pro rodu ductivity ctivity mod odel el Publ blic ic Se Sect - PowerPoint PPT Presentation

Tsh shwan wane e so soci cioec oeconomi onomic c ca capita ital l pro rodu ductivity ctivity mod odel el Publ blic ic Se Sect ctor or Eco cono nomists ists Fo Forum um 6 th th An Annual l Congre gress ss 24 24-26 26 Nove vember mber 2014 Shaakira ira Ka Karo roli lia Ch Chief f Eco cono nomis mist

Outline • Socioeconomic impact assessment rationale • Capex project selection • Methodology and definitions • Results: an overview of the TRT • Model limitations • Future capex assessments and model adjustments to be effected • Conclusion

Socioeconomic impact assessment rationale

Rationale As Tshwane Deciding upon the communities quantum A systematic Designed to assist continue to grow, associated with analysis of the government and the Executive and new developments socioeconomic communities in the Administration based on its effect of a making decisions are constantly envisaged impact proposed that promote long- challenged by the on the lives of development term sustainability. need to balance a citizens is a number of goals. challenge.

Rationale Requires both quantitative • For example, a proposed development may increase and qualitative assessments employment in the community and simultaneously of the impact of a proposed create demand for affordable housing. development. A quantitative measurement • A crucial component of any socioeconomic impact of such factors assessment • Economic growth effects, direct and indirect within the short and long-run, including a sectoral effect This study is a quantitative • Employment effects, direct and indirect within the short and long-run, including sectoral employment assessment considering the disaggregation following: • Capital productivity model – socioeconomic IRR • LSM analysis

Capex project selection

Capex project selection Magnitude and envisaged radical TRT spatially transformative effects Replacement, Upgrade, Allows the inclusion Construction of Waste of different sectors Water Treatment for evaluation Works Facilities Allows the inclusion Mamelodi and of different sectors Saulsville Hostels for evaluation

Associated capital expenditure per project Project Year 1 Year 2 Year 3 TRT R 867 571 000 R 800 000 000 R 812 300 000 Waste Water R 145 992 062 R 159 722 437 R 213 094 153 Hostels R 50 000 000 R 50 000 000 R 40 000 000

Methodology and definitions

Methodology and definitions • Social accounting matrix model • Relatively intuitive; input-output model – that’s its beauty • Very few assumptions • Describes the total impact on the City of Tshwane economy from an initial exogenous increase / shock • Input-output multipliers obtained from input-output tables capture the direct and indirect effects • Our analysis estimates the level of economic activity occurring because of the proposed (TRT) project • Localised for Tshwane using sector industry classification codes (SIC) • Structure of an economy by describing inter-industry relationships • Includes the latest data and will be updated on a yearly basis

Methodology and definitions • Rate which equates the NPV of the CAPEX to Socioeconomic IRR (se- the NPV of the wage income streams over different time horizons IRR): a real rate of • Socioeconomic discount rate • Above zero implies a positive se-IRR ; return, in other words, • IRR of an investment = discount rate at which: the NPV costs = NPV benefits • Considers the direct and Short run impact is per indirect economic year impact of actual construction activities • Considers the Long-run impact has permanent economic been constrained to impact of new economic five years activity

Results: an overview of the TRT

TRT Results: a brief overview Short-run Indicator Long-run Year 1 Year 2 Year 3 0.397%-0.439% 0.366%-0.405% 0.372%-0.411% 0.135% - GGP (% change per annum) 0.149% R 555 – R 613 R 1 636 – R 1 809 R 1 509 – R 1 667 R 1 532 – R 1 693 Rand Equivalent (R million) 2 851- 2 629 - 2 670 – 818 - 904 Total Employment 3151 2 951 2 906 Formal Employment 1911-2112 1762-1947 1789-1977 560-619 205-227 189-209 192-212 75-83 Highly Skilled 640-707 590-652 599-662 329-363 Skilled Semi-unskilled 1066-178 983-1086 988-1103 156-173 940-1039 867-959 881-873 257-284 Informal Employment 8.31% 8.31% 8.31% Socio-economic IRR Total socio-economic IRR 4.67%

