Budget 2017: All you need to know in Financial Mail's special report

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financialmail.co.za February 23 - March 1, 2017

contents

special report budget 2017

The Times

Pic credit Here

OVERVIEW 4 The Big Picture 7 Credit Ratings 8 Analysing the Speech 10 Politics 12 Market Reaction 14 Budget Transparency 15 Preparing a Budget OPINION 16 Get Set for Change 19 A Secret 2% Growth Jab 23 Caught in a Debt Trap 29 Make Your Own Budget 33 Pre-empting Disruption

37 Africa Growth Search 42 Unite to Drive Growth REVENUE 17 Revenue Collection 20 Personal Taxes 20 Sin Taxes 21 Transfer Duties 22 Corporate Tax 24 Wealth Tax POLICY 25 State-owned Enterprises 28 Pensions 28 Small Business

SPENDING 30 Health 31 Provinces 32 Tourism 34 Education 35 Infrastructure 36 Social Welfare 38 Defence, Public Order & Safety 38 Human Settlements 39 Rural Development 40 Telecommunications 41 Energy

Cover: Vuyo Singiswa

special report BUDGET 2017 — THE BIG PICTURE

Praise for Pravin, but things are looking bleak for the economy 4

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budget 2017 Only faster economic growth can take the pressure off SA’s strained public finances and overburdened taxpayers Claire Bisseker bissekerc@fm.co.za

ý SA’s lethargic growth rate has placed immense pressure on the country’s public finances, resulting in a R30bn revenue shortfall that has forced treasury to double down on measures to curb the build-up of debt.

The past year is the first since 2009/2010 that tax revenues have not kept pace with economic growth. This has created a huge hole in the budget and cast a cloud over the future pace of revenue collection.

But such is the esteem in which finance minister Pravin Gordhan is held that he received a standing ovation before and after delivering his budget speech in parliament.

Praise even came from opposite sides of the ideological divide. Julius Malema’s EFF loved Gordhan’s message of economic transformation, while the rating agencies were comforted by the budget’s adherence to fiscal discipline.

But all the cheering should not distract from the fact that the 2017 budget reveals just how fiscally constrained SA has become. Most alarming is that the buoyancy of tax revenue (its responsiveness to economic growth) has nosedived over the past year — and it appears that treasury is unsure why.

To accommodate the revenue slowdown — SA’s steepest decline since the global financial crisis — the expenditure ceiling will be reduced by R26bn over the next two fiscal years while taxes will be raised by R28bn in 2017/2018.

Since these adjustments were announced in the October medium-term budget policy statement, there are no new shocks for the markets to digest from the budget, other than the form that the new tax measures will take.

This includes the creation of a new top personal income tax bracket of 45% for taxable incomes over R1.5m/year, very little relief for fiscal drag, and an increase in the dividend withholding tax rate from 15% to 20%.

Investec Asset Management’s Nazmeera Moola says as there were only 75,000 individuals earning above R1.5m in 2015, this measure is likely to raise only about R4.4bn for the fiscus. Treasury’s official documents put this number slightly higher, at 103,000 people. Either way, with the base small at the high end of income distribution, the room for further tax hikes is very small.

By contrast, the “limited adjustment” for bracket creep will rake in an additional R12.1bn.

“The upshot is that every single income taxpayer is affected and paying the price of SA’s slow growth and inefficient

expenditure,” says Moola. “This will certainly constrain consumption growth in 2017.”

The Budget Review concedes that continuing to raise the personal income tax burden could have negative consequences for growth and investment. It also appears to prepare the ground for a Vat hike down the line.

“If growth does not accelerate over the medium term, it may be necessary to adjust consumption taxes,” the Budget Review says.

“The least economically damaging means of doing so would be to increase the Vat rate, which is low by global standards.”

As ever, the budget hangs together because it assumes an automatic upswing in economic growth in the future.

Treasury has not changed its forecast that economic growth will recover from about 0.5% in 2016 to 1.3% this year, 2% in 2018 and 2.2% in 2019. This is only slightly more optimistic than the prevailing Reuters consensus.

But even with faster growth and projected fiscal consolidation of R154bn (from 2015/2016 to 2018/2019), treasury hasn’t been able to avoid a small amount of fiscal slippage.

The consolidated budget deficit is still intended to come in at -3.4% of GDP in the 2016/2017 fiscal year, as announced in October, narrowing to -3.1% next year. But net loan debt will now stabilise at 48.2% in 2020/2021 – a year later, and 0.3 of a percentage point higher than before.

The goal of achieving a primary surplus has also been pushed out a year to 2018/2019. In general, when the primary balance (revenue minus noninterest spending) is in surplus, the debt-to-GDP ratio can be expected to fall.

Moola says: “While there will be some disappointment in the revenue slippage and increased issuance, we believe the budget should be enough to retain SA’s credit rating through June 2017 — provided there are no major personnel changes at the finance department and that growth continues to improve as forecast.”

Michael Sachs, head of treasury’s budget office, stresses that SA’s underlying fiscal fundamentals have steadily improved. For a start, the primary deficit halves as a share of GDP in the current year, and will even move into surplus over the medium term.

This improvement in the primary deficit is a clear statement of intent, says Sanlam Investment economist Arthur Kamp. “It is also a remarkable achievement in a low-growth environment with an excessive unemployment rate and rising demands on state resources.” But Kamp points out that an ideal, lasting fiscal adjustment is one where a government cuts consumption spending, boosts infrastructure investment and limits tax increases to taxes on consumption.

“We’re not doing any of that,” he says. “If you increase the dividend withholding tax, you reduce the return on savings and, in an economy with a dearth of savings, ➦

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budget 2017 overview

R30bn is the size of the gap in Gordhan's budget

you frustrate growth.”

North-West University Business School economist Raymond Parsons makes a similar point, arguing that about two-thirds of the fiscal consolidation appears to be coming from tax measures and only a third from spending restraint.

Parsons warns that unless renewed growth boosts tax revenues, a more aggressive tax policy could ultimately prove self-defeating.

Of course, part of the problem is that the SA Revenue Service (Sars) has fallen far short of its collection targets.

Gordhan admitted during a prebudget press briefing — from which Sars commissioner Tom Moyane was notably absent — that he was worried about the shape of revenue collection.

Gordhan said he had met Sars senior executives four times in recent weeks to discuss tax administration. While the lack of trust between Gordhan and Moyane is a matter of public record, the feud hasn’t appeared to affect revenue collection — until now.

The Budget Review states explicitly that given rising public concerns about corruption, wastage and inefficiencies in service delivery, citizens’ willingness to contribute tax can’t be taken for granted.

Responding to speculation that either he or his deputy, Mcebisi Jonas, may soon be replaced, Gordhan said: “It is in the interests of a generation of South Africans to come that you don’t mess with the national treasury and Sars.

“It can take many years to build a solid institution, but it takes very little time to mess it up.”

Asked to comment on the possibility of Brian Molefe, the disgraced former CEO of Eskom, as a potential replacement, Jonas said “political deployments that fly against all rational thinking” had complicated the task of growing the economy.

Besides the heightened uncertainty around revenue collection, the Budget Review cites several other risks to SA’s OVERALL public finances. These include: % of GDP ● Policy changes made without consider80 ation of the budgetary consequences, like those related to higher education; ● Infrastructure projects that are poorly 60 designed and not effectively delivered; ● Financial imbalances related to water and electricity charges; 40 ● The public-sector wage bill increasingly crowding out other areas of spending; ● The risks posed by mismanaged state 20 companies; and ● Rising debt service costs.

0 Debt service costs will climb from 2005-06 R146bn now to R197bn by 2019/2020.

These costs remain the fastest-growing item in the budget, diverting critical

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resources from frontline services. In fact, for every R1 collected in tax, 13c must be diverted to service debt.

To rein in debt and accommodate new priorities, such as higher education, large adjustments have been made to spending plans.

National, provincial and local government must together take a combined haircut of R18.4bn, or 0.4%, off baseline budgets over the medium term.

But after the deaths of more than 100 psychiatric patients as a result of cost-cutting by the Gauteng health department, treasury is painfully aware of the budget execution risks as it expects departments to make do with less.

“As much as we believe there’s waste and inefficiency that can be corrected in response to pressure, that doesn’t mean that wrong decisions won’t be made,” says Sachs.

“If they plan with care, they can avoid seriously compromising service delivery. But if they are rash and determined to protect the wrong things, they can make mistakes.”

With the system under immense pressure, SA’s fiscal position will not improve significantly unless growth can be reignited beyond 2%.

SA needs to develop “a national obsession” with growth, Gordhan exhorted. And not just any growth, but inclusive, transformative growth that has the broadening of economic opportunities as its main goal.

The Budget Review is careful to make a distinction between narrow transformation that benefits only a wellconnected elite, and the creation of jobs and opportunities that would lift the masses out of poverty.

“Growth without transformation would only reinforce the inequitable patterns of wealth inherited from the past,” it says. But, it adds, “transformation without economic growth would be narrow and unsustainable”. x

DEBT LEVELS FLIRTING WITH 70%

2007-08

2009-10

2011-12

Net debt + guarantees + contingent liabilities

2013-14

2015-16

2017-18

Net debt Source: Treasury, Momentum Investments

CREDIT RATINGS

Konrad Reuss

S&P Global Ratings MD for sub-Saharan Africa and SA

Your initial reaction to this budget?

From a rating agencies’ perspective, given that the fiscal targets and economic growth assumptions in the budget are very much aligned with our expectations, I would call this a very reassuring budget. Also, this budget has shown a continued firm commitment to a path of fiscal consolidation, which is important to us.

Is there anything in the budget to give you confidence that SA may be able to raise its growth rate this year beyond the 1.4% which S&P has pencilled in?

It would be wrong to expect the budget alone to be a game-changer with regards to economic growth. The moderate recovery we’ve seen this year is very much a cyclical rebound after what happened last year. It’s helped by firming commodity prices, the breaking of the drought, and the pickup in global demand. So overall there’s been a more positive external environment.

But the main point is that it’s very much a cyclical recovery — not the sustained, higher level of growth which is so important with respect to the long term. That is something this budget is short on. It mentions structural reform, but only the implementation of reform — be it in parastatals, or mining, or the labour market — can have a positive impact on sentiment and drive higher growth . . . We have expressed discomfort at the slow pace of structural reform. It would need to pick up [for us] to see sustainable faster growth.

How high is the bar to further downgrades from S&P? With the continued negative outlook, we’re saying the risks are on the downside, and there is generally greater than a one-out-ofthree chance. Since assigning the negative outlook on the current BBB- foreign currency rating, fiscal financing needs and economic growth have not met our basecase expectations. However, we affirmed the ratings in December, notwithstanding marginal revisions to our growth forecast.

Looking ahead, if GDP growth or the fiscal trajectory does not improve in line with

Robert Tshabalala

our current expectations (say, if SA enters a recession in 2017) then we could lower the rating. In addition, if government debt levels and contingent liabilities (related to parastatals) exceed our current expectations, ratings could be lowered. A weakening of SA’s institutions due to political interference . . . could also result in lower ratings.

In December, you noted that political tension in SA was rising, and said this could weigh on investor confidence and exchange rates and potentially affect government policy direction. Is this prediction being borne out?

In our December affirmation, we assumed that political tension and contestation will increase in the run-up to the ANC’s 2017 elective conference.

At this point, there are no signs that political tensions are diminishing. If (rising) political tensions were to undermine the economic growth and fiscal trajectory, it would be a concern.

If Pravin Gordhan were to be removed as finance minister and replaced with a less credible candidate, how would that affect SA’s sovereign rating with S&P? Ratings are not a credit opinion on specific office holders. A sovereign rating addresses a government’s willingness and ability to service its debt . . . we have seen that political events have distracted from growthenhancing reforms while economic growth has remained a key rating’s weakness. In light of our negative outlook, disruptive events that would impact on market confidence and investment climate, threatening GDP growth or the fiscal trajectory, are a concern.

What factors support SA’s rating?

The rating is supported by SA’s status as a middle-income country and its diversified economy as well as our assumption that SA will experience continued broad political and institutional stability as well as macroeconomic continuity. This also takes into account the strength and transparency of SA’s political institutions and deep domestic financial markets. x

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budget 2017 overview ANALYSING THE SPEECH

Balancing political principle with economic reality SA should be obsessed with finding a cure for inequality, according to Pravin Gordhan. But in its quest for a more inclusive economic model, recklessly ignoring the ‘stark’ situation faced by the country can only end in tears Marc Hasenfuss hasenfussm@fm.co.za

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From the outset, Gordhan reiterated that sound public finances, the health of financial institutions, investment-grade credit ratings and competitive public procurement processes are valued elements in the sustainability and integrity of the country’s transformation path.

But the progress in radical economic transformation must be rapid: “There is a growing impatience and ferment among our people.”

His priorities in creating this transformation revolve around a handful of initiatives in which government wants to work with the private sector and social stakeholders.

Improved education is a priority — particularly the quality of basic literacy and numeracy in the first phase of schooling. Reform of technical and vocational education, and of training programmes, are also highlighted as ways to meet occupational and industrial needs.

Gordhan also believes in accelerating development in cities through housing development, better public transport, urban enterprise and industrial development. He contended that SA’s integration and linkages with regional neighbours offer significant opportunities for enterprise growth, agricultural development and the creation of new industrialists.

The most critical consideration was left for last: “Reform of domestic market structures, promotion of competition, ‘deconcentration’ of monopolised industries and greater private [involvement] in sectors dominated by public iStock

ý The persistent refrain in finance minister Pravin Gordhan’s budget speech was inclusive growth, harking back to President Jacob Zuma’s call for radical transformation of the economy during his state of the nation address.

But while Zuma’s message could be dismissed as placatory populism, Gordhan’s musings are harder to discount. At the prebudget briefing with journalists, he suggested economic inclusivity should become a national obsession.

Of course, the reality is that radical transformation is overshadowed by stark fiscal fundamentals. It might not be politically convenient at a time of growing populist sentiment, but the hell-bent pursuit of radical economic transformation against a backdrop of lacklustre economic growth could easily damage SA’s already fragile longer-term growth prospects.

In his prebudget remarks, Gordhan insisted there is enough money in the system “to do what we want to achieve”. But he added that “many processes are at play at the moment” and an “economic Codesa” might be required to find solutions to inequality.

The budget is already highly distributive to poor and working families: about two-thirds is earmarked to realise social rights. But meaningful transformation still needs to take place to change perceptions of the imbalance in control and ownership of the economy. Transforming the economy, even at this delicate juncture, is not open to question. But how radical is the economic transformation envisaged by Zuma?

In the preamble to the budget speech, Gordhan stressed that transformation will not be achieved through “conquest, conflict or extortion”. Rather, it will be built through economic participation, partnerships and mobilisation.

Gordhan noted: “We have a plan for a more inclusive, shared economy. Its implementation requires greater urgency and effective collaboration among all social stakeholders.”

The Times

enterprises: these are structural reforms that will bring opportunities for business development, modernisation and a more balanced distribution of wealth and opportunities.”

He pointed out that state-owned companies hold a combined asset base of R1.2 trillion, and are well placed to partner with private-sector investors to grow the productive capacity and infrastructure of the economy. Some observers may wonder if his remarks had any bearing on SA Airways. He met airline board members last week to discuss turnaround plans. “I am pleased to report that the challenges are well understood and the advisory work that is in progress has clarified the way forward,” he said.

Overall, though, the base to support radical economic transformation is brittle, and the 3.1% budget deficit for 2017/2018 looms large. Gordhan’s challenge is to grow a sluggish economy so that it will open up more business to previously excluded participants rather than reinforce existing ownership structures.

He said: “Acting too quickly to reduce the deficit would harm service delivery, delay economic recovery and compromise tax revenue collection. But to ignore fiscal targets would result in interest-rate hikes, unsustainable commitments and creditrating downgrades. This is a scenario in which short-term gains would quickly give way to financial stress, capital flight and cutbacks in service delivery.”

