Defence Procurement and Regional Industrial ...

Defence Procurement and Regional Industrial Development in South Africa: A Case Study of the Eastern Cape

Paul Dunne and Richard Haines Middlesex University and University of Port Elizabeth

June 2001

ABSTRACT This paper reviews the issues and the implications of the offset/defence industrial participation deal for industrial and economic development at sub-national and especially local levels. It examines the initial impact and implications of the defence offsets on the Nelson Mandela metropolitan region, and the Eastern Cape province more generally. It finds that, while not wholly without merit in attracting and focussing investment, industrial participation schemes can deform efforts at more integrated development at sub national levels and further fragment the terrain for industrial policy conceptualisation. Defence industrial policy deals are additionally worrying in regard to their deployment within a country’s space economy, in that it is possible that their design and implementation can be tainted with corruption. This can distort the policy environment and deform industrial development. It would appear to be mostly tangential to new strategy options for the country, with regard to industrial development and employment and, if anything, would tend to reinforce the ‘mineral-energy’ core of the South African economy. The projects initiated appear to be essentially top-down and do not mesh sufficiently with productive local economic forces and policy. As a result they seem to offer little that might challenge the existing inequalities in South Africa’s space economy. Overall, the paper finds that, while the scheme is still in its early stages, its present and future impact at national and local levels is likely to be more problematic than is often recognised. Preliminary draft, comments welcome. Please do not quote without permission. We are grateful to the National Research Foundation for support and to Guy Lamb for comments and suggestions. Correspondence: Richard Haines: [email protected]

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INTRODUCTION

In the present international environment, the provision of offsets has become a major part of the trade in arms. There are few importers of arms who do not make strenuous attempts to gain some form of offset, directly and indirectly, for a major arms procurement. There is, however, some debate over the how real the benefits of offsets and counter-trade are. Questions have been raised as to the actual value added, the linkages with the economy and the accuracy of the estimated benefits to the economy. This debate has been particularly noticeable in South Africa, where the large defence offset deal announced by the South African government in late 1998, and subsequently restructured and refined, is now in the early stages of implementation. As a key component of government’s Industrial Participation (IP) strategy, the defence procurement exercise includes both defence-related counter-trade investment, namely the Defence Industrial Participation (DIP) scheme, and non-defence related investment, namely the National Industrial Participation Scheme (NIP) scheme. These two forms of offsets are seen by their public and private sector protagonists as providing a major boost to industrial and developmental investment, and job creation. Of particular interest is the role that such schemes can play in the development of particular regions in South Africa. The degree of public debate and the availability of information make South Africa a particularly interesting case study for the economics of offsets and their impact on regional development.

This paper aims review the issues and of the implications of the relevant NIPS and DIPS for industrial and economic development at sub-national and especially local levels. It examines the initial impact and implications of the defence offsets on the Nelson Mandela Metropole (a local government arrangement incorporting the city of Port Elizabeth, and the nearby towns of Uitenhage and Dispatch), and the Eastern Cape province more generally, and provides certain insights into the application at the sub-national level of defence offset investments. Section 1 considers the issues concerned with defence industrial participation and development, both generally and within the context of South Africa, with section 2 considering some of the sub national and regional issues of industrial policy. Any case analysis of the development of the Eastern Cape and the likely impact of the offsets is undertaken in section 3, with section 4 considering the Nelson Mandela Metropole. Finally, section 5 presents some conclusions and policy implications.

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1. DEFENCE PARTICIPATION AND DEVELOPMENT

When the South African Parliament decided on a major upgrade of the SANDF weaponry, the issue of offsets quickly took centre stage. A considerable amount of effort was put in to attempts to wring as much from the potential suppliers as possible, both in the form on defence-related industrial participation and nondefence products. A major justification for the packages became the economic benefits through these offset deals. The proposals included direct contracts with South African defence firms; investment in the defence parastatal DENEL; and diverse non-defence investments ranging from automotive components, manufacturing, telecommunications, stainless steel and speciality steel plants, gold jewellery, plastics and highquality textiles. Credits were given for technology transfers and for economic empowerment . Under guidelines that took effect from September 1996, all government and parastatal contracts with an import content exceeding US $10m, must include an Industrial Participation (IP) component. The value of the offsets was to comprise a minimum 30% of a bid’s imported component for civilian contracts. For defence contracts the offsets should comprise 50% of a bid’s imported components.

The industrial participation portion of the bid was assessed according to ‘credits’ awarded for each type of benefit. To illustrate, the number of credits for job creation should equal the estimated value of salaries and wages. New investments, research and development, and links with previously disadvantaged persons (either as shareholders or contractors) earned double credits. Bidders must fulfil their obligations within seven years, and must provide a performance guarantee equal to five per cent of the offset component. Once the contract is awarded, the supplier must file bi-annual progress reports.

The Ministry of Finance and the DTI personnel, who assisted in the final stages of negotiation, once the structure of the deal was essentially in place, are convinced that they achieved a particularly good deal. The anticipated export percentages of the projects well exceed the stipulated 50% level, and returns on the overall cost of the procurement package are estimated to be in the order of 94,5% on investment. And during the duration of the deal, exports are expected to be in the region of 280% of the original purchase price (Interview, Dr P Jourdan, Director, Special Projects, DTI, 30 May 2000).

There is a limited but growing international literature on defence offsets and their effects on industrial development, and national and regional economies more generally. On the whole, the impact of offsets is often problematic in terms of job creation, the strengthening of backward and forward linkages, and technology

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enhancement. Nor do they constitute a ‘third way’ for the economic development of LDCs (Matthews 2000; Batchelor and Dunne 1999a). A recent study of Saudi Arabia’s defence offset programmes, reveals that instead of a proclaimed 75 000 local jobs, the various programmes had generated employment in the region of 2 000 (Matthews 2000). Few countries appear to have been successful in using defence offsets to utilise sufficiently, and embed and extend technology transfers. Those domestic defence industries that are expected to benefit from offset deals are often characterised by a ‘technologically sophisticated conservatism’ (BAEC 1987: 33; Batchelor and Dunne 1999a) which does not lend itself to the densification of intellectual and social capital. What is required is a ‘high degree of local technological absorptive capacity’ to be achieved through a state-sponsored ‘civil-military, Science and Technology strategy’ (Matthews 2000). In addition, new modes of structuring technology-intensive production appropriate for the ‘new economy’. In a recent study of Route 128, Michael Best (2000: 34) has shown how a regional industrial system had to be re-invented ‘to fully exploit the opportunities inherent in the emergence of a new technology’.

In regard to the wider question of the possibility of defence offsets contributing to more equitable and balanced forms of regional development, a concluding remark in a 1981 study of defence spending in the UK regions provides some warnings: ‘Overall, then, it would seem that the scope for using defence expenditure as a direct tool of regional policy is limited, and that most regional benefits are likely to be spin-offs rather than as a direct result of policy’ (Short 1981: 104-5).

In South Africa, the implementation of the industrial participation side of the defence procurement deal is still in its infancy and any evaluation can be little more than provisional. At a more popular level, both the financial viability, and social and economic morality of the programme have been questioned by several of civil society groupings, certain political parties, and defence analysts. Furthermore, media revelations of the procurement exercises have identified a number of South African beneficiaries, including companies linked to the head of the weapons procurement committee,1 and a number of high-ranking members of the ANC government.2 The powers of the multi-party Select Committee on Public Accounts (SCOPA), in establishing the framework for the investigation have been undercut by the ANC majority acting on party orders3 SCOPA originally

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Shamin ‘Chippy’ Shaik (Mail & Guardian, 26 May – June 1, 2000; 2-8 June 2000) At the time of writing , the most detailed investigation and coverage of the current arms procurement could be found in the Mail and Guardian (since early 2000) and Noseweek, February and April 2001 issues in particular. See also the Sunday Times 25 March; 1,8, 22, 29, April 2001 for anecdotal coverage. 3 Among other things, Andrew Feinstein, the original leader of the ANC group on SCOPA, was replaced by party whip Geoff Doidge. Feinstein had called for an open and transparent inquiry into the deal. Interestingly, Feinstein declined to a vote in a recent motion of confidence in the Speaker of the House, Frene Ginwala. The Speaker had been accused by UDM 2

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recommended that the Heath Investigative Unit head up the enquiry. This Unit, which appears to non-partisan observers to the most suitable body to spearhead the investigation has been excluded from the enuqiry. Instead, the inquiry under the supervision of the Auditor General, the Directorate of Public Prosecutions, and the Public Protector will be held in part as a public hearing, which opposition parties and social critics have seen as a disincentive for certain groups and individuals to present evidence (e.g. Daily Dispatch 31 March 2001; Business Day 17 April 2001; Eastern Province Herald, 29 & 30 May 3001).

