Small Business Minister’s subsidies would promote corruption, inefficiency

Gary Moore is a Senior Consultant at the Free Market Foundation. He was a practising attorney in Johannesburg for 30 years. He is the author of published articles and monographs about the rule of law, the legality of state action, the meaning of statutes, and laws affecting small business.

For interviews:

The views expressed in the article are the author's and not necessarily shared by the members of the Foundation.

This article may be republished without prior consent but with acknowledgement to the author.

The FMF is an independent, non-profit, public benefit organisation, created in 1975 by pro-free market business and civil society national bodies to work for
a non-racial, free and prosperous South Africa.
As a policy organisation it promotes sound economic policies and the principles
of good law. As a think tank it seeks and puts forward solutions to some of the country's most pressing problems: unemployment, poverty, growth, education, health care, electricity supply, and more. The FMF was instrumental in the post-apartheid negotiations and directly influenced the Constitutional Commission to include the property
rights clause: a critical cornerstone of economic freedom.

+27 11 884 0270
PO Box 4056, Cramerview 2060

This article was first published on on
16 July 2022

Small Business Minister’s subsidies would promote corruption, inefficiency  

Minister of Small Business Development intends to gazette a Small Enterprise Development Masterplan as a policy for small-enterprise support as envisaged in the 1996 National Small Enterprise Act.
The Act defines a small enterprise as an owner-managed business entity which is carried on in any of eleven identified economic sectors, and which has such number of employees and annual turnover as to categorise it in its sector as a micro, small, or medium enterprise. The Masterplan refers to micro, small, and medium enterprises collectively as “SMMEs”.
intended Masterplan proposes some things which are unnecessary, and some things which the National Small Enterprise Act does not authorise.
The Masterplan laments that there is “low uptake” of the SMME definition in the National Small Enterprise Act, and that “stakeholders are reluctant to align”. The Masterplan complains that many statutes and government departments use different definitions of a “small business” or “small enterprise”.
Thus, the Masterplan observes that the Income Tax Act, the Cooperatives Act, and the Broad-Based Black Economic Empowerment Act all use differing definitions. The Masterplan notes that the
South African Revenue Service, the Department of Trade & Industry, and Statistics South Africa, use varying definitions to track and monitor SMMEs.
The Masterplan asserts that it is necessary that statutes and government departments should all apply the National Small Enterprise Act’s definition of SMMEs for
“contributions to tax revenue collection” and to provide “a deeper, richer understanding of the wide spectrum of factors relevant to operating a business, across geographical locations and sectors.”
But the Act does not authorise the Minister to exercise powers that go beyond support, development, and promotion of SMMEs.
The Minister acts beyond her powers in urging other ministers and departments to apply the Act’s SMME definition to aid “contributions to tax revenue collection” or to merely provide “a deeper, richer understanding” of factors relevant to operating businesses.
It is beyond her powers to urge other ministers to apply the Act’s SMME definition in statutes they administer which, although they might touch on small businesses, are for the most part aimed at objects other than promoting small businesses.
The Minister also wants departments to use her uniform definition to “target enterprises for support” and for “targeting of incentives”. However, she really cannot afford to subsidise small business. The Masterplan admits to budgetary constraints.
Even if the Minister could afford to subsidise anyone who presented themselves as being small businesses, any such subsidies would likely be unavoidably selective and unfair, and promote corruption and fraud, and foster waste by permitting the inefficient to undermine efficient producers.
The Minister should focus on identifying the types of legislation that have an adverse effect on small enterprise as defined in the National Small Enterprise Act, and on issuing guidelines for organs of state who administer legislation of the types so identified about how they might amend their legislation to reduce its legislative burden on small enterprises.
The Act authorises the Minister, by notice in the Government Gazette, to identify types of legislation that may have an effect on small enterprise, and to publish guidelines about assessment and review of the effect of existing legislation on small enterprise.
The Masterplan anticipates this, and already identifies types of legislation that have an adverse effect on small enterprise, and gives some indication about how such legislation might be assessed and reviewed.
Thus, the Masterplan states that the National Treasury estimates that compliance costs represent a significant percentage of turnover for enterprises at the lower end of the scale whereas this is disproportionally inverted for business at the upper end. Heavy compliance burdens to business are a symptom of an inability to critically analyse and assess the consequences (intended and unintended) of the impact of laws on business.
The Masterplan observes that South Africa’s rigid labour laws have come under increasing scrutiny over the years by both the domestic and international community. Particularly, collective bargaining wage agreements made between big business and labour and then being extended to non-parties (i.e., small businesses). Even though exemptions do apply in some cases, exemptions are often reported to be difficult to apply for, and cumbersome to administer. Mandatory wage increases do not consider the unique characteristics of small firms and the viability of small businesses to survive and compete with their larger counterparts.
According to the Masterplan, overarching all support efforts is the requirement for an enabling environment that is supportive of investment and conducive to growing business in South Africa. An enabling environment for SMMEs to develop and grow implies that laws are scrutinised and assessed to measure their appropriateness and their intended and unintended effects on SMMEs—the “Think Small First” principle.
The Masterplan maintains that this requires continual review of laws, to ensure that they are targeted and proportional to the problem identified, have the smallest possible effect on small enterprise, were assessed for alternatives to legislation, and do not cost society more that the benefit accruing from the intervention. Emphasis should be given to assessing the impact of laws about business licensing, taxation, employment, and land zonings which restricting uses of land.
The Masterplan states that reports (which should be written, presumably, by the Department of Small Business Development) should then be sent to the competent departments about the impact of those laws on small business, with recommendations for reform.
It is evident, from these and other observations in the Masterplan, that the Minister is in possession of sufficient material to enable her to exercise her powers under the Act to identify the types of legislation that have an adverse effect on small enterprise as defined in the Act, and to issue guidelines for organs of state who administer legislation of the types so identified which assess the effect of that legislation on small enterprise and recommend how those organs of state might amend their legislation to reduce its legislative burden on small enterprises.
The removal of these undue legislative restrictions on small enterprise will enable them to grow more freely, to hire more employees, and to contribute generally to economic growth.

Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE