Contrary to the simplistic notion of SA’s government officials, capital is not the problem. The problem is a poor skills base, a lack of viable business ideas and, most of all, anaemic economic growth. Fix those, and the need for yet another transformation fund tax fizzles away.
When Trade and Industry Minister Parks Tau first suggested his R100-billion transformation fund, the idea was rejected outright by business groups, mainly on the basis that introducing a new tax on business was inappropriate in a time of economic stagnation. The hope was that this terrible idea had gone away.
Read more: ‘Madness’ or ‘necessary intervention?’ Parks Tau’s R100bn transformation fund draws mixed reactions
No such luck. Tau published a discussion document this week on the proposal because “the imperative is to transform the economy through increased participation of the previously disadvantaged groups in the mainstream economy, which remains relevant for economic redistribution and the changing of patterns of ownership of means of production”. (And, BTW, doesn’t the use of that phrase inadvertently reveal the underlying philosophy of the whole effort?)
Read more: Parks Tau’s R100bn transformation fund plan published for public comment
But the crucial thing is that the document seeks to claim this idea is not just a new tax, but actually a “partnership” with the private sector and that the fund constitutes “no additional requirements for entities over and above what currently exists in the BBBEE policy”. Right.
Both of these claims are false and duplicitous, as the briefest examination of the proposal will attest. Tau’s notion is that the BBBEE policy through the Codes of Good Practice requires that entities must contribute to Enterprise and Supplier Development (ESD) 3% of Net Profit After Tax towards development of black suppliers, black industrialists and SMMEs to broaden the industrial and services base of SA’s economy.
So, his idea is that instead of making this contribution themselves, businesses will just hand over the funds to the government. See? Easy. Huzzah! And the reason for this is that the government “would like to see a much more impact and spending on relevant ESD activities that must lead to growth and sustainability of black owned enterprises and SMMEs, by having a coordinated effort”.
So, the essence of the proposal is that instead of business funding suppliers who supply them, the government will take over this function. So, why is this just another tax? Well, under the direction of a business, with some creativity, the establishment and nurturing of suppliers could be an effective cost-saving measure. There is no guarantee, or even assurance, that the government’s chosen beneficiaries would be a useful part of anyone’s value chain.
To ensure that these are viable businesses, partly because well-run businesses are not in the business of giving away money, these supplier entities are often loan-funded, rather than gift-funded. Consequently, the contributions businesses are making, with any luck, come back over the years.
By contrast, in Tau’s proposal, it is explicitly stated in the proposal that funds, called ESD funds, “will be utilised for transformation purposes and will not be repayable to contributing entities”. So, really, it is a tax disguised as a tax that is pretending not to be a tax. This is similar to the training levy which goes to the Sector Education and Training Authorities (Setas) and which then notionally comes back to business in the form of better-trained staff.
But here is the problem: Business doesn’t use the Setas for proper training because their training, generally speaking, sucks. And the trainees experience this too because generally the certificates issued by the Setas don’t get you a job. And this is not even to mention the struggle with slow, complex administrative processes, and financial mismanagement and corruption. In the larger sense, you can see the Setas haven’t worked because the unemployment rate keeps going up.
The problem is not universal: the banking and insurance Setas seem to sort of work. But the construction Seta faced allegations of corruption and mismanagement, which were so bad that the government was forced to intervene. The services Seta – surely a central part of the effort – has also reportedly struggled with financial mismanagement. The Setas are constantly getting qualified audits. One of the problems highlighted a few years ago was the rehiring of executives previously implicated in corruption within the Seta sector. These are institutions the government spends R22-billion on every year.
What about the notion that this fund will work in partnership with business? Tau’s idea is that the R100-billion will be overseen by a joint board of directors made up of eight people. There will be an oversight committee, which will be made up of “three ministers and five members from the business and social groups”. Interesting how these numbers are all exactly specified.
So, it seems as though business will have some sort of say about it all. But who are these “social groups”? What is a social group? Are they a group of friendly people? Perhaps they are tame, government-supporting NGOs that possess sufficient lapdog credentials to get appointed to this government boondoggle and to stay that way. And the kicker is that Tau appoints everyone. There are going to be no independent voices here, thank you very much.
But the crucial question is this: Why on earth, given its history, does the government think it’s better at starting businesses than businesses are? There are already enormous pots of money devoted to government-sponsored business creation and they are all failing. The reason is obvious: if you start a business founded on a gift, you are not in the business of selling something; you are in the business of receiving gifts. When the first gift runs out, what you will need to stay in business is another gift. And another one. And another one.
There is another big misconception I find in government-run business labs: their incentive structure is totally misaligned. They are not looking for good ideas; they are looking for good gift recipients. Tau’s document claims that the big problem in SA is that small businesses lack capital. The implication is that if we could just fill that gap, our problems will be solved.
But at the briefest glance at the balance sheet of SA’s banks, you can see this is false; there is an enormous quantity of available capital. If banks see a remotely viable business, run by people with a track record of honesty and ability, I suspect they will fall over themselves to fund it. This is not to say that a lot of people don’t complain about how tightfisted banks are – of course they do and of course they can be; the bar to win loans is high. The problem is that applicants tend to overlook the fact that banks have a responsibility to be cautious and, judging by their bad loan books, they don’t do a great job of it.
The point is that contrary to the simplistic notion of SA’s government officials, capital is not the problem. The problem is a poor skills base, a lack of viable business ideas and, most of all, anaemic economic growth. Fix those, and the need for yet another transformation fund tax fizzles away.
There are a gazillion better ways to achieve these goals. But the way to not achieve them is to give the job to politically appointed bureaucrats who know nothing about how to run a business. DM
