Cave Klapwijk and Associates.

Transcription

1 Cave Klapwijk and Associates. Macroeconomic Assessment of the N3: Keeversfontein to Warden (De Beers Pass Section) Final Report 11 February 2014 Conningarth Economists PO Box 75818, Lynnwood Ridge 0040, Pretoria, South Africa Tel: +27 (0) Fax: +27 (0) i

2 Executive Summary Conningarth Economists was appointed by the N3 EIA team to conduct a Macroeconomic Assessment of the NATIONAL ROAD 3: KEEVERSFONTEIN TO WARDEN (De Beers Pass Route - DBPR) on the National Economy. A preliminary Transport Economic Analysis (HDM-4 Analysis Techworld) has indicated that the proposed DBPR will have substantial positive financial benefits for the road users in terms of savings in vehicle operating costs, travel time savings and savings due to a reduction in road accidents. The objective of this study is to translate the money values of these cost savings for road-users into macroeconomic impacts on the national economy, i.e. additional economic growth, creation of job opportunities, boosting of general tax revenues and the impact on poverty alleviation. It is important to note that the N3 is entrenched as a national economic asset in the sense that its importance lies mainly with enhancing the performance of the national economy rather than with the local economy (although the latter impact is not underrated by any means). The following alternative route alignments included in this study are listed in the table below: 1. De Beers Pass Route (Base Case) - DBPR 2. Alternative A 3. Alternative AC 4. Alternative C A partial general equilibrium model based on the National Social Accounting Matrix is used to calculate the impacts of the DBPR on the South African Economy. The overall methodology adopted consists of two steps, firstly translating the (net) economic benefits of the DBPR into an increase in real savings in the national economy, providing funds to finance an increase in new fixed investments. Secondly, to use the macroeconomic model in order to determine the corresponding effects of the increased investments in terms of additional production activities as well as employment throughout the national economy. For a large part the data and critical assumptions required by the macroeconomic impact model were sourced from the Cost Benefit Analysis undertaken by Techworld Consulting Engineers. The following table contains a summary of the input data utilised in the macroeconomic impact analysis. ii

3 Alternative Route Alignments Total Capital Investment Net Consumer Surplus/Loss (Net Present Value) Savings/Dissaving s for Reinvestment/Disinvestment purposes R millions (Constant, 2013 Prices) De Beers Pass Route (Base Case) - DBPR Alternative A Alternative AC Alternative C As shown in the table above, only the DBPR is expected to make a profound positive contribution to economic growth and development in South Africa through the creation of a consumer surplus. Consequently, only this alternative s impact on the economy is investigated further in detail. The following table reflects the calculated increase in average annual contributions over the project time period. GDP amounts to R4 415 million and the employment opportunities created and sustained amounts to The total impacts on lowincome households is not insignificant, with an annual amount of R474 million, translated to 16.5% of the total impact on households income. This is due to the construction and hospitality industries that generally employ relatively low skilled people. Macroeconomic Aggregates on GDP (R millions) on Employment [numbers] on Households (R millions) Low Income Households (R millions) Medium Income Households (R millions) High Income Households (R millions) Fiscal (R millions) Total Prices are constant 2013 prices Although the DBPR would require the government (national, provincial and local government) to invest a substantial amount, it is important to note that substantial amounts of tax revenue will in-turn flow back to the government. Total additional government revenue is expected to amount to approximately R1 408 million per annum. The main tax revenue types are direct taxes and indirect taxes, where direct taxes consist mainly of personal income tax and company tax. Examples of indirect taxes are Value Added Tax (VAT) and customs and excise taxes. iii

4 The efficiency of this investment expenditure, in terms of its utilisation of scarce productive resources, is calculated using standardized efficiency criteria, viz. the GDP/Capital ratio and Labour/Capital ratio. The efficiency ratios for GDP and employment, in the table below, show that capital is less efficiently utilised in the DBPR application compared to an alternative average project in South Africa. However, when it s compared to the efficiency ratios of infrastructure producing sectors, such as Electricity; Gas and Water; and Transport, Storage and Communication, then it compares much more favourable and in some cases even better. The somewhat subdued GDP and labour efficiency ratios should be viewed against the background that it is a typical infrastructural investment that is very capital intensive but is indispensable to securing the South African economy s long-term growth potential. In terms of the income distribution effect, its performance is in line with the economy s average. GDP/Capital Ratio Labour/Capital Ratio Low-Income Households/Total Households Ratio Total DBPR Project % Electricity, Gas and Water % Transport, Storage and Communication % Total National Economy % The table below indicates that the most beneficial outcome for the South African economy would be to proceed with the DBPR base case as opposed to the listed alternatives. The three alternative route alignments would, on a net basis, not contribute to economic growth nor towards new jobs created on the scale the DBPR would. iv

