Regions of recovery: Increasing diversification is helping fuel an uptick across the provinces

Since the establishment of a democratic South Africa in 1994, and the creation of nine provinces from the original four, the role of regional government has become a prominent topic in political debate in the country. In the 1990s several parties called for a greater role for provincial authorities, to counter the power of the central government in Pretoria.

While the ruling African National Congress has largely stood for a strong central government, the capacity of local and provincial government to provide services and infrastructure to millions of South Africans has remained central to the evolution of the country during the post-apartheid period.

In 2010/11 the provincial governments received 43.5% of nationally raised revenue, according to the National Treasury’s “Budget Review 2011”. Each of the nine provinces – Eastern Cape, Free State, Gauteng, KwaZulu-Natal (KZN), Limpopo, Mpumalanga, Northern Cape, North West and Western Cape – enjoys significant scope to craft policy and bolster economic development at the regional level.

DEBATE: This federal system has continued to be a source of tension. Despite encouraging each province to implement a growth and development strategy and drawing up guidelines for the purpose in 2005, in a bid to empower local government to affect change, the level of government that is best suited for development programmes has been frequently debated. In 2007 three cabinet ministers – Mosioua Lekota, then minister of defence, Trevor Manuel, then minister of finance, and Sydney Mufamadi, then minister of provincial and local government – called for a reduction in the number of provinces and a review of the relationship between national and local authorities, with the aim of giving more power to the central government.

While this led to claim and counter-claim, including accusations of attempted gerrymandering, it appears that there remain diverging opinions on the best role for provincial government and the future of the federal system as it now stands. What is beyond dispute, however, is the major discrepancy in the economic capacity and development of South Africa’s nine provinces. Gauteng, KZN and the Western Cape combined account for 64.4% of the country’s GDP, while the Northern Cape contributes 2.2%. These three provinces, which are home to South Africa’s largest cities (Johannesburg, Durban and Cape Town), dominate the country’s economic landscape.

However, rural provinces – such as Mpumalanga, which has a population one-third the size of that of Gauteng but which accounts for the vast majority of South Africa’s coal production – have been increasingly looking to leverage their natural attributes, which include extractive resources and land. It is hoped this will increase capital flows and encourage development.

GAUTENG: Gauteng is the economic engine of South Africa. The second-most-populous province, with the highest density, Gauteng accounts for more than one-third of the country’s GDP and 10% of the continent’s, according to Statistics South Africa. Centred on Johannesburg, 97% of the province is urban. Traditionally, its wealth was garnered from the gold deposits discovered within its borders in 1886. However, the economy has diversified significantly, with the development of the manufacturing base and the tertiary sector. According to the Tress Index, which measures how concentrated or diversified an economy is, Gauteng’s economy has been diversifying steadily from a level above 51 in 2001 to 39.75 in 2010 (where 100 = total concentration on one sector), according to the “Gauteng Provincial Economic Review and Outlook 2011”.

As of 2010, financial and business services were the biggest contributor to the regional economy, accounting for 24.9% of GDP, according to IHS Global Insight. This was followed by manufacturing at 17.7% and wholesale retail and trade at 14.5%. Mining and quarrying now only contributes 2.8% to the economy, while the primary sector as a whole accounts for 3.2%. According to the “Gauteng Provincial Economic Review and Outlook 2011”, financial and business services are likely to continue to retain their prominence in the regional economy, contributing 26.2% by 2015.

As the largest contributor to the national economy – with the province’s GDP estimated at R644bn ($79bn) in 2010, according to the Gauteng Provincial Economic Review and Outlook 2011 – Gauteng’s fortunes have predominantly followed those of South Africa.

As such, the region benefitted greatly from the FIFA World Cup in 2010, hosting a number of matches in Johannesburg. Indeed, from the announcement in 2004 that the country would host the tournament, Gauteng’s GDP grew rapidly, increasing by 6.6% year-on-year in 2007, compared to 3.6% in 2004, according to the Gauteng Employment Growth and Development Strategy, published by the Gauteng Department of Economic Development. This figure was higher than the national GDP growth rate, which reached 5.1% in 2007.

