Cheap, but time consuming to start a South African business, benchmark study finds

12th June 2015

By: Terence Creamer

Creamer Media Editor

  

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A new report benchmarking the regulatory environment faced by small businesses operating in nine South Africa cities shows that entrepreneurs face quite distinct regulatory burdens depending on the location of their firms. Overall, however, the study found that, while it is relatively inexpensive to start a business in South Africa, it is also time consuming when compared with the performance of 189 other economies.

Titled ‘Doing Business in South Africa 2015’, the inaugural sub-national report, which will be followed up again in 2018, was compiled by the World Bank Group, in collaboration with the National Treasury, the Department of Trade and Industry and the South African Cities Network, with funding support from Switzerland’s State Secretariat for Economic Affairs.

Based on a qualitative and quantitative methodology that assesses the hurdles faced by entrepreneurs in starting a business, dealing with construction permits, getting electricity, registering property, enforcing contracts and trading across borders, it compares the business regulatory environment for companies operating in Buffalo City, Cape Town, Ekurhuleni, eThekwini, Johannesburg, Mangaung, Msunduzi, Nelson Mandela Bay and Tshwane.

It also benchmarks the performance of the ports of Cape Town, Durban, Ngqura, and Port Elizabeth against the performance of harbours in other economies.

Speaking at the launch in Midrand, coauthors Mierta Capaul and Trimore Mici said that the study – complied through an analysis of laws and regulatory processes presided over primarily by local authorities, as well as surveys of public and private practitioners in the various areas covered – found that no city performed equally well or poorly across the areas analysed. There was also no direct relationship between the size of a city and its efficiency in supporting the creation and operation of businesses.

For instance, while Johannesburg and Cape Town performed strongly in the areas of property registration and construction permits respectively, Mangaung, in the Free State, came out tops on indicators for getting electricity and enforcing contracts.

The three Gauteng metropolitan cities of Ekurhuleni, Johannesburg and Tshwane also led in indicators relating to starting a business, but the study found that this could be largely attributable to their relative proximity to the Compensation Fund, which was held up as a major bottleneck.

KEY BOTTLENECKS

In fact, the study found that 70% of the total time it took to establish a business in South Africa was taken up by registering the company with the Compensation Fund, a Department of Labour agency.

Glitches and bottlenecks with the online registration system operated by the Companies and Intellectual Property Commission (CIPC), which has received much media attention in recent year, were also identified as a problem. But the authors indicated that performance of the online platform had improved and was becoming more user-friendly.

Overall, the report found that it was relatively cheap, but time consuming, to start a business in South Africa, with the process involving six procedures, 46 days and 0.3% of income per capita in the three best performing cities of Ekurhuleni, Johannesburg and Tshwane.

The time taken in the other six cities was over 55 days, which compared unfavourably with the global benchmark of New Zealand, where it took a single day, and also with the Organisation for Economic Cooperation and Development- (OECD-) country norm of less than ten days. However, on the cost of starting a business, South Africa ranked with leading performers such as New Zealand, the UK, Australia and Chile.

Besides the immediate recommendation of improving the efficiency of Compensation Fund registration, the authors argued that, over the medium-term, South Africa should create of an online one-stop-shop for company registration.

“Today, entrepreneurs must interface with four different government agencies when starting a business,” the reports states, noting that besides the CIPC and the Compensation Fund authorisations were also required from the Unemployment Insurance Fund and the South African Revenue Service.

“Integrating different services with a single identity number under one single interface would not only save time and resources, but it would also make procedural requirements more transparent.”

The study makes similarly far-reaching recommendations across the other five areas analysed, including: making construction permitting more transparent; streamlining electrical-connection approval processes; adopting an electronic issuance of rates certificates nationwide to improve property registration, introducing electronic filing and tracking of commercial cases instituted to enforce contracts; and reducing documentation to facilitate imports and exports.

ENGINES OF GROWTH

In receiving the report, Deputy Finance Minister Mcebisi Jonas said government was committed to improving the business climate and he was encouraged that the report highlighted areas of good practices that should be expanded across cities.

“We recognise that the cities are the engines of the South African economy,” Jonas added, highlighting that, between 1996 and 2012, the country’s eight metros accounted for 53% of all additional value-added achieved.

City governments, he added, needed to properly understand how to use the levers available to them to promote local economic activity, which, in cities, was underpinned by the investment decisions made by private firms and households.

“These levers are effective local service delivery, fast and effective spatial planning, land-use management and building controls, and responsiveness to the needs of local business,” Jonas elaborated.

The report said the national business climate could be improved simply by replicating these good practices through peer-to-peer sharing.

“Local reforms could not only improve the business environment of one location as compared to another within South Africa, but also make a significant difference on the global scale.

“If a South African city was to adopt the good practices found across the nine cities in dealing with construction permits, getting electricity and enforcing contracts, it would surpass the average performance of the OECD high-income economies in all three areas,” the authors concluded.

Edited by Creamer Media Reporter

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