Until
such time as we decide what entrepreneurial support actually means, we cannot
reliably tell if we are doing enough, less than enough or even more than
enough. Anecdotally, the choir seems to agree that we are doing less than
enough. But again, the choir hasn’t provided a comprehensive framework for how
we ought to be supporting entrepreneurship in its many quarters and forms.
First
we must identify what entrepreneurs need, in general. Not through fancy ‘bosberaads’,
but simply though a statistical system administered through channels that reach
entrepreneurs directly. Then we must look to see what it is that we are already
doing well and embed this deeper in the support structure. Thereafter, identify
our shortcomings and decide on corrective measures to take.
Suffice
to say, entrepreneurial support cannot merely be an ideological dialogue that
ends in the corridors of power. It must, necessarily, become a preferred choice
in the developmental agenda, such that society is sold to it as a frontier of
economic thought. This requires policy shifts in terms of how we perceive the societal
role of entrepreneurs and how we structure state institutions to support this
perspective.
Policy
without intent and substantive action does nothing more than add layers of
administrative and functional bureaucracy to processes. This manifests itself
in all sorts of ‘unintended consequences’ that result in the failing of
institutions. Look for example at CIPC, nobly intended to make the registration
of companies more efficient. Instead, we have ended up with higher business
registration costs and annual fees that are misaligned to the goal of
entrepreneurial development.
Entrepreneurial
support is not a new phenomenon, we can borrow best practice models from countries
across the world. Many countries have succeeded in creating enduring
entrepreneurial cultures that now serve as the basis for future economic
developmental strategies. Some of the policy choices that can fundamentally
shift our momentum towards an entrepreneurial economy include the following;
Insolvency Protection
Acknowledgement
that small businesses are typically funded through basic household resources
such as excess bonds, personal loans, credit cards and overdraft facilities.
The buoyancy of small business activity is directly proportional to the level
of availability of these resources. Insolvency is a critical constraint to the
accessibility of these facilities. This is partly why Insolvency protection was
introduced in the United States. They somehow understood that an entrepreneur
may fail in business several times before getting it right. In which case, you
wouldn’t want their entire credit profile ruined and their ability to raise
capital permanently impaired.
For
example, an entrepreneur can file for Chapter 7 or Chapter 12 Bankruptcy and
still retain a substantial part of their estate, such as their primary
residence. Naturally, certain abusive practices are prevented through various
statutes that have been enacted to protect creditors i.e. the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. Overall, this is supportive of
a fledgling small business culture, which is exemplified by the 7 million
average annual start-ups in the US.
Preferential
Procurement
The
South African preferential procurement system is widely ineffectual. In part,
this problem has been exacerbated by the revision of Preferential Procurement
Policy Regulations. The system awards points primarily on the basis of a
company’s performance on their Broad Based BEE scorecard, such that the company
with the highest level receives the most number of points.
You
would think that a small business owned by a co-operative of black women in
rural South Africa would be the prime target of public sector procurement.
Sadly, if you think so, you may be disappointed. Instead, a listed
multinational organisation could achieve a higher BB-BEE score, relative to
this co-operative, and as such have a much better score in terms of the
preferential procurement guidelines.
This
makes a mockery of the preferential procurement framework in South Africa and
contributes very little to entrepreneurial development. Instead, the
procurement policy should revolve around large “set asides” for targeted
businesses. For each contract issued by the public sector, a fixed portion
thereof (say 50%) should be allocated to targeted groups (e.g. 100% black owned
small businesses).
The
Small Business Administration in the US is abound with examples of how the set-aside
system has worked very well for them. For example, 30% of all public sector
procurement in the US is reserved for small businesses.
Tax Reforms
Our
entire business tax regime is not entrepreneur friendly. Why would SARS think
it’s a good idea to tax small businesses thirty percent of their profit when
that money would best be reinvested in increasing the capacity of the businesses?
Unless the profit is being commuted through dividends, SARS should not tax
small businesses. Instead it should allow small businesses to accumulate the
capital reserves and resources they need to enhance their creditworthiness and
capital replacement capability. Capital expansion is what ultimately leads to
higher employment levels. Besides, SARS can reserve the right to
retrospectively tax profits when dividends are declared at a later stage.
Most
taxes on small businesses are irrational at best. How is it a good idea for us
to temper with the cash flows of growing businesses that are creating jobs? VAT
is proving to be a nightmare for most small businesses, why we still insist on
them collecting it is strange to me. Similarly, UIF and Skills Development
Levies are inefficient taxes that should not be paid by small businesses with
revenues under R10 million.
Labour Regulation
Exemptions
Small
businesses should be exempted from certain labour laws. A binding bargaining
council agreement reached by big business and labour often has a disproportionately
harsh impact on smaller businesses. How does it make any sense for a small
business with little bargaining power to have to pay the same rate as a large,
well established multinational organisation?
I
would contend that small businesses (
Small
businesses would inevitably be the training ground where new entrants to the
job market would cut their teeth and gain experience, obviously at a corresponding
wage rate. As a small business, cost competitiveness is everything and for as
long as you can keep your marginal costs below your marginal income, you have a
business with good growth potential. It is for this reason that small businesses
would be willing to employ less experienced employees for the reciprocal
benefit of paying them a lesser wage rate. Experienced and talented employees
would compete for bargained wage levels with employers subject to bargaining
council wage agreements.
Business Finance
Funding
remains a sore point for most entrepreneurs. There is a definite discord between
the preferred debtor as seen by institutions and the funding readiness of businesses
as perceived by entrepreneurs. By far the largest number of declines by institutions
is not so much that business ideas or entrepreneurs behind businesses are of
low calibre but more a phenomenon of funding readiness or appropriateness of small
businesses.
Both
the risks of adverse selection and moral hazard increase substantially with business
loans and this doesn’t bode well for private sector funders. That said, we need
to do more to improve our risk tolerance threshold and lower the demands associated
with raising capital. Our institutions need to take risks along with entrepreneurs.
This can best be done if business funding is coupled with mentorship as we are beginning
to see with some institutions.
Bridging
finance is possibly by far the worst kind of funding an entrepreneur may require.
If you eventually find someone willing to provide you with a bridging facility,
the associated costs of finance tend to be dissuasively exorbitant. Clearly,
there is a lot more that can be done by public sector funding institutions,
particularly because many bridging finance applicants are created through
public sector awarded tenders.
Import Replacement, Infant
industry protection and Beneficiation
We have to consider both downstream and
upstream activities in the exploitation of our mineral resources. In other words,
we have to beneficiate our resources. Move up the value chain through expanding
secondary sector activities, particularly in manufacturing. If we don’t do that
our economy will never become anything more than a glorified pick and shovel
operation.
We must quarantine this tendency to rush into
low barrier industries and look to the Government for handouts in the form of
tenders. The 2 million RDP houses yet to be built by the Department of Human
Settlements must ideally be built with South African raw materials, equipment
and labour. Similarly, Transnet’s R300bn capital expenditure program must
incorporate a much higher than 30% local inputs quota.
Unless you have a sensible import replacement
strategy cognisant of skills, productivity, input costs and economies of scale,
you cannot compete with cheaper and better imports. China is going to throw
things at you cheaper, faster and at an equivalent or higher quality. In other
words, the primary sector entrepreneurship that is needed cannot be realised
unless we take drastic but cumulative actions to participate meaningfully in
the value chain.