The rapid provincial growth also ate into the region’s unemployment rate, bringing it down from 28.3% in 2002 to 20.2% in 2007. As one would expect given the demands for additional infrastructure and accommodation that the World Cup placed on the region, the construction sector experienced the fastest real growth rate between 2000 and 2008, averaging 123.4%. Other standout sectors included finance, real estate and business services, growing at 75.6%, and transport, storage and communications, averaging growth of 60%.

However, South Africa’s economic engine room was unable to fully shield itself from the global financial crisis. The fallout caused the provincial economy to shrink by 1.8% in 2009, slightly above the national figure of 1.7%. While the region returned to growth in 2010 (estimated at 3.1%), the crisis had a withering affect on certain indicators. Since the last quarter of 2008, the provincial economy has shed a significant number of jobs, with unemployment rising by 7.5 percentage points to a rate of 28.2% in the second quarter of 2011. The region’s manufacturing sector, a prime generator of jobs, was particularly hard hit by the crisis, with its share of regional GDP decreasing from 20.3% in 2008 to 17.7% in 2010, according to the “Gauteng Provincial Economic Review and Outlook 2011”.

INVESTMENT: Nonetheless, the regional authorities are bullish about the prospects for future growth of the sector and the economy as a whole. According to the Gauteng Economic Development Agency (GEDA), in the financial year 2010/11 the agency attracted R2.1bn ($257m) worth of investment and created 4454 sustainable jobs, above the targets of R2bn ($245m) in investment and 2000 jobs. The manufacturing sector accounted for 53% of these investments, with new projects in the automotive, furniture and glass sectors.

Domestic direct investment still accounts for the majority (62%) of new projects in the province, while foreign direct investment (FDI) is dominated by China and India, which accounted for 89% of all FDI facilitated in 2010/11, according to GEDA.

The main preoccupation now for Gauteng will be to boost the value of exports from the sector. In 2009 the province contributed 66.7% of South Africa’s export value, according to local company Quantec Research.

However, the majority of this still comes from the primary sector, with precious stones and minerals accounting for some 35.4% of all Gauteng’s exports in 2009 and mineral products for a further 23.4%. With global commodity prices strong, particularly for gold, Gauteng’s export base has prospered.

Nonetheless, the government is keen to move up the chain and bolster value-added exports. In line with this, the Gauteng Department of Economic Development created the Gauteng Advanced Manufacturing Sector Key Action Plan in 2009 to highlight areas for growth. These include white goods, electro-technical industries, the automotive industry and agro-processing. The provincial authorities hope that through a focus on such segments they can increase the region’s competitiveness and retain Gauteng’s position as the driver of South African growth and development.

KWAZULU-NATAL: Known as the Garden State, KZN has many comparative advantages that have driven its economic growth over the last decade and should continue to do so. Sandwiched between the warm waters of the Indian Ocean in the west and the Drakensberg escarpment in the east, the province has developed a prospering tourism industry. Furthermore, situated in a subtropical zone, the topography and climate provide beneficial conditions for the agricultural sector.

Finally, with the presence of South Africa’s busiest port at Durban, one of the 10 largest ports in the world, the province also has industrial heft. The province has the second-largest economy in South Africa, accounting for 16.1% of national GDP in 2009 (R291bn, $36bn), according to Trade and Invest KwaZulu-Natal. It is also the most populous province, with 10.7m people in 2009, 21% of the country’s population.

AGRICULTURE: With 54% of the population living in rural areas, agriculture has traditionally played an important role in the province’s economy. At 26% the sector contributes the greatest amount to national agricultural output of any of the country’s nine provinces.

The sector’s role in the provincial economy has diminished, however, averaging just 4.7% of provincial GDP from 2000-09, according to Trade and Invest KwaZulu-Natal. Competitiveness has been suffering, with the number of commercial farming enterprises falling by 11.8% to 3560 between 2002 and 2007, according to Statistics South Africa, while the number of paid full-time agricultural workers decreased by 12% in the same time period, according to the KwaZulu-Natal Provincial Planning Commission. The general loss of jobs in the sector has been even more severe, with employment falling by some 64% between 2000 and 2009.

