COHESIVE ENTREPRENEURIAL SUPPORT

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.