Dreams offset by business realities and another taxpayer burden

While controversy over the Coega project intensifies, Eastern Cape Finance & Economic Affairs Minister Enoch Godongwana remains confident that progress is being made with plans to construct a deep water harbour at Coega, 20 km from Port

Elizabeth, and to establish an industrial development zone (IDZ) around it.

The controversy reverberates noisily in the political arena, where it adds to the din emanating from argument over the arms procurement deal.

The Coega project has been flagged by official statements as one that will benefit tangibly from the "offset" investments promised by the arms manufacturers selected to supply weapons to the Defence Force. It is thus a major test of whether the offsets will actually materialise and whether they will pay for the cost of the arms, estimated at R43,8bn in February by Finance Minister Trevor Manuel in his Budget speech.

Though Godongwana does not liken detractors of the Coega project to dogs yapping at a moving caravan - the metaphor used by the communications manager of the Coega Development Corporation (CDC), Ray Hartle - he believes the development groundwork has been done and that "building blocks are all in place".

He is not perturbed by the failure so far of the CDC to clinch a single deal involving a concrete commitment from a large private company, local or foreign, to invest in the Coega project, though more than five years have passed since the establishment of the Coega Implementing Authority, forerunner of the CDC.

It is two years since hopes were aroused that German steel manufacturer Ferrostaal would build a multimillion rand stainless steel mill at Coega as part of the offset from the German consortium - of which Ferrostaal was a component - awarded a R4,5bn contract to supply the SA navy with three submarines.

Mindful of the failure of Ferrostaal to build the steel mill - it has decided to invest in Middelburg, Mpumalanga, instead - observers might be tempted to interpret Godongwana's quiet confidence as unjustified optimism or, more charitably, as the inscrutable composure of a poker player with a weak hand.

Ferrostaal's withdrawal is a double blow in the sense that it is the sequel to another, earlier withdrawal by a major investor, Billiton.  

Godongwana's list of the achievements for the Coega project includes:

• Completion of an environmental impact assessment by the provincial government, which has been sent to the national Department of Environmental Affairs for appraisal, and as a sign that Coega is the joint responsibility of provincial and national government;  

• Finalisation of plans to construct a harbour at Coega and later revisions to include the building of a container terminal adjacent to the harbour;

• Commitment by Portnet, a subdivision of Transnet, to finance the building of the harbour and the construction of a 7 km road linking Coega to Coega Kop; and  

• Application by the CDC to operate as an IDZ agency when Trade & Industry Minister Alec Erwin has designated the precincts around Coega as an industrial zone.

Since funding for the building of the harbour comes from a State corporation, the financial burden falls on the Treasury and ultimately the taxpayer. On present evidence the Coega project, far from reducing the bill for the arms deal by way of offsets, will add to the taxpayer's burden.

Portnet head Siyabonya Gama has put the construction costs of Coega at R4,65bn, consisting of an initial phase cost of R1,65bn and another R3bn "depending on tenant demand". Godongwana talks of a maximum cost of R2,4bn.

Either way, the bill will be passed on to the taxpayer. The hope is that Portnet's investment will stimulate interest from the private sector and attract tenants, who, in turn, will serve as generators of economic growth in a region characterised by unemployment.

Manuel is on record as saying as far back as September 1998 that R20bn worth of projects had been lined up for the Coega harbour and IDZ.

Those projects have not yet materialised, despite promises of substantial incentives by CDC chief executive officer Pepi Slinga, including a six-year tax holiday, a special labour dispensation and a "world-class purpose-built infrastructure".

The anticipated investments from the submarine consortium have been relegated to a historical footnote. 

With acknowledgment to Patrick Laurence and the Financial Mail.