FUNDING SKILLS · PDF fileBriefing Paper for the NSA: Funding Skills Development TABLE OF...

South African – German Development Co-operation

National Skills Authority – Briefing Paper

FUNDING SKILLS DEVELOPMENT

October 2007

Commissioned by the Department of Labour and

Briefing Paper for the NSA: Funding Skills Development

TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS.........................................................................4 METHODOLOGY AND CONSULTATION ..................................................................5 Consultation during the development of the NSA Briefing Papers...............................5 Acknowledgements ......................................................................................................6 1. OVERVIEW OF THE CONTENT .......................................................................7 2. REVIEW OF 1997 FINDINGS ON SKILLS DEVELOPMENT FUNDING ..........7 3. LEGISLATION ...................................................................................................8 3.1 Problems addressed by the Skills Development legislation ...............................8 3.2 Perceived shortcomings in current legislation ....................................................8 4. EMERGING ISSUES AND OPTIONS TO IMPROVE THE EFFICIENCY AND

EFFECTIVENESS OF THE FUNDING SYSTEM ..............................................9 4.1 Overview of this section ....................................................................................9 4.2 Findings on macro cross-cutting issues ............................................................9

4.2.1 Economic growth and employment..............................................................9 4.2.2 Funding and tax incentives for the First and Second Economies................9 4.2.3 Funding and tax incentives for scarce and critical skills, and priority skills10 4.2.4 Emerging issues ........................................................................................11 4.2.5 Options ......................................................................................................11

4.3 Findings relating to SETAs..............................................................................12 4.3.1 SETA credibility and the impact on funding ...............................................12 4.3.2 Verification of training claims .....................................................................13 4.3.3 Verification of levy receipts ........................................................................13 4.3.4 Cross-subsidisation ...................................................................................13 4.3.5 The marginalisation of SMEs by raising the levy threshold to 500,000 .....14 4.3.6 Do Workplace Skills Plans and Annual Training Reports continue to serve a reliable national or sector purpose?.....................................................................14 4.3.7 Employer participation rates under NSDS I and NSDS II ..........................15 4.3.8 Emerging issues ........................................................................................15 4.3.9 Options ......................................................................................................15

4.4 Findings on the NSF........................................................................................16 4.5 Findings on National Government Departments .............................................18

4.5.1 Emerging issues ........................................................................................19 4.5.2 Options ......................................................................................................19

4.6 Findings on Provincial Governments...............................................................19 5. NEW FUNDING SYSTEM...............................................................................19 5.1 Introduction......................................................................................................19

5.1.1 Avoiding future control oversights, errors of judgment or abuses of autonomy by maverick SETAs................................................................................19 5.1.2 Fragmentation of funding delivery systems – who guards the guards?.....19 5.1.3 Inadequate management information systems..........................................19 5.1.4 The need for greater levels of financing ....................................................20 5.1.5 Emerging issues ........................................................................................20

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5.1.6 Option ........................................................................................................20 5.2 The need to recognise and brand ‘skills equity’ ...............................................21 5.3 Phasing out mandatory grants .........................................................................21 5.4 SETAs to be retained .......................................................................................21 5.5 The NSA to be retained....................................................................................21 5.6 Workplace Skills Plans and Annual Training Reports to be retained ...............22 5.7 Phase 1 of the new funding model – tweaking the existing model...................22 5.8 Phase 2 of the new funding model – assuming inadequate funding ................23 5.9 If the levy is increased – who should get what? ...............................................23 5.10 Need for in-depth research on funding skills development ...........................24 6. ADDITIONAL OPTIONS FOR CONSIDERATION ..........................................24 6.1 Linking skills development and social grant processes....................................24 6.2 Rewards for employers for training the unemployed........................................25 6.3 Re-investing skills development grants in training ...........................................25 REFERENCES...........................................................................................................26

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ACRONYMS AND ABBREVIATIONS ABET Adult Basic Education and Training AsgiSA Accelerated and Shared Growth Initiative of South Africa DoL Department of Labour JIPSA Joint Initiative on Priority Skills Acquisition NSA National Skills Authority NSDS National Skills Development Strategy NSF National Skills Fund QCTO Quality Council for Trades and Occupations SARS South African Revenue Service SETA Sector Education and Training Authority SME Small and Medium Enterprises SMME Small, Medium and Micro Enterprises

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METHODOLOGY AND CONSULTATION The methodology used in compiling the four NSA Briefing Papers on ‘Skills Development in the First Economy’, ‘Skills Development in the Second Economy’, ‘Funding Skills Development’ and ‘Scarce and Critical Skills’ is closely related to the general value-added (results) chain1. The results chain is the casual sequence of a development intervention, such as the NSDS, and stipulates the sequence for achieving the desired objectives. It begins with inputs, moves through activities and outputs, and culminates in outcomes and impact. The implementation of the current NSDS is funded from the skills development levy. Using these financial inputs, the institutions in the skills development system (e.g. the DoL, NSF, SETAs and others) launch activities that generate outputs in the form of skills development products, including learnerships, skills programmes, apprenticeships and internships. These outputs are then utilised by education and training providers to enrol learners from various target groups to participate in workplace-based learning. The objective is to achieve development outcomes, such as acquiring critical skills in order to improve the employability of learners, so that they will be able to enter the labour market or self-employment on the impact level. Consultation during the development of the NSA Briefing Papers The approach followed in developing these papers has included extensive reading and interrogation of documentation relating to the NSDS. The study focused on examining current legislation and policies, and then analysing whether the implementation processes and structures are having, or are likely to have, the planned impact in the areas covered in the four Briefing Papers. The Briefing Paper includes: • a review of the policy and legislative parameters; • a review and analysis of the principal criticisms of current skills development

arrangements; • a review of current skills development interventions and a gap analysis covering

the strategic, policy and legislative environment as well as macro-capacity issues; and

• a set of alternative solutions framed as recommendations. Experiences and views are extensively recorded in the documents. In addition, there is sufficient awareness of these issues amongst the key role players to enable an informed debate. The original Briefing Papers were also tabled at the Skills Colloquium of the NSA with SETAs held on 3-4 May 2007 at Kopanong Conference Centre in Gauteng. As it is assumed that readers are familiar with the skills development system and the NSDS, background information and details on the current situation will be kept to a