5 Net Present Value (NPV) [R millions] on GDP [R millions] on Employment [numbers] Social Indicators Additional Educators [numbers] Additional beds serviced Additional doctors [numbers] Additional houses [numbers per annum] Effectiveness Criteria GDP/Capital Ratio Labour Capital Ratio Low Income Household / Total Household Ratio De Beers Pass Route (Base Case) Total Value Total Value Alternative A Alternative AC Alternative C *Marginal *% Change Total Value *Marginal *% Change Total Value *Marginal *% Change % % % % % % % % % % % % % % % % % % % % % % % % % % % [16.5%] [16.4%] % [16.5%] 0 0% [16.5%] 0 0% Prices are constant 2013 prices. * The marginal impact and % change for each Alternative is measured in relation to the Base Case. The reason why the alternative route alignments are reflecting relatively insignificant and negatively impacting on the GDP and employment is that the Net Present Values (NPVs) of these alternative route alignments are negative as reflected in the table above. This implies that the possibilities are high that if the same amount of investment earmarked for these alternative projects is made in other infrastructural projects e.g. a road or a power line in another area of South Africa, the contribution to the South African economy would be positive. Put another way, if either one of the alternative route alignments is allowed to proceed, it means that other, more deserving projects in the National economy would be shut out due to the shortage of investment capital in this country. v

6 Table of Contents 1. INTRODUCTION OBJECTIVE AND STUDY SCOPE METHODOLOGY OF THE MACROECONOMIC IMPACT ANALYSIS Calculating the Magnitude of Savings for Re-investment Macroeconomic Modelling Framework Converting the Social Accounting Matrix into an Model DATA AND ASSUMPTIONS MACROECONOMIC IMPACT ANALYSIS RESULTS Introduction Macroeconomic of the DBPR on the Economy of South Africa Sectoral of the DBPR Measuring the Economic Efficiency and Effectiveness of Capital Investments Dedicated to the DBPR Comparison of the DBPR National economic impacts with that of the Alternative Route Alignments CONCLUSIONS APPENDIX A: SOCIAL ACCOUNTING MATRIX The Social Accounting Matrix Application of a SAM APPENDIX B: MAGNITUDE OF LINKAGES Direct s Indirect s Induced s APPENDIX C: MACROECONOMIC AGGREGATES on Gross Domestic Product (GDP) on Capital Utilisation on Employment Creation on Household Income Fiscal Effectiveness Criteria...24 vi

7 List of Figures, Graphs and Tables Figure 1: Locality map showing the proposed route alignments...3 Graph 1: Sectoral GDP on the National Economy...12 Graph 2: Sectoral Employment on the National Economy...12 Table 1: Alternative Route Alignments...2 Table 2: Input data for the Macroeconomic Analysis....8 Table 3: Macroeconomic of the DBPR on average per annum over the project period on the National Economy (Constant 2013 prices)...9 Table 4: Effectiveness Criteria of the DBPR on the National Economy...14 Table 5: National Macroeconomic of the DBPR Alternative Route Alignments in terms of GDP and Employment (Constant 2013 prices)...15 vii

8 1. INTRODUCTION Conningarth Economists was appointed by the N3 EIA team to conduct a Macroeconomic Assessment of the NATIONAL ROAD 3: KEEVERSFONTEIN TO WARDEN (De Beers Pass Route - DBPR) on the National Economy. The objective of the report is to enable the client to configure a trade-off between the national economic impact and the local economic impact. The impact on the local economy may be positive or negative. It is important to note that on a regional basis the economic impact is not forfeited, but only diverted to other areas along the N3. Furthermore, the N3 will still pass through the same local municipality s area of jurisdiction, although on a different route. The local economic impact of the DBPR has been well researched. The Harrismith Highway Group commissioned a study by Urban-Econ Development Economists in 2008 to determine the economic impact assessment of the DBPR on the local economy. A desk-top study was also prepared for the N3TC by WJ Pienaar of the University of Stellenbosch titled Regional Economic Evaluation of the proposed De Beers Pass Route Project. DEMACON was also appointed to undertake a study on the impacts on the local economy titled Harrismith Economic Assessment. Until this study the economic impact on the national economy has not been analysed on the same level of detail as the local economic impact. However, the preliminary Transport Economic Analysis (HDM-4 Analysis Techworld) has already indicated that the proposed DBPR will have substantial positive financial benefits for the road users in terms of savings in vehicle operating costs, travel time savings and savings due to a reduction in road accidents. The money values of these cost saving impacts however have not yet been translated into macroeconomic impacts on the national economy, such as additional economic growth, creation of job opportunities, boosting of general tax revenues and the impact on poverty alleviation. It is important to note that the N3 is entrenched as a national economic asset in the sense that its importance lies mainly with enhancing the performance of the national economy rather than with the local economy (although the latter impact is not underrated by any means). 1

