The cash-strapped Eastern Cape government has threatened to withdraw up to R220-million annually from Coega Development Corporation — the national Department of Trade and Industry’s flagship infrastructure development project — in a move which could plunge it into financial crisis.
Coega is at the heart of President Thabo Mbeki’s broader economic strategy to transform South Africa into a competitive export-driven economy. Mbeki highlighted the investment initiative in his State of the Nation address this year. The corporation describes itself as South Africa’s primary location for new investment.
Eastern Cape finance minister Billy Nel told the Mail & Guardian Coega had been targeted in a sweeping review of the budgets of every government department and entity, aimed at “solving cash flow problems in the province”.
The other major entity under threat is the East London industrial development zone (IDZ).
“At this stage the core functions of Coega haven’t been affected — but I can’t predict the future,” said Nel. “The question is whether we are addressing core government functions first, such as essential services. We won’t let Coega and the East London IDZ down, but we can’t let the public down either.
“We are asking departments and parastatals to see where they can surrender funds so that the province doesn’t go into overdraft. At the moment we are borderline.”
Nel said a public announcement regarding the “realignment of the departmental and public entity budgets” could be expected next week.
Lumkile Mondi, chief economist at the Industrial Development Corporation (IDC), which with Eskom has invested about R5-billion in the Coega project, said he was concerned “big time” by the provincial treasury’s move.
Launched in 1999, the R7,4-billion Coega Development Corporation is owned by the national government through the Eastern Cape Development Corporation. It comprises a duty-free industrial zone and a deep-water port on which the National Ports Authority is lavishing R2,65-billion.
However, it has been widely accused of being a white elephant, and dogged by a persistent failure to attract an anchor tenant. Plans by French multinational Pechiney to build a $2-billion aluminium smelter in the industrial zone were thrown into question last year when Canadian aluminum giant Alcan took over Pechiney.
News that the Eastern Cape is considering withdrawing support for the project comes weeks after Premier Nosimo Balindlela launched the Provincial Growth and Development Plan for the next 10 years.
The province’s projected over-expenditure is R2-billion in the current financial year — the second year the budget has been exceeded.
The M&G understands that the Coega budget could be slashed by up to R222-million, although Vuyelwa Qinga-Vika, the communications manager at Coega, said that “the exact amount has not yet been confirmed by the provincial government … we are still discussing it”.
Provincial minister for economic affairs, environment and tourism Andre de Wet revealed that former finance minister Enoch Godongwana had threatened to withdraw R222-million from the Coega budget. “But I am moving away from that approach, and am rather discussing with the government departments and the CEO of Coega Development Corporation about where they can tighten their belts to help finance the province’s deficit and overdraft. It could be less than this amount, but we need to remember that this is one province with one budget.”
The IDC’s Mondi, who visited the Eastern Cape last week, questioned the wisdom of cutting the budgets of parastatals to boost the province’s cash flow. “My biggest worry is: If the money is withdrawn, what effect will this have on the medium-term expenditure framework commitments to the project? They will all have to be postponed.”
He said that one of the advantages of introducing a rolling budget for Coega had been to create certainty about the sources and application of funding. “Someone somewhere will have to explain why a commitment like this is going to be sacrificed because of maladministration. It’s simply spreading the financial malaise in the province and undermining investor confidence.”
He said the best option was for the National Treasury to invoke Section 100 of the Constitution, which empowers national government to take over the running of a province when the latter cannot fulfil its executive duties. The Eastern Cape was subjected to this indignity in 2001, after it ran out of money to pay social grants.
The spokesperson for the East London IDZ, Ayanda Ramncwana, confirmed that, “there was a notification by the [provincial] treasury of a global budget freeze or suspension” affecting the Eastern Cape IDZ, comprising Coega and the East London development zone.
However, the East London IDZ had not received formal notification of its component of the frozen budget, Ramncwana said. “The East London IDZ has seen a reference to a R40-million cut [of a total budget of R400-million] in the Provincial Growth and Development Plan, but we believe that the necessary processes have not been pursued to finality to effect any budget change. We are trying to clarify and resolve this.”
Alistair Ruiters, Director General of the Department of Trade and Industry, confirmed he had heard there would be budget cuts, but added that he had not been officially informed.
Ruiters said he is aware that the Coega board of directors had met this week to discuss the matter and would be handing him a report. “Once I get the information and where the cuts are happening, I will assess how and if they begin to impact on the delivery of infrastructure.”
The 2004 Coega annual report, released this week, says 25 multi-year projects to the value of R381,2-million have been identified for the coming financial year. Possible investments to the tune of $4-billion — including three Italian investments in clothing and textiles — were being explored.
It is expected to start its operations in late 2005 and will be sub-Saharan Africa’s biggest such industrial venture.