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Small business is suffering from analysis paralysis

South Africa

BUSINESS MAVERICK

Small business is suffering from analysis paralysis

A woman sews masks at the Ubuntu cloth mask initiative at the Coconut Clothing Factory in Goodwood, Cape Town. SMEs contribute disproportionately to their country’s economy and employment with small businesses driving innovation and growing up into large businesses. (Photo: Gallo Images/Netwerk24/ Jaco Marais)

The Covid-19 lockdown has reinforced the importance of SMEs in the SA economy — and their vulnerabilities. This has resulted in an avalanche of research that risks being overwhelmed in the noise. Now the Small Business Institute is analysing this research in an effort to provide policymakers with a clear picture of what SMEs really need if they are to grow and thrive.

The government’s latest economic development proposal, the South African Economic Reconstruction and Recovery Plan, which is due to be finalised at a Cabinet meeting this week and adopted urgently, puts the development and support of SMMEs as one of the centrepieces of the policy.

This is critical. Around the world, SMEs contribute disproportionately to their country’s economy and employment with small businesses driving innovation and growing up into large businesses. It is in these small to medium businesses that future organic growth opportunities are found.

Except this is not the case in South Africa.

Even before the advent of the pandemic, the number of active small businesses has declined dramatically. At the end of 2019, the number of liquidations in this sector was up 10% on 2018 — the economic cataclysm precipitated by the Covid-19 lockdown has simply accelerated that trend.

This is despite years of lip service paid to the importance of small businesses by the government and big business, and the country having a ministry dedicated to small business.

There is no point to layering clever, forward-looking initiatives on top of a foundation impeding business growth.

With this in mind, the Small Business Institute (SBI), with support from mining house Exxaro, has embarked on a research programme to analyse the situational environment for small businesses of South Africa. The intention is to identify the activities, barriers or mindsets that are holding these businesses back, and make policy recommendations.

“There is no point to layering clever, forward-looking initiatives on top of a foundation impeding business growth,” says Jennifer Cohen, who heads policy and research at the SBI.

“Ultimately, we will make recommendations to support small businesses, whether formal or informal, to rebound and grow, ensuring greater economic activity and money flowing into the economy.”

Conducted by small business research experts SBP, the intention is to review and compare the ongoing findings and proposals from the government, government agencies, academics, NGOs and the business community on the economic impact of the coronavirus over the next five months. 

The research will also look at what is happening on the ground in two districts – one in the Free State and one in Mpumalanga – examining historic, systemic challenges for businesses and those wrought by the economic shock and devastation of Covid-19. 

SBP has reviewed more than 160 surveys and papers published since April — and the information stemming from this research has been published in this note.

Pre-Covid there were about 267,959 formal businesses in SA, all employing one or more people. This number has not grown since 2004. Of these, micro, small and medium enterprises (which employ between one and 250 people) constitute by far the majority of SA’s business sector – 98.5%. This is drawn from a study conducted by the SBI in 2018 that analysed Corporate Income Tax and employment pay-as-you-earn (PAYE) tax filings. 

Using these findings, the GEN 22 on Sloane survey which was conducted early in the lockdown, estimated that 55,000 SMEs will not survive extended lockdown and the Covid-19 pandemic. They also calculate that there could be 423,000 potential job losses in the small business segment.

More recent surveys, conducted from May onwards by Nedbank, Visa, the SA SME Finance Association (SASFA), Genesis and consumer credit organisation Transunion amplify these concerns. 

The research notes that while UIF support has been life-saving in many cases, government’s loan relief support to South African small businesses failed miserably. 

Of the R200-billion set aside for business assistance, only R13-billion had been lent by government, assisting about 10,000 businesses by August. 

SASFA reported that by May, 47% of SMEs had applied for government relief and only 32% of those were successful, implying that only 15% of SMEs with turnover of below R10-million per annum had any support.

The dismal performance has much to do with obligatory compliance measures to access government’s loan relief, says Cohen. Qualifying businesses had to be South African-owned and employing a 70% majority of South Africans. 

This is time consuming and difficult to do under normal circumstances, nearly impossible in a hard lockdown.

Informal traders and township businesses unable to trade for months in the hard lockdown stages were required to obtain a licence to operate from the local municipality; register with the CIPC, the revenue authority SARS and Unemployment Insurance Fund.

“This is time-consuming and difficult to do under normal circumstances, nearly impossible in a hard lockdown,” says Cohen.

In June, the Minister of Small Business Development — charged with dispensing the government’s loan relief — reported that her department had formalised more than 2,242 spaza shops during Covid-19, processing applications from another 4,406. These represent less than 3% of the 150,857 FMCG retailers in townships mapped by market researchers Frontline and AfricaScope. 

It would seem that the government focused more on formalising informal businesses and collecting their data than providing financial aid to distressed businesses during Covid-19. A survey by the Small Enterprise Foundation (SEF), which has 216,000 informal sector entrepreneurs on its loan book, found this to be the case. 

Understanding the barriers to the growth for informal township businesses is equally important to SA’s economic future. Since lockdown, government seems to have awoken to the importance of this sector as an employer, its vulnerability and the absence of support — policy or otherwise — for these entrepreneurs.

Speaking at a CDE-organised webinar on the subject, Frederick Fourie, Professor and Senior Research Fellow in the Department of Economics at the University of the Free State, said that an estimated two million informal enterprises operated in SA in 2019, employing three million people. Of this, almost 400,000 businesses provided paid employment to 1.2 million people. 

“The informal sector is a potent creator of jobs and needs to be supported,” he said. 

The research, which aims to be concluded by January, will examine four key areas, notably the concept of “formalisation” of informal businesses and what this means in a new world; the principles of localism and whether the government’s new district-based planning model offers opportunity for a “bottom-up” approach to economic development and recovery. 

In addition, SBP will present recommendations to resolve the regulatory systemic hurdles that have impeded small businesses to start, run and grow and will also delve deeper into the digitalisation of SA’s economy and the opportunities this presents for small businesses. 

The research is evidence-based and one hopes that policymakers and big business will constructively engage with the recommendations. DM/BM

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