9 2. OBJECTIVE AND STUDY SCOPE The main objective of the study is to quantify (determine) the macroeconomic impact of the DBPR on the national economy. The negative impact that the DBPR will probably have on the local economy, specifically the town of Harrismith and its immediate surrounding areas, should not be ignored, but rather weighed up against the positive national macroeconomic impacts to arrive at a balanced view. In order to arrive at an optimum assessment of the net macroeconomic impact of the DBPR on the South African Economy, it will be necessary to weigh up the local impacts of the Demacon study and the national impacts calculated by Conningarth Economists in this study. It is important to note that not only the Base Case option was analysed but also the alternative route alignments. The analysis was done separately for the DBPR base case as well as for each of the three (3) alternative route alignments. The following alternative route alignments included in this study are listed in Table 1 and depicted in Figure 1: Table 1: Alternative Route Alignments 1. De Beers Pass Route (Base Case) - DBPR 2. Alternative A 3. Alternative AC 4. Alternative C 2

10 Figure 1: Locality map showing the proposed route alignments 3

11 A description of each route alignment is provided below. De Beers Pass Route (Base Case) - DBPR The DBPR runs from Keeversfontein (Tugela Toll Plaza) via the De Beers Pass area to Warden. The route branches off the current N3 just north of the Tugela Toll Plaza. The route reaches the top of the KwaZulu-Natal escarpment where it passes through a tunnel approximately 500m in length and then goes around the top edge of a gorge before entering the Free State. A wetland associated with the Wilge River is crossed and the alignment then follows a route close to the Wilge River before the road climbs to the more even plateau of the Free State Highveld. The Wilge, Meul and Cornelis Rivers are crossed before the DBPR re-joins the existing N3 just north of Warden, where a Toll Plaza is proposed. The total length of this route is approximately 97, 7 km. Alternative A This route up the escarpment begins just north of the Tugela Toll Plaza and runs for a short distance almost parallel to and east of the existing N3 Van Reenen s Pass. The route then follows the landform ridges and reaches the crest of the escarpment through a saddle immediately south of Van Reenen Village. Just north of Van Reenen village an interchange will connect with the existing N3. The route continues in a north westerly direction to intersect the N3 in the Swinburne area. The route then deviates to the north and connects with the existing N3 at an interchange before continuing across the slopes of Platberg Mountain to an interchange north of Harrismith near 42nd Hill. From this point the route will closely follow the existing N3 to Warden, where a Toll Plaza is proposed. The Wilge River is crossed at Swinburne and the Meul and Cornelis Rivers will be crossed at the same points they are crossed by the existing N3. The detailed design will determine to which side the existing road is to be widened. The total length of this route is approximately 107 km. Alternative AC This Alternative is a combination of Alternative A and Alternative C. Alternative AC incorporates the new Van Reenen s Pass as described in Alternative A, together with the existing alignment of the National Road 3 between Keeversfontein (Tugela Plaza) and Warden. The upgrade is to comply with the existing National Highway Standards as in Alternative C. Alternative C The existing alignment of the National Road 3 between Keeversfontein (Tugela Plaza) and Warden will be upgraded to comply with the existing National Highway Standards. 4

12 3. METHODOLOGY OF THE MACROECONOMIC IMPACT ANALYSIS This section discusses the methodology used to estimate the macroeconomic impact of the DBPR on the national economy. A partial general equilibrium model based on the National Social Accounting Matrix was used to calculate the impacts of the DBPR on the South African Economy (A more detailed technical description of the Social Accounting Matrix and its analytical attributes is given in Appendix A). The overall methodology will be discussed in two steps: firstly how the benefits of the DBPR are translated into real savings in the economy leading to further investment, and secondly by making use of macroeconomic modelling, how the corresponding effects of the increased investment will culminate into additional production activities as well as employment in the national economy. 3.1 Calculating the Magnitude of Savings for Re-investment Considerable benefits to be derived from investment in roads will be consumer savings through a decrease in vehicle operating costs, decrease in accidents and associated time savings. These benefits will be achieved by all the road users of the new infrastructure. These savings are usually regarded as a reflection of an increase in the efficiency of the commercial operations in the economy as a result of the provision of the new infrastructure. In economic terms, such increases in overall efficiency (also referred to as the economic surplus ) lead to increases in businesses operating surpluses which will produce additional savings and investments by all the role players in the economy. This phenomenon is also referred to as the efficiency (or productivity) investment impact of a capital infrastructure project. Classical economic theory dictates that, under a free market economic system with reigning of perfect competition conditions, equilibrium will always be achieved in the capital market through an appropriate real interest rate that will equate savings and investments. Given this theoretical point of departure, the logical approach to measuring the impact on the economy via efficiency improvements is to; firstly, determine the magnitude of the total consumer surplus involved. Once this has been achieved, the next step is to translate this total consumer surplus into the additional savings amount resulting from the new infrastructure. Due to the fact that according to the classic economic theory, these additional savings are equal to a corresponding future investment. Although the real savings are generated in a specific sphere of the economy (the road users) these investments will occur in all the sectors of the economy which present an opportunity. In order to calculate the macroeconomic impact of this anticipated investment the following assumption was made: Gross savings as a percentage of gross operating surplus is calculated at 48.43% in the fourth quarter of (Calculated from the Quarterly Bulletin of the South African Reserve Bank, December 2013: Table S-128 [Non-financial Corporations]). This percentage represents the gross surplus ratio of the non-financial corporations in the economy. The reason why this specific institution, viz. non- 1 Calculated from the Quarterly Bulletin of the South African Reserve Bank, December 2013: Table S-128 (Non-financial Corporations). 5

