Driving inclusive growth through targeted investment

Introduction

South Africa faces a large degree of spatial inequality, as economic activity is concentrated in a few places. Many other parts of the country have inherent economic potential but they need targeted investment if such potential is to be unlocked. A key benefit of investing in regions with potential is that it leads to positive socio-economic spillovers in surrounding areas.

THE LOCATION ATTRACTIVENESS INDEX

While the four major city-regions (Johannesburg, Durban, Cape Town and Pretoria) are magnets for investment in South Africa because they are centres of intense economic activity, this chapter reveals certain secondary cities which could become investment drawcards and development hubs.

It does this in two ways: by using a theoretical framework of spatial agglomeration and spillovers to analyse spatial development and inequality in the country; and by using an index of location attractiveness to pinpoint the most deserving investment prospects from among the country’s more than 200 municipalities. Whoever is bringing the investment to a particular region – government or business, or both – the chances of it bearing fruit are greatly enhanced if there are cooperation and trust among all relevant stakeholders, including the communities that directly and indirectly benefit from such investment.

Any discussion of South Africa’s current and future economic prospects would be incomplete if attention were not paid to how entrenched the problem of inequality has become. South Africa’s official economic blueprint, the National Development Plan (NDP), sees inclusive growth as one of the cornerstones of socio-economic stability and well-being in the country. Yet, over the years, inequality has intensified and this has made inclusive growth increasingly elusive. A healthy rate of growth is necessary to reduce inequality, but when inequality is so pronounced, it simply adds to social costs and puts a strain on productivity, which in turn suppresses economic activity.1 A relentless cycle of rising inequality and declining growth becomes the norm.

Where to start?

Addressing skewed spatial development through targeted investment Many places are not growing economically because of a lack of infrastructure, inadequate skills, poor innovation capacity and weak governance. The locked-in potential of these areas could be released through targeted investment in economic and social infrastructure and institutional support.2

This extract from the NDP calls for a systematic response to South Africa’s spatial inequality problem, bearing in mind that different parts of the country have different levels of potential and underlying requirements.

While it is widely acknowledged that tackling the inequality challenge in South Africa calls for enormous effort and commitment, it also requires a different way of looking at and doing things. What exacerbates social inequality and economic inefficiency in South Africa are the skewed spatial patterns in the country that originated in colonial times and were reinforced during the apartheid era.3 For example, as much as 65% of economic activity in the country is generated in just three of its nine provinces.4

Many of South Africa’s municipalities – often the target of criticism for perceived inefficiency and underperformance – have a great deal of inherent investment potential which, if unlocked, could stimulate growth and jobs. For this to happen, government, business and civil society – stakeholders that would benefit from more productive and efficient economic activity – need to form active partnerships rather than maintain typically adversarial positions towards one another.

Targeted investment in regions with potential will generate growth through spillovers, which will ultimately enhance the potential and productivity of surrounding areas. The aim of this chapter is to answer the ‘where to start?’ question by identifying places in South Africa that have strong investment potential. In other words, where will the investment deliver the best returns?

It will do this in two ways: firstly, by using a theoretical framework of spatial agglomeration and spillovers with an analysis of spatial developments and inequality in the country, and secondly, by using a specially constructed index of location attractiveness for the country’s 205 municipalities. This index will rank the top 40 municipalities according to their investment potential and show the spillovers that would likely be generated within each municipality.

Some theoretical concepts: locations and agglomerations

In his seminal 1991 work, Paul Krugman5 developed the theory of new economic geography (NEG), which provides insight into the spatial nature of an economy and how the physical concentration of economic activity is shaped by economic forces. These forces can either pull economic activity together (for example, market-size effects, thick labour markets, and pure external economies such as knowledge spillovers) or pull it apart (for example, immobile factors of production, land rents, and pure external economies such as congestion).6 The former are called centripetal forces; the latter, centrifugal forces. In essence, the NEG provides a modelling approach to illustrate the role of centripetal and centrifugal forces in shaping the spatial structure of an economy.7

When economic activity is pulled together, agglomerations are created. Over time, these agglomerations generate spillovers (or externalities) which can be classified either as localisation economies or urbanisation economies.8

Jargon buster: Urban agglomeration: an extended city or town area comprising the built-up area of a central place and any suburbs linked by continuous urban area.9

Externalities, Fujita and Krugman write, are positive or negative consequences (or external effects) of economic activity. These effects influence not only the producer but also those not directly involved in production. A well-known example of a negative externality is pollution; research and development activities, or a skilled labour force create positive externalities.10

Localisation economies are externalities that occur when the same, or similar, industries are grouped together11 (for example, in Silicon Valley12). The externalities created as a result of this regional specialisation of economic activity can be grouped into two categories: the availability of a specialised (or thick) labour market, and access to a diverse range of intermediate inputs.13 A thick labour market benefits both the organisation and the employee, as it enables organisations to choose the most appropriate person for the job. The result is a better match between employees and jobs. Over time, the organisation’s efficiency improves if employees are well suited to their tasks. Moreover, a thick labour market allows employees to become more specialised, which also enhances efficiency.

