When President Jacob Zuma in 2014 announced the setting up of a new small business department many South Africans felt that the government was at last serious about supporting small business. Yet now approaching its third year the Department of Small Business Development has little to show for itself.
In November 2016 during a parliamentary briefing the department came under fire from MPs who said it had done little in the way of supporting small businesses or improving co-ordination of small business support across departments, entities and municipalities.
The chair of the National Assembly’s small business committee, Ruth Bhengu even remarked at the time that there is “no problem at policy level, the problem is at implementation level”.
'Hamstrung by budget'
The department in its defence claims that it is hamstrung by a small budget (for example the National Treasury slashed a third off the department’s requested allocation from the fiscus for the 2015/16 year).
Yet if it is to get a bigger allocation from the fiscus it will have to prove that it can spend its existing allocation of about R1.4 billion ($106m) a year wisely. In its 2015/16 annual report the department itself notes that it had failed to implement eight planned programmes for that financial year.
Little progress against red tape
Among these was a provincial red-tape reduction study which the department had to defer to the following financial year. Despite this it was able to carry out workshops with 81
municipalities on guidelines to reduce red tape.
Yet holding workshops alone don’t amount to tackling red tape if the actual laws are not removed or made easier for businesses to adhere to these through the use of technology, better trained public servants or streamlined procedures.
Small Business Minister Lindiwe Zulu’s initial pledge that she would look at how to reduce red tape for small businesses particularly labour laws has seemingly come to nought.
Red tape in some respects is worsening. Since the department’s inception the time it takes to register a business has increased (even as online registrations have grown) – from 19 days in 2014 to 46 days in 2016, according to the World Bank.
New labour laws (see this earlier post) require firms to convert temporary workers into permanent staff after three months (although firms with fewer than 10 employees and start-ups are exempt from these).
A national minimum wage planned to take effect in May 2018 will hit small firms the hardest. An advisory panel’s proposal to allow firms with fewer than 10 employees a one-year period to phase in the new minimum wage looks to have been dropped by government, labour and business (see this post).
To combat red tape the department could do more to publicise the use of regulatory impact assessments (RIAs) among government departments when new legislation is considered. RIAs are useful mechanisms in ensuring that any new legislation doesn’t end up killing small businesses, but far too few government departments make use of them.
Little monitoring, research
Another serious flaw in the government’s assistance for small business is that the state carries out very little monitoring of its own programmes and next to no research on the sector. This was highlighted by a 2015 review of the department’s programmes (see post)
The department doesn’t publish any detailed reports on the impact that its programmes have made (although the department noted last year that a review is currently under way of two of its programmes).
Nor does it carry out much research on the sector. South Africa, unlike other emerging economies like India, Malaysia or Brazil, doesn’t run a regular census or survey on the on the small business sector.
Without consistent research and evaluation and monitoring of programmes, it is easy to understand why programmes are simply started and run without too much consideration for the impact they have on new firm creation, creating sustainable jobs and encouraging more innovation and exports.
No voice of small business
The department has also done little to address the voice of small business – which is often drowned out by big business or absent because business owners are so busy trying to keep their businesses afloat.
A national small business advisory council – set up in 2006 by the Minister of Trade and Industry – could help, but few small businesses even know it exists.
Even if they did, there is no way to access its minutes, and so they can’t participate in debates on the sector or hold the government to account on what it is doing to support the sector. This renders the entire council a waste of tax payers’ money.
A new council has not been announced despite the small business ministry having issued a call for nominations went out in August 2015. The council instead needs a remodelling to encourage openness and participation – or it should simply be done away with.
Then there’s the department’s Small Enterprise Development Agency (Seda) which has never made much of an impressive impact.
For one the agency’s budget of R750 million ($56m) is miniscule when compared to that of similar agencies in Chile or Brazil (their agencies have a budget three and 17 times larger than Seda’s, respectively (see this post).
Seda also helps few businesses (just less than 11,000 in 2015/16, compared to for example Brazil’s Sebrae which in 2014 assisted 2.2 million businesses or one in five businesses in the country (see this and this post).
Seda might be able to improve its impact if it made use of better business advisors and mentors. Shamefully many of its business advisors have never run a business before.