The inflated prices of much of the equipment has been noted (ECAAR 2000). One example quoted (Interview, DENEL employee, name withheld, 2 June 2000) is that the 9 Grippen fighters come at a price that could purchase in the region of 24 American F16 fighters4. It has also been pointed out that the German corvettes that South Africa has chosen to buy, are significantly more expensive than the Spanish-made ones originally considered.

The nature of the equipment chosen has also been questioned. Defence analyst Dr ‘Rocky’ Williams, formerly with the Department of Defence, argues that a thoroughgoing critique of the mechanics of the deal ought to have been undertaken before proceeding with the procurement exercise (Interview, Dr R Williams, Institute for Security Studies, 1 June 2000). He points out that the SAAF have only six full-time pilots, and yet have a number of Mirage C jet fighters (30) in excellent or in new condition. Buying 9 Grippen fighters is a questionable decision. The Mirage C is more than adequate for South African conditions, and there is continuity in terms of the maintenance partnership with France. In addition, the Augusta helicopter is apparently a thirty-year old design (Mail & Guardian, 2-8 June 2000). Also, insufficient cognisance has been taken of the nature and scope of South Africa’s future military involvements. For sub-Saharan African conditions, the most likely campaign area, the Air Force would make extensive use of helicopters as opposed to supersonic fighters – a contention of the ex-chief of the SAAF (Interview, Dr R Williams, 1 June 2000).

Hidden costs, including unanticipated capital expenditure to activate imported equipment, and the R&D expenditure required to benefit from technology transfers, are also factors to be taken into consideration. Furthermore, as is acknowledged by DENEL staff, there will be a variety of possibilities for technology transfer and other opportunities arising from the defence offsets which the economy is not in a position to party leader, Bantu Holomisa of not being impartial in her attitude to the arms deal inquiry (See e.g. Sunday Times, 10 June 2001).

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exploit (Interview, Mr Pieter Labuschagne, Group Manager, Trade in Arms Control, DENEL, 1 June 2000). A further potential issues is the higher maintenance costs of the new equipment. For instance, it has been argued that the highly-sophisticated nature of the German vessels, will entail higher operating costs and an increased reliance on maintenance arrangements with overseas contractors (Martin Welz, address to the Pyramid Club, Port Elizabeth, March 2001).

On a macro-economic level, the new arms procurement and related industrial participation scheme, will have a knock-on effect. Government maintains that it will not be exceeding its deficit targets to fund the packages; they will apparently not add to the total public sector borrowing requirement or to government’s total projected interest burden (RSA Govt press release on the Economic and Fiscal Impacts of the Procurement, 1999) The impact on the budget it is claimed will be ‘relatively attenuated and is entirely manageable’. In addition, it claims that the ‘net effect on the total procurement on the South African economy is broadly neutral’ (ibid.). By contrast, the IDASA Budgetary group, anticipates that the R30-43bn procurement package, despite being spread out over several years, will both increase defence’s share of the budget, and reduce somewhat the percentage allocated to infrastructural and public works programmes (See Tables 1 and 2 below). This will in turn undercut somewhat the provision of more funds for poverty relief and affect the more peripheral provinces such as the Eastern Cape. Furthermore, Batchelor and Dunne (1999) suggest that the arms acquisition programme could lead to more imports and place pressure on the South Africa’s balance of payments. This is borne out by the rising cost of the arms procurement package, from R30bn in late 2000 to R51bn (and rising) by mid-2001. In addition, there is the R20bn to be paid in interest charges (Noseweek, April 2001). Press reports show that the South African Cabinet was aware of the long-term implications of the procurement exercise. A 1999 study by the Department of Finance of the affordability of the arms deal, predicted the progressive decline of the rand against the dollar, from 2003/4, R18,5 by 2013/4 and R22,8/$by 2016/17 (Mail & Guardian, 26 April 2001).

As regards regional development, there are promises of important contributions, but these are not integrated into a clear policy framework. The initiative is project-driven, but there is little in the way of public awareness of the investment possibilities on offer. There is no doubt that the procurement programme will impact on the economy, but its spatial effects are more difficult to estimate. The initial estimate of 65 000 jobs and earnings of R110bn for the original R31bn have been downscaled. These figures were widely dismissed by some 4

Though the price of such weapons systems is notoriously difficult to compare because of the different specifications available and possible non-standard requirements.

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critics as an exercise in ‘voodoo economics’ (Defence Systems Daily, 15 September 1999). The estimate of earnings was subsequently reduced to R70bn over a period of 11 years (RSA Govt. press release on Economic and Fiscal Impacts of the Procurement, 1999).

Table 1: Service Shares and Growth (as percentage of total) 1988/99

1999/00

2000/02

2001/02

2002/03

1999-2002/03 Average Annual Growth

Social Services

53.8

53.8

53.7

53.6

54

Education

27.9

27.5

27.7

27.6

27.8

6.4

Health

14.5

14.8

14.6

14.6

14.8

6.2

Welfare

11.4

11.5

11.4

11.4

11.4

5.8

Defence and Intelligence

7.1

6.6

8

8.3

8.5

14.9

Integrated Justice System

13

13

13.3

13.2

13.2

6.6

Economic Services

7

6.6

6.5

6.7

6.8

7.1

Infrastructure

14.8

12.3

11.1

11.1

0011

2.4

Administration

4.4

6.3

6.6

6.4

6.4

6.7

Total

100

100

100

100

100

6.5

Protection Services

Source: Idasa 1999

Table 2: Defence spending as percentage of the total budget 1988/99

1999/00

2000/01

2001/02

2002/03

Defence

11.4

0011.4

14.6

16.1

17.3

Total

160.9

169

181.9

193.1

204.2

Defence %

7.1%

6.7%

8.0%

8.3%

8.5%

Source: Idasa 1999

A financial assessment of the project carried out by the IDC for the Department of Finance and Development Bank of Southern Africa (DBSA), during 1999-2000, has still to be released for public scrutiny (Interview, Mr G van Wyk, IDC, 1 7 May 2000; telephone discussion, January 2001).

A number of the projects under the NIP and DIP schemes have still to be finalized, and others are in exploratory and negotiation phases. Thus the Coega IDZ project, which we will examine later, is potentially the recipient of the largest non-defence related offset investments.

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However, its future is still the subject of speculation. This is obviously an extreme example, but it does illustrate the potential fragility of some of the mooted investment projects. Most of the offset investments mooted for the Eastern Cape are concentrated in this IDZ. Thus a green light for the project would significantly increase the Eastern Cape’s rather meagre share of defence procurement. However, in general, the current DIP scheme will probably confirm the current space economy and existing inequalities. In terms of direct defence investment under the DIP scheme, much of the contracts and/or investment will be channelled to DENEL companies or sub-contractors, who are mostly situated in Gauteng, and Durban and Cape Town to a lesser extent. (See Appendix 1 for table of regional procurement patterns). Only one defence subcontractor in the Eastern Cape, namely the Comau Aims Corporation in Uitenhage, has so far received a contract under the DIP scheme. There is a possibility that the company may receive further contracts. However, Daimler Chrysler Aerospace (DASA) a sister company of the Daimler-Chrysler (South Africa) plant located in East London (on the Eastern Cape coast), has been incorporated into a multi-national company European Aeronautic Defence and Space (EADS). In turn EADS has a 33% share in a Stellenbosch-based company (Reutech Radar Systems) which has been awarded contracts worth R420million to supply missiles and tracking radars for the new corvettes (Sunday Times, 25 March 2001; 29 April 2001).

2. SOUTH AFRICA’S INDUSTRIAL STRATEGY AND SUB-NATIONAL DEVELOPMENT

In recent years, consultants and policy makers, have identified South African industry as facing something of a ‘crisis of competitiveness’. This crisis has been partly engendered by the global trend towards the reduction of tariff barriers, and the adoption by the South African government of key aspects of the policy agenda of the hegemonic international agencies, notably the IMF, World Bank and WTO, which inter alia has aimed at the deregulation of markets. South Africa’s industrial sector has had limited time to respond to these shifts. The state is unable to provide the same levels of support to the industrial sector as was possible in the past. It is nevertheless deemed important that the infrastructural basis for such competitiveness be established in the shortest possible time. This in turn is seen to require a shift to various forms of public-private cooperation to help provide infrastructural investment and social capital formation.

A 1998 Department of Finance confidential audit (DFA 1998), underlined two initiatives within the Department of Trade and Industry (DTI) as specifically reinforcing the a partial shift to public-private partnership (PPPs). First, the Industrial Offset Programme (IOP) - incorporating the Defence Industrial

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Participation Scheme (DIP) and second the Spatial Development Initiatives (SDIs). The SANDF optimistically describes the current DIP scheme as ‘an industrial and economic investment package spanning a variety of industrial sectors and underpinning the government’s industrial strategy’ (SANDF Media News, September 1999).

