Has the contribution of South Africa's small, medium and micro sector really contracted by six percentage points within a year, or is it down to errors by statisticians and researchers?
The latest quarterly financial statistics from the country's statistics body, Statistics SA, contain estimates for small, medium and large enterprises by industry.
These reveal that SMEs contributed 36% (9% by medium-sized firms and 27% by small firms) of the R2.1 trillion ($30bn) generated by the private sector in the last quarter of 2015.
This is down significantly from the 42% of value-add that the sector generated in the first quarter last year (9% by medium-sized firms and 33% by small ones), according to a survey by the Stellenbosch University’s Bureau of Economic Research (BER) in January.
If the calculations of the BER report as well as those of the Statistics SA's are correct, it would mean that the SME sector has contracted and is close to the 33% of value-add calculated by BER for the last quarter of 2010.
In January BER economist Nicolaas van der Wath, who worked on the BER report, was unable to explain how the small business sector had grown so fast. He added that most of the growth appeared to have been in 2014.
While the dive could be related to statistical errors (the BER report did contain some initial errors - see this earlier post), one hint at what is going on is that the SA Revenue Service recently reported that tax contributions from small businesses increased in 2015.
Because the data for value-add is calculated from declarations made by firms to the tax agency, this could explain the apparent increase in SME's contribution between 2010 and 2014. Yet it does not account for the drop of six percentage points within the same year.
This aside, the most interesting is that the latest quarterly financial statistics reveal the contribution of small businesses per sector (see the graphic above).
While SME definitions differ slightly for each country (in terms of turnovers eased to define firm size), it is interesting to note that in South Africa's manufacturing sector SME contributes less per total value-add in the sector (31%) than in India (37%), Malaysia (34%) and Brazil (45%), but more than Chile (11%) and Georgia (14%).
In the commerce sector SMEs account for 43% of value-add in South Africa - smaller than in Brazil where SMEs account for 63% of value-add, but again significantly more than in Chile (27%) and Georgia (21%).
Small and medium-sized firms dominate the services sector in South Africa, where they account for between 41% (personal services) and 57% (business services) of value-add, compared to between 33% (business) and 36% (personal services) in Chile. The SA figures are at a similar level to Brazil (44% in all), but higher than the 39% contribution in Malaysia.
The figures in the estimates for small, medium and large enterprises by industry also reveal that small and medium-sized firms appear on the whole to be doing a lot better than larger firms.
Of the R550bn small firms expended in the fourth quarter of last year, they returned a profit before tax of R45.5bn - giving them a profit margin of 7.6% - slightly more than the 7.2% medium-sized firms returned and well ahead of the 4.3% of large companies.
What this reveals is that SMEs in South Africa might not be performing as badly as some pundits may assume - at least in the formal sector. What is missing however is more firms and far more South Africans starting businesses.
Statistics from Malaysia were drawn from a page on the Department of Statistics. Those from Chile were taken from a 2014 report. In Georgia figures were drawn from a 2014 publication, while those from Brazil were taken from a 2014 report and those from India from a 2015 annual report.
South Africa is increasingly becoming a less friendly place to do business in when compared with its emerging market peers.
The World Bank's Doing Business 2016 report, released this week, revealed that the country fell four places to 73 in the rankings on ease of doing business.
For probably the first time, it is now easier to run a business in Botswana than in South Africa (ranked 72nd). The island of Mauritius (32nd) tops the continent.
This is worrying, more so when coupled with the country's deteriorating entrepreneurship rate (see this earlier post).
In contrast it's now easier to run a business in Russia than in South Africa. Eight years ago it was nearly as hard to run a business in Russia as in legendary red tape champions India and Brazil.
The World Bank said Russia rose 11 places because of reforms addressing the registration of property, power supply reliability, and the transparency of electricity tariffs, among other measures (The big jump in ratings raised Russia from 62nd place worldwide to 51st place - just shy of President Vladimir Putin's goal of raising Russia ranking to 50 by 2015.)
On the other hand Chile has made significant progress – slashing the time it takes to start a business from 40 days to 5.5 days over the same period. Colombia has cut it from 40 days to 11 days, Georgia from 11 to 2 days, Russia from 29 days to 11 days and Malaysia from 31 days to 7 days.
The only country to perform worse in this regard is Brazil – which has dropped from 122 to 174 (after hitting 90 in 2012). Chile has also slid back. After climbing from 69 in 2008 to 22 in 2014, it has fallen to 62. The best performer continues to be Georgia, ranked sixth.
In contrast Brazil continues to be an outlier, with issues of tax consuming a massive 2,600 hours a year for mid-size businesses.
How fair are they?
But the World Bank has faced a barrage of criticism of recent over the rankings.
