Smaller needs to get a lot bigger in SA
Formal SME sector accounts for far fewer jobs than expected
It was an indaba on small business that was opened by big business. And it raised all sorts of questions about the failure of South Africa’s economic policy environment to nurture small and medium enterprises and what to do about it.
Eskom and Telkom chairman Jabu Mabuza gave the keynote address at a Small Business Initiative indaba this week, wearing his hat as president of Business Leadership South Africa and the CEO Initiative.
He reminisced about his early years as a taxi operator in the 1980s. He talked about the need for the SME sector to be mainstreamed, pointing out that despite the public claims, it hadn’t received the requisite attention.
He called for a “reset” of the relationship between big and small business — starting with a commitment by large businesses to pay smaller creditors within one month.
The SBI, the old Afrikaanse Handelsinstituut, has been revived over the past couple of years under the leadership of former Harmony Gold CEO Bernard Swanepoel and repositioned as the “big voice of small business”.
One of its first projects has been to undertake a comprehensive baseline study of the sector — despite all the government rhetoric over the years on promoting SMEs, policy interventions were based largely on guesstimates rather than hard evidence.
Early results of the study, presented at the indaba, suggest the National Development Plan’s notion that SMEs will create most of the growth and jobs the plan is targeting is little more than a pipe dream.
As it turns out, the formal SME sector (defined as firms employing fewer than 200 people) is much smaller than expected, with only about a quarter of a million enterprises, and its contribution to employment is alarmingly low — about 28% of South Africa’s jobs, where globally 60% to 70% of jobs are in SMMEs.
By contrast, the study finds that 56% of jobs are provided by just 1 000 large entities, including the government, in South Africa’s highly concentrated economy.
This first phase of the study is based on formal enterprises that are registered for tax purposes.
Separately, a new collection published by the University of Cape Town’s REDI3x3 examines South Africa’s informal sector — about 1.4 million enterprises that are not incorporated or registered for tax but which provide an estimated 17% of employment, most in very low-paid jobs.
In the formal sector, by contrast, Swanepoel says the research shows SMEs generally have to pay more to get the skills they need, dispelling the myth that they don’t create “decent work”.
Clearly, though, there aren’t nearly enough of them.
And they struggle to scale up, if they survive at all, in an environment that remains as inhospitable as ever for SMEs. They have to contend with everything from regulatory hurdles and mind-boggling red tape to a lack of access to finance and high broadband costs — and that’s before they even try to get their clients in the government and big business to pay them on time.
The evidence is that more than twothirds of those formal-sector SMEs employ fewer than 10 people and about 70% fail within their first two years.
The study finds too that large businesses created jobs much faster than SMEs between 2011 and 2016. That’s an interesting statistic because it is in that period that the government’s Department of Small Business Development was established. The evidence suggests the SME landscape has got worse, if anything, during its five years of existence.
Swanepoel is calling for the department to be shut down. Mabuza is more careful, but he calls for a “review” of the multiple government agencies supposedly tasked with promoting SMEs.
Under new political leadership, there appears to be the space to look at interventions to create the right conditions for SMEs to thrive and create jobs.
So far, however, the main policy initiative is Economic Development Minister Ebrahim Patel’s effort to give competition authorities the power to go after big businesses in concentrated sectors with the aim of opening up the economy to smaller businesses.
On its own, that will do nothing to address the constraints on SMEs. As this week’s indaba highlighted, what’s needed is not a separate department or new competition laws but rather a concerted effort across the government to make it easier to do business as an SME — and a concerted effort by big business to use the power it has to encourage and support smaller suppliers and competitors.