Lions laying down R1,5bn for the lambs

John Kane-Berman on the contradictions of big business' new fund to support SMEs

"Monopoly capitalists" to the rescue once again

One of the fascinating things about South Africa is all its contradictions. Among the sharpest is the government's dependence on the very business sector that the leaders of the African National Congress (ANC), among them Jacob Zuma and Cyril Ramaphosa, deride as "monopoly capitalists". The list of companies backing the new R1.5 billion private sector fund to "stimulate entrepreneurship and support small and medium enterprises (SMEs)" is a Who's Who of some of the usual suspects.

One of the new fund's other objectives is to "avoid a credit ratings downgrade". This may be easier than stimulating entrepreneurship, for the SME fund will encounter enormous difficulties in doing that. Indeed, its chief value may turn out to be not the venture capital it provides, but the additional pressure it will generate for these difficulties to be removed.

One of the biggest difficulties confronting SMEs is our collective bargaining system. This favours big business (and organised labour). It hurts not only the unemployed but also SMEs. So some of the signatories to the new initiative may find themselves having to stand up and be counted for the liberalisation of our industrial relations system, notably ending the practice of imposing bargaining council agreements on SMEs against their will.

The South African Reserve Bank said a month ago that the centralised bargaining system kept out new and smaller firms, resulting in a concentration of fewer and more profitable firms but a lower level of unemployment and higher wages. The International Monetary Fund  recently said the system "suppressed competition for established businesses".

The proposed national minimum wage for sectors outside the bargaining system will further "suppress competition" to the advantage of big business.        

Yet another problem SMEs face is the demand by larger companies, in the steel manufacturing sector in particular, for protection against cheap imports. A 10% duty was implemented last year, and another 30% is being sought. These duties hurt "downstream" SMEs seeking to import cheaper steel as one of the components in their own manufacturing process.  

A further problem facing SMEs is late payment of invoices by state agencies. As long as racial and political considerations govern appointments to organs of state, and as long as state officials enjoy immunity for these (and other) derelictions, this problem will persist.

The SME fund will put the ANC's racial preferencing policies under pressure in other respects. A recent report of the Global Entrepreneurship Monitor (GEM) found that entrepreneurship among Africans was dropping, while it was increasing among white, coloured, and Indian people.

The reason was "increasingly stringent black economic empowerment (BEE) requirements". These stimulated Africans to seek lucrative jobs in established companies rather than become entrepreneurs, whereas the three minority groups found it difficult to get jobs in the corporate sector, so that they had to become entrepreneurs. 

Attempts to promote African entrepreneurship are likely to be undermined as major companies continue to suck the pool of potential African entrepreneurs dry in order to comply with their own employment equity requirements. If the SME fund seeks to promote SMEs irrespective of race, it will run into opposition from the government as well as from organised black business. Promotion of SMEs among all races would also fall foul of the escalating "transformation" demands directed at small white business, including family companies.

The SME fund literature quotes the finance minister, Pravin Gordhan, on the need to "create the right kind of ecosystems". But our economic "ecosystem" is hostile to SMEs. In the words of the IMF, regulations "stifle competition and entrepreneurship".

Large businesses "maintain entry barriers against their potential competitors". The IMF is merely echoing what others have been saying for years. Putting up money to promote SMEs is easy.

The question now is whether the SME funders will actually try to change the hostile ecosystem from which they themselves benefit, and which they sometimes also help to perpetuate.

* John Kane-Berman is a policy fellow at the Institute of Race Relations, a think-tank promoting political and economic freedom.