The Financial Times noted this week that in many ways they favour authoritarian regimes which have the capacity to pass regulations quickly through rubber-stamp parliaments over democratically elected ones. In May, for example, Putin signed a decree to get the country to number 20 on the rankings.
Yet none the less the South African government seems to be taking action - at least in response to slowdown of growth (the economy is set to grow at just 1.5% this year).
The Presidency is set to establish an investment task team, as part of a nine-point plan mooted by South African president Jacob Zuma earlier this year to tackle low growth. It will look at how to reduce red tape and encourage more investment.
In addition, the Department of Trade and Industry has begun the process of setting up an investment clearing house which will take a more focused approach to attracting and retaining investors in the country.
A more focused approach to trimming red tape and enabling the private sector is what's needed. But will it happen?
Timm is a South African who writes on small business. He is currently based in Cape Town, South Africa. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
The percentage of adult South Africans involved in starting a business has plunged by 34%, a new report shows.
The Global Entrepreneur Monitor (Gem) global report for 2014 reveals that the percentage of adults involved in a business less than three-and-a-half years old (the TEA rate) fell to 6.97% last year from a 13-year high of 10.6% in 2013.
This, while the percentage of South African adults running established businesses (those of older than three and a half years) has also slipped - from 2.9% to 2.68%.
The 2014 report surveyed over 206,000 individuals and 3,936 national experts on entrepreneurship across 73 economies.
South Africa is not alone in its decline. The rate of adults starting new businesses also fell dramatically in India (along with its established business rate) and Colombia, and slipped slightly in Russia and Malaysia.
South Africa continues to perform below similar, efficiency driven economies (see graph below), where the average early-stage entrepreneurial activity (TEA) rate rate is 14% of adults, while that of established businesses is 4.5%.
Below par performance
“When one looks at the TEA rates of different countries and compares these to the GDP per capita in the country, a “line of best fit” shows that South Africa should have a TEA rate in the region of 14%, which, if achieved, would go a long way towards reducing unemployment and alleviating the poverty experienced by much of its population,” says Gem executive director Mike Herrington, (pictured right) in the report.
Herrington adds that it’s difficult to show where Gem has influenced policymaking in South Africa except that over the years Gem results are being quoted by businesses and government departments to a greater extent than when Gem first started tracking South Africa in 2001.
High failure rate
While there is evidence that South African firms are failing less than in previous years (with the discontinuance rate fell falling from 4.9% to 3.89%) an analysis by Small Business Insight of Gem data for 2014 shows that South Africa still has one of the high failure rates (those running established companies as a ratio of the sum of both established and early-stage entrepreneurial activity).
Of a group of eight emerging economies (Brazil, Chile, Colombia, Malaysia, India, Russia, Georgia and South Africa) South Africa, with the exception of Chile and Colombia, has the highest business failure rate.
But what makes South Africa's case concerning is the country's low number of adults involved in start-up activity (see graph) and in running established firms.
Of the group of eight, Malaysia is ranked as having the most favourable entrepreneurial eco-system – with good access to finance and good policies and government programmes, among other things. Last year it eco-system was judged as more favourable than in 2013.
The biggest gain was made by India, possibly driven by prime minister Narendra Modi and his mooted reforms. Local experts there rated the country more favourably than in 2013, particularly in government policies as well as programmes and finance and cultural norms.
The rating of South Africa’s entrepreneurial eco-system slipped (as did those of Colombia and Chile). The African country is weighed down by poor ratings on government programmes and primary education.
Brazil continues to trail at the bottom of the rankings, bogged down by its low rating by local experts on regulations and poor primary education.
Four types of nations
Of the eight emerging economies analysed by Small Business Insight, four types of countries emerge:
Timm is the author of Trade and Industrial Policy Strategies (TIPS) 2012 report ‘How the state and private sector can partner to boost support to SMEs: Lessons from Chile & Malaysia. Click here to view the report. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.
Can cutting red tape boost entrepreneurship? Most agree it can. But there are limits. The example of Georgia shows why.
In March last year I was in Tbilisi, the capital, for a short holiday. I was one of millions of tourists that are now flooding into the Switzerland of the Caucasus. I listened to the owner of a small hostel as he gave me a lift from the airport. He enthused about how just two years back the city was teaming with some 20 hostels. Now just five remained - his was one of them.
The recent boost in tourism in a country which has become known as one of the easiest in the world to start up a business drove demand. But a lack of innovation may be key to why many stay small or fail fast.
Countries that have been torn apart by war can rise from the ashes. They offer something peculiar to newly instated governments – a reason to cut red tape to the bone to attract new business and help the country to rebuild. At least this has been the experience in two such small countries – Georgia and Rwanda.
