Re-regulating business licensing in South Africa

Zapiro Business License 2013
Cartoon by Zapiro, The Times, 30 April 2013

In March and April this year, the South African Department of Trade and Industry (DTI) and its minister, Rob Davies, found themselves in a storm of protest over the attempt to introduce a new law on business licensing – Government Notice 231 of 2013. Critics of the draft bill complained it would add to the burden of red tape that is “already strangling the private sector”.

If promulgated, the bill would require all businesses, no matter their size, to obtain a licence to operate from their local municipality. Failure to produce a licence on demand would be punishable by fines and/or prison terms of up to 10 years.

Mr Davies said the main aim of the bill was to weed out illegal operators. He said existing informal traders and small businesses were subject to increasing competition by illegal traders who sold illicit goods, failed to pay VAT and employed people illegally.

While attempts were made at SA’s borders to control the influx of illegal goods, a lot did creep in. The bill would be a mechanism to deal with this. It was designed on the “easy in-easy out” principle, the minister explained.

If found to be illegal, an operator would be removed from the business register and not be allowed to function. This would address the current situation where illegal businesses which were closed down simply re-emerged under a different guise somewhere else.

SOURCE: Business Day 23 April 2013

Previously, the minister explained the legal initiative as an attempt to reduce the time spent by businesses “going down to municipalities”:

“The most important thing is for municipalities when they register people to put this on a national database so we can see who is trading where. The second thing we want is a negative database. People who have been found to be in transgression will be denied registration. We are looking quite carefully at the graduation of this because I think the current draft is a bit too blunt”.

Business Unity South Africa (BUSA) published its concerns with the bill here, arguing:

Reducing bureaucratic hurdles is one proven short term quick win intervention that could turn this tide but, sadly, introduction of legislation such as this completely misses that point. Business is not advocating illegal business operations and practices but the reality is that besides posing a real threat by increasing bureaucratic red tape and related costs, this bill falls short of proving its necessity over existing pieces of legislation aimed at curbing similar illegal practices and operations. We do not need more layers of legislation resulting in cumbersome compliance requirements; we need better enforcement of current legislation. These onerous compliance requirements slowly squeeze life out of business. They push up the cost of doing business and eat into time and other resources that could be more productively deployed in pursuing core business.

Neren Rau, CEO of the South African Chamber of Commerce and Industry (Sacci) also expressed concerns here. He agreed with the intent of the bill: “Our members across the country have complained regularly to us again about competition from foreign traders who are operating inappropriately, competition from those who are selling counterfeit goods”. However, he said the main problem is enforcement and policing: “The current laws are sound and strong enough — we’re just not effectively policing them”.

He went on to express concern over the many loopholes in the bill:

One of those is the potential for greater levels of corruption. You are giving the enforcement authorities more power through this bill — more power to enter premises, more power to conduct searches and powers in terms of seizure, and that is going to, unfortunately, pave the way for greater levels of corruption, potentially. Secondly, within its mechanisms itself it has to acknowledge the capacity issues at local level as a bill and it does so. And one of the ways in which it does that is by saying that if you, as a business, have applied for a licence and you don’t receive a response within 30 days — yay or nay — then you are to assume that you have that licence. Now you can imagine that when the enforcement officials come around, how are they going to determine whether you legitimately have such a licence? You can, of course, prove that you’ve put an application through but really we should be showing them a legitimate licence, not saying you are deemed to have a licence simply because 30 days have expired. Again, you’re creating a loophole for potential corruption and fraudulent activity.

The Helen Suzman Foundation has outlined a number of concerns with the bill here.

It is interesting to see how governments often turn to a regulatory solution to the problems they face. Since 1994 the new democratic government of South Africa has introduced a wide range of very important laws and regulations designed to stimulate development, reduce exploitation, protect workers, and encourage equal participation in the economy and the society in general. While the effectiveness of these individual initiatives can be debated, the need for re-regulating was clear in 1994. Today, it appears that the pendulum has swung too far.

Ivo Vegter, writing in South Africa’s Daily Maverick, argues that the Business Act of 1991 “removed a raft of Apartheid-era regulation that gave the state stifling control over businesses” and that repealing this act with the proposed bill “would curtail our newly-won freedom and once again increase the level and cost of regulation”.

In 2004, SBP estimated that red tape costs South African business R79-billion – an amount equivalent to 6,5% of the country’s GDP. In 2012, it published this paper on the Current State of legislation in South Africa arguing that the country is over-regulated and under-governed. SPB cite concerns with the quality of drafting, the low levels of implementation and the need for regulatory impact assessments (RIAs).

The minister has returned to his drawing board and it we await the next draft of the bill. Hopefully, the concerns of the business community will have been heard. But more than this, it would be interesting to see if government can better explore the options to addressing the original problem and finding a solution that is in proportion to this problem and one that can be implemented. This might require regulation, but it also might require a more strategic use of information, awareness raising, incentives, physical facilities, and partnerships with the business community and other civil society groups. As the saying goes, if the only tool you have is a hammer, then every problem will look like a nail. Government has more than hammers in its toolkit. It is time it considered them.