By Kebalepile Matlhako, Transformation Specialist at the BEE Chamber
Despite many plans and interventions by the government, unemployment continues to rear its ugly head; this is evident by the Quarter 3, of the Quarterly Labor Force Survey (QLFS) results of 29 November 2022 citing a 32,9% unemployment rate which is a slight improvement from Q2. The National Development Plan 2030 target is 11 million new jobs by 2030.
In real terms employment is increasing at a rate of 31 000 new jobs in the past year, as opposed to the 1.6 million per year needed to meet the NDP targets. This unemployment is not helped by the fact that since 2015, the GDP per capita has been negative, according to the macroeconomic indicators. This means that the economic growth is slower than population growth.
Small Medium Micro Enterprises (SMMEs) are seen as the bastion of hope for job creation, however, they bear the brunt of the regulatory framework as they are expected to perform at the same level as large corporations with resources. The burden of compliance, load shedding, overheads, and other structural factors, continue to result in myriads of statistics in South Africa indicating 70% of small businesses fail within the first two years of operation. It is extremely difficult to see where the 11 million jobs will come from.
According to SEDA SMME Quarterly report 2021 Q3, there are just over 2.4 million SMMEs operating in South Africa of which 68% are in the informal sector. The 2.4 million SMMEs account for just under 10 million of employment and have unfortunately been the highest shedder of jobs, over 300 000, in that period. While we struggle with SMMEs not employing enough, we are also faced with the reality that “South Africa also has a concentration of power sitting in only a few employers (mostly government and large corporates), leading to 56% of jobs coming from only 1 000 employers – and these jobs are growing at a faster rate than what SMMEs are creating,”- Sonqoba Vuma, 2019. At the rate we are going, South Africa will not reach its targeted NDP job creation targets.
However, we cannot ignore the fact that the B-BBEE provides a good tool for inclusive economic growth, particularly the Enterprise and Supplier Development element which includes Preferential Procurement, Enterprise Development and Supplier Development.
The Preferential Procurement element makes available, in the generic scorecard, a total of 7 points for buying from SMMEs, an additional 11 points for buying from companies who have a minimum of 51% black ownership, 4 points for companies that have at least 30% black women ownership, and an additional 2 points for companies owned by black designated groups i.e., military veterans, women, youth, people with disability and based in underdeveloped areas. When companies spend on goods and services, they receive points based on which company they have selected and the credentials they possess.
Enterprise Development (ED) awards 5 points for supporting 51% or more black-owned SMMEs that you do business with. This support is targeted at a % of Net Profit After Tax (NPAT), and ED is for generic codes, generally set at a target of 1% NPAT to obtain the 5 points. This means that if the value of support towards ED-qualifying SMMEs is equal to 1% NPAT, you will receive 5 points. This form of support or development must lead to sustainability, towards operational and or financial independence. Developing an SMME means that you may procure goods and services from them – and graduating the Enterprise Development beneficiaries into fully fledged suppliers also yields bonus points.
Supplier Development is intended to support the “at least 51% black-owned SMMEs” that are your suppliers in order to improve their delivery. This will help with reducing supply risk and ensure the quality of supply. Supplier Development has 10 points available for reaching 2% NPAT, in terms of support towards qualifying SMMEs. Both Enterprise Development and Supplier Development also provide a bonus point if jobs were created because of the support provided. So, B-BBEE provides sufficient incentives to score points, while creating an inclusive economy.
Among many other benefits, B-BBEE through ESD provides a plethora of opportunities for small businesses and the economy; these include:
- driving investment in enterprise and supplier development
- encouraging SMME funding
- commercialisation of products
- providing access to market
- rewarding job creation
- providing competitive advantage
- a business case for economic growth.
The growth in the number of SMMEs will result in commensurate growth in the market as the need for products and services increases. If we want to grow the economy, we need to put more effort into the growth and sustainability of SMMEs.
In the past 12 months, I have worked with 44 SMMEs, analysing their operations, needs and working on interventions for sustainable operational and financial independence. In the process, I noticed 3 out of many areas that required attention if we are to win with employment creation by SMMEs:
- Cash flow challenges
- Navigating red tape
- Austerity vs productive fiscal spending
The lifeblood of a business is the availability of cash to meet its current obligation – the difference between what comes in vs what is spent to deliver goods and services. One of the most difficult challenges that SMMEs face is late payments from clients, both government and private companies, particularly large organisations. SMMEs struggle to obtain cheaper credit and would generally sit on accounts receivable of over 120 days from their regular customers who have it as their policy to pay in 60 to 90 days, thereby making an SMME carry their trade credit. Since the SMME does not have money to carry stock or deliver services while waiting for payment, they will resort to trade finance, overdraft, or PO financing which comes at a higher cost and eats at their margins.
One of the ways to manage this cash flow challenge would be to legislate payment terms for SMMEs, limiting them to no more than 30 days failing which, a levy must be imposed. This, I believe will go a long way in ensuring the survival and growth of this sector.
Red tape, due diligence.
As indicated earlier, red tape or complex regulatory and compliance frameworks compels compliance from both big businesses and SMMEs. This means much-needed resources are channeled in this direction. If one thought registering a company was difficult, one must look at obtaining finance to implement a purchase order, or to run a business with orders already in place. The hoops that an SMME must jump through can be daunting and even lead to losing a contract due to the length of time it takes to obtain approval together with the list of documents required. There are many unnecessary rules, procedures and regulations, formal systems and centralised decision-making that result in inefficient, and unjustifiable delays, all of which lead to a small business losing opportunities and its ultimate demise.
Austerity vs. productive fiscal spending,
In the 2020 budget speech, the Finance Minister referred to a R48-billion saving that would go back into the taxpayers’ pocket in 3 years. Much as this is a welcome budget policy direction and an effort to please businesses, I would imagine that an option of fiscal stimulus, instead of austerity measures, would have been more welcome, particularly given the Covid-19 pressure on economic growth. According to Schröder, E. and Storm, S., the option of multipliers would have yielded better economic results if channeled in a productivist approach; this was based on the deduction that R1-billion extra spending would have generated R1.68-billion extra income with the ability to yield 6900 jobs. The R48- billion would therefore have resulted in an estimated 330 000 much-needed jobs.
Let me conclude by asserting that the revised Procurement Regulations introduced by the Finance Minister, Enoch Godongwane, in November 2022 is a much-needed breather, only if properly implemented to target the said specific goals. These specific goals may, among others, include targeted spend by government entities towards SMMEs, Black woman-owned businesses, black-owned businesses and black designated groups so as to achieve inclusive economic growth. These Regulations, I believe can be used to address the unemployment challenges that we face through targeted spending towards the historically excluded groups, and targeted spending towards SMMEs.
I would also include the already proposed policy on early payments of SMMEs to ensure quicker money flows in the economy and increased ability to spend on the delivery of goods and services resulting in a ripple effect.
The reduction of red tape and improving efficiencies in the Developmental Funding Institute targeting SMMEs will go a long way in reducing the SMME failure rate, especially when companies are already in possession of contracts to deliver and remain in business. Production-based, SMME-targeted spending, Preferential Procurement, and productive fiscal spending, coupled with effective Enterprise and Supplier Development activities that ensure the improved capacity to deliver for SMMEs, will help channel more money towards the creation of much-needed jobs in this country.
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