Business and Economy

Eastern Cape’s bold plan to industrialise and attract investors

The Eastern Cape is seeking to increase its contribution to the South African economy and industrialise its underdeveloped eastern section of the province, which consists of former Transkei homeland. Photo: Transnet

During Thabo Mbeki’s tumultuous nine-year reign as South African president, tens of billions of rand in infrastructure and industrial investment poured into the Eastern Cape economy, as Mbeki attempted to slam the brakes on the province’s declining contribution to the country’s economy.

The Eastern Cape’s contribution to GDP dropped to 7.6% in 2014 from 8.2% in 1995, but the province has managed to hang on to its spot as the fourth-biggest contributor to the national economy, behind Gauteng (34.3%), KwaZulu-Natal (16.1%), and the Western Cape (13.6%).

The Eastern Cape is characterised by skewed economic development akin to that of Germany before the fall of the Berlin Wall in 1989. The communist eastern part of the country (formerly East Germany) was underdeveloped and poor, while the capitalist western section (formerly West Germany) was highly industrialised and prosperous.

In the case of the Eastern Cape, the eastern part of the province, largely made up of the rural former Transkei homeland, is still lagging economically behind the industrialised western section of the province. Under Mbeki’s rule, cut short in 2008 when the ANC unceremoniously axed him, the province received billions of rand to build two industrial development zones (IDZs) – one in East London and one at Coega, near Port Elizabeth.

The province’s western portion is an important motor vehicle manufacturing hub, producing about 51% of South Africa’s motor exports and accounting for 30% of manufacturing employment in the Eastern Cape.

The unequal distribution of industrial wealth is a concern for the province’s government. Now it is implementing policies to rebalance economic development in the province by industrialising the eastern portion, thereby boosting incomes and creating jobs. With 6.9m residents, the Eastern Cape has the third-largest population in South Africa, yet its residents have the lowest per capita income in the country, resulting in the migration of its residents to richer provinces.

Part of the reason the Eastern Cape carries the tag of SA’s poorest province is that it was formed in 1994 by cobbling together the poverty-stricken Xhosa homelands of Transkei and Ciskei and what was formerly the eastern region of the colonial-era Cape Province, including the coastal cities of East London and Port Elizabeth.

Between 2004 and 2014, the EasternCape saw the construction sector growing at a faster rate (expanding by 5.8% annually, according to Stats SA), pushing up its contribution to the provincial economy. The province’s mainstay – export-orientated automotive manufacturing – experienced slower growth over the same period. Manufacturing grew at 2% over the period and agriculture 3.7%. Manufacturing’s contribution to the provincial economy dropped to 11% from 17% in the decade under review, while construction increased its share to 4% from 2%.

“A close look at these numbers shows that businesses involved in the construction sector received close to half of all loans. The sector is robust”

The Eastern Cape Development Corporation (ECDC) is driving plans to transform the eastern side from a consumer-based economy, saddled by high unemployment and non-productive subsistence farming, into a production-led economy.

Ndzondelelo Dlulane, CEO of the ECDC, concurs that the development funder has been pushing the bulk of its loans to small contractors and civil engineering firms, in response to the strong growth in the construction sector. In the financial year 2015/16, the ECDC disbursed loans worth R92.3 million to 260 small, medium and micro enterprises.

“The loan disbursements led to the facilitation of 1 875 jobs. A close look at these numbers shows that businesses involved in the construction sector received close to half of all loans. The sector is robust, indicating increased government spending in the roll-out of socio-economic infrastructure projects, particularly in the former Transkei, which has significant backlogs,” explains Dlulane.

However, Dlulane is brutally frank about the heavy reliance of the Eastern Cape’s economy on car manufacturing, and how this leaves the province susceptible to global economic shocks. In the two years prior to the 2008 global financial crisis, the provincial economy grew at over 5%, thanks mainly to the commodity boom, even though there is very little mining in the Eastern Cape.

But by 2009, the province went into recession when the financial crisis hit, shrinking the provincial economy by 1%. “Manufacturing in the Eastern Cape is largely driven by the automotive sector. If anything happens to the automotive sector, our economy is dead,” warns Dlulane. Three cities (East London, Port Elizabeth and Uitenhage) in the western part of the province are home to four large auto manufacturers, namely Volkswagen, Mercedes-Benz, Ford and General Motors.