Treasury needs to raise R28bn in additional tax revenues and cut spending by R26bn over the next two years.

In summary, the proposed expenditure of 2017/2018 will top R1.56 trillion and projected revenue should reach R1.41 trillion. This means the shortfall of R149bn (3.1% of GDP) will be borrowed at a time when interest on government debt of R2.2 trillion (50.7% of GDP) amounts to R169bn.

Predictions are for total tax revenue of R1.14 trillion in 2016/2017 — an increase of about 7%. The main tax proposals, much to the relief of consumers, do not include proposals to hike Vat. But there is some pain for big earners, with a new top personal income tax rate of 45% for those earning taxable annual income of more than R1.5m/year. Gordhan

estimated this will raise R16.5bn.

Possibly even less palatable is the decision to push the dividend withholding tax rate from 15% to 20%. This will raise R6.8bn, assuming companies don’t opt for scrip dividends or share buybacks as an alternative to cash payouts to shareholders.

There is limited bracket-creep relief, pushing the tax-free threshold from R75,000 to R75,750.

Then there are the traditional hikes in sin taxes and the fuel levy. The excise duties for alcohol and tobacco increase 6%-10%, while the general fuel levy increases by 30c/l and the road accident fund levy by 9c/l. This should add another R5.1bn to government coffers.

The sugar tax on sweet beverages will come in later this year once legislation is passed. The proposed carbon tax still looks some way off.

The expected tax revenue breakdown for 2017/2018 shows R482bn from personal tax, R313bn from Vat, R219bn in corporate income tax, R96bn from customs and excise duties, R71bn in fuel levies and R85bn from other sources. Treasury has pencilled in a narrower deficit of 2.6% in the 2019/2020 fiscal year. The big amounts over the next three years are R490bn on social grants, R106bn on transfers to universities (R54bn to the National Student Financial Aid Scheme), R751bn on basic education, R115bn on subsidised housing, R94bn on water resources and bulk infrastructure, R189bn on basic services for poor households, R143bn to support public transport and R606bn on health.

In terms of spending efficiencies, Gordhan promised further procurement reform. He said a draft public procurement bill will be published shortly, establishing a single procurement authority and consolidating a fragmented regulatory environment.

It seems tangible progress has been made with the central supplier database, which is now fully operational.

Gordhan said: “It enables government to know who it is doing business with and to use technology to reduce the opportunities for fraud and corruption.” Large numbers of transactions have been identified for further investigation.

New procurement rules have resulted in savings of R675m on cellphone and vehicle contracts. Gordhan estimated medium-term savings of between R1bn and R1.5bn on vehicle contracts alone.

In the property leasing sector, savings of R2bn-R3bn are expected, and R2.5bn will be saved in the next three years in the 10 largest ICT equipment contracts.

Collaboration with the department of basic education on cost-effective standards for building design has reduced the average cost of building a new 7,500 m² school from R70m to R34m. x February 23 - March 1, 2017

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budget 2017 overview POLITICS

Gordhan’s ‘inclusive growth’ is merely a substitute for Zuma’s ‘radical economic transformation’. But the president is interested in none of that. He is under too much pressure and he wants to replace the finance minister Peter Bruce

ý This is how it works here. Sometime relatively early every February, the president gives a state of the nation address. Effectively it is the opening of parliament in the new calendar year.

The president uses the address to declare things. This time it was the Year of Radical Social & Economic Transformation. By way of comparison, for instance, 2011 was the Year of Job Creation.

Then, a few weeks later in February, the finance minister delivers the national budget for that year. In it, he is supposed to not so much echo the president but to give some substance to what the president said, to make the president’s speech sound not only reasonable and thoughtful, but affordable too.

Any alien listening to finance minister Pravin Gordhan’s budget would have thought he had done a pretty good job. He twice mentioned the word “radical”.

Here was one of them: “. . . President [Jacob] Zuma articulated this in the state of the nation address, rightly emphasising the radical nature of the socioeconomic transformation we need”.

For a nonalien, sadly, the gulf between Zuma and his finance minister never seemed wider than it did on Wednesday. Gordhan was careful to touch all the right buttons but the two men live in different worlds.

For Gordhan, what would be “radical” would be an ANC cabinet minister actually implementing a promised policy. In other words, “do your job properly”, “implement policy”, “actually help the poor” are radical and transformative notions.

For Zuma “radical” is a word appropriated from the Left to make himself more popular as his time in office (in both party 10

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and state) runs out. It is also something he uses to counter strident left-wing opposition to his deeply improper relationships with a handful of rich business people.

Zuma, for instance, wants his friends to be able to buy a bank. That would be “radical”, in the way he sells it, because not many blacks in SA own banks.

Gordhan, who doesn’t want Zuma’s friends to own a bank, would rather see “radical transformation measures” in the finance sector — like making sure that ANC programmes really do create jobs, that transformation “must be mass-based” and must “entrench open, transparent governance and the rule of law”.

Jacob Zuma

Bloomberg/Michael Nagle

Carefully walking a tightrope — but also sounding a warning

He substitutes “inclusive growth” for Zuma’s “radical transformation”. Basically they mean the same thing, but one implies some measure of prudence.

Zuma is interested in none of that. He is under too much pressure and he wants Gordhan out. So the question is, did Gordhan do enough yesterday to save himself in any forthcoming cabinet reshuffle?

We all know the story. This is his second stint in the job, having been brought back into treasury after Zuma famously tried and failed, in December 2015, to install a patsy as finance minister to please his cronies.

Since then, Gordhan has fought an uphill battle against Zuma, the cronies, many members of cabinet, the police and the National Prosecuting Authority. Little wonder he received a standing ovation merely for stepping up to the podium.

Lesser men would have fallen long ago.

Now the SA body politic is alive with rumour and speculation. At the end of the year the ANC will elect a new leader. Zuma will not be a can-

Bloomberg/Waldo Swiegers

Gallo Images/AFP/Rajesh Jantilal

didate. But what will happen then? What parliament and then, possibly, into cabinet). will happen before? What will happen later Three branches have claimed him this week? so far. It is a joke and it will all be agony No-one knows. Zuma is said to carry a to a private man like Molefe. The fact is master plan in his head, but don’t believe that while Zuma may want Molefe now, that. He is making it up as he goes along. he is living on his nerves and is easily Facing the resurrection of some 780 distracted. counts of fraud against him should he lose The wider strategy has to be to get the protection of his office, Zuma has Dlamini-Zuma elected ANC president at looked around for a suitable successor. And the end of this year, probably against the he has settled, with almost no imagination, opposing candidacy of deputy president on Nkosazana Dlamini-Zuma, who hapCyril Ramaphosa. pens to be an ex-wife and the mother of Ramaphosa should, on paper, be a some of his children. This is the ANC vetstrong contender. He is the deputy, after eran he packed off to run the AU Comall, and very experienced; a great negomission for the past four years, to keep her tiator; and supposedly incorruptible as he out of domestic politics. is already exceedingly rich.

In his sylvan view of the world, what One school of thought is that Zuma mother would put her children’s father in could send Ramaphosa to treasury (a plaujail? And he may well be right. Dlaminisible replacement for Gordhan) and make Nkosazana Dlamini-Zuma Zuma remains indisputably fond of him.

Dlamini-Zuma the deputy president, thus But Zuma has been naughty while she positioning her more perfectly for the has been away. His friendships with the ANC’s vote in December.

Gupta family and a range of their political Or, perhaps, with her as deputy, he favourites in the higher echelons of provincould step down early as head of state and cial ANC politics are an unsettling inherallow her to contest the ANC job as a sititance for Dlamini-Zuma. That, in turn, ting or acting president of the country. But leads to further complications, as some of for that scenario to stand a chance, these provincial power brokers think about Ramaphosa would have to go quietly. putting their own hands up for his job.

Scenarios like this arise because Dlamini-Zuma would look after Zuma, Ramaphosa has been so helpful and quiet they’d agree, but would she look after a deputy to the outrageous reign of Zuma them too? that some people suggest Zuma has someThere’s no knowing for sure, which is thing on him; that he can be blackmailed. I why, to get back to the point, Gordhan has doubt that’s the case, but Ramaphosa to go. Zuma needs a minister in the treaneeds to begin to show his hand much sury who will give ministers and cronies more forcefully than he is doing — or he the money and the contracts they want. will not have the required momentum Call it “access” and it sounds progressive by the time the December conference and correct. In turn, these people — all satgets to vote.

Brian Molefe isfied and sated — will help him get DlamiEverybody knows broadly what is ni-Zuma elected. going on. The infighting in the Zuma govNever mind the debt ceiling. Never mind fisernment and the Zuma ANC is at close quarters facilitated the fire sale of a rich and Eskom-tied cal consolidation, argues “radical transforma— office to office, face to face. In his budget coal mine to the Guptas and made repeated tion” Zuma. Let’s just go for it. speech Gordhan tried to warn Zuma while he calls to the Gupta household during the period And he has just the man for it: Brian Molefe, also tried to support him. around the transfer of the mine. former deputy director-general in national trea“Our growth challenge is intertwined with It got to him. He broke down in tears at a sury, former CEO of the Public Investment our transformation imperative,” he said. “We press conference and resigned from Eskom a Corp, former CEO of Transnet and, until recentneed to transform in order to grow, we need to few days later. Zuma likes Molefe, and knows ly, CEO of Eskom. grow in order to transform. Without transforhe could do what is required. But he doesn’t Molefe’s a good manager, there’s no doubt. mation, growth will reinforce inequality, without know if he can take the pressure of public life.

He inspires love and loathing. He gets things growth, transformation will be distorted by done. He has a swashbuckler’s approach to This is because there is pressure — and then patronage.” danger. For Zuma, he’d be the perfect man to Whether or not Zuma was listening is moot. there is public pressure. How would he stand replace prudent old Gordhan. But there’s a He wouldn’t care much anyway. up to a grilling in parliament, or to insults from problem, as always.

What he would have noticed, though, was a the Left? There are already photographs of the Last year former public protector Thuli remarkable gap in all the tributes that finance houses that he owns doing the rounds online.

Madonsela produced a report of what we South ministers make as they amble through their This is as he becomes embroiled in a deeply Africans call “state capture” — the ability of fambudget speeches, thanking this minister for her shady row over which branch of the ANC he ilies like the Guptas to get Zuma to do their will prudence, congratulating that one on a probelongs to (he has to belong to one so that — that was particularly harsh on Molefe. He gramme completed. ➦ Zuma can make him an MP and bring him into February 23 - March 1, 2017

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budget 2017 overview Ajay and Atul Gupta

Business Day

Not once did Gordhan mention the name of Tom Moyane, commissioner of the SA Revenue Service, a Zuma appointee for whom Gordhan has no regard or respect whatsoever. Moyane knows almost nothing about tax. He is a former prisons commissioner, and a close Zuma confidante whom Gordhan has been unable to move.

If anything, Gordhan’s failure to mention Moyane was a direct challenge to Zuma. He was, he’d admit, being deliberately rude and he made a point of reminding the president that tax revenues this year are short R30bn, reflecting slower wage growth and bonus payouts — “among other factors”.

This may well have been Gordhan’s last budget. Those “other factors” — Moyane’s inability, in Gordhan’s view, to run a successful revenue service, constant infighting and Zuma’s cronies’ influence over policy — will make taking the final call from Zuma that much easier.

He’ll leave behind him the finest team of public servants in the country and a sovereign rating still, just, in the black. Let someone else come and mess it all up. x

MARKET REACTION

Mixed bag of fortunes, hits and misses Marc Hasenfuss

commit to a high percentage of social spending in an economy that is not growing is difficult.

It was a case of damned if you do, damned if you don’t.”

Durand argues that the decision not to increase the Vat rate meant a continuation in the concentration of the tax burden on a section of the population. “This is a bit of a concern . . . high earners are often very mobile.”

Retail tycoon Christo Wiese — whose major shareholdings include retail giant Shoprite,

Jannie Durand

Christo Wiese

Wayne McCurrie

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Hetty Zantman

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February 23 - March 1, 2017

Jeremy Glyn

surprises in that tax hikes were largely expected. “What was unusual was the tax increase on people earning over R1.5m a year. We initially thought it would come in at 43%, and not the proposed 45%.”

McCurrie says that overall the budget speech sent out the right messages. “It will be well received by the market and ratings agencies.”

Remgro CEO Jannie Durand believes finance minister Pravin Gordhan made the best of a difficult situation. “Having to

Hetty Zantman

The market took the 2017 budget speech in its stride — even though the proposed hike in withholding tax on dividends to 20% might have irked investors.

The JSE all share index firmed slightly after the reading of the budget speech — though it still finished the day down. On the currency front, the rand weakened slightly against the dollar.

Ashburton Investments portfolio manager Wayne McCurrie says there were no

international conglomerate Steinhoff and investment group Brait — says at first glance there was nothing really negative in the budget speech, which reiterated President Jacob Zuma’s call for radical economic transformation.

He says government needs to understand that people who are perceived to be “well off” have no difficulty in making fair contributions, and in different ways, to ensure a better life for all. “We all agree that more money needs to be spent on education. But the output is dismal . . . despite government spending on education being one of the highest proportions of GDP in the world.”

Consideration should be given to allow the private sector to play a bigger role in delivering quality education.

“Such an initiative would save government money while enhancing quality of output,” Wiese says. x

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budget 2017 overview BUDGET TRANSPARENCY

Facts are there for all to see Economists weigh in on how national treasury can improve SA’s already worldclass budget documents Claire Bisseker bissekerc@fm.co.za

OVERSHADOWING NEIGHBOURS IN TRANSPARENCY Regional comparison

45

Global average

86

SA ý Over the years, SA has entrenched its reputation as a global leader in budget transparency. This is clear from the expansive budget information that is published for public scrutiny each year, as well as from SA’s performance in international budget surveys.

“There was a time, back in the 1980s, when all you wanted to know from the budget was government’s assumption on the gold price, because tax revenue from the gold mines accounted for 25% of government tax revenue,” recalls Sanlam economic adviser Jac Laubscher.

In those days the public had access only to the budget speech and tables of numbers.

Budget transparency has evolved steadily over time. In 1993, the Budget Review document was introduced. It has become an extensive resource of around 235 pages, presenting an enormous amount of information on fiscal policy across eight chapters.

The next big evolution came in October 1999, when treasury held its first-ever medium-term budget. In these budgets it sets out its spending, revenue, debt and deficit projections as well as economic forecasts for the next three years.

“What is now necessary is much more than budget transparency,” says Laubscher. “The budget tells you how the money is spent in terms of expenditure [line] items but it doesn’t tell you who gets the contracts.”

Laubscher feels it would be useful in the current climate for treasury to disclose the identities of the recipients of all government contracts over R10m.

He would also like to be told more about the assumptions that underlie treasury’s macroeconomic models and information about how sensitive the results are to the assumptions made, whether on the rand, the oil price or matters such as SA’s tax buoyancy ratios.

Stanlib chief economist Kevin Lings identifies a few pieces of information he would like to see incorporated in the budget. These include: ● A detailed time-series on infrastructure spending. This should provide budgeted versus actual infrastructural spend, explain why key projects had been delayed or shelved, and give information about which projects had started in 14

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65

Malawi

47 46

Botswana Namibia

39 38 35

Zambia Mozambique Zimbabwe

26

Angola Source: Open Budget Index

Scant or none

Minimal

the past fiscal year; ● An indication of the success of tax incentive measures such as the youth wage subsidy and tax-free savings plans; and ● A more detailed breakdown of government employment, including wage costs per department, details about municipal salaries and the amount spent annually on consultants.

