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Musina Special Economic Zone License Application For Designation – Concept Note

MSEZ AMN AAD 02 A

Musina SEZ - Concept Note

July 2015

Musina SEZ Licence Application

Concept Note

Polokwane, Limpopo

Mott MacDonald PDNA, 25 Scott Street, Waverley, Johannesburg 2090, South AfricaPO Box 7707, Johannesburg 2000, South AfricaT +27 (0)11 052 1000 W www.mottmac.com

Musina SEZ Licence Application

Concept Note

July 2015

Limpopo Economic Development Agency (LEDA)

Information class: Standard

This document is issued for the party which commissioned it and for specific purposes connected with the above-captioned project only. It should not be relied upon by any other party or used for any other purpose.

We accept no responsibility for the consequences of this document being relied upon by any other party, or being used for any other purpose, or containing any error or omission which is due to an error or omission in data supplied to us by other parties.

This document contains confidential information and proprietary intellectual property. It should not be shown to other parties without consent from us and from the party which commissioned it.

Revision Date Originator Checker Approver DescriptionClick here to enter text.

MSEZ/AMN/AAD/02/A July 2015 Musina SEZ - Concept Note

STYLEREF ~ShortTitle Musina SEZ Licence ApplicationConcept Note

Chapter TitlePage

1 SEZ Concept Note 11.1 Statement of intent____________________________________________________________________11.1.1 Purpose____________________________________________________________________________11.1.2 Objective____________________________________________________________________________11.2 Socio Economic Profile_________________________________________________________________11.3 Economic Rational____________________________________________________________________11.4 Summary of Risks_____________________________________________________________________11.4.1 Technical___________________________________________________________________________11.4.2 Operational__________________________________________________________________________11.4.3 Financial____________________________________________________________________________11.5 Brief Business Case___________________________________________________________________11.6 Financial Resources___________________________________________________________________1

STYLEREF ~FooterJobRef MSEZ/ STYLEREF ~FooterDivRef AMN/ STYLEREF ~FooterSubDivRef AAD/ STYLEREF ~FooterRepNo 02/ STYLEREF ~FooterRevNo A STYLEREF ~FooterDate July 2015 STYLEREF ~FooterFilepath Musina SEZ - Concept Note

Contents STYLEREF ~ShortTitle Musina SEZ Licence ApplicationConcept Note

1.1 Statement of intent

1.1.1 Purpose

Facilitate the creation of an industrial complex, having strategic national economic advantage for targeted investments and industries in the manufacturing sector and tradable services;

Develop infrastructure required to support the development of targeted industrial activities; Attract foreign and domestic direct investment; Provide the location for the establishment of targeted investments; Enable the beneficiation of mineral and natural resources; Take advantage of existing industrial and technological capacity, promote integration with local

industry and increasing value-added production; Promote regional development; Create decent work and other economic and social benefits in the region in which it is located,

including the broadening of economic participation by promoting small, micro and medium enterprises and co-operatives, and promoting skills and technology transfer; and

Generate new and innovative economic activities.

This is aligned with the national strategies of the South African government in terms of a number of policies and strategies. The IPAP 2016/17 makes provision for SEZ's as important instruments to support long-term industrial and economic development, which will have a direct impact on employment and economic growth, as well as attract foreign direct investment.

Furthermore, one of the key focus areas for the dti, as announced by Minister Davies, is the beneficiation of South Africa's minerals, which will be addressed through the establishment of the metallurgical cluster near Makhado to the South of Musina.

In terms of the NDP, the activities of the SEZ will speak specifically to chapter 7 in terms of aggressively expanding trade and investment. The SEZ is a strong driver for promoting exports and competitiveness for the country and South African companies will be encouraged to participate in regional infrastructure projects, but also in integrating regional supply chains to promote industrialisation, as outlined in the NDP. The NDP also states that "South Africa will act as a spur to regional growth, rather than merely relying on it. This will involve greater commitment to regional industrialisation and supply chain linkages".

There is also a strong focus on skills development and growing human capital, which directly speaks to the New Growth Path (NGP), in addition to the specific reference to beneficiation and relating the activities of the SEZ to the priorities regarding industrial policy. The SEZ also will address SME

1 SEZ Concept Note

Musina SEZ Licence ApplicationConcept Note


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development and BEE through envisaged outsourcing and value chain activities, which again are highlighted in the NGP, among other national policies and frameworks.

