Business confidence hinges on fixing municipal failures

Business confidence will not improve until municipal service delivery does, even as reforms in electricity and logistics have taken root and the government has stable fiscal and monetary policy.

Citi South Africa economist Gina Schoeman Economist Gina Schoeman was speaking alongside the director-general of National Treasury, Duncan Pieterse, at The Money Summit in Sandton on Tuesday.

Schoeman said business confidence remained low despite reforms driven by Operation Vulindlela because municipal infrastructure was “deteriorating at a rapid rate”, which has almost offset some of the bigger improvements in the government’s efforts to tackle power and logistics weaknesses.

Pieterse said Operation Vulindlela, a joint initiative of the South African Presidency and Treasury designed to accelerate structural economic reforms and remove regulatory bottlenecks to growth, has been successful in reforming constraints to the economy.

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He said the government was trying to drive economic growth through “credible, sustainable fiscal policy that brings down interest rates, anchors the exchange rate, and reduces the cost of cash flow for businesses” through Operation Vulindlela.

The government has opened up the electricity market to private producers and begun to address challenges in ports and rail with a public-private partnership at the Durban container terminal.

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Credible fiscal policy

Pieterse also said that investor confidence was growing due to stable fiscal and monetary policy.

“We are seeing confidence, and I’ll explain why. We have a growing primary surplus where revenue is greater than non-interest expenditure, and we’ve just had the third year of a primary surplus.

“Mathematically, what a primary surplus does, all things being equal, is that it brings down the debt-to-GDP ratio, which is why our 10-year bond yields are, I think, lower than Mexico’s, which is an investment-grade local currency economy.

He said credible fiscal policy brings down the cost of capital and thus unlocks investment and sentiment confidence.

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Investor confidence starts with basic service delivery

However, Schoeman said that asset managers encounter the effects of municipal failures before they even make investment decisions, whether through potholes on their way to work or water and power outages at home.

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“What we need is basic service delivery improvement, but because of the success of Operation Vulindlela, people are looking at municipal delivery with more hope,” Schoeman said.  She said the failures made life challenging for small businesses.

Pieterse admitted there was a challenge of municipalities not investing enough on infrastructure, for example, a metro such as Ekurhuleni earning R11 billion in payments and reinvesting only R1 billion in water.

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Treasury had entered agreements to improve investment with municipalities.

Pieterse said that Treasury has created a corporate incentive with all the metros incentivising them to ring fence payments for rates from businesses and reinvest the money in infrastructure.

Schoeman said that people had the power to change municipal weakness by using their vote in the November local government elections.

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