In 2010, SA came first in the Open Budget Index survey, but in 2015 — a year when the rules placed a greater emphasis on formal public participation and budget oversight — SA dropped to third place out of 102 countries in a

GLOBAL LEADERS

Open budget index, 2015 survey Country

New Zealand Sweden SA Norway US Brazil France UK Romania Peru Russia Italy Germany

Rank

1 2 3 4 5 6 7 8 9 10 11 12 13 Source: So rce International Internatio Budget Partnership

Limited

Substantial

Extensive

closely fought race with New Zealand and Sweden. Even so, SA was one of only five countries that performed solidly across all three main areas of public accountability and scored above 80 out of 100.

In 2015, SA and New Zealand got equal scores on public participation, better than Sweden. On the other hand, SA and Sweden got equal scores on budget oversight, which were better than those of New Zealand.

SA scored lower on a subcategory of public participation because the office of the auditorgeneral lacks a formal mechanism to secure public input. In SA this is done at the discretion of the auditor-general.

Past survey results have been used to identify gaps in budget transparency, according to national treasury. The improvements implemented between 2010 and 2015 included the initiation of procurement reforms by the chief procurement officer to enhance transparency in the bidding for government contracts.

National treasury is also continuing to engage civil society and academia in the quest to expand budget participation. A budget outreach programme is rolled out every year after the national budget has been tabled in which treasury takes the budget discussion to forums around the country, hosted by universities.

Civil society workshops are also held annually to present the budget as well as to solicit civil society organisations’ inputs.

Furthermore, an online budget data portal project with civil society representatives on its steering committee is in the initial stages of implementation. x

PREPARING A BUDGET

Under pressure Preparing a budget is a lonely task that requires the finance minister to fend off numerous demands from his cabinet colleagues. For Pravin Gordhan, it is likely to have been even lonelier, given a lack of support from the president Sikonathi Mantshantsha & Natasha Marrian mantshantshas@fm.co.za; marriann@businesslive.co.za

ý SA’s finance minister will have spent the past three months, particularly the three weeks leading up to this week’s budget presentation, fending off the demands of his colleagues. These countless consultations, formal and informal, can be very lonely for the man who controls a budget exceeding R1 trillion.

The task has likely been made lonelier by the lack of political support from the current president, says a former finance minister, who spoke to the Financial Mail a few months ago on condition of anonymity.

Every member of President Jacob Zuma’s bloated cabinet feels his or her projects deserve to be prioritised over others. “In my time as finance minister I sat in cabinet meetings in the three months before budget fending off my colleagues,” says the former minister.

He says he had to attend formal budget preparation meetings at treasury and at the various offices of his colleagues. “If we funded everything we were presented with, the budget would [have] come up to R7 trillion. And when my comrades pressed their points, they’d look at the president and plead with him for the funding of their projects.”

According to the Open Budget Index, SA’s budgeting process is the third most transparent in the world.

The process begins almost immediately after the budget speech is delivered. It is an intensely consultative process, with two key committees — one of ministers and one of technocrats — engaging with the numbers for months on end. The budget is also endorsed by cabinet once the process has concluded.

The finance minister will on many occasions be forced to sit the technocrats down, in front of their ministers, to go through each department’s budget and see if existing funds can be moved to priority projects.

“Once we’d done this, having pointed out to my counterpart that, in effect, he did have funds available for his latest project, I’d excuse

myself and leave the meeting,” says the former minister. “By this time the minister would be scolding his officials for not telling him they’d always had the money.”

However, when departments demand money, they are not always nice.

Finance minister Pravin Gordhan has been finding this out the hard way. In the past two weeks, the loud calls for funding have escaped the relative comfort of a cabinet lekgotla or boardroom.

Populist but ineffective ministers, such as Nomvula Mokonyane at water affairs, and their acolytes have labelled Gordhan an enemy of “radical economic transformation” for not dishing enough money their way. The ANC Youth League has even called for his dismissal, accusing Gordhan of protecting what it calls the interests of white monopoly capital.

But these noisemakers take their cue from their senior leaders.

This year, no less a person than the president himself led the charge against Gordhan’s treasury. Business Day reported in January that Zuma had told a closed session at the ANC lekgotla that treasury was standing in the way of radical economic transformation by refusing to fund certain projects. The ANC denied its president had made these comments.

You could be forgiven for thinking the ANC is referring to a minister from an opposition party, never mind one implementing its own mandate. Not for them such constraints as the Public Finance Management Act, which limits expenditure to projects that can be properly funded after being convincingly costed. For this section of government, priorities mean nothing. “The president just sits there and lets them have a go at you,” the former finance minister says. “The only time he intervenes is to instruct me [as finance minister]: ‘Find the money!’ ” Zuma, he says, has no sense of money — or that it is finite. “He will fund every project, if you allow him to, without knowing where the money comes from.” x February 23 - March 1, 2017

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opinion by Nicolaas Kruger

Get set for change Kruger is CEO of MMI Holdings

T Our youth and existing workforce will need to adapt to transforming labour markets 16

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he old adage that the only thing that is constant is change certainly holds true. At a global level, we have seen many surprises, such as Brexit in the UK and the inauguration of Donald Trump as president of the US, and instability continues in many parts of the world.

In SA, ongoing uncertainty and sluggish growth have caused many people to accept that what we think has been working has not worked for many citizens. Many of the structures that we hold onto do not support the drive for equality or inclusive growth, and we must face the reality that too many fellow South Africans remain stuck in the cycle of poverty, and too few are able to access economic opportunities.

SA’s unemployment rate is stuck at about 25%, with even higher rates for the youth, at more than 50%.

An inadequately educated and unskilled workforce is one of the root causes of unemployment.

The challenge is likely to be amplified in the coming years due to the “Fourth Industrial Revolution”, characterised by fast-paced technological progress and

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February 23 - March 1, 2017

deeper socioeconomic and demographic changes. Where one-third of jobs will not exist in their current form, our youth and existing workforce will need to adapt to transforming labour markets.

According to the World Economic Forum’s (WEF) “Future of Jobs” study, the result could be a net loss of more than 5m jobs in 15 major developed and emerging economies, including that of SA. The study highlights that skills demands will change significantly over the next five years, pointing to the importance of aligning education with the skills needed in the labour force.

Only a portion of students currently enrolled in SA’s tertiary institutions are studying subjects that directly address the need in business for science, technology, engineering and maths, as well as future-oriented skills. Many organisations also face the challenge of finding appropriately trained graduates who have complex problem-solving, critical thinking and decision-making skills, good judgment and cognitive flexibility.

Skills and development are key to SA’s transformation and economic growth. We are seeing some notable successes, such as the R1.5bn fund provided by the private sector to advance

entrepreneurship among small and medium enterprises. The agreement between government and business to place 330,000 youth in paid internships in the private sector is another.

A number of other good private-sector initiatives are also under way, driven by regulated skills spend.

If we are to make a meaningful impact on unemployment, and achieve the scale and sustainability required to address the skills shortage, a more collaborative and concerted effort is required.

Through the WEF’s Africa Skills Initiative, work is being done to anticipate trends in the labour market and convene stakeholders from business, government and the education and training sector.

We believe that the opportunity to engage and learn from others is invaluable, and that working together is key; longer-term reform by the public sector must be complemented by collaboration with the private sector.

We have to accept that the way things used to work will not necessarily be the way they continue to work. We need to work together and act now if we are to equip our youth and workforce for a future where the only real constant will be change. x

budget 2017 revenue REVENUE COLLECTION

Almost in a perfect storm Sars is closing in on wealthy taxpayers with undisclosed offshore assets, as well as multinationals that try to game the system, but the fact remains that the heaviest burden falls on individual taxpayers. How much longer can they stand it?

Stafford Thomas thomass@fm.co.za

Sars’s revenue collection unit is also on the hunt for tax dodgers. “It is well organised and far more diligent in performing audits,” says Teuchert. “They are able to delve into trends and averages to identify taxpayers who should be audited.”

Unintentional errors made by taxpayers can also land them in trouble. In the case of deductions claimed on a tax return, if Sars requests verification it now sends the request to the taxpayer’s online eFiling profile with no back-up through e-mail or conventional mail. Miss a Sars request and it will disallow the deduction.

“An eFiling profile is hardly something most taxpayers will be monitoring on a regular basis,”

says Teuchert.

Sars is also hot on the heels of high net worth individuals (HNWI) with undisclosed offshore assets. Under a short-term amnesty it has given them until August 31 to come clean. “Sars has already received disclosures of R3.8bn in foreign assets, which will yield revenue of about R600m,” Gordhan noted jubilantly in his budget speech.

It is probably only the tip of the iceberg. “I would say there are staggering sums of undisclosed offshore assets,” says Andrew Wellsted, head of tax at Norton Rose Fulbright.

Sars is likely to go in guns blazing. It will be armed with the Automatic Exchange of ➦

COMPONENTS OF NATIONAL GOVERNMENT REVENUE Percentage change over one year Total revenue

Direct taxes

Income tax payable by individuals Income tax paid by companies Withholding tax on dividends Taxes on property Specific excise duties

Indirect taxes

ý Finance minister Pravin Gordhan dished up a tough budget. But it still leaves the SA Revenue Service with the daunting task of raking in an additional R121bn in gross tax receipts.

It is a big ask in an economic environment where tax collection remains an uphill battle.

Reflecting this are preliminary fiscal 2016/2017 figures released by national treasury, which reveal that tax collections of R1.144 trillion fell R30bn (7%) short of the R1.174 trillion targeted in the budget speech Gordhan delivered in February last year. The shortfall was also higher than the estimate of R23bn contained in the medium-term budget policy statement in October.

It was a repeat of tax receipt shortfalls in the two previous fiscal years. In 2015/2016 tax collections came in R11.6bn (1.1%) short of the R1.081 trillion first budgeted, while in 2014/2015 tax collected fell R14.65bn (1.5%) short of the R979bn targeted.

In fiscal 2017/2018 Gordhan is looking to personal taxes to do the heavy lifting, with receipts targeted to rise by a huge R56bn to R482bn. It places a heavy burden on a very small tax base in which just over 1m individuals earning more than R350,000 annually account for 77% of personal taxes, according to national treasury data for 2015.

Gordhan has taken an almost draconian approach, including hiking the maximum marginal tax rate on individuals and trusts to 45%. Bracket creep relief was also limited to a miserly R2.5bn, a mere 0.5% of total personal tax receipts budgeted for.

Ernie Lai King, head of taxation and AfricaAsia practices at Hogan Lovells SA, is concerned about the tax burden on individuals. “It raises a serious question,” he says. “What is going to happen with tax morality?”

One thing is certain: Sars will more than ever be on the hunt for taxpayers bent on evading tax. It has the resources to do so.

“Automation (eFiling) is allowing Sars to apply far more diligent enforcement,” says Mike Teuchert, national head of taxation services at Mazars. “Sars’s systems are working efficiently and enabling them to do a lot more risk analysis and data mining of tax returns.”

Value-added tax Fuel levy

Import duties 5 Originally budgeted

10

Actual, April - September 2016

15

20

Source: Reserve Bank Quarterly Bulletin, December 2016

February 23 - March 1, 2017

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Robert Tshabalala

budget 2017 revenue

Ernie Lai king

Ernie Lai King: what is going to happen to tax morality?

Information Treaty, an initiative of the Organisation for Economic Co-operation & Development (OECD) which comes into force in June. It will enable Sars to share information about HNWI foreign assets and bank accounts across tax authorities in over 60 countries.

If a taxpayer was under investigation in one tax jurisdiction, tax authorities in other jurisdictions would have no alternative other than to provide information required, Gordhan said.

Wellsted says: “People with irregular offshore structures are running out of time fast.”

They can expect no help from financial institutions, which are now obliged to keep records and comply with due diligence requirements.

The first reporting period for financial institutions ends on Tuesday, with returns due in June.

“Institutions are now potentially on the line if a client is exposed concerning irregular actions,” says Wellsted.

Compared with individual taxpayers, companies have come off lightly in the 2017/2018 budget. Their total contribution to the tax coffers is budgeted to rise by only R5.8bn (6.6%) to R218.69bn.

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February 23 - March 1, 2017

But on paper at least Sars has another means of extracting far more company tax. The potential source is multinationals that indulge in profit shifting to the most beneficial tax jurisdictions with the resultant loss of tax income (base erosion) by countries where they earn their profits.

At the heart of base erosion and profit shifting (BEPS) is transfer pricing.

A complex area, transfer pricing between units of a multinational company in different countries should be done at arm’s-length pricing, as would be the case when trading with another unrelated company. In reality, intracompany transfer pricing is open to a multitude of abuses.

According to the OECD, tax revenue losses globally from BEPS are conservatively estimated at US$100bn-$240bn annually, or anywhere from 4%-10% of global company income tax revenues.

To its credit Sars has been at the forefront of international co-operation on combating BEPS since the formation in July 2013 of the BEPS action plan under the auspices of the OECD. Signatories to the action plan will begin exchanging information next year, which will provide Sars with access to country-by-country information on all large multinationals operating in SA. Sars is already on the move, requiring documentation from multinationals on any transfer pricing action of over R100m.

But whether Sars has the human resources to combat transfer pricing abuse effectively and garner more tax in the process is unclear.

“Transfer pricing is resource heavy in terms of skilled staff required,” says Wellsted. “You

need skilled people to sift through data and to apply it.”

Lai King also has reservations. “Questions are being asked about the availability of skills at Sars. It has lost some top people in the transfer pricing unit to the private sector,” says Lai King.

The loss of Nishana Gosai and Sunita Manik to international law firm Baker & McKenzie in September last year appears to have been particularly damaging.

Gosai was the SA representative on transfer pricing at the OECD and is a current serving member of the UN’s subcommittee on transfer pricing. Manik was the only African member of the OECD’s BEPS Bureau and Committee on Fiscal Affairs and was closely involved in the creation of a new international tax framework.

But even if Sars can nail some big profitshifting cases, snatch some more tax from HNWI taxpayers’ offshore assets and extract more from errant PAYE taxpayers, it is unlikely to provide the real solutions to SA’s tax revenue challenge.

“SA is near the end of the road on what can be done to extract much more by way of tax from the economy,” says economist Mike Schüssler. “SA is already one of the world’s most highly taxed countries when measured in terms of GDP.” Indeed it is, with Sars revealing that it expects total tax receipts in 2017/2018 to equate to 26.7% of SA’s GDP. The World Bank ranks SA as the eighthhighest tax-paying nation based on a proportion of GDP. The world average is 14.8% of GDP. Lai King shares Schüssler’s concern. “There is only so much blood you can get out of a stone. We are almost in a perfect storm.”

Gordhan is hinting at a possible increase in the Vat rate. “If they do that you will know they have reached the bottom of the barrel,” says Lai King. x

MAIN SOURCES OF TAX REVENUE % of GDP 10 8 6 4 2 0 1994-95

1997-98

2000-01

Personal income tax

2006-07

2009-10

Value-added tax

2012-13

2015-16

Corporate income tax Source: Treasury

opinion by herman schoeman

A secret 2% growth jab Schoeman is CEO of MMI Corporate & Public Sector

T Improving productivity should be a key focus for every manager, yet too often it takes a back seat to cutting costs

he finance minister, like the rest of us, is looking for growth in the economy. But there’s one almost secret space where growth of as much as 2% could be found that he didn’t mention in his budget speech.

That twilight zone is our poor productivity.

According to the MMI Effective Employee Index, we lose more than 120m days per year (or around 13 days per employee per year) in productive work time. That lost time is estimated at roughly R70bn, or 2% of GDP. And that startling figure does not account for the increasing phenomenon of “presenteeism” — where employees are at work but not operating optimally.

Improving productivity should be a key focus for every company or organisation manager, yet too often it takes a back seat to cutting costs. One reason is a perceived inability to measure causality in productivity, while more direct bottom-line measures are highly visible.

MMI has filled that gap by building, in consultation with Unisa, a robust model that reveals the drivers of lost work time in SA. More than 70,000 data points, relating to over 500,000 employees across 400 companies, were analysed to produce the index, which enables managers to benchmark their companies’ performance and design interventions that will cut the number of sick days, get staff back at work faster and improve their output when they’re there.

