1. ECONOMIC IMPACT OF INFRASTRUCTURE EXPENDITURE IN THE RURAL AREAS Public Sector Economists Forum November 2011 Protea Kruger Gate Hotel

2. CONTENTS Purpose & Scope Criteria for Rural/Urban Classification
Provincial Government Infrastructure Expenditure in Rural Municipal Areas
Economic Impact of Provincial Government Infrastructure Expenditure in Rural Municipal Areas
Challenges & Recommendations

3. PURPOSE & SCOPE
A core function of Provincial Treasury is to provide economic and social research and analysis that informs the fiscal policy development and the annual budget process.
According to the 2007/2008 report of the Portfolio Committee on Finance (Mpumalanga), the Economic Analysis Unit should assess the impact that government’s services-delivery has on the lives of the citizens of this province on a continuous basis.
Main objective of the study was to quantify the economic impact of provincial government infrastructure expenditure in rural areas of the Mpumalanga Province, in line with MTSF priorities.
Scope of study –
Theoretical framework/study
Rural development in Mpumalanga
Assessment of provincial government infrastructure spending in the rural areas
Economic impact of provincial government infrastructure spending in the rural areas - SAM
Challenges & recommendations
Data challenges of study

4. CRITERIA FOR CLASSIFICATION OF RURAL
Defining rural areas has been contentious both nationally & internationally
No standard national or international definition - therefore no commonly accepted criteria to be used when attempting to classify an area as rural
International benchmarks: North American & European countries define rural areas as 400 people per km2 BUT for Australia 200 people per km2
StatsSA - reliance on one criterion for classification is insufficient & ineffective
StatsSA suggest looking at the following three broad areas:
Economic criteria Contribution to economic activity
Demographic indicators Population density
Urban characteristics Classification of town size
Finance & service provider agreed on the use of economic contribution, population density, town classification & COGTA classification as the four classification criteria

5. CRITERIA FOR CLASSIFICATION OF RURAL
HOMT – Higher Order Medium-sized Town
HOST – Higher Order Small-sized town
LOMT – Lower Order Medium-sized Town *
The town classification measure was developed by the CSIR and is provided within their Geospatial Analysis Platform developed in In using this classification, local municipalities that contained only very small villages were classified as rural for this criterion.

6. INFRASTRUCTURE SPENDING IN THE RURAL AREAS
Total infrastructure expenditure in Mpumalanga was R2.2 billion in 2009/10, amounting to 2.1% of provincial GVA
Mpumalanga has the second lowest per capita spending on infrastructure relative to the other provinces, amounting to a mere R590 in 2009/10. Gauteng the highest per capita infrastructure spend at R1 197
It should be noted, though, that per capita spending on infrastructure has increased by just under 220% since 2006/07

7. INFRASTRUCTURE SPENDING IN THE RURAL AREAS
Infrastructure expenditure by department, Mpumalanga, 2007/ /10

8. INFRASTRUCTURE SPENDING IN THE RURAL AREAS
Infrastructure expenditure as a share of total expenditure by Department, Mpumalanga, 2009/10

9. INFRASTRUCTURE SPENDING IN THE RURAL AREAS
Department of Public Works, Roads and Transport
Department of Health
Department of Education
Total infrastructure spending: R928 million in 2009/10 (35% of budget)
Rural share of infrastructure spending declined from 75% in 2006/07 to 41% in 2009/10
Rural share of infrastructure spending averaging 60% between 2006/07 and 2009/10
A large share of infrastructure spending in this department can be attributed to projects that include road upgrades, storm water drainage and design of coal haulage routes
Total infrastructure spending: R526 million in 2009/10 (10% of budget)
Spent a relatively small share of its infrastructure budget in rural municipalities – averaging 37% between 2006/07 and 2009/10
Increase in infrastructure budget over review period
The increase can be linked to the “Trisano” campaign, which was launched in 2009 with the aim of bringing integrated health services to rural areas
Total infrastructure spending: R379 million in 2009/10 (4% of budget)
Between 2006/07 and 2009/10, an average of 75% of this department’s infrastructure budget was spent in rural areas
Most infrastructure spending is concentrated on the upgrading of school buildings, with the main beneficiaries of the 2009/10 year being Nzunza Mabhoko, Nalithuba and Mtimandze Secondary Schools

