Not enough pull industrial development

Posted On Friday, 17 December 2010 02:00 Published by eProp Commercial Property News
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Without incentives to attract foreign investors, Coega, SA’s premier industrial development zone, may never realise its full potential.

Christopher MashigoAn IDZ is a concept similar to an export processing zone, of which there are about 600 in the world. Elsewhere, they operate as tax-free hubs to attract investments from multinational companies. They also eliminate bureaucratic requirements and, sometimes controversially, even provide concessions on labour legislation.

By establishing zones in Shannon, Ireland and in Shenzhen, China, those countries have successfully transformed rural economies into thriving cities, promoting employment and generating new revenue for their economies.

The two IDZs in the Eastern Cape, Coega and East London, have already contributed to job creation in one of SA’s poorest provinces. SA’s other IDZs include one at OR Tambo International in Johannesburg, which is yet to take off, and Richards Bay, KwaZulu Natal.

Using this model, government hopes to attract foreign direct investment, as well as advanced foreign production and technology methods. It has invested billions in Coega since its first feasibility study in 1997.

But for every billion rand of investment gained, there is a significant cost to lay the basic infrastructure. This is, in part, compensated for by the investment that companies bring to the region. Coega has thus far attracted investment valued at R4bn. This has yielded over 30000 jobs.

However, government will have to take a more strategic approach.

“Our argument is that lower tax revenue is compensated for in other ways, like more jobs,” says Coega’s business development manager, Christopher Mashigo

A government review of incentives is under way. Mashigo says five or six delegations of department of trade & industry officials have visited Coega recently, armed with questions about how it can be made more attractive for current and future investors. He expects them to announce a new policy by March.

There are already some benefits. Coega has administrative advantages and links to Ngqura, a deep-water port at the Coega site. It also has duty suspensions on products intended for export, and provides access to shared services like a sophisticated skills development centre.

Mashigo adds that Coega is willing to invest in building top structure on behalf of or in conjunction with investors. For example, it built the top structure of automotive components manufacturer Benteler’s plant in the Nelson Mandela Bay Logistics Park, which the Coega Development Corp manages on behalf of the municipality. Coega spent R140m and Benteler added R180m. The plant was constructed in a year, and four months after opening it is already talking about expanding its capacity.

The Logistics Park, which fell under Coega Development Corp’s management in March 2008, has thus far signed six manufacturers and six automotive services investors.

However, the recession and energy concerns did cause setbacks. Rio Tinto Alcan scrapped its planned R20bn aluminium smelter in October and a R9,2bn SeaArk prawn farm was also canned. Both cited Eskom’s energy price hikes as the deal-breaker.

But the past three years have seen the landscape transform from virgin land to an area that is equipped with basic infrastructure. Moreover, within a year of being operational, the Ngqura port, which is pivotal to Coega’s success, is already moving cargo at half of its capacity (which is 800000 twenty-foot equivalent units, or TEUs).

Shipping lines MOL and MSC call at the terminal regularly, and from there goods are transferred by rail and road. The port is already creating additional berthing space. It will also consider expanding the port’s capacity to 2m TEUs.

With the basics in place, Coega’s trajectory, Mashigo believes, will shift upward. Three large projects and three smaller ones worth a total of R9,8bn — more than the total current investment in Coega to date — are confirmed, but were delayed because of concerns about energy supply, or affected by the recession. They are expected to begin implementation next year. Another R5,9bn in investment is under negotiation.

But Coega’s mettle will be tested next year, when it attempts to confirm R117bn of investment currently subject to feasibility studies. This includes PetroSA’s R76bn Project Mthombo oil refinery, a R38bn combined cycle gas turbine plant and a R5bn ferro-manganese smelter. President Jacob Zuma has spoken in support of Project Mthombo as recently as October, but cabinet is yet to make a decision on whether to proceed.

Though it has shifted away from an anchor tenant approach, the refinery is still key to the IDZ’s future. In the absence of large tenants, says business development and automotive sector head Gustav Meyer, the zone has been able to secure job-yielding medium-sized projects that don’t draw large amounts of energy.

Coega has also been able to attract investors into the energy sector. It has ambitions to contribute 1000GWh (480MW) of renewable energy, or 10% of 2013 SA’s renewable target. Most of this will come from wind energy, for which Coega is ideally placed on the Eastern Cape coastline. One 2,3MW gas turbine was erected by Belgian company Electrawinds earlier this year as a pilot.

Nkuli Mxenge-Mayende, Coega Development Corp’s renewable energy manager, says it has proved viable and Electrawinds will build another 24 turbines next year. Two other wind energy projects, which will add 36 turbines, will be launched next year.

Solar, biosteam, biofuels and biogas projects are also being considered, says Mxenge-Mayende. Coega has developed a renewable energy strategy and hopes to put the zone at the forefront of SA’s renewable energy technologies.

Because of their link to agriculture, bio-energy projects will create more jobs than other energy projects.

Agro-processing is another important element of Coega’s strategy to diversify its investments away from the Eastern Cape’s reliance on the automotive sector. A number of medium-sized export-driven firms are already operational, including Cape Concentrate, Cerebos and Digistics

A few years ago, with heightened energy supply concerns, sceptics were questioning whether Coega would be an empty shell. However, a long-term project of this nature will take years to realise the return on the original investment.

International experience shows it takes at least 11 years for an industrial zone to get off the ground, says Mashigo. After that, its growth curve shows an exponential increase.

Coega’s test will come in 2011, its tenth year as an industrial development zone, and a time when private-sector investment is expected to recover following the recession.

Its ability to secure part or all the massive R117bn of projects that it has in the pipeline, particularly Project Mthombo, will be the litmus test for its future. The introduction of incentives may just be Coega’s deal-maker.

 

Last modified on Wednesday, 14 May 2014 20:27

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