How government squashes SMEs

SLEEPING WITH AN ELEPHANT: Why Bad Government is Bad for Business


Everyone loves small businesses, and for all the right reasons. Few people look to big corporations to provide jobs any more. Instead, small and medium sized enterprises (SMEs) are regarded as the way to go, from Seoul to Seattle. South Africa is no exception. Government here sings the praise of SMEs, and there are literally a host of public sector interventions of various kinds to support them. Unfortunately, in South Africa (and indeed in the US and elsewhere), in practice government can be very bad for business.

List the state intervention over the past sixteen years and government's commitment to enterprise development is amply attested. The roll call of acronyms of SME support agencies bears this out. Who remembers Namac and Ntsika Enterprises? Then there is SAWEN, Seda, Khula, Khula Direct, GEP (for Gauteng), Umsombomvu(now the National Youth Development Agency), and agencies in all the other provinces. Metros have their own initiatives too.

This is not surprising, for SMEs account for the majority of new jobs created, and are an obvious route for black entrepreneurs to enter the mainstream. State procurement policies emphasise subcontracting to SMEs, and the B-BBEE Codes emphasise enterprise development as a key component.

Yet we are by no means swamped with new enterprises, as several internationally benchmarked surveys, such as those run by GEM, have shown. On the contrary, if anything would -be entrepreneurs are confused about who does what where and why. Too often they are provided with inappropriate business "plans" that amount to little more than suicide notes, or they are let down mid project by dilatory payments or a lack of "joined up interventions", all designed by bureaucrats with no business experience ( and little sympathy for profit making capitalism). As the state interventions grow, so the failures mount, certainly in proportion to the time, energy and resources committed. Why is this so?

An answer is provided by government itself, in this case by a survey commissioned by the Gauteng Department of Economic Development (GDEP), and circulated in draft form. ("Costs, Constraints and Opportunities of Doing Business in Gauteng: Results of a Business Survey, SBP Consultants, Draft, Sept. 2009). While the initiative is a commendable one for the GPG, the news it contains is that government can be dangerous for an entrepreneur's health.

The survey of 516 SMEs across Gauteng focused on their perceptions of the key challenges to their growth. Of the top 10 problems identified by all the businesses surveyed, medium or small, all but one (market conditions) are directly related to government ineptitude.

Nor will the remaining nine challenges come as much of a surprise to those with an interest in SMEs in this country. They are inadequate and costly transport infrastructure (wait until the toll roads on the Joburg-Pretoria route hit Gauteng in 2011), unreliable and costly telecommunications and energy supply (i.e. electricity), crime and the costs of averting crime, and a lack of appropriate skills suited to business needs (whatever Mr. Jimmy Manyi says).

Corruption and government inefficiency rank as key problems as well, as do poor and opaque tendering processes (55%). Indeed, government emerges with little credit from those it says it serves.

Look at the list of key challenges to survival and growth put forward by the SMEs themselves;

1. Government leadership (local and provincial is "poor or very poor" (64% of those interviewed).

2. Access to information about regulations is not easy, comprising a "major or severe constraint" on doing business for 45% of respondents

3. Integration of provincial and local government strategies "poor or very poor" (54%).

4. Service delivery "poor or very poor" (50%).

5. Corruption "a major or very severe obstacle to doing business " (70%).

6. Overly rigid spatial development frameworks ( important for construction and property development) that are "designed for social engineering rather than to support economic development", along with slow Environmental Impact Assessment processes, trade zoning approvals, poor enforcement of existing regulations, thereby prejudicing those who do operate within the law, and, especially for the tourist industry, slow and incompetent licensing approvals. Call centres that don't work, provincial planners that don't plan, civil servants unfit for purpose, billing systems that collapse frequently, clearance certificates that cause long, costly and unpredictable delays are other common gripes.

7. Inefficient government exacts a huge toll on entrepreneurship – 40% describe it as "a major or very severe obstacle to doing business"

8. Obtaining municipal permits, which can take up to six months, is a problem for businesses, stretching their cash flows to breaking point.

9. Compliance with municipal by laws is difficult, slow and inefficient, leading some to go ahead regardless, while others are penalised for waiting patiently: "...the results indicate a very unsatisfactory working relationship between the industry (property) and the municipal and provincial departments responsible for these approvals".

In sum, without good government, all the state initiatives come to naught. Despite all the talk of "one stop shops", the Sedas and GEPs open offices only to fail to reach their market in ways that the market itself needs. Top-down, bureaucratic "solutions" administered by people with no predilection or aptitude for business in the first place all too often lead to dead ends - over half respondents bemoan " the attitudes of provincial and local government towards facilitating business activity and/or investment".

These obstacles to entrepreneurship are besides all the constraints not measured by this survey. They include high taxes (especially administered prices), and poor or entirely absent regulatory impact assessments of new policies or penalties– see the harmful impact of new carbon taxes on business road (rail having all but collapsed) transport logistics. There are all sorts of unintended negative consequences for job creation and private sector led wealth creation .

Labour market regulations also threaten to become even more restrictive and costly. Just recently the Adcorp Employment Index put the cost of SA's new labour laws at R8400 per annum per employee ("Falling job rate slows" The Times, 13/7/2010). Then there all the compliance costs, in time and money, imposed by SARS and by BEE requirements, which have become a de facto tax on business.

If government really wants to make a difference in favour of SMEs, it should start by first doing its job effectively and efficiently; second, by creating a conducive environment for business ( regulations, processes, red tape, etc.); and third by reducing the costs of doing business , including bearing SMEs in mind when new taxes are mooted. Money diverted to the exchequer for ineffective state "support" for SMEs would be much better spent by the SMEs themselves.

Reducing crime (42%) would also help – it hits small businesses especially hard, and imposes extra costs in the form of insurance payments and private security hired. Eliminating corruption must include serious consequences for the corrupt, not sideways promotions or golden handshakes intended to avert more scandal.

For the rest, however, the best thing that government in Gauteng can probably do for enterprise development is to get its own house in order and then get out of the way. Until this happens, SMEs should beware of getting into bed with the government elephant. It will roll over on you when you least expect it.