SBI COMMENTS AND SUGGESTIONS TO THE NATIONAL TREASURY
Economic transformation, inclusive growth and competitiveness: Towards an Economic Strategy for South Africa
The Small Business Institute (SBI) is an independent, not-for-profit, 75-year-old organisation that represents about 100 business chambers and thousands of small businesses in South Africa.
Over the last two years, it has been undergoing a transformation from its roots as the Afrikaanse Handelsinstituut (AHI) so that its work becomes more reflective of South Africa’s demographics to be truly representative of small and medium-sized businesses (SMEs) in South Africa.
As a non-political organisation, we are driven by one thing: namely, our passion to see South Africa develop the ‘enabling environment’ promised in the first white paper strategy for small business. By doing so, SMEs in our country can play their rightful role as drivers of inclusive, transformative growth and employment.
About this Document
SBI is a member of Business Unity SA (BUSA) where it represents the voice of the small business segment in the economic development discourse. It is also a participant in the Public-Private Growth Initiative (PPGI).
This paper represents the views of SBI, as the voice of small business. Accordingly, we have decided to limit our comments to matters affecting SMEs. BUSA, as an apex business organization, will deal with other pertinent economic policy issues.
General comments about the proposed economic strategy for South Africa
We commend the authors of the paper for acknowledging the role of SMEs in contributing to GDP growth and employment creation.
Small businesses make up 98.5% of the formal economy, across all sectors, and are yet only able – or willing – to create 28% of formal jobs (see the findings from the first phase of SBP’s baseline study of SMEs in South Africa: https://www.smallbusinessinstitute.co.za/wpcontent/uploads/2019/01/SBIbaselineStudyAlertfinal.pdf. This makes South Africa an outlier in both the developed and developing world, since the contribution to employment by SMEs should be between 60% to 70%. Some 56% of jobs in South Africa come from only 1 000 large employers, including the government, state-owned companies (SOCs) and the civil service.
Given the latest unemployment statistics, minimising constraints for SMEs to employ more 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.
In the last five years, we have had a ministry and department dedicated to supporting SME growth. Yet, little progress was made during the past administration to ease the challenges small businesses face to start, run and grow and the odds remain stacked against this important segment of the economy.
• Red tape and insufficient attention paid not only to eliminating unnecessary or cumbersome bureaucracy, but to regulatory impact assessments prior to new laws and directives being promulgated;
• Late payments (by government departments, SOCs and big business); and,
• The right kind of financial and non-financial support for the SMEs.
In policy, approaching SMEs as a standalone ‘sector’ is inappropriate and problematic. Small businesses are a segment of every sector. Failing to frame them in this way siloes them and could result in ineffective interventions, condemning them to forever remain small. We find that this approach is the default (and perhaps preferred) approach in all multi-lateral engagements where Big Government, Big Business, and Big Labour convene to discuss small business in our absence.
Through our work with chambers, we are close to the challenges SMEs face in dysfunctional municipalities as well as how they suffer from limited coordination – as your paper has identified – among agencies that support SMEs.
Finally, we lament the lack of agreed, credible data about small businesses in South Africa. We would urge government to support a non-partisan study that seeks to establish common facts and empirical evidence about the SME landscape: their demographics; regional attributes; size, industry and level of formality; the sectors in which they succeed and in which they fail and, importantly, their contribution to GDP. We are of the opinion that the baseline study initiated and conducted by SBP should form the basis of such fact-based policy formulation.
More specific comments – what we agree with and suggest
Eradicating Red Tape
We agree with the focus of the Treasury paper on the problem of red tape. Eradicating red tape should be the highest priority for every minister In South Africa.
The burden of red tape is, of course, felt disproportionately by SMEs so much so that the International Labour Organisation (ILO) says the problem “can encourage businesses to remain informal and small to avoid compliance costs, which limits our ability to create the jobs we need.”
The Treasury paper suggests that we revisit the Regulatory Impact Assessment (RIA) Act, which would see some 25% of regulations scrapped over the next five years. We support this, but it is our understanding that RIAs would prevent ill-advised legislation, regulations and policy positions, not necessarily unwind those choking the lifeblood out of SMEs. Instead we would propose that we embark on initiatives like the Mexican ‘most unnecessary steps’ contest and the UK’s ‘Red Tape Challenge’.
