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The budget plans

for the year ahead.
We’ll help you plan
for your lifeme.
At MMI our vision is to help you realise Financial Wellness over the
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Financial Mail Page 3 -22/02/18 03:01:46 AM

financialmail.co.za
February 22 - February 28, 2018 contents
special report budget 2018

OVERVIEW 39 Towards Financial SPENDING REUTERS/Sumaya Hisham

4 The Big Picture Inclusion 30 Pensions

8 Highlights 42 Don’t Be Caught Unawares 31 Health
10 Politics 32 Provinces
14 Reaction REVENUE 33 Education
16 Gigaba’s Politics 18 Administration 34 Infrastructure
20 Vat 36 Social Grants
OPINION 21 Personal Tax 37 Justice
12 Lifting the Growth 21 Sin Tax 37 Human Settlements
Gradient 22 Transfer Duty 38 Land & Agriculture
17 Reporting for Duty 23 Corporate 40 Telecommunications
24 Between a Rock and a 25 Personal Finance 41 Energy
Hard Place
29 Rethinking Engagement POLICY
Cover: Esa Alexander
26 State-owned Enterprises
28 Eskom

February 22 - February 28, 2018 . financialmail.co.za 3

Financial Mail Page 4-5 -22/02/18 03:06:27 AM

special report budget

Ruvan Boshoff
BUDGET 2018 — THE BIG PICTURE 2018

hopefully, growth. GREATER ALLOCATION

“This is a tough but hopeful budget,” said
finance minister Malusi Gigaba in his speech. Spending growth by function over MTEF (%)*
“Acting now to strengthen the fiscal position will
Post-school
improve the outlook for the economy and education and training 13.7
increase space for future investment growth.”
The first order of business was to correct the Debt-service costs 9.4
impression created by his medium-term budget
in October that government had relinquished its
commitment to fiscal discipline. Social protection 7.9
Instead, the 2018 budget accelerates fiscal
consolidation, while accommodating a promised Health 7.8
rollout of free higher education over the next
three years with a whopping R57bn allocation.
Economic
development 7.4
Thanks to expectations of higher GDP
growth, a stronger currency, lower borrowing Community
development
7.4
rate and significant fiscal consolidation, the
deficit-to-GDP ratio will fall to 3.5% in
2020/2021. Before, it was expected to remain
Basic education 6.8
just under 4% over the medium term.
Peace and security 5.2
The upshot is that gross government debt
will stabilise at 56.2% of GDP in 2021/2022
General public
services 4.3
instead of blowing out to 60% as forecast last
October. It’s a big improvement, even though it * Medium-term expenditure framework Source: National treasury

will take almost five years for debt to stabilise.

For this, SA will get a big tick from the mar-
kets and rating agencies. The rand strengthened
by 10c to R11.62/$ during Gigaba’s speech.
“In light of the political flux [this budget] was
produced in, it is excellent,” says Investec’s
Nazmeera Moola. “By raising Vat, government
has indicated a willingness to take difficult and
unpopular decisions to stabilise the fiscus. Cou-
pled with the recent change [of] president, this
budget should be enough to keep Moody’s on
hold when it releases its SA sovereign review
on March 22,” she says.
The budget works hard In the next few days, new president Cyril
Ramaphosa is expected to announce a new
to rein in debt while cabinet. If his choices are solid, it may even be
protecting the poor, but enough for Moody’s to move SA’s rating outlook
to stable from negative, Moola feels.
it’s bad news for the rich Taxpayers can be forgiven for being less than
enthusiastic, however, given that the new tax
measures will push SA’s gross tax-to-GDP ratio
from 25.9% now to 27.2% in 2020/2021 —
among the top 10 highest ratios in the world.
The challenge for government in slowing
debt was to be mindful of the constitutional
imperative to address SA’s vast service-delivery
needs and protect the poor.
This was a tall order, given the R48bn rev-
enue shortfall in the current financial year, cou-
pled with the last-minute Jacob Zuma-led
directive to fund free higher education.
“Something had to give,” explained Gigaba.
The result: painful fiscal measures, including
tax hikes of R36bn in 2018/2019 and spending
cuts of R85.7bn over the next three years.
Treasury has been forced to make difficult
trade-offs in determining which taxes to raise in

Claire Bisseker bissekerc@fm.co.za OUT OF BALANCE

Consolidated government fiscal framework
ý The 2018 budget has snatched SA from
the jaws of a debt trap, almost certainly 2017-18 2018-19 2019-20 2020-21
averted an imminent credit rating down- Rbn/percentage of GDP Revised estimate Medium-term estimates
grade from Moody’s and cemented the foun- Revenue 1,353.6 1 490.7 1,609.7 1,736.9
28.8% 29.7% 29.9% 29.9%

Tax hikes and pain: brutal times

dations of the country’s newly established
economic recovery.
The bad news is that all taxpayers will Expenditure 1,558.0 1,671.2 1,803.0 1,941.9
33.2% 33.3% 33.4% 33.4%
pay for the profligacy of the Zuma years

demand brutal measures through higher taxes, including a hike in Vat

to 15%. But the good news is that the reduc-
tion in fiscal risk should fuel confidence and,
Budget balance -204.3
-4.3%
-180.5
-3.6%
-193.3
-3.6%
-205.0
-3.5%
Source: National treasury

4 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 5
Financial Mail Page 6-7 -22/02/18 03:06:48 AM

budget 2018 overview

national minimum cies that support investment and transforma- CLOSING THE GAP plans would be tions and selling noncore state assets.
RESTORING FISCAL SUSTAINABILITY wage will also help. tion; releasing extra broadband spectrum; low- Main budget revenue and non interest spending as a share of GDP implemented In this last category, government’s property
Gross debt-to-GDP outlook as a share of GDP During a pre- ering barriers to entry for business by address- % For a start, a new portfolio is the immediate low-hanging fruit.
% budget briefing, he ing anticompetitive practices; and providing 28 government guaran- Already, treasury has identified 195,000 state
65 admitted that while support for labour-intensive sectors like tee and funding properties in prime locations, with an estimated
62.8 63.3
61.6 62.4 tax increases would tourism and agriculture. 26 framework for state value of over R40bn.
60.8
60 59.7 “cause economic “Ultimately, all our budget woes would be companies is in the Selling non-core assets will help plug some
58.2
57.0
discomfort”, the resolved if we could get growth going,” says final stages of being holes in the dyke, but can never provide a last-
55 impact of fiscal Moola. She estimates that if SA could get growth 24 revised. Arms com- ing solution.
56.2 56.2 56.1 55.7
54.2 55.1 55.3 56.0 55.3 consolidation on of 3% by 2020, this alone would move the bud- pany Denel is next in North-West University professor Raymond
growth and service get deficit to 3.4% of GDP. line for a new board, Parsons says the danger of SA drifting into a
50 52.9 52.4 52.2 51.9
51.3 22
50.7 53.3 50.5 delivery would be On spending, R85.7bn will be cut over the Gigaba said. negative tax-and-spend cycle can, however, be
49.0 49.2
52.3 “bearable”. And it next three years. However, because of the huge Revenue Non interest spending Importantly, Giga- averted if strenuous efforts are made to slash
45 46.5
was necessary to outlay for higher education, the pace of gov- ba also promised that the size of government and boost growth.
2017 Budget 2017 MTBPS 2018 Budget 20
43.8 protect the integrity ernment spending will still average 2.1% of GDP any spending on state “Unless fundamental economic reforms are

8
9
0
1
2
3
/14

5
/16
/17

8
9
0
1
7
40

/2
/1
/0
/0

/1
/1

/1
/1
of SA’s public in real terms, reaching R1,9 trillion in companies would be in the offing, and if the economy languishes in a

/1
/0
/0

/2
/1
41.1

16
10

17

20
13
11
12

15

18
14
09
06
05

07

19
08
finances. 2020/2021. Higher education now becomes the Source: Budget Review done in a “deficit- low-growth trap, the balancing of the books in
6
0

5
1

4
3
/16

2
5

/17

8
3
/14

/2

/2
/2

/2
/2
/2

/2
/1
/1

/1
/1

20

25
23

Tax hikes aside, fastest-growing spending item, at 13.7%/year, neutral” manner — in the 2018/2019 budget will rest on weak foun-
24
22
15

16

18
19
14

21
17
13
12

Source: Budget Review the budget capi- over the medium term — exceeding growth in other words, in ways dations,” he says.
talises on the state debt costs (which is 9.4%) for the first time. governments have also been cut, by R28bn. This that won’t add to government debt. Most likely Ramaphosa, and whoever is sitting in the
a fragile growth environment and where to cut “renewed sense of optimism” sweeping SA. The largest category of spending remains will slow school building programmes (a R3.6bn this will be done through introducing strategic chair of the finance minister in the next few
government spending to minimise the impact For one thing, the growth outlook has salaries for government employees, which cut) and the provision of new houses and ser- equity partners, as well as direct capital injec- months, will be keenly aware of this fact. x

on service delivery.
The danger was that if it cut too much, or
hiked taxes in the wrong place, SA’s growth
recovery could have been scuppered. But the
loss of investor confidence, had public finances
not returned to a more sustainable path, could
have been far worse.
Higher-income earners will bear the brunt of
the tax increases. Estate duty will climb from
20% to 25% for the wealthy, excise duty on cars
will go up from 20% to 30%, medical tax credits
will be eroded, and the top four tax brackets
will get zero relief from fiscal drag.
But the Vat hike was the real clincher. Until
now, the ANC government has rejected a Vat
hike, arguing it is a regressive tax that hurts the
poor the most. But with SA’s options so limited,
there weren’t too many other levers to pull.
In recent years, the tax measures have
focused mainly on personal income tax (PIT).
But its PIT revenues have disappointed recently,
coming in R21bn short of the 2017/2018 target.
This suggests further increases might not have
yielded the required revenue. Also, extra PIT
hikes would have had greater negative conse-
quences for growth and investment than a Vat
increase, the Davis Tax Committee found.
It was the same story with corporate income
tax (CIT). At 28%, SA’s CIT rate is becoming a
global outlier — threatening the country’s com-
petitiveness and providing an incentive for
companies to shift profits abroad. The US, for
example, has cut its corporate tax rate from 35% be raised from 1.5%
to 21% and the Netherlands from 26% to 21%.
This left Vat, which will bring in R22.9bn of
the R36bn in extra tax revenue in the next year.
To cushion the impact on the poor, social
grants will be increased by more than inflation.
Gigaba said free higher education and a new
Esa Alexander
improved since October, because confidence accounts for over 35% of expenditure. This is viced sites (a R7.2bn cut), but these are areas
has risen thanks to greater political certainty. followed by basic education (16.5%) and health with a history of hefty underspending anyway.
The SA Chamber of Commerce & Industry (13.9%). Unfortunately, this means the compo- However, government has taken care to pro-
confidence index has reached its highest sition of spending will shift from capital towards tect services — including school meals, bus sub-
level since October 2015, while the Absa pur- consumption spending — something which sidies and medicine. Also, R6bn has been pro-
chasing managers’ index is at its highest level treasury acknowledges is the very opposite of visionally allocated to drought management. The
since January 2010. More private investment the adjustment required. potential for a severe contraction in the Western
should follow. On the other hand, there is still room for Cape economy due to drought is flagged as a
Critically, treasury is now expecting real more savings if Ramaphosa merges some risk in the Budget Review.
GDP to amount to 1.5% this year (previously departments and slashes his cabinet. Other fiscal risks include continued policy
1.2%) rising to 2.1% by 2020. This is roughly in The public-sector wage settlement, being and political uncertainty, wage pressure, and the
line with the wider economic consensus, but negotiated now, will be critical. Any deviation fact that large parts of the public-sector balance
Gigaba is “very optimistic” that this could be from the budgeted increase of 7%/year will sheet have become “exhausted” at a time when
exceeded if the Ramaphosa-led government is derail plans — not for the first time either. the full costs of free higher education and
able to maintain its reform momentum. About 60% (R53bn) of the R85bn in spending National Health Insurance (NHI) are uncertain.
In a best-case growth scenario, treasury cuts will come from national government — Budget officials say treasury considered rais-
forecasts that if government is able to institute including from defence, prisons, and trade & ing Vat by two percentage points, but held off as
robust structural reforms, including to state- industry. it was able to make up the extra revenue need-
owned enterprises (SOEs), and bolster confi- Infrastructure grants to provincial and local ed by raising a variety of other taxes. But this
dence and invest- doesn’t mean further Vat hikes can be ruled out.
ment, then real And if government wants full-scale NHI,
GDP growth could RAISING SA’s POTENTIAL another Vat hike seems the only viable option.
top 2% this year. Potential impact of selected NDP reforms on GDP growth Other policies “If you’re going to have step changes in spend-
and reforms,
If the global 5.0 such as ing, you’re going to need another big bullet,” said
economy continues addressing one government official in a pre-budget briefing.
4.5 the skills
to play ball. 4.0 constraint “Government needs to stabilise expenditure. It
Treasury says if can’t keep having step changes every year.”
3.5
government can 0.3 0.2 The main risk to SA’s public finances
3.0
finalise reforms in 0.6 remains the parlous state of finances at just
just four key sec- 2.5 about all the state-owned enterprises.
0.6
tors, SA’s potential 2.0 Thankfully, decisive action by government to
growth rate could 1.5 0.5 strengthen governance at Eskom has staved off
1.0 the likelihood of a near-term default. But the
to over 3.5% over 0.5 financial position of the power utility, as well as
the next decade 0.0 several other beleaguered state companies, pos-
(see graph). Current Improvement Telecoms Barriers to Transport Prioritising Potential es big risks to the economy and the fiscus.
These reforms potential in confidence reforms entry reforms tourism and growth aer “SOEs are in large measure fiscally unsus-
growth agriculture reforms
are: implementing tainable,” Gigaba conceded in a pre-budget
mining-sector poli- Source: Budget Review briefing. But he vowed that robust turnaround

6 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 7
Financial Mail Page 8-9 -22/02/18 03:02:52 AM
budget 2018 overview
ECONOMIC POLICY
“Aer several years during which
economic growth undershot our
projections, we now see the
improved growth projections for
2018 and subsequent years as a floor,
rather than a ceiling.
“We are convinced that as
business and consumer confidence
return, and as government follows
through on its commitments to
enable growth with prudent, fast and
decisive action, we can exceed our
growth projections.
“With purpose and resolve, we can
take advantage of these opportuni-
ties, and achieve the faster growth
which is needed dramatically to
reduce unemployment, poverty and
inequality, and relieve pressure on
our fiscal framework. This is a tough
but hopeful budget.”
“The country’s economic growth
outlook has improved over the past
few months because of strong
growth in the primary sector of the
economy — particularly agriculture
— as well as a welcome recovery in
investor sentiment and business
confidence.”
“Over the medium term, the growth
outlook is higher than projected in
last year’s medium-term budget
policy statement. The cyclical
recovery is matched by a renewed
sense of optimism that government
can and will do its work effectively.”
“We are anticipating growth of 1.5%
in 2018, rising to 2.1% in 2020. While
this is a good start, there are immedi-
ate policy interventions we need to
make to ensure we create the right
environment for investment, growth
and employment.”
8 financialmail.co.za . February 22 - February 28, 2018
Highlights from Gigaba’s speech
TAX POLICY
“Tax proposals for the 2018
budget are designed to generate
an additional R36bn in tax
revenue for 2018/2019.”
“We are investigating options
to further curb the practice of
excessive interest deductions by
companies to reduce their tax
liability.”
“We have not adjusted Vat
since 1993 and it is low
compared to some of our peers.
We therefore decided that
increasing Vat was unavoidable if
we are to maintain the integrity of
our public finances.”
FREE EDUCATION
“The largest reallocation of
resources towards government’s
priorities is on higher education and
training, amounting to additional
funding of R57bn over the medium
term. This is the fastest-growing
spending category, with an annual
average growth of 13.7%.”
“Returning national student
financial aid scheme students at
university will have their loans for
2018 onwards converted to a bursary.
This is an important step in breaking
the cycle of poverty and confronting
youth unemployment, as labour
statistics show that unemployment is
lowest for tertiary graduates.”
LUXURY GOODS
“In addition to Vat, we are
increasing excise duties on luxury
goods and estate duty on wealthy
individuals. Taken together, we
believe these proposals best protect
the progressive nature of our tax
regime, to minimise the impact on
lower-income households.”
URBAN RENEWAL
“Let us think beyond car washes
and spaza shops, important as they
are, and find ways to foster produc-
tive, high-value economic activity in
townships owned and managed by
township residents. We need to see
factories, workshops, tech hubs and
locally owned retail operations being
established in our townships.”
MINING POLICY
“The president’s intervention
PUBLIC this week to restore dialogue on
mining policy raises hope that a
PROCUREMENT
solution will be found to unlock
“Next week, the director-
growth and transformation in this
general of national treasury
critical sunrise sector. All stake-
will issue a directive to all
holders should be encouraged by
government departments and
the president’s intervention and
public institutions, instructing
commitment to set the industry on
them to pay suppliers on time a new path of investment,
or be charged with financial inclusive growth and transforma-
misconduct.” tion.”
PUBLIC SPENDING
“Funds available for spending on
public services [will] grow by an
average of 7.1%/year, increasing to
R1.3 trillion next year, and are
projected to rise to R1.5 trillion in
2020/2021. We would like to be able
to allocate more to each sphere for
service delivery, and a larger share to
local government, but the reality is
that the rising cost of servicing our
national debt leaves less resources
available.”
“Over the past decade, the public
sector has invested R2.2 trillion in
economic and social infrastructure.
Yet weaknesses in project prepara-
tion, execution and delivery have
resulted in lengthy delays and cost
overruns. Government has estab-
lished a budget facility to standardise
and improve the management of
public infrastructure projects.”
LAND REFORM
“Accelerating land reform has
become urgent and the depart-
ment of rural development and
land reform has set aside R4.2bn
for the acquisition of about
291,000 ha of strategically
located land.”
STATE-OWNED
STATE CAPTURE COMPANIES
“Government has demonstrated its
resolve to confront allegations of
“We have limited fiscal room and
are loath to use it to subsidise
state capture and corruption through
inefficiency, rather than address
the judicial commission of inquiry
social needs and invest to improve
announced by former president
our economic competitiveness.
[Jacob] Zuma, and the investigations
Government recognises that the
being conducted by the Hawks, Asset
business models of some state
Forfeiture Unit and other agencies.”
owned companies are unsustainable
and their capital structures too reliant
TAX AMNESTY on debt.
“It is anticipated that by the end of
“We have demonstrated our
March 2018, over R3bn will have
resolve by strengthening Eskom’s
been collected in respect of the
board and management with highly
special voluntary disclosure
capable, ethical and credible
programme [applications] that have
leadership. This leadership has hit the
been processed.”
ground running”
FINTECH/
CRYPTOCURRENCIES CROSS-BORDER
“Treasury is working with the INVESTMENT
LOCAL GOVERNMENT Reserve Bank, Financial Services “A range of reforms are proposed
Board and other government to make it easier for South Africans to
“Local governments continue to entities towards a regulatory
face significant financial manage- diversify and invest into Africa. The
framework for all types of offshore allocation limits for institu-
ment and governance challenges.
fintech. For instance, the tional investors are increased by five
Too many municipalities do not
emergence of cryptocurrencies percentage points across all catego-
charge tariffs that reflect the full
is a major development to which ries. This includes the special
cost of the services they deliver, in
our regulatory regime must allocation to African investments,
particular for water services. Many
respond.” which will rise to 10%.
municipalities do not collect the
funds that are owed to them, and do
not adopt credible budgets. As a
result, they are unable to pay their
own creditors.”
February 22 - February 28, 2018 . financialmail.co.za 9
Financial Mail Page 10-11 -22/02/18 12:33:42 AM

