A deregulation task force could set business free

To operate in this country, any incorporated business must register with the Companies and Intellectual Property Commission (CIPC).

Almost all employers must register with the South African Revenue Service (Sars) for income tax – and, once they cross relevant thresholds, for value-added tax (Vat), pay-as-you-earn (PAYE) tax, the Unemployment Insurance Fund (UIF) and the Compensation Fund that exists in terms of the Occupational Injuries and Diseases Act.

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Employers must also comply with Department of Employment and Labour requirements via the UIF, the Compensation Fund, and other regulatory obligations.

On top of this, there are industry regulations, municipal licensing and sector-specific permits.

Accurate accounting is required for tax payments. There must be contracts with shareholders, staff, premises, insurers, and suppliers.

The Protection of Personal Information Act (Popia) governs customer and staff information, and the Consumer Protection Act regulates customer rights.

In addition, there are B-BBEE certification and employment-equity requirements.

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Studies cited by the Department of Small Business Development estimate that our country’s regulatory burden can cost firms between 4% and 8% of turnover – and that it takes a business around 210 hours a year to meet its tax-compliance requirements.

In addition, the Public Interest scoring system – meant to alleviate the audit burden on small businesses – has not been adapted for inflation for more than a decade, undermining its value.

Discouraging growth

Progressive compliance requirements also have the unintended effect of discouraging business growth.

Under the amended Employment Equity Act, affirmative-action obligations apply to employers with 50 or more employees (irrespective of turnover).

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Sadly, as a professional-services firm, we often see client businesses choosing to avoid expansion because of the compliance burden it brings.

That ’50 staff’ threshold becomes a ceiling to growth even for transformed businesses that fully support the goals of an inclusive, representative workforce.

South Africa presents an exceptionally difficult environment for small and medium enterprises (SMEs). The Global Entrepreneurship Monitor recently ranked South Africa’s entrepreneurial environment among the weakest in the world, with our national context index placing us 45th out of 50 participating economies.

Many medium-sized businesses find themselves pushed into full statutory audits and new beneficial-ownership filing requirements, further eating into the time those owners can spend running their businesses.

In the end, far fewer businesses enter the mid-sized realm that drives employment and labour absorption – discouraged by these massive compliance requirements.

Transformed labour market

The recent G20 Leaders’ Summit in Johannesburg placed SME development and labour absorption firmly on the agenda, highlighting the role of smaller firms in driving inclusive growth. It’s an opportune moment to recognise the importance of the “missing middle” for achieving these goals at scale.

However, South Africa faces a uniquely self-inflicted constraint to unleashing the midmarket.

The Organisation for Economic Co-operation and Development (OECD) concurs.

“Restrictive regulations hinder business dynamism and job creation” reads the recent OECD Economic Survey of South Africa “… by stifling firms’ market entry and expansion”.

The report points in particular to burdensome licensing and permit regimes as priority areas for reform.

At the same time, the SME sector is already doing the heavy lifting.

Studies by the South African Chamber of Commerce and Industry, the International Finance Corporation and others suggest that SMEs comprise roughly 91% of formal businesses in South Africa, and contribute about 60% of employment and around 34% of GDP.

Small business is not the fringe of the economy; it is the backbone.

The most empowering social force is economic growth. It is also the only way to make a meaningful dent in South Africa’s alarming unemployment figures.

From government’s perspective, the instinct is often to drive transformation through more laws – such as the proposed Business Licensing Bill, which may add further compliance layers to the process of opening a business.

In the face of a highly regulated investment environment, many businesses are inclined to keep their powder dry. Anecdotally, we’ve seen private equity firms shifting their mandate from large funds to a smaller, deal-for-deal strategy, reflecting a cautious approach to risk and execution in a complex regulatory setting.

In practice, however, the most effective way to achieve transformation may be precisely the opposite of regulation: transformation through growth.

Task force

Simplified legislation is required across the board.

An advanced financial system need not be bureaucratic and riddled with complexity.

At present, only the top one percent of companies have the capacity to navigate the South African compliance environment comfortably. Smaller businesses face massive time, cost and resource pressure just to remain compliant.

A permanent deregulation task force should be established, including representatives from the CIPC, Sars, the Department of Employment and Labour, the Department of Small Business Development and the private sector.

It could:

• Map the compliance journey for small and mid-sized business;
• Identify duplications, outdated thresholds and unnecessary permits;
• Propose sector-specific SME exemptions where risk is low; and
• Drive digital integration between “compliance nodes”.

The goal should be simple and measurable: reduce the time and cost of compliance for growing businesses, without weakening core protections for workers, consumers or the fiscus.

Our economy requires a step change. To get there, we must remove all roadblocks to growth, starting with the compliance thicket that holds back the firms we need most. A well-designed deregulation task force would be a practical first step towards setting South African business free.

Leonard Roberts is CEO of Moore Infinity.

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