The provincial government is looking to arrest this trend and bolster the agricultural sector in order to support rural development and employment generation. According to the KZN Growth and Development Strategy 2011, the industry needs to diversify, specifically in terms of production and processing.

It further states that, “This needs to be supplemented by expansion of irrigation schemes and development of a strategy and action plan for the expansion of emerging commercial farmers. In addition, agricultural land needs to be protected to ensure that there are sufficient resources to sustain the sector in the long run, while rehabilitation efforts are required to prepare land for agricultural production.”

The Department of Economic Development and Tourism established two projects in the 2010/11 financial year to deal with these challenges. Firstly, work started on a R430m ($53m), 16-ha agri-zone at Dube Trade Port that will be able to produce 3000 tonnes of air freight upon full completion in 2012. Secondly, the Agri-business Development Agency was established to support land reform farmers through skills development and market access facilitation.

MANUFACTURING: However, these efforts are unlikely to dramatically alter the composition of the region’s economy or its future direction. While KZN remains a predominantly rural state, Durban, its largest city, is home to Africa’s busiest container port, associated logistics services and a strong manufacturing sector.

Manufacturing contributed an average of 21.3% to the KZN economy between 2000 and 2009, according to Trade and Invest KwaZulu-Natal, making it the province’s most important sector. Almost one-third of South Africa’s manufactured exports come from KZN, according to South Africa Info.

The largest manufacturing sectors in the provincial economy are pulp and paper products (19%), chemicals and petrochemicals (17%), food and beverages (16%), and textiles, clothing and leather (15%).

As with the economy as a whole, the manufacturing sector has suffered as a result of the global economic crisis, with weak demand at home and abroad. The sector within KZN posted growth of -5.1% in the third quarter of 2010, and the downturn played a key part in the loss of almost 100,000 jobs in the province between 2007 and 2010.

LOOKING UP: However, the sector, and the wider economy, both seem to be recovering, with growth rates of 4.4% and 3.9%, respectively, in the fourth quarter of 2010. Indeed, exports are once again heading upwards, increasing from R56.7bn ($6.9bn) in 2009 to R61.3bn ($7.5bn) in 2010. While natural resources accounted for some 44% of these exports, key manufacturing sectors are also beginning to perform, with motor vehicles accounting for 11.1% of the total, for example.

Conditions certainly seem to be looking up for KZN. Trade and Investment KwaZulu-Natal attracted four major new investments in water infrastructure, business process outsourcing, aviation and automotives – with a combined value of more than R1.1bn ($135m) – in 2010/11. This was up from investments of R856m ($105m) in 2009/10. These projects are expected to create 1240 new jobs, above the Trade and Investment KwaZulu-Natal target of 1000.

The investment environment is supported by the province’s strong transport infrastructure. Durban handled 38% of all ships calling at South African ports in 2008/09. The port had total cargo traffic of 74.7m tonnes and container traffic of 2.56m twenty-foot equivalent units in the same year.

KZN is also supported by other major transport hubs, including Richards Bay Port, which handled a total of 75.9m tonnes of bulk cargo in 2010/11, Dube Trade Port and King Shaka International Airport. With such high-quality infrastructure, KZN is well placed to continue to attract investment and support economic development and job creation throughout the province.

WESTERN CAPE: The Western Cape has had the standout provincial economy in South Africa over the last decade. Between 2002 and 2009, the region had the highest average GDP growth of any province, standing at 4.3%, compared to a national average of 3.7%, according to Statistics South Africa. Although agriculture remains an important component of the local economy, these stellar growth rates have largely been fuelled by the secondary and tertiary sectors.

The tertiary sector contributed 65.2% to provincial GDP in 2009. This was largely driven by finance, real estate and business services, which accounted for 29.2% of GDP, and wholesale and retail trade and hotels and restaurants, which accounted for 13.1% of GDP.

