Initial Business Position -7 June 2003

1. INTRODUCTION

Business is committed to working in partnership with government and the other social partners to ensure the success of the Growth and Development Summit (GDS), and to making a real and sustainable contribution to growth and development in South Africa.

Business is, therefore, pleased to present its initial document on the GDS to its social partners. The main emphasis in this document is on practical and achievable initiatives to meet some of the challenges facing our country. It deals largely with short-term strategies in an attempt to start addressing immediate needs urgently. However, a longer-term proposal is also made so that any successes attained in the short-term can be sustained over time.

This document is not business's final word on the subject. Further business proposals will be made as the engagement between the stakeholders unfolds. It is an initial position put forward by business with the intention of stimulating further debate on practical measures that might be developed to encourage growth and development. We recognise that the successful outcome of the GDS depends on the parties arriving at practical projects and initiatives that can be implemented on an urgent basis.

Not only will we have to explore the overarching architecture of such projects, but we must also design the steps required for their practical implementation. Business recognises that it must work in concert with government and other stakeholders to drive such initiatives forward, and appreciates the opportunity afforded by the GDS to foster such interaction.

All the proposals and initiatives set out in this document are in the pursuit of a shared vision of a globally competitive economy that draws on the human and financial resources of all South Africa's people and offers real benefits to all South Africans.

An essential condition for growth and development is a competitive economy to pave the way for a greater share of world trade and investment for South Africa. All our efforts at the GDS should be underscored by this fact.

2. ECONOMIC BACKGROUND

The positive results for the economy of the difficult post-1994 economic decisions have been apparent in recent years. In earlier decades South African business cycles owed their "boom/bust" nature to "stop/start" fiscal and monetary policies. Now, because government finances are in better shape, the economy is less vulnerable to external shocks.

The official approach and resolve, and the country's consequent reduced risk profile, have been increasingly recognised by international rating agencies. A major benefit of the opening up of the economy to world competition has been an improvement in industrial productivity and international competitiveness. Important challenges still remain, some of which are addressed in this document.

In February 2000 inflation targeting became the formal mechanism of monetary policy. A target of 3% to 6% was set for 2002, reducing to 3%-5% in subsequent years. Unfortunately, the sharp fall in the rand towards the end of 2001 made it difficult to meet the target - but the subsequent tightening of monetary policy should at least ensure that inflation drops through 2003. Also, because it is anchored in fiscal discipline and trade liberalisation, the long term trend in South African inflation is downward.

Business applauds the macroeconomic achievements to-date and the success which the government has had in stabilising the economy. In so doing, greater predictability and certainty have been created in fiscal and monetary policy. This has been accomplished in tandem with the development of a more business-friendly environment and the forging of constructive links with the business community in NEDLAC and other structures.

Although many problems - such as unemployment and poverty - remain, the approach to a number of economic policy issues in recent years has strengthened the prospects for a better overall economic performance over the longer term. Macro-economic stability is a necessary condition, but not a sufficient one, for growth and development.

3. THE CONTRIBUTION OF BUSINESS

The business contribution to growth and development hitherto has been largely based on productive businesses that invest in the economy. This is supplemented by the encouragement of economic participation by those previously excluded (through employment equity, BEE, SMME and training programmes); participation in the provision of public services, through public private partnerships; and investment in society through corporate social investment programmes.

In real terms, gross private fixed investment rose by 70% from 1994 to 2002, against a rise of 19% by general government and public corporations combined. In 2002, private fixed investment constituted 75% of total private and public fixed investment. If, however, the benchmark is accepted that total investment should be about 25% of GDP, the creation of an environment which would foster investment remains a critical challenge.

In a developing country with an unusually substantial private business sector, a key challenge is to free the entrepreneurial capacity of large and small firms to be productive and increase the rate at which they mobilise investment, produce services, create jobs, pay taxes, etc. A complementary challenge for a country with high levels of poverty and unemployment is for businesses, over and above their commercial activities, to demonstrate a commitment to help ameliorate the plight of the poor. In South Africa this is done through substantial corporate social investment programmes.

Corporate social investment for 2001 was estimated at just over R2bn. Across a sample of 100 corporate grant makers this amounted to some R1067 per employee per annum. 49% of this went to education and training and another 26% to health, welfare and job creation. Less than half (42%) of corporate giving qualified for tax deductibility. South African corporate giving represented some 1,16% of pre-tax profit, compared to 0,22% in the UK and 0,9% in the USA. If account is taken of non-financial contributions by way of advice, donations in kind, partnership links, providing the use of facilities, equipment and materials and senior executive time, the contribution could be as much as R4bn to development in South Africa.

