CHRIS HART: Glitz and glamour, but no substance

While there was none of the bitch-slapping we so enjoyed at the Oscars, it was clear that President Cyril Ramaphosa’s recent Investment Conference was designed to offer a touch of glamour.

Its two awards sections featured a breathless master of ceremonies rattling off the names of the companies and bodies that have pledged new investment, with the boss of each one allowed a few seconds alongside our president as they competed to see who could provide the photographers with the toothiest grin.

No shortage of red carpet style, then, but what of the substance? The new pledges of R332bn, combined with those at previous conferences, make it certain that when the president hosts his next and final conference next year the overall total will easily exceed his R1.2-trillion target.

Some observers, including Business Day’s always astute and vigilant Hilary Joffe, have already put the new pledges under the microscope, and cast serious doubt on the veracity of some of them. Indeed, the entire presidential process and the ethos of all this grandstanding ought to be questioned given SA’s unemployment rate.

Despite all the conferences and pledges, the official jobless rate has been climbing relentlessly and now stands above 35%. Unquestionably, the SA economy needs more investment, but it needs the right investment — that which generates revenue and employment, that which grows the economy.

The president’s conference boasted a stream of big investments, but the pledges primarily came from big corporates, offering minimal job creation.  Welcome, certainly, but wholly inadequate. The sheer scale of unemployment, and its decade-long rising trend, is unique — and clearly self-inflicted through the wrong policy choices.

SA is underperforming not only the developed world but also its emerging market peers and the Sub-Saharan Africa region. The engine of job creation in any economy is always small business formation and the growth of existing small businesses. Ask any economist and — for once — you will get the same answer from all of us. 

This sector is where we will get the jobs we need, not in the labour-scarce robotics of a new car assembly plant or in automated underground mining. It is the SME, SMME, (call it what you like) sector that was not given any direct attention at the investment conference beyond lip-service. And I am increasingly impatient with lip-service. The conference, for instance, included not one but two self-congratulatory speeches from our president, who also scurried around talking to as many television journalists as possible.

What was conspicuous by its absence was any new investment of the order that we need into the SME sector.  The voice of real job creation was absent. There was talk of removing red tape, and the president has a new unit in his administration to address that. Large businesses have already emphasised that red tape has been counterproductive for them, but often it serves these big businesses as a weapon to prevent competition from smaller participants.

We will need more than a pair of red-tape trimming shears to revitalise our SMEs. Unfortunately, the small business voice doesn’t seem to have the capacity to make itself heard at these glitzy gatherings. For start-ups, their voice has yet to come into existence, yet  a crucial, fundamental issue we must address is how to remove the barriers to entry for these start-ups.

As I have already argued, SA’s problem is primarily unemployment, which has poverty and inequality consequences. Resolving unemployment will not be achieved by our existing economic capacity or pledges from big business. Unemployment will only be solved through the expansion of economic capacity that still has to be created — in the SME sector.

The solution lies in combating the blocking and prevention of new businesses entering this economy, and until we resolve this challenge all these hundreds of billions of rand in (hopefully) new investment will scratch the surface, but not much more. SA already has a superb, world-class financial services sector, but its fundamental flaw is the lack of channels to, and consequent lack of access to capital for, the SME sector.

The other important potential source of capital to fund small businesses lies in the household sector. Start-ups and SMEs are primarily backed by household resources — using the equity in homes, pension funds, and household savings. Our households and the middle class are under aggressive attack by a rapacious system of taxes that hamper them from accumulating or accessing capital to fund SMEs. The big villains remain the transfer duty on property, capital gains tax, death duties and personal tax rates at a confiscatory level of as much as 45%.

Small business is trapped in a no-man’s land between a household sector hampered by an inability to supply the capital that is so desperately needed and a financial services sector that is unwilling or unable to provide the finance. At the same time, we have the regulatory obstructions in the National Credit Act, which allow one to fund income but not assets. This skews debt creation to consumption-related debt, rather than investment-related debt.

You then have myriad regulations on labour, and other statutory requirements and taxes that are imposed on start-ups and small businesses before they have generated a cent of income. The entire regulatory framework imposes extraordinary barriers to entry in a sector that is also starved of capital.

If we don’t address these issues of regulatory obstruction and access to capital for the SME sector in the quantum that’s needed, we are offering mere gestures and empty non-solutions. The red-carpet talk of the investment trillions masks the real solutions and the real financing channels that our SMEs need.

I am genuinely happy that no-one decided to do a Will Smith and walk on stage to slap our president. But we need to find some way to give our politicians the wake-up call they need before the neglect of small businesses leads to even longer unemployment queues and further fuels the growing threat of civil unrest.

• Hart is executive chair of Impact Investment Management.