The availability of a diverse range of both tradable and non-tradable inputs further contributes to improved productivity. (Tradable inputs are used in the production process; non-tradable inputs include a range of auxiliary services, such as maintenance and repair services, and finance.14) Linkages with foreign markets through import and export activities extend the range of inputs available to a region. In short, when there is specialisation, innovation and growth occur at a faster rate for all organisations, as similar organisations are able to share knowledge, sector-specific inputs, and skilled (or specialised) labour and technologies.15

Urbanisation economies

Urbanisation economies are externalities that occur when an organisation is close to all economic activity16 (for example, being located within the city of Los Angeles17). In general, organisations that operate in a location with a diverse range of industries have access to a wide range of services that can support and expand their business.18 The spillovers are linked to an organisation’s proximity to knowledge-sharing and infrastructure.19 Knowledge spillovers, or knowledge-sharing, can result in learning, innovation and, ultimately, faster growth, especially if knowledge is shared among organisations from diverse industries.20 In addition, access to infrastructure, or public goods and services, can reduce costs and increase efficiency within a particular location.21

In summary, investment flows to a location where investors are likely to experience spillovers or benefits accruing from a large local market, a thick labour market, foreign trade linkages, a diverse range of intermediate inputs, knowledge-sharing and access to infrastructure.22

Spatial inequality in South Africa: studies to date

South Africa has always been characterised by significant spatial inequality. A small percentage of regions in the country contribute to the bulk of the country’s output – a situation that remained largely unchanged from 1996 to 2017 (see Table 2.1.1). This section delves into the South African literature before setting out a location attractiveness index based on localisation and urbanisation economies.

Unequal development

South Africa’s unequal or skewed spatial structure can to some extent be attributed to developments on the policymaking front, but the main cause can be traced to the discovery of diamonds and gold.

Source: Authors’ calculations using Global Insight’s Regional Economic Explorer (ReX) data^23

During the 1700s, spatial development in South Africa was largely concentrated along the coast (in Cape Town, Port Elizabeth and Durban). The discovery of diamonds in the 1800s changed this concentration, with Kimberley developing into the first major inland agglomeration. The discovery of gold spurred the development of Johannesburg in a similar fashion. Johannesburg and its surrounding areas experienced rapid urbanisation, as supporting industries to the mining sector stimulated the development of a manufacturing sector within the Johannesburg–Pretoria agglomeration.24

**By the 1950s, the tightening of apartheid’s grip reinforced South Africa’s spatial inequalities, with the introduction of various territorial development policies fostering the unequal development of economic activity.The NDP explains that because of apartheid the majority of South Africans were relegated to locations far from their places of work.**25 This created inefficient land use, exclusion from the benefits of society, high transport costs and under-investment in transport infrastructure, telecommunications and electricity, as these services could not be sustained.26

At the onset of democracy in 1994, South Africa’s trade liberalisation process also influenced the spatial structure of economic activity in the country. Owing to changes in trade policy and incentives, including the reduction of protective tariffs, organisations that could not cope with rising levels of competition closed down (for example, the textile industry in the Western Cape), while those that were able to move into new markets thrived (for example, the motor industry in the Eastern Cape).27

The NDP summarises developments in South Africa’s spatial structure since 1994 as follows:

The Gauteng city-region has reinforced its national dominance and attracted growing migration. The coastal city-regions have performed less well, especially in terms of job creation, largely because the manufacturing sector has failed to gain traction despite the apparent advantages of their location. The performance of smaller cities has been uneven, depending on their dominant industries. Many small towns and rural areas have stagnated or declined as agriculture and mining have gone through structural changes, while others have developed dramatically as economic activity has increased. Parts of the former homelands are changing their economic structure, supported by increased spending from social grants, which raises questions about long-term sustainability but does potentially open new opportunities. This is occurring along major transport corridors, in developing tourism areas and along national borders where trade and transport are growing.28

Studies at firm, city and municipal level

Many empirical studies have been conducted to investigate the spatial structure of South Africa’s economy at various subnational levels. Table 2.1.1 summarises a selection of those studies.

These studies show that spatial inequality is persistent. Krugell emphasises how inclusive spatial development can be achieved through investment in, for example, human capital and infrastructure.45 In light of this body of evidence, where could investment be directed in order to stimulate development?

The current study: empirical evidence

Computing the location attractiveness index

The data used in this study was obtained from Global Insight’s Regional Economic Explorer (ReX)46 database. The ReX provides data at provincial, metro, district and local municipality level for the years 1996 to 2017. For this study, mainly municipality-level data was used. Principal component analysis was used to construct the location attractiveness index. The investment attractiveness (or investment potential) of a location is a latent variable which cannot be directly measured. Krugell and Matthee47 provide a range of subnational variables, based on the United Nations Conference on Trade and Development’s (UNCTAD’s) Inward FDI Potential Index, which are measures of how attractive a location is to investors or its investment potential. The indicators of investment potential that were used to construct the location attractiveness index are:

• Measures of local market size: gross domestic product (GDP) per capita; index of buying power with retail spending as a percentage of total retail spending
• Measures of the agglomeration of people: total population; population density; the percentage of the population who are urbanised
• Measures of the agglomeration of economic activity: manufacturing employment as a percentage of total employment; the Tress index (smaller values indicate a more diversified economy); location quotient for manufacturing (a larger quotient reflects a comparative advantage in manufacturing)
• Measure of the openness of the local economy: total trade as a percentage of GDP
• Measure of the cost of labour: average wage per worker in manufacturing
• Measure of the quality of labour: the percentage of the population with post-matric qualifications
• Measures of local stability: the percentage of people who live below the food poverty line; the Gini coefficient (larger values indicate greater inequality); an overall crime index

Principal component analysis is used to group these variables into factors based on their commonalities. These factors correspond with the literature and present investment themes, namely: urbanisation economies (diversity), localisation economies (specialisation), thick markets (in terms of size) and openness. The factors are then summed to arrive at the overall location attractiveness index. We can unpack the information of a location with a high index score in terms of one or more of the investment themes. For example, a location with a high score in openness, relative to the other factors, indicates that it can offer investors spillovers from openness. Negative values imply that the variables in the factor (or investment theme) make a weaker contribution to the overall index value than those in other factors.