In addition to what has become routine corporate social investment, South African businesses have pooled their resources to work together, and more recently in partnership with government, to respond to critical national challenges. The Business Trust, to which business has committed R900 million to-date, is the most recent of these efforts. The Trust was established at the time of the 1999 Job Summit as a five year partnership between business and government and is one of several ways in which business commits itself to corporate social investment. Business would like to see this partnership strengthened.

4. THE CHALLENGE OF THE GDS

There remains a widespread acceptance that "South Africa Inc" can do better. Despite the achievements to-date there are several key ways in which economic performance and participation can - and must - be improved. Hence the focus of the GDS. Business believes that the GDS is a valuable opportunity to explore additional ways and means of widening and deepening partnership as a mechanism to promote growth and development,

Although we recognise the need for longer-term strategies, the business position has been heavily influenced by the need to concentrate on what is "doable". Therefore, we have focused to the largest extent on practical programmes and projects which can make a difference to growth and development. In developing certain initial proposals, business has found the recent 2003 / 2004 national budget a useful point of departure.

Business welcomes the logical juxtaposition of "growth" and "development" in the title of the Summit. This emphasises that, although the business position is being defined in terms of the broad GDS themes agreed to, many of the issues are indeed cross-cutting ones.

5. GDS THEMES - INVESTMENT, GROWTH, JOBS, EQUITY, DELIVERY

It is to the GDS themes that the business position now turns:

5.1 Growth and Investment

Despite the optimistic forecasts for SA of another year of about 3% growth in 2003, there is a widespread view that our economy can do much better in the emerging market "growth league" table. Already there is evidence of a levelling off in growth in 2003, for both external and internal reasons. An average growth rate of 2,7% over the period 1994-2002, although much higher than the 1% over the previous decade, is far below SA's true potential.

A condition precedent to higher growth, together with more and better jobs, is investment. At present the 3% growth rate is being supported by total fixed investment (private, including foreign direct investment, and public sector) of about 15% of GDP.

This ratio needs to be closer to 25% if sustainable growth rates of 5% and 6% are to be attained. It is possible for SA to grow at higher rates over the longer term. This challenge needs to be set in the broader context of integrating growth and sustainable development. What can fiscal and monetary policy contribute?

State finances today are completely unrecognisable from ten years ago. Ten years ago the overriding objective was to stabilise the state's finances. Today this objective has been achieved and the fiscus has already been able to switch to a more stimulatory policy in the last three budgets.

The overriding objective ten years ago was to prevent a "debt trap". The fiscal deficit stood at 7,3% of GDP in the '93 fiscal year. State debt, expressed as a percentage of GDP rose sharply through the 1980s and 1990s to reach a peak of 50,2% in '98/'99.

Since then the fiscal deficit has been reduced to approximately 1% of GDP in the fiscal year '02/'03 with the result that state debt should fall to close to or even below the 40% GDP mark within a year.

On the revenue side, an overhaul of the tax system has resulted in a more efficient tax collection regime, but also in a shifting of the tax burden to the potential savers; contributing to the current low levels of savings in the economy. Put simply, South Africa needs to encourage savings, and this should feature on the agenda of the GDS.

The combination of more spending on social expenditure at the cost of capital expenditure, and the shifting of the tax burden to middle/higher income earners and corporates, has resulted in the current huge redistributional effect of the state.

While the fiscus should be redistributional, at this stage, social expenditure as a proportion of overall government spending is almost sufficient and the state, for a period, should rather concentrate on:

• the improvement of efficiencies; and
• an increase in capital expenditure.

While the first priority of the state has been to stabilise an unsustainable financial situation and to provide much needed social expenditure for social upliftment in general, and more specifically for poverty alleviation, capital expenditure has been a victim.

Regarding monetary policy, over time low inflation is a prerequisite for long-term economic growth, while inflation also has a particularly severe impact on the poor. Nevertheless, analysis of the likely future trends of inflation indicate that the current cycle of price increases is slowing down. This suggests that the monetary authorities could soon be in a position to lower short term interest rates to facilitate investment.

A perceived area of difficulty in meeting inflation targets in South Africa has been the role of so-called "administered prices". It is suggested that it may be necessary to develop guidelines on administered prices to support inflation targeting. Business proposes that the issue of administered prices in this context be investigated.

There are also a number of other factors, including labour market reform and other microeconomic factors, which bear on the creation of an investment climate favourable to higher rates of economic growth - not all of which can be explored in this preliminary document.

5.2 Job Creation / Skills

Business has always shared government's deep concern that the poor skills base in our country inhibits our competitiveness. We have repeatedly argued that the rapid and sustained advancement of skills is an essential ingredient in transforming the workplace and underpinning higher rates of growth and development in South Africa.