1 OECD/DAC Glossary of Key Terms in Evaluation and Result-Based Management, 2002 (www.undp.org).

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minimum. This is not an academic research study; therefore references will be limited. Acknowledgements This Briefing Paper has been prepared by Siya Phambile Consultants (Pty) Ltd and has benefited from contributions by: • Sam Morotoba, Deputy Director General: ESDS & HRD Branch of the DoL; • Stakeholders who provided feedback on the papers at the NSA Colloquium in

May 2007; • Selected managers and staff from SETAs and the NSF; • Selected people involved in skills development in the areas covered in the

Briefing Papers; and • Ellen Hüster (GTZ Technical Advisor) and Suzanne Hattingh (MD of Learning for

Performance Improvement) who consolidated feedback and prepared the final documents.

The development of the Briefing Papers was funded by German technical Co-operation (GTZ) on behalf of the Federal German Ministry of Economic Co-operation and Development.

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1. OVERVIEW OF THE CONTENT This Briefing Paper begins with an examination of macro-level issues as they were perceived about a decade ago when the levy-grant system was introduced. It then re-examines these issues, highlighting any additions/deletions and then crystallising these into ‘emerging issues’ and ‘options’ that could be considered in address them. 2. REVIEW OF 1997 FINDINGS ON SKILLS DEVELOPMENT FUNDING A series of reports were published about a decade ago by the Director General of the DoL which investigated ‘South African Funding Mechanisms’. Extracts from some of these publications on national and international funding trends provide a valuable introduction to this report2: • Employers spend on average 3-4% of labour costs on training. This decreases to

1-2% for small employers, with half of these doing no training at all (1)3. • Training expenditure of Provincial Governments, calculated as a percentage of

the total amount voted in 1995/6, was 0.49% (2). • The training budget of local authorities, as a percentage of total personnel cost in

the sample analysed, ranged from 0.558-1.086% (3). • The percentage of trainees trained at Regional Training Centres who found full-

time employment in 1995 ranged between 23% and 28%, while those establishing their own businesses ranged between 11% and 13% (1).

• Training expenditure is understated due to the omission of salaries and wages, which could add 0.72% to the amount spent on training (1). Note: While the inclusion of salaries as a component of training expenditure is generally opposed (because of ‘double dipping’ for tax purposes) it must be recognised that training expenditure is nonetheless understated.

• The rapidly-growing informal sector tends to fall outside the normal provision of training services (1).

• The number of unemployed in 1997 was 2.5 million, and this increased to 3.2 million in 1998/1999, to 4 million in 2000, to 4.2 million in 2001 and to 4.8 million persons in 2002 (4).

• The levy-grant and exemptions schemes tend to discriminate against small firms, since they are the least likely to be able to conduct training that is eligible for grants or exemptions. Therefore, they are less likely to benefit from grants or exemptions than other firms (5).

• All the countries examined struggled to raise the level of training taking place in small businesses. The financing of training in these firms has been particularly difficult, despite some innovative tailoring of financing instruments (5).

• In Chile, the information requirements on firms are particularly burdensome, and are a key reason for the relatively low participation of firms in the tax incentive scheme – particularly small firms (5).

• In Australia, every state and territory has its budgetary allocation for vocational education and training (VET) locked up by the Australian National Training Authority (ANTA) until it provides the Authority with a regional profile specifying

2 The information below relates to South Africa, unless indicated otherwise. 3 The numbers in brackets refer to publications under the References section of this Briefing Paper.

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economic and labour market trends, and linking these to its VET strategy for the year (5).

• While there are degrees of overlap between the kinds of training financed by different funding mechanisms internationally, there is also increasing demarcation between funding systems. State budgetary appropriations are generally used to finance the public provision of training and special training programmes addressing the micro-enterprise and informal sectors as well as social and equity needs. On the other hand, levy schemes or tax incentives are used to finance entry-level and continued training of employed workers (5).

• In Korea, most firms simply pay the levy applicable to them and spend much more on training their own employees (5).

While some baseline statistics have changed (some less than others) and new infrastructural vehicles have been created, almost every issue in the above list is as current and controversial in 2007 at it was in 1997. It must be acknowledged, however, that the research is now very dated, so there is a need for in-depth research into current international funding models. 3. LEGISLATION 3.1 Problems addressed by the Skills Development legislation South Africa has a poor skills profile as a result of the poor quality of general education received by the majority of South Africans, the low level of investment by firms in training, and the fact that much of publicly-funded training was not very relevant to the need. The resulting poor skills profile inhibits productivity growth in firms, new investment prospects, and the employability of the young and unemployed. The sustainability of small and medium-sized enterprises is similarly impaired. The Skills Development Act and Skills Development Levies Act were introduced to establish a stronger institutional and financial framework than existed previously under the Manpower Training Act of 1981. 3.2 Perceived shortcomings in current legislation Greater clarity is needed in the following five areas, which have been identified as the main shortcomings in the current legislation and regulations governing skills development: • There is lack of clarity about the institutional responsibility for the First and

Second Economies and the unemployed, together with the sources of funding (e.g. skills levy vs. the Fiscus) for each. A complicating fact is that it is clearly impossible for any skills development funding system to meet all the needs of these three constituencies due to a lack of financial capacity. Some form of ‘ring fencing’ will have to be developed in recognition of the limited financial resources. Inherent in the funding debate is a key scoping question: Where does the NSDS begin and end? This is an important issue as the institutions providing skills development services on behalf of the State do not seem to have a mandate to act beyond the ‘borders’ of the NSDS?

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• Closely tied to the former point is the fact that AsgiSA, JIPSA and the focus on scarce and critical skills did not exist when the legislation was promulgated. Attempts to interface these with the present legal framework have resulted in uncertainty and inconsistency.

• Although implicit in the first point, the roles and responsibilities of all service providers in the skills development landscape should be critically examined and clarified, and, where necessary, legislative changes should be made.