We present the results from three angles to provide a holistic overview of the performance of the municipalities and their corresponding cities and towns within the index since 1996:

• We compare the top 10 ranked places in 1996 and 2017, together with the worst performers.
• We show the top 40 places that have improved their ranking between 1996 and 2017.
• We give a detailed view of the places that have persistently performed well since 1996. Those marked in bold have consistently (with the exception of 2012 in some places) shown investment location attractiveness. These are also discussed in further detail.

The first set of results is shown in Table 2.1.2. Places ranked high in the 1996 index are also those that ranked high in the 2017 index, with the exception of a few. The same goes for the lowest-ranking places.

Over the period, numerous places have improved their ranking, as shown in Figure 2.1.2. For example, the Mantsopa Local Municipality (whose towns include Excelsior, Hobhouse, Ladybrand, Thaba Patchoa and Tweespruit) has moved up from number 146 to 70. Comparing the raw data from the indicators listed above, the municipality has since 1996 improved its location quotient in manufacturing, become more urbanised and open, and grown both its percentage of skilled workers and the average wage per person in manufacturing. While these are off a very low base, they represent an improvement nonetheless.

Source: Authors’ calculations using ReX data

The location attractiveness index identifies places where an investor is likely to enjoy returns from spillovers or benefits. These spillovers can accrue from a large local market, a thick labour market, foreign trade linkages, a diverse range of intermediate inputs, knowledge-sharing and access to infrastructure. Places that offer these spillovers are more likely to be attractive to potential investors.

Although many places have improved significantly in the rankings, they may have done so from a low base and therefore may not yet offer benefits to fully lock in investment. We therefore need to investigate places that consistently offer spillovers to investors by identifying those that have performed well consistently since 1996. Investing in these places will unlock the potential of not only the cities themselves but also the surrounding areas through proximity and connectivity. The Western Cape provides an interesting example of this: in 1996, the province had 14 of the top 40 municipalities. In 2017, this number increased to 20. This kind of focused investment will ultimately contribute to transforming South Africa’s entrenched pattern of spatial inequality.

Source: Authors’ calculations using ReX data

Targeting investment in secondary cities

The appointment of four special investment envoys by President Cyril Ramaphosa is a testament to his commitment to bolstering investment in the South African economy. The envoys are tasked with campaigning for investment to the amount of $100 billion over the next five years. President Ramaphosa has emphasised that a conducive environment has to be created to attract investment and unlock the growth potential of the economy.49 The location attractiveness index presented here provides a first step towards identifying places that are conducive to investment and where growth potential can be unlocked. Using municipal data, we now give a synopsis of the economies (and spatial locations) of the secondary cities that have performed consistently well in the location attractiveness index.

OVERVIEW OF LOCATION AND ECONOMIC CHARACTERISTICS OF BEST-PERFORMING MUNICIPALITIES THROUGHOUT THE PERIOD 1996 TO 2017

City of uMhlathuze Local Municipality50

The City of uMhlanhuze Local Municipality (which comprises the secondary cities of Richards Bay and Empangeni) has the greatest location attractiveness. This municipality offers investors both openness and market-size spillovers to investors.

The municipality’s economy grew at an average annual rate of 0.5% between 1996 and 2017. Most of its formal-sector employment is generated through construction (7.2%), education (7.8%), land and water transport (5.7%), metal products, machinery and household appliances (4.5%), and other business activities (12.7%). The municipality’s highest location quotient is for manufacturing (2.17), followed by transport (1.48) and agriculture (1.26). A value above one means the municipality has a comparative advantage (taking production and employment into account) over other municipalities in those sectors. The region is involved in the manufacture of basic metals, fabricated metal products, machinery and equipment, and office, accounting and computing machinery.

Apart from manufacturing, land and water transport made the greatest contribution to the gross value added (GVA) in 2017. The municipality is home to the Richards Bay Industrial Development Zone (RBIDZ), which offers access to the port of Richards Bay and strategic inland links through the R43 and N2 roads.

Emfuleni Local Municipality

Emfuleni Local Municipality offers market-size spillovers to investors.

The Emfuleni Local Municipality’s secondary cities, Vanderbijlpark and Vereeniging, are located in the southern part of Gauteng. They have access to a well-maintained road network and are strategically located near the N1 freeway linking Johannesburg and Bloemfontein. The municipality’s largest location quotient is in manufacturing (1.96), followed by financial intermediation, insurance, real estate and business services (1.10) and construction (1.04). The majority of formal-sector employees work in the manufacturing sector, specifically the manufacturing of basic metals, fabricated metal products, machinery and equipment, and office, accounting and computing machinery (10.3%). Around 9.6% of employees are in the retail trade and repair of personal household goods sector 9.6%, and 13.3% are in business services.

The municipality’s average annual GDP growth rate between 1996 and 2017 was 0.8%. Sectors that contributed most to GVA in 2017 were manufacturing, real estate and education.

Msunduzi Local Municipality

The Msunduzi Local Municipality offers market-size spillovers to investors.

The municipality consists largely of Pietermaritzburg and is part of two major development corridors, namely the industrial corridor between Durban and Pietermaritzburg and the agro-industrial corridor between Pietermaritzburg and Estcourt. Moreover, the municipality is strategically placed along the N3 freeway and is connected to King Shaka International Airport and the port of Durban.

The municipality’s economy grew at an average annual rate of 2.2% between 1996 and 2017. The NDP asserts that the region could enhance national growth through its port and industrial and agro-processing hubs.51 The Msunduzi Local Municipality has a comparative advantage in a number of sectors: electricity, gas and water supply (1.45), community, social and personal services (1.28), transport, storage and communication (1.20), agriculture (1.09), construction (1.02) and manufacturing (1.00). The education industry employs 9.7% of formal-sector workers, with the health and social work sector at 9.4%, retail trade and repair of personal household goods at 8.8% and business services at 12.9%.