Seda’s new head said in August last year that efforts were being made to improve the skills of its internal business advisors and the quality of its mentors (see this post)
Added to this though Seda is steadily growing its incubator network, the bulk of its incubators are aimed at supporting fairly unsophisticated firms, rather than supporting entrepreneurs that develop more innovative ideas or those that would be able to have a bigger impact on employment.
Little focus on job creators
This support for run-of-the-mill businesses seems to be inherent in the government’s small business support over the years.
Much of the department’s focus for example is on supporting informal businesses – through business skills training offered to informal traders and attempts to partner with municipalities to develop better trading infrastructure in townships.
Yet the department appears to be doing little to assist the real job-creating firms – start-ups with innovative ideas.
The one exception is the launch last year of Seda’s Gazelle programme (see this post), an attempt to help 120 high-growth businesses to grow over three years by helping them source finance and business support. It’s a gamble which might just come off if the private sector is roped in sufficiently.
Rare victory with set-asides
Despite its challenges however the department has scored one important victory for small businesses – in getting the National Treasury to draft regulations that call for state departments and entities to get winning bidders to outsource 30% of the value of contracts to small businesses.
The regulations are expected to take effect from April 1 this year. But the measure will not be compulsory for state entities to carry out. This may dampen its impact (see here).
Ultimately the department’s central challenge is the way it is configured. Small business support is spread across a wide range of departments at provincial and national level and is also located at the level of municipalities.
All this amounts to about R15.5 billion ($1.2bn) in support to small businesses, according to DA MP Toby Chance, who sits on the small business committee.
Better co-ordination would therefore help. Yet more effective than just another line ministry might be a small business function in The Presidency or a high-profile committee headed by the president and staffed by heads of agencies and private-sector organisations that assist SMEs (similar to Malaysia’s National SME Development Council).
Importantly, if it is to make more of a radical impact the department and the government as a whole should be more bold and step out with more aggressive instruments that incentivise funding and support from the private sector.
The Treasury’s Jobs Funds, the R&D tax incentive, 12J venture capital tax incentive, Technology Innovation Agency’s seed fund and the use of the BEE codes’ supplier and enterprise development to get big companies to help and buy from more black suppliers show that the state is onto something.
In the end the best way for any government to help small businesses is to strip away as much red tape as possible, hire better and more accountable public servants and incentivise the private sector – big firms and organisations – to ratchet up support to small businesses.
Getting this right could result in real radical economic transformation.
*For more on the Department of Small Business Development's plans for this year see this recent post.
Timm is a South African who writes on small business. This opinion piece was included in the 2017 Global Entrepreneurship Monitor (GEM) report for South Africa (find it here). Click here to sign up for the monthly Small Business Insight newsletter.
Government, labour, business and civil society in South Africa have seemingly dropped a plan by an advisory panel to grant firms with fewer than 10 employees an extra year in which to adopt a planned national minimum wage.
The agreement – signed earlier this month between Nedlac social partners and overseen by Deputy President Cyril Ramaphosa – says only that no business will be excluded from the national minimum wage (targeted at R3,500 a month, to begin May 1 next year).
This contrasts a recommendation by an advisory panel in its November report that all firms be given one year to bring wages in line with the minimum wage and that firms that employ 10 or fewer employees be given two years in all in which to do so (see this post).
The agreement instead calls for those businesses that cannot afford the minimum wage to be able to apply for an exemption of up to 12 months. It calls for firms to be able to lodge applications before the implementation date, to provide them with sufficient time to put in their exemption applications. A 30-day turn-around time on exemptions is envisaged.
While these details are not been set in stone, as legislation to effect the national minimum wage will now need to be introduced and debated in Parliament, it does a lack of foresight on the effect the minimum wage will have on small businesses.
Provide productivity support
In Malaysia in the first few years after the country implemented a minimum wage in 2013 firms employing five or fewer employees were initially given six months in which to meet the national minimum wage. SMEs and any other businesses also had an opportunity to apply for a further deferment from paying the national minimum wage
In addition to raise the productivity in small firms the government introduced four measures to assist small firms (outlined by the government's small business agency SME Corp here). These are:
Such measures implemented by South Africa might also help small firms. It is promising therefore that The Nedlac agreement notes that the government will explore ways in which exemptions could provide access to tax incentives.
While a number of countries (Nigeria, Morocco, the US and the Philippines) exempt micro firms from the national minimum wage, South Africa's advisory panel is not in favour of blanket exemptions for such firms.