budget 2018 overview course; stronger demand in the US and euro
areas; commodity prices were up and the rest
of Africa was going to grow at 3.3% in 2018.
POLITICS So the growth he was talking about was a
sort of effortless cyclical enlargement where we
do nothing, but things somehow end up all right
something useful. Or just drop him and leave
him to his fate and to Zondo.
But the bottom line is, someone has to be
able to do better than this for growth. Take this
line: “Working closely with the department of
trade & industry, I have approved six special

Cloaked in sanctimony anyway. In that budget scenario, everything was

Speech Gigaba quoted also said some
people cannot grasp ‘that to denounce
mudslinging does not mean the
endorsement of whitewashing’
Peter Bruce brucep@bdfm.co.za
ý About a minute or two after he stepped up to
the podium in parliament to deliver his budget
speech, finance minister Malusi Gigaba turned
to President Cyril Ramaphosa and asked: “How
long have I got?”
The question wasn’t a joke, even though
Gigaba was far more assured this week than he
was last October, when he delivered the medi-
um-term budget policy statement.
The finance minister is a man under enor-
mous political pressure. His apparent associa-
tions with the thieving Gupta family were just
too many and too frequent. His sweeping away
of the boards of the state’s biggest companies in
June 2011, and their replacement with many
people who turned out to be proxies of the
Gupta family, is indisputable. This was, after all,
the formal start of the state capture project.
The only question is whether or not Gigaba
knew at the time that they were proxies for the
Guptas, or whether then-president Jacob Zuma
had given him an instruction to make those
appointments.
Evidently Gigaba hit Google before the
speech and found what he was looking for: a
rousing and famous address by US president
Theodore Roosevelt in April 1906, which would
be a cloak to wrap himself up in. Roosevelt’s
speech has become known as the Muckraker
address — an attack by the US president on the
way the press was scraping the bottom of the
barrel in its reporting about him.
Gigaba quoted this bit: “There are, in the body
politic, economic and social, many and grave
evils, and there is urgent necessity for the
sternest war upon them. There should be
relentless exposure of, and attack upon every
evil man, whether politician or businessman,
every evil practice, whether in politics, in busi-
ness, or in social life. I hail as a benefactor every
writer or speaker, every man who, on the plat-
form, or in book, magazine, or newspaper, with
merciless severity makes such attack, provided
always that he, in his turn, remembers that the
attack is of use only if it is absolutely truthful.”
In other words, Gigaba was saying: “I may
not be as guilty as you think I am”.
But Roosevelt wasn’t finished.
“An epidemic of indiscriminate assault upon
character does no good,” he said, “but very great
harm. The soul of every scoundrel is gladdened
whenever an honest man is assailed, or even
when a scoundrel is untruthfully assailed.
“Now, it is easy to twist out of shape what I
have just said, easy to affect to misunderstand it,
and, if it is slurred over in repetition, not difficult
really to misunderstand it. Some persons are
sincerely incapable of understanding that to
denounce mudslinging does not mean the
endorsement of whitewashing; and both the
interested individuals who need whitewashing,
and those others who practise mudslinging, like
to encourage such confusion of ideas.
“One of the chief counts against those who
make indiscriminate assault upon men in busi-
ness or men in public life, is that they invite a
reaction which is sure to tell powerfully in
favour of the unscrupulous scoundrel who real-
ly ought to be attacked, who ought to be
exposed, who ought, if possible, to be put in the
penitentiary.”
It’s lovely stuff, of course — especially the
“some persons are sincerely incapable of
understanding that to denounce mudslinging
does not mean the endorsement of whitewash-
ing”. At the time, Roosevelt was facing from the
print media what politicians today routinely get
from social media. It wasn’t nice then, and it
isn’t nice now.
But it doesn’t get Gigaba off the hook. At
some stage he will have to test his story in pub-
lic. Until he does that, he can progress little fur-
ther in politics. If “how long have I got, Mr Pres-
ident?” is the question now, the answer must
surely be: “not very long at all”.
But life is complicated, Ramaphosa’s perhaps
more than most. After all, Gigaba is young,
bright, fit and a Zulu. His whole life has been
spent in politics. In many scenarios, he’s a future
president of the country. He is just the sort of
person that Ramaphosa needs in cabinet.
pretty much all sorted by the time Ramaphosa
was elected ANC president in December. It’s the
economic zones that will make qualifying com-
panies subject to a reduced corporate tax rate
and enable them to claim an employment tax
sort of prognosis that bears strong traces of incentive for workers of all ages.”
Zuma’s dead hand.
Gigaba is more than likely to be removed as As far as I could see, this was the only effort
finance minister in a cabinet reshuffle in a few in Gigaba’s speech to get even close to the rein-
days or weeks. If Ramaphosa wants to hold on dustrialising, job-creating, exciting and benefi-
to him, I’ve already suggested sending him to ciated new manufacturing land that Ramaphosa
Harvard’s Kennedy School of Government for a has got us all looking out for. These would not
while. Get him out of the country and learning be six new economic zones as he implied, you
can bet. And the “qualifying” conditions would
Only, Gigaba could quite as easily go to jail. surely be as stupid now as they have been from
He faces two direct threats. First, when deputy the start — qualifying investors in the zones (the
chief justice Ray Zondo’s commission of inquiry ones we already have, which I suspect are the
into state capture gets its funding and starts same ones Gigaba has just “approved”) have to
work, Gigaba will surely be one of the early partner with the state.
witnesses. He’ll be subject to, we all hope, the Does anyone in the ANC have any idea how
toughest possible cross-examination. At the end to create just one sustainable job? I doubt it.
of his inquiry, Zondo will have the power to Ramaphosa will be the only person in his
order the criminal prosecution of whomever he cabinet ever to have run a business and he did it
thinks deserves it. with help that not many ordinary entrepreneurs
The second threat is direct arrest by the in his wake can expect to find.
police, even if the Hawks don’t exactly inspire You create jobs by making it worthwhile and
much confidence. Perhaps when Ramaphosa easy to create businesses that create the jobs in
has had time to settle, he’ll be able to establish a the first place. Or you just straight-out give peo-
new form of prosecutorial investigation (sort of ple the money to start their own dreams.
like the Scorpions used to be) or re-establish The more government tries to “create jobs”
working groups of police and prosecutors to the deeper the hole it has dug for itself thus far.
speed up priority investigations. Watching Gigaba’s speech I couldn’t help but
For the moment, Gigaba has cloaked himself think about the damage that Zuma did to the
in sanctimony. As he spoke yesterday, you people whose lives and careers he touched.
could tell his time at treasury had done him Gigaba, in my view, is one such casualty. I
good. He knows, probably for the first time, doubt this is a budget he’ll be around to account
what real trouble looks like, and he worked for this time next year. x
hard yesterday to stop it.
In a way he succeeded. He dug a trench.
Raising Vat from 14% to 15% was the right thing
to do, if only because he has to protect our tax
morality (which is our general agreement that
yes, we must pay our income taxes) and there
was a danger that further personal tax increases
could backfire. The Greeks don’t feel sentimen-
tal about paying tax, for instance, which is why
they are in a state of permanent crisis. Oh yes,
and hidden in the budget was a quick line about
cutting the public-sector wage bill. We’ll see.
But even while he was putting in place a
defensive line to reassure the ratings agencies, Esa Alexander
there was something missing: growth. Yes, he
said SA would end this year with GDP growth
of 1%, up from an estimated 0.7% last October.
That rises to 1.5 % in 2018 to 2.1% in 2020.
Which is all well and good, but treasury
always over-forecasts growth.
Worse, all of the growth Gigaba was talking
about was due to factors external to the econ-
omy. There was the new national mood, of

10 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 11
Financial Mail Page 12 -21/02/18 11:49:04 PM
opinion by Herman van Papendorp
Lifting
the
growth
gradient
I
Van Papendorp n recent years, the SA econ-
is head of investment omy has decoupled from an
research & asset
accelerating global growth
allocation at
Momentum trajectory. Indeed, the most
Investments synchronised global growth
recovery since 2010 has, on
its own, been unable to boost local
growth rates, which have fallen as global
rates have risen.
Consumer and business confidence
are at their lowest since 1994 due to an
uncertain political and policy environ-
ment, coupled with revelations that cor-
ruption is rife and corporate governance
largely absent in sections of society. This
has had a negative effect on consumer
spending and business investment.
The onus is now on SA’s politicians
and policy makers to address the trust
deficit in society and improve confi-
dence so the journey to a more pros-
perous future for all can commence.
The 2018 budget builds on the pos-
itive political seeds sown in December
with the election of a new ANC lead-
ership and this leadership’s subsequent
The onus encouraging policy pronouncements.
is now on These have enhanced the prospects for
politicians structural policy reforms.
and policy This year’s budget needed to
makers to credibly and tangibly demonstrate gov-
address the ernment’s commitment to fiscal consol-
trust deficit idation while at the same time limiting
in society the potentially negative temporary
12 financialmail.co.za . February 22 - February 28, 2018
impact on growth.
Far higher local growth levels are
required to induce even a short-term
cyclical improvement in unemployment,
poverty and inequality. More important-
ly though, to put the economy on a
structurally higher growth plane, SA’s
uncompetitive product and labour mar-
kets and the deficiencies in the educa-
tion system need to be eradicated
through macro policy reforms.
Fiscal policy can help by reprioritis-
ing spending towards the right strategic
areas while altering corporate behaviour
through appropriate tax measures.
SA’s fiscus collects too little revenue
for its bloated expenditure base. Not only
did the budget demonstrate a commit-
ment to fiscal consolidation — it also
provided tangible evidence of how this
will be achieved.
To put the economy on a more
sustainable path, government must be
ruthless on wasteful expenditure, show
prudence in terms of the public sector
wage bill and procurement policy, and
prioritise infrastructure spending to
boost longer-term growth potential.
Progress on these issues will prob-
ably impress ratings agencies. This will
cut debt service costs and help redirect
spending to sustainable, growth-
enhancing projects and probably
123RF/lightwise
improve tax morality and compliance.
While additional revenue-generating
measures were unavoidable to address
the revenue shortfall and the unsustain-
able debt path, the emphasis had to be
on tax increases that do not discourage
capital expansion or job creation.
With policy uncertainty a major con-
straint on private sector expansion
plans, investors would welcome trans-
parency on progress with the mining
charter and land reform policy. In addi-
tion, the budget needed to offer credible
funding plans for state-owned enterpris-
es and free higher education, and pro-
vide clarity on the cost of dealing with
the Western Cape water crisis.
Only a small elite of the previously
disadvantaged population has benefited
meaningfully in a financial sense from
the democratic transition of 1994.
The 2018 budget can support the
mantra of inclusive growth by redirect-
ing spending and revenue towards pri-
orities that sustainably lift the growth
gradient of the economy.
Only by substantially enlarging the
economic rewards available in SA can
we make a broader cross-section of
the population financial beneficiaries of
the political dividend that democracy
provided almost 25 years ago. In the
interest of social cohesion and relative
fairness, this is long overdue. x
Financial Mail Page 13 -21/02/18 11:45:22 AM

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Financial Mail Page 14-15 -22/02/18 02:31:58 AM
budget 2018 reaction
Mmusi Maimane
DA leader
“I think today we have come to
recognise the fact that while the
ANC has been stealing money for a
number of years, poor South
Africans are going to pay for it ...
This is a budget which is an assault
on poor people. I would hope that
we begin to grow our economy so
that people will be able to find
work, but what we saw today is a
consequence of nine years of
mismanagement under the ANC.”
Nqabayomzi Kwankwa
United Democratic
Movement chief whip
“It was unfortunate that president
[Cyril] Ramaphosa allowed an
accomplice in the looting of state
resources by president [Jacob]
Zuma to address us. We’re bierly,
bierly disappointed [about Vat].
We think they used it as a so
target because they don’t want to
upset the private sector.”
“We do have a new dawn and it
was a very tough budget. To
balance that budget we believe
that more could have been done to
reduce government expenditure
as opposed to increasing Vat ... We
believe that we should address
corruption and wasteful and
irregular expenditure which runs
up to R100bn/year. If we do that
then it is unnecessary to increase
Vat, which affects the poorest of
the poor.”
Steve Swart
African Christian
Democratic Party MP
14 financialmail.co.za . February 22 - February 28, 2018
WHAT PARTIES THINK
Opposition
finds flaws
Increase in Vat widely condemned,
though lone voice of the FF+ says
it’s a good thing, in a way
Genevieve Quintal
“We ... view his budget as still
commied to the protection of
capitalist accumulation which over
the past 24 years has not led to any
meaningful investments ... There is
no sign of concrete plans to grow the
economy and create sustainable
jobs.”
The EFF
(which boycoed
the event)
Mangosuthu
Buthelezi
Inkatha Freedom Party leader
“I was pleasantly surprised. The
increase in Vat is regreable, but at
the same time as far as the poorest of
the poor are concerned ... I think it is a
very good balancing act. Staple food
was not increased, [there was] some
increase in social grants and in money
for education generally.”
“It’s not fair for individuals to carry
the whole tax burden. We saw an
increase in personal tax but at least
now we broaden it [with the Vat
increase]. We are worried because
if you look at the economic growth
rate predicted by the minister, it
says 1.5% for the next financial
year and about 2.1% for 2020; that
is not going to create enough jobs
if for instance more than 800,000
pupils leave school annually.”
Pieter Groenewald
Freedom Front
Plus leader
“The very low appetite for supporting
WHAT CEOs THINK state-owned enterprises (SOEs) was hearten-
Cautious
ing aer so many previous budgets extended
bail-outs to ailing entities. This is a welcome
development since SOEs are a major area of
contingent liabilities that the ratings agencies
optimism
look at ... Overall, it was a tough budget,
considering the size of the fiscal deficit. But
there were signs that government is leaning
into issues that need to be tackled.”
Business leaders say there Nicky Newton-King
were few surprises in Gigaba’s CEO of the JSE
‘tough but hopeful’ budget “There was nothing that really surprised me in
Marc Hasenfuss the budget. But I do worry that a combination of
a hike in the Vat rate and an increase in the fuel
levy could be inflationary. We could dri out of
our inflation targeting range, and put pressure
on interest rates again.”
Mustaq Brey
CEO of Brimstone Investment Corp
“This was obviously a tax-driven
budget, and the fact that a
wealth tax has started to come
through is not that surprising.
Overall, though, I’m not too
disappointed.” Jannie Durand
CEO of Remgro
“Against the backdrop of a difficult macro
environment, government has produced a
credible budget. Some hard decisions have
been taken in order to stabilise the country’s
finances, such as increasing Vat. What was
missing was a greater commitment by govern-
ment to look at ways to expand the tax network
and revitalise Sars [the SA Revenue Service].
We need to improve the tax authority’s
Mteto Nyati investigative capacity once again.”
CEO of Altron Group
Raoul Gamsu “My expectation aer the budget is that there are no quick fixes.
CEO of Consolidated But hopefully over the next six months we will see [economic
Infrastructure Group policy] changing. Most importantly, I am optimistic about the
leadership of SA ... we have a good CEO in charge of the country.
Last year I had expectations of further downgrades, increases in
interest rates and currency weakness. This time it’s the reverse.”
February 22 - February 28, 2018 . financialmail.co.za 15
Financial Mail Page 16-17 -22/02/18 02:06:07 AM

budget 2018 overview

GIGABA’S POLITICS While he might remain a member of the cab-
inet, his demotion seems all but certain.
Dim future for The main reason for this is the cloud hanging
over him as a result of his tenure as public
enterprises minister — and his alleged role in
this chameleon facilitating the “capture” of state-owned enter-
which was pretty much elected on an anti-cor-
ruption and anti-state-capture ticket.
opinion by Bonang Mohale
Deputy chief justice Raymond Zondo is set to
get to work on his judicial inquiry into state
capture — and topping the list of his terms of
reference is how the Guptas and their political

