SEZ Development in South Africa: A Case Study of Coega SEZ

Abstract

This paper analyzes the major advantages and problems of Coega special economic zone (SEZ), the earliest and largest SEZ in South Africa, adopting the research method of a case study. The author observes and analyzes the three main participants in the development and construction of Coega SEZ, namely the government, SEZ operator (Coega Development Corporation), and SEZ enterprises, so as to clarify the attribution of the problems and provide suggestions. How the South African government at all levels understands and operates the SEZ would have a significant impact on the development of Coega, which is also the concern of investors. The multi-party system in South Africa has generated complicated partisan politics, in which different parties at all levels are formulated in the administrative system, subsequently leading to a cumbersome process of administrative procedures and policy implementation. Issues like overprotective labor laws for employees, aggressive labor unions, and frequent strikes will reduce enthusiasm from investors. In addition, deep-rooted poverty and educational plights in South Africa also reduce the competitiveness of the talent market to some extent. For the South African government and relevant authorities that are responsible for designing SEZ strategies for better development, the following issues should be their major concerns, including what the development paths of SEZs are, what roles and functions they can play at each stage of the development itself, as well as how they and the management committees can form complementary mechanisms so as to better serve zone enterprises and facilitate multiple interactions among enterprises, between enterprises and management committees, and between enterprises and government departments, eventually improving the core competitiveness and comparative advantages of Coega SEZ.

Translated by Hao Yunhui.

1 An Overview of South Africa and Coega SEZ

Coega, the first Industrial Development Zone in South Africa, was established in 2000 and followed by four other zones across the country in the following 12 years. In 2012, the Department of Trade and Industry (DTI) conducted an overall assessment of the four Industrial Development Zones (IDZs) in South Africa and concluded that these zones had not met the development expectations and were even been considered as a “failure”. In order to implement development projects more effectively, the South African government transformed all IDZs into Special Economic Zones (SEZs) and passed the Special Economic Zone Bill in 2014, which defined the transformation and development objectives of South African zones and provided a framework for zone planning.

Coega SEZ, operated and managed by Coega Development Corporation (CDC), covers an area of 9003 hectares, of which 5650 hectares are available for lease with advanced infrastructure. It is located in the southeast of South Africa, 20 kms east of Gqeberha (formerly Port Elizabeth) in the Eastern Cape, adjacent to Ngqura Deepwater Port.^{1 2} CDC is wholly owned by the DTI and has received 3.6 billion rand and 1.1 billion rand as funds (I suggest also show the US$ wherever SA Rand currency is shown) from the DIT and Eastern Cape respectively.³ The Eastern Cape provincial government owns part of the shares of CDC and participates in the management via the Eastern Cape Development Corporation.⁴

1.1 The SEZ Management: Coega Development Corporation

Coega Development Corporation is a state-owned enterprise in South Africa, and its headquarters is located in Nelson Mandela Bay. Its goal is to empower Coega SEZ and improve the investment potential, which in turn will contribute to the socio-economic development of the Eastern Cape and other regions.⁵ It has 415 employees.

In 1997, the South African government conducted an investigation of the feasibility of the Coega SEZ project, identifying the significant value of the project, and thus established CDC in 1999. In December 2001, CDC was designated as the first organization in South Africa to operate the Zone on a full-time basis. In 2002, construction of the supporting infrastructure of the Zone was initiated. From 2003 to 2005, all relevant functional modules in the Zone were also completed successively, such as business center, staff dormitory, and conference center. Between 2007 and 2010, the Zone signed contracts with a number of corporations and completed the first terminal at the deep-water port of Quila, and meanwhile began its trial operation. In 2008, CDC transformed its product system with a major focus on three main areas: management and operation of Coega SEZ, business services, and project management and consulting services, with the development and operation of the Zone being part of its core strategy. CDC is responsible for various matters and its overall development.⁶ In 2012, the South African government assessed the zones in South Africa and decided to transform the previous Industrial Development Zones into Special Economic Zones. Coega was therefore renamed Coega SEZ from the original Coega IDZ.

For the management of Coega SEZ, there are two administrative systems involved in the operation of CDC and its Zone. One is undertaken by the Eastern Cape Provincial Government and the Department of Economic Development, Environmental Affairs and Tourism, while the other management system is undertaken by the South African Department of Trade and Industry and the Nelson Mandela Bay Municipality.⁷

1.2 Distribution of Industries in Coega SEZ

Established in 1999, the Coega Industrial Development Zone (IDZ) is currently the largest in South Africa and was renamed as the Coega Special Economic Zone (SEZ) after the South African government launched the SEZ project in 2012. Coega is a zone following the cluster concept, aiming to embed core industries and their supply chains closely together to create economic value and stimulate regional economic development.

The Coega SEZ consists of 14 zones and one logistics zone. There are road links within the Zone and its logistics system covers road, rail, air, and sea. Its industrial focus is on metal metallurgy (metallurgy already means the science of extracting metals from their ores, so metal metallurgy here seems redundant), automotive manufacturing, business process outsourcing (BPO), chemicals, agricultural product processing, logistics, energy, and mariculture.

1.3 Operation Status of Coega SEZ

The data from Coega's official website shows that Coega SEZ has created 120,990 jobs and provided job skills training for over 100,000 people since its establishment in 1999.⁸ From 2018 to 2019, there were 45 investment enterprises in Coega, with a total investment of 9.53 billion rand. In addition, 18 Investors Secured are expected to follow, and the Value of Investment Pledged is expected to reach 2.06 billion rand. In the same fiscal year, 8016 new construction jobs were created and 7406 people were trained in their careers. The revenue of the Zone in that fiscal year was 2523.8 million rand, including other parallel operation projects of the Zone and CDC. As can be seen from Fig. 1, the actual figures for construction jobs and Number of Cumulative Operational Jobs are different from the expected indicators; Procurement Spend on SMMEs reaches 33%, slightly lower than the planned 35%, due to a reduction in overall spending by the South African government, particularly on infrastructure projects. The other five actual figures are all flat or above expectations.⁹

Fig. 1

A comparison of performance and indicators of Coega SEZ in 2018–2019Footnote

Source: Coega Development Corporation (CDC), Integrated Annual Report 2018/2019, 2019, p. 10.

