Dear finance minister Enoch Godongwana,
While you are busy putting the finishing touches to your second main budget, I’m sure you don’t need reminding that every tick of the clock without progress on impactful economic reform is a moment wasted to unleash the power of the private sector to pull SA back from the precipice — and wrench the beloved country from the tightening grip of the various mafias.
I’m sure that you, and the rest of the Treasury budget office team, have been working day and night to announce real detail on Eskom’s debt intervention. But if the government you serve has learnt anything from the few reforms that have been pushed through so far in the energy sector it’s that once the private sector is unleashed solutions are swift. Just ask the mining companies with 10GW of power projects in the pipeline.
I’m sure you are acutely aware that the top 10% of SA companies earn 86% of all income, while the bottom 50% earn a mere 1.6%. Put another way, the bulk of SA’s thinning corporate (and by extension personal income) tax base come from the 300-odd firms listed on the JSE, and the many thousands of dynamic small and medium-sized unlisted businesses, many family owned, that form President Cyril Ramaphosa’s resilient SA, earn a mere 12.4%.
I came across this shocking statistic in a paper shared with me by the researchers at the Startup Act movement, who are investigating how to unleash the power and dynamism of SA’s entrepreneurial class.
Startup Act’s goal is to minimise and relax existing regulations and the regulatory hurdles that affect high-growth businesses. Its mission? To create fewer rules, simplify the growth trajectory of SA companies and accelerate social and economic impact.
The researchers point to the Treasury’s “exclusionary” preferential procurement policies, which favour established businesses and limit opportunities for new entrants. They propose that qualifying start-ups be given automatic Level 1 BBBEE status when accessing the supply chains of corporate and public SA.
This would help them compete with larger suppliers and multinational corporations by not being automatically disqualified from rendering services or supplying products. Qualifying start-ups will have a better chance when competing head-on with large suppliers and foreign multinationals. And, Mr Minister, it would accelerate the transformation of the economy.
But what should be of even greater concern for all of us is that SA is at risk of losing its premier status as the breeding ground for high-growth start-ups on the African continent, with many high-growth businesses leaving our shores, due primarily to exchange controls.
Before I explain why exchange controls are such a blunt impediment to foreign direct inward investment, one cannot overstate the importance of high-growth start-ups to reversing the red tide of sluggish growth and record high levels of joblessness.
The economic core belief in the role and importance of small businesses is based on their ability to develop, since when businesses grow they innovate for change and create social and economic impact in the form of paying wages and creating new jobs.
SA, which has a GDP larger than Finland, the world’s leading innovation economy, has exceptional capital markets. But growth is proportional to market size, and no market is larger than the world. To seek international capital 80.8% of companies questioned in the SA Act study established a foreign-based corporation, with more than 67.3% directed to do so by their investors.
This is where exchange controls come in. To truly scale into global markets it is important to position the business for international investment and establish a foreign-domiciled company.
An SA start-up establishing a foreign domiciled company is mainly about sheltering the start-up’s intellectual property (IP) rights, both existing and prospective IP, in the foreign jurisdiction. This allows the founders and the investor to own the entity that will hold future intellectual property developed through the deployment of the investor’s funds. Otherwise, the foreign investor will simply not invest.
This involves overcoming the restrictions of your exchange control regulations, Mr Minister, such as an outright prohibition on structuring the start-up as being held by an offshore holding company, the need to obtain exchange control approval when taking SA IP offshore, and the financial and administrative impact on day-to-day business when receiving payments from foreign customers.
“Exchange controls deny founders the option to set up international companies and remain South African,” the report states bluntly. “In other words, SA law fundamentally prevents our entrepreneurs and youth to contribute meaningfully to the development, transformation, and growth of the SA economy.”
The other important concerns raised in the paper relate to when capital gains tax is triggered too early and there being no incentives for risk capital investments in high-growth start-ups (amplified with the ending of Section 12J).
Ultimately you, Mr Minister, and your team at the Treasury, have a simple lever at your disposal to lift the sluice gates holding back investment into SA’s entrepreneurial class that offers the single most impactful return on investment for an administration on the path of fiscal consolidation.
It’s in your hat, sir.
• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at Badger@businesslive.co.za.
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