The recent Quarterly Labour Force Survey by Statistics SA reports that over the past decade there has been a staggering 76% decline in the number of new businesses being registered, from 250 000 in 2001 to only 58 000 in 2011. However, as journalist Teigue Paine notes in a recent article, this is in all likelihood as much in response to increasingly onerous tax and labour laws in SA, as to the recession or any other global economic conditions.
Paine quotes Adcorp’s labour economist Loane Sharp as saying that indications are that many small businesses and start ups have simply been forced ‘underground’ in response to deteriorating conditions for starting a small business. In a nutshell, Sharp argues that the figures we are seeing are not a true reflection of entrepreneurial activity, but rather of an ‘informalisation’ of the SA economy in a bid to escape heavy tax and employment burdens placed by Government on the SMME sector, and business as a whole.
This is worrying on a number of levels, because it suggests that the intentions of Government to create an enabling climate for small business are in fact doing the opposite. If small business is squeezed too tight by excessive Government regulation, trade union domination of the labour market and a business climate that stacks the odds against start-up success, one of two things happen – either the business simply cannot survive, so it closes (or fails to start), or it goes underground.
The much-vaunted potential of the SMME sector to create meaningful jobs and contribute to the economy is largely negated if entrepreneurs feel forced to operate ‘below the radar’ as a means of survival. An unregistered business does not contribute to the tax pool, nor will it provide its employees with job security, contracts, PAYE, UIF and other benefits as laid out in the Basic Conditions of Employment Act.
Fortunately though, not all is doom and gloom. Many organisations and individuals engaged ‘in the trenches’ in enterprise development and support to emerging entrepreneurs report increasingly positive signs of a renaissance in entrepreneurial activity, in contrast to the bleak reports. While the numbers may be down on paper, they say, the quality and innovativeness of the emerging business sector is cause for optimism.
“This year was by far the most promising since 2007 in terms of the quality and viability of the organisations who applied to be a part of our programme, we were blown away by the potential,” says Catherine Wijnberg, founder of the Legends programme, a national SMME and non-profit business incubator sponsored by Old Mutual. Each year, Legends puts out a nationwide call to small businesses to apply to join the programme, which offers mentorship, business support, workshops, e-learning and other resources to support the growth of beneficiaries. “We had an inspiring pool of applicants this year, across a host of business sectors. A common theme was that people in all Provinces were determined to succeed, in spite of the difficult economic climate and restrictive legislation a new business is faced with in South Africa,” she adds.
Wijnberg cites the example of Legends beneficiary Molefinyana Seqhala, Founder of Seqhala Open Projects. This fast-growing electrical consulting and construction firm was started by Seqhala, a qualified electrician who identified a gap in the market for a multi-service provider of electrical, building, maintenance and security services, in response to what he saw as domination of the market by one or two established players. In the past four years, Seqhala has grown a promising business – he has purchased several work vehicles, increased his turnover by over 800% and currently employs 15 people, with plans in place for expansion into manufacturing of building and related materials. A little over five years ago, Seqhala was an employee working for one of his competitors.
Informal but Influential
Donald Kau, Head of Corporate Affairs at Santam, concurs with Wijnberg on the upsurge in entrepreneurship. “I have many peers who started out really small who are now well established entrepreneurs. Typically, they open an informal part-time business like a car wash or a hair salon, and the business expands organically over time to include complementary offerings such as a take-away or a spaza shop. Once they are properly established, which may take several years, many of them do indeed register their businesses – either because their suppliers or investors require them to do so, or because there may be licences and permits required to operate, such as with a tavern.”
These examples suggest that the informal or unregulated economy serves a purpose as an ‘incubator’ of potential, preparing businesses for the mainstream economy. Rather than being seen in a negative light there may be an opportunity for government and the informal sector to work together to create an acceleration of entrepreneurship from grassroots level upwards.
Some measures might include tax exemption for start-ups for a set period, tax incentives and rewards for registering employees for PAYE and UIF, easier access to loan finance and so on. The point is that informal businesses are an increasingly large part of the economy and many of them are thriving, with tremendous potential to become meaningful employers and contributors to the mainstream. One simply has to walk through a main road in Soweto, Khayelitsha or Diepsloot and see the plethora of grassroots enterprises on virtually every corner to recognise that entrepreneurship is not dead or dying in any way. Imagine how different the figures would look if every one of these businesses were registered?
Toby Chance, MD of Adele Lucas Promotions, has also noticed an increase in the calibre of entrepreneurship over the past few years. His company are the organisers of the Soweto Festival Expo, in which over 400 SMME’s participated last year. “2011 was the best Expo to date, and feedback was excellent. Some SMME’s have exhibited at every single event and their growth is clear, such as Molobi Enterprises who won the Radio 702 Small Business Competition, and Nqobile Nkosi, who has opened Soweto’s first jewellery manufacturing and retail shop in Vilakazi Street.”
While it would be foolhardy to ignore the statistics that point to an entrepreneurial sector in crisis, it is important to recognise that all is not doom and gloom, in fact it’s better than many think. There are new businesses being started by passionate, capable and determined entrepreneurs every day in SA, and while many of them will fly under the radar for some years, by necessity as much as by choice, hopefully the legislative and regulatory climate will shift sufficiently for them to emerge and take their rightful place as contributors to a country crying out for sustainable job creation through entrepreneurship.
How Economic Crime Is Impacting Business In South Africa
77% of SA organisations have experienced economic crime and CEO’s and boards are increasingly being held accountable for economic crime.
South African organisations continue to report the highest instances of economic crime in the world with economic crime reaching its highest level over the past decade, according to PwC’s biennial Global Economic Crime Survey.
South African organisations that have experienced economic crime is now at a staggering 77%, followed in second place by Kenya (75%), and thirdly France (71%). With half of the top ten countries who reported economic crime coming from Africa, the situation at home is more than dire.
The Global Economic Crime and Fraud Survey examines over 7200 respondents from 123 countries, of which 282 were from South Africa.
The rise of economic crime
Trevor White PwC Partner, Forensic Services and South Africa Survey Leader, says: “ Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77% South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%. However, this year saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016.”
Related: PwC Focus On Sugar Tax
Economic crime in South Africa is now at the highest level over the past decade. It is also alarming to note that 6% of executives in South Africa (Africa 5% and Global 7%) simply did not know whether their respective organisations were being affected by economic crime or not.
While the overall rate of economic crime reported was indeed the highest for South Africa, the period-on-period rate of increase for South Africa and Africa as a whole was below that of our American, Asian and European counterparts.
Global indicators of a rise in economic crime
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25% increase since 2016 to 53% in respondents who indicated they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and 14%, respectively.
Asset misappropriation continues to remain the most prevalent form of economic crime reported by 45% of respondents globally and 49% of South African respondents. While the instances of reported cybercrime showed a small decrease in the South African context (29% in 2018 versus 32% in 2016), it retained its second place in the global rankings (31%) albeit at a lower rate of occurrence than 2016.
One of the new categories of economic crimes was that of “fraud committed by the consumer”.
It is the second most reported crime in South Africa at 42% and takes third place globally at 29%. This was followed closely by procurement fraud (39% in South Africa versus 22% globally). This indicates that the entire supply chain in SouthAfrica is fraught with criminality.
Related: PwC: Pria Chetty
When combined with the high instances of bribery and corruption reported (affecting more than a third of organisations at 34%), the resultant erosion in value from the country’s gross domestic product (GDP) is startling. Accounting fraud, which is usually perpetrated by senior management and results in the largest losses, increased from 20% to 22%.
Accountability of the board
Accountability for fraud and economic crime has moved into the executive suite, with the C-Suite increasingly taking responsibility, and the fall, when economic crime and fraud occur.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95%).