Sectors that contributed most to the municipality’s GVA in 2017 were retail trade, land and water transport, other business activities, public administration and defence activities, education, and health and social work.

Stellenbosch Local Municipality

The Stellenbosch Local Municipality offers urbanisation-economies spillovers to investors and is located next to the Cape Town metropolitan area.

Its GDP grew at an average annual rate of 2.9% between 1996 and 2017. The Stellenbosch district boasts a comparative advantage in many sectors: agriculture (2.08), manufacturing (1.45), construction (1.34), financial intermediation, insurance, real estate and business services (1.07), wholesale and retail trade, hotels and restaurants (1.04) and community, social and personal services (1.00).

The largest contributors to the district’s GVA in 2017 were financial intermediation, insurance and pension funding and activities auxiliary to financial intermediation, and the manufacture of food products, beverages and tobacco products. The retail and wholesale trade sector and business services sector have the highest formal-sector employment rates in the municipality (16.0% and 11.7%, respectively).

Mogale City Local Municipality

Mogale City Local Municipality offers market-size spillovers to investors.

Situated in the West Rand region of Gauteng, this municipality forms part of the development around the mining belt between Johannesburg and Krugersdorp. It has strategic transport linkages to both Johannesburg and Pretoria, and a large urban concentration between Krugersdorp and Kagiso. Although Mogale City recorded an average annual GDP growth rate of 0% between 1996 and 2017, it has a location quotient above one in various industries: manufacturing (1.56), electricity, gas and water supply (1.11), construction (1.14) and community, social and personal services (1.19).

Most formal-sector workers are employed in business services (15.9%), with 7.6% in the manufacture of basic metals, fabricated metal products, machinery and equipment, and office, accounting and computing machinery, and 8.9% in the retail and wholesale trade. The largest contributors to GVA (in 2017) were financial intermediation, insurance and pension funds and activities auxiliary to financial intermediation, and health and social work.

Metsimaholo Local Municipality

The Metsimaholo Local Municipality’s main urban area is Sasolburg. The district’s proximity to Johannesburg provides an opportunity for investors to make use of the localisation-economies spillovers created in this municipality.

The municipality’s average annual growth rate between 1996 and 2017 was 3.2%, and the largest contributor to GVA in 2017 was the manufacture of fuel, petroleum, chemical and rubber products. This sector also formally employs the most workers (14.2%), followed by construction (9.3%). Another significant contributor to GVA is the mining of coal and lignite. The municipality’s location quotient values for 2017 reflect this, with manufacturing at 3.21, mining at 2.11 and electricity, gas and water supply at 2.10.

Govan Mbeki Local Municipality

The Govan Mbeki Local Municipality is located in Mpumalanga, with Secunda its main urban area. It offers market-size and localisation-economies spillovers to investors.

The municipality’s economy grew at an average annual rate of 0.9% between 1996 and 2017. The largest contributors to GVA in 2017 were the manufacture of fuel, petroleum, chemical and rubber products, and the mining of coal and lignite. Around 10.0% of formal-sector employees work in other business services and around 9.6% in agriculture. The municipality had a 2017 location quotient above one in the following sectors: mining (4.02), manufacturing (2.31) and electricity (1.38).

Newcastle Local Municipality

Newcastle is a secondary city located in KwaZulu-Natal which offers market-size and localisation-economies spillovers to investors.

The municipality’s GDP increased at an average annual rate of -0.1% between 1996 and 2017. Its comparative advantages are in manufacturing (1.51), electricity (1.14), agriculture (1.04) and community services (1.08). The sector that contributed most to GVA in 2017 was the manufacturing of metal products, machinery and household appliances. Business services (13.4%) have the highest percentage of formal-sector employees in the municipality, followed by retail (11.4%) and construction (6.4%).

Mossel Bay Local Municipality

The Mossel Bay Local Municipality offers urbanisation-economies spillovers to investors. It is situated midway between the port cities of Cape Town and Port Elizabeth, along the N2 freeway.

The municipality’s economy grew at an average annual rate of 6.3% between 1996 and 2017. Its highest location quotients are for electricity (5.90), construction (1.75), agriculture (1.59) and manufacturing (1.14). The majority of formalsector employees work in other business activities (19.0%) and in retail (12.1%). The largest contributor to GVA (in 2017) was the supply of electricity, gas, steam and hot water.

City of Mbombela Local Municipality

Mbombela, the capital of Mpumalanga, offers market-size spillovers to investors.

The municipality’s average annual growth rate between 1996 and 2017 was 4.0%, and the largest contributors to GVA in 2017 were wholesale and retail trade, finance, public administration and education. The education sector also formally employs 9.2% of workers, whereas agriculture employs 10.0%, other business activities 14.2% and the retail sector 9.5%. The municipality’s location quotient values for 2017 reflect this diverse range of sectors, with electricity at 1.53, trade at 1.43, agriculture at 1.11, construction at 1.08, manufacturing at 1.05 and community services at 1.00.

Knysna Local Municipality

The Knysna Local Municipality offers urbanisationeconomies spillovers to investors and is situated between George and Plettenberg Bay.

The municipality’s GDP increased at an average annual rate of 4.1% between 1996 and 2017. Its comparative advantages are in agriculture (which includes fishing) (1.27), construction (3.54) and trade (1.57). The sectors that contributed most to GVA in 2017 were construction and retail trade. Construction (13.7%) has the highest percentage of formal-sector employees in the municipality, followed by hotels and restaurants (11.5%) and other business activities (10.9%).

