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, says independent policy analysis and advocacy organisation the Centre for Development and Enterprise (CDE).

In a new report, the organisation calls for a radically new approach to small business development.

The report, called ‘Action Eight: Let the private sector drive small business development’, is the latest in the CDE’s Agenda 2024 series, which outlines actions to get the country back on track after 15 years of stagnation and decline.

The CDE believes the small business sector in South Africa is not living up to its potential, creating far too few economic and employment opportunities.

The small business sector grew by only 1.6% between 2010 and 2019, before being devastated by the impacts of the Covid-19 pandemic.

At the height of the pandemic, 13.9% of South African small businesses closed down, compared with 6.5% of small businesses globally.

The CDE’s report finds that between the financial years of 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 and loans.

However, there is little publicly available information on who received financial support, on what basis the funds were allocated, how recipients used the funds and how many companies have thrived or failed.

“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,” the CDE states.

The organisation explains that 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.

“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,” says CDE executive director Ann Bernstein.

The CDE says government officials often have no knowledge of business or about selecting and supporting small firms. In this regard, private lenders, venture capitalists and investment funds have a far better record of identifying promising startups and supporting them accordingly.

The organisation suggests reallocating half of State money devoted to small business support into three to five private funds, to test whether they can do better than the State in this area.

If these same State funds were transferred to private players over a three-year period, it could create more dynamic and successful small businesses. The funds should be disbursed based on transparent and competitive tenders, with winning firms committing to high levels of performance and transparency.

Bernstein also suggests that small business development discussions happen at Parliamentary level, where private and public funders devoted to small businesses development table yearly reports and account for their expenditure and achievements.

LESS REGULATION, MORE EFFICIENCY

The CDE also calls for the removal of tax burdens and licensing requirements that inhibit small business growth. “They need a labour regime that is not premised on the assumption that they are large, capital-intensive concerns with human resource departments and the capacity to pay high wages.

The CDE elaborates that collective bargaining agreements ought not to extend to small businesses, since these are often negotiated by large corporations and unions for wage and benefit structures that small firms simply cannot afford.

To this end, the CDE suggests a “small business test” for all regulations to ensure these businesses are not disproportionately burdened, but rather encouraged and enabled to grow.

Moreover, the CDE recommends government do away with the Department of Small Business Development, saying the department has failed to produce any demonstrable, large-scale successes as it was mandated to do.

Rather, its functions related to building a more enabling environment can be absorbed by the Department of Trade, Industry and Competition, the CDE suggests.

It also states that procurement to artificially create township economies on government’s part has been misguided and flawed. Gauteng’s Township Economic Development Act requires that 40% of the province’s procurement budget be spent on township-based businesses.

“However, 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,” Bernstein explains.

She says 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.

Ultimately, the CDE asserts, South Africa does not need more government intervention and the country must abandon the illusion that government can engineer entrepreneurship.

“The private sector – not the public sector – is best equipped to drive small business growth.”