Why BEE alone does not lead to entrepreneurship

2012-06-20 12:51

Zama Ndlovu

During a discussion on Black Economic Empowerment on SAFM, a familiar criticism was raised by a caller: BEE has failed to encourage black entrepreneurship.

The argument goes that although BEE has assisted in deracialising the South African economy through curbing unfair discriminatory practices, blacks have mainly acquired equity in formally white-owned companies, rather than starting their own enterprises. Although there is much truth to this sentiment, it is more likely that the high return on investment in education from working in a corporate is the real stumbling block to entrepreneurship in South Africa. Let’s face it, in South Africa, entrepreneurship has become largely the option of the most desperate.

Key aspects

By now many of us are familiar with the main interventions identified as key to reducing high unemployment in the country. In order to create employment opportunities for the high number of young unskilled job entrants, the growth of the Small and Medium Micro Enterprises (SMME) has been identified as crucial as the sector is labour-intensive. In addition, the manufacturing industry can also absorb the type of unskilled inexperienced labour that is in large supply.

Finally, as new global challenges of limited resource and climate change considerations also require that economies move towards efficient and less energy and resource intensive economic activity, South Africa needs to focus on activities that would require skills which are currently scarce within the economy. It is therefore critical that the education system be fixed in order to produce the skills set required, in high volumes that would increase the availability of skilled employees for the service sector.

Return on investment

Today, despite a largely failing education system, there are pockets of excellence within the education system that have allowed a small percentage of lucky individuals to access quality tertiary education at a relatively cheap price. It has been our country’s hope that these young graduates would use their rare skills to start enterprises that would help boost the employment rate, but this has not happened. Why?

Put yourself in a young graduate’s shoes. Because of the small number of people with the right tertiary qualifications, competition for skills is stiff. Engineering firms, for example, find themselves competing with financial services and management consulting firms for skills. In addition, black graduates with the right qualifications are also sought after by companies desperate to meet their BEE targets. In such a steep competitive environment, salaries for rare skills are forced upwards. It often makes very little sense for a young skilled person to walk away from a fairly lucrative salary to start their own high-risk venture.

Personally, I was able to earn back the total investment into my BCom degree, including the costs of accommodation and estimated costs of food and textbooks, in less than three years of working. That’s an incredible return on investment at very little risk. Although the idea of entrepreneurship is attractive from a self-determination perspective, from a risk perspective it doesn’t make as much sense. It’s not uncommon for a person’s salaries to double in a few short years in corporate South Africa with significantly less effort and risk than starting one’s own enterprise.

Consequently, the very young people with the skills to start enterprises that can add real value to the economy have little incentive to; and it’s thus mainly those with few alternatives that are forced to start their own businesses.

Tough market

With little or no skills, most entrepreneurs are then forced into reselling rather real value adding activities, and thus often priced out of the market by larger corporates with cost effective supply chains that make their products cheaper. South Africa’s SME failure rate of 75% is amongst the highest in the world, since among other reasons; unlike in many economies, they don’t produce new products and innovations that disrupt the market.

This is why it’s imperative to fix the education system, to encourage entrepreneurship and to stabilise the cost of skills in South Africa. While labour unions are typically blamed for high labour costs, skills scarcity has also forced salary costs up in the tertiary sector; and arguable stifling entrepreneurship.

It's all about the education

Although the Black Economic Empowerment Act is meant to ensure that historically disadvantaged persons are provided with more opportunity; this tool on its own will not encourage the type of entrepreneurship the country needs. In addition to the high returns on corporate employment, the issues faced by entrepreneurs in registering their initiatives and sourcing funding, as well as a high failure rate further add to the unattractiveness of entrepreneurship in South Africa.

What South African policy makers need to acknowledge is that none of these policies can work in a vacuum. Without an equitable high quality education system, Black Economic Empowerment or any other act meant to grow entrepreneurship and economic activity will fail. And the few that get a quality education in South Africa, will opt for the pleasures of a well-paying corporate position and avoid the headaches of entrepreneurship.

- Zama Ndlovu is a management consultant, managing director of Youth Lab, writer, activist, and anything else you'd like her to be. Follow her on Twitter: @JoziGoddess

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