Friday, 26 September 2014

Department of Small Business Development: quo vadis?

The task ahead

”If countries fail at creating jobs, their societies will fall apart. Countries, and more specifically cities, will experience suffering, instability, chaos, and eventually revolution. This is the new world that leaders will confront. 

What would fix the world – what would suddenly create worldwide peace, global wellbeing, and the next extraordinary advances in human development, I would say the immediate appearance of 1.8 billion jobs – formal jobs. Nothing would change the current state of humankind more.”

– Jim Clifton in The Coming Jobs War.

This message should act as a stern warning to the ANC-SACP-COSATU alliance and Jacob Zuma’s government. Unless they design and implement measures friendly for creating jobs, the National Democratic Revolution so many of them are wedded to will end up being very undemocratic and threaten South Africa’s future as a nation. Instead, we will become a failed state.  

How to create jobs, therefore, is the most pressing problem the country faces today. This is highly contested political as well as economic territory.  

The National  Development Plan, which the DA supports, envisages 11 million new jobs by 2030, but our track record in the past 5 years has been very poor. Before the 2008-09 global recession, Stats SA figures show an unemployment rate by the narrow definition of 21.9%. It now sits at 24.1%. By the wider definition, which includes those who  have given up looking for work, it is 34%. If this trend continues, South Africa is in big trouble.

David Birch, in his 1979 report The Job Generation Process, coined the term Gazelle companies, meaning those small, nimble companies with a high potential to create jobs. Birch estimated that gazelle companies account for only 4% of US companies but 70% of new jobs. 

The formation of the Department of Small Business Development must be seen in this context. As a new ministry in the Economics Cluster, it has a very specific task: to formulate and implement policies that maximise job creation.  

The DA is very clear about the need to review not just the legislative and policy framework within the new department, but in all departments which have an impact on job creation. This will be a severe test for the Minister, who will come up against entrenched interests which are inherently job destructive rather than job creative.  

The challenge facing the Minister Lindiwe Zulu is to be the first enterprise-friendly ANC minister in Jacob Zuma’s cabinet. I have publically stated that I will support the Minister, if she shows a willingness to adopt this approach. As Shadow Minister I will play the role of watchdog and continually press for the needs of small business to be paramount in the formulation of new policies and regulations. This is the only chance South Africa has of creating the jobs we so urgently need. 

What is the current status of the Department of Small Business Development? 

The Minister presented her vision for the department and its mandate to the Portfolio Committee at its first meeting  on 2nd July, with a follow-up presentation on 20th August. A number of Acts will fall under the department’s purview, the main ones being the National Small Business Act of 1996, amended in 2004, and the Cooperatives Act of 2013.  

The Minister also indicated that she would be looking at legislation and regulations falling under other departments if they have an impact on small business. Perhaps the most important of these is the Labour Relations Act. However, comments from her department during the recent metal workers strike do not suggest it has the appetite to tackle labour laws that deter job creation.  

Most of the functions of the department are being transferred from the DTI (Small Enterprise Development Agency, Incubation Support Programme, Cooperatives Support Programme) and the DED (Small Enterprises Finance Agency). The department has an acting Director General with a Deputy Director General seconded from the DTI. There appear to be turf wars between the DSBD and the DED which is reluctant to let SEFA go as this will further denude it of any meaningful functions.

Small business has always been the step child in the DTI, receiving only 10% of the DTI’s budget. Its performance has been questionable, with SEDA spending most of its time and budget supporting micro and survivalist businesses with little impact on job creation. By its own admission, support for cooperatives has been disastrous, with most newly formed cooperatives ceasing to exist when grant funding dries up. It is too soon to assess the impact of the incubator support programme, which has taken more than two years to get off the ground and less than 10 DTI-funded incubators are operational. 

SEFA, which was formed in 2012 with the merger of Khula Finance and a number of smaller institutions, has struggled to gain traction. Like SEDA, its focus has been survivalist businesses which are funded through micro-finance intermediaries with loans averaging around R5000. SEFA’s SME beneficiaries create on average only 1,5 jobs each with the funding they receive, a hopelessly inadequate outcome on expenditure in the 2013/14 financial year of R808 million. 98,3% of SEFA’s 46,182 loans were disbursed by micro-finance intermediaries, charged at very high interest rates. Just 0.5% of SEFA’s loans were made directly, averaging around R1 million per loan. 

