East London Industrial Development Zone: briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
13 February 2002
EAST LONDON INDUSTRIAL DEVELOPMENT ZONE: BRIEFING
 

PowerPoint Presentation by the East London Industrial Development Zone Corporation (edited version)
Outline of presentation (see Appendix 1)

SUMMARY
The East London Industrial Development Zone corporation (ELIDZ) briefed the Committee on strategy and planning; their efforts to improve the economy generally and the East London economy specifically. East London is currently experiencing economic difficulty and unemployment. The most important objective of the project is to improve the quality of life of residents of East London. The Department supports the project and the support of the Portfolio Committee is now needed. ELIDZ and Coega have competed for the same tenders in the past but they now work closely together and are not perceived as threats to one another.

The Department explained their work on establishing industrial development zones throughout the country, in which the Eastern Cape has taken the lead.

MINUTES
Mr P Miles: CEO, East London Industrial Development Zone (ELIDZ) conducted the presentation (see Appendix 1 for outline of presentation).

The Mayor of Buffalo City informed Members that the primary purpose of this session's briefing was to make the Committee aware of the processing of the ELIDZ project. All involved are aware of the serious economic and unemployment problems currently facing the Eastern Cape, and indeed the country at large. An important objective of the ELIDZ project is to improve the quality of the lives of the East London communities. The Department has already pledged its support for the ELIDZ project, and it now remains for the Portfolio Committee to pledge its support before any such progress can be made. As the presentation illustrated, both Buffalo City and the East London community are ready and able to effect such change.

Dr Mohale, Department of Trade and Industry representative, explained the reasoning behind the establishment of a number of industrial development zones (IDZ's) throughout the country, the running of the process and the degree of support given to the project by the South African government. The planned spatial development initiatives (SDI) are internationally orientated, and it is expected that the IDZ would follow suit. The latter would be linked to international ports, be it sea, air or inland ports. The initiative is currently researching the possible merits of having numerous IDZ's throughout South Africa. The only designated IDZ presently is the Coega port.

The Eastern Cape is leading the way as far as the development of IDZ's is concerned, but to achieve a desirable and successful result, ELIDZ needs the following:
-A registered company undertaking the project that has received the support of the local and
provincial authorities, upon consultation with the Minister of Trade and Industry (the Minister);
-The results of a feasibility study and the successful application of these findings; and
-Properly informing the public of the intention to effect the change, which is not always an easy
task.

In this regard the ELIDZ project is proceeding at a rather rapid pace, but this is due primarily to the lessons learnt from the difficulties experienced with the Coega port. In this sense the ELIDZ project has been truly advantaged.

The project commenced with the submission by the ELIDZ corporation's to the Minister of its intention to develop the zone, followed by public hearings on the matter that allowed the general public to voice their positions on the matter. The consensus from these hearings was considered by the advisory board, and only once Cabinet ratifies the Minister's decision will East London be officially and lawfully designated as an IDZ. The initial thinking behind the initiative was the formation of the IDZ via a Section 21 company, that is, a corporation not-for-gain, that would in turn be wholly owned by the South African government. It was also initially thought that once the project is fully operational the risks attached would be minimal, because at that stage the ownership of the entire undertaking would then be handed over to the private sector. Yet these views have since changed, with the result that the local and provincial governments are now allowed to play a much more active financial role in the process, until partners from the private sector are introduced. Until such time, financial support is relied on extensively from the three spheres of government.

What, then, has the response been from the Department? The Department has already pledged R8m to the project and has guaranteed no less than 30% of the total cost of the critical infrastructure that includes the provision of wood and rail services. The Coega project has received R58, 2m from the Department for sewerage and telecommunications services and facilities, yet the actual plant was not funded by the Department.

The project has, however, been faced with certain challenges in implementing the ELIDZ strategy. There is presently a company on site, and it will proceed with operations as soon as ELIDZ receives permission via the issued permit. Again, to complete the industrialisation of the zone, the assistance of no less than twelve government departments has been enlisted as stakeholders in the project. However, the biggest contribution has to come from the South African Revenue Service (SARS) in terms of the customer income services, as this represents the biggest capital return for the ELIDZ. Therefore, although the Coega port was the first initiative of its kind in South Africa, it seems as though the ELIDZ might be the first project of its kind to succeed in this country. The primary reason for this is the fact that the Coega port, unlike it ELIDZ counterpart, does not presently have its own infrastructure.

