PATIENCE PANASHE: The plight of SA’s over-regulated small business sector

Before Covid-19  small, medium and micro enterprises (SMMEs) constituted by far the majority of businesses in SA, accounting for up to 70% of the country’s employment. However, the Covid-19 pandemic revealed in great clarity the structural limitations faced by small and medium enterprises (SMEs) in creating  growth and employment. 

Like other sectors, the SME sector was adversely affected by the pandemic, experiencing a decline of 11% in the number of businesses (from 2.65-million in Q3 2019 to 2.36-million in Q3 2020).  Other challenges affecting the sector included electricity supply constraints, which continue to intensify, and the sociopolitical environment, which remains strained.

Despite the rise in liquidations and distressing turnover numbers due to the pandemic and the lockdown measures applied to contain it, one thing for certain is that SMEs remain a key component to achieving inclusive economic growth. And yet instead of government creating an environment conducive for SMEs to operate as the engine room of our economy they are still assigned an inferior rank in the business hierarchy. For instance, SMEs continue to suffer at the hand of policies and regulations made for big businesses with large compliance departments. And though much ink has been spilled writing about an enabling environment, there has been insufficient understanding of what this should look like. The over-regulation of small businesses remains one of the biggest challenges faced by SA’s entrepreneurs.

Regulatory environment

Excessive red tape with regard to labour laws, human and industrial relations, tax and tax-related issues, municipal regulations and compliance checklists were identified as the primary inhibitors of small business growth. One such example is the recently introduced Companies and Intellectual Property Commission (CIPC) compliance checklist, which consists of 24 items small businesses are required to satisfy. As a result, smaller businesses usually face a higher cost of adhering to regulations such as those proposed by the compliance checklist. If anything, this type of over-regulation will only deter entrepreneurs from contributing to the resuscitation and subsequent growth of the economy. To improve rates of SME performance, government must review such restrictive regulations to include clauses tailored for small businesses, ranging from taxation to compliance issues.

Access to funding

Access to funding is also a problem for the majority of entrepreneurs in SA. This lack of funding hinges on the tension between what the entrepreneur can offer and what funders require. Between 2000 and 2020 government introduced many programmes to promote entrepreneurial development, including making funding available to sector-specific departments, introducing common templates for funding applications across development finance institutions, and introducing the Small Business Innovation Fund, which uses a blended finance model to lower financial costs for entrepreneurs through loans and grants.

It is important to note that government funding initiatives also fall under the policy constraints experienced by small businesses as they have to comply with and satisfy certain requirements to qualify. Unfortunately, the success of these programmes has been very low, and this has been corroborated by the expert ratings by the National Entrepreneurship Context Index. Over the last five years SA ranked between 87 and 129 out of 190, suggesting a very low success rate in terms of capacitating small businesses beyond bureaucratic red tape.

Policy shift

According to the Global Entrepreneurship Monitor SA, there is a clear need to define and reflect on the current entrepreneurial landscape. Government should identify and examine the policies that are most likely to affect an entrepreneur’s decision to start or continue running a business. For instance, tax subsidies and credits are more beneficial to businesses with an annual turnover of between R10m and R50m through a full rebate. Yet the subsidies were introduced to benefit small businesses, and there has been low uptake since most small businesses’ turnover is less than R10m a year.

Though it is not the responsibility of governments to start businesses or create employment, it is its responsibility to create a policy environment that supports entrepreneurial activity, success and sustainability. Therefore, there needs to be better alignment of government policies with programmes if the probability of policy positively affecting entrepreneurial activity is to be heightened. While government should be the leading stakeholder by setting new policy directions for supporting entrepreneurial activity, all stakeholders, including the private sector, industry associations and trade unions, should be involved in the development of a suitable framework.

A dynamic small business sector can make an important contribution to an economy, not only in terms of employment creation but also in reducing the concentration in SA’s generally oligopolistic industrial structure. For this to occur small businesses need to be integrated into the mainstream. This is going to require a concerted effort from government, the formal private sector and other stakeholders to develop a framework that is not only suitable but fosters small business growth and continuity. 

The more small businesses are involved in economic activity the higher SA’s chances of resuscitating the economy to what it once was, and hopefully better. A thriving small business sector equals a thriving SA. 

Panashe is an associate at research & strategy firm Birguid.