13 financial corporations, was used is that it will mainly benefit from the new road infrastructure. The gross surplus ratio is applied to the total consumer surplus, which was calculated in the Cost Benefit Analysis (CBA), in order to obtain the real savings in the economy and the corresponding investment. It is important to note that not all the consumer surplus leads to real savings in the economy. Some of the consumer surplus finds its way to final consumption expenditure by households, government taxes and foreign transfers. The macroeconomic impact is analysed on a detailed sectoral basis which necessitates the apportionment of the contents of this total investment in the detail sectors of the economy as required by the modelling system. An important assumption was made that the additional savings in the economy will be re-invested in the economy in the same sectoral proportions as is currently demonstrated by actual total gross fixed investment data. For instance if currently 10% of gross fixed investment is invested in the Coal Mining industry then 10% of additional savings in the economy will be destined for the Coal Mining industry. 3.2 Macroeconomic Modelling Framework The main purpose of this portion of the study is to describe the macroeconomic modelling framework that was used to calculate the national impacts. These impacts were measured in terms of the contribution of the DBPR towards the following macroeconomic aggregates of the national economy: Gross Domestic Product (Economic Growth); Capital Utilisation (Investment); Employment Creation split into: - Skilled Labourers; - Semi-Skilled Labourers; and - Unskilled Labourers; Household Income (Poverty Alleviation in terms of Low Income Households), and; Fiscal s. The above mentioned macroeconomic aggregates are defined in Appendix C. By using a partial general equilibrium economic impact model, with the Social Accounting Matrix (SAM) of South Africa as basis, the direct, indirect and induced effects on the economy emanating from the various development stages are quantified (See Appendix A). Readers are advised to take specific cognisance of the differentiation between direct, indirect and induced economic impacts which is described in Appendix B. The indirect effect takes into account the ripple effects through the economy due to the purchase of intermediate products and services. The induced effect highlights the impact that the economy will experience from the buying of consumer products and services due to the additional salaries, wages and profits that will be paid into the economy. 6

14 Apart from the additional activity that goes hand in hand with the re-investment of the savings, the macroeconomic model will also calculate the impact of the construction phase of the DBPR. It is important to note that the construction phase stimuli will only be applicable for the duration of the construction period. The impact analysis will be conducted on two levels. Firstly, the quantified impacts of a number of well-known economic aggregates referred to above will be expressed in terms of changes in absolute and percentage terms. Secondly, these changes will be employed to calculate the so-called performance indicators, i.e. putting the impacts in a more realistic perspective concerning its contribution to a number of defined socio-economic objectives. 3.3 Converting the Social Accounting Matrix into an Model A SAM serves a dual purpose. Firstly, it is a reflection of the magnitude of economic and financial linkages that exist between the major stakeholders in an economy, and secondly, it can be converted into a powerful econometric tool that can be used to conduct various economic analyses such as calculating the impact of investment projects on various parts of the economy. (A more detailed technical description of the SAM and its analytical attributes are provided in Appendix A.) The national and provincial SAM s compiled by Conningarth Economists were converted into user-friendly macroeconomic impact models which can be used by each province to calculate the economic impact that interventions have by way of programmes and projects, on the economy of the relevant province and South Africa. The compilation of the updated South African SAM was part of a major initiative by the Development Bank of Southern Africa (DBSA), Department of Provincial and Local Government (DPLG), StatsSA, National Treasury and the South African Reserve Bank (SARB) to compile nine comparable provincial SAMs. 7

15 4. DATA AND ASSUMPTIONS The data and assumptions used in this study were taken from a Cost Benefit Analysis undertaken by Techworld Consulting Engineers. The following table provides a brief summary of the input data utilised in the macroeconomic impact analysis. Table 2: Input data for the Macroeconomic Analysis. Alternative Route Alignments De Beers Pass Route (Base Case) - DBPR Alternative A Alternative AC Alternative C Total Capital Investment Net Consumer Surplus/Loss (Net Present Value) Savings/Dissaving s for Reinvestment/Disinvestment purposes R millions (Constant, 2013 Prices)

