Organised business and the South African government agree that it is necessary to create an enabling environment that spurs economic growth and job creation. The rewards of an improved regulatory environment are large. A 2002 study of 10 developing countries, including South Africa, by SBP and Bannock Consulting concluded that an appropriate regulatory environment was the single most important element in an economic growth strategy. A 2004 World Bank study has found that many developing countries could improve their annual growth rates by as much as 1,4% if they created a world-class regulatory environment for business. Though South Africa has a better regulatory system than many developing countries, improving the regulatory environment could have a significant impact on economic prospects.

The report is based on a survey of the costs of regulation to the South African private sector. Between February and June 2004, a total of 1 794 businesses throughout the country were interviewed in depth. Respondents ranged from corporations on the top-200 list to enterprises in the informal sector. The survey covered all the sectors of the economy, including manufacturing, mining, construction, trade, agri-business and services. Regulations are vital to the fair and sustainable working of market economies, but even the most socially necessary regulations create costs as well as benefits, and some of these costs may be unnecessarily high. It is important to distinguish between a regulation and the costs created by complying with it. For example, health and safety regulations are unarguably essential. This does not mean, however, that we should accept the current level of associated regulatory costs as fixed. It may well be possible to reduce the costs of complying with regulations without reducing their benefits.

Reducing regulatory costs can be very beneficial: studies by the World Bank, covering 145 countries, have demonstrated that countries with higher regulatory costs have larger informal sectors, more unemployment and slower growth. SBP's survey looked in detail at two kinds of regulatory costs faced by the private sector: efficiency costs and compliance costs.\

Efficiency costs
Efficiency costs arise because regulation may distort market outcomes. If employment is discouraged by inappropriate labour market regulation, for example, then the costs of the resulting unemployment in terms of lost output and incomes is an efficiency cost. Other examples of efficiency costs of regulation would be a business's decision to restrict output to keep sales below the value added tax (VAT) threshold, or an inability to compete in an export market because the costs of complying with regulations have made a product too expensive.

Compliance costs
Compliance costs are pure red-tape costs: that is, they are the incremental costs incurred by business in the course of complying with regulations. They include the value of time spent by business managers and staff on understanding the rules and applying them; interacting with the authorities to clarify matters arising; and the payments made for the expertise of professional advisers such as consultants, lawyers and accountants. For example, the costs of tax paperwork are compliance costs, while the tax payments themselves are not. Capital costs of compliance, such as those for effluent or smokestack equipment, were excluded. What makes the study valuable is that it provides hard data on compliance costs. For the first time in South Africa we have quantitative information on how much red tape actually costs businesses. We also have a much clearer picture of the precise incidence of regulatory compliance costs. It is important to note that the study has not attempted to measure the benefits of regulation. The estimates of compliance costs are the gross of the benefits accruing to individual firms or to society in general. Clearly, the benefits of regulation are often substantial, but these are usually far better understood than their costs. It is, therefore, appropriate to focus research effort, at least in the first instance, on regulatory costs. It is clear from the results that regulation creates significant efficiency costs in the South African economy. There is strong evidence, echoed by many other studies, to show that features of the regulatory environment discourage business growth and job creation in the formal economy. The research has also shown that, even though regulations may not be enforced in the informal sector, the regulatory environment acts as a barrier to development by keeping a large, energetic and entrepreneurial group of black South Africans out of the formal economy. From the perspective of informal operators, the regulatory environment is a cliff. They stand at base, aware of the advantages of reaching the higher ground, but equally aware that the cliff is too steep to climb.

The survey has shown that regulatory compliance costs are substantial and it has specified, with some precision, what these costs are to South Africa. Based on the average recurring compliance cost per firm of R105174, and SBP's conservative estimate of 750 000 as the number of firms affected, the estimated aggregate recurring compliance costs for the formal sector amounted to R78,9-billion in 2004 — an amount equivalent to 6,52% of the gross domestic product. These costs represent real resources, which have alternative uses. Businesses could employ the resources used in complying with regulation for innovation and expansion, or improving their local and international competitiveness.

The government could use some of the cost savings (and some of the income generated by the private sector in the rounds of spending and production stimulated by these savings) to improve public services or to reduce taxation. Moreover, countries that reduce their regulatory compliance costs increase their attractiveness to foreign direct investment.