Indeed, the Minister of Small Business Development already has the necessary power to gazette Section 18 of the National Small Business Act to require each department to conduct regulatory assessments of every new directive. They would, in effect, be charged with ‘thinking small first’. The impact specifically on small businesses would have to be considered so they could be offered relief or considered for specific special treatment if necessary. This powerful and useful instrument has been lying dormant on the shelf since the Act was passed in 1996. This is either by choice, in which case it makes a mockery of government’s stated commitment to growing the SME segment, or it is gross negligence – and indeed, contempt of Parliament – and lack of implementation.
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 improving their regulatory quality, necessity, and red tape reduction. We should learn from them and follow suit.
The President has set proposed target of improving our ranking in the Ease of Doing Business survey by the World Bank (where we’ve fallen from 32nd place in 2008 to 82nd place in 2018). We fully support this.
Of equal importance is to turn our eyes to the World Economic Forum’s index which places South Africa at 89th in terms of 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 South Africa 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 is an approach we could support!
Rwanda has bounded from 143rd to 29th in the Ease of Doing Business survey in part because of their 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 a freehold title; and made the transfer of property easier by eliminating the requirements of obtaining a tax clearance certificate. They have also made the process of acquiring credit more flexible; VAT is now filed quarterly; they have 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. In a small business, regulatory compliance consumes one of the two most scarce resources: either money for a service provider, or the time the business owner should have spent growing the business.
Vietnam is abolishing and simplifying unclear and infeasible business prerequisites before the third quarter of this year and plans to reduce the number of import and goods subject to inspections by half. Their 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 recorded great success by holding the Red Tape Challenge. Run over the 2011-2014 period as part of government’s growth agenda, crowd-sourced ideas (more than 30 000 people offered suggestions) were adopted and saved over £1,2 billion, freeing up the private sector to invest in their businesses, or hire more employees. Out of 21 000 statutory rules and regulations (excluding tax and national security), over 2 200 were scrapped or improved.
By citing the Mexican initiative called the ‘most unnecessary steps contest’, which also allowed businesses to identify the red tape that most challenged them, the SBI applauds the instinct that suggestions should come from those who are burdened by the regulations, not those in government who, never having run businesses themselves, issued them in the first place.
The OECD says: “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 multi-level 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.” Many such one-stop experiments exist at local and provincial levels, but central government, through Treasury and SARS especially, are uniquely positioned to implement this nationally.
We have noted the newly re-established Policy and Research Unit in the presidency. If its officials are casting about for something to do, South Africa’s growth, dynamism, innovation and most of all job creation would all benefit from following this advice. It may take coordination in the presidency to manage the inter-departmental turf wars that will inevitably come 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 to exclude the job-creating medium-sized businesses.
Implementation of the Definitions of Small Business
During the fifth administration, the Department of Small Business Development managed to formulate definitions of small, micro, very micro and medium-sized enterprises (SMMEs) in South Africa. This harmonizes definitions across the public sector – among state departments, agencies and SOCs. The immediate priority is to implement these across all of the public sector, and lobby for the private sector to adopt them.
Access to Finance
The former minister of small business development estimated that in 2018 there was R15.5 billion available in government SME support of various kinds and yet there is no consolidated accounting of these programmes, which work, which do not, what their mandates are, whether they are fully staffed and whether there is duplication. This excludes funding and other interventions by the private sector and commercial banks; another R120 million is devoted to supply-chain/enterprise development by the BBBEE sector codes.
Data from the SA Reserve Bank shows that a percentage of SME loans compared to total loans from banks stood at 10.4% in November 2017 – remaining flat from 2008 recession. But loans to big business increased during the period. Reasons for this funding miss-match should be investigated. Fiduciary requirements for banks may entrench this problem, in which case different solutions should be investigated. Section 12J, for instance, seems to have resulted in an over-supply of shopping centres, but could be tweaked so that large institutions – banks and other funders – can use it to fund the unfunded middle of our business world. The UCT Graduate School of Business revealed that in Gauteng just 13.5% of entrepreneurs had heard of the Small Enterprise Development Agency and 1.3% had accessed the agency, and in the Western Cape these figures stood at just 10% and 0.5% respectively.