There is a burgeoning literature on the evaluation of South African industrial policy and practice in the later 1990s (e.g. Le Quesne 2000; Chang 1998; Fine 1998; Fine and Rustomjee 1997; Haines 1996 & 1998). The need to move beyond simplistic polarising demand and supply-side measures, and to take due cognisance of the role of the ‘hard state’ in policy formulation and intervention along the lines of the East Asian economies has been stressed (Chang 1998; Haines 1996; and Fine 1998). Researchers have stressed the continued dominance of what they term the mineral-energy complex in the country’s economic structure and related policy discourse (Fine & Rustomjee 1997; Fine 1998). A related issue is the under-emphasis on the use of natural resources or capital, and the seeming downgrading of the environmental agenda by government in recent years (Le Quesne 2000). The depiction of the industrial policy as exemplified in recent policy documents, has both a functionalist and positivist orientation. This is in part a reflection of the considerable extent to which neo-classical economic theory has informed the relevant policy design (Haines 1996: Fine 1998b). The question of targeting particular sectors, sub-sectors and locales has also been raised (e.g. Chang 1998; Driver 1998) - an issue of some significance in considering the regional identification and application of the DIP investment projects.

National industrial strategy and policy is still somewhat compromised by lack of integration between differing ministries at central level, as well as by imperfect linkages between central, provincial and local agencies. For instance, several well-known international consultants and commentators on investment and macro economic development in South Africa have pointed to the proliferation of agencies involved in industrial and economic development; the over-reliance on investor conferences and promotional campaigns as opposed to sustained, informed, and behind-the-scenes lobbying; and a somewhat ad hoc as opposed to strategic approach to project selection and implementation (Interview, Mr Jerry Kelly, IDA consultant, Dublin, 2 July 1999). The partial disjunction between local, provincial and central level government on industrial and economic policy is not so obvious, but there is some evidence of central government dealing directly with potential investors, but in a seemingly ad hoc fashion with local government and players, as would appear to be the case with the DIP scheme and as is evidenced in the promotion of the Coega IDZ project.

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The application of the offset investment projects, comes at a time when are moves within and without the DTI for a rethinking of industrial policy. There are differing emphases and differences of opinion within DTI and between the DTI and associated institutional partners, such as the IDC. A central area of disagreement appears to be those advocating development from the existing ‘production platform’ in which the mineralenergy complex is central, and those who look to a qualitative shift towards the ‘new economy’ and advocate the widening of the parameters of industrial policy (Interviews with Dr Paul Jourdan, 30 May 2000; Dr Alan Hirsch, 17 May 2000; Mr G van Wyk, Director of Research, IDC; Hirsch 2000; ). A further dimension, partly an outcome of the Southern African SDIs, as well as moves to establish a free-trade zone in Southern Africa, is the growing sense that South Africa’s future industrial policy should have more of a subcontinental rather than national character (Interview with Mr G van Wyk, IDC, May 2000).

Despite a relatively sophisticated set of local and regional plans one notes lack of integration between the relevant actors and structures, coupled with ad hoc interventions in South African space economy. Robin Bloch (1999) argues that the problem lies mainly with a deeply-entrenched core-periphery system in terms of industrial location. A national industrial core is dominated by a ‘parallelogram’ bounded by Rustenburg-Free State Goldfields, Newcastle-Middleburg. It includes the industrial components of Gauteng, the adjacent mineral-rich areas, and the iron and steel, electrical and chemical-based centres in the North-West, Free State, and Mpumalanga provinces. It is the heartland of the ‘Mineral-Energy-Complex’ that has dominated South African economic development in the post-war period (Bloch 1999). The Cape Town and Durban metropolitan areas are subordinate but integral parts of the core; as are Port Elizabeth and East London, although in a more subordinate sense. Attempts by the DTI to attract investment and support business, argues Bloch, will not alter the South African space economy, in the short, medium, or even the long-term. Nor will it create new growth centres (ibid.).

Whether Bloch takes too deterministic a line is a matter that needs to be debated elsewhere. His arguments suggest that the current DIP projects are likely to simply confirm the existing spatial economic arrangements. An alternative policy perspective, however, might provide possibilities for local and regional economic and industrial development. The new institutional studies of regional economic development challenges policy makers to shift from firm-centred, incentive-based, standardised and state-driven modes of promoting regional and local economic development policy (Amin 1998). A range of alternative approaches are available to reconstruct local social capital, with the state helping to energise local and regional economies through demand-led interventions by funding building and infrastructural programmes (ibid).

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The next section considers the case of the Eastern Cape. It outlines the structure of the regional economy, local economic policy and existing initiative and considers the coherence of DIP and NIP with these and their likely impact on the local economy.

3. DEFENCE OFFSETS AND THE EASTERN CAPE Economic globalisation has had a dramatic impact on the Eastern Cape, and contributed to a observable restructuring of industrial production and work processes. Probably the most devastating and observable effect have been the job losses in manufacturing over the last two decades, a situation which has been compounded by tariff reduction, weak controls on illicit imports, and economic deregulation which has hastened the shift offshore of various local companies. However, this region’s engagement with globalisation is mediated and shaped by the nature of state intervention in industrial policy and by continued spatial economic inequalities (Cunningham & Haines 2000).

Macro-level industrial restructuring in the Eastern Cape has been significantly influenced by state-led and primarily exogenous initiatives which have tended to reinforce the dominance of the MEC (Mineral Energy Complex) in the South African industrial economy (Cunningham & Haines 2000; Bloch 1999). Such initiatives also appear to have done little to counter the relative peripheral economic status of the Eastern Cape. Moreover, they appear to have undercut more endogenous development alternatives. Dominant state investment in the industrial development has been the Coega IDZ project, which is in turn tied up with the controversial R51bn procurement deal for the SADF.

The Eastern Cape is the second poorest of South Africa’s nine provinces in terms of income generation. Its two major cities, have a long tradition of manufacturing in sectors, such as the motoring industry, clothing and textiles, and food processing. Both urban centres have experienced industrial decline, especially in the 1980s. While there are signs of recovery, especially in Port Elizabeth, the economic future of the province is still problematic (Driver 1998). The metropolitan region with the highest income generation per capita in the Eastern Cape is the Port Elizabeth-Uitenhage-Dispatch (PEDU) metropolitan area. Its per capital income is about 50% higher than that of the East-London-King Wiliamstown metropolitan region (Hosking 2000).

According the 1994 October Household Survey (CSS 1995) the main sectors of the Eastern Cape economy are Agriculture, Forestry and Fishing, Manufacturing, Trade, Catering and Accommodation, and Community,

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Social and Personal Services. The Community, Social and Personal Services sector is the largest employer and generator of income in the Eastern Cape. It generates 39.1 per cent of all employment in the province and 25.4% of the income. The core of this sector is comprised of government services. The government sector is larger relative to the economy in the Eastern Cape than is the norm in South Africa. This is a not a particularly productive situation as taxes need to be raised to finance this sector and the raising of these taxes can crowd out other expenditures, including private sector investment. In addition, a high proportion of this expenditure is on personnel costs, as opposed to infrastructural and capital expenditure.

The trade, catering and accommodation sector is the second biggest employer in the Eastern Cape, but only the third largest generator of income. Tourism is obviously one of the activities which adds value in this sector. However, the Eastern Cape lags behind its neighbouring provinces in tourism promotion, despite containing a large share of the most spectacular coastline in South Africa, and a good share of its mountain ranges. Inadequate infrastructure - which includes a poor provision and servicing of roads in the eastern half of the province - is a constraining factor.

Manufacturing is the second largest generator of income, and the third biggest generator of jobs. Motor vehicles and motor components, food, textiles, rubber products, and electrical appliances and supplies, in descending order, constitute the largest sector. With the phasing out of import tariffs within the motor industry, a number of commentators do not see this sector as a significant growth area, despite the establishment of certain export niche markets for cars, and motor components (Duze, Haines and Hosking 1997).

The agricultural, forestry and fishing sector employs almost as many people as does the manufacturing sector, but generates less than one quarter of the income (Hosking 2000). During the last few years, numerous proposals for new agricultural initiatives have been mooted. These range from the introduction of new cash crops in the Wild Coast zone, replacing grazing land with forestry, and shifting from conventional commercial farming to game farming and eco-tourism. Particularly encouraging is the Greater Addo National Park Initiative, which seeks to expand dramatically the current reserve (some 30 kilometers from Port Elizabeth) and its offerings. Set in a malaria-free zone, with the ‘big five’ on show, the project would lead to a significant influx of tourists5.

