An Eskom Case Study

An Eskom Case Study
 
THE ESKOM INFLUENCE
 
A case study of how the construction of the Medupi Power Station
influenced the economy of Lephalale ( Ellisras) and
by implication, how a similar situation could impact on Kouga.
 
Introduction
 
A recent press report stated that Lephalale is generally considered to be the fastest growing business node in Africa. Even if this were only partly true, it is interesting that PriceWaterhouseCoopers identified it as an important growth point. This resulted in some of their staff members then investing in property in Lephalale.
 
Judging from a visit to Lephalale and after discussions with business leaders there, it became clear that the area is experiencing an unprecedented economic boom as a result of the construction of the Medupi power station next to the town.
 
The purpose behind the undertaking of this case study was to establish the potential relevance of the Lephalale experience for Kouga, considering that a similar economic boom could be experienced as a result of the planned construction of the Thuyspunt Power Station. 
   
Although Lephalale and Kouga are different in nature, there are sufficient business and demographic similarities to regard a comparison of the two areas as realistic. The budgeted cost of Thuyspunt at R180bn is, however, about 40% more than the cost of Medupi. A comparison of the economic impact of the two power stations will therefore differ in quantum but not in essence.
 
 
The Progression of the Lephalale Economic Boom
 
The year 2004.
The first unofficial mention of the possible new Power Station at Lephalale.
 
The year 2008
Eskom initiates
·         the upgrading of municipal services
·         the upgrading of the road infrastructure.
·         the purchase of 50 homes.
House prices have increased by 50% since 2004.
Eskom budgets a further R1bn for 3 000 homes for staff accommodation.
Eskom awards contracts for 560 of these homes to be built by July 2009.
Construction of the Medupi Power Station commences and is expected to continue for six years.
The year 2009
Private developers are slow in anticipating the housing demand. Only 37 stands are available of between 714m2 and 960m2, selling at R330 000.
A private development of 160 sectional title units is in planning for 2009. These 49m2, 78m2 and 90m2 one-, two- and three-bedroom units were priced from R400 000.
It was reported that even at this late stage, investors from far and wide had started to purchase land for residential development. It unfortunately took a very long time to reduce the backlog.
As a result of the housing backlog, there was “a huge demand for rental stock.” Rentals had increased by more than 200% compared to pre Medupi levels.
  
Three bedroom houses let for R7 500 and prime dwellings for R12 000
Rental levels are expected to continue to rise steeply.
The year 2010.
By December 2010, house prices had actually doubled.
The price of an average entry-level, newly built, two-bedroom home in Ellisras then ranged between R600 000 and R1,3m.
Prices of mid-level homes ranged between the R850 000 and R1,6m.
Homes at the upper-end of the market were selling at around R1,7m.
Sectional title units were in the R670 000 range.  
Rentals continue to increase.
According to Pam Golding Properties, rentals are driven by corporates, mainly sub contractors to Eskom such as Roberts Construction. They say that quality homes that offer lifestyle are always sought-after, such as well-appointed four bedroom homes with a pool or situated on the golf-course. Three bedroom houses let for R15 000 and prestige homes for much more.
Rentals had therefore more than doubled since pre Medupi times. 
 
 The Medupi Influence
 
Medupi has significant development implications for Lephalale. According to the Municipality, the current 5 000 erven may double by 2016.
 
They furthermore state that total estimated housing demand in the municipal area is in excess of 22 302 of which 10 940 units would represent subsidized units, and 11 701 traditional dwellings.
 
Industrial Development.
In 2008, demand for industrial buildings had already far outstripped supply.
Industrial development provides the supporting infrastructure required by not only the main Eskom contractor but also the numerous sub contractors who require workshops or supporting technical services. There are immense opportunities for local businesses to provide technical services to the various contractors and sub contractors.    Only in 2010 was a new industrial area proclaimed with stands of 5 000m2 to 18 000m2 selling at R610 per m2. 
 Commercial Development.
The first phase which is planned to open in 2012, will comprise 32 000m2. It will ultimately be increased to 42 000m2.     
 Office development.
Linked to the shopping centre, the developers plan to build a 17 000 m2 office park.
 
Demographics and job creation.
 
According to the Local Authority, in 2008 Lephalale had about 45 000 people living in the town. By 2016, the town population is expected to increase to 100.000 people. However, this increase is not only due to Medupi. Major mining and industrial expansion is anticipated, including a possible SASOL plant. Job creation by Eskom and the numerous sub contractors will peak at 7 000 in 2012. On completion of the project an estimated 1 000 permanent jobs are expected to remain.
 
Development implications.
It is an understatement to say that Ellisras experienced a development explosion.
It is significant that both the Local Authority and the Private Sector under estimated the demand for residential accommodation as well as for business and industrial premises. Serious bottlenecks resulted. The main lesson to be learnt from the Lephalale case study is that a R170bn investment in an area should be taken more seriously than was done, in terms of pre planning and being ready to reap the benefits it can provide.
 
 
An interpretation of the case study as it could apply to Kouga
 
1.    The budgeted capital cost of Thuyspunt is obviously much more than that of Medupi: R180bn compared to R125bn. Whereas the only facts we have, relate to the Medupi scenario, it is reasonable to assume that the Thuyspunt impact on Kouga will be much greater than the impact created by Medupi.
 
