Defend Truth


2012 Budget: there is no new policy under the sun

Paul Berkowitz: studied economics, maths stats. Worked at Econometrix, FNB, Wits. Interested in South African politics, economics.

The Treasury should be commended on managing to balance the books during the economic downturn. But that’s all they should be commended for. This year’s Budget called for bolder approaches to reducing unemployment and boosting infrastructure spending. Gordhan and his team weren’t up to the task. By PAUL BERKOWITZ.

The central theme of President Jacob Zuma’s State of the Nation address earlier this month was the ramp-up in infrastructure projects needed to drive future economic growth. Finance minister Pravin Gordhan confirmed the importance of the infrastructure drive by placing it front and centre of his Budget speech.

Over the medium-term, R845-billion has been budgeted for approved infrastructure plans. R300-billion of this is allocated to the energy sector, predominantly for the building of new power stations, and R200-billion is allocated to transport and logistics projects.

This allocation from the fiscus is only about a quarter of the R3.2-trillion value for the 43 major infrastructure projects earmarked in the Budget Review. Part of the difference between the two numbers is the timeframes involved; the R3.2-trillion includes some spending beyond the three-year medium-term budget. The remaining discrepancy is spending not covered by the fiscus. This will be provided by investments and own revenue from public entities, cost recovery from user fees and investments from the private sector. In addition, the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) will play a role in raising finance.

This sounds good on paper, and the Budget speech makes mention of the fact that independent power producers have already tendered for over 1,200 megawatts in renewable energy projects. What is not mentioned is that one of the private sector pioneers in power generation, Independent Power South Africa (Ipsa), has already had its fingers burned through its investments in South Africa.

Ipsa is the South African arm of an English engineering company specialising in power production. It entered the South African energy market a few years ago and purchased an existing power plant in Newcastle with the goal of refurbishing the plant and selling the power generated back to Eskom. Unfortunately it wasn’t able to finalise a contract and eventually had to freeze the project. There appears to have been no urgency on the side of Eskom to conclude a deal.

Although there appears to be renewed vigour from government, Eskom and Nersa to attract private investment, there is no desire to liberalise the energy market to make it easier to do business. Eskom retains an effective monopoly on the lion’s share of the energy supply chain (production, transmission and a chunk of distribution). Rather than allow market forces to dictate the optimum mix of energy generation, including renewable sources, there are fixed quotas for the different types of renewable energy, euphemistically called “targets”.

Gordhan acknowledges the weaknesses in the state’s capacity to spend on infrastructure in his speech. He makes mention of the fact that only R178-billion out of a planned R260-billion was actually spent in the 2010/11 financial year, or some 68%. The answer to the problem is apparently to increase the capacity of the state to monitor and implement capital projects, rather than to make it easier for the private sector to enter the market.

One of the initiatives to improve delivery at the municipal level is a Cities Support Programme to assist the metros with spatial planning, public transport and utility management. Another is the establishment of the Municipal Infrastructure Support Agency to assist rural municipalities with their planning capacity. As always, the intentions are laudable but the thinking remains within the ideological space committed to centralising the state’s capacity and removing responsibility and power from local government.

This theme is continued in the allocations for municipal infrastructure. Additional allocations of some R10-billion over the medium-term include spending on water and sanitation infrastructure in the Sedibeng, Sekhukhune and OR Tambo district municipalities. Ideally this infrastructure should be funded from own revenues and the responsible use of the municipal infrastructure grant (MIG). It’s not clear whether these districts have done all they can to address infrastructure backlogs or whether years of maladministration have resulted in intervention on the national level. What is clear is that the local municipalities in these districts are that much further off from achieving their own autonomy.

There is an increased allocation of R4.8-billion over the medium-term to the expanded public works programme for the purpose of creating jobs. This is a “central priority” of government, according to Gordhan. This newspaper has mentioned before that the ‘job opportunities’ these programmes create are not sustainable and the employment they generate only lasts as long as the funding does.

The long-anticipated announcement on the youth wage subsidy scheme has, predictably, been delayed for another year or so. The debate over such a scheme is years old but according to Gordhan “[it] is under discussion at Nedlac, where the labour constituency has expressed reservations”. In other words, it continues to be obstructed by Cosatu’s opposition.

Gordhan has tried to put a brave face on this non-development but phrases like “[w]e would all like to see greater urgency in resolving this matter” belie the frustrations of some within the alliance. The Zuma administration is aware that it is being judged primarily on its ability to deliver jobs and that it has not kept its promises in previous years.

There are some welcome developments for small businesses, including a streamlined tax reporting system for micro-businesses, which should lower their administrative burden. There are new and revised support programmes for the automotive and textile industries and a similar programme proposed for the capital goods sector. A policy framework and legislation have also been drafted for the proposed special economic zones. Critics could point out that these processes are taking far too long to finalise and also point to the patchy record of previous industrial support programmes – manufacturers in the automotive sector remain dependent on these subsidies and haven’t weaned themselves from state support.

There will also be more bailouts of state-owned enterprises (SOEs), charmingly termed “recapitalisation”. These include R700-million for Denel, R350-million for Alexkor’s obligations to the Richtersveld Community joint venture and a whopping R5.8-billion for the Gauteng Freeway Improvement Programme. This last line item absolves Sanral and the Gauteng transport department of a large share of responsibility and is an effective subsidy by all taxpayers of Gauteng residents. This has the perverse effect of the poorer provinces subsidising the richest.

It also undermines the autonomy of Sanral and increases the risk of moral hazard for other public agencies. Why should other development agencies be responsible with their spending plans if the probability of a bailout from national government increases in proportion with the size of the problem? Better to just let the problem grow until it’s too big for Treasury to ignore.

In comparison to the wretched state of the national finances of Greece and Italy, we’re doing quite well. Our public debt levels are quite manageable and the forecasts over the medium-term claim that our position will be even better by the end of the 2014/15 financial year. On the other hand, we have the small matter of millions of unemployed people and huge infrastructure backlogs.

The response from Treasury has been a non-response. The spending figures announced in the Budget don’t mask the fact that deep structural reforms in the labour market and for SOEs are long overdue. There is much more to a Budget than a mere balancing of the books. The best that we can hope for is that the global economy recovers quickly enough to boost export-led growth and tax revenues.

The mixed messages from Treasury are unfortunate; Gordhan’s speech encourages the broader South African society to be self-sufficient and resilient but his government’s policy approach is for all of us to remain dependent on external forces for our salvation. Maybe we will be saved by a resurgent global economy. Maybe the latest efforts at oversight and corruption-busting will be successful where all the previous efforts have failed. Maybe some of us will be lucky enough to be employed through the expanded public works programme for another few months.

Maybe all this will come to pass. Maybe not. Maybe next year the people of South Africa will receive the budget they deserve and not a lottery ticket disguised as responsible fiscal policy. DM


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