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Improving the Ease of Doing Business in SA will boost confidence and growth

In his State of the Nation address on 7 February 2019, President Cyril Ramaphosa highlighted the importance of improving the ease of doing business in SA to lift business confidence and encourage a pick-up in fixed investment activity.

In particular, the World Bank’s annual Doing Business Report currently ranks SA 82nd out of 190 countries. The president has set the country a target of being ranked among the top 50 global performers within the next three years.

While this appears an ambitious target, as recently as 2014 SA was ranked 43rd in the world and it was ranked 32nd in 2009.

The World Bank’s Ease of Doing Business survey does not contain separate measurements for every facet of the business environment including, for example, the flexibility of the labour market, availability of appropriate skills, impact of minimum wages, competitiveness within each business sector, cost of capital, level of taxation, and the availability of critical business infrastructure. Instead, the survey concentrates on evaluating the level of regulation the business sector experiences on a daily basis. There is no doubt that excess regulation stifles business development and competitiveness, providing the opportunity for increased corruption.

A number of factors have contributed to the deterioration in SA’s ranking in the Ease of Doing Business survey in recent years.

Firstly, there was deterioration in almost every component of SA’s measurement of the Ease of Doing Business. The areas of significant deterioration include the ease of starting a business (SA’s global ranking has dropped from 61st in 2014 to a shocking 134th in 2018), the ease of undertaking cross-border business (SA’s global ranking has dropped from a worrying 100th in 2014 to a desperate 143rd in 2018) and the ease of enforcing a contract (SA’s global ranking has plummeted from 46th in 2014 to 115th in 2018).

Secondly, many countries have recognized that encouraging their private sector fixed investment is critical to achieving higher economic growth and that making it easier for companies to do business results in higher business confidence, additional fixed investment spending and increased job creation. This means that part of the reason for the deterioration in SA’s ranking in the Ease of Doing Business survey is that other countries have made significantly more progress in encouraging their business sector in recent years. A good example is Rwanda, which is now ranked an impressive 29th out of 190 countries in the Ease of Doing Business global survey. Around the world the “ease of starting a business” continues to be the most popular area of regulatory reform.

Finding the balance between widespread and thoughtless deregulation, while at the same time ensuring that the business community maintains appropriate standards that safeguard the consumer and the environment, has been a key challenge for most regulators. In answering this challenge, many countries have focused on reducing the amount of time it takes for business to meet regulatory requirements rather than eliminating important regulations. This has, to a large extent, been done through the introduction of technology as well as skills development, but also by ensuring that the regulations are easy to follow and understand.

Unfortunately, SA has moved in the opposite direction. For example, in 2014 it took an average of 19 days to start a business, involving five separate procedures. Today it takes an average of 40 days and requires seven procedures. By comparison, in New Zealand (which is ranked 1st in the world for the ease of starting a business) it takes an average of half a day to start a business, requiring only one procedure to be completed.

Another example is the ease of dealing with construction permits. In 2014 it took an average of 48 days for a construction permit to be approved in SA and involved completing 16 procedures. Today it takes an average of 155 days, requiring 20 procedures to be completed. By comparison, the top-performing countries require five procedures to obtain a construction permit and it takes 26 days to be completed.

Based on the above examples, as well as other data, it seems fair to conclude that the development of new business as well as the advancement of small- and medium-sized business have not been key priorities within government.

Fortunately, lifting SA’s Ease of Doing Business ranking into the top 50 globally within the next three years is clearly very achievable, partly because the president has detailed this priority and partly because SA was able to achieve this ranking on a regular basis just five years ago.

The data suggests that improving SA’s ranking, under current circumstances, is probably best achieved by trying to reduce the number of procedures required to meet the various regulatory requirements (eliminating just one procedure would have a positive impact on SA’s global ranking), but mostly by dramatically reducing the amount of time required to complete each procedure. In simple terms, there needs to be a dramatic improvement in the productivity of SA’s business regulation.

Lastly, in the 2019 Ease of Doing Business report the World Bank highlighted that “an economy cannot thrive without a healthy private sector. When local businesses flourish, they create jobs and generate income that can be spent and invested domestically. Any rational government that cares about the economic wellbeing and advancement of its constituency pays special attention to laws and regulations affecting local small- and medium-sized enterprises (SMEs)”.

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