Steve Tshwete Local Municipality

The Steve Tshwete Local Municipality’s main urban area is Middelburg in Mpumalanga. The district is located between Johannesburg and Mbombela and offers an opportunity for investors to make use of the market-size and urbanisation-economies spillovers created in this municipality.

The municipality’s average annual growth rate between 1996 and 2017 was 2.6%, and the largest contributors to GVA in 2017 were the mining of coal and lignite and the manufacture of metal products, machinery and household appliances. This sector also formally employs the most workers (15.4%), followed by other business activities (13.1%). The municipality’s location quotient values for 2017 reflect this, with manufacturing at 1.49 and mining at 4.57.

Lesedi Local Municipality

The Lesedi Local Municipality, situated between the N17 and N3 freeways, offers localisation-economies spillovers to investors, which makes it attractive for future economic development.

The municipality’s GDP increased at an average annual rate of 4.8% between 1996 and 2017. Its comparative advantages are in agriculture (1.60), manufacturing (1.48), construction (1.14), community services (1.15) and transport (1.01). The sectors that contributed most to GVA in 2017 were the manufacturing of food, beverages and tobacco products, and finance, retail trade and public administration. Business services (14.6%) have the highest percentage of formal-sector employees in the municipality, followed by retail (9.3%) and the manufacturing of metal products (8.5%).

Emalahleni Local Municipality

The Emalahleni Local Municipality in Mpumalanga offers market-size spillovers. Its particular spatial importance is outlined on the Municipalities South Africa website as follows:**

The Emalahleni Municipality is strategically located in terms of the provincial context and transport network. It is situated in close proximity to the City of Ekurhuleni, City of Johannesburg and City of Tshwane Metropolitan Municipalities in Gauteng, and is connected to these areas by the N4 and N12 freeways. These freeways converge at eMalahleni in Emalahleni, from where the N4 extends to Mbombela, the provincial capital, and ultimately Maputo in Mozambique. The N4 freeway, along with the railway line that runs adjacent to the freeway from Gauteng to Mozambique, constitute the Maputo Corridor.52

The municipality’s economy grew at an average annual rate of 1.3% between 1996 and 2017. The Emalahleni Local Municipality has a comparative advantage in two sectors: mining (6.36), and electricity, gas and water supply (2.23). The mining sector employs 22.0% of formal-sector workers, with business services employing 11.8%.

Sectors that contributed most to the municipality’s GVA in 2017 were mining (coal, lignite and metal ores) and the manufacturing of metal products, machinery and household appliances.

Madibeng Local Municipality

The Madibeng Local Municipality in the North West province is strategically located near Gauteng and Limpopo. It also offers a gateway to Botswana via the N4 freeway. The municipality offers urbanisation-economies spillovers to investors.

The municipality’s economy grew at an average annual rate of 4.8% between 1996 and 2017. Mining contributed most to the municipality’s GVA in 2017, followed by education. Correspondingly, the mining sector employs 18.9% of formal-sector workers, followed by business services at 9.9%. The municipality’s location quotient values for 2017 reflect this, with mining having a location quotient above one (3.97).

Bitou Local Municipality

The Bitou Local Municipality is located in proximity to the N2 freeway connecting Port Elizabeth and Cape Town. It provides an opportunity for investors to make use of the urbanisation spillovers created in this municipality.

The municipality’s average annual growth rate between 1996 and 2017 was 6.6%, and the largest contributors to GVA in 2017 were construction, retail trade and finance. The construction sector also formally employs the most workers (14.4%), followed by hotels and restaurants (10.1%) and business services (12.7%). The municipality’s location quotient values for 2017 reflect this, with construction at 4.03, trade at 1.63 and agriculture at 1.44.

Rustenburg Local Municipality

The Rustenburg Local Municipality’s main urban area is Rustenburg, which is also the most populated municipality in the North West province. It offers market-size spillovers to investors.

The municipality’s average annual growth rate between 1996 and 2017 was 0.7%, and the largest contributor to GVA in 2017 was the mining of metal ores, followed by real estate. The mining sector also formally employs the most workers (36.4%), followed by business services (6.9%). The municipality’s location quotient values reflect the role of the mining sector, as only mining had a location quotient above one for 2017 (9.43).

Consolidating the evidence

Economic theory and international evidence show that economic activity is never evenly distributed across a country. People and organisations tend to cluster together in cities to take advantage of the benefits that proximity offers. This chapter has shown that specialised and diversified economies offer cost benefits to organisations and efficiency benefits to workers. Large local markets and openness to international markets attract more people and more organisations. It is easy to arrive at a general recommendation for attracting investment: make it cost-effective for people and organisations to be close to one another. That means developing land for commercial and residential use in ways that encourage density and also lower the cost of connectivity. However, as our brief history since democracy has shown, urban development and renewal are slow and precarious processes.

Special zones and industrial parks are often planned without consideration of urbanisation and localisation economies. Many spatial policies fall into the political trap of trying to spread out economic activity instead of finding ways to agglomerate it. Instead of initiating grand projects with the thinking, ’build it and they will come’, we need to realise that people will always be attracted to safe neighbourhoods with reliable services, good schools, efficient and affordable public transport systems, and functioning hospitals.

More quick wins, particularly for organisations, are possible. Organisations also prefer safety and services but really benefit from reliable and cost-effective transport (refer to flx case study ), as well as connectivity. Investment in roads and information and communication technology infrastructure is paramount. If specific sectors in specific places are to be targeted, the next step would be conducting an input–output analysis of backward and forward linkages, specifically within the context of global value chains.