• The rationale for Government (on national, provincial and local level) being exempted from paying the skills levy to a SETA needs to be clearly motivated. Furthermore, penalties for non-compliance should be introduced. Alternatively, the same funding regime that applies to other employers should also apply to the State.

• The ongoing debate around SETAs being unable to verify the accuracy or completeness of their levy receipts from SARS should be addressed and resolved.

4. EMERGING ISSUES AND OPTIONS TO IMPROVE THE EFFICIENCY

AND EFFECTIVENESS OF THE FUNDING SYSTEM 4.1 Overview of this section This section reviews the efficiency and effectiveness of aspects of the skills development funding landscape. It then identifies the main emerging issues and provides options to be considered for addressing the issues. 4.2 Findings on macro cross-cutting issues4 4.2.1 Economic growth and employment • Economic growth rate: It seems that South Africa will achieve an average

economic growth of around 4.5% or more per year until the end of this decade (6). It will be more challenging to reach the 6% growth rate needed to halve unemployment and poverty by 2014 (6). Although employment has risen at about 3% per year in recent years, it is currently estimated that there will be a shortfall of between one and two million jobs by 2014 (6).

• Unemployment: The number of unemployed people decreased for the first time since 1997 from 4.6 million in 2004 to 4.4 million (in 2005), indicating a decrease of 2.7% [item 1.4.2 in (7)].

• Illiteracy: This remains a formidable barrier to meaningful employment.

4.2.2 Funding and tax incentives for the First and Second Economies The First Economy is generally understood to mean the formal economy, while the Second Economy refers to the more informal sector. A small part of the Second Economy looks like the First Economy from the outside, but lacks many of the necessary structures and regulations. The larger part is the informal economy, consisting of street vendors and similar survivalist occupations.

4 This excludes issues relating to SETAs, the NSF and National/Provincial Governments, which are covered separately later in this section.

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In theory, benefits from the First Economy are supposed to ‘trickle down’ to the Second Economy. However, if the human capital in the Second Economy is too under-developed (as is certainly the case in the informal economy), this trickle-down will not occur, thus ‘imprisoning’ these entities and persons in the Second Economy. SETAs and the NSF are currently free to fund a range of projects in the Second Economy, and are already doing so. There is no need for legislative changes in this regard, with the possible exception of the clarification of institutional roles and mechanisms to increase funding (proposals on funding are provided in section 5 of this Briefing Paper). However, if the SETAs are called upon to fund projects outside their present scope, this could be an obstacle, as could ongoing debates over the scope of the NSF being restricted to NSDS activities. It is probably fair to state that the current levy-grant model – which incorporates funding and tax incentives for learnerships and apprenticeships – is more suited to the First Economy than to the ‘prisoners’ of the Second Economy. 4.2.3 Funding and tax incentives for scarce and critical skills, and priority

skills Funding AsgiSA priorities AsgiSA was established in response to a range of constraints, including skills shortages and the challenges faced by small-, medium- and micro-sized enterprises. It also emphasised partnerships between business, labour and civil society. The ultimate objective of AsgiSA is to halve unemployment and poverty by 2014. AsgiSA appears to have a wide range of practical ideas that have been carefully thought through and are awaiting execution. Again, SETA discretionary funds and NSF funds could be directed or redirected to some of these projects. This should be possible in respects of unallocated funds, such as surplus funds within the NSF or SETAs, subject to their institutional roles and scope alluded to earlier. The AsgiSA 2006 Annual Report (p. 17) expresses concern about the NSA’s role and functioning, and its relationship with the DoL, the NSF and certain SETAs. The report highlights problems such as administrative inefficiency, SETA costs, poor responsiveness to labour market requirements, uncertainty and confusion about the apprenticeship and learnership systems, and uneven quality assurance requirements. Overlap between JIPSA and NSDS objectives The establishment of JIPSA created a framework for addressing the shortage of urgently-needed skills, as well as identifying and mobilising unemployed graduates, retired experts and foreign experts, and deploying them into our economy. JIPSA has the same kind of funding needs as AsgiSA. Item (8.3) in Chapter 8 of the 2005/6 NSDS Implementation Report alludes to there being ‘substantial overlap’ between the objectives of the NSDS and JIPSA, and expresses regret that there is no proper liaison between JIPSA and the NSA to ensure that their efforts complement each other.

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4.2.4 Emerging issues • Unemployment seems to be entering a slow downward spiral, but employment

still requires major acceleration. • The lack of progress towards the achievement of the ABET target for the

unemployed (success indicator 3.3), as reported in item 8.3 of the NSDS 2005/6 Implementation Report, is not encouraging.

• The release of people trapped in the informal economy must be accelerated. The NSDS Implementation Report for 2005/6 [item (8.3)] also indicates that “there is no common definition of what constitutes a new venture and a lack of clarity on the role of SETAs after training in new venture. This is because the SETA mandate does not cover the funding of start-up costs of a new venture”. This results in an unfortunate delay in what appeared to be a promising mechanism for entrepreneurs. However, the DoL 2006 Annual Report (p. 29) records that 1,731 young people entered the new venture programme, indicating that there is some progress (15).

• Some questions arise about current NSF or SETA projects that are producing the required outputs, but that are not aligned to AsgiSA or JIPSA. Should these be put on hold or cancelled in mid-stream? Would this result in major financial losses in funds already spent on these projects? Could the defined scope of the NSF or SETAs present obstacles to alignment with AsgiSA and JIPSA? How responsive is the current system to re-prioritisation and addressing emerging stakeholder needs? How will overlaps and conflicts between AsgiSA, JIPSA and the NSA/NSF be resolved?

