Today is Small Business Friday and it is therefore appropriate to look at the many recommendations aimed at assisting small businesses in Tito Mboweni’s discussion document Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa.  

The biggest factors that stymie growth in smaller businesses – which include the bulk of distributors and retailers in our industry – are too many red tape regulations, inflexible labour markets and difficulties with accessing finance, this document highlights.

Reducing red tape

“The costs of compliance with red tape (e.g. obtaining BEE certification, applying for a tax incentive, or accessing a learnership through a SETA) is the same across companies, making it much more expensive in relative terms for smaller companies,” the document states.

It is estimated that small businesses spend an aggregate 4% of turnover on red tape and the smallest firms (those employing fewer than 21 people) are the worst affected, with R1 in every R20 spent on red tape. In companies employing more than 40 people, the equivalent figure is R1 in every R33.

Treasury therefore recommends that red tape around licensing and municipal servitudes should be lowered and a silence is consent rule for licensing procedures that have low associated risks should be introduced. It would also like to reintroduce the Red Tape Impact Assessment Bill.

The Bill proposes that a new Red Tape Impact Assessment Unit would review all new legislation and determine whether a full red tape impact assessment is needed. All departments and self-regulatory agencies will also be required to reduce red tape in existing regulations by 25% over five years. It is calculated that reducing regulation to best practice in three areas could boost GDP per capita by 1.1% over five years.

“The government should consider full or partial exemptions for small businesses from certain kinds of regulation (e.g. the extension of bargaining council agreements),” Treasury recommends.  Special economic zones can be introduced to launch pilot projects to test the effectiveness of measures that will assist small businesses and new market entrants.

A One-Stop Shop as a single government contact point for SMMEs is another recommendation to reduce red tape. This will also reduce “the cost of information asymmetries and lack of access to networks” and would enable entrepreneurs to register a new business and apply for local and national government permits in a simplified manner across all three tiers of government – only needing to provide information to government once.

The Department of Trade and Industry (DTI) is already launching a website (named Bizportal) in October that will allow businesses to register electronically and complete all relevant paperwork on one site, which should significantly reduce South Africa’s lengthy business registration time of 25 days, compared to 5 days in many other countries. This website will include registration for UIF, the compensation fund as well as SARS.

Labour regulations

Certain labour regulations increase the cost of doing business for small businesses – especially the extension of wage agreements negotiated by big companies in collective bargaining councils which are enforced on small businesses. “If these wage agreements raise labour costs without concomitant increases in productivity, it reduces the global competitiveness of South African workers and may inhibit the long-term sustainability of SMMEs and contribute to rising youth unemployment,” the document states. “In addition, the introduction of the National Minimum Wage could potentially have an adverse effect on small businesses who cannot afford the increase.”

Access to finance

“Entrepreneurs continue to complain about the lack of affordable credit,” says the document, adding that there is a lack of credit information for SMMEs that they could use as a basis to make decisions on granting or applying for credit.

Accessing credit with little collateral and failure due to inexperience in running a small business or having limited experience of a specific sector, are also factors that contribute to the failure of SMMEs

“The newly launched private sector small business fund and various other initiatives like the Gazelles programme tend to focus on scale-ups (i.e. expanding existing businesses), at the expense of start-ups,” according to the document.

“A failure to support early-stage entrepreneurs clearly disadvantages those who do not have capital, collateral or access to angel investors. This policy failure, in turn, inhibits the ability of government to promote economic transformation and the resultant gap presents an opportunity where public funds can be deployed more effectively.”

Treasury recommends that existing funds for SMME support should be consolidated  into a single fund with a clearly defined mandate and performance metrics. “The National Treasury is working with the Departments of Small Business Development and Science and Technology on the design and implementation of a small business ideation and early start-up fund to address some of the shortcomings of the current funding landscape.”

Government support

Treasury acknowledges that there are a number of agencies that are already dedicated to supporting small business development, such as the Small Enterprise Development Agency and Small Business Finance Agency, as well as sector-specific programmes and national incentives with a small business component directed at small business (e.g. the Manufacturing Competitiveness Enhancement Programme pays out higher grants to SMMEs than it does for large firms).

“Several recent measures offer support to small business through the tax regime, including a simplified tax regime for small business,” it states.

But, says the Treasury, there are many ways in which SMMEs can be further assisted to grow:

  • Government support, in the form of incentive programmes, needs to be better communicated and simpler to apply for, especially for small businesses.
  • Small businesses should be supported through public procurement by the drafting of tenders that will create more opportunities for small businesses through sub-contracting.
  • Late payments by government to small business should be addressed (perhaps by allowing for automatic addition of interest on outstanding balances after a certain period). The points scoring system of the Preferential Procurement Policy Framework Act is currently being amended to enhance opportunities for SMMEs.
  • The ban on upfront payments disadvantages small business for whom cash flow is a critical issue and can cause liquidity risks for SMMEs, which are compounded by the risk of delayed payments. “Steps should be taken to improve oversight and monitoring of the sub-contracting relationship, possibly through the creation of a sub-contracting ombudsman or a dispute resolution mechanism in the Chief Procurement Office,” treasury recommends.

“Promoting export competitiveness and harnessing regional growth opportunities” are other priorities highlighted in the document.  The need for Government to collaborate with the private sector to set up an automated licensing system for key export documentation, and review border control procedures, are among the many recommendations to improve exports. “Government support, in the form of incentive programmes, needs to be better communicated and simpler to apply for, especially for small business.”

Although the 73 page document can by no means be considered a light read, it contains many other interesting recommendations aimed at improving the Ease of Doing Business in South Africa. It is well worth a read here.

Remember, all comments on the Treasury  recommendations must be sent to Rita.Coetzee@treasury.gov.za by 15 September 2019.