The most obvious area for attention is workplace management. Proper analysis of claims data and sick-leave statistics can quickly lead to the creation of a safer and healthier work environment.

The second clear win lies in delivering employee benefits that meet genuine needs and provide incentives for the right behaviours.

Here are some concerns: ● Some disability cover in the relatively new tax environment is effectively encouraging claimants not to return to work, and urgently needs restructuring; ● Mental health claims are on the rise, especially in the higher demographics, demanding greater sensitivity and new benefit conditions; ● Health cover needs to be expanded into the broader market; and ● For rewards and incentive programmes to achieve real value they

must not be gimmicky.

The third area is overlooked by many, and that’s the employee’s financial wellness, which we define as the ability to meet planned and unplanned expenses through their lifetime.

There is clearly a symbiotic benefit in financially well employees creating a healthy and productive workplace.

Debt is a huge SA problem — the MMI Unisa Consumer Financial Vulnerability Index shows that collectively we are in the “very exposed” category on this issue – but few managers appreciate that employees under stress financially are unlikely to work optimally.

It makes enormous sense for companies and their benefit partners to assist with the basic steps of financial education, planning and debt consolidation, while also delivering very clear communication of benefits and possibly even providing workplace emergency loans.

Employee financial wellness is a vital ecosystem that needs urgent attention.

Productivity must also become a key factor in the national economic conversation, and be part of wage negotiations.

A proactive approach to productivity across the board would result in happier and healthier staff contributing to a bottom-line uplift. And that could give the finance minister a far easier time of it next year. x

February 23 - March 1, 2017

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budget 2017 revenue PERSONAL TAXES

SIN TAXES

Mercy for middle earners

Bitter pill for smokers and drinkers

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Minister gets hard on vices in an effort to promote good health . . . and raise funds for the fiscus Pericles Anetos anetosp@timesmedia.co.za

ý All things sweet and sinful will come at a higher price in 2017.

Finance minister Pravin Gordhan said during a media briefing that government had not forgotten about those who drink and smoke tobacco when deciding what to tax.

“We want to look after your hearts and lungs as well, so the appropriate [tax] increase [has been made],” said Gordhan.

Treasury continued its above-inflation adjustments — which it started in 2002 — to the excise duties on alcohol and tobacco.

The tax on traditional tobacco products such as cigars, cigarettes and pipe tobacco will be raised by between 8% and 9.5%. This will raise an additional R656m. Treasury has not proposed any excise duties on e-cigarettes, which entered the SA market a couple of years ago.

Excise duty increases on alcohol of between 6.1% and 9% are proposed for the 2017 budget.

This will raise R1.2bn.

This will result in a bottle of unfortified wine costing 30c more per litre and a bottle of whisky R4.43 more, while beer will increase by 11c/340 ml.

SIN TAXES

R4.43

Wine

Bo le of

Whiskey

Changes in specific excise duties

Bo le of

1 - 20k 20,001- 30k 30,001- 40k 40,001- 50k 50,001- 60k 60,001- 70k 70,001- 80k 80,001- 90k 90,000- 100k 100,001- 110k 110,001- 120k 120,001- 130k 130,001- 140k 140,001- 150k 150,001- 200k 200,001- 250k 250,001- 350k 350,001- 500k 500,001- 750k 750,001- 1m 1,000,001- 2m 2,000,001- 5m 5,000,001+

marginal rate, which kicks in at R1,5m. There are just 103,000 taxpayers in this bracket but they already contribute a quarter of total income tax — and their share is expected to grow from 25.5% to 26.3%.

The increase in tax credit is quite lean in comparison. The medical aid tax credit increases from R286 to R303 for the first three benTax revenue short of target but Gordhan eficiaries and the annual limit for tax-free savresists temptation to penalise everyone ings accounts is up from R30,000 to R33,000. except those in top bracket Andrew Wellsted, head of tax at attorneys Norton Rose Fulbright, says there might be Stephen Cranston cranstons@fm.co.za more justification for income tax increases if the money was seen to be going to work on infraý A big disappointment for treasury last year structure. was the R15.2bn shortfall in personal tax, comBut there were few commitments in the pounded by an R11,3bn shortfall in Vat and budget, other than some established infrastrucR6,5bn in customs revenue. Finance minister ture projects such as renewable energy and Pravin Gordhan said it is not ideal to increase national health insurance. The latter seems to be tax rates in a stagnant economy but argues that still some way off. further redistribution of wealth is part of gov“I am very disappointed that the national ernment’s inclusive growth strategy, and that development plan appears to have been forgotthe fiscus is an effective tool for reducing ten,” says Wellsted. inequality.

Gordhan said SA’s democracy depends on LEANING ON HIGHER EARNERS the strength of its social compact. While the payDistribution of individual taxpayers and tax paid ment of taxes is a legal % obligation, the effective20 ness of the tax system relies to a large extent on 16 the willingness of citizens to contribute.

12 He admits this cannot 8 be taken for granted in light of rising public con4 cern about corruption, the waste of public funds 0 and inefficiencies in service delivery.

In the August 2016 Davis Committee report, chairman Dennis Davis said personal income tax % of total taxpayers % of total tax assessed was transparent and cerSource: SARS, Treasury, Momentum Investments tain, and fairest when combined with capital gains tax. He said: “Personal income tax is proGordhan has tried to limit the effect of tax gressive by design — with those who can afford increases for those who earn between R70,000 to pay paying most. Redistribution is enhanced and R350,000 annually. They do not escape through expenditure patterns. altogether as the bracket adjustments and “The argument is that countries with lower rebate levels were increased by 1%. For examlevels of inequality experience higher, more ple, more people will be joining the 26% tax prolonged periods of economic growth.” bracket as the base was increased not by inflaOne useful proposal from the budget is to tion — a preferred tactic of National Party minprovide additional bursary support to employisters such as Barend du Plessis — but by 1%, to ees. If an employee has an annual income of R189,881. The increase is expected to raise an less than R400,000 and the employer provides extra R12,1bn. a bursary to them or their relatives, the value of The introduction of a new top rate, by conthe bursary will not be taxable in the hands of trast, is quite symbolic. An extra R4,4bn will be the employee. x brought in by the introduction of a 45% top

sin tax gra

30

cents

TRANSFER DUTIES

Buyers of properties costing up to R900,000 will benefit most, but even the well-heeled will see a small saving Joan Muller mullerj@fm.co.za

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February 23 - March 1, 2017

6.7

7.4

14/15

15/16

5.48

4.27

13/14

12/13

11/12

3.83

5.32

4.68

09/10

10/11

4.93

08/09

7.4

07/08

06/07

05/06

6.77

7.11

8.51

8.42*

R1.06

17/18

ý From March 1, home buyers won’t pay a cent in transfer duties when they acquire a property priced up to R900,000, up from the previous exemption threshold of R750,000.

At present, transfer duty of 3% on the property value between R750,000 and R900,000 applies. In other words, if BRINGING IN MORE you bought a R900,000 Transfer duty revenues (Rbn) house a month ago, your transfer duty liability would have been R4,500.

10 The unexpected adjustment in the transfer duty 8 threshold will no doubt provide welcome relief to first6 time and middle-income home buyers.

4 It is also in line with the overall focus of this year’s 2 budget, which is largely supportive of poor and workingclass families.

0 Though buyers in the sub-R900,000 bracket will be the biggest winners from Source: Treasury * estimate this year’s transfer duty adjustments, people who buy homes for R1.25m and more will also make a running that upper-income home buyers were saving, albeit a marginal one. hit by transfer duty hikes.

Effectively, from March 1 all home buyers In the 2015 budget, the transfer duty on will save R4,500 in transfer duties, irrespective properties priced at more than R2.25m was of whether they have paid R1,5m or R15m for raised to 11% of the value, plus R85,000 — up their abode. sharply from the previous limit of 8% on houses Finance minister Pravin Gordhan expects the valued at more than R1.5m. changes to the transfer duty rates to lead to a Estate agents have welcomed this year’s drop in revenue of R448m in 2017/2018, bringtransfer duty changes. ing government’s estimated collection from “The raising of the exemption threshold to transfer duty to R8.42bn.

R900,000 will certainly enable more first-time That’s an increase of less than 3% on the home buyers to get onto the property ladder,” R8.25bn earned in 2016/2017. says Seeff Property group chairman Samuel However, government raked in R250m more Seeff. x

8.25

cents

than it expected in transfer duty revenue in 2016/2017, no doubt on the back of last year’s sizeable hike in transfer duties on luxury homes priced above R10m. Gordhan last year raised the transfer duty rate on such homes from 11% to 13% plus R937,500.

That meant a well-heeled buyer who spent R15m on a luxury abode incurred a hefty R100,000 more in transfer duties than a year earlier.

Moreover, last year was the second year

16/17

11

Source: Budget Review

20 cigare es

Pack of

Beer

340 ml

sin tax graphic (shaun)

iStock

Home is where the saving is

04/05

Gordhan indicated that the proposed sugar tax would be implemented later this year. But the necessary legislation still needs to be approved by parliament and signed by President Jacob Zuma.

The minister said that the tax has been revised to include both intrinsic sugars that are in beverages like fruit juice and products with added sugars such as soft drinks.

The proposed tax rate will be 2.1c/g of sugar in beverages that contain above 4 g/100 ml.

Concentrated beverages that need to be mixed with water will be taxed at 50% of the rate.

Gordhan said that further consultations are taking place on the tax on sugary beverages.

Treasury indicated that its preliminary socioeconomic impact assessment shows a relatively small effect on job losses, most of which can be prevented if companies reformulate their products. This is contradicted by a number of beverage manufacturers that have said the tax would affect their businesses negatively.

A number of places such as Denmark, Finland, France, the UK and Norway already have taxes on sugar-sweetened beverages.

Prof Karen Hofman, an expert in health policy and sugar tax from Wits University’s School of Public Health, says the impact on jobs has been exaggerated by the industry. Hofman says evidence shows there have not been any job losses in jurisdictions where a sugar tax has been introduced around the world.

“People will buy other products to drink that are cheaper and healthier, so there won’t be job loses. We can have as many consultations as we like but this will never be resolved, except by implementing and showing it does not make any difference [to jobs],” Hofman says.

Hofman says noncommunicable diseases like obesity and type 2 diabetes are currently costing SA roughly 6.2% of GDP. x

.

budget 2017 revenue CORPORATE TAX

Buoyant source of revenue While personal tax receipts have been below expectations, corporate tax has grown strongly thanks to increased compliance and measures to limit avoidance. Treasury performs a juggling act to please the goose that lays the golden eggs Stephen Cranston cranstons@fm.co.za

Freddy Mavunda

ý The corporate income tax rate was once Norton Rose Fulbright, says corporates might again held at 28%. Yet it has turned out to be the not have been hit explicitly through income tax most robust of the four major revenue sources. and they are hit harder when they distribute While personal tax receipts have been below income by the five percentage point increase in expectations, corporate income tax bagged the dividend withholding tax, which increases R189bn in the 2016 tax year, R2.1bn ahead of the effective corporate tax rate to 42.4%. budget. In the 2017 year, which closes next Troost says a significant difference between week, it was R6.8bn ahead at R205bn. As a rule, the 45% top individual tax rate and the company corporate tax brings in about half as much as tax rate provides an opportunity for tax arbipersonal tax. By 2020 corporate tax revenue Andrew Wellstead: Corporates not hit through income tax trage where business owners will be more will increase to R252bn. inclined to declare dividends to themselves Corporate tax has proved to be one of the SA argued that corporate tax is not economically rather than pay themselves a salary — the highRevenue Service’s success stories. It helps that it er dividend tax closes the arbitrage opportunity efficient, particularly when incentive prois easier to collect than personal tax as corgrammes are introduced. to some extent but not entirely. porates have nowhere to hide. It grew particIt is unclear how the burden is shared So it was not a surprising decision to not ularly strongly from 2001 to 2009 not just among shareholders, institutional investors and increase corporate tax. In the Davis committee’s because of economic growth and the commodiconsumers. Also, the tax is complex and open to August 2016 report, chairman Dennis Davis ties boom but also thanks to increased cominterpretation. It is also highly sensitive to the pliance and measures to limit tax avoidance. business cycle, both positively and negatively.

Ma nu There were pockets of buoyancy which There is a danger that, as Troost sugfa ct helped collections. Export values increased gests, corporates might be tempted to ur by 8.1% in the first three quarters of 2016. shift profits to report income in lower Export volume growth is expected to tax countries. increase by 5% in 2019 if treasury’s Finance minister Pravin Gordhan forecast of higher global growth, announced in the budget that govfewer mining safety stoppages ernment was re-evaluating existand real depreciation of the ing items that narrowed the corrand comes true. porate tax base, such as tax Tertius Troost, a tax consulincentives and deductions for tant at boutique accounting excessive debt financing, such firm Mazars, says SA’s corpoas Edcon’s funding under prirate tax rate is considered vate equity. Treasury has refoCORPORATE TAX high, and increasing this cused and tightened the urban CONTRIBUTORS would impair the country’s development zone tax incenstatus as an investment destitive as well as the learnership nation. But he adds that SA and employment tax incentives. cannot follow countries such The main tool for protecting Source: Sars, Treasury, Momentum Investments as Australia, Poland and the corporate income tax base Botswana which are reducing will be through measures introcorporate tax. duced across the G20 after their 6.

“It takes a significant amount of meeting in November 2015. Along 2% 3.9 % time to produce any positive results with more than 100 jurisdictions, SA for an economy. Given our country’s has adopted a multilateral instrument vast budget, the short-term effects of to swiftly modify and implement tax this would only further increase treatreaty related measures. g Ot n sury’s shortfall. And the high risk of a ratings There will be no need to renegotiate each i n he Mi r downgrade would substantially increase the tax treaty on a bilateral basis. There will also be So cost of financing SA’s government debt.” an automatic exchange of financial information t perscial/ Transpor onal Andrew Wellsted, head of tax at law firm from September 1. x

37.7 %

Fi n an

g

ce

in

%

21.3

15.7%

.8 6 8.5 %

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opinion by khanyile nzukuma

Nzukuma is CEO of Metropolitan Retail

Caught in a debt trap

F Debt levels lead to greater poverty and do enormous damage to families, communities and productivity

or finance minister Pravin Gordhan, debt management is a huge problem. National debt servicing costs are R169bn for 2017 and they’re swallowing up an alarming amount of his budget.

So he knows how most South Africans feel because, as individuals, we’re also drowning in debt.

Only one in four of us have any money left at the end of the month.

And 86% of adults borrow money (the highest level anywhere, according to a 2015 World Bank report).

This level of indebtedness has a back story which is important to understand.

Prior to 1994, the majority of the nation didn’t have access to formal lines of credit and lacked education regarding their use.

After we achieved democracy, access to credit was opened across the board, with positive and negative consequences.

Access to lines of credit beyond the limitations of stokvels and the harsh interest rates of the mashonisas (loan sharks) fuelled the extraordinary rise of the middle class.

It drove the growth which reached its peak around 2008.

But much of that money was borrowed on an unsustainable basis.

Or it was used for unproductive purposes with a lack of understanding of the core divide between good debt, which enables the building of an asset base, and bad debt, which usually meets a want, which may not contribute to building wealth.

No widespread savings culture was ever developed so the boom dividend was largely spent on debt servicing, with 75% of net disposable income currently devoted to that purpose.

This meant that when the macroeconomic tide turned against us, very few had anything to fall back on.

The obvious physical consequences of our debt levels are widespread impoverishment and an inability to improve circumstances.

But the psychological damage is also enormous and has a huge impact on families, entire communities and on national productivity.

The MMI Unisa Effective Employee Index demonstrates that stress about debt usually affects worker productivity significantly.

At the start of my working life I briefly experienced the particularly acute sense of vulnerability which comes from

feeling caught in a debt trap.

