Is the promotion of Black Businesses done by the blind?

Government is pursuing numerous strategies to promote black owned businesses, e.g.:

• The 80 Black Industrialists’ programme;
• The Gazelles Programme (fast growing small enterprises that should increase their turnover and growth much faster than the market average);
• The Cooperative Incentive Scheme;
• Preferential procurement programmes;
• BBBEE-measures effectively forcing large and medium-sized companies to subcontract to black owned businesses;
• Sector Charters;
• Grants and SEFA loans;
• Land Reform and Restitution;
• The Free State Provincial Grants Scheme and numerous other provincial initiatives,

and the list goes on and on…

These are supposed to take place within the contours of:

• the National Development Plan;
• The New Growth Path;
• The National Strategy for the Development and Promotion of Small Business in South Africa;
• The National Informal Business Upliftment Strategy.

This list also goes on and on…

And at national level we saw the creation of a dedicated Department for Small Business Development.

Billions of rand have been devoted to these initiatives. It is high time to assess what contribution to economic growth the results of these initiatives have made. It can be done in a number of ways by assessing how successful they were to expand employment by creating sustainable new jobs and by assessing which growing percentage of VAT and company tax contributions SARS is receiving from these sources. If these benefits are not clear for all to see, it is time to assess whether these programmes are in fact helping or hampering economic growth.

EOSA would not be surprised if the nett benefits in jobs and taxes are far lower than the actual expenditures together with the institutional civil service costs (salaries, offices & running costs) involved in administering these initiatives.

There is a simple operational truth in the economy: if there is not overall growth, there cannot be overall expansion of the number of viable businesses where consumer spending is the main source of income.

Government operates with the paradigm that through state procurement processes cooperatives can be made successful. The cooperative drive has resulted in a 99% failure rate of cooperatives and that is so not because of lack of contracts with the public sector, but simply because there was no business case made. Some really basic calculations were never made or were discarded since they contradicted populist beliefs. In this regard, one can ask how many cooperatives can become financially viable businesses through public sector contracts to:

• Provide cleaning services;
• Render Security and guard services;
• Implement Feeding Schemes at schools and catering services at hospitals;
• Supply stationery and toilet paper for government offices.

There’s simply not enough of these contracts to make the 130 000 newly created cooperatives viable.

In addition: all these contracts would be preferential and come at a higher than normal cost. In the process, numerous existing formal businesses will shrink (shedding staff and surviving on reduced turnover and profits) or sink. And Treasury will applaud all the way with higher procurement costs and lower tax revenues…  Another case of misdirected Government expenditures with the poor bearing the brunt…

Some very basic economic thinking is simply absent.

In 2010 the EU Delegation in Pretoria commissioned Lyonette & Pearson to assess the Local Economic Development (LED) Program. (The Department of Cooperative Governance and Traditional Affairs is tasked with LED.) The EU study concluded that CoGTA at the highest level “lacks the internal capacity for economic analysis at any level.”

Also in 2010, then Deputy Minister of Trade & Industry, Maria Ntuli acknowledged the high failure rate of cooperatives and mentioned “a fundamental lack of knowledge within the DTI and other promoting agencies within the public sector” based on research the Dti themselves has conducted.

Has anything changed?

I have had interactions with:

• Agricultural Extension officers in various provinces within the Department of Agriculture who had never farmed or attended any agricultural training;
• Municipal LED officials who have never worked in the private sector and who never had any training in economics. (I haven’t encountered a single LED officer as yet who is capable of interpreting a multi-year Table or a Figure based on that Table);
• Community-based workers tasked with the creation of cooperatives who have not the faintest idea of business basics.

Unfortunately, this list also goes on and on…

Surprised by this lack of understanding? Understanding economics cannot be a requirement when at the highest level the following is paraded as the Gospel:  On the evening after Nhlanhla Nene was fired as Minister of Finance (December 2015), the President said:

“I rebelled against it that what determines the value of a commodity is the law of supply and demand. I define it differently: the value of a commodity. It is the necessary labour time, taking (sic) in the production of the commodity. That is what determines the value. I’m making these remarks deliberately because it’s important to understand ourselves fully. Not half or just a quarter – I’m an African. It’s important.” (http://www.biznews.com/leadership/2015/12/11/full-speech-zuma-addresses-business-community-after-sacking-nene/)

As far as EOSA can see there hasn’t been a single repudiation of the President for those utterances coming from any Cabinet Minister, not even from Gordhan or Gigaba.  Neither has ANY of the candidates clamouring to succeed Zuma put any space between themselves and that marxist understanding of economics…

Promoting growth is not a priority for the current Government (despite some utterances purporting that) and National Budget after National Budget serves as evidence for this. Promoting black business formation outside a framework of pursuing economic growth, reinforces one the one hand an anti-growth stance, but simultaneously undermines the prospects of success for such new (black-owned) business ventures.

Given the evidence by independent EU assessors (the EU gave billions in development aid), the Dti themselves and my own experience, we unfortunately do not have a situation of one-eyed policy-makers leading the blind.  There is almost no attention given to the findings of enterprise research.

It is worse: it appears to be a case of the blind leading the blind…

In my next Blog, I will concentrate on some basic things Government can do to promote growth and the creation of black-owned enterprises.