16 5. MACROECONOMIC IMPACT ANALYSIS RESULTS 5.1 Introduction This section of the report signifies a comprehensive macroeconomic impact of the DBPR on the South African economy via various economic aggregates. The first section focuses on the impact of the base case scenario, i.e. De Beers Pass Route (DBPR), which is about 14km shorter than the existing N3 route. In the second section the impacts of this base case will be compared to the impacts of the three alternative route alignments. 5.2 Macroeconomic of the DBPR on the Economy of South Africa The tables below show the macroeconomic impacts on the Gross Domestic Product, Capital Utilisation, Employment, Income Distribution and Fiscal for South Africa. The macroeconomic impact is presented as average annual values over the project time period and not the start or end values of the project s lifespan period. It, therefore, indicates that the impact will happen every year (year-on-year). Table 3: Macroeconomic of the DBPR on average per annum over the project period on the National Economy (Constant 2013 prices) Macroeconomic Aggregates Direct Indirect Induced Total on GDP (R millions) on Capital Formation (R millions) on Employment [numbers] Skilled impact on employment [numbers] Semi-skilled impact on employment [numbers] Unskilled impact on employment [numbers] on Households (R millions) Low Income Households (R millions) Medium Income Households (R millions) High Income Households (R millions) Fiscal (R millions) National Government (R millions) Provincial Government (R millions) Local Government (R millions)

17 In the discussions below the salient features of the macroeconomic impact on the South African economy (see table 3) are expressed in terms of GDP, Capital Utilisation, and Employment creation, income distribution in terms of the impact on Households and the Fiscal impact resulting from the DBPR. on Gross Domestic Product (GDP) GDP is a good indicator of economic growth and welfare as it contains amongst other factors, the remuneration of employees and gross operating surplus (profits) representing the value added at all the levels of the national economy. According to Table 3 the total impact on the South African GDP per annum over the period is estimated at R4 415 million (in constant, 2013 prices), which translates to approximately 0.14% of the total national GDP of South Africa. on Capital Utilization Productive capital assets are required to support or generate any given amount of economic activity (i.e. GDP). These capital assets, together with labour and entrepreneurship, form the core productive factors needed for production. Obviously the effectiveness and efficiency with which these factors are combined will determine the overall level of productivity and profitability of such assets. The aforementioned will in turn depend on a whole array of factors, of which the appropriate technology and skills content of the labour force are important. Table 3 indicates the following: R million in the form of capital stock is required within the national economy to sustain the increase in the level of GDP within the country attributed to the DBPR over the project period. on Employment Creation Labour inputs form the key input into the production process. Labour is one of the main production factors in any economy and absolute and relative employment levels are indicators of the extent to which labour is effectively absorbed in the economy. As indicated previously, capital together with labour and entrepreneurship form the primary productive factors needed for production enhancement within the economy. The manpower requirements (man years), in terms of workers employed over the period influenced by the DBPR are as shown in Table 3 above. From the table above it can therefore be seen that as a result of putting the DBPR in operation, jobs should be sustained in South Africa annually over the period. This employment impact represents 0.28% of the total employment in South Africa. on Households (Poverty Alleviation) One of the crucial aspects of any macroeconomic impact assessment in South Africa is determining whether it has a positive impact on poverty alleviation. The extent to which poverty alleviation is in fact achieved through the DBPR is 10

18 measured by means of its impact on household incomes, specifically to what extent the low-income households will benefit. The impact on low-income households is presented in Table 3. It is evident that the total impact on low-income households nationally will be R474 million annually over the relevant time period, which translates to 16.5% of the total impact on households income nationally. Fiscal and Assumed Social s According to Table 3, the total annual increase in national government revenue is expected to be R1 408 million. The main tax revenues are direct taxes and indirect taxes, where direct tax consists mainly of personal income tax and company tax. Examples of indirect taxes are Value Added Tax (VAT) as well as customs and excise taxes. The increase in VAT is the result of additional household spending made possible by the increase in household incomes resulting from the increase in employment and the resulting increases in salaries and wages facilitated by the DBPR. As shown above, the occurrence of the DBPR produces increased economic activities, from which the national government derives additional revenue. The annual increase in state revenue could provide the means to increase government expenditure on social services. This is discussed in more detail further on in the document Sectoral of the DBPR The sectoral impact analysis measures the nature and magnitude of the DBPR on all economic sectors in the national economy such as the agricultural sector, mining, manufacturing, etc. The graphs below show the impact in terms of GDP and employment for the 9 main sectors in the economy. These graphs reflect how the GDP and employment in each sector is impacted upon by production activities that flow from the DBPR. 11

19 Graph 1: Sectoral GDP on the National Economy Community services 16% Agriculture 3% GDP Mining 4% Manufacturing 18% Financial & business services 29% Electricity & water 3% Construction 4% Transport & communication 8% Trade & accommodation 15% Graph 2: Sectoral Employment on the National Economy Community services 15% Labour Agriculture 12% Mining 2% Financial & business services 15% Manufacturing 14% Transport & communication 5% Trade & accommodation 28% Construction 8% Electricity & water 1% In its totality, the DBPR impact on the national economy reflects the weighted average of all the sub-sectors within the nine (9) main economic sectors combined. It is also important to note that the relevant GDP impact coefficients provide for import leakages from overseas. The sectoral impacts, therefore, only reflect the impacts on the domestic production of the supply sectors in terms of GDP in South Africa. 12

