How to boost the SA economy: first, ditch the Insolvency Act

Posted 21 January 2015 Written by Pat O'Shea
Category Economy

The minister of finance has called for suggestions from the public ahead of the 2015 Budget due out next month. Here's a few suggestions from a Cape-based businessman on how to get SA into double digit growth figures within six years.

Dear Friends and Minister, 
The Minister (of Finance) called for ideas for the budget.
Here are some thoughts and an excerpt from a recent article by world famous economist John Mauldin.

Difficult or not, self-employment is extremely rewarding, and I wouldn’t have it any other way. Nor would the other 6 million business owners in the United States. Of those 6 million businesses, the vast majority are small “Mom and Pop” businesses. Here are more statistics on businesses in the US:

  • 3.8 million have four or fewer employees. That’s me!
  • 1 million with 5-9 employees;
  • 600,000 with 10-19 employees;
  • 500,000 with 20-99 employees;
  • 90,000 with 100-499 employees;
  • 18,000 with 500 employees or more; and
  • 1,000 companies with 10,000 employees or more.

Those small businesses are the backbone of our economy and responsible for employing roughly half of all Americans. Moreover, while estimates vary, small business create roughly two-thirds of all new jobs in our country.

Never a truer word said. I would say that SA is a microcosm of what is happening in the USA. Except that SA has way less small businesses than the US. 
In fact, let us be honest: SA is ruled by corporates.
For this reason alone we need serious action from government, business and citizens in creating new businesses and, more importantly, implementing these suggested steps below. 
1. Financing: 
We need easy access to financing for new ventures and this funding is  to be made available for small businesses for start up capital and expansion capital ! We need Venture Capital at competitive rates and terms. 
SA has very few  VC funds and has a draconian approach to start ups! Its death before they even get out of the starting blocks. We need friendly finance and at competitive terms and more importantly we need quick access to these funds and the right find manager to make decisions i.e. not ex-bankers with their old models. We need entrepreneurs who understand business to be the fund managers.
2. Tax Assistance:
Some great relief has come into play already and a great job by government on this but more can be done.
3. Changes to the Insolvency Act