As President Zuma said in his State of the Nation speech, South Africa’s development finance institutions need a big shake up and SEFA is in urgent need of remedial surgery.  

In my first one-on-one meeting with Minister Zulu on July 3rd she told me her goal was for the new department to be up and running within 100 days of her taking office. She has now been in office 120 days and her department is still far from being functional. In its most recent statement its spokesman said the were now aiming to be up and running in November. 

Priorities for the Department of Small Business Development 

Since my appointment as Shadow Minister for Small Business Development on June 5th I have focused on assessing the state of the small business development landscape in South Africa. On Thursday and Friday this week the Portfolio Committee is holding a workshop where we will deliberate on the mandate, strategy and action plans for the department. I will be ready to make my recommendations and I am pleased to be able to share some of them with you today. Most of these are within the department’s mandate and can be achieved within the government’s 5 year term.  

1.       Give unequivocal support to the vision and strategies embedded in the National Development plan as the overarching guideline for the Department.

2.       Become the champion of South Africa’s Entrepreneurial Ecosystem by making a clear statement that she intends to break from the past and establish a policy framework for small and medium businesses to grow, thrive and create jobs

3.       Work towards establishing an enabling environment conducive to entrepreneurial and innovative business creation, including means of bridging the gap between investors and entrepreneurs

4.       Review the classification of small businesses to include not just their turnover and number of employees but also their stage of growth and motivation for being in business. These can include start-ups, informal, entrepreneurial, survivalist, lifestyle, mature and high-growth potential businesses

5.       Establish policy instruments and agencies that are designed around each category of small business, which require very different sorts of intervention

6.       Develop an outcomes rather than an activity based approach in all financial and non-financial support provided to small business

7.       Assess all government measures and support mechanisms by the number of jobs created and the economic value added, channelling the majority of funds and resources where they have the greatest impact

8.       Make a clear distinction between support and funding of survivalist businesses (which arguably should be overseen by the Department of Social Development) and those of high growth-potential (gazelle) businesses

9.       Motivate for an army of business mentors to be established that are made available to small business incubators

10.   Compress existing instruments for small business support at national, provincial and local government levels into one nationally directed but locally delivered set of instruments and agencies

11.   Establish one-stop small business service centres or help desks in each municipality staffed by trained personnel from SARS, SEFA, CIPC and SEDA to speed up business registrations and handling of tax queries, finance applications and requests for support

12.   Keep the department’s bureaucracy to a minimum and outsource the bulk of support and implementation work to the private sector

13.   Create a Red Tape Reduction Unit, following the example of the Western Cape Provincial Government, with a mandate to root out wasteful and pointless regulations that strangle small  business

14.   Review the Labour Relations Act with the aim of easing regulations on small business    

15.   Review the recommendations of the Human Resource Development Council’s Enabling Entrepreneurship Technical Task Team, March 2014, on introducing entrepreneurship into the school, FET and higher education curriculum

16.   Review the SiMODiSA Start Up position paper of June 2014 which is possibly the most comprehensive research-based study yet produced of how to accelerate the growth of small and medium sized enterprises

DA launches the DA National Small Business Tour

Over the next three months, my deputy Henro Kruger and I will be visiting every province in the country conducting oversight visits to assess the state of small business in South Africa. We will be visiting government-run small business support centres, including SEDA and SEFA offices and local and provincial government departments and agencies. We will meet with small business owners, local chambers of commerce, representatives of small businesses in townships and per-urban areas, as well as rural South Africa which is sorely neglected as a source of innovation and entrepreneurship.

The tour will enable us to form a picture of the needs of small business, and to show business owners that the DA is the party of small business, enterprise and job creation. As proof of this, we can point to  the Western Cape which under a DA-run governments shows the country’s lowest unemployment rate at 22% compared to the national rate of 34%.

We will report on cases where business owners are facing difficulties or are being hampered by red tape, bullying unions or big companies that refuse to include them in their supply chains.

When we uncover corruption, tendrepreneurs and contracts for pals we will expose them. Crony  capitalism is the antithesis of the Open Opportunity Society for All espoused by the DA.

We look forward to sending in a regular flow of stories and case studies which you in the media can use to inform your audiences about how implementing DA policies will lead to the economic future we dream about, but which under ANC rule remains just a dream.

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