Is South Africa’s Department of Small Business Development about to be axed?
The department – which has long come under fire for doing too little to support small business (see this post), was set up in 2014 by Jacob Zuma, who last month stepped down as president.
Cyril Ramaphosa, who took over as head of state, has vowed to down size the cabinet. In his State of the Nation Address last month he said a review would be carried out on the number and size of government departments.
Following the speech, Small Business Minister Lindiwe Zulu survived a cabinet reshuffle Ramaphosa carried out last month.
But a report by City Press earlier this month quoted an unnamed insider as saying the department is likely to be dissolved and allocated a director-general in the trade and industry department.
At present the Department of Small Business Development is struck with having to carry out a R1 million forensic audit into a poultry co-operatives project in the Mpumalanga.
This, after the Small Enterprise Finance Agency (Sefa) released the findings of a forensic investigation into a R20-million loan deal, in which instances of embezzlement, fraud and theft were uncovered.
In addition it has struggled to get a Sefa enterprise development fund off the ground that intends to take private-sector commitments from businesses which can then score Black Economic Empowerment (BEE) points by capitalising the fund.
Last month Parliament was told that the fund has been held up for over two years, because the Department of Trade and Industry has not given Sefa the go ahead to allow those firms that make commitments, to score BEE points.
Adding to a long list of promises it has yet to fulfil, the department has yet to set up a promised Co-operatives Development Agency to support co-operatives.
More than two years after a review of its programmes (see this post), the department is only now finalising its new approach to assisting small businesses, in what it calls the “portfolio for architecture” project.
The department outlined in Parliament last month that the approach would see the department tailor-make support programmes depending on the phase a business was in – whether this be pre-start-up, start-up, growth or decline (see the presentation here).
But DA member Toby Chance asked why since a review conducted by the department in 2015, it had taken over two years to develop a portfolio architecture that had merit.
He noted too that the presentation did not recognise what was happening in the private sector in the business life cycle.
Zulu responded by saying that the department is still fairly new and that it would take time for things to be developed. She said the that the department is still deciding on what aspects should be dealt by Sefa and Seda.
This doesn't do much to justify the continuing funding of a separate department - to the tune of almost R1.5 billion ($130m) in the 2018/19 financial year. This will climb to almost R2.6bn as the first tranche of a R2.1bn fund for start-ups is allocated to the department.
Keep minister, cut department?
Better perhaps would be to do away with a separate department, but to perhaps keep the role of a minister - which is what Canada and New Zealand do, where the small business minister is part of the trade or economic department.
South Africa could benefit from the co-ordinating role a minister could play, But this might work better if the minister were to be placed in the presidency - such as Brazil did in 2013 when it selected a small business minister, Guilherme Afif Domingos.
The position was cut in 2015 as part of a downsizing of ministries carried out by then president, Dilma Rousseff. Domingos now heads the state's small business agency Sebrae.
The department’s Lindokuhle Mkhumane last month told Parliament that it had established a national interdepartmental coordinating committee made up of representatives from 24 government departments which meets once a quarter.
Mkhumane said the committee has for example engaged with the Construction Industry Development Board (CIDB) about aligning its Contractor Incubator Programme (CIP) with Small Enterprise Development Agency (Seda) incubators.
This could play a valuable role -- similar as that played by Malaysia's SME Development Council. Perhaps Ramaphosa - a former businessman himself - needs to head the South African one up, to ensure its effectiveness.
This, together with keeping a small business minister close to Ramaphosa in the presidency could just be what the country needs. What it surely can do without - is more of the same poorly performing bloat.
Only a few countries have small business ministers - here they are:
Democratic Republic of Congo
Timm is a South African who writes on small business. He was briefly on holiday in February. Follow Small Business Insight on Twitter at @Smallbinsight.
The number of black-owned tech start-ups in South Africa may be on the rise, yet just four percent turn a profit currently, reveals a new survey. What then should be done about it?
In the survey - released on 22 November SA tech start-up publication Ventureburn - 50% of 260 tech startup founders reported that they were black founders (black African, coloured, Indian or Chinese South African). This is up from 26% in a 2015 survey of 197 founders by the publication.
Of the current survey, four percent opted not to reveal their race, while 46% listed themselves as white.
Yet, while 16% of start-ups founded by white entrepreneurs are turning a profit, a mere four percent of black-owned tech start-ups are doing the same. In addition 61% of black start-ups have yet to generate an income, compared to 30% of white start-ups.
Added to this white start-ups accounted for 59% of all those start-ups that reported having tapped angel funding.
The survey also reveals that white start-up founders are significantly older than black founders. Over a quarter of white founders are 40 years or older, compared to just 13% of black founders. Almost three quarters of black founders are aged 35 and younger.
