South Africa Embraces Corporate Welfare: Mega Deal Subsidies Over Servies for the Poor

by Patrick Bond

Durban, South Africa — The South African government is channeling Africa’s largest-ever industrial subsidies into the Coega industrial zone complex and port, located in the country’s fourth largest city, the Nelson Mandela Metropole (better known by its apartheid-era name, Port Elizabeth). Government proponents say Coega represents sound industrial and development policy, but a growing legion of critics are labeling it a corporate welfare boondoggle in a country that does not have resources to spare.

Aside from tailor-made infrastructure, including a 20-meter deep port, the key attraction of Coega for foreign investors is super-cheap energy. Following a year of frequent brownouts in the two largest metropolitan areas, Johannesburg and Cape Town, a fierce debate has erupted over the idea of providing discounted electricity to industrial users when citizens cannot get a dependable supply at any price. Mismanagement of the state electricity company, Eskom, in the course of its corporatization has interfered with a steady supply.

The main beneficiary of Coega’s cheap energy, the Canadian firm Alcan, agreed in December 2006 to a quarter-century power supply deal from Eskom — the world’s fourth-largest power company — at an extremely generous price, less than the two cents per hour that bulk industrial consumers pay. This is already the world’s cheapest electricity, but Alcan insisted on the subsidy due to volatile commodity prices, a factor that has caused consternation in prior deals the South African government made with large mining houses and metals smelters such as BHP Billiton, the Anglo American group and Mittal Steel.

Alcan and Eskom claim that the deal will bring job creation and foreign exchange earnings, and pay off for the country. Using imported bauxite, Coega’s $3 billion aluminum smelter could by 2014 produce 720,000 tons of the metal annually in one of the world’s biggest smelters. Fewer than 1,000 permanent jobs will be created in the process, however.

Chief Executive Officer of the Coega Development Corporation Ongama Mtimka insists that Coega will create economic development. “Both business and ordinary citizens in the Nelson Mandela Bay see economic opportunities which have been rather concentrated on a few big cities in South Africa,” according to Mtimka.

Mtimka says “the Coega Development Corporation (CDC) will not be drawn into an argument about whether Coega is or is not a white elephant.” But he contends, “Our studies show that Coega is a viable business proposition. Alcan’s Cynthia Carroll’s comment that Coega has the best infrastructure she has seen throughout the world affirms the competitiveness of the Coega IDZ (Industrial Development Zone) relative to its global counterparts.”

Coega is one in a long list of post-apartheid megaprojects undertaken by the South African government. These include the Pebble Bed Nuclear Reactors (one of the first global deployments of a new nuclear energy technology that purports to offer new safety guarantees), the Lesotho Highlands Water Project (six vast dams under construction) which supplies water to Johannesburg [see “Making the Earth Rumble,” Multinational Monitor, May 1996], and the “Gautrain” elite fast rail network that will link Johannesburg, Pretoria and the country’s largest airport.

An impoverished South African majority, increasingly well organized and mobilized, is challenging these megaprojects and demanding instead that state resources be deployed to deliver basic services to the majority, on a more ecologically sustainable basis.

The Costs of Corporate Welfare

Coega’s site will include a new port, container terminal and Industrial Development Zone, utilizing vast public investments — at least $1.5 billion, including a $300 million tax break for Alcan — and enormous quantities of land, water and electricity. The new employment anticipated at the port/IDZ would be the most expensive, in terms of capital per job, of any major facility in Africa. Environmentally, the costs of the Coega projects in water consumption, air pollution, electricity usage and marine impacts are potentially immense.

The infrastructure under construction is unprecedented in Africa, and dwarfs the basic-needs development infrastructure required by deprived citizens of Mandela Metropole and across the Eastern Cape. Hence controversy has surrounded the decision-making process to construct the port and IDZ. Reports of conflicts of interest for key decision-makers cloud the project’s governance. Coega was also initially meant to represent a key site at which European industrial firms involved in arms sales to South Africa could make “offset” investments that would create jobs, so the government could justify to the public its corruption-ridden $6 billion weapons purchase. These investments so far have not been forthcoming.

Socially, there are significant costs as well. Several hundred families were displaced to build Coega’s infrastructure, and those in the area will bear the brunt of the environmental toll exacted by the project.

Coega Development Corporation’s Mtimka retorts that the displaced “now live in a better community with a holistic provision of housing facilities with social infrastructure including schools and recreational facilities, and are fully integrated with other residential areas with vibrant public transport. In addition, they got, and will continue to get, employment opportunities at Coega.”

Community and environmental activists say the biggest cost of Coega is the lost opportunity to exploit far better prospects for employment creation and socio-economic progress if resources were used elsewhere. Six years ago, the Mandela Metropole Sustainability Coalition proposed an alternative economic development scenario. The alternative strategy prioritizes basic-needs infrastructure investment throughout the Eastern Cape and, at Coega, the development of state-supported eco-tourism and black-owned, small-scale agriculture and mariculture. The opportunity costs of Coega include as many as 10,000 jobs lost on economic sectors which either must close or cannot expand, including existing salt works, mariculture, fisheries, agriculture and eco-tourism.

