Botshabelo and Phuthaditjhaba Industrial Parks & Maluti-A-Phofung SEZ: Free State agencies

Meeting report

Opening Remarks
The Chairperson stated that the first briefing would be on the Maluti-A-Phofung Special Economic Zone (SEZ); that would be followed by a briefing by the Free State Economic Development Agency on the status of the Botshabelo and Phuthaditjhaba Industrial Parks

Presentation by MEC Free State
Mr Maoto Molefane, Chief Director: Special Economic Zones, Department of Trade, Industry, and Competition (dtic), introduced the Free State MEC for Economic, Small Business Development, Tourism and Environmental Affairs, Mr Mokalo Mohale.

Mr Mohale informed the Committee that, although the Maluti-A-Phofung Special Economic Zone (MAPSEZ) had been designated by the Minister of Trade and Industry in September 2015, governance issues had caused the delay in developing the zone. The Free State had struggled with the confusion arising from the Special Economic Zone (SEZ) legislation, especially as the FS did not have direct responsibility for the SEZ, nor could it get permission to develop the necessary company; it had to utilise the company that was already running the Industrial Zone. He explained how many problems the provincial government had suffered in determining who was in control of the SEZ. Funding was a major issue because the Free State had one of the smallest budgets and that affected operations while vandalism made conditions worse. The local municipality had been unable to secure electricity and water for the SEZ.

Ms Mpho Mgemane, CEO, MAPSEZ, made the presentation. The MAPSEZ baseline budget had not increased since 2017. The R20 million allocation was initially allocated for the recruitment of the necessary human resources and technical expertise required, however, a huge part of the budget was utilised for security services, maintenance, and repairs. MAPSEZ had not received a capital budget from the Province. Currently, 18 vacant factories required refurbishments to make them ready for investor occupation but MAPSEZ did not have a capital budget to fund the refurbishments and depended on the dtic’s establishment fund for the building of new factories. Funding was also required for ITC systems, built environment expertise, operational staff, business analysts, architects, property and facilities management.

The SEZ had thirteen employees, including two Executives and one Manager. There were several plans or initiatives to expand and attract investors. It was hoped to support SMMEs by refurbishing some of the existing factories and partitioning them into smaller sizes to accommodate SMMEs. A multi-purpose centre housing a conference centre, training facilities, One Stop Shop, etc. as well as selling advertising space along the N5 highway and offering support to SMMEs was in the plan. Ultimately the intention was to create a smart city in collaboration with the Municipality and other relevant Departments. Special concessions being offered in the SEZ included SEZ tax incentives, below market-related rentals to tenants, holiday rentals, low escalation rates, and conferencing facilities at a discounted rate.

Presentation by Free State Development Corporation on the status of the Botshabelo and Phuthaditjhaba Industrial Parks
Mr Thabo Lebelo, CEO, Free State Development Corporation (FDC), briefed the Committee on the Industrial Parks (IPs) in the Free State. The Development Bank of Southern Africa (DBSA) had been appointed by the dtic to provide implementing agency services for the physical infrastructure development to revitalise the industrial parks.

The assessment of the Botshabelo and Phuthaditjhaba Industrial Parks in 2016 had revealed a poor state of affairs. In 2016, the estimated cost of the revitalisation of Botshabelo Industrial Park was R1 216 million and Phuthaditjhaba Industrial Park would cost R 1 612 million, i.e., a total of R2.9 billion to refurbish both parks. Challenges included, inter alia, environmental degradation, and pollution; non-compliant buildings and infrastructure that did not even meet the basic Health, Safety, and Fire Regulation standards, real estate management deficiencies and structural and infrastructure deficiencies.

An application had been made for the Thaba Nchu IP but that was declined by the dtic. Amendments and resubmission had been made as advised by the dtic.

All three Industrial Parks were owned and managed by the Free State Development Corporation, a provincial business enterprise. Through the Development Bank of Southern Africa (DBSA), dtic was assisting with the revitalisation programme while the provincial government assisted with the cleaning and upkeep of the parks through the Expanded Public Works Programme. Due to the challenges that Mangaung Metro and Maluti a Phofung municipalities had been experiencing, they had not been able to assist the parks except for normal municipal administrative assistance to the tenants. The main challenge was funding. However, private sector partners were continually sourced to upgrade some of the dilapidated factories in exchange for long lease tenure.

