Deep-water port or bottomless pit?

Posted On Friday, 13 August 2004 02:00 Published by eProp Commercial Property News
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The cost of Coega

Alec ErwinTHE recent announcement that the public enterprises department had cancelled talks with P&O Nedlloyd and TCI Infrastructure on the development of its container terminal and industrial hub is a serious setback for the Coega port and industrial zone. 

The two companies were identified in 2000 as the preferred international concessionaires for Coega. Inadequate progress on the concession, combined with the lack of an anchor tenant, means the Eastern Cape site is increasingly being labelled a "white elephant".

Coega is one of government's surviving spatial interventions, intended to drive industrial growth in underdeveloped areas. Many of the Spatial Development Initiatives have faded into obscurity, with the notable exception of the Maputo Corridor.
Coega, by contrast, has risen in prominence as a politically significant drive to uplift the economy of Eastern Cape. However, the private sector has not responded adequately to the development, raising the pressing issue of whether it merits further state support.

The recent history of Coega suggests a serious opportunity cost in diverting attention from other much-needed development in Eastern Cape.

The idea of a deep-water port in the eastern Cape goes back about 30 years. The concept was revitalised by Gencor, which now falls under BHP Billiton, in the mid-1990s, but the potential anchor tenant fell through when its Japanese partner, Mitsui, dropped out of talks. At the time, there was speculation that BHP Billiton's interest in the project (as a zinc smelter) was politically motivated. It was seen as a means of demonstrating support for SA's economy at the same time as lobbying for a London listing.
This was not, however, Coega's only setback. Plans have since been adapted to accommodate the needs of a German stainless steel investor and, more recently, a French aluminium group, Pechiney, which was taken over by the Canadian company, Alcan. Alcan has yet to give a firm commitment to the project.

To an extent, the timing of Alcan's takeover appears to have been merely unfortunate, with the Canadian group focusing attention on a smelter in Oman, delaying a decision on Coega until the end of the year.

But it is the inability to attract alternative investors that is a more serious concern. Despite speculation to the contrary, BHP Billiton, Anglo American and Brazilian Companhia Vale do Rio Doce have denied any interest in the project.

Coega's setbacks have materialised in spite of keen attention from politicians and officials, most notably former trade and industry (now public enterprises) minister Alec Erwin, and the department's director-general, Alistair Ruiters. Both spent considerable time trying to secure Pechiney and Alcan's commitment to a smelter .

Disappointments such as these have national ramifications.

In spite of reservations from economists and environmentalists that the opportunity costs were too high, enabling legislation was promulgated in 1998, leading to the establishment of the state-owned Coega Development Corporation in 1999. The Coega site has infrastructure already in place, with the construction halfway mark recently recognised in a ceremony by Erwin, who said: "We will get many tenants, that I can assure you. It will work, there is no question (of that)."

So how much has the ardent pursuit of Coega cost to date? The amount often bandied about is R3,2bn, excluding the time and effort expended by top-level officials . Recently mooted plans for more extensive dredging of the harbour, as well as upgrading Coega's rail link to Northern Cape in order to export iron ore, mean this amount could rise.

The Coega home page breaks costs down as follows: R800m for the initial infrastructure (state funding); R2,6bn for marine infrastructure (funded by the National Ports Authority); and a R1,8bn upgrade of the electricity line servicing Eastern Cape's coastline (Eskom ).

There are also additional infrastructure requirements, such as the upgrading of the national road (the development corporation ); and concessions for infrastructure, such as the container terminal (private investors).

Since inception, the corporation has spent about R45m on, among other things, feasibility, technical and business studies, environmental assessments, human resources, marketing and operational expenses. A R606m tax relief concession for the proposed smelter was announced late last year, as a component of the Strategic Industrial Project Fund.

Alarmingly, proponents of Coega argue that further state support is needed to ensure the viability of the project, in the form of additional concessions to attract investors . The question must be asked: Exactly how much more funding is required, and will the project ever be sustainable? If experience is anything to go by, Coega presents an ever-deepening, if not bottomless pit for resources.

The regret surrounding Coega is not that industrial policy is not needed in SA, but that it should probably have been focussed elsewhere. Without an adequate private sector or foreign investment response to Coega, the trade and industry department will struggle to motivate that the fiscus should support similar initiatives in the future.

Erwin appeared to be a driving force in the vision for Coega. It can only be hoped that new Trade and Industry Minister Mandisi Mpahlwa is able to learn the importance of mitigating losses where a project fails to materialise as originally hoped.
Heese is a BusinessMap Foundation associate.

Last modified on Thursday, 26 June 2014 15:50

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