Energy security key to attracting investors

Renewable power and less red tape would attract billions to East London IDZ

● Simphiwe Kondlo, CEO of the East London Industrial Development Zone (IDZ), which recently secured R3.3bn of investment from the automotive sector, says the zone could have had billions more in private-sector investment if the government had shown more commitment to renewable energy.

“Energy security is one of the major fears of international investors we’ve had to address,” he says. “We had to provide a guarantee that we could deal with issues of energy security.”

The IDZ participated in the building of a substation in Buffalo City to supply its tenants in return for a commitment from the Buffalo City metropolitan municipality that the zone would be the last to be switched off during load-shedding.

But for foreign investors the need is no longer just to avoid load-shedding by Eskom. Even if Kondlo could guarantee that, it is not enough to bring them here.

It’s also not enough that the IDZ provides customer-designed factories for its tenants on a lease-term basis, which reduces tenants’ capital investment in brick and mortar to a minimum.

“Most of them, being international suppliers, need to demonstrate to their head offices that they’re utilising renewable energy in their manufacturing processes,” he says.

This means Kondlo’s IDZ has to guarantee it or there’s no investment.

It has been pushing to develop renewable energy projects on 500ha outside East London that it has designated as a zone focusing on renewable energy. But getting these projects approved has taken forever.

Meanwhile, investors who were keen to come have given up waiting.

“Our renewable energy rollout in South Africa has been very slow and has made some international investors lose their appetite. Even on projects that have been approved, getting to financial closure has been a long, long process.”

Entry requirements by the department of energy and approval delays have cost them heavily, he says. One investor who was looking to invest about R3bn pulled out because of the delays.

Kondlo has targeted cutting red tape in an effort to create a more conducive environment for investors. “Built into the special economic zone programme is a one-stop shop which tries to have expediting mechanisms for approvals for investors, be it at national, provincial or municipal level.”

The IDZ has partnered with the departments of home affairs & labour to see how they can fast-track approvals for its investors. “There is a definite hidden cost of red tape which makes us unattractive as an investment destination, whatever incentives there may be such as tax incentives and subsidised infrastructure and rentals.”

The biggest incentive would be to slash the red tape, he says. “When it comes to fasttracking processes, our government is on a learning curve, but at least there is commitment to do that. We are riding on that commitment to make sure we become the pilot of how this can be done better in these special economic zones.”

The purpose of the zones is to encourage local manufacturing, which will create employment and grow township and regional economies.

But for manufacturing activity to be sustainable it needs to be export-oriented, Kondlo says. Manufacturers need to be able to access other markets and capitalise on economies of scale. Which is why the lack of efficient rail and port services is another major challenge.

“We find ourselves with a port that has not had investment for more than 50 years and yet we’re trying to industrialise the city and increase export-oriented GDP.”

There’s a desperate need for East London port, which he says is in a “dire” condition, to become a more effective link in the zone’s export chains. Apart from fixing the port, this means revitalising the rail system, which is critical to ensure a smooth flow of goods between the zone and more functional ports.

Kondlo says the IDZ wants to develop new industries that respond to new environmental and technological requirements. “There is a need for us to help more small manufacturers to develop from scratch so they can participate in modern manufacturing processes using modern equipment. There’s a bigger and bigger element of automation and robotics in manufacturing and new skills are needed.”

Therein lies the problem. Most manufacturers in advanced manufacturing industries such as the automotive industry in East London have developed their own academies to meet their skills requirements.

Others have to rely on state technical and vocational education and training colleges, which are not producing the required skills. The country’s TVET colleges don’t have the equipment or experience to understand the latest developments in industry, Kondlo says.

“Digital transformation is a reality affecting the manufacturing sector in a big way and we are not moving fast enough to skill our young people for modern manufacturing.”

Manufacturers in the IDZ are frustrated because they don’t have the skills they need on their factory floors. It’s a serious problem for would-be investors, he says.

Kondlo, 55, trained as an agricultural and civil engineer. He worked at Umgeni Water in KwaZulu-Natal and was CEO of Amatola Water in East London.

He has been CEO of the IDZ since 2004, “basically from the start”. In 2007, it became the first IDZ in the country to be given an operating permit by the trade, industry & competition department.

He says social unrest is “a major disincentive” for investors. “It creates another element of uncertainty that no investor would be comfortable with.”

At an investment presentation recently a potential investor asked him: “What’s the use of having all the IDZ benefits you talk about if I could wake up with a gun held to my head?”

“Crime is bad enough for a country trying to attract investment,” he says. “If you add organised unrest it takes it to another level.”

He tells investors the July riots last year should not have happened “and should never ever happen in our country again”. But he can give them no guarantees.

“Our social unrest is a manifestation of political division within the ruling party and it should be nipped in the bud. It should be dealt with one way or another because it is sinking the country.”

The zone could lure far more investment if the renewable energy rollout was faster, and if technical colleges were producing the skills needed for the hi-tech age