Discussion
Mr Mbuyane stated that the presentations provided some understanding of how the SEZ and IPs operated. Were the IPs and SEZ representative? Were they able to produce Black industrialists, including women, youth, and disabled people? He asked if the MEC could name his challenges, besides electricity and telecommunications. He proposed that the Committee should soon undertake an oversight visit so that the Members could link what had been presented with what was transpiring on the ground and get a full understanding of the situation. Was there a clean energy alternative for both the IPs and the SEZ?

Mr Malematja said that the SEZ was the last hope of the people when they found that others were not necessarily doing enough to create jobs for them. The SEZs created jobs under difficult circumstances, and they had proven that they could create a lot of jobs. One of the issues was that a lot of investors had run away from ageing infrastructure. He had heard the presenter say that there was an arrangement of some sort where the investor was given money. The state was not an ordinary person who could just lend money. That could lead to the capturing of that institute. The presenters ought to take note of the issues in the country and guard against anything untoward with the investors. Could the presenters explain how they had tightened up their assessment of the investors to ensure that they opened all doors to them and assisted them through the official channels whilst guarding against corruption in the long run? When the Committee went on site, Members did not want to be told that officials were assisting the investors, but, at the same time, were asking for kickbacks. He did not want to see people opening holes for corruption. Corruption was bad; it was something that could result in manipulation and people should not be found wanting but, all in all, from the community aspect, he was happy with the first presentation.

Mr Malematja added that the second presentation did not show much of an advance and the job numbers being funded were not very high. He was not too concerned about the decline; he wanted to see the massive funding of small businesses. He wanted to see them funded, upgraded, and going forward. They had to try much harder at the second site.

Ms M Motaung (ANC) applauded the provincial agency as they were trying hard in respect of job creation, even if they faced some challenges. She agreed that the only thing outstanding was an oversight visit to the province by the Portfolio Committee. The MEC had spoken about the newly appointed board and she asked about gender representation and qualifications on the board. It was important to know about the board as it could assist the province.

Mr W Thring (ACDP) noted the degradation that had taken place over the years and the stagnation and decay of the buildings in the SEZs, in particular. The second presentation of the buildings within the Free State that had crumbled and decayed presented fire and safety hazards to those who worked in the factories. He had two simple questions. Why was that allowed to happen in the first place when it had cost billions of rands to get the buildings back up to scratch? If the province had just invested monthly to ensure that no degradation was taking place within the buildings, it could have saved substantial funds that could have been spent on the upgrades. Why was that allowed to happen in the first place? Secondly, how could the province ensure now that the funding that had gone into these structures would not be wasted again by neglect? What measures were in place to ensure that the fences being built would keep the tenants feeling safe, that there would not be Eskom outages because incorrect safety switches and fuses had been installed, and that all of those things would not happen again? What measures were in place to prevent this from happening in a year or two?

The Chairperson added her question about the capacity of the industrial parks. How many more tenants were needed in each of the industrial parks for them to be operating at full capacity? What was the plan for attracting investments into the industrial parks?

Responses
The Chairperson requested the MEC and his team to respond.

Response from SEZ
Mr Mohale suggested the team members would start with the responses and he would follow on.

Ms Mgemane responded to the questions relating to the nature of support provided, and how they ensured that it did not attract corruption and damage. The support given was non-financial in the sense that there were incentives for the investors. Many investors did not understand how the incentives worked as they were quite technical. The SEZ arranged for workshops conducted by salespersons together with a tax consultant as her staff were not trained tax consultants. Workshops were conducted in Pretoria and investors were coordinated in groups most beneficial to the investors. Other types of support included opening doors for investors in the sense that most of the investors did not know where to look for their Opex budget and one of the requirements was that the investors had to demonstrate a state of readiness to operate within the zone with an Opex budget. The SEZ provided details of the vendors and industrial funds. The SEZ worked together with dtic in that regard. Investors were provided with letters of support when the SEZ had done proper due diligence.

She added that, because of the capacity problems that the SEZ currently had, it even outsourced that process to ensure that the investors were interrogated by people with relevant skills, such as professionals in legal and accounting firms.

The second mechanism used was a sort of rebate where the SEZ requested the investor to self-fund either their renovations or their top structure. The process was legitimate in the sense that the investors obtained loan funding or capital funding from the banks. Ms Mgemane cited the example of Timber Park which was operating within the zone. The investor had borrowed R68 million from the bank to build his structure. As he was building the structure on government land, the SEZ had entered into a material lease, which was interrogated by the legal firm as well as her own team. It was beneficial to the state because, at the end of the term of the lease, the structural asset would belong to the government, not to the investor. The arrangement was clearly documented in terms of the legalities and the lease agreement. In essence, the government did not give a budget to the investor nor did it have to find the capital. Finding investors was important, but the investors had to demonstrate that they were ready in terms of capital to operate their businesses as the SEZ provided only the factories and infrastructure. It was quite a tedious process and it took a while, so it was quite critical to source investors and to have a healthy pipeline of investors.