We agree with the Treasury paper about the need for more patient capital, a consolidation of funding, and a re-think of support from the development finance institutions. Support programmes should be better communicated.
Better targeting of support for start-ups and going-concern small and medium-sized firms
Former Minister of Trade and Industry Rob Davies said 70% of small businesses fail within the first two years, and research from Enterprise Observatory of SA highlights data from the SA Revenue Service showing that 31 small businesses with turnovers of less than R10 million shut their doors each week.
Given the high rate of unemployment, we suggest that support for SMEs be tailored better. More dedicated support should target medium-sized enterprises that have survived the two-year death trap. These firms have better employment creation potential than start-ups which need different types of support. In a rising tide, all vessels will rise, but it is exactly then when the medium-sized business will demonstrate its job creation potential.
We also support the idea of the creation of a One-Stop Shop for SMEs as proposed by the sixth administration to facilitate state support for SMEs.
We support government’s focus in supporting start-ups through “blended finance” (a mix of grants and loans) and lengthier incubation periods.
We applaud the candour that the Treasury paper has adopted with regards to acknowledging the issue of late payments to SME suppliers. It is also important to note that the problem goes beyond health, education and public works, it also affects SME suppliers contracted to SOCs and other state departments as well as private big business.
We support the automatic addition of interest on delayed payment of invoices including the measures such as black listing envisaged in the Treasury paper. A critical consideration to make this aspiration a reality is to ensure that invoices are standardised across the public and private sector.
The disruption to cash flow for a small business is one of the leading causes of their failure and a disincentive to employ people when they are unsure of making payroll.
Given the fact that the problem of late payment is an economy-wide issue, we propose learning from other jurisdictions.
In the UK government is now paying small businesses within five days of invoicing; a previous campaign resulted in halving delay in five years.
They are also asking big businesses to appoint a director responsible for prompt payments, promoting innovative technologies, such as the latest accounting software (to help small firms manage their payments processes), and empowering trade bodies to highlight the best and worst practices in payment behaviour.
The Australian government pays in 20 days for any contracts up to AUS$1m and are developing a framework for any businesses with turnover > AUS$100m to publish their payment information.
The UK already requires businesses to report payment policies, practices and performance twice a year. Failure to comply is a criminal offence for which companies can be fined. We would like to see this transparency in South Africa. Here, most listed companies do not report payment terms and many we surveyed refused on grounds of confidentiality. We say they are using SMEs as a line of credit.
We also believe it is desirable to introduce transparency into payment terms towards SMEs and to demand the scrapping of exclusivity agreements with SME suppliers, which can limit their growth and sentences them to perpetual ‘supply chain’ status rather than stand-alone competitors to their current large customer.
Similarly, we support the 30% set-aside for SMEs in public procurement and the measures to improve oversight and monitoring of the subcontracting relations, possibly through a dispute resolution mechanism within the Chief Procurement Office. Creating a new Ombudsman, however, is unnecessary – indeed, when the Democratic Alliance introduced a private member’s bill last year to do so, we opposed it.
Government should prioritise policy that introduces better cohesion and coordination between the public and private sectors.
The lack of capacity in municipalities and their resistance to involve the private sector must be addressed as a matter of urgency. Many small businesses struggle because of lack of basic infrastructure and services despite paying for them directly or indirectly and unlike big businesses they cannot duplicate such services by, for instance, affording their own generators or security services.
Revitalising local businesses through business chambers and establishing a framework for strong collaboration with local government structures – especially around issues of service delivery, municipal budgets, local procurement and job creation – is a matter of urgency.
We would welcome the creation of at least one Special Enterprise Zone or Enterprise Development Zone per province in a town where there is a functioning public-private partnership between local business and the local government. This will allow space to relax red tape with emphasis being placed on local issues and needs.
We especially support the ‘assumed approved after 30-days’ concept boldly proposed in the strategy document. This will speed up regulators and make sure they respond to invoices timeously.
Finally we would encourage, as do the authors of the various studies commissioned and cited by the Treasury’s strategy at CCRED, that government legislate for competition, not just act to punish anti-competitive behaviour. In this economy, SMEs don’t need a level playing field; they need all the advantages they can extract from ease of doing business (throughout the start, run, grow continuum) to a government which first does no harm.