4.2.5 Options Addressing unemployment It should be remembered that while illiteracy makes many persons unemployable in the formal economy, it does not make them totally unemployable. It requires a different mindset to find creative work opportunities for these persons, allowing them to learn skills informally until they are trained in ABET. Various Government Departments and the NSF are making major contributions to alleviating unemployment through the Extended Public Work Programme and similar initiatives. These could be expanded if the necessary funding was available. For example, unemployed persons could be used in the security industry, especially with the onset of the 2010 Soccer World Cup, although they would require English verbal communication skills. Another option may be to set up large training colleges funded by the DoL funding structures to be used by Government Departments for the bulk training of artisans. These Departments would obviously pay for the training. The assumption would be that qualified trainees could be recruited by the private sector. The DoL could also consider funding and creating national enterprises under brand names to employ the unemployed until such enterprises become self-sustaining. There are numerous opportunities in the service industry, specifically, where many unskilled and illiterate persons could function effectively – for example, corporate

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cleaning services, car washing and garden services. These enterprises could be well advertised and endorsed – as was done with the ‘Proudly South African’ campaign – to encourage the average citizen to support these ventures in their offices or homes. Each unit would obviously need to be headed by someone with the requisite communication and basic business skills, as well as technical expertise. The above options are also applicable to survivalist entities in the informal economy. However, the existing obstacles relating to the New Venture Creation programme need to be removed as soon as possible. Illiteracy There is a need for greater financial support for NSDS success indicator 3.3, if possible, as it only targets 100,000 persons out of an unemployed population of 4.4 million – of which the majority are probably illiterate. However, in the longer term, educational shortcomings are the direct responsibility of the Department of Education, not the DoL.

There should also be strong support for rigorous business-orientation programmes for all work entrants, including graduates. This view is shared by JIPSA in its report for March to December 2006 (pp. 20-21). AsgiSA/JIPSA From a funding perspective, the major issues here are a quantitative one (Is there enough money?); a procedural one (Can the NSF/NSA re-prioritise and release funds without undue delay?); and a legal one (Could the NSF/SETA institutional roles and scope requirements block potential funding?)5. If the relevant authorities consider the issue of the NSF/SETA institutional roles to be potentially problematic, legislation will need to be amended. The NSF – among other institutional players – has been identified by AsgiSA as a problem area in terms of procedural issues. The 2005/6 NSDS Implementation Report [item (8.3)] highlights other problems relating to the NSA that need to receive attention. The issues of organisational fragmentation are dealt with in section 5 of this Briefing Paper. 4.3 Findings relating to SETAs 4.3.1 SETA credibility and the impact on funding It is generally accepted that the overwhelming majority of SETAs have broadly performed their funding mandates satisfactorily. However, the ongoing qualification of audit reports and recent investigations into perceived excessive SETA reserves continue to dominate the press. The DoL reported in March 2007 that SETAs had about R3.8 billion invested (8). This reinforces the public perception that

5 Funding requirements in terms of the optimal size of budgets are not within the scope of this Briefing Paper.

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mismanagement and corruption are rife, and that SETAs are locking away billions that should be spent on skills development.

However, while commenting on financial management issues it is equally important that the DoL and its affiliates avoid further audit report qualifications, emphasis of matter and the like. Newspaper headlines such as ‘fruitless and wasteful expenditure’, ‘irregular expenditure’ and ‘criminal aspects of irregularities’ negatively impact on the credibility of the SETAs and the skills development system. It is important to stress that this lack of public confidence in SETAs – the perceived engine-room and showcase of the skills development delivery system – can have direct funding implications in areas such as stakeholder sensitivity to levy and grant rate fluctuations, and participation rates. It is therefore as much a funding issue as a governance issue. 4.3.2 Verification of training claims The question being asked at the highest levels is: Why, after so many years of the current funding model being operational, are there still skills shortages? Phrased differently, if Workplace Skills Plans reflect corporate training needs and Annual Training Reports are approved (supposedly indicating the achievement of these needs) how can skills shortages persist? This unavoidably leads one to questioning the veracity of the approval process with regard to the Annual Training Report. 4.3.3 Verification of levy receipts Due to SARS confidentiality requirements, SETAs have never been able to determine with certainty that they receive the correct funding from SARS, as they lack information on the initial payment of levies by employers. This problem extends to the NSF as well: the DoL 2006 Annual Report (p. 149) states that “The NSF could not verify that SARS has collected all potential levy income” (15). This has serious financial implications for SETAs and the NSF. For example, if levy payers incorrectly classify the various payments to SARS [e.g. including PAYE (Pay As You Earn) with their skills development levy when completing their EMP201 returns, or vice versa], the funding reaching the SETA and NSF will be overstated or understated accordingly. When SARS identifies the problem and reverses the entries, this can adversely impact on the SETA. Many such examples are documented, and SETAs such as the INSETA have begun to request their levy payers to provide them with monthly copies of their EMP201 forms (9). 4.3.4 Cross-subsidisation Since the outset of the NSDS, large employers have complained that they contribute the bulk of the levy, yet because they comprise a minority in terms of stakeholders, they are somehow ‘cross-subsidising’ smaller firms. In a strictly ‘arithmetic’ sense, this view is incorrect, as the levies and grants of all employers are ring-fenced.

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However, their argument gains more credibility in view of the 10% administrative funding, discretionary funding from unclaimed levies, and the 20% NSF contribution. Early warnings of major cash-flow problems for funding SMMEs came in a ministerial press release entitled ‘High skills funding demand threatens small business’ on 3 August 2006. The Minister of Labour stated that the value of funds being transferred by SETAs from mandatory to discretionary grants was rapidly diminishing due to the 92% mandatory grants claim rate amongst large and medium firms. This meant that the levy funds available to support SMMEs (from discretionary grants) have been dramatically depleted. “With the reduced discretionary funds in SETA coffers, chances are that SETAs will find it difficult to fund the majority of the new Employment Skills Development Agencies from their discretionary funds,” the Minister said.

The Minister continued: “The demands on the NSF are very high and we will not be in a position to address the plight of SMMEs in the near future. The end result of these factors is that SMMEs who need the skills most and are very important in creating employment are going to become the biggest losers6 from our skills development initiatives unless an alternative source of funding is found”. 4.3.5 The marginalisation of SMEs by raising the levy threshold to R500,000 One must remember that raising the levy threshold to R500,000 will compound the previous issue of cross-subsidisation. This is because these small firms no longer pay levies, and yet continue to draw benefits from the available funding from certain SETAs (e.g. through free capacity-building and learnerships). An analysis of statistics provided by the DoL indicates that with only three exceptions, the trend between August 2005 and January 2006 was that the rand value of SETA levy income increased, notwithstanding this policy adjustment (probably as a result of the growth in new contributors). The number of overall contributors, however, fell by a staggering 92,450 stakeholders over this period – a decline of over 52%.