He was kept on to deliver a tough

budget, but can Gigaba survive as a
senior member of Ramaphosa’s cabinet?
Natasha Marrian marriann@businesslive.co.za
prises by Zuma’s alleged benefactors, the Gup-
tas, who are now on the run.
A report into state capture by the SA Council
of Churches earmarked Gigaba’s tenure at pub-
lic enterprises, from 2009 to 2014, as the gen-
esis of the state capture project.
A report by the Public Affairs Research
allies in the state manipulated ministerial
appointments and the appointments of board
members in key state-owned companies.
Reporting for duty
This probe, with powers to subpoena, is set
to lead directly to Gigaba’s tenure as public Business is ready to answer Ramaphosa’s call — ‘send me’ — to
enterprises minister. ensure our economy is pulled from the brink of policy own goals
Still, it will provide him with an opportunity @ tobyshapshak
to clear his now deeply tainted name. Julius

ý Finance minister Malusi Gigaba perfectly fit-
ted the mould of WH Auden’s poem, “The
Unknown Citizen” until his tenure as public
enterprises minister, when his links to state
capture emerged.
“Our researchers into Public Opinion are
content / That he held the proper opinions for
the time of year; / When there was peace, he
Institute went further, describing in detail how
Gigaba systematically went about “repurposing”
the boards of state-owned entities, “which
became broadly representative of ‘Gupta-Zuma’
interests”.
According to the report, Gigaba appointed the
Gupta-linked Iqbal Sharma to the Transnet
board in 2010, and in 2011 he appointed Brian
T
Malema’s EFF boycotted Gigaba’s maiden bud-
get speech as a protest against his alleged role
as the Guptas’ facilitator, including fast-tracking he past few days have
their SA citizenship when he was home affairs renewed the hope and
minister (from 2014 to 2017). confidence of millions
Gigaba’s hitherto fairly low-key role in pol- of South Africans in
itics, which simultaneously helped him rise their country, its insti-
within whatever faction was at the helm, shifted tutions and future.

was for peace: when there was war, he went,”
the poet wrote.
That pretty much sums up the description of
Gigaba’s politics by his peers. He is a career
politician who blows the way of power in the
hurly-burly of SA’s political shifts.
Gigaba’s most acerbic critics in the ANC
describe him as someone with little depth, and
say his vacillation can in essence be attributed
to the pursuit of high office — a strategy that has
largely worked. To supporters he is talented,
bright and astute; he has mastered the art of the
political chess game, doing what is necessary to
rise in the ranks of the ANC and government.
Gigaba was elected president of the ANC
Youth League for three terms — in 1996, 1998
and 2001.
He was seen as one of former president
Thabo Mbeki’s loyalists — but following the
ANC’s rejection of Mbeki at Polokwane in 2007
and his subsequent recall and exit from the
political stage, Gigaba’s allegiance switched
seamlessly, allowing him to rise steadily in
stature under Mbeki’s successor, Jacob Zuma.
In ANC circles, during the debate on “gen-
erational mix” ahead of the Mangaung confer-
ence in 2012, it was naturally assumed that he,
along with contemporaries like Fikile Mbalula
and Zizi Kodwa, was among the rising stars
who would lead the party into the future.
But how will Gigaba’s chameleon-like style
of politics go down in the new administration
under President Cyril Ramaphosa?
It is widely predicted that it will not be
smooth sailing for the relatively young politician
(he is 46), known for his immaculate suits and a
Molefe — whose ties to the Gupta family are
well documented in former public protector
Thuli Madonsela’s report on state capture — as
Transnet CEO. In June 2011, he announced
wholesale changes to the boards of Eskom and
Transnet.
Leaving Gigaba at the helm of treasury poses
a distinct risk to the Ramaphosa administration,
under Zuma. First, our MPs elected a new pres-
His role could be exposed by the Zondo ident, Cyril Ramaphosa, enabling a
commission or, worse, it could show that he constitutional transition from one
blindly followed instructions to the detriment of leader to another. Then Ramaphosa
principle. opened parliament with an upbeat
It will be difficult for him to maintain the message that was a fitting tribute to
strategy — that of Auden’s Unknown Citizen — Nelson Mandela in the year of the
that has worked for him thus far. x icon’s centenary. And this week
finance minister Malusi Gigaba deliv-
ered a budget in support of the strong
but achievable plans announced by
Ramaphosa.
What remains is for South Africans
to join hands in ensuring that these
positive statements translate into
action and that the younger beneficia-
ries of social grants are quickly turned
into salary earners.
While the broad thrust of the bud-
get is to be welcomed, we think Giga-
ba could have been bolder, in certain
respects, to stabilise our public
finances — especially by reining in
expenditure, and addressing public
debt and the plethora of troubled
state-owned enterprises (SOEs).
As expected, and regrettably, the
rate of Vat will be increased to 15%,
alongside adjustments in other taxes.
This will hurt the poor.
The state The money could have been raised
of our SOEs through eradicating fruitless expendi-
remains ture. But government’s course is
one of the indicative of the economic times we
biggest are facing thanks, in part, to a lack of
threats to the investor confidence in the economy,
Siyabulela Duda
We welcome the marginal reduc-
tion in the deficit. Our preference,
though, would have been to address
the fiscal gap through a deeper cut in
spending and measures to stimulate
growth to increase revenues.
Government needs to move with
speed to set up the judicial commis-
sion of inquiry into the administration
and governance of the SA Revenue
Service. Raising taxes in an environ-
ment in which tax morality has been
compromised by governance and
leadership concerns in the revenue
authority is counterproductive.
Government has to be commend-
ed for the responsible manner in
which it has sought to address the
issue of fee-free higher education,
which could have become a political
football during the coming election
season.
Similarly, the approval of six spe-
cial economic zones is a welcome
move in the attempt to take advantage
of improving global economic condi-
tions through promoting export-led
growth. Government needs to urgent-
ly put in place the requisite incentives.
The state of our SOEs remains one
of the biggest threats to the integrity of
our public finances. Of major concern
is the heavy reliance of some of these
entities on government guarantees to
123RF
ship, capital structures and gover-
nance of these entities cannot be
delayed. The work that government
has commenced with Eskom — where
a new, credible leadership is now in
place — needs to be replicated across
all the major SOEs.
It’s concerning that government
will be injecting more cash into some
of these entities. Hopefully, financial
support will only be considered for
those SOEs that support public policy
objectives or have social mandates.
Caution is required in funding those
that have a commercial mandate.
As we approach another period of
ratings reviews, it would be helpful if
government were to clarify how it
plans to address the problems in the
SOE sector — especially in the major
entities.
The core message of the budget is
hopeful. Still, achieving the aspirations
envisaged in it will require a lot of
hard work on all of our parts.
Business is ready to answer Rama-
phosa’s call — thuma mina (send me)
— to do its part in ensuring that our
economy is pulled back from the
brink of policy own goals.
In this respect, Business Leadership
SA has been working with other
stakeholders on a set of short- to
medium-term measures to get our
economy on a growth path again. In

glamorous lifestyle. integrity of which is still reeling from the effects stay afloat, instead of using the guar- due course, we will share our propos-
It is expected that Gigaba will be shifted out our public of last year’s credit ratings down- antees to fund capital expenditure. als with government. x
of national treasury in the next cabinet reshuffle. finances grades. The task of addressing the leader- Mohale is CEO of Business Leadership SA

16 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 17
Financial Mail Page 18-19 -22/02/18 01:26:35 AM
budget 2018 revenue
ADMINISTRATION with the previous fiscal year. It was a daunting
task in an economy in which growth had
Scraping the barrel ground to a halt and annual inflation was to fall
to just above 5%.
Sars pulled out the stops, but it was not
enough. Preliminary estimates show that tax
revenue collected in the past fiscal year fell
The SA Revenue Service finds itself under increasing pressure — and scrutiny — as R48.2bn (3.8%) short of the budgeted total.
rising tax collection shortfalls become the norm and a commission of enquiry gets That’s at least a marginal improvement from
set up to investigate governance at the tax authority the expectation in the October medium-term
budget policy statement, in which Gigaba
Stafford Thomas thomass@fm.co.za warned of a projected tax collection shortfall
of R50.8bn.
I
In his latest budget speech, an undaunted
f there were any doubts about the dire sit- annual tax receipt deficit approaching R50bn. Gigaba set Sars the task of raising tax revenue
uation faced by the SA Revenue Service “We always knew that when government of R1.345 trillion in the 2018/2019 fiscal year. It
(Sars) in raising tax revenue, finance min- increased the Vat rate we would be at the bot- represents a 10.5% (R128bn) rise on the estimat-
ister Malusi Gigaba laid them to rest in his tom of the revenue barrel,” says Ernie Lai King, ed tax revenue collected in the past year.
budget speech. MD of tax consultancy One Road Consulting. As always, personal income taxpayers will
In a move potentially fraught with political The past fiscal year was always going to be a bear the brunt of Gigaba’s tax-raising goals. In
risk for the ruling ANC, Gigaba announced an tough year for Sars on the tax revenue collec- addition to the increase in Vat, he is aiming to
increase in the Vat rate from 14% to 15%, effec- tion front. And it was — in no uncertain terms. extract another R44.8bn (9.7%) from taxpayers
tive on April 1. Last February, then finance minister Pravin through means including lower-than-inflation
This will bring in an estimated extra R22.9bn Gordhan set Sars a goal of collecting tax rev- increases to personal income tax rebates and
in the 2018/2019 fiscal year, helping to close an enue of R1.265 trillion, a 7% increase compared brackets. In all, individual taxpayers are project-
ed to contribute revenue of R505.8bn, or 37.6%
of total tax revenue.
With Vat added, individuals are projected to
contribute tax revenue of R853.9bn, or 63.5% of
total tax revenue.
Also as usual, corporates got off lightly, with
their tax contribution to state coffers projected
Ernie Lai King to rise by R13.1bn (6%) to R231.2bn, or 17.1% of
total tax revenue.
But in government’s defence, it finds itself
between a rock and a hard place on corporate
tax. The current corporate tax rate is 28%.
In its revenue trends and tax policy review,
national treasury notes that the global trend is to
reduce corporate income tax rates. The US, for
example, has lowered its corporate tax rate
from 35% to 21%, and the UK has lowered its
rate from 30% to 19%.
“At 28%, SA is becoming an outlier,” warns
national treasury.
Can Sars pull off the revenue collection
objective it has been set by Gigaba? It remains
to be seen. But recent history suggests it will be
touch and go.
Tax collection shortfalls have, unfortunately,
become the norm over the past four fiscal
years. And the shortfalls have been rising.
In the 2016/2017 fiscal year tax revenue fell
7% (R30bn) short of the R1.174 trillion targeted.
That was a sharp rise from the 1.1% (R11.6bn)
shortfall in the 2015/2016 fiscal year and the 1.5%
Robert Tshabalala
(R14.65bn) shortfall in the 2014/2015 fiscal year.
With the growing shortfalls has come an
increasingly aggressive approach by Sars to
extract every last cent it can from taxpayers.
18 financialmail.co.za . February 22 - February 28, 2018
Sars has also been clinging on to refunds due
to taxpayers, says Andrew Wellsted, head of tax
at Norton Rose Fulbright.
This is so much so that the tax authority was
censured in a recent report on the refund issue
by the tax ombud. The report noted that
between November 2016 and March 2017 the
office of the ombud received 500 complaints
about Sars’s refusal to pay refunds. Half of the
complaints were found to be valid.
“The average time it takes us to sort out a
refund problem is three months,” says Mike
Teuchert, national head of taxation services at
Mazars. “It is time-consuming for tax advisers,
and, for clients, [it] adds more fees. Most indi-
viduals do not have the knowledge needed to
approach Sars themselves.”
And for refunds or other issues a taxpayer
may have with Sars, the office of the tax ombud
is not a quick solution.
“All avenues with Sars must first be followed
before a taxpayer can approach the ombud’s
office,” says Teuchert.
Sars has devised another means of making
life difficult for taxpayers through deductions
claimed in a tax return.
Teuchert explains that if Sars requests verifi-
cation of a claimed deduction, it sends it to the
taxpayer’s online eFiling profile, with no back-
up through e-mail or conventional mail. Miss a
Sars request, and it will disallow the deduction.
This can easily happen. “No one looks at
their eFiling profile on a regular basis,” says
Teuchert.
Sars is also after much bigger fish, among
them high-net-worth (HNW) individuals with
undisclosed assets offshore. Sars is now armed
with the automatic exchange of information
CONTRIBUTION TO GROSS
TAX REVENUE
Percentage of gross tax revenue, 2016-17
Persons and individuals 37.1
Vat 25.3
Companies 17.9
Fuel levy 5.5
Customs duties 4 warns treasury. The most significant factor in
Specific excise duties 3.1
Dividend withholding tax 2.7
Skills development levy 1.3
0.7
Electricity levy
Transfer duties 0.7 Source: National treasury
Hetty Zantman
treaty, an initiative of the Organ-
isation for Economic Co-operation
& Development (OECD) that came
into force in June.
The treaty brought with it the
common reporting standard under
which tax authorities in more than
60 countries share information on
assets and bank accounts held by
HNW individuals.
Underpinning this, financial
institutions are now required to
keep records of their HNW clients,
comply with due diligence require-
ments and report pertinent infor-
mation on a regular basis to tax
authorities.
The no-place-to-hide nature of
the new common reporting stan-
dard was hoped to already have
shown results, albeit indirectly.
Delinquent taxpayers with undis-
closed foreign assets had been
provided with an amnesty to come
clean. It expired at the end of
August.
Disappointingly, Gigaba made
no mention of the outcome of the
amnesty in his budget speech.
“I suspect the amount of assets
revealed proved to be embarrass-
ingly low,” says Lai King.
Whether Sars will use the
OECD’s common reporting stan-
dard to crack down on errant tax-
payers remains to be seen.
“We have not seen anything
yet,” says Teuchert. “But it is still Mike Teuchert
early days. A lot of revenue author-
ities are still trying to work out
how they will be able to analyse
the information.” ment in his state of the nation address that a
The common reporting standard has another commission of inquiry is to be set up to probe
key role to play: cracking down on multination- “tax administration and governance” at the rev-
als indulging in profit shifting to the most ben- enue authority.
eficial tax jurisdictions. The result is a loss of tax Gigaba in November called for such a com-
income (base erosion) in countries where they mission to be set up.
earn their profits. “We know very little about what the com-
SA’s comparatively high corporate tax rate mission’s remit is, but I suspect it will in part
puts it at risk of base erosion and profit shifting, deal with the substantial loss of senior staff in
the past 18 months and all the negative public
this is transfer pricing between units of a multi- attention Sars has been getting,” says Wellsted.
national company. While it should be done at Says Teuchert: “There is no accurate infor-
arm’s length pricing, it is a practice open to mation on Sars staff turnover and in its media
much abuse. releases it has played down the losses of highly
With the introduction of the common report- experienced people. But anecdotally we see it
ing standard, Sars now has access to country- all over the place.”
by-country information on all large multination- It is worrisome at a time when Sars needs all
als operating in SA. the skills it can muster.
Sars will soon find itself under scrutiny fol- “A strong Sars is critical to restoring SA to
lowing President Cyril Ramaphosa’s announce- health,” says Teuchert. x
February 22 - February 28, 2018 . financialmail.co.za 19
Financial Mail Page 20-21 -22/02/18 02:15:32 AM