Fortunately for me I had the emotional and practical tools to successfully manage the burden. I was able to come out on the other side.

But too few have those tools. They need to be given them — urgently.

Many positive things have been done by government, the National Credit Regulator, the Financial Services Board and the courts to rein in irresponsible and usurious lending practices.

But no amount of regulatory measures can enforce responsible behaviour on the part of individuals.

Somehow we have to broadly entrench the concepts of basic budgeting and planning which lead to personal financial wellness.

We also need to have the ability to exercise patience in executing our needs instead of reaching for instant gratification.

Financial services companies have a responsibility here, as do employers, who must assist their workforces in tackling the burden of debt.

At government level the solution lies not with the finance minister but with his counterparts at basic and higher education.

Financial wellness must be taught effectively at schools and varsities.

There’s simply no excuse for the next generation failing to understand how to use money wisely. x

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budget 2017 revenue WEALTH TAX

That’s rich! Well-off must pay even more Don’t feel too sorry for top earners hit by the increase in top tax rates. The new level is well below what some people argue is fair. In any case, the rich will find ways to minimise their real contribution to the fiscus Ann Crotty acrotty@worldonline.co.za

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Indonesdia Egypt Kenya Colombia India China Mexico Chile South Korea US SA Australia Turkey Japan Canada Argentina UK Brazil Russia Germany Hungary Italy

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ý Finance minister Pravin Gordhan is giving is making some progress in cutting back on 103,000 are probably not white) part of the 103,000 lucky, and fabulously rich, South government wastage and corruption. white monopoly capital cabal.

Africans a greater opportunity to promote the The super-wealthy won’t want to hand over The belief that the 45% tax rate will bring in their hard earned dosh to a bunch of wasters. sort of meaningful transformation that will only about 63% of what it could assumes not “allow us all to say we all own our economy”. only more aggressive tax-avoidance measures Gordhan told a press conference before his Those 103,000, who were probably well but also that some of the 103,000 are mobile budget speech that he had not received input represented in the well-heeled audience and will head off to friendlier tax jurisdictions. from the CEO Initiative on the introduction of (including MPs) that sits in on the minister’s Certainly there will be much whingeing and the new tax bracket. budget speech each year, earn an annual taxspecial pleading by a group that has easy access Seeking input from various interest groups is able income of over R1.5m. Their tax rate has to the media. And it may be that when the dust not what the budget process is about. But, said been upped to 45% and is expected to consettles, many of the 103,000 have headed off. the minister, treasury has its antennae out to tribute an additional R4.4bn to the fiscus in But chances are they will over-egg their comlisten and decide what is reasonable. In passing, 2017/2018. plaining. he referred to suggestions that 65%, rather than This means the total contribution from our In the US, where the threat of moving is rou45%, might be more appropriate. super-rich will be R126.9bn, which is slightly tinely used to restrain tax, policy research has What will inevitably be termed a “wealth tax” more than 10% of government’s total revenue shown the rich are actually unwilling to move is a key part of the budget balance Gordhan has for the year. even between states to reduce their tax liabilto strike between fending off ANC politicians Not bad for just 1.4% of the 7.4m South ities, let alone out of the US altogether. And intent on looting the fiscus and seeming too Africans who pay tax. Add in a higher dividends despite all the huffing and puffing, there’s also chummy with those who might be tagged (inap- little international evidence of correlation tax hit (up to 20% from 15%) and those among propriately, given that a large number of the the super rich who smoke, drink and drive a lot between economic growth and the level of top might be feeling hard done by.

But don’t feel too sorry for SA’S RISING TAX BURDEN TAX BURDEN COMPARISON them. The same 103,000 are part % Tax revenue to GDP compared (%) of the 10% of the population that owns 95% of the country’s 28 50 wealth. And if all 103,000 of them Actual did actually pay the full additional Projected amount, the extra contribution to 40 the fiscus would be closer to 26 R7bn than the R4.4bn treasury is 30 working on.

Because Sars knows the super-rich have access to lots of 20 options as well as tax consultants 24 who will be able to whittle down 10 their liabilities, it has been modest in its expectations on this front.

Exactly how modest they 50 should be will probably depend 22 on how well Gordhan is able to persuade them of their critical role in transformation. In addition, he will have to convince them he Source: SARS, Treasury, Momentum Investments Source: Heritage Foundation, Momentum Investments

iStock

budget 2017 policy STATE-OWNED ENTERPRISES

Free-spending SOEs gobble up government funds SOEs’ R1.2 trillion asset base can be used to improve the economy’s productive capacity, but they have to address their operational management and governance problems Sikonathi Mantshantsha mantshantshas@fm.co.za

In times of war: Demands that the rich also suffer

tax rates.

That Gordhan’s top tax rate is modest by international standards is important to those (most of us) who believe a tax system should be fair. Taxing the rich will certainly seem fair to those who believe the state (including the previous state) has conferred privileges on the rich.

A 65% rate might offend the notion of fairness — except in the case of war breaking out.

Anyone who has made their weary way

R4.4bn in additional tax revenue, from a 45% tax on those who earn over R1,5m/year through Thomas Piketty’s book, Capital in the Twenty-First Century, will have noted the only time in the past 100 years that the leading global governments, on the right and left, managed to tax the rich at previously unimagined levels was between 1914 and the 1970s.

The two world wars were not only remarkably traumatic events, the mass mobilisation that underpinned both led to previously unheard-of demands that the rich should also suffer.

The extension of the vote across the globe ensured these demands were heard by new democratic governments.

In parliament on Wednesday, Gordhan made no mention of war, but he did paint a picture of a country balanced between radical transformation (combined with economic growth) and conflagration. x

ý National treasury has increased government guarantees to state-owned enterprises (SOEs) to R477.7bn in the current financial year, up from R469.9bn a year earlier.

The amount is equivalent to a quarter of government’s total national debt, allowing companies such as Eskom, the SA National Roads Agency and SA Airways (SAA) to access cheaper funding to continue their operations.

These companies have borrowed R308bn against this guarantee so far, treasury says in the Budget Review.

“A government guarantee is a commitment to take responsibility for a loan in the event of default; it enables the beneficiary to access funding that would otherwise be unavailable, or to borrow at rates that reflect lower-risk premiums,” it says. These guarantees, however, pose the biggest risk to the fiscus and serve to increase the risk premium on the nation’s debt, and government seeks therefore to maintain “these liabilities within prudent levels”.

Treasury aims to use the combined R1.2 trillion asset base of SOEs to partner with private investors and improve the productive capacity of the economy, finance minister Pravin Gordhan said.

These entities, however, have to improve both their operational management and governance on their boards to be effective agents, said the minister.

“There’s no doubt about that,” added Gordhan. “There’s room for significant improvement in governance. State-owned enterprises are the major risk we face.”

While the country relies on SOEs to execute its service delivery programmes, many of them are going through operational and management turmoil, largely as a result of political meddling by government ministers and officials, negatively affecting their ability to execute the mandate of government.

Gordhan said treasury will use the legal mechanisms available to it to support these entities, including leveraging the Public Finance Management Act to achieve financial sustainability.

SA is in the middle of a large capital investment programme in the energy sector, where Eskom is investing in build two coal-fired power stations.

At completion in 2022, Medupi and Kusile power stations will add a combined 9,600 MW of generation capacity, taking Eskom’s total output capacity to more than 53,000 MW. As such, the utility has the biggest exposure of this debt guarantee, at R350bn. Eskom will have borrowed R218bn against the guarantee by the end of next month, according to the Budget Review. It will this year probably use another R43.6bn of the guarantee, followed by R22bn for each of the following two years.

Eskom will continue to draw down on this debt while it works towards the completion of the 12 generating units of the coal-fired power stations.

Only one unit is in commercial production at Medupi; the second While the country generating unit was relies on SOEs to synchronised into the execute its grid in September last service delivery year and will enter programmes, commercial production many of them are in March next year. going through The first generating operational and unit of Kusile is expectmanagement ed to only enter comturmoil, largely as mercial production in a result of July next year, with the political meddling last of six units being by government completed in 2022. ministers and Earlier this year, officials Eskom announced the completion of ➦ February 23 - March 1, 2017

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budget 2017 policy SA Airways and other state-owned enterprises will have easier access to funding Sunday Times

REACHING THEIR LIMIT Government guarantee exposure 2016-2017 (Rbn) Guarantee

building activity at its Ingula Pumped Storage Scheme in the Drakensberg, which adds another 1,332 MW of capacity.

Eskom has already used up almost twothirds of its guarantee on its current capital build programme, and it will need a whole lot more when it launches its ambitious nuclear power investment programme.

This month the utility announced that it had received an overwhelming response from nuclear vendors to its request for proposals to build the next fleet of nuclear power stations.

Eskom has admitted that its balance sheet cannot fund the nuclear programme, and that it will ask the government for the required funds.

The next-biggest guarantee, at R200bn, went to independent power producers, which have had to contribute renewable energy to help Eskom meet demand over the past three years.

These companies have already used up R125.8bn of the debt.

Other companies making up the R477.7bn in government guarantees include roads agency Sanral, which manages a national road network of just under 21,000 km.

Its R39bn guarantee is followed by the R25.7bn guarantee of debt owed by the TransCaledon Tunnel Authority, which is responsible for the construction and maintenance of the country’s dam and water-provision infrastruc26

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Exposure*

State-owned companies (Total)

477.7

308.3

Eskom

350.0

218.2

SANRAL

38.9

30.1

Trans-Caledon Tunnel Authority

25.7

20.7

SAA

19.1

17.9

Land and Agricultural Bank of SA

11.1

5.4

Development Bank of Southern Africa

12.7

4.2

SA Post Office

4.4

3.9

Transnet

3.5

3.8

Denel

1.9

1.9

SA Express

1.1

1.0

IDC

1.9

0.2

SA Reserve Bank

3.0

—

200.2

125.8

10.9

10.9

Independent power producers Public-private partnerships**

* Total amount of borrowing and accrued interest for the period made against the guarantee ** This amount only includes national and provincial public-private partnership agreements Source: National Treasury

ture, mainly in Lesotho, where SA draws the bulk of its water.

The riskiest debt profile, however, is the total R19.1bn guarantee afforded to SAA. The national carrier still doesn’t have a management team in place, with a succession of executive directors and top management coming and going under controversial circumstances over the past four years.

Nonexecutive chair Dudu Myeni, whose term was extended by a year to September, has been accused of crippling the airline through interference in executive roles.

In the next few months SAA will appoint its fifth CEO in four years, and adopt its 10th turnaround plan in 15 years.

Together with subsidiary Mango, SAA has retained Bain & Co to advise it on the proposed merger with sister airline company SA Express, also a perennial loss maker.

Gordhan said the merger would optimise the use of its resources and consolidate the government’s exposure to the aviation companies.

His plan of part privatisation of the combined entity through a sale of stock will, however, be met with stiff resistance by his colleagues in cabinet.

Government formally abandoned the privatisation of companies it owned about a decade ago, and has since resisted all efforts to sell its many loss-making entities. x

“ Metropolitan

Metropolitan Financial Mail Final.indd 1

empower empower

your When you employees, you your business.

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2017/02/13 12:05 PM

PENSIONS

Getting in line with reality Confusion over the future of pension and provident funds remains. The budget did not make that any easier to understand Stephen Cranston cranstons@fm.co.za

ý With personal taxes up and an increase in dividend withholding tax from 15% to 20%, the tax breaks from retirement funds continue to get more valuable.

There is still confusion about the future of pension and provident funds, and the budget did not make that easier to understand. There is a stalemate over plans to force provident fund members to take pensions instead of lump sums at retirement. Treasury had planned to introduce this in the 2016 financial year, but the budget document says nothing will be introduced until there is consensus at the National Economic Development & Labour Council.

Arno Loots, head of Liberty’s umbrella funds unit, says that the only stick treasury has

SMALL BUSINESS

Big plans for procurement Increased emphasis by government and corporates on buying from small businesses should help grow the sector Charlotte Mathews mathewsc@fm.co.za

ý The priority in encouraging small businesses must be to create an enabling environment that ensures they are targeted by the procurement policies of government and the private sector alike, said finance minister Pravin Gordhan.

New preferential procurement regulations, gazetted in January 2017, require large firms awarded tenders of R30m or more to set aside one-third of the value for small or black-owned enterprises, where feasible.

The budget allocates R3.9bn over the medium term to support small, medium and micro enterprises and co-operatives.

Dumisani Bengu, head of franchising at Absa, says these funds will help to promote growth, to eradicate poverty and to promote employment.

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deployed is to indicate that provident fund contributions will lose their recently gained tax-free status unless the parties agree to accept forced pensions (or compulsory annuitisation).

Loots says that an interesting suggestion in the budget documents is that treasury and the retirement industry should look at developing a new kind of annuity product for the lower- and middle-income market, given that traditional pensions are unpopular in these markets.

The current topical discussion in the pensions world is the default regulations, which were published in December 2016 and for which industry comment is due by next week.

These set out what will be permitted for retirement fund members who do not want to choose. In the first draft, performance fees and smooth bonus funds were not permitted; in the second draft they were allowed.

“My heart skipped a beat when I read that concerns on these topics might be reviewed in the final paper,” says Malusi Ndlovu, head of Old Mutual Corporate Consultants. Ndlovu has a vested interest in supporting the highly profitable smooth bonus funds that Old Mutual uses as its main default. But many of these products are unlikely to get over the tight cost ceiling treasury is likely to implement.

Regulations will soon be in line with reality,

ment’s budget will grow annually by 7.1% to R1.6bn by 2019/2020. Its plans in the next three years include drawing up the National Small Business Amendment Bill, to refine the definition of a small business so that more appropriate policies and interventions can be developed. It will also streamline government entities serving the sector.

The Small Enterprise Development Agency,

Russell Roberts

budget 2017 policy

Arno Loots, head of Liberty’s umbrella funds unit

as parliament is finally expected to recognise the status of umbrella funds officially. When the Pension Funds Act was written in 1956, umbrellas — which allow for multiple employers and are usually offered by life offices — had not been invented. And treasury is certainly ambitious as it hopes to solve the problem of the billions in unclaimed benefits sitting in retirement funds. x

which provides incubator support through the National Gazelles programme, expects to support about 600 small enterprises in the next three years.

The number of small, black-owned enterprises receiving grants to help buy machinery and pay for training is expected to top 2,000 in the next few years.

There is also an informal business upliftment scheme which aims to grow 5,445 informal businesses through financial and nonfinanSA’s entrepreneurial activity is low cial support.

Support for co-operatives, Nascent New business through the co-operative incenentrepreneurship ownership Economy tive scheme, will increase by rate rate Africa about 5.6% annually but the Botswana number of co-operatives sup23.0 11.9 ported will fall, to about 302 Burkina Faso 19.7 11.2 from 370.

Cameroon 16.5 10.0 This year the department of Egypt economic development will 4.0 3.4 finalise the Tirisano Fund, Morocco 1.3 3.2 financed from the settlement Senegal 249 15.0 reached between competition SA authorities and construction 5.5 3.8 companies. Tirisano’s mandate Tunisia 5.4 3.4 will be to boost black skills and Total 12.5 7.9 support emerging enterprises. Its Source: Global Entrepreneurship monitor 2016 initial allocation is R117m. x

FALLING BEHIND

opinion by etienne de waal

De@Waal CEO scranissto n of Momentum Retail

Make your own budget

F

When SA revises its budget and sets financial goals, so should you

inance minister Pravin Gordhan’s 2017 budget will go down in history as one of the most critical budgets for SA, given the tough economic and political environment, locally and globally.

With insufficient financial resources to meet all its requirements, but increased demand for subsidies and better living standards, government faces the tough task of balancing the needs of its constituency with the looming threat of zero growth, a ratings downgrade and disinterested foreign investors.

Now is an opportune time to take stock of your personal budget. How will the national budget affect your expenditure? Will you pay more for food, education and basic services? Will you benefit from tax breaks? Can you protect and grow your savings?

