“Moreneedstobedone”Minister-21/2/18

FiscalFrameworkandRevenueProposals-2018

PresentationtotheStandingCommitteeofFinanceandtheSelectCommitteeofFinance

ByGuyHarrisCA(SA)

FounderofKLOPAcceleratorandEducation&GovernanceActivist

28February2018

Updatedfordistributionwithintroductorycomments,elaborationandresponsetoquestions350wordwrittensummaryavailableaswell

Outline•  IntroductoryComments•  RegainingourRightfulRatings•  TransformingforInclusiveGrowth•  OverviewofInput•  TheEconomicEnvironment•  ROIfromECD–threeDichotomies•  EffectiveEarlyChildhoodEducationistheFoundationforFutureSkills•  JobCreatingLeverOptions•  AnnouncedSMEFundingnotyetDelivering•  SupportiveEnvironmentforJobCreatingMediumSizedBusiness

Development•  SelectedCommercialisationforFundingPivotalProjects•  Reregulation•  InSummary•  Questions/CommentsandResponses•  ThePresenter

IntroductoryComments•  AppreciateworkdonetopivotSAreputationstartingwith

reconstitutionofEskomBoard,January2018,butweneedeconomicgrowthforrerating–SME’scandeliver!

•  AppreciateworkdonebyTreasury,SCOPAandParliamentaryCommitteestoimprovegovernanceandreturnsontaxgatheredbutdailythenewsremindsushowmuchstillneedstobedone

•  ThelardwasspreadthinbyrecentrashpopulousdecisionsbutweshouldhavefoundsomejamforthetwocornersofECDandmediumsizedbusinessjobcreationthatwillputusontherightgrowthpathandassistjobcreationinthelongandshorttermbutthatrequiredevengreaterinnovationandbolderleadership.Theywillprovidethepathwaysoutapovertytoturnaroundthefreewaysintopovertybuiltbypastandcurrenteducationsystems

•  The45%marginaltaxratecanbemanageddownandeconomicgrowthupbyinvestinginjobcreating“real”S12J’s

RegainingourRightfulRatingsEveryonecarriestheburdenintheinterim!

•  Whatistheplan?•  ShouldbepriorityNo1asitimpactsacrosstheboard

•  HowdidSouthKoreadoitsoquickly?Whatcanwelearn?

•  Whatareour:– Planstomakesurenofurtherdowngrades– Targetdatestoregainourpreviousratings,andimprove

(radical)TransformingforInclusiveGrowth•  SAEconomyiscurrentlyanunstable,teetering,elegant

thinstem,topheavywineglass:–  Large,overlyconcentratedindustriesdominatedbyafewbigcompanies,supportedbybiggovernmentandbiglabour,inthebowloftheglass

–  FragilethinstemofSMEbusinesses–  Aneconomicallysmall(butlargepopulation)baseof70%ofSAhouseholdssurvivingonlessthanR6000permonth=R20-30ppd

•  Needtotransformintoamuchmorerobusttumbler:–  Concentratedbowltransformedtobemorecompetitivethroughsupplychaininclusion

–  AsubstantiallyexpandedandstrongSMEstem–  Acapacitatedbasethathaspathwaysoutapovertyintoformalbusinesssectorviajobs/entrepreneurshipviascalablebusinessesratherthanpovertyalleviationmicroenterprises

Noexcisedutypaidonwineglasscontents–justpureCapeTownwater!

OverviewofInput•  Ratingsdowngradesneedtobereversedquickly!•  Educationisthekeydriverforreducinginequality

sustainablybutneedsamuchstrongerEarlyChildhoodDevelopment*basethatiswellfundedandhasclarityofwhereresponsibilitylies(Province,MunicipalorBasicEducation?)–FreeTertiaryispopulousandtoolate.

•  Jobcreationiskeytoreducingunemploymentandprimingeconomicgrowthand,iffocusedonentrylevelupskillablejobs,willreducepoverty–TheMediumSectorcandeliver

•  Tofundtheabovewithoutnegativelyimpactingongovernmentratiosandtemptingfurtherdowngrade–useselected,targetedcommercialisationandadditionalsintaxesforareaswithhighsocialcostssuchasFAS/substanceabuse,importsurchargeswherelocallymanufacturedsubstituteproductsareavailable

*HighlightedinSONA2018

TheEconomicEnvironment

•  Ratingsdowngradearealitybutneedrealeconomicgrowth,alongwithregainedstrongfiscalmanagementandincreasedpolicycertainty,toregainfavour

•  Moststablelabourenvironmentinadecadeoverthelastfewyears–itisallofourjobsecurity

•  GovernmentandLarge(corporate)Businesscooperatingbutlittleinputfrommediumsizedbusinesseswhoarethemostlikelyengineroomofjobcreation,esp.forexistingpoorlyeducated