budget 2018 revenue

VAT respectively. In Nigeria it is 5%. PERSONAL TAX SIN TAX
The increase is being relied upon to con- SA VAT RATE
Filling the tribute about R23bn — equivalent to 64% of the
additional R36bn revenue that government is Some relief Sugar jobs
targeting.
revenue hole PwC Vat partner Lesley O’Connell says the
increase will have a major effect on households’
but it’s slight may be lost
already tight budgets, and the April 1 implemen-
While some believe the Vat increase was tation date doesn’t leave much time for busi- 10% 14% 15% Bad news for the rich: increased duty Plan is to raise billions once again from
inevitable and necessary, others say there nesses to effect the necessary system changes. will squeeze more money from high- users of alcohol and tobacco but now
are better ways to make up the shortfall Despite the reservations, she believes it’s the value estates fans of sugary drinks also face a levy
Introduced 1993 2018
correct approach. “This raises large amounts of in 1991
Ann Crotty crottya@sundaytimes.co.za revenue with relatively small increases in rates Stephen Cranston cranstons@fm.co.za Stafford Thomas thomass@fm.co.za
due to its broad base and economic efficiency.
ý Imagine former Steinhoff CEO Markus Jooste The fact that there is no amended list of zero- ý Last year there was a painful increase in the ý Smokers and alcohol drinkers need no
pitching up to present the group’s 2017 financial
results along with the restated 2016 and 2015
rated foodstuffs is positive as it maintains the
integrity and efficiency of the Vat system.” R289.2bn
revenue generated
top marginal income-tax rate to 45%. There are
no similar fireworks this year; the same rate
longer feel alone when it comes to being the
targets of punitive excise duties. From April 1
figures and, before the end of the presentation, Not everyone agrees that a Vat increase was applies for those earning from R1.5m/year. Sim- they will be joined by consumers of sugary
in 2016-17
blithely informing shareholders that they will either inevitable or the right thing to do. Gilad ilarly, there are no changes to brackets above drinks.
have to weigh in with additional billions Isaacs, director of the corporate strategy & R555,000. The initial hit that sugary-drink consumers
Source: National treasury
because the company is in such difficulties. And industrial development research programme at At lower levels, changes to tax brackets and face is a levy of 2.1c/g of sugar, with the first
imagine him presenting this reality as though he Wits University, says it is “madness” to place the rebates offer 3.1% relief. Andrew Wellsted, a 4g/100 ml exempt. Hogan Lovells estimates that
had nothing to do with those difficulties. burden of collecting so much of the additional “If Ramaphosa wants to place a moratorium partner at the Norton Rose law firm, says gov- the levy will lead to an 11% rise in the price of
Fortunately, Steinhoff shareholders in such a revenue on Vat. on the Vat move, he could [do so] on the rea- ernment realises SA has a very small tax base, sugary drinks.
position would be able to walk away. It’s not so “In a country plagued with high levels of sonable grounds that he wants to engage with with 100,000 people paying at least 27% It will also extract over R1bn in additional tax
for South African citizens, particularly the poor- poverty and inequality every instrument must social partners such as Cosatu and civil society income tax. It is more palatable to increase tax- revenue from consumers.
123RF/ limbi007
est who will be most heavily affected by the one be brought to bear on solving these challenges,” groups,” says Isaacs. es stealthily by adjusting brackets than keep The SA Revenue Service describes the sugar
percentage point increase in Vat that the ANC’s he says. “The tax system is one tool.” If Ramaphosa does want to engage with civil increasing the top marginal rate. levy as being in support of the department of
very own value-destroyer, finance minister Isaacs describes Vat as the least progressive society groups, he need look no further than the An additional R6.8bn is likely to be collected pay more in real terms as they move up the health’s aim to decrease diabetes, obesity and
Malusi Gigaba, announced on Wednesday. component of the tax system, noting it has a Alternative Information & Development Centre next year through the monetary illusion of earnings ladder. other related diseases. But it comes with more
It is only the second increase in Vat since the relatively greater effect on the poor and lower- (AIDC), which has collated the views of 30 civil keeping taxes “unchanged” but having people About 75% of taxpayers earn less than than just an added cost to consumers.
tax was introduced in 1991. The first was in income earners. society organisations. R350,000 so could be eligible for free higher A study conducted by the Bureau for Food &
1993, just ahead of the country’s first democratic However, he says the Vat increase is not a The AIDC describes a Vat increase as an HIGHER BURDEN education. They account for 19% of income tax Agricultural Policy for the SA Sugar Association
elections. done deal. “There is still a parliamentary pro- attack on the poor that SA cannot afford. payments. found that the levy will result in a 200,000 t fall
For many establishment economists, the cess to go through, which provides a two-week “If an increase in Vat is a symbol of what the Taxable income (R) Rates of tax (2018-19) SA’s personal income tax burden has in annual sugar demand which in turn will lead
strongest argument for increasing Vat is simply window for discussion.” future holds under Ramaphosa, it will mean R0 - R195,850 18% of each R1 increased from 8.3% of GDP in 2011 to 9.8% to the loss of an estimated 3,129 direct farm
that it hasn’t been done for so long. Or, as Giga- While a budget has never been rejected in harder times for SA’s poor,” says the AIDC. today but revenue continues to be strangled by jobs, most of them among small growers.
ba put it rather pointlessly during his budget the past, Isaacs believes things are sufficiently Isaacs says there are workable alternatives, R195,851 - R305,850 R35,253 + 26% of the lower bonus payments, moderate wage settle- For smokers and consumers of alcoholic
amount above R195,850
speech: “We have not adjusted Vat since 1993 different this time to provide some scope for a including increasing government debt, which is ments, job losses and the stabilisation of public- beverages, finance minister Malusi Gigaba had
and it is low compared to some of our peers. review of the Vat decision. not high by international standards. R305,851 - R423,300 R63,853 + 31% of the service employment after years of growth. As a more of the same bad news they have been
We therefore decided that increasing Vat was He refers to speculation of a cabinet reshuffle Personal income tax increases, especially at amount above R305,850 result, Gigaba expects personal income tax rev- getting since 2002: excise duty increases will
unavoidable if we are to maintain the integrity and the likelihood of Gigaba being removed the highest level, a wealth tax with a particular enue to undershoot its target by R21.1bn in the be above the inflation rate.
of our public finances.” from his position as finance minister. He also focus on intergenerational wealth and a small R423,301 - R555,600 R100,263 + 36% of the 2017/2018 fiscal year, now ending. Between them, drinkers and smokers are
The peers he referred to might be Norway wonders to what extent this budget is backed increase in corporate tax are all options that amount above R423,300 Personal tax accounts for 37.1% of revenue, projected to contribute an additional R1.33bn in
and Hungary, where Vat is 25% and 27% by Ramaphosa. should be considered. x R147,891 + 39% of the
double the 17.9% from corporate tax. tax revenue in 2018/2019.
R555,601 - R708,310
amount above R555,600 There will be at least one attempt to squeeze Liquor consumers face proposed excise duty
COMPARATIVE STANDARD VAT RATES BY COUNTRY the rich. In line with Davis Tax Committee rec- increases of from 6% to 10% which will extract
R708,311 - R1,500,000 R207,448 + 41% of the ommendations, estate duty on estates worth an additional R910m in tax revenue.
% amount above R708,310 more than R30m will increase from 25% to Hardest hit, at a 10% rise, are beer drinkers
21
30%. Any donation above R30m in any one year who will soon find the price of their favourite
R1,500,001 and above R532,041 + 45% of the
amount above R1,500,000
will be taxed at 25%. brew jumping by 14.6c/340 ml can.
14
Private citizens are being challenged by a It takes the total excise duty payable to
Rebates range of additional taxes. The sugar tax will 161.56c/340 ml.
7 Primary R14,067 arrive on April Fool’s Day — the latest in a list of Coming off comparatively lightly, fortified-
Secondary R7,713 special impositions such as the plastic bag tax, wine drinkers will pay an extra 37c/l. The 6%
0 Tertiary R2,574 the levy on incandescent light bulbs and the rise takes total tax on fortified wine to R6.54/l.
Argentina

UK

Madagascar

Morocco

Cameroon

OECD

India

Russia

Turkey

Côte d'Ivoire

Rwanda

Tanzania

Uganda

Brazil

China

Mozambique

Malawi

Mexico

Kenya

Ghana

Mauritius

Namibia

Zimbabwe

SA

Botswana

Indonesia

South Korea

Japan

Nigeria

Saudi Arabia

vehicle emissions tax. These will soon be joined But it is still well above the R3.91/l for unfor-
Tax threshold by the carbon tax bill. tified wine, which represents by far the largest
Below age 65 R78,150 The slight increase in medical tax credits is portion of the wine market.
Age 65 and over R121,000 also a hit for the private citizen. Tax increases Smokers will feel the pain of an 8.5% rise in
* Rates are for 2017 and 2018. THE OECD rate refers to an unweighted average Age 75 and over R135,300
Source: International Bureau of Fiscal Documentation
Source: National treasury on tobacco and alcohol will surprise nobody. x tax on cigarettes that will take excise duty to

20 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 21
Financial Mail Page 22-23 -22/02/18 02:15:18 AM

budget 2018 revenue

SIN TAXES

Source: National treasury

Changes in specific excise duties R15.52 on a pack of 20. CORPORATE TAX But the intention is not to let local
CORPORATE INCOME TAX
Ostensibly tax on “sin” prod- companies simply shift their activ-
as a share of GDP
ities to reduce their tax liabilities. All %
ucts such as cigarettes and alcohol
All eyes on

Cigarees
South Africa

Pack of 20
are aimed at cutting consumption. tax incentives and grants are being 7
Reality seems to tell another story. monitored — all must meet inclusive OECD
Unfortified wine
According to British American incentives growth incentives.
6 Africa

Malt beer
Tobacco (BAT), illegal tobacco The research and development 5

340ml
products today account for 24% of incentives have certainly missed the
Companies get a break with no tax
Spirits
750ml

the SA market with an estimated mark. They allow taxpayers to 4

increase, but government has a few
1l

5.5bn illicit cigarettes sold in this deduct 150% of expenditure on

country annually. Loss of tax rev- tricks up its sleeve qualifying projects. But there is a 3

enue is said to be about long application backlog and the

2
R5bn/year. Stephen Cranston cranstons@fm.co.za incentive will be reviewed to reduce
It also suggests very poor complexity. 1
policing by Sars. BAT estimates ý Finance minister Malusi Gigaba must have Nazmeera Moola, co-head of

R4.80 30c 14.6c R1.22

2000

2004

2006

2009
2008
2005
2003
2002
2001

2010
2007

2015
2013
2014
that 80% of the total trade in illicit been tempted to increase the corporate tax rate. fixed income at Investec Asset Man-

TRANSFER DUTY down from a multiyear high of 7% in 2014.
Finance minister Malusi Gigaba expects rev-
tobacco is manufactured locally. x It has remained at 28% since 2013, when the
more neo-liberal Pravin Gordhan regime
reduced it from 34.5%.
mildly stronger year for all housing market seg- But companies can be a lot more mobile than
ments,’’ he says. people and are certainly more prepared to shop
2012
2011
agement, says the budget, including
Source: OECD
a stable corporate tax rate, is a nec-
essary but not sufficient condition to
shoring up SA’s one remaining investment- global trend towards lower corporate tax rates,
grade investment rating (from Moody’s). government will review the controlled foreign

No relief for enue collection from transfer duties to recover

home buyers
Transfer duty rates have not been
changed, partly because revenue from
property sales was lower than expected
Joan Muller mullerj@fm.co.za
ý Unsurprisingly, no adjustment to transfer
duty rates was announced in this year’s budget.
It follows a drop in the revenue that gov-
ernment earns from property sales: transfer
duty collection for the 2017/2018 tax year came
in at R7.8bn, about R620m less than the
R8.42bn treasury had hoped to earn.
The transfer duty shortfall can be attributed
largely to the relief that was offered to entry-
level home buyers when government raised the
transfer duty exemption threshold last year
by 7% to R8.34bn in 2018/2019. Some may
argue this estimate is overoptimistic, particular-
ly since transfer duty rates did not increase.
Furthermore, there has been no adjustment
to capital gains tax in this year’s budget, which
means there won’t be a rise in revenue on that
front either.
However, FNB household and property sec-
tor strategist John Loos says housing activity
may well pick up over the next 12 months on
the back of improved sentiment, thanks to SA’s
political transition.
Loos notes that leading economic indicators
are already pointing towards a strengthening
economy.
“It seems plausible that 2018 could be a
BRINGING IN LESS
Transfer duty revenues (Rbn)
8.51
Jacques du Toit, senior property economist at
Absa Home Loans, echoes a similar sentiment.
He says that while the increase in Vat,
marginal personal income tax relief and
increased fuel levies will have a negative effect
on household finances, lower inflation and the
stronger rand could lead to lower interest rates,
which could provide much-needed support for
the housing market.
Herschel Jawitz, CEO of Jawitz Properties,
agrees that while the budget provides no real
impetus for a residential property market
recovery, improved consumer confidence is
likely to support property prices and demand
over the next 12 months. But the increase in
estate duty on estates above R30m may lower
demand in the luxury market, he says. x
around for a more attractive environment. It
would be a major blow if there were an outflow
of big corporates along the lines of the 1999
exodus of Old Mutual, Anglo American, Billiton,
Dimension Data and SAB.
According to the Budget Review, falling cor-
porate income tax rates in advanced and
emerging countries have already affected SA’s
global competitiveness. This trend limits the
room to increase or even maintain the tax rates
on business. Corporate income tax already con-
tributes more to GDP than in virtually every
sizeable economy except Chile.
“There was definitely a danger that we would
price ourselves out of the market,” says Andrew
Wellsted, a partner at Norton Rose Fulbright.
Life was already made somewhat uncom-
fortable for shareholders by last year’s increase
in the dividend withholding tax from 15% to
20%.
Corporate tax has been reduced from 35% to
21% in the US and from 30% to 19% in the UK.
The SA government has opted for a simpli-
As it is there is a pick-up in resistance to
paying tax. Tax buoyancy, or the relationship
company tax exemption to see whether a
reduction is warranted.
between tax revenue growth and economic Government is also reviewing the tax treat-
growth, fell to 0.96, materially below
economic growth.
ment of excessive debt financing. As interest
payments are tax deductible it is an incentive to
use debt rather than equity, and is often used to
TAX REVENUE 2018/19 strip profits from high-tax countries. There will
be a discussion document coming out soon. The
aim in corporate tax is to balance certainty,
Personal
R505.8bn income tax simplicity and protection of the revenue base,
the Budget Review says.
R348.1bn Vat There are also ambitions to expand Vat to
foreign electronic services including cloud com-
Corporate puting and other online services.
R348.1bn income tax And to ensure proper governance of public
entities and encourage accountability, losses or
Customs &
R97.4bn excise duties
expenditure classified as fruitless or wasteful
will not qualify for a tax deduction.
R84.8bn Other
Corporates will also be pleased to hear that
there will be improvements to tax administra-
tion. Perhaps the SA Revenue Service (Sars) can
become a partner to business after all.
R77.5bn Fuel levies
It is looking to bring in electronic fiscal

*8.34
8.25

from R750,000 to R900,000. fied corporate tax regime in which businesses Source: National treasury devices, or electronic cash registers, to help
7.8

Though buyers in the sub-R900,000 bracket know exactly what they are going to pay, and revenue administration by monitoring business
After much debate the minister decided to
7.4

7.4

were the biggest winners from the adjustments wasteful tax incentives have been removed, transactions. It is also looking to prevent “fore-
introduced in the 2017 budget, anyone who though a few high-profile special zones have let Vat take the strain rather than corporate or stalling” in which abnormal volumes of prod-
6.77

6.7

bought a property priced at R1.25m or more been set up. personal tax increases. ucts are moved from warehouses into the
benefited too. From March 1 last year they effec- They will get additional tax incentives. The Corporates might be getting away with no market to avoid increases in excise duty rates.
tively saved R4,500 in transfer duty. initiative is being led by the department of trade tax increase, but they will need to be well It also plans to take on counterfeit cigarette
5.48
5.32

Transfer duty revenue was hit not only by & industry and is focused on the manufacturing aware of some government initiatives featured operations with fiscal markers required under
4.93
4.68

the higher exemption threshold but by a dip in and tradable services sectors to support exports, in the budget. the tracking and tracing obligations of the World
4.27

housing sales. Industry players say market sen- economic growth and job creation. Coega in the It will be reviewing the controlled foreign Health Organisation’s protocol to eliminate illicit
3.83

timent was dented last year by ongoing political Eastern Cape is the best known but others company comparable tax exemption. SA-con- trade in tobacco products. Other products could
uncertainty, credit rating agency downgrades include Dube TradePort in Durban, East London, trolled companies operating in countries where soon be subjected to fiscal marking.
and SA’s dismal economic growth rate of only Maluti-a-Phofung, Richards Bay and Saldanha tax payable is less than 75% of what would have Sars collects more than 30% of total revenue
around 1%. Bay. Against the national trend they will be been payable at home are required to include from the customs and excise system and is at
In addition, softer sales volumes led to lower offered a lower corporate tax rate for qualifying the foreign net income in their SA tax calcu- an advanced stage in its customs modernisation
house price growth. The FNB house price index firms as well as employment tax incentives not lation. This prevents these firms from shifting programme: strengthening data and revenue
recorded average growth of only 3.7% last year, just for young people but workers of all ages. profits to low-tax jurisdictions. In view of the collection associated with cross-border trade. x
6

