BUSINESS SOUTH AFRICA'S CONCERNS OVER THE PROPOSED FUNDING MECHANISM FOR THE NATIONAL SKILLS FUND AND A RECOMMENDED SOLUTION

INTRODUCTION
Business South Africa (BSA) has agreed in the spirit of a new training paradigm for South Africa, to help establish not only new institutional structures for skills development, but also to investing a minimum of 1 per cent of payroll into skills development and training. In 1997 money terms, this represents the equivalent of 2.5 billion on a conservative measure (excluding the agricultural and informal business sectors). This is part of BSA's commitment to playing a meaningful role in promoting economic and employment growth in South Africa.

However, although BSA is strongly supportive of the Bill in principle, there is one aspect BSA is firmly opposed to, namely the Bill's proposals that the National Skills Fund (NSF) be credited with 20 per cent of the levies collected by the Sectoral Education and Training Authorities (SETAs). BSA is not averse to the objectives of the National Skills Fund per se, but is opposed to the proposed means of financing the NSF. While the Department of Labour has provided some objectives for the NSF (in terms of certain funding envelopes), it has not provided a detailed analysis showing why it needs an extra R500 million per year from the business community alone. The 20 per cent appears to be an arbitrarily determined number and is unacceptable to business. BSA believes that the 20 per cent skim-off compromises a number of fundamental economic principles "dial to both high levels of economic and employment growth in South Africa. These economic principles include:

A Rejection of Off-Budget Taxes
BSA fundamentally rejects government departments funding their own initiatives through off-budget taxes. The reasons for this include: distorting the pricing and investment environment; the impact of cross-subsidisation on prices: raising the cost of doing business: agency problems between the user and the provider of funds: realistic priority setting within fiscal constraints: and economic efficiency. These issues will be dealt with in this document.

The Department of Labour's acceptance of a more decentralised funding collection and control mechanism, during the Skills Development Bill NEDLAC negotiation process, represents a shift from a government controlled and centrally collected off-budget tax towards what can be defined more appropriately as a "user-charge". This shift also provided greater certainty to BSA that the 1 per cent minimum level of investment was closer to the definition of a user-charge than a dedicated tax. This move provided sufficient comfort to business to agree to the minimum level of investment in training in South Africa.

However, the 20 per cent skim-off represents an off-budget tax which appropriates the funds out of the hands of the industries concerned into a fund that is directed solely by government. Even industries in difficulty. such as the gold mining industry, which made an accumulated loss of R65 million in 1997, will have funds taken out of their hands by government. Such funds will, in all probability, not be used to improve the competitive position of the industry itself, but will be used to cross-subsidise other industries or special interest groups. The 20 per cent skim-off therefore represents an off-budget tax and is unacceptable to BSA.

A REJECTION OF OFF-BUDGET TAXES WHICH DISTORT THE PRICE-MECHANISM AND INVESTMENT ENVIRONMENT IN SOUTH AFRICA
Off-budget taxes and levies have a major impact on the domestic pricing system in South Africa. Through regulations, cross-subsidies and taxes the entire price system in South Africa has been skewed away from reflecting the true value of goods and services in the economy - including the cost of capital, technology, labour and the exchange rate. This has led to poor investment decisions and the misallocation of funds into low growth activities. In other words, government's off-budget revenue raising activities are one of the causes of the unsatisfactory pattern of resource use that has resulted in the long-term GDP growth rate being unacceptably low so far this decade.

BSA believes that the 20 per cent skim-off is an off-budget tax that contributes to further distortion of the domestic pricing system. It is not the impact of any single off-budget tax that is negative to the investment environment. but the aggregate of many off-budget taxes that is causing the problem. This results in higher than necessary costs of doing business and, by implication, higher than necessary investment hurdle rates. This means that fewer investment projects are getting the go-ahead than South Africa's potential warrants. Most of South Africa's industries, which are now competing in the ever-changing global environment, cannot pass on cost increases to the final consumer and therefore have to absorb the cost increases. The result is shrinkage and a declining labour force. A "user-charge" has a much weaker impact on the pricing mechanism and investment than an off-budget tax.