Although manufacturing remains a key segment of the economy, its share of production decreased from 18.3% in 2000 to 15.2% in 2009. As with much of the country, the fastest-growing sector up to 2010 was construction. Fuelled by the demands of the FIFA World Cup, the segment grew by 46.4% between 2005 and 2009, according to Statistics South Africa.

While the primary sector has diminished in importance, agriculture still plays a significant role in the province’s economic development. Although the industry only accounted for 3.6% of GDP in 2009, it was responsible for over 7% of employment in the province. The sector also plays a crucial role in the Western Cape’s export potential. Fruit is the province’s premier export, with a value of R10.6bn ($1.3bn) in 2009, according to Quantec Research. Other important agricultural exports include vegetables, cereals and tobacco, which accounted for 73% of all tobacco and tobacco substitutes exports from South Africa in 2009. The Western Cape is also dominant in the export of fish, accounting for 81.2% of all South African exports of this product.

Despite a strong and diverse economy, the Western Cape has not been immune from the global downturn. The province experienced growth of -1.5% in 2009 and, as with South Africa as a whole, has continued to suffer from a persistent unemployment problem. In the second quarter of 2010, unemployment in the province stood at 23.6%, or 579,683 people.

The provincial authorities are trying to address this issue with a two-pronged approach. First, the government will invest in bolstering the education system and developing human capital. Second, it will continue to encourage investment for economic growth.

The Western Cape has arguably the most successful education system in the country, with 21% of the population having matriculated from school, compared to 14% in Gauteng and KZN, according to the Western Cape’s Draft Strategic Plan.

However, the number of underperforming schools – those with a matric pass rate of less than 60% – increased from 36 in 2006 to 74 at the end of 2008. The system also suffers from high drop-out rates, with 24% of people aged 20 or over having received less than nine years of schooling, according to the “2007 Community Survey” by Statistics South Africa. The Western Cape provincial government is hoping to arrest such trends by a number of means, including implementing a new system of testing and benchmarking for grades one-six, professional development and training for teachers, and improved, cost-effective infrastructure maintenance through public-private partnerships, according to the Western Cape Draft Strategic Plan.

This focus on human capital will support, and also be supported by, a continued drive to bolster FDI. In 2011 the province attracted R8.71bn ($1.07bn) in FDI from 22 projects, representing 13.8% of all FDI into the country, according to the Investment and Trade Promotion Agency for the Western Cape.

Between 2009 and 2011, the key sectors for FDI were software and IT services, business services and financial services, while the UK, the US and France were the top three sources of inward FDI in 2011.

The biggest drivers of investment into the Western Cape in 2010 were the growth potential of the domestic market and the proximity to customers. The provincial government is trying to build on this success and in its draft strategic plans has highlighted the need to look at the existing regulatory environment and the need to create a corruption-free public sector as ongoing concerns. This will be supported by plans for the establishment of a Western Cape Economic Development Agency. The province is, therefore, well placed to continue its strong economic performance and address the challenges, such as unemployment and associated social problems, which currently afflict the province.

THE NORTHERN CAPE: Covering almost one-third of South Africa’s land mass but home to just 2% of the country’s population, the Northern Cape is a vast and remote province. With its capital Kimberley nicknamed “the Diamond City”, the province was the birthplace of the country’s historic diamond rush and at one time found itself at the forefront of domestic economic activity. More recently, with diamond mining in decline and distances between towns an economic hurdle, much of the province’s population has been migrating to the neighbouring Western Cape for employment.

The province is trying to reverse this trend by earmarking other industries with growth potential and enhancing transportation connectivity, and it should stand to benefit from two national initiatives it is set to play host to: solar energy production and the Square Kilometre Array (SKA) radio telescope.

MOVING DOWNSTREAM: Mining and agriculture are the largest contributors to the province’s exports and employment, with further beneficiation and more value-added activity being targeted for both.

While the province’s diamond mining heyday is a thing of the past, diamonds still account for around 27% of its mining output, with 97% of the country’s diamond mining activities taking place within a 200-km radius of Kimberley. As diamond production declines, the province is looking to retain more value locally by setting up academies and institutes focused on polishing and jewellery manufacturing.

