Every entrepreneur knows that if there is no demand for his product or service, his business has no chance of survival. And every entrepreneur who applies for funding soon finds out that the collateral that banks most like to see is evidence of existing orders. So why can’t government apply this basic principle in its policies for job creation and enterprise development?
Here is a simple analogy of the relationship between supply and demand that illustrates where our SME policies are failing: Government decides that building more mills to grind wheat is a good way of creating jobs. So it provides a plethora of policies to support the building of flour mills – incentives, skills development, industry zones, business support centres, guaranteed loans, tax relief, red tape reduction, simpler compliance and regulation – the list goes on and on.
But unless the market needs more wheat, there is no point in building another mill. All that is achieved is that the mill owners are set up for failure and the hopes of creating jobs at the mill are dashed.
The scary stats
No wonder our track record for small business growth is so dismal. In South Africa 56% of our new businesses close their doors within the first 12 months; by year three, 72% have gone under; and after five years, only 7% will still be going. How can we possibly create enough jobs and encourage significant black ownership of new businesses against these odds?
It is hoped that Economic Development Minister Ebrahim Patel will bear this in mind when the details for implementing his New Growth Path are thrashed out. A vision of 5 million new jobs by 2020 is inspiring, but this target has no hope of being achieved unless there is a demand for what these additional 5 million people can produce or deliver.
It is encouraging that Minister Patel declared in his framework document on the New Growth Path (23 November 2010) that government intends to “mobilise domestic investment around activities that can create sustainable employment.”
I would recommend that government contributes significantly to that investment by taking the lead in generating demand. If government chooses to source its supplies and services from local communities, enters into contracts with local suppliers, puts its orders on the table, and then abides by the terms of those contracts, the rest will follow.
With guaranteed orders in place, funding can be raised, investors can be found, and entrepreneurship can thrive.
Indeed, The Gestalt Group has developed a local economic development model that can support this approach.
We identify suitable opportunities for establishing community-owned projects; we link them to what government needs; we raise funding from companies that want to invest in enterprise development as part of their B-BBEE commitments; we identify partners for these ventures; we bring in the support that is needed to get the businesses up and running and we provide a franchised, centralised support system for each venture.
One such scheme that is already producing results is the establishment of local bakeries that have acquired contracts to supply bread to government institutions.
The bakeries are owned by community groups, they employ people from their communities, they receive sound business support from Gestalt to help them to become sustainable, government is the procurer who has created the demand for their products, they are able to undercut the prices charged by the big bakery monopolies, and they are likely to be instrumental in driving down the price of bread, which brings benefit to all South Africans.
Furthermore, the scheme has brought equitable ownership to a slice of the bakery industry and has facilitated economic empowerment in areas where it is most needed.
In an economy where 40% of the national income goes to 10% of the population and where 10% of the population controls 90% of the economy, such new community ventures are key to changing the way money flows in South Africa.
Focusing on demand
If our policies for enterprise development shift from a focus on supply to a focus on demand, the enterprises and new jobs will follow as a natural result of that demand.
This mind shift is critical if we are to break the macro-level impasse between government and business – while government wants business to create jobs, business is resisting because it doesn’t want to create more jobs, for all sorts of reasons.
While business has proved to be very willing to come to the party in many ways, including through broad-based enterprise development investment, it has made it clear that it can’t be expected to create jobs that it neither needs nor wants.
So it’s time for a fresh approach to strategic intervention from government. Since government is arguably the biggest procurer in our country, it has the power to create new demand and stimulate new chains of supply.
But it has to break down its own needs into opportunities for small contractors, it has to put its orders on the table, and it has to honour its contractual agreements.
This is a simple vision for government to apply to the complexities of enterprise development – and it is this simple vision that can guide it towards achieving 5 million new jobs over the next 10 years and reaching its targets for achieving economic growth and equitable economic empowerment for all.