As shown in Fig. 2, the year 2018–2019 is the fourth year of the five-year strategic plan for 2015–2020 formulated by Coega SEZ. Put in the overall 5-year plan, the KPIs achieved in FY18-19 exceeded 138.6%. The projected committed investment for the original 5-year target was R9413 million and the actual total committed investment was R42,130 million, exceeding the expected investment commitment by 448%.¹¹ This remarkable indicator is mainly due to the fact that Coega has entered into partnerships with a number of large-scale multinational companies, such as the Beijing Automotive Investment Company (BAIC), which contributed a huge investment plan of up to R11 billion to Coega.¹²

Fig. 2

A Comparison of Performance in 2018–2019 and Overall Five-year Indicators for Coega SEZFootnote

Source: Coega Development Corporation (CDC), Integrated Annual Report 2018/2019, 2019, p. 11.

In the four indicators of Number of Cumulative Operational Investors, Revenue Generation, Procurement Expenditure of Micro, Small and Medium Enterprises, and Number of People Trained, the actual completion rates in FY18–19 are 90%, 83%, 90%, and 97% respectively, which is a remarkable progress rate. However, for the indicator of the number of construction jobs, 28,088 jobs were actually created with a completion rate of only 54%, still far from the expectation.¹⁴

In general, compared with the first few years of transformation into a special economic zone, the overall performance of Coega has improved significantly from 2018 to 2019, with the increased experience of CDC in the operation and management of the Zone, the active support of the South African government at all levels and relevant departments, and the increased efforts to attract investment. However, according to the annual report data released by CDC, in the dimension of employment growth, 2019 is the penultimate year of the 5-year plan, but Coega is currently only halfway through the overall 5-year plan; and for the South African government, one of the important objectives of strengthening the development of the Zone’s economy is to address the problem of the low employment rate. Therefore, Coega still faces huge challenges.

2 Existing Research Focus on Coega SEZ

Through sorting through the existing research on Coega SEZ, the author found that studies on Coega SEZ are quite limited and they span a wide range of time, with seven studies collected from 2003 to 2019 that are directly related to Coega SEZ, six of which are academic papers and one is an internal report provided by the management committee of Coega SEZ. The literature covers disciplines such as management, economics, public administration, and anthropology, and research methods used include case studies, empirical analysis, triangulation correction method, and fieldwork, with most studies starting from topics such as development issues, policy proposals, people’s livelihood, and corporate responsibility in Coega. In order to better analyze the development of Coega SEZ from the perspective of these researchers, this paper sorted out these studies in chronological order.

2.1 Review of Coega-Related Studies

John M. Luiz, Professor of International Management at the University of Sussex in the UK, and the Graduate School of Business (GSB) at the University of Cape Town, (added this for context about Luiz—if not required you can remove—info from his Linked-in) in his study in 2003, gave policy recommendations on regional development in South Africa from a public management perspective. He noted that South Africa had always been tied to ideological and political influences on regional development issues, rather than considering them on an economic level. He evaluated the Fish River SDI¹⁵ project, a key component of the overall spatial development strategy for South Africa. The project was divided into three stages: the first one was the start-up stage in 1997; the second stage identified the priority development of Coega SEZ, East London zones, and their surrounding economies, which took place in 1998; and the third one was the subsequent implementation stage. Through a follow-up study of the three stages, he found that the project proceeded at a low rate in the implementation stage. One of the important reasons is the lack of clear development consensus at all levels of government and related departments, and the tension between politicians and technical experts. John suggested that government should take a serious position in considering the combination of macroeconomic elements and sectoral policies when formulating regional development policies, and making rational use of government funds. If the South African government insists on focusing on development projects with low sustainable development capacity and poor viability, it may repeat the mistakes of the previous governments’ misguided implementation of spatial intervention policies. He was sceptical about the Coega SEZ project at that time for the following reasons. Firstly, the planning and decision-making of the project were under different government agencies with unclear boundaries of responsibility and inefficient complementary assistance from all levels of government and agencies, which led to the postponement of the project. Secondly, investors believed that the responsibilities of various government departments were unclear and required multiple contacts with different departments, rather than a simple one-stop registration process. Thirdly, Coega did not have significant development potential due to poor transportation infrastructure and limited job opportunities.¹⁶

At the initial stage of Coega SEZ in 2003, Brigitte Lawler, based on the basic situation of Coega at that time and the worldwide experience, tried to assess in her paper whether the Industrial Development Zone project in South Africa could really stimulate economic growth and discussed how to maximize its effect and enhance the national economic benefits. Lawler’s study drew two important conclusions: first, the industrial localization and supply side characteristics of industrial development zones will create necessary conditions for the concentrated growth of export-oriented economy; second, private institutions with extensive experience and expertise in zone operations should be invited to manage the zones so as to optimize the zones’ services and operations. Lawler also advised on the selection of the operating companies. In addition, she argued that Coega can attract foreign direct investment and enhance South Africa's competitiveness by providing a world-class and professional infrastructure, but she also pointed out that the project would be in vain if South Africa cannot provide expected hardware like infrastructure, transport, and logistics network in and around the zone.¹⁷

Lloyd Etherington (2014), through a case study of Coega SEZ, noted that the main purpose of establishing Coega was to create more employment opportunities for the region. There is a specifically designated skill training department in Coega SEZ, which adopts various programs and projects to train local residents for employment. By teaching vocational skills needed by local government and companies inside and outside Coega SEZ, trainees are given the opportunity in a variety of employment options, endowing them how to make a living.¹⁸

At the same time, he found that although Coega SEZ shows an increasing trend in job creation in terms of data, a considerable proportion of temporary construction jobs will have an adverse impact on solving the problem of regional unemployment. Etherington proposed that Coega SEZ should aim to create more permanent or operational jobs within the zone on a sustainable basis, rather than short-term or temporary construction jobs, which would have a sustainable positive impact on the regional economy. In his opinion, generally speaking, the contribution of Coega SEZ in job creation and skills upgrading is evident and consistent with the South African government’s goal of stimulating regional development and downgrading unemployment through the zone economy.¹⁹

