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The case for (coal and nuclear) megaprojects

Dec 31 2018 06:00

Major projects, such as the development of Sasol and the motor industry, fall into the category of megaprojects because of their huge size and cost. Major new coal and nuclear power stations fall into the same category.

Since large projects are generally both capital and technologically intensive by nature, they often create a relatively limited number of direct jobs. However, their indirect effect on the local economy through strong inter-industry linkages with suppliers of goods and services, as well as the increased viability for downstream industrial developments, has a substantial multiplier effect on the economy.

Importantly, such projects form the nucleus of economic development in many different regions in the country and all over the world.

Sectoral and regional development impact

Such projects are very significant in terms of their impact on sectoral and, in particular, regional development. Their importance can only be outlined by giving examples of the process that results from such projects.

Their product often supports industrial development in many different locations in the country and many industrial sectors. Power stations in particular can be considered the key to all such development and economic growth. Growth of secure, reliable electricity is a fundamental necessity for economic growth.

Such electricity growth results in the growth of smaller, less energy-intensive businesses and industries. Often such power station projects are associated with the energy needs of other energy-intensive projects, generally in nearby urban and harbour areas, such as occurred at Richards Bay and Saldanha Bay.

Power in the latter case was provided by the nuclear power station at Koeberg. Development at Coega was slowed by lack of reliable cheap power. A nuclear power station nearby at Thyspunt would have allowed full development and enhanced growth at Coega and in the Nelson Mandela Bay areas.

Such major projects provide impetus for other industrial activities to locate to the area. The increase in industrial activity and the influx of people to the area bring with it an increased need for business and related services as well as other commercial services. As a result, the tax base of the region also increases allowing more services to be provided to the populations of these regions.

Major economic and industrial developments

Policy decisions regarding major economic and industrial development projects have a profound long-term impact on the economy. Two examples illustrate this one region and the other industrial. The first example is the development of Richards Bay and the second is the development of Sasol.

Both of these megaprojects have been successful, and each has resulted in substantial and significant economic and social benefit to the regions affected, and to South Africa as a whole.

Regional development: Richards Bay

Richards Bay evolved over a period of 30 years, from a small fishing village into one of South Africa’s premier industrial districts. The population of Richards Bay grew from approximately 7 500 in 1980 to over 538 000 in the 2011 Census; or, to put it differently, the population's growth rate increased from approximately 9% per annum before the construction of the port and consequent developments, to approximately 27% per annum.

Major developments contributed to infrastructure in Richards Bay, such as the development of the deep-water harbour in 1976, an extensive rail and road infrastructure to access the port and water, electricity, telecommunications, roads and further enhancement to the port facilities.

Over R50bn was invested in various infrastructure and investment projects. This subsequently provided the stimulus for several large industrial projects to be established.

Annual gross output from the Richards Bay region showed consistently high growth rates over the past few decades, putting it third in the province behind Durban and Pietermaritzburg. The reason for this phenomenal expansion can be traced to several specific events that occurred over time.

Richards Bay and the nearby town of Empangeni have an economic growth rate higher than the average for the country and the province. The businesses in the area often have a far wider geographical impact as opposed to being locally restricted.

Industry Development: Sasol

Sasol was established in 1952. Today, the Secunda operations of Sasol are among the world’s largest petrochemical operations and manufacture more than seven million tonnes of fuels and chemical feedstock a year in their primary production phases.

Besides producing liquid and gaseous fuels, the group produces more than 200 chemical products. Sasol manufactures and markets most of the country’s chemical building blocks. The synfuels and chemical interests rely extensively on Sasol Mining.

The company is one of the world’s largest coal-mining enterprises and operates one of the world’s largest underground coal-mining complexes. It mines more than 50m tonnes a year - approximately 22% of all coal mined in South Africa.

Sasol has many international initiatives. It supplies more than 200 products to customers in 90 countries and is involved in several plants in different parts of the world using its technology. Sasol has grown remarkably in 50 years, to become one of South Africa’s most significant contributors to socioeconomic development.

The Group employs over 30 000 people in 32 countries, according to its website. The company plays a vital role in fuelling South Africa, and supplies through the wholesale and retail sectors about 30% of the nation’s liquid fuels from coal and crude oil, including diesel, petrol, jet fuel, paraffin and liquefied petroleum gas.

It is estimated that the Group’s mining and manufacturing operations save the country around R40bn a year in foreign exchange. Sasol serves as an excellent example of successful long-term industry development.

Where power station build programmes come in

It is interesting to compare the economic impact of a few regional and or economic projects in this case Richards Bay, Sasol and the motor industry with a major power station.

Examining Richards Bay and Sasol, it is worth considering what South Africa would be like if these projects had not gone ahead. All this and other businesses development, of course, is driven by electricity supply. Eskom has stated that Medupi, once complete, will support GDP growth of approximately 0.35% per year.

The above summary illustrates the wide impact that well-supported industrial development initiatives can have on an economy.

A power station capital build programme falls into the megaproject category, and an economic impact study suggests it will have an equally far-reaching positive long-term impact on the economy of South Africa.

It should be noted that without the substantial electricity growth in the past, these megaprojects would not have existed on the scale that they do today and probably would not have existed at all. A nuclear power station build programme at the coast would have a major impact on the national economy. A nuclear power station at Thyspunt would have a major impact on the regional GDP of the Eastern Cape and employment there.

Future growth

Electricity generation power station projects in an environment of an energy or electricity shortage are fundamental for future regional economic growth and development as they allow downstream industry to develop.

These projects, together with other major downstream projects, which will follow such developments, offer the Southern African region considerable benefits, which far exceed their shortcomings.

It is the government, and in this case, Eskom’s role to give priority to the engine rooms of existing and future growth and employment in the economy.

It is essential that the damage of electricity disruption to mining and the goods-producing sectors, as with other key export-orientated industries are minimised, otherwise errors would be compounded and investors, foreign and domestic, would seriously question the economic and political management of the economy.

The development of technologies that effectively increase the energy and electricity generating capacity of the country brings with it the possibility of higher growth. This will mean the development of major projects. A power station build programme, like many megaprojects, will boost the local and regional economies of the country. The overall impact on the country and region will be substantial.

Rob Jeffrey is an independent economic risk consultant. He is the former MD of Econometrix and currently consults for them and other energy groups and forums. Views expressed are his own.

sasol  |  infrastructure  |  major development  |  energy  |  nuclear
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