Opinion piece by Nazeem Martin, Managing Director of Business Partners Limited, a specialist risk finance company for formal small and medium enterprises (SMEs) in South Africa:
Most SME owners know what it's like to put a budget together under difficult circumstances. Many will therefore be sparing a thought for Finance Minister Pravin Gordhan, who on 26 February 2014 will be announcing the national Budget in the face of a yawning deficit, a falling rand, menacing inflation and sluggish growth.
However, the answer to much of these woes lies in the extent to which the minister spares a thought for small and medium enterprises (SMEs) in his Budget.
SMEs are responsible for about 60% of new jobs created annually, and have for a long time been the providers of more than 50% of formal jobs in South Africa. One of the surest ways for the finance minister to boost job creation and economic development is to deliver a small-business friendly Budget.
While there is no silver bullet, a Budget which includes a range of measures empowering South Africa’s SMEs to expand and employ more people, would go a long way in supporting small-business development.
Boost the newly created youth wage subsidy, officially known as the Employment Tax Incentive, to make it more practical for business owners to employ young, first-time workers.
As it stands, the scheme provides benefits to businesses only if the new workers earn less than R6 000 per month. Maximum benefit from the scheme is derived if the worker earns only about R2 000 per month. These thresholds are so low that it arguably provides little incentive for young people to take up a job, and employers will struggle to find candidates. Businesses in the knowledge economy that take the risk of employing first-time young workers at more realistic salaries are therefore largely overlooked by the youth wage subsidy. By increasing the thresholds, the scheme could really begin to boost youth employment.
The thresholds for the existing small-business tax incentives are still too low.
The most substantial tax break, Small Business Company Tax, allows business owners to pay a lower corporate tax on their first R350 000 worth of profit per year, but only businesses with turnovers of less than R14 million per year qualify. By pushing up the turnover amount, as well as the profit threshold of the scheme, the tax break will provide a clear incentive for entrepreneurs to invest and expand rather than doing all they can to remain under the radar.
The current turnover scheme tax has the admirable intention of minimising paper work and the tax burden for informal micro businesses, but the take-up has been minimal. A bold expansion of the scheme, or some similar regime, can provide the fuel for a real entrepreneurial groundswell.
Something else that is needed in terms of small-business tax incentives is a substantial tax break for start-ups, for example a minimal flat tax or turnover tax in the first five years of a business's existence, with a threshold higher than the current R1m per year.
The time is right for a substantial fund to finance the most risky of all businesses – start-ups.
Several experiments with start-up funds have been done over the past two decades, and it is time to go big – to the tune of at least R1 billion, provided the lessons learned thus far are taken into account.
The first thing that needs to be acknowledged for this particular fund to work is that commercial returns must not be expected. On the contrary, if a true start-up fund gets all of its capital back, it is doing brilliantly. A more realistic benchmark is to try to get back in the region of 65 to 70% of the capital. From the government's point of view, the unrecouped money is not really lost, because it is spent into the economy.
The second aspect to consider is to implement a substantial mentorship and training programme that forms part of the fund so that the start-ups financed by the fund are properly incubated – a R1 billion fund, for example, should have at least R300m available for incubation.
Private companies should also be allowed to bid against government agencies for managing such a fund. A company such Business Partners Limited for example, which has one of the most substantial mentorship programmes in South Africa, has a wealth of experience in start-up financing to contribute to the success of a flag-ship start-up fund.
The time for talking about the infrastructure roll-out is over – large-scale implementation needs to happen urgently.
If the promised building of roads, bridges, dams, power stations and optic-fibre networks is done with clear set-asides for SME subcontractors. Not only will the economic boost be substantial and long-lasting, but the economy will also be freed from the deadly grip of electricity and broadband shortages.
If the South African Revenue Services could reduce down red tape for businesses significantly, so can all other government agencies that add to the compliance burden of businesses, from the department of labour to municipalities.
Apart from a continued focus on reducing red tape, a network of one-stop shops where businesses can go to for all their compliance dealings will also help to free South Africa's entrepreneurs to concentrate on growing the economy.
The government's tax incentives for venture capital investments are immensely complex
As the minimal take-up of the incentive clearly shows. Simplification and strengthening of the scheme can make millions available for investment into local businesses.
With the current weak rand, things are looking up for South Africa's exporters.
Now is the time for the government to boost the export sector by reducing duties on imported machinery and equipment and supporting efforts to develop overseas markets for South African products.