The SBP project is funded by the United Kingdom Department/or International Development via the Business Linkages Challenge Fund, the ComMark Trust, and the Friedrich Naumann Stiftung

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Johannesburg - Policy makers must move quickly to cut red tape for small businesses if the country's unemployment crisis was to be resolved, the Small Business Project (SBP) said yesterday. The SBP released a study that showed local firms incurred costs of R79 billion last year as they tried to comply with the proliferation of new regulations. The survey, which covered about 1800 large, small and medium enterprises, showed that the automotive, clothing and textile, pharmaceutical, and tourism industries faced more regulatory costs than any other sectors. The labour-intensive tourism sector was said to be the most heavily burdened, because its influence extended to other industries such as transport, hotels, catering and beverages.

"Tourism is one of the most important sectors for growth and job creation, and we think that a high priority should be placed on finding out why tourism companies are being disadvantaged in this way," said Chris Darroll, the executive director of the SBP. Tourism contributes about 9 percent to gross domestic product and, indirectly, provides more than 1.1 million jobs. Most businesses reported that they spent time complying with VAT and other tax regulations, labour laws and the requirements associated with the sector education and training authorities. While excessive regulation affected all businesses negatively, small firms were the hardest hit, with labour and employment equity regulations cited as the most damaging compared with tax laws. "Our report makes it very clear that smaller firms face unfairly high costs from red tape," said Darroll. "In a country with South Africa's crisis of unemployment, we really need to be making it easier for small firms to grow and take on more workers".

Some of the key findings were:

Lionel October, the deputy director-general at the department of trade and industry, said the government viewed the improvement in South Africa's regulatory system as a priority and it had established a small business regulatory task team as a result. The task team, which comprises officials from the presidency, the department and the national treasury, is located at the office of the president and its main objective is to review the effect of the current legislation on micro firms. The department "has come up with a proposal for the establishment of a regulatory impact assessment unit to look at the impact of future regulations on businesses before they are signed into law by the president. This unit is based on the models that the UK and Holland adopted," said October. Significant strides had been taken in making life easier for small enterprises in the areas of company registration and tax regulations."In other parts of Europe, for instance in Italy, it takes four months to register a company; in South Africa it takes 14 days. But we are looking to reducing that to seven days," said October.

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Hi-lite Magazine, January 2005
Cutting the cost of red tape!
Compiled by Mike Hendrikse

A new report released by the Small Business Project (SBP) highlights the cost of regulatory compliance (red tape) in South Africa. The study concludes that R79 billion rand was spent by businesses in order to be compliant with government red tape in 2004 which translates to about 6.5% of GDP. SBP claims that this is the largest study of its kind anywhere in the world. SBP claims that the regulatory environment is the single most important element in an economic growth strategy and they hope that their study will provide insight for the authorities to create a friendlier business environment. SBP quote a 2004 World Bank study which says that many developing countries could improve their annual growth rates by at least 1,4% if they created world class regulatory environments.

The report highlights the onerous red tape that business has to comply with. They say that for a general start up business, there are nine registration requirements at five different offices. There are 9 Acts to comply with in terms of people and workplace procedures, 8 different forms of taxation, and at least fourteen other miscellaneous charges or bits of legislation one has to comply with. There is no standardisation between levies and taxes and each business is issued with numerous different registration numbers by the Receiver of Revenue to control various taxes. The SBP advocates one revenue number to deal with and standardised databases as this will not only give better control to the receiver but will minimize the opportunities for corruption within state departments.

As part of the study respondents were asked to estimate the recurring annual administrative, manpower, supervisory, and professional costs of regulatory compliance for the range of state regulations and the mean cost was determined at R105 174.00 per annum. This obviously provides a barrier to SMME development. Twenty six percent of this cost or about R27 000 per year was the cost of tax compliance alone.

The survey also looked at the informal sector where the study found that 57% of respondents would prefer to run their own business rather than have a job. By definition this sector is largely excluded from the regulatory framework but the study found that this sector was subject to harassment and some forced to pay bribes to stay in business. This sector obviously weighs up the costs of non compliance versus the benefits of compliance. This sector remains a source of entrepreneurial energy that could be harnessed to drive the economy and create jobs and compliance would free these entrepreneurs to access finance and markets. A less onerous compliance framework may entice some of these entrepreneurs to legitimise their businesses.

The full report can be accessed at www.sbp.org.za
SBP is an independent private sector development and research organisation, promoting strategic partnerships and a better regulatory environment for business growth in Africa. Their work combines research, advocacy, and practical business development programmes with interlinked objectives: promoting a policy, regulatory and operating environment conducive to private sector growth. SBP is a registered section 21 Company which has received funding from amongst others GTZ, Department of Industrial Development (UK) and the Ford Foundation.

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