Tiwanna DeMoss-Norman’s research starts from an anthropological perspective, exploring the dilemmas individuals face after moving from a suburban informal settlement to a new housing development community. In 1999, CDC and the then Gqeberha government needed to implement a relocation program for 300 households within the current Coega SEZ site due to the construction of the zone, which was called the Wells Manor Project. Based on this background, the authors found that some residents lost their sense of community belonging, openness, and social trust after moving into their new homes, and further analyzed how resettlement projects affect the social cohesion, trust, and community participation of people relocated from informal settlements. The paper also interpreted the resettlement measures from CDC and the Gqeberha government. They provided packaged resettlement programs for residents relocated to Wells Manor, which includes the provision of at least one member of each household with one year’s employment skills training in preparation for projects at Coega SEZ, one employment position in Coega for each household, and an additional R3000 per household, apart from initial assistance and housing. In addition to discussing the problem from the perspective of migrating residents, this paper also interpreted corporate social responsibility and government actions, pointing out that more public infrastructure should be installed in migrating areas and more employment opportunities with sustainable income should be created for residents.²⁰

A 2016 report by Muffin Consulting provides a detailed analysis of the integration of Coega with local industries outside the Zone and its impact on job creation. This report assessed the impact of Coega SEZ and Nelson Mandela Bay Logistics Zone on the local area and the Eastern Cape Province since their establishment, aiming to help CDC and relevant government at all levels in South Africa deepen their understanding of the impact of Coega SEZ on the regional economy and even the Eastern Cape Province. The report was entrusted by CDC to Muffin Consulting. It mainly adopts the triangular correction method, and extracts recommendations that serve as important references for the development of Coega SEZ through data collection, interview surveys, literature analysis, and regression statistics. The investigation and analysis related to investors in the report are divided into four categories: Economic impact, Government support, Linkages with local firms, and Special economic zone support.²¹

In terms of economic impact feedback, 9 of the 15 companies that provided feedback created more than 100 full-time jobs. From 2014 to 2015, 9 of the 13 companies that provided feedback created an average of 1–25 part-time jobs. One company employed 26–50 part-time employees, and two companies employed more than 100 part-time employees in addition to full-time employees. According to the report, these part-time opportunities could be effective in alleviating persistent unemployment, based on the fact that the majority of unemployed South Africans are young and middle-aged people. However, in his study, Lloyd Etherington noted that Coega SEZ should create more permanent or operational jobs to stimulate the growth of the regional economy.²²

In the feedback of local enterprise contact survey, it was reported that businesses in the Zone spend billions of rand each year sourcing all types of goods and services from local suppliers, and all respondents confirmed that they have local suppliers. More than half of the companies indicated that 78% of their production-related commodity purchases were spent in Nelson Mandela Bay and the Eastern Cape. These expenditures include raw materials, telecommunication equipment, chemicals, various support services, and logistics.²³

In terms of feedback on government support, 47% of investors were positively influenced by government actions, mainly through direct communication, incentives from the South African DTI, funding from the Industrial Development Corporation (IDC), and the introduction of a scrap metal price reference system by the Department of Economic Development (DED) to reduce raw material costs. However, a quarter of the respondents claimed that it had a negative impact, mainly from the payment of customs clearance duties, currency devaluation due to the problems of the South Africa government, and the adverse political environment that affected business confidence. In addition, there were also concerns about the integrity of the South African government’s leadership among those involved in Chinese and European companies. It is worth noting that 64% of investors did not believe that government incentives or industrialization programs play any role in influencing their decision to build facilities in the Zone. The remaining 36% of respondents held that it had indeed played a role, most of which are enterprises related to the automotive industry.²⁴

In the supportive feedback on the main advantages of locating in Coega, 93% of the 38 respondents considered the location of Coega SEZ and its supporting logistics zone was ideal. However, some respondents indicated that Coega was not the only available zone option in South Africa. When asked about the reasons for choosing to settle in Coega, 50% of the 26 respondents cited proximity to the port as their main reason for locating in Coega. While 64% of the respondents believed that the disadvantages of settling in Coega and the logistics zone were also obvious, such as lack of reliable public transport facilities for employees, limited choice of equipment purchased by enterprises, distance from Gqeberha, lack of significant incentives, lack of subsidies for electricity costs, limited office space, lack of flexibility, high lease costs and high utility costs, and lack of opportunities to reduce costs from lessors. Overall, however generally, 92% of respondents were highly confident in the future prospects of Coega SEZ.²⁵

There are three types of surveys and analyses related to family background in the report: demographics, creating decent work, and quality of life. Demographics show that 44% of the labor force in Coega SEZ is female. The population between the ages of 18 and 45 in the zone makes up 68% of the employed population. The majority of those employed are black Africans at 42%, followed by people of color at 31%, whites at 25%, and Asians at two percent. About 53% of respondents are married, 25% are single, 10% are divorced, and five percent are cohabiting. About 56% of the employees own property, 31% rent, and the others neither own nor rent.

Of the feedback on creating decent work, 91% felt that the work they did was beneficial; another 75% felt more engaged and used more skills than before. About 80% of respondents believed that the variety of tasks they performed had increased, and 69% felt that their sense of responsibility had increased. In terms of job security, 72% felt secure about their jobs, 19% were unsure, and 9% felt insecure. Respondents were generally satisfied with their current jobs, with 69% of respondents saying they were satisfied with their jobs, seven percent dissatisfied, and 24% uncertain.²⁶

The feedback on the quality of life showed that 36% of households earned more than R350,000 per year, 19% earned between R200,000 and R350,000, and 13% earned less than R60,000. Another nice percent earned between R100,000 and R150,000 and the remaining nine percent between R150,000 and R200,000. In terms of debt handling, about 30% of households said they could pay their bills, 44% could afford it but would struggle a bit, 11% struggled a lot, and 13% could not afford it. More than 54% of respondents had to borrow money to meet daily expenses in the past 12 months. Over 47% of respondents borrowed money primarily from family members, 25% from banks, 18% from friends, six percent from moneylenders, and three percent from cash converters.²⁷

Based on information and feedback from different questionnaires related to both groups of investors and employees in Coega SEZ, McFinn's consulting report provides detailed additions to the details that the Management Committee tends to overlook, providing additional ideas and suggestions for discussing the integration of Coega with local industries outside the Zone and the impact on employment.