Without changing this Act no business survives anyway in SA. We have a 90% death rate of business. How come well we have a death pill known as the Insolvency Act and 40,000 lawyers applying it rigorously to make money. When you kill a company (using the Insolvency Act) your company assets are likely to realise maybe 30% of their net asset value on auction. Why work when you can just kill businesses?
We need to change section 8G of the Insolvency Act of 1936 which allows a creditor / stakeholder to liquidate a company for a R1,000 debt (still measured in pounds i.e. 50 pounds). I mean seriously: are we living in the dark ages? There are 200 liquidations a month alone in the Western Cape High Court. Extrapolate this over the rest of the country and you can see what this dreadful Act is doing to the economy. You could never open enough businesses to counteract the liquidations that are taking place each year.  
It's carnage for small business. This has to stop! For starters this Act is unconstitutional and flies in the face of everything our forefathers and ancestors strived for. This an Act dates back to 1936 and is used prolifically to kill businesses and put entrepreneurs in the ground daily.  Ask me. I can attest personally to this having been a victim of this archaic legislation. It destroys our economy daily. Government needs to change this Act and appoint independent offshore consultants to do so because virtually no lawyers are willing to piss in the trough that feeds them. I believe there is a very large offshore US-based group now taking this Act head-on, and thats good news, because simply put this is the death penalty for small business. As the Act stands, you don't even need to be found guilty. You are automatically guilty by virtue of the Act, which says that if you owe anyone 50 pounds (roughly R1,000) for more than 60 days the "creditor"' or his "agent" can apply for your liquidation or sequestration. This is just one I mean seriously  and there are host of other draconian clauses in this stupid act.
4. Changes to the Labour Law 
This is a biggie. We need something akin to the US system: if you don't do your job you are fired with no consequences to the employers. Simple. Then no one mucks about. Yes sure you can have provisions for warning systems, strikes, unfair bosses and the like. I get all that. You need to protect employees, but not at the expense of their employers.  
The bottom line is if you mess up badly in your job and you have the warnings, you are out without a pay cheque then the game changes and people take their jobs seriously. The responsibility to perform is back on the employee where it should be. So we don't waste employers' time and money on people who don't want their jobs. 
5. Removal of Red Tape 
All the paperwork needed to set up a company and also all the myriad of monthly returns is just burdening business owners. And I don't mean the lame duck watered-down version  Cape Town has a fast-track system which means you can open a company in one hour. The paperwork is issued immediately or its free! So it means regionalised offices, competent people, and several call centres, active selling of companies, ambassadors you can call on cell phone if you don't understand something and warm, breathing bodies who walk you through each step till you have you papers in your hand - as they do in Mauritius, Nigeria and other fast-growing economies. My late chairman, good friend and advisor to President Mbeki, Dr Vincent Elijah Msibi, once told me this is one of our greatest challenges. He visited Nigeria in about 2006 with our president and on his return he predicted that Nigeria would outgrow SA. Why? Because you have your company, tax certificate and other necessary papers in hours (at the time he was waiting three months for a company to be set up in SA and was understandly frustrated. 
6. Free internet for new businesses 
How?  Well through SAIX and Telkom. They can fund it. We could  create a "B class" or a CSI (Corporate Social Investment) share for Telkom and use it as a social development fund for investment into Africa, using US social funds (Telkom is listed on the NASDAQ). This is easily done. Alternatively, we can use CSI points via a discounted linked system giving a rebate to corporates via Telkom for funding the internet service for new businesses. There are other ways this could be funded. There are many other social investment funds, philanthropies and social capital just waiting to be invested in these types of ventures. A friend told me that 5% of all sovereign funds have been set aside for African investment but there is no vehicle to invest into. Let's create the vehicle. 
If we can turn the economy on its head  (i.e. grow small business and take away control by large business) then the opposite happens in SA. Here's what we can look forward to if we adopt the above approach:
  • Booming economy,  No more Corporates holding government to ransom and Relocating their  Headquarters and killing the tax base, 
  • No more corporate strikes because now the employment base is split amongst thousands of entities not just a few,
  • Increased tax base, Decrease in Crime and Social Disorders.
  • People spending money ( YES more money in the system ) , 
  • Exports, 
  • Development of IP, Goods, Manufacturing .
  • Increased public pride amongst the people with the new economically active , having jobs, having income & in turn they support Sport ,The Arts and create sustainable initiatives.
The Cape Town Symphony Orchestra is facing ruin. Why? Simply put, there is no cash to fund them. Not even famous luminaries like Judge Davis, Raymond Ackerman or Benny Rabinowitz can save it unless they write a very large cheque every year, which is unsustainable. That's a reality of a failed or no growth economy: no funding for the arts or sports. But maybe that can change too if we allow our little business to become medium-sized business and then large businesses. 
As business people we need to take on the system and work with government to change the system.
Heres another example : 
Why are we not shooting more major feature films here in the Cape? Well, for one, we have too much red tape, too many by-laws and too much "democratic" interference. Anyone who shouts loud enough they can kill a film shoot. If you try get a location and the local resident moans then you are out. But the same resident is renting their house out for films shoots that pay their bond. Then there is the system for permits. 
What a mess. No respected international director wants to shoot here because of these obstacles. Why not turn that around have no tax for films being shot in SA (the tax revenue will come in other ways, such as from contractors and employees).  
