By Robert Likhang – Chartered Accountant & Consultant – founder RL Consulting firstname.lastname@example.org
Challenges facing business growth in Lesotho
Our economy is not growing mainly because of insufficient capital expenditure by government and low revenue levels. Government is the main ‘trading partner’ for most of our local enterprises. Most of our businesses have not developed capacity to go business to business and move away from business to government.
The business financing is still predominantly done by commercial banks which provide working capital and medium-term financing to our local businesses. There is also pressure from Asian businesses operating in Lesotho, who do not have to seek costly financing from banks as they rather bring their own capital or use bulk buying to obtain discounted purchases.
Our tax system is based on a 1993 statute and it has provisions which are not friendly to our businesses. The unfavourable provisions include provisional taxes, fringe benefits taxes paid by businesses enjoyed by employees, accrual-based Value Added Tax is paid to tax authorities before cash is collected, government departments who play the role of agents of the tax authorities and deduct withholding tax on payments. However these do not issue withholding tax certificates and thus businesses do not enjoy tax deductions until government departments remit the taxes to tax authorities. The net effect of this scenario is that our businesses struggle to maintain a healthy working capital. There are insufficient provisions in our tax law to enable adequate deferring of tax in the initial years of business when businesses are still finding their feet and struggling with teething problems.
The labour code has provisions that make it difficult to dismiss employees that are not productive. There is an overprotection of employees at a cost to small businesses. Regulations for businesses are high and services are slow at every corner, making it difficult to start and maintain business in Lesotho.
The cost of utilities is likely to grow with recent applications of tariff increases by WASCO and LEC. If the tariff increases are approved, that will take away the incentive of the utility companies to strive to be operationally efficient. They will always have that easier option of passing their inefficiencies to businesses and consumers through annual tariff increases which ultimately contribute to increased business costs.
Possible solutions to the problems
Those challenges that affect government need to be immediately addressed. Organisations such as Lesotho Chamber of Commerce and Industry can be instrumental in influencing policy changes by the government to address the challenges faced by business community especially indigenous Basotho businesses. Possible solutions could include:
- A Small and Medium Enterprises (SMEs) Policy that will provide preferential treatment in respect to public procurement, such as the sub-contracting of Basotho businesses in infrastructure and consulting work and protecting certain procurements of works, services and goods to SMEs owned by indigenous Basotho.
- Revising the tax system to address promotion of priority areas in the National Strategic Development Plan, for example, capital allowances to be higher on priority areas such as tourism, agriculture matching those in Manufacturing sector, also staggering capital allowances such that they are higher in earlier years when businesses are still finding their feet.
- The Labour law should show a balance and remove provisions that require heavy and costly compliance and undue support for employees even where they are unproductive.
- As part of investment policy and regulation, all foreign businesses to be involved in enterprise development and supplier development programmes for them to be licenced and to enjoy any tax or other benefits.
- The state-owned enterprises and agencies, including regulators, need to remit all surpluses to government in the forms of dividends and purely remitting surpluses so that they can be used for larger central and local government needs. Their policy ministries should manage them on policy mandate only, but Ministry of finance should manage their commercial mandate, and further ensuring that each enterprise provides value for money through amongst others being operationally effective and efficient.
The above relates to what government should do. However, the private sector should pivot from ‘business as usual’ and operate differently. Our businesses operate as small enterprises with no likelihood of growth. The following could be explored:
- Mergers and Acquisitions – enlarged entities would enjoy economies of scale thus influence government policy direction better.
- Going global sourcing – there are also noticeable sourcing of input materials and equipment from Asia in places like India and China where the inputs can be obtained at much lower prices than in South Africa. The cheaper inputs would lower cost of trading within Lesotho and enable cheaper exports.
- Changing from reliance on business to government (public tenders) diversifying to business to business. Currently our businesses obtain expensive goods from South Africa and pass the expensive costs to government. This business model is not sustainable and promotes waste.
- Promote capacity in businesses – Our businesses must develop staff to be professional. They must explore setting out boards and operating on good corporate governance principles. Businesses should learn to use expertise of outsourced accountants and advisors as well as business coaches.
Facing SA – bilateral talks
There is a lot of waste at the borders with trucks spending days and lost men days of people traveling to South Africa to procure inputs. While these delays can be an opportunity to attract SA businesses to invest in Lesotho (particularly our border towns of Maseru and Maputsoe), we are actually losing a lot of trade. I think more bilateral discussions should be undertaken to address the challenges businesses are facing at the borders. Other negotiations should relate to free movement of labour to avoid harassment of our people who in the meantime must work in South Africa while local businesses are still growing in Lesotho. South Africa creates a safety valve by providing jobs for our unemployed and we need to treat this matter with the urgency it deserves.