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Coega still sounds great, but 10 years later where is i...

Business Maverick

Business Maverick, Politics

Coega still sounds great, but 10 years later where is it?

It just goes to show, you shouldn’t always believe what you read in the press. For a long time, there were gushing reports that South Africa wanted to copy the economic miracles of the Asian tigers by building a multibillion-rand duty-free industrial park at Coega, near Port Elizabeth. But hold on folks, let's look at the facts.

When you read the PR blurb for the Coega Development Corporation, you’d think you were being transported into a commercial wonderland. But in truth, the R10 billion construction of the Coega industrial development zone (with real cost to date uncertain) is a graveyard for white elephants. With Coega, you feel as if you’re reading a book you’ve read before, and now it’s become dated.

By the time revenues flow at Coega, the Asians will have built many more trade zones for their rapidly expanding economies. But SA is yet to hit a modest 6% GDP growth, while Coega remains a half-empty sandpit devoid of essential infrastructure.

In China, Shenzhen has been the most successful special economic zone (SEZ), developing within 20 years from a village rice paddy into a city with a population of more than 10 million. Being adjacent to Hong Kong likely helped this growth, along with China’s massive workforce, but it does show that Coega’s 10-year development path has taken far too long, and the non-existent returns so far speak volumes for the troubles that have beset this project.

India introduced SEZs in 2000, deeming them foreign territories for purposes of trade, duties and tariffs. Since 2007, some 220 zones been built, causing the World Bank to worry that they’re not sustainable. But the point here is that these countries act fast, which cannot be said of SA.

India’s and China’s SEZs are often developed through a public-private partnership, with off-site infrastructure, equity investment, favourable loans and bond issues helping private developers obtain adequate returns. It’s fair to say that little is known about Coega in this regard. Its accomplishments to date and the real terms of its trade and investment incentives are distinctly out of the public eye. A new government has come in, and the curtain has been drawn further across the window of bright potential. And potential is all that remains, when, after years of haggling, the zone lost its anchor tenant, the Alcan aluminium smelter project, because Eskom couldn’t guarantee uninterrupted power supply.

So forget the double taxation avoidance agreements, the customs and excise duty refunds and drawbacks, the export marketing and investment assistance scheme, the zero rating for VAT on exports and services, the capital allowance write-off over five years at 20% a year, the wear-and-tear allowances or the depreciation allowance on buildings used for manufacturing. Forget it all. The special economic zone means nothing when the site is unfinished and electricity is nowhere to be seen.

The vision for Coega keeps changing, and not because of changing markets. Rather, there’s not enough happening on the ground, despite the Coega Development Corp. saying 22 investors have signed some R30 billion in agreements to make and process goods such as chemicals, vehicle components and other manufactured products, while prioritising petrochemicals, bio-fuels and business process outsourcing. And this makes one wonder what the future will hold for the port of Port Elizabeth, some 20km up the road. The 12,000ha Coega site has a core 4,500ha industrial area for export-driven manufacturers. At first, the concept was for a deep-water port to handle manganese and other bulk ores, but now the emphasis has shifted to containerised cargo, although the cranes dotting the skyline remain static hulks.

A closer look at the PR that gets pumped out of the Coega IDZ shows that all you’re reading late in 2009 are calls for expressions of interest. The place should already be humming like the port of Rotterdam, with state-of-the-art cranes gently setting containers of finely manufactured goods on cargo carriers destined for the ports of the world. Instead, the giant has stumbled before it’s even taken its first step. And it wouldn’t be wrong to say that it was a misconceived baby from the start.

An SEZ (or IDZ in this case) is a place that is more commercially liberal than a country’s usual productive base. The term can include free trade zones, export processing zones, industrial estates, free ports, and urban enterprise zones, among others. Each zone has a different utility and legal standing in the greater economic scheme. Coega’s problem is that it doesn’t know what it is. It also has a tainted history in the South African sense of the term, starting out as a product of arms deal offsets, but failing to hook German steel firms, Ferrostaal and Thyssen, despite listing them as anchor tenants. Usually the goal of an SEZ is to increase foreign direct investment, but Coega certainly hasn’t done that yet. And as for the arms deal offsets, well, show us the money.

SA’s fascination with the notion of a developmental state glibly overlooks the deadly triangle that strangles China’s state-owned enterprises – government bureaucracy, state funding and opportunities for endemic corruption. It also overlooks the fact that India and China are rapidly freeing up their economies, just as politicians in SA are throttling markets.  And, while state-owned Coega is premised on private enterprise, government made a number of very costly ground-floor mistakes from the outset by encouraging the wrong tenants – lumbering behemoths like Alcan – when it should have offered incentives to medium-sized manufacturing enterprises and those that are small, technologically-savvy and spry.

Infamously, the state also screwed up Eskom.

