSATU does not reject the use of fiscal incentives in toto, but we should avoid a situation where these incentives just amount to a subsidy to capital. Any incentives provided to IDZs or elsewhere should have clear and direct employment creation effects. As discussed in section 5.2.1.5 above, we are concerned that the incentives proposed could actually have the opposite effect by inter alia promoting capital-intensive production.

It is noted that, according to Section 35 of the Draft Regulation, the taking up of specific IDZ incentives by IDZ operators does not preclude eligibility for any of the other incentives generally available to business. Thus a business operating in an IDZ could enjoy IDZ incentives in addition to benefiting from other supply-side measures6.

5.3.2 Other supply-side measures

Notwithstanding the above it has come to our attention that government is considering the introduction of a new package of "strategic investment incentives". We seek clarity from DTI in this regard.

COSATU recommends that the existing supply-side measure toolbox should be reviewed and amended accordingly. All supply-side measures should be re-assessed in terms of their impact on employment creation. Considering that one of the "marketing" approaches that may be used to attract enterprises to IDZs will be elements of the supply-side package, it is vital that the entire toolbox is immediately reviewed. The DTI should report annually to NEDLAC and to the relevant Parliamentary Portfolio Committee on the efficacy (or otherwise) and especially the employment impact of the supply-side programme, in particular within IDZs.

Should the "strategic investment incentives" be proceeded with, a primary underpinning principle should be that public funds should only be used to incentivise the establishment of enterprises on the basis of clearly specified projections of upstream and down-stream job creation. Prior to the introduction of any new incentive packages COSATU would request that NEDLAC consultations take place.

5.3.3 Customs and excise

The fact that customs and excise legislation and regulation within IDZs will be suspended – via the creation of Customs Secured Areas - is the source of one of our main concerns related to the proposed establishment of IDZs. Labour is concerned that substantial quantities of products manufactured in IDZs, or "conduited" via IDZs will flow into South Africa without the payment of the requisite duties and taxes.

In spite of the fact that labour has, since the late 1980s, been campaigning for the complete overhaul of South Africa’s customs administration tens of thousands of jobs have been lost. The proposed establishment of about six IDZs will place further strains on a customs’ administration that is already unable to effectively manage the existing tariff book, many of South Africa's existing bi-lateral trade agreements, and which will soon also be expected to handle the EU-RSA and SADC trade agreements.

"Best practice" customs and excise standards should apply not only to IDZs, but there should be a general upgrading and tightening of South African customs. This should not be compromised by a concentration of scarce resources at IDZs7. Instead, further resources should be released to fund this general upgrading.

5.4 Relocation of enterprises to IDZs

It has long been one of COSATU’s major concerns that IDZs would not create new jobs, but would merely create an environment whereby enterprises would be able to relocate their existing operations within South Africa to the IDZ in pursuit of the incentives offered. This would not create jobs, but would merely result in a disruptive relocation of existing jobs.

We believe that the DTI shares these sentiments and that relocation of enterprises to IDZs is not an intended consequence of the Draft Regulation. Nevertheless, we are concerned that the Draft Regulation (and particularly Chapter VII which deals with the designation and functions of IDZ enterprises) does not preclude this happening.

COSATU would accordingly propose that the DTI should tighten-up the eligibility requirements so as to ensure that no existing enterprise can :

New investment must be encouraged, not replacement investment. All loopholes must be closed that would allow the above mentioned, and similar practices, to occur.

5.5 Problems with the Manufacturing Development Board

The MDB plays an extremely powerful role in terms of the IDZ programme as envisaged in the Draft Regulation. To all intents and purposes this is the institution which will drive the IDZ programme and is the only public body to which the private companies which are to act as IDZ operators are at all accountable. The critical functions of the MTB in the IDZ programme, as per the Draft Regulation, include the following:

As can be seen the scope and significance of these responsibilities renders the MTB an extremely important and powerful institution. This centrality raises questions for COSATU about the adequacy of the MTB as it currently stands for implementing these responsibilities in a satisfactory manner.

An amendment to the Manufacturing Development Act 22 of 1998 (passed on 9/6/98) provided for the representation of one person on the MDB who "has adequate expertise, knowledge or experience in labour and employment matters." To date no one has been appointed with a labour background to sit on the Board. Should this state of affairs continue organised labour will not be able to influence the day-to-day matters relating to IDZs should IDZs be proceeded with8. COSATU recommends that a nominee from the labour constituency at NEDLAC should immediately be accepted onto the MDB.

COSATU understands that the DTI may be contemplating restructuring the MTB as a whole. We would support such an initiative, and would hope that labour would have significant representation in a revised Board.