The change to the levy threshold resulted in the loss of baseline data on SMEs (and all newly-registered SMEs since the change in legislation). The potential marginalisation of a constituency that makes up more than half of the intended beneficiaries of skills development is seen as undesirable within the broader context, and seems counter-productive to the spirit of the founding legislation. The lack of information could also cause future problems in attempting to reconcile learnerships, apprenticeships and skills programmes to registered employers. 4.3.6 Do Workplace Skills Plans and Annual Training Reports continue to

serve a reliable national or sector purpose? The submission rates of Workplace Skills Plans (and to a far greater extent Annual Training Reports) have been low from the outset, and have been further reduced by 52% as a result of the introduction of the levy threshold. Therefore, it is not

6 Italics indicates the researcher’s emphasis.

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unreasonable to ask whether national and sector decisions on training needs and related issues can reliably be made from such a small sample, which now probably only represents the needs of large employers. 4.3.7 Employer participation rates under NSDS I and NSDS II During NSDS I, and according to the DoL 2006 Annual Report (p. 24), 88,410 learners were in learnerships and 21,237 in apprenticeships, i.e. a total of 109,647 over the NSDS 1 period. Of these, 56,301 had completed the learning programmes and 77% were employed on a full-time or part-time basis. The same report (p. 24) indicates that, during NSDS II, a total of 37,227 unemployed learners had entered, and 11,168 had completed, learning programmes by March 2006. There has been a healthy growth in the number (i.e. categories) of registered learnerships. To date, 1,007 learnerships have been registered (10) but it is at the same time known that this does not mean that these are all active learnerships.

Based on the above, participation would appear to be on track and the funding and tax incentives would seem to be effective. Persistent feedback from the field, however, is that quality management processes impacting on employers implementing learnerships are too demanding, especially in the case of smaller employers. AsgiSA makes similar comments on its 2006 Annual Report (p. 17). 4.3.8 Emerging issues • Governance and structural issues continue to cloud the image of SETAs, and

they are also seen as the hoarders of vast sums of money. • The verification of fairly basic data continues to be a problem for SETAs. • SETA funding sources for SMEs are decreasing under the present funding

model, and raising the levy threshold has resulted in the marginalisation of 92,450 SME employers.

• Serious consideration needs to be given to the future role of Workplace Skills Plans and Annual Training Reports.

• SETA quality assurance requirements, which are seen to be excessive, seem to be blunting the initial enthusiasm towards learnership implementation.

4.3.9 Options • The development of a comprehensive range of accounting definitions and policies

would assist in addressing what is seen as the excessive amount of money accumulated by SETAs.

• Verification of levy receipts could be achieved by SETAs calling for their stakeholders to submit EMP201 forms and proof of payment, unless legislation is changed.

• Verifying Annual Training Reports is a complex activity. Clear guidelines are needed in terms of setting out the costs that can be included as training costs, and how in-house training is to be costed. A decision would also need to be made on the extent, to which verification by external bodies can be relied on, where

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applicable, (e.g. the verification of the training of accountants). Implementation of this system would then need to be enforced.

• With regard to the point made above, and in terms of enforcement options, it is assumed that the Auditor-General would expect more than self-enforcement or an alteration to the forms signed by Skills Development Facilitators certifying specific compliance areas. SETA staff may be able to perform random and limited inspections, but may lack the capacity to do this. In this event, SETAs would need to outsource the function, or the DoL would need to provide this service. Could Labour Inspectors make a contribution here? Should the use of SARS be considered, although the provision of this service by SARS is strongly doubted? Lastly, the Auditor-General may wish to verify this internally, although this is also seen as unlikely. Enforcement costs will vary with the frequency and level of scrutiny.

• While logic supports the exemption of SMEs from paying the levy and completing complex forms, consideration should be given to requiring all SMEs (now and in the future) to register with their SETA (e.g. registering as a non-levy-paying stakeholder). In this way, SETAs will know of their existence. Consideration might also be given to a simple ‘annual return’ designed to record brief summary-level data for the SETA.

• Other options with regard to SMEs include passing SMEs over to the Small Business Development Agency (SEDA) – with or without DoL funding and support. However, one of the greatest benefits for SMEs has been attending the numerous free courses and capacity-building interventions offered by SETAs, which allow SMEs the opportunity to network with colleagues from the same industry. The reintegration of SMEs into the SETA community should therefore be supported. Funding issues surrounding SMEs are dealt with in section 5 of this Briefing Paper.

• Options relating to Workplace Skills Plans and Annual Training Reports are presented in section 5 of this Briefing Paper.

• Work is currently in progress on the formation of the Quality Assurance Council for Trades and Occupations (QCTO) that, together with the Higher Education Quality Committee of the Council on Higher Education (HEQC) and Umalusi, will be responsible for quality assurance within their particular domains of responsibility (11). Recommendations are welcomed to “cut down the number of QA [quality assurance] requirements & focus on key areas which will enhance the credibility of qualifications in the context of trades & occupations” (12).

4.4 Findings on the NSF The NSF has faced, and continues to face, some extraordinary difficulties. The Skills Development Act confines its activities to supporting the NSDS (while there are some legal loopholes to this), yet calls are being made upon it to fund areas arguably beyond the NSDS. Estimates are that it should perhaps be funded at around three times its present level to effectively address its perceived national mandate. The NSF has had to develop complex funding windows while ensuring the continued flow of funds to beneficiaries. It has had to make difficult choices in terms of a centralised or devolved financial and management control system and it has had to function within the DoL structure and systems, while plans are advanced for it to