In terms of the main national planning priorities and policies, the SEZ will address the NIPF directly through its activities that will support the goals of promoting increased value-addition of commodities, more labour-absorbing industrialisation especially involving greater participation by marginalised regions and contributing to the industrial development of Africa by building on its productive capabilities. The SEZ will address national priorities in terms of SP1 - Sectoral Strategies, SP4 - Skills and Education for industrialisation, SP9: Spatial Industrial Development and Industrial Infrastructure Programme, SP10: Small Enterprise Support, SP11: Leveraging Empowerment for Growth and Employment, SP12: Regional and African Industrial and Trade framework.

1.1.2 Objective

To support local economic development To create jobs To contribute to national GDP

1.2 Socio Economic Profile

The population in Limpopo was estimated at about 5 million in 2001, of which approximately 39310 were living in the Musina local municipality. This figure increased to 68359 as per the 2011 census, of which 18.7% were unemployed. This is significantly below the provincial unemployment figure of 38.7%. The dominant sector in the local municipality in terms of employment is agriculture, which provides 61% of all jobs.

Education levels have improved significantly from 2001 to 2011 but the percentage of people older than 20 without schooling was still high at 17.7% in the Vhembe District and 11.3% in the Musina Local Municipality. The percentage of the population aged 20+ in 2011 with a higher education was 9.9% in Vhembe District Municipality and 6.8% in the Musina Local Municipality.

The contribution of the province to South Africa’s economy was 7.1%in 2012 and the main contribution to provincial GDP is from the mining and quarrying sector (28.7%), followed by services and the wholesale and retail sectors. Limpopo makes a relatively small contribution to overall exports, which was 2.2% in 2011. Most of provincial exports are to Asia (56.4%) of which 68.6% are mineral products.

Limpopo, the Vhembe District Municipality and Musina Local Municipality experienced significant growth in fixed investment between 1999 and 2008, which slowed between 2008 and 2011. Gross domestic fixed



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investment in 2011 was R685 million for Musina Local Municipality, R 4.8 billion for Vhembe District Municipality and R 27.3 billion for Limpopo province.

1.3 Economic Rational

The proposed concept for a SEZ in Musina will prove invaluable to the national industrialisation strategy and associated policies, as well as contribute significantly to South Africa’s mineral beneficiation strategy because of the metallurgy cluster that will be established on the Bokmakierie land to the south of Musina. This cluster is driven by a large consortium of Chinese investors who expect to invest in excess of R 39 billion in this cluster to produce ferro-based products (ferrochrome, ferromanganese, ferrosilicon) from the vast iron ore, manganese, chrome, silicon, nickel and limestone deposits in the area while at the same time utilising coal for coking and thermal purposes from the nearby coal mines in the Makhado area. This cluster will establish this SEZ as one of the key areas of national priority concerning mineral beneficiation, providing in excess of 20 000 jobs on beneficiation activities alone.

The logistics and agro-processing/ cold storage clusters will contribute at least between 835 and 1607 jobs in the first 5 years and around 714 jobs form year 6 onwards based on current projections.

For the middle road scenario in Musina, the overall results of the assessment of economic benefits can be

summarised as follows:

Direct capital investment attracted or leveraged as a result of the establishment of zone would total R754m with the warehousing tenant responsible for more than half of this investment;

The total contribution to GDP is expected to fluctuate between R308m and R709m during the first five years before settling down to a constant R284m per year from year 6 onwards consisting of:

o R18m from the SEZ management operations;o R42m from the warehousing tenants;o R86m from the vehicle distribution centre;o R49m from the container yard;o R18m from the fresh produce handling area; ando R71m from the food processing facility.

