SA entrepreneurs need a pikitup

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.”

Entrepreneurship | The lost legacy

IN A RECENT opinion piece, Anthony Farr – who heads the Allan Gray Orbis Foundation – bemoaned the fact that South Africa had lost its legacy of “entrepreneuring”. Talking about the success of the United States as a nation of entrepreneurs, Farr commented: “The real reason for America’s economic dominance is that they’re the world’s best entrepreneurs. The rate of company formation in America is at least double that of the next closest country. According to Carl Schramm, of the Kauffman Foundation, 70% of Americans currently at university will at some point in their career be involved in starting a new venture – meaning you’re as likely to start a business as you are to get married or have children.”

Compared with that, SA’s rate of 6% is very poor.

One of the issues Farr highlighted was that SA had been poor in profiling entrepreneurship and making it attractive as a would-be career path for young South Africans. However, he saw a number of positive signs in the establishment of the Silicon Cape initiative in Cape Town and the partnering with the Endeavor organisation, which supports entrepreneurial activity. Endeavor is expected to create up to 700 000 jobs in nine countries, thanks to its high-impact entrepreneurship model.

Allon Raiz, of SME incubator Raizcorp, says SA as a whole still has some way to go in embracing entrepreneurship and small businesses. Similarly, he says entrepreneurs also need to recognise the blood, sweat and tears that go into running a business and not just the glamorous side of entrepreneurship. Raizcorp, which mentors young business owners, has a success rate in excess of 90% and has recently partnered banking group Nedbank to support entrepreneurs, a move the bank says will help it better understand the sector.

Scott Cundill, author of How Not to Start and Run Your Own Business, agrees the culture in SA has to change when it comes to dealing with SMEs. In his 10 000-strong Majestic entrepreneur community he finds one complaint coming up time and time again: “If there’s one thing that will change small business in SA it’s ensuring every invoice, from any company in any industry, is paid within 14 days. If SMEs got paid quicker, it would mean that money would fly through the economy much faster than it does now. Faster money has much the same effect as more money and gives the sector a wonderful boost.”

Competition Commission | Showing its teeth

ONE OF THE FEW PLUSSES over the past few years has been the Competition Commission and its cartel-busting activities, which will hopefully, over time, have a material impact on South Africa’s small business sector. Some of the big names that have felt the commission’s bite include JSE-listed giants Sasol, Adcock Ingram and Pioneer Foods.

Martin Versfeld, a partner at law firm Webber Wentzel, says most of the instances of cartel behaviour were brought to the commission’s attention by firms which, as part of an active self-auditing process, identified areas of exposure and decided to proactively manage their risk and seek leniency.

“The competition authorities have been the beneficiaries of an unprecedented number of leniency applications. The alignment of corporate SA with the requirements of the Competition Act is an ongoing process and we can therefore expect more cartels to be exposed over the short to medium term,” Versfeld says.

Smaller businesses haven’t been excluded. Over the past few weeks the commission has recommended to the Competition Tribunal that 28 bicycle wholesalers and retailers it’s charged with anti-competitive behaviour – including setting price mark-ups on bicycles and accessories – should pay a 10% penalty after minutes of a meeting held in 2008 surfaced.

That prompted an outcry from those small retailers, who argued they’d be put out of business if forced to settle the fine. The counter argument to that was the market would ultimately provide a mechanism for weighing up supply and demand and new players would replace those who fall away.

Asked whether cartel-busting was likely to realise short-term benefits for the small business sector, Versfeld says the impact was more likely to be felt over the longer term. He emphasised that the “bigger was better” legacy largely owed its genesis to apartheid SA and efforts to circumvent sanctions. We’ve inherited a very concentrated market and it’s likely to stay that way over the short to medium term.

“While a more competitive market should reduce some of the barriers to entry, it should be appreciated that a number of the industries that have been investigated are very capital-intensive and for that reason alone entry for new players will remain difficult,” Versfeld says. “But I’m encouraged by the fact that firms are now no longer talking about the Competition Act – they’re living it. With this sea change it’s inevitable the consumer will benefit over the long term from more competitive prices, greater choice and better service offerings.”
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