85% of South African respondents indicated their organization had a formal business ethics and compliance programme in place.
In addition, 20% of local respondents indicated that the CEO (who is part of the first line of defence) has primary responsibility for the organisation’s ethics and compliance programmes, and is therefore more instrumental to the detection of fraud and the response to it.
PwC Focus On Sugar Tax
The proposed sugar levy is unlikely to make sizeable dent in fiscal deficit, but the Sugar Beverage Industry is offering a helping hand to reduce obesity.
In 2016, the National Treasury announced a Sugar Beverage Levy (SBL) on sugar-sweetened beverages (SSBs) scheduled to take effect April 2018. The aim of the levy was to prevent and control obesity in South Africa, but key industry players also viewed it as a potentially significant new source of revenue that could help plug the growing fiscal deficit.
The fiscal deficit has been widening as National Treasury faces slow economic growth and a shrinking tax base. Initially estimated at 3.1% of GDP, fiscal deficit projections increased to 4.3% of GDP in October last year.[i]
However, official data suggests the deficit already reached R195 billion in the first 8 months of the 2018/19 fiscal year, so it could amount to approximately R250 billion, thereby exceeding Finance Minister Gigaba’s October projections by 25%.
The levy has undergone various changes since it was first announced.
When the levy takes effect in April this year, it will amount to 2.1 cents per gram of sugar per 100ml, above 4 grams per 100ml.
This is down from an initial 2.29 cents per gram of sugar with no exempted amount.[ii]
Our estimations suggest the tax burden is approximately 10% given current levels of sugar content, down from approximately 20% previously. In addition, industry has recently reacted to the news of the SBL, reducing the sugar content of popular beverages by including non-nutritive sweeteners.
In addition to efforts to reformulate, the industry introduced smaller bottle sizes to curb excessive sugar consumption and limit the excise tax burden.
SBL excise revenue estimations
We estimated that in a scenario in which the beverages industry makes no change to the sugar content of SSBs, the levy would result in an estimated R1.5 billion loss in sales revenue and a R 1.4 billion excise revenue gain for government.
However, a reformulation by industry would result in a lower loss in sales revenues of only R1.07bn and lower than expected excise revenue gain for government of R990mn.
Given the estimated fiscal budget deficit of up to R250bn, additional revenues of between R990mn and R1.4bn are unlikely to make a significant dent in plugging the deficit and could support the assertion that the levy will focus on curbing sugar consumption rather than providing significant additional revenue inflows.
In our quantitative analysis of the proposed tax on SSBs, we use the PwC Economic Impact Assessment Model to derive the potential impacts, based on a 10% sales reduction calculation due to potential excise driven price changes.
Although excise revenues are expected to increase, other tax revenue streams are likely to experience a decline. Not considering excise impacts, the prospective tax revenue loss stemming from reduced sales revenues and showing in lower VAT, corporate income tax (CIT) and personal income tax (PIT) could range between R363 million and R518 million in the reformulation and non-reformulation scenarios, respectively.
Therefore, the net impact on estimated tax revenue combining the implications for excise tax, VAT, CIT and PIT revenue would only range between R631 million and R856 million, subject to which scenario is implemented.
It is unclear whether the SBL levy will assist in reducing consumers’ sugar consumption. However, industry facilitates lower sugar consumption by reducing bottle sizes and through reformulation.
Smaller sizes nudge consumers to lower sugar consumption
In addition to reformulating popular SSBs, the beverages industry has altered the size of the 500ml buddy bottle to 440ml, potentially nudging consumers to reducing their sugar consumption.
The move to the 440ml bottle represents a 12%[iii] reduction in size and means that sugar content fell from 53 grams in the 500ml bottle to 46.6 grams in the 440ml bottle.
The implementation of the new levy could still result in an approximately 61 cent increase in the price of the 440ml bottle.
