OP-ED

We need a fresh, fleet-of-foot approach to funding small business development (Part One)

By Ann Bernstein and Stefan Schirmer 6 July 2021

Many policymakers see the provision of state support to small businesses as a good way to achieve a more inclusive economy, but a broader, bolder approach is needed.(Photo by Gallo Images / Sydney Seshibedi)

It is extremely difficult for large bureaucracies, staffed by people of whom few have any experience running a business, to provide effective support to small businesses. It is much more likely that smaller agencies, incentivised partly by a profit motive and specialising in certain kinds of business activities, will provide the right kind of support.

Ann Bernstein and Stefan Schirmer

Ann Bernstein and Stefan Schirmer are from the Centre for Development and Enterprise. This article is based on a new CDE publication, What role can small and micro businesses play in achieving inclusive growth?

Part One in a two-part series.

The Department of Small Business Development received R2.5-billion in 2021 to fulfil its mandate: R900-million is to be spent on enterprise development and R1.4-billion is for development finance. Vastly more (an estimated R17-billion) is spent by all levels and agencies of government on “small enterprise development”. A significant proportion of this takes the form of procurement from small, medium and micro enterprises (SMMEs).  

What impact does that massive expenditure have? No one really knows. What is clear is that our small business sector was hardly expanding and thriving before the pandemic, and Covid-19 has by all accounts had a devastating impact.

In a series of conversations with small business representatives, the Centre for Development and Enterprise (CDE) heard a lot of dissatisfaction with the government’s approach to small business development.

For example, Kgotso Mmadi, president of the Wesvaal Chamber of Business, said: “We cannot say that the government’s procurement strategy helps us in any noticeable way. It works for a few connected individuals but does nothing for most of us.”

Similarly, Oupa Pilane, president of the Kruger Lowveld Chamber of Business and Tourism, believes that “a large chunk of government procurement has not created business; in fact, over the past 25 years, the state has not created enterprises.”

Pilane also complained about the general difficulties of accessing financing of any kind. He claimed that it is easier for him to get a loan to buy a car than it is to secure a loan for his business. He added that “at least the private sector will let you know in 48 hours whether or not you got the loan you applied for. The best you can hope for from the public sector is that they reply in three or four years, if they reply at all.”

In this context of discontent with the government’s small business development policies, a wholly new approach has been called for. Some experts at CDE’s small business webinars expressed the belief that the draft Gauteng Township Economic Development Bill is that new approach.

The bill sets out to do something about township economies that “remain on the margins of the mainstream economy with high levels of poverty, unemployment and inequality”. The instruments the bill (and the new version of the bill) aim to employ in this regard are various forms of special, legislated support to township-based businesses.

There is an understandable desire to support and encourage black-owned businesses, especially in economically deprived areas like townships, but, even though the new draft (published for public comment on 29 June 2021) is much less draconian and more focused on creating “an enabling regulatory framework”, it still falls prey to repeating past procurement-based approaches and overestimates the capacity of state bureaucracies.

Using state procurement targets to privilege specifically defined types of businesses will continue to produce limited results and create opportunities for corruption. In addition, the intention to compel established retailers who want to operate in townships to use township-based suppliers produces the danger of raising costs and squeezing returns at a time when even established businesses are struggling.

This is not to deny the importance of providing small businesses with more support. The challenge is that any support, if it is to be effective, needs to be targeted at businesses with real potential to grow — and it should ideally be fashioned towards actual challenges that various kinds of businesses confront.

Leaving aside the pervasive capacity challenges across all levels of government, it is extremely difficult for large bureaucracies, staffed by people of whom few have any experience running a business, to provide effective support in this way. It is much more likely that smaller agencies, incentivised partly by a profit motive and specialising in certain kinds of business activities, will provide the right kind of support.

The large, corporate banks that dominate our financial sector are not well suited to helping small, township-based businesses access a bridging or even a start-up loan. This is an ongoing challenge that is difficult to solve, although banks like Capitec are pushing to improve their engagement levels with the SME market.  

In addition, new agencies are stepping into the gap, including the South African SME Fund, established by members of the CEO Initiative to provide venture capital to the upper end of the SME sector, and the RisCura impact fund, which explicitly seeks to fill the gap between large banks and the SME sector.

Then there is the newly established Kisby SME Fund, with similar goals. As its CEO, Mark Barnes, told CDE: “SME owners cannot obtain economies of scale, they do not have access to capital, and they cannot trade wholesale. With better support, the best of these firms could overcome these challenges and start competing with more established, larger firms. Many small firms desperate for funds are currently forced into borrowing money at 40% to 50%. Can you imagine what they could achieve with an appropriate mix of capital that is properly priced?”

One pioneer of this trend operating for the past 17 years in the property development sector is the TUHF group. It provides small housing developers, many of them just starting up, with funds to cover their building and administrative costs. TUHF has successfully invested R3.7-billion in 128 suburbs across all eight metros.

Its track record and focus on areas that are significantly underserved by the traditional banks has allowed it to develop an in-depth understanding of very specific property markets. This makes it possible for TUHF to assess the viability of potential builders/landlords and to provide relevant advice as well as financial support. TUHF also provides training and mentoring and introduces new clients to existing clients so that they can pass on their experience and lessons of failure and success.  

TUHF combines financial and business support in ways that have had a demonstrable impact. There are other organisations emerging in this sector providing financing and other support to small developers who understand their neighbourhoods and the local demand. What we need is many more such close-to-the-ground organisations, especially those that focus on specific sectors and provide more than just loans.

Effective government services (such as reliable electricity, water and policing) are essential for the success of businesses of all sizes, but the market is often better suited to delivering solutions that are tailored, flexible and innovative. Legitimate profit-oriented organisations are also likely to operate at a larger scale and at a higher level of sophistication than either the informal lenders or the NGOs that dominate the small business space at the moment.

Rather than special procurement set-asides, new rules and regulations dictating to established businesses, or even government-provided finance, the main thrust of a business development strategy should be to make it easier for all businesses to operate. And, for government at all levels to become much better at delivering basic services and essential infrastructure.

Many policymakers see the provision of state support to small businesses as a good way to achieve a more inclusive economy, but we need a broader, bolder approach. The emphasis must shift to making markets work more effectively and the barriers hampering the establishment and growth of all businesses must be removed. DM

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