Trevor Manuel, left, and Cyril Ramaphosa. Picture: GCIS
Trevor Manuel, left, and Cyril Ramaphosa. Picture: GCIS

President Cyril Ramaphosa’s announcement that four special ambassadors — including former finance minister Trevor Manuel — are to roam the globe in an aggressive pursuit of foreign investment "like a pack of lions" appears premature. It would have helped these ambassadors if they could have had a better story to tell than one of a business environment with stagnating profitability and growing losses where:

Only 25% of firms have earned sufficient income to be liable for company tax;

Firms with a taxable income below R10m decline at a rate of 31 per week;

A mere 635 companies are responsible for 77% of company tax; and

From 2009 to 2015 company losses as submitted to the South African Revenue Service (SARS) increased 85% and for the past two years were higher than the taxable income assessed.

SARS data for tax years 2009 to 2015 as indicators of the health of the South African enterprise landscape show the business devastation of the Zuma administration. This administration, responsible for mismanaging the macro-environment and overseeing the collapse of the police force and education quality and a rise in crime and corruption, critically damaged the enterprise environment.

In nine years there was no growth in the number of formal enterprises submitting tax returns; there was no increase in the number of companies liable for tax; the majority of firms (75%) experienced poor financial health with either losses in 2015 or loss rollovers from previous years that swallowed profits; and the average tax bill per company for those with taxable income in 2015 was 40% higher than in 2009.

Graphic: DOROTHY KGOSI
Graphic: DOROTHY KGOSI

SARS has already acknowledged that company tax shows no real growth. The full picture of how bad the nine years of the Zuma administration really were for business will only be seen once SARS data for the 2018 tax year become available.

Enterprise Observatory of SA’s quantitative research (both on South African and US enterprise data) reveals a strong correlation in localities (whether towns and cities, municipalities or counties) between the number of residents and the number of enterprises. Timeline studies reveal this correlation remains fairly consistent over time: as the population expands, the number of enterprises grows pro rata. The same holds at national level. In 2009 (the commencement of the Zuma administration) there were 69.2 residents per firm submitting tax returns. By 2015 that number had increased to 77.4 residents per firm.

This indicates impoverishment: more people are required to sustain a firm. It is further indicative of a declining capacity in SA to establish and grow firms that can compete internationally — since enterprises that are primarily exporting do not rely that much on local consumer spending, growth in such firms would have shown a lower number of residents per enterprise.

From 2009 to 2015 the population grew by 4.32-million to 55.3-million in 2015, but businesses submitting tax returns fell 3% and those that registered taxable income fell 5%. The tax payments of a declining number of businesses have to (co)-cover an expanding demand for services, including social grants, quotas of free water and electricity, installation of modern infrastructure and building of a housing superstructure, free education (including more primary classrooms and teachers and access to university studies) and free medical services.

The massive shift in the company tax burden (the share of company income tax by firms with taxable income above R100m rose from 69.5% to 77.4% and that of firms with taxable income below R100m declined by 26%) is indicative of the declining profitability of small and medium firms.

The fact that 1% of taxpaying companies (635 companies in 2015) generate 77% of company taxes is generally interpreted as indicating insufficient competition. Though it is true that SA suffers from high concentration in some sectors, it is contentious to assume this is caused solely by cartel practices by large companies. There are numerous other factors hindering firms from growing: electricity constraints; slow and expensive harbours compared with those of the country’s main trade partners; ineffective crime prevention; black economic empowerment requirements and substantially higher corporate tax rates than those in Mauritius and Botswana, which are registering numerous companies of South African entrepreneurs.

To interpret these figures for the six-year period that the SARS data cover, firms with taxable income of R10m or less diminished at a rate of 31 firms a week.

SARS data prove the Zuma administration did nothing for South African enterprises to grow. On the contrary, it hampered them with its incompetence in combating crime, arbitrarily suspending mining licences, forcing international companies to sell mines to cronies, bailing out South African Airways and playing musical chairs at the Eskom board of directors.

Investors normally look at five key considerations before investing:

Reliable and cost-effective infrastructure (including bandwidth, ports and airports);

Labour force stability and comparable productivity levels;

Ease of enterprise operation and a low corporate tax rate;

Low levels of crime and high levels of societal stability; and

Policy certainty and protection of property rights.

It is evident from comparing the perceptions of South African business in the 2007 and 2018 Global Competitiveness Reports of the World Economic Forum that South African businesses consider exactly these issues as problematic. In 2007 labour skills (18.8%), labour regulations (18.3%), crime (15.4%) and an inefficient bureaucracy (11%) were the factors considered most negative for the business environment.

In the last report, government and policy instability and uncertainty (15.5%), corruption (14.3%), crime (12%) and tax rates and regulations (10.2%) were of utmost concern. Labour regulations registered a low score at 6.3%.

These scores reflect issues considered most detrimental and it should not be read as if SA has eased labour regulations to enhance economic competitiveness. In fact, the labour regulatory environment has not become easier.

By considering therefore the private sector’s concern about labour regulations as a constant, one can develop an index scale to assess the extent to which other problems have changed since 2007. On an index scale, government and policy instability shot up like a rocket. The Mining Charter, empowerment policies and Parliament’s unwillingness to support a chapter 9 institution (the public protector) are contributing factors.

Corruption was just beaten into second place: he Zuma administration, Parliament’s unwillingness to call him to account, effectively giving a thumbs-up to what were then already well-known practices, wastage of public money, not to mention all the shenanigans at state-owned enterprises, provincial and municipal levels.

Crime was third.

Tax rates and regulations: the situation is self-evident. Inefficient bureaucracy: the South African Social Security Agency, cushioning incompetence in Cabinet, state-owned enterprises, municipalities and high costs caused by monopolies like Portnet.

The Zuma legacy ensured several of these essential investor confidence boxes cannot be ticked. Investment ambassadors are sent out without improvement at these vital levels: money is still poured into nonstrategic state-owned enterprises, there is no evidence of an end to enterprise-unfriendly policies and practices. There is a strong commitment by Ramaphosa to fight corruption — but as seen before, the wastage of corruption is small compared with the wastage of poor policies and bureaucratic incompetence.

Considering the government’s latest investment incentive — expropriation without compensation — potential investors may be uncertain about the intentions of the pack of lions, not to mention all the hyenas still roaming free.

Wessels is director of the Enterprise Observatory of SA. This article first appeared on eosa.org.za.

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