What are the objectives of the South African government in the ELIDZ project? One of the chief objectives is the proper facilitation of the ELIDZ project via an effective regulatory framework, and to take care of market failures, where possible, to lower the cost of production. Yet it not desirable that all the IDZ's be allowed to mimic each other and do "the same thing", and for this reason applicants have been encouraged to add a theme to their plants or zones and sites. For instance, the theme of the Coega plant was heavy metals, so that the primary business purpose of any enterprise in and around that site should have something to do with the mining and/or refinement of heavy metals. It has been proposed that the ELIDZ project may consist of several themes that include:
- the motor vehicle production industry;
- the clothing and textile industry, with the production of mohair, wool and, to a lesser extent,
leather goods; and
- the forestry industry.

All these industries will thrive in the ELIDZ project because of the proximity of the site to the source of these materials, thus simultaneously lowering the cost of production. There is also an impressive floral culture, which needs an efficient air freight system to ensure maximum turnover and longevity. Furthermore, competition between the corporations within the specific region would be bolstered, as the investor would first have to be issued a permit from the Department, and thus the collaboration between the industry players would be critical here. Indeed, the project has received full support from the technical team of all the businesses that have submitted applications.

Discussion
Mr N S Bruce (DP) requested Mr Miles to explain the basis for the figures contained in the presentation on the projected income turnover as well as the statement that tenants have already committed themselves to the ELIDZ site, as the media has not reported anything on this matter. Furthermore, the procurement of the condom manufacturing company on site cannot be attributed to the efforts and endeavours of the ELIDZ project, as this contract had already been secured during the arms deal negotiations.

Mr Miles suggested that Mr Bruce was confusing the purpose and functions of a business plan with that of a market plan when, in fact, the two are fundamentally distinguishable. ELIDZ has in fact conducted a survey that showed that the East London community presents a distinct comparative advantage with regards to investment. A business plan on no less than twelve investors was also conducted, the relevant target market was identified and the pre-feasibility financials on these were also completed. Indeed, the job creation factor of these initiatives is a definite catalyst, and the assumptions on which the figures that have been provided are based clearly illustrate this.

The Deputy Mayor of Buffalo City added that the condom manufacturing company actually had a choice of sites for its plant, and eventually decided East London was the most attractive location. It can therefore not be said that this decision was a mere "by-product" of the arms deal negotiations.

Secondly, Mr Bruce enquired where the bulk of the financial investment will come from? Will they be procured locally or abroad and, if it is the latter, does the South African foreign investment climate provide sufficient incentives for such investment, such as whether our labour policy is strong enough to compete with that of the Irish, the Scots and the Norwegians?

Mr Miles responded that this is essentially geared around viable competition within the market, and it is primarily a subjective inquiry. ELIDZ does believe, however, that the national government has provided good incentives that have clearly put East London to an advantage. It should also be borne in mind that South Africa has inherent incentives, such as inexpensive labour and electricity.

Thirdly, what would the approach of the ELIDZ corporation be should local investors such as Daimler-Chrysler (DC) suddenly assert that they are entitled to duty-free transactions?

Mr Miles replied that DC is currently positioned within the duty-free area. DC currently pays duty for importing goods, and when it exports the final product this levy is reclaimed. It is therefore highly unlikely that the sort of development suggested would arise. The relationship presently enjoyed with DC is a healthy and mutually beneficial one. In fact, it seeks to expand the South African industry on a global basis, and research is being conducted on this matter.

The Deputy Mayor of Buffalo City added that DC is a major stakeholder in the success of the ELIDZ project, and it is engaged in regular consultation with the Buffalo City mayor on potential areas of development of the city. The relationship is thus sound.

