One Size Strategy for SMEs Does Not Fit All

One Size Strategy for SMEs Does Not Fit All

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As in the rest of the world, South Africa is pinning its hopes on small, medium and micro-enterprises (SMEs) to create jobs and drive economic growth. Indeed, government has spent billions on this sector. Yet some 17 years of state support for SMEs has produced disappointing results.

Much of this poor outcome is due to a failure to understand that the needs of micro and small enterprises are very different from those of medium-sized enterprises. We have blanket policies being applied, at substantial cost, by a range of programmes and institutions, but our “one size fits all” approach is falling between the cracks.

The acronym “SMME” covers anything from survivalist informal enterprises to established multi-million rand companies. Loosely defined, a micro business has a turnover of less than R100,000 and employs no more than 5 people; a small business has a turnover of under R5 million and employs up to 50 people; and a medium-sized business has a turnover of up to R35 million and employs up to 200 people.

A fourth category of ‘very small’ exists largely due to the SARS concessions of turnover tax and the VAT threshold for those businesses with a turnover of less than R1 million.

Given the considerable differences between these various levels of enterprise, one would expect commensurate policy differentiation, but this has not been the case.

Micro enterprises

Much of government’s enterprise development focus is on micro enterprises where the majority of emerging entrepreneurs are to be found. But micro businesses are usually not so much examples of entrepreneurial flair as they are of brave attempts to survive until better days.

They need small loans, low crime and corruption, physical access to markets and help with registration, assistance in finding staff and managing cash flow, amongst other things. And they are not where the capacity for real job creation lies.

Furthermore, access to finance, a primary SME strategy, is not necessarily a route to success for micro enterprises. Crucially, they need mentorship and business skills transfer (delivered by qualified people, not bureaucrats) to make the transition to becoming established in the formal sector. Without the capacity to take on the next level of business practice, micro business owners will continue to be much more comfortable in the informal sector.

Small businesses need different interventions. Access to finance and a healthy cash flow are vital if they are to thrive. Yet they are often required to manage their cash flows on a knife’s edge in an economy where the tendency to pay late, both by government and big business, has become the norm.

While government has acknowledged this problem and instituted a 30-day payment policy for its small suppliers, the wheels of implementation turn excruciatingly slowly. Economist Iraj Abedian estimates that 40% of the one million jobs lost during the recession were the result of government’s failure to pay on time.

Small businesses also struggle with dealing with competitors, marketing, meeting market needs and infrastructure challenges, such as finding business premises, connecting water services and electricity, transporting stock and acquiring equipment.

While some of these issues are addressed by the Department of Trade and Industry (the dti) incentive programmes (such as the Black Business Supplier Development Programme or the Project Funding for Emerging Exporters Programme), they do so inefficiently at best. Bureaucracy gets in the way and the process is arduous – it takes the tenacity of a tortoise to benefit from these programmes and most business owners haven’t got the time; they find another way.

Job creators

Studies by the Global Entrepreneurship Monitor (GEM) and FinScope show that jobs are created by sophisticated small businesses, not informal or very small ones. National Treasury agrees, saying that small businesses with less than 50 employees create 77% of new jobs [National Treasury Budget Review 2011]. It is here that the primary thrust of enterprise development should be directed – a strategy to move established small businesses to the next level.

But we are not doing this. Our support programmes are confined to local initiatives and incubation centres that serve largely the micro and very small emerging entrepreneurs (SEDA, the dti’s Small Enterprise Development Agency, wants to roll out 250 of these over the next five years) and to ill-conceived and poorly performing funding initiatives.

Khula Enterprise Finance, for instance, has been floundering, partly because it underestimates the practical support needed by its beneficiaries and does not have the capacity to provide such support. Even our skills training programmes are missing the mark – companies that may access Sector Education and Training Authority (SETA) products are discouraged by red tape and complain that the level of technical training supplied by the SETAs is too low.

And what is being done for the medium-sized sector? Medium-sized businesses are usually sufficiently well established to be able to get on with the job without needing government intervention. But they do need a business-friendly environment in which to operate.

Encountering obstacles

Instead, in South Africa, our medium-sized businesses bear the brunt of our policy shortcomings and encounter severe obstacles to growth. These include; expensive and onerous compliance and regulations, poorly maintained, expensive and unreliable transport infrastructure, frequent water and power cuts, high cost telecoms, inefficient licensing and rezoning services, rocketing electricity costs, a severe shortage of critical skills and restrictive labour regulations.

These problems indicate poorly conceptualised strategies for enterprise development, developed by policy makers bent on supporting enterprise start-ups without any notion of the external factors that will inhibit the growth of these businesses once they become established.

When will the needs of the medium-sized business sector be taken more seriously? We don’t need more incubators and more funding to achieve 8% levels of economic growth. On the contrary, it’s time to take the second M out of SMEs and urgently focus on making it easier for established companies to do business in South Africa.

Allon Raiz
Allon Raiz is the CEO of Raizcorp, the only privately-owned small business ‘prosperator’ in Allon Raiz is the CEO of Raizcorp. In 2008, Raiz was selected as a Young Global Leader by the World Economic Forum, and in 2011 he was appointed for the first time as a member of the Global Agenda Council on Fostering Entrepreneurship. Following a series of entrepreneurship master classes delivered at Oxford University in April 2014, Raiz has been recognised as the Entrepreneur-in-Residence at the University of Oxford’s Saïd Business School. Follow Allon on Twitter.