Concerning the occupancy rate, she admitted that it was still in the infancy stage. But looking at the pipeline, she was confident that it would be accelerated. Once the SEZ was properly funded in terms of a capital budget and it had proper property facilities management, it would succeed. Refurbishment would also contribute to the acceleration of the development of the zone.

Response from Free State Development Corporation
Mr Lebelo, CEO of the Free State Development Corporation, responded to Mr Mbuyane. FDC included black industrialists, women, youth, and disabled people in its targets. The Development Corporation specifically made funding available to Black Industrialists who were women or had disabilities. Concerning the alternative power supply for the products, the CEO said that the FDC was doing a test case looking at a solar photovoltaic installation. The project was currently being piloted. Once that was working and his team was happy, it would take a load off their reliance on Eskom. It would roll out throughout the park and in the other parks as well, so the Corporation was seriously looking at green energy.

Mr Lebelo responded to a question about using own funds to operate the factories. Ms Mgemane had answered it to a large extent, but he wished to stress the safeguards. The Corporation had put in place a system to avoid what was referred to as state capture. The FDC advertised and invited everybody to tender for the process, which was run independently. His team had just finished a residential block of flats in Qwaqwa. The FDC had advertised and made sure that the most qualified people had been awarded those leases. In that way, the FDC made sure that it was not found wanting as far as the process was concerned. The FDC tried to run as cleanly as possible to avoid corruption and so on.

He assured the Committee that FDC intended to get involved in massive funding of SMEs as soon as the systems and processes were in place. What the FDC did not have was Research and Development capability, but in that respect, it was knocking on many doors. The Industrial Development Corporation (IDC) wanted to start a core fund with the province where the IDC would put money into a fund and the province would manage the process while the FDC administered the fund. That should start to make a real impact in funding SMEs in the province. So, there were things that the FDC was doing and hopefully, by the next time he met with the Committee, he would be able to give statistics of what had been achieved.

He noted that the Committee wanted to conduct an oversight visit to see things on the ground and he welcomed that. He added, in respect of the degradation that had been allowed to take place, that those factories had been built in the 1980s, and age played a role but since 1994, like much public infrastructure, there had not been much money allocated towards refurbishment, which was a little more than just maintenance. That funding had not been made available due to the competing allocation of funds to the social budget of the country. So, the IPs suffered the same fate as many other infrastructure-related type installations of government. To make sure it did not happen again to the extent that it would have to be upgraded and major components replaced, the FDC had asked for a maintenance budget while it was still a new installation. Obviously, in 20 to 30 years, there would still be a need to replace some things again, but forward planning was the key and critical to maintaining the infrastructure.

About the plan to attract more tenants in the parks, and also the numbers in terms of vacancies, Mr Lebelo wanted to place the situation in context. There was a 72% occupancy rate in Botshabelo, 103 out of 144, and the 41 vacant factories needed some work done before they could be occupied. The FDC was looking for funding from the dtic as well as private funding to upgrade the factories so that the park could be fully occupied. In Phuthaditjhaba Industrial Park, the situation was different with some 296 factories on site and only 178 occupied. Unoccupied premises was mostly a result of the intermittent supply of water and electricity which made it difficult to attract tenants. The FDC attracted the tenants, but they did not move in because they worried about the sustainability of their businesses without a constant supply of water and electricity and that was on top of the fact that a lot of the factories were not in good condition. The immediate concern was the supply of water and electricity.

Mr Lebelo added that Thaba Nchu was a very small industrial park with only eight factories, four of which were occupied, but there was a lot of vacant space where other people could put up their structures on a lease. The FDC was working on getting that park registered.

Response from MEC
MEC Mohale began with the question on the qualifications or the skills profile of the newly appointed Maluti-A-Phofung SEZ board members, providing names and professional details.

