Is the Value of the Ease of Doing Business Index Questionable?
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Welcome to the Supernatural Stocks Podcast on Moneyweb, hosted by The Finance Ghost—your weekly source for local and international insights tailored for investors and traders.
New Zealand, Singapore, and Hong Kong are ranked as the top three countries on the World Bank’s Ease of Doing Business Index. In contrast, South Africa is positioned at number 84—while Mexico sits at 60 and Rwanda at 38.
Remarkably, Russia is ranked 28th. Does that seem accurate? It certainly hints at when the last index was compiled, back in 2020, when Russia hadn’t yet become a global outcast.
Zambia is at 85th—just beneath us. Really?
Among sub-Saharan African nations, Mauritius ranks highest at number 13 worldwide. Yet, any corporate advisor with structural experience will tell you that while the island has its benefits, raising capital there is not one of them.
Are there businesses you genuinely want to invest in that are based in Mauritius? Probably not. The “ease of doing business” score acts more like a lead generation tool than a reflection of the real corporate landscape on the island.
Clearly, a deeper investigation is warranted. I’ll touch on a couple of stocks towards the end, as this is Supernatural Stocks, not Supernatural Macroeconomics, but I feel compelled to comment on the current economic landscape from time to time.
The devil is in the details
The Ease of Doing Business Index comprises several categories.
First up is starting a business. This pertains to the procedures, time, and costs involved in launching a (Pty) Ltd. Unfortunately, we don’t fare well here, ranking 139th, indicating we lag significantly in administrative efficiency.
Can the government address this? Certainly. Will they? Who really knows.
If the experience of registering beneficial ownership on the CIPC [Companies and Intellectual Property Commission] website is any indication, the prospects don’t seem promising. This is an area where the government should be held accountable.
Next is construction permits, where we rank at 98th. Again, bureaucracy, departmental inefficiencies, and corruption impede progress—contributing to the current perception of our government.
Read/listen:
Policing sector tops corruption complaints in 2024
Anti-corruption efforts stagnate in SA – Corruption Watch
Moving on to getting electricity, which is humorously measured using City Power Johannesburg as a case study. Unsurprisingly, we’re ranked 114th—though some may find that surprising since I would have expected a lower position.
It’s somehow more challenging to start a business in South Africa than to obtain electricity in Johannesburg!
Fortunately, “is there any electricity?” is not a criterion, as that wouldn’t have made for a pretty picture in 2020.
Next up is registering property, where we rank 108th. Clearly, our systems do little to enhance our international reputation. Let’s keep moving.
Then we have getting credit, where we should perform better, right?
Sadly, we only sit at 80th. This is where my interest in the index begins to wane. “Getting credit” in this context refers to companies’ ability to secure debt. The JSE has a dynamic debt capital market, with corporates borrowing at tight spreads. While banks may struggle to lend to SMEs, this is a common issue in numerous nations, and it explains the rise of fintech solutions.
Read/listen:
New SMME fund aims to assist artisanal entrepreneurs
Why SMEs are exploring non-traditional funding sources
So why the low rank at 80th? A closer examination reveals that credit bureau data on adults plays a significant role in this evaluation. Is this the Ease of Doing Business Index or the Ease of Acquiring a Personal Loan Index? Even the legal metrics they consider primarily relate to individual lending.
This metric seems applicable only to lenders rather than borrowers.
Strike one for me.
Next on the list is Protecting Minority Investors. Our Companies Act, the JSE, and most of our financial regulators are top-notch. We score 13th, which is commendable. I graciously accept this on behalf of my fellow financial professionals and we’ll proceed.
Following that is Paying Taxes, where we rank 54th. This seems quite generous concerning Sars, especially given reports from 2020. However, improvements have been observed since then. As a small business owner, I can attest that while there’s still room for enhancement, processes have definitely improved.
Next is Trading Across Borders. Here, we’re abysmally placed at 145th, and conditions have likely worsened since then. Shockingly, this is our worst score—lower than Getting Electricity, even during load shedding! This is yet another demonstration of governmental failure. Our ports are slow, inefficient, and in dire need of reform, as any local retailer or supply chain professional would confirm. This should be a major focus for the GNU.
Read/listen:
Port of Cape Town ranks lowest globally [Jun 2024]
Let’s not stress too much about the World Bank ranking our ports poorly [Jun 2024]
Durban to receive a significant portion of R3.4bn for Transnet port improvements [Feb 2025]
What are the private sector plans for Cape Town port? [Mar 2025]
Next, we assess Enforcing Contracts, evaluated based on the Johannesburg Magistrates Court. In a bid to put our best foot forward, we still don’t measure up. Minor court cases are assessed, and to our dismay, our ranking is poor at 102nd.
Times are tough for court dates, as I’ve heard, marking yet another government failure. There are no excuses here; this is simply unacceptable.
