Small, medium, and micro enterprises (SMMEs) have the potential to drive economic growth and employment in South Africa. However, this potential is not being realised.
The Small Business Institute estimates that approximately 98% of all registered businesses in the country are SMMEs. However, SMMEs consistently contribute less than 28% of jobs, which is a far cry from the government’s ambitions of 90% contribution to job creation by small businesses by 2030. In fact, large firms with over 250 employees remain the lynchpin of job creation and account for just under 70% of firms that employ 10 or more people (according to the OECD).
Although sources differ on how SMMEs are classified, data provided by the Small Enterprise Development Agency (SEDA) suggests that there are roughly 2.55 million ‘SMME owners’ (a proxy measure for the number of formal and informal SMMEs) in South Africa).
In our recent report on the SMME landscape in SA, we highlight the sustainability of SMMEs as a concern. SEDA data reveals that 107 377 new SMMEs entered the market in Q1 2019.
However, fewer and fewer firms survive each year, and many of those that do survive are unable to grow revenues or employment. According to the Enterprise Observatory of South Africa an average of 31 companies with taxable income of less than R10 million close down each week, and the number of employees hardly increases as SMMEs grow older.
The reasons for these high failure rates are many and complex. Our report outlines our view and experience: SMMEs are caught in a cycle of limited bargaining power, cash flow constraints, significant skills gaps and having to operate in a taxing regulatory environment. Each of the aforementioned challenges exacerbates the next:
• Tight margins (these vary by industry conditions) and poor terms of trade as a result of weak bargaining power constrain cash flows;
• Poor cash availability exacerbates challenges in sourcing adequate human and other skills requisite for growth;
• A lack of sufficient resources and capabilities as well as inadequate systems and processes to support growth means that existing, scarce resources are deployed to address not only business operations, but also significant regulatory compliance;
• This in turn further hampers companies’ ability to grow and create jobs. This ultimately limits economies of scale, which in turn further reduces the ability to improve margins, setting off the cycle once more.
While these factors are not unique to South African SMMEs, their magnitude certainly is. For instance, whilst over 54% of SMME owners have not completed secondary schooling in South Africa, only 5% of entrepreneurs in the United States have not completed high school.
Unlocking the potential of SMMEs
SMME development needs to focus on creating the right factors for companies to not just survive, but to grow. We propose the following interventions to facilitate SMME growth in SA:
1. Skills that allow people to participate in the economy must be promoted as a part of the basic school curriculum. At its most basic, this means the “three Rs” of reading, writing, and 'rithmetic, which appear to be widely missing in young work seekers. Of course, a greater emphasis on quantitative skills through a focus on science, technology, engineering and mathematics (STEM) disciplines would more sustainably prepare new entrants to the job market for an ever more modern, skills-intensive economy. Further, the curriculum should provide for subjects such as business studies that combine basic bookkeeping, marketing and economics.
2. Government and regulatory bodies should identify opportunities to reduce regulations for SMMEs and more generally ensure that regulations are appropriate to the size of operations. Large businesses tend to have the resources to navigate their way through extensive regulations, while SMMEs have to employ greater relative financial and human resources to comply. This diverts attention from critical business functions, which in turn affects business survival rates. SMMEs should be exempted from provisions of broad-based black economic empowerment.
3. SMMEs should be provided with exemptions from existing labour regulations. This would include, inter alia, increasing flexibility to hire and dismiss staff, freeing small business owners from having to comply with wages laid down in bargaining council agreements (as well as statutory national minimum wages), and removing provisions in the Basic Conditions of Employment Act that reduce small businesses’ operational flexibility. Further, penalties that the CCMA can impose should be further capped for SMMEs.
4. The rule of law is essential for the proper functioning of a market economy. Government and regulatory bodies should ensure consistent enforcement of rules and regulations. In addition, rules governing business activity should be simplified wherever possible to make them more easily understandable and implementable by SMMEs.
5. Efforts should be made to reduce the costs of and delays involved in enforcing contracts, for instance by establishing a small claims commercial court. This would provide for low cost and accelerated resolution of legal disputes.
6. Commercial banks, government, and development finance institutions (DFIs) should consider shifting funding and technical support away from the creation of new ‘survivalist micro-enterprises’ towards supporting the growth of larger, employment generating SMMEs. These firms tend to be more sustainable, and generally have greater capacity to absorb capital and technical support. As a result, they are more likely to grow, and thus contribute more meaningfully to job creation than survivalist ‘micro’ businesses.
SMMEs have the potential to contribute significantly to employment, income generation and asset accumulation. Unlocking this potential requires implementing innovative reforms to make South Africa truly open for business.
David Ansara is the Chief Operating Officer of the Centre For Risk Analysis, a political risk and economic policy think tank. Rolf Endres is a Director at Agis, a strategy and economic-development consulting firm active throughout Africa, and an investor in three SMMEs. Boikanyo Mothibatsela is a senior manager at Agis. This article is adapted from a joint report published by the CRA and Agis entitled “Open for business? A review of the SMME landscape in South Africa.” Views expressed are their own.