Is the presidential acknowledgement of entrepreneurs as heroes and not villains the equivalent of Pope John Paul II’s admission that the church was wrong to condemn Galileo for endorsing a helio-centric view? If so, it is one of the most astute political reverse double summersaults. As deputy-president Mr. Ramaphosa himself sung heartily the “Down with White Monopoly Capital” song in the Zuma choir.
Does the comment during the dinner of the Investment Summit really signal the dawn of economic freedom or was it merely a modern manifestation of Janus? Will the future reveal a Ramaphosa butterfly that was an ugly caterpillar under Zuma or is the two-mouths-two-messages the real reality?
The first requirement to assess future options is a proper understanding of the present. Let us explore that by assessing the ANC Government’s (and Ramaphosa’s) views on SMEs: does it indicate an embrace of private initiative or something else?
Return the land and fund black-owned businesses
The Department of Small Business Development in their 2015-2019 Strategic Plan commits itself to “garner political support to prioritise SMME and cooperatives as a key driver for the economy.” When launching his CR17 campaign and trying to put as much distance as possible between himself and Pres Zuma, the New Deal Manifesto was launched. This manifesto promised the accelerated transfer of ownership and control of the economy to black South Africans.
The most prominent key interventions being:
- expropriation of property without compensation, a topic that 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 thé key drivers to create jobs and growth: a belief also proclaimed in the NDP. As indicated in “Open Sesame. Open SME” the conviction that small businesses are the job creators rest largely on a “common wisdom” that has not been proven beyond doubt. Lack of a factual base doesn’t guarantee lack of momentum. The unproven belief in the curing power of bloodletting lasted another three centuries after Harvey had described the circular system, purely because it was the popular belief.
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, therefore the assumption is that government can detect a mass of entrepreneurial opportunities that entrepreneurs cannot see. It is far removed from private initiative.
- Who will provide the finance for the mass of new businesses? Since the government is already dishing out billions in grants to black industrialists, black cooperatives, micro-businesses and loans by SEFA that are 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? SEDA is since 2009 involved in this process and will probably be expanded by appointing a mass of additional salaried staff that rely on the overstressed public purse.
Still-born and cot death Cooperatives: the wasteful spending continues
Concerning the ability of government to assess entrepreneurial opportunities, the following evidence is at hand:
- More than 99% of the state-induced cooperatives (more than 100 000 registered since 2007) are dead, the majority still-born rather than infant mortality cases. Whilst the DTI had claimed they didn’t finance the creation of cooperatives, there is sufficient proof that a governmental drive with public sector staff performances linked to the creation of cooperatives fuelled this development.
Regardless acknowledgement (even by a previous deputy minister of DTI) of the dismal failure rate of cooperatives, the DSBD remains committed to sink more and more funds into this initiative: The Entrepreneurship and Cooperative Development Institute was recently formed with training to be rolled out all over the country.
There is little (if any) evidence of entrepreneurial initiative or markets at work: poor communities were seduced and impregnated by state organs by stimulating the hope of the poor. In reality, it was a pursuit of self-satisfaction since performance targets were set: instead of a wave of spontaneous entrepreneurship it was an exercise of official masturbation under the pretext of assisting the poor.
SEFA’s loan book proves an inability to assess enterprises worth of funding
The Small Enterprise Finance Agency (SEFA) was launched in 2012 as a wholly-owned subsidiary of the IDC. A range of previous funding channels (Khula 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, were written off and transformed thereby into grants. Did restructuring and the refinancing of SEFA achieve an 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 on the extract from a SEFA presentation to a Parliamentary committee.
SEFA’s impairment rate on their loan book would have been even worse if they 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 SEFA to demonstrate its ability to repay the loan”.
Despite laudable phrases like “capacitating the poor”, 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…
SEDA is running the Gazelles program whereby three batches of 40 companies with fast-growing potential are identified and supported with both grant funding and free business development advice. Amongst the first 40 gazelles 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 a second year after their selection and the jury is still out on their growth performance in terms of exports, turnover growth and jobs created.
Ntokozo Majola, SEDA Executive Manager for Enterprise Development reckons “the most important intervention of the accelerator programs is access to markets.” So far so good. Her explanation to the parliamentary committee that SEDA had expected the National Gazelles would easily access business opportunities especially within the public sector since it was a government program, indicates that even the 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 of the program so that when Gazelles “approach individual government departments” the programme is not so unknown… The market place and its competitive dynamics are apparently too much to stomach. Lack of business acumen and an inadequate grasp of the enterprise world coupled with poor feasibility studies result (as with cooperatives) in an increasing number of businesses that are set up to fail.
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.
- SANRAL’s construction projects are held hostage by the 30% mafia.
- Numerous private sector developments overrun costs due to disruptions by local communities demanding that up to 30% of the value of the project should be for local small (mainly informal) businesses.
- 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 cost of poorly built houses that require rectification.
Totalitarian perspective and a disregard of the spontaneous enterprise order
- Are rooted in a totalitarian perspective with the premise that government is entitled to determine everything and can interfere without negative consequences in the internal affairs of non-state entities.
- Operate with an assumption of abundant latent entrepreneurship waiting like Sleeping Beauty on The Prince to stir it to a blossoming life.
- Disregard market demand and operate from the premise that the government can cherry-pick winning enterprises better than the billions of uncoordinated decisions of consumers.
- Ignore the spontaneous regularities that emerge without central planning in the enterprise world and that regulate entrepreneurial space filling (see Enterprises of the right kind generate city growth as well as the publications by Daan Toerien. )
If the reverse somersault was real and not a Janus sales pitch to soft soap potential investors, respect for entrepreneurs should bring an end to the wastage of tax money on the ineffective production lines of the state factory that tries 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, very clever people clung to the erroneous Aristotelian “wisdom” that heavier objects fall quicker than lighter objects of the same material. It took the genius of Galileo in 1582 to show that belief belonged to the realm of fable. The pitfall was not absence of intelligence, rather a case of paradigm paralysis: regurgitating an assumed common known “truth” and not subjecting it to scrutiny and testing.
Whilst naive comfort with fabrication prevents proper insight and thereby delays and prevents an improved understanding (e.g. 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.
To know whether the Investment Summit was a Pope John Paul moment or the utterance from the double-faced Janus, is unclear. One person can clarify that and the best way to do that would be to not only repeat the dinner utterances before investors, but to repeat them in the heart of the ANC as part of the formal text of the January 8 statement for 2019.
And it would be even better if it is accompanied by an apology for singing heartily the WMC song in the Zuma choir… as well as by culling ineffective and basically wrong policies.