Rejuvenating South Africa's economy - A SMME sector perspective




Copyright © 2021


November 2021


Inclusive Society Institute

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Cape Town

South Africa

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235-515 NPO


All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute


DISCLAIMER


Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or its Board or Council members. All records and findings included in this report, originated from a panel discussion on developing a new economic blueprint for South Africa, which took place October 2021.


Author: Mariaan Webb, Creamer Media

Editor: Daryl Swanepoel

CONTENT


Introduction


Key barriers to growth

  • Excessive regulations and red tape

  • Bribery and corruption

  • Unhealthy competition

  • Distrust in local government

  • Impotent revenue collection

  • Education and skills development

  • Soaring unemployment

  • Survival grants vs empowerment grants


Towards a new dispensation of growth


Suggestions for addressing barriers to growth

  • Lift regulatory burdens

  • Build healthy platforms

  • Incubation centres

  • Develop scares skills

  • Rehabilitate municipalities

  • User-friendly e-government

  • Curtail unemployment

  • Tackle corruption


Conclusion


References


Introduction


Small, medium and micro enterprises (SMMEs) are undoubtedly the lifeblood of South Africa’s economy. In fact, President Ramaphosa has asserted that, “the growth of our economy will be sustained by small businesses, as in the case of many countries” (SBI, 2019). They represent more than 98% of businesses, employ between 50-60% of the country’s workforce, and contribute 39% to GDP (McKinsey & Company, 2020). But the SMME sector also seems to be the most vulnerable in a global crisis.


In an industry already facing strong headwinds – a contracting economy, ratings downgrades, increasing bureaucratic red tape, corruption, lack of healthy competition, defunct payment systems and revenue collection, climbing unemployment, skills deficiencies, among others – the Covid-19 pandemic has done more than just exacerbate these longstanding challenges, it has created new ones. The impact of the ongoing lockdowns has decimated many small businesses and left others battling to survive. The entrepreneurial ecosystem is in danger of collapse.


The number of SMMEs in South Africa declined by 11% (or 290 000) year-on-year from 2.65 million to 2.36 million in 2020:03. Of this contraction, 232 000 occurred in 2020:02. A further 58 000 SMMEs closed for business in 2020:03, despite the general economic rebound during the third quarter. Furthermore, of all jobs lost in the economy, 90% were lost in the SMME sector (SEDA, 2020). And these trends show no sign of abating any time soon.


In this report, the Inclusive Society Institute (ISI) draws on discussions held with representatives at the coalface of the small business sector as a barometer of the barriers to operational growth and to glean new insight into how we can navigate our way through them. This forms part of an extensive economic research project the institute has undertaken to forge a desperately-needed blueprint for resuscitating and reviving a drowning South African economy.


The first phase of this research – looking at the methods adopted by Germany, Japan, South Korea and Rwanda to rapidly lift their economies out of the doldrums – is complete. Currently in phase two, the institute is engaging with spokespeople on the ground within the various sectors to gauge the obstacles from their viewpoint and gather fresh ideas on how to move towards resolution and an economic upswing.


Phase three will take place from January to March of 2022. It will involve rallying the policy experts, academics, the present economic advisory council members, etc., together around the table to consolidate all these inputs and develop them into a workable model, to measure the impact that structural adjustments could have on our economy over the next 20 years and generate high-level policy proposals and plans around those outcomes.


Key barriers to growth


Excessive regulation and red tape


New legislation constantly being introduced impacts on the ease of doing business negatively and makes it difficult to grow the economy and create jobs. Recently, South Africa was ranked 84 in a total of 190 countries in the World Bank Ease of Doing Business Index – a drop of two positions since Ramaphosa set the ambitious goal of being in the top 50 during his keynote address at the World Economic Forum on Africa in 2019 (Ramaphosa, 2019).


The level of red tape and bureaucracy that burdens business in dealing with government remains a major stumbling block across all the sectors. It strangles the capacity of business to compete globally by causing needless costs and delays; putting the brakes on new businesses; and placing existing enterprises in a predicament about their sustainability and growth.


A concern raised during the discussions was that small businesses are being forced to throw more capital, cash flow and human resources at administrative problems to remain compliant; or admit defeat and sell out to a larger company. Some new businesses are choosing to turn a blind eye or even avoid the red tape altogether by flying below the radar and remaining in the informal sector.


The reality is, many SMMEs simply lack the resources and information to deal with the issues arising from regulations. The business owner is then caught in a catch-22: either spend more time and money on jumping through hoops to achieve compliancy, risking the survival of the business, or focus on running and improving the business in the hopes of not being caught until compliancy can be afforded.