Mtimka is dismissive of the Sustainability Coalition’s alternative proposal, saying “it lacks the necessary quantitative data.”

Of the many subsidy components of Coega, civic groups find Eskom’s new deal most worrying, given the persistent electricity shortage across South Africa and the problem of mass disconnections of poor people for whom electricity remains too expensive. Using roughly 1,300 megawatts, about 3 percent of the country’s total, Coega will constitute an enormous new drain, requiring expensive new transmission lines from Eskom’s coal-fired generators 1,000 kilometers away.

Moreover, South Africa’s carbon dioxide emissions are already running approximately 20 times higher than even the United States on a per capita income basis. Ironically, Environment Minister Martinus van Schalkwyk returned triumphant from the November climate change treaty renegotiations in Nairobi, claiming that “South Africa achieved most of its key objectives.” Those included promoting “Clean Development Mechanisms.”

By bringing the vast “ghost on the Coast” (the long-empty Coega’s nickname) to life through the new subsidies, the national government will substantially increase carbon emissions. Yet because Alcan promises to use relatively energy efficient technologies, the market-oriented New York-based group Environment Defense has suggested that Coega be considered worthy of Clean Development Mechanism investments by large international polluters. In exchange for supporting this purportedly clean energy investment in a development country, rich country polluters would be able to continue with their present rate of emissions at existing facilities. In promoting these kinds of investments, van Schalkwyk says that his government is sending “a clear signal to carbon markets of our common resolve to secure the future of the Kyoto regime.”

Critics have pointed to vast problems with the new emissions trading system. They say that project such as Coega show why the emissions-trading market should not be expanded in ways that generate new ecological problems without making a dent in overall emissions.

Basic Needs and Corporate Greed

>From the standpoint of meeting basic needs for electricity, South Africa’s regulation of Eskom and municipal distributors has not been successful. This is not only because of an extremely weak performance by the initial National Electricity Regulator — Xolani Mkhwanazi, who subsequently became, tellingly, chief operating officer for BHP Billiton Aluminum Southern Africa — but also because government policy has increasingly imposed “cost-reflective tariffs,” as a 1995 document insisted. The key issue is whether all consumers must cover the costs of the electricity they use, or whether richer and industrial consumers pay higher rates to subsidize the poor.

The 1998 White Paper allowed for “moderately subsidized tariffs” for poor domestic consumers. (White Papers are formal governmental policy statements.) But, it also stated, “cross-subsidies should have minimal impact on the price of electricity to consumers in the productive sectors of the economy,” meaning industrial users should not subsidize costs for poor residential consumers.

In addition to Mkhwanazi, the man responsible for Eskom’s late-apartheid pricing, Mick Davis, left the parastatal’s treasury to become the London-based operating head of Billiton. Davis took the post after former Finance Minister Derek Keys gave permission for an Afrikaner-controlled industrial company (Gencor) to expatriate vast assets in order to buy Billiton from Shell. After apartheid ended, Keys became chief executive of Billiton.

Ironically, the deals that gave Billiton, Anglo American and other huge corporations the world’s lowest electricity prices came under attack in 2005 by Alec Erwin, the Minister of Public Enterprises. The package Davis had given Billiton for smelters north of Durban and in Maputo, Mozambique, during the period when Eskom had extreme overcapacity, resulted in prices that often dropped below $0.01 per kilowatt hour, when world aluminum prices fell. (Most households pay five times that amount.)

Erwin reportedly insisted on lower “financial-reporting volatility.” Because the amount the foreign companies pay for energy changes with the value of South Africa’s currency, the rand, every time the rand changes value by 10 percent, Eskom wins or loses $300 million. Erwin said the utility should work to escape from existing contracts. From Billiton’s side, Mkhwanazi replied that any change to the current contracts could be “a bit tricky for us. … We would adopt a pragmatic approach and, who knows, perhaps there will even be some sweeteners in it for us.”

But the allegedly new approach was not applied at Coega, where Erwin as Trade and Industry Minister from 1996 to 2004 had led negotiations for a new smelter. According to the chief executive of the parastatal Industrial Development Corporation (IDC), Geoffrey Qhena, “The main issue was the electricity price and that has been resolved. Alcan has put a lot of resources into this, which is why we are confident it will go ahead.”

Meanwhile, however, to operate a new smelter at Coega, lubricated by at least 15 percent financing from the IDC, Alcan and other large aluminum firms were in the process of shutting European plants that produce 600,000 metric tons between 2006 and 2009, simply “in search of cheaper power,” according to industry analysts.

