Development zone woes

2012-11-10 14:08

IDZs in Coega, East London and Richards Bay are not performing to expectations, says trade department

The Department of Trade and Industry (DTI) has publicly admitted all three operating Industrial Development Zones (IDZ) – Coega, East London and Richards Bay – have not performed to expectations.

The department is now finalising new legislation that will set up a new programme to create special economic zones (SEZs), in which the IDZs would be incorporated for the sake of greater effectiveness.

Marked by pomp and ceremony at its launch in Port Elizabeth in 2000, many in Nelson Mandela Bay and throughout Eastern Cape
hoped the Coega IDZ at the Port of Ngqura, just outside

Port Elizabeth, would be an economic saviour that would create much-needed jobs and deliver the area’s inhabitants from abject poverty.

Others, however, were pessimistic from the onset. They saw a white elephant that would simply brighten the Algoa Bay shoreline without adding much economic value to the region’s 6.5 million people.

Economists, business analysts and government itself agrees the Coega IDZ has not performed according to expectations.

Government has largely been blamed for not providing enough investment incentives to the IDZ.

Other factors, aside from incentives, that are seen to have contributed to the slow economic growth of the IDZ are the poor supply of electricity and water and the shortage of skills in the region.

A bill that will lead to the establishment of SEZs is currently out for public participation. In admitting the failure of IDZs, the DTI cites the lack of coordinated planning arrangements, dependence on government funding and a lack of targeted investment promotion, among many other causes.

The department also cites inadequate coordination across government agencies as one of the key constraints to the success of the IDZ programme.

According to DTI documents, the review of the IDZ programme was brought about by developments in national economic policies and strategies such as the Industrial Policy Framework and the New Growth Path.

Developments in the global economic environment such as the formation of Brics (a Brazilian, Russian, Indian, Chinese and South African economic partnership) also played a role.

Tumelo Chipfupa, the DTI’s deputy director-general, in September told Parliament that three IDZs “should have achieved better results”, adding a lot more had been hoped for but the result of underachievement was mainly because “the funding model did not cater for the dynamics needed by investors, and the allocation of funds had been inconsistent and inflexible”.

Chipfupa admitted there was a lack of sufficient marketing and stakeholder coordination of the IDZs, and funding was on an ad hoc basis.

The other challenge that faced the IDZs was that they were supposed to be at harbours, ports or international airports only, and were supposed to be focused mainly on exports.

Government now feels this was limiting, as other parts of the country were not considered even though they had the potential for economic growth.

The proposed different categories of SEZs include free ports, free trade zones, industrial parks, science and technology parks, sector development zones, partial development corridors, and IDZs. This means instead of being stand-alones, IDZs will
be part of larger, inclusive SEZs.

However, the developers and operators of the Coega IDZ, the Coega Development Corporation (CDC), do not agree their IDZ has not lured enough investment.

Although it admits there are challenges, the CDC feels it has done well in the circumstances.

Ayanda Vilakazi, the CDC’s communications manager, says: “Infrastructure development such as the Coega IDZ should be measured in decades and not after a few years – and the achievements of the past 15 years are staggering considering the short time span.

“The IDZ only became operational and open to investors in 2007. In the five years of operation, the 22 investors that have been secured – in spite of several challenges, including the European debt crisis and electricity shortages, funding scarcities and reduced commitment from power suppliers – is testimony to sticking to a socioeconomic-development trajectory.”

Vilakazi says investment incentives, which form part of any government’s strategic approach to securing investment, are kept confidential but differ from one investor to the next.

Given the nature of global competition for investment, incentives are one way in which certain locations gain a cutting edge over others even though they offer very similar benefits, he says.

Since April this year, he says, the Coega IDZ has secured investment to the tune of R754 million, with seven investment commitments valued at R2.7 billion.

According to him, during the 2011/2012 financial year, about 8 898 jobs were created and 25 586 people were trained as part of the skills development programme of the IDZs.

Currently, the Coega IDZ is home to 22 operational investors with an investment portfolio of R140 billion.

The IDZ contributes 5.9% to the Eastern Cape’s provincial gross domestic product (GDP), and 0.5% to the national GDP.

But Ed Richardson, a former business editor and communications and public relations consultant, has a different view.

He says: “The Coega IDZ has not met expectations, mostly because the CDC has been forced to work at a disadvantage in relation to other IDZs and export-processing zones around the world. All offer infrastructure, logistics, access to markets and land.”

According to him, Coega was “hugely” uncompetitive due to the DTI not offering any meaningful incentives in the form of tax holidays, relocation allowances and other tax breaks.

Richardson also mentions the shortage of electricity, which makes business more expensive, as another investor disincentive.

“South Africa’s IDZ strategy was conceived at a time when strategists believed, wrongly as it has turned out, that the country had abundant and cheap electricity. It is now a known fact it has neither cheap nor reliable electricity,” he says.

Due to the manner in which the Coega IDZ has been zoned, he says, it is not able to offer freehold property or low-cost long-term rentals to investors.

“Nor is it able to offer competitive rebates on rates and electricity as these are controlled by the Nelson Mandela Bay municipality, which has been less than an active partner in the development and marketing of the IDZ,” says Richardson.

Other stakeholders also mention Transnet’s “non-cooperation” in providing a sustained competitive railway link between the Port of Ngqura and Gauteng as another reason investors are wary of committing to the IDZ.

“In short, Coega has met expectations in terms of developing world-class infrastructure and systems. It has not, and will not, deliver the expected jobs and local economic growth until such time as the constraints outside of the power of the CDC are addressed,” says Richardson.

The Nelson Mandela Bay Business Chamber echoed the same concerns about the lack of incentives from government.

The chamber’s chief executive Kevin Hustler says that while there has been concern regarding the slow investor uptake over the past years, there is now a growing momentum, as seen in recent investments.

But Hustler adds: “We need more incentives from the DTI to ensure we attract international investors if we are to compete globally.”

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