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become a separate legal entity under the Public Finance Management Act. The NSF is therefore an organisation where much ‘thinking on its feet’ has had to occur, and this has made it difficult for the organisation to do the necessary in-depth planning and up-front design. The emphasis of the NSF has typically been more on hands-on projects and activities, rather than on specific constituencies (for example, the Extended Public Works Programme rather than the Second Economy). It makes widespread use of a range of intermediaries in funding projects, such as the Provincial Offices of the DoL. The NSF management acknowledges that the standards of financial and management control, as well as the Information Communication Technology systems in use by intermediaries, are likely to vary significantly. It is also possible that there is duplication of effort. The NSF funding windows cover the following areas: special projects; discretionary and innovation projects; social projects; ABET for the unemployed; critical skills support; provisioning support; industry support programmes; informal sector support; constituency capacity-building and advocacy; and a strategic projects initiative (that is not considered to be a funding window). These funding windows support a range of NSDS objectives and success indicators, as well as cross-cutting NSDS principles. The strategic projects window experienced initial delays [item 2.2 in Appendix B in (7)]. Many other serious problems are highlighted in Chapter 8 of the NSDS Implementation Report for 2005/6. A selection of those with a quantitative or funding implication is listed below: Note: While these issues also relate to SETAs and other areas, they do indicate the difficulties faced by the NSA. • 18% of the success indicators for SETAs could not be measured due to lack of

information, such as baselines. • Success indicators for the NSF could not be measured due to a complete

restructuring of the NSF funding-window mechanism. • 36% of the success indicators that could be measured were not achieved. • Government Departments have continued to lag behind in their submission of

Workplace Skills Plans and Annual Training Reports. Non-reporting by Government Departments results in missing in information on skills gaps and skills development initiatives.

• There is no correlation between the number of firms claiming grants and the actual number of firms in a particular sector.

• There is inadequate evaluation of the impact of individual SETAs in addressing scarce and critical skills in the labour market.

• No formal measurement system has been established for measuring the quality of skills development initiatives supported by SETAs. This has not been possible in view of the fact that the review of the NQF has not been finalised.

• The fact that no national standard of good practice in skills development has yet been approved by the Minister of Labour means that this indicator could not be measured. The fact that this standard is yet to be developed and finally approved

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by the minister raises questions as to whether the target set in success indicator 2.4 will be achieved.

4.4.1 Emerging issues • When the preceding difficulties are seen together with the issues outlined under

AsgiSA and JIPSA above, it becomes clear that the NSF is an extremely complex organisation. Its scope is cross-cutting in nature; there is lack of clarity among stakeholders on its responsibilities and accountabilities; massive strategic national projects are funded through autonomous intermediaries; and management information appears to be inadequate. This combination of factors creates many problems and makes the effective management of the organisation an increasingly difficult task.

4.4.2 Options • While the complexity and span of control of the NSF would seem to warrant a

dedicated research project, some initial structural, systems and funding proposals are provided in section 5 below.

4.5 Findings on National Government Departments The potential contribution of National Government Departments to skills development is enormous. There is much criticism of these stakeholders for not submitting Workplace Skills Plans and Annual Training Reports, and for not fulfilling their 1% obligation to skills development. An analysis of compliance to the 1% requirement found that for 2007/8, Government Departments collectively are spending 2.7% of payroll costs on training. Departments spending below 1% are the Presidency, Foreign Affairs, Arts and Culture, Education, Defence, Independent Complaints Directorate, Justice and Constitutional Development, and Environmental Affairs and Tourism (13). • Overall, an apparent over-spend of R649 million emerges, but this masks under-

spending of around R51 million. • The most material under-spenders are Justice and Constitutional Development at

R24.9 million, and Defence at R24.4 million. • The largest over-spenders are Safety and Security at R484.7 million and

Correctional Services at R67.1 million. • The highest percentages of training as a percentage of employment costs are

Housing at 5.46%, Science and Technology at 4.43%, Water Affairs at 4.23% and Trade and Industry at 4.02%.

• The lowest percentages of training as a percentage of employment costs are Justice and Constitutional Development at 0.45%, the Presidency at 0.66% and Arts and Culture at 0.73%.

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4.5.1 Emerging issues • Those Departments spending below the required level have deprived the NSDS

of R51 million in potential skills development funding. Government is urged to investigate the causes of this so as to rectify the situation.

4.5.2 Options No options are provided, as the key problem is enforcing compliance to legislation upon the legislators who promulgated it. 4.6 Findings on Provincial Governments No statistics could be located during the compilation of this Briefing Paper, and the DoL Annual Report for 2006 (p. 27) confirms that “Statistics for Provincial Departments are not available”. This is a key area for analysis, and a separate study on funding by Provincial Governments is recommended (15). 5. NEW FUNDING SYSTEM 5.1 Introduction This section of the report focuses on suggested policy changes to the package controlling the collection and distribution of funds, and increasing the supply of funds. The development of a far more centralised system is proposed. The following main issues are brought forward from previous sections of the paper: 5.1.1 Avoiding future control oversights, errors of judgment or abuses of

autonomy by maverick SETAs The further erosion of confidence in the SETA system must be stopped, and a zero-tolerance stand must be taken against SETAs who are guilty of non-compliance and/or underperformance. This is necessary to bring the SETAs into line that have brought the entire system into disrepute. Accounting definitions and policies must be agreed and legislated. 5.1.2 Fragmentation of funding delivery systems – who guards the guards? The decision to use all means available to make the NSDS work has resulted in a proliferation of organisations and mechanisms related to funding delivery, as well as the establishment of a large number of projects. It is prudent to enquire whether the fragmented funding system is resulting in duplication and/or gaps, whether it is adequately controlled, and also whether it is understood by the citizens who have to engage with the system. 5.1.3 Inadequate management information systems This study encountered repeated problems relating to reporting difficulties, management information shortcomings and similar Information Communication

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Technology problems that are obstacles to producing management information. It appears to be a very complex matter, for example, to collect baseline costs – such as the average cost of a learnership, apprenticeship or other type of learning programmes – in each sector. This impedes budgeting, identifying patterns and trends, exploring cost-effectiveness and making projections on various levels of labour-market intervention. In addition, it impedes vital strategic planning to address scarce and critical skills. It is obviously impossible to manage any enterprise, especially one as organisationally-fragmented as the broader skills development system, without advanced management information capabilities. There was consensus at the May 2007 Colloquium that current Information Communication Technology systems available to drive NSDS II fell far short of requirements, and that the strategic management of the NSDS could suffer major failures if this was not addressed. 5.1.4 The need for greater levels of financing There is insufficient funding to assist vulnerable groups. The DoL suggested that a benchmark of 7% of training expenditure as a percentage of training to employment costs be used for this study (as per to international best practice) and 5% (as South African best practice). However, it may be that the expectation of 5% in smaller enterprises in probably unreasonable and at variance with international and local research already cited. Furthermore, a 5% benchmark will technically increase by 6% when salaries are included in the cost. 5.1.5 Emerging issues • The governance, structure, functionality and user-unfriendliness of the current

funding system suggest that an intervention will be necessary to make the system meet the expectations of 2005-2010.