Just as Gordhan surrounds himself with experts to draw up the national budget, individuals should seek expert advice to create a well-formulated budget as the first step to financial wellness.

Financial wellness means being able to sustainably cover planned as well as unforeseen expenses.

Research shows that people with budgets are more likely to be financially healthy. Once you understand how and why you spend money, you can set financial goals.

Momentum recommends a four-step process. First, know where you spend your money. This will help identify areas where you could save. Second, keep

track of your expenditure and ensure you are within your budget limits.

Third, be disciplined about managing your money and make wise decisions daily that save money while keeping your budget on track.

Lastly, look for opportunities to free up money to save for your lifetime goals and ensure financial wellness.

Similarly, Gordhan has drawn up a list of SA’s income and expenditure. He will have sought ways to increase income through cost-cutting measures or higher taxes. Then he will have applied any available funds after expenditure to meet SA’s wish-list of financial needs and goals.

A personal budget can be formulated using spreadsheet software, together with an analysis of your bank accounts.

Momentum is investing in digital platforms to give clients the tools to manage their budgets.

Online tools such a Myfintrack on momentum.co.za help categorise and track daily spending. Financial advisers also offer budgeting and financial planning advice.

The expense of face-to-face financial advice, as well as the minimum investable income required, leaves many lower- and middle-income earners unable to afford wealth management advice. With lower fees and investment

minimums, digital advice offers an opportunity to narrow the financial advice gap.

By simply using a mobile phone, clients can obtain advice tailored to their current needs and long-term goals.

Digital advice appeals to cost-conscious investors as well as those who do not need face-to-face advice for all their investment needs. Given the compounding effect of interest, even a small cut in fees can make a big difference to the long-term value of an investment.

For most clients, blending digital with face-to-face advice provides the optimal balance between trustworthy financial advice and the most affordable rates.

Despite the appeal of cost-effective digital advice, when it comes to complex matters such as trusts, taxation and estate planning, we recommend consulting a reputable financial adviser.

Whichever route you take, use the opportunity of the national budget to reflect on past financial successes and mistakes, measure your current financial wellness and reassess your financial and lifestyle goals. x

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budget 2017 spending HEALTH

Coverage for all Gordhan announced the imminent establishment of a national health insurance fund as he allocated R606bn over the next three years to the ailing health system Michelle Gumede gumedem@businesslive.co.za

ý National health insurance (NHI) is fast moving towards a reality, with treasury announcing that an NHI fund will be established this year as the country heads towards the next phase of providing universal health coverage.

While the white paper on the NHI is still being revised and finalised, treasury and the health department are working on a sustainable long-term financial framework.

The fund aims to improve access to services such as maternal health care, wheelchair access, family planning and mental health care.

Initially it will also serve to expand school health-care programmes.

Finance minister Pravin Gordhan said that, in setting up the fund, treasury will weigh all the options, including possible adjustments to the tax credit on medical scheme contributions.

The private health-care system in SA is utilised by a small percentage of the population, though expenditure in private care is well over 50% of total health-care spend.

Abieyuwa Ohonba, a health economics expert at the University of Johannesburg, says even though public hospitals have considerably lower rates for adults, and free primary health

HEALTH

R83.6bn District health services

R9.9bn

Facilities managment and maintenance

R25.8bn Other health services

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care for children under six and pensioners, private health care is first choice for most people.

“Even the very poor would rather incur outof-pocket expenses to consult with a private doctor,” she says.

Against the background of a disparate and unfair health system, where a greater percentage of the population is serviced by a severely underfunded and deprived public health system, “the NHI is certainly a vital transformation tool in the process of economic growth and development in SA”, Ohonba says. “However, there are many challenges, like the source of funding which is expected to be derived mainly from general taxes.”

Over the next three years, government will spend R606bn on health, concentrating funds primarily on HIV/Aids treatment and prevention programmes, revitalisCentral hospital ing health-care facilities and services providing specialised tertiary services.

Treasury committed R19.1bn more to the health budget than in 2016. Between 2012 and 2018/2019 health expenditure will have grown in real terms by 1.3%.

R32.3bn For the 2017 financial year, Provincial hospital R187.5bn is reserved for the services health sector and district health services will get the lion’s share of R83.6bn.

Central hospital services Source: Budget Review will receive R35.9bn, R32.3bn

R35.9bn

is set aside for provincial hospital services, and other health services will have R25.8bn to spend. R9.9bn is reserved for facilities management and maintenance.

With SA’s shortage of medical personnel and training facilities, higher education & training minister Blade Nzimande has sent thousands of students to Cuba to obtain medical degrees and experience in a country with one of the best health-care systems in the world.

Gordhan said that over the next few months he will work with health minister Aaron Motsoaledi, Nzimande and economic development minister Ebrahim Patel to plan the development of the Limpopo Central Hospital and launch a new medical school in the area.

Prof Laetitia Rispel, who heads the Centre for Health Policy at Wits University, says all categories of medicine need to be developed to ensure a reasonable ratio of practitioners.

Rispel says government also needs to provide incentives to health-care workers across the board. “Our problem is that the majority of doctors are in the private sector and those in the public sector are based mainly in cities,” she explains.

Though the health-care sector faces huge challenges, there have been some gains in the treatment of HIV/Aids. Mother-tochild transmission has been drastically reduced in the country through various interventions.

Gordhan set aside an additional R885m for the implementation of the universal test-andtreat policy for HIV/Aids.

More than 3.5m people are accessing antiretrovirals (ARVs) and the health department expects ARV treatment to reach 5m South Africans by 2018/2019.

Treasury says it has saved about R1.6bn/year through the centralised procurement of medication, but savings have been offset by a weaker rand, which has driven up prices. x

PROVINCES

urban areas,” it says.

“The impact of these allocations depends, however, on the choices made by provinces and municipalities in allocating and executing their own budgets.”

Of the equitable share allocated to the provincial governments — an amount of R441.3bn — R93.7bn went to KwaZulu Natal, R86bn to Gauteng and R61bn to the Gordhan’s ‘highly redistributive’ budget takes from the rich and gives Eastern Cape. to poor households in rural as well as urban areas. But, say experts, Six provincial governments around the this puts Gauteng and the Western Cape at a disadvantage country have started to either merge or incorporate some entities into other provincial Pericles Anetos Anetosp@timesmedia.co.za departments to reduce costs.

Treasury says the planned merger of gambling and liquor boards in several provinces into ý Provinces and municipalities are getting provinces such as the Eastern Cape and one board is expected to result in annual sava bigger slice of the pie each year with more KwaZulu Natal. ings of about R3m per merger. than half of the national budget heading Treasury says in the Budget Review that the Underspending has stabilised across national, their way. allocations to provinces are based primarily on provincial and local government, it says.

This year treasury allocated R538.2bn to demand for services.

Provinces have made progress in impleprovinces, up from a revised estimate of “The division of revenue system is menting the cost-containment measures R500.4bn the year before. A further R112.5bn highly effective at redistributing resources announced in 2013. went to local government, which received from a largely urban tax base to programmes Spending on nonessential goods and services R103.3bn last year. that benefit poor households in both rural and fell in real terms by 6.1% last year and was This means that 43.4% of the budget is going expected to drop by 4.5% annually over the to the provinces and 9.1% to local government. medium term.

Finance minister Pravin Gordhan said this Treasury says municipalities are also year’s budget was “highly redistributive”. taking steps to reduce expenditure on He said the budget redistributed consultants, travel and subsistence, resources from urban economic areas credit cards, catering, events, to fund services in rural areas. advertising and conferences.

In the Budget Review, treaThe proportion of provinsury says that while metropoliGAUTENG cial spending on personnel tan municipalities account for has also declined slightly, 70% of personal income tax from 60.4% in 2015 to revenue they receive only LIMPOPO LIMPO 59.8% last year.

31% of local government NORTH ORTH WEST Treasury says the transfers.

NOR number of people Similarly, the 61 THE CAP RN employed by provinmostly rural local E cial departments is municipalities also expected to grow by receive 31% of the MPUMALANGA MP about 1% as more transfers to local govteachers and healthernment, but account care professionals are for only 5% of personal WESTERN N hired. income tax revenues.

CAPE Conditional grants But this puts some overseen by national provinces at a disadvandepartments which are tage — particularly Gautused to fund specific eng and the Western Cape, programmes make up which deal with more 18.3% of provincial transdomestic migration as KWAZULU-NATAL fers. people move to the county’s But municipalities needed to economic powerhouses looking EASTERN CAPE balance their plans to extend and for jobs, says Roelof Botha, ecoimprove services with available nomic adviser to PwC. FREE STATE resources.

Botha says the equitable distribuTO “Unlike provinces, municipalities can tion puts more pressure on Gauteng and TAL raise substantial own revenues through the Western Cape.

TRAN SFERS property rates and service charges,” treasury The Western Cape and Gauteng receive far says. x less per capita from the budget compared to

107,471

20 17 -

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59,845 59,8

37,882

Unal

123 l o ca

te d

TR

SF

ER

OVINCES O PR T S

8

AN

More for rural municipalities

16,0 09

43,264 4

56,050 0

112,580

73,145 73 145

31,789

0 6 1 , 538

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budget 2017 spending TOURISM

Welcome news for welcome industry Industry gets long overdue recognition and support as one of the main drivers of the economy as SA continues to be a favourite for global travellers Thabiso Mochiko Mochikot@businesslive.co.za

ý The tourism industry is set for a major boost after treasury allocated an additional R494m for tourism promotion. The industry is seen as playing a central role in growing employment and ensuring inclusive economic growth.

According to treasury, in 2015, 4.5% of the total workforce was employed in tourism, accounting for 711,746 people, and the sector contributed 3% to GDP. Tshifhiwa Tshivhengwa, CEO of the Federated Hospitality Association of Southern Africa, welcomed the funding allocation, saying this would go a long way to get more people to visit SA and create more jobs.

“This is long overdue. The industry has been underfunded for years. It is about time that it is recognised as one of the economic drivers,” he says. Tshivhengwa says tourism surpasses the mining sector in terms of employment and ‘needs to be taken seriously’.

“Finally, the message of travel and tourism as a key economic driver (though not yet regarded as an economic sector by the department of

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Sweden

Switzerland

India

Australia

China

Netherlands

France

US

UK

Germany

trade & industry, which is something we wonder about) is filtering through government speeches and plans,” says Mmatšatši Ramawela, CEO of the Tourism Business Council of SA (TBCSA).

In terms of the budget allocations the reality is that finance minister Pravin Gordhan “did not have much room to manoeuvre,” she says.

However, the TBCSA is pleased that government was able to source additional funds for tourism promotion. “This allocation and the significant mention of tourism in various parts of his [Gordhan’s] speech sends a clear signal that government is beginning to embrace this sector.

We now look forward to hearing from the national tourism minister on how the increased funding will be used in his own budget vote later this year,” says Ramawela.

Business Day reported last week that in 2016 more than 10m international tourists arrived in SA‚ 13% more than in 2015, according to Statistics SA. This is well over the world average growth rate of 3.9% for the same period.

The UK remained the MORE VISITORS leading source market for overseas arrivals to SA last Number of tourists from 10 leading overseas countries year with 447,840 visitors, Nov 2015 - Nov 2016 followed by the US with 45,000 345,013 and Germany at 40,000 311,832. China is the lead2015 35,000 ing growth market‚ with 2016 30,000 year-on-year growth recorded at 38%. Arrivals 25,000 from India grew by 22%.

20,000 There was an 11% growth 15,000 in tourist arrivals from Africa, bringing the total for 10,000 2016 to 7.5m.

5,000 According to treasury, 0 the tourism department relies on SA Tourism to market the country. The organisation is mandated to grow local and overseas tourist numbers and tourist Source: Stats SA spending, which in turn

supports jobs and economic growth. Additional funding of R174m has been allocated to the organisation over the medium term to increase marketing in established and emerging markets.

The department is set to transfer R1.1bn over the medium term to the Working for Tourism project through the expanded public works programme. This is expected to create 10,629 fulltime-equivalent jobs by 2019/2020. The department will also spend a further R124.8m through

711,746 the number of people employed in the tourism industry in 2015 the Enterprise Development & Transformation subprogramme, which aims to transform and increase the geographical spread of the tourism sector, to provide developmental support to 1,400 rural tourism enterprises over the medium term.

Through the Destination Development programme, the department plans to work with municipalities and communities to develop the underused public recreation facilities that they own into tourism destinations. It has allocated R200m for this initiative.

Yudhvir Seetharam, head of analytics at FNB, said in a statement recently that SA has remained a popular luxury destination for many international travellers, especially as it offers a world-class experience from shopping to pristine beaches and unforgettable safaris at a fraction of the price.

A weaker rand makes for a favourable exchange rate for foreign tourists travelling to SA. Locals who would have otherwise travelled abroad, will most likely travel within the country, creating a greater income stream for tour operators, transport, hotels, and bed & breakfasts, according to Seetharam. x

opinion by jaco oosthuizen

Oosthuizen is chief exponential officer at MMI’s Exponential Ventures

Pre-empting disruption

F MMI is futureproofing its business by creating disruptive capabilities within the company

inancial technology (fintech) has grown with the advent of new technology. From blockchain to drones, data analysis to crowdfunded insurance, artificial intelligence to robotics, the Internet of Things to genome technology and wearables, exciting new technology will transform the way consumers engage with financial services companies.

Fintech and insurtech have enormous potential benefits for the industry, entrepreneurs, clients and the economy.

MMI is particularly interested in fintech, insurtech and healthtech because of their potential to disrupt traditional business models. Insurtech is lagging fintech by about four years but is picking up exponentially.

Last year MMI launched Exponential Ventures, a business unit focused on potentially disruptive innovation opportunities in the financial wellness space.

Rather than be disrupted by a new entrant, MMI is future-proofing its business by creating disruptive capabilities within the company. It believes disruptive innovation in the fintech and insurtech sectors will allow it to transform its existing business model by

partnering with and investing in start-up businesses and building new businesses.

According to global research conducted by Accenture, players with a vested interest in the fintech space have invested over US$50bn in almost 2,500 companies since 2010.

In SA, lack of funding has been a barrier to entry, with many entrepreneurs relying on self-funding or funding from friends and family. This is changing as corporates become involved. Exponential Ventures has created a new technology venture capital fund, the 4Di Exponential Tech Fund, aimed at earlyand growth-stage startups with ambitions to reach international markets.

Traditional industries that previously fuelled the SA economy are stagnant or in decline. The rapid growth of fintech and insurtech in SA is good news not only for the economy but also for improved employment levels.

To boost Exponential’s impact, MMI has invested in the first-ever insurtech accelerator programme, Startupbootcamp InsurTech, based in London.

Startups across the globe participate in a rigorous selection process, after which only the top 10 get selected in the accel-

eration programme in London. In the recent Startupbootcamp intake of January 2017, 10 start-ups were selected worldwide, three of which are SA businesses. This is another way that Exponential is contributing towards growth in SA’s insurtech ecosystem and ultimately creating economic value.

Exponential Ventures hopes government will focus on enabling entrepreneurs, given their ability to potentially boost economic growth rates while creating fresh employment opportunities.

For start-up businesses economic stability is essential, as is firm policy direction. To boost small businesses and entrepreneurs, government needs to reduce the current onerous administrative compliance burdens. Easing regulations that threaten to stifle any local industry is essential to grow new businesses as well as the overall economy.

Increased tax concessions for smaller companies as well as enticing foreign investment into SA will also enhance entrepreneurial growth.

It would also benefit entrepreneurs if it were easier for start-ups to do business with government.