In addition, there is a sense that an extensive list of legislation is being introduced, without the capacity to enforce that legislation. This bureaucratic ineptitude makes it all the more difficult for law-abiding businesses to comply with the rules. It also creates a situation where there are increasing rules that aren’t being properly implemented and monitored.


Bribery and corruption


Corruption is contributing on a vast scale to creating a platform that could eventually destroy SMMEs, and the economy. During the discussion, participants were asked to indicate by a show of hands whether they had been confronted with corruption in their own business dealings. The response was a staggering 50% in the affirmative.

In 2020, South Africa scored 44 points and ranked 69th out of 180 on the Corruption Perceptions Index (CPI), the most widely used indicator of corruption worldwide. The scale has a range from 0 to 100, where corruption increases, the higher the number is (Transparency International, 2020).


It is well documented that there is a huge problem with corrupt government officials and state-owned enterprises (SOEs), but this is a two-way street, said a representative during the dialogue. Corruption cannot thrive in a vacuum. Businesses contribute to corruption by participating with government in corrupt actions – for instance, there are many instances of dodgy tenders, offered and accepted.


However, these small enterprises are being backed into a corner where they are coerced, and sometimes blackmailed, into either paying a bribe for an opportunity or suffering the consequence: losing their business. There is tremendous pressure on honest business owners to be politically connected in one way or another, a form of comrade, in order to survive (Fin24, 2020)


Private corruption affects the entire supply chain – distorting markets, undermining competition, increasing costs to enterprises, reducing the quality of products and services, and leading to missed business opportunities (UNODC, 2021). But the most severe damage is done through the perpetuation and normalising of corruption by highly influential individuals, creating a veneer of acceptability around what is actually a deep-seated malaise (Fin24, 2020).


Unhealthy competition


A concern raised among participants during the webinar was the monopoly by big companies, especially the multinationals, as it precludes fair competition and denies small businesses the opportunity to reach wider markets. Monopolies also have the potential to gain political power and thereby the power to shape communities in an undemocratic and unaccountable way (Pettinger, 2020).


This issue ties in with another concern: keeping the rand local. In Africa, the power and the money stay within the local communities, families and neighbourhoods. South Africa’s system is flawed; there is marginal payback to the community in which people are working. Much of the money is largely not making it into the formal coffers, so it is not benefiting the taxpayer or the economy. And, on the other hand, that which does flow into the formal sector to a large extent supports established businesses with little transformational impact.


Big corporations, and South African employers in general, are exploiting illegal immigrants, who have lower wage demands, rather than employing local workers. These workers often don’t pay tax and send large portions of their wages back to their families in their home countries. Citizens are also spending their hard-earned money at shops run by foreign nationals and buying products made in foreign countries because of affordability. All of which are a drain on the rand and stall growth.


Distrust in local government


Entrepreneurs in South Africa are confronted with such high levels of unnecessary interference by local officials that they often don’t even make it out of the starting block. The very departments that are supposed to provide help to SMMEs end up acting as barriers to their growth. When asked to indicate their level of trust in local authority, none of the seminar representatives indicated more than a 60% level of trust, with the bulk indicating a low 20-40%.


The late Auditor-General Kimi Makwetu said in 2018 of the sorry state of local government that “on average almost 60% of the revenue shown in the books will never find its way into the bank account”. With such rampant corruption and incompetence going unchecked, it is inevitable that there would be a growing mistrust and an escalating resistance to paying rates and taxes (Everatt, 2021).

Combine that with the increasing deterioration of already poor service delivery, and businesses are left in jeopardy. Case in point is dairy manufacturer Clover, who announced in June this year that it would be moving its operations from the Ditsobotla Municipality in North-West Province, to Durban, following losses due to unreliable water supply, defective roads and power outages. The resulting financial and job losses for the company will have a disastrous knock-on effect for the community (M&G, 2021).

This mismanagement is reflected in the Auditor-General reporting an amount of R32-billion for fruitless and wasteful expenditure during the 2018 to 2019 period, with many of these failing municipalities being placed under administration. Between November 2018 and May 2019, 39 municipalities fell under administration – 15 in North-West Province alone (IOL, 2021).


Impotent revenue collection


Municipalities were already battling to collect revenue from service charges and rates before the pandemic hit and worsened the situation. Recently, international ratings agency Moody’s downgraded five South African municipalities, highlighting rising liquidity pressure as a result of shortfalls in revenue collection (ESI Africa, 2021). Another key diagnosis in terms of a lack of revenue collection was in connection with state bodies. According to SARS, South Africa collected R1.25-trillion in tax revenue in the financial year ended March 2021, around 12% less than the government’s original target of R1.425-trillion (Reuters, 2021).


