Negative impact of licensing requirements on small business

The negative impact of licensing requirements on small businesses has long been a talking point in government, with the president promising in his ‘Ease of Doing Business’ speech¹ at the World Economic Forum in 2019 to make it easier to do business in South Africa.

However, in 2022 we still sit with the same licensing requirements, which are a major headache for small businesses while they should be spared from challenges as much as possible, at least those coming from the state.

“Licensing laws protect existing businesses by preventing new entrepreneurs from entering the economy and competing with them,” Neil Emerick, director and co-founder of NightsBridge, said recently at the Free Market Foundation’s presentation of its third booklet in a series of eight called Laws Affecting Small Business.

Outlining the negative impact of licensing requirements on small businesses, Emerick said while licensing enriches some people at the expense of the public and creates what has been called a tyranny of beneficiaries, this phenomenon tends to favour entities with more resources over those with less.

This has a negative effect on entrepreneurs from poorer communities.

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Drawbacks of licensing requirements

The Foundation says licensing legislation:

• restricts economic activity
• prevents people from entering the economy
• reduces productivity at public expense
• raises costs
• protects existing businesses at the cost of everyone else
• criminalises ordinary economic activity and create opportunities for corruption
• imposes financial costs and burdens on businesses.

Many licensing laws once considered essential have also been repealed, while some progress has been made to repeal licensing laws.

According to the Businesses Act of 1991, anyone is free to start up a business as an accommodation establishment, advertising agent, auctioneer, baker, barber, bicycle dealer, building contractor, butcher, café, cartage contractor, commercial traveller, driving instructor, fishmonger, gardening services contractor, general dealer, hawker, hiring service, kennel, laundry, livestock or produce dealer, mail order undertaking, market agent, motor garage, motor graveyard, motor vehicle attendant, motor vehicle dealer, parking garage, pawnbroker, photographer, poultry farm, private investigator, quarrier, recreation ground, rickshaw hauler, riding school keeper, salesman, vending machine keeper, warehouse, and workshop without first having to apply to a licensing authority for a licence.

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Recommendations

The Foundation recommends that there should be no national general Business Registration Act and refers to two attempts to impose a much wider business licensing system.

The first attempt failed at national level in March 2013, when the minister of trade and industry published a proposed national Licensing of Businesses Bill which would have prohibited any person from carrying on any business without a licence.

After vehement opposition, the minister withdrew the draft bill and the Foundation says the 1991 Businesses Act is all that is necessary.

The Foundation also recommends that Limpopo’s general Business Registration Act should be repealed, except for selling meals and perishable foodstuffs, as well as trade licensing laws in the former homeland of KwaZulu.

In addition, the Foundation also recommends that most, if not all, licensing laws should be repealed for a wide range of trades, occupations and businesses that still require a licence of some kind.

These include for an abattoir, accountant, advocate, animal embryo transferor, boxing trainer, buffalo breeder, escort agency, financial adviser, keeper of three or more snooker tables, remedial gymnast, sauna, school, tour guide, Turkish bath, unit trust scheme, university, valuer and veterinarian.

According to the Foundation, financial service representatives engaged as independent operators or employees by a financial adviser or intermediary to render services on its behalf to clients are subject to a “negative licensing” system where they do not need to obtain a licence to operate.

However, if they are subsequently perceived to have breached rules of fit and proper conduct, the financial adviser or intermediary who engaged them must debar them from the industry.

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Do licensing requirements protect consumers?

Many people believe that a licensing requirement is the only way to protect the public, particularly in an industry that involves high risk – such as medicine, banking, or air transport.

“It is prudent that in sectors such as these, there should be a prior screening process, such as a licensing law, before a person is permitted to start a business, but licensing laws do not guarantee that the public will be protected and that there will be no failure in the licensed activity. Dishonesty and accidents happen even within licensed industries,” the Foundation says.

There is also an argument that limited entry protects exploitation of a scarce resource, such as broadcasting on the radio waves, or fishing but the Foundation says activities in these sectors do not require any special treatment.

“They can provide a service and protect existing resources simply by relying on property rights. For example, there is no need to introduce broadcasting legislation as broadcasters are able to obtain interdicts against other broadcasters who attempt to use their frequencies.”

The Foundation says that there is also no need for licensing law to protect the public’s money with fidelity funds as conveyancers, estate agents and debt collectors can maintain the necessary insurance or fidelity cover.

When it comes to the argument that licensing laws are necessary as a source of revenue and raise taxes and licensing fees, the Foundation points out that licences are not an essential tool of tax collection.

“The majority of taxpayers are not licence holders, and taxes can be raised through the ordinary taxation laws without imposing licensing burdens on particular industries.

“Does the benefits government enjoy with greater revenue outweigh the cost to society imposed by licensing laws, such as less employment, decreased investment, reduced entrepreneurship and more expensive goods and services?”

The Foundation also does not believe that a licensing requirement is necessary as a source of information for government to keep track of people active in a business sector and enable government officials to inspect and enforce other laws, as licensing laws do not meet this requirement in many cases.

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Other recommendations

Other recommendations include that:

• licensing laws entitle applicants to licences automatically, unless they will clearly violate essential health and safety laws
• no new licensing laws be introduced unless strictly necessary.
• any licensing laws that permit only one supplier and create a monopoly be repealed
• no licensing law requires an applicant to be “suitable” or “fit and proper”
• licensing laws must not disqualify applicants who have prior convictions
• licensing authorities must not have the power to refuse a licence “in the public interest”
• licensing laws should not authorise discouraging competition
• there should be no special requirements for individuals or premises
• there should be no exemptions for government-owned businesses
• licensed operators should not be disciplined by people in the same industry
• municipal bylaws should not authorise municipal officials to impound the goods of informal or street traders who fail to produce a licence to trade
• legislation permitting the seizure of street traders’ property should also provide for the return of property
• bylaws should not require itinerant hawkers who sell goods other than meals to hold a permit
• the Immigration Act’s financial and staffing requirements imposed on immigrants starting a business should be relaxed
• laws should not prevent refugees from starting a business
• an unlicensed trader convicted of a first offence should be discharged with a caution.

1. ^{President Ramaphosa’s Ease of Business speech.}