10. INFRASTRUCTURE SPENDING IN THE RURAL AREAS
DARDLA – Share of its infrastructure spending in rural municipal areas averaging 70% between 2006/7 and 2009/10
Culture, Sports & Recreation – Averaging just less than 50% between 2007/8 and 2009/10
Human Settlements – Averaging almost 60% between 2006/7 and 2009/10
Social Development – Averaging 75% between 2007/8 and 2009/10

11. ECONOMIC IMPACT OF RURAL INFRASTRUCTURE SPENDING
Methodology – Social Accounting Matrix (SAM) for the province to model the economic impact
SAM is a tool that sets out the framework for the structure of the economy
It maps out the transactions that occur between different institutions within the economy & captures the full circular flow of the economy
Multiplier analysis (developed by Leontief) to assess the impact of a change in one variable on the rest of the economy – in our case we look at the effect on the provincial and national economy
It enables us to quantify the direct, indirect and induced impacts of expenditure within the economy

12. ECONOMIC IMPACT OF RURAL INFRASTRUCTURE SPENDING
E.g. building a hospital
Construction businesses will undertake additional business activity
Increase in the number of people it employs and the goods and services it demands in order to build and equip the hospital
Additional people employed have more income to spend on consumption, to save – therefore more income & indirect tax
Businesses that supply construction businesses also have an increase in demand for their goods and services
Increased business activity leads to increased corporate tax

13. ECONOMIC IMPACT OF RURAL INFRASTRUCTURE SPENDING
Data
Primary data source – IRM database
DARDLA & DPWRT inconsistency in data between different reporting forms – data from budget statements used. IRM database used to inform rural-urban split
Department of Human Settlements – data directly from department

14. ECONOMIC IMPACT OF RURAL INFRASTRUCTURE SPENDING
Region
 Indicator
Capex and Opex (R million)
2006
2007
2008
2009
Total
Mpumalanga
Initial expenditure
R 637
R 849
R 997
R 835
R3 318
Total impact on output
R 743
R 977
R 1 169
R 1 002
R 3 891
Total employment impact*
2 030
2 641
3 392
2 980
11 043
Total tax revenue
R 264
R 348
R 409
R 349
R 1369
South Africa
Economy wide impact
R 1 324
R 1 743
R 2 086
R 1 786
R 6 940
Economy wide employment*
3 461
4 526
5 658
4 922
18 567
Total impact on output was R3.9 billion, R1.4 billion in tax revenue & in person years of employment created
Rural infrastructure spending has a multiplier of approximately 1.17
For each R1 of rural infrastructure expenditure, total output impact was R1.17
Lower than those generated for the SA economy at 1.28 and 1.36 (multipliers for 2 different SA infrastructure mixes)

15. ECONOMIC IMPACT OF RURAL INFRASTRUCTURE SPENDING
Indicator
Agriculture (06/07-09/10)
Culture (07/08-09/10)
Education (06/07-09/10)
Health (06/07-09/10)
Human Settlements (06/07-09/10)
Public Works (06/07-09/10)
Social Development (07/08-09/10)
Total
Total expenditure (R-million)
R132
R35
R848
R273
R11
R1 979
R41
R3 319
Total impact of expenditure (R-million)
R171
R42
R1 025
R371
R14
R2 220
R48
R3 891
Expenditure multiplier
1.30
1.20
1.21
1.36
1.27
1.12
1.17
Total employment impact
427
157
4 003
876 36
5 332
212
11 043
Departments of Health, Agriculture and Human Settlements had largest multipliers - largest impact on the economy for each rand spent vs DPWRT lowest
Numerous and complex linkages of these departments with other sectors of the economy - these departments may rely on more resources and inputs from other sectors than DPWRT
DPWRT had highest impact on job creation – responsible for 50% of jobs created

16. CHALLENGES & RECOMMENDATIONS
Classifying local municipalities (rural and urban) was a significant challenge in undertaking the study – importance of guidance from National Government, especially Statistics South Africa
The project illustrated a clear development gap between urban and rural municipal areas in Mpumalanga – the importance of continued & accelerated infrastructure spending in the rural areas of the province – interventions in the rural areas (especially CRDP areas)
Infrastructure data challenges – implementation of IRM must continue and the importance of cross-checking data

17. CHALLENGES & RECOMMENDATIONS
Departments must make sure their infrastructure spending is in line with national & provincial policy regarding rural development (i.e. CRDP)
The study’s findings must inform Departmental plans & budgets regarding infrastructure spending and rural development – the budget is an important tool for growth and development!
The importance & relevance of economic impact assessment for policy & budget purposes
The importance of future impact studies by Finance and Sector Departments – regarding the CRDP areas etc

18. Thank you