For Coega it’s either diversify or die

2009-10-24 14:07

SOUTH Africa’s flagship industrial development zone (IDZ), Coega, has had to undergo a transformation to fend off serious threats to its viability as an investment destination.

Coega, situated near Port Elizabeth, is one of five IDZs sold to international investors about five to 10 years ago on the back of South Africa’s reliable and cheap electricity supply.

Since then, things have changed.

Coega Development Corporation chief executive Pepi Silinga said: “The power cuts caused some of us to suffer from personal depression. But we are not whingers and we want to be part of the solution to the power crisis.”

Last week the impact of the country’s electricity woes finally hit home when global mining giant Rio Tinto scrapped plans to build a $2.7?billion (R20?billion) aluminium smelter at Coega.

Silinga said Coega executives saw the Rio Tinto decision coming as early as August last year when a study they commissioned showed that there was a global glut of aluminium, which had resulted in prices going into free-fall. Power cuts in South Africa did not help as aluminium smelters are power beasts.

“We asked ourselves who in their right mind would continue with this project (smelter),” Silinga said.

More than 30% of aluminium production costs are related to electricity. South Africa’s IDZs have long struggled to entice investors – even during the times of abundant cheap electricity.

Silinga said: “Energy was never a panacea to all the problems that we had in attracting investment. There were countries who were twice as expensive as us but were attracting 10 times more investment.”

Decades of underinvestment in electricity infrastructure led to the national grid nearly collapsing in January last year, forcing mines and smelters to shut down for days.

South Africa is not yet out of the woods as Eskom is battling to raise the R385?billion it needs to build powerstations and invest in electricity transmission and distribution.

As long as Eskom struggles to find the funding, the risk of further power blackouts still looms large.

The cash-strapped power utility has requested yearly tariff increases of 45% for the next three years and has invited independent power producers to assist it.

Questions marks over the country’s security of power supply and the tariff hikes have resulted in South Africa losing its most competitive advantage as one of the world’s lowest-cost electricity regions.

Silinga said the loss of this competitive advantage had been a big blow and has weakened Coega’s ability to attract heavy industries, especially metal producers which are power guzzlers.

The East London IDZ, which is also in the Eastern Cape, said it was concerned about the power crisis, but less so than Coega.

“Our focus has never been on the large electricity intensive industries. We are still continuing on our strategy of attracting light industries into the zone,” said Ayanda Ramncwana, its spokesperson.

To shield itself from the energy crisis, Coega is diversifying. Business Process Outsourcing, whose key component is call centres, has become a key part of its future strategy, so too are sectors such as automotive, agro-processing, logistics and warehousing, capital goods and energy.

“We are no more an industrial zone, we are an economic zone with a number of sectors, which are not heavily dependent on electricity,” said ­Silinga.

The business community around Port Elizabeth is lukewarm to the impact Coega is having on the region.

“Ten years down the line, Coega has not delivered the results we initially expected. But overall we are pleased with what is happening at Coega. You have to think of it on a 20- to 30-year investment horizon.

“If Coega gets things right, the city will be propelled to the global stage,” said Samantha Venter, operations manager at the Port Elizabeth Regional Chamber of Commerce and Industry.

The global economic recession, which has depressed demand, has made it difficult to attract investors. Some investors who committed themselves to Coega are struggling to raise finance and others have folded.

One Malaysian auto-components manufacturer has had to abandon a plant it was building halfway after experiencing financial woes.

Silinga, an enthusiastic investment promoter, has a daunting task of filling up with factories the 11?000 hectares estate, an area the size of 22?000 football pitches.

From his office located at the top floor of the Coega headquarters one begins to appreciate the sheer magnitude of the work that lies ahead for his team. The area is still a wasteland of bushes and shrubs with a few structures that have been built by committed investors.

However, an impressive roads network, electricity and bulk water infrastructure has already been laid. Roughly R14?billion has been spent on infrastructure and the construction of a deep-water port, which welcomed its first cargo vessel in early October.

Silinga reckons it will take at least 50 years to fully populate the IDZ.

“At one stage, the Dubai port was closed for 10 years because it had no clients. In 1945 Singapore was a swamp and it only started seeing development after 1986. We will also reach our tipping point, it could take 15 years or longer, but we will get there,” he said.

Filling up such a gigantic industrial park will not be easy as it has to compete with industrial powerhouses such as the US, Europe, China and India.

It also has to fight for a share of the less than 2% of foreign direct investment that comes to Southern Africa. Of the portion that makes it to South Africa, Coega has to compete with the established industrial hubs of Gauteng and KwaZulu-Natal.

Nonetheless Coega has signed up 21 investors, of which 18 are already operational or building factories. The combined investment to the area is just over R9 billion.

A further R120 billion worth of investments is already in the pipeline. These include a planned R75 billion oil refinery by PetroSA and a mooted R30-billion power station.

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