Interview with the Sunday Tribune on measures to assist small businesses

Today's Sunday Tribune business section features a Q&A with me on Page 4. Here is the article.

You can read my full answers below. 

      NOTE: There is an error in the article on the BBBEE scores for procurement and enterprise development. It says the combined points is 25, whereas the correct number is 25 for procurement and 15 for enterprise and supplier development.

1.       Red tape hinders SMEs development. For each new regulation introduced, two old ones will have to be cut, potentially reducing compliance burdens for SMEs. What are your thoughts on this?

All new legislation and regulations should be subjected to a Regulatory Impact Assessment (RIA). This is required of government departments but in answers to Parliamentary questions the DA put to them recently nearly all admitted they did not have a policy of implementing RIAs. The purpose of a RIA is to minimize the unintended consequences of legislation and regulations. The new visa regulations are a classic case of government not conducting a RIA, or else ignoring the negative impacts of the regulations spelled out by the tourism industry. In the Western Cape and DA-run municipalities, a Red Tape Reduction Unit scrutinizes all existing and new regulations including by-laws and is systematically eliminating those deemed unnecessary or with negative impacts on business.

2.       Also aimed at improving regulatory process is the Small Business Appeals Champion, which the government says will make it easier to challenge decisions made by the regulator. Will this be effectively implemented?

It is hard to say at this point because it has not got off the ground. Also, when you refer to “the regulator”, this is misleading because there is no single regulator of business. Regulations from multiple sources affect business – national, provincial and local government departments spew out new regulations all the time, it is very difficult for small businesses to keep up. For the appeals champion to work it has to be very easy to submit and track an appeal, and appeals must be dealt with in a matter of weeks not months or years, which is often the case when the competition commission is asked to investigate cases of uncompetitive behavior.

3.       Access to finance is typically top of the agenda in business and the better sharing of information between banks and alternative finance providers will help SMEs increase their chances of getting funded. What do you think is the solution small business financing conundrum

I have gone on record (see my recent article in Business Times, also published on my blog) as saying a new wholesale financing vehicle should be created that crowds in multiple funding sources including government and private funds (debt, investment and grants), BBBEE and CSI funds and targets new and growing small businesses. This should combine non-financial support measures such as training and access to mentors, which are vital for businesses emerging out of townships and rural areas where there is a historic lack of business expertise or sophistication. The funding vehicle should distribute funds through a country-wide network of approved intermediaries with proven expertise. These can include business incubators with fund management experience such as Awethu Project and Anglo Zimele. Serious consideration should be given to merging Seda and Sefa, which today operate in silos and have not delivered support at scale and with demonstrable impact in terms of beneficiary growth and job creation. We should learn from the experience of Britain’s Business Bank and Start-up Loans Company which have shown what can be done by pooling public and private sector funds.

4.       Do you think there needs to be the creation of new banks to challenge the status quo and improve competition for business?

South Africa has a very tightly regulated banking system which is both a strength and a weakness for the economy as a whole. On the plus side it protected us from too much fallout from the 2008 banking crisis, on the negative side our banks are very risk averse so getting finance without collateral is almost impossible. Rather than create new banks, our existing banks should be encouraged to ring-fence a percentage of their capital for small business support, using the wholesale vehicle mentioned above as a partial source of that capital. This is another form of what we know as prescribed assets mooted for pension funds over the years. I do believe we need to place a higher proportion of the country’s financial resources behind small and growing businesses – the country cannot afford the risk of not creating new entrepreneurs and the jobs which big business are failing to create.

5.       Do you think the insolvency system needs to be overhauled and hopefully, seeing a reduction in abuse by insolvency practitioners?

Insolvency is an escape valve for non-performing business and cleans out the rotten bits of the economy. On its own it performs a useful function and allows entrepreneurs to close down a failing business and start up another one. It would be ideal if more attention were placed on business rescue, but this needs to be carefully overseen by the banking regulator to ensure timely resolution and avoid placing further burdens on distressed businesses.

6.       New incentives are being introduced to get larger firms paying on time and make late payments less damaging to smaller companies. Government is notorious for late payments. Do you think government can achieve this whilst getting its act together?

This is a vital area for government and business to get right. Improved payment terms can often be the difference between survival and liquidation for many small businesses. Just as important as paying on time (minimum 30 days, preferably 14 days) is acceptance of the principle of paying an up-front deposit. Most small businesses do not have the cash-flow to fund a project before delivering and bridging finance is very expensive and often hard to find. This places a greater responsibility on buyers to ensure they appoint trustworthy and credit-worthy suppliers who will not run away with their cash.

7.       SMEs will be helped to grow overseas, with increased access to export finance. Do you think we are in the position to increase our export output through this channel?

This is an important and neglected area of government support. The DTI and other departments have an export incentive scheme and offer grants for businesses to take part in expos overseas, but more could be done here, especially in Africa where we have a competitive advantage. More emphasis should be placed on export promotion through our trade missions overseas. South Africa has the second most number of foreign missions after the US. To justify their cost they should be promoting South African companies, but to do this they must be staffed with competent officials with experience in business promotion.

