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Government’s role in job creation

by Justin
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“We all know that government does not create jobs, businesses create jobs.” That simple statement during President Cyril Ramaphosa’s State-of-the-Nation address in February triggered a debate marked largely by binary “either-or” positions. That is a pointless argument. The important debate is to assess the most effective way for business and government to work together to grow the economy.

Of course government creates jobs – it does so through infrastructure development and providing services to the public, among other areas. But it’s primary role should be to create an enabling environment for the economy to grow and it’s in such an environment that businesses increase profits and create jobs. Unless government can grow the economy, public sector jobs are unsustainable because tax revenue will not grow.

An implausible position

The one implausible position is the belief that the public sector can somehow create jobs in a shrinking economy, marked by a declining tax base and a deteriorating fiscal position. One of the most important decisions that directors of companies – listed and non-listed – need to make every year is on what to do with profits. How much should be reinvested in the company, how much should be retained as cash reserves and how much should be distributed to shareholders through dividends?

Their assessment needs to be based on their confidence in being able to generate higher returns with that money, making it worthwhile for shareholders to forgo a portion of the profits now. They also need to ensure they have sufficient cash on hand to trade through a difficult future. High cash levels are therefore either a sign of trouble or of confidence – trouble if it is held to cover costs during a recession in which revenue will dip, confidence if it is held temporarily while preparing to invest it.

They then recommend to the shareholders – the owners of the company – how much to pay in dividends, how much to hold for bad times and how much to reinvest. Obviously, the outlook hinges on the state of the economy and expectations of its performance in the future. Should directors believe the economy is in such a state that they cannot be confident that the investment will generate sufficient returns, and the company doesn’t need it, it is their responsibility to return the funds to shareholders.

For far too long now the economy has not been in that desired state where directors can be confident of generating high returns if they reinvest profits into company expansion. That is exactly where government’s role is important: its responsibility is to ensure that company directors regain confidence that reinvesting profits is in the best interests of shareholders.

The primary source of job creation

And that’s the primary source of job creation. In an environment where businesses are investing to expand, they create more jobs. Indeed, for professional services companies, investing profits may consist purely of hiring more employees in areas where they may be short of capacity so that they can service more clients. For manufacturers it might mean opening a new plant while retailers may wish to expand into other markets. Each of these creates jobs.

Such an environment also promotes entrepreneurship and small business development. Small businesses follow the same principles and will reinvest profits to expand, and entrepreneurs will be willing to risk their cash to start a new business.

That’s a virtuous cycle. As more businesses start up and established businesses enjoy robust growth, more and more jobs are created, and more and more tax revenue flows into the fiscus. That provides funding for government not only to better alleviate the plight of a shrinking number of financially distressed citizens but also to “invest” in further developing the economy’s efficiency through infrastructure and other initiatives that will in turn accelerate economic growth.

A perfect example of government enabling business development

A perfect example of government playing an enabling role for business development is through the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP). This has been successful, yet it perhaps does not get the recognition it deserves, particularly for the role that government played in it.

Through the Independent Power Producers Office, a unit with the energy department, a novel process was established that was so successful it was quickly emulated across the globe. Importantly, it remained untainted by the corruption of the state capture era.

Instead of publishing a single tariff that the government was willing to pay, the IPP Office conducted consecutive auctions in which potential producers bid a certain price per megawatt they were willing to sell at. The structure also guaranteed returns through the 20-year power purchase agreements to supply Eskom.

The format saw prices falling dramatically from an average of R3.12/kWh in the first round of bidding in 2011 to just R0.47/kWh in the recently completed fifth bid window. Despite such low prices, the IPPs are still queuing up – the fifth bid window was four times oversubscribed.

Including smaller auctions and the fifth bid window, the programme has injected nearly R260 billion into the economy, according to IPP Office figures, with more than R40 billion of that from offshore. So far 55 217 job years have been created, with the programme contributing to R1.3 billion to socioeconomic development and R402 million to enterprise development.

The process hasn’t been perfect. Despite its success, political interference and state capture protagonists stalled the programme for three years from 2015, which killed off many small manufacturers that had started producing renewable energy components. With the programme kickstarted back to life in 2018, government needs to focus on re-establishing and growing that base of small manufacturers – a concept that fits its industrialisation and localisation policies.

The government’s role in the REIPPPP process is exactly the kind of supporting role that business needs it to play. When it gets it right, businesses flourish and create jobs. 

Expanding the concept to the rest of the economy may be difficult

Expanding that concept to the entire economy is no easy task because in other areas, government’s role has not always been constructive. The policy uncertainty within the mining sector has seen its contribution to GDP in real terms fall from about 21% in 1980 to 7.5% in 2020. That’s a clear sign that government is getting things wrong: its role is not conducive to growth and a new approach is needed. A good place to start would be clearing the backlog of nearly 5 000 applications for mining and related rights. That alone would trigger massive economic activity in the sector particularly in the context of the buoyant commodities market.

Given the generally distressed state of the wider economy today, the challenge is for government to transform numerous other sectors of the economy by implementing conditions that are conducive to growth. President Ramaphosa is trying to achieve that, instituting long-term measures to address structural flaws in our economic system that are hindering growth. These include further liberalisation of the energy sector, trying to make spectrum available to telecommunication companies to enable them to be globally competitive within the fourth industrial revolution through 5G technology while bringing data costs down for consumers, restructuring our ports and railways to improve efficiencies and through refining the skills visa process to enable expertise to be brought into the country where it is lacking.

More recently he has turned his attention to another important area, establishing a unit within the Presidency to make it easier to do business by cutting red tape across government departments. This is particularly critical for reviving the small business sector that was so devastatingly ravaged by the Covid lockdowns. A new loan scheme for small businesses is also being introduced.

Supplemented by the R1 trillion infrastructure programme, these are all important initiatives that, once fully implemented, will establish the type of conditions that are indeed conducive to growth and job creation.

 

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