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SA’s SMMEs face a slow strangle as red tape litters the business environment

15 October 2021 Gareth Stokes

The administrative burden facing small, medium and microenterprises (SMMEs) plying their trade in South Africa continues to grow, discouraging many firms from expanding operations and forcing countless others to trade ‘under the radar’ in the informal sector. South Africa excels at bureaucracy and red tape despite the well-documented negative impact of hostile regulatory environments on small business. In fact, it is impossible to find an ‘ease of doing business’ index that features our beautiful country near the sharp edge of the wedge.

A collection of pedestrian placings

South Africa placed a pedestrian 84th out of 190 countries in the 2020 World Bank Doing Business rankings, which is said to offer an objective measure of the impact of regulation and property rights in the local business environment. Our overall competitiveness is rather lacklustre too. The 2021 IMD World Competitiveness Ranking, which includes only 64 countries, placed South Africa at a lowly 62nd, just scraping in ahead of Argentina and Venezuela. We also achieve notoriously low scores in many fundamental categories of the annual World Economic Forum Global Competitiveness survey. Our focus today is less on the grand overarching measures and more on the obstacles facing small business due to often irrational rules and regulations. 

We chose to discuss red tape and the resulting ‘strangulation by regulation’ after an informal chat with the CEO of a local investment advice practice. He observed that the decades-long prediction that small- to mid-size financial services providers (FSPs) would struggle to keep pace with the mounting compliance burden was proving true. The only way for small firms to remain compliant is to throw more capital, cash flow or human resource at the problem, or to simply sell out to a larger FSP. Firms in the financial services sector face a raft of regulations over and above the standard set of business rules and regulations. They operate in a sector governed by 15 acts and accompanying regulations and standards, all overseen by the Financial Sector Conduct Authority (FSCA). These laws are in addition to the country’s complex competition, data protection, labour and tax laws. 

A good way to get to grips with the irrationality of regulation, and the cost of complying with such, is to reflect on our personal experiences. For example, the Department of Traffic’s grand ‘renew your driver’s license card every five years’ experiment. This unnecessary hurdle has been forced on law abiding citizens despite being difficult to comply with due to bureaucratic ineptitude. This writer, like every fellow driver he knows, has wasted countless hours of valuable time in a multi-visit renewal process that unfolds over weeks or months. Follow with me as we step through the process. 

Frustrations in a non-functioning bureaucracy

Day one: Travel to license centre, centre is closed due to computer theft. Day two: Travel to license centre, centre is closed for union meeting. Day three: Travel to license centre, join queue in parking lot, get told three hours later that you will not be served today. Day four: Travel to license centre. Etc. And the frustration repeats at every step of the process, including the eye test, payment at the cashier’s window, the collection notification and the subsequent collection… Now, imagine the impact on a small business of having to jump through these types of hoops to fulfil some or other legislative requirement, just for the sake of it. That, dear reader, illustrate the effect of unnecessary red tape. 

Fortunately, there are some local initiatives that could yield positive results in eradicating red tape. In researching this article, the writer stumbled upon an encouraging webpage housed at WesternCape.gov.za and titled: Red Tape Reduction. The site defined red tape as “non-essential procedures, forms, licenses and regulations that add to the cost of dealing with government; or anything obsolete, redundant, wasteful or confusing that diminishes the competitiveness of the province, which stands in the way of economic growth and job creation or wastes taxpayers’ time and money”. Red tape interferes with the ability of business to compete in global markets by causing unnecessary costs and / or delays; slowing the rate of establishment of new businesses; and affecting the sustainability and / or growth of existing enterprises. 

As financial journalist Bruce Whitfield noted in his introduction to the 2021 PSG Think Big Series: Future of the SMEs: “In South Africa, you have to jump through an extraordinary number of hoops [to set up and run a business]. You have to go through a huge bureaucratic process and a regulatory process and a government process in terms of government regulation, just to get out of the starting blocks”. He added that people opted out of registering businesses in this environment, operating in the equivalent of a dark kitchen, simply because the process of complying with VAT requirements, producing BEE certificates and everything else that goes with it is too onerous”. 

Crossing the ‘red tape’ moat

Whitfield added that one of the greatest indictments on our regulatory environment was that complex regulation created a moat for established businesses… Red tape can be great for businesses that have achieved a certain scale, because it prevents potential competitors from entering the market. Mike Stopforth, founder and director of transformation specialist, Beyond Binary, agreed there was tragedy in the regulatory burden. Excessive regulation places undue stress on the SMME segment, which accounts for around 30% of the country’s GDP and creates 50-60% of all jobs. “There is this massive disproportionate dependency on small business owners, entrepreneurs and start-ups to create the jobs that South Africa needs to fuel economic growth,” he said. “Even if you have an established business, you are often faced with regulatory requirements that might not have been anticipated”. 

There is an obvious need for regulation in the financial services sector; but more needs to be done to mitigate the impact of compliance costs in smaller and start-up firms. It is one thing to operate a 10-person legal and compliance division in a firm of 500 employees and quite another to have to maintain a similar structure in a 30-person outfit. And we have not even begun to unpack the myriad regulatory hurdles that firms face in license applications and renewals and the countless reports demanded by the departments of labour and trade and industry and others. These requirements are consistent across businesses, from the lowly one-person PTY Limited all the way through to the Discovery, Old Mutual, MMH or Sanlam. 

Focus on what happens when things go right

The challenge for entrepreneurs and small business owners is to rethink their operations for South Africa’s high-touch regulatory environment. “You should start with the assumption that there is more opportunity than you think,” concluded Stopforth, with his business incubator hat on. “You should forget asking ‘what happens if this fails’ and focus on what happens if you get things right”.

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