This might explain why so few black start-ups are making a profit compared to white start-ups. Older founders are usually more experienced, better networked and have more capital than younger entrepreneurs.
Aligns with increase in black SMEs
The survey results suggesting the growing number of black tech start-ups, are in line with a study released earlier this year by Trade and Industrial Policy Strategies (TIPS) which revealed that the percentage of black-owned formal small businesses grew from 38% of such firms in 2002 to 49% in 2015 (see this post).
The figure however still lags behind the national population where black population make up 92% of South Africans.
A lack of black angel investors means the state has to get more involved. Earlier this year Matsi Modise (pictured above), head of start-up advocacy group Simodisa, said more black high-net-worth individuals would help to grow the angel investors pool.
But this alone won't be enough. A “black tax”, where black professionals are compelled to financially support relatives, also holds many back from investing in start-ups, she says.
State support still lacking
Perhaps then the state should intervene?
To some degree the state is already doing so - by offering incubation and seed funding and by using Black Economic Empowerment (BEE) legislation to compel large IT companies (including multinationals) to support and fund black entrepreneurs.
Yet there is much the state still needs to do. Just nine* of the 62 incubators under the government’s Small Enterprise Development Agency (Seda) support software or high-tech firms. The agency added three new incubators in 2016/17, two of which are incubators aimed at the high-tech sector (see this post). It needs to fund more such incubators.
A Pretoria-based incubator and science park - The Innovation Hub - has of late broadened its reach to innovative entrepreneurs, by adding township hubs (the eKasi Labs programme) and running Startupbootcamp and Startup Weekend events.
But its head McLean Sibanda admitted in May that it’s still difficult to find black entrepreneurs with unique ideas in the township. Too many township startups are pursuing “me-too ideas” over innovative ideas. More exposure to the networks of more affluent entrepreneurs might help and better schooling could help.
The introduction of seed grants in 2012 by the Technology Innovation Agency (TIA) could well help fund more black technology start-ups. The agency disburses grants of up to R600,000 through universities and selected small business support organisations.
In the last financial year the agency channelled R74.3m to 133 innovative projects - up from R66.5m in the 2015/16 year. Though the initiative isn't aimed exclusively at black innovators or entrepreneurs, a large number of those the agency supports are black.
Black tech start-ups have also to thank the country’s BEE legislation for increased support and funding.
Large IT companies such as telecoms provider Telkom (in which the state still retains about 50% ownership), as well multinational firms such as IBM and Microsoft have introduced support programmes in recent years.
For instance Telkom Futuremakers head Litha Kutta says three hubs that the telecoms provider backs support over 1,000 tech entrepreneurs involved in black-owned start-ups.
Among IT multinationals, IBM has provided support and funding to three black-owned IT companies and four aspiring black tech entrepreneurs in the last two years. It includes R1.2m in incubation support and about R2.5m in funding to two of these IT black firms.
But Bhavya Rama, who oversees IBM’s R700-million Equity Equivalence Investment Programme, says it’s not always easy to find black-owned IT firms, says Rama. “We’re finding that the market has challenges. Every startup claims that they have ICT capability, but when you look it’s only a few that have it.”
She also notes that many black tech startups getting support currently through incubation programmes are serial incubatees.
These are the kinds of challenges to be expected initially, when black startups are still struggling
But limit state's role
In the end the state's role should be limited - to support such as training and incubation and seed funding.
Helping to nurture a venture capital sector could help too, if the state were to launch a co-investment fund. Here an idea by Discovery Health CEO Adrian Gore might be worth testing - where fund managers could be enticed to invest in black startups in return for higher management fees (see this post).
In addition the state could tweak its venture capital tax incentive - which is growing in popularity (see this post) to allow for greater deductions for those that invest in black tech startups. This might help fuel the creation of black angel investors.
Ultimately the state should be wary of any measures that distort the market. Black tech startups after all want to pitch their solutions on an equal as possible footing as their white counterparts. Some support will help. Too much might render black firms uncompetitive.
*Seda's nine high-tech and software incubators are: Sofstart, Invotech, Smartxchange Durban, Smartxchange Ugu, SA French Tech Labs, Savant, Tuksnovation, Singatha ICT Incubator College and Seda Nelson Mandela Bay ICT Incubator.
Timm is a South African who writes on small business in emerging economies. He is also the editor of Ventureburn (which conducted the tech survey). Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Firms supported by Small Enterprise Development Agency's (Seda) incubators generated R825 million in revenue in 2016/17 - a 766% return on investment (ROE) on the R96.3m invested by the agency in its incubator network that year. But job creation remains low.
So reveals the agency's annual report for 2016/17, which was released earlier this month.
While the return on investment (see footer note) is up from 532% for the previous financial year, the number of jobs created by each supported enterprises remains at barely one per enterprise - a figure which has barely changed in the last eight years (see below graph).
