The medium-term budget policy statement will this week reveal how the government is going to deal with a shortfall in tax collection against its targets. The problem is our economy has performed worse than expected when the goals were set.
The imperative is to maintain fiscal discipline. I can’t stress enough how important this is. You can't spend your way out of a deficit. If business perceives the government is being reckless with its finances, then confidence will fall as the country faces the risk of sovereign financial distress. When that happens, companies stop investing, which constrains growth. While it is true that government spending supports growth, this can be offset by the reduction in investment by businesses out of fear public expenditure is unsustainable.
Given the revenue shortfall, the National Treasury must either cut expenditure or raise funding. Traditionally, there are only two sources of funding: taxes and debt. Taxes might be hiked marginally but are unlikely to increase significantly, given South Africa already has higher tax rates than most competing markets and such increases are unpopular. But debt is also difficult — interest rates are high, and further rises will increase the cost of borrowing in a market wary of the sustainability of the government’s debt load. So what should the Treasury do?
There is a third way — better partnerships with the private sector. These can play an important role in driving infrastructure investment critical to delivering economic growth. Infrastructure is what allows the country to function, and includes electricity-generation plants, railways, ports, bulk-water works and roads. These systems are essential to increasing our economy's capacity to produce goods and services, and ensure they reach diverse markets.
Historically, through the state-owned enterprises, the government has been the main investor in network infrastructure. However, the challenges facing Transnet and Eskom have left them unable to provide the finance needed. These entities have absorbed R234bn from the Treasury over the past five years, but still they are unable to meet the needs of business — and there have been recent calls for even more funding.
This is where partnerships with business have made a difference. The electricity sector is emerging as an excellent example. Through the national electricity crisis committee (Necom) established by President Cyril Ramaphosa under Operation Vulindlela, a clear plan has been drawn up. Progress has been made on implementation, with legislative changes enabling the private sector to start putting huge amounts of money into building new electricity plants. In the past 18 months, electricity regulator Nersa has registered nearly 6GW of new electricity projects being built by the private sector. The renewable energy independent power producers’ procurement programme has seen hundreds of billions of rands invested by the private sector in new electricity-generating infrastructure.
Improvements in rail capacity can also make a huge difference — every train running between Durban and Johannesburg takes hundreds of trucks off the choked N3
— Busisiwe Mavuso, CEO of Business Leadership South Africa
Our logistics sector has deteriorated badly and now constrains our ability to move goods around the country and from our ports. The national logistics crisis committee has drafted a road map detailing how performance can be improved, drawing on the strengths of both the government and the private sector. Progress is on the horizon — Transnet has a preferred bidder for a concession at the Durban container port, and similar plans are being developed for rail. These schemes have the potential to generate the investment needed but, instead of taking money from the public purse, they can be financed by the private sector. Improvements in rail capacity can also make a huge difference — every train running between Durban and Johannesburg takes hundreds of trucks off the choked N3.
Partnerships are also going to be essential in delivering bulk-water infrastructure, developing the electricity grid, building digital infrastructure, improving the capacity of our important road corridors, and providing social infrastructure such as hospitals and government buildings.
The National Treasury has been working on improving the regulatory framework governing public-private partnerships (PPPs). Appropriate regulation is essential. Business needs projects to be well-defined, with risks allocated to those best able to manage them. In the February budget, the Treasury provided an update on progress in reforming the regulatory environment for PPPs, to make them easier to implement and manage. It would be good to hear of further progress on this front in the medium-term budget policy statement.
While PPPs are good mechanisms for creating partnerships, they are not the only ones. As Business Leadership South Africa, we are supporting Necom by funding the critical skills needed to support interventions in the electricity sector. This is producing results — Kusile power station, for example, has been able to bring two units back online a month early because of support from the private sector. We are willing to work with the public sector on such initiatives because they support improvements to the business environment, enabling companies to invest and grow. If we are able to do this, tax revenues will recover and government finances will be restored.
I do not envy the finance minister’s job this week. The competing demands are immense. But he has an ally in business to use to make his job easier. Create an enabling environment for businesses to form partnerships with the government and this will unleash billions in investment spending. Hold the line on fiscal discipline and investor confidence will grow. This is the path to sustainable outcomes.
• Mavuso is the CEO of Business Leadership South Africa
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.