Big business is killing off small business
Avnish Jolly
http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=272206&sn=Detail&pid=71619
Brent Meersman
18 December 2011
Brent Meersman says the parastatals, banks and suppliers are the real
enemies of the entrepreneur
Minister Trevor Manual's National Development Plan states that "some
90 percent of jobs will be created in small and expanding firms". In
2002, I sold a small business built virtually from scratch over 12
years. The profits of my share of the sale allowed me to set myself up
as a fulltime writer. From the luxury of my current position, I cannot
imagine wanting to start a small, legitimate business in South Africa
now. This is why:
Manuel is correct in identifying small business as our only realistic
and sustainable means to solve unemployment, but small business,
entrepreneurs and survivalists, whether urban or rural, face a very
hostile environment, almost exceptional to South Africa.
According to the Global Entrepreneurship Monitor our entrepreneurship
rates are less than half what they should be as a developing country
economy, and recent research conducted by Fort Hare University
revealed that we have about the worst failure rate for new businesses
in the world (no less than 80 countries were surveyed).
But small business is not failing for the reasons that our corporation
dominated chambers of commerce and free market think-tanks like to
scream about in our generally pro-capitalist press.
Business is always railing against red tape. To set up a business,
there are six legal procedures, about the same as in Europe, though it
takes 22 days on average in SA not the European 15 (the world average
is 35 days; the sub-Saharan average is 9 procedures and 45 days).
There are far greater challenges to setting up a small business than
red tape. Anyone stumped by this is unlikely to cope with what lies
ahead.
Entrepreneurs are naturally averse to regulation, more so when it
wastes our time, but it is hardly a reason to fail. We'll put up with
the fact that South Africa requires twice as many documents to export
and import, and registering a property costs double the OECD average.
We'll even cope with the fact that approvals and permits can easily
delay one by a year, often much longer (this however becomes a major
problem when small enterprises try to expand).
Small business failure has also little to do with the other headlining
bugbear from business lobbyists - our labour regulations. I was
already in business with a staff of 14 when the new Basic Conditions
of Employment Act came into being. I welcomed it. It gave me a
guideline for what was reasonable and fair to expect of my staff. It
is an eminently reasonable piece of legislation.
Nor is the perception (strongly held by the business media) true that
the courts and the department of labour are hostile to business. The
majority of disputes in our labour forums go the way of the employer.
I was taken to both the CCMA and the Department of Labour and won.
Just follow the law and you'll be fine. If you abuse people, expect to
be penalised; you have no business in the first place employing people
if you can't act with the minimum decency our laws require.
Where things do go wrong is that thanks to our apartheid history
labour-employer relations are poor. Employers who haven't dealt with
their unconscious racist socialisation can expect to have labour
problems. Overall, management is appalling bad in South Africa. Good
management skills may well be our scarcest resource.
It is also a myth that affirmative action has crimped small business.
It may have actually bolstered it (‘white' kids with resources have
had to go it alone). Affirmative action has had an indirect negative
impact by its deleterious effect on municipal and on other services
businesses require. (Recent procurement legislation may however start
to hurt; it appears that small business previously exempt will now be
required to prove their credentials.)
I ‘democratised' my business (around 1994). I invested in training and
‘upskilling'. Within two years, the ‘black' staff ran almost every
routine aspect of the business and the business ran better than it had
ever done. Not only were the outcomes rewarding on a personal level
for all involved, but the business reaped enormous benefits.
Having said that, I dislike the way affirmative action is implemented
in this country and agree with Neville Alexander that there are other
ways than the ignominious and inaccurate use of the shorthand of
‘race' to achieve its goals. I would find it extremely distasteful to
have to fill in government's affirmative red tape and score cards
(they weren't required in my day) classifying my employees. I refused
to answer the ethnicity question in Census 2011. I prefer Sobukwe's
‘human race' or Tutu's ‘South African', instead of the categories
presented.
Then there are the challenges that face any business in South Africa
and make life extremely hard. These are: a poorly educated workforce;
the failing health of staff, especially the burden of HIV/AIDS (I can
disclose now that 4 of my 14 staff identified themselves as HIV
positive, and asked for help); the high rates of crime and violence
and its costly security and insurance overheads; the lack of safe and
reliable public transport and its exorbitant costs thanks to our
apartheid geography (the average domestic worker spends over a quarter
of her wage on transport); the wildly fluctuating rand that adds risk
to forward planning; and last but not least, corruption, which is in
many places endemic. In a UN survey, 13% of South Africans interviewed
said they had faced a bribe situation in the previous year.
Hurt small business, these things surely do. But these factors are
part of the generally unfavourable business environment and not unique
to small business or even to business alone. To these can be added,
the world economic downturn which is without a doubt making it hard
for small businesses to succeed; put simply, there aren't enough
customers.
One might also add that the government agencies meant to help small
business are feeble, and that the measly six points to promote small
business as outlined in Minister Ebrahim Patel's New Growth Path is
little more than an exercise in verbiage (much of which is blandly
repeated in Manuel's National Development Plan). Don't expect much
from either quarter.
What then is killing off small business? The short reply is big
business.
