Balancing Act

This article was published by McKinsey & Company in honor of the Skoll World Forum.

Pravin Gordhan

As South Africa’s finance minister, Pravin Gordhan must keep the country’s fiscal house in order and ensure that the government can pay for the social services South Africa needs to develop. At this year’s meeting of the World Economic Forum in Davos, Gordhan sat down with Rik Kirkland of McKinsey & Company for a wide-ranging conversation about taxes, spending, and delivery in Africa’s largest economy.

Rik Kirkland: What is the role of government in setting a policy framework to deliver economic and social development in South Africa?

Pravin Gordhan: In the first instance, delivery means more effective government in a context where you’re also building state capacity. Until 1994, South Africa was a state that represented a minority and suppressed the majority. So pre-1994, the South African state and the South African economy were for the benefit of five million people. Virtually overnight we had to transform that state and begin to service all South Africans. That meant building critical institutions such as hospitals and educational institutions, as well as developing a tax administration. We also built institutions that support small businesses and provide infrastructure at a community level, which makes a difference to entrepreneurs accessing markets.

Over the past ten years, I think we’ve done a formidable job of providing a new policy framework, particularly on the tax side. We’ve also been very successful at building a modern treasury out of an old bureaucracy. Over the last six years or so, the South African treasury has been ranked first or second out of 100 countries in a global survey of budget transparency. In 2012, New Zealand beat us. Two years ago, we were first.

What does it mean to have a modern treasury?

It means that we have a very transparent system where information is shared publicly, warts and all. It’s very easy to access public financial data in South Africa. We’ve tried to create equally transparent and responsive systems throughout the government. In 1994, many of us walked into parliament for the very first time as part of the African National Congress. We transformed that institution from one that did not listen to people to one that did, and we put in place very transparent processes. For example, parliamentary committees can no longer opt to close their meetings and chase the press away as a matter of routine. Now we have closed committee sessions only if there’s a very serious reason for them.

What sort of institutional framework have you put in place to encourage economic development in South Africa?

We also have very strong institutions for economic development. For example, we have the Development Bank of Southern Africa, which operates both within South Africa and across our region. We also have the Industrial Development Corporation (IDC), which plays a big part in supporting industry and business in South Africa. Nowadays the IDC’s role is changing to make sure that it contributes to more job creation and investment in the right sectors, for example, renewable energy. We also have what we call state-owned enterprises, such as Eskom in the energy sector and Transnet in the transportation sector. We have a highly effective airports company that is able to take on contracts for the Mumbai airport and for São Paulo airport, as part of consortia that are transforming those airports as well.

What are some of the key social challenges that you face?

We’ve seen some improvement in our schooling system over the past ten years, but education is still a key challenge that we need to address. We’re working on developing our teachers, as well as bringing in information and communication technology to more effectively train and capacitate our young people. Our youth unemployment rate is very similar to Spain’s, about 50 percent. How do we give young people their first career opportunities?

Our goal is to use public-works programs paid for with government money to create jobs for people or give them opportunities to work more effectively. In parallel, we want the private sector to buy in on the job-creation and job-opportunity agenda, and create some incentives that will move things in
the right direction.

What about healthcare?

We’ve done reasonably well at stabilizing our health system. We now have a 14-year plan to introduce a national health-insurance system and do it within a sustainable fiscal framework. In South Africa, there is a small group of people who can access health insurance from the private sector. But the vast majority of South Africans don’t have that financial capability. One of our key objectives is to find a balance between access and quality where healthcare is concerned.

How do you convince South Africans to pay their taxes?

It starts with getting tax-administration personnel to embrace a service culture. Citizens and their concerns come first. Then it’s about educating the public constantly about why they should pay taxes. That requires constantly improving our service and making it easier for people to comply. In the past six years, we’ve implemented electronic tax filing, and now 98 percent of taxpayers file electronically. We also have about 10,000 staff members who actually go door-to-door visiting people. They’ll say, “Show that you registered for tax. Show us your last payment.” But they do it in a very polite and cooperative way.

We also work hard to find the right balance between government and the private sector. Our approach there is to say, “We’ll work with you. We’ll help to solve your problems. If you transgress the law, we’re willing to sit across the table and find the solution. If you don’t want to take up that particular option, however, then we have a very effective court system that will take care of you.” In that way we are able to demonstrate fairness, which actually helps to increase the credibility of government.

How do you build the internal capacity that government needs to deliver better results in education, healthcare, economic empowerment, and other areas?

I think it’s a challenge. After the end of apartheid, so many activists who were in the anti-apartheid struggle became councilors at a municipality level, or became provincial and national legislators. We’ve needed to give black people opportunities that they didn’t have under apartheid. We’ve had to rebuild systems and sometimes invest quite heavily in information technology as well. And we’ve had to find people with the right expertise from communities that weren’t represented in government adequately.

So we’ve adapted to a whole new system of governing. Our challenge is using the expertise that was already in government in a wise way, while creating a more representative bureaucracy. Some of that has worked. Some of it remains a challenge. Probably for the next 20 years we’ll be continuing to train accountants and scientists and experts in fields such as energy, water, or wherever the need might be. I think we’ve reached an interesting level of competence within the state, but there are still areas with significant weaknesses that we need to remedy.

What is very important and increasingly challenging, for a state and society like ours, is to sustain activist leadership in the civil service, among politicians and, to the extent that’s possible, in the business sector. We need leaders in all sections of society who can address various challenges and deliver on their immediate jobs, while remaining cognizant of our history and the social context we actually come from. We need to put in that extra energy, create that extra innovation, and ensure that we deliver in a way that wipes out all the backlogs in our society.

Editor's Note: This collection of articles is part of "The Art and Science of Delivery," an anthology of essays published by McKinsey & Company in honor of the 10th Anniversary of the Skoll World Forum. It is the most recent installment of McKinsey's ongoing series, Voices on Society, which convenes leading thinkers on social topics. (Copyright (c) 2013 McKinsey & Company. All rights reserved. Reprinted by permission)

Read more stories by Rik Kirkland.