5.1.6 Option • Consideration should be given to greater ‘virtual’ centralisation. There seems little

doubt that a centralised function would improve issues of governance, fragmentation, differing standards of financial and procedural control, audit trails, etc. This should improve the process for receiving levy income, distributing grants, distributing discretionary funds, and providing a ‘one-stop shop’ for accounting and administrative services.

• A management information system built around this function would also provide a

‘one-stop shop’ for information needs. Through world-class Information Communication Technology systems and controls, it is possible for this to be a ‘virtual’ centralisation rather than a ‘physical’ structural or institutional centralisation. A ‘virtual’ centralisation would not necessarily alter present delegations of authority and accountability, unless this is considered desirable in some cases.

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• This centralisation also presents certain obstacles. What would happen to

existing structures if structural changes were made? What level of fund transfers would be required from proliferated structures to the centralised function before making the change-over, and how complex would this be? How would expenditure be financed during the change? What level of retrenchment, if any, would be required? How would service delivery be impacted? What would the cost-benefits be? Answers to these questions cannot emerge without an in-depth study, which is strongly recommended.

5.2 The need to recognise and brand ‘skills equity’ In opening this Briefing Paper, it is noted that internationally there is a trend towards using a levy-grant system and tax incentives to generate funding for training of the employed, and using budget votes through the Fiscus to finance the training of others – particularly the unemployed. This is considered fair in that workplace training is funded by employers, and employers do not cross-subsidise other stakeholders such as the unemployed. The Fiscus funds these groups through the national tax pool and thereby politically de-links (and de-sensitises) employer funding from what are seen as welfare issues. South Africa elected to use a levy-grant system and tax incentives to finance both clusters of beneficiaries. One could use the term ‘skills equity’ to describe the cross-subsidisation of vulnerable groups by employers through the NSF, along the same lines as ‘employment equity’. Few South African industrialists are likely to consider that continuing this policy is unreasonable, at least in the short-term, given the inequalities caused by apartheid. Therefore, continuing with the principle of ‘skills equity’ in the next funding system is seen as inevitable and is not debated here. 5.3 Phasing out mandatory grants It has been common knowledge within the skills development community for many years that mandatory grants were going to be reduced over time, and that discretionary grants would increase. This Briefing Paper supports this decrease in mandatory grants, but not its abolition. 5.4 SETAs to be retained The next element of the funding model that should be retained is the SETAs. It makes sense to have the SETAs to focus on the needs of their constituents. A centralised organisation trying to be ‘all things to all people’ is unlikely to improve on the dynamics of the SETA/stakeholder interface, which includes both employer and labour representation. Interestingly, there were several calls at the May 2007 Colloquium for the NSF to be subsumed by the SETAs. 5.5 The NSA to be retained If the SETAs are retained in the new funding model, it is obvious that there is a need for a separate vehicle to address national needs, free from any sectoral boundaries.

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Therefore, an organisation such as the NSA is clearly called for to achieve the desired ‘skills equity’. 5.6 Workplace Skills Plans and Annual Training Reports to be

retained Despite the low statistical value of Workplace Skills Plans and Annual Training Reports – in view of low submission rates – this Briefing Paper does not recommend their abolition. Abolishing them would make the vouching of training impossible, and would make it more difficult to keep record of employers participating in skills development. Simplification of these forms is, however, recommended to ensure that employers are only required to provide information that is needed and used. 5.7 Phase 1 of the new funding model – tweaking the existing model This Briefing Paper recommends the following intermediate actions be considered as the first phase towards developing a new funding model: The current 1% should be retained, but the balance between mandatory grants and discretionary grants should be altered, while keeping total grants at the current level. It is vital that all stakeholders are able to see the benefits resulting from the implementation of these changes, which should be noticeable in the following: • Save as much money as possible through greater consolidation and

rationalisation of infrastructure and resources. • Stop fraud and irregular or wasteful expenditure once and for all. • Manage SETA reserves down to what are seen as more appropriate levels, in

line with a set of accounting definitions and policies. • Ensure that those not delivering fully on contributions to the NSDS do so, e.g.

certain Government Departments. • Consider the possibility of the prudent use of any Unemployment Insurance Fund

(UIF) surplus revenue, obviously without exposing the Fund to any risk. • Reduce mandatory grants to around 30% and increase discretionary grants –

which serve as incentives to employers for doing the right things, such as training in scarce and critical skills.

• Try to leverage greater tax rebates, but also link these to encouraging identified skills development priorities, making stakeholders stretch to attain these.

• Overall, avoid reducing the potential value of bottom-line payments to employers, if at all possible. This is important as Government has gone to great lengths to emphasise that the skills levy is not a tax, and doing away with financial returns will overnight make the levy a de facto tax. The negative impact of this is that it will discourage reporting and could embarrass smaller employers that use this funding to bankroll apprenticeships and learnerships.

If all these changes have been implemented, and the desired expenditure still exceeds income, only then should consideration be given to increasing the skills development levy.

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5.8 Phase 2 of the new funding model – assuming inadequate funding

The need for an in-depth analysis for the establishment of a new funding model has been expressed in different sections of this Briefing Paper. In the absence of the findings from such an analysis, the guiding principles outlined in par. 5.7 above are the closest to a ‘new funding model’ we can present at this stage.

