South Africa

Op-Ed: South Africa’s cities need to work much better

By Dirk De Vos 13 October 2015

There is an overwhelming consensus that South Africa's cities need to change to become the engines of economic growth and opportunity. We need to integrate housing and public transport, maximise returns on investments in infrastructure, address energy issues and promote economic growth within our large cities. However, this calls for integrated planning and powers at a city level but the powers and incentives to do this are not there. By DIRK DE VOS.

Talk of reducing the number provinces is apparently back on the national agenda. One of the resolutions of the recent African National Congress (ANC) national general council was to reduce the number of municipalities. The reasoning given by ANC’s legislature and governance committee chairman Nomaindia Mfeketo is that this could be an effective way of making sure the state is efficient and responsive and much closer to the citizens.

Changing the number of provinces would be a tricky thing to get right. It would require a constitutional amendment and the ANC does not, on its own, have the majority it needs to do so. One can imagine that the Democratic Alliance, the likely loser in a reduced province scenario, will oppose any such changes and if it does, then nothing much could come of it. Maybe we should use this opportunity to re-examine all three spheres of government. The basic constitutional set-up is that we have three spheres of government, national provincial and local. Each sphere is autonomous from the other in those matters assigned to each sphere. This is different from having different levels of government working as a hierarchical pyramid structure with local as the base leading up to provincial and then national.

There are no big problems with the basic set-up but where we do have problems is in the allocation of functions within those spheres. Some matters, based on a principle of subsidiarity which are most effective at a local level, are a national competence. However, given the autonomous nature of the different spheres, for the whole thing to work, there has to be co-ordination between the different spheres. For the most part, the effort has not been a great success. The provinces are not the real problem though, it is at the local government sphere and in particular, our larger cities. To see why things don’t work, one needs to examine our cities’ constitutional powers and revenue models.

Some context first. A 2012 Centre for Development and Enterprise paper relying extensively on the work done by Philip Harrison, a former member of the National Planning Commission and a professor at the University of the Witwatersrand, shows that South Africa’s five largest metros, Johannesburg, Cape Town, eThekwini (Durban), Tshwane (Pretoria), Ekurhuleni (East Rand) and Nelson Mandela Bay (Port Elizabeth) are home to just under 40% of South Africa’s population but produce nearly 60% of the country’s economic output (measured as gross value add). While South Africa’s average annual economic growth rate between 1996 and 2011 grew by 3.2%, in the bigger cities it was 3.8%. South Africa’s urbanisation continues apace. The National Development Plan estimates that by 2030, South Africa will have a 70% rate of urbanisation in 2030, with most growth in the largest metros. South Africa is fast becoming an urbanised country.

We can’t reverse the abovementioned trends and neither should we try to do so. Factors that economists call the ‘agglomeration effect’ mean cities are inherently more efficient and generate more economic growth than rural areas. This has been true for centuries. Before the modern conception of the nation state, cities were at the centre of development. The word ‘citizen’ a Latinate borrowing originally meant ‘inhabitant of a city’. The Germanic equivalent word reflected in Dutch/Afrikaans is burger, from burg, a castle/fort, or the urban centres of Europe.

If economic growth and job creation are a primary objective, then more urbanisation is needed. Yet our cities are not set up to take advantage the effects of agglomeration. Apartheid spatial planning and an anti-urban bias are the reasons for this. What we have instead are mushrooming informal settlements or Reconstruction and Development Programme (RDP) type developments at the periphery, urban sprawl and inefficient, costly public transport. The result is cities that are not socially cohesive, nor, for most inhabitants, particularly liveable, not ecologically sustainable and neither are they economically efficient. On the face of it, apartheid settlement patterns may look as if they favour whites and the middle classes who increasingly retreat behind high walls or manned booms, blocking access to their suburbs and protected by private security companies but it is simply not sustainable – for anyone. More socially integrated cities are not only good for economic development, they reduce conflict through social/economic exclusion something the rich and poor would all benefit from. Our current urban development trajectory, in the words of Professor Ivan Turok, lacks an essential ‘resilience’.

There is an overwhelming consensus that our cities need to change to become the engines of economic growth and opportunity. We need to integrate housing and public transport, maximise returns on investments in infrastructure, address energy issues and promote economic growth within our large cities. However, this calls for integrated planning and powers at a city level but the powers and incentives to do this are not there.

Take a look at the budgets our cities pass every year. Figures maintained by the Treasury show our eight metros collectively have an annual budget of R164-billion. Our secondary cities have, between all of them, a budget of R38-billion. Collectively, these urban nodes represent about 60% of our gross domestic product yet their budgets are less than 20% of the R1.2-trillion national budget and even this overstates the case. About 30% of our cities’ revenues are made up of sales of electricity, redistributing Eskom’s power. Many of the functions that, elsewhere would be functions performed by a city are either a provincial or national competence. Looking at our metros’ revenues (their sources of income, adjusted for size are remarkably similar to each other), the following emerges. If only electricity mark-ups on Eskom-delivered power are included, then the largest source of revenue, by far, is property rates; second-largest is the electricity mark-up, third are transfers from the central government; fourth are water and sanitation charges; and fifth-largest is another central government transfer of the fuel levy for road construction/maintenance based on the amount of fuel (petrol/diesel) sold in the city concerned.

