Budget 2019 | ‘Send us’ – the long journey to Ramaphosa’s path of renewal

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Ian Matthews | Head of Business Development | Bravura | mail me |


The stakes have never been higher, and despite Minister Tito Mboweni’s always-jovial presence in parliament as he tabled Budget 2019, his words prepared us for the bitter medicine that must be swallowed before we can experience economic recovery.

President Ramaphosa demands that we are on a path of renewal. Mboweni shows us the narrow route along which we must travel…

The time is now for corporate South Africa to apply itself creatively; there are ample opportunities within grasp to enable a sustained economic expansion. Mboweni outlined key principles that can be viewed as the necessary sign posts directing us on our journey.  These include achieving a higher rate of economic growth, improved tax collection, management of government expenditure, reconfiguring State-Owned Enterprises (SOEs) and managing the public sector wage bill.

Mboweni has not lost sight of President Ramaphosa’s tasks that he outlined in his State of the Nation address earlier this month, and of particular relevance for the private sector is the role we can play in accelerating inclusive economic growth and creating jobs.

This has been the lynchpin of Ramaphosa’s plan for South Africa and one which government believes is strengthened by recent policy clarity that helps the local and international investment community regain some of its lost confidence. Mboweni has reiterated the R300 billion worth of pledges made at the Investment Conference last year as demonstrating a private sector ready to grasp opportunities that are presented.

Real incentives to drive growth

Government has – and continues to – put its money where its mouth is in terms of opening up channels that encourage local businesses to foster growth and job creation by making use of instruments and tools already in existence. Government’s commitment to leveraging existing mechanisms such as funding allocations and incentive schemes is to be applauded.

For example, the Employment Tax Incentive (ETI) was launched in 2014 by SARS to encourage employers to hire young job seekers. The scheme limits hiring costs by reducing the amount of PAYE owed by the employer without affecting the employees’ wages, thereby sharing to the cost of hiring young, inexperienced workers between employers and government. To date the fund has successfully supported 1.1 million young people. In light of this, government will be increasing the income eligibility thresholds. In 2018, government also extended the employment tax incentive by 10 years to February 2029.

Industrial businesses have also been incentivised through the allocation of around R19.8 billion. A total of R600 million has already gone to the clothing and textile competitiveness programme which will support 35,500 existing jobs, as well as hopefully creating 25,000 new jobs over the next three years.

Government’s commitment to enabling mid- and smaller enterprises to get a larger piece of the economic pie needs to be highlighted. The Jobs Fund, which is a vital complement to private sector job creation, was established in 2011. Through its government co-finances public, private and non-governmental organisation projects that can significantly contribute to job creation. At the time an amount of R9 billion was set aside. To date the fund has disbursed R4.6 billion in grant funding and created well over 200,000 jobs since inception.  The fund allocation is set to rise over the next three years to R1.1 billion.

Additionally, an amount of R481.6 million has been allocated to the Small Enterprise Development Agency (SEDA) to expand the small business incubation programme. This was initially a three-year programme designed to strengthen technology commercialisation and harness the entrepreneurship of the technology community in South Africa.

While government has been criticised for inaction around the debate of land ownership, it continues to support the private sector investments in agriculture by emerging farmers. R1.8 billion is allocated for the implementation of 262 priority land-reform projects over the next three years. And a total of R3.7 billion has been set aside to assist emerging farmers seeking to acquire land to farm. As well as this, the Land Bank is committed to supporting smallholders, and leverage partnerships with other financial institutions, with a disbursement target of R3 billion in the next fiscal year.

Opportunities in the Infrastructure Fund

The infrastructure fund is a central pillar of the Budget and of reprioritisation. Government is partnering with the private sector, development finance institutions and multilateral development banks to create this infrastructure fund. The fund will increase the number of blended-finance projects to enhance oversight, improve the speed and quality of spending, and reduce costs in public infrastructure.

The fund will draw on global expertise to strengthen project preparation and implementation. Discussions are already under way with the DBSA, the World Bank and the New Development Bank. Over the next three years, general government infrastructure investment plans amount to R526 billion. Work is under way to support some existing projects and programmes with blended finance. Government will seek out private-sector skills in the design, construction and operation of key projects.

In several instances the private sector will design, build and operate key infrastructure assets and government will additionally commit at least R100 billion over the next decade.

This is where public private partnerships (PPPs) have, and will continue to be critical. There is a huge potential for the project pipeline to be expanded and new players to be brought into the supply chain.

Government has spent an estimated R3 trillion on infrastructure since 1998/99 and allocated R864.9 billion to spend in this area over the medium-term period. However, infrastructure budgets have come under pressure over the past several years due to lower economic growth and a shift in spending towards consumption priorities, and government cannot meet growing infrastructure demands on its own.

PPP projects account for R17.3 billion, or 2% of the total public-sector infrastructure budget estimate and are an effective way for the public and private sectors to work together to deliver much-needed infrastructure.

Despite this being a sound model in use across the globe, I would caution that in the South African context management is critical to ensuring that the model is successfully implemented. South Africa’s e-toll debacle has soured the notion of PPPs for many people, and others fear that it leads to privatisation of national projects. But in fact, all PPPs must go through regulatory tests to check compliance with the regulation before they are implemented, which assess value for money, affordability and risk transfer.

Government acknowledges that clear information about these projects must be shared with the public, and along with a streamlined supporting regulatory framework, will add to the model’s feasibility.

Not ignoring the challenges

Opportunity must be balanced with sobering reality to understand the enormity of the task that is ahead of us.

Government still faces a budget deficit of R243 billion in 2018/10. And South Africa’s stubborn unemployment rate sits at 27.1%, which does not compare well to South Africa’s emerging market BRICS peers (such as Brazil at 12.3%, India at 3.5%, China at 3.9%, Russia at 4.7% and Mexico at 3.5%.)

In addition, the World Bank ranks South Africa as one of the most unequal societies in the world – with 50% of the poorest households currently earning only 8% of total household income, while 10% of the wealthiest account for about 55%. Since 2014, the average economic growth is just 1.1% per annum, whilst the population grows at about 1.6% a year. This means that the average South African has become poorer over the last five years.

Private-sector job creation remains the only sustainable way to reduce unemployment. Labour relations have improved, but employment outcomes depend on a prolonged rise in confidence and investment. Since 2015, the private sector’s contribution to job creation has fallen.

Clawing our way forward

During the recent Public-Private Growth Initiative (PPGI), government and business leaders expressed their confidence that a higher growth trajectory for the South African economy could be within reach between now and 2023, with investment of at least R500 billion achievable in specific economic sectors.

The PPGI believes growth of 5% and more is possible, provided certain enablers for the economy are realised, and key inhibitors are eliminated. Using a sector growth-drive model that requires government and business to work at a sectoral level rather than a national level to develop a growth plan, this could become a workable joint effort to pull the country from the low-growth, high unemployment trap it is stuck in. It is initiatives such as this which approach problems differently that may give rise to fresh solutions.

In conclusion

In his budget speech, Mboweni said that we need to free our entrepreneurs from stifling regulations and complicated taxes. He said that narrow nationalism often leads to stagnation and cited successful economies that have found immigrants to be a source of dynamism.

If South Africa is to grasp new models to propel inclusive growth, now more than ever we need to develop new ways of thinking.


 

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