By year 20 the cumulative contribution to GDP is expected to amount to R6.9bn; The contribution to Limpopo Province GGP is expected to fluctuate between R143m and R364

during the first five years before settling down to a constant R145m per year from year 6 onwards. The cumulative increase to GGP by year 20 is estimated at R3.5bn;

Job creation would be as follows:



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o Direct jobs are expected to increase from 172 in year 1 to 345 from year 6 onwards but with a peak of 531 direct jobs in year 4. These 345 direct jobs in year 6 are then sustained for the rest of the analysis period;

o Total direct and indirect jobs in the province are estimated to increase from 317 in year 1 to 481 in year 6 but also with a peak in year 4; and

o Total direct and indirect jobs in South Africa are expected fluctuate between 835 and 1 607 in the first five years before settling down to 714 from year 6 onwards;

The cumulative contribution to taxes throughout South Africa over the twenty years is estimated at R773m, taking the reduced company tax rate for businesses located in SEZ’s into account;

The SEZ is estimated to contribute a cumulative R1.9bn to household income over the twenty year analysis period;

It is estimated that when full operations are under way that the SEZ could earn R10m a year from exports. Cumulatively over the 20 year analysis period this is expected to amount to R164m in foreign exchange; and

The SEZ provides an opportunity for skills upgrading, technology transfer and demonstration effects. These dynamic effects have the potential to contribute further to regional development especially in the longer term. Their potential to result in the emergence of entrepreneurs willing and equipped to start new businesses is particularly important as it is these businesses that will be needed to ensure that the SEZ continues to growth.

Based on the above, it is clear that the SEZ will make a significant contribution to the national economy and that it will enable the Musina area to grow into a greater port for trade between South Africa and the rest of Africa, especially the SADC area. With sufficient support from the provincial structures, this SEZ will attract further investment which will drive the local development of the area in line with the vision as outlined by the province and the IDP and SDF of the local government structures, which will dramatically enhance the standard of living of the local population. It will in addition drive strongly the trade relationship between South Africa and Zimbabwe and also strengthen cross-border trade and investment.

1.4 Summary of Risks

1.4.1 Technical Risks

Potential isolation of Musina and associated industrial sites in and around the town with the proposed development of the N1 national route. The delay in implementing the Musina Rail Hub might have a long term negative impact on the viability of the MUSINA Logistics SEZ.

The other risks associated with the establishment of the SEZ are typical of any industrial or property development project and relates to availability of land, funds and resources to establish the SEZ as well as



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licencing and regulatory processes that are not aligned with the current development of the logistics industry in South Africa. While the Strategic Infrastructure Projects are well construed, it is in the implementation that co-ordination of departments at national and provincial level is required. Funding for these massive projects remains a challenge for the government. The IDC and other state owned enterprises will be required to provide assistance and guidance in these developments.

Besides the market development risks, it appears that all other risks can be mitigated amicably by employing and training the SEZ management team sooner than later to take over the promotion and management of the SEZ implementation process.

1.4.2 Operational

The implementation of the SEZ process can be delayed for an extensive period while the demand for facilities increases. The risk is that the potential investors will then seek other areas to locate and the opportunity(ies) for Musina Logistics SEZ may be lost

Limited uptake of investment opportunities by Logistics companies due to changes in market and or technology issues outside the control of LEDA or the SEZ project management team.

Implementation risks include a number of risks associated with the implementation of a project of this nature. These include the capability and capacity of the SEZ management team to manage the project according to set timelines, engage with the market to attract investors, engage with financiers.

1.4.3 Financial

SEZ designation and funding risks. The projected investment in the Logistics SEZ is dependent on the availability of funds from the dti for the establishment of the infrastructure. A delay in the licencing of the SEZ and the subsequent allocation of the funds will discourage investors. It will also hamper the SEZ team's efforts to promote the SEZ to investors and industrialists and continue engagement with Transnet.

Funding: interest rates, insufficient funds and delays in attracting financiers will cause delays in implementation as well as create uncertainty in the market. The allocation of funds from the SEZ Fund can also be delayed or not awarded at all.

Sources of income for the SEZ. The primary source of income for industrial parks includes the provision of shared services and rental of buildings to tenants. It is not clear from the current SEZ Act whether the SEZ Company can raise funding from the government or external parties to construct the necessary buildings and top structures required by tenants. If income is limited to a levy on bulk services and infrastructure, the economic sustainability of the SEZ Company will be difficult to justify.



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1.4.4 Regulatory

SEZ designation. The Musina Logistics SEZ offers significant benefits to importers and exporters if it is designated as an inland port of entry. The designation of the SEZ as such is therefore of vital importance. SARS appears to not support such initiatives

Competition from other SEZ in the region, especially across the border.

1.4.5 Business

SEZ qualification criteria risks. According to the SEZ Act, companies that invest in excess of R100m, employ more than 50 people and export more than 50% of their production, will be eligible to establish in SEZ's. This will therefore exclude smaller companies from establishing in the Musina SEZ.