Exponential Ventures looks forward to making great strides in the fintech and insurtech areas, to build sustainable businesses that will make a meaningful contribution to MMI’s stated purpose of enhancing life-time financial wellness, while at the same time growing the wealth of SA and South Africans. x

February 23 - March 1, 2017

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budget 2017 spending EDUCATION

Student funding gets a boost University education continues to get more support but there are calls for more funding for basic education and technical institutions Charlotte Mathews mathewsc@fm.co.za

EDUCATION

ý Post-school education, governnext three years. The department of ment’s biggest cost after servicing basic education will provide 40,500 its debt, receives an additional R5bn bursaries, at R3.5bn, to increase the on top of the R32bn extra allocated number of teachers with an emphain the medium-term budget. sis on mathematics, science and In his budget speech, finance technology.

Basic Education minister Pravin Gordhan reiterated Ian Cruickshanks, chief government’s commitment last year economist at the SA Institute of Race that there will be no increase in fees Relations, says the output from unifor university and technical college versities cannot be improved unless students whose annual family the inputs are improved. income is below R600,000. All That means more money needs to poor students who qualify for the be directed at improving the quality National Students Financial Aid of teachers at primary school level, Scheme (NSFAS) will be supported. so that students who reach univerThe NSFAS said this week it sity level are able to proceed beyond would be funding 10% more stumerely entry to those institutions. dents this year — at about 450,000 people — using the additional fundCruickshanks says the budget’s ing granted in last year’s budget. failure to direct more funding University Last year an additional R10.6bn towards artisanal training was a dissubsidies over three years was added to appointment. The country needs carNSFAS’s coffers. penters, electricians and bricklayers The number of enrolled univerjust as much as it needs doctors and sity students is expected to rise to lawyers.

1.1m by 2019/2020 from about 1m in Roné McFarlane, a researcher at 2016/2017, while enrolments at Equal Education, says the organisatechnical colleges will stabilise at Skills development tion is excited about the R1.1bn Technical and about 710,535/year, Gordhan said. increase in the early childhood levy institutions vocational National student Community education programmes development grant to include 113,889 education Education financial aid will serve about 340,000 people by more children. and training administration Source: Budget Review scheme 2019/2020 from 310,000 this year.

But Equal Education is disapThe Heher commission of inquiry pointed that the “equitable share forinto higher education and training will mula”, under which funds are allocated to the eracy and numeracy in foundation phase complete its work by June and the interminprovinces, has not been adjusted for the fact schooling and reforming technical and vocaisterial committee on higher education is canthat schooling costs more in rural areas. tional education so they meet employers’ needs, vassing opinions.

It was also disappointing that no commitGordhan said. Next year government will spend Treasury says a graduate tax — a proposal to ment was made to finance transport for scholover R240bn or 17.5% of the budget on basic levy a tax directly on all university graduates to ars. In provinces like Limpopo, KwaZulu Natal education. help raise funding — is unlikely to raise enough and the Eastern Cape, children often have to Spending on school buildings will grow at for universities. In 2011, SA had about 1.3m grad- 12.5%/year, and the plan is to have replaced walk long distances to schools, which affects uates and 80,000 graduated in 2014. their concentration in class. about 510 inappropriate and unsafe schools by Assuming the marginal tax rate of university Though the allocation for school infrastruc2018/2019. In 2015/2016 the basic education graduates were to be increased by one percentture was increased in this budget over last department’s school infrastructure budget was age point, it would generate only about R3bn, far one of the five areas of greatest underspending. year’s, Equal Education says it is also concerned lower than the R59.8bn needed by SA’s 26 pubthat overall it is lower than in previous comIt had underspent by R490m, mainly because of lic universities in 2015. mitments. McFarlane says it is also unfortunate difficulties in reaching agreements with comIn targeting radical transformation and incluthat the department of basic education is conmunities. sive growth, two of government’s five critical sistently underspending on school buildings and Spending on learning materials for pupils priorities are improving the quality of basic litfailing to meet its targets. x and teachers will grow at 9.5%/year over the

R216.7bn

R31.6bn

R7.3bn

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R15.3bn R15.8bn

R21.1bn

INFRASTRUCTURE

Eskom and Transnet lead the pack Government extends power utility’s R350bn guarantee by six years — but it will not be used to cover nuclear build.

Meanwhile, the state transport company gets R273bn to spend over the next five years Sikonathi Mantshantsha mantshantshas@fm.co.za

ý Government entities will spend about R433bn on capital goods over the next three years, most of which will be spent on fixed infrastructure by the state’s six largest companies.

Majuba power station: Eskom and Transnet are at the forefront of the capital expenditure drive The Times This will take total expenditure on infrastructure to over R1 trillion since 2012, as these the two power stations currently under way, forward. entities have already spent R514.4bn, finance has been extended from next month.

Eskom wants to build a fleet of power staminister Pravin Gordhan said in parliament This guarantee is specific to raising tions eventually amounting to 9,600 MW by the this week. money for the current build of coal-fired power year 2037.

Eskom and Transnet are at the forefront of stations.

At current estimates it is expected to cost the capital expenditure drive, having taken up It will not be extended to fund Eskom’s R440bn at the low end and R1.2 trillion at the 74% of the total. ambitious nuclear electricity investment drive. top end.

This was spent by Eskom bringing online Late last year, Eskom requested proposals Equally, Eskom has stated that its balance 1,900 MW of electricity-generating capacity and from interested parties to provide information sheet cannot fund any expenditure of this nature transmission infrastructure, while Transnet’s on what it would cost to build the infrastructure. without government support. acquisition of locomotives and investment in rail When the process closed last month, Eskom This is a significant amount, as current govinfrastructure added 26.4 Mt of capacity for its said it had had overwhelming interest from ernment expenditure totals R1.56 trillion over general freight business. major international nuclear vendors, and would the medium term.

Another 9 Mt was added to the export coal analyse the information to determine the way Asked if the budget makes allowance for line to the Richards Bay Coal Ternuclear build, Gordhan said no. minal and the capacity of the iron “That process (at Eskom) is still in ore line was boosted by 7.2 Mt. CONSTRAINTS TO DOMESTIC INVESTMENT the early stages, and treasury is not yet Transnet’s capital expenditure required to make any provision for it,” % of respondents reporting constraints to investing amounts to over R122bn over the he said.

100 past five years, including buying A major surprise in the budget was 1,064 rail locomotives, laying a fuel an allocation of R200bn for the conpipeline and rolling stock. struction of the Mthombo oil refinery 75 The utility will spend the money that PetroSA wanted to build at Coega expanding and upgrading its rail in the Eastern Cape. infrastructure and rolling stock.

The fuel supplier quietly abandoned 50 Over the next five years, the project two years ago, in the face Transnet will spend another R273bn of depressed oil prices that would have on capital infrastructure. made the 300 000 barrels per day 25 In addition to handing Eskom uneconomical. a cash bailout of R23bn and conIt was at the feasibility stage then. verting a R60bn loan into equity, Treasury says in the budget review 0 government has extended the utilthat should this project go ahead, it ity’s R350bn guarantee facility by would require further investment of 1988 1992 1996 2000 2004 2008 2012 2016 six years.

R100bn in supporting infrastructure to Insufficient demand Political climate The guarantee, which Eskom make it work in an area bereft of fuel Source: BER, Momentum Investments, data up to 4Q16 needs to complete the building of transportation capacity. x February 23 - March 1, 2017

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budget 2017 spending SOCIAL WELFARE

A bit more in grants — plus a scary delay The social development department doesn’t appear to have made much progress to ensure that people who depend on social subsidies receive them from April. And national treasury has little to say on the matter

ý For those hoping for some indication of adult oversight of the controversial social grant tender, the budget was a grim disappointment.

Perhaps understandably, given the political sensitivity attached to the issue, finance minister Pravin Gordhan brushed off the one SA Social Security Agency (Sassa)-related question at the press conference ahead of the budget.

“We’ve little to say on that matter; we’ve engaged with Sassa and the social development department . . . ultimately it is the department’s responsibility,” the minister said. “We’re expecting them to go to the constitutional court at some point,” he added.

And then the very scary part: “There’s a process they’re following.”

At least it was scary for anyone who had, minutes earlier, listened to social development minister Bathabile Dlamini update parliament’s portfolio committee on the progress of that process to ensure that social grants continue to be distributed to people who depend on them.

Those who sat in for the full session concluded there had been little progress.

It appears Sassa has not started its negotiations to extend Net1-UEPS’s subsidiary Cash Paymaster Services’ (CPS) contract. It now distributes grants to 11m recipients (who receive grants on behalf of 17m beneficiaries).

And though Sassa undertook to apply to the constitutional court by February 15 to extend its contract with CPS, it has not yet done so. Once it has been back to the court, Dlamini told the committee, it will return to national treasury for approval of a plan for the distribution of social grants after April 1. That’s when the current CPS contract, which has been declared invalid by the court, expires.

Dlamini’s short-term plan appears to be the continuation of some sort of relationship with CPS for up to two years. That relationship will require a new contract.

Against this uncertain backdrop it was probably reasonable that national treasury based its figures for the coming year on the assumption 36

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Sowetan

Ann Crotty crottya@bdfm.co.za

that little would change with Sassa’s distribution contract in 2017/2018.

“The agency currently spends R2bn a year on contracting the full payment function Bathabile Dlamini: Updated to a service provider. This baseline is expect- parliament’s portfolio committee ed to be maintained over the medium term,” the Estimates of National Expenditure 2017 received R2.1bn in 2016/2017 and may or may tome says. not (but probably will) be the contractor that Sassa’s total budget for 2017/2018 is R7.2bn. receives a budgeted R2.3bn in 2017/2018.

The largest single item in that budget is R3.2bn If, as many suspect, CPS is able to extract for employees; the second-largest is R2.3bn for better terms for the additional two years “payment contractors”. This is where CPS referred to by Dlamini, then Sassa will have to comes in. CPS was the payment contractor that find the extra funds from somewhere within its R7.2bn budget. Remarkably, it had an accumulated surplus of R625m at the end of financial 2016/2017. This surplus is expected to be Social grant values reduced to R123m by the end of 2017/2018.

Treasury will be reluctant to hand over any Percentage additional funds to Sassa for on-payment to increase 2017/2018 CPS. It points out that the grants’ administration cost is now over 5% of the total costs of the State grants. This compares with the world best of 6.3% 6.3 3% % old age around 3%.

Estimates of National Expenditure also State old makes reference to expectations that Sassa will age, over 75 6.2% 6.2 2% % implement a biometric authentication system: “The system is expected to reduce fraud by providing secure, positive identification of users, War and [the linking of officials] from the agency veterans 6.2 6.2% 2% % with the beneficiary whose grant they approved. An estimated R100m over the [medium-term expenditure framework] period is Disability 6.3% 6.3 3% % allocated for the project, which is set to be implemented in 2017/2018.”

Meanwhile, the 2017/2018 budget will result Foster care in more money being distributed by whoever 3.4% 3.4 4% secures the contract after March 31. The old-age grant creeps up by R90 to R1,600/month for Care people over 60 and R1,620 for those over 75. dependency 6.3% 6.3 3% % The disability and care dependency grants also increase by R90, to R1,600. Foster grants are up R30 to R920 and child support grants by R20 to Child R380/month. The total social welfare bill for the support 7% % year will be R142bn, just R15bn more than the Source: Treasury S T new wealth tax is expected to generate. x

RISING WITH INFLATION

R1,600 R1,620 R1,620

R1,600 R920

R1,600 R380

opinion by innocent dutiro

Africa growth search Dutiro is CEO of MMI: Africa & Asia

W

The race for Africa’s insurance market depends on the ability to integrate insurance with mobile networks

ith predicted growth rates of 4%-10% for many African economies, foreign investors are streaming into Africa, enticed by the prospect of an emerging middle class. Even though per capita GDP is low in many African countries, the sheer volume of underserviced people is enormous. Demographics are also a huge driver. Europe’s population is skewed to older people; while Africa’s younger population offers a market that will require servicing for decades.

As investors in Africa, SA companies compete with those from all over the world. For large foreign investors, the small scale of potential investment in Africa is the biggest challenge, followed by an unfamiliar culture. This gives SA a competitive advantage. Without the expense of establishing headquarters in Africa, local firms can support smaller investments and are also able to develop Afrocentric teams that are more likely to understand local cultures.

For the SA insurance industry, diversification into Africa is an obvious growth path, given that insurance penetration in this country and the developed world is saturated and competitive.

Conversely, insurance penetration in the rest of the continent is low.

The African insurance market is estimated to be worth US$63bn — 80% of which comes from SA. Collectively, Kenya, Nigeria, Ghana, Tanzania, Uganda, Ethiopia, Rwanda and the South Sudan

insurance markets make up $3.97bn, with the rest of Africa estimated to be worth about $15bn.

Currently, insurance services amount to only 1% of Africa’s GDP, compared to 12%-14% of GDP in SA. Projected profit before tax in 2020 is estimated at about $900m — 70% of which will come from general insurance.

Africa’s insurance industry is still at an embryonic stage with no established culture of insurance outside of Southern Africa. Education is key to attracting this market; each requires unique products and services linked to its needs.

MMI’s African businesses force it to be innovative, especially with regard to mobile technology as a means of education and distribution. The race for Africa’s insurance market will be won or lost on the ability to integrate insurance offerings with mobile networks. We have many initiatives in place to provide health and other insurance products to our client base via mobile networks.

MMI’s presence in 11 African countries over nearly four decades gives it a sound platform to tap into Africa’s increasingly formally employed population. Ten years from now, MMI envisages 15%-20% of its earnings emanating

from its Africa businesses.

By doing business in Africa the MMI way, MMI hopes to establish its culture across Africa to make a real difference in the lives of its customers and employees. With the goal of financial wellness for its clients, MMI aims to improve savings rates and establish a long-term savings culture in the countries in which it operates.

We believe in the benefits of employing local skills as these individuals know the local dynamics, trends and languages and can tap into local networks.

MMI also immerses itself in the countries it invests in by becoming involved in local industry bodies and lobby groups, consulting with government and investing in consumer education.

SA remains MMI’s core focus area.

As its capital to invest comes from SA, a healthy local business is imperative to its African expansion. Similarly, MMI can only reach its Africa expansion targets if SA’s economy is stable. A healthier SA economy, with incentives to encourage investment in SA as well as investment from SA into Africa, will go a long way to growing the insurance industry in Africa and strengthening SA’s existing insurance industry. x

February 23 - March 1, 2017

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budget 2017 spending

Police will intensify implementation of the ‘Back to Basics’ strategy, aimed at improving performance and conduct Michelle Gumede gumedem@bdlive.co.za

ý A total of R198.7bn will be devoted to the defence, public order & public safety portfolio.

Spending will focus on fighting transnational crimes, improving policing, peace support operations and military health services.

“The National Development Plan (NDP) has underlined the need for greater safety and security through an effective criminal justice system and responsive police services,” the national budget said.

SA Police Service crime statistics say incidents of murder, assault and robbery with aggravating circumstances increased by between 2.2% and 4.9% from April 2014 to March 2016.

HUMAN SETTLEMENTS

Housing scores big More money will be spent to house the country’s poor, but SA’s housing backlog still weighs heavily Joan Muller mullerj@fm.co.za

ý Government is clearly putting its money where its mouth is in its bid to prioritise the provision of adequate housing for the poor.

The 2017/2018 budget for human settlements and municipal infrastructure has increased by nearly 9% to R195.8bn, which is ahead of budget increases in other key government expenditure areas such as basic education, health and social grants. Finance minister Pravin Gordhan said the urgent need for urban reform to overcome apartheid’s spatial legacy will necessitate continued growth in the human settlements and municipal infrastructure budget, by 8%/year over the next three years. Spending will focus on housing, public transport and improving access to water, sanitation and electricity.

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To promote affordable medium-density rental housing, treasury has allocated R3.2bn to lower-income housing projects, which is expected to deliver 55,171 social housing units over the next three years. By 2019/2020, government will also provide an additional 623,635 households in informal settlements with access to basic services and 66,554 finance-linked subsidies for the affordable housing market. In what appears to be a shift away from government’s policy to promote home ownership

among the poor, Gordhan said from now on the focus will include the provision of high-density, rental accommodation.

