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Factors necessary for secured investors toward foreign direct investment ownership transfer in special economic zones

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Endorsed by world leaders as an ideal investment destination, the Coega Special Economic Zone (SEZ) prioritises growth in Foreign Direct Investment (FDI).

The field of FDI attraction and investment promotion has a strong body of extant literature and a number of studies have focussed on the attraction of domestic and FDI. There is however, limited research on the methodology for operationalising of secured investors, once attracted.

Research indicates that attracting FDI into the country is one thing and operationalising it is another. Investors have been responding well to President Ramaphosa’s call for $100 billion over the next five years. Once secured, the focus should be on converting secured investors into operational investors as swiftly as possible to speed up socio-economic dividends in terms of employment, training and development, small business growth, and reducing the scourge of poverty and hardship for the people of this country.

Eleven factors have been identified as essential to converting secured investors into operational ones. These factors were also presented at the proceedings of the 31st South African Institute for Management Scientists (SAIMS) Conference in September 2019 in the Nelson Mandela Bay by PhD Candidate at NMU, Mr Thembinkosi Maduna.

These factors include: (1) consideration of risks regarding project feasibility, (2) consideration of risks regarding project viability, (3) business registration requirements, (4) adherence to business regulations, (5) availability of basic infrastructure, (6) prevalent environmental risks, (7) consideration of market distortions, (8) adherence to human rights requirements, (9) selecting funding sources, (10) availability of investment incentives and (11) contractors procurement.

There are three important processes that need to take place for FDI ownership transfer, namely (a) Detailed Due Diligence Process, which refers to the assessment of land ownership, zoning, availability of utilities, environmental risks, geotechnical conditions, business and tax regulations (as performed by various Professionals in the Industry); (b) Investment Structuring, which involves consideration the type of funding sources available including incentives and business registration; and (c) Investment Negotiation Process, which relates to the negotiation of cash-based incentives. Furthermore, investment negotiation seeks to transfer a business registration that will result in optimal tax benefits for the secured investor.

Currently, Coega retains its investors by improving its post-investment activities, which include expediting value-adding services especially for foreign investors. In addition, the Coega SEZ is strengthening its relationships with strategic government departments that have a key interest in Zone Development. This include the streamlining of the SEZ’s value chain by ensuring critical services for investors are located in one area through a one-stop shop model; and improving services to investors through speeding up the resolution of enquiries for pre-investment activities (pre-operational phase) and post investment activities (operational phase).

The Coega SEZ also advocates for business-to-business networking amongst investors currently located within the SEZ via quarterly investor meetings. This is poised towards leveraging from existing investors.

The only real benefits from FDI’s come after ownership transfer, i.e., when the investment become operational. Therefore, given South Africa’s economic climate, fast-tracking FDI ownership transfer is a very important issue to address as it can bring about economic reform and growth.

By CDC Market Analyst, Thembinkosi Maduna

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