A REJECTION OF Cross-Subsidisation between Users and Between Sectors
BSA does not support cross-subsidisation between the providers and users of fluids as this creates a number of agency and economic efficiency problems (dealt with below). Cross-subsidisation also results in severe economic distortions to the pricing mechanism as discussed above. The agreed funding mechanism for SETAs results in no cross-subsidisation across sectors and little cross-subsidisation within sectors. The onus intra-sector is for the providers of funds to access their contribution as efficiently as possible. The SETA has the responsibility to ensure maximum coverage for collecting the levy. Both factors again provide BSA with a comfort that cross-subsidisation will be minimised. BSA also rejects the state targeting interventions, via cross-subsidies, in the industrialisation adjustment process. BSA would reject NSF funding of tertiary sectors through cross-subsidies at the expense of the equally important primary sectors.

The 20 per cent skim-off represents a direct cross-subsidy mechanism, which is unacceptable to BSA.

OPPOSITION TO THE Agency Problems created by the 20 Per cent Skim-Off
In a private company a board director has a fiduciary responsibility' to every shareholder with respect to the use of company funds. This means that those who make investment decisions are accountable to the provider of funds. Global economic experience suggests that government bureaucrats have less accountability to the providers of funds (the taxpayer than a private company director, and this results in poorer investment decisions being made. Shareholders in a private company tend to be more critical of investment decisions than the taxpayer is critical of government investment decisions. The proposed funding and control of the NSF by government represents a major agency; problem between the providers of funds, the allocator of funds and the ultimate user of the funds.

Business is expected to carry the entire burden of the 20 per cent skim-off. Government has not committed a specific amount to fund the NSF, nor is there a 20 per cent skim-off of the one per cent training levy from government departments. This burden is large and because it falls on the shoulders of a single constituent it provides the other social partners with a large amount of leverage against business. To promote economic efficiency, BSA believes that the optimal route will be for all constituents to contribute to skills development in South Africa. Only when each party has to weigh up the true economic costs of their decisions and mandates, will efficient outcomes emerge.

The proposed 20 per cent-skim off means there is no direct accountability for the use of funds to the providers of the funds which normally results in inefficiency, a misallocation of scarce resources and poor skills development results.

THE NEED FOR Realistic Priority setting within fiscal constraints
BSA strongly supports the principle that government prioritises expenditure needs within realistic fiscal constraints. South Africa has finite resources available for funding government policies and actions. To promote more efficient use of tax revenues BSA supports realistic expenditure priority' setting through the national budgetary process. For this reason BSA believes that the NSF should be funded directly by national budgetary process. For this reason BSA believes that the NSF should be funded directly by national government and should have to compete for funds with other national needs and priorities in terms of the normal budgetary process. To this end, the Medium Term Expenditure Framework represents an important policy position by government in the setting of national priorities.

The NSF being funded by the fiscus not only places a cap on possible expenditures. it also ensures that the NSA determines what the priorities are and then matches the available resources to such programmes. BSA is concerned that the existing NSF funding proposal will result in the Department of Labour trying to match projects to the available funds rather than vice-versa. Rather, BSA believes that the specific needs of the NSF should be determined first and then the funding for these needs be met on an incremental basis, thus encouraging efficiency and appropriate allocation of scarce resources.

Proposed Compromise
It would be a shame if the tremendous progress made in the negotiations around the Skills Development Bill were undermined by a lack of consensus around the key financial issue of funding the National Skills Fund. It is also difficult for business, who will bear the sole cost of the 20 per cent skim-off, to convince the other social partners of business' difficulties pertaining to this issue when they do not bear the economic cost of the 20 per cent skim-off.

In the spirit of these constructive negotiations, business, after consultation with organised labour and community representatives, wishes to propose a compromise funding arrangement for the National Skills Fund. The compromise is that BSA agrees to a 10 per cent skim-off of the 1 per cent levies collected by SETAs provided that the following three conditions are met:

The skim-off is reviewed after three years. BSA proposes that the funding of the National Skills Fund has a limited shelf-life as it violates a number of BSA's core economic principles.

Government contributes a pro-rata amount to the NSF. Government should contribute to the National Skills Fund an amount equal to what business is required to contribute. Donor funding will be over and above government's pro-rata contribution.

That the allocation of funds from the National Skills Fund be controlled by the social partners, and not the director-general of labour only.

It is expected that a 10 per cent skim-off will raise about R250 million from business annually. More than adequate funds have been allocated to the Department of Labour, in terms of the Medium Term Expenditure Framework, for government to meet its pro-rata contribution to the NSF.

BSA believes that such a compromise will effectively meet the needs of all the social partners and contribute to a sustainable, effective skills development programme for South Africa.