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MSEZ AMN AAD 02 A

Musina SEZ - Concept Note

July 2015

Musina SEZ Licence Application

Concept Note

Musina Special Economic Zone License Application For Designation – Concept Note

Musina SEZ Licence Application

Concept Note

July 2015

Limpopo Economic Development Agency (LEDA)

Polokwane, Limpopo

Mott MacDonald PDNA, 25 Scott Street, Waverley, Johannesburg 2090, South Africa

PO Box 7707, Johannesburg 2000, South Africa

T +27 (0)11 052 1000 W www.mottmac.com

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

Musina SEZ Licence Application Concept Note

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Chapter Title Page

1 SEZ Concept Note 1

1.1 Statement of intent __________________________________________________________________ 1 1.1.1 Purpose __________________________________________________________________________ 1 1.1.2 Objective _________________________________________________________________________ 2 1.2 Socio Economic Profile _______________________________________________________________ 2 1.3 Economic Rational __________________________________________________________________ 2 1.4 Summary of Risks __________________________________________________________________ 4 1.4.1 Technical _________________________________________________ Error! Bookmark not defined. 1.4.2 Operational ________________________________________________________________________ 4 1.4.3 Financial __________________________________________________________________________ 5 1.5 Brief Business Case _________________________________________________________________ 6 1.6 Financial Resources ________________________________________________________________ 12

Contents



1

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

development and BEE through envisaged outsourcing and value chain activities, which again are

highlighted in the NGP, among other national policies and frameworks.

1 SEZ Concept Note



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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

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 Rationale

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



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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; and

o 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:

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;



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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

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



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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.

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.



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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:

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 as above.

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.



7

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;

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) Type

Building

cost / m2 Building cost

Rental

/m2

Anchor Tenants 50,000 Hi-Tech Industrial

Space 8,200 410,000,000 75.00



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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 Space 30,000 Storage space 700 21,000,000 20.00

Office portion of Anchor

tenants 600 Office 6,500 3,900,000 150.00

Parking bays 300 Parking (5m x 2.5m =

12.5m²) 400 120,000 2.5

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

Vehicle Distribution

Centre 144,600 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



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Infrastructure capex cost element

EIA and WUL 1,200,000

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:



10

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

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

Rate of Return is



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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 Plans

The 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.

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.



12

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 - LEDA

The 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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