Labour federation Cosatu’s strategies co-ordinator Neil Coleman (pictured above) said in a Daily Maverick opinion piece this week that proposals to exclude small businesses have been rejected, “based on cogent arguments” from the National Minimum Wage panel on the South Africa reality, as well as consideration of the international experience.
Wits University researcher Elena Konopelko argues in a policy paper published last year that such exclusions carry substantial risks.
“In cases where business exemptions are based on the number of employees, some companies employ workers illegally or classify permanent employees as volunteers to remain below the threshold and therefore avoid paying the national minimum wage.”
“In cases of exemptions being based on turnover, some companies start illegal accounting schemes to hide their real turnover. Labelling staff as volunteers or interns and paying them below the national minimum wage has also been documented in the UK.”
She says in addition, some sectors of the SA economy (such as the textile sector) consist predominantly of small firms and introducing a blanket exclusion would not provide a “decent wage floor” for workers, which could undermine the purpose of a minimum wage.
Still up for debate
If no exemptions are forthcoming, the government - under the Department of Small Business Development - in partnership with the private sector needs to put in place measures to boost the productivity of small businesses.
Without much better help from the government, coupled with perhaps tax rebates or incentives, the small business sector could see significant job losses.
Timm writes on small business. Click here to download the National Minimum Wage advisory committee report. Follow Small Business Insight on Twitter at @Smallbinsight.
Will the planned implementation in South Africa of a minimum wage lead to significant job losses among small businesses or will it as some assume, have little negative effect?
An advisory panel set up in August by Deputy President Cyril Ramaphosa to probe a national minimum wage, believes a minimum wage of R20 ($1.40) an hour or R3,500 a month may have a significant effect among those with fewer than 10 employees.
In a report released on Sunday, the advisory panel (its chair Imraan Valodia is pictured above) suggests that employers of such firms should be given a three-year reprieve from when the national minimum wage comes into effect and that exemptions also be allowed.
Small business association Nafcoc said this week however that a national minimum wage was a “disaster” the country cannot afford. Other commentators, such as the DA MP Toby Chance, also cautioned that it would place an additional burden on small businesses.
In its report the advisory panel noted that there are over 4 million employees in firms with between one and nine employees, and a further 1.9 million in firms of between 10 and 19 employees.
South Africa already has a number of minimum wages dispensations specific to certain business sectors. The report says about half of employees in firms employing fewer than 10 people and just over three quarters of firms employing between 10 and 19 people are employed in sectors covered by these sectoral determinations.
Significant variation in pay
The panel's report notes that in agriculture, contract cleaning, hospitality, taxi, and wholesale and retail, more than 50% of firms have fewer than 50 employees.
But it says data suggests that it is not true that all small firms support low-wage workers.
The report's authors say data presented by the National Treasury, derived from the Quarterly Labour Force Survey, suggest that a significant number of small firms would be affected by the introduction of a minimum wage above R3,000. Most affected would be firms with fewer than 20 employees.
“For example, for a wage of R3,189, just over 1.45 million workers would be affected, while the average wage increase would be around 23% for firms with less than 10 workers and 18% for firms with between 10 and 20 workers.”
It says in firms with fewer than 20 employees, retail and community services are notably affected, as are agriculture, manufacturing, business services and construction.
Extra year of phase-in
The panel wants to allow businesses a two-year phase-in period to meet the national minimum wage.
However it says because in general smaller firms are less easily able to adjust to policy measures, enterprises employing fewer than 10 employees should be granted one additional year with technical assistance before they must comply or face penalties.
“In other words, for enterprises employing less than 10 workers, penalties would only apply in 2021,” the panel suggests.
Furthermore, the panel believes that the general exemption procedure is more important for smaller enterprises than large enterprises. The panel stresses the need for “modernised administration” of the national minimum wage system if the objectives of the system are to bear fruit.
While international evidence (including a recent literature review on emerging economies) suggests that the imposition of a minimum wage doesn't lead to significant joblessness, many in South Africa aren't so certain.
With unemployment touching a 13-year high of 27% in the last quarter, introducing a national minimum wage could constrain small firms, which might instead hold off making new hires or resort to more informal hiring methods.
Timm writes on small business. Click here to download the National Minimum Wage advisory committee report. Follow Small Business Insight on Twitter at @Smallbinsight.