Fourthly, how much has the East London municipality contributed financially to the establishment of the ELIDZ infrastructure, notwithstanding the administrative support given, as mentioned by both the Mayor and Mr Miles. Would its contribution provide sufficient financial investment? Finally, the Irish business sector has a very sophisticated market research team that conducts very focussed studies and produces top class results. Has the ELIDZ project employed any such expertise?

Mr Miles informed the Committee that the IDZ enjoys a competitive advantage at local level, as both the local municipality and ELIDZ work together for mutual gain, thereby creating healthy competition within that sphere. Negotiations with South African banks are currently underway in an effort to make the initiative sufficiently competitive with global IDZ's. Furthermore, the introduction of another IDZ is on the cards for the bank directly opposite Buffalo City, and this initiative would then "open up" the entire city. Buffalo City itself finances the sewerage and solid waster disposal systems, which cost hundreds of millions of rands, and has also made large areas of land available for ELIDZ at a marginal price. It is therefore clear that the local municipality is making significant financial contributions to the project.

The Deputy Mayor of Buffalo City agreed with Mr Miles that the R500 000 contributed by the municipality cannot be considered a true reflection of the actual contribution made to the ELIDZ project. The land on which the industrial site is to be constructed was sold to ELIDZ at only R4m, substantially lower of its true market value. The other infrastructures provided, as mentioned by Mr Miles, are the waste removal facilities valued at R10m and the outfall sewer system valued at R6m. The city is also financing the future construction of a bridge across the Buffalo River. These, then are the significant projects to which Buffalo City has committed its resources.

Mr Miles answered the final question posed by Mr Bruce by explaining that a research team has been employed to identify the world leaders in these various activities. As soon as the ELIDZ project is properly licensed, it would focus on the twelve investments mentioned because these have been identified as those areas that would give East London a competitive advantage.

Dr Mohale added that Trade and Investment South African (TISA) is responsible for assisting and promoting investment in South Africa. The ELIDZ also falls under this rubric.

Mr H J Bekker (IFP) informed the ELIDZ delegation that the current status of the rail line is a cause of concern, because if that project is not "spontaneously done", it would have to rely on government subsidies and "handouts", which would in turn affect the national economy.

Mr Miles stated that the Durban railroad link is currently battling to maintain a feasible traffic flow to Durban and the primary port. A reason for this is the fact that the excess is routed to East London to save costs and time. It is totally unproductive and illogical to have empty containers routed back to Gauteng. It would seems that the better option would be to re-route these via East London, so that the (currently) empty containers may be filled by DC products destined for Gauteng. This re-routing would spare both time and costs and, indeed, very little funds are needed to effect such re-routing.

Secondly, Mr Bekker asked in which areas precisely does South Africa have a comparative advantage over other countries, apart from the creation of employment as stated earlier, that would really ensure the "very best of the best" for East London?

Dr Mohale said that it is not desirable for the South African government itself to make the most substantial contribution to the ELIDZ project, as this has been shown to ward off foreign investors. It has, however, been acknowledged that some of the factors unique to South Africa that have proved most attractive are the stability of the environment, the quality of life for foreign investors, abundance of leisure spots and availability of health care. It is factors such as these, which affect the investor personally, that attract such investments. As stated earlier with regard to the contributions made by Buffalo City itself, these incentives that are provided by the local municipality that significantly aids the ELIDZ project. However, the increase in pollution levels in East London is a possible deterrent to foreign investors, and the city has to address this concern.

Thirdly, Mr Bekker commented that all attention should not be focussed exclusively on the ELIDZ project, but the Coega port and development within the neighbouring Port Elizabeth communities also has to be addressed.

In response Mr Miles stated that there is some degree of tension between ELIDZ and Coega because both have, in the past, competed for the same tenders (such as the zinc refinery and the brewery). Yet the two now work closely together in order to "break down these barriers", and so the one is not perceived as a threat to the welfare of the other. Furthermore, such interaction ensures that an equitable investment in both areas is attained. As Dr Mohale alluded to earlier, ELIDZ has been encouraged to attach a theme to the IDZ, which differs from that of the Coega project. This then avoids the duplication of operations within the areas, so that development and job creation are promoted. Furthermore, the Port Elizabeth community is not being ignored, as the smaller Volkswagen supplier would be located in Port Elizabeth. The DC plant would, however, remain in East London.