So now, after years of haggling, Coega has lost its anchor tenant because it can’t promise uninterrupted power. The Independent Democrats, whose voices  are just a squeak in the parliamentary boom-box, have got it about right when they say the cancellation of the smelter project will save South Africa as much electricity as is used by Cape Town. Aluminium smelting is an energy-sucking business. It’s highly polluting with costly controls. But more than that, it’s a huge undertaking that requires massive up-front investment, a big time-frame, consistent returns and market competitiveness. It’s a moot point that Coega, or SA, offers that, especially after Eskom started turning out the lights. Okay, good riddance Alcan, let’s look ahead.

To be sure, the government should be encouraging thousands of less-energy demanding medium and small manufacturing enterprises from SA and the rest of the world to set up in Coega, mostly for purposes of exporting saleable, high-tech goods and services. Along with its attractions of lower US import tariffs through the African Growth and Opportunity Act, and preferential access to European markets, there’s no harm in also licensing some of these firms to import critical skills and technologies at preferential rates. So, first up, how about contracting independent services operators to set up the expediting and receiving functions for such products. Then give further incentives for companies dealing in certifiable “green” goods and processes that meet the highest legal standards elsewhere. Add bigger tax breaks for companies employing labour forces greater than a certain size and even give personal tax breaks to the workers themselves, subject to qualifications and experience.

Instead, calls for expressions of interest on Coega’s website hopefully request that someone will build an R80 billion PetroSA refinery along with a R30 billion gas-fired power station. The gas would no doubt come from Mossel Bay, which is relatively nearby and run by the state-owned concern. But these potential synergies still don’t whet the market’s appetite, and the numbers involved are astronomical, leaving one to wonder what the operating stipulations would be. And it’s this uncertainty and the focus on big, investment-heavy companies, that makes Coega a sleeping dog, instead of an industrial giant.

In Asia they encourage BOO (build, own, operate) and BOT (build, own, transfer). There’s even BOOT (build, own, operate, transfer). But few have ever heard of these concepts here. Eastern Cape has huge structural problems. It’s not very populated. East London and PE are miles apart with not much in between. They’re miles from Durban at one end and Cape Town at the other. And there’s little that they can produce or cost-effectively ship to or from Bloemfontein, Kimberley, Johannesburg or Pretoria. In other words, they’re just out there. And that’s why Coega hit the drawing board in the first place, because the real potential comes from the sea  in the form of trade routes east and west.

While SA has rich and private banks, they’re unlikely to want to politicise their income streams outside of the market economy. Like state enterprises in China, one suspects that Coega lacks hard budgetary constraints. It can keep running even though it’s chewing money. This is mostly because of politics and taxpayer-funded largesse. The government can’t afford to turn away because the promise of further unemployment will cause social instability. And, because the state owns Coega, various government agencies will be able to intervene in its smooth running. Then there is a lack of incentives to induce managers to act in the interests of tenants. Because managers are often politically appointed, their careers are linked less to performance than their assumed political loyalty and competence. And a lack of management accountability results in well-paid managers running money-losing firms. So, too, managers negotiate their contracts with the state by hiding the real figures of production, revenue and profits, and thereby gain undeserved benefits.

As in China (and India), all of this bedevils Coega. And while apartheid’s Nationalist regime bequeathed the country the likes of Eskom and Sasol, strategically privatising the latter before democracy came about, the end result has been two of the most polluting industries on the planet. And Eskom and Sasol performed the same political roles then as they do now, employing cadres loyal to the cause, with endless benefits and jobs for life (okay, unless you’re the CEO).

So much for the economics of the developmental state – the turgid and unyielding legacy of Stalinist-style industry. In the South African context, an unfettered free market approach won’t help Coega at all. But profitability based on well thought out BOO, BOT and BOOT contracts might help prevent the corruption that’s endemic to cosy relationships between states and private enterprise. And more importantly, it may give Coega the focus it needs, so that everybody is on the same side, for the long-term. Such properly mandated returns could see Coega benefit democracy, as well as the broader populace and economy. (The Independent Democrats might be on to something when they say the Alcans of the world won’t lead to large-scale job creation, because aluminium ingots are simply exported, and the real value is added elsewhere.)

But Coega is with us, and we dare not let it fail. In September, Belgium’s ELECTRAWINDS said it’s finalising the feasibility of setting up a commercial wind farm in Coega, investing R1.2 billion to produce green, renewable energy by 2011. In addition, the firm will offer scholarships to top local students interested in furthering their studies in this field. The Belgians say they want the first turbine in place by May 2010, so that green energy will power the Nelson Mandela Stadium.

Now that’s an exciting initiative, great PR as well, but it won’t solve Coega’s energy woes on its own. We wonder if there’s anything that could.

By Mark Allix

Read more: Coega, Rhodes University Public Service Accountability Monitor, electrawinds, eprop, University of Michigan in Ann Arbor, Southern Africa Transport and Communications Commission Technical Unit, All Academic Research


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