Government’s attempts to promote business formation as effective as a rain dance…

it would help more to combat crime effectively

Is the blind leading the blind when it comes to the promotion of black businesses? This question in my previous blog apparently ruffled a few feathers. Let us therefore compare the positive impact of Government strategies to stimulate business formation and the negative impact on business formation by Government’s failures in core governmental functions.

Government will be more successful in promoting business activities and the economy by stopping its efforts in this field and rather concentrate on the Kindergarten functions of governance: effective and efficient service delivery and crime prevention.

StatsSA found that one of every eight (11.8%) of the unemployed work seekers and the discouraged unemployed would have considered home-based enterprises were it not for crime. Government’s failure to effectively combat crime therefore prevented more than a million people from starting a home-based micro enterprise.

High crime levels not only prevent potential start-ups: it also restricts investment and growth. In the municipal area of Tokologo (Free State Province) there were on average 2.6 crimes per formal business in 2013: not an environment for a prospective businessman to invest in.

The successful prosecution rate of crimes committed in South Africa is low and the detective work of such a standard that the risk of arrest is very low. Crime in South Africa has almost no consequence for the perpetrator, but a massive impact on preventing poor people from attempting a home business and adding extra costs on SA businesses (actual losses through burglary, robbery and truck-jacking, cost of security systems, protection services, higher insurance premiums, loss of production due to staff trauma after robberies to mention only some).

South Africa businesses thereby become less competitive than their international competitors that operate in countries where there is effective crime prevention.

Poor municipal services – unreliable water, sanitation, electricity and pothole-scarred streets and roads – are not leading only to service protests, they also make SA enterprises uncompetitive. Add in ineffective state-owned enterprises (SOEs) like Eskom, SAA and Portnet. South Africa suffers from not only much higher port tariffs, it also appears as if the higher premium is being paid to ensure slower service as well with ship turn-around times being well above the global average. This not only put SA businesses in leg-irons in their race against other competitors, it also ensures higher prices for all the consumers. SOEs are a double drag on the economy.

Let us now focus on some of Government’s attempts to promote the economy and new business formation. Government officials are directly involved in creating cooperatives: more than 120 000 have been registered and President Zuma recently again promised cooperatives preferential procurement by the public sector.

These cooperatives are not businesses formed out of entrepreneurial insight. The figure below is based on all cooperatives that were formed in two of the Free State district municipal areas. Of the 2716 cooperatives that were established by 2013, in 2014 only 220 could be reached (the rest had no telephone number listed originally or the telephone number in the CIPC data base was no longer a functional number). And of those 220 only 81 were still functioning with a mere TWO reporting an improvement in profitability. It is a record in business promotion failure worthy of the Guinness Book of Records…Cooperative failure rate

This is unfortunately not an outlier: thousands of LED projects, the lack of Khula and Ntsika successes, productive farming enterprises becoming unproductive land sustaining far fewer people after the land reform exercise (as in the case of sugarcane farms close to Empangeni that is now dry grazing land with a far lower yield per hectare, thus causing the sugar mill at Felixton laying off workers), all indicate that the public sector has had only miniscule successes with sustainable business formation.

Many factors contribute to that failure, but an ignorance of the market and how it operates, lies at the root. (For that same reason the SAA, Eskom, SABC, Coega and more than a hundred other State-owned enterprises are financially contributing to our economic woes rather than helping the country overcoming them.)

Government would therefore have more success in promoting (black) business development by stopping its attempts as a business incubator (often without the skills and insights required for that as Lyonette and Pearson found in 2010 when they concluded the internal capacity for economic analysis at any level was lacking at senior official level – See previous blog) and seriously reversing their failures in the Kindergarten functions of governance.

Reliable and affordable services and proper crime prevention are as important for business growth and investment as the Vaal Dam is for water provision for Gauteng. Ignoring the negative impact of service delivery and crime prevention on economic growth and business development (the equivalent of allowing the Vaal Dam to empty because of cracks) whilst continuing with failing enterprise policies and strategies, is akin to attempting to render constant water supply to Gauteng by performing a rain dance…

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