Incentive benefits to enable price competitiveness. The attractiveness of the SEZ for many industrialists is evident and the proposed incentive package is attractive for potential investors. Without these, the investors will either not invest or locate in another location.

1.4.6 Market

Training and capacity building. The transport industry at large is experiencing challenges with skilled operators and logistic staff.

1.5 Brief Business Case

1.5.1 Thematic Focus

The Antonvilla site will predominately be a logistics activity with secondary activities of the Metallurgic cluster that will be based on the Makhado site. The agro processing part of the SEZ will be more a logistics function with cold storage facilities as agro processing as an industry is not a viable option for the Musina SEZ. The following activities will form part of the Antonvilla site:

Vehicle distribution centre Container yard Consolidated warehousing Cold Storage Truck stop Metallurgic cluster secondary services

The Makhado site will host the Metallurgic cluster and all their secondary services will be hosted at the Antonvilla site. The following industries will form part of the Metallurgic cluster:



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Coking Plant Thermal Power Plant Ferrochrome Plant Ferromanganese Plant Ferrosilicon Plant Pig Iron Metallurgy Plant Steel Plant Stainless Steel Plant Lime Plant

1.5.2 Financial Details

Summary

1.5.3 Environmental

1.5.3.1 Antonvilla

The proposed activities for Antonvilla need to be further investigated and confirmed, as the nature of the development will influence the extent of the impact on the ecological and socio-economic environments. All three sites are also in close proximity to waterbodies (particularly the Limpopo River), all of which are considered to be sensitive and in need of preservation. Hence, planning of the proposed activities must be undertaken with these environmental sensitivities in mind.

During the next phase of the project, it is critical that public participation/ stakeholder engagement takes place, to facilitate the involvement of those potentially affected by or interested in the proposed development. All parties affected by or interested in the development have the right to become involved in the decision-making process, and as such public participation/ stakeholder engagement is an integral part of the process.

1.5.3.2 Makhado

The environmental pre-feasibility study of the proposed development at the Makhado site has identified several problem areas that subsequently require further and more robust investigation. If practical and effective mitigation measures cannot be implemented, then the overall project viability is questionable. Of critical concern are the following environmental issues:

Intrusion into the protected area network; Detrimental effect on the biodiversity assets of the region;



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Resource use conflicts (especially with respect to land and water); Large-scale land transformation; Potential increase in pollution pathways; Need for social infrastructure investment; Integrating anticipated inflow of labour with existing communities; and High water requirements of the development in a water scarce area where much of the existing

water resources are required for agriculture and thus food security.

Further, more detailed, studies are required to quantify the impacts of the proposed development such that mitigation measures and alternatives can be identified before the project progresses.

1.5.4 Costs

1.5.4.1 Antonvilla

The following key assumptions have been made as input into the financial model:

Area (m²) TypeBuilding

cost / m2Building cost

Rental

/m2

Anchor Tenants 50,000Hi-Tech Industrial

Space8,200 410,000,000 75.00

Central hub 3,500 Office 6,500 22,750,000 150.00

Fresh produce area 6,000 Refrigerated area 12,000 72,000,000 20.00

Logistics/Container Yard

centre Open Space30,000 Storage space 700 21,000,000 20.00

Office portion of Anchor

tenants600 Office 6,500 3,900,000 150.00

Parking bays 300 Parking (5m x 2.5m = 400 120,000 2.5



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12.5m²)

Food Processing Area 7,377 Factories 5,000 36,885,000 20

Vehicle Distribution

Centre144,600 Storage space 700 101,220,000 2.5

TOTAL LAND YIELD 242,377 667,875,000

Inflation rate of South Africa 6.10%

Start of financial year 2015

Interest rate of South Africa 9.00%

Interest received from banks 3.00%

Tax rate of South Africa in SEZ area 15%

Dividend policy 30%

Dividend tax 15.00%

Debtors payment period (years) 30

Loan period (years) 14

Depreciation period infrastructure (years) 30

Depreciation period buildings (years) 20

Infrastructure capex cost element

EIA and WUL 1,200,000



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Infrastructure capex cost element

Electricity bulk connection 22,320,000

Land value/cost 90,000,000

Internal Roads Infrastructure 29,750,000

Bulk services connection 182,000,000

Technical team costs 72,892,500

Perimeter Fencing 20,300,000

Gatehouse and boom 11,000,000

Landscaping 11,250,000

Infrastructure Capex Cost Total 440,712,500

The financial modelling looks positive, but not great, and with the Dti’s contribution of R 250 million for

each of years 1, 2 and 3, the Internal Rate of Return (IRR) is:

IRR (nominal) 11.57%

IRR (real) 5.16%

The IRR is fairly low, as the investment property from which rental income can be earned is not that much

in comparison to the investment required in infrastructure.

