1. ORGANISED BUSINESS SUBMISSION
Employment and Learnership Tax Incentive Submission to the Standing Committee on Finance
9 November 2016

2. CONTENTS Objectives of the ETI & Current Conditions Nedlac process
Learnership Tax Incentive
Employment Tax Incentive

3. OBJECTIVE OF THE INCENTIVES
LEARNERSHIP INCENTIVE – To provide financial support to offset some of the costs in order to facilitate formal workplace skills development.
EMPLOYMENT TAX INCENTIVE - To stimulate youth employment to target formal sector employers by using a tax incentive to reduce the risks and costs associated with hiring of younger workers who tend to be less experienced.
In the context of an excess supply of labour, with significant structural unemployment. These two incentives are the only demand side employment incentives. (Bhorat, slide 5)
BUSINESS FULLY SUPPORTS THESE OBJECTIVES AND THESE INCENTIVES AS ENABLERS OF YOUTH EMPLOYMENT AND SKILLS DEVELOPMENT NECESSARY FOR INCLUSIVE GROWTH AND EMPLOYMENT

4. PREVAILING CONDITIONS FOR JOB CREATION
Current conditions not conducive to employment creation:
Sluggish growth (IMF forecasts no growth, SARB 0.04% and Treasury 0.05%)
Retrenchment on the rise
Risk of a sovereign ratings downgrade
Labour force participation at only 57.9% - very low by international standards.
Unemployment at 27% on the narrow definition,
Youth being double less likely to secure employment than those between the ages of
Complex, mismatched skills environment ill-suited for inclusive economic growth
Increased incidence of social uprising involving youth, such as University fee crisis
Yet,
Productive employment is the most effective mechanism to address poverty and inequality
As a country we have a window of opportunity, until 2038, to take advantage of the demographic dividend
If we can get large numbers of youth into employment and give them job relevant skills we can make a substantial difference to our collective future

5. NEDLAC PROCESS
BUSA and BBC participated on behalf of organised business on the Employment Tax Incentive (ETI)
Robust engagement with research presented over a six week period.
The Learnership Tax Incentive was not part of the direct scope of deliberations in NEDLAC
NEDLAC Report on the ETI reflects:
Research, albeit that too short a time has lapsed to fully evaluate the effects, reflects a positive impact on youth employment at a relatively low fiscal cost
Appreciation for the consultation process in Nedlac and the evidence presented during the process
Support by social partners in favour of the ETI to extend the scheme without the cap

6. LEARNERSHIP TAX INCENTIVE
Proposal to extend the tax allowance for 5 years in respect of formal learnership contracts with some adjustments to promote greater emphasis on lower level skills, and alternative registration of learnership mechanisms is supported by Business.
This incentive provides much needed support to fund the high costs incurred in securing and running learnerships, taking into account:
The firm level costs (trainers, training time, mentorship, administration, registration and monitoring of learnerships) considerably exceed the value of the incentive
The regulatory burden of registering, verifying and providing learnerships is proving to be prohibitive.
Business regards this incentive as an important component of workplace skills development.
We are actively exploring solutions to unblock impediments to skills development in line with the future needs of an inclusive economy.

7. ETI RESEARCH FINDINGS 1
HUNDREDS OF THOUSANDS OF YOUTH HAVE BEEN GIVEN THE OPPORTUNITY TO ACCESS TO FIRST TIME EMPLOYMENT
Research, albeit over too short a time, reflects positive results, with 15% of youth jobs being supported, amounting to 5.7% of the individual tax base.
ETI supported large numbers of first time youth to access employment and gain valuable employment experience.
The ETI has had a positive impact:
It has achieved the intended objectives - those with low levels of experience, earning between R2000- R4000 p/m between 21 – 25 were supported the most
4% higher wages, improved skills and job security for ETI supported workers
Small firms have taken up a disproportionately larger % of claims per job, and there is significant potential to expand this further
Manufacturing sector displaying the highest average claims relative to eligibility.
New jobs have been created, and employment has been directed towards the youth
Many ETI supported youth are retained, after year 1 and after the conclusion of the ETI

8. CONCERNS ABOUT THE ETI HAVE NOT MANIFESTED
ETI RESEARCH FINDINGS 2
CONCERNS ABOUT THE ETI HAVE NOT MANIFESTED
Displacement of older workers
Older workers lose out on jobs to younger workers
1% negative growth yr olds, but quantitatively very small and given that employment has slowed
8% job growth in yr olds
No reports of displacement nor CCMA referrals
Negative churn
Firms constantly release workers and hire new ones to benefit from the scheme
Econometric evidence indicates job growth in ETI firms at 8% faster than without, with overall increase in employment indicating these are new jobs
Duration of jobs for ETI and non-ETI similar
Wage suppression
Firms supress wages to access the incentive
Wages of ETI and non-ETI jobs highly similar
Median wage for yr olds increased
No evidence of wage suppression
Labour brokers
Will benefit disproportionately
ETI claims are relatively proportionate to the number of eligible firms per sector
Labour brokers claim 9% out of the 11% eligible to claim
Labour Broker claim share underrepresented
Bhorat & Thornton Presentation

