Last week, I took issue with a widespread view of small business as being something other than business – that is, small business as a community service or a moral statement. A vibrant community of small businesses is a valuable asset to any society, and there are good reasons for wanting to develop it: opportunities for wealth creation, for the creative use of people’s talents and above all for jobs.
If this is to be taken seriously, not only must the fundamentally commercial orientation of small businesses be acknowledged, but the conditions under which such companies operate need to be altered to encourage them in this.
While I endorse the prayers that Pope Francis has asked for, I also remember the words of Alan Paton, in Cry, the Beloved Country: ‘Somewhere down here upon the earth men must come together, think something, do something.’
Conducive environment
Small business is nominally something around which most interests in the country could come together. Creative a conducive environment for small businesses has been a theme in official economic thinking since PW Botha’s presidency. At his ill-fated Rubicon speech, Botha hailed the potential of small-scale entrepreneurs to help South Africa out of its difficulties, specifically in regard to unemployment. With characteristic pugilism, he declared: ‘I am of the opinion that there are too many rules and regulations in our country serving as stumbling blocks in the way of entrepreneurs. These stumbling blocks must be removed. We are already seriously attending to this problem. Even if I as State President have to take power during the next session of Parliament so as to enable me to deregulise [sic] in the interest of the country, I will do so!’
Nearly four decades later, in February this year, President Ramaphosa would describe to Parliament how his administration was ‘undertaking far-reaching measures to unleash the potential of small businesses, micro businesses and informal businesses.’ Characteristically foregrounding others’ responsibilities, he went on to say: ‘These are the businesses that create the most jobs and provide the most opportunities for poor people to earn a living. We have started discussions with social partners as part of the social compact process to review labour market regulations for smaller businesses to enable them to hire more people, while continuing to protect workers’ rights.’
Between these two commitments have been numerous restatements of the centrality of small business to South Africa’s future success. They have featured in each of the development plans and growth strategies intended to achieve economic take-off. And yet between Botha’s time and that of Ramaphosa, the talk remains of action ‘already’ taken, engagements ‘started’ and goals perpetually just over the horizon.
The failure of the South African economy to generate a robust SME economy has been much remarked on. However, the Centre for Development and Enterprise pointed out in a report last year that it was less South Africa’s entrepreneurial energy that was in question, than the ability to turn this into sustainable (and growing) enterprises. Drawing on data from the Global Entrepreneurship Monitor, CDE noted that the proportion of South Africans involved in early-stage entrepreneurship is respectable among its peers. Where it lags badly – in 44th position of the 50 countries ranked – is in the ownership of established businesses. Prospective entrepreneurs may attempt some sort of business venture, but relatively few can bring it to longevity. This phenomenon has been widely noted.
Not well understood
So, what’s going on? Part of the answer is that SMEs in South Africa are not well understood. The National Development Plan – which envisaged ‘small and expanding firms’ creating 90% of future jobs – made the following observation: ‘Before measures can be instituted, clear understanding of the issues facing small and medium sized enterprises and recognition of the diversity of the sector is essential. Small businesses operate in different environments and are owned and managed by people with a wide range of motivations and aspirations. The size of the business, its geographical location and the sector in which it operates will determine the kind of assistance it needs and interventions required.’
Yet there is a sizeable body of information that allow some tentative suggestions to be made about what to do, or at least to prompt some public debate and policy experimentation.
One consideration is that terms like ‘small business’, SMEs and SMMEs capture a wide range of undertakings. There is some scholarly disagreement as to whether the formal and informal enterprises can be grouped and analysed together. The line between them particularly in a developing country, is a permeable one. The taxi industry crosses this divide in many ways.
But as a means for driving growth and development most of the informal sector simply lacks the necessary dynamism and opportunities. As Prof Andre Ligthelm argued: ‘The informal sector cannot be regarded as, and will never become, the springboard of successful and productive business development and growth.’
The informal economy is by no means peripheral, but it seems that it is best served by respecting its informality. This is at odds with a recurrent view arising in the government that business should increasingly be formalised. This has a long pedigree. In 2013, a Licensing of Businesses Bill was published. This would have required permits to be issued by local authorities to carry out any business at all, supposedly to root out competition from illegal migrants and the trade in counterfeit goods.
This was fortunately dropped, but the impulse remains. Government relief during the Covid-19 pandemic was contingent on company registration with the CIPC, the SA Revenue Service and the Unemployment Insurance Fund. A report commissioned by the Small Business Institute said that implied that ‘government’s motivation has focused more on formalising informal businesses and collecting their data than providing financial aid to distressed businesses during Covid-19.’
The future of the informal sector is probably best secured if it is left largely alone.
Formal enterprises
A dynamic SME community would be centred on its formal enterprises. It is within such firms that innovation takes place, where expansion and scaling are possible, and where participation in complex value chains is a viable strategy. In Germany, such business entities take the collective descriptor of the Mittelstand (literally, the ‘middle estate’), firms that have played a significant role not only in the country’s domestic prosperity, but in its international commercial and branding footprint.
To the extent than an equivalent exists in South Africa, it is very small. Based on data from the National Treasury, the SBI reported in 2018 that there were a little over 260 000 SMEs in South Africa, far fewer than previous estimates had suggested. A large majority of these were micro enterprises. These firms together accounted for some 28% of jobs – more than half of the country’s jobs were produced by 1000 entities, including the government – while SMEs in comparator economies accounted for some 50% to 70% of jobs.