20 As seen from the above two graphs, the Financial & Business Services sector, in terms of GDP benefits the most from the DBPR and in terms of additional employment it is the Trade and Accommodation sector which should benefit the most. All the other sectors obviously also benefit from this project due to improved productivity that the new route will provide its users Measuring the Economic Efficiency and Effectiveness of Capital Investments Dedicated to the DBPR In order to provide some indication of the effectiveness and efficiency with which the DBPR employs scarce productive resources, it is necessary to compare its performance with other sectors in the economy. The question is then asked viz. what the returns would have been had the same amount of capital been invested elsewhere. The table below provides a number of standardized criteria that are used to compare the efficiency of a similar investment in each of the different economic sectors. The following efficiency ratios used are: A GDP/Capital ratio, which measures the additional GDP that could be generated from the investment of R1 of capital in the various economic sectors. A Labour/Capital ratio, which measures the number of additional employment opportunities that can be created from the investment of R1 in capital in the various sectors. A Low-Income Households/Total Households ratio, which measures the proportion of total income to households, which flows to low-income households. The data in the following table indicates that one unit of capital investment made in the DBPR within the national context is less efficiently utilised than the average for the national economy, both as far as the creation of GDP and employment opportunities are concerned, but equals the impact on low-income households. The GDP and labour effectiveness outcomes should be viewed against the background that this project is of a typical infrastructural nature which is very capital intensive, however, it is indispensable to securing the South African economy s long-term growth potential. In the case of low-income households, it is shown that 16.5% of the labour remuneration generated by the project in its entirety will go to these households compared to the 16.2% average for the entire country. This proves that the DBPR in fact is on par with the average performances in the economy. 13

21 Table 4: Effectiveness Criteria of the DBPR on the National Economy GDP/Capital Ratio Labour Capital Ratio Low Income Households/Total Households Ratio of the DBPR on the Total South African Economy % in the event that a similar amount invested in the DBPR, is invested in the main sectors of the total RSA economy Agriculture, Hunting, Forestry and Fishing % Mining and Quarrying % Manufacturing % Electricity, Gas and Water % Construction % Wholesale and Retail Trade % Transport, Storage and Communication % Financial, Insurance, Real Estate and Business Services % Community, Social and Personal Services % Total National Economy % 5.3 Comparison of the DBPR National economic impacts with that of the Alternative Route Alignments The table below contains a comparison of the national macroeconomic impacts in terms of GDP and employment between DBPR and alternative route alignments. 14

22 Table 5: National Macroeconomic of the DBPR Alternative Route Alignments in terms of GDP and Employment (Constant 2013 prices) Net Present Value (NPV) [R millions] on GDP (R millions) on Employment [numbers] Social Indicators Additional Educators [numbers] Additional beds serviced Additional doctors [numbers] Additional houses [numbers per annum] Effectiveness Criteria GDP/Capital Ratio Labour Capital Ratio Low Income Household / Total Household Ratio De Beers Pass Route (Base Case) Total Value Total Value Alternative A Alternative AC Alternative C *Marginal *% Change Total Value *Marginal *% Change Total Value *Marginal *% Change % % % % % % % % % % % % % % % % % % % % % % % % % % % [16.5%] [16.4%] % [16.5%] 0 0% [16.5%] 0 0% * The marginal impact and % change for each Alternative is measured in relation to the Base Case. From the above table, it is important to note that the most beneficial outcome for the South African economy is to proceed with the DBPR. Investment in two of the three alternative route alignments would actually show a negative return causing a depressing effect on economic growth as well as a loss in potential jobs created. This implies that if the same investment amount destined for either of these two alternative route alignments is invested elsewhere in the South African economy in similar infrastructural projects, the return on such investments would be positive. This also means that if either of the alternative route alignments is allowed to proceed, then other more deserving projects in the National economy would be shut out. The impact deviations, as shown in the above table, could also be interpreted as the difference between the economic impacts of potentially more deserving investments that are now eliminated due to the investment in any one of the 15

23 alternative route alignments. This usually happens because South Africa is experiencing a shortage of capital for investment purposes. Using the latest information on the functional distribution of government spending on social services, table 5 also reflects an estimate of how the state can expand its services in regards to social expenditure. When conducting these types of projections, it is important to note that, for example, the total cost for government to employ an additional teacher account must also be taken of not only the educator's total remuneration package, but also all the other costs related to supporting the educator standing in front of a class (i.e. furniture, books, school buildings, administrative support, etc.). Thus, total government expenditure on education is divided between the total numbers of educators employed. The figures reflected above thus make provision for all direct and indirect costs associated with each of the social services researched. 16

