SMEs face an uphill climb against new legislation and red tape

As with many emerging markets, small and mediumsized enterprises (SMEs) make up a large proportion of South Africa’s private sector. According to the government’s economic blueprint, the National Development Plan, 90% of planned new jobs will be created by SMEs by 2030. To enable this, the government has rolled out a new department charged with aiding SME activity, the Ministry of Small Business Development.

State Of SMEs

Unsurprisingly, SMEs are being hit by the broader headwinds facing the economy. Given the current difficulties the country is seeing in terms of labour unrest and rising wages, there has been increasing concern among South African players. In part SMEs are at risk because they not only lack capital buffers to ride out short-term downturns in activity, but also because they largely operate in the informal sector. Statistics South Africa found that 1.5m people ran informal businesses in 2013, according to the “Survey of Employers and Self-Employed”. The informal sector accounts for 5% of GDP, according to official estimates. More than half of the businesses in the survey were found to be very small enterprises with monthly sales of less than R1500 ($142). Only one in seven made more than R6000 ($568) in monthly revenues.

Another challenge for SMEs is hiring staff. “SMEs would rather not employ people, or would hire on contract basis, because of the harsh labour rules,” Cas Coovadia, managing director of the Banking Association of South Africa, told OBG. He points out that SME employers cannot afford the time and expense of long-drawn-out dispute settlement under the framework of the Commission for Conciliation, Mediation and Arbitration, if embroiled in labour disputes.

Ministerial Support

Following the May 2014 elections, the Ministry of Small Business Development was created as a department devoted to SME promotion. As of October 2014, the new ministry was still finding its footing and had not yet begun operations. Neren Rau, CEO of the South African Chamber of Commerce and Industry (SACCI), told OBG, “The new ministry should not impose regulation, but should provide an enabling environment.” He noted that the new body could score some quick wins, such as setting aside 30-50% of government procurement contracts for SMEs. The government has also allocated R6.5bn ($615.5m) to SME development over the next three years.

Promoting Business

SACCI has also asked the new authority to work on addressing unnecessarily bureaucratic processes and cutting red tape, implementing innovative solutions to improve the SME business environment through centralised systems at a subsidised cost, expanding incentives available to SMEs such as turnover tax and addressing environmental challenges for local businesses. Perhaps the foremost priority for facilitating SME growth is addressing financing challenges. As is the case in many emerging markets, most universal banks are not set up for SME lending, given the lower returns and elevated risk the segment brings, as well as the need for higher levels of transparency.

Coovadia said that there is no significant venture capital in South Africa devoted to supporting SMEs, which are forced to turn to debt financing. However, venture capital can help greenfield projects and boost entrepreneurship. The advantage of venture capital is that it is patient capital that allows for a longer-term exit strategy and is also less risk averse than traditional funding sources. Coovadia added that the higher risks can be compensated by higher returns.

Building Up Firms

According to the International Finance Corporation, more than 80% of SMEs fail because of internal factors such as mismanagement. Lindiwe Zulu, the new minister for small business development, has also said that capacity building will be a focus area and that the ministry will push for cooperatives development to pool talents and resources as a catalyst for small business growth.

The new ministry will reportedly focus on six new projects to boost smaller firms through training for business owners and entrepreneurs, and broadening access to financing and information on potential markets.