11

9
-0

-1
-1

-1

-1

-1

-1
-1

-1
-0

-0
-0

-1

0-

16
11

12

17
13

18
15
14

. .
06

09
07

08
05

20
20

20
20

20

22 financialmail.co.za February 22 - February 28, 2018

20

20

20

February 22 - February 28, 2018 financialmail.co.za 23

20
20
20

20
20
20

Source: National treasury *Estimate

Financial Mail Page 24-25 -22/02/18 02:29:57 AM
budget 2018 revenue
opinion by Dennis Davis
Between a rock
and a hard place
The 2018 budget will be remembered as the one in which Vat was
increased for the first time since 1993 — but Gigaba had little choice
I
n the end, it turned out that
the 2018 budget was a
prisoner of the economic
and political conditions
created over the past few
years. The tepid levels of
GDP growth, astounding levels of cor-
ruption, declining tax morality and
turbulence in the SA Revenue Service
(Sars) all combined to create a rev-
enue shortfall that has created fiscal
unsustainability.
If you recall, back in October when
finance minister Malusi Gigaba deliv-
ered the medium-term budget policy
statement, the revenue shortfall was
calculated at R50.8bn — and that did
not include the added expenditure
needed to fulfil former president Jacob
Zuma’s cavalier pledge of free tertiary
education.
This week’s budget showed that
the R50.8bn has been revised down to
R48.2bn. To fill this gap, national trea-
sury needs extra tax revenue of
R36bn, as well as a commitment to
prune government expenditure by
R85bn over the next three years.
It may be controversial that a one
percentage point increase in Vat is the
centre of the tax increases needed to
fund this shortfall, but it’s hardly sur-
prising. After all, where else would
Gigaba have been able to source a
predictable R22.9bn?
At 28%, corporate tax is already
fairly high, and in a globalised world in
The one which SA is seeking new investment
percentage to power its growth trajectory, an
point increase would have proved econom-
increase in ically counterproductive. And besides,
Vat may be we need reliable information about the
controversial, gap between nominal and effective
but it’s hardly corporate rates of tax before any cor-
surprising porate tax increase could be justified.
24 financialmail.co.za . February 22 - February 28, 2018
While personal income tax rates
remain unchanged, the partial imple-
mentation of fiscal drag does repre-
sent a modest effective tax increase
for higher earners.
But even if the marginal tax rate
were increased from 45% to 50% for
people earning more than R1.5m/year,
it would raise revenue by less than
R5bn — hardly a replacement for a Vat
increase when the country needs to
raise more than R20bn.
The reality of SA’s economy is that
the pyramid shape of income distri-
bution — itself an unwelcome product
of our racist past — imposes an inher-
ent constraint on our ability to raise
the sort of revenue needed to plug the
shortfall through any hikes to personal
income tax.
Of course, some attempt has been
made to target the wealthy in this
budget through an increase in estate
duty. But the fact is, unless tougher
anti-avoidance measures are imple-
mented, along the lines recommended
by the Davis tax committee, little will
come of this increase.
While it’s doubtful that estate duty
could ever make a really major con-
tribution to revenue, it must still be
taken seriously in a country with the
sort of egregious levels of income and
wealth inequality that we have in SA.
The Davis tax committee has com-
pleted a report on wealth tax, but
implementation of the proposals
requires significant additional informa-
tion about wealth patterns and a com-
prehensive discussion of its scope.
For example, does wealth situated
in retirement funds — which, on any
plausible definition, make up a signif-
icant part of SA wealth’s landscape —
123RF/Andrey Kiselev
fall within the scope of a wealth tax?
As you’d expect, the budget places
much-needed emphasis on tax
administration. Tax buoyancy is now
below 1 — a measure that illustrates
how revenues have fallen below the
rate of GDP growth in the country.
The Budget Review suggests that
the decline in the dividend tax collec-
tion — by more than R5bn from what
was projected last year — is a signif-
icant factor in that buoyancy rate. That
is true, but concerns with the state of
Sars could also have been a contribut-
ing factor.
The problems at Sars are one of the
early issues that President Cyril
Ramaphosa needs to fix.
On balance, Gigaba’s budget will
doubtlessly be remembered as the
one in which Vat was increased for
the first time since 1993.
Some have argued for a three-tier
Vat system: a luxury Vat tier for a cer-
tain range of products; a zero-rated
tier for essentials like bread; and the
normal tier, which will now be 15%.
The answer to this is that creating a
luxury Vat tier would require signif-
icant legislative work to define what
constitutes these items. That legisla-
tion would take time to put together.
Second, a three-tier Vat system
creates opportunities for arbitrage (on
the input side), which makes it inef-
ficient and difficult to administer. Also,
increasing the scope for a “zero rating”
means the revenue that is foregone
mainly benefits the wealthiest people.
It is far better to redistribute on the
expenditure side — such as the
increases to social grants announced
in this budget, as well as the increased
spending on tertiary education for the
poorer sections of SA. x
PERSONAL FINANCE
Tightening the
tax screws
The increasing burden on South Africans
in some income classes is close to
reaching a tipping point
Laura du Preez
ý The squeeze on individual taxpayers contin-
ued in this year’s budget with increased Vat and
fuel levies, almost no fiscal-drag relief and a
below-inflation increase in the medical tax
credit that whittled away this benefit.
This year’s additional burden comes on the
back of a steady increase in income tax and
indirect taxes over the past few years.
South Africans’ personal income tax burden
has risen from 8.3% of GDP seven years ago
to 9.8% in the 2018 tax year, the Budget
Review notes.
Add to this consumption taxes such as Vat
increasing the price of many purchases by
another percentage point, the fuel levy and road
accident fund levy increasing the tax on fuel
from 35.6% to 38.4%, and a two-percentage-
point increase in ad valorem excise duty push-
ing up the cost of goods such as vehicles and
cellphones.
Following an income tax rate increase in
2016 and the introduction of a 45% marginal tax
bracket for high earners last year, personal
income tax rates were not increased this year.
However, the screws will tighten on all tax-
payers as national treasury chose, once again,
not to fully address tax-bracket creep. This
occurs when a salary increase pushes a tax-
payer into a higher tax bracket.
This year even the lower income brackets
were granted only partial bracket-creep relief —
the bottom three income brackets were raised
by a below-inflation 3.1%, while the four higher
tax brackets were not adjusted at all.
This will cost personal taxpayers an addi-
tional R6.8bn in the 2019 tax year.
Individual taxpayers will also be squeezed
for an additional R700m because medical tax
credits rose by less than inflation.
They increased by a mere 2.31% (for the first
two beneficiaries) and 2.45% (for remaining
beneficiaries) — well below the increases in
contributions that medical scheme members
face, which are typically two to three percent-
age points above inflation (which was 4.4% for
the year to the end of January).
The increases in contributions average 7.75%
for nine large medical schemes, according to
Grant Thornton Healthcare.
Middle-income earners were spared invest-
ment tax and estate duty increases this year, but
high earners with estates exceeding R30m will
face a higher estate duty rate of 25% — or
should they try to donate assets exceeding this
amount, they will pay donations tax.
Dividends tax was increased last year from
15% to 20% and the inclusion rate on capital
gains tax increased in 2016.
The tax burden on individuals is often mea-
sured in terms of the number of days in the
year the average taxpayer works to pay his or
her tax obligation — known as tax freedom day.
Last year tax freedom day was on May 25 —
five days later than it was in 2015 and six weeks
later than it was in 1994, the Free Market Foun-
dation reported last year.
Tax freedom day is calculated by taking total
government tax revenue and dividing it by GDP.
But Ferdie Schneider, the national head of tax
at BDO, says the calculation is misleading
because it only considers an average effective
tax rate, and these rates vary sharply.
Just in income tax, the Budget Review shows
the 2019 average income tax rates will vary
from 0% to 36.8%.
Tax freedom day also fails to take into
Russell Roberts
Ferdie Schneider
February 22 - February 28, 2018
226
The number of days in a year
a person earning R1m/year in
the past tax year may need to
work to pay income tax,
typical medical scheme
contributions, private
schooling costs, retirement
savings and security costs
account public services provided by the state.
If government fails to provide benefits such
as health care, education, retirement savings
and security, taxpayers need to fund these
themselves.
Health care is not the only one of these
costs rising at above-inflation rates. Recently
Old Mutual warned parents to expect education
costs to rise by 9%/year.
This means public school costs of
R32,000/year last year could amount to
R50,000 in five years, and private high school
costs of R125,000 could rise to R197,000 by
2021. University costs of R54,000 last year
would increase to R85,000 by 2021 and
R176,000 by 2030, Old Mutual says.
Eugene du Plessis, director of tax at Grant
Thornton, says a taxpayer earning R1m/year in
the past tax year and paying R7,500/month in
medical scheme contributions, R10,000 in pri-
vate schooling costs, R5,000 in retirement sav-
ings and R1,360 for security had an annual
income tax burden of R275,918.
Such a taxpayer would have needed to work
224 days out of 365 — or until August 13 — to
cover tax, medical, security, retirement and
education costs.
In the tax year that starts on March 1,
assuming this taxpayer’s income and costs
increase by 4.8%, his or her annual income tax
liability will rise to R294,417, which means
working an extra two days until August 15 to
meet expenses.
Rhodes Business School tax professor
Matthew Lester says last year’s tax statistics
released by the SA Revenue Service show that
just over 1m taxpayers earning more than
R500,000/year pay 62% of personal tax, which
amounts to 23% of total tax revenue, before they
spend a cent on anything else.
The tax burden on these individuals could
therefore be close to reaching a tipping point.
Schneider says too heavy a burden on tax-
payers leads to an emigration brain drain, tax
avoidance mechanisms, and capital or income-
generating potential being moved to tax juris-
dictions with lower rates. x
. financialmail.co.za 25
Financial Mail Page 26 -22/02/18 02:36:08 AM

budget 2017 policy

STATE-OWNED ENTERPRISES as will a new set of directors for SA Express
(SAX) — the regional airline operator that is set

No more bailouts — to soon be merged with its larger but equally

cash-strapped cousin, SA Airways (SAA).
Both Denel and SAX have been operating

and clean up your

only thanks to the loan guarantees they have
from government. Neither has been able to fund
its operations independently.
In December, Denel was forced to turn to

act, Gigaba tells SOEs national treasury for a further R580m loan
guarantee to pay the salaries of its approximate-
ly 2,000 employees. This was in addition to a
R1.9bn increase in a debt guarantee that gov-
Finance minister says the elimination of corruption and the strengthening of ernment had extended to Denel earlier, hiking
governance will be priorities. As an example he points to Eskom, where in January its total exposure to R2.4bn.
six new directors were appointed to the board and the acting CEO was replaced “We will follow the same path of fixing man-
agement and governance teams as government
Sikonathi Mantshantsha mantshantshas@fm.co.za and the management teams of SOEs to elim- has done at Eskom,” said Gigaba.
inate rampant corruption. Nonetheless, the Eskom has been perhaps the worst and most
ý Cash-strapped utilities that were hoping for R466bn in government guarantees, given to the visible of the bumbling SOEs. To strengthen its
financial respite from the budget were left dis- entities as collateral for their debts, will stay in governance, six new directors were appointed
appointed as finance minister Malusi Gigaba place. The last of the guarantees — R350bn to the board in January, including Telkom chair-
chose not to make any new allocations to shore extended to cover Eskom’s debt — will expire in man Jabu Mabuza. The power utility also
up their leaking balance sheets. March 2023. replaced Sean Maritz, who had been acting CEO
Instead of the carrot that state-owned enter- First in the whipping line would be the board for three months, with the highly rated Phaka-
prises (SOEs) were hoping for, the minister and management of arms manufacturer Denel, mani Hadebe.
spoke of the stick. He said government would Gigaba said. Eskom’s new board was also mandated to
prioritise strengthening corporate governance Denel’s new board will be announced soon, cull all senior managers and executives who

Waldo Swiegers

26 financialmail.co.za . February 22 - February 28, 2018

Financial Mail Page 27 -21/02/18 11:45:39 AM

F O U N D AT I O N

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Financial Mail Page 28-29 -22/02/18 02:36:33 AM

budget 2017 policy opinion by Charlene Lackay

A DEEP HOLE
Government guarantee exposure had been accused of corruption from its top appointed to the board together with Martin
2017-2018 (Rbn) ranks immediately. Since then, seven executives Kingston, the CEO of investment bank Roth-
have either resigned or been fired, including schild’s SA unit.
Guarantee Exposure* former chief financial officer Anoj Singh and Though SAA’s survival remains precarious,
State-owned head of generation Matshela Koko. Gigaba said the airline would receive only the
enterprises (total) 466.0 300.4 It was a commendable step to improve gov- R3bn government had already promised it,
ernance, but Eskom didn’t have a choice. together with the R5.5bn that had been trans-
Eskom 350.0 220.8 Eskom’s major lenders said that for them to ferred to settle the debt liabilities in 2017. That
Sanral 38.9 30.1 keep their credit lines open, the utility had to R3bn would be paid to SAA next year, he said.
remove all those accused of the corruption that Of course, this is in addition to the R19.1bn
Trans-Caledon
Tunnel Authority 25.7 18.7 has crippled the utility and driven it to the brink debt guarantee government has extended to
of defaulting on its bonds. The electricity pro- SAA. Government has also maintained its
SA Airways 19.1 11.8 ducer still has R540bn in outstanding debt. R39bn debt guarantee to the SA National Roads
Land and Agricultural Quite when the new boards at the other Agency (Sanral), whose finances have been
Bank of SA 9.6 6.6 companies will be appointed is anyone’s guess. weakened by the revolt against e-tolls. Sanral is,
Development Bank On this point, Gigaba said: “The time frame of however, in the early stages of modernising the
of Southern Africa 12.3 4.2 board appointments for the other companies road infrastructure, particularly in the Eastern
SA Post Office 0.4 0.4 will be announced as soon as the president Cape, where it will build a new highway at a

Transnet 3.5
firmly takes charge of the presidential infra-
3.8 structure commission.”
But again, it’s not like there’s a choice. Gigaba
cost of about R8bn.
But it does seem as if these state-owned
companies are cutting back.
Rethinking
2.4 2.3
engagement
Denel said that “lenders have been saying they cannot In all, these entities will borrow about
lend to the companies before corruption is dealt R368bn from the capital markets over the
SA Express 0.8 0.8 with and those accused [have been] removed”. three-year medium-term budgeting time frame,
This has already happened at SAA, which last compared with R433bn over the previous medi-
IDC 0.5 0.1 year recruited former Vodacom Group execu-

C
um-term expenditure period.
123RF/lightwise
Independent tive Vuyani Jarana as CEO. Jarana’s appointment Railway and logistics operator Transnet has
power producers 200.2 122.2 put a stop to the revolving door of the executive said it would scale back its capital investment Lackay yril Ramaphosa’s state of employment and the protection of the Grameen microfinance bank, famously
is group CSI
Public-private
partnerships** 9.6 9.6 suite at Airways Park, the carrier’s head office.
Political and board interference under the lead-
plans because demand had been weaker than
expected. This will allow the transport utility to manager of MMI
the nation address
reignited the hope that it
most vulnerable remain — made worse
by government failure, as was crudely
said: “I looked at what the problem was,
then started a business.”
Holdings
ership of Dudu Myeni, the former chair and a pay down its debt over the next five years. was still possible to build evident with the Life Esidimeni tragedy. In SA, growth in social entrepreneur-
* Total amount of borrowing and accrued interest for the
period made against the guarantee friend of Jacob Zuma, resulted in SAA going There is a downside to this, however. Cur- an inclusive society How should we understand this? Did ship has been encouraging. The depart-
** This amount only includes national and provincial through no fewer than six CEOs in six years. tailing building railway infrastructure may have using our collective tal- we just waste R137bn? Or, is there ment of economic development is
public-private partnership agreements Myeni was last year replaced by corporate negative consequences when economic growth ents and resources. It was a presidential something fundamentally wrong with working on a policy framework to boost
Source: National treasury
veteran Johannes B Magwaza, who was picks up. But that is still some way away. x call to action, grand and inspiring. the way we think about CSI? this sector, which could make a tremen-
Then, during the budget speech, this In 2018, government committed dous contribution to growth, job creation
wave of enthusiasm crashed headlong R259.4bn for social development, which and youth unemployment.
ESKOM accused of corruption. to fund operations and pay salaries and sup- into the harsh fiscal realities facing SA. It makes CSI budgets seem like a sneeze Of course, tough economic times lead
In January, government appointed additional pliers. was clear it will be hard work. It will in a thunderstorm. So shouldn’t we use to a lockdown in funding from donors.

No freebies directors to the board, headed by chair Jabu

this time
Market forces, not government, must
help haunted power utility navigate its
way to financial stability
Sikonathi Mantshantsha mantshantshas@fm.co.za
ý Eskom’s dire financial situation was not suf-
ficient to persuade finance minister Malusi
Gigaba to bail out the power utility in his budget.
Instead, he said government had prioritised
leadership changes and improved corporate
governance to make Eskom and other state-
owned entities attractive to commercial lenders.
Late last year, commercial lenders closed
their books to Eskom, insisting it appoint a
credible board and get rid of senior employees
Mabuza. Others included Sifiso Dabengwa, a
former MTN group CEO who was previously a
senior Eskom executive; current Imperial Hold-
ings CEO Mark Lamberti; and former energy
department director-general Nelisiwe
Magubane.
Among the new board’s first
decisions were the appoint-
ment of Phakamani Hadebe as
interim CEO, and the shedding
of seven executives, including
chief financial officer Anoj
Singh and former acting CEO
Matshela Koko.
“The lenders are again
engaging Eskom and it will be
able to sort its funding require-
ments that way,” said Gigaba.
The utility has been teetering
on the brink of financial col- Nelisiwe Magubane
lapse after running out of cash
In November, Eskom admitted it would run
out of cash at the end of December. It then
raised a R3.5bn loan from China to operate dur-
ing January. The Public Investment Corp then
stepped in early this month with a R5bn loan.
The utility is talking to other local commercial
lenders to raise the R20bn loan
it says it needs to keep oper-
ating until the end of the finan-
cial year next month.
Eskom has relied on gov-
ernment guarantees for R350bn
of its debt, which stood at
R540bn in the period to end-
September 2017. Most of the
funds have been used for
infrastructure investments,
including three power stations.
Gigaba also failed to make
any changes to the utility’s
guarantee, which was last year
extended to March 2023. x
also challenge corporate social invest-
ment (CSI) decision makers about where
to focus their efforts.
Companies spend R8bn/year on CSI
— a contribution mirrored by R8bn in
philanthropic donations from high-net-
worth individuals.
This doesn’t take into account con-
tributions towards skills and supplier
development. The 2017 Trialogue Busi-
ness in Society Handbook says compa-
nies have spent R137bn on CSI over the
past 20 years.
One can rightly argue about the qual-
ity and impact of this investment. But the
Instead of fact is, our transformation and gover-
sneezing in a nance codes (such as BEE codes and
thunderstorm, King 4), ensure that companies are
firms should actively contributing, collaborating and
be brave connecting with communities.
enough to Yet the challenges facing us in edu-
experiment cation, health care, access to justice,
our comparatively small pot of funds to
take the risks government can’t?
If you ask Kerryn Krige, chief tech-
nical adviser for the International Labour
Organisation, the answer is an unequiv-
ocal “yes”. We should look at ways to be
catalysts for service delivery, innovation
and strengthening community systems.
CSI has evolved from pure philan-
thropy where “strategic CSI” and busi-
ness sustainability are considered
integral. What is frowned upon today
are old-school, transactional funding
partnerships that do nothing to build
the financial sustainability, independence
and capacity of organisations.
One area producing results is social
entrepreneurship. Social entrepreneurs
follow start-up rules and try to address
a social problem with a business solu-
tion. Muhammad Yunus, who started the
In this context, experimenting with
investments in social entrepreneurship
could easily be seen as irresponsible.
But instead of trying to do what only
government can, companies should pro-
vide new social investment models that
can, once established, grow to scale with
the help of government’s muscle.
Here is the snag: CSI departments
are flooded with requests for funding of
critical functions such as clean water
supply, access to basic health care and
education spaces that can build the dig-
nity of children. These are honourable
causes that make a difference, but they
can never be the core focus of CSI.
Companies should take their lead
from government priorities — but
instead of sneezing in the thunderstorm,
they should be brave enough to exper-
iment with ways to amplify the efforts of
government. x