Much of this can be ascribed to the historical development of South Africa’s economy, both the dominant position of mining and a limited number of companies, and by the exclusion of black people – particularly black Africans – from proper participation in the economy. The scope for African entrepreneurship was extremely constrained. This has had a knock-on effect into the present.
Yet this does not explain everything, not least the failure to grow the SME economy despite close to four decades of commitment to doing so.
Prof Cecile Nieuwenhuizen of the University of Johannesburg made this observation in a piece in the journal Development Southern Africa in 2019: ‘Growth and employment come from new and growing businesses. By imposing additional costs and regulations on existing businesses that contribute to the economy of the country, attention is diverted away from stimulating growth and entrepreneurship. In order to address the problem of limited business establishment and growth, government should focus on creating an environment which is conducive to business start-up and development with no political intervention.’
South African SMEs confront numerous obstacles that the country’s authorities have chosen to impose on them.
Red tape
One of the most obvious of these is the extent of so-called ‘red tape’. At the very opening of the post-apartheid era the 1995 White Paper on Small Business recognised it: ‘Inappropriate or unduly restrictive legislative and regulatory conditions are often viewed as critical constraints on the access of small enterprises into the business sector and as obstacles to their growth.’ In 2005, the business environment research group SBP (formerly the Small Business Project) conducted a study into the costs of regulatory compliance across the economy and concluded that it consumed around 6.5% of GDP.
SBP revisited this issue in its SME Growth Index, a longitudinal study of growth-oriented formal firms that it reported on between 2011 and 2015. In the report on its 2012 round, it found that the average SME spent 4% of turnover on compliance. The following round reported that firms were spending some 75 hours a month dealing with it. This was the equivalent of 8 working days. Only 41% of its respondents felt confident that they knew all the regulations they were required to comply with. Demands from the SA Revenue Service were regarded as the most burdensome.
All of this represents an extraordinary commitment of resources that might otherwise have been dedicated to productive purposes.
The demands of South Africa’s labour regime, meanwhile, represent the victory of a ‘social partnership’ concluded between the government and large interests in the economy. Bargaining council determinations extend to SMEs wage demands to which they did not agree, and which they are often unable to afford.
The Report of the High Level Panel on the Assessment of Key Legislation and the Acceleration of Fundamental Change – published in 2017, and representing an unusually frank analysis of policy and legislative impact – noted: ‘In practice, the Labour Relations Act unintentionally forces the terms of an agreement reached by large employers and large unions onto SMEs. The result is higher than manageable wages for SMEs, arising out of agreements reached by larger firms and employers – with negative consequences for the growth of, and employment generation among SMEs in the relevant sectors.’
More than this, compliance issues around labour legislation, and restrictions on dismissals – issues arising both from the design of the system and its practical management – bring problems of their own.
This concern has been well represented in studies of SME dynamics and identified by SBP’s work as a significant brake on firm and employment growth – thereby forfeiting one of the key societal contributions that SMEs make. As one businessman told SBP: As one manufacturer put it: ‘Labour laws are very restrictive. You have ideas but they are too risky. If the project doesn’t go well, you can be stuck with them.’
State of governance
Intimately linked to these issues is that state of governance. As much as South Africa’s post-apartheid governments have committed themselves to one or another variant of state-heavy development – whether this is expressed as an ‘activist state’, a ‘developmental state’ or a ‘capable state’ (the current formulation) – it has never come remotely close to achieving this. The dire state of municipal governance across most of the country needs no elucidation; and since this is the level tasked with managing most day-to-day aspects of social life, its failings hit businesses particularly hard.
The withdrawal of the Clover plant from Lichtenburg last year – citing ‘ongoing poor service delivery’ – illustrates just how debilitating municipal failure can be. Clover was of course not a small business, but the loss of a large wealth creator has an inevitable knock-on effect. Its departure would mean fewer local rands, and less demand for the services of retailers, vehicle dealerships, and insurance brokerages.
In Standerton, similar failings led Astral foods to turn to the courts to try to force the municipality to provide the services it was required to. This had little apparent impact, and Astral has to truck water from the Vaal River to an on-site filtration system in its plant.
Clover at least had the option to relocate, and Astral to provide its own infrastructure. Most SMEs do not; the increased costs render them uncompetitive, and they face decline and closure. The collateral benefits they bring – which so impresses the Pope, and supposedly animates our policy makers – fades with them.
Beyond municipalities, there are the pressures of infrastructure breakdown, of which electricity and transport systems are probably the most serious. The unreliability of the postal service places South African SMEs at a disadvantage in servicing clients outside their immediate localities – and the Post Office has proposed enforcing a monopoly over the delivery of small parcels, which would only compound the problem further.
Crime exerts crippling costs on business, both directly and through mitigating measures, as well as in psychological terms. SBP’s 2013 report found that over half of its respondents had been victims of crime in the past year, and that crime-imposed costs in the order of 3% of turnover.
In each of these areas, it is the smaller business operators who find it most difficult to cope.
It is, ultimately, a functional economic environment that is lacking. CDE perhaps sums up the circumstances of business in South Africa faces, small business above all: ‘One possible explanation for this rising frustration is that while the government has focused a lot on providing special assistance to selected firms (and there could be numerous problems with the way this assistance is doled out), it has not devoted nearly enough attention to creating a more conducive environment in which businesses of all sizes could thrive.’
These, the realities of operating a viable SME, must be addressed.
As I was writing this article, a headline in the Daily Maverick caught my eye: ‘Women do not desire resilience; we want opportunities to thrive’. This much applies to SMEs too. Less praise and more practicality – and perhaps a prayer that we can accept the difference.
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