Looking ahead

Unlocking potential through trusting partnerships

South Africa has always had embedded social and spatial inequalities. The country needs to grow in a more inclusive manner: a process that can be accelerated through targeted investment and a policy environment that supports this vision. In seeking to provide an answer to the question of just where this investment should be targeted, an overriding consideration should be that investment is a scarce resource. For this reason, it must be allocated in the most efficient manner.

The above cities and towns offer various benefits to investors, according to the identified investment themes. Participants in the economy must give these places special attention with a view to unlocking their investment potential, leading to inclusive growth and development. As emphasised in the NDP:

There is also a critical lack of trust between different interest groups which reduces the willingness of economic players to commit to the kind of long-term investments which are needed to generate jobs and the economic returns that would support sustainable (urban) growth.53

Proximity and connectivity at the core of policy development
Proximity and connectivity (to agglomerations) must be at the core of policy development. After all, spatial development needs to focus on enabling people to be pulled into agglomerations through mobility and connectivity. For example, the development of transport infrastructure, in line with the government’s infrastructure plan, is crucial for linking economic hubs across the country.

The NDP points out that numerous spatial opportunities remain unrealised because of a lack of connectivity. In this regard, the NDP prioritises 17 development projects which should act as catalysts for connectivity in the different provinces. Importantly, lower transport costs as well as the rollout of internet and communication technology will enable people to benefit from opportunities in secondary cities and towns as proximity and connectivity are enhanced.

Ultimately, policies must be place-specific or location-specific, and investment should play to a location’s strengths. For example, industrial policy should see to it that global value chain connections are built or strengthened through developing upstream and downstream activities around existing industries. An example of this is creating or expanding agro-processing industries in agriculture-intensive areas.

This article has presented some of the thinking behind, and the methodology used to arrive at the location attractiveness index. It has also identified places where targeted investment and focused policies are likely to bear fruit. The results have shown that places with the greatest potential are close to major agglomerations. A few secondary cities and towns have also featured in the rankings, as they are well connected through road and rail networks as well as transport corridors.

By way of conclusion: Is a ‘new deal’ possible?

Greyling and Mothata argue that the proposed ‘new deal’ of President Ramaphosa must be accompanied by the creation of special economic zones that contribute to the development of secondary cities, with both public and private investment being used to unlock opportunities for growth and expansion.54 The NDP calls this a spatial compact, in which trust is the foundation and broad community engagement and enrichment are recurring themes. Only through compacts that involve business, government and citizens can the slow process of transforming South Africa’s entrenched spatial anomalies start to gain momentum.55

Looking at second-tier cities for growth: The Odisha case

Case study by Lesiba Mothata

India has consistently grown its gross domestic product (GDP) by more than 6% every year since Prime Minister Narendra Modi came into power on a promise of becoming a leader who will place the country’s economy on a sustained higher growth trajectory.

At the April 2018 India–South Africa Business Summit held in Sandton, Johannesburg, authorities from India detailed what has contributed to this enviable economic growth outcome, specifically the approach taken by the country to focus on second-tier cities to produce sustained economic advancement. (Second-tier cities are those at the periphery of a major metropolitan area.)

The Principal Secretary from the state of Odisha, India, gave an update on progress made by the Startup India initiative since its 2016 launch (see Figure 2.1.4). Nineteen states have constructed Startup India policies and notable progress has been made in peripheral locations, including Odisha.

Located on the east coast of India along the Bay of Bengal, Odisha has a coastline of 485 km and is endowed with large mineral deposits. According to Invest India, the National Investment Promotion and Facilitation Agency of India, Odisha is considered a hub for mineral-based industries.55

Source: Invest India and Office of the High Commissioner of India presentation delivered at the India–Africa Business Summit April 2018, Sandton Convention Centre, Johannesburg

Odisha is one of the fastest-growing regional economies in India, outpacing national growth since 2012 and expected to achieve double-digit GDP growth by 2020. It is also home to a few second-tier cities, defined as having a population of less than one million. The government of Odisha has positioned the state to become a budding hub for start-ups so it can occupy a top-three spot in India by 2020.56

It is interesting that economic growth in Odisha is the result of a deliberate strategy to focus on startups and entrepreneurs in second-tier cities. A lesson here is that achieving sustained high levels of GDP growth requires micro-economic reforms, focused on second-tier cities, to augment the macro initiatives expressed at national-government level.

A framework for productive multistakeholder engagement has underpinned the success of the strategy to ignite growth in second-tier cities in India. The interplay between business (big and small), policymakers (regional and national) and private capital (local and foreign) has yielded meaningful results. The policy framework established by the government has become a major support for business to invest in new projects and has allowed funders to take risks by providing them with capital for development.

Technology-enabled opportunity set

Odisha has embraced the use of technology in creating investment opportunities in the region. To improve the ease of doing business, in 2017 its government launched an online single-window investor portal called GO-SWIFT (Government of Odisha Single Window Investor Facilitation and Tracking).57 GO-SWIFT makes it easy for investors to access information on projects, simplifies application processes and expedites approvals for projects.

The system removes human involvement from the investment process. It’s a single portal for lodging applications and seeking clearance for establishing a business. Investors no longer have to knock on the doors of various government departments to comply with regulations, which improves implementation efficiency. The Associated Chambers of Commerce and Industry of India, an industry body, ranks Odisha highly on its ability to implement projects and attract investment.58

Private funders looking for value

Given its investment constructs, Odisha is most likely to attract funders from the private sector looking to deploy capital into assets expected to yield high returns at a commensurate risk level. Second-tier cities such as Odisha, given their status as peripheral and unexplored, usually present a compelling investment proposition. Their low-cost structure, relative to established metropolitan areas, is attractive in many important aspects.

