This is according to a panel of experts approached by Opportunity on the role of SMEs in addressing joblessness in South Africa.

In March, at a presidential summit in Pretoria, Minister of Trade and Industry Rob Davies said there was a high level of consensus about the fundamental objective of creating five million jobs.

According to the January data from the Unemployment Insurance Fund, businesses in South Africa employ an average of 10.1 workers. That means 495 000 new businesses have to be created to provide five million new jobs, said economist Mike Schüssler. (Source: Sunday Times, Business Times, 20 March 2011)

In the 1980s, the average was 34 employees per business.

“Businesses are becoming smaller,” Schüssler said. “That means government has to look at ways of supporting small businesses.”

Davies told the Sunday Times that the development of small businesses was discussed during the summit.

Schüssler told Opportunity that during the third quarter of 2010, South Africa only had 301 000 businesses employing four people or more. “We have a long way to go,” he added.

Currently, there are 29 916 businesses that employ 50 or more employees, while 40 000 employ between 20 and 49 workers. A total of 105 000 businesses employ between 10 and 19 people.

“For 17 years, we have tried to protect workers by using bigger and bigger labour legislation. But what government needs to help small businesses, is a complete mind-shift,” said Schüssler.

“What government needs, is not new (labour) rules. But they must focus on things we need to do, like pothole-free roads, like making sure that every business park is a crime-free area, and that there is enough electricity for every workplace.”

He pleaded for a holistic approach to education, instead of a one-size-fits-all.

A basic practical business skills course must be introduced at school level, and must be available to people who start businesses, Schüssler noted.

“We need a change of ownership in the economy, but the way in which we reach that must be revisited,” he added.

Cash flow and markets

Dennis Dykes, chief economist at Nedbank, said small businesses in South Africa are hampered by the regulatory environment and the general environment.

In particular, both government and big businesses tend to be late with payments, which hurts cash flow and, in extreme cases, results in business failures.

The government has already committed to changing this (payments within 30 days), which would make a huge difference.

Other solutions would be simplifying the regulatory environment (small businesses spend a disproportionate amount of time on compliance) and making the overall climate more flexible and business-conducive, Dykes told Opportunity.

In particular, current proposed changes to labour legislation would be very damaging (generally, but particularly so for small businesses) as, for example, they would force businesses to avoid temporary labour and therefore operate below capacity during better times to avoid overcapacity when the economy weakens.

Small businesses are often less informed (about markets, incentives and financing options, for example) and both government and business chambers have a role to play in reducing information costs, Dykes advised.

Youth employment subsidy

He told Opportunity that the government’s proposed youth employment subsidy is an excellent idea, as it would facilitate training and employability.

However, it would need to be structured in such a way that would make it attractive to small businesses. This is because training is a greater commitment for a small company, as the staff complements are smaller.

“In the longer term, education and skills development remain crucial. Fundamentally, the quality of teaching has to improve, superseding any other policy goals,” Dykes said.

A few dark clouds for SME sector

Neren Rau, chief executive officer of the South African Chamber of Commerce & Industry (SACCI), said urgent attention to the SME sector is required.

He added that prospects for South African employment recovery in the short term are low.

The SACCI trade indices indicate marginal prospects for recovery on the trade environment broadly.

The economic crisis has intractably harmed the South African SME sector.

For the government’s recently announced New Growth Plan to succeed, a strong SME base is required.

“Liquidations numbers were, until recently, high. Those businesses that are currently being lost are previously healthy enterprises,” said Rau.

‘Repair’ of the SME sector is more easily achieved through the encouragement of successful businesses from the informal to the formal sector than through the creation of new SMEs.

Challenges when starting new small businesses

In a recent survey by Finmark Trust, 39% of small business owners cited money and money-related matters as an obstacle when starting a business, 34% cited business strategy as the challenge, and 17% cited infrastructure and equipment as the challenge.

In terms of growing businesses, 16% cited space to operate as the challenge, 14% cited access cost of finance, and 13% cited competition as the challenge.

Rau told Opportunity that access to loan finance has been identified by Chamber members as critical for the development of SMEs.

“The paucity of SME finance is compounded by lack of comprehensive business skills required to manage SMEs in a competitive environment,” he said.

“In the start-up phase of SMEs, entrepreneurs are almost always unable to adequately demonstrate the potential of their businesses to deliver the required rates of return to financiers.

“Those that are able to attract financial support in the early stages of the venture fail to sustain the interest of financiers in their businesses due to lack of diverse business education, business experience and peer support,” Rau told Opportunity.

