SME sector poised for lift-off
Small businesses are reinvesting, following signs that government is serious about supporting the sector
Pledges of support for small businesses in the state of the nation address and the 2018 budget look great on paper. And though the sector has heard it all before, things could really be different this time.
Government has an excellent track record of paying mere lip service to small and medium enterprises (SMEs).
It has consistently failed to put the sector at the centre of policy making despite the critical role small businesses play in creating jobs.
According to national treasury, the sector employs 47% of the workforce, contributes more than 20% of GDP and pays about 6% of corporate taxes. Despite this, government has allowed the small business environment to deteriorate markedly in recent years.
Since 2015, SA’s position has plummeted 75 places, to 136 out of 190 countries in the World Bank’s Doing Business survey for the ease of starting a business. It takes 45 days for an entrepreneur to meet the regulatory requirements to get a business up and running in SA, whereas it takes less than 20 days in 130 other countries.
"Getting a Vat number is one of the worst experiences for a small-business owner," confirms Simon Leps, CEO of the SME lender XPRS Capital Africa. As a young entrepreneur it often took him seven or eight visits to the SA Revenue Service (Sars), each involving standing in lengthy queues.
Small Business Institute chairman Bernard Swanepoel points out that despite government’s establishment of the small business development department four years ago, with a cumulative budget of roughly R5.2bn, it has consistently failed to achieve its annual targets or even to develop a proper strategy to support SMEs.
But with at least five new SME support initiatives set to come to fruition under the Cyril Ramaphosa administration, coupled with a pick-up in business and consumer confidence, there is a sense that the sector may finally be poised for lift-off.
"We’ve been through a harrowing decade, and now there’s a whole new sense of optimism," says Chris Darroll, CEO of the Small Business Project. "There are glimmers of political resolve to really get our country working."
Karl Westvig, CEO of Retail Capital, which provides working capital to small business, agrees. "There is a visibly more positive sentiment in the SME market, with businesses beginning to reinvest for growth," he says. "SMEs are open to taking funding to buy more stock, expand their premises and [operate in] new locations."
Ben Bierman, MD of Business Partners, a specialist risk finance company focusing on SMEs, also acknowledges that confidence has returned, but is worried it won’t last.
"It is essential for business, labour and civil society to believe in the positive sea change of Ramaphosa’s message and work together so it becomes a self-fulfilling prophesy," he says.
The most concrete expression of government’s new attitude is Ramaphosa’s directive that government departments pay suppliers within 30 days of invoicing or be charged with financial misconduct.
"It’s critically important for government to follow through on this promise," says Pieter Bensch, an executive vice-president of Sage. "Cash flow is a major challenge for small businesses, and few of them can afford to wait three to six months for payment on a big project."
It’s one of the reasons Leps established his company, which provides short-term financing to SMEs.
"Working with government is the hardest thing you can do because it does not pay on time, and that can put a small company out of business," he says.
He’s cautiously optimistic that under Ramaphosa things will be different, because the new president is not a bureaucrat or career politician. "He’s been in the private sector and hopefully he’ll bring that experience to bear on how government works."
SMEs are also set to benefit from the following:
• Preferential procurement regulations and the Public Procurement Bill will be submitted to cabinet in March. Their purpose is to use public procurement to support industrialisation and empower black-owned and small enterprises.
• The revised financial sector code, which allows banks to invest in the R100bn Black Business Growth Fund in lieu of empowerment ownership deals, should stimulate SME growth.
• The 2018 budget has allocated R2.1bn to a new SME Incubation Fund. This is over and above the R1.5bn private SME Fund, which invests in private equity and venture capital SME funds that are focused on scalable, high-potential SMEs.
• Government will review "evergreen" contracts, since these open-ended government contracts typically favour larger, more established firms.
• Ramaphosa has undertaken to reduce the regulatory barriers for SMEs, acknowledging that "the growing regulatory burden, coupled with regulatory uncertainty, has consistently been the single most important impediment to small business growth over the past five years".
• Government has promised to root out anticompetitive behaviour that harms SME business entry.
• The Small Business Institute and the Small Business Project will undertake a huge baseline study into the sector to provide hard evidence for more effective public policy making.
Several SME practitioners expressed disappointment, however, in the relatively small size of government’s new SME development fund (given that total government expenditure is nearly R2trillion) and the fact that it will come into operation only in 2019/2020. There is also the fact that the hike in Vat and the 54c/l fuel levy will raise business costs and are likely to hit consumer spending.
Right now small-business owners are proceeding mostly on the basis of hope and promises. If government is to succeed in accelerating growth and job creation it can’t afford to fail them this time.