Small businesses in South Africa were already in trouble prior to Covid-19, suffering from the pre-existing pressures of late payments, red tape, load-shedding, credit rating downgrades and recessionary conditions.
John Dludlu, CEO of the Small Business Institute (SBI), considers what will be needed to rebuild and sustain small and medium enterprises (SMEs), which remain the backbone of the economy.
The Covid-19 pandemic has underscored the vulnerabilities of small businesses. What was the status of the sector prior to the pandemic, and what does it look like now?
The pandemic and ensuing lockdown measures that prevented much of what was considered non-essential trading were merely an accelerator in an already deteriorating economy. SBI research conducted in 2018 indicates that there were only around a quarter of a million formal, employing firms in South Africa, which makes us an international outlier economy. Around the world, 60–70% of employment is created by small firms, but only 28% of South Africa’s jobs are provided by SMEs. Estimates of how many informal firms there are vary wildly, but in South Africa they are mostly survivalist businesses.
Those most likely to employ – approximately 17 000 medium-sized firms – were already extremely fragile in 2018. Our 2021 research found that new business entry into the small business category has been insufficient to off- set the exit of established businesses, which has sadly been the case for the past 20 years. Our review of surveys into the impact of Covid-19 suggested as many as 55 000 might not make it through the pandemic – and this estimate was made last year, before the country was sent back to other harder lockdowns.
What was the take-up and impact of the various SME support and relief programmes launched during the past year?
While government’s social relief of distress grants and the Covid-19 Temporary Employer/Employee Relief Scheme (TERS) were beneficial, its relief support to small businesses was slow and ineffectual.
A key reason for the slow uptake was the stringent qualifying criteria – an extensive list of compliance requirements for prospective beneficiaries. The economic relief came in the form of debt rescheduling and new loans to an already over-geared corporate sector – by March 2021, banks had approved 14 827 in loans to the value of around R18 billion – evidence of low appetite for loan finance.
How does the proposed South African Economic Reconstruction and Recovery Plan (ERRP) address the needs of SMEs?
Structural reform is required to unwind deeply embedded challenges throttling our economy. It will require all of government to act in concert to create an environment for growth. The implementation of the ERRP has been slow. We need to examine where policy has failed and be willing to try new things, including how we create an enabling environment for enterprises (and remove the ‘disabling’ challenges like red tape); move from a ‘compliance’ mindset in respect of formalisation to one with social and commercial benefits; invite local business champions to work with dysfunctional municipalities to improve their chances to grow and employ people, especially in rural and small-town South Africa; and leap into the future by really embracing digitalisation so that competition and innovation can thrive.
What policies and actions are vital to reanimate the SME sector in South Africa?
The government should strive for transparent, evidence-based policymaking. It should reinstitute regulatory impact assessments, especially in respect of the way policy, legislation and regulation may harm SMEs. Sorting out infrastructure is key – whether a stable, affordable power
supply; accessible, low-cost bandwidth; or roads capable of carrying goods to market. Let the private sector help and incentivise it to do so. South Africa has paid lip service to the importance of SMEs since the democratic government was inaugurated. Essentially, it is now time to get out of their way. Let them do what they do and help them to do it. We need to re-evaluate compliance measures that kick in at various turnovers, numbers of employees, and in different sectors to protect employees as well as make it easier for people to grow their businesses and hire.
Which types of corporate interventions do you think are most effective in supporting SMEs?
We would recommend ensuring that supply chain terms and conditions do not result in exclusive relationships or carry other unintended consequences that could limit scale and sustainability of small businesses. It is also important to not add further compliance burdens to their already overloaded plates as compliance affects SMEs disproportionately. Spending as much as 4–6% of their turnover on compliance and up to five days a month make it a highly regressive ‘tax’, often costing as much as 10–20 times more than for their larger counterparts. Companies should also work with government through their powerful platforms to ensure that government understands what an enabling ecosystem for SMEs might look like.