As growth in emerging markets stalls, Brazil and India, which have long had some of the world's worst red tape for firms, are looking to reduce the burden.
While Brazil's government is acting to tackle its ailing economy (the OECD says it will contract by 0.5% this year), India's reforms are driven by a pledge by President Narendra Modi (pictured left) to make Indian business more competitive.
India more than Brazil needs to reduce paperwork for businesses. Last year Asia's third biggest economy was ranked 142 by a World Bank report, below Sierra Leone and Cambodia. Brazil was ranked 120.
Since late last year the government has taken several measures to make it easier for firms to do business.
In the latest move the government last month reduced the number of mandatory documents required for the import and export of goods from about 10 to just three. The measures took effect this yesterday.
Since last year the government has announced a string of other measures it hopes will bring down the cost of doing business in India.
In February it launched an e-business platform (www.ebiz.gov.in) which allows businesses to apply for or renew licenses and registrations and to file tax returns and other regulatory reports. It follows the launch in October of a portal to allow employers to register for employee benefits and a workplace safety fund in one place. Previously employers had to deal with four different units.
Also in October last year Modi introduced measures to make labour inspections (a constant concern for Indian businesses) more transparent, by having a computer pick the enterprises to be inspected.
In addition in the Labour Laws Amendment Bill 2011, approved in November by India’s Parliament, moves the definition of a small manufacturer to one with up to 40 employees (previously it was 19). This will allow more small firms to complete just one labour return rather than file separate ones.
While the government is expected to release a new bankruptcy code in the coming year (as announced by Finance minister Arun Jaitely in his budget speech in February), Modi also has plans to cut the time it takes to register a business from the current 27 days, to just one day.
There are signs the state wants to get tough. Last month Amitabh Kant, India's secretary of industrial policy, said the government will “name and shame” states which don't ease procedures for doing business. It remains to be seen whether it will in fact do so, and how effective this may prove.
Bye bye bureaucracy?
Not to be left out Brazil is also looking to the country an easier place to do business in. More than India, the South American giant needs to reform its crippling regulations if it is to return to growth.
There are already signs that small firms are taking strain. The turnover of small businesses in São Paulo fell by about 15% in January compared with the same month last year, according to a survey by small business agency Sebrae.
The country's small business minister Guilherme Afif Domingos (pictured right) and the governor of the federal district (where the capital Brasilia lies) signed an accord last month to pilot the government's simplified registration regime (Redesim) which aims to have small businesses register in five days.
At present it takes 83 days to register a business in Brazil, according to the World Bank's 2015 Doing Business report, which ranks the country at 167 out of 189 countries for ease of starting a business.
A process to hasten the closure of businesses will take immediate effect across all states in Brazil, Domingos said, adding that over 1,000 firms had been closed via the quicker procedure - which ensures firms can be closed immediately on a web portal (Portal Empresa Simples) - since October last year.
It will likely take some time to roll out the new registration system, time Brazil can't afford to lose.
What about SA?
Red tape is a constant concern for small businesses the world over. In South Africa a 2004 report revealed that red tape cost smaller businesses proportionately more than it does large firms - 8.3% of revenue for firms with an annual turnover below R1 million, but just 0.2% for those with sales of over R1 billion.
With the exception of its onerous labour laws (see this previous post), South Africa arguably has far less bureaucracy than its fellow Brics members. It is ranked by the World Bank at number 43 for ease of doing business, just below Chile (41) - which recently cut the time to register a firm to two days (see this post).
It is more likely shoddy public servants and a lack of business experience among many South Africans than red tape that is to blame for the country's poor showing on entrepreneurship (see this post).
The government, together with the private sector, needs to do more to skill better public servants and offer first-time business owners proper business support. None the less doing away with unnecessary rules that stifle job creation would also help.
Recent moves such as the Business Licensing Bill which is currently being redrafted, changes to the labour laws to limit the employment of temporary workers to just three months (which took effect at the beginning of this year - see this post) and measures to restrict labour brokering (effective from this month), do little to calm fears that red tape is not mounting.
Business owners will hold the Minister of Small Business Development Lindiwe Zulu to a promise she made last year when the ministry was formed, to look into and tackle any unnecessary red tape.
But as the economy flounders in South Africa (expected to grow at 2% this year), the optimism many held that a ministry for small businesses would be able to stand up for their rights, is fast beginning to fade.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a