MONEYWEB / 13 NOVEMBER 2018 - 11.33 / JOHANNES WESSELS
Politically, he’s done a double backwards somersault – is it for real? And what can be done to help?
Was President Cyril Rampahosa’s acknowledgement of entrepreneurs as heroes and not villains at his recent investment summit an astute political backward double somersault, or a modern manifestation of the mythical god Janus with it two-mouths-two-messages reality?
Entrepreneurial policy is something of an oxymoron – it is based on the belief that government can ‘manufacture’ entrepreneurs. Photographer: Waldo Swiegers/Bloomberg
In 2016, as deputy president, Rampahosa sang from the same ‘Down with white monopoly capital‘ hymn sheet as former president Jacob Zuma.
His comments at dinner after the summit – that entrepreneurs and business people have been treated badly, have been called all sorts of names including ‘white monopoly capital’, and that “that must end today” – stand in stark contrast with his comment about the time of white business monopolies being over. Government was hell-bent on making sure that blacks owned and managed the economy, he said at an ANC summit for academics and professionals in Johannesburg on March 23, 2016. “Those who don’t like this idea – tough for you. That is how we are proceeding.”
Source: Enterprise Observatory of SA
Will the ugly caterpillar under Zuma now be transformed into a beautiful butterfly? Is this really the dawn of economic freedom?
To assess future options we need a proper understanding of the present. Let’s explore that by assessing the state’s (and Ramaphosa’s) views on small and medium-sized enterprises (SMEs).
The Department of Small Business Development (DSBD), in its 2015-2019 Strategic Plan, commits to “garner[ing] political support to prioritise SMME and cooperatives as a key driver for the economy.” In his 2017 election campaign, Ramaphosa tried to put as much distance as possible between himself and Zuma, and the New Deal manifesto was launched. It promised the accelerated transfer of ownership and control of the economy to black South Africans.
The most prominent interventions being:
Expropriation of property without compensation, a topic Ramaphosa started to lead with months prior to his election as ANC president: “the wealth of the country must be shared and the land returned to its rightful owners”.
Massifying “the creation, funding and development of black-owned small businesses”.
The latter is aligned with the (unproven) belief that SMEs are the key drivers to creating jobs and growth: a belief also proclaimed in the National Development Plan (NDP). I have previously written about SMEs as the supposed drivers of jobs (Open Sesame. Open SME); however, this conviction is not proven beyond doubt. Lack of a factual base doesn’t, however, guarantee lack of momentum.
What can one deduce from a process that wants to ‘massify’ the creation, funding and development of small businesses?
Who detects the entrepreneurial opportunity? The New Deal is clear: government will massify the creation of the black-owned small businesses. The assumption is that government can detect a mass of entrepreneurial opportunities that entrepreneurs cannot see.
Who will provide the finance? Since government is already dishing out billions in grants to black industrialists, black cooperatives, micro-businesses – and with loans from the Small Enterprise Finance Agency (sefa) mostly disregarded and written off – it can only imply that this process itself will be massified.
Who will provide the business services of product development and strategic, marketing and financial managerial advice? The Small Enterprise Development Agency (Seda) is involved in this process and will probably be expanded by appointing a mass of additional salaried staff that rely on the overstressed public purse.
Cooperatives: the wasteful spending continues
Concerning government’s ability to assess entrepreneurial opportunities, the following evidence is at hand: more than 99% of state-induced cooperatives (more than 100 000 registered since 2007) are dead, the majority still-born. While the Department of Trade and Industry (dti) has claimed it didn’t finance the creation of cooperatives, there is sufficient proof that a government drive with public sector staff performances linked to the creation of cooperatives fuelled this development.
Regardless of acknowledgement of the dismal failure rate of cooperatives (even by a previous deputy minister of the dti), the DSBD remains committed to sinking more and more funds into this initiative – the Entrepreneurship and Cooperative Development Institute was formed recently.
There is little evidence of entrepreneurial initiative at work: poor communities were ‘assisted’ by state organs that were more focused on reaching performance targets.
Small Enterprise Finance Agency loan book proves its inability to assess enterprises worth funding
It was launched in 2012 as a wholly-owned subsidiary of the Industrial Development Corporation (IDC). A range of previous funding channels (Khula Enterprise Finance being the most important) were consolidated. At the time of consolidation, the loan books of the constituting funding mechanisms were incomplete or in arrears or in shambles. A large percentage of loan agreements could not be found and were written off, thereby transformed into grants. Did restructuring achieve improvement? According to sefa itself, matters remain dismal with its “financial sustainability at risk if there is inadequate quality growth on the loan portfolio and the losses resulting from the high risk operating segment is not recovered”.