Wages are naturally low in second-tier cities, and municipal costs, housing and land prices are competitive relative to those in big cities. According to an Asian Development Bank (ADB) study, Odisha has a competitive edge over other Indian cities in terms of the cost of establishing and running a business. Using three key variables – wages of skilled labour, electricity tariffs and land costs – the ADB’s study found Odisha had a constructive cost environment for doing business.59

Environments such as these can attract formal savings using pension funds, endowments and saving pools from private investment companies and governments in the form of sovereign wealth funds looking to make a meaningful impact on society, and high net worth individuals seeking to diversify their wealth in less-researched and untapped markets.

Bottom line

India presents a useful example of how to integrate micro-economic reforms focused on secondtier cities with big macro initiatives to unlock sustainable growth. The multistakeholder approach undertaken by Modi’s administration shows that development and growth can be achieved when all parts of society are working together. Governments need to create a conducive environment for investment. Business ought to seek opportunities and take risks. Private capital in the form of savings can be used to fund development. The interconnectedness of these three stakeholders – business, government and savings owners – can make a major contribution to economic growth and improve the livelihood of citizens.

THE PROBLEM OF TRANSPORTING SOUTH AFRICANS TO WORK IN MAJOR URBAN CENTRES

Case study by Justin Coetzee and Margaret O'Connor

Congestion on our ever-expanding road networks is a reality for most people during the morning and evening rush to work and to school. The physical and emotional stress of navigating rush-hour traffic is starting to challenge South Africans’ love affair with their cars. But what real choices do working people have?

Figure 2.1.5 shows the dimensions of quality a user considers when deciding on a mode of transport.

Source: Van Hagen^60

Our current mobility options are limited. I can choose the convenience of a car – and live with the consequences of gridlock, air pollution, pedestrian and cyclist accidents, and eroding disposable income. Or I can make the socially responsible choice to use public transport – assuming it’s readily available and I know the schedule, the route and where the bus stop is. Oh, and that I have credit on my card, or cash, for the fare. And my local bus or train or metro or taxi is safe, clean and reliable, and the walk from the bus or train is safe and not too hilly. Socially responsible? Yes. Convenient? No.

But what if we could create new categories of transport services that are convenient, comfortable, affordable, predictable and safe? What if we could create a compelling value proposition for personal travel that removes the need for parking, that reduces emissions, saves money, gives back time, is safer to use than driving yourself and gets you exactly where you want to be, when you want to be there?

This is what we are working on at GoMetro. It’s the world of flexible mobility: a smart engine that matches supply and demand across a city and uses the principles of shared mobility, ride-hailing and subscription services to deliver a transport experience like nothing before. flx offers employees and employers the chance to contract with a responsible corporate service provider to deliver people between work and home, safely and reliably, in a WiFi-enabled vehicle.

flx has been designed as an enterprise solution that may one day help manage an entire fleet. We’re focusing on corporate shuttles and employee transport solutions, working with like-minded companies to get this right.

What is flx?

flx was conceptualised in 2016 at a GoMetro strategy day. The idea was to offer mobility as a service to corporates.

The GoMetro Group is a South African technology company with international technical expertise. In the last six years, GoMetro has become a trusted global B2B brand in urban planning and smart city transportation mapping.

South African companies and government organisations have a unique opportunity to share the future of global mobility with us, right here and right now, by helping to test and to tweak flx. We’d like to share our patented flexible-shuttle technology solution to help calculate and build customised contracts for daily commuting trips.

How does flx work?

flx works with independent transport service providers (shuttle companies, transport operators, individual professional drivers) to provide a service to a market the service providers would not otherwise have access to, with a pre-approved fleet. It provides a demand-responsive transport solution to commuters, allowing them to bend the system to speak to their needs. Each person is charged individually.

Employees are grouped into the most optimum ‘pods’ of people, based on where they are. Each pod has an associated travel cost, regulated by a smart social contract that’s calculated up front and presented to the employee to accept.

Multistakeholder approach

flx is a multistakeholder initiative that involves:

• business (corporate customers, flx insurance, banking partners, and flx operators – mostly small businesses)
• public–private sector strategic urban planning stakeholders
• government urban planners
• academic research partners (local and global)
• investors

The role incentives play

The average person has become programmed to ignore actual costs and instead focus on what we’ve termed ‘direct costs’. These direct costs are what drivers feel in their wallets: petrol, car payments, insurance. Few South Africans factor in vehicle depreciation, the cost to themselves and to their employers of parking, and the value of their time spent fighting traffic and looking for parking. Almost no one factors in the cost to their personal wellness, professional productivity and presenteeism, or the cost to the country of pollution, congestion, accidents and lost productivity.

What type of incentives do South African workers need?

• Flexible auto insurance coverage that allows people to pay only for the days on which they drive their car.
• A cash grant for those who don’t cost the company money in the form of parking. In urban South Africa, the average cost for renting parking bays is around R600 a month.
• A ‘well-being’ incentive of 0.25 days’ additional annual leave for every month you’re with flx (three days a year) to recognise the measurable physical and emotional wellness improvements that come from a reimagined commute. For many companies, the bottom-line benefit of improved employee health, morale and motivation far outweighs any incremental cost.

The future is flx. What does the future look like?

While shared mobility isn’t new (think buses and taxis), the concept of innovating this particular mode of transport and saving money is the new cool. The future holds many unknowns but it’s an exciting one, filled with possibility and flexibility, where decreasing expenditure and increasing employee benefits take centre stage.

The use of electric vehicles will likely power up more start-ups in an effort to reduce carbon footprints and congestion in cities. Countries with excess electrical supplies, like India, have already shown a vast interest in scaling up electric vehicle operations: with more electric vehicles on the road, and less dependency on the cost of oil and fuel, the mobility industry could become incredibly sustainable in the long term.