The Deputy Mayor of Buffalo City informed Mr Bekker that the CEO of the Coega project has been instructed to meet with the East London counterpart, so that conflict between the two projects is avoided.

Dr Mohale explained that the Department has concluded a "memorandum of understanding" with all government departments that have a critical role to play in the ELIDZ project. This contract confirms the commitment of these Departments to the establishment of any infrastructure required by the ELIDZ project. The Department of Transport has already pledged its support to reviewing the rail situation referred to earlier.

As clarification Mr Bekker then, on a point of clarification, informed both the ELIDZ delegation and the Department that he referred to the rail system from Richards Bay to East London and not, as assumed by those parties, the system between Gauteng and East London.

Dr Rob Davies (ANC) said it has been reported that the DC plant enjoys the most effective and productive relationship with smaller South African businesses that, in turn, manufacture various parts for DC. Could Mr Miles explain any plans made by the ELIDZ project to perpetuate and enhance this relationship, as well as any strategies devised for creating others like it?

In response to the Chair's first question, Mr Miles stated that ELIDZ has insisted that a tenant questionnaire be completed as part of the small/medium/micro enterprises (SMME's) building programme, as part of the application procedure and the general application procedure. This would ensure a healthy relationship, very similar to that enjoyed by DC and ELIDZ, between ELIDZ and any future business on within the industrial zone.

Dr Mohale added that the automobile manufacturing industry is highly organised, and the plans for the ELIDZ plant will include a "supplier park", which would then house all the various SMME's (the suppliers of automobile parts) in one location. This would enhance production rates and decrease the costs involved. This model has already been implemented in Gauteng, and the similar plans have been made for ELIDZ.

Secondly, what steps have been taken by the ELIDZ corporation to effectively balance, on the one hand, healthy investment in the ELIDZ project and the creation of a viable infrastructure here and, on the other, the inclusion of a duty free site. Would these two seemingly conflicting operations be able to function successfully in some sort of symbiosis, or even within the same industrial site?

Dr Mohale stated that more than one aspect was considered in planning the ELIDZ initiative. These included the environment, the skills required, the source of raw materials, the proximity and efficiency of the transportation system, the support given to the infrastructure and costs considerations. Thus various issues were considered in an attempt to arrive at a multi-faceted approach.

Thirdly, Dr Davies requested clarity on the date by which the Minister's decision on these matters in expected.

Dr Mohale informed Members that the stipulated date is 20 March 2002, and the announcement or ratification is expected by then.

Ms CC September (ANC) encouraged the Department to effect the proclamation as the actual document states February as the cut-off date, yet is this session the date has now been further delayed to March.

Dr Mohale informed Members that this process would definitely not be finalised by the end of February, as it takes at least three weeks to complete the process as a matter of proper procedure. The revised provision date is thus 20 March 2002.

Secondly, how are the automobile, clothing and textiles and wood industries informed that East London is indeed the best location for their business? Is East London not currently experiencing problems with unemployment and poverty, and would these industries be best suited to solve these problems in Ease London. It is suggested that to properly solve the matter other industries be considered.

Mr Miles responded that the wood and textiles industries chose East London because resources are readily available in the Eastern Cape. Furthermore, the Eastern Cape has more potential for human resource skills development and opportunities for job creation for these industries than any other South African industry. Consequently the more remote areas could also be developed because of their proximity to these resources. In fact, the timber industry in the Eastern Cape consists of approximately 300 hectares that are to be found in Transkei and Ciskei predominantly, in which the local, less advantaged communities are actively involved. The development of SMME's are also accommodated.

Furthermore, having recourse to industries other than those expressing an interest in ELIDZ development (as suggested by Ms September) would be undesirable, because "the others" have already entrenched themselves in Cape Town, Durban and Gauteng. A consultant has been employed to devise a plan to identify ways in which the proposed duty free zone could compete at a global level.