If businesses and residences are getting away with not paying rates and taxes, our ability to build infrastructure, provide service delivery, fund grants, suffers. It becomes a vicious circle of declining revenue, refusal to pay for dysfunctional services and, ultimately, business failure.


The effect on small businesses when not enough revenue is collected, is that they are not prioritised for payment. The revenue that is collected is earmarked for inflated government salaries, Eskom, water boards, service providers, which leaves scant funds for the plumber or the construction worker, for the SMMEs on the ground.


Just more than half of the participants in the SMME sector discussions indicated that they do business with government in some form or another. Yet not one could say that they were absolutely satisfied with the payment issue, and the majority showed that their businesses were in peril due to non-payment. We need to get our systems right.


Education and skills deficiencies


It has been widely quoted that education is the backbone of a nation. It affects every aspect of the economy, and in South Africa, it is far behind international standards. In relation to SMMEs, students are not being taught the content and skills they need to be employable in the practical world of business. Colleges are churning out students with theoretical knowledge that have to be taught from scratch when they enter an organisation.


There is a disconnect between education and real-world needs. The latest Xpatweb Critical Skills Survey 2020/21 revealed that 77% of organisations are still struggling to recruit and obtain critical skills for their local and cross-border operations and that they are being forced to look internationally to meet their objectives. The survey also mapped out the scarcest skills in South Africa: being in the science, technology, engineering and maths (STEM) areas (BusinessTech, 2021).


On another level, there is a deep-seated skills deficiency within our government and state-owned entities (SOEs), with many of the growth initiatives supported by government prioritising the creation of low-skill jobs and development of high-level skills. The findings of a 2020 research study by the Local Government Sector Education and Training Authority (LGSETA) on the effect of the skills mismatch indicate that the country has a widespread case of under-qualified staff. Another study, by the Department of Higher Education (DHET) in 2019, echoed this with their findings that as a whole, almost one-third of workers in South Africa are mismatched by their area of study (LGSETA, 2020).


Although municipal officials have the resources at their disposal from National Treasury to deal with service delivery setbacks, they lack the skills to prepare a business case, submit it to National Treasury for funding, and implement the plan. Or they lack the will to write those reports. This results in infrastructure not being maintained and slow, or stalled, service delivery, creating a domino effect of massive revenue and business losses.


The issue of employees being hired solely on political grounds without being put through a vetting process, also means that we often end up with officials in positions that they are simply not qualified for.


In July 2020, Freeman Nomvalo, CEO of SAICA, said that “municipal audit results continue to show worrying trends of the lack of financial skill and accountability in our municipalities”. Nomvalo believes that it is not possible to improve accountability and internal controls if the skills needed to perform these controls are lacking (M&G, 2020).

Soaring unemployment


South Africa's unemployment rate is one of the highest in the world. According to the Statistics South Africa (Stats SA) Quarterly Labour Force Survey (QLFS) for the second quarter of 2021, unemployment has hit a record high of 44.4%, using the expanded definition which includes people who have stopped looking for work, or 7.8 million jobless people (Stats SA, 2021).


A large proportion of these people are from the townships and rural areas. Part of the problem here, as suggested by the representatives during the discussion, is that when we look at attracting investment, our focus is on turnkey projects that don’t involve the townships and rural SMMEs in their roll out. In turn, when the products that these big companies are selling enter the township market, the people who reside there cannot afford to buy them because they don’t have jobs. When we neglect the township economy, we, in effect, cut off the circulation in the greater economy.


Another angle on this issue is that there is too much focus on redistribution in the country, instead of on creating new opportunities to foster loyalty within the townships, with the outcome of building the resources of these areas from within by creating business and work prospects.

Survival grants vs Empowerment grants


In South Africa, social grants are a key element of individual and social well-being considering the relentless unemployment, poverty and health crisis in the country, compounded now by the pandemic. But the grants need to be effectively and equally dispensed if they are to have the desired end goal of true social welfare. The concern is that some measures may pose a risk to fiscal sustainability by undermining people’s incentives to work, save or invest (HSRC, 2013).


This sentiment was echoed by participants at the SMME sector dialogue – the idea that grants create dependency on government and stifle economic liberation. In this way, we are failing to implement the social development policies that could free people from a cycle of poverty: skills development, SMME support, job creation, fair minimum wage, among many others.


The Financial and Fiscal Commission has estimated that the cost of a basic income grant based on R350 per month would amount to approximately R243-billion per year, or just under R45-billion if it was only offered to unemployed working-age people. Business Unity South Africa (BUSA) fears that once implemented, it would be a permanent expense and would compete with a broader social security safety net within the economy. Although BUSA supports the extension of the social relief of distress grant, it believes that a universal income grant is not sustainable (Fin24, 2021).