2.    Construction of Thuyspunt will probably commence in 2012, therefore lagging Lephalale by four years. What happened at Lephalale is therefore likely to happen at Kouga four years later. The Thuyspunt contract period is expected to be 10 years.
 
3.    The primary economic benefits will flow to the St Francis area, to Jeffreys Bay and to Humansdorp, although the whole of Kouga will benefit.
 
4.    As was the case at Lephalale, it is anticipated that between 20% and 25% of the R180bn Thuyspunt cost will flow directly into the local economy. An annual average boost to Kouga of almost R4bn (22%) over ten years is a very large sum of money and will consequently have far reaching economic implications.
 
5.    The economic impact that will ultimately accrue to Kouga will in practise be much more than the 22%. If inflation were to be taken into account over the ten year construction period, the above mentioned figures will increase substantially. Furthermore, Government Capital projects of this nature invariably end up costing very much more than what was budgeted for.
 
6.    This estimated R40bn will most likely be distributed as follows:
·         Housing construction and cost of accommodation                R10 billion
·         Infrastructure – new and upgrade                                                4 billion
·         Salaries and wages spent locally                                                6 billion
·         Construction materials and services                                         20 billion
TOTAL                                                                                                R 40 billion
 
7.    An estimated 5 000 workers will initially be required, peaking at 7 000. The presumed demographic split is as follows;
·         Management, professional and white collar                          1 500
·         Technical, artisans and blue collar                                         1 500
·         Labour                                                                                     2 000
TOTAL                                                                                                5 000
 
8.    A very important point is to realise that all sectors of the Kouga community will derive benefit from the economic prosperity brought about by Thuyspunt. This includes the farming community, service providers, all businesses, big and small, and significantly will create job opportunities for the currently unemployed members of the population.
 9.    Both house prices and rentals at Lephalale trebled in the first three years after construction commenced. It can therefore be anticipated that basic three bedroom houses in Jeffreys Bay will sell for R1,3 million and more in 2012 /2013. Such houses could then be let for R15 000 per month as is the rental in Lephalale. Luxury dwellings in the St Francis area will obviously attract significantly higher prices and rentals.  
 
10. The main demand will be for townhouses and flats. These will sell and let at very profitable levels for developers. Flats could be let at R7 500 per month in 2012/2013.
 
11. Considering that there will be an initial demand for about 3 000 houses, it is our considered opinion that about 1 000 existing houses in St Francis and Jeffreys Bay will be sold or let to Eskom and its sub contractors. This leaves an unfilled demand of 2 000 dwellings that will have to be constructed. Flats and townhouses will likely make up 500 of these, and middle to upper class dwellings a further 500. This leaves a demand for 1 000 in the Affordable Housing category.
 
12.  None of the above categories include accommodation planned for unskilled labour. Eskom has stated that they intend providing for the accommodation of unskilled and temporary workers at Humansdorp.
 
13. Taking Lephalale as an example, Eskom assisted in upgrading the roads and essential services infrastructure to optimum levels. This will no doubt happen in Kouga but the bonus will be the construction of the coastal road linking Thuyspunt to Jeffreys Bay.
 
14. Commercial and industrial development. Because of a substantial increase in permanent population and the specific demand for construction material and services, the retail, commercial and industrial sectors in Kouga will receive a very substantial economic injection. Based on the case study we anticipate a threefold increase in the development of shops, offices and factories. Land values could treble by 2013. 
 
General prosperity
 
The Thuyspunt Nuclear facility will in addition to the anticipated influence outlined above, provide two further vital economic benefits to the Kouga area:
 
1.    For the first time ever, Kouga will have an industrial growth generator.
2.    The availability of ample electricity in the eastern Cape will give new life to the Coega industrial precinct and will enable some of the mothballed industries to revive. This will be to the manifest benefit of all surrounding areas, not least of all to Kouga as dormitory town.
 
The fountains business park
 
The Fountains development was planned to provide Kouga with a modern and orderly commercial and industrial development zone. Being only partly developed and having immediately available serviced land stock, it is suitably poised to capitalise on the economic injection that Eskom will provide. There will be no time delay for Fountains properties to derive maximum benefit from the economic boom that is expected.   
 
Savuti Wild Life Estate
 
As is always the case and as was experienced at Lephalale, the highest rentals and the best prices are invariably obtained for upmarket dwellings that incorporate lifestyle features. In the case of Savuti in Jeffreys Bay, this is particularly appropriate in the context of prestige dwellings in wide open spaces with state of the art security, numerous water features, a school and being in close proximity to all appropriate amenities including a Regional Shopping Centre. The free ranging wild life adds an atmosphere not found elsewhere in the area.
 
A choice of sites including medium density will no doubt make Savuti the prime destination for executives with or without families.
 
Taking the above into account, Savuti therefore also constitutes an ideal income earning investment opportunity.
 
Summary
 
We are confident that our conclusions are conservative, particularly in the context of Thuyspunt being the larger of the two Power Stations.
 
Finally and most important:
 
1.    The Lephalale Case Study provides a realistic time scale guideline of what is likely to take place in Kouga. It gives an indication of the build up of residential and commercial demand. In simple terms, everything will happen four years later than when it happened at Lephalale.
 
2.    It is seldom that the economic development of an area can be predicted with such certainty.
 
3.    It follows that people who take account of this time scale guideline and prepare to capitalise on it, will derive much economic benefit.
 
4.    Those that do not, will have only themselves to blame.  
 
NOTE.      Press cuttings and Municipal reports are available for further information.
 

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