ROIfromECD–threedichotomies

•  WecannotaffordECDastoomuchmoneyiswastedontertiarydropoutsandhighschoolrepeats

•  WecannotaffordECDasweneedtospendonprisonsfilledwith“necessity”criminalswhomissedapositivegrounding

•  WecannotaffordECDaswearedealingwithsocialillsandcorrectinglearningdifficulties

EffectiveEarlyChildhoodEducationistheFoundationforFutureSkills

•  Atpresenttoomuchdumpinganddormitoringratherthanrealdevelopmentofthechildinfirstthousanddays,secondthousanddaysandpreGrade1.OnemillioninECDshouldbethreetofivemillion+andwhatqualitydevelopmentaretheygetting?Benchmarktestresultspoor

•  Mostbraindevelopmentoccurspriortoage6•  SupportviacapacitatingECDcentres:

–  “GogaorGrannyinabox”–  NSFsupportshouldbegiven–  BBBEESDexpenditureshouldqualify–  S18Ataxdeductionviadistributor

•  Needstobesupportedby:–  Reducedsubstanceabuse,FAS–  Increasedfatherinvolvement–  Householdlevelfoodsecurity–braincannotfunctiontoreasonablecapacity

onanemptystomachoronefilledwithchipsandcoke–  CommunitycollegestoallowparentsandNEETtocatchuptheirskillsthrough

secondopportunitiesandstartovercominglegacyissuesAlongwithECdumpingthesefourarethefivereasonsforourvenomousdowncycle

JobCreatingLeverOptions•  Government–noasalreadyexceeding%ofspendingonwages

regardedassustainable,EPWPispovertyalleviationnotjobs•  Survivalistentrepreneurs–little,verylowmultipliers(1.3)•  Lifestyleentrepreneurs–bynaturelownumberofemployees•  Tenderpreneurs–notsustainableunlessahigh%of“normal”

businesstocountercyclicalityoftenderswhichiswhytenderpreneursaremainlyopportunistic“markup”distributersratherthanmanufacturersandsustainablebusinesses*

•  Smallstartupbusiness–yesbuthighfailurerate,smallnumbersuntilinvestableandstartacceleratingbeyond10employees

•  Bigbusiness–unlikelyasdownsizingandautomatingandmainlyrecruitinghighlyskilledsonodirectpovertyreduction,12iandotherincentivestargetinglargebusiness=highcostperjobcreated

•  Mediumsizedbusinessthatacceleratefrom10-50andscalefrom50-500employeesaretheremaininghope,policyshouldfocusonsteroidsforthesebusinesses

*PPPtargetsneedtobespentonviablesme’snotjusttoticktheboxandpromotefrontingandimports

AnnouncedSMEFundingnotdeliveringyetandnotfocusedwheregreatestpaybackwillbe!•  Initiatives

–  CEOInitiativeR1.5bnSMEFund;focusedonPrivateEquityFoFratherthanVentureCapital;Governmentshouldmatchvia“nocost”deregulationstepsofR3bn

–  LatestbudgetR2.1bnDSB/DST/TreasuryStartupFundyettobedefined;overcomehighfailuresatstartupstage

–  FinancecharterR100bnblackbusinessgrowthfundyettobedefined;shouldemphasisnotbeonjobs?

•  FocusshouldbeonlaterstageangelsandtrueVC’s;lean,selfandFFF(family,friendsandfools)seldommorethan:–  Underresourcedentrepdifficulttoraise>R10k-R100k–  Wellresourcedentrpusuallypeakat<R100k-R10m

•  Howtofocusonfinancingjobcreatingscalingbusinessesquicklyandeffectively?

SupportiveEnvironmentforJobCreatingMediumSizedBusinessDevelopment•  NeedAngelInvestorsratherthanhighendVentureCapital/lowend

PrivateEquity,newchannelsbeyondJewish,MuslimandStellies•  IncentivestogrowbeyondR50mtoR500mturnovernotdisincentives

tostaybelowR50m•  30daypaymentisnotworkingandnotenforced,rathergetTreasury

tofactorvaliddepartment,soeandmunicipaldebts–problemareaswillbequicklyhighlightedandmoreeasilyaddressed

•  Bigbusiness(>500employees,>R500mturnover)shouldalsocommitto30daysandnominatedbankshouldfactorthosevalidunpaiddebtsatbigbusinesscost

•  Aneffective12JthatworksquicklyandhasuptakesimilartotheUK,andonefocusedonjobcreationnot“adapted”tofundgamefarms,socalledBnB’s,equipmentpurchase,etc

