REDUCING THE SMALL BUSINESS REGULATORY BURDEN

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• REDUCING THE SMALL BUSINESS REGULATORY BURDEN
• Septi Bukula
• Tri-nations Conference
• Durban, 23-25 August 2006

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Comment by Somali aviation entrepreneur

• In Somalia we have no functioning government and
  no government regulation. Thats good. There is
  no corruption.
• But its also a problem, with new market
  entrants, standards are not regulated
• So you need regulation!

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Why regulation is necessary

• Regulations are essential for a properly
  functioning economy. They shape incentives and
  influence behaviour and interaction among people
  and can help societies deal with difficult
  economic, social and environmental problems.
  OECD, 2003
• Regulations can also create benefits for
  enterprises by establishing an environment that
  fosters healthy competition and reduces
  transaction costs. Baldwin Cave, 1999

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Good regulation is

• Not unduly prescriptive and enables the regulated
  to choose the most cost-effective ways to comply
• Enforceable, with incentives and disciplines at
  the level necessary for reasonable enforcement
• Administered by accountable bodies in a fair and
  consistent manner
• Monitored and periodically reviewed to ensure it
  continues to achieve its aims

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Bad regulation has bad results

• Impedes innovation in the market
• Creates unnecessary barriers to trade and
  investment
• Hampers economic efficiency
• Discourages entrepreneurship
• Can threaten the legitimacy and effectiveness of
  regulation as a tool to achieve policy objectives
• If burdens are seen as unreasonable, compliance
  levels fall and the general level of respect for
  the law could be undermined

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Regulatory madness Kenya example

• Broadway Bakery (Single Business Permit)
• Has depots in many locations throughout the
  country
• Delivers to depots and directly to shopkeepers
• Has to obtain 35 SBPs from 35 municipal and
  county councils
• Varying council license fees per vehicle
• Should there be a need to use another vehicle,
  other than the one licensed as per the SBP, the
  company is charged full annual fee for the
  vehicle for one day

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Higher level impact of bad regulation

• To an increasing extent it is being recognised
• that unnecessary compliance costs for business
• may have adverse effects on economic growth
• and employment (EIM)

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Regulatory costs
Total direct costs
Taxes
Premiums
Financial
Admin. charges
Dues
Fines
Compliance
Substantive
Offsetting benefits
Admin. burdens
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In SA, negative regulatory impact recognised

• Inappropriate and unduly restrictive legislative
  and regulatory conditions are often viewed as
  critical constraints on the access of small
  enterprises into the business sector and as
  obstacles to their growth. Unduly strict
  regulations often harm small and, in particular,
  emergent enterprises and benefit the larger,
  established ones
• (White paper on the promotion and development of
  small business)

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Historically, good intentions

• (NSBA Sec 18) The Minister may publish
  guidelines on
• Procedures for consultation with the dti on
  proposed legislation
• Assessment of the effect and application of
  legislation on SMEs
• Consultation with SME organisations and others
• The review of the effect of existing legislation
  on small business
• The Minister may identify the type of legislation
  that may have an effect on small business and in
  respect of which the consultations may be
  conducted

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Accompanied by various positive efforts

• National small business regulatory review
• Impact assessment of the Basic Conditions of
  Employment Act
• Study on international best practice on
  regulatory impact assessment (RIA)
• SARS cost of tax compliance initiative
• Administrative burdens study
• Red tape to smart tape initiative of PSA
• Presidency efforts??

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Why focus on small business?