Thirdly, Ms September said that the infrastructure and support provided by other government departments (especially local and national government) remains a cause of concern here, and the primary problem is that government is providing financial but not infrastructural support.

Mr Miles stated that it is firmly believed that the IDZ would catalyse the establishment of infrastructure that would, in turn, yield growth for the East London region in general.

Dr Mohale added that the memorandum of understanding referred to earlier confirms the support given by other government departments to ensure ELIDZ is a success.

Mr S M Rasmeni (ANC) inquired whether the Eastern Cape Standing Committee has received input from both the Coega and East London IDZ's, so that the "mushrooming" of IDZ's is avoided?

Secondly, how would ELIDZ influence economic growth and development in East London and other areas, and not only focus on the port and Buffalo City. The Coega delegation was asked the same question, because the impression was created that the entire region would receive attention whereas, as it seems is the present case, this is not true.

Mr Miles responded that the standing commission has indeed been addressed by the ELIDZ delegation, and that it is working closely with the Eastern Cape MEC and Premier on both projects. Furthermore, the IDZ has to be located next to a major international port or airport, and this effectively avoids the "mushrooming" of IDZ's throughout South Africa.

Dr Mohale added that the standing committee knows as much about Coega as it does about ELIDZ because it was actively involved in both projects, and in fact initiated the ELIDZ project.

Mr C Dudley (ACDP) asked Mr Miles whether ELIDZ would negatively affect the creation and development of other IDZ's, such as the Richards Bay rail to Gauteng. If, in fact, ELIDZ is completed by 2004 as projected, where would potential IDZ's be located to afford them a fair opportunity to develop?

Ms B M Ntuli (ANC) asked whether the Department would focus exclusively on ELIDZ, or would it develop all IDZ's equally and simultaneously. A full progress report is requested on all the IDZ's currently operational within South Africa.

Dr Mohale replied to these two questions by stating that this would not be the case at all, as all would proceed accordingly without any detrimental effect. Unfair competition between the various IDZ's is also a non-factor.

Ms Ntuli requested figures on the levels of job creation of the IDZ.

Mr Miles stated that the creation of approximately 38 000 jobs by year 10 of operation are envisaged in terms of the IDZ alone, and not the timber and textile industries.

Secondly, are members of previously disadvantaged communities involved, on a senior or management level, in the construction of the brewery?

Mr Miles replied that these are indeed being accommodated.

Thirdly, it was mentioned in the presentation that a road running alongside a primary school would have to be altered to accommodate the industrialisation. What safety measures are being taken by ELIDZ here?

Mr Miles explained that the proper precautionary and safety measures have been undertaken, and these include the needs of pedestrians in terms of fencing and so forth.

A member asked whether a strategy for developing the rail system between Richards Bay and East London had been devised. Secondly, what percentage of the South African automobile manufacturing industry is located in East London, and is the bulk located in Gauteng?

Mr Miles responded to the second stating that the majority of the automobile manufacturing industry is indeed located in the Eastern Cape, and 40-45% of the component manufacturers are also located here. Furthermore, any future development within this industry has, of necessity, to include the Eastern Cape, because any expansion will occur within that province.

Thirdly, the Eastern Cape currently has the "greatest rural landscape" in South Africa, with the result that the rail linkages are far too remote. What steps are being taken by ELIDZ to improve the poverty and unemployment levels in the remote areas of the Eastern Cape?

The Mayor stated that a working group has been elected to deal specifically with this issue, consisting of three analysts who work in regular consultation with the Premier of the Eastern Cape. Also, a forum comprising the various mayors from the various areas has been created to address this issue. National government and the Department are currently devising a rural development strategy to ensure this issue is resolved.

Dr Mohale added that the creation of jobs within these communities is the joint responsibility of the IDZ and national and provincial government, in consultation with the Minister.

Several questions were posed to both the ELIDZ delegation and the Department, and the following were not answered:
- The lessons, if any, the ELIDZ project has learnt from the Coega experience.
- The possible impact on and interaction with the Richards Bay rail system.
- The contribution of ELIDZ to economic growth in East London as a whole.
- Whether, despite the international trend to focus on a single international import/export site,
national consensus tends towards the establishment of several smaller units to serve the same
function.

