Strategic shift for Western Cape

The Western Cape is trying a new way of doing things to lift growth and job creation by supplying the missing link in previous economic strategies: direct engagement between the government and the private sector.

Initiated by premier Alan Winde during his first 100 days in office, and based on methodology coming out of Harvard University, the province’s economic war room will report jointly to the premier and the mayor of Cape Town — two separate tiers of government.

The first phase of the process is well under way, with free support from Harvard. It involves officials meeting industry bodies and businesses one-on-one to determine what is preventing growth and investment.

Five priority sectors that underpin the Western Cape economy are involved: construction and property; informal light manufacturing; the Atlantis special economic zone (a manufacturing hub that focuses on green energy); information technology and business process outsourcing; and commuter transport.

In phase 2 the problems identified will be analysed and sequenced by the five teams of officials from provincial and metro departments. Their job is to fix the issues immediately or escalate them to the premier or mayor’s office, with the overall aim of creating a more enabling environment for private enterprise to flourish.

"The economic war room model is the first real attempt to engage practically with industry," says Deon van Zyl, who chairs the Western Cape Property Development Forum (WCPDF).

"If the process receives the same ongoing commitment from both government and the private sector as it has to date, it truly has the potential to set the scene for a new form of engagement and true partnership between the government and the private sector," he says.

But Van Zyl is no starry-eyed optimist. The property development and construction sector is in "a serious crisis", he says, with many companies either in business rescue or having closed their doors permanently, and thousands of jobs lost.

This is a disaster, given that it is the sector that the government depends on most for service delivery. It also has huge job multipliers, with 4.7 jobs created for each R1m spent on construction.

In addition, 25% of the capital value of any development goes on salaries and wages, mostly to subcontractors, artisans and labourers. In Cape Town, every R1bn of commercial or industrial investment also generates R13.4m a year in rates for the municipality.

Despite this, the government is failing to create an environment to attract fixed investment, says Van Zyl.

He cites three main factors that have led to the crisis.

First, "a cumbersome suite" of legislative approvals is required before building can commence. The process of getting approvals can often take three times as long as it takes to actually erect a building.

This is largely due to nonaligned legislation, and repetition of the same public participation, comment, objection and appeal processes for each piece of legislation.

Added to this is that most authorities don’t know what they want, due to a lack of planning and a unified growth vision, says Van Zyl. This results in officials applying a subjective veto to projects, acting as "gatekeepers" rather than as facilitators of development. In short, he says, "you end up in a very high-risk application process".

Second, the underspending of government capex budgets is a major problem at local authority level.

"What is lacking is an understanding that the underspending of capital budgets stalls the economy, causes a drainage of skills, prevents growth in tax revenue streams, and keeps food off people’s tables," says Van Zyl.

Third, government procurement processes are in disarray.

According to the WCPDF, the private sector typically takes three to four weeks to assess a tender. The City of Cape Town takes upwards of 24 weeks. In the past financial year, the city cancelled R5.9bn worth of tenders after tender closure and generally after the 24-week period had expired.

Van Zyl says SA urgently needs to design a service-orientated procurement process. "This should be elevated to a presidential priority with the [National] Treasury becoming obsessed with the turnaround time of public tenders," he argues.

Clearly, none of the big issues the WCPDF has raised is going to be solved easily.

"We are making huge strides via the leadership of premier Winde," says Van Zyl, "but what we really need is for the president, the premier and the Cape Town mayor to sit around the same table and agree to align their respective processes.

"Unless national, provincial and local government decide to work towards the same priority of economic growth and job creation, and therefore agree to align legislative processes, the current problem will not be solved."

Winde’s office says the war room is "still in its early days", but there are some quick wins to be had, and it hopes to show some results soon.

In addition to the war room, Winde has undertaken to expand the province’s red tape reduction unit to all municipalities, and to focus on the issues preventing small businesses and entrepreneurs from getting their enterprises off the ground.

He has also promised to address technical issues that constrain growth, such as visa regimes, port fees, licensing requirements and slow planning processes. Within the next six months, the province will develop its own ease of doing business index to track its progress in this regard.

David Maynier, Western Cape finance & economic opportunities MEC, says: "The Western Cape government has worked hard to create an enabling environment for the private sector and for the markets to drive economic growth and job creation."

His department expects the province to stage an economic recovery from estimated real GDP growth of 0.7% in 2019 to 1.2% in 2020. In contrast, it is forecasting that the national economy will slow to 0.2% in 2019 (from 0.8% last year) and then recover to 1.1% in 2020.

Maynier considers the biggest risk to the provincial economic outlook to be the national government.

"Rather than clear and decisive leadership, there is a sense of paralysis which has resulted in a descent into economic madness, with national government considering reckless economic policy proposals, including land expropriation without compensation, state-owned banks, prescribed assets and the nationalisation of the Reserve Bank," Maynier said last month in the provincial parliament.

He pledged to keep the province growing faster and creating more jobs than the rest of the country, saying: "We cannot, and we will not, sit back and allow national government to become a ball and chain holding back the economy in the Western Cape."

Maynier attributes the province’s higher performance partly to the fact that the provincial government has created an enabling environment for business through red tape reduction; supported high-growth sectors such as oil and gas, agri-processing and tourism; focused on promoting investment and trade; improved air access; and invested in infrastructure. He concedes that "the structure of the provincial economy, which has a larger services sector, and which has grown at a higher rate than sectors such as mining, is an advantage".

The province’s real GDP growth rate has been both well above and well below the national average at various times since 1995, perhaps due to the strong role that agriculture and drought plays in its economy (see graph). But over the past decade, the province’s growth rate has averaged 2.4% against 2.1% for the rest of SA.

Provincial employment has also grown faster than the national rate. Between the first quarter of 2014 and the first quarter of 2019, Western Cape employment increased by 283,000 jobs — an average annual growth rate of 2.4% compared with the national average of 1.6%.

Unemployment in the Western Cape has always been structurally lower than the national average.

As of the second quarter of 2019, the province’s unemployment rate was 20.4% compared with 31.1% for Gauteng and 29% for the country as a whole.

Business confidence in the Western Cape, at 22 index points, is just a fraction higher than the national figure of 21, according to the Bureau for Economic Research (BER). The latter is a 20-year low.

Since 1993, the BER business confidence index (BCI) for the Western Cape has generally remained higher than the national figure, having averaged 47.7 against 44.8 for SA as a whole. Since 2009, when the DA was elected to run the province, the two figures have diverged further, with the provincial BCI having averaged 45 against the national average of 38.6.

BER chief economist Hugo Pienaar says, given that SA’s industrial performance has been in decline, the fact that the Western Cape is predominantly a service-based economy could explain its historically higher levels of growth and job creation. It follows that business confidence would therefore also be higher.

"A bit better governance may also be a part of the story," he adds. "It’s well appreciated that since the DA started governing the province on its own, the Western Cape has been seen as the best-run province."