A new report by the Centre for Development and Enterprise (CDE) calls for a radically new approach to small business development. “Given the stagnation of the small business sector and a government riddled with deficiencies and inefficiencies, the time has come to hand the reins to the private sector and let markets shape the future of entrepreneurship in South Africa,” said Ann Bernstein, executive director of CDE.

ACTION EIGHT: Let the private sector drive small business development is the latest report in CDE’s AGENDA 2024 series – a set of catalytic actions to get the country back on track after 15 years of stagnation and decline.

The small business sector in South Africa is small and stagnant, creating far too few economic and employment opportunities. Government’s 2022 National Integrated Small Enterprise Development Strategic Framework describes the small business sector as characterised by “low survival rates and stagnant growth”. By some calculations, the sector expanded at the unimpressive rate of 1.6 per cent annum from 2010 to 2019, before being devastated by Covid. During the height of the Covid pandemic, many more South African small businesses shut their doors (13.9 per cent) than the global average (6.5 per cent).

CDE research shows that between the financial years 2017/18 and 2020/21, the state transferred an average of R5.8 billion every year to small enterprises in direct financial support, through grants, loans and a combination of the two. However, there is little publicly available information on who receives financial support, on what basis the funds are allocated, how recipients use the funds or how many firms thrive or fail.

What we do know is that government efforts have often favoured a well-connected few, imposed additional costs on essential services, and been hampered by regulatory obstacles such as onerous labour laws and rigid empowerment requirements. These interventions, rather than fostering a dynamic small business sector, have largely made it more difficult for enterprises to survive and expand.

“South Africa needs a radical rethink in its approach to small business development,” said Bernstein.

“We need to move away from the flawed assumption that government can create businesses, that bureaucrats are best placed to identify and support firms with the potential to grow and that small firms exist in isolation from the broader economy”, she added.

CDE RECOMMENDATIONS

1. The private sector should drive small business development. Let’s turbo boost private institutions to assist with the difficult business of identifying firms with potential to grow and employ more people

“We need to stop asking government officials, most of whom have no knowledge of business, to select and support small firms. Private lenders, venture capitalists, and investment funds have a far better track record of identifying promising startups than government bureaucrats,” said Bernstein.

“Over a three-year period, we propose reallocating half of state money devoted to small business support into three to five private funds. The aim is to test if they can do better than the state in this area. Government spends some R6 billion every year on small business support, we therefore propose that over a three-year period, R9 billion is transferred to private players to create a more dynamic and successful small business sector. These funds should be disbursed based on transparent, competitive tenders, with winning funds/firms committing to high levels of performance and transparency,” she added.

We need an annual day or two in Parliament, where private and public funders devoted to small business development table annual reports and account for their expenditure and achievements in spurring economic growth, employment and achieving a dynamic small business sector.

2. Regulatory barriers that stifle small business growth must be removed

Entrepreneurs face a thicket of regulations, licensing requirements, and tax burdens that make formalisation unattractive.

“The most powerful role government can play is in reducing the regulatory burden on small businesses.

“To flourish, they need a labour regime that is not premised on the assumption that they are large, capital-intensive concerns with HR departments and the capacity to pay high wages. We must remove the Minister of Employment and Labour’s power to extend collective bargaining agreements to small businesses. These agreements, negotiated by large corporations and big unions, impose wage and benefit structures that small firms simply cannot afford, leading to job losses and business closures,” she said.

“SA should introduce an ‘SME test’ for all regulations to ensure that small businesses are not disproportionately burdened. This has been tried in many OECD countries, resulting in policies that encourage, rather than stifle, entrepreneurship,” added Bernstein. The responsible body should be in the Presidency and we need an annual public report on its activities debated in Parliament.

3. Stop using procurement to artificially ‘create’ township economies

“One of the most misguided policies in recent years has been the fixation on developing township economies through procurement spending. Gauteng’s Township Economic Development Act requires that 40 per cent of the province’s procurement budget be spent on township-based businesses. This approach is fundamentally flawed,” said Bernstein.

“Instead of fostering real entrepreneurship, it facilitates clientelist relationships, where politically connected businesses act as middlemen, inflating prices and delivering subpar services. This raises costs for township residents, as hospitals, schools, and public institutions are forced to buy from preferred suppliers regardless of price or quality. A truly transformative approach would focus on integrating townships into the broader economy by improving transport links, reducing crime, and creating an environment in which businesses can grow,” she added.

4. Shut down the Department of Small Business Development

“CDE argues that there is no need to have a self-standing Department of Small Business Development. Government has limited means to directly shape the development of the small business sector. Most attempts to do so will create costly distortions whose overall developmental impact is more likely to be negative than positive. The department has failed to produce any demonstrable, large-scale successes and it has largely failed to deliver on its mandate. Its remaining functions, especially those related to building a more enabling environment, should be absorbed by the Department of Trade, Industry, and Competition,” said Bernstein.

“This restructuring should be aligned with a major rethink of the whole approach to small business support. Rather than playing banker and venture capitalist, the state should focus on creating an enabling environment ensuring reliable electricity, reducing crime, improving transport infrastructure, and removing bureaucratic hurdles,” added Bernstein.

“South Africa does not need more government intervention; it needs less. For the country to escape its economic malaise, it must abandon the illusion that government can engineer entrepreneurship. The private sector – not the state – is best equipped to drive small business growth,” concluded Bernstein.

For media enquiries and interview requests, please contact Refiloe Benjamin: media@cde.org.za | 011 482 5140

ABOUT AGENDA 2024: PRIORITIES FOR A NEW GOVERNMENT

AGENDA 2024, based on CDE’s extensive policy work and recent consultations with experts, business leaders, former public servants and academics, sets out to answer what is by far the most important question facing South Africa: what can a new government do to get the country back on track after 15 years of stagnation and decline?

CDE’S AGENDA 2024 identifies five urgent priority areas that the new government needs to focus on: fixing the state; driving growth and development by freeing up markets and competition; building a new approach to mass inclusion; tackling the fiscal crisis; and strengthening the rule of law. Previous reports in the series can be accessed here.

ABOUT THE CENTRE FOR DEVELOPMENT AND ENTERPRISE

CDE is an independent policy research and advocacy organisation. It is South Africa’s leading development think tank, focusing on critical development issues and their relationship to economic growth and democratic consolidation. Through examining South African realities and international experience, coupled with high-level forums, workshops and roundtables, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges