South Africa: An Expensive Guest

HOW far will the government go to attract foreign direct investment -- and at what cost? The planned aluminium smelter at Coega gives us a glimpse.

Negotiations to secure the project have been extremely difficult for government. First, extensive talks with Pechiney were cut short when Alcan acquired the French aluminium producer. That sent the government back to the drawing board, to start negotiating afresh with Alcan. And this time ministers discovered they were dealing with a potential investor that was decidedly less enthusiastic about bringing investment into the country than Pechiney was.

So government itself started splashing out to make the deal more attractive and to lure the sceptical Canadians to Eastern Cape.

To date R5bn has been spent to develop the Coega industrial development zone, the success of which hinged on the identity of its grand anchor tenant, which, it now turns out, will be Alcan's smelter

Altogether, the government will spend R14bn to get the zone into shape -- R7bn for the development of a deep sea port and container terminals and R4bn on a electricity power upgrade. The Alcan smelter will be the main beneficiary of the power investments.

As if that was not enough, the government sweetened the deal with a R1,93bn tax incentive, making Alcan one of the last beneficiaries of the strategic industrial projects programme .

But the real clincher is the rate at which Alcan would get electricity.

Making aluminium requires a massive amount of power. The 720000 tons of aluminium which the Alcan smelter will produce in a year will require 675MW of electricity. The smelter will also tap into the national electricity grid, already notoriously under strain.

Of course, negotiations on the project started long before the alarm bells were raised about the electricity supply crisis in SA.

But the attraction of SA as a destination for the giant Alcan investment -- R21bn at the last count -- is precisely because SA's electricity is the cheapest in the world.

Of course, the power situation has changed fundamentally and the price of electricity is set to spike.

Eskom charges average rates for electricity at 16c a kilowatt hour (for industry) and 29c/kwh (for residential consumers). These costs are set to rise substantially.

To address SA's power shortage, Eskom will spend R150bn over the next five years and the power utility has asked the National Energy Regulator of SA for tariff hikes of 18%. It's highly unlikely that Alcan would ever have agreed to the deal at the prices Eskom is proposing for the rest of us.

Those in the know commonly refer to aluminium earmarked for the export market as the "export of electricity". Now it has emerged that this is exactly what Alcan will do, as 95% of the aluminium produced at Coega will be exported overseas.

Eskom is keeping under wraps the rate at which Alcan has secured its electricity and we can safely assume that this is because the truth would be hard to swallow for citizens and businesses about to suffer steep price increases.

Environmental lobby group Earthlife Africa thinks the Canadians will get their 1355MW (a second phase of the project will push power demand to this level) of power at 5c/kwh.

Remember also that the electricity rate has been locked into a 25-year agreement, exempting Alcan from the above-inflation rate hikes which SA as a whole will face.

Essentially, South Africans will therefore be heavily subsidising the Coega smelter with cheap electricity at a time that they themselves will cough up considerably more for power -- if they can get it.

It's a lot to give away to a project that can in no way guarantee that Coega will become the industrial hub its creators dreamed of.