• It is an established fact that the burden of
  regulation
• falls more heavily on small businesses, not
  because
• they are more heavily regulated, but because they
  have
• the least capacity to cope (Productivity
  Commission,
• Australia)

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SMEs cry out about red tape!
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How the model works

• In-depth analysis - data transfers between a
  business and the authority are isolated and
  defined
• Time for each data transfer and the level of the
  person performing determined, assuming a
  reasonably efficient performance
• Data computed to produce cost estimates

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Benefits of the model

• Results provide insight on the exact allocation
  of costs
• Therefore assists in formulating strategies to
  reduce compliance costs for enterprises in a
  certain policy area
• May not necessarily imply a change in the content
  of legislation and/or public goals

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SA study on administrative burdens

• Focus on VAT and RSC levies
• Among the top identified by SMEs as causing most
  administrative pain
• Also cited in the National Small Business
  Regulatory Review
• Internationally, there has been a lot of focus on
  VAT (tax legislation in general accounts for
  between 40 and 50 of compliance costs)
• MISTRAL (Standard Cost Model) methodolofy used

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Administrative obligations

• Obligations largely similar for VAT RSC
• Registration
• Record-keeping
• Submission of return
• Communication with authorities
• Inspections
• Notify authorities on change in status
• De-registration

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Results of cost estimates VAT

• Registration R 1 063 per enterprise
• Record-keeping R 3 556 Recurring
• Tax return R 2 471
• Communication R 97
• Inspection R 506
• Notify changes R 83
• Deregistration R 664

R6 027
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Estimate for recurring costs VAT

• 2002 506 098 (registered enterprises) SOURCE
  SARS (2003)
• Approximately 498 500 SMMEs
• Estimated recurring AB R3 billion p/year
• Large part AB caused by outsourcing costs (60
  SMMEs)

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Results of cost estimates RSC

• Registration R161 per enterprise
• Tax return R1 497 Recurring
• Communication R9
• Inspection R562
• Notify changes R63
• Deregistration R103

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Estimated administrative burdens RSC

• 2003 approximately 960 000 (registered SMMEs)
  SOURCE Ntsika (2002)
• Estimated recurring AB R1.4 billion p/year
• RSC AB not heavy but high due to large number of
  enterprises that have to comply

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General measures to ease small business burdens

• Special assistance and guidance to help SMEs meet
  their compliance requirements
• Amendment of administrative requirements to make
  them less stringent for small business
• Ensuring that new and amended regulatory
  requirements are sensitive to small business
  compliance issues right from the start

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Specific recommendations VAT

• Increase reliabibility of internal logistics and
  improve image
• Expand online filing possibilities
• Reduce queuing time at SARS offices
• Bring the frequency of the VAT return down
• Conduct an international benchmark study on
  reduction of VAT induced admininistrative burdens

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Recommendations RSC

• Bring the frequency of the RSC levy down
• Link the RSC levies to other taxations and
  incorporate them within e-filing

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Kenya SBP objectives

• Simplify the local regulatory environment to
  encourage greater economic growth and employment
• Reduce administration and compliance costs
• Generate consistent business related data for
  local level planning, regulatory and service
  delivery purposes
• Enhance local government revenues
• Establish a stronger link between government and
  the business community in order to improve
  government transparency, accountability and
  responsiveness

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Kenya SBP application procedure

• Applicant has to physically visit Local Authority
  offices to purchase the SBP application form
• Relevant officer may be out of office at the time
  of the visit or LA may want to inspect the
  premises before issuing the application form
  requiring the applicant to visit the LA offices
  more than once  
• In completing the form, the applicant has to
  refer to the previous years application and
  records for certain information

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SBP application procedure (cont.)

• Since payment accepted ONLY in cash or bank
  cheque, not company cheque, most companies prefer
  to use bank cheque
• An application, accompanied by a company cheque,
  is lodged with the bank and a bank cheque
  subsequently collected
• SBP application form, together with payment, is
  lodged in person at the offices of the local
  authority

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SBP application procedure (cont.)

• SBP is collected in person. Sometimes collector
  is informed that there is missing information or
  the application form is incorrectly completed
• The collector is then required to return to the
  company to correct the error and resubmit the
  application
• Finally, if everything is in order, the SBP is
  issued and the company representative returns the
  second time to collect it

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Kenya regulatory enforcement

• Bizarre regulatory enforcement regime bordering
  on criminal behaviour and abundance of corrupt
  practices!

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SBP burden estimate

• Taking into account
• Application procedure
• Traffic delays
• Number of enterprises
• Single license (not multiple SBP)
• KSH 4,4 billion annually

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• THE END