Furthermore, provision should be made for representatives from the local labour movement (and from the local community) to sit on the supervisory boards of the approved IDZ zone operators.

  1. Miscellaneous issues of concern

The following specific sections of the Draft Regulation are also of concern to us, and we recommend that they be amended accordingly:

6.1 Section 3(a) of the Draft Regulation sets out the criteria for designation of an area as an industrial development zone. We propose the addition of a criterion which prioritises currently underdeveloped areas which have development potential. This would promote geographic redistribution.

6.2 Section 3(b) sets out the processes to be followed before the declaration of an area as an industrial development zone. In terms of consultation, the Draft Regulation requires consultation with provincial and local governments in the proposed area. COSATU proposes that trade union and other relevant structures in the area should also be consulted. Furthermore, the views of affected representative national industry bodies (e.g. employer bodies; trade unions) should be solicited prior to determining the focus of an IDZ. This should take place prior to the proclamation of each zone; and choice of an anchor enterprise(s).

6.3 Section 18(a)(8) accords an IDZ operator the right to contract out the provision of infrastructure, utilities and other services to the IDZ. COSATU is extremely concerned about the growth of sub-contracting and outsourcing in the South African economy, and we are of the view that this trend should be discouraged rather than further facilitated. The contracting out provided for in this clause would be likely to lead to fragmentation of services and infrastructure provision and would hinder monitoring and uniformity of standards.

6.4 Section 19(a)(7) identifies one of the responsibilities of an IDZ operator as being to report to the MDB on the development and operation of the IDZ "from time to time, as required by its IDZ operator permit or by written notice of the MDB". This provision is unnecessarily vague and could further undermine the already limited accountability of IDZ operators. We propose a tightening up of the reporting requirements for IDZ operators (while cognisant of the fact that individual IDZ operator permits should spell these requirements in further detail), to stipulate the required frequency and content of reports. In particular, IDZ operators should be required to report on jobs actually created by the IDZ vis-à-vis projections submitted in the application and feasibility study.

6.5 Section 29 deals with IDZ Service Providers, which are defined as companies located within the IDZ which provide ancillary services to IDZ users. Section 29(b) states that these service providers shall be entitled to the same benefits as IDZ enterprises, as set out in the Draft Regulation. The rationale for this is not clear to us – why should service providers also benefit from tax exemptions and the other incentives on offer, obviously at a loss to the fiscus? Given that section 29(a)(1) stipulates that the services which these providers render within IDZ should not exceed those which they provide outside, the rationale is presumably not to attract new companies to the IDZ. We therefore cannot support this provision, in the absence of an adequate explanation.

Footnotes:

  1. Forward linkages refer to the relationship between an industry and the consumers of its products, while backward linkages refer the relationship between an industry and the supplier of its inputs.

  2. See for example our recent submission to the Portfolio and Select Committees on Finance on the Medium Term Budget Policy Statement.

  3. We refer to the RDP which states : "Instruments of policy such as subsidies, taxes, tariffs, tender, etc. must all be utilised to encourage stakeholder participation in the RDP and promote worker rights, human resource development and job creation" RDP base document; at clause 4.8.11.

  4. It is COSATU's view that government should as a policy principle link compliance with labour legislation to an enterprise right to apply for and continue to receive supply-side measure support - even to those enterprises outside of IDZs.

  5. This provision excludes imported vehicles and fuel unless used only within the customs secured area, and used goods.

  6.  We note that the case of sales from the rest of South Africa to a customs secured area within the IDZ is treated as exports from South Africa and as such are governed by the Customs and Excise Act and related legislation and are subject to normal customs policy. Such sales will qualify for the generally available benefits an incentives provided that they shall not qualify for support within the Export Marketing and Investment Assistance Scheme.

  7. Specific proposals on improving the efficacy of South African customs and excise, which have been tabled elsewhere by both COSATU are our affiliates, include the following:

    • increasing the inspection rate of goods
    • developing a new valuation methodology and enforcing practical valuation procedures at ports of entry
    • improving the technical ability of customs officials to identify and value goods accurately
    • tighten security at customs warehouses to stop the theft of seized goods
    • improve the resources available in the Board of Trade and Tariffs for anti-dumping and countervailing investigations
    • prosecute retailers and middlemen caught with goods which have entered the country without the proper payment of duties, publicly disclose the names of guilty parties and apply stiff penalties against companies and individuals found to have benefited from such abuses
    • implement the remainder of the proposals for reform of customs and excise as submitted by Labour to the Presidential Jobs Summit.

  8. In fact a NEDLAC agreement (20/9/99) provided for labour representation on the MDB. Labour notes with some disquiet that the MDB is currently intimately involved in the processes that may lead to the establishment of IDZ

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