24 6. CONCLUSIONS The DBPR is expected to make a positive contribution to economic growth and development in South Africa. It is calculated that its annual contribution, over the project time period amounts to R4 415 million, and also the employment opportunities created and sustained amounts to The total impact on lowincome households is not insignificant, with an annual amount of R474 million, which translates to 16.5% of the total impact on households income. This is due to the construction and hospitality industries that generally employ relatively low skilled people. Although the DBPR would require the government (national, provincial and local government) a substantial amount of supporting investments, it is important to note that substantial amounts of tax revenues will in-turn flow back to the government. Total government revenue is expected to increase annually by approximately R1 537 million. The main tax revenues are direct taxes and indirect taxes, where direct tax consists mainly of personal income tax and company tax. Examples of indirect taxes are Value Added Tax (VAT) and customs and excise taxes. It is foreseen that with this additional revenue derived from the DBPR, the government is put in a position to provide the following social services: Social Services Numbers No of additional educators No of additional beds serviced 907 No of additional doctors 79 No of additional houses 928 It should, however, also be noted that when measuring the efficiency of the capital expenditure in DBPR using standardized efficiency criteria, such as the GDP/Capital ratio and Labour/Capital ratio, it is found that capital is not as efficiently utilised compared with the so-called average project in South Africa. The lower levels of capital utilisation must be viewed against the background of the fact that this is a typical infrastructural project which is very capital intensive but serves as a pre-condition to the achievement of the country s long-term economic growth potential. In terms of the income distribution it should be noted that it equals the national average. The empirical results are given in the following table: GDP/Capital Ratio Labour/Capital Ratio Low-Income Households/Total Households Ratio Total DBPR Project % Electricity, Gas and Water % Transport, Storage and Communication % Total National Economy % 17

25 The alternative route alignments reflect relatively insignificant and negative impacts on the national GDP and employment aggregates due to the negative Net Present Values (NPV s) that these alternative route alignments have produced. This implies that the returns on the investment amounts designated for either of these alternative route alignments, would most probably be much higher (and positive) in other infrastructural applications elsewhere in the South African economy. Furthermore, if either one of the alternative route alignments is allowed to proceed, it would mean that other more deserving projects in the national economy would have to be shelved or discarded because of the endemic shortage of investment capital in South Africa. 18

26 7. APPENDIX A: SOCIAL ACCOUNTING MATRIX 7.1 The Social Accounting Matrix A Social Accounting Matrix (SAM) is a comprehensive, economy-wide database, which contains information on the flow of resources that take place between the different economic agents that exist within an economy (i.e. business enterprises, households, government, etc.) during a given period of time usually one calendar year. When economic agents in an economy are involved in transactions, financial resources change hands. The SAM provides a complete database of all transactions that take place between these agents in a given period, thereby presenting a snapshot of the structure of the economy for that time period. As a system for organising information, a SAM presents a powerful tool in terms of which the economy can be described in a complete and consistent way: Complete in the sense that it provides a comprehensive accounting of all economic transactions for the entity being represented (i.e. country, region/province, city, etc.), and Consistent in that all incomes and expenditures are matched. Consequently, a SAM can provide a unifying structure within which the statistical authorities can compile and present the national accounts. Like the traditional Input-Output Table, the SAM reflects the inter-sectoral linkages in terms of sales and purchases of goods and services, as well as the remuneration of production factors that forms the essence of any economy s functioning. What is also of importance is that a SAM reflects the economic related activities of households in some detail. Households are responsible for decisions that have a direct and indirect effect on important economic variables such as private consumption expenditures and savings. These economic aggregates are important drivers of the economic growth processes and ultimately the creation of employment opportunities and wealth. Private consumption expenditure, for example, comprises approximately 60% of total gross final domestic spending in the economy. By combining households into meaningful categories, such as a range of income levels, the impact on these households welfare of a changing economic environment is made possible by the SAM. It is clear from the above that because of the intrinsic characteristics of the SAM, once compiled, it renders itself as a useful tool for analytical purposes. Especially, based on the mathematical traits of the matrix notations that describe its structure, a SAM can be transformed into a powerful econometric tool/model. For example, the model can be used to quantify the probable impact on the economy of a new infrastructural project such as a new power station both the construction phase and the operational phase will be modelled. Thus apart from serving as an extension to a country s National Accounts, the SAM in its model form opens up many opportunities for the economic analyst to conduct rigorous policy and other impact analyses for the purpose of ensuring optimal benefit to the stakeholders concerned. 19