•  Anincentiveforinvestingatangelstage•  Largescalederegulationtomakeiteasiertostartandgrowtocritical

massandbecomehighvolumeemployers

SelectedCommercialisationforFundingPivotalProjects

•  Startwithnoncoreandnonstrategicassets•  PlaytostrengthsoftheprivatesectorandincludebroadbasedBEEcommunities

•  HelpputSOE’sontopropercapitalisation– recapitalisationviarevenueisveryinefficient-SARSistheonlywinner

•  Anexample–oldpowerstationsnearendoflifewhereStatecansettherulesandPrivateSectorcansweattheassetandextendtheusefullivesthroughinnovationandfocusedmanagementSupplementedbyincreasedsintaxesonproductsthatdetractfromeffectiveECD

andjobcreation–e.g.substanceabuse

Reregulation•  Currentregulationdrivenvialargebigbusinessdominated

structuresinconsolidatedindustriesandcascadeddowntosmallerplayers,whoareoftenmorelabourintensive,withlimitedexemptionopportunities

•  Threetierproposal:–  Small–0-50ee’s–focusonhealthandsafety–  Medium-50-500ee’s–swingbalancetomanagementbutemployees

andtheirrepresentativeshavewaysoftakingunscrupulousandexploitativeownerstotask,encouragegainsharing

–  Big->500ee’s–currentmodelbutBargainingCouncilstasked(andtracked)withexpandingtheirindustry,ensuringjobcreationandenhancingcompetitiveness

•  Dramaticallysimplifytax,registrationandcomplianceforsmallandmediumbusinesses,esphighjobcreators

•  Makeentrepreneurshipvisasmoreaccessible,subjecttograduateddeliveryoflocaljobssustainably

InSummary•  TheRatingsdowngradehasimpactedonconfidenceandiscosting

usalldirectlyandindirectly•  Educationisthekeydriverofreducinginequality,alongwith

redistributionwhichisnotsustainable–  Inaknowledgebased4.0economyneedeffectiveeducation+far

morethantheexisting4%*ofmatriculantsgetting>50%inmathsplusgoodreading,writing,arithmetic,codingandsocialskills

–  EarlyChildhoodDevelopmentisthebaseandneedsevenmoresupport#feesmustrisetofundECD

•  Jobcreation,mostlikelyviamediumsizedbusiness,iskeytoreducingunemploymentandavoidingan“ArabSpring”andifjobsareentrylevelupskillable,jobswillstartreducingpoverty

•  TofundtheabovewithoutraisingDebt/GDPratioorfurtherincreasingalreadyhighmarginaltaxrates(corporate,individualorindirect)requiresinnovativethinkingandstrongleadership

*Expressedasa%ofthosestartinggrade112yearsearlier

Questions/CommentsandResponsesQuestion/Comment Response

ECDfundsallocatedforinfrastructure,MP’sandMPL’smustseemoneywellspent

NotclearwhohasrespforECD– ProvorNatlSocialDev,ProvorNatlBasicEducationorMuniciplaities.Needtogobeyondtheinfrastructure(hardware)andalsolookatteachers(warmware)andlearningtools(software).FromPRILSdoesnotlookgreat

ECDfundswerepromotedattheGoodHopeconference3yearsago

Doesnotseemadequateofonly1mof4-5mareinECDandnotestsonqualitybutteachershavetodealwithconsequenceofpoorornoECDholdingbackotherlearners.AmpersonallyinvolvedinagrassrootsECDinitiativeinLavenderHillandcommunitiesaredoinggreatworkunderdifficultconditions

HowelseshouldSOE’sberecapitalisedifnotviarevenue

UsingEskomasexample,makesprofitofapproxR6bnperannumandR2bngoestoSARS.Pricesup,Demanddown,competitivenessofSAdown,espEIUG,jobsdown.Versusselloffoldassetswithguaranteedbuybacktoaprivatesectorthatcansweattheasset,avoidscurrentconsumerssubsidisingfutureconsumers!

Exampleof30daypaymentproblem

LocalNPOthatdesignsandsellswheelchairsintoAfricaandtoprovincialhealthdepartmentsdoesnotgetpaidfor270daysputting40jobs,manydisabledworkersatrisk.240daysofunnecessarystressandeyeoffthebusinessballcouldhavebeenavoided!

ThePresenter

•  GuyHarrisCA(SA)•  0825598755•  guyharrissa@gmail.com•  20yearsatDeloitte– HeadofConsultingDurban•  20yearsatBellEquipmentasaDirector–50yearsagoBellwasamidsizescalablebusiness!

•  Nowfocusedonscalingmediumsizedbusiness,helpingPoP(PathwaysoutaPovertyforNEETYouthindisadvantagedareastostarttheirjourney)andvariousgovernanceandeducationinvolvements