Seda currently has 62 incubators. The 57 it had at the end of February supported 2,663 clients (including 497 new firms that it helped start).
In addition while the number of enterprises incubated has fallen from a high of 3,016 in 2014/15, the number of jobs created by such enterprises climbed from 1,963 in 2014/15 to 2,582 in 2016/17 over the same period.
Earlier this month Seda CEO Mandisa Tshikwatamba (pictured above) told the National Assembly’s portfolio committee on small business that the number of clients participating in incubation support programmes increased due to an improved framework on incubation centres that encouraged clients to maintain incubatees.
In other words the agency is inflating numbers by holding onto incubating clients for longer.
Meanwhile the agency added three new incubators in 2016/17, two of which are incubators aimed at the high-tech sector – a new focus of the agency’s.
The two are the French SA tech labs in Cape Town, which is a partnership between Seda and software development company Methys and Tuksnovation, which focuses on commercialising innovative technologies in the ICT and engineering sectors.
However Seda's technology programme (under which its incubators fall) carries out little in the way of sophisticated interventions.
For example among its interventions, just 161 entrepreneurs were assisted with certification readiness, standards guidelines and quality health checks. This, while just 25 were assisted with product testing and certification.
Too little sophisticated help
Seda in 2016/17 supported 12,215 enterprises – the highest number since 2010/11 when 15,391 were assisted.
Encouragingly despite the slow down in the economy, Seda reported that the percentage of clients supported who reported having seen their turnover and number of employees increase had risen in the last year.
For example 77% of those enterprises supported reported taking on more employees, versus 74% in 2015/16 and 63% in 2014/15.
Despite this the agency notes that it has not made a material impact on the small business sector and adds that it needs more resources and better reach to rural areas and townships if it is to make a difference.
On figure is perhaps telling: just 75 clients in the last financial year grew their firms from fewer than 20 employees to more than 20 employees (just 0.6 of its clients).
Perhaps it shows that the agency needs to focus more on interventions on technology and quality standards and do more to seek out and back job-creating firms rather than aim the bulk of its service on the thousands of micro entrepreneurs that create few jobs.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
*Seda CEO Mandisa Tshikwatamba subsequently responded to Small Business Insight as follows on job creation: On average 40 to 45% of the clients in the portfolio in any given period are not at job creation stage, they are in the first year of operation, they are building the business ie (in the) final stages of product development or launching product to market. It's mostly companies in the second and third year that create most jobs.
We also don’t report on jobs sustained as Seda, this would take care of the fact that companies at this stage of their business do not create new jobs every year during their three-year incubation cycle.
If one company created five jobs in year two, they might create just one job in year three or none. This indicates that a snap shot in one year doesn’t provide full picture for researchers to draw conclusions. You need to follow a company over a three-year period of time to make correct deductions.
In the coming 2018/19 period we will include jobs sustained.
**Return on investment is defined by Seda in this instance as revenue generated by firms incubated by the agency. Small Business Insight however notes that a more accurate measure would be for Seda to include the tax paid by firms and collected by the fiscus.
A since defunct five-year long incentive to encourage private sector organisations to roll out incubators helped develop almost 4,000 small businesses, the Department of Trade and Industry revealed in a recently published report.
Since 2012/13 the department’s Incubation Support Programme (ISP), which was suspended in November last year, covered between 40% and 60% of the costs for private organisations and companies to set up an incubator.
In this time the ISP supported 53 incubation projects with R911 million in grants, to develop 3,908 small businesses.
The department has previously claimed that in the first year of the programme it supported 30 incubators to launch with funding of R817m, helping to create 19,546 jobs. This suggests that each firm created at least five jobs.
This is markedly more than the number of jobs the average firm supported by Small Enterprise Development Agency (Seda’s) incubators created in the same time period.
Over this time Seda incubators assisted about 2,500 entrepreneurs or businesses a year, creating about one job per business assisted (data is drawn from Seda annual reports). The Seda programme currently has 62 incubators.
However in November last year the Minister of Trade and Industry Rob Davies (pictured above) suspended the programme and replaced it with new the Strategic Partnership Programme.
The new incentive’s main focus is to strengthen supplier development and inclusion of black suppliers in the value chain.
The change comes after the department in 2015 said it had to reject a large number of applications because many applicants had failed to understand the criteria needed to qualify for the incentive. In some cases people had failed to bring on board an industry partner or wanted funding for things that were not deemed as incubators.
The department at the time launched an incubation handbook to offer applicants clearer guidance on what constituted an incubator.
The figures from the department suggest that it's incentive programme -- which helped big companies and organisations to support small businesses -- has been arguably way more successful in creating jobs than Seda's incubation programme.
The private sector then may be far more successful in incubating small firms than the government. This should leave the state with something to think about.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a