To support this initiative, subsidies for social housing have been rationalised, with R600m to be reprioritised to the Social Housing Regulatory Authority for investment in rental housing units.

Gordhan said that human settlements minister Lindiwe Sisulu is expected to soon release a white paper on the reforms necessary to build more inclusive residential property markets, and accelerate the upgrading of informal settlements.

While government’s increased expenditure on housing provision will no doubt benefit many lowerincome families, it is unlikely Housing budget graphic to make a meaningful dent in SA’s housing backlog over the short term.

Latest figures from the SA Institute of Race Relations place SA’s housing backlog at around 2m units, more than the estimated deficit of 1.5m houses in 1994. Informal settlements have ballooned from an estimated 300 to more than 2,000 in the same period. x Better access to basic services: Informal settlement in Langa, Cape Town Gallo Images / The Times / David Harrison)

Policing gets largest slice

Police services account for 47.3% of the total functional allocation. A total of R2.5bn is allocated to the department to upgrade and maintain police stations, with a further R10.2bn to procure and maintain transport equipment. Over the medium term, the police will intensify implementation of the “Back to Basics” strategy — it is aimed at improving police performance and conduct.

For the 2016/2017 financial year, R93.8bn is directed to the police service, R54bn to defence Keeping order: Riot police on duty at the state of the nation address and state security and R43.8bn will fund law courts and prisons. which examines passenger data to prevent indiThe consolidated three-year budget for the viduals who are wanted by the authorities, or defence, public order & safety function group prohibited from travelling internationally, from accounts for 14.2% of total expenditure. It will entering the country. Over the medium term, grow from R190bn in 2016/2017 to R225bn in R153m has been reprioritised from the depart2019/2020 at an average annual rate of 5.8%. ment of police to the department of home affairs The department of defence plans to spend to augment the baseline budget of R352.5m for R3.3bn over the next three years to safeguard this system to adjust for currency depreciation. national borders.

Since its implementation, 4,213 people have According to national treasury, the departbeen prevented from boarding SA-bound flights, ment of home affairs has implemented the and 3,083 people using lost or stolen SA passadvanced passenger processing system — ports were denied exit. x Gallo Images / Rapport / Conrad Bornman

DEFENCE, PUBLIC ORDER, SAFETY

RURAL DEVELOPMENT

Not on a par with land reform talk The renewed call for land reform requires defined, actionable programmes and a clear timetable. Without this, success is unlikely Joan Muller mullerj@fm.co.za

funding model to support emerging and land reform farmers.

Currently, there appears to be some overlapping on funding structures offered by the department of agriculture, forestry & fisheries and the department of rural development & land reform.

Gordhan says the first task is to clarify the roles of each department.

However, industry commentators remain sceptical on how recent populist rhetoric on land reform will translate into improved land redistribution processes and settlement of land claims.

Nkuli Bogopa, president of the SA Institute for Black Property Practitioners, says that while the organisation supports Zuma’s renewed call for land reform, defined, actionable programmes and a clear timetable are now required.

Nkuli Bogopa: Actionable programmes and a clear timetable are now required

Freddy Mavunda

ý Land reform, or rather the lack thereof, doesn’t get much attention in this year’s budget despite being one of the key issues raised in President Jacob Zuma’s state of the nation (Sona) address earlier in February.

Land reform was singled out in that speech as one of the ANC’s 12 urgent tasks to achieve what the president called “radical economic transformation”.

Industry commentators have long argued that if there is to be a greater emphasis on land reform, there must also be a substantial increase in government funding.

However, this hasn’t happened yet. The 2017/2018 budget allocation for agriculture, rural development and land reform is up less than 3% to R26.53bn and still represents less than 2% of total government expenditure.

Though the budget allocation is set to rise to nearly R30bn in 2019/2020, most of the increased spending will go towards stimulating rural development and food production.

Government will spend more than R5.5bn on a comprehensive agricultural support programme to provide about 435,000 subsistence and smallholder farmers with equipment, fencing, fertilisers, seedlings, repairs to flood-damaged infrastructure and other services.

Finance minister Pravin Gordhan said the department of rural development & land reform will also intensify the “One Household One Hectare” initiative to provide land to the landless and fast-track the establishment of agri-parks in district municipalities.

In areas where land has been distributed, the department will provide mechanised irrigation, mentorship and other inputs so that the land becomes productive and profitable.

About R4.3bn will be spent on this programme over the next three years. Gordhan said that since the programme was launched in 2008/2009, more than 4.7m ha of land has been acquired for redistribution and 1,496 new farms created.

Government will also assess the current

“Without the support of a solid implementation strategy and measurable targets, it is unlikely that we will see results in either the short or medium term,’’ says Bogopa.

Zuma’s Sona also brought the Expropriation Bill, which was passed by parliament last year, back into the spotlight.

He said he would refer the bill back to parliament for more public participation to help speed up the long-standing land redistribution process.

The bill paves the way for government to pay for land at a value determined by the valuergeneral.

It also allows for expropriation of land for the “public interest”, ending the willing-buyer, willing-seller approach which has governed land reform in the past.

However, industry body AfriBusiness says recent talk by rural development & land reform minister Gugile Nkwinti that property required for land reform should be expropriated without compensation suggests government is considering a Zimbabwe-style attitude to property rights.

AfriBusiness law and property analyst Armand Greyling says the minister’s suggestions that amendments should be made to sections of the constitution that currently prohibit state acquisition of property without compensation, creates the impression that government is willing to infringe on private property rights in order to push its political agenda.

“AfriBusiness will not hesitate to institute legal proceedings to protect, defend and uphold the constitution. Should government pass any form of legislation that seeks to undermine the sanctity of property rights in SA, it will be faced with strong opposition,” says Greyling. x February 23 - March 1, 2017

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budget 2017 spending TELECOMMUNICATIONS

Broadly speaking, it’s a start

Industry welcomes funding, but laments the little priority given to ICT/broadband by the state, particularly in the rural areas where there is a dire need for technology to facilitate delivery of most basic services Thabiso Mochiko mochikot@bdlive.co.za

ý Government has allocated R1.9bn for the first phase of its broadband infrastructure programme — an amount described by a technology executive as reflecting “the low priority given by the state to ICT/broadband”.

The broadband project, SA Connect, is intended to deliver broadband access to all South Africans in the coming years. By 2020, government wants a universal broadband penetration at a minimum speed of 2 mbps (megabits/second).

Broadband has been described as an accelerator of economic and social development but SA has suffered in recent years because of the lack of broadband access in many areas, especially rural communities. Mobile network operators have spent billions of rand on expanding wireless high-speed network infrastructure but most of the effort has gone into urban and semiurban areas.

In future, the department of telecommunications & postal services’ policy will place more emphasis on underserviced areas, prioritising 40

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February 23 - March 1, 2017

schools, health facilities and other government institutions.

A key focus over the medium term will be on project management and co-ordinating implementation of the first phase of SA Connect by rolling out broadband services to an estimated 6,135 government institutions and 4,983 schools, the department says.

Roll-out has been delayed since the policy was published in 2014. Reasons have included technical procurement issues and a failed State Information Technology Agency tender process.

The first phase finally started mid-February at the OR Tambo district municipality in the Eastern Cape. Driven by the Universal Service & Access Agency of SA (Usaasa), health services and schools in two municipalities in the area will be connected to a high-speed telecommunications network.

The municipality was named by President Jacob Zuma in his 2015 state of the nation address as one of eight prioritised for the first roll-out phase.

“This project will address many of the challenges experienced by local government, local business and citizens of the municipalities.

The project will provide voice and highspeed data connectivity services,” Usaasa said in a statement.

Executive mayor Nomakhosazana Meth says the project will improve government service through efficient delivery and facilitate the avail-

ability of specialised applications such as eHealth for local clinics and hospitals, e-Education for teachers and learners, e-Agriculture for local farmers to gain access to agricultural markets and e-Commerce for small and medium enterprises.

BMI-TechKnowledge MD Denis Smit says the R1.9bn budget allocation is very small in relation to the true costs of rolling out SA Connect and “reflects the low priority given by the state to ICT/broadband in general compared to other, more pressing service delivery demands”.

In February 2016, the cost of the project was estimated at R67bn.

The first phase will be managed by state entities. For the second phase, government plans to raise funds through a partnership with the private sector, says telecommunications & postal services minister Siyabonga Cwele.

Meanwhile, state-owned broadcasting signal distributor Sentech will get R193m to provide analogue and digital signals to broadcasters.

SA’s migration to digital broadcasting has been delayed for various reasons, the latest being a court dispute between communications minister Faith Muthambi and broadcaster e.tv over whether set-top boxes should have an encryption system. The case was heard on Tuesday at the constitutional court and judgment is pending. The boxes will be used to receive the digital signal.

The migration to digital will free up the telecoms spectrum needed for the rollout of a super-fast mobile wireless network.

The SA Post Office is set to receive R240m in the 2017/2018 financial year to distribute about 1.8m set-top boxes given free to indigent households. Government has prioritised communities close to other countries with set-top boxes.

Spending on digital migration activities, including dual broadcasting on analogue and digital, is expected to amount to R1.3bn over the medium term. x

ENERGY

Power to the people Carbon tax legislation will be refined this year for readiness by next year’s budget, despite industry protests about an additional tax burden and that SA’s reliance on coal for energy makes carbon taxes impractical Charlotte Mathews mathewsc@fm.co.za

ý Government expects to be able to provide clarity on the alignment of the carbon tax and carbon budget by the end of this year, according to national treasury.

A carbon tax has been under discussion for several years to help SA to meet its commitments to combat climate change, but it is deeply unpopular with the business sector. Energyintensive businesses say it will increase their costs at a time when the economy is under pressure.

Hogan Lovells SA head of mining Warren Beech says the carbon tax is inevitable because it is one of SA’s international commitments.

It is likely to be ready for the 2017/2018 budget.

But SA Institute of Race Relations chief economist Ian Cruickshanks is sceptical . He says that as a developing country dependent on its cheap and abundant sources of coal, SA cannot afford to tax a key source of its energy mix.

Treasury says a revised Carbon Tax Bill will be published for public consultation and tabled in parliament by the middle of this year. It will not have any effect on the price of electricity (which is mainly generated from coal) in its first phase, to 2020. The regulation for carbon offsets which allows firms to reduce their carbon tax liability has been revised.

Finance minister Pravin Gordhan said that continuing the independent power producer programme, both in renewables and gas, was one of the imperatives to boost investment in the short term. But he provided no further detail on the stand-off between the energy department and Eskom over Eskom’s reluctance to add more renewable power to the grid, which it claims is too expensive and not needed now.

Government has extended Eskom’s R350bn guarantee from March 31 this year to March 31 2023 to allow the utility to complete its current capex programme. At the end of December it had drawn down R187bn of this guarantee and it expects to have used R218.2bn by the end of next month. Eskom has increased its planned borrowings to R68.5bn from R46.8bn as it has revised its cost savings, and tariffs will be lower than anticipated. From 2017/2018, foreign loans will provide about 77.3% of

Eskom’s total funding.

The priority for the energy department over the next three years will be to continue electrifying households, Pic renewaqble energy plant for which an additional R1bn has been granted. In this period 723,000 grid and 60,000 nongrid (solar power) connections are being targeted. It is becoming more expensive to electrify Solar geyser: Programme will be households as the programme moves accelerated in the next three years into deep rural areas.

Sunday Times The solar water heater programme, which is designed to reduce demand ing its current gas-to-liquid refinery into a conpressure on the national grid and has recently densate processing facility. The next phase will been revised, will be accelerated in the next be to consider a gas-to-power project to divert three years. Spending on this programme, tail gas to Eskom’s Gourikwa power station. which now has higher local content and small Meanwhile, the staff complement of the Cenbusiness development targets, will increase to tral Energy Fund will be reduced to 1,886 from R534.1m from R478m in 2016/2017 with 2,074. A discussion paper outlining options to 141,000 solar water heaters to be installed. The address acid mine drainage would be published Central Energy Fund, which has a 2025 plan to for public comment by the middle of this year, restore its commercial viability, will be focusing Gordhan said. Beech says Gordhan’s reference in particular on PetroSA, which has been affectto finalising legislation on mining development ed by declining revenues from its gas-to-liquids and land redistribution fits with the budget’s activities as its field off Mossel Bay is reaching emphasis on transformation. Government is the end of its life. PetroSA will reduce costs, committed to a new mining charter, amendexplore new gasfields and ways to extend the ments to the mineral laws and growing the state lives of its current wells and work on convertmining company. x

CLEAN ENERGY PUSH Renewable energy capacity procured per round (MW) Round 1

Round 2

Round 3

Round 4

Round 4 (B) 5

Wind

648

558

787

676

687

Solar PV

626

417

435

415

398

Concentrated solar power

150

50

400

0

0

Landfill gas

0

0

18

0

0

Small hydro

0

14

0

5

0

Biomass

0

0

16

25

0

Biogas

0

0

0

0

0

1,425

1,040

1,656

1,121

1,085

Technology

Total (MW)

Total generation capacity procured (MW) 6,328 Source: Green Cape’s 2016 Report: Utility scale tenewable energy sector

February 23 - March 1, 2017

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opinion by mary vilakazi

Unite to drive growth Vilakazi is chief financial officer of MMI Holdings

C Policy certainty, structural reforms and an efficient public service will improve SA’s economic health 42

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onstrained financial resources and limited room to raise additional taxes, together with increased needs such as housing, subsidised university fees, national health care and pension fund provisioning, mean the private and public sectors need to unify behind a strategy to aggressively drive economic growth.

SA is not immunised from the global economy, with its litany of uncertainties that include Brexit, terror attacks and the election of Donald Trump as the US president. Though the country managed to weather the 2008 economic downturn, it didn’t ride that wave by making it easier to conduct business with and within SA. A greater focus on structural reforms, policy certainty and a more focused public service would improve SA’s economic health.

In these highly uncertain times, many of SA’s trading partners are facing political and economic difficulties, and their current inward focus is likely to affect

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Thursday 23 February 2017

the economy. To minimise that impact, SA needs to ensure that it is highly attractive to its trading partners and potential investors.

It is heartening to see the closer and more constructive working relationship that has developed between business, labour and government. The effort put into ensuring that SA is not downgraded and the plans currently under way to turn our economy around should be acknowledged, encouraged and celebrated. Unified, they can continue to work together to accomplish an investor-friendly, growth-orientated economy by agreeing on structural reforms and policy certainty that will boost economic growth and create jobs.

To achieve its financial goals, government needs to spend more prudently and increase its tax revenue, while bearing in mind the severe unemployment and poverty in the country.

The base of SA taxpayers is small, consisting of about 1.1m people. One of the most effective ways to capture tax from a broader base is through an

increase in Vat. To avoid burdening the poor, tax exemptions would have to be provided while essential foodstuffs should remain untaxed.

The public-sector wage bill is a burden on the fiscus. Government has attempted to create jobs instead of establishing a more enabling environment for entrepreneurs and the private sector to generate employment. High wage increases in the public sector have not necessarily led to an efficient public service. Government needs to get more bang for its buck by focusing on improved service delivery.

Reducing service delays as well as unnecessary red tape will reinvigorate the business environment.

A zero-tolerance approach to corruption and the leakage of government funds is necessary to ensure excessive spending of much-needed financial resources is prevented. Government routinely overspends on tenders. This is often due to fraud, as both the public and private sectors have conspired to abuse the tender process by colluding on prices, establishing monopolies and engaging in anticompetitive behaviour.

Hopefully a more closely allied public and private sector, with a cohesive goal to uplift the economy, will reduce such unscrupulous behaviour.

There is enough money to achieve the country’s goals and meet its needs if revenue is collected efficiently and spent effectively. Doing so requires commitment by the private and public sectors to put the needs of the citizens of SA first. x

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