Business Day: SIPHO NKOSI: Cut red tape to prevent small business staying informal

Initiatives in Rwanda, Mexico and the UK show that making ease of business a priority yields rich rewards

Both the finance minister and the new minister for small business development have laid down a few cards before the public in support of small businesses and economic growth. We’re glad to see they’re tossing some of their chips in to help eradicate red tape.

The burden of red tape is, of course, felt disproportionately by small and medium enterprises (SMEs), so much so that the International Labour Organisation says the problem “can encourage businesses to remain informal and small to avoid compliance costs, which of course limits our ability to create the jobs we need”.

Given the latest unemployment statistics, minimising constraints for SMEs to employ people has become urgent. We need to find the will to do whatever it takes collectively to create the most conducive environment possible for SMEs. Eradicating red tape should be the highest priority — for every minister in SA. Small businesses make up 98.5% of the formal economy across all sectors, yet are able — or willing — to create only 28% of formal jobs.

It won’t be difficult to focus the minds of the cabinet. Small business development minister Khumbudzo Ntshavheni merely has to gazette section 18 of the National Small Business Act to require each minister to conduct regulatory assessments of every policy, law or regulation issued. The impact on small businesses would have to be considered so that they could be offered relief, or considered for specific special treatment if necessary. Finance minister Tito Mboweni has suggested this, and raised the idea that we revisit the Regulatory Impact Assessment Act, which would result in 25% of regulations being scrapped over the next five years.

More than 60 countries worldwide, in developed and developing economies, have adopted various forms of regulatory impact analysis (RIA) as a mandatory step in developing new legal norms as a means to improve their regulatory quality, necessity, and red tape reduction.

The president has set his sights on improving our ranking in the World Bank’s ease of doing business survey (where we’ve fallen from 32nd place in 2008 to 82nd in 2018). Of equal importance is to turn our eyes to the World Economic Forum’s index, which places SA 89th in terms of the burden of government regulation.

Concerns regarding the “administrative burdens” relate not only to the volume of regulatory requirements and poor administration, but also the frequency of regulatory change. This is not a problem unique to SA, and as part of our “new dawn”, we could look at the way the sun is setting on red tape in other jurisdictions. Canada requires that one regulation be removed for every new regulation introduced. Now that’s a regulation we could support!

Rwanda has bounded from 143rd to 29th in the ease of doing business survey in part because of its work to ease regulatory burdens by reducing the time required to obtain a registration certificate; easing the process of acquiring construction permits; eliminating the fee for obtaining freehold title; and making the transfer of property easier by eliminating the requirement of obtaining a tax clearance certificate. The country has also made the process of acquiring credit more flexible; VAT is now filed quarterly; it has instituted an electronic filing system; and payments required per year have fallen while the time spent filing taxes each year has fallen from 168 hours to 113.

Vietnam is abolishing and simplifying unclear and unfeasible business prerequisites before the third quarter of 2019 and plans to reduce the number of imports and goods subject to inspections by half. The trade and industry minister commented: “A business investing in high-tech farming [currently] will have to go through 16 doors and 40 procedures to finally win the privilege it legally deserves.”

The UK enjoyed great success holding a “red tape challenge”. Run between 2011 and 2014 as part of the government’s growth agenda, crowdsourced ideas (more than 30,000 people offered suggestions) were adopted, saving more than £1,2bn and freeing up the private sector to invest in businesses or hire more employees. Out of 21,000 statutory rules and regulations (excluding tax and national security), more than 2,200 were scrapped or improved.

Mboweni’s strategy also cites a Mexican initiative called the “most unnecessary steps contest”, which allowed businesses to identify the red tape that most challenged them. We applaud his instinct that suggestions should come from those who are burdened by the regulations, not those in government who, never having run businesses themselves, promulgated them in the first place.

The Organisation for Economic Co-operation and Development laid it out for us: “What can governments do? Strategies include reviews of the stock of regulations, reduction of administrative burdens, codification, simplification of administrative procedures and re-engineering, better multilevel co-ordination, and rapid introduction of e-government services.

“Supported by task forces and advisory committees, governments increasingly locate responsibility within a central administrative unit. This ‘whole-of-government’ approach represents a major step in recent years, embedding administrative simplification in the overall regulatory quality system at the national level.”

We have a new administrative unit in the presidency. If its members are casting about for something to do, SA’s growth, dynamism, innovation and most of all job creation would all benefit from following this advice. It may take co-ordination in the presidency to manage the turf wars that will inevitably arise from these reviews and other proposals by the finance minister, namely to consolidate the funding source for SMEs. On this we would encourage that funding businesses at start-up and ideation phase should allow escalating repayment terms as businesses gain traction, but also not exclude the job-creating medium-sized businesses.

Small businesses are characterised by risk-taking, entrepreneurship and giving it a shot, which is the exact opposite of how government operates. As entrepreneur Annie Malan said at one of our SMEIndabas, “Entrepreneurs jump off the cliff and build their parachutes on their way down.”

So let’s take the handcuffs off SMEs. Let them jump.

by Business Day –

Sipho Nkosi