The small business development department should be abolished with the private sector driving small business growth instead, the Centre for Development and Enterprise (CDE) has recommended in its latest report on the priority actions the government of national unity (GNU) needs to embark upon to get SA back on track.
“The department has failed to produce any demonstrable, large-scale successes and it has largely failed to deliver on its mandate. Its remaining functions, especially those related to building a more enabling environment, should be absorbed by the department of trade, industry & competition,” said CDE executive director Ann Bernstein on the release of the report.
The think-tank has called for a radically new approach to small business development in the eighth of its Agenda 2024 series of reports on the priorities for the GNU to get SA back on track after 15 years of stagnation and decline. The latest report deals with how to promote small business development.
Priority areas for action identified in the series include fixing the state, driving growth and development by freeing up markets and competition, building a new approach to mass inclusion, tackling the fiscal crisis and strengthening the rule of law.
“Given the stagnation of the small business sector and a government riddled with deficiencies and inefficiencies, the time has come to hand the reins to the private sector and let markets shape the future of entrepreneurship in SA,” Bernstein said.
Radical rethink
“SA needs a radical rethink in its approach to small business development. We need to move away from the flawed assumption that the government can create businesses, that bureaucrats are best placed to identify and support firms with the potential to grow and that small firms exist in isolation from the broader economy”, she said.
“We need to stop asking government officials, most of whom have no knowledge of business, to select and support small firms. Private lenders, venture capitalists, and investment funds have a far better track record of identifying promising start-ups than government bureaucrats,” said Bernstein.
“The state should focus on creating an enabling environment ensuring reliable electricity, reducing crime, improving transport infrastructure, and removing bureaucratic hurdles. SA does not need more government intervention; it needs less.”
The report noted that there were more than 300 government departments and entities across all tiers of the state that are actively supporting small businesses, most of it in the form of nonfinancial support.
It noted that the small business sector in SA is small and stagnant with a low survival rate. CDE said that by some calculations, the sector expanded at the unimpressive rate of 1.6% per annum in 2010-19, before being devastated by Covid-19.
CDE research also shows that between the financial years 2017/18 and 2020/21 the state transferred an average of R5.8bn every year to small enterprises in direct financial support, through grants, loans and a combination of the two. But its interventions, rather than fostering a dynamic small business sector, had largely made it more difficult for enterprises to survive and expand.
The CDE recommended that over a three-year period half (R9bn) of state money devoted to small business support should to allocated into three to five private funds to test if they could do better than the state in this area.
Regulatory barriers
Another recommendation is that the regulatory barriers that stifle small business growth be removed, particularly labour laws that extend collective bargaining agreements to small businesses.
“These agreements, negotiated by large corporations and big unions, impose wage and benefit structures that small firms simply cannot afford, leading to job losses and business closures,” Bernstein said.
“SA should introduce an ‘SME test’ for all regulations to ensure that small businesses are not disproportionately burdened. This has been tried in many OECD [Organisation for Economic Co-operation and Development] countries, resulting in policies that encourage, rather than stifle, entrepreneurship,” she said. The responsible body to do this should be in the presidency.
The government appears to have done less to help small businesses than it has to hamper them by creating a hostile regulatory environment.
— CDE report
The CDE report noted that entrepreneurs faced a thicket of regulations, licensing requirements and tax burdens that made formalisation unattractive.
“The government appears to have done less to help small businesses than it has to hamper them by creating a hostile regulatory environment. The government’s efforts to develop the small business sector are not working,” the report said.
Another recommendation is for the government to stop using procurement spending to artificially develop township economies.
“One of the most misguided policies in recent years has been the fixation on developing township economies through procurement spending. Gauteng’s Township Economic Development Act requires that 40% of the province’s procurement budget be spent on township-based businesses. This approach is fundamentally flawed,” said Bernstein.
“Instead of fostering real entrepreneurship, it facilitates clientelism relationships, where politically connected businesses act as middlemen, inflating prices and delivering subpar services. This raises costs for township residents, as hospitals, schools and public institutions are forced to buy from preferred suppliers regardless of price or quality. A truly transformative approach would focus on integrating townships into the broader economy by improving transport links, reducing crime and creating an environment in which businesses can grow,” she said.
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