9. Bhorat & Thornton Presentation
ETI RESEARCH FINDINGS 3
MARGINAL COST PER ETI JOB MUCH LESS THAN OTHER SUPPORT Bhorat & Thornton, slide 14
R3,584
Bhorat & Thornton Presentation

10. ETI RESEARCH FINDINGS 4
THE ETI IS BEING EFFECTIVELY UTILSED TO SUPPORT INCLUSIVE GROWTH & EMPLOYMENT OBJECTIVES
Employment Growth in ETI claiming firms far higher than in non-claiming firms in all age categories
Treasury Descriptive Report, page 27
This has been confirmed in the qualitative research by Singizi (pages 6-7):
The ETI has resulted in an increase in employment
The ETI has been an effective mechanism to make business more competitive and manage transitions:
Prevent job loss due to high wage increases (agriculture)
Prevent job loss due to impact of LRA amendments
Be more internationally competitive (clothing manufacturing)
And the Treasury Snap Survey:
ETI firms were in better health in terms of turnover, staffing, profitability and capital investment.

11. POSITIVE RELATIONSHIP BETWEEN THE ETI & TRAINING
ETI RESEARCH FINDINGS 5
The Singizi research demonstrates that the ETI:
Provided the space to reduce labour churn
A bridge to address the gap between education and work
Access to work experience, including enabling a focus on work readiness and non-cognitive skills
Facilitated training in excess of direct company needs
Enabled large scale workplace training
Supported the provision of structured learning (learnerships and apprenticeships) given the high costs and complexity associated with running SETA learnerships.
Upgraded training facilities
Employment and training for employees with disabilities
Basis for career progression
Important contributor to workplace integrated learning – studies showing an 80% retention rate of employees
The Treasury Snap Survey confirms these results, indicating the combined ETI and learnership incentive has a multiplier effect on employment.

12. TO CAP OR NOT TO CAP ETI RESEARCH FINDINGS 4 TREASURY RESEARCH
Positive impact of the ETI clearly demonstrated in smaller firms
But, mixed results for larger firms where the bulk of the jobs supported by the ETI are located.
In 2014/15 year, the R20 mil cap would have impacted upon approximately of jobs (14%) supported.
PROPOSAL
Not desirable to shut off support for youth jobs for those firms that are demonstrating positive impacts, particularly given the strong correlation between bulk youth employment, skills development and use of the ETI in larger firms.
The YES proposition under the CEO initiative has signalled that the extention of the ETI with no cap is required in order for the plan to create 1 million youth internships in next 3 years.
The cap would unintendedly serve to penalise firms that are leveraging the ETI to create youth jobs in conjunction with skills development.
Propose to scrap the cap over the next 2 years, and continue to carefully monitor progress and prevent abuse.
This will provide business with the opportunity to explore creative mechanisms to leverage skills development and youth employment.
Every youth job counts

13. IN SUMMARY: THE EMPLOYMENT TAX INCENTIVE:
The ETI has resulted in hundreds of thousands of youth gaining access to first time employment
The concerns about the ETI have not manifested
The marginal cost per ETI job is much less than other support
The ETI is being effectively utilised to support inclusive growth and employment objectives
There is a positive relationship between the ETI and training
No cap should be imposed for the 2 year extension

14. CONCLUDING REMARKS
There is room to improve access to the ETI and learnerships through non-legislative improvements.
Small business awareness and support
Streamlined claim back system for the ETI
Innovation by business, in partnership with Government, to resolve barriers to formal learnerships and the acquisition of workplace skills
The learnership and employment tax incentives are highly effective, low cost, targeted tools that incentivise and encourage youth employment and skills development, thereby contributing to inclusive growth and employment.
The proposed extensions should be passed with haste, with the exclusion of the R20 million cap.
There should be continued monitoring, and within the next 2 years, the ETI must be again subjected to rigorous review.
THE INCENTIVES ARE HIGHLY VALUED BY FIRMS. THEY ARE EFFECTIVE TOOLS TO SUPPORT YOUTH EMPLOYMENT AND THE ACQUISITION OF WORKPLACE SKILLS– BOTH OF WHICH ARE CRITICALLY NEEDED FOR INCLUSIVE GROWTH AND EMPLOYMENT.