Together with the South African consumer, the small business owner
finds him- or herself at the mercy of large corporations. He is
squeezed from every side. The basic, unavoidable overheads of doing
business are onerously priced and usually available from only one
supplier. The services he requires are price structured for big
business by big business. The government regulations that really
strangle him are those that are designed to favour big business.
10 years ago, despite a draconian energy saving regime in my business,
Eskom still accounted for over12% of my overhead. Had this cost
doubled (as it will within a two year period from the first to the
third Eskom increase), I do not know how we would have coped.
Meanwhile the mining corporations and the smelters that are sapping
our energy grid while repatriating their profits outside the country
and contributing nothing vaguely proportional to resolving
unemployment, continue to be subsidised by the ordinary consumer and
small business. Not only is it dirty electricity, but it's expensive
(when compared on a purchasing power parity basis, rates are higher
than Europe) and unreliable. Even in the 1990s, my business had
significant spoilage costs (from which Eskom is exempt from liability)
due to power failures.
Then there are the excessive costs of telecommunications, largely a
result of the monopolistic effects on the market exercised by Telkom
and its cosy relationship with government regulators. Services across
the board are outlandishly expensive by world standards; 3G data
services, especially important to today's small entrepreneur, are
simply prohibitive.
The SA Post Office is unreliable and exorbitantly priced; it costs
more to post a single folio A4 letter to Port Elizabeth from Cape Town
than it does to post a 3kg art book in New York to South Africa. It
doesn't stop there. Just one more instance: container export costs in
SA are 50% higher in dollar terms than the OECD country average.
Similarly, professional services are also priced for the big company.
Auditing and legal firms virtually print money for themselves when it
comes to the small business; charging thousands in fees for filing and
ticking a few routine boxes. There are not enough small-sized,
competitively priced, competent bookkeepers to offer a viable
alternative. Compliance costs for South African business with regards
to tax are high by international standards.
Then there are the corporate landlords and the gouging rentals shop
owners must pay to shopping malls and the like. Time and again you ask
a small business owner why he closed down and the reply is either that
the rental went up or that they grew tired of working for a landlord,
which doesn't exactly fit the ambitions of someone in business for
themselves.
From all directions the small businessman is therefore hit, like some
kind of super consumer, with inflated prices. I blame the overpaid,
unproductive, bloated middle management that squats in nearly all
South African companies for their inability to deliver cheaper
services.
Even government SETAs favour big business. To cut a long story short,
the hospitality industry SETA was unable to help my business in any
way. They actually admitted this to me in as many words on the
telephone. I was paying 1% of my wage bill in Skills Development Levy
to a SETA that was using the money to subsidise the training costs of
the big hotel chains, some of them not even South African owned.
As for government's ‘developmental' agencies, these are stocked with
sinecure positions and structured to force one to employ a gravy chain
of services (specific consultancies; specific formats) of little use
to the real entrepreneur. I have experience of the equivalent agencies
in Europe that are free of charge and able to give one expert,
detailed information.
But faraway the number one enemy of small businesses are the banks.
Well-known for arguably the highest service charges in the world, they
recoup their cost of doing business from fees instead of returns on
what is after all our capital. South African banks even charge
customers a percentage of the cash they deposit for depositing it!
Commissions on credit cards, card machines and facility rentals are
unjustifiably high. In return, they give poor service and incompetent
advice. In terms of service levels there is almost nothing to choose
between the big banks; they are all equally bad in my experience.
Historically, interest rates have been punitively high considering the
differential between the rate the bank can lend at and what it charges
its small businesses. At one point, I was paying 28% on a substantial
business loan from one of the big five. The South African Reserve Bank
rate at the time was about half that. When the bank rate went up, the
increase was passed on with immediate effect; when the rate came down,
banks would wait months before lowering their rates. Meanwhile, our
rich, clash-flush corporate giants, incestuously enmeshed with the
banking sector, were buying up or liquidating the numerous small
providers and properties around me that couldn't hold out during that
1991-2 recession.
There has been much talk of microfinance and it is something worth
pursuing. However, research shows that after its vaunted successes in
limited parts of India in the 1970s, micro-lending is by no means the
panacea many economic pundits claim it to be. It's a hit and miss
affair and we don't yet understand fully why some microlenders blossom
while many others fail.
It is not the poor, but the rich in South Africa who are lazy. In
terms of encouraging entrepreneurship our rich are close to bone idle
when compared to their peers in the USA and Asia. The almost complete
absence of venture capital and the non-existence of a venture capital
market is a critical lack in South Africa. The blame must fall on the
hold the big banks have on the financial market and their sway over
government policy. There are no tax incentives and many regulatory
disincentives to the establishment of a secondary capital market.
Given all of the above, it is hardly surprising that many great ideas
have ended up being made and marketed outside the country. The brain
drain of entrepreneurs and intellectual capital shows no signs of
slowing.
The corporatized nature of the South African economy is what is really
stifling the engine of free enterprise. The much touted objections to
red tape, transformation, and the alleged inflexible labour market,
are once again the agenda of the big companies and not nearly as
material to the success of small businesses. Starting a small business
today in South Africa requires real chutzpah.
Brent Meersman is the author of Reports Before Daybreak and Primary
Coloured.