Big business is killing off small business

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.

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