The chairperson was William, a legal professional and a property law specialist with over 19 years of experience in the field. He had been the Registrar of Deeds in one of the northern provinces. He held various qualifications, i.e., BProc and LLB, and was a qualified governance professional with the Chartered Governance Institute of South Africa. He had qualifications specialising in contracts and so on. The deputy chairperson was Ms Kameda, a female with a wide range of management experience and with a specialisation area around marketing and stakeholder management. She had more than 15 years’ experience in the private sector. She held a degree in Social Sciences from the University of Free State and specialised degrees in Enterprise Risk and Project Management. The third member was Dr McCrone with a Master of Science in Business Analytics, analytics and another Masters in Business Administration and a specialist Diploma qualification in property. He was also a medical practitioner in a modern practice but had also been the CEO of a private entity specialising in medical supplies and medical consultancy. The other members included an IT professional and business analyst with more than six years in the IT space with a BTech in Product Management, a Diploma and a National Diploma in Business Analytics, and a postgraduate Honours Degree in Business Administration. Another board member was Ms Joanna Moore who held a BCom in Accounting, and a post-graduate Diploma in Business Administration. She was a senior Management Development Programmer who also had more than 10 years in the finance and credit management field having occupied various positions at the senior management level, including finance manager and regional manager.

The MEC stated that there was still one vacancy on the board; he was awaiting the dtic to submit its representative’s name, as per the regulations. The board had a qualified and experienced team appointed in line with the commitment of the provincial government that would ensure that the board was open and transparent and the people would add value and be helpful to all the entities and structures being put in place. The board had the right combination of skills. The majority of them were still young. It was the only doctor who was in his 50s; the rest were in their 40s, and some were below 30. That had been the approach with the board of the FTC, i.e., to give young people with the skills, a chance to bring that energy to effect.

He said that another challenge was the funding model of the sector. The economic cluster was the only sector that did not receive funding from National Treasury directly to the provincial government. In the social cluster, the provincial departments survived largely on the grants of the departments of Education, Social Development, Human Settlement, etc. The money came directly from the national departments for them to function but that was not the case with the economic sector, a sector that all the other sectors were reliant on. If the economic cluster was working, it would make the work of everyone else much easier. They could cut the long queues in Social Development and cut the long queues at Human Settlements. People would be self-sustainable. But unfortunately, for whatever reason, the economic sector received the smallest budget. The province had to work with the agencies of the national government. The only power the economic sector had was the power of influence, particularly in the small provinces, like Free State, where a large chunk of the funding, for obvious reasons, had to be prioritised to the social class because of the needs that people had. Children had to eat immediately; they could not wait until the economy was booming.

Mr Mohale noted that it was quite a difficult matter but his Department and the entities were trying hard. He had to say that even the legislature was telling the executive to change the spending patterns and prioritise funding for the economic cluster. The Free State tried to consciously ensure the development of agriculture as a strength because the Free State still believed that it had not optimised that sector. The government was trying to create markets and opportunities, although the hostilities in the market made it difficult. The province was trying to emulate Gauteng with a Township Bill. The Free State had just tabled the Bill in the legislature that year and public participation had taken place. He hoped that the legislature would be able to entertain the Bill in the new calendar year when it should be able to pass that law.

One of the notable issues concerning the current subject matter was that if one intended to close the gap between the mainstream economy and small business, indicators had to be more focused on small businesses. He said that one of the biggest challenges noted in the approach to small business was the issue of the markets. Everything that other investors tried to do to support small businesses in the mainstream economy did not create market opportunities for them. The economic cluster had to show a willingness to provide alternative markets. The investment pipeline, as well as existing activities, were carefully dissected to understand every value chain and to find where small businesses could play a role. Traditionally, when there were investment opportunities, they were all about employment. However, Mr Mohale believed that the centre of the economic transformation drive should be about creating opportunities for small businesses to be self-sustainable so that they did not rely on the government as their only market source. One of the legislative interventions that he had tabled in the House was to compel all businesses that did business with the government to source a certain percentage of their commodities from small businesses to create a demand for the products of those small businesses. The last point was that the challenges facing local government were impacting quite seriously on the IPs and SEZs so the provincial government had to assist with transformers to keep the lights on and supply not only the Zone but also the nearby communities. That, unfortunately, was the complex situation. The provincial government tried to mitigate some of the effects of those challenges, over and above the challenges relating to economic infrastructure.