This acknowledgement of dishing out good money after bad ideas is evident in the following extract from a sefa presentation to a parliamentary committee:
Source: Small Enterprise Finance Agency (sefa) via EOSA
The impairment rate on sefa’s loan book would have been even worse if it had not written off millions as bad debt. It is so bad that sefa “is currently facing a going concern challenge” and might be forced to draw down on an IDC loan facility, but the IDC has requested that sefa “demonstrate its ability to repay the loan”.
Despite laudable phrases like ‘capacitating the poor’, the fact is that entrepreneurial and enterprise basics are ignored due to the belief that the state knows best.
Seda: the gazelles that require state contracts to run …
The Small Enterprise Development Agency runs the National Gazelles programme whereby 40 companies with fast-growing potential are identified and given grant funding and business development advice. Among the first to be selected were a nursery, a cement brick manufacturer, a panel beater and an installer of air-conditioners, all aimed at capturing a piece of the local consumer market. These companies are now in their second year and the jury is still out on their ability to grow in terms of exports, turnover and jobs created.
Ntokozo Majola, Seda executive manager for enterprise development, reckons “the most important intervention” of the accelerator programmes is “access to markets”. So far so good.
However, her explanation to the parliamentary committee – that Seda had expected the National Gazelles to easily access business opportunities, especially within the public sector since it was a government programme – indicates that even those companies selected to dent unemployment and low growth were expected to grow from public preferential procurement.
Seda’s solution: better selection of firms with potential to compete? No, raising the profile so that when Gazelles “approach individual government departments” the programme is not so unknown … The marketplace and its competitive dynamics are apparently too much to stomach.
Preferential procurement and 30% outsourcing empower inefficiency
The policies of preferential procurement have already added substantial costs to both the public and private sectors in South Africa:
* Government departments and municipalities gladly pay a higher price to source products and services from black-owned businesses.
* Numerous private sector developments overrun on costs due to disruptions by local communities demanding that up to 30% of the value of the project be for local small (mainly informal) businesses.
* Roads agency Sanral’s construction projects are being held hostage by the 30% ‘construction mafia’.
* The strategy to pursue business development of small black contractors through the housing subsidy scheme has already scared most large contractors away and landed government with a massive challenge and costs associated with poorly built houses that require rectification.
A disregard of the spontaneous enterprise order
1. Are rooted in a totalitarian perspective that government is entitled to determine everything and can interfere in the internal affairs of non-state entities without negative consequences.
2. Operate with an assumption of abundant latent entrepreneurship waiting to be stirred to life.
3. Disregard market demand and operate on the premise that government can cherry-pick winning enterprises better than the billions of uncoordinated decisions of consumers.
4. Ignore the spontaneous regularities that emerge – without central planning – in the world of enterprise.
If the reverse somersault is real and not a Janus sales pitch to soft-soap potential investors, respect for entrepreneurs should bring an end to the wasting of tax money on the ineffective production lines of the state factory that try to manufacture entrepreneurs and enterprises.
The problem with entrepreneurial policy is not merely the dogged belief in SMEs as the answer, but the erroneous belief that a state Midas has the golden touch to create enterprises and entrepreneurs.
For 18 centuries, clever people clung to the Aristotelian ‘wisdom’ that heavier objects fall more quickly than lighter objects of the same material. It took the genius of Galileo in 1582 to show that that belief belonged to the realm of fable. The pitfall was not absence of intelligence, rather a case of paradigm paralysis: an assumed common-known ‘truth’ requires no testing.
While naive comfort with fabrication prevents proper insight and thereby delays and prevents an improved understanding (such as the fact that SMEs are not per se the better creators of jobs and growth), there is a far more dangerous side of paradigm paralysis: the vilification of innovative voices.
We don’t know if the investment summit comments were Janus-type utterances. Only one person can clarify that, and the best way will be to not only repeat them to investors, but to repeat them in the heart of the ANC as part of the text of the State of the Nation address for 2019. The words would be even better if accompanied by an apology for singing so heartily from the Zuma-era white monopoly capital hymn sheet.
Johannes Wessels is director of the Enterprise Observatory of SA. This is a condensed version of an article that first appeared on the EOSA website.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER