Investing in KwaZulu-Natal

In the 2019 edition of the Global Competitiveness Report published by the World Economic Forum, South Africa was ranked the 60 most competitive nation in the world out of 141 countries, a considerable improvement from being ranked 67th in the 2018. The report consists of 98 variables which are further classified into twelve pillars with the most salient including: institutions, infrastructure, ICT adoption, macroeconomic stability, business dynamism, health, skills, product market, labour market, financial system, market size and innovation capability.

South Africa performed well in terms of  domestic credit to private sector where it was ranked 10^th in the world, in terms of the financial systems where it was ranked 19^th, in terms of checks and balances where it was ranked 16^th and in terms of stability where it was ranked 32^nd. Encouragingly, it improved to its best ranking of 46^th in the category of intellectual property protection thereby sending good signals to investors and in and in the cost of starting a business where it was ranked 4^th.

The graph below shows South Africa’s competitiveness rank over time, from 2011 to 2019 (without the outlier year of 2020 underpinned by the COVID-19 pandemic). The figure shows the that the country’s best performance was recorded in 2016, with a ranking of 49.

KZN’s Trade and Investment Climate

The World Bank Group also releases a global and country-specific Doing Business Report on an annual basis. The report gathers detailed and objective data on 11 areas of business regulation, helping governments across the globe diagnose issues in administrative procedures in order to provide remedy. It measures complex regulatory processes in various countries and provides a comparison over time and across economies, also highlighting areas of reforms and improvements.

The 11 areas of the life of a business covered by the report include:

• starting a business;
• dealing with construction permits;
• getting electricity;
• registering property;
• getting credit;
• protecting minority investors;
• paying taxes;
• trading across borders;
• enforcing contracts;
• resolving insolvency; and
• labour market regulation (excluded in the rankings).

The inner loop of the image below provides a vivid display and understanding of what factors are considered in determining ‘Doing Business’ drivers.

South Africa was ranked 82^nd out of 190 countries by the World Bank Group’s 2019 Doing Business Report. The best ranked country was New Zealand followed by Singapore. South Africa country performed best in the areas of ‘protecting minority investors’ (23/190), ‘paying taxes’ (46/190), ‘resolving insolvency’ (66/190), and ‘getting credit’ (73/190). The country’s worst performing areas were ‘trading across borders’ (143/190), ‘starting a business’ (134/190) and ‘enforcing contracts’ (115/190). Although progress has been made in starting a business and getting electricity since 2018, it is concerning in light of this Strategy that South Africa continues to underperform in the area of trading across borders with non-tariff barriers (NTBs) issues including border and documentary compliance being cause for concern. This is an area that requires major national support as this will continue to hinder both exports and investment. Moreover, NTBs have the potential to constrict gains made by South African companies which are currently trading under various trade agreements, including the African Continental Free Trade Area Agreement.

Overall, South Africa had a positive score change of +1.37 in 2019 from 2018.

The country’s strengths lie in its outstanding performances in financial market development, the accountability of private institutions and the effectiveness of its competition policies. There was recorded improvement in the ease of doing business starting a business (procedures) sub-category, where South Africa was ranked 7^th. This is encouraging and can be attributed to the consequence of the introduction of the new Companies Act, which included the simplification of the company registration procedure. Other sub-categories with improvements include getting electricity, procedures (ranked 5^th), and debt of credit information and paying taxes (ranked 7^th respectively).

Within the Doing Business in South Africa report, the World Bank Group compares the major South African Municipalities in relation to five key variables, namely, dealing with permits, getting electricity, registering property, enforcing contacts and trading across borders. The table below provides a summary of the main findings of the 2018 report (excluding trading across borders, which is done separately).

Both eThekwini and Msunduzi fare well in dealing with construction permits (ranked 2^nd and 3^rd  respectively out of 9) and in enforcing contracts (ranked 4^th and 2^nd respectively out of 9). eThekwini was also ranked 2^nd  in getting electricity, while Msunduzi was ranked 8^th. Both eThekwini and Msunduzi require significant work in improving their rankings for registering property, which are 8^th and 9^th ninth respectively. This is largely due to delays in obtaining rates clearance certificates, with the total time in days for transferring a property in Msunduzi being 63, which is double Ekurhuleni (33 days), while eThekwini was 48 days. The best performing city was Nelson Mandela Bay with 20 days to register a property.

Global GDP was estimated by the International Monetary Fund to have contracted by -3.1% in 2020 and is forecasted to rebound to 5.9% for 2021 and 4.9% for 2022. Emerging economies are estimated to have contracted by -2.1% in 2020 but are forecasted to grow to 6.4% in 2020 and 5.1% in 2022. China and India are expected to rebound to healthy growth levels of over 8.0% and 9.5% respectively in 2021 with growth expected to correspondingly normalise in 2022 at 5.6% and 8.5%. South Africa’s GDP is estimated to have declined by -6.4% in 2020 but is forecasted to grow at 5.0% in 2021 and at 2.2%% in 2022, far lower than the average Sub-Saharan rate of above 3.8%.

KwaZulu-Natal is the second largest productive province in South Africa with a gross value added (GVA) at basic prices of R716,673 million in 2019, which accounts for roughly 16% of South Africa’s total GVA. On average, KZN’s GVA grew at a rate of 5.51% from 2015-2019, which is 0.29% lower than South Africa’s average annual growth over the same period. The economies of the Western Cape and Gauteng all grew at a higher average annual growth rate over the 2015-2019 period, at 5.82%, and 5.89% respectively.

In terms of trading across borders, the study compares four main ports in South African by measuring the time and cost associated with the logistical process of exporting and importing goods. Documentary compliance at the border takes 68 hours and costs US$55 an hour. Border compliance takes 92 hours in the Port of Durban and costs US$1257 on average for exports. This is in line with the South African average in terms of border compliance time (94 hours) but is double the cost. In fact, the cost of export border compliance in Durban is greater than any other port in comparison, and greater than Sub-Saharan and BRICS ports. Overall, the Port of Durban is the lowest ranking port in South Africa.

KZN possesses a strong value proposition which is both beneficial to potential investors and exports alike. The value proposition below is drawn from the various KZN entities such a Trade and Investment KZN, Dube TradePort, and Richards Bay IDZ, and was tested thoroughly during the sector workshops and other stakeholder engagements. The value proposition includes:

• Large labour force with varied skill level;
• Excellent transport infrastructure – two ports, an international airport and national roads;
• Access to markets, especially African markets;
• Large youth population;
• Large, entrenched industries with strong value chains;
• A good quality of life, including an ideal climate, diverse culture, and natural endowments;
• Available land at a competitive price; and
• Natural resource endowments.

A resilient economy with strong growth potential.

Comparative Advantage

The sectors in which KZN has an economic advantage are tabulated below, along with their location quotient and the district in which those sectors are most prevalent. Only the districts with the highest location quotients have been included.

Table 1: KZN sectoral economic advantage, measured using the location quotient, 2017

Source: Lumec calculations based on Quantec, 2018