The MEC said that the province had provided support to municipalities in terms of their economic plans and was guiding municipalities to have incentive policies. He hoped that they would cooperate by implementing it as it was very difficult for people to move from established cities where there was good infrastructure to the Free State, where, on top of the problems, was the cost of doing business. The provincial government conducted a study. The cost of services in the Free State was the second or the third highest in the country, and by far exceeded Cape Town and all of those areas which had industries. If a person relocated from Kempton Park or Germiston which was in the heart of good infrastructure, to come to the Free State an additional 500 kilometres from the hub, there needed to be at least one sweetener that would make people consider investing. Every municipality had to consciously offer something to investors to ensure job creation and economic stimulation to change the situation. There had been a great disinvestment out of the Free State recently and had it not been for the SEZ, it would have been worse. At least with the benefits, such as tax concessions and so on, the SEZ had been able to retain some of the establishments. All measures were intended to mitigate the situation and to ensure that the Free State economy did not close shop.

The Chairperson thanked the MEC and called on the dtic to make the final remarks.

Response from the dtic
Mr Molefane appreciated the progress made in the approval of the board. For a long time, there was no board which had been quite concerning for the dtic. He would take the matter offline with the MEC and his team to find out how the dtic could collaborate and make sure that things took off the ground. The dtic had appointed the Development Bank of Southern Africa to help with the rollout of the infrastructure while the province was building its capacity in the SEZ. He appreciated the progress made.

Mr Thami Klassen, Director: Regional Industrial Development, dtic, said from the side of the industrial parks and the pursuit to include the township economy, the dtic had collaborated with other organisations in looking into the problems and challenges around the infrastructure, and all the other constraints within the park sites. The greatest constraint was the lack of consistent electricity. Work had been started in looking at alternative forms of energy, and quantifying what each business was losing in terms of water use. Effluents were sometimes discharged in the parks and that was not taken care of in the management of waste material. Parks had to start behaving according to green eco-industrial practices and methodologies. New investors were looking for industries that could meet their premium demands in terms of what they would ultimately want or need to sell their products. The dtic had adopted an eco-industrial development approach and was helping industrial parks to revise their approach.

Mr Klassen explained that industrial parks were rejected oftentimes because there was a lack of a strategy, whether it was a business case to indicate how it was going to sustain even the provisional infrastructure that would be made available. Some cases showed that some of the elements and components funded by the state were being vandalised and at other times buildings were underutilized. There was a need to look deeply into how the parks were developed, considering the ecosystem of where the industries were located and what that meant. There had to be a sensitivity to community participation. The dtic was doing a study of various small industries that were operating in the townships and that should be located within the industrial parks themselves. The move would provide opportunities for those companies to add value to their projects, but in a place where they could access formal markets and trading areas and maximise opportunities to access some of the value chains. So, the view was to bring in a "Township Manufacturing Precinct" within the industrial parks. Those would be ring-fenced and provided with security. That could bring a shared value to the communities, which was critical in building a sustainable industrial ecosystem where the parks were located.

He explained that the ongoing work was a study taking consideration of what was currently in place, together with the National Treasury framework, to find a path to address some of the deficiencies that had been raised. Governance was an issue. All rentals in the industrial parks had to be collected. The dtic had finalised some of the modalities for rental collections in the North West and was rolling that out to other provinces, structuring how calls in terms of rentals were taken inside most of the industrial parks. Many tenants had huge bills so those patterns that eroded the potential of investment had to be addressed. Companies were leaving as a result of those challenges but the dtic was attending to it jointly with similar departments like National Treasury and provincial structures of the District Development Plan so that it was not a piecemeal approach. The IT unit of the Small Business Development Department was also on board in terms of addressing issues related to individual SMEs and enterprises. The dtic would be producing a module with case studies showing how to approach the revitalization of the industrial parks so that they could retain the jobs they had and expand.

Mr Klassen added that the 13 to 15 parks currently in operation employed about 45,000 people. The critical aspect raised in discussions with National Treasury was the constraints that the municipalities were facing. If they were not addressed through the industrial path, numbers would be eroded because the municipalities and the parks were not able to meet their electrification bills. Hence, there was also a need to look for alternative forms of energy solar.

Closing Remarks
The Chairperson stated that the Committee was doing oversight over the SEZs and the industrial parks as part of the Committee programme. Sometimes it was a physical visit to the site as when the Committee went to Mpumalanga and Limpopo. Members had expressed the need to do a physical oversight of the Free State areas. She would also look at how the Portfolio Committee could include the Free State in the programme for physical oversight to check on progress in 2023. There were still many challenges and the country needed investment, investment, investment, both domestic and foreign investment, to grow the economy and to secure jobs.

The Secretary stated that the Committee would engage with the National Consumer Council on the Annual Report and the First Quarter Financial and Non-Financial Performance the following day. The Committee could also consider the minutes and there might be some Committee business to be addressed.

The meeting was adjourned.