 

Investor opportunities beyond auto sector

Beyond the automotive industry, the province possesses enormous opportunities for investors and entrepreneurs in renewable energy, agro-processing, construction, non-auto manufacturing, waste management, and property development (ECDC holds 961 pieces of large vacant land).

Should shale gas become part of the mix, the Eastern Cape could become a big player in the resources market overnight. Right now, the mining and quarrying sector contributes a negligible 0.2% to the Eastern Cape economy, compared with other provinces that are heavily dependent on mining, like the Northern Cape (21.8%), North West (29.5%), Limpopo (25.1%) and Mpumalanga (21.6%).

The Eastern Cape government has described shale gas as a potential “game-changer” that could significantly elevate the province’s economy. Estimates of the recoverable shale gas in the Karoo region range between 20 trillion cubic feet and 485 trillion cubic feet, with the potential to generate revenue of between R1 trillion and R20 trillion.

While potential shale gas exploitation is still mired in an environmental and legislative stalemate, the Eastern Cape has within five years built a formidable wind energy sector that has seen independent power producers (IPPs) flocking to the province to build wind farms. About R1.8 billion of investment flowed into the province for the construction of 16 wind farms last year, of which three were built by Innowind in Komga, Grahamstown and Port Elizabeth.

“The latest investments affirm the Eastern Cape’s attractiveness in the competitive wind energy sector. The province is acknowledged globally as having one of the best wind conditions in the world. New Zealand is our closest competitor. Within three to five years, it will be able to generate an average of eight hours of electricity every 24 hours,” Dlulane says.

                   

Industrialising backwater east

By 2001, two years after Mbeki became president, the Coega IDZ was officially designated and a year later the East London IDZ followed suit. Since its inception, Coega has attracted 36 tenants, who have invested R181 billion, while East London has netted private sector investment worth more than R7.3 billion from 45 investors.

“The East London IDZ continues to attract export-oriented investors that strengthen and diversify the local economy. Linked to this, the Stats SA report also revealed that 67% (R3.8bn) of the total inputs used by manufacturers in the zone last year were sourced locally, while R2.6 billion worth of the outputs from these manufacturers were export bound,” says Ayanda Ramncwana, spokesperson for the East London IDZ.

Ayanda Vilakazi, head of marketing and communications at the Coega Development Corporation, which operates the Coega IDZ, says the industrial park has signed on 19 new investors, who are ploughing in R1.9 billion. Coega has created 96 776 jobs since 2001.

During SA’s political transition, government discontinued massive tax incentives that encouraged industrial investors to settle in former homelands. This resulted in an exodus by manufacturers out of Transkei

“Even the companies situated in the Coega IDZ have an impact on the Eastern Cape economy through creating decent work,” Vilakazi says.

There are also plans to take manufacturing back to the former Transkei area. The bulk of the homeland’s industrial activities were based in Butterworth in the 1980s, boasting 51 large-scale manufacturers during its heyday – half the number of all the manufacturers based in Transkei as a whole at the time.

During SA’s political transition, government discontinued massive tax incentives that encouraged industrial investors to settle in former homelands. This resulted in an exodus by manufacturers out of Transkei and, by the time the homeland was integrated into the newly established Eastern Cape in 1994, it was a deindustrialised backwater.

Mthatha, the former Transkei capital, will be the new site of rekindling manufacturing in the area, and has been chosen by the department of trade and industry as the home of a mooted Special Economic Zone (SEZ), which will focus on agro-processing. The SEZ is part of the Integrated Wild Coast Development Programme, which will see the construction of a R9 billion N2 toll road, linking Durban and East London, and the R3bn Wild Coast Meander road, hugging parts of Transkei’s coastline.

These roads will open up the Wild Coast to trade and investment. A study compiled by the South African National Roads Agency (Sanral) suggests that the N2 toll road could inject up to R29.4 billion and create 540 000 jobs over a 30-year period for businesses and families along the route. The study also lists agriculture, forestry, manufacturing, construction and property development, finance and real estate, trade, tourism and catering as the sectors that could benefit from the highway.

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