Relevant, high quality training is essential if industry is to meet the productivity and competitiveness standards required by a country which aspires to become a global player. Our domestic industries are increasingly being exposed to international competition and enterprises in most sectors have recognised that they must invest in skills development or be overtaken by smarter and more efficient opposition.

The real challenge of the new skills development dispensation is not simply to devise methods to ensure that companies claim grants - though this will help. It is more about achieving a fundamental and radical mindshift on the part of both employers and employees to skills development. We all have to accept that skills development is not a "nice to have"; it is a strategic imperative for growth at all levels - individuals, communities, business and the country as a whole.

Business has, thus, been supportive of an integrated skills development system which promotes economic and employment growth and social development through a focus on education and training. For these reasons, too, business has agreed, in the spirit of a new training paradigm for South Africa, not only to play a leading role in establishing new institutional structures for skills development, but also to investing a minimum of one percent of payroll into skills development and training.

There are so many countries that already have the basic economic essentials in place, that we have to ensure that South Africa stands out from the rest by developing and implementing leading edge policies which will attract investment. This applies particularly to the quality of the skills our people possess.

5.2.1 Learnerships

In preparation for the GDS, business is currently working on a project that will have two main goals:

• to establish a realistic target for learnerships that the business sector can set as a goal to pursue during the next year; and
• to propose a process through which business can co-ordinate and drive the targets selected.

Business hopes to report significant progress by the time the GDS takes place.

5.2.2 Public Works

The government is already committed to a large scale public works programme. Business believes that the private sector can play a bigger role in the implementation of a successful public works strategy. It is proposed that a Technical Task Team should be established to design a public works programme that will serve to provide a small income for the unemployed and also give the beneficiaries a modicum of training and work experience that could provide them with more marketable skills and experience for the future.

A basic framework for such a programme could include the following:

• the programme could be overseen by a specialist board which draws on expertise from government, business and labour. It is believed that this is essential if bottlenecks to the creation of such schemes are to be avoided;
• the programme should be multi-faceted and demand driven;
• any labour intensive activity must be economically rational;
• mechanisms to measure the legitimacy of spending and to avoid corruption would have to be put in place; and
• targets should be realistic, but ambitious.

5.2.3 Infrastructure

One of the major focuses of the 2003 / 2004 budget is on alleviating poverty through the provision of basic services and infrastructure. However, the decision by the national government to use the lower tiers of government as a delivery mechanism raises some concerns about institutional capacity and the ability to spend effectively at the local level.

Business proposes that government should establish a joint Task Group to deal with infrastructure delivery mechanisms and to identify steps which strengthen and encourage public private partnerships, particularly in those areas where budget provisions are already in existence. Business is willing to consider to what extent local chambers of commerce / sakekamers can be further mobilised to assist municipalities and local authorities to address delivery problems.

5.2.4 Encouraging Small Business: Regulatory Impact

Regulation is a reality in the South African market. Where regulation exists without the necessary checks and balances, however, it can create as many problems as it provides solutions. It has been shown that small businesses often carry a disproportionate burden of regulatory costs.

It is proposed that South Africa adopts a Regulatory Impact Assessment (RIA) strategy to ensure that the level and cost of regulation is appropriate, particularly for small business. Research done by business overseas shows great advantages accruing to those economies where efforts are made to minimise regulatory costs.

Although the impact assessment system will be of particular benefit to SMEs, the benefits are, however, not limited to this category of institution but accrue to the economy in general through more efficient regulation and limiting the unintended consequences of regulation.

In this regard, business therefore suggests that:

• a task team be appointed to review regulation in South Africa pertaining to business activities. The review should propose ways to reduce unnecessary compliance costs and should be particularly mindful of the impact on SMEs; and
• the task team should recommend an appropriate institutional structure to ensure ongoing RIA in all relevant areas of regulation, drawing on international experience. It should also advise on the legislative and regulatory changes required.

One such area for investigation relates to the government's preferential procurement policy. We understand that the Preferential Procurement Policy Framework Act and its regulations are already under review by the National Treasury and business suggests that the social partners be involved in this process so as to assist with the streamlining of the relevant policies.

5.3 Equity

Business believes that the critical issue relating to equity is that of Black Economic Empowerment (BEE). The systematic exclusion of black South Africans, and also women and the disabled, from equitable economic participation prior to 1994 has created a legacy of extensive inequality of wealth, income, skill levels and ownership of the country's productive capacity and resources. The South African business community recognises the urgent imperative to create conditions and implement policies aimed at eliminating, as far and as quickly as is practicable, these manifestations of our history. We do so both because we see it as necessary for ensuring political stability and economic growth and development, and because it is inherently just.