Research by Siviwe Mditshwa and Rozenda Hendrickse in 2017 assessed the financial and socio-economic impacts of the Public–Private Partnership (PPP) adopted for Coega and East London zones. The paper argued that since Coega and East London zones were able to use the PPP model to create jobs, reduce poverty, and develop skills in specific regions, the model could theoretically be implemented in cities at all levels as well. Although the PPP models implemented in Buffalo City and Nelson Mandela Bay in the Eastern Cape had not led to significant improvements in various economic issues, it did have the model significance for the management and economic development of cities at all levels. Through questionnaire survey and analysis, one research pointed out that under this model, all levels of government in South Africa should encourage private enterprises to cooperate with the government in the construction of public infrastructure, but the planning and management of the project should be transferred to government departments, which has a positive impact on effective services.²⁸ While the research focused on the effective use of the PPP model, it reminded people of the function of South African zones as not only a test field for economic development, but also as an incubator for government to rehearse policy mechanisms, tools, and instruments.

In 2019, Lisa Thompson provided critical reflections on the development of the Coega SEZ through field research and textual analysis. She believes that zone development is a means of promoting industrialization, product diversification, and job creation, and that these three characteristics are relevant to South Africa’s development trajectory. The author, however, feels that the “success” of Coega SEZ is overstated. Through her fieldwork, she raised three main problems with the development of Coega: firstly, the employment skills training provided by the zone cannot satisfy the needs of its enterprises or investors, resulting in frequent mismatches between professional skills and job demands. The lack of access to more specialized or refined occupations for the majority of residents in the area suggests that Coega is deficient in the design of vocational training. Secondly, in terms of long-term job creation, Coega has made very limited achievements, with less than 1000 permanent jobs locally, and most SMEs have expressed disappointment and dissatisfaction with Coega’s performance in terms of job creation between 2016 and 2017. Thirdly, Coega has attracted a limited number of investments from 2016 to 2017, and it will be impossible to recoup the huge early development costs of the Zone if it fails to generate sustainable revenue.²⁹

2.2 Limitations and Implications of Previous Research

It can be seen that from 2013 to 2014, there was almost no specific research on Coega. Research on Coega SEZ and its actual development revealed that some of John Luiz’s concerns have been addressed, such as basic transportation facilities and one-stop services in the zone. Brigitte Lawler's proposal to introduce a third party with experience in zone operations and management to lead the development of the Zone was not actually put into practice, and instead the South Africa government set up a state-owned enterprise, the CDC. Of all the literature, the lack of more sustainable and high-quality job creation and supply is the most important concern and is still an issue to be addressed by Coega.

Compared with the diversity of paradigms, perspectives, and disciplines in Chinese industry zone case studies, the approach of Coega SEZ-related studies is relatively homogeneous and the perspectives of the issues discussed are limited. For example, what are the comparative advantages of South Africa’s zones compared with other similar zones, those in other sub-Saharan African countries? Recognized as the earliest and fastest growing zone in South Africa, is there a clear delineation of the action agents responsible for the problems that arise in the actual operation of Coega? Such questions call for the participation of more scholars to explore.

In analyzing the literature review on the development of Coega SEZ, the biggest inspiration for me is that there is no discussion and clear division of the roles and functions of participants in the development of the zone. The participants in the development of the zone should include three actors: the government and relevant institutions, SEZ operator and zone enterprises. According to existing literature and Table 1, although most studies covered the three actors of zone development, they didn’t illustrate the functions of a SEZ operator. In addition, it should be noted that, as a wholly state-owned enterprise, scholars have discussed Coega issues based on the consensus that “SEZ operators are government departments”, without extending the assumption that “if SEZ operators are not government departments or institutions”. This implies that there are more possibilities and a wider scope to analyze the development of South African zones at the level of zone development participants.

Table 1 Discussion of Zone Participants in Coega-related Studies

3 Main Advantages of SEZ Development

The development advantages of Coega SEZ can be summarized in four main aspects: its location and relatively well-developed infrastructure, strong support from the South African government, continuous investment and improvement of the employment training system by CDC, the stability of the overall investment and business environment in South Africa.

3.1 Location and Infrastructure Advantages

Coega has obvious geographical advantages. Coega SEZ is located on the south-eastern coast of South Africa, adjacent to the Indian Ocean and approximately 20 km drive from the city of Gqeberha. It is located on the main east–west route of the Southern Hemisphere, with frequent flights between east and west. The zone has rail links to all South African cities and other African countries, while its main road is seamlessly connected to the South African national N2 highway, ensuring access to all parts of South Africa.

In terms of shipping, Coega has an even more obvious advantage, since it is located in Nelson Mandela Bay, South Africa's deep-water container transhipment hub. Feedback from Muffin Consulting (Fig. 3) shows that “proximity to the port” is the first reason given by representatives of companies that chose to locate their companies in the Coega SEZ.

Fig. 3

An investigation on the reasons why enterprises settled in Coega SEZFootnote

Source: SITHEBE N, RUSTOMJEE Z: Muffin Consulting, 2016, p. 53.

