SA’s industrial zones show promise despite hiccups
After making a slow, tentative start, South Africa’s industrial development zones (IDZs) are beginning to find their feet despite the country facing an extreme electricity shortage that has disrupted business operations across the economy and triggered fears of further steep power tariff hikes.
When the IDZ programme was launched in the 1990s, it was sold to international investors on the back of the country’s status as a cheap, reliable supplier of power. Then unsuspecting South Africans saw this golden status being shredded into pieces in 2008 when the national electricity grid nearly collapsed, resulting in state-owned power supplier Eskom unleashing disruptive spells of load-shedding that forced mines and smelters to shut down for days.
The energy cloud hanging over the country proved to be too much for some investors and the Coega IDZ, one of the country’s five operational IDZs, became a casualty of the crisis when a big a potential industrial tenant, Rio Tinto, pulled out of plans to build a $2.7 billion aluminium smelter at the industrial park. The global mining giant came within a whisker of making the investment, but scrapped it due to concerns about the power crisis and weak aluminium prices.
Despite this setback, Coega IDZ, located near Port Elizabeth adjacent to the Ngqura Port, has rumbled on, attracting 28 operational investors who have invested more than R151 billion since its inception.
A hike in electricity price will increase the cost of doing business while Shell’s partial disinvestment in South Africa due to regulatory concerns and delays in issuing of energy exploration licences will send a negative signal to global and local investors who have designs on the country’s petroleum and gas industry.
Just recently Ngqura Port, operated by transport and logistics parastatal Transnet, officially unveiled two new berths and port operating equipment costing R2 billion, an investment that has scaled up the port’s cargo handling capacity to 1.5 million TEUs from 800 000 TEUs.
This investment is a signal that the government has confidence in the IDZ programme, which is intended to attract foreign direct investment (FDI) and boost industrial exports into the rest of the world.
In recent times, the government has increased the number of operating IDZs to five. Saldanha Bay and Dube Trade Port were added, respectively in 2013 and 2014, to forerunners Coega, East London and Richards Bay. All the IDZs are situated adjacent to the ports, except for the Dube Trade Port which is situated close to the King Shaka International Airport in Durban.
But there are two developments that occurred last week that could halt the momentum the IDZs have built. Firstly, Eskom announced that it has applied for a 25.3% electricity tariff hike from the energy regulator, National Energy Regulator SA (Nersa), and a second announcement was a decision by global energy producer, Royal Dutch Shell (Shell) that it was pulling back from its shale gas projects in South Africa due to low oil prices and a six-year delay in obtaining an exploration licence for the onshore Karoo Basin shale gas project.
A hike in electricity price will increase the cost of doing business while Shell’s partial disinvestment in South Africa due to regulatory concerns and delays in the issuing of energy exploration licences will send a negative signal to global and local investors who have designs on the country’s petroleum and gas industry.
The proposed tariff hike comes amid reports of a power struggle at the electricity parastatal, which could prolong the energy crisis and further delay commissioning of power stations needed to boost electricity supply. Eskom chairman Zola Tsotsi announced over a week ago the suspension of four Eskom executives including chief executive Tsediso Matona, only to emerge yesterday that Tsotsi himself is at loggerheads with his board, which wants to oust him.
SHELL PULL-BACK MAY AFFECT SALDANHA IDZ
The Shell decision to pull back may also have negative implications for the Saldanha Bay IDZ, the 126-hectare industrial estate, which is being positioned as an oil and gas hub for Southern Africa. Since its establishment, Saldanha Bay has attracted over R9 billion in oil and gas-related investments and it seeks to attract companies specialising in marine oilfield services, oilrig operations, logistics, ship repair and engineering services.
The above-mentioned developments come hot on the heels of reports that the East London IDZ, also based in the Eastern Cape like Coega, faces a R38 million cash flow crunch after its expenses exceeded its revenue.
“If we did not move to use R38 million from our operations due to the limited window of opportunity we had for the project that led to our current shortfall, we would have lost an opportunity to attract six new investments”
The cash shortfall has been triggered by the IDZ’s decision to use a portion of its operational budget to support a catalytic project after an unnamed development lender delayed in funding half of the project as was initially promised.
The crisis has since eased after the Department of Trade and Industry and the Eastern Cape government stepped in to bail out the East London IDZ with funding of R26 million and R4 million respectively.
“If we did not move to use R38 million from our operations due to the limited window of opportunity we had for the project that led to our current shortfall, we would have lost an opportunity to attract six new investments, introduce a new capability for one of the key sectors of our provincial economy, and create 1 200 construction employment opportunities and 348 manufacturing and services jobs,” Simphiwe Kondlo, East London IDZ Chief Executive, told GetBiz.
Kondlo pointed out that the IDZs decisive action to protect the investment will bring positive economic spinoffs for the industrial estate, which has attracted 38 investors that have invested R4.4 billion in total in the automotive, agro-processing, renewable energy, aqua-culture, and general manufacturing sectors
Most big industrial hubs across the world – in Japan, South Korea, Taiwan, China and Europe – are strategically located on the coast or along huge navigable waterways. South Africa merely followed suit.
IDZs MAY TAKE 50 TO 100 YEARS TO POPULATE
Some of South Africa’s IDZs are industrial estates that are so huge that will take between 50 and 100 years to fill up with factories. Take Coega, for instance, it is 11 000 hectares estate, an area the size of 22 000 football pitches, which the IDZ’s Chief Executive Pepi Silinga predicted in 2009 it would take up to 50 years to fill up the IDZ with industrial investors.
The youngest of the IDZs, the Dube Trade Port, is targeting light manufacturing, which is not electricity-intensive, and will appeal to investors who are in aerospace, agro-processing, electronics, pharmaceutical, clothing and textile sectors.
“The aim of the IDZ is to attract industry, create jobs and be sustainable rather than maximise profits through prohibitive rentals”
On the other hand, its KwaZulu-Natal counterpart, the Richards Bay IDZ, is looking to attract heavy industries such as minerals beneficiators that require loads of power for their operations.
After years of struggling to attract tenants, the Richards Bay IDZ, which has Indian company Tata Steel as the only investor, appears to have turned the corner last year. The IDZ’s 2013/2014 annual report says that it has signed up three new investors who will make investments worth R4.56 billion.
“The aim of the IDZ is to attract industry, create jobs and be sustainable rather than maximise profits through prohibitive rentals. Land needs to be made available to investors at an attractive rate, which the Richards Bay IDZ has until now strived to do,” Bongiwe Kunene, the IDZ’s chairman, is quoted as saying in the report.
*Article first published by www.getbiz.co.za