When identifying the obstacles to setting up and sustaining SMEs, it is not possible to single out individual factors such as the lack of skills or finance in themselves as the major obstacles, as Chamber members cite a combination of several factors.

Rau said the regulatory burden and bureaucracy makes it difficult to set up a business. It makes it costly and administratively complex to maintain businesses and challenging to move from informal to formal status.

The lack of understanding and/or trust in the banks and insurance companies causes SMEs to prefer to self-finance when start-up funding and business insurance would have been helpful.

Dr Mike Herrington, director of the Centre for Innovation and Entrepreneurship at the University of Cape Town Graduate School of Business (UCT GSB), said the regulatory environment is tremendously onerous in South Africa.

It takes a long time to start and register small business. Sometimes that process may take well in excess of 30 days in South Africa.

In Rwanda, only two days – or in the case of Egypt, four or five days – were needed to start and register small businesses.

The regulatory reporting requirements are onerous, and the small business owner has to do it when there is not a large staff complement. It takes one away from what one is supposed to be doing – running one’s business. These regulatory burdens could certainly be decreased.

The government could address this at the rate of one regulatory burden every six months, and actively do away with it, or consolidate and refine the process.

Another fairly long-term problem hindering small businesses to a huge degree, particularly in townships and rural areas, is the high incidence of crime.

It is having a devastating effect on small businesses, Dr Herrington warned.

“If you are selling sweets in a township, and somebody is pinching it, it might not be a problem. But if you are a hairdresser or own an Internet café and they steal your equipment, you are dead. You no longer exist as a businessman.

“Apparently, it is also quite difficult to get suitable and economical insurance for those businesses.

“Crime plays an incredibly important role in SME development, and I think it prevents many overseas organisations from investing in the country particularly,” he added.

Labour laws, skills and mentors

Dr Herrington said South Africa will have to relook labour laws with regard to small businesses.

“Labour unions are very important, and you have to regulate how you hire and fire people. But small businesses are very reluctant to hire people because if they have to fire them, it is a hugely expensive and time-consuming process,” he added.

“And that is why we will have to look at labour regulations again, particularly for smaller businesses.”

With regard to a lack of skills in South Africa, experienced mentors are required to form a mentorship network where experienced people are able to help new businesses get off the ground because the failure rate of new small businesses is high, said Dr Herrington.

Success stories of youth business development

At the UCT GSB, and at the Soweto Campus of the University of Johannesburg, there is the Raymond Ackerman Academy of Entrepreneurial Development where young school-leavers who never had a chance of getting a job or starting a company, were subjected to a strenuous and intensive six-month training programme.

“We have monitored the results over the last six years, and it has been absolutely remarkable,” said Dr Herrington.

Mansoor Mohamed, the City of Cape Town’s executive director of Economic, Social Development and Tourism, sent a delegation of people to Barcelona. The purpose was to look at the Barcelona hub to develop specific niches of businesses in various areas such as yacht building, biotechnology and information technology.

“There could be a concerted effort on behalf of regional governments to try and identify the growth sector in their areas and to get funding support and business support to those particular sectors,” said Dr Herrington.

Instead of a copycat or ‘me-too-type’ of business, South Africa may be in need of a ‘depository’ of business ideas where people can explore what possible ideas are worthy of development, he added.

The right environment

Government needs to improve the overall operating environment for business.

It has done well to reduce corporate tax, improve external and internal competitiveness, and reduce exchange controls, said Dykes.

Yet, the capacity constraints (in electricity and transport) and regulatory and policy uncertainty are hampering investment decisions.

In particular, the contradictory nature of certain policies (some business-friendly and some hostile to business) is of concern.

Nationalisation debates, unclear mining rights regulations, land tenure and land reform debates have postponed investments in key parts of the economy over at least the past decade, warned Dykes.

Rau said the government should contemplate the alignment of incentives for SME financing incentives with other policy incentives, for example youth development incentives.

The government should further consider a national SME database, which should be supportive in promoting SME business opportunities as well as in facilitating the interaction between SMEs and various development finance institutions (DFIs).

These institutions should be more flexible in the allocation of small amounts of seed capital. Larger amounts of capital can be allocated on a graduated basis concomitant with the growth of the enterprise.

The DFIs must develop and offer working capital funding more readily to SMEs and pursue the use of innovative financing products such as invoice discounting, particularly where the government is a client, said Rau.

The government must create conditions conducive to venture capital development, perhaps using tax incentives and breaks to encourage risk-taking.

The creation of a state venture capital fund aimed at funding SMEs could focus on a wide range of financing needs from start-up capital to working capital and cash flow funding, proposed Rau.

Fanie Heyns