Coega is the only zone in sub-Saharan Africa with two ports, Gqeberha and Ngqura Deepwater Port. Among the two ports, Gqeberha, built in 1799, is the main port of South Africa, about 4 km drive from the International Airport. The wharf has a berth length of 202 meters, a berth depth of 8–11 meters, and a port capacity of 400,000 containers.³¹ Ngqura Deepwater Port is a designated container hub port in South Africa, and is planned to be built into an emerging oil trading hub. The port was constructed in 2002 and put into use in 2009. By 2019, Transnet National Ports Authority (TNPA) had invested more than R10 billion in the port’s development.³² Ngqura covers an area of 60 hectares with a ship draft of 16.5 m and can accommodate 8000–9000 vessels of Twenty feet Equivalent Units (TEU).³³

As for infrastructure construction, referring to the standards of “Three supplies and one levelling”, “Five accessibles and one levelling”, “Seven accesses and site levelling”, and “Nine availables and one accessible” in the infrastructure construction of China’s zones, Coega SEZ has largely achieved “Seven accesses and site levelling”, including water supply, drainage, electricity, access, communication, and natural gas or gas, except for heating systems.³⁴ The location and infrastructure advantages of Coega are also evident through the feedback from the investment enterprises. As shown in Fig. 4, the vast majority of investment respondents believe that one of the biggest advantages of Coega SEZ is its advanced world-class infrastructure.

Fig. 4

Benefits of entering Coega SEZFootnote

Source: SITHEBE N, RUSTOMJEE Z: Muffin Consulting, 2016, p. 52.

3.2 Strong Government Support

From its inception, Coega SEZ received strong support from the South Africa government at all levels, which can be reflected in four main aspects: sound relevant policies and bills, well-developed zone management institutions, and the formulation of various preferential measures in the zone.

Despite being a state-owned enterprise, CDC, different from the “one team, two brands” model adopted by China in the initial stage of zone development, acts as the zone management committee and is responsible for the overall operation and development of the zone, while the government at all levels can also provide guidance and management to Coega. In this way, qualified independent zone operating enterprises, instead of government agencies, can face the market competition directly, which also makes the operation of the Zone more in line with objective laws of economic development. CDC has restructured and streamlined its departments since 2015, allowing the entire company to focus on three business functions: Zone Investment Services, Centre Support Services, and External Services, with all business activities and operations going around these three basic functions.³⁶ It is also worth mentioning that Coega is affiliated with two systems in terms of attribution: one is the Eastern Cape Provincial Government and the subordinate Department of Economic Development, Environmental Affairs and Tourism, and the other is the South African Department of Trade and Industry and the Nelson Mandela Bay Municipality.

The South Africa government provides strong support for the zone’s economic development. A series of policies and bills have been promulgated to promote the development of the Zone, and the government has also emphasized the importance of zone development in a number of national key projects and policies. In 2011, the South African government drafted the Special Economic Zones Act, making a plan that included 10 zones, and the Act was passed in 2014.³⁷ The “Zone Development Policy”, issued by the South African DTI in 2012, illustrates the South African zone development. In May 2014, the South Africa government passed Act No. 16, the Special Economic Zones Act, which further refined the definition of a zone and proposed that all levels of the government (including national, provincial, and municipal government), public entities, and municipal units or public–private partnerships may apply, either independently or jointly, to designate a specific area as a zone, provided certain conditions are met.³⁸ The Special Economic Zones Act, which entered into force on February 9, 2016, aims to promote domestic and foreign investment in labor-intensive regions and to create jobs, enhance competitiveness, promote skills and technology transfer, and increase exports.³⁹ By 2019, the importance of zones had been repeatedly mentioned in the Industrial Action Plans released by the South African government each year. At the same time, the government had given its support for the development of zones in the introduction of tax breaks and other incentive considerations within the zones.

The government has issued a series of tax relief measures to boost zones’ development. For qualified enterprises that meet certain conditions, they can enjoy value-added tax and tariff relief, relaxed employment tax incentives, and other policies. These preferential policies mainly include: the ability for eligible enterprises to enjoy a reduced corporate income tax rate of 13% between 2014 and 2024; tax relief for incoming businesses that are qualified for new industrial project development, or for businesses that invest in the expansion and upgrading of existing projects; VAT and duty relief for eligible businesses located in the customs control area, which is similar to the incentives available in the zone; and employment tax incentives for businesses employing less than R60,000 per year in any of the zones.⁴⁰

3.3 Improvement of Employment Training System

From industrial development zones to SEZs, one of the main purposes of South Africa’s zones is to promote employment, create more jobs, and alleviate high unemployment that has plagued the country for a long time. Therefore, stimulated by the strong employment demand, Coega has also put considerable efforts in to creating better employment conditions. CDC has three core business modules, namely Coega SEZ, Coega Business Services, and Project Management Services, with the Business Services module covering recruitment, selection, and vocational skills training.

Coega has a special employment guidance department, the Coega Development Foundation (CDF),⁴¹ which is a non-profit corporation affiliated to Coega. The corporation is located in Coega SEZ, and its main function is to provide various vocational training and employment counseling services for people intending to find a job, including short-term courses, apprenticeship training, traditional skills, and training for the rating of relevant national vocational certificates.⁴² The specific types of training are also diverse: apart from the common types of work such as welding, carpentry, plumbing, construction, and renovation, CDF has taken the initiative to provide training in math and science subjects for the unemployed. This training, different from the vocational skills training in other zones, is designed according to the local educational environment in South Africa. In the South African education system, the disqualification rate of mathematics and science always remains high all year round. By providing tutorial services related to these two subjects, it will provide access to higher education for those from poor families.⁴³

The employment training and service system continues to operate and has had a positive and significant impact on employment in the Coega SEZ. As shown in Table 2, as of June 2015, the total number of employees (except employees hired through labor intermediaries) in Coega SEZ was 2859, of which 86.7% were employed in the manufacturing sector, amounting to 2480 persons. Compared to 2015, as of June 2018, the total number of people employed in the Coega campus was 4779, with the most employees in the manufacturing sector, which accounted for 2563 people or 53.6% of the total number. Compared with 2015, the annual growth rate of employment in 2018 was 18.7%, with 1920 new jobs and an increase in non-manufacturing jobs of 1837.⁴⁴ From 2018 to 2019, Coega created 8016 new construction jobs, 7815 operation jobs and trained 7406 people in total.⁴⁵ From 1999 to 2019, Coega created 120,990 jobs and trained 100,000 people.⁴⁶

Table 2 Employment in Coega SEZ by activity type (as of the end of June 2015 and June 2018)Footnote

Source: MALULEKE R, Coega Special Economic Zone, 2018: Statistics South Africa, 2019, p. 7.