There is no accurate and valid information on the size of the budget required to achieve our skills development objectives, or reliable statistics on income projections. Therefore, there is no justification for proposing an increase in the levy at this stage. Should in-depth research indicate that there is a need to increase the levy, the following could be considered for the new funding model: • A sliding levy scale based on pay-roll is recommended that is considerate of the

constraints of small business, who should continue paying 1% of payroll. This scale could peak at 5% for large employers. Computerised verification and enforcement of categories claimed via EMP201 forms could be used.

• In addition, consideration could be given to the principle of a further sliding scale of levy retention within companies, on condition that approved training occurs and can be vouched for. This might range between a low of 0% for small employers and a high of 3-4% for large employers (i.e. a net levy increase of a maximum of 1% or 2%). This retention entitlement should incorporate rewards for scarce and critical skills alleviation and other NSDS goals in order to be fully claimable. In this way, indirect control can be exercised over a very large pool of funding – despite it being inaccessible to the Department – through incentive-based mechanisms, making the opportunity cost of non-compliance high. In view of the Auditor-General’s need for Annual Training Reports to be vouched for, the verification task under this system would be no greater than would be the case for addressing current concerns.

• We do not recommend reducing any current incentives for various forms of approved learning programmes such as learnerships and apprenticeships.

• The introduction of work-experience grants should receive greater statutory attention. This can do much to alleviate graduate unemployment and increase their rate of professional registration, by offering work experience to tertiary students in the form of in-service training and/or internships.

A detailed financial model based on above recommendations would need to be implemented and adjusted under various scenarios by those with access to all the variables, so as to enable bottom-line impact to be accurately assessed. It might be possible, by introducing the measures proposed in par. 5.8, to double levy income without making the cash-flow burden on employers too onerous through the levy-retention principle. 5.9 If the levy is increased – who should get what? An increase in the levy is not recommended in this Briefing Paper, but is an option that would need to be explored after a thorough study to calculate the required funding.

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However, assuming that the levy is increased, consideration would need to be given to how to distribute the additional funds. Assuming institutional roles and responsibilities remain unchanged, it is proposed that the maximum amount possible be allocated to the NSF, which effectively currently benefits to the extent of only 16 cents per rand of levy income. The NSF believes that it could spend three times this amount if it had the necessary capacity to manage this extra funding. This will make an enormous difference to the scale of NSF interventions, the advancement of the unemployed, the alleviation of poverty and, ultimately, the stimulation of economic growth. 5.10 Need for in-depth research on funding skills development In-depth research into funding-related issues is recommended before any far-reaching changes are introduced, including a study of current international funding models. This Briefing Paper has also alluded to numerous issues that should be investigated in such research. The following issues that were raised at the May 2007 Colloquium should be considered during the research: • Is the current skills funding model fit for purpose? • Is there room for fundamental change within the present funding system? • Are the main problems with the funding system related to the model itself, or its

implementation? • Would different incentives and funding models be necessary to best serve the

wide range of possible beneficiaries, and to best address the question of scarce and critical skills?

• Will it be possible to achieve AsgiSA and JIPSA goals without an increase in the levy?

• Is the 10% SETA administration fee inadequate to allow SETAs to reach out to rural areas?

• Should all SETAs be required to make a fixed contribution to the informal sector? • Are issues around governance and funding programmes geared towards

addressing the strategic skills development imperatives? • What Information Communication Technology systems should be in place to drive

the remainder of NSDS II and NSDS III? 6. ADDITIONAL OPTIONS FOR CONSIDERATION 6.1 Linking skills development and social grant processes Grants paid by the State to citizens in recognition of various misfortunes suffered do not seem to have a training or education component to them. In other words, citizens receive compensation, but there seems to be little visible reinforcement in terms of making this a learning experience as well. A further lost opportunity for personal development is that the beneficiaries often spend their time ‘out of the system’ unproductively, mostly sitting at home doing

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nothing. In particular, this is seen to apply to the beneficiaries of unemployment insurance grants. Consideration should be given to introducing a system where each grant has a compulsory education or training module associated with it – either designed to assist the victims with their misfortune in some practical way, or to avoid its recurrence. In the case of unemployment, career guidance interventions could be considered, or some linkage to an ABET or business-orientation programme. Given the reported financial health of the Unemployment Insurance Fund (UIF), these benefits could possibly be funded from the Fund, rather than from levy income. 6.2 Rewards for employers for training the unemployed

There are employers who not only train their own staff, but contribute equally to training unemployed persons. The DoL has requested suggestions on how this commitment can be recognised, as well as guidance on ways in which to identify such employers. Identifying employers that have attained the National Standard in People Development does not seem to be an appropriate way, as this standard does not extend beyond the organisation to the training of the unemployed.

Companies supporting such training should be able to record the interventions on their Workplace Skills Plan, Annual Training Report or discretionary grant applications. However, the current forms make no provision for this and should be amended accordingly. The introduction of a tax rebate would be the recommended route to pursue, as it is linked to the unemployed (theoretically the responsibility of the Fiscus) rather than the payroll levy. 6.3 Re-investing skills development grants in training

A recommendation to be considered in future is to make it compulsory for grant refunds to be re-invested in training. Although this is obviously the intention (and the practice in some cases), there is no legal requirement for this.

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REFERENCES (1) DoL document: ‘Industry Training – Supply and Competition’, December 1995 (2) DoL report: ‘Provincial Government’, May 1997 (3) DoL report: ‘Local Authorities’. May 1997 (4) NSDS Implementation Report 2002-2003 Chapter 2, Figure 1 (5) DoL report: ‘The International Experience on the Financing of Training’, May

1997 (6) Annual Report 2006 of the Accelerated and Shared Growth Initiative for South

Africa (AsgiSA) (7) NSDS Implementation Report 2005-2006 (8) DoL Communiqué, 6 March 2007 (9) INSETA Call Centre letter, 4 April 2007 (10) DoL publication: ‘Registered Learnerships by SETAs’, 9 February 2007 (11) DoL document: ‘Enhancing the Efficacy and Efficiency of The National

Qualifications Framework’, undated (12) DoL presentation: ‘NQF Implementation Review presentation’, undated (13) National Treasury: ‘Estimates of National Expenditure 2007’ (14) Department of Labour Annual Report, 2006

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