For the total development, the following additional loan finance is required:



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Loans required Rand

Stage 2 Buildings and Development 583,490,575

TOTAL 583,490,574

Considering that the total investment property value is R1, 290,159,240, the total loan finance makes up

45% of the investment value, which should be fairly easy to achieve.

1.5.4.2 Makhado

The cost for the Makhado site was only done on the Bulk Infrastructure and the Lease of Land.The following key assumptions have been made as input into the financial model:

Land area (ha) 8000

Rate of land acquisition per m2 9

Inflation rate of South Africa 6.0%

Start of financial year 2016

Interest Rate of South Africa 9.50%

Interest received from banks 3.00%

Tax rate of South Africa 28%

Dividend policy 30%

Dividend tax 15.00%

Debtors payment period 30

Loan period (years) 20

Depreciation period infrastructure 40

Bulk Infrastructure capex cost element R

Land 720 million

Bulk Infrastructure 1.2 billion

Total 1.92 billion



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The financial modelling looks positive, and with assumed loan finance to acquire the assets, the Internal

Rate of Return is

IRR (nominal) 25.98%

IRR (real) 18.85%

The rental income is assumed to be R0.80 per m2 of land. Taking cognisance that the development area

will most likely not exceed 60%, this will cost the building owner R 1.12 per developed building area m2.

This is a realistic contribution for serviced land and developed infrastructure.

For the total development, the following additional loan finance is required.

Loans required Rand

Bulk Infrastructure and land 842 million

TOTAL 842 million

Considering that the total Land and Bulk Infrastructure value is R 1920 000 000, the total loan finance

makes up 44% of the Investment value. This should be fairly easy to achieve. The development capital can

also be partly subsidised with Municipality Infrastructure Fund, the Critical Infrastructure Fund or other

government incentive schemes.

1.5.5 Scope and PlansThe scope of the SEZ addresses logistics, agro-processing and metallurgy clusters, of which the

metallurgical complex will be based on the site identified near Makhado, driven by primarily Chinese

investment. This site will house the main processing facilities while most downstream production and

beneficiation activities will take place on the Antonvilla site. The logistical and agro-processing clusters

will also be based on the Antonvilla site. The logistics support infrastructure will support a bigger sector

and this will be developed prior to and in parallel with the development in Makhado.



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The plans for the SEZ outline the development in phases. Phase 1 will involve the development of the first

375 ha in Antonvilla (comprises Logistics hub with distribution centre and warehouses, admin, a container

yard, and light industrial) in parallel with the Makhado site (development of power station, and main

processing plants for chrome, iron and manganese). This phase includes bulk infrastructure

implementation as well as the first buildings and top-structures.

Phase 2 will address the additional land that is earmarked for expansion of the Antonvilla site, first

addressing light/ medium industrial development, followed by heavy industrial development thereafter.

The investment in buildings and top-structures in the SEZ is projected to be phased in over a 5-year

period after commencement of operations and will therefore only be completed during phase 2.

A possible third phase is envisaged to include the Limpopo Eco-Industrial Park (LEIP) as a petrochemical

cluster of the SEZ.

1.5.6 Timelines - LEDAThe developments will be done in phases and the implementation phase will start after the approval of

the SEZ license.

1.5.7 Socio – Economic and Economic Profile and Impact

The above can be found in Chapter 6 page 232 to page 268 in the Technical Feasibility Document.

1.6 Financial Resources

The bulk infrastructure will be funded by the Limpopo Province and the Dti. The interim operational costs will be financed by the Limpopo Government. The top structures (buildings will be financed by the investors)



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Mott MacDonald Report Template · Web viewMcNeil, Robert Created Date 07/30/2015 07:04:00 Title Mott MacDonald Report Template Last modified by Nelson, James F Company CTS Creative