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The big five are the large game animals: buffalo, elephant, leopard, lion, and rhino,

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From a somewhat different standpoint, it has been argued that regional and local industrial policy and development in the province needs to be rethought substantially, and shift from a notion of industrial development as mainly predicated on manufacture (e.g. LeQuesne 2000; Hirsch 2000; Hosking 1998). There should be a far stronger focus on the utilization in a sustainable manner of the abundance of natural capital resources in the province, and a more determined attempt to create more urban and rural jobs. More generally, a new provincial development strategy should be formulated which would inter alia focus on costreducing mechanisms, such as service and transport cost reduction projects. The construction and maintenance of infrastructure should also be high on the agenda (Hosking 2000). The location of future investments in infrastructure should lead to development surges in the province. For this reason, careful consideration will have to be given to selecting those investments which maximise development equity within the Eastern Cape. Should more than the estimated R2bn be sunk in infrastructure provision in the Coega IDZ, then infrastructure provision elsewhere in the province would almost certainly be de-emphasized.

The Eastern Cape government is beginning to address certain of the above concerns, and is currently formulating a macro development strategy, which it would like to discuss and debate widely with stakeholders throughout the province (Interview with Prof Bill Davies, DG Economic Affairs, 24 May 2000). What is of some concern, however, is the seeming lack of involvement of the Eastern Cape government in the defence offset investment in the province. This provincial department has yet to establish a monitoring and evaluation process of the projects in question.

At the time of writing there are two different kinds of defence-related offset investments that have been specifically earmarked for the Eastern Cape Province. The first is a modest defence procurement contract (R22m) secured by the Uitenhage-based Comau Aims Corporation - a DENEL sub-contractor. The contract, which has already been completed, is for the partial manufacture of missile pylons for the BAE/SAAB Grippen jet fighter. There are apparently possibilities for further contracts. There are other projects under consideration, not so clearly defence related. The Daimler-Chrysler plant in East London has been exploring project options for the region (Interview with Dr A Hirsch, DTI, 17 May 2000), and has a stake in arms firm EADS which in turn has a stake in a won contracts worth R420-million to supply missiles and tracking radar for the new corvettes (Sunday Times, 29 April 2001). Offset agreements linked to the corvette, submarine and helicopter consortia are potentially larger. These proposed investment measures aim to create a series of steel mills and plants in the Coega IDZ, accompanied by secondary beneficiation and empowerment ventures. BAE Systems has apprently committed itself to projects within and without the

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Coega IDZ, including a leisure and community centre in Uitenhage (Information supplied by Marion Edmunds, E-TV, April 2001).

The Director General of Economic Affairs and Tourism of the Eastern Cape Province, finds the idea of offset investment acceptable in principle, but questions several aspects of the current scheme. Firstly, the need to diversify offsets from orthodox large-industry projects is seen to be critical. Thus there is a concern that the series of steel mills and plants in the Coega IDZ, will have little of a multiplier effect in the province, and will benefit mainly national as opposed to local sub-contractors. Secondly, the need to remove the stigma of reinforcing the defence side of South African industry, in the deployment of defence offset investment is stressed (Interview, Prof Bill Davies, 24 May 2000).

Overall, there have been indications that the DIP and NIP could make an important contribution to regional development. The concerns are that the projects seem to remain promises for the main part, despite the advancement of the procurement contracts and that there has been no obvious attempt to mesh the offset projects with already existing regional plans. There is certainly potential to improve the likely impact on the region by considering policy options that differ from those under active consideration. We now move on to analyse the situation at sub regional level within the Port Elizabeth Metropole.

4. THE NELSON-MANDELA METROPOLE

The Nelson Mandela Metropole (NMM) region is the major centre of economic activity within the Eastern Cape and is best placed to benefit from DIP and NIP investments. It has potentially one of the most sophisticated industrial support systems in Africa. In addition, a comprehensive set of local economic development (LED) policies have been endorsed by the Port Elizabeth City Council, and despite delays, are likely to be incorporated in the new Nelson Mandela Metropolitan government’s long-range development strategy which is currently being elaborated (Discussions with John Jaffray (Tech Ease Consultancy); and George Mandis, Local Economic Development Unit (Nelson Mandela Metropolitan Government), January 2001).

A critical factor for the social development in the Greater Port Elizabeth region (now the Nelson Mandela Metropole) is job and wealth creation, infrastructural provision and improved standards of living for all. High unemployment rates (50-60%) and poor socio-economic conditions drive the need for reconstruction

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and development. These factors spurred by the Port Elizabeth City Council to define and implement a coherent LED in the late 1990s. A range of specific ‘fast-track’ projects were identified in a 1999 tactical policy document on LED for the Port Elizabeth Municipality. These comprised five main project/activity areas, namely, an economic intelligence system; an SME industry support system, an industrial parks system, a strategic partnering system and a Greater Port Elizabeth Development Section 21 company or equivalent to coordinate and promote a public-private approach to development investment. 1990sA Local Economic Development Unit was established in 2000, and subsequently expanded to incorporate the metropolitan region

The envisaged Industrial Parks System is particularly strategic as it attempts to establish a hierarchy of linked productive spaces, and provide services and assistance for the establishment of a variety of small industrial parks in the community. This should be done with the clear intent of creating jobs, affording increased opportunities for new kinds of ventures in the community, assisting in increasing the numbers and varieties of firms in Port Elizabeth and with a view to increasing diversification of manufacturing and service provision in the region (Material provided by TechEase director, John Jaffray, consultant on LED strategy to the Port Elizabeth Municipality 1999-2000).

Independent from the proposed hierarchy of industrial parks, but dovetailing with the vision, has been the development of a private-public partnership that aims to establish a high-end science or ‘knowledge’ park in the metropole. This initiative was mandated by the Economic and Tourism Development Task Team of the Port Elizabeth Municipality (now superceded by the Nelson Mandela Metropolitan council), and commercially spearheaded by Nedcor Investment Bank, and has a range of parastatal and institutional stakeholders. The proposed Science Park in Port Elizabeth is conceived of in terms of an innnovation hub, with state-of-the-art telecommunications networks, a massive e-port and ‘virtual’ stock exchange facilities, substantive software manufacturing capabilities synergistically linked with specialist degree programmes. A national design centre, a School of Manufacturing, and a range of selected R&D operations will be established. Other potential components include best-practice ‘green’ technologies, commercial applications of indigenous biotechnology. The project aims at both endogenous and exogenous densification of social and intellectual capital. The latter would be achieved by partnership between regional universities with appropriate international partners. The promotion of quality of life within the metropole is an associated strategy (Provisional business plan of Port Elizabeth Science Park, January 2000).

17

The most appropriate metropolitan and sub-regional context for high-technology innovation and production is one that places a premium on quality of life and environment. Indeed, private investors have been reluctant to commit themselves to a thoroughgoing development until they are satisfied that the neighbouring heavy industry project in the Coega IDZ does not degrade the natural and built environment. They also require from the new Nelson Mandela Metropolitan Council a firm long-term development strategy - as opposed to ‘managed consensus’ around particular projects - to which the people in the metropole can subscribe to, participate in, and comprehend. It is felt that the metropole’s political and business leaders have failed to develop a cohesive strategy for attracting coordinated investment and creating of a climate conducive to sustainable investment and the densification of social capital (Mr Neven Hendricks, Nedcor Investment Bank, November 1999; Duze, Haines and Hosking 1997). For instance, Neal Bruton, director of the Port Elizabeth Business Confidence Index, warned that the NMM region ‘risks missing out on numerous economic and business opportunities due to a lack of economic vision and strategic marketing (Eastern Province Herald, 23 May 2001). 4.1 COEGA IDZ The idea for an Industrial Development Zone and harbour, was a response to a 1996 proposal by the metals and mining conglomerate Billiton to construct a zinc refinery (R2,7bn at 1998 prices) in the Eastern Cape (Le Quesne 2000). A private-public partnership was swiftly set up, and the proposal transformed into plans for the construction of a large deep-water harbour to service a heavy industrial site with Billiton’s zinc refinery as the anchor tenant. The projected harbour was to take the form of bulk handling port. The public-private partnership (now known as the Coega IDZ) secured government funding in the order of R8m, and longer term funding from the parastatal Portnet which is responsible for the management of South Africa’s major commercial ports. The project has encountered several problems in recent years. These include the withdrawal from the project in early 1999 of Biliton’s chief technical partner Mitsui –reportedly because of government red-tape and bureaucratic delays - and the suspension of the Billiton refinery as anchor tenant for the venture (Financial Mail, 26 May 2000). National media coverage has grown more critical, but the government, especially the Ministry of Trade and Industries, has remained committed to the project, despite some misgivings by business advisers close to President Mbeki’s inner circle (Interview, Mr Neven Hendricks, Nedcor Investment Bank, 17 May 2000). The project was given a boost when Ferrostaal were seen as the potential anchor tenant in the wake of Billiton’s decision not to erect a plant in the IDZ. Indeed, some commentators saw the Ferrostaal

18

connection as one of the reasons for the German submarine consortium being favoured in the procurement deal e.g. report by Robyn Chalmers of 15 July 1999, http://www.saep.org).