3.4 Stable Investment Environment

A robust external economic environment is needed to support a sustainable and orderly development of the zone’s economy. South Africa, as the leading country in sub-Saharan Africa and the first choice for foreign investment into the south of Africa, has also received mostly positive and favorable comments on its investment business environment. According to the South Africa Investment Guide published by the South African DTI in 2020, South Africa, a member of the G20 and BRICS, is the second largest economy in Africa in terms of economic indicators. Commercial bank lending rates in South Africa are relatively low compared with other major economies in Africa. South Africa was the largest exporter and importer in Africa in 2017. Also in that year, the service sector remained a strong contributor to South Africa's economic development, contributing nearly 70% of the country’s value added, as well as the largest number of jobs across the country. The three industries that created the most jobs in South Africa from 2013 to 2018 were finance, construction, as well as community and social services. In 2018, FDI in South Africa grew rapidly, accounting for approximately 18% of Africa's total, and the growth was mainly generated in mining, petroleum refining, food processing, information and communication technology, and renewable energy.

According to the Doing Business 2020 report released by the World Bank, South Africa ranked 84th out of 190 economies in the world for the ease of doing business and fourth among sub-Saharan countries.⁴⁸ South Africa was ranked 60th among 141 economies in The 2019 Global Competitiveness Report released by the World Economic Forum, up six positions in the ranking system compared with that in 2018.⁴⁹ The report points out that South Africa is the financial center of the African continent, with relatively developed stock, credit, and insurance markets, advanced infrastructure, and transportation facilities, and the market scale is also among the best in Africa. Significant progress has also been made in the administrative efficiency and corporate governance scores of the public sector.⁵⁰ Country (Region) Guide to Outbound Investment Cooperation: South Africa released by The Ministry of Commerce of China in 2019 also summarizes some of the key advantages of doing business in South Africa, including a relatively stable political and economic environment, a sound financial and legal system, strong third-party professional services such as lawyers and accountants, abundant mineral and natural resources, some capacity for scientific research and innovation, and strong consumer demand.⁵¹

4 Analysis of Zone Development Issues

Through field research, the author has identified three issues that are closely related to the development of Coega SEZ and are of common concern to people from different industries: the lack of sustainable job creation and the unsatisfactory quality of labor force, South African Labor Law’s overprotection of employees and the overpowering influence of labor unions, and the chaotic administrative systems at all levels of government that are responsible for Coega SEZ’s management.

4.1 Sustainable Job Creation and Labor Quality

The first challenge that Coega SEZ faces in its development is the lack of sustainable job creation and low labor quality. Zone enterprises are satisfied with the quality and education level of the employees hired through CDC, such as welders and painters, which also reflects that the effectiveness of the vocational skills training implemented by Coega Development Fund is in line with employers’ expectations. However, the data shows that most of the jobs created are temporary or short-term ones, with a limited number of long-term jobs and a lack of sustainability in the workforce. Moreover, some enterprises have their own separate training systems and programs, which overlap with those of Coega, but are more in line with the requirements of corporate production with fair training costs. China FAW, for example, employs workers directly from the Zone for some simple jobs, but carries out special training for the employees of the assembly line, usually for three months, and signs long-term contracts with them.⁵² This situation is consistent with Lisa Thompson's fieldwork, that is, the employment skills training provided by the Zone authorities does not cover the needs of all jobs in the Zone, but only some generalized and low-threshold jobs, and it lacks training for specialized occupations.⁵³ Furthermore, the local workers employed by enterprises located in Coega SEZ are less productive, and their output does not match with the input of the enterprises and Coega, which indirectly affects and reduces the core competitiveness of the Zone.

The consequences of failing to create enough permanent jobs include the gatherings, marches, and demonstrations of laid-off employees when their contracts are terminated. Some SMEs have contracted local workers for short-term jobs, so when the project is completed, the contract expires and the workers lose their jobs. To protest the termination of short-term contracts by their employers, the workers gathered at the entrance of Coega SEZ headquarters, expressing their protest in the form of singing and dancing.⁵⁴ In view of this situation, Coega collected the information of these workers and recorded it into the system, giving priority to them once there is a demand from employers.

The overall poor quality of the labor force is also a major factor contributing to the challenges of sustainable employment. As shown in Fig. 5, the number of South Africans with junior high school and below education accounted for 55% of the total national population in 2016, while the same data in the Eastern Cape province accounted for 66% of the population in 2016, and the proportion of people with high school education or above was lower than the national average.

Fig. 5

(Source WazimapFootnote

https://wazimap.co.za/.

)

Comparison of educational attainment between South Africa and the Eastern Cape in 2016.

The direct impact of a low education level is that people have extremely limited employment options because their abilities and skills cannot meet the needs of employers. As for Coega and Zone enterprises, employers do not have enough choice when recruiting local employees except the personnel provided by Coega SEZ. Further, enterprises in the zone report that absence rate of employees is about seven percent per month, and the average attendance from 2013 to 2016 is not high, at about 91%.⁵⁶ Most of the absences are unexpected, such as temporarily informing the person in charge concerned that he or she is unwell or needs to leave for urgent matters. Sometimes business leaders are aware that these are excuses, but they have to accept them. However, any absence in the core production line will affect the whole production line capacity. In addition, about three million people in South Africa are affected by Fetal Alcohol Syndrome, while the number of people affected in the Eastern Cape Province ranks second in the country.^{57 58} The Coega Development Fund staff highlighted this data and noted that alcohol abuse is common in and around Coega SEZ, which has a negative impact on the work of employees and then affects the overall efficiency of enterprises.⁵⁹

4.2 Confusion in the Administrative Management System of the Zone at All Levels

As mentioned above, in addition to the direct operation of CDC, Coega SEZ is administratively managed by two different departments and their subordinate agencies, namely the Eastern Cape Provincial Government and the subordinate Department of Economic Development, Environmental Affairs and Tourism, as well as the South African Department of Trade and Industry and the Nelson Mandela Municipality. The two administrative systems and cross-departmental management operations make the process of information exchange and decision-making lengthy, cumbersome, and slow. The chaotic administrative system of Coega SEZ is the result of governmental dysfunction, complex and lengthy approval of the Zone's project funding, and a lack of understanding of the Zone's operational mechanisms at the highest level of the State.

