SETA not resolving skills shortage, just eating our tax money

Although South Africa has one of the worst employment rates in the world, it also has a skills shortage that remains a critical barrier to economic growth.

A study has found that while the Sector Education and Training Authority (SETA) was created to solve this problem, but instead it only eats our tax money at a rate of R20 billion per year, reaching only 0.6% of the workforce.

The government created the system to resolve the skills shortage, but it has proven to be inefficient and ineffective, according to research by the Bureau for Economic Research (BER).

The BER proposes to resolve the skills problem by restructuring and moving towards a more effective approach that prioritises skills for growth.

BER researchers Robert Botha, Roy Havemann and Claire Bisseker say South Africa faces a serious skills shortage, which is damaging long-run economic growth.

They cite the BER’s Manufacturing Survey as an example that shows that around half of all manufacturing businesses cite skilled labour as a significant business constraint.

The SETAs were intended to increase skills levels in the economy by solving market failures in skills training, such as underinvestment in skills development, by compelling firms to contribute to the collective cost of training through a mandatory levy.

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Systemic underperformance

Botha, Havemann and Bisseker identified systemic underperformance as the root cause of the failure, saying that while the SETA system operates at a significant scale, its performance is undermined by deep-rooted inefficiencies and a “leaky pipeline” where a substantial number of students exit programmes without certification.

Between 2011/12 and 2023/24, the system registered 2.6 million individuals across various programmes, with 2 million completions.

However, these headline figures mask critical weaknesses, as more than 630 000 registrations did not lead to a successful certification.

This leakage is most severe in the programmes designed to address deep skills and facilitate workforce entry.

The total number of SETA skills programme registrations in 2023/24 was only 1% of the employed and 0.7% of the labour force. Botha, Havemann, and Bisseker say this is in sharp contrast to similar international schemes where uptake is very high.

In France’s equivalent scheme, approximately 50% of employees participate, while in Canada approximately 30% participate.

The researchers also noted that the system’s overall performance statistics are significantly inflated by short, arguably low-complexity skills programmes.

These programmes account for 48.3% of all registrations and 60.8% of completions, boasting a high 96% throughput rate.

However, when these short programmes are excluded, the throughput rate for more substantive interventions, such as learnerships, internships and artisanal programmes, plummets to 57%.

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SETAs fail to meet most of their targets

Botha, Havemann, and Bisseker point out that the system consistently fails to meet performance targets.

SETAs failed to achieve most of their cumulative targets over the period of review. For internships, for example, targets were missed for 10 out of the 13 years under review.

The researchers point out that the SETAs have highly variable labour market absorption rates.

“The ultimate goal of SETA programmes is employment, but tracer studies reveal vastly inconsistent absorption rates. This challenges the idea of a uniform ‘SETA absorption rate’ and points to highly contextual performance. Tracer studies find absorption rates varied between 83% to 6.1%.”

They say the build-up and hoarding of surpluses and cash reserves point to significant financial inefficiency and chronic mismanagement.

“The SETA system commands significant financial resources but is defined by inefficiency and a failure to spend its budget on its core mandate.”

The researchers found that more than the review period, R164 billion was disbursed to the SETAs, and total revenue consistently exceeded expenditure, leading to large net surpluses, which stood at R6.7 billion at the end of 2023/24.

The researchers also found that the SETA’s total number of employees grew by 60%, from 1 716 in 2011/12 to 2 748 in 2023/24, while the wage bill grew by 12% on average annually between 2014/15 and 2023/24, significantly outpacing both average consumer price inflation (5%) and the growth of the broader public service wage bill.

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SETAs also expensive system, costing more than university

SETA is also an expensive system. In 2023/24, the cost per SETA certification was R181 269, significantly higher than the cost per university enrolment of R76 405, NSFAS funding per university student of R73 829 and TVET college funding per student of R34 230.

The researchers say when the low-cost, high-volume skills programmes are excluded to get a truer picture of the cost for substantive qualifications, the SETA cost per certification skyrockets to R388 052, which is even higher than the cost per university graduate of R370 923, although universities also have research mandates.

With all this money, the SETA system is only achieving 4% to 6.6% of the overarching target set out in the National Skills Development Plan, in conjunction with the National Development Plan and the New Growth Plan.

Based on these overarching plans, the Seta system should aim to facilitate and co-finance training “for approximately 10% of the workforce annually”.

In 2023/24, the labour force was 24 million, which would imply a target of 2.4 million. However, the total number of SETA registrations was 165,125 in that year, while the total number of programmes completed was 98,834.

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Options to resolve the problem

Botha, Havemann, and Bisseker give four options to resolve the problem:

• Option 1: phase out the SETAs entirely, including the levy. However, the researchers point out that it is likely that SETAs increase unemployment on a net basis and phasing them out is likely to increase employment. Even if firms do not increase employees significantly, firm profits and corporate tax will rise. The main disadvantage it would take away funding for skills development. Although the SETAs are inefficient, the system creates an existing pool of funding that could arguably still be used for developing skills, but in a better way.
• Option 2: Reduce the levy. The SETAs are not spending their entire allocations, with excess funds accumulating in growing surpluses and cash reserves. This increases unemployment without the offsetting benefit of an increase in skills.
• Option 3: Redirect the levy. There have been calls to use the levy for other purposes, and the researchers believe this is a second-best (but still relatively good) option, although it does not directly address the skills shortages and mismatches that the economy currently faces.
• Option 4: Convert the system to one based on a revenue-neutral tax incentive. Economic theory suggests that a market failure in skills development arises because firms are not incentivised to upskill their employees with general skills, nor is there an incentive to skill up the unemployed.

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Best option, according to researchers

Botha, Havemann, and Bisseker argue that it would be a better solution to shift from the current SETA system to a revenue-neutral skills tax incentive, funded from the skills development levy and paired with other employment creation incentives such as the Youth Employment Service (YES) and the Employment Tax Incentive (ETI).

The proposed design would mirror the Research and Development Incentive, where firms would be able to claim their qualifying skills programme spend off their skills development levy contribution.

The researchers say this would essentially create a ring-fenced pool of money for each firm to spend on skills.

The choice of skills development would be at the firm level, rather than at a centralised SETA level.

Depending on budget pressures, over time, the deduction can be increased, such as the Research and Development Incentive that allows for 150% of qualifying spend to be deducted from tax.