In April 2000, the premier of the Eastern Cape announced that the project would be formally launched in November 2000, and that government had accepted the CDC’s recommendation of Anglo-Dutch consortium P&O Nedlloyd and TCI as the preferred private partner for the project. This obliged a rethinking of the configuration of the port, and a shift from a bulk-handling port to a container hub port. However, P&O Nedlloyd have not committed themselves formally to the project. Furthermore, although Portnet have given their backing to the R2,2bn port construction phase after hearing that CDC were ready to embrace a joint private sector initiative, they were apparently displeased about the lack of consultation between CDC, P&O Nedlloyd and themselves (Financial Mail 26 May 2000).

The defence counter-trade deal offered alternative possibilities to the Coega IDZ, with Ferrostaal, Danielli and Thyssen being identified as potential anchor tenants, constructing a stainless steel mill, a speciality steel mill, and a galvanizing mill. But there has been considerable uncertainty and changing scenarios regarding the defence offsets planned for the Coega IDZ. Ferrostaal, Danielli and Thyssen – firms linked with the corvette and submarine consortia - were identified as potential anchor tenants, providing a stainless steel mill, a speciality steel mill, and a galvanizing mill respectively. These firms also committed themselves to SMME development in ventures coupled with stainless and speciality steel beneficiation (CDC 2000). British Aeropace Systems subsequently committed itself to projects within and without the Coega IDZ, including a leisure and community centre in Uitenhage. Complications arose, when Ferrostaal publicly withdrew from the project in favour of a joint project with Columbus Steel (Financial Mail 26 May 2000; interview with Dr Paul Jourdan, 30 May 2000), only to return in early 2001, with a smaller investment and proposed plant.

In early 2001, there was still considerable uncertainty in the CDC’s project management regarding the finalization of promised or anticipated offsets (interview with Graham Price, Executive Manager (Business Development) and Khwezi Tiya (Executive Special Assistance to CEO) of the CDC, Port Elizabeth, 1 February 2001). However, with the growing public questioning of the arms deal, there is added pressure on government to implement offset-related projects such as the Coega IDZ.

19

The need for a new container port is questioned by a range of critics. Port Elizabeth’s own harbour is functioning at only 45% capacity, and South Africa appears well supplied by existing harbours such as Durban, which has better road and rail networks. Indeed, this was one of the reasons Government gave in the early 1990s for not siting a mini-steel plant in Port Elizabeth. The Port Elizabeth rail linkage is single carriage one, as opposed to the double rail system operative on the Gauteng-Durban line, and significantly longer and slower. Spoornet do not possess the funds to build a double-track line to Port Elizabeth, and to service the new container port would have to run the network at a loss as opposed to the small profit they currently make on the Gauteng-Durban line (Noseweek, Issue No 31, March 2001). Indeed, there is evidence that P&O Nedlloyd’s involvement in the Coega project has been secured in part by a covert arrangement which provides P&O Nedlloyd with a guaranteed container traffic, and subsidized port infrastructure (Noseweek, Issues No. 31-32, March and April 2001). The head of South Africa’s leading container shipping line, Salvatore Sarno, remarked that the establishment of a hub container port at Coega to serve as a feeder to other ports in the was ‘wishful thinking’. He added: I hope it is not happening for (the sake of) South Africa. The politicians want this port – (the plan) is dictated by political, not technical reasons. (Report of Daily Dispatch interview, n.d.. Supplied by email from Southern Africa Environment Project).

Ironically, at the time of writing, the CEO of the CDC, Pepi Silinga, was calling for the urgent upgrading of road and rail infrastructure between Port Elizabeth and Johannesburg, without which the proposed venture would be ‘a waste of time’ (EP Herald, 5 June 2001). Also, by June 2001, Silingi admitted that no IDZ tenants have ‘actually been signed up’.

The CDC’s 2000 estimates of current and potential investment opportunities are listed in Table 3 below. They calculate the total value of opportunities in the region of R11.4 bn, and stress that R8,4bn of these investments, which are represented by the envisaged steel plants, would only be directed to the Eastern Cape if the Coega Port was built. This, the Corporation stresses, ‘emphasizes the strategic importance of the Coega project in the overall development of the Eastern Cape’ (CDC 2000: 3). Table 4 encapsulates the CDC’s (problematic) argument that these potential investments would create a ‘critical mass’, allowing for a leveraging of these investment opportunities to other sectors (ibid.)

20

Table 3 CURRENT INVESTMENT OPPORTUNITIES Container Terminal

Common-user hub container terminal with estimated throughput of 500 000 containers estimated initial investment R0,6 billion Beneficiation of materials, export of stainless steel sheet in rolls and structural elements: estimated initial investment R4,8 billion Beneficiation of materials, export of specialist steel produce, estimated initial investment of R1,8 billion Galvanising of steel sheet, export of finished producet; estimated initial investment of R1,8 billion 300 hectare facility for e-commerce and information technology; estimated initial investment of R0,1 billion Breakwaters, quay walls, dredging, et al; estimated initial investment of R1.5 billion Storage and handling facilities for liquid fuels; estimaed initial investment of R0,3 billion Materials storage and handling facilities for manganese, coal and iron ore; estimaed future investment of R0,4 billion New cement plant with potential for export of clinker and/or finished product; estimated future investment of R0,25 billion

Stainless Steel Mill Speciality Steel Mill Galvanising Mill E-commerce Park Port Common Infrastructure Fuel Dept Bulk Materials Export Cement Plant

Source:CDC (2000) Table 4 CURRENT EMPLOYMENT OPPORTUNITIES (These figures must be dealt with very cautiously and are only a conservative estimate at this time until confirmation by investors) DIRECT

Port Infrastructure Ferrostaal Danielli Thyssen Container Terminal TOTAL Source: CDC 2000

INDIRECT

Construction

Production

Construction

Production

2 000 300 4 000 4 000 2 000 1 000 + 14 000

250 500 500 500 250 250 + 2 500

3 000 450 6 000 6 000 3 000 1 500 + 20 000

375 300 750 750 375 375 + 3 000

21

The methodology used for these calculations is not available, but the estimations appear to unduly optimistic. For one, Ferrostaal’s downgraded steel plant may impact somewhat on job creation prospects and certain anticipated internal and external linkages within and without the IDZ. An earlier economic plan of the Coega IDZ, when the Billiton zinc refinery was still the designated anchor tenant, showed a suspect use of multiplier methodology, and substantially overestimated the amount of direct and indirect jobs created (Hosking 1998). Given the capital- and technology-intensive nature of the plant, much of the demand would be for high-level technicians, which would have necessitated hiring a good proportion of personnel from outside the region (ibid.). Batchelor and Dunne (1999a: 14) stress the downward revision between November 1998 and June 1999, of the estimates of revenues from exports and local sales (down from R24bn to R13bn) from the envisaged Ferrostaal steel mill at Coega (ibid.). They note too that the job creation effects from the submarine deal would be significantly less than the 16 000 jobs originally forecast (ibid.). Indeed, with the downsizing of the planned Ferrostaal plant, job creation possibilities would be further compromised. The defence offset investments targeted for the Coega IDZ, have a seductive quality to them. They seemingly offer a way to help salvage and/or finance an expensive macro level project; and help deflect criticisms of the value of that project. They also provide a range of investment inputs - mostly of a heavy industrial nature which privilege a particular developmental trajectory in the Eastern Cape at a time when the province needs to examine closely its areas of competitive advantage - areas which seem to lie at least in part with a more systematic and sustainable utilisation of natural capital. More generally, they do little or nothing to force a rethinking of the nature of industrial policy and development at local and national levels.

