Why SMEs struggle for survival in South Africa

Around the world, in every economy, whether emerging or advanced, SMEs are widely accepted as a significant driver of GDP and the primary job creator. In South Africa SMEs account for around 40% of GDP[1] and, according to the Finscope (2006) survey, 90% of jobs created between 1998 and 2005 were in small, medium and micro enterprises[2]. Interestingly Brazil’s SMEs are estimated to produce 96% of jobs[3]. Based off this the South African Institute of Chartered Accountants suggests that according to the National Development Plan, SMEs are expected to provide a staggering 90% of new jobs by 2030[4]. Given South Africa’s divided past and our current population demographics, the importance of stimulating black owned SMEs must therefore take centre stage.

To quote Shakespeare (Hamlet Act III, Scene 1) [with some enhancements for South Africa]:

ToBEE, or not toBEE- that is the question:

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune

Or to take arms against a sea of troubles,

And by opposing end them.

Given the current unemployment rate in South Africa, and the expectation for SMEs to create significant jobs by 2030, it is important to understand the stumbling blocks for SMEs in South Africa. We as a country need to understand the crucial role that SMEs will play in creating employment and driving growth in our economy. As Shakespeare suggests we cannot passively sit; we must rather actively engage and thereby ensure that every effort is made to encourage and promote SMEs.

A number of South African studies including the National Development Plan[5] have identified factors which undermine a strong SME growth vector including:

1. Excessive red tape,
2. Rigid labour regulations,
3. Inability to access finance,
4. Skills development and business support, and
5. Access to markets (procurement).

Contrasting South Africa with other economies which have vibrant SME participation provides us with some potential suggestions as to what participants in the South African economy could do, to stimulate the SME sector. An interesting policy study undertaken in 2004 by the OECD (Organisation for Economic Co-operation and Development)[6] found “SMEs play a key role in transition and developing economies. These firms typically account for more than 90% of all firms outside the agricultural sector, constituting a major source of employment and generate significant domestic and export earnings.As such SME development emerges as a key instrument in poverty reduction efforts.” (my emphasis)

Furthermore the OECD study made the following key recommendations:

1. Embed strategies toward the private sector and SMEs in countries’ broader national development and poverty reduction programmes
2. Strengthen SME capacity to improve their competitiveness in domestic, regional and global markets,
3. Promote policy coherence at regional, national and international level, and
4. Maximise the spill over of management skills and knowledge from multi-national enterprises to local SMEs.

Not surprisingly these two pictures (South Africa and OECD), from vastly differing sources, enjoy significant overlap. This confirms the overwhelming finding that South Africa’s SME perspective has similarities to those found around the globe.

How then do we collectively address the stumbling blocks facing South African SMEs? Looking at the list of 5 shortcomings identified in the South African studies which SMEs face, the following high level perspective is worth noting:

1. Excessive red tape and rigid labour regulations are firmly within the regulatory framework. It is important that government takes note of these issues and addresses them. These remain firmly within government policy. Realistically, apart from consistently raising the issue for debate and challenging our elected officials in this regard, private enterprise will have limited ability to change these two issues in the absence of policy change. However, with regards the three remaining issues there is much that the private sector can do.
2. The inability for SMEs to access finance, the need for skills development and business support and access to markets are all significant stumbling blocks. In addition, due to South Africa’s skewed economic development under apartheid, it is realistic that policy intervention is necessary to remedy the imbalance. Capitalism, in the absence of this policy intervention, would most likely see the strong becoming stronger and the weak becoming weaker. The drafters of the B-BBEE Act and Codes of Good Practice appear to have taken these factors into account in the following way:

• The Amended Codes of Good Practice have made Skills Development a mandatory aspect of the codes which required a sub-minimum of 40% compliance,
• Supplier Development, a component of the mandatory element of Enterprise and Supplier Development, has been added to improve the opportunity for black SMEs to secure procurement opportunity from companies (access to markets),
• The definition of an empowering supplier includes an element of skills transfer, and
• Enterprise and Supplier Development encourage the provision of finance by companies to black SMEs.

Notwithstanding a number of shortcomings within the Amended Codes of Good Practice [most notably around the 51% black owned measure which, by almost any global measure of control, should have been 50% plus 1], the Codes give voice to the reality that SMEs are a vital sector of the market. If we are genuinely to address job creation all stakeholders need to embrace the pivotal role SMEs will play in that regard.

Ultimately chief executives will play the most important role in implementing the BEE Codes within their companies. If implemented well the Codes will bolster the growth of black SMEs in our economy, and in so doing we will start to make inroads into South Africa’s massive unemployment burden.

To chief executives then the challenge offered is to “…take arms against a sea of troubles, and by opposing end them”. The Amended Codes are difficult and imperfect. However they include tangible elements which will support the growth of black SMEs; and by extension job creation. There is no better time for action than now.

Evan Jones is CEO of Inyosi Empowerment. Inyosi Empowerment, a black owned company, was created in a partnership between Mineworkers Investment Company and Stellar Credit. Inyosi Empowerment offers Enterprise and Supplier Development investment based solutions to companies who are looking to enhance their scorecard whilst ensuring that the ideals of the Codes are fully met.