First of all, the management dysfunction among various government departments and multi-levels of government in the process of zone management is closely related to the political environment of South Africa. The National Assembly of South Africa currently has 13 political parties and implements a multi-party democracy. The African National Congress (ANC), which leads the “3 + 1” ruling coalition (ANC, South African Communist Party (SACP), Congress of South African Trade Unions (COSATU) and Citizens for All South Africa (CISA)), is the ruling party in South Africa. Founded in 1912, the ANC is the oldest and largest black nationalist party in South Africa with the largest membership. The largest opposition party in South Africa is the Democratic Alliance, which mainly represents the interests of business and finance, and its members are mostly white.⁶⁰

South Africa has a three-tier system of government—central, provincial, and local—with members from all parties, which means that there is a considerable degree of political competition and gamesmanship at all three levels of government. The fact that all levels of government are not controlled by the same political party can create significant obstacles to the implementation of administrative directives and policies. Tensions between parliament and provincial government make administrative advances long, complex, and lack integrated planning. Provincial and local government staff cannot see the urgency of their work and how it impacts the economy. Those involved in the government sector believe that it is important for the central government of South Africa to focus on existing problems and try to find solutions, rather than drawing blueprints for the future. They should focus on improving the existing infrastructure at the provincial level instead of constantly building new ones. Local governments, on the other hand, do not have the capacity to reform and implement new mechanisms or strategies, nor do they have economic development deployments and plans. Many policies and regulations have not been updated for years and the outdated policies are still used widely. The relationship between the provincial governments and local governments is also subtle. Stakeholders believe that the provincial government's primary task is to attract investment, which requires cooperation of local government proactively, but local governments always wait for instructions from the central government⁶¹ Based on this political environment and Coega SEZ’s operations, some employees said that they keep thinking about one question after witnessing constant see-saw struggle and shifting of blame among various departments during their reporting to all levels of administrative agencies—who can really be held accountable for the development of the Zone?⁶²

Moreover, Coega needs to apply for each single project separately when building, repairing, maintaining, or upgrading infrastructure facilities. For example, if one wants to use a water receptacle to purify wastewater for industrial water, he/she must apply for a specific grant from DTI or the relevant department. This entire administrative approval process takes about three months, or longer if additional documents or project descriptions need to be submitted. Taking the approval mechanism of DTI as an example, the relevant personnel in charge of approval will only issue approval signatures once a month, and if one misses it, he/she has to wait for another month.⁶³ Therefore, efficient decision-making and streamlining the approval process is a common concern for SEZ operators and enterprises. For Zone management enterprises, the support from different levels of government can effectively and quickly promote the implementation of various things in the Zone; for the Zone enterprises, the “one-stop” services and the government's attention to the Zone can increase their confidence in sustainable investment.

Third, the central government agency that is directly responsible for the Zone is the DTI, which is also the agency responsible for approving and signing applications for various projects in the Zone, and for the disbursement of all funds related to the development of the Zone. However, the central government seems to lack the awareness of developing core competitiveness of the Zone: enhancing core competitiveness requires all kinds of service institutions to gather and efficiently assist the Zone management committee and settled enterprises to attract investment with high efficiency and standardized procedures. In reality, however, the Minister of DTI is directly responsible for signing the approval of new projects or new construction facilities in the Zone. For example, even though the Management Committee of the Zone and the enterprises intending to settle in can sign a contract immediately, the management committee needs to send the signing application to DTI and wait for instructions for at least two months to determine whether they can sign the contract. Once the contract is signed successfully, the zone management committee needs to apply to DTI for various incentives and tax exemption mechanisms, such as whether the resident enterprises can receive a 13% corporate income tax reduction, etc., and then wait for their reply. According to the feedback of relevant personnel in the Zone, the approval process for these two applications alone can take up to a year.⁶⁴ If government executives fail to realize the problems of its operational model and the urgency of implementing various policies, it will be a heavy loss of both time and resources for the Zone operator and potential enterprises. The foreseeable result is that, due to the above-mentioned problems, potential enterprises will be most likely to switch to other zones with more streamlined administrative approval processes, similar infrastructure quality, and more flexible incentives.

4.3 Labor Law Tendencies and Labor Union’s Strong Power

The third challenge to the development of Coega SEZ is the relatively strict labor laws and regulations in South Africa, which provide abundant protection for employees; meanwhile labor unions are overpowering, resulting in frequent labor-management tensions and strikes. COSATU, a member of the “3 + 1” ruling coalition, is a powerful organization with 21 unions and more than 1.8 million dues paying members. (Ministry of Commerce Report) There are many labor-related laws and regulations in South Africa, and some of the representative ones are the Labour Relations Act, the Employment Equity Act, and the Basic Conditions of Employment Act.⁶⁵ These laws have played a positive role in protecting labor rights and interests, promoting employment equity, and safeguarding employees’ income. Data shows that South African trade unions make full use of labor laws to fight for workers’ rights and benefits, and in 2014, the average salary increase of South African trade union members reached 7.8%.⁶⁶ It should be noted, however, that these laws give considerable power to South African trade union organizations, and have an evident preference for employees, with protectionist overtones. Blind emphasis on labor’s rights and protections at the legislative level may be hypercorrect.