While April 7 marked the 20th anniversary of the commencement of the Rwandan genocide, it's 25 years to the day (April 9) since the Tbilisi Massacre in Georgia in which 20 people were killed during an anti-Soviet demonstration. The Caucasus country then suffered a civil war in the 1990s and was briefly invaded by Russia in 2008.
But today the two countries are ranked by the World Bank as the top two nations in the world when it comes to carrying out business reforms.
Rwanda, now the top reformer since 2005 according to the organisation’s 2014 Doing Business report, is the 32nd easiest place in the world to do business. Georgia is at eighth (see the table, left) spot.
Less red tape, more firms
The World Bank reveals in its latest Doing Business report notes that in Rwanda the number of firms per 1,000 adults rose from 0.3 to 3.4 between 2006 and 2012. While this is still substantially below the world average of 12.4, the increase over time it notes, is impressive. Over the same period the number of firms per 1,000 adult in Georgia increased from less than 20 to over 35.
Following the peaceful 2003 Rose Revolution Georgia embarked on numerous business reforms, slashing the time that it takes to register a business and reducing the number of tax types.
In 2006 the Ministry of Economy set up a regulatory review division which reviewed 21,000 laws and regulations – 12,000 were scrapped. Laws were streamlined in procurement, company law, public finance and tax and customs systems.
The World Bank in its 2012 report found that by 2008 senior managers in Georgian firms reported spending less than 2% of their time dealing with government regulations, down from about 10% in 2002.
There was a also significant drop in visits by tax officials between 2008 and 2005, from eight a year in 2005 to an average of just 0.4 in 2008. This followed the introduction of a new tax code which slashed the number of tax categories from 22 to six.
The government also tackled corruption – including the brazen firing of 16,000 traffic officers. Glass frontages were erected at police charge offices to make it more difficult for bribes to take place.
By 2008 just four percent of ﬁrms expected to make informal payments to public officials to get things done, compared with a regional average of 17%.
Today it requires only two procedures and two days to start a business. Back in 2004 it took 25 days and nine procedures.
After the reforms the informal sector fell from 67% in 2002 to 22% in 2010, according to the World Bank, while Georgian firms participating in 2005 and 2008 World Bank surveys reported adding an extra 23 employees – with average employment increasing from 61 to 84 jobs. Today small businesses in Georgia make up 20% of GDP and 90% of firms.
However despite the reforms about a third of Georgians still live below the poverty line and officially about 15% are unemployed.
A new World Bank report released last year (titled Fostering Entrepreneurship in Georgia) reveals that most Georgian firms remain relatively small and unsophisticated.
Out of a sample of 373 firms with average size of 12 employees, more than 90% had not carried out any research and development (R&D) in the last five years (compared to 50% in Armenia). Only seven percent had introduced a new or substantially improved product or service in last three years (versus 67% in Armenia).
Added to this because of a lack of financing options and high interest rates at banks, almost 90% of Georgian firms in the sample were funded by own savings.
The World Bank noted that Georgia does not have a specific SME or innovation policy – outside its State Strategy for Regional Development of Georgia for 2010-2017 - and suggests that the government should look at providing R&D incentives, more technical training in universities and mentoring for small businesses.
According to Lado Gurgenidze who helps run Smartex a local venture capital fund, innovative entrepreneurs there face several problems. In an interview last year with the American Chamber of Commerce in Georgia's magazine Investor.ge he listed among others limited broadband, low smartphone and tablet penetration and a small talent pool of software engineers.
But he remains positive that all that's needed is to showcase more examples of those who have succeeded. He hopes to do so through events like Tbilisi Startup Weekend. But the government, he says, should stay out of the way of entrepreneurs. His is an often-heard call, though better internet and more training could help.
Encourage an entrepreneurial ecosystem
Last week Brazil's President Dilma Rousseff once again promised to cut the time from the current over 150 days to just five days. But it is not enough for governments to slash red tape or put in place better systems to make it easier to pay taxes or register a business.
To flourish business owners also need better functioning entrepreneurial ecosystems - where it is easier to access finance, get help from mentors or incubators and where schools and universities actively encourage entrepreneurship.
For many emerging economies this remains a pipe dream. But one country - Chile - is striking ahead (read entrepreneur Nathan Lustig's article) . It has not only made it possible to register a business in just one day and simplified bankruptcy proceedings, but it is actively encouraging something many countries continue to sideline - the creation of more innovative entrepreneurs.
Governments should cut unnecessary red tape, use smart systems like web portals to save entrepreneurs' time and then work with the private sector to improve the entrepreneurial ecosystem without taking control of it. Like this more innovative firms will flourish.
Stephen Timm visited Georgia in March 2013 as part of an eight-day visit to the Caucasus.
Stephen Timm is a