The key problem is that macro development alternatives which allow for labour-intensive employment and sustainable use of natural resources appear to be dismissed without due consideration and debate. In a comparative analysis of permanent on-site (direct) income and employment generated by the Coega IDZ and Harbour project, and that generated by an alternative agriculture-tourism model, Hosking (1997; 1998) argues that the returns on investment are significantly higher with the latter alternative. Critics have also stressed the neglect of the economic aspects of the environmental impact of the Coega IDZ (Le Quesne 2000; Hosking 1997; 1998; and Financial Mail 26 May 2000). They maintain that a range of natural capital enterprises – agriculture, aquaculture, salt processing, and eco-tourism, would be adversely affected by the Coega project. Overall, there should be a far stronger focus on the sustainable utilisation of the abundant natural capital resources in the province, and a more determined attempt to create more urban and rural jobs, as well as an exploration of the evident synergies between natural and high-tech capital. In regard to the latter

22

point, the emphasis on Coega has seen plans for a high-end science park and IT-oriented innovation hub for the City of Port Elizabeth, marginalized.6

The envisaged Greater Addo National Park Initiative, is seen as an illustrative case. The initiative, which has already gained government support, aims to incorporate the expansion plans of the Addo Elephant National Park with a contract parks system on privately owned farm and various provincial reserves in order to bring up to 400 000 ha under one management system and authority. One line of thought is that the Coega IDZ effectively reduces the size and impact of the super-park. Hosking argues that the IDZ interrupts the lateral bisect of the corridor/ between the Groendaal Wilderness Area and the Addo Elephant National Park. The opportunity cost of the Coega IDZ is the consumer surplus and tourist revenue forgone as a result of locating this extended national park further away from Port Elizabeth than it could otherwise be if the Coega IDZ project were abandoned in favour of a plan which allowed for a contract park to extend into the Coega area as well (Hosking 1998). By contrast the DTI argues that the Addo Initiative will not be adversely affected by the Coega IDZ, and that the two ventures will if anything be complementary (Observations by Minister of Trade and Industry, Mr Alec Irwin, DTI Parliamentary Hearing, Cape Town, 6 February 2001).

In addition to the above points, there various other arguments against the Coega IDZ project. These include the cost of the water that would be consumed in vast quantities by heavy industry. This would place a longterm strain on existing water supplies for the NMM region (Le Quesne 2000), as well as farming interests in the hinterland. A number of environmental and civil society groupings and activists have waged a long campaign against the project,7 emphasizing the short-circuiting of the public participation process; and the absence of suitable and updated environmental and economic impact studies (See Appendix 2 for a summary of progressive economic arguments against the project).

There is some evidence to suggest that the CDC has sought to control and channel secondary investment and procurement activities, to work through rather than allow a more incorporative set of dealings with businesses, SMMEs and relevant parties in the PEU area. While the CDC initially approached COMAU/AIMS to assist in sub-contracting work in the IDZ, they have never re-established contact or responded to a proposal drawn up by the engineering company for empowering local technicians to participate in process engineering and

6

Minutes of Port Elizabeth Science Park Working Group, 1999-2000. Several of these groups formed the Mandela Metropole Sustainability Coalition in early 2001. See the MMSC web-site (www.coega.org) for further details regarding the campaign against the Coega development. 7

23

control aspects of the steel plants in the zone. Rather CDC have apparently drawn on four major subcontractors, with an essentially national as opposed to local profile (Interview, Mr Pieter Wolfhaardt, Technical Director, COMAU/AIMS, 2 June 2000). Of late there has been some media interest in the Masincedane Community Development Trust (MCDT). The Trust has two trustees who appear to run the trust like a company. The Trust has picked up a range of lucrative contracts in the NMM including the construction of 300 houses at Wells Estate for the people the CDC want to move out of the IDZ (Communique from Marion Edmunds, E-TV, 10 April 2001). They also have a running contract for planning and scheduling for the CDC. This raises questions about the nature of the tendering process. There are other examples of efforts to limit community involvement8.

Increased media and public criticism of the nature of the arms procurement deal, has placed further pressure on Government to demonstrate the positive spin-offs from the industrial participation programme, the defence procurement venture in particular. Thus from government’s point of view, it is important that Coega proceed with the promised and anticipated offset investments.

Clearly, the debate over Coega and its future will continue. One thing is clear, that the involvement of the offset deals within the project, has complicated matters, but has so far failed to provide any concrete contribution to the project.

4.2 REGIONAL LINKAGES AND TECHNOLOGY TRANSFER: THE CASE OF COMAUAIMS

Despite the fact that the motor industry in the NMM area – Delta Motors, Volkswagen (at Uitenhage), and a Ford engine plant – are invoked a major beneficiaries of galvanized and specialized steel, there appear to be little or no formal linkages between these firms and the CDC. And at the time of writing none of the local

8

In October 1999, a delegation from SASSDA (Southern Africa Stainless Steel Association), the CSIR, DTI and Ferrostaal, requested the coordinator of the Port Elizabeth Science Park Working Group to act as set up a series of meetings to explore a range of secondary investments beyond the Coega IDZ. They expressed an interest in investing in the Science Park project. The meeting also agreed to establish a community empowerment forum, not under the auspices of the CDC, with the objective of providing non-partisan input regarding empowerment opportunities for the disadvantaged communities and aspirant businesspeople in the PEU region. Significantly, the Coega IDZ has continued to rely on their own empowerment advice group. It is also worth noting that the most recent CDC list of possible projects under the DIP scheme, is a R100m ecommerce park, which duplicates a key component of the Port Elizabeth Science Park project (November minutes of meeting of Port Elizabeth Science Park Working Group).

24

motor firms appear to be involved in ventures to explore industrial participation ventures with the British and German consortia (A.Young, 15 June 2000; March 2001).

One local company that has expectations of benefits from the offset deal is Comau Aims Corporation. A member of the Denel group this Uitenhage-based company is probably the leading specialist engineering group in the PEDU economy, with advanced capacity in Articulate Intelligent Manufacturing Systems. Its defence-related business is something of a side-line at this stage, although there are possibilities of additional orders from the likes of BAE Systems. The bulk of its work is derived from the automotive and tyre industries, is derived from export orders, rather than from South African businesses. Interestingly, several of their orders are in the form of sub-contracts from international firms contracted by the large Port Elizabethbased motor and tyre companies (Interview, Pieter Wolfaardt, 2 June 2000). In most instances, the international firms do little more than add a substantial management fee and outsource the work to the PEDU region. In effect, their local capacity for specialist outsourced work is neglected in favour of overseas companies. Thus the company’s competitive advantage within the PEDU is not maximised, and articulated in any substantive manner with cluster arrangements in the regional space economy. Furthermore, the fact that the Coega Development Corporation’s would appear to have failed to utilise this expertise adequately, is indicative at a micro-level of the broader problems the Coega IDZ has in linking with the local economy.

The degree to which successful offsets projects can contribute to technology transfer can also be questioned. The R22m deal concluded with BAE Systems for the manufacture of missile pylons for the Grippen fighter has been completed successfully. The pylons were, however, semi-manufactured and returned to BAE Systems for wiring and final machining. The local company were not informed as to how the pylons would be mounted on the wing of the fighter in question (interview, Pieter Wolfaardt, 2 June 2000), although BAE Systems do point out that this contract is a prototyping exercise. Nevertheless, this does suggest that the degree of technology transfer might be more limited than expected and does emphasise the need for monitoring at subnational levels if the maximum benefits are to be gained from the scheme.

CONCLUSION

This paper has considered the relation between the defence offsets and regional development in South Africa, with a case study of the Eastern Cape. The links between the nationally negotiated deals and the regional economy has been found to be somewhat problematic. Their ad-hoc and project-oriented nature, could lead

25

to them having impacts on the national and sub-national space economy that differ form those expected by the DTI and IDC. The assessment concludes that the industrial participation projects from the large defence procurement package is unlikely to benefit the Eastern Cape much in structural terms; indeed, there is cause for concern that it may lead to further contractions and undermine alternative and more sustainable macro development options for the province.

The offset projects in the Eastern Cape have been largely directed to the Coega IDZ project, with little attempt by local and provincial government to incorporate them in LED strategies Local economic and industrial development strategies are inadequately conceptualised and implemented to take suitable advantage of the offset possibilities. There is a need for more policy debate and transparency in the way local level actors become the conduit for secondary level counter-trade and investment. Should the Coega IDZ be launched, with a range of industrial participation projects, such as the various heavy industrial plants, there will be multiplier effects and spin-offs for the local and provincial economy, but the economic benefits are likely to be more modest than its protagonists insist. Local and regional linkages would appear to be more tenuous than is often assumed.

In the current rethinking of industrial policy, the question of industrial participation and specifically the defence offset investment interventions, should be the subject of inquiry. A tendency to marginalise environmental concerns in policy considerations and to opt for project interventions which consolidate rather than challenge the discourse of the mineral-energy complex, needs to be recognised and reconsidered. The DIP schemes need to be planned and evaluated within a wider sub-national context that recognises the spatial inequalities in the South African economy. Policy-makers need to address the question of utilising natural resources in a sustainable and equitable fashion, and explore the potential synergies between such resources and broaderbased industrial and high-technology development. To do this properly they need to build in a clearer understanding of the regional implications of national policy and to attempt to develop a coherence between national and sub national planning, that allow them to be mutually reinforcing.