What does this all mean? The incentives are all wrong. The only tax they can raise and one on which they are heavily dependent is a property tax, not that different from a wealth tax. They would therefore be justifiably wary of interventions that would negatively impact on this wealth tax. At present, the only revenue item that might approximate an income tax is the surcharge on electricity sales but in the current system, they are disincentivised from introducing energy efficiency or to look at local generation options, hoping instead that they can maintain the margin of Eskom-delivered electricity. If the available revenues to construct and maintain roads are derived from the sale of fuel, then promoting private transport on these city roads over far more efficient public transport is what we get. Rail transport, or Metrorail is a national competence and it suffers from chronic under-investment while new roads for private transport are planned. What we have is unsustainable but there is little incentive to change to something else. Local government finds itself playing a maintenance game.

Allocations from central government are mostly unconditional. Cities get them on a calculation roughly based on population size. You don’t get more of it if you perform better as a city. So, if a particular city does anything to attract new investment or much needed new economic activity, the potential benefits of new income and its taxation benefit the country as a whole but leave little direct benefit for the city concerned.

If property taxes are the main source of revenue for cities, then property development favours greenfield type developments, often at the periphery of cities away from existing transport nodes which then perpetuates existing spatial patterns. If you struggle to understand why the City of Johannesburg would support the development of the exclusive gigantic scale property development known as Steyn City, these incentives might explain some of it.

Suppose for a moment that a South African city, acting in terms of a pro-poor democratic mandate, decides to densify and develop a low-income RDP housing project in a relatively affluent area. What happens once the new inhabitants move in? They come under pressure to sell to higher-income buyers also wanting to live in the area who can afford to pay a price which reflects the value of the RDP house based upon its location. The first sales of houses in the development trigger a new municipal property valuation for the rest of the development in terms of the Municipal Property Rates Act (national legislation) and the rates applicable to everyone in the development go up, forcing more poor people out.

Policing is another area. How regular policing is undertaken and where policing resources ought to be focused is a national function. Local and even provincial government has very little say over how this function is conducted. This became clear during the recent Khayelitsha Commission of Inquiry established by the Western Cape provincial government. Clearly, regular policing is best done at a city level. Instead, we have a situation where policing is organised nationally without reference to local government. The unintended consequence is the explosion of private security companies undertaking privatised policing in many areas of our cities.

One of the important drivers of economic development for port cities is, well, their ports. Yet these too are managed at a national level. Cape Town set an objective of becoming an oil and gas hub something that would play to its competitive advantages. But in an excellent paper entitled Understanding South Africa’s Poor Economic Performance, Professor Ricardo Hausmann says success would have required co-ordination and help from Transnet. Against the potential, the outcome has been disappointing. The problem lay in the lack of co-ordination between the national government and state-owned enterprises. He mentions that in spite of the best efforts of some of those involved, this co-ordination never emerged. If the same project had started in China, it would have been a huge industry today.

There are many other examples of failure. Each local government’s exclusive zoning rights, confirmed by the Constitution Court, have prevented an effective roll-out of fibre broadband networks. Critical reforms to the electricity distribution system have been stymied.

Most of the important functions performed by our cities are prescribed by national legislation and there is very little latitude. Even salaries of municipal workers, the largest cost of any city, are determined nationally. This means cities on the coast such as Cape Town or Durban lose their comparative advantage. The private sector knows this and pays people in Cape Town and Durban less than those in Johannesburg. Many of the functions monopolised by the Department of Trade and Industry could just as well be done at a metro level and introduce some competition between our cities and thereby improve the service levels for all South Africans. Competition between cities is one of the topics covered in an excellent paper on the future of African Cities published by the Brenthurst Foundation.

Most of these issues are in fact understood. The Treasury has a very capable team of local government specialists who run a number of projects such as the Cities Support Programme and try to get cities to develop built environment performance plans that can be rewarded with additional funding through an integrated urban development grant. Even this is hamstrung by functions that must be performed by national government.

If we are to reform the structure of government, we should start by acknowledging the right of large cities to plan, with the rest of government taking its cue from these plans. We could confer those powers already held by provinces to our metros and then go further and include some functions that are currently a national government competence to our metros as well. But if this is to be effective, the cities’ revenue model has to change and include a share of income generated within the city boundaries. If this were to occur, a number of additional opportunities present themselves. Instead of relying on current income and national government grants, cities could tap into the capital/debt markets and use long-term borrowing to support necessary capital investments in economic infrastructure.

None of this suggests abandoning rural areas and smaller towns. Rural areas with less capabilities and declining populations characterised, in the words of the National Development Plan, by “greater poverty and inequality than urban areas, with many households trapped in a vicious cycle of poverty” need a distinct economic strategy for the rural areas. This might require more involvement from national government or a strengthened provincial government. Greater scale would allow a province to procure qualified engineers, administrators and planners to service a collection of rural municipalities and better ensure that basic services are efficiently and effectively provided and remove the political capture of municipal budgets for personal gain which is rife in many rural municipalities.

As South Africa becomes an urbanised society, the ability of our large cities to respond and take advantage of the opportunity will determine the country’s future, socially economically and environmentally. Maybe engaging in proposals on changing our provincial set-up provides just the opening we need to change the way our large cities are run and give them a chance to succeed for the benefit of the country as a whole. DM

Photo: Early morning light catches rainway carriages as they wait for the Monday morning rush hour at the Johannesburg station, South Africa, 18 November 2007. EPA/KIM LUDBROOK.

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