Then create an instant approval for permits, established a specialised board that welcomes everyone here and has a results-driven sales target to make sure we attract productions to SA. We are one of the top destinations in the world but no-one is selling us to film makers. Instead we have more and more rules to chase filmmakers away. We lost the last James Bond movie because of actions such as this. My neighbour is an award-winning director who now has to go abroad to make a living. He take trips all over the world to do projects because as he puts it there is little work locally. Well there is work, but not nearly as much as there could be. Look at tiny Mauritius. It set up the Board of Investment Mauritius. Some serious salesmen and dealmakers on a plane 250 days a year selling Mauritius and all its new wonderful benefits. Who is selling SA properly? Certainly not the newspapers!
Now you don't make a nation grow by making their rich poor. That's not what I am suggesting. I am suggesting we need a little help from the wealthy for  investment in small business and  for social investment and ultimately protection of their own assets.
Call it what you will but it's not redistribution of wealth. This is investment by the wealthy so that they still have their wealth, and a growing economy. i.e. consider it an investment in themselves or insurance for protection of their owns assets and protection against a potentially failed economy which will render their assets worthless if they don't so something. Do they really have a choice? Do we have a choice? No we don't. Business confidence is at an all time low in SA. 
Lets study another case involving one prominent "SA" institution (well, not really its owned 60% in London so its technically a foreign owned institution). Lets unpack their numbers: 60% is owned in London and the local entity produces a mere 2% of the foreign entity's turnover (small wonder as only 60% is reported and, of course, in rands, so it has to be converted to pounds first and that's painful at todays rate). Now here's the astonishing part: with only a 2% revenue contribution the local institution manages to still contribute 22% to the profit of the international institution. How can that be, you might ask? Who is paying for this?
Well do the maths on that  scary number . Who do you think is paying for that profit? Who is sending South African sweat overseas to Britain and paying hundreds of times more for their funding than the British? How can we be such idiots that we diss our own economy and our own business people to this extent and then we give it to a British Institution? We must be fools or maybe someone didn't think this one through, so why are we not putting some pressure back on the London and local subsidiary of this financial institution  to give us some of our own money back so we can provide jobs for some of the 25 million unemployed people (of which 50% plus are youth) in this country?  
Simply put, can we ask the British Institution to give back some of our own money so that we may can have our children work and eat . I am sorry to be so crass about this example but by now you know I don't mince my words. 
Let's put things in perspective. Our leadership let this happen and we let this happen and we continue to endorse these practices and support said institution. 
In the US, some 200 shopping malls out of a total 1,200 have closed, with another 400 to follow. Shopping malls are yesterday's news. So are corporates, cartels and foreign-owned corporates in SA. We need to create the new economy and get ahead of the trend. The old one is dying. We are back in 1928 where we do all the work, the British fund our efforts at a very high cost with no risk, and take all the money. We are slow learners!
It's time people went back to owner managed businesses, and I am not talking about the pyjama brigade working from their laptops at home. I am talking real industry, be it IT, goods, services or food. Not just wind farms and solar power with nothing to power. We need to power real businesses.
We need diversified industries: agri, aquaculture, IT, manufacturing, clothing, cars, etc. 
Below are wise words from my favourite economist. Small Business is the key to a stable and growing economy. Small business in the US contributes 76% of its GDP, compared to 4% or 5% in SA (if my memory serves me correctly). 
Sure SME's don't contribute to the tax base because they are too few in number and too small. That can change too and it needs to in order for the government to survive. It's like having a business with one big customer: if he shuts down or moves shop you are out of busines. The same is true for the Treasury. It is better to have 1,000 little customers than to be held to ransom by one or two big ones. SA historically has a tax base of corporates and that must change. Corporations are listing overseas, acquiring overseas, moving HQ's to neighboring countries in mining etc., and diversifying into foreign assets. What does this mean for SA? If this tax base is replaced by the "new economy" then the risks are reduced. 
Why is this so difficult to see? The stats are there. Even with such a small percentage contribution to GDP from SME's (and add the informal economy) and 67% of the employee base of this country employed by SME's (not corporations or government), it makes no sense that we have so little support for SME's or start-ups. Instead, we are killing them daily by liquidating them, drowning them in high interest financing, suffocating them with legislation and letting underperforming employees have more rights than the business owners who employ them.
This does not make any sense to me.
Minister Nene is looking for suggestions for his budget speech.
Here is one. 
Issue a wealth tax on the listed corporates who are sitting with a combined R500 billion cash pile on their balance sheets (yes, you heard right - R500 billion worth of cash). That's roughly 1,3 times our GDP as a nation. 
Even if taxed at 5%, that's R25 billion to the fiscus. Let's not call it tax. Lets' call it insurance or social investment. 
We can always grant these corporates a credit on their tax or amortise it in credits. There are many ways to do this. 
Greece securitised  its lottery funds. The City of Cape Town discounted its future rates book. There are a million ways to structure this financing but put these funds to work in a way which promotes businesses.
Don't spend the money on consultants and salaries that will be gone as soon as it is spent with nothing to show for it.
Then plough these funds into start-ups and possibly a safety fund for existing businesses in need of cash flow solutions and financing support.  
Let's use the retired grey hairs out there, especially the experienced entrepreneurs, to oversee these funds and appoint them as mentors for each company as a standard condition of funding. M
Implement steps 1 to 5 concurrently and then Minister Nene wait three to six years and you will have a very different country and a very different tax base. Look forward to double digit growth and increased revenues. Adjust the criteria for foreign investment and review your Reserve Bank policies and watch the cash pour in. We will reduce our current account deficit nad provide sufficient to fund future projects.
I can't sit around and do nothing while my countrymen starve and are jobless and homeless! It's not right, especially when we have all the resources right here amongst us and we can fix this.
Have a good evening all.
Patrick O'Shea

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