Results: a brief overview Short run sectoral disaggregated growth effects on most impacted sectors 160 30 140 24 25 120 20 100 R millions % of Total 14 80 13 15 12 10 60 10 7 6 40 5 20 0 0 Mining and Petroleum Other non- Metals, metal Construction Business services Wholesale and quarrying [2] products, metallic mineral products, (contractors) [5] [83-88] retail trade [61- chemicals, rubber products [341- machinery and 63] and plastic [331- 342] equipment [351- 338] 359] Sectors Year 1 Year 2 Year 3 % of Total

Results: a brief overview Short-run employment effects, direct and indirect* 3500 3000 Number of jobs 2500 2000 1500 1000 500 0 Year 1 Year 2 Year 3 Level of Skill per Stage Total employment Formal employment Highly skilled Skilled Semi-unskilled Informal employment *Also available per affected sector

Results: a brief overview Long-run employment impact: most important sectors 900 800 700 186 600 Number of Jobs 81 500 185 400 30 300 200 60 8 14 16 297 55 58 100 17 11 0 1 86 85 4 0 13 9 13 0 7 7 6 3 4 2 5 2 20 17 14 19 0 Finance and Business services Community, social Transport and Wholesale and Petroleum Transport insurance [81-82] [83-88] and personal storage [71-74] retail trade [61-63] products, equipment [381- services [9] chemicals, rubber 387] and plastic [331- 338] Sectors Formal employment Highly skilled Skilled Semi-unskilled Informal employment

Results: a brief overview Capital efficiency estimation Calculates the se-IRR by treating the capital expenses and the The analysis takes full account of total wage income stemming the impact of inflation on both se-IRR distinct from an from the new employment the expenditure and the accounting IRR created by the TRT project, as potential increase in total wages negative and positive cash flows, over different time horizons. respectively.

Results: a brief overview Capital efficiency estimation • Accounts for deprecation on public sector capital assets, as reported by Lockwood (2010) • The return on capital (ROC) rate is the annual opportunity cost of capital rate, and is 8.5%. • This is consistent with the estimated cost of capital for the South African public sector of between 3% and 9%, as reported by Kantor (2013) • The inflation rate has been chosen as the upper value of the inflation target (IT) band of 3% to 6%, managed by the South African Reserve Bank (SARB) • Annual rate set equal to 6.0%.

Results: a brief overview Capital efficiency estimation Total wage effects per sector is estimated Calculated for the combined short-run and long-run impact of the TRT project Appraises capital efficiency by assessing the time-value of money spent and generated through the capital expenditure related to the TRT project and evaluates these flows at current (2013) Rands Combined short-run and long-run total socio-economic internal rate of return of the CAPEX related to the TRT project is 4.67% with the yearly impact above 8 percent. • It is important to again stress that this is a real rate of return

Results: a brief overview LSM indicative analysis An indicative comparative static analysis of the distributional impact of the (TRT) project on the citizens of Tshwane Reveals that the most new jobs will be created in the LSM1-4 income segmentation group over the duration of the project The LSM5-7 and LSM8-10 segments see a marginal increase in the number of additional households The CAPEX related to the TRT projects exhibits a strong redistributional impact in the local economy of Tshwane.

Results: a brief overview LSM indicative analysis 750000 700000 721221 717540 650000 600000 609042 609060 550000 500000 450000 400000 Baseline LSM 350000 TRT LSM 300000 250000 200000 150000 100000 +21.9% 50000 26207 31956 0 LSM 1-4 LSM 5-7 LSM 8-10

Model limitations

Model limitations Softer effects Positive externalities therefore a • For example, improved Negative Environmental mobility of the labour conservative externalities impact force, less time spent in traffic, TOD effects approach etc. Poor governance Accounting for • In an attempt to identify Inefficient Other hidden costs and quantify the leakages expenditure counterfactual ito “what could have been” • Monitoring and evaluation in the period following the implementation of the proposed project • Part of Phase 2