Towards a new dispensation of growth


Suggestions for addressing barriers to growth


Lift regulatory burdens


Small business doesn’t need new legislation, it needs more relevant and business-friendly legislation. We need to consolidate current policies and properly implement only those rules and regulations that are necessary.


Suggestions to ease bureaucracy and red tape include:

  • Access to information about regulations should be made easily available to SMMEs at minimum cost.

  • Policymakers should be transparent about the legislature and ensure that compliance procedures are not costly, complex or lengthy.

  • Set up a “one-stop-shop system”, where all information is made available in one place, as already exists in some countries.


Build healthy platforms


Government needs to deal decisively with platforms that have been created which oppress SMMEs rather than help them thrive. Competition is good, but it needs to be healthy.


The public policymakers need to look at breaking down turnkey projects into biteable chunks to widen the spectrum of businesses that can be pulled into the project. We need to take the development of the township economy more seriously and develop a “township business network” to ensure that there is circulation taking place within the townships.


Focussing on creating new opportunities for small businesses as opposed to redistributing what we already have will garner far more economic growth. Big business is encouraged to support and buy shares in SMMEs, which will allow small enterprises to expand and close the funding gap.


Incubation centres


Handouts can create dependence and undermine growth, for the person and the country. Whereas using those funds to create a business environment, an incubation centre, where the basic costs are covered will be more valuable for government spend.


Develop scarce skills


Education and skills development are vital to South Africa’s long-term success in upping productivity, social involvement and inclusive growth. But the curricula need to be relevant, prioritising business needs.


Suggestions to improve skills deficiencies include:

  • Build more technical and agricultural high schools in close proximity to poorer communities.

  • Equip students with courses on entrepreneurship and technology.

  • Foster partnerships between government and business.

  • Offer more on-the-job training opportunities.


Rehabilitate municipalities


As the bedrock of government, we need our municipalities to be reliable and trustworthy. We need to capacitate our municipal departments with highly skilled, apolitical personnel. This is at the epicentre of municipal failure. We also need to ensure that professional conduct and ethics are upheld at the highest level by both municipal staff and consultants. The mandatory minimum skills and qualifications required for financial management positions in local government must be reviewed and staff must be trained or upskilled.


One solution is to outsource e-skills and services. There is a growing trend towards on-demand human capital.


User-friendly e-government


The use of information technologies in public administration will streamline and integrate systems that are currently awkward and inaccessible. It will also manage data and information more productively and help with smoother-running public service delivery. In this way, communication will reach a wider audience, empowering people and backing economic growth.


Curtail unemployment


Rife unemployment kills any real chance of economic recovery and growth and increases crime rates, violence and health concerns. There are ways in which established SMMEs can lessen this concern: share resources with other small businesses such as staff when a company is down sized. Formalise and register all employees with the Unemployment Insurance Fund. Rather than letting staff go, businesses should consider rotating staff. Upskilling can be a mutually beneficial solution.


Tackle corruption


Corruption erodes trust in government, undermines the social contract and impedes investment, with consequent effects on growth and jobs.


We need to put in place institutional systems and incentives to prevent corruption from occurring in the first place. The systems must be credible, with accountability and enforcement mechanisms, sending a strong message to potential wrongdoers of the cost of misconduct.


For example, administering fair and transparent tender processes will help to drive down corruption, encourage investment, and create an equal playing field for SMMEs.


Conclusion


Small businesses have been in the eye of the storm that is the Covid-19 pandemic over the last 18 months. But while many have fallen and some are still fighting to stay alive, there is a sense of hope and a stronger leaning towards collaboration among the small business community. Being entrepreneurs, there is a deep-rooted innovative and courageous spirit that keeps these out-the-box thinking risk-takers moving forward. And they will need it for the rocky road ahead.


South Africa needs to grow at 4-6% of GDP, which sounds like a pipedream considering our current position. But it is possible; we have done it before, not too many decades ago, under the Mandela/Mbeki era. If we grow at 4-5%, we can start chipping away at the unemployment figure in this country. From there, we can take the normal economic development expected of us and turn it into extraordinary economic development.


Under the right conditions, the SMME sector has the power to be a dynamic transformational force – small businesses enrich competition, job growth and champion economy-wide efficiency, innovation and growth. Although there is still much to be done to create these conditions, government is coming to the party. In August this year, Trade, Industry and Competition Minister Ebrahim Patel announced a new funding facility, making available R342-million to support more than 500 businesses and generate more than 1000 jobs (SAnews, 2021).


Despite the hardships, small business owners remain optimistic about the future of the sector, saying that now is not the time to lose hope, it is the time to start our own engines, put our shoulder to the wheel and drive our own businesses, and with them the South African economy, into a flourishing future.


References


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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.


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