The meeting was adjourned.

Appendix:
Outline of Powerpoint presentation
EAST LONDON IDZ
Creating a world class IDZ
Offering world class infrastructure and services

MILESTONES 2001
Buffalo City agrees to transfer land to ELDZC
Environmental Impact Assessment approved by Province
Intention to Designate confirmed by Department of Trade and Industry
Extensive Public Participation and Stakeholder support process
Internal Audit of Environmental Management System
Rezoning of land for industrial purposes approved
National Ports Authority commissions feasibility study on extension of Port
Earthworks start for the first two manufacturers.

ENVIRONMENT
Environmental Management System
ISO 14001 certification due 2002
Environmental Design Manual
Construction Environmental Management Plan
Tenants Review Procedure

SPATIAL DEVELOPMENT INITIATIVES
Inherent economic potential
Crowding in of investment
Investment "cluster" configuration
PPP - Public-Private-Partnerships
Political commitments; and
Rapid planning and delivery (momentum).

CRITICAL FACTORS FOR SUCCESS
Human Resource Skills
World Class Logistics
Strategic Investments
Responsible Environmental Management

ELDZC BOARD REPRESENTATION
National Government
Provincial Government
Buffalo City (Local Government)
East Cape Development Corporation
Airports Company of South Africa
National Ports Authority
Business
Labour

ELIDZ FEASIBILITY FUNDING TO DATE - R 9.28 M
National Government 48% R4,47m
Provinical Government 46% R4,25m
Local Government 6% R0.56m

KEY SECTORS FOR INVESTMENT
Motor Industry
Clothes and Textiles
High Tech Manufacturing & Electronics
Pharmaceutical
Forestry & Wood Products
Agricultural Products beneficiation

THE PORT OF EAST LONDON
Shaping the world's most effective supply chain, thereby enabling global competitiveness

NATIONAL PORT AUTHORITY AND OPERATIONS OBJECTIVES
National Ports Authority (NPA) to provide a seamless service, by;
Optimising port related logistical processes, and thereby;
Enabling port users to maximise their supply to international and local markets; and
NPA to redress past tariff imbalances.

PORT OF EAST LONDON VEHICLE TERMINAL
CHARACTERISTICS
Dedicated Multi-level Port Car Terminal
Strategically Positioned
World Class Facility
Safe Storage
Capacity for Growth.
CAR TERMINAL
OVERVIEW
For IDZ to succeed, the port needs regular calls to and from all continents and an upgraded rail link to Gauteng.
To achieve this, traffic through the port needs to be increased substantially
DCSA expansion has assisted in dramatic increase in traffic
ELIDZ is facilitating implementation of the strategy to attract manufacturers from the Pretoria Metropole to utilise the Port of East London
Further increases in traffic to be created by exports of, amongst others, timber related products, kaolin products and black granite
NPA commissioned a study to investigate a new container terminal on the West Bank or an extension of the Port.
Spoornet has commissioned a study to accommodate Gauteng Motor Industry Imports and Exports.

Import & Export Volumes
HOW DOES THE ELIDZ CONTRIBUTE TO THE PROCESS?
Being a principal motivator behind the current process
Developing an Industrial Development Zone on the West Bank in East London
With "Free Zone" status and the concomitant benefits to be realized for industrialists
Implementing local and national incentives
Providing world class infrastructure
Providing a "One Stop" efficient business regime
Creating an "Export Orientated" regime.

BENEFITS OF IDZ
Estimated combined turnover by year 10 - Eleven Billion Rand
Estimated taxation generation - 1.459 Billion
Estimated Buffalo City Municipal revenue - 192 Million
Estimated job creation - Thirty Eight Thousand

REQUIRED SUPPORT
East London Port as Motor Industry Hub for South Africa.
Investments into East London IDZ to create equitable growth between East London and Port Elizabeth.
Strategy to upgrade rail line and port extension.

CONCLUSION
Phase 1 has two projects valued at - Three Hundred Million
Phase 1a and 1b will be operational by January 2004