Fix SMEs by using the Private Sector

Gavin Lewis

Published in Finweek, 16/5/2013

Every year the South African government, both at national and provincial levels, pours hundreds of millions of rand down the drain in ineffectual attempts to support the establishment and growth of small and medium enterprises (SMEs). Yet every year another international surveys shows South Africa underperforming in the SME sector. This is despite the critical importance of SMEs to job creation. What are we doing wrong?

Government expenditure on its flagship SME support agency, the Small Enterprise Development Agency (SEDA) in 2011-12 alone was nearly R700 million.  Add to that the budgets of provincial SMME support agencies, such as Gauteng’s Gauteng Economic Propeller (GEP), and it’s likely that we are spending over one billion rand a year of taxpayers’ money – poorly.

Government business development services (BDS) institutions such as SEDA are very expensive, and too interventionist in the wrong ways. The fact is that government does not have the capacity to deliver services to small enterprises effectively. Government SMEs support agencies  are all too often stuffed with sinecures and are a source of gravy train consultancies of little relevance to the actual needs of SMEs.

Government has failed to ensure that the people who deliver services to small enterprises have business experience, understand small enterprises and empathise with their clients. Public service support for SMEs in South Africa “is hampered by poor quality and lack of reach,” says a Global Entrepreneurship Monitor (GEM) survey.

Government BDS agencies are also appalling communicators. Few people know of their existence. For instance, Minister Ebrahim Patel announced a new IDC- funding programme for SMMES in April 2012 called the Small Enterprise Funding Agency (SEFA). How many people have ever heard of it?

We also have to link the provision of finance to SMEs to improved business capacity. Currently there is a very low repayment record for government loans to SMEs. Sometimes it is just a sense of entitlement. But in too many cases people enter into financial arrangements without fully understanding them, so that the collapse of an SME means the loss of everything, including their homes pledged as collateral. SMES generally suffer from poor financial and general management capacity. Training in these will increase both start ups and new firm survival rates.

Also, government’s policy of stimulating SME growth via procurement is impeded at source by red tape and inefficiency, which includes long lead times and late payments. A glaring obstacle is the effort that must go into tendering for government contracts – a process so arduous and the chance of success so slender (winning one in twenty tenders is regarded as good), that many SMEs see big business, and not government, as their main clients.

Open doors for private BDS

The solution is a radical rethink about the role of an under-capacitated state and that of private sector support for SMEs in South Africa. Instead of creating more and more state BDS agencies, or combining others into one big agency, government should look to become smarter in the way it assists small businesses.

Internationally the trend is towards a move away from direct-market substitution by international donors and governments towards facilitating private sector business development market development. 

Government SME support systems should refrain from direct support and concentrate on facilitating private sector provision. There are a number of good private sector BDS agencies with a long track record of success, such as Aurik, Raizcorp, the Business Hub, Business Partners, etc. The public sector can use private sector partnerships to share costs, lock in private sector capacity and reduce risk.

Big business can also contribute. Many of our multi-nationals have had long experience in supporting SMEs – e.g. Anglo American’s Zimele Fund which includes professional support and guidance until the SMEs are self sustaining. SA Breweries has a similar programme. Other businesses assist in other spheres (e.g. the auto industry and aerospace) with the integration of SMEs into global supply chains. Government would do well to learn from them, instead of assuming it already knows everything.

What then is the role of government?

At the macro level, the solutions are too well known to need much repetition here. They include reducing the inefficiency of government in order to slash red tape. Then there is regulatory reform. World Bank studies show that regulatory reform alone can raise the GDP growth of developing countries by up to 1.4%. Tax incentives or deductions for SMEs also have their place, as the new DA economic policy shows.

Few SA citizens feel up to starting their own business, measured by international standards. Why? Because of our poor quality education system, especially when it comes to maths, and the absence of entrepreneurship education in all schools up to grade 12. This must change.

 Government should decentralise wage bargaining to allow for greater differentials based on sector and geographic location, seasonality, and firm size.

Outside of South Africa, Africa is booming, as reflected in annual growth rates higher than ours. Huge export opportunities are opening up all the time. Exporting firms employ larger numbers of people than those who don’t. So encourage more SMEs to export.

Imports and exports require filling in reams of paperwork and supporting documentation. And the administrative response is slow – up to a year. Government can, with private sector exporters, co-fund a Help Desk for SME exporters. Such help desks should be established in every regional or national BDS branch, including help with SARS and with the CIPCS.

Industry specific programmes

SMEs are not one size fits all. They have different needs in different sectors, and at different stages of growth. And we must distinguish clearly between social welfare (most micro enterprises) and small enterprise promotion. Government’s one size fits all approach is not working.

Wherever possible, provincial governments should link SMES closer to local economic development (LED). It always pays to focus on industry specific programmes e.g. auto cluster, rather than on general ones. Industry knows what skills it wants and what services it needs, and can offer jobs to graduates. Government should therefore provide support funding for incubators run by private sector, e.g. (in Gauteng) the Auto Industry Development Cluster (AIDC).

It would also be relatively inexpensive to set up shared resources centres where entrepreneurs can rent space and share equipment, focussing on particular sectors – e.g. construction, IT, clothing and textiles, shoes, furniture, motor mechanics.

Let us remind ourselves that 60% of South Africans work for SMEs (those with fewer than 50 workers) as Finance Minister Pravin Gordhan has pointed out. In Brazil, between 1995 and 2000, 96% of new jobs were created by enterprises with fewer than 100 employees, creating 1.4 million jobs. We can do the same.

We all are concerned about rising inequalities within the SA economy. Yet when all is said and done, it is unemployment that plays the leading role in producing inequality.