Coega Development Corporation (CDC) was established in 1999 as an industrial development zone (IDZ). In 2017 it became a special economic zone (SEZ). SEZs are intended to target specific economic activities. Various incentives are available to attract foreign direct investment (FDI) and to ensure international competitiveness, such as a preferential 15% corporate tax rate, a building allowance, and the advantages of being in a customs-controlled area.
To date, CDC has attracted 45 operational tenants (25 local and 20 international) with a combined investment value of R9.53 billion; 15 831 jobs have been created and 7 406 people have received training.
Coega recently released its 2019 integrated annual report. The chair, Dr Paul Jourdan, commits Coega to maintaining a “good record of positive audit findings”.
Unfortunately, this is somewhat marred by Coega not having published its 2018 annual report.
The 2018 comparative figures have been restated in the 2019 financial statements.
- Net profit for the year was R146.6 million (2018: R26.9 million). The increase in net profit was mainly attributable to a reduction in the doubtful debt provision and the implementation of International Financial Reporting Standard (IFRS) 9.
- Group revenue increased to R597.9 million (2018: R583.5 million).
- Total cash at the end of the year amounted to R850.8 million (2018: R750.2 million).
- Retained income increased to R4.3 billion (2018: R3.9 billion).
- Government grants received during the year amounted to R118.2 million (2018: R314 million). Of this, R28.2 million was released to income (2018: R48.8 million), and R161.4 million (2018: R171.8 million) was released to fund SEZ projects.
No reasons were proffered for the errors made in the 2018 financial statements (nor the absence of the 2018 integrated report from the Coega website) – it appears that the statement of the financial position and the statement of profit and loss were completely restated.
External audit report
The key findings highlighted in the external audit report note that: key financial ratios have deteriorated, the 2018 comparative figures have been restated, the company operated without receiving the full amount of requisite funding for operational expenditure, and effective steps were not taken to prevent fruitless and wasteful expenditure of R3.5 million.
It is to be noted that funding difficulties led to Coega having to incur interest and penalties to the South African Revenue Service (Sars) and creditors.
The CDC has secured 18 new investors with a pledged investment value of R2.06 billion.
However, 82% of this new investment is from domestic entities.
The new investments include a cold storage warehouse for packing export fruits, an abalone farm, processing facilities for artichokes and other crops, and a freshwater aquaculture system. Another business provides goods and services, and others provide packaging.
This does lead one to question whether these are ‘new’ investments or whether these companies are relocating to take advantage of the tax incentives.
Hopefully these businesses will show an increase in exports, an increase in revenue, and an increase in employment. If not, the taxpayer will be picking up the tab.
An exciting development is that China-based automaker Beijing Automotive Industry Corporation South Africa (BAIC SA) is constructing a $750 million (approximately R11 billion) vehicle assembly plant. We can expect a state-of-the-art factory, and 100% worker productivity.
Sale of lease contracts to external parties
Some years ago, Coega ceded and assigned its rights in the following lease agreements:
- In 2010 General Motors South Africa (GMSA) combined its operations into a 38 000m2 warehouse (which required a R250 million investment). In December 2010 CDC concluded a 12-year agreement with Souvaris; effectively it ceded and assigned its rights, title and obligations in the GMSA lease for R125 million.
- In 2015 CDC concluded a 50-year lease agreement with container shipping company MSC for R19.8 million.
I only have one question – why?
Future transformational projects
- Over the last few years, there has been intermittent talk of Project Mthombo. If it happens, it will be a $10 billion oil refinery that could create some 26 000 jobs. However, this is unlikely to happen without a foreign investor.
- There is also talk of a $2.7 billion combined-cycle gas turbine power station which could create an additional 8 140 jobs. Preliminary work was completed in 2016, but the 2019 report does not give any information as to whether the project is being implemented.
- Unpredictable future costs of electricity.
- Funding challenges for operational expenditure.
- Capital funding to upgrade legacy information and communication technology.
- The threat of deindustrialisation as a consequence of deglobalisation.
Coega’s vision versus cost to government
Coega’s vision is to become the “leading catalyst for the championing of socio-economic development”.
But at what cost to the government? Over the last 12 years government has poured R5.5 billion into Coega, which has been allocated between revenue and construction costs.
Unknown costs include the revenue foregone by the fiscus in offering special tax rates. This of course should be adequately compensated for by the additional tax revenue received by companies in the SEZs. But then, that would be in an ideal world.
At least National Treasury has now realised that the generous tax breaks granted to SEZs may entice domestic companies to relocate (without generating additional revenue nor increasing employment).
Perhaps Treasury should look to streamlining the government’s financial commitments in keeping state-owned entities afloat, including the lucrative tax holidays gifted to SEZs, before it tries to raise further taxes from the public in the 2020 budget.