Further sources of potential for the province are to be found in its iron ore and manganese offerings: two commodities for which there is significant demand from China. The province’s Shishen Mine is the country’s largest source of iron ore, while over 25% of the world’s manganese originates in the Northern Cape. New rail lines identified by state-owned logistics company Transnet to connect the province’s mines with the country’s principal minerals export terminal in Saldhana should help expand export volumes even further.

AGRICULTURE: The Northern Cape is drier than most provinces, and has accordingly gained a reputation for its grains and dried fruits. With two of the country’s biggest rivers running through, the soil is fertile and the vegetation diverse, and irrigation schemes are being upgraded to improve yields and productivity. While the Western Cape gets most of the attention for its wine industry, the Northern Cape’s wines are growing globally in reputation, and Roibos tea is becoming increasingly popular among health-conscious consumers in Western countries due to its high levels of antioxidants.

To date, a major disadvantage for the province has been its distance and isolation from other economic centres. Plans are afoot for a new harbour in Port Nolloth, an expanded cargo centre at Upington airport, and the aforementioned rail lines and links to the country’s main export port of Saldhana – all of which should help get goods to market and unlock trade connectivity.

RENEWABLES: Due to its abundance of sunshine and flat, sparsely populated land, the Northern Cape has been identified as the ideal setting for the country’s future solar industry. With the national government announcing plans to spend $36bn on renewables by 2030, the economic landscape of the province is set to potentially shift from a heavy reliance on mining and agriculture to one dominated by solar energy and the manufacture of solar-related components. Plans are already under way to build a huge solar park capable of generating 8% (5000 MW) of the country’s electricity needs near the town of Upington.

ICT: South Africa, alongside Australia, has been selected as a finalist to host the world’s most powerful radio telescope, the SKA. The Northern Cape, with stable weather patterns and isolation from sources of interference such as cell phone towers and heavy industry, was selected as the base for which the country’s bid was submitted. If selected (a final decision is expected in May 2012), the project – jointly funded by a consortium of international science agencies – is set to cost nearly $2bn, with annual outlays on operation and maintenance of around $200m.

This would provide a huge boost to the local economy and, aside from the financial gains, would position the province at the forefront of global astronomy. In February 2012’s State of the Nation address, President Jacob Zuma announced that the province is to have its own public university. It is currently one of two provinces not to have such an institution, and with solar energy and astronomy set to potentially constitute a major part of the province’s future make-up, engineering and sciences should feature prominently in the curriculum, helping to reverse the exodus of the best young minds.

TOURISM: With a rugged and challenging landscape, the Northern Cape has deliberately targeted adventure and ecotourism as popular niches offering it a competitive advantage. In addition to six national parks, adventure seekers and outdoor enthusiasts can partake in river rafting, mountain biking, extreme marathon running, sandboarding, cave diving and paragliding.

In addition, the province plays host to two global extreme sports events: the Maloof Money Cup skateboarding world championships and the BLOODHOUND world land-speed record attempt.

MPUMALANGA: Mpumalanga has a population of just over 3.6m, around one-third that of either Gauteng or KZN. It is one of the smallest provinces in terms of area, second-to-last above heavily urbanised Gauteng. However, the province benefits from some fortuitous geography – as evidenced by the high contribution of the primary sector, at roughly 22% – with extensive coal reserves, sizeable tracts of grazing land, vast swathes of the famed Kruger National Park, and land borders with both Mozambique and Swaziland.

The province has sought to leverage these assets, increasing diversification and moving activity up the value chain – and with good reason. Although Mpumalanga has averaged 4.7% growth over the past five years, more recently the region has been hit by the broader national slowdown, with provincial GDP growth dropping noticeably from its high of 6.4% in 2008 to -1.7% in 2009 before levelling out at 3.1% in 2011. The province was the fifth-largest contributor to national GDP in 2010, down from fourth place a few years earlier.