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Finally, we look at Resolving Insolvency, which measures metrics like recovery rates and duration. Here, we rank 68th. This seems fair since our financial systems are sound. While resolving insolvency shouldn’t be at the top of your agenda when considering a company, I acknowledge that we performed decently.
What are we missing?
I understand that this is the Ease of Doing Business Index and not the “Will You Be Profitable Here?” index. Yet, at the end of the day, business won’t thrive if profitability is at stake. It might be straightforward to establish a company, acquire property, and pursue legal action, but does it matter if viable opportunities are scarce afterward?
To analyze this effectively, we ought to overlay this index with economic growth metrics. Unsurprisingly, our performance won’t be stellar in that regard either.
However, I believe there are two potential improvements to this index that, while not directly linked to growth, do reflect levels of economic activity and available opportunities.
First suggestion: incorporate the ease of raising equity capital. This would assess the depth of capital pools on the JSE and the infrastructure surrounding private equity. South Africa would likely perform quite well in this category.
We boast a somewhat robust venture capital scene, along with a mature private equity sector and institutional investor base. Trust me, while Mauritius may rank higher in ease of doing business, Fairvest’s recent R400 million capital raise at a minimal discount to their volume-weighted average price would be near impossible to achieve on the island. I doubt they could even manage R40 million, let alone R400 million.
Additionally, can we please adjust the Getting Credit section to reflect a business standpoint rather than an individual’s?
The second category to consider for inclusion: the number of registered and operating companies. I have no idea how we’d fare in this regard, but measuring operating companies per capita could yield interesting insights.
Having access to other businesses indeed simplifies the process of conducting business. This speaks to the broader ecosystem of economic activity and its level of formality.
I specifically refer to operating companies, as there’s a significant contrast between the postbox companies commonly found in island economies like Mauritius—where many offices are merely rooms occupied by various firms—and the active companies in South Africa, which employ numerous individuals.
Read: Cape Town firms have mixed views on the city’s ‘business friendliness’
I’m not solely targeting Mauritius; it’s a broader observation. Yet, we frequently encounter assertions like, ‘Check the score in Mauritius,’ implying it’s a superior business environment. In reality, it’s that they excel in ticking off boxes for this index.
Protecting Minority Investors – the aspect that should concern you the most
Undoubtedly, contending with inefficient government departments and processes in dire need of reform is frustrating. The condition of our ports alone is painfully unacceptable and demands attention.
As an investor, most of you listening to this podcast, what is your greater concern? Ending up short-changed as a minority shareholder in a publicly traded company, or facing minor delays at the deeds office when selling a home you may only do twice in your lifetime? Would you prefer investing in corporations that can raise funds when needed, or are you more preoccupied with the CIPC’s minor inconveniences that make starting a new company take a little longer than in other nations?
I’m not excusing government shortcomings or glossing over the issues at hand, but consider African Rainbow Capital as an example. They intend to take the entity private—something they’ve been hinting at for some time—at a discount to the newly published net asset value [NAV] per share. Here in South Africa, appraisal rights would almost certainly protect minority shareholders. I can’t fathom their justification that the fair value is not reflected by the NAV per share. They will have to carefully consider their approach, knowing that activist shareholders will demand accountability through legal channels to receive the NAV payout.
Read:
ARC aims to delist from the JSE
R1bn in management fees later, ARC Investments plans to exit JSE
However, here’s the twist: the listed company is not incorporated in South Africa. It operates under Mauritian jurisdiction. You know—the hallmark of Ease of Doing Business. I’ve reviewed the Mauritian Companies Act, and while certain provisions might be relevant, it’s hardly a straightforward or familiar path for South African investors.
It entails a different legal system with distinct case law. I would be surprised if Mauritius has as rich a body of case law on this matter as South Africa does. It poses greater risks for shareholders attempting to seek court remedies in Mauritius to secure the NAV payout. This opens doors for discounted offers without much consequence. How this will unfold remains uncertain.
What I do know is that while our government should actively work to enhance our global image, I also think this index lacks realism.
It overwhelmingly relies on a checkbox system, making it simpler for small island economies to perform well by getting administrative protocols right. Credit to them for that, genuinely, but let’s not fool ourselves into thinking more people are thriving economically in places like Mauritius or Rwanda compared to South Africa.
In essence, this whole index is flawed
Moreover, a visit to the index’s website reveals that the World Bank issued a statement in 2021 citing data inconsistencies that were identified during the indexing process. This explains the absence of a subsequent index since 2020. A follow-up investigation uncovered several deficiencies in the report’s compilation process, including attempts by certain countries to skew the results. What a huge surprise.
In closing, I question the value of this index. Nevertheless, I urge South Africans to persist in voicing their concerns about government deficiencies.
We don’t need an index to recognize these issues; we just need to observe our surroundings and analyze company performances on the JSE. Additionally, let’s remember to celebrate our successes, like South Africa’s exceptional financial ecosystem that enabled Fairvest to raise R400 million in capital in the time it takes to enjoy breakfast.
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