The implementation of the various elements of empowerment need to be guided by a range of principles to ensure that the objectives of empowerment can be met. These include:

• BEE should be implemented within the context of increased and sustained economic growth;
• it must be broad-based and ensure the inclusion of as many people as possible in the mainstream of the economy; and
• BEE should be implemented within the context of sound business principles.

Business recognises that a consequence of past policies is the lack of capital accumulation amongst black people. This makes it difficult for black people to participate effectively in the mainstream economy.

The principles and factors described above dictate the necessity for sound financing mechanisms for BEE, with a critical role for both the financial sector and government. Business believes that it is essential that available and potential resources be used in the financing of BEE. Government funds, currently placed in numerous institutions for BEE programmes, should be utilised for risk enhancement, guarantees, equity and other instruments to enable transactions to comply with the principle of sound business practice and sustainability.

Business proposes the following broad framework:

• the overall capacity of the financial sector to finance BEE transactions needs to be determined;
• the quantum of such capacity should be such that it does not inhibit the financial sector from continuing on a sustainable growth path;
• a suitable mechanism will have to be agreed to determine the capacity referred to above. This should include the financial sector, regulators and, possibly, government; and
• all attempts should be made to source available grant funding from overseas donors and foreign investment potential for BEE.

In addition, a mechanism to determine priorities for financing, probably with substantial government input, needs to be investigated.

The critical objectives in business' recommendation of such a framework are to:

• determine the maximum funds available for BEE financing;
• enable the financial sector, which will be looked upon to provide a significant portion of the financing, to do this in a way that promotes growth and maintains soundness;
• suggest sustainable use of government resources, bearing in mind also the funds allocated to BEE in the 2003 / 2004 national budget;
• to mobilise other resources; and
• to enable sustainability in broad-based BEE implementation.

Business believes that the recent BEE draft legislation creates a positive context within which to pursue these, and other, BEE issues.

5.4 Delivery, Especially at Local Level

Public private partnerships, in which private financing and management has been provided for the provision of public facilities, exceeded R6 billion in value between May 2002 and March 2003 for deals under the national PPP regulations and a further R6 billion in municipal service partnerships between 1998 and 2002. This has included building of toll roads, development of hospitals, fleet management, eco tourism, waste, water, power and other projects. This brings private resources to the provision of public services and reduces the burden on the state.

One of the gravest needs is to accelerate delivery at local government level. Development at this level is hampered by lack of technical capacity and finance. We propose that the following happen:

• more certainty be induced into the delivery process by protecting project proposals by private sector investors/consultants to provide services backlogs, (mobilizing/infusing know-how);
• define a process of project development until public tenders could be called (first right of refusal), (protection against total risk); and
• review laws that hinder public private partnerships. (Attract private sector capital).

Business would like to explore with its social partners agreed ways to enhance capacity and delivery, especially at the local government level.

6. CONCLUSION

The GDS can help to develop consensus around the primacy of growth in the hierarchy of policy objectives for South Africa. This is essential if we are to achieve an economic growth performance that will result in increased job creation, enhance the country's ability to compete in a global economy and succeed in attracting both domestic and foreign investment. Economic growth is a precondition for development. It is a precondition for transformation, and it is an essential, albeit not sufficient, precondition for job creation.

Business believes that the GDS creates an excellent opportunity to strengthen the mobilisation of the nation's commitment and skills to secure higher economic growth and better outcomes. South Africa possesses a national economy that already supports millions of jobs, boasts a sophisticated infrastructure, and remains a cornucopia of natural resources and latent wealth. These valuable assets are available upon which to build a better future.

Ever mindful of this, in this document business has sought to suggest a series of initiatives that can increase our economic growth at the same time as stimulating development and job creation. Other proposals will emerge as the GDS process develops.

The current proposals are limited in their scope to what we believe is achievable in the short-term in regard to:

• growth and investment climate;
• measures to promote savings;
• administered prices and inflation targeting;
• learnerships for the unemployed;
• public works programmes;
• infrastructure development;
• steps to encourage small business;
• black economic empowerment, particularly its financing; and
• delivery, especially at the local level.

As a longer-term proposal, business has made a case for a regulatory impact assessment.

Business also recognises that, while some proposals may be agreed prior to the GDS, other issues may have to be finalised in a post-Summit process with, where appropriate, agreed time lines. The GDS represents an opportunity to create an important platform to further the partnership process in dealing with these matters.

D0284/03(revised)