Small business policy is based on wrong assumptions, study shows

Ramaphosa will need to change tack and consider counterintuitive facts if SA is to have effective strategies

President Cyril Ramaphosa has asserted that “the growth of our economy will be sustained by small businesses, as in the case of many countries”. Indeed, most of SA’s policy documents since the 1995 white paper have laid out the government’s ambitions to emulate the job-creating power of small, medium and micro enterprises (SMMEs) around the world.

It turns out, however, that SA is an international outlier. Unless the country conceives and implements policies that pay heed to the facts, the president will need to look elsewhere for growth and employment.

The Small Business Institute (SBI), in partnership with research company SBP, has been working in 2018 on SA’s first baseline study of SMMEs. We have completed the first phase and have learned that:

● There are only about 250,000 formal SMMEs in SA — a far cry from the range of 1.2-million to 6-million estimated up until now;

● Despite comprising a relatively high proportion of formal firms (98.5% in 2016), SMMEs provide a relatively low proportion of jobs in SA (28% in 2016);

● Employment in SA is highly concentrated — the 1,000 largest companies (including government) employ 56% of those who have jobs. Large firms also added more jobs and grew employment at a faster rate than SMMEs from 2011 to 2016; and

● Small firms pay more as a percentage of turnover to retain staff than larger firms but are not employing people at a desirable rate.

If small businesses with 50 or fewer employees account for less than half of the employment share than is commonly believed, it should be assumed that their contribution to GDP is also far lower than estimated.

SA’s small businesses continue to be as economically fragile as they were more than two decades ago, with about 70% of start-ups failing in their first two years.

The study’s preliminary findings confirm that most small business policy and supportive initiatives developed over the years also fail since their assumptions and underlying data have been wrong. In its research, for example, the CEO Initiative’s SA SME Fund, designed as a fund of funds to support SMMEs financially, identified 84,000 firms with a turnover of R20m-R500m as its “investable universe”, when it is more likely that only 20,000 to 40,000 firms would qualify.

Our research, supported by the Treasury and the South African Revenue Service, shows that in 2016, SA had only 176,333 “micro” firms with fewer than 10 employees (66% of the total); 68,494 small firms with 11-50 employees (26% of the total); and 17,397 medium enterprises employing 51-200 people (6.5% of the total). These add up to just more than 250,000 SMMEs — a far cry from the small business development minister’s estimation that there were about 2.1-million small enterprises in SA.

Employment by these firms is inversely proportional — only 5.1% of employment occurs in micro firms, 11% in small firms and 12% in medium ones. SMME firms employed only 3,863,104 people, or 29% of the South Africans who work.

This makes it clear that instead of perpetuating SA’s obsession with start-ups, it needs initiatives to nurture medium-sized enterprises — those creating most of the jobs in the SMME sector.

SA should once and for all make every effort to reduce red tape. On average, a small business owner spends nine working days (equivalent to 75 hours) a month dealing with unnecessary forms and bureaucracy. This can equate to 8% of turnover for small businesses.

This is especially important given SA’s high youth unemployment. Earlier research by SBP showed that relative to a 35-year-old, a 20-yearold is almost four percentage points more likely to be in a small firm. Those with less than matric are 19 percentage points more likely to be in small firms compared to those with matric or higher.

Another factor hampering good policy is the government’s failure to apply a common definition of what constitutes a small, medium or micro business across its laws, regulations and key strategies. We conducted a review — also the first of its kind — of about 70 laws, regulations and strategic policy documents only to discover that there are numerous interpretations of small enterprises across the spectrum of laws, and the proxies used are outdated and complicated to apply, track and verify.

These siloed, divergent approaches to identifying and supporting SMMEs mean there is no policy or regulatory co-ordination, no harmonisation across laws, no co-ordination across government to understand the impact of its well-intended interventions, which was meant to be the purpose of the Department of Small Business Development, established in 2014. It is time to close down this ineffective, fiscally wasteful ministry and create a strategic unit in the Presidency to address the urgent task at hand.

SA has been warned annually for years by several international comparative surveys, but are only now able to add meat to their conclusions that its SMME segment is imperilled and far worse off than imagined: in 2016 SA was ranked 136th out of 190 countries in the World Bank’s Ease of Doing Business survey, although its position improved to 82nd last year. Entrepreneurial activity by 25-34 year-olds, among whom unemployment is highest, has fallen by more than 40%, and the time it takes to complete the procedures necessary to start a business in SA has more than doubled since 2015.

SA needs to undergo a step change in the way it thinks about small business, putting it centre stage in the fight against poverty, inequality and unemployment. At the very least it should acknowledge that small businesses are a vital segment of the economy. They are diverse; they operate across every industrial sector and in every geographical location.

Relegating small businesses as a “sector”, as many do, is a misnomer; it misses the heterogeneous nature of these enterprises and condemns them to remain forever small and the Cinderella of the economy.

Our study, to be completed in early 2019, will provide path-breaking evidence for more effective public policy and dialogue to advance small business development and expansion by vastly improving our understanding of the business dynamics of the small firms operating across SA, and the effects of the business environment on their growth and job creation potential. Funded with support from corporate SA, its methodology will be peer reviewed and the study’s data will be open sourced.

As Ramaphosa said recently: “We need to have the capacity, the data and the political will to make the right choices.” By the end of 2018 we will have the data — let’s hope the public and private sector will use it wisely.

Without a coherent, single-minded, powerfully driven strategy based on reliable evidence SA will continue to fail to unleash SMMEs and their entrepreneurial value to drive innovation and grow their enterprises and employ millions more South Africans in the jobs of today and tomorrow.

Swanepoel is SBI chairman and Darroll SBP CEO and a director of SBI.