Johannesburg: Coega - the deep-water port outside Port Elizabeth - and the industrial development zone (IDZ) to which it is attached have since their inception struggled to shake off the white elephant tag. Without a large anchor tenant and lurching from one financial crisis to the next, Coega has been a problem that the government has been unable to solve. But it might turn out that Coega was a visionary idea — if the government breathes new life into its IDZ policy, and the zones flourish into what was intended, becoming magnets for new industrial development.
The government seldom admits policy failures. When the director-general of the Department of Trade and Industry, Lionel October, briefed Parliament’s portfolio committee last week on the new special economic zones (SEZs) that will replace the IDZs, he described the latter as "not as successful as we would have hoped" and said the government had decided to "shift course". In 10 years, three IDZ s — Coega, Richards Bay and East London — have been established. A fourth is planned for Saldanha and a fifth for Johannesburg’s OR Tambo International Airport.
So why did the IDZs — punted by the department since the late 1990s as the answer to economic growth and development — fail? Three reasons stand out. First, the IDZs were begrudgingly agreed to by the National Treasury, which, once it had released funds for the initial infrastructure investments, starved them of operational resources and opposed providing incentives to attract investors. Second, the IDZs and the department were easily ignored and bullied by the big parastatals whose inputs were essential to attract investment. Third, the department was weak and disorganised and never properly made the case for IDZs, which became neglected.
The fight between the Treasury and the department — more particularly between their former ministers, Trevor Manuel and Alec Erwin — over industrial policy and industrial incentives was a bitter one. To support his industrial policy proposals, Erwin wanted two things: funds to build infrastructure in IDZs and a strategic investment fund that would provide incentives for new investment. In the end, and only because he had then president Thabo Mbeki behind him, he got a little of both. To date, R5,3bn has flowed from the fiscus via the department into IDZ infrastructure. On the incentive side, Manuel agreed to the Strategic Investment Programme (SIP) in 2002, a tax benefit for new investment or expansion of more than R50m. The SIP was not specifically aimed at the IDZs and ran for only three years.
One consequence of the lack of national consensus over the IDZ concept was the absence of a coherent funding model. Funds for the IDZs were never predictable or guaranteed. The IDZs were never given meaningful resources of their own to manage.
This policy dichotomy between the Treasury and the department on this issue, which has cut through government policy for much of the past decade, seems to be softening. Last year, the SIP scheme was revived in a similar form and last month it was further modified to allow firms that do business in the new SEZs to get an additional tax benefit via an enhanced capital depreciation allowance.
As well as this incentive, departmental officials are hoping to tap into several other sources of funding. One will be a new SEZ fund, which will fund operations in a long-term, predictable way but is hoped might also be a source for either sector-specific infrastructure development or incentives. Another is a R25bn economic support package.
The Treasury was not the only important stakeholder that didn’t believe in the IDZ concept. Parastatals — particularly Transnet — had to be dragged into, for instance, providing the infrastructure necessary for the Coega port, on which the rationale for the Coega IDZ rested. Other examples of failure or noncooperation by parastatals are the lack of progress made on plans to deepen the East London port, on which the success of the IDZ rests, and the failure of the National Ports Authority to come up with an attractive enough offer to oil-and gas-shipping company Universal Africa Lines, which after more than a year of negotiations said this week it would no longer invest in the Saldanha IDZ. SA’s port charges remain among the world’s highest.
The SEZ concept has been designed to overcome many of these problems. The SEZs will have a common governance structure on which both those who fund them, those responsible for political oversight, and all of the significant parastatals will have board representation. The funding problem has also been taken care of through the establishment of a dedicated fund.
While the department failed to get buy-in for its IDZ concept, it must shoulder some of the blame for their failure. During the past decade, it spent a good deal of its time in crisis: it restructured twice and became so dysfunctional that a succession of experienced officials left.
The consequence of this for the IDZs was that the concept was not as fully scoped out as it should have been. Once they were set up, the IDZs were left to their own devices. Under the care of provincial and local government, which lacked the vision and the global connections to market themselves and the ports to which they were attached, they have grown slowly and incrementally. They have also been subject to the vagaries of politics. In Richards Bay, where provincial and local authorities have at times been controlled by different political parties, co-ordination has been particularly difficult. The SEZ governance model will also bring all three levels of government together on the board.
But while the SEZ model is a more coherent and widely supported concept, success is by no means guaranteed.
The department believes, in line with the international literature on the topic, that while incentives can help tip an investment decision in a particular direction, it is the underlying business case that is the real deciding factor. In SA’s case, it hopes that the business case for investment will rest on location and world-class infrastructure.
On location, SA is probably better placed than ever before as the world fixes its attention on Africa as the next hot spot of growth. But when it comes to infrastructure, the challenges remain large.
Apart from constrained electricity supply over the next two years and the steadily rising price over the next decade, rail and road constraints remain a problem. In contrast to competing countries — such as Malaysia, where it is not uncommon for a big power user to secure a 30-year supply agreement for electricity, or Australia and Canada, where the regulatory environment allows large users to generate their own power — SA is way behind the times.
Individual investors need tenacity and even a bit of patriotism to secure the infrastructure they need.
One of Coega’s planned new investments — a manganese smelter by Kalagadi Resources — illustrates the point well. To connect its manganese mine in the Northern Cape to the rail line, the company says it has invested R525m in building 23km of rail, made further substantial investment in roads, built a temporary power line and trucked in water.
Few other investors would be likely to go to such lengths.
Whatever the incentives the department finally secures, getting SA’s infrastructural environment competitive will be the foundation on which the SEZs succeed or fail.