The main Alcan negotiator, 49-year-old Cynthia Carroll of the United States, was recognized for her skill in browbeating South African officials when in late 2006 she was named CEO-designate at Anglo American Corporation. Breaking the longstanding tradition, dating to the era of founder Ernest Oppenheimer, of giving the top job to insider elderly male candidates, Anglo’s offer was seen as a way to better position the firm — South Africa’s largest even though its financial headquarters since 1999 is in London — for further international metals deals. 

Partnership for Climate Change

The state’s decision to provide Alcan such vast subsidies at Coega comes amidst rising elite and popular consciousness about climate change problems. For years, rich country governments have avoided action on carbon dioxide (CO2) emissions, as reflected at a high-level inter-governmental meeting in October in Monterrey, Mexico. There energy ministers from the G8 group of rich countries were joined by 12 other major polluters, including South Africa. No commitments were made to reduce greenhouse gas emissions.

Three weeks later, however, the British government released The Stern Review: The Economics of Climate Change, which estimates climate change costs of 5 to 20 percent of global economic output at current warming rates. Former World Bank chief economist Nick Stern calls for demand reduction of emissions-intensive products (the opposite of Coega), energy efficiency, avoiding deforestation and new low-carbon technology.

Stern also calls, however, for carbon-trading.

Likewise, in 2002, Princeton University researcher Nipun Vats and Environmental Defense — through its “Partnership for Climate Action” relationship with French aluminum firm Pechiney (subsequently purchased by Alcan) — promoted Coega as eligible for subsidies under the Clean Development Mechanism. Coega could receive such subsidies if it can show its technology is cleaner than existing aluminum suppliers, and in turn that the energy-saving smelter technology can only be profitably financed through “additional” investment resources using carbon trading mechanisms like the World Bank’s Prototype Carbon Fund.

In November, Alcan said it would proceed with the $2.7 billion aluminum Coega smelter thanks to vast electricity subsidies from Eskom. Within days, University of Cape Town Environmental Studies Professor Richard Fuggle — the country’s most respected environmentalist — attacked the increase in CO2 emissions due to Coega in his retirement speech. He described Environment Minister Van Schalkwyk as a “political lightweight” who is “unable to press for environmental considerations to take precedence of ‘development.’”

According to Fuggle, “It is rather pathetic that van Schalkwyk has expounded the virtues of South Africa’s 13 small projects to garner carbon credits under the Kyoto Protocol’s CDM, but has not expressed dismay at Eskom selling 1,360 megawatts a year of coal-derived electricity to a foreign aluminum company. We already have one of the world’s highest rates of carbon emissions per dollar of GDP. Adding the carbon that will be emitted to supply power to this single factory will make us number one on this dubious league table.”

Boondoggle Politics

In Mandela Metropole, emerging resistance to Coega’s guzzling of water and power will add to existing popular unrest. In South Africa during 2004 to 2005, the police counted more than 5,800 protests against government, possibly the highest per-person rate in the world. In China, with 1.3 billion people, there were 87,000 mainly rural protests, while South Africa’s population is 45 million.

Thirty years ago, in the wake of the Soweto uprising near Johannesburg, the revitalized anti-apartheid social movements known as civic associations were founded in Port Elizabeth’s impoverished townships, thanks in part to the legacy of black consciousness and community empowerment activist Steve Biko, killed by the city’s police in 1979.

Twenty years later, the assistant city engineer for hydraulics wrote a blunt memo about the prospects for imposing a redistributive tariff to help poor consumers through cross-subsidization, funded by higher prices paid by large industrial users: If such a plan “were to be implemented for industry, Coega would not go ahead.”

The redistributive scheme subsequently adopted by the city does not assure low-income citizens basic electricity and water access. In other words, the perceived need to pump cheap water and electricity into Coega industries will likely sabotage government’s objectives of social justice, public health and economic growth via municipal services.

Coega’s chief booster, Mtimka asserts that such criticisms are groundless. “The project is gaining momentum as the catalyst for creating better standards of living  for people in the Eastern Cape,” he claims, “if the resultant upgrades of power, railway lines and roads, the massive human development strategy, the increasing number of ‘affirmable’ small businesses as well as the upstream and downstream opportunities are things to go by.”

But critics say the Coega port and IDZ will likely exacerbate the apartheid economic legacy of division, marginalization and grandiose, unworkable public-investment schemes. Such ventures were traditionally grounded not in a logic of development, but instead reflected the power of special interest groups.

Civil society resistance to this sort of maldistribution is already quite advanced, but often takes the form of illegal reconnections after prolific disconnections by municipalities and Eskom. To alter policy decisions, what is needed is a more sustained campaign for radically new industrial policies as well as tough state regulation of emissions. It may be inspired by the case of Coega, which stands out as a beacon of irresponsibility and corporate welfare.

Patrick Bond is director of the Centre for Civil Society at the University of KwaZulu-Natal in Durban, South Africa