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Driver, A. 1998. ‘The Fish River SDI: New Hope for Industrial Regeneration in the Eastern Cape?’ Development Southern Africa. Vol. 15, No. 5. pp. 787-808. de Fraja, G. and K. Hartley. ‘Defence Procurement: Theory and UK Policy’. Oxford Review of Economic Policy. Vol. 12, No. 4. pp70-88. Development Bank of Southern Africa (DBSA). 1996. ‘Eastern Cape: A Human Development Profile’. Report by Janine Erasmus. Duze, S, Haines, RJ & S. Hosking. 1997. ‘An Assessment of Labour Migrancy, Infrastructural Levels and Social Capital in the Port Elizabeth-Uitenhage Metropole as a Result of the Coega Project’. Combined Report for the Coega IDZ Company. May. Fine, B. 1998. ‘Industrial Policy Revisited: An Exercise in Self-Indulgence’. Paper presented to Annual Forum of Trade and Policy Secretariate, Muldersdrift, 20-22 September. Fine, B. and Z. Rustomjee. 1997. The Political Economy of South Africa: From Minerals-Energy Complex to Industrialization. Johannesburg: Witwatersrand. Haines, R.J. 1996. ‘Industrial Policy in Contemporary South Africa’. Iliso. Vol. 1, No. 1. November, pp 2954. Haines, RJ 1999. ‘Public-Private Partnerships and the Developmental State: The Case of South Africa’. Paper presented to the Fifth International Conference on Public-Private Partnerships, University College, Cork, Ireland, 26-29 May 1999. Hirsch, Alan. 2000. ‘Government Incentives for Private Economic Development - A Context for the Introduction of a New Suite of Investment Incentives.’ DTI Position Paper. Horridge, J.M. & Parmented, B.R. et.al. 1995. ‘The Macroeconomic, Industrial, Distributional, and Regional Effects of Government Spending Programmes in South Africa’. Centre of Policy Studies & the Impact Project, Monash University, April. Hosking, S. 1997. ‘Heavy Industry Compared to Agro-Aquaculture Options in the Coega River Mouth Area. Mimeo. Hosking, S. 1998. ‘Exploring the Economies of an Alternative to the Coega IDZ and Harbour Project’, Iliso, Vol.2, No. 1. pp. 2-21.

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Hosking, S. 1999. ‘The Experience with Trade Liberalization of Selected Industries in the Port-ElizabethUitenhage Metropolitan Area’. Annual Forum of Trade and Industrial Policy Secretariate, Muldersdrift, South Africa, 19-22 September. Hosking, S. 2000. ‘Development Planning in the Eastern Cape.’ Unpublished paper. Hosking, S. And Jauch, H. 1997. ‘Spatial Development Initiatives (SDIs) and Industrial Development Zones (IDZs)’. Report for the Eastern Cape Socio-Economic Consultative Council. Eastern Cape Province. IDASA. 1999. ‘Submission on the Medium Term Budget Policy Statement.’ IDASA Budget Brief, Institute for Democratic Alternatives in South Africa.Cape Town. Le Quesne, Tom. 2000. ‘The Development of a South African Environmental Policy Agenda and Economic and Development Policy under the first ANC Government’. Unpublished paper. Lewis, David, & Robin Bloch. 1998. ‘SDIs: Infrastructure, Agglomeration and the Region in Industrial Policy. Development Southern Africa. Vol 15, No. 5, Summer, pp. 727 -755. Lovering, John. ‘The Changing Geography of the Military Industry in Britain’. Regional Studies. Vol. 25, No. 4. pp. 279-293. Matthews, Ron. 2000. ‘Defence Offsets and Development: The Case of Saudi Arabia’. Unpublished Paper, Cranfield University. Newman, N. 1998. ‘SDIs and IDZs: Challenges Facing South Africa’. South African Labour Bulletin, Vol. 22, No. 4. August, pp. 42-45. Oakley, R.P. 1988. ‘High Technology Industry and the “Peace Dividend” A Comment on Future National and Regional Industrial Policy’. Cranfield School of Management Working Paper, 30/88. Pakes, T. 1998. ‘Industrial Development as an Effective Local Economic Development Strategy: The Port Elizabeth Metropole as a Case Study.’ Paper presented to Annual Forum of Trade and Industrial Policy Secretariate, Muldersdrift, South Africa, 20-22 September. Province of the Eastern Cape: Department of Economic Affairs, Environment and Tourism. 2000. ‘Towards a Provincial Economic Policy’. Discussion Paper. Quigley, P and J. Selby. 1994. ‘Restructuring in the Arms Economy: The Local Industrial Policy Response. The Report of a Survey’. January. RSA Government. 23 May 1996a. ‘Growth, Employment and Redistribution: A Macroeconomic Strategy’. Pretoria. RSA Government. 1998. Defence in a Democracy: Incorporating South African White Paper on Defence 1996, and the South African Defence Review. Pretoria. Short, J. 1981. ‘Defence Spending in the U.K. Regions’. Regional Studies, Vol 15, No. 2, pp. 101-110.

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Southern Africa Environment Project. 2000. ‘Comments on Proposed Coega Development, Environmental Impact Assessment and Public Participation Process.’ September. Tolbert, CM, Lyson, TA & M.D. Irwin. 1998. ‘Local Capitalism, Civic Engagement,and Socioeconomic Well-Being’. Social Forces. Vol. 77, No 2, pp 401-428. APPENDIX ONE: REGIONAL PROCUREMENT PATTERNS IN SOUTH AFRICA Table 1 Total Armscor procurement by Year and Province PROVNUM 1995 WESTERN CAPE 220,700 EASTERN CAPE 256 NORTHERN CAPE 3,955 Free State 113 KWAZULU-NATAL 55,390 NORTH WEST PROVINCE 7,306 GAUTENG 1,538,315 MPUMALANGA 3,659 NORTHERN PROVINCE 175

1996 187,737 11,020 8,870 6,374 139,942 37,537 2,183,073 33,563 557

1997 84,281 1,081 10,769 0 195,869 42,721 1,387,975 2,151 0

1998 249,154 388 19,368 88 202,833 14,549 8,663,528 180,955 0

Total Domestic Procurement Domestic Share Foreign Procurement Foreign Share Total Procurement

2,608,673 98.5 39,628 1.5 2,648,301

1,724,847 96.3 66,022 3.7 1,790,869

9,330,864 99.5 43,963 0.5 9,374,828

558,855 98.7 7,083

1,829,869 97.8 40,670 2.2 1,870,539

1999 31,8

21,524 503,191 2,143

565,938

Distribution of Domestic Procurement By Province

PROVNUM WESTERN CAPE EASTERN CAPE NORTHERN CAPE Free State KWAZULU-NATAL NORTH WEST PROVINCE GAUTENG MPUMALANGA NORTHERN PROVINCE

1995 12.1 0.0 0.2 0.0 3.0 0.4 84.1 0.2 0.01

1996 7.2 0.4 0.3 0.2 5.4 1.4 83.7 1.3 0.0

1997 4.9 0.1 0.6 0.0 11.4 2.5 80.5 0.1 0.0

1998 2.7 0.0 0.2 0.0 2.2 0.2 92.8 1.9 0.0

1999

100.00

100.0

100.0

100.0

100.0

100.0

100.00 11

100.00 16

100.00 11

100.00 58

100.00

Distribution of Domestic Procurement by Year

90.0

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APPENDIX TWO:

Coega as Economic Development? Problems and Alternatives Heads of Argument submitted by a team of economists associated with the Mandela Metropole Sustainability Coalition to the Department of Trade and Industry, Republic of South Africa 2 May 2001 ABSTRACT Should the Coega Port and Industrial Development Zone be constructed, at the cost of massive state subsidies and environmental degradation? We believe not, because • there continue to be extremely high risks associated with fickle private sector participation in the IDZ, and with shipping associated with the deep-water port; • labour prospects are far better in other alternative scenarios for investment and socioeconomic development; • the opportunity costs of Coega in terms of probable water consumption, electricity usage and infrastructure investment are potentially huge, particularly in relation to basic-needs development required by citizens of Mandela Metropole; • long-standing environmental concerns remain unaddressed; and • public law and participation processes associated with the port and IDZ development are unsatisfactory.

