The Challenge of Doing Business in South Africa

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Doing business in South Africa is not for the fainthearted. In fact, South Africa dropped from 34th place out of 181 countries on the World Bank’s Ease of Doing Business ranking in 2009 to 82nd out of 192 countries last year, leaving the country trailing its African peers, including Mauritius (20), Rwanda (29) and Kenya (61), writes Sanisha Packirisamy in City Press.

It’s a pity that doing business in South Africa is perceived to be so difficult, because South Africa is nicely placed as the economic growth hub in Africa. After all, Africa is nowadays seen as one of the most exciting continents in the world to expand business for. Yet, the problem with Africa is that in many instances you can’t just arrive and start a business. Because Africa is mostly underdeveloped – therefore offering many business opportunities, but without the structures to support investors.

Nevertheless, South Africa is the second biggest economy in Africa. It is also the best developed with existing infrastructure, financial institutions and skilled labor. Sadly South Africa has regressed in stature and status as the first choice investment destination in Africa. Indeed, it’s even getting more difficult for small businesses doing business in South Africa.

So, let’s consider the challenges that face new business owners that want to open a venture in South Africa.

The perils of doing business in South Africa

Starting a Business

Although starting a business anywhere in the world requires some effort and funding, doing so in South Africa needs special attention. According to Business Partners, the following are statutory requirements to register a business in South Africa:

  • Register your business – if you’re setting up a private company ((Pty) Ltd), you need to register your company as a legal entity.
  • Register with SARS – Whether you’re running a sole proprietorship, a partnership or a private company, you have to be registered with the South African Revenue Services (SARS).
  • VAT Vendor – if your turnover is – or is likely to be – R1 million a year or more, you need to register as a VAT (Value Added Tax) vendor.
  • Register for employee tax – if you employ one or more staff members who earn over R40,000 per year, you have to register your company for PAYE (Pay As You Earn) tax contributions.
  • The Department of Labor – all companies – and sole proprietorship that have one or more full-time employees – need to register with the Department of Labor.
  • The Unemployment Insurance Fund (UIF) – All employers must register their employees for unemployment insurance.

This red tape, although seemingly justified, may take a lot of time and resources from business start-ups. Sadly, many businesses wont even try to open because of admin obstacles…

Getting Electricity

Getting electricity is a big concern for business start-ups in South Africa,  taking 226 days and involving a string of lengthy procedures. Eskom, South Africa’s public electricity utility, can take 60 days to provide an estimate after the application has been received, and 165 days to complete external connection works, says The TMF Group.

Apart from waiting a long time to get electricity for your new business, the supply thereof is not guaranteed. The ‘load shedding” of the electricity supply is a reoccurring event here in South Africa. Power cuts are instigated on a rotational basis to prevent a total blackout. Consequently SA businesses had to endure load shedding earlier this year with devastating consequences. Who can do business without electricity in a modern economy?

Infrastructure issues

Apart from having reliable access to electricity, having access to water, communication services, roads, and affordable, safe public transport is incredibly important for fostering business growth (Jana Jansen van Vuuren in GVI).

Mike Schüssler, owner of Economists dotcoza recently said that the country’s total road surface of 475,000km had not increased much since the advent of democracy. Also are some roads no longer drivable (Business Tech). This is in-spite of around 80% of all South Africa’s land transport is performed by road. The thing is – business depends on good quality roads to get inventory at their shops or products to their online customers…

Labor issues

Most business doing business in South Africa finds it difficult to attract and keep skilled staff. One of the main reasons, according to Business Tech, is that South Africa is competing for skilled labor against countries with stronger currencies.

The workers in South Africa want to do less for more money. Indeed, the productivity of labor in South Africa has, at best, stagnated over the last 10 years, while remuneration growth has increased by more than 6% per year (USB News). As a result, the unit costs of labor have escalated to be almost three times higher today than at the beginning of the 21st century.

Because of the high cost of labor in South Africa, businesses employ less people and in many cases automate their processes. The result is that many people can’t find jobs to earn a living. Many of them do crime just to survive…

The issue of crime

The very nature of crime is a deterrent to doing business in both the formal and the informal sectors, meaning that firms – domestic or foreign – are less inclined to start a business reports Elizabeth Matsangou in World Finance.

The above assertion is support by research done by Mahofa and others (2016). They found that increased crime rates reduce business entry in South Africa.

Another reality is that new business owners can’t always rely on the South African Police to protect their business and people. Billions of rand are spend each year by businesses to pay private security firms to do the police’s job.

Taking about government not doing their job…

Collapse of the political environment

Low growth prospects, stark inequality, a mismanagement of resources and a degradation of institutional credibility are discouraging people from doing business in South Africa.

Here South Africa is its own biggest enemy. Massive corruption involving the ruling ANC party, private sector and others has brought South Africa to the brink of a failed state. It will take years for things to get back to normal…

Concluding

Let’s conclude on a positive note. “South Africans are resilient when faced with adversity” says Peter Olyott, CEO at Indwe Risk Services. Indeed, here we are – we’ve accomplished so much – a miracle from apartheid to democracy. Under the leadership of Cyril Ramaphosa, South Africa has avoided obsolescence.

The road to recovery will be hard. But, think about it – it may be now the best time to start a business in South Africa. Why? Because many businesses have closed and many business estates stand empty. You can start from scratch, on your terms and negotiate a bargain price to rent your retail space.

Remember within every threat lurk plenty opportunities.

Most importantly, you need a strong stomach doing business in South Africa. Especially doing the paperwork!

Doing business in South Africa is most of the time a “shitty” affair 🙁

Read more: Questions about your business that you should answer before starting

A well researched and written Business Plan helps to get your business started the right way.

Note

Mahofa, G., Sundaram, A. and Edwards, L. 2016. Impact of crime on firm entry: Evidence from South Africa, Economic Research Southern Africa, no 652.

Images
  1. Feature image: Pexels
  2. Image in text: eBizplan
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Douw G Steyn

Douw G Steyn

Management consultant, blog writer, dreamer

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