The folly of creating businesses in a criminal-friendly environment

The South African enterprise world remains in a critical condition since the real causes undermining its wellbeing are not being addressed.

We’ve seen that:

• The paradigm of small enterprises as the knight that will overcome unemployment and economic stagnation comforts its adherents in their belief that they are on the right track.
• Repetitive incantations of beliefs embolden policymakers and administrators to believe that there’s no need for them to consider alternatives and that they can ignore evidence to the contrary. Why seek solutions by acknowledging the data-supported evidence of regularities that shape entrepreneurial space if you know that all that’s required is the ‘massification’ of new businesses and a dogged adherence to state-induced enterprise creation?

Comfortable in this paradigm, government embarked on an interventionist road to transform the economy in accordance with its perceived reality. It launched a range of black enterprise incubation programmes with massive grants, prescriptive procurement strategies, BEE, industry charters, interference with intellectual property, and a commitment to expropriate land without compensation.

Knowing better than the marketplace, government decides which sectors to back and which industrialists and SMEs to boost. The strategy: transformation by preaching B-BBEE, but practicing SBEG (Selected Black Entrepreneurial Grantees).

State-induced enterprise incubation as a strategy to promote growth and jobs also serves to obscure the fact that government is in fact undermining the total economy through its mismanagement of some basic tasks.

One of the kindergarten tasks of any government is to ensure a safe environment for and protection of the rights of all the people and legal entities (companies, trusts and so on) in its jurisdictional area. This entails not just effective crime prevention, but also effective detective work and prosecution so that wrongdoers can be brought to justice.

Consider for a moment the under-achievements of the ANC government under the Zuma administration in protecting the rights and property of businesses. This is a period covering the Kgalema Motlanthe and Cyril Ramaphosa vice presidencies, ten years with Rob Davies and Ebrahim Patel at the helm of Trade & Industry and Economic Development respectively, with Treasury for seven budgets under Pravin Gordhan.

Using the World Economic Forum (WEF) rankings for 2007 and 2017, the outcome resembles the downhill speed-skiing performances at the Winter Olympics:

The outcome: South Africa ranks high (one of the top five) as a haven for criminals to feed off business. In the period of comparison, South Africa bypassed Trinidad, Nigeria, Liberia, Kenya, Haiti, Jamaica and Mexico as a beneficial environment for criminals. It is only Guatemala, Honduras, Venezuela and El Salvador that South Africa has to overtake to become the undisputed champion as having the highest cost of crime for business.

An overstatement? Only the views of the large disgruntled corporates?

Combining data by the Enterprise Observatory of South Africa on the number of enterprises per municipality, with crime statistics from the Institute for Security Studies, enables us to express five specific crimes against businesses as the number of crimes (with enterprises as victims) per 100 enterprises in a municipal area. On this basis, one can compare small and large municipalities.

In Tokologo in the western Free State, there were 262 crimes with businesses as victims per 100 enterprises in the municipal area; on average 2.6 crimes per business per year. No wonder the local private sector has already disinvested from the municipal area – the value of non-farm commercial and industrial properties forms less than 1% of the value of the Tokologo municipal valuation roll.

At this level, it is small and medium sized firms that can no longer compete due to rampant crime. But crime also has a massive impact at micro firm level in the informal economy. A 2011 study by P Cichello, L Mncube and M Oosthuizen found that crime was the primary deterrent preventing people from entry into the informal sector.

Based on Stats SA’s Victims of Crime reports for 2010 and 2015, the percentage of persons refraining from establishing a home business out of fear of crime had increased from 8.2% to 11.8%. Consider the 6.214 million unemployed South Africans, and add the 2.277 million South Africans who were so discouraged that they stopped looking for employment: a total of 8 491 000. Were it not for high crime levels, close to one million people would have attempted to start a home business.

Mix into this damning statistical evidence the following headline-grabbers, and the investment roadshow by Ramaphosa’s four ambassadors looks like an attempt to wallpaper the cracks.:

• Truck burning and looting at Mooi River Toll Plaza
• The blackmailing of construction companies by local business forums insisting on 30% of the work in subcontracts
• The destruction of an H&M store by an EFF-inspired mob
• The dramatic rise in blatant attacks on cash-in-transit vehicles (rumour has it that some incidents are linked to building a campaign ‘treasure chest’ for the 2019 elections).

The business environment has deteriorated dismally. According to Sars, 8 000 fewer businesses submitted tax returns in 2015 than in 2007, implying that formal businesses disappeared at a rate of 31 each week – far higher than the rhino poaching figures that evoke so much emotion. In addition, net taxable income of Sars-assessed corporate income tax returns deteriorated from R97.241 billion in 2007 to R52.065 billion in 2015 – a clear indication of a very sick business environment.

By failing in its obligation to protect the rights and property of citizens and businesses, government is more effective at stimulating a criminal-friendly environment than ensuring enterprise-friendly conditions.

Supporting attempts to stimulate business creation through grants for the lucky selected few (the Black Industrialists Scheme, the National Gazelles and all other enterprise incentive schemes) while neglecting one of the most fundamental tasks of governance that would, if properly carried out, achieve much more for economic growth, is the equivalent of the Cabinet and the ANC caucus applauding the correct pronunciation of Nkandla rather than acting to uphold the Constitution.

If government is really serious about the business environment, it would push crime back (without contemplating the convening of a summit on how to tackle it) by implementing a system requiring accountability and impact at each of the Saps stations in the country.

Johannes Wessels is the director of the Enterprise Observatory of SA. This is a condensed version of an article that first appeared on EOSA.

Brought to you by Moneyweb