It remains to be seen how South Africans will react to the current and impending price change of SSBs and if the SBL can indeed assist in reducing obesity. It is clear that monitoring and evaluation are key tools to help government and industry understand the effectiveness of this initiative to prevent and control obesity in South Africa.
- [i] Treasury, 2017. Medium Term Budget Policy Statement. [Online] Available: http://www.treasury.gov.za/documents/mtbps/2017/speech/speech.pdf [Accessed 08 February 2018]
- [ii] SARS, 2017. SARS to collect for sugar tax (SBL) from 1 April 2018. [Online] Available: http://www.sars.gov.za/Media/MediaReleases/Pages/15-December-2017—SARS-to-collect-for-sugar-tax-from-1-April-2018-.aspx [Accessed on 06 February 2018]
- [iii] PwC calculations
What It Will Really Take For South Africa’s Businesses To Scale And Create Jobs
It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
Much has been said about the potential of SMEs to drive job creation and economic growth for South Africa. Our unemployment rate is at 26.7% – an astonishing figure that speaks volumes about the dire need for job creation. On the back of this, we are seeing increasing amounts of money being channeled into incubators and the funding of startup companies.
Although important, the starting of new businesses, unless they are completely innovative, well-timed and highly scalable, will not provide us with much-needed quick wins on our path to job creation and economic growth. It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
The state of established businesses in South Africa
Established businesses that already employ 10-20 people have a working product, willing buyers and a proven business model and with some modifications, increased guidance and adequate management, they have the potential to increase their number of employees significantly as they scale up. However, a 2016/2017 report by the Global Entrepreneurship Monitor (GEM) in partnership with the University of Cape Town found that the rate of established businesses in South Africa has declined by an incredible 26% since 2015.
In fact, South Africa had one of the lowest established business rates of all the economies that participated in the GEM 2016 study (ranked 61st out of 65 economies). This, the report says, “paints a bleak picture of the SMME sector’s potential to contribute meaningfully to job creation, economic growth and more equal income distribution.” While we should not neglect the starting of new businesses, scaling up established businesses will provide young people with much needed experience to ensure that when they eventually start their own businesses, they may have greater chances of success.
How to increase the proportion of established businesses that scale up
Have a clear vision for your business
When we as business coaches work with established businesses that are scaling up, we make sure to start with the founder as their attitudes and desires determine how far the business will go. Scaling up an established business begins with a clear vision. Often, we find that the businesses owners don’t have a clear vision of where they want to take their business, and without a vision, it’s very difficult to scale.
Determine why your business exists
Linked to a clear vision, business owners need to have a strong purpose that answers the question of why they want to scale. Some business owners often see their business as a vehicle that provides them with an income, rather than the business serving a bigger purpose to impact an industry or the broader society. As a result, they often stop short of developing the full potential of their businesses.
Be willing to learn and seek help where needed
Business owners also need to have a willingness to learn. Being entrepreneurs, they often have a definitive view of the world and how it should work, which drives them to create something that they believe needs to exist (a new business venture). A risk to these strongly held views and high levels of confidence is that entrepreneurs potentially won’t open themselves up to new ideas, or to being challenged that some of their beliefs and views may, in fact, be holding their businesses back.
Business owners need to realise that they may not have all the skills to scale their business. I’ve found that entrepreneurs tend to be strong in customer service, innovation and sales, and are often weaker in people management and attention to detail – skills that become a lot more critical at the point of scaling the business.
Other areas of importance in scaling up
There are other critical areas that businesses need to address in scaling up but dealing with the founder is most critical. Strategy is one, cash flow is another, as is the question of hiring/finding and developing key talent. I will be unpacking these and more at the upcoming Business Day TV SME Summit on 8 March; and with increasing efforts by government to address the unemployment crises through platforms like the Jobs Summit announced in the State of the Nation Address, we hope that more conversations are had around harnessing the job creation power of established businesses that manage to scale up quickly and sustainably.
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