The South African government is acutely aware that cutting wages and expenditure in a bid to bring its fiscal framework under control is only one half of the equation. The other half is an urgent need to improve the competitiveness of its economy. Unless this happens and economic growth takes place, the country will be stuck in a debt trap of its own making – GDP will remain flat, tax revenues will decline and debt together with service costs will rise, crowding out public spending. The implications of this are not worth dwelling on.
In his February state of the nation speech in 2019, President Cyril Ramaphosa made improving this country’s competitiveness one of his stated goals.
Everyone knows what needs to be done: provide policy certainty, make it easier and cheaper to do business (including cutting red tape and unnecessary regulation), increase competition (including in industries where state-owned entities are near-monopolies), and improve the quality of public services.
For the most part, government’s efforts to free the economy have simply paid lip-service to the subject. But this is starting to change under the Ramaphosa government. Budget2020 reinforces the need for South Africa to make the structural reforms necessary to push South Africa’s competitiveness in the right direction.
“The cost of doing business, the cost of finding or conducting work and the cost of living must be meaningfully reduced,” National Treasury says. “Reforms will help to transform the economy by improving the profitability of existing businesses, encouraging the start-up of new enterprises, boosting private-sector investment, creating jobs and reducing unemployment, and improving the purchasing power of all households.”
The government hopes that if red tape is cut and the power of monopolies trimmed, investment in network industries (infrastructure), will result, a critical first step in catalysing economic growth.
At the moment, infrastructure investment is at a sub-par 17% of GDP, which is not enough. The national development plan targets infrastructure investment of 30% as a percentage of GDP by 2030, but that will remain a pipe-dream unless government removes the blockages to spending, specifically by the private sector.
PUBLIC AND PRIVATE CAPITAL INVESTMENT AS A SHARE OF GDP, 1960-2018
The 2020 Budget makes the usual references to unlocking spectrum, cutting red tape for small businesses and welcomes the progress of the Infrastructure Fund, but there are a few new suggestions.
For one, the corporatisation of the National Ports Authority should be accelerated. The authority, which regulates port operators and undertakes infrastructure investment, currently operates as a division within Transnet.
Pulling the authority out of the belly of Transnet will allow for better independent regulation of South Africa’s ports and (hopefully) result in increased competition in terminal operations.
It is not an impossible suggestion; after all, Mozambique port authorities have outsourced the management of their dry bulk terminals, the general cargo terminal, the container terminal and vehicle terminals to the private sector. In some cases, the Mozambique port authority is a partner, but not all.
This move would also support greater investment in ports from operating profits, free from Transnet group considerations.
Corporatisation was provided for in the legislation in 2005, according to Treasury officials, so it is not a new idea. What is new is that the subject has made its way into the light. Whether it will actually happen in this financial year or next is an open question.
In addition, efforts to liberalise access to freight rail are gathering steam. The Economic Regulation of Transport Bill, which was approved by Cabinet for submission to Parliament, will improve third-party access to freight rail. While Transnet is not excited about this idea, government believes it will generate efficiencies in the rail sector. When it will happen is not specified, however.
Treasury would also like reforms that promote freight rail efficiency complemented by the removal of implicit subsidies in road freight transport, ensuring a level playing field for competition. Quite how this would happen is also a little unclear. It could mean higher road tolls for hauliers, or other taxes, say Treasury officials.
What may come as a surprise to some are plans to modernise SA’s foreign-exchange system. Since 1993, the country has operated a “negative list” system where, by default, forex transactions are prohibited, with a few exceptions. This means that even small individual transactions – such as for travel – require approval.
This constrains trade and cross-border flows, particularly in relation to fast-growing African economies.
In 2019, South Africa was a signatory to the African Continental Free-Trade Agreement, which creates the world’s largest free-trade area. Signatories are now in the “operational phase”, which is a work in progress to removing trade restrictions and barriers. In SA, loosening exchange controls is just one step on this journey.
A new capital flow management system will be put in place over the next year. Apart from a few exceptions, all foreign-currency transactions will be allowed. Individuals wanting to transfer more than R10-million offshore will be able to do so, but will be subjected to a stringent process to ensure the funds are not the result of some ill-advised activities.
As Finance Minister Tito Mboweni pointed out in his pre-speech broadcast, changing habits within government is a slow and difficult process.
Budget2020 is more evolutionary than revolutionary, but there are steps in the right direction. BM
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