But there’s more to this than just electric cars. Property developers are seeing a future of business parks and campuses without parking areas. This vision of a carless society offers massive cost-saving benefits to the developer, and corporate benefits, too. More space for offices and less money spent on parking facilities means companies can focus on employee benefits and creating an environment in which employees feel appreciated. The use of a service such as flx allows businesses to offer their employees a way to save money and time, and arrive at work – and depart later – feeling energised and relaxed, ultimately resulting in higher productivity than in most current cases.

A new role for the employer: mobility change agent

The employer is key to the success of this initiative. What businesses demand of property developers and managing agents is what they will get. The employer also needs to incentivise the change for the user.

Organisations have a responsibility to their employees to offer a workplace which promotes well-being, and actively endorses and supports campaigns which have employee well-being as their core focus. As change agents, organisations should therefore put pressure on property developers and lobby government.

The clear and consistent interpretation of the South African Revenue Service (SARS) policy about the tax treatment of employee transport services should help drive corporate subsidies for employees who use services such as flx. In the same way government taxes fuel, it could offer a green-tax subsidy on monthly earnings for contributing to efforts to look after the environment.

How do corporates start their own flx experiment?

Market testing and customer journeys with likeminded corporates will help to evolve mobility solutions in ways that make business and lifestyle sense for employees across South Africa. When starting its own flx experiment, the corporate has to first ascertain the needs of employees and their current transport challenges. For example, it makes perfect sense for a corporate to invest in (and potentially subsidise) a flx experiment if employees live a fair distance from the office and spend eight hours a week in traffic. Once the corporate has identified a need for flx, the next step is for a senior employee to lead the ride-sharing recruitment drive and work with the flx operations team to fill a shuttle. Once the shuttle has been filled, and corporate ride-sharing ambassadors are born, it’s only a matter of time before demand grows organically and people are signing up one after the other.

The different types of flx users

• The convenience user is looking for a more convenient way to get to work (early adopters).
  They’re not too perturbed by high prices because they know the value of their time and have been looking for a solution that’s far more reliable and comfortable than public transport – even if it’s at a premium.\
• The cost-efficient user is looking to save money through shared mobility (public transport replacement).
  They’re counting their pennies but at the same time getting frustrated with the limited public transport options out there. They’re hoping a shared-mobility solution will give them back their time, save them money and make their journey to and from the office a far more pleasant experience.\
• The graduate user is just being introduced to corporate life.
  They have the perfect car in mind but may also realise the benefits of investing their money into property rather than a depreciating asset (the car). This user has an opportunity to reinvent or create their asset wealth, and ensure flx not only saves them money but helps them build a foundation of investment for the future.\
• The company-supplied transport user relies solely on the company for transport to and from work.
  Usually, this is a low-income earner who is completely or mostly reliant on management’s choice of transport to get them to the office and back home again. They may also work shifts outside regular working hours.

The law and regulations

Corporate group commuter transport is regulated by the National Land Transport Act of 2009, which states that local authorities are responsible for regulation. If you can prove demand, municipal or provincial regulating entities will consider and issue licences for each vehicle in a charter or commuter staff transport scheme.

The tax treatment of flexible mobility services for corporate employees

SARS released Binding Private Ruling 262 (BPR 262) and Binding General Ruling (Income Tax) 42 (BGR 42) in 2017. According to BPR 262, there are two types of services that can be implemented under the transport service scheme: a direct service and a shuttle service. flx is a direct service, as it provides a dedicated transport service between the employee’s residence and their place of work. Regarding the BGR 42 and under paragraph 10(2)(b) of the Seventh Schedule to the Act, transport services provided to employees to and from any collection or drop-off point en-route to or from the employees’ homes and place of employment is accepted to fall within the provisions of paragraph 10(2)(b). No value will, therefore, be placed on these transport services.

Case studies

Google Corporate Shuttles, known as the ‘Google Bus’, transport employees from various tech companies, not just Google, from their homes in San Francisco and Oakland to corporate campuses in Silicon Valley, almost 65 km away. The commute takes 90 minutes to two hours, depending on traffic. The bus is fitted with WiFi and tables, so people can use their laptops during their commute to work. ‘It’s the most useful Google fringe benefit,’ said Wiltse Carpenter, a 45-year-old software engineer. ‘It’s changed my quality of life.’

The Ford Chariot is an on-demand ride-sharing commuter shuttle service. It’s a 14-seater bus fitted with WiFi. The aim is to provide a mass-transit system that relieves congestion while offering a more comfortable and personalised commuting experience. Unlike the Google Bus, the service is not limited to the employees of a certain company. A commuter can reserve their seat on the Chariot by using an app. The Chariot service is cheaper than Uber and Lyft. Here’s one Chariot commuter’s review of the service: ‘Commuting to the Financial District from the Marina was extremely stressful until I found Chariot. With Chariot, there are always plenty of vans available to pick me up so it is very flexible with my schedule. I never have to worry about surge pricing or whether or not I’ll be able to find a ride to get me to work on time, like I did with Uber and Lyft.’

The world’s first electric ride-sharing car, MOIA, aims to create a solution for the typical transport problems that cities face, such as congestion, air and noise pollution, and limited space, while helping them reach their sustainability goals. Operational from the end of 2018, MOIA is a fully electric car that provides space for up to six passengers. It was developed with a ride-sharing service in mind, so has spacious seating for improved comfort. MOIA also comes with an app that allows riders to book trips and pay for their rides. This visionary shared-mobility service offers an alternative to car ownership.

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