Johannesburg - The R2.2 billion tax allowance granted to French aluminium producer Pechiney as an incentive to help reduce the cost of building a $2.2 billion (R12.9 billion) smelter at Coega, near Port Elizabeth, had been withdrawn after the company altered its initial investment plan, the department of trade and industry (dti), said yesterday.

Pechiney received the tax incentive after it agreed to go ahead with plans to build a first-generation aluminium smelter at Coega.

The tax break was granted under the government's Strategic Industrial Project (SIP), which offers incentives to companies investing in projects worth over R50 million.

Pechiney was acquired by Canadian aluminium firm Alcan in 2003, prompting the new owner to review the French company's global assets and future investment projects, including the smelter at Coega.

Although Alcan is still deciding whether to construct the smelter, it has indicated that it would use the current AP30 or AP35 technology instead of the first-generation AP50 technology Pechiney intended to commission.

"The tax break was based on the original project, but the incentive will be revised because the project has changed," said Lionel October, the dti's deputy director-general for enterprise and industry development.

"I think Alcan will reapply for the tax incentive. They are by no means pulling out of Coega. They are currently doing a feasibility study on the project and they are also negotiating with us about the smelter."

October said Alcan would make a decision later this year about the Coega smelter. A source close to the dti said Alcan executives were in the country to hold talks with government officials about the aluminium project.

But the Eastern Cape-based Coega Development Corporation, which manages the construction of an industrial park at Coega, said plans to build the smelter were still on track.

"We are still working with Alcan and, as far as we are concerned, there is going to be a smelter at Coega," said the corporation's spokesperson, Vuyelwa Qinga-Vika.

Tumelo Chipfupa, a senior manager in the dti's enterprise support unit, said Alcan would reapply for the SIP benefit as it was required by legislation.

"Depending on discussions currently in progress, it is envisaged that a final decision on proceeding with the project will be made during 2005. Once a final investment decision has been taken, Alcan will have to reapply for tax allowances in terms of section 12 of the Income Tax Act," said Chipfupa.

Alcan could not be reached for comment.

The SIP incentive scheme has attracted investments worth R33.8 billion and created about 7 000 direct jobs and 110 000 indirect jobs since its inception more than three years ago.

The Enterprise Organisation, a division with the dti, manages the scheme, which is expected to expire in July this year.