1. The Coega Development Corporation (CDC) programme's Industrial Development Zone (IDZ) and Portnet's plan to develop a deep-water harbour capable of accommodating the largest container ship carriers are both inappropriate. Alternatives are possible. 2. This paper provides the Heads of Argument associated with the critique of Coega as an economic development strategy, and reiterates the Coalition's desire to have an alternative development strategy considered seriously. The Heads of Argument will be augmented by full empirical information and documentation in coming days. 3. ARGUMENT 1: Systematic failure of analysis to date. The Coalition is very concerned about Coega's false starts. The initial idea of identifying an "anchor tenant"--initially, the zinc refinery (BillitonMitsubishi) and then the steel plant (Ferrostaal)--was abandoned. As many observers predicted, the international markets were not sustainable in sensitive sectors associated with environmentally-destructive heavy metals exports. All parties either withdrew, or unsuccessfully tried to increase the stakes in the SA government participation in the programme. The main conclusion is that the planners and promoters of Coega were extremely naive in believing that the existence of a deep-water port could mitigate against Coega's unfavourable location, distance from electricity sources and lack of existing infrastructure. We share the concern amongst observers--such as Business Day editorialists--that Coega is another pie-in-the-sky project whose costs are being passed increasingly from disappearing private-sector investors, to the taxpayer: The public and private financiers who will eventually decide the fate of the project need to be careful to separate sober projections from wild and wishful thinking. The world is littered with white elephants-from steel plants to airports--based on optimistic projections that within a few years turned out to be hopelessly wrong. Invariably, taxpayers are left carrying the can as governments are persuaded to rescue the project rather than leave workers and local communities in the lurch. Separating reliable projections from pie-in-the-sky predictions is never easy. (Business Day, 29 May 1998)

4. ARGUMENT 2: Faith in IDZ tenants is unconvincing. For want of a viable anchor tenant alternative, the CDC then changed its own focus in late 2000, to promote a diversified export-oriented industrial park that combines traditional techniques associated with heavy industrial development, alongside a lighter industrial sector. But as of May 2001, there seems to be virtually no single industrial group that has yet made a firm commitment to the IDZ. The CDC seems optimistic that once the formal application procedure has been completed, they will be able to overcome the present inertia and move ahead at good speed. But once again, this suggests naivety. 5. ARGUMENT 3: The viability of the Port remains in question. Portnet's contribution to the project has been fully approved and is now being delayed only by the land acquisition and consolidation process. But tellingly, the port development project is functionally separated from the IDZ. There are several crucial issues associated with the port development project that are not being addressed, but that are fundamental. Perhaps the most significant of these is the notion of whether such an investment is advisable from a purely technical point of view. There are several matters to consider here: a) The availability of alternative sites nearby for most shipping (Port Elizabeth, East London, Durban) and the massive over-capacity (especially in Port Elizabeth) generally being developed at public expense; b) the assumption that private ownership will guarantee efficient and profitable operation;

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c) the ongoing debate in the shipping industry over the long-term viability of deep-water "postPanamax" ships that have few ports at which to dock; d) the lack of consideration of the availability of wide-structure designs for container ships that do not require the 21 meter draft being discussed for Coega; e) the distance from South African markets, and lack of immediately proximate accompanying infrastructure (road, rail, air) to assure passage of trans-shipment goods from port to consumer market; and f) the need for additional expensive public subsidies and financing guarantees so that the Port can come to fruition. 6. ARGUMENT 4: There are insufficient jobs associated with Coega. How many formal, full-time jobs will Coega create? The impact assessment for the harbour released in August 2000 stated that only 80 permanent jobs would be created by the harbour. (Projected temporary employment fluctuates between 100 and 800 jobs over the course of construction of the harbour.) Job estimates for the IDZ are harder to specify, since no tenants have committed to locate in Coega. However, earlier estimates of job creation were extremely disappointing: the proposed Billion refinery would have created only 600 permanent jobs. 7. ARGUMENT 5: Coega is too expensive. The estimated cost of constructing the harbour is R1,65 billion. In addition, Portnet's Port Authority Division estimates that an additional R3 billion will be required for subsequent infrastructure investment. Moreover, IDZ infrastructure will cost R500 million, not including approximately R200 million for land purchase costs, hundreds of millions of rands for purchasing or relocation of saltworks and the abalone farm, and R150 million for "marketing, management and development." In earlier (1997) estimates, the total cost of the harbour, IDZ infrastructure and associated expenditure was R1,6 billion, half of the sum now envisaged. The land purchase costs were envisaged at only R560 000, while the cost of the harbour construction was estimated at only R830 million; cost escalation is a severe problem. 8. ARGUMENT 6: Coega will use too much water. Water consumption in Port Elizabeth totalled 166 ml/day in 1996, with projections rising to 288-304 ml/day by 2010, and 423-472 ml/day by 2025. The inter-basin water transfer from the Orange River scheme is itself threatened by the Lesotho Highlands Water Project which also drains the Orange River, for the sake of Gauteng industry and domestic consumption. The Coega IDZ would exacerbate the overall trend towards water stress. Water usage in industrial areas is estimated on an area basis. Light and service industries use on average 10-15 kl/ha/day, while the types of "wet" industries that the IDZ is specifically targeting use 30-60 kl/ha/day. The first stage of the IDZ is envisaged as being at 4000 ha. Were only half of this to be developed, and were water consumption to be at the lower end of the estimates for industries of this nature, water consumption could total 60 ml/day, a considerable increased burden on an already constrained situation. The ultimate plans for a 17,000 ha IDZ would seem to be fatally challenged by water availability. Were only 10,000 ha to be developed for industry within the IDZ, and, again, using the lower end of the estimates for water consumption, the IDZ would require 300 ml/day. In the current situation, even this conservative estimate would appear to be beyond the supply possibilities for the area. Equally, one of the industries targeted by the IDZ are petro-chemical works. Such works can use 200 ml/day, rendering impossible their location in the IDZ. 9. ARGUMENT 7: Coega will use too much clean air. The limited safe waste assimilating capacity of the air is a similarly worrying constraint on the project. Projected air emissions from the proposed zinc refinery would have alone resulted in air pollution levels close to the limits set for the IDZ, thus precluding the

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development of any other polluting industries in the IDZ. The development framework plan for the IDZ envisages the development of a metallurgical cluster, two metal industry clusters, and two mineral and construction clusters in the IDZ. Such development would be simply impossible due to air pollution constraints. 10. ARGUMENT 8: Coega will use too much electricity. Although without a clear sense of whether the IDZ will contain anchor tenants it is impossible to predict electricity demand, it is worrying that the original plans for at least two major anchor tenants entailed enormous amounts of electricity consumption (968 000 million Watt hours per annum). The amounts anticipated were 0,5% of Eskom's total supply capacity, 4% of its available surplus installed capacity, and 25% of Port Elizabeth's current demand. There is some likelihood, based on past experience (Billiton's Megaflex tariff structure deal with Eskom), that the Mandela Metropole will be called upon to subsidise the price of electricity to IDZ tenants, at the expense of supplying cheaper electricity to households and existing businesses. 11. ARGUMENT 9: Coega will not have sufficient spin-offs, and will not change structural barriers to development. The capital intensive heavy industry targeted for the IDZ would allow little to no opportunity for the development of SMMEs, which are repeatedly identified as the crucial sector in meaningful poverty alleviation. In addition, the capital intensive nature of the industries means that they will make no contribution to redressing the chasm in the Mandela Metropole's economy, between an affluent few and a vast, dispossessed majority. The Coega project would do nothing to address structural needs and failings of the bulk of the economic activity in the Eastern Cape, and instead would simply incorporate a tiny group of people into the affluent sector, while leaving the prospects of the majority of people utterly unchanged. 12. ARGUMENT 10: Alternative social and economic development strategies do exist. There are better options than what the Coega Port and IDZ present to the citizens of Mandela Metropole. These will be spelled out in detail in a forthcoming document. One set of options combines tourism, horticulture, agriculture and mariculture (Appendix One). Another takes seriously the opportunity costs associated with use of water and electricity, and considers subsidising low-income people in Mandela Metropole instead of IDZ tenants (Appendix Two). These alternative socio-economic development strategies should be investigated in much more detail; the Coalition will provide updated information about the prospects for an alternative strategy to Coega in coming days. 13. Conclusion. These Heads of Argument have documented the core rationales for the Mandela Metropole Sustainability Coalition's belief that the Coega IDZ and Port should be given extremely critical scrutiny. In a previous submission (Boyce Papu, 26 April 2001), the Coalition expressed grave doubts about Coega's public-participation process, including transparency and legality of the proposed IDZ. Those concerns are only amplified by the previous pages, in the form of key economic arguments against the Coega proposal, and by the following pages, which represent some of the alternative socio-economic development strategies that should be considered additional opportunity costs of Coega.

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