Local government plays a vital role in boosting gross domestic product

It is not only national government and its economic policies that are important to economic growth and attracting international investors.

South African local authorities, particularly the centres of economic activities of scale represented by metropolitan areas and larger municipalities, have a vital role to play in the overall economic well-being of the country and growth in gross domestic product (GDP).

This fact was highlighted in Helen Zille’s keynote speech at last year’s Institute of Municipal Financial Officers Conference, when she was still the executive mayor of Cape Town.

She referred to a 1999 Centre for Development and Enterprise study of 75 large corporations and 600 established businesses of all sizes, which showed how important it is to secure large-scale investment in this regard.

The study found that for every R100 in after-tax profit, South Africa’s major corporations also generated R280 in wages, salaries and benefits; R147 in export earnings; R188 in new investments of all types; R69 in taxes, levies duties and rates for government; R13 to training; and R9 to outsourcing and partnerships with emerging black business.

“To reap these benefits, we need to attract skills and capital, and we need to do so in the context of a global economy where both are more mobile than ever.

“Both seek opportunities and returns globally, [they] avoid bad governments, uncertainty and instability. Where these factors increase, capital and skills move away, deepening poverty and the instability it brings,” she said.

It is with this in mind that the City of Cape Towns aims to create a virtuous cycle, where improved government services and infrastructure attract skills and capital, which in turn drive development and further improve government capacity through increased revenues.

She also pointed out that this is not a uniquely South African situation. In Latin America, for example, each 1% growth in infrastructure stock has been accompanied by a percentage point increase in GDP per capita.

“In Cape Town, about R30 billion in new developments in the CBD alone are planned for the next three to five years, of which two-thirds are private sector investment on the back of public sector investments.

“In fact, in the metro region as a whole, we expect to see an approximately 9.5% growth in fixed investment over the medium term.

“Public investments include the R2.5-billion airport upgrade, R4bn for the 2010 Soccer World Cup stadiums, the R4.2-billion container harbour expansion, the R1.3-billion first phase of the bus rapid transit system, and several billion more for road and rail upgrades.

“In the private sector we are seeing expansions to the V&A Waterfront, the Strand on Adderley development, worth R2.5bn, the Media24 head office expansion, the Chevron expansion and Old Mutual’s Malgas building, which will be among the highest in Africa when it is finished,” she said.

Sound financial management as well as clean and transparent handling of public funds in local government are crucial if the city wants to continue to improve this fixed investment trend.

Conversely, corruption scandals dent business confidence in government leadership.

If corruption is left unchecked, it opens the door to the criminalisation of the state – where government becomes a patronage system, dispensing jobs, contracts and services only to members of the ruling elite and their cronies.

This severely discourages investors and skilled professionals in its own right, and leads to a rapid deterioration of services, infrastructure and, eventually, political stability.

However, local government also needs to find the correct balance between adequate financial controls and excessive red tape, which slows delivery and undermines their objectives, she said.

Zille added that she does not believe the right balance has yet been found in this country.

“The Municipal Finance Management Act is intended to curb corruption, and sometimes it is very effective at doing so.

“But the stringent and time-consuming procedures it requires also slow down our delivery processes, sometimes to the point where the Act defeats its own intended purpose of improving governance.

“In addition, it makes our officials excessively risk averse, especially when it comes to innovative projects involving public private partnerships.

“This stunts initiative, and results in goal displacement, creating an incentive for our officials to focus more on following the correct procedures than with achieving the best possible outcomes in terms of our IDP [Integrated Development Plan] objectives,” she said.