28 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 29
Financial Mail Page 30-31 -22/02/18 02:30:55 AM
budget 2018 spending
PENSIONS
Some progress
Nedlac annuity talks bogged down, but
budget generally signals positive news
for pensions industry
Stephen Cranston cranstons@fm.co.za
ý Finance minister Malusi Gigaba admitted that
the stalemate continues in pension industry
negotiations — the parties at Nedlac have yet to
agree on the future of provident funds.
For now, members of provident funds can
take out their pension pots in a lump sum,
though government and business would like to
see pension and provident fund rules aligned so
that everyone would have to buy a regular
annuity. But labour has dug in its heels.
This stalemate notwithstanding, there has
123RF/Brian Jackson
30 financialmail.co.za . February 22 - February 28, 2018
been some progress in the pensions industry.
Changes to offshore regulations were quietly
slipped into the budget.
Soon, pension funds and retirement annuities
will be able to increase their exposure to off-
shore assets from 25% to 30%.
Rowan Burger, managing executive at MMI,
says this will give investors the opportunity to
diversify from a highly concentrated local mar-
ket, where Naspers alone can account for 25%
of the index.
It is quite a bold move when a stronger cur-
rency makes offshore assets look cheaper in
rand terms.
Burger says “project bonds” outlined by
Gigaba will provide a new asset class for retire-
ment funds. They will give institutional investors
the chance to participate in infrastructure pro-
jects through listed tradable securities that aim
to offer superior risk-adjusted returns.
They will be underpinned by the cash flow of
infrastructure or energy projects, for example.
David Gluckman, head of special projects at
Sanlam, says that for the first time treasury has
put a stake in the ground on retirement fund
consolidation.
The Financial Services Board has been
directed to continue the policy of reducing the
number of retirement funds to fewer than 200,
compared with the currently active 1,650.
The subscale funds are likely to join umbrella
funds offered by the likes of Sanlam, Old Mutual
and Alexander Forbes.
Michelle Acton, principal consultant at Old
Mutual Corporate Consultants, says it is inter-
esting that the proposals include even those
funds that are exempt from annual audits
because they have less than R6m in assets.
And all funds should have independent
trustees.
“They can ensure that there is a fair balance
between the interests of the members and the
management trustees,” Acton says.
“Ironically, when these small funds fold into
umbrellas they no longer have the right to vote
for trustees. But the aim is for the governance of
retirement funds to be in line with the
King 4 standards.”
Unclaimed benefits are a serious issue,
with more than R40bn lying waiting for for-
mer members to take their share.
Treasury officials speak of consulting
with Nedlac to look at a more efficient way
to find beneficiaries. They talk of centralised
data, not yet explicitly about a centralised
government-run fund.
Treasury also wants to strengthen mea-
sures to deal with criminal and unethical
practices and expects funds and adminis-
trators to improve disclosure. And the same
rules need to apply to state entities such as
the Government Employees Pension Fund
(GEPF). This is by far the largest fund in the
country, but raises governance questions by
not giving its members the right to elect
trustees.
The Budget Review reports that the
GEPF now has 1.3m members and 437,000
beneficiaries, mostly pensioners. Its total
contributions were up R5bn to R65.4bn.
Membership was flat but beneficiaries
increased by 3.3%.
It plays a huge role in the creation and
preservation of wealth in the public sector,
paying benefits of R88.3bn last year.
The portion of benefits that went to res-
ignations was 34%, down from 44% the
year before with more stability in the work-
force. The full GEPF actuarial review will
only be issued next year.
The fund’s assets are divided between
equities (R927bn), bonds (R538bn), money
market (R71bn), property (R59bn) and
unlisted investment (R97bn). x
Russell Roberts
HEALTH
NHI still somewhere
on the distant horizon
But health promotion levy, which taxes it is concerning that treasury has substituted
sugary beverages, will be implemented one service, which serves middle-income
from the beginning of April workers by subsidising medical aid, to fund
another, which is still under construction.
Michelle Gumede gumedem@businesslive.co.za Van den Heever points out that the interven-
tion targets taxpayers, while the corporate and
ý SA’s ailing health system will get 13.9% of the financial services sectors remain untouched.
national budget in order to increase awareness Gigaba said health remains a key priority of
and access to services, establish a regulatory government and the 2018 health budget expen-
body and fund universal healthcare. But the elu- diture points to a “prevention is cheaper than
sive National Health Insurance (NHI) remains a cure” stance.
vague concept.
Finance minister Malusi Gigaba revealed on Government strengthened tobacco laws
Wednesday that R191.6bn had been set aside for and introduced health-conscious tax proposals
health in 2017/2018 and R205bn in 2018/2019. designed to increase revenue collection.
This is set to grow to R240bn by 2020/2021. The health promotion levy, which taxes sug- Alex van den Heever
About R126bn is earmarked for tertiary hos- ary beverages, will be implemented from the
pital services and R66.4bn will support beginning of April 2018 in a bid to encourage
HIV/Aids prevention and treatment. SA has the healthier choices.
largest HIV/Aids treatment programme in the Sugar is a high-risk ingredient that leads to a The sugar levy is set to be coupled with the
world, for 3.9m people. number of noncommunicable diseases such as launch of a public-awareness campaign that has
The health budget is the second-largest after hypertension and diabetes. Noncommunicable been allocated R368m to establish a health
education. diseases are linked to risk factors such as technology assessment unit. Part of the unit’s
The NHI fund was back on the cards after its tobacco use, unhealthy diet and alcohol abuse. work will be to analyse the cost-effectiveness of
maiden appearance in the budget last year. In StatsSA data shows these diseases caused various health interventions.
2017, then finance minister Pravin Gordhan allo- more than half of SA’s 460,236 registered Prof Laetitia Rispel, National Research Foun-
cated R5.2bn to set up the NHI fund. But Gigaba deaths in 2015. They were responsible for 62.5% dation research chair at the Wits School of Pub-
gave little detail about it during the medium- of the top 10 leading causes of death among lic Health, says the health interventions are
term budget policy statement in October. females aged 65 and above. encouraging in that they will result in less pres-
On Wednesday Gigaba sure on the country’s public health-care system.
said an additional R4.2bn has Rispel says health complications associated
been earmarked for amend- with co-morbidity requires specialists — and SA
ments to the medical tax had a dire shortage of these.
subsidy over the next three The scarcity of doctors will be compounded
years. But the nature and by the decrease in top-ups to infrastructure
expenditure of funds HEALTH R38.6bn spending.
remains unclear.
Government will increase
R90.2bn Central hospital
services
Gigaba said over the medium-term expen-
diture framework period, the health facility
District health
the medical tax credit from services revitalisation grant and indirect health facility
R303 to R310/month for the revitalisation grant, which fund infrastructure
first two beneficiaries, and programmes, would be cut by R820m.
from R204 to R209/month
for the remaining beneficia-
R204.5bn Treasury says the SA health products reg-
ulatory authority will be launched as a public
ries. The medical tax credit entity in 2018/2019. The authority will receive
will be reviewed after the R34.3bn R396.9m in transfers to oversee registration,
Davis tax committee pre- Provincial licensing, manufacturing and importing of active
hospital
sents its recommendations.
Prof Alex van den Heever,
R8.5bn services pharmaceutical ingredients, medicines and
medical devices. It will also regulate clinical tri-
Facilities managment
chair of social security sys- and maintenance R33.8bn als in line with national policy.
tems administration & man- Other health Treasury says the body will generate fees
agement studies at the Wits services from the pharmaceutical and health products
School of Governance, says Source: Budget Review industry. x
February 22 - February 28, 2018 . financialmail.co.za 31
Financial Mail Page 32-33 -21/02/18 11:51:36 PM

budget 2018 spending

PROVINCES expected to invest in infrastructure that can Gigaba said over the medium-term expen- students receive less than their fair share,
boost economic growth, and larger municipal- diture framework period, after providing for he says.

Less for ities are expected to invest more of their own

resources, offsetting some of the impact on the
debt-service costs and the contingency reserve,
funds available for spending on public services
Still, free higher education has seemed an
impossible task for treasury to achieve.

services
Provincial and local governments take a
hit as Gigaba makes trade-off for free
higher education
Claudi Mailovich mailovichc@businesslive.co.za
ý The provincial and local spheres of
government were left bruised following
finance minister Malusi Gigaba’s maiden budget
speech.
The minister announced that the planned
spending for 2018/2019 was affected by
reprioritisation and reductions that had been
undertaken since the 2017 medium-term budget
policy statement.
The real effect for municipalities and provin-
cial governments was R3.2bn less to local gov-
Business Day
reductions of the infrastructure grants, and to would grow by an average of 7.1% a year, Gigaba’s medium-term budget policy
build partnerships with the private sector.
Underspending in national and provincial
increasing to R1.3 trillion next year, and project-
ed to rise to R1.5 trillion in 2020/2021.
statement delivered in October painted a
bleak picture of SA’s economy.
governments has stabilised, while weaknesses One of the highlights was the drought relief The consolidated debt-to-GDP ratio
in planning and budgeting at municipal level to provinces and municipalities Gigaba widened to 4.3% from a target of 3.1%, while
remain. announced in his address to the national the projected tax shortfall for 2017 was esti-
KwaZulu Natal received the biggest chunk of assembly on Wednesday. mated at R50.8bn.
the provincial equitable share, with Gauteng The Western Cape, Eastern Cape, Northern Adding to the strained outlook, the Heher
receiving the second highest. Cape, Free State and parts of KwaZulu Natal are commission, tasked with looking into the
Gigaba said over the next three years, 48% ofaffected by drought, with Cape Town facing a feasibility of free higher education, found that
nationally raised funds would be allocated to real possibility of taps running dry this year. the state could not afford to provide free
national government, 43% to provincial govern- “Government stands ready to provide finan- education for all students, while the Davis
ment and 9% to local government. cial assistance where necessary. A provisional tax committee said free university education
“Of course, we would like to be able to allo-allocation of R6bn has been set aside in was neither affordable nor desirable.
cate more to each sphere for service delivery, 2018/2019 for several purposes, including The recent presidential shake-up put a
and a larger share to local government, but the drought relief and to augment public infrastruc- huge question mark over the issue, but
reality is that the rising cost of servicing our ture investment,” Gigaba said. Ramaphosa stayed true to Zuma’s word.
national debt leaves fewer resources available to Gigaba also said government would use the “In addition to promoting social justice, an
invest in services across all three spheres of expanded public works programme to mitigate investment of this scale in higher education
government,” he said. any serious economic impact of the drought, is expected to contribute to greater econom-
including the loss of jobs. ic growth, reduce poverty, reduce inequality,

PROVINCES
ernment and R5.2bn less in the bank for trans- It was clear, however, that tough times await enhance earnings and increase the compet-

O
fers to provinces. provincial and local governments, and by impli- itiveness of our economy,” Ramaphosa said

ST
'The reductions in the budget focused cation residents who depend on these EDUCATION Announced just ahead of the ANC elective con- in his state of the nation address last week.
20
specifically on infrastructure conditional
E R 18 spheres of government to deliver ser- ference, it was a political move. Few expected it, But this promise, coupled with SA’s growing
grants.
The SA Local Government
S F - 20
1
vices to them.
DA leader Mmusi Maimane says Finding the and national treasury had no plans to fund it.
So where will the money come from?
debt levels and alarming budget deficit, meant
an increase in the Vat rate was inevitable, says
Association had pleaded with the cuts to the budgets of local In a press briefing just before the budget Citadel chief economist and advisory partner
93,384 funds for fees
AN

President Cyril Ramaphosa 55,179 and provincial governments is speech was delivered, finance minister Malusi Maarten Ackerman.
(R

GAUTENG
before his state of the nation one of the reasons the budget Gigaba and his deputy, Sfiso Buthelezi, adopted Worryingly, an increase in Vat is expected to
TR

LIMPOPO
m)

address that municipalities
should be protected and
supported in the harsh
economic climate.
“The economic
crunch has seen local
NORTHH WEST
government fiscal bud-
get allocations shrink
substantially. Insuffi-
cient funding of infra-
structure projects will
further undermine the
very same initiatives
WESTERN
meant to turn the econ-
omy around and create
jobs,” it said.
But municipalities are
now out in the cold follow-
ing the cuts, as the budget
makes clear that this adjust-
ment will delay delivery of some
planned infrastructure.
It requires departments responsible
is an “is an assault on poor martyr-like personas. In spite of the budget’s hit poorer households hardest.
people”. Gigaba’s self-congratulatory move other shortcomings, fee-free higher education “You can’t think about funding this without
He adds: “I would hope to fund free higher education for would be their saving grace. changing one of the big tax instruments,” says
that we begin to grow students from poor families comes “The children of the poor and the poor are Ismail Momoniat, deputy director-general at
32,392
392 with sacrifices
38,468
3 our economy so that
people will be able to
pretty much taken care of. This will break the
cycle of poverty and of unemployment,” said a
treasury.
Unfortunately, it is a sacrifice that will come
MPUMALANGA
MP
find work, but what Sunita Menon menons@businesslive.co.za self-congratulatory Gigaba. with other costs. Over the next three years,
we saw today is a con- government expenditure will be cut by R85bn.
12,475 sequence of nine years ý Free higher education can best be described Higher education & training received the Of this, R53bn will be cut at a national level,
NORTHERN CAPE of mismanagement as something of a scramble for SA’s government. largest reallocation of resources in the 2018 including from programmes and transfers to
under the ANC.” Some had expected that free education budget. Gigaba announced that higher education public entities; infrastructure grants at local and
47,447
47 But Theo Venter of
the North-West Univer-
would be a dream deferred, but President Cyril
Ramaphosa, at his inaugural state of the nation
would get additional funding of R57bn over the
medium term to fund free education. It’s the
national level will be slashed by R28bn.
But treasury’s leaders seem glib about the
RN
CAPE
E sity’s school of business address, assured the nation that this promise fastest-growing spending category, with aver- effect this will have.
99,264
99,26 and governance, says
Maimane’s comment is a
would be delivered on.
Since the 2015 #FeesMustFall protests, free
age growth of 13.7%/year.
This year, free higher education will receive
As Buthelezi put it: “Don’t look at having to
pay extra Vat or at our cost-cutting measures.
KWAZULU-NATAL
KWAZULU-N
cheap shot. higher education has been a hot-button issue. R12.4bn, which will increase to R20.3bn next Look at the black child who will finally have an
He says the direct trade- With marches, and disruptions to lectures and year and R24.3bn the year after. The money will education.
off made is savings on capital exams, the issue has come to the fore at the end go to funding fees, transport and food. “We did this for the children of 1976.” x
65,500
65 500 expenditure, to contribute to of every year. “Fee-free higher education is a current trans-
EASTERN CAPE pay for free higher education. Then president Jacob Zuma’s unexpected fer to households and every year ramps up with
26,178 “That is the immediate trade-off, announcement in December that government the influx of students. It’s about plugging holes Don’t look at having to pay extra Vat
or at our cost cutting-measures. Look
which may haunt us in the long term,” in the financial aid system,” says Ian Stuart, act-
7
FREE STATE will subsidise free higher education by the 2018

8
at the black child who will finally have
TO
RANSF ERS 47 0, 2
for front-line services to exercise “excep- Venter says, adding that there is no cer- academic year for poor and working-class stu- ing head of the budget office.
tional care” in allocating public funds to TAL tainty that the education of students would dents — referring to students from households The National Student Financial Aid Scheme an education. We did this for the
maintain core services.
T give the same economic foundation that build- with a combined annual income of up to makes it possible for more people to attend children of 1976.
Provinces and municipalities are also ing a new highway would. x R350,000 — threw a spanner in the works. university by making loans available, but poor Sfiso Buthelezi

32 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 33
Financial Mail Page 34 -22/02/18 02:06:56 AM
budget 2018 spending
INFRASTRUCTURE
Slow train
Transnet reins in spending due to lack of
customers
Sikonathi Mantshantsha mantshantshas@fm.co.za
ý One of the major disclosures in the budget
was that logistics and railway operator Transnet
will cut back on capital expenditure due to low-
er demand.
This comes on the back of a modest 5.3%
increase in the company’s revenue to R65.5bn
for the year ended March, assisted by a small
tariff hike in the fuel pipeline business.
Overall, government will cut expenditure by
R85bn. A large part of this will hit national pro-
jects, including those at Transnet.
“Over the next three years, Transnet will
scale back its capital investment plans due to
weaker than expected demand,” treasury says in
34 financialmail.co.za . February 22 - February 28, 2018
the Budget Review.
Transnet, which operates the country’s ports,
fuel pipelines and goods trains, has over the
past few years spent hundreds of billions of
rand on expanding its rolling stock capacity.
The most high-profile of these tenders
was the R54bn acquisition of 1,064 locomotives
from Canada, the US and China over the past
four years.
The transactions have been mired in con-
troversy amid allegations of corruption involv-
ing Transnet management and the Gupta family.
Reports allege that the Guptas creamed off
about R5.3bn in bribes from South China Rail
during the process.
Together with other allegations of corruption
in state infrastructure projects, the Transnet
locomotive deal contributed to an apparent
reluctance among lenders to extend credit for
such projects.
Treasury has this to say on the matter: “To
maintain investor confidence, Transnet will have
to address concerns about governance lapses,
including concerns about its supply-chain man-
agement practices.”
123RF/Dmitri Luchinovich
The company’s governance structures have
been earmarked for overhaul, along with those
of other state-owned companies.
The government will soon appoint new,
more credible boards and management teams,
as it dramatically did at Eskom last month.
What Transnet is not skimping on is expand-
ing its pipeline business. Treasury says in the
Budget Review that this division will double
over the next three years.
Other than Eskom’s continuing investments
in power stations, the next biggest slice of cap-
ital will be spent on improving water and san-
itation infrastructure.
Government will allocate more than R118bn
— or 14% of the public sector infrastructure bill
— to this over the next three years. Of this
amount, 25% will be transferred to regional
water boards for the provision of bulk sanitation
infrastructure.
The Passenger Rail Agency of SA is also in
line for a big investment programme, with
R41bn allocated to it over the next three years.
The passenger rail operator will use some of the
money to acquire 125 trains. x
Financial Mail Page 35 -21/02/18 11:45:56 AM

South Africa, we put our shoulders to the grind 9 to 5, 5 to 9.

