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.
Stephen Timm is a