8.       Access to procurement processes will be opened up to SMEs. Government has been pushing for this for while. Is it possible?

The new BBBEE scorecard which came into effect on May 1^st gives 40 points to procurement and enterprise development, which have been bundled together. Business has a patchy track record in these areas and more needs to be done to train buyers in the ways and means of supplier development to as to open up supply chains. Most buyers have cosy relationships with a few preferred suppliers and it is incumbent on executive management to ensure supplier development is not just a nice-to-have but is integrated into its standard business practices. Government has also indicated that 30% of government procurement will be set aside for small businesses, but the mechanisms for this are unclear at present. The change in procurement regulations from the 80/20 and 90/10 ratio, of price to BBBEE status, to 50/50, is problematic though, for it opens the door to more cronyism in government which has cost tax payers dearly in poorly delivered and over-priced contracts, particularly in local government.  

9.       Lindiwe Zulu is new in the recently created portfolio of Small Business and also lacked proper resources. That aside how would you rate her performance so far?

Overall I give her an average rating, with potential to do much more. She is saying many of the right things in terms of government’s commitment to small business, but is constrained because she is not in control of  the main levers of the economy which affect small business. These are in the hands of Treasury, DTI, Economic Development and Labour. She needs to show more courage by becoming the voice of business in Cabinet, which is overly represented by communists who are inherently anti-business. Soon after being appointed she floated the idea of labour reform to make it easier to hire and fire, but was immediately castigated by Cosatu and has not ventured onto this territory since. Unless the tripartite alliance breaks up it is virtually impossible for an ANC minister to do what is needed to boost the economy because economic policy is in hock to the unions and the SACP. The NDP has effectively been shelved because there does not exist in Cabinet a minister with sufficient clout and authority to put the case for its implementation. The alliance is wedded to the developmental state and radical economic transformation but is blind to the obvious fact that the state is failing everywhere and transformation will only come through economic growth, which this government is incapable of delivering.  

10.   Clearly the government must lead but is the private sector doing its part in the promotion of the growth of SMEs thereby boosting the economy and reducing unemployment?

This is an interesting question, and my answer is yes, in parts, but more needs to be done to learn from best practice and replicate it at scale. Business will not do it out of the kindness of its heart, except at the margin through CSI initiatives which typically consume a tiny fraction of turnover or profits. There need to be incentives for business to broaden supply chains, provide mentorship to new suppliers and offer financial assistance by improving payment terms beyond the punitive measures enshrined in BBBEE regulations. Business does not respond well to threats, and the jail terms and huge fines for non-compliance just make business owners angry. There are a disconcertingly large number of business owners who are selling or closing their businesses because the cost of compliance is just too high. In a recent conversation with a BBBEE consultancy they estimated that only 5% of corporate BBBEE measures are having a positive impact on new business formation and job creation. This is in large measure because businesses do not know how to implement BBBEE and there aren’t enough specialized practitioners who can help. There is too much box-ticking and fronting, but this is inevitable when companies see BBBEE as a cost to doing business rather than an incentivized imperative. Medium-sized mainly white-owned businesses feel they are under siege. It is very risky to take on any partner or new shareholder in a business, so when they have to give away 51% to a (black) partner to be compliant you can understand their reluctance.  They say they cannot find suitable black business people who can add value to the business. The ANC and its allies have a misconception that businesses can be grown on trees and that an entrepreneur will willingly part with a portion of their hard-earned business to an unknown person. This simply not the way business or entrepreneurs work.

11.   The youth tax subsidy has been running for more than a year now and some R2.8bn of the R5bn allocated has been claimed with about 270 000 young people having benefitted. Are SMEs also included in this and have they taken advantage of this opportunity to reduce their costs and help fight youth unemployment?

The tax incentive is available to any business, large or small, but it is aimed at stimulating the hiring of new employees not the taking on of new small suppliers. I have had conversations with small business owners who have hired young people due to the incentive, keeping them for 6 months before choosing which ones to hire permanently. The incentive has definitely worked but it needs to be ramped up. For example the money used to finance the National Youth Development Agency could be better applied to the employment tax incentive.

12.   SMEs have a dismal failure rate. Financing, the negative economic climate and a lack of skills have been blamed for start-ups collapsing. How do you think we can improve the longevity of SMEs?

SA has one of the worst records of start-up business success. Part of the reason for this is that many would-be South African entrepreneurs are over-optimistic and do not have a good grounding in business so their business concepts could be wanting and practical business skills are lacking. Many businesses are set up not because of their fundamental merit but because the owner cannot get a job. To address this we need more and better training and mentorship so the pipeline of new businesses is stimulated. The new Centres of Entrepreneurship set up by the Department of Small Business Development in some of the TVET colleges have potential, but only if they are staffed correctly and use appropriate business incubation techniques. Getting a plumber or a videographer to consider starting a business is step one, but hand-holding them in the early months or years can be the vital ingredient of success. There must be a much greater emphasis on mentorship and this is where the tens of thousands of business owners and retired professionals out there can play their part. In my view it would be much more productive to marshal their expertise to stimulate the creation of new businesses and new wealth rather than try to re-distribute shares in existing businesses to a small pool of connected insiders.