South Africa’s small business sector is offering the country a way out of the jobless growth cul-de-sac in which it currently finds itself – but the irony is Government is refusing to listen. That’s one of the complaints being levelled by SME sector stakeholders and it’s going to take some creative thinking and some unpopular changes to labour and economic policies to avert a crisis.
Recently, leading South African economist Mike Schüssler (from Economists.co.za) revealed some shocking statistics that highlighted a growing problem that can no longer be dismissed. Speaking at the opening of the conference for trade union United Association of South Africa (UASA), Schüssler said more South Africans received money from welfare than from employment. According to his statistics, 12,8m people were currently working while 13,8m received State welfare payments from the proceeds of 5m taxpayers. He also highlighted there had been a rapid increase in the number of people who had simply given up searching for jobs or making an effort to join the ranks of formal employment and that trend was on the up.
Even more worrying is feedback from SA’s participation in the Global Entrepreneurship Monitor (GEM). When the report was released in May this year, it included a note from GEM researcher Mike Herrington, which said: “What’s interesting to note is that most of the recommendations put forward by the GEM team to Government haven’t been implemented. In certain cases token efforts have been made, but nothing substantive. This is vital, particularly due to the fact that unemployment in SA runs between 26,6% and 40%, depending upon who one talks to.”
The report went so far as to say: “Government-administered programmes are ineffective at best and corrupt at worst.”
For a country basking in the glow of successfully having hosted a sporting event of the magnitude of the Soccer World Cup there’s a certain irony in that statement.
The four key areas identified in the report that had contributed towards poor levels of economic activity were: a low level of overall education and training; social factors that don’t encourage entrepreneurship as a career path of choice; lack of access to finance, particularly in the micro-financing sector; and a difficult regulatory environment.
If you look at some of SA’s most successful entrepreneurs of recent memory there are very few stories of individuals battling from grassroots. Instead, the successes have fallen to the likes of highly skilled people, such as Adrian Gore (Discovery) and Mark Shuttleworth, who sold IT company Thawte to international buyers for R3,5bn in 1999.
The world is in a tricky place right now. Cash-strapped governments are seeking to raise a variety of taxes to fund ballooning budget deficits. Those taxes in turn are being heaped on economies continuing to bleed jobs.
Closer to home, we face our own challenges. Those include a Government that derives much of its support from organised labour. Black economic empowerment scorecards, militant trade unions, low productivity and labour laws that discourage small businesses from creating jobs are doing little to alleviate SA’s employment crisis.
Over the past 16 years SA has undergone remarkable social and economic upheaval attempting to rectify the wrongs of apartheid. However, the focus of economic policies needs to change. That was a point recently raised by Richard Pike, CEO of JSE-listed labour broking firm Adcorp, who said undue wage escalations had increased the use of labour-saving alternatives, such as automation and mechanisation. That, coupled with a number of legislative tools – the Compensation for Occupational Injuries and Diseases Act (1993), the Occupational Health and Safety Act (1993), the Labour Relations Act (1995), the Basic Conditions of Employment Act (1997), the Employment Equity Act (1998), the Skills Development Levies Act (1998) and the Immigration Act (2002) – had added to the non-wage costs of employing people in SA and had discouraged potential employers from taking on new staff.
While there’s a perceived increase in benefits for employees, the number of employed people is going backwards. That’s led to some frosty relationships between business, labour and Government, which walks the barbed wire fence separating the two other parties.
However, there are some encouraging sounds coming from Government. Speaking at the FinMedia24 Economist of the Year awards ceremony, Finance Minister Pravin Gordhan emphasised a new focus by Government on the creation of first jobs for South Africans. “The economic reforms that are needed to generate faster and inclusive economic growth are impossible – as is a World Cup victory – in the absence of teamwork. Government, business, organised labour and the larger society – all of us must work together as a team,” Gordhan said.
He added there was no single policy intervention or “silver bullet” that would magically cure the ills of SA’s unemployment situation. “What’s needed is a comprehensive set of short- and long-term reforms that maximise job creation, improve the skills of our workers and get young people into their first jobs,” he said.
Carien Engelbrecht, a director at Aurik Business Incubator, has identified that, relative to many of its emerging market peers, SA has a very low level of economic activity driven by entrepreneurs. She says the Total Entrepreneurial Activity (TEA) rate – which represents the number of people in a country between the ages of 18 and 64 involved in entrepreneurship or an owner-manager of their business – in SA comes in at around 5%. That compares poorly with similarly structured economies, such as Chile and Brazil that are running at 16%.
“Addressing entrepreneurship and SME development starts at grassroots level. That means getting people interested in entrepreneurship and changing our current entrepreneurial culture into a positive and respected self-employment choice,” Engelbrecht says. She believes the concept of “Enterprise Development” (ED) is the way to go. That would see large corporates contributing part of their annual budget into investing in small businesses within their sector and engaging the services of professionals to help nurture these up-starts. However, there’s been little co-ordination between large and small enterprise.
“As far back as 2006, Empowerdex said ED is a ‘missed opportunity’ for companies, because so few have a firm understanding of it. Four years later little has changed. Perhaps many companies have a poor understanding of ED because it’s so simple and sounds too good to be true,” says Engelbrecht.
That reflects on the ground if you consider the problems recently highlighted at SA’s Companies and Intellectual Property Registration Office (Cipro). The auditing community has been warning authorities for some time that Cipro’s systems weren’t up to scratch and it was becoming increasingly difficult to register company names. Matters came to a head in May, when Cipro began “de-registering” small businesses and sending instructions to banks to freeze bank accounts. One more nail in the coffin of would-be small businesses.
But one person upbeat about the changing landscape offered by the SME sector is Chris Delport, of pan-African financier GroFin. Delport says over the past five years it’s become easier to set up a small business, with many financing companies providing dedicated small business units and technology allowing SMEs to level the playing fields with bigger competitors.
Added to that, new financiers have entered the market, allowing would-be entrepreneurs who wouldn’t qualify for credit from traditional banks to be able to get their ventures off the ground.
Delport also applauded the positive work done by both SA’s Competition Commission and National Credit Regulator to change the landscape in which SMEs operate. However, he’s critical of some of the initiatives provided by Government. “One of the problems we have is Government or quasi-government institutions providing assistance to small businesses,” he says, adding: “The wrong people and businesses are being funded.”
He uses the example of Sector Education and Training Authority (Seta) funded businesses, which have an incredibly high failure rate. In the Services Seta, one observation made was there was a 96% failure rate of those businesses where the person operating the venture was under the age of 35, whereas the failure rate was 42% where the person was aged above 35, indicating another flaw in backing youth-focused companies.
Delport agrees that access to financing isn’t holding back the sector but that a lack of experienced business skills is.
The experts are highlighting an unsustainable situation in SA’s economy and Government isn’t listening. Much of that’s been covered up by a resources boom and a period of economic growth and prosperity over the past 16 years.
However, in just three years we’ve given up nearly every single job added to SA’s formal economy since 1994 – and that’s creating a recipe for disaster unless aggressive steps are taken to change the economic landscape.
Perhaps SA’s policy makers need to heed the words of American pastor, conservative and author Adrian Rogers, who commented in 1984: “You can’t legislate the poor into freedom by legislating the industrious out of it. You don’t multiply wealth by dividing it. Government can’t give anything to anybody that it doesn’t first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving.
“The worst thing that can happen to a nation is for half of the people to get the idea they don’t have to work because somebody else will work for them; and the other half to get the idea it does no good to work because they don’t get to enjoy the fruits of their labour.”