27 7.2 Application of a SAM The development of the SAM is very significant as it provides a framework within the context of the International System of National Accounts (SNA) in which the activities of all economic agents are accentuated and prominently distinguished. By combining these agents into meaningful groups, the SAM makes it possible to clearly distinguish between groups, to research the effects of interaction between groups, and to measure the economic welfare of each group. There are two key reasons for compiling a SAM: Firstly, a SAM provides a framework for organising information about the economic and social structure of a particular geographical entity (i.e. a country, region or province) for a particular time period (usually one calendar year), and Secondly, to provide a database that can be used by a number of different macroeconomic modelling tools for evaluating the impact of different economic decisions and/or economic development programmes. Because the SAM is a comprehensive, disaggregated, consistent, and complete data system of economic entities that captures the interdependence that exists within a socio-economic system, it can be used as a conceptual framework for exploring the impact of exogenous changes in such variables as exports, certain categories of government expenditure, and investment on the entire interdependent socio-economic system. In this regard, there exist sophisticated macro-econometric models, such as the Computable General Equilibrium models (CGEs). The SAM, because of its finer disaggregation of private household expenditure into relatively homogenous socio-economic categories that are recognisable for policy purposes, has been used to explore issues related to income distribution. The SAM s main contribution in the field of economic policy planning and impact analysis is divided into two categories: As a Primary Source of Economic Information As a detailed and integrated national and regional accounting framework consistent with officially published socio-economic data, a SAM instantly projects a picture of the nature of a country or region s economy. It lends itself to both descriptive and structural analysis. As a Planning Tool Due to its mathematical/statistical underpinnings it can be transformed into a macro-econometric model that can be used to: Conduct economic forecasting exercises/scenario building. Conduct economic impact analysis both for policy adjustments at a national and provincial level and for large project evaluation. Conduct self-sufficiency analysis i.e. gap analysis to determine, with the help of the inter industry and commodity flows contained in the provincial SAM, where possible investment opportunities exist, and 20

28 Calculate the inflationary impacts on provincial level of price changes instigated at national level (i.e. administered prices, VAT, etc.). To summarise, the SAM mechanism provides a universally acceptable framework within which the economic impact of development projects and policy adjustments can be reviewed and assessed at both national and provincial/regional levels. It serves as an extension to the official National Accounts of a country s economy and, therefore, provides a wealth of additional information, especially when disaggregated to more detailed levels. 21

29 8. APPENDIX B: MAGNITUDE OF LINKAGES Formally, economists distinguish between direct, indirect and induced economic effects. Indirect and induced effects are sometimes collectively called secondary effects. The total economic impact is the sum of direct, indirect and induced effects within a region. Any of these impacts may be measured in terms of gross output or sales, income, employment or value added. 8.1 Direct s The direct impacts refer to the effect of the activities that take place within an industry. It refers to the income and expenditure that is associated with the everyday operation of each of the components of the industry. For instance if a factory is taken as an example the direct impacts refer to the total production/turnover of the factory; the intermediate goods bought by the factory; the salaries and wages paid by the factory; the profits generated by the factory. 8.2 Indirect s The indirect impacts refer to economic activities that arise in the sectors that provide inputs to the industry and other backward linked industries. For example, if the primary agriculture sector uses fertilizer, the indirect impacts refer to the activity (paying of salaries and wages; and profit generation) that occurs in the fertilizer sector as well as the sectors that provide materials to the fertilizer sector. 8.3 Induced s Induced impacts refer, inter alia, to the economic impacts that result from the payment of salaries and wages to people who are (directly) employed at the various stages an industry. In addition the induced impact also includes the salaries and wages paid by businesses operating in the sectors indirectly linked to the industry through the supply of inputs. These additional salaries and wages lead to an increased demand for various consumable goods that need to be supplied by other sectors of the economy that then have to raise their productions in tandem with the demand for their products and services. These induced impacts can then be expressed in terms of their contributions to GDP, employment creation and investment or other useful macroeconomic variables. Added together, the direct, indirect and induced impacts provide the total impact that an industry will have on the national and provincial economies. 22

30 9. APPENDIX C: MACROECONOMIC AGGREGATES analysis will be based on a number of standard economic parameters and the results will be presented under the following headings: Standard Macro- Economic Performance Criteria on Gross Domestic Product (GDP) on Capital Utilization on Employment Creation on Households Fiscal Social Low Income Households Medium Income Households High Income Households National Government Provincial Government Local Government Effectiveness Criteria Utilization of Scarce Capital Utilization of Labour Resources The following is a brief overview of the definition of each of these economic parameters. 9.1 on Gross Domestic Product (GDP) The impact on GDP reflects the magnitude of the values added to the Building and Construction industry from activities within the industry. Value added is made up of three elements, namely: Remuneration of employees, Gross operating surplus (which includes profit and depreciation), and Net indirect taxes 9.2 on Capital Utilisation For an economy to operate at a specific level of activity, investment in capital assets (i.e. buildings, machinery, equipment, etc.) is needed. Capital, together with labour and entrepreneurship, are the basic factors needed for production in an economy. The effectiveness and efficiency with which these factors are combined influence the overall level of productivity/profitability processes, bearing in mind that 23