South African labor law has clear regulations on employees’ working hours, minimum pay and leave mechanisms, resulting in extremely limited bargaining space between employers and employees and even leading to a passive position by employers. For example, employers are not allowed to dismiss employees at will without special reasons; native black South African employees, regardless of working performance, are required to be given a 10% annual pay increase; and employers are not allowed to require employees to work on public holidays or to work overtime under non-agreed conditions.⁶⁷ In the actual enterprises operation, it is difficult for employers to dismiss anyone, and there are considerable obstacles to implementing the shift system.⁶⁸ The consequences of employees being overprotected by the law are that when employees have conflicts with the employer, they will seek help from the union. The indulgence of the trade union will make some employees unscrupulous, especially those with speculative ideas; what is worse, some employees even use the trade union as the “protective umbrella” for illegal activities.⁶⁹ In the long run, this will frustrate investors and undermine South Africa's job competitiveness.⁷⁰ For Coega SEZ, however, South Africa does not have special legislation for workers in the Zone, but follows the general labor laws and regulations, which renders the management committee of Coega SEZ and enterprises in the Zone powerless in labor premium, and they are in a passive position when negotiating with employees’ salary.⁷¹

Another consequence of the excessive power of trade union organizations is the frequent strikes throughout South Africa. Strike activity in South Africa varies in duration, from a few hours to several months, and the reasons for strikes are mostly related to demands for wage increases, especially in the mining and manufacturing industries. Frequent strikes across the region have had a huge impact on local and foreign businesses, as well as the South African economy as a whole. The strike and its chain effects will also shake the investment confidence of foreign enterprises.

A series of labor laws have strengthened the protection of the rights for native black South Africans, and heightened the scrutiny of foreign workers. The South Africa government has very strict controls and restrictions on the introduction of foreign workers. In principle, no foreign employees can be recruited if suitable employees can be found in South Africa, so as to protect the employment opportunities of South African workers. According to South Africa’s Immigration Act and Foreigners Management Act, foreigners are legal only if they have a work permit issued by the South African Department of Home Affairs and are employed in the required companies.⁷² The application for work permits and the approval of corresponding visas are cumbersome and time-consuming, according to the feedback from staff and enterprises in the Zone, which largely affects the efficiency of all parties.^{73 74}

The above-mentioned problems about labor law restrictions and the excessive power of labor unions have made it difficult for existing enterprises in the Coega SEZ to deal with labor relations, flexible arrangements for employees, and salary negotiations, and even curbs the development of enterprises.⁷⁵ For enterprises interested in investing in the Zone, rigid and employee-oriented labor laws may hinder their investment decisions.⁷⁶ As an important and experimental place for the implementation of new national economic policies, the Zone needs to refer to the pilot policies implemented in competitive zones in other countries, rather than simply and rigidly imitating various regulations from other zones.

4.4 Other Problems

In addition to the three main problems mentioned above, some respondents such as government officials, zone enterprises, and zone management committees, pointed out other problems and challenges at Coega from their own perspectives. One Nelson Mandela Bay City government official believes that Coega SEZ’s model does has certain potential, but more attention should be paid to improving its productivity. He also notes that Coega SEZ and Nelson Mandela Bay City should have a closer bond, and effective communication between Coega SEZ and local municipal management needs to be further improved.⁷⁷

Representatives of Coega SEZ enterprises are generally satisfied with the infrastructure and support services of the Zone at this stage, believing that basic energy supply can be guaranteed, such as water and electricity. However, the cost of water and electricity is too high, nearly R100,000 per month for one zone enterprise, and it keeps increasing. Enterprises in the Zone tried to send e-mails to or call Coega on this issue, but to date have received no reply. In terms of information consultation and legal assistance, Coega does not provide strategic consultation and information tracking feedback services, nor is there any legal assistance. As for accommodation, the supporting facilities in the Zone meet the basic requirements and security is relatively guaranteed, but there is no telephone and Internet service, which makes it a “low level of accommodation”, and it is not very liveable in general due to the poor external social security.⁷⁸

Although the South African government has taken measures to implement relevant policies and legislation, the relevant personnel of the Zone generally agree that Coega lacks the current support of government funds. Coega is not financially independent at this stage, which means that it is unable to generate profits or conduct financial operations. In terms of financial applications, Coega has to apply to the Ministry of Trade and Industry for grants for each specific project.⁷⁹ In addition, the South African government believes that the Coega SEZ should be self-sufficient within an expected time frame, but voices on the ground at the Zone say that it is difficult for Coega to achieve financial independence in the following three or five years.^{80 81}

5 Conclusion and Reflection

Despite the financial and policy support from the South African government, the development of Coega is far from satisfactory. In order to analyze the strengths and challenges of Coega on the basis of the Zone’s current development and management participants, the author made an evaluation in terms of the advantages and challenges listed below on the participants—the South African government, CDC (Coega SEZ Management Committee), and the Zone enterprises, so as to identify whether they are involved in these sub-items.

As can be seen from Table 3, Zone enterprises are not directly involved in the creation of core strengths and major problems faced in Coega. In the early stages of the Zone, the government played a leading role in selecting the location and constructing infrastructure, while the Coega Management Committee is responsible for implementation. The South African government has also provided much support to the Zone: improving relevant policies and regulations to ensure the smooth development of the Zone projects, and meanwhile inviting relevant government departments at all levels to plan, guide, support, and supervise the Zone. In addition, the government has also specified various incentives for the Zone, such as tax exemptions. The SEZ operator, CDC, also upholds the principle of creating more jobs for South Africa in the construction of employment training systems, and has created a large number of employment opportunities. Overall, the South African government and the Zone operator have each played an active role in two of the three main strengths that have contributed to making the Zone more competitive.

Table 3 Participation of participants in South Africa zones

However, when analyzing the problems and challenges for zone development, the author found that the essential causes of the three main problems discussed above are all related to the government and its governance. The issues, namely the overall employment environment and labor quality, the overly cumbersome and lengthy administrative procedures of the Zone, and the problems at the legislative level and strong union power, can be settled not at the zone level but at the government level. This also shows that the South African government plays a crucial role in the development of the Zone, regardless of the development stages. The government needs to realize that zones, unlike other areas of the country, should follow a different development pattern, and such differences must be reflected in legislation, administration, supporting services, policy support, and other aspects, otherwise the development of zones in South Africa is most likely to move forward in the disguise of a zone economy, without comprehending the essence of this kind of economy pattern.