We see you. We’re for you.

Together we can.

Metropolitan, a division of MMI Group Ltd, an authorised financial services provider.

Financial Mail Page 36-37 -22/02/18 02:03:15 AM
budget 2018 spending
SOCIAL GRANTS
On the brink
of desperation
DA says 6.6% increase in child grants
will not be enough to counteract Vat
hike and the effects of inflation
Ann Crotty crottya@sundaytimes.co.za
ý The Black Sash is cautiously upbeat about
the above-inflation increase in social grants
announced by finance minister Malusi Gigaba
on Wednesday.
“The fact that [treasury] attempted to mitigate
the impact of the one percentage point increase
in Vat is encouraging,” says Hoodah Abrahams-
Fayker.
She says social grants remain a vital lifeline
for 17m South Africans living in poverty.
But she says it will take some time to deter-
mine if the increase will be sufficient to cover
the combined effect of inflation and the 15% Vat
rate. She also notes there is a large group of
vulnerable people between the ages of 18 and
59 who do not have access to any social grants
but will have to deal with the increased Vat.
The DA’s Lindy Wilson is less impressed and
says the budget once again proves the ANC
government does not care for the poor and vul-
nerable. “We are disappointed in the 6.6%
increase in child grants. Currently 135 children
per month are dying of malnutrition-related dis-
SASSA GRANTS
Number of
Number of social
recipients grants paid
10.7m 17.3m
Value of CPS
five-year contract
to distribute grants
Annual expenditure
on social grants R10bn
R150bn
Source: National treasury
36 financialmail.co.za . February 22 - February 28, 2018
JUSTICE
Trevor Samson
eases. The increase him from facing criminal charges, elite crime budget makes sense given the rising crime
will do nothing to fighting unit the Hawks was rendered toothless statistics.
assist children who
are being stunted Security gets a and the state security agency was said to be
using its powers to fight political battles.
He adds that even though there are fewer
functional police officers on the ground, one has
by hunger.” As part of the efforts to improve access to to take into consideration that the aim is to
Wilson says fami-
lies of five are surviv-
helping hand court, the budget reprioritised R121m to the
department of justice & constitutional develop-
grow the public order police force from about
4,500 to about 9,000 members by 2019.
ing on R760/month ment. This amount has been allocated to the Cosatu has, however, warned that the cutting
and the additional Ipid’s allocation of R158.5m will address office of the chief justice, the National Prose- of public service posts by 3% over the past two
R50/month will do weaknesses in its internal controls and cuting Authority and Legal Aid SA to begin years has already been detrimental to the ser-
nothing to alleviate the boost its case-management system operations at the Mpumalanga high court, which vice to the public. The trade union federation
effect of the increase Claudi Mailovich mailovichc@businesslive.co.za is scheduled to open this year. says the police head count will be cut at a time
in Vat and other levies. The Independent Police Investigative when crime is on the rise.
Gigaba said govern- ý SA’s peace and security functions will have Directorate (Ipid) receives R158.5m. Steve Swart from the African
ment had taken delib- spending growth of 5.2% over the medium term, The funds will be used to Christian Democratic Party says
erate steps to adjust the budget tabled by finance minister Malusi increase staffing and finalise that if law enforcement agen-
social grant values Gigaba shows. the review of its founding cies such as the Hawks and
above inflation “to at The peace and security functions are defence legislation in line with a the Asset Forfeiture Unit
least partially cover for and state security, police services, law, courts 2016 judgment by the con- were given additional
the proposed increase and prisons, as well as home affairs. stitutional court. capacity, “they could recov-
in Vat”. Home affairs has been given the smallest This money will also be er the billions that have
With effect from piece of the pie — just R7.9bn — while the used to address weakness- been wasted and stolen
April 1 the old-age, dis- expenditure budgeted for police services goes es in internal controls and through corruption and state
ability and care-depen- up from R93.7bn in the revised budget of Ipid’s case-management capture, and this can assist
dency grants will 2017/2018 to R99.1bn for 2018/2019. system. in balancing the books and
increase by R90 to The justice cluster was eroded by former Johan Burger, research ensure that we are on a fiscal
R1,690/month. On president Jacob Zuma in his almost two terms associate for the Institute for consolidation path — which
October 1 they will in office. The National Prosecuting Authority has Security Studies, says the will [boost] business confidence
increase by an addi- been accused of colluding with Zuma to keep increase to the police services and reassure our investors.” x
123RF/Kristina Kuznetsova
tional R10 to R1,700 —
equivalent to a stag-
gered increase of just HUMAN SETTLEMENTS delivery of new houses and serviced sites, the funding without the possession of a title deed.
over 6%. Child support sector is still expected to build 316,813 houses “About 1m state-subsidised properties still
grants will increase
from the baseline of Getting value and upgrade 417,391 sites in informal settle-
ments by 2020/2021.
need to be registered for title deeds. Eradicating
this backlog would increase the proportion of
R380 to R400 on April The Centre for Affordable Housing Finance state-subsidised properties on the deeds reg-
1, with an increase to
R410 on October 1.
Lindy Wilson via title deeds estimates that about 1.8m — or 29% of the 6.2m
formal residential properties on the SA deeds
istry to 39% of the formal housing market,
thereby unlocking an estimated R180bn of value
Gigaba said R6bn registry — were financed by the public housing for low-income households,’’ Gigaba said.
had been added to the Government plans to unlock an programme. This reflects assets with an esti- Government has also confirmed its ongoing
social grant budget estimated R180bn of value for mated value of R326bn. commitment to improve the living conditions of
since the medium- low-income home owners However, Gigaba said that the full benefits of those in inadequate shelter.
term budget policy statement last October. ment currently pays Net1 for each of the 10.7m government’s housing programme have not Over the next three years, R123.3bn will be
He also assured South Africans that govern- recipients collecting grants (on behalf of 17m Joan Muller mullerj@fm.co.za been realised because a large number of houses spent on subsidising public housing pro-
ment will ensure that social grants will continue beneficiaries). Kotze says the recipients could built through state subsidies are not on the grammes. Gigaba said government’s housing
to be paid without disruption after April 1, but then decide which payment option to choose. ý In what appears to be a shift away from deeds registry. programme will provide more than 417,000
provided no details to support this assurance. Social grants are set to remain one of gov- the previous focus on providing housing for the As a result of this, owners cannot access the households in informal settlements with access
With less than six weeks to go before the con-
troversial Net1 social grant distribution contract
ernment’s three big expenditure items, with a
budgeted spend of R528bn over the medium
poorest of the poor, government is now looking
to help bring more lower-income households
full value of their properties as no property can
be sold or used as collateral to access bank
to basic services.
In line with government’s urban renewal and
is due to expire, uncertainty remains around term. This places it third behind basic education, into the formal property market. densification policy, 62,000 rental housing units
how grants will be paid. with a medium-term spending budget of In a bid to speed up broader participation in are also expected to be built, while an additional
The SA Social Security Agency’s current R792bn, and health with a R668bn budget. The SA’s housing market, government is creating a 98,000 finance-linked individual subsidies for
communication strategy, which is aimed at health budget is part of government’s social title deeds restoration grant to help speed up the the affordable housing market will be provided.
encouraging beneficiaries to open a commercial protection system, designed to protect the registration of state-subsidised houses in the Bulk infrastructure for water and sanitation ser-
or Post Office bank account, has led to much country’s poorest and most vulnerable. deeds office. vices will be supported through funding of 73
confusion among beneficiaries. There are efforts For the 2017/2018 year, spending on social The title deeds restoration grant will be fund- regional projects and 180 small, interim projects
to develop a low-cost banking product but as grants is expected to be R150.8bn. The bill is set ed through a reprioritisation from the human amounting to R34.2bn.
yet there are no details about the cost implica- to rise to R189.7bn by the 2020/2021 tax year. settlements development grant, which will be Government plans to increase spending on
tions for the beneficiaries. Government may be hoping that, over time, reduced by R7.2bn over the next three years. public transport infrastructure, water, sanitation,
Net1 CEO Herman Kotze suggests social the steep spending on education will lead to a Finance minister Malusi Gigaba said in his electricity and human settlements by an average
grants should be increased by the R22 govern- reduction in poverty and dependency. x budget speech that though this will slow the 7.4%/year over the next three years. x
February 22 - February 28, 2018 . financialmail.co.za 37
Financial Mail Page 38-39 -22/02/18 02:05:43 AM

budget 2018 spending opinion by Peter Tshiguvho

LAND & AGRICULTURE significant amount of budget for land acquisition spent on idealistic dreams and ideologies.
has been directed to other functions in the “Unfortunately, the dream of a new dawn by

Speeding up department,” he says.

the transfer
More money for redistribution but some
doubters still fear the state retains
smash-and-grab ambitions
Theto Mahlakoana mahlakoanat@businesslive.co.za
ý Government has put its money where its
mouth is on land restitution and redistribution,
by allocating more than 50% of the department
of rural development & land reform’s budget to
the two functions.
While ANC policy advocating expropriation
of land without compensation is still a long way
from becoming government policy, finance
minister Malusi Gigaba’s budget address sug-
gested efforts were being made to address it.
President Cyril Ramaphosa has already indi-
Gigaba told parliament land reform had
become urgent.
In an effort to strengthen the agricultural
sector’s global market access, government has
allocated R40m to upgrading infrastructure and
equipment for analytic services laboratories.
“This will provide assurance to global trading
partners that SA agricultural products meet
internationally recognised standards for human
safety, thereby facilitating our ability to export
unhindered,” Gigaba said.
The funds were located in the R7.8bn budget
of the department of agriculture, forestry &
fisheries.
The department also plans to create and sup-
port 450 “sustainable and profitable” black com-
mercial farmers over the next five years.
“An estimated R581.7m is expected to be
reprioritised for the black producer commer-
cialisation programme. By creating opportuni-
ties for black agricultural producers, we are
radically transforming the agricultural sector of
a president who inspires hope can quickly
become a nightmare if land ownership and
property rights are played like a chess game,
using either only white or only black chess
pieces,” he says.
“The success of the game lies in using all the
pieces, black and white, with great ingenuity
and insight, not in misrepresentations and false
perceptions.”
Schoeman’s sentiments appear to ignore
guarantees by Ramaphosa that the land reform
process will be handled in a meticulous way
that will avoid “smash-and-grab” state
interventions.
Wessel Lemmer, senior agricultural
Towards
financial
economist at Absa AgriBusiness, commends
Gigaba’s decision to earmark funds for black
producer commercialisation.
“The announcement of an estimated R581.7m
earmarked for the programme is most wel-
come,” he says.
“This will go a long way to boosting efforts
inclusion
to transform the agricultural sector of our

T
cated that the policy needs to be located within our economy,” Gigaba said. economy.”
123RF/lightwise
a “broad and comprehensive land redistribution The Afrikanerbond interest group warns that He adds that government’s provision to pur-
and agricultural development programme”. the initiatives could destabilise the country and chase agricultural land needs to be implement- Tshiguvho he greatest challenge exponential growth of middle-income economy, they gain the skills to manage
To this end, the department intends to accel- create uncertainty. ed efficiently in order to make use of the R4.8bn is head of faced by our ANC-led earners emanating from SA’s previously their finances along with their financial
erate finalisation of 2,851 land restitution claims Chairman Jaco Schoeman says that too allocated “within the willing-buyer/willing-sell- channel at government since our disadvantaged households. service providers.
Metropolitan
over the next three years by allocating R10.8bn. much time, energy and scarce funds are being er market framework”. x democracy came into But this pattern has slowed in recent The financial services sector can also
A further R8.8bn will be allo- being in 1994 has been years. Our unemployment rate is 26.7% create innovative financial products and
cated for land redistribution. to build an inclusive — extremely high compared with our service models relevant to people’s
The department’s total budget economy and, more importantly, to Brics peers. According to the World needs. Kenya, for example, has created
is R31bn. kick-start a chain of events that allows Bank, Brazil has 13.4% unemployment, an innovative product: a one-day loan.
Theo Boshoff, legal intelli- prosperity to filter down to all. China is at 4.6%, India at 3.6% and Russia For instance, a vendor can take out a
gence manager at Agbiz, says Unfortunately, this ideal has been at 5.3%. Besides the human toll, our high loan in the morning to fund wholesale
that even if expropriation through some trying times. We have unemployment hits investor confidence. purchases for resale. At the end of the
were already government been buffeted by macroeconomic head- day, the vendor pays back the loan, with
policy, large sums of money winds and a host of political factors, The winds of change are blowing interest, and keeps the profit. This can be
would still be needed to including credit-rating downgrades and through our political landscape, but repeated until the vendor has raised
accommodate those claimants allegations of state capture. there’s a lot more to do. The new lead- enough working capital to sustain his or
who prefer financial compen- It is an uncomfortable truth that the ership has shown resolve to fix state- her business. Small businesses are crit-
sation to actual land transfer. emerging market in SA is highly owned entities and prosecute cases of ical in driving economic growth, so cre-
Government also intends exposed to economic shocks and set- maladministration. If successful, this will ating an enabling environment for such
to acquire about 290,000 ha backs, and it generally lacks the sustain- free up funds for development. businesses is essential.
of “strategically located land” able buffer of financial security to hedge More spending on education, health The emerging and informal markets,
for farming initiatives at a cost the effect of these fluctuations. and public safety saves consumers hav- though different, are rich with opportu-
of R4.2bn. The Momentum/Unisa consumer ing to pay for these services themselves. nities and present similar challenges.
Boshoff, however, warns financial vulnerability index shows that This means more money in their pock- Financial planning and financial literacy
that it is too soon to tell if the consumers are becoming more finan- ets and more need for financial services are important to withstand these chal-
department will spend the cially vulnerable. The four components — a positive step to financial inclusion. lenges, whether you earn R1,000/week
funds exclusively on land of the index — income, expenditure, sav- However, consumers and the private or R100,000/month.
acquisition and not channel it Sustainable ing and debt servicing — worsened for a sector also have roles to play in creating By cultivating the right financial
towards other activities, as it wealth second consecutive quarter last year. wealth. For the financial services indus- habits, in partnership with a trusted
has often done in the past. can be Government and its policies remain try, this means driving education, which financial partner, we will be able to build
“I think one of the more built by the primary gatekeepers when it comes is critical to ensure broad-based finan- sustainable wealth. In turn, having active
important aspects is that cultivating to the emerging-economy consumer’s cial inclusion. participants in the economy will help to
the right
Sunday Times

when the department spends quest to build wealth and play an active Ideally, financial literacy would move build a stable and inclusive base from
the money, how it will do so. financial role in the formal economy. Nowhere in parallel with financial inclusion, so which the entire country can move for-
A panel report recorded that a habits has this been more evident than in the that as more people enter the formal ward and thrive. Together, we can. x

