A common complaint from SMEs in SA is that there is an excessive amount of red tape involved in setting up and running a business, which negatively impacts the sector. Many believe the problem lies with government – its apathetic effort to curtail, let alone decrease, the massive amounts of regulation and legislation being a key concern. The World Bank’s 2017 Ease of Doing Business report for SA shows that it takes an average of 43 days to start a business, leading to the country being ranked 131 on the list – down six places from 2016. Many SA SMEs have, however, reported that it can take up to 60 days to start a new business. Making this an even more bitter pill to swallow is that much of this time is not even ascribed to completing the required forms – it is due to administrative inefficiency.

The overall business environment in SA is, for SMEs in particular, a pressing concern, says Chris Darroll, founder and CEO of SBP, an independent development and research NPO. ‘Findings from SBP’s longitudinal study – SME Growth Index – released in late 2015, revealed that year-on-year changes in the study’s sub-indices show downward trends. One-in-five firms reported a decline in turnover from the previous year, while a further 20% reported no growth in the same year,’ she says. Moreover, as much as 78% of businesses interviewed said the business climate is increasingly more hostile to firm growth, says Darroll.

SMEs reported that the top factors inhibiting the growth of their businesses are burdensome regulations (40%), followed by lack of skills (38%), local economic conditions (37%), and cost of labour (32%). Darroll says it is interesting that the regulatory burden, though it has repeatedly been raised by firms as a main factor impacting on their growth, was identified as the top impediment for the first time in five years. From a competitiveness perspective, the increasing regulatory burden is deeply concerning, she says. ‘South African firms are operating under severe and adverse circumstances, which small businesses in competitor economies do not have to contend with.’

Darroll argues that government needs to sit up and take notice. ‘It is well established that SMEs are the known engine for job growth. According to the National Development Plan, SMEs will be responsible for the creation of the greater part of employment creation. The fact is that South Africa is experiencing a net loss of small businesses (4.9%), which exceeds the start-up rate (2.9%) at a time when the country’s policy objectives are focused on growing and formalising them.’

While agreeing that the SA business environment is highly regulated, Stephen Kennedy-Good, director at Norton Rose Fulbright South Africa, says there is an upside to this. ‘There are a lot of rules that apply in conducting business in South Africa. For example, we’ve got the Companies Act, consumer protection legislation, laws relating to IP, tax laws and so on.

‘The positive spin on this is that if you have proper regulation, this often leads to investor confidence and investors wanting to invest in the South African market. So, while the situation may be frustrating for smaller businesses, there is a positive spin-off in that it creates confidence.’ However, government must hold the line on clear policies, he says, and entrench investor confidence. ‘Government needs to ensure that investors have certainty that when they invest in this country, they know what the landscape looks like and the policies that apply here, and that they’re going to have stability in their investment.’

According to Vivien Chaplin, partner at Hogan Lovells South Africa, in addition to many of the more well-known challenges, along with regulatory challenges, the lack of transparent guidelines in relation to specific industry licences and permits is also a hindrance to SMEs. ‘The relevant authorities do not always provide a clear and publicly accessible process to be followed, and the lack of skills in many of our government institutions means SMEs cannot obtain the guidance they require without the assistance of specialist advisors,’ she says.

Kennedy-Good maintains that if SA could move to a system where the registration of businesses with the Companies and Intellectual Property Commission (CIPC) was easier to follow and easier to do by oneself, this would be ideal.

 

‘If you could go directly to the Companies Commission and set this up yourself, this would be most helpful to SMEs,’ he says, adding that improving turnaround time at the Companies Commission would make a difference too. ‘In some of the countries overseas, you can register a company within 24 hours. It’s not easy to aspire to 24 hours but a matter of days rather than weeks would be very helpful.’

Chaplin notes that the large level of fraud historically experienced at the CIPC means that it has had to tighten the requirements, with the result that amending company details, such as changing share capital or directors, can become arduous.

‘The average turnaround time to change such details is about six weeks and can be administratively burdensome, for example, requiring certified documentation from all directors to be lodged in each instance,’ she says. This can lead to significant delays in opening bank accounts, accessing capital or completing tender documents, as although all the correct internal governance procedures have been followed, the relevant institutions would rely on the official CIPC records, according to Chaplin.

Asked which emerging countries SA might be able to take its lead from, Kennedy-Good says Mauritius has done well to attract foreign investment. ‘Mauritius has got it right in the sense that many foreign firms prefer to invest through Mauritius into Africa, as opposed to investing in South Africa and, through that, into African countries. What may also help on that front is further relaxation of our exchange-control rules, as these are very strict governing the inwards and outwards flow of capital to and from South Africa.’

Darroll cites Malaysia as a good example. ‘South Africa needs to simplify its definition of SMEs so that government can better understand the policies and the challenges,’ she says. Malaysia uses just two criteria to define SMEs, namely a company’s sales turnover, or its employment numbers. It also has a five-year SME strategy in place, as does Brazil, with clear and well-defined aims. These policies or strategies are measured and adjusted accordingly every five years.

A common criticism of the SA government’s approach to SME development is that it has been overly ambitious, with a complex, ever-changing mix of strategies, says Darroll. ‘These tended to be supply-driven, use a generic one-size-fits-all approach and had overly complex goals,’ she says.

‘The main element driving government’s policy and support measures for SME development is based on the erroneous understanding that all small businesses – from micro to small and medium enterprises – are homogeneous in nature and all require the same support, at the same time.’

She makes the pertinent point that policy cannot be developed in a vacuum. ‘A deeper and fuller understanding of what constitutes the SME community in South Africa is sorely needed. SMEs are poorly researched and we have little statistical knowledge of the size of the sector, their nature and characteristics,’ says Darroll.

Chaplin argues that there is no single solution to these issues, as they cross over many institutions and areas and, given the general level of fraud and corruption, there are no shortcuts to solving these problems. ‘Small business development agencies and other initiatives mooted by government need traction, support and resources from government to get affordable, accessible and skilled satellite SME-advisory centres into communities to assist SMEs with these challenges at minimal cost,’ she says.

‘Similarly, entities involved in promoting SMEs should be lobbying and equipping the various accountable government bodies and regulators with the knowledge learnt “on-the-ground”, to streamline and simplify processes and compliance requirements for small businesses.’

Another solution, she adds, would be to incentivise the established private sector – perhaps on an industry-by-industry basis – to establish bodies to assist SME players within those specific markets, and for government to give recognition to the time and monetary contributions made by such corporations, in terms of a new type of BEE recognition and/or tax incentives.

By Toni Muir
Image: Andreas Eiselen/HMmages