SA needs a fundamental change in our approach to small business development. For too long the state has attempted to engineer entrepreneurship through bureaucratic interventions that have produced little measurable success other than in businesses that provide goods and services to the government itself, many of which would cease to exist but for preferential procurement rules.

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 SA.

The conclusions of a new Centre for Development & Enterprise (CDE) report on small business development are clear: government intervention has not only failed to stimulate small business growth but has actually hindered it. Bureaucratic inefficiencies and the misallocation of scarce resources, together with unnecessarily restrictive regulations, have created an environment in which small businesses struggle to survive, let alone thrive. To address these problems SA must prioritise the expansion of private sector financing and the creation of an enabling economic environment.

It is widely accepted that a vibrant small business sector is essential for job creation and economic dynamism. Yet despite pouring billions into small business development the government has little to show for it. Since 2014 small business’s contributions to total business turnover have improved only marginally, from 20% to 23% in 2024. The government’s own 2022 Small Enterprise Development Masterplan complained about “low survival rates and stagnant growth” in the sector, and concluded that a more significant expansion has been held back by, among others, “ineffective support to small, medium and micro enterprises”.

Government policies treat all small businesses as equal, lumping tiny spaza shops together with high-potential start-ups and formal small businesses. This one-size-fits-all approach stifles growth because its focus is on the size of firms helped, not whether the firms that receive help are the ones most likely to grow. Policies should prioritise firms with the potential to scale, create jobs and drive innovation, rather than merely keeping microbusinesses afloat.

The government has consistently demonstrated an inability to support small businesses effectively. The state spends roughly R6bn each year on direct financial support for small businesses, through dozens of programmes none of which knows what the others are doing, have tried to do or are planning to do, because there is no clear data on where this money goes or what effect it has. Worse, the loans that do get disbursed often have high non-performing rates — a 2022 report said 40% of Small Enterprise Finance Agency loans were in default.

Bureaucracy

The bureaucracy surrounding small business support is astonishing. More than 300 government entities claim to provide assistance, yet most offer little more than a maze of red tape and bureaucratic hurdles while achieving little actual business development. Entrepreneurs face a thicket of regulations, licensing requirements and tax burdens that make formalisation unattractive. While President Cyril Ramaphosa has acknowledged the problem and launched a Red Tape Reduction Task Team, it is unclear what — if anything — they have achieved.

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

Instead of fostering real entrepreneurship, it facilitates clientelism relationships, where politically connected businesses act as middlemen, inflating prices and delivering subpar services. Alternatively, businesses must make political contributions if they want to secure business. The idea that townships can become self-sufficient economic hubs through state-driven procurement is beyond naive — why would one expect any residential area or city to be self-sufficient? Are Soweto’s residents to grow their own food and assemble their own cellphones? In any event, prosperity is not created by government contracts but by competitive businesses that innovate, expand and compete in a city, nationally or globally.

This policy 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.

The CDE proposes a radical but necessary solution: let private financial institutions drive small business funding. Private lenders, venture capitalists and investment funds have a far better track record of identifying promising start-ups than government bureaucrats. We propose reallocating half of the R6bn in annual small business support towards private sector-managed funds. This should be disbursed on the basis of transparent, competitive tenders, with winning firms committing to high levels of performance, transparency and innovation.

Banks and private funds already have the risk assessment skills and incentives to invest in businesses with real growth potential. By involving the private sector, transparency and accountability would improve — something government agencies have consistently failed to achieve. One promising model is the SA SME Fund, a public-private initiative launched in 2016, that has raised funds from both government and major corporations to invest in high-potential small businesses. Scaled up, such initiatives could provide capital to small firms while minimising inefficiencies and corruption associated with state-led funding schemes.

The most potent lever the government can pull is reducing the regulatory burden on small businesses. SA’s rigid labour laws, unduly onerous rules relating to what kinds of business can run where and by whom, and complex tax regulations, make it unnecessarily difficult to start and grow businesses.

For small businesses to flourish they need to have 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 & 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.

SA should introduce an “SME test” for all regulations to ensure small businesses are not disproportionately burdened. This has been tried in a number of Organisation for Economic Co-operation & Development countries, resulting in policies that encourage, rather than stifle, entrepreneurship.

There is, in our view, no need to have a self-standing department of small business development. The department has 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 & competition.

This restructuring should be aligned with a fundamental 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.

For SA to escape its economic malaise it must abandon the illusion that the government can engineer entrepreneurship. The private sector — not the state — is best equipped to drive small business growth. SA does not need more government intervention; it needs less. It does not need more township set-asides; it needs more integration into the broader economy.

Mostly, it does not need another decade of failed small business policies. We need a bold new approach that embraces market-driven growth, competition and innovation.

• Bernstein is CDE executive director. This article draws on a new CDE report, “Let the private sector drive small business development”, the eighth document in its Agenda 2024: Priorities For a New Government series.

This article was published on Business Day