Regulatory compliance, or “red tape”, will cost South Africa (SA) business R79 billion (US$13 billion) in 2004 — an amount equivalent to 6.5 per cent of gross domestic product (GDP). This is one of the key findings to emerge from a major survey of some 1,800 large, small and medium enterprises in SA.
Developed and commissioned by the Small Business Project (SBP), the survey called “Counting the Cost of Red Tape for Business in South Africa” provides the first hard data on the costs of regulatory compliance in SA.
It is also probably the largest and most wide-ranging survey of its kind ever conducted in the world. The survey covered all parts of the economy, including manufacturing, mining, construction, trade, agribusiness and services.
Among the key findings are:
— Total cost to business of complying with regulations is R79 billion in 2004.
— Thirty-four per cent of businesses believe that regulations and other interactions with the state inhibit business growth.
— Twenty per cent of employers say that labour law and general government regulations constrain increased employment.
— Businesses report that the most troublesome and time-consuming regulations are VAT, other aspects of tax administration, labor laws, Seta and RSC levies, in that order.
— Seventy-six per cent of respondents say that compliance costs have increased in the past two years.
— Large firms pay the most in absolute terms, but regulatory compliance costs weigh more heavily on smaller enterprises: compliance costs represent 8.3 per cent of turnover for firms with sales of less than R1 million a year, and 0.2 percent of turnover for corporations that turn over R1 billion or more a year.
— The impact of red tape is greatest in transport, services and tourism and least in retailing and wholesaling.
In analyzing the data, SBP executive director, Chris Darroll, says the study is the first to quantify the costs of red tape. “In the past, all we have had is anecdotal evidence, but now we have the quantifiable data for society, business and government to engage in meaningful debate.”
The SBP survey looks in detail at two kinds of regulatory costs faced by the private sector — efficiency costs and compliance costs. Efficiency costs occur when regulations distort the market, such as when inappropriate labor market legislation affects employment and output, or when a business decides to limit sales in order to stay below the VAT threshold.
Compliance costs are purely the costs of red tape, including management time, interacting with authorities, paperwork and professional services and consultants’ fees. They do not include tax payments or levies.
“Excessive red tape negatively impacts on employment and growth,” says Darroll. “What is clear is that the private sector devotes considerable resources to administering red tape, and that the cost burden weighs more heavily on the small business sector. Red tape affects certain sectors, like the key growth sector of tourism, more than others.
“It is obvious that many regulations are necessary, such as occupational health and safety rules, but even among necessary regulations, there are many that have become unnecessarily expensive to comply with. There are also likely to be many other regulations where the costs exceed the benefits and some which have no benefits at all.”
“By working towards a more appropriate and efficient regulatory framework for SA, we can significantly increase the country’s economic growth prospects,” says Darroll.
A hidden cost in a regulatory environment is the cost to government of administering regulations.
Evidence from the U.K. suggests this could be 20 per cent of the cost of red tape to the private sector. “If the same could be said to apply to SA, then government could be spending as much as R16 billion on administering the regulatory environment. Reducing costs in government could also free up funds for more worthy social programs,” concludes Darroll.