38 financialmail.co.za . February 22 - February 28, 2018 February 22 - February 28, 2018 . financialmail.co.za 39
Financial Mail Page 40-41 -22/02/18 02:04:02 AM
budget 2018 spending
TELECOMMUNICATIONS ital migration project,” said one.
Sapo’s equity injection was necessary to
Drought after keep it afloat, according to CEO Mark Barnes
and the auditor-general.
Craig Pheiffer, chief investment strategist at
the flood Absa Stockbrokers & Portfolio Management,
says Sapo is considered critical to service deliv-
ery, particularly for the distribution of social
grants and provision of basic banking services.
Broadband and digital migration While it has been “modestly” reducing losses, telecommunications sector. Citadel portfolio
spending take the brunt of cutbacks as the R85bn expenditure cuts announced in the
SA Post Office prepares to reap benefits national budget would be achieved only if Sapo
of huge cash injection. But not everyone and other state companies “can bring about the
is happy with the new spending efficiencies that have been pencilled in”.
emphasis Pheiffer says: “Sapo has to reinvent itself,
diversify its income streams and become more
Nick Hedley hedleyn@bdfm.co.za efficient, and that may take some time.”
Sapo hopes to secure a banking licence for
ý The department of telecommunications & its Postbank unit and finalise its transition into a
postal services will have its budget slashed over commercial bank by March next year. This will
coming years, following a one-off allocation of help it facilitate the payment of
R3.7bn to recapitalise the SA Post Office (Sapo). social grants.
The department’s annual budget more than Expenditure on the Postbank
doubled in 2017/2018 because of the Sapo programme is expected to nearly
injection, going from R2.1bn in 2016/2017 to double, from R302m in 2016/2017
R5.2bn in 2017/2018. However, the budget has to R573m in 2020/2021. Mark Barnes
been cut to R923m in 2018/2019. This is Finance minister Malusi Gigaba
expected to rise to R1.1bn in 2020/2021. said in his budget speech that the
Budgets were cut for broadband projects and
others related to the migration to digital broad-
competition commission would
complete its investigation into data
casting, according to documents. prices by the end of August.
“Cabinet approved budget reductions over
the medium term of R1.7bn to the SA Connect
Victor von Reiche, portfolio man-
ager at Citadel Investment Services,
broadband project, and R764m to the Universal says the inquiry “is a big positive”
Service & Access Fund for the broadcasting dig- since information and communica-
tions technology (ICT) is a key
HONEY, THEY SHRUNK enabler of business.
Referring to the white paper on
OUR SHARE national integrated ICT policy, Giga-
How the telecoms & postal services ba said the investigation would
budget will decline (Rbn) “support the work by government to
improve competition in the telecom-
5.17
munications sector”.
To enable legislative changes, he
said the department expected to
spend R271.2m on the policy,
research and capacity development
programme over the medium term.
Among other initiatives, the
department planned to establish a
*1.09
state information technology com-
*1.02
*0.92
2.08
pany and a state ICT infrastructure
company by 2020. This would
1.57
1.30
involve merging different functions
of the State Information Technology
Agency, Sentech and Broadband
Infraco.
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Draft legislation would be devel-
oped for these companies. Alloca-
tions to the ICT enterprise develop-
Source: National treasury *Estimate ment and public entities oversight
40 financialmail.co.za . February 22 - February 28, 2018
programme were expected to amount to
R797.4m over the medium term.
Owing to the reduced broadband connection
budget, funds would be reprioritised to Sentech
in 2018/2019 for costs related to “dual illumi-
nation” – running analogue and digital broadcast
signals at the same time.
The much-delayed shift to digital broadcast-
ing will unlock much-needed spectrum for the
manager Nishlen Govender says though the
budget commits to a speedy resolution to the
spectrum impasse, “there was no detail on how
this would be done”.
He adds: “This has been an issue for some
time and [a solution] is crucial if SA is to move
alongside its global peers in terms of the avail-
ability of next-generation LTE [long-term evo-
lution for wireless communications], 4G and 5G
data.” x
ENERGY
Positive signs
emerging
Silence on nuclear procurement and
commitment to finalise Eskom deals with
private suppliers give reasons for hope
Charlotte Mathews mathewsc@fm.co.za
ý Government is leaning more towards pri-
vate-sector involvement in energy projects and
Eskom’s restructuring as pressure mounts to
spend on other priorities.
Spending on energy projects over the next
three years will total R218.8bn, mostly through
Eskom, representing about a quarter of public-
sector infrastructure spend. At the same time,
public-private partnerships (PPPs) in energy,
municipal solid waste and accommodation pro-
jects are going to grow, treasury says, and it is
looking at ways to streamline PPPs by reducing
decision-making timelines and restrictive rules.
Charles Kieck, chief energy economist and CEO
of independent commodity researchers Afri-
foresight, welcomes the budget’s silence on
funds for nuclear procurement along with the
renewed commitment to buy power from inde-
Russell Roberts
pendent producers of renewable energy.
As one of government’s “confidence-boost-
ing measures”, the minister of energy has
instructed Eskom to conclude all outstanding
power-purchase agreements with independent
renewable power producers. Government has
guaranteed Eskom’s procurement of up to
R200bn of renewable energy from the private
sector. By March 2018 the value of signed pro-
jects will be R122.2bn. Eskom has procured
6,426 megawatts (MW) of renewable power out
of a commitment to procure 14,725 MW in total.
So far 3,774 MW has been connected to the grid.
SA Wind Energy Association chief executive
Brenda Martin says the budget did not contain
any positive new announcements for the
renewable energy industry. But she was
encouraged by President Cyril Ramaphosa’s
state of the nation address, in which he empha-
sised the need to rebuild the economy and grow
the manufacturing sector, which are areas the
renewable energy industry will support.
The total amount allocated for energy pro-
jects over three years includes completing the
R145bn Medupi power station by 2020 and the
R161.4bn Kusile by 2022, as well as various grid
projects. Government will spend R17.3bn on grid
and stand-alone electricity projects, providing
625,000 new grid connections and giving an
additional 20,000 households nongrid power.
The programme to roll out solar water heaters
will continue but the amount allocated will fall
to R442.7m in 2020/2021 from R742.5m in the
past year because of budget constraints.
Levies on fuel this year will increase by
52c/l, including 22c for the general fuel levy and
30c for the Road Accident Fund. Taxes will
February 22 - February 28, 2018
123RF/Guillermo Avello
make up 38.4% of the current Gauteng pump
price in February of 93 octane fuel and 41.3% of
the price of diesel, up from 36% and 39% in
2017/2018. Kieck says the increase in the fuel
levy can be absorbed relatively easily because,
owing to the strong rand and lower oil prices,
local fuel prices fell in January and February. On
current trends, they will fall again in March.
Gigaba says carbon tax will be implemented
from January 1 2019. The new tax, which will be
set at R120/t of emissions but will allow certain
offsets, will enable SA to meet its commitments
under the 2015 Paris Agreement of the UN
Framework Convention on Climate Change. The
department of environmental affairs also plans
to publish shortly a brief which would use fiscal
and regulatory measures to improve water-
resource management, reduce emissions and
encourage recycling, Gigaba says.
Simphiwe Masuku, a tax lawyer at attorneys
Norton Rose Fulbright SA, says the implemen-
tation date for the first phase of carbon tax is in
line with the firm’s expectations. A few changes
are likely to be made to the draft bill that was
published for comment in mid-December and
the final bill should be tabled in parliament by
the middle of the year. There is still uncertainty
about the carbon offset regulations, which could
be published by midyear.
Andrew Wellsted, the firm’s head of tax, says
the proposed carbon tax has aroused huge
opposition from the private sector but apart
from enabling SA to meet its climate-change
commitments it also creates a new source of
revenue for the fiscus. x
. financialmail.co.za 41
Financial Mail Page 40-41 -22/02/18 02:04:02 AM
budget 2018 spending
TELECOMMUNICATIONS ital migration project,” said one.
Sapo’s equity injection was necessary to
Drought after keep it afloat, according to CEO Mark Barnes
and the auditor-general.
Craig Pheiffer, chief investment strategist at
the flood Absa Stockbrokers & Portfolio Management,
says Sapo is considered critical to service deliv-
ery, particularly for the distribution of social
grants and provision of basic banking services.
Broadband and digital migration While it has been “modestly” reducing losses, telecommunications sector. Citadel portfolio
spending take the brunt of cutbacks as the R85bn expenditure cuts announced in the
SA Post Office prepares to reap benefits national budget would be achieved only if Sapo
of huge cash injection. But not everyone and other state companies “can bring about the
is happy with the new spending efficiencies that have been pencilled in”.
emphasis Pheiffer says: “Sapo has to reinvent itself,
diversify its income streams and become more
Nick Hedley hedleyn@bdfm.co.za efficient, and that may take some time.”
Sapo hopes to secure a banking licence for
ý The department of telecommunications & its Postbank unit and finalise its transition into a
postal services will have its budget slashed over commercial bank by March next year. This will
coming years, following a one-off allocation of help it facilitate the payment of
R3.7bn to recapitalise the SA Post Office (Sapo). social grants.
The department’s annual budget more than Expenditure on the Postbank
doubled in 2017/2018 because of the Sapo programme is expected to nearly
injection, going from R2.1bn in 2016/2017 to double, from R302m in 2016/2017
R5.2bn in 2017/2018. However, the budget has to R573m in 2020/2021. Mark Barnes
been cut to R923m in 2018/2019. This is Finance minister Malusi Gigaba
expected to rise to R1.1bn in 2020/2021. said in his budget speech that the
Budgets were cut for broadband projects and
others related to the migration to digital broad-
competition commission would
complete its investigation into data
casting, according to documents. prices by the end of August.
“Cabinet approved budget reductions over
the medium term of R1.7bn to the SA Connect
Victor von Reiche, portfolio man-
ager at Citadel Investment Services,
broadband project, and R764m to the Universal says the inquiry “is a big positive”
Service & Access Fund for the broadcasting dig- since information and communica-
tions technology (ICT) is a key
HONEY, THEY SHRUNK enabler of business.
Referring to the white paper on
OUR SHARE national integrated ICT policy, Giga-
How the telecoms & postal services ba said the investigation would
budget will decline (Rbn) “support the work by government to
improve competition in the telecom-
5.17
munications sector”.
To enable legislative changes, he
said the department expected to
spend R271.2m on the policy,
research and capacity development
programme over the medium term.
Among other initiatives, the
department planned to establish a
*1.09
state information technology com-
*1.02
*0.92
2.08
pany and a state ICT infrastructure
company by 2020. This would
1.57
1.30
involve merging different functions
of the State Information Technology
Agency, Sentech and Broadband
Infraco.
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Draft legislation would be devel-
oped for these companies. Alloca-
tions to the ICT enterprise develop-
Source: National treasury *Estimate ment and public entities oversight
40 financialmail.co.za . February 22 - February 28, 2018
programme were expected to amount to
R797.4m over the medium term.
Owing to the reduced broadband connection
budget, funds would be reprioritised to Sentech
in 2018/2019 for costs related to “dual illumi-
nation” – running analogue and digital broadcast
signals at the same time.
The much-delayed shift to digital broadcast-
ing will unlock much-needed spectrum for the
manager Nishlen Govender says though the
budget commits to a speedy resolution to the
spectrum impasse, “there was no detail on how
this would be done”.
He adds: “This has been an issue for some
time and [a solution] is crucial if SA is to move
alongside its global peers in terms of the avail-
ability of next-generation LTE [long-term evo-
lution for wireless communications], 4G and 5G
data.” x
ENERGY
Positive signs
emerging
Silence on nuclear procurement and
commitment to finalise Eskom deals with
private suppliers give reasons for hope
Charlotte Mathews mathewsc@fm.co.za
ý Government is leaning more towards pri-
vate-sector involvement in energy projects and
Eskom’s restructuring as pressure mounts to
spend on other priorities.
Spending on energy projects over the next
three years will total R218.8bn, mostly through
Eskom, representing about a quarter of public-
sector infrastructure spend. At the same time,
public-private partnerships (PPPs) in energy,
municipal solid waste and accommodation pro-
jects are going to grow, treasury says, and it is
looking at ways to streamline PPPs by reducing
decision-making timelines and restrictive rules.
Charles Kieck, chief energy economist and CEO
of independent commodity researchers Afri-
foresight, welcomes the budget’s silence on
funds for nuclear procurement along with the
renewed commitment to buy power from inde-
Russell Roberts
pendent producers of renewable energy.
As one of government’s “confidence-boost-
ing measures”, the minister of energy has
instructed Eskom to conclude all outstanding
power-purchase agreements with independent
renewable power producers. Government has
guaranteed Eskom’s procurement of up to
R200bn of renewable energy from the private
sector. By March 2018 the value of signed pro-
jects will be R122.2bn. Eskom has procured
6,426 megawatts (MW) of renewable power out
of a commitment to procure 14,725 MW in total.
So far 3,774 MW has been connected to the grid.
SA Wind Energy Association chief executive
Brenda Martin says the budget did not contain
any positive new announcements for the
renewable energy industry. But she was
encouraged by President Cyril Ramaphosa’s
state of the nation address, in which he empha-
sised the need to rebuild the economy and grow
the manufacturing sector, which are areas the
renewable energy industry will support.
The total amount allocated for energy pro-
jects over three years includes completing the
R145bn Medupi power station by 2020 and the
R161.4bn Kusile by 2022, as well as various grid
projects. Government will spend R17.3bn on grid
and stand-alone electricity projects, providing
625,000 new grid connections and giving an
additional 20,000 households nongrid power.
The programme to roll out solar water heaters
will continue but the amount allocated will fall
to R442.7m in 2020/2021 from R742.5m in the
past year because of budget constraints.
Levies on fuel this year will increase by
52c/l, including 22c for the general fuel levy and
30c for the Road Accident Fund. Taxes will
February 22 - February 28, 2018
123RF/Guillermo Avello
make up 38.4% of the current Gauteng pump
price in February of 93 octane fuel and 41.3% of
the price of diesel, up from 36% and 39% in
2017/2018. Kieck says the increase in the fuel
levy can be absorbed relatively easily because,
owing to the strong rand and lower oil prices,
local fuel prices fell in January and February. On
current trends, they will fall again in March.
Gigaba says carbon tax will be implemented
from January 1 2019. The new tax, which will be
set at R120/t of emissions but will allow certain
offsets, will enable SA to meet its commitments
under the 2015 Paris Agreement of the UN
Framework Convention on Climate Change. The
department of environmental affairs also plans
to publish shortly a brief which would use fiscal
and regulatory measures to improve water-
resource management, reduce emissions and
encourage recycling, Gigaba says.
Simphiwe Masuku, a tax lawyer at attorneys
Norton Rose Fulbright SA, says the implemen-
tation date for the first phase of carbon tax is in
line with the firm’s expectations. A few changes
are likely to be made to the draft bill that was
published for comment in mid-December and
the final bill should be tabled in parliament by
the middle of the year. There is still uncertainty
about the carbon offset regulations, which could
be published by midyear.
Andrew Wellsted, the firm’s head of tax, says
the proposed carbon tax has aroused huge
opposition from the private sector but apart
from enabling SA to meet its climate-change
commitments it also creates a new source of
revenue for the fiscus. x
. financialmail.co.za 41
Financial Mail Page 42 -21/02/18 11:53:49 PM
opinion by Andrew le Roux
Don’t be
caught
unawares
T
Le Roux he recent changes in
is chief business government and an
transformation
enhanced expectation of
officer of MMI
Holdings consistent leadership
and direction make it
tempting to believe that
our country and our region are entering
a period of relative stability.
However, we’re not out of the woods
yet. We’ve come out of a period of policy
uncertainty, ratings downgrades and
currency volatility, but we have a new
period of change to look forward to as
we clean up abuses and seek solutions
for education funding, land reform and
water management, among others.
Dynamic change is perhaps the only
constant we can expect — though the
form it will take is not easy to predict.
Private sector companies should get
used to uncertainty. While government
may show signs of more ethical leader-
ship and a renewed commitment to
growth, emerging trends outside politics
also present threats to businesses.
Structural challenges such as inequality,
Corporate unemployment and low economic
leaders need growth don’t have easy solutions.
to formulate Corporate leaders need to formulate
strategies to strategies to anticipate these potential
anticipate shocks and their ramifications if they are
and deal with to future-proof their businesses for the
potential long term.
shocks SA’s future shocks are likely to be
42 financialmail.co.za . February 22 - February 28, 2018
environmental as well as political. And
as we see with the Cape water crisis,
the two factors are often intertwined.
In response, scenario planning and
risk management can predict crises, and
suggest the levers with which to miti-
gate them. Whether making decisions in
uncertain times or navigating shocks in
the environment, strategies are available
to protect the proactive business leader.
A reliable information-management
system provides a monitoring and early-
warning system. Emerging trends can
be measured and tracked. Accurate, up-
to-date metrics give an understanding of
what is happening and enable risk-man-
agement strategies to be implemented
timeously.
Of greater importance is understand-
ing one’s business purpose, strategy and
business model. This means clarifying
what the company does for clients, the
means and the choices that make it
competitive, and the variables that have
an effect on profitability. As an example,
rand strength represents a windfall for
importers but not for exporters.
If and when a shock comes, manage-
ment should face the situation head-on.
The executive — and the board — should
take the time to understand the issue
and then respond decisively.
However, one should not act for the
123RF/lightwise
sake of it. Doing nothing is also an action
— sometimes it is the most courageous
one. A robust business model should not
require knee-jerk responses.
There are also opportunities in a cri-
sis. To quote Warren Buffett: “Be fearful
when others are greedy and greedy
when others are fearful”. Holistic crisis
management will identify business pos-
sibilities that come from challenges, and
one should intentionally pursue these.
One of the most valuable assets for a
company navigating a storm is a work-
force with confidence and a can-do atti-
tude. A leader should never “waste a
good crisis”. When the chips are down,
staff observe management closely to see
whether they live the values they talk
about. They also take comfort from lead-
ers who communicate and are visible
during times of uncertainty.
The various stakeholders of a firm
should be engaged from the outset, both
in terms of giving input and being
assured that the situation is being han-
dled. Consultation should not be an
excuse not to act.
Crises and industry shocks will
remain a fact of corporate life as we
enter a new political dispensation. The
companies that navigate these new
waters best will be those that prepare
for the storms and know how they will
respond. x
Financial Mail Page 43 -21/02/18 11:46:12 AM
Financial Mail Page 44 -21/02/18 11:46:28 AM

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