Why these cities could be South Africa’s next big economic hubs

A report by specialised financial services group Alexander Forbes highlights a number of municipal areas and ‘secondary cities’ that could help unlock South Africa’s growth potential.

Alexander Forbes’ Benefits Barometer noted that the appointment of four special investment envoys by President Cyril Ramaphosa is a testament to his commitment to bolstering investment in the local economy.

The envoys, it pointed out, 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,” it said.

Within the Benefits Barometer, is a “location attractiveness index” which moves to identify 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,” Alexander Forbes said.

The location attractiveness index identifies places where an investor is likely to enjoy returns from spillovers or benefits, the financial services group added.

“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.”

The indicators of investment potential that were used to construct the location attractiveness index are:

  • Market size: gross domestic product (GDP) per capita; index of buying power with retail spending as a percentage of total retail spending.
  • Agglomeration of people: total  population; population density; the percentage  of the population who are urbanised.
  •  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).
  • Openness of the local economy: total trade as a percentage of GDP.
  • Cost of labour:  average wage per worker in manufacturing.
  • Quality of labour: the percentage of the population with post-matric  qualifications.
  • 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.

The City of uMhlanhuze Local Municipality (which comprises the secondary cities of Richards Bay and Empangeni) has the greatest location attractiveness, according to Alexander Forbes.

“This municipality offers investors both openness and market-size spillovers to investors,” it said.

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, Alexander Forbes noted.

Second on the list, the Emfuleni Local Municipality’s secondary cities, Vanderbijlpark and Vereeniging, 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 index said.

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.

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.

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.

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).

Situated in the West Rand region of Gauteng, Mogale City Local 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.

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.

Top 10 highest-ranking municipalities in the location attractiveness index  2017

Alexander Forbes also showed how, the attractiveness index has changed in a little over a decade:

Read: Ramaphosa’s best bet could be two-tier cities – here’s how it works

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Why these cities could be South Africa’s next big economic hubs