PETER ATTARD MONTALTO: Just energy transition will add to interprovincial competition

Some interesting things have happened since 2019, driven no doubt by the strange underlying forces of economics as opposed to anything more sinister.

There has been a flight of several restaurants from Cape Town to Johannesburg. Indeed, some seem to be charging more now than they were in the past despite the view that Cape Town is so often the more expensive place to be. Quality is as good if not better.

Similarly, the hotel sector in Cape Town seems to be taking a little longer to bounce back than Johannesburg.  

Johannesburg has benefited from a less volatile economy, being much less reliant on tourism, while Cape Town saw a sudden stop in about a third of its economy during the height of Covid-19.

Now that tourism is bouncing back surprisingly quickly, we will no doubt get a healthy pickup in restaurant competition between the two major hubs.

The idea of interprovincial or intermetro competition is remarkably underappreciated and little discussed in SA — even by economic policy panjandrums. Obviously, they want to keep up with whatever anyone else is doing on infrastructure or similar. But the idea of cut-throat competition is not really there. We seem to be happy to think that SA could find a path towards productivity and growth through exports and export competitiveness. Yet the idea this could happen domestically is underappreciated as a friendly and fruitful form of development pathway.

The issue will become increasingly important for a range of reasons — in particular related to the just energy transition.

As metros move at different speeds to secure their own electricity (eThekwini maybe marginally pipping Cape Town and Johannesburg a little further behind, with others barely out of the blocks), so businesses and households will naturally be attracted to them. The internal migration flows — already ongoing based on simple drivers such as service delivery — will be important to watch, and with it the changes required to town planning, social and employment support and the risks to social stability if these cannot be met. Thinking through the circular problem of successful municipal generation procurement attracting more electricity demand and so the need for yet more procurement is an interesting — good — problem to think on.

Similarly with production of hydrogen as a future industry — where its production takes off fastest in SA in a rapidly emerging global market will be important. Photovoltaic assembly plant construction is meant to be directed towards Mpumalanga to absorb coal-related job losses. However, its far from obvious why it should be based here versus Johannesburg or Cape Town (which, after all, has an existing green special economic zone). The competitive propositions of each of these potential locations will be important to inspect. Mpumalanga may well require (and indeed is likely to get access to) cheaper financing or other support to skew the eventual choice for public policy reasons.

Prices have traditionally adjusted as a result of movements of people and demand for property and so on, however in future prices could well be a cause if we start to think about differential climate change outcomes affecting insurance prices or insurance availability and the same lens applied to insurance from a social unrest perspective too. Start adding on top of that a differentiate view between a larger number of provinces and metros based on where service delivery happens and things start to become very interesting.

Risks and opportunities

Businesses are just starting to think about these kinds of risks and opportunities in a more structured way, and as boards interact more with them, we may well start getting more interesting choices and outcomes.

Municipal risks bend slightly as domestic immigration happens, but not quickly. Those without power procured from independent producers will see sharp reductions in income from electricity provided through legacy distribution networks. However, central government grants will still be a major source of income until the equitable share process cycles through updates and funds get cut.

A key political economy trend of the past five years — a timely observation, of course, as we move towards the ANC elective conference in December — is that taps have been turned off. This has happened at a moderate degree at state-owned enterprises, as metros have been lost from control and some municipalities have transferred too. This will be an additional pressure.

Some interesting solutions could be found to support such shifting risks. Fiscal funding flows will increasingly have to follow individuals through processes such as health and school vouchers. Capital market structures like insurance risk bonds can also smooth the process to some degree, but probably only by delaying the inevitable.

The larger point here is that all this should be eminently plannable change. It requires some innovation and some forethought, but nothing here is not being researched somewhere, either in academia or within some places in better provinces. The recent “shock” from policymakers at the climate issues behind the floods is a good place to generate some collective focus perhaps on these issues towards some solutions.

July 2021 taught us that subnational narratives and differentiation will become increasingly important. Insights and research is there but will have to deepen and broaden to catch up with this shift in importance. Debt markets will catch up when such trends are increasingly important for the fiscus and so ratings.

For now, watch where the restaurants compete.

• Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.