Unemployment has long been a challenge, with roughly one in four residents looking for work – a particularly tricky quandary given that 70% of the population is under the age of 34. Income equality is also a problem, with a Gini coefficient of up to 0.7, according to the Mpumalanga government.

However, the long-term fundamentals of the province are encouraging should the government be able to address the short-term issues. The landlocked province has long benefitted from primary sector output. Mpumalanga boasts a healthy potential for increased agricultural growth, with 61% of the province’s total land being used for commercial farming, particularly in the cereal and fruit segments, and serving as the third-largest contributor to agricultural production.

COAL: However, it is the mining and electrical generation sectors, which account for more than one-third of the province’s total GDP, that have driven growth in recent years. Mpumalanga has 11 of national utility Eskom’s 13 coal-fired power stations, which contribute roughly 76% of the country’s electricity. It is responsible for more than 80% of coal production in the world’s second-largest exporter of coal, contributing roughly one-fifth of South Africa’s mining GDP.

Although some of the province’s most productive deposits are slowly declining, with a 30-year lifespan projected for belts such as Springs-Witbank, Mpumalanga is nonetheless looking to maximise its gain from its coal reserves. Eskom is in the process of building a new coal-fired plant at Kusile, which when completed will have a capacity of roughly 4800 MW, making it one of the largest such facilities in the world.

ADDED VALUE: The province has sought to increase value-adding activities to boost GDP and employment, through the launch of the 10-year Mpumalanga Economic Growth and Development Path (MEGDP). The MEGDP will strengthen the emphasis on agricultural development in the short term in the hope of spurring faster job creation, but seeks to increase capital flows into the secondary and tertiary sectors – including agro-processing, chemicals and information technology – over the medium and long term.

The strategy is aiming to capitalise on existing shifts in the province’s economic structure. Manufacturing now accounts for approximately 20% of the regional economy, with significant activity in petrochemicals, green industries, sugar and steel. Currently, a quarter of all sugar is produced and refined in Mpumalanga, with TSB Sugar operating one of the largest sugar cane mills in the country, while paper and pulp producer Sappi, the largest such operation in the southern hemisphere, is in the midst of expanding its facilities at Ngodwana. Similarly, Sasol’s petrochemicals plant at Secunda, South Africa’s second-largest churns out more than 200 various byproducts for further added value.

To help ensure the sustainability of this trend in manufacturing growth, the province’s development department, the Mpumalanga Economic Growth Agency, is looking to attract R300m ($37m) of direct investment over the coming year into the key sectors targeted by the MEGDP. In addition, four new industrial parks are under consideration in Balfour, Barberton, Mashishing and Middleburg, along with plans for the refurbishment of some underperforming industrial zones, such as the Ka-Bokweni Industrial Area.

One of the biggest focuses for the government, however, is on increasing the role Mpumalanga plays in facilitating cross-border trade. The Maputo Development Corridor, which connects Gauteng with the port of Maputo in Mozambique – which happens to be the closest port to Johannesburg and Pretoria – cuts straight through the heart of the province, and with increasing congestion at some of South Africa’s larger port facilities, the corridor is proving increasingly important in sending South African exports – such as fruit, coal and sugar – to their destination markets.

OUTLOOK: South Africa’s three biggest provincial economies have all come through the global economic crisis intact. While the stellar growth rates of the mid2000s, boosted by a strong global economy and World Cup preparations at home, came to an abrupt halt in 2009, all three provinces have begun to climb out of the slump. This is in no small part because Gauteng, KZN and the Western Cape are all more diverse economies than they were a decade ago.

However, a number of the smaller provinces are looking to increase their investment attractiveness, growth rates and sectoral diversification as well, which is helping to buttress development nationwide. With Mpumalanga shifting an increasing amount of resources into the secondary sector, employment is on the rise and – crucially for a country concerned about maintaining competitiveness – industrial output is growing.

Although each province faces common challenges, including high unemployment rates, their future looks promising. The expansion of the secondary, and particularly tertiary, sectors has reinforced the development of these regional powerhouses and points the way to continued growth over the coming decade.