- Despite government emphasising the importance of small and medium enterprises to facilitate economic growth, these businesses have been in decline.
- The "devastation" in the primary and secondary sectors over the past decade has had a knock-on effect on the survival of small businesses, says the Small Business Institute.
- Government's Economic Reconstruction and Recovery Plan aims to pursue an aggressive localisation strategy, which assumes small businesses are willing to participate in new government procurement contracts.
Despite government emphasising small and medium enterprises' (SMEs) role in supporting economic growth, the reality is that these businesses have been in decline, research shows.
The Small Business Institute (SBI) on Wednesday released four research papers to help the country set an inclusive growth path and allow businesses to create jobs.
In one of the papers, the SBI assesses government's localisation policy, leveraging procurement from SMEs. Even though government has had economic policies such as Growth, Employment, and Redistribution (GEAR), the Accelerated and Shared Growth Initiative for SA (AsgiSA) and the National Development Plan (NDP) to support small businesses, they have declined.
"[T]he number of formal small businesses - those that the NDP emphasises to drive employment - have been disappearing at an alarming rate over the past decade, despite policy rhetoric given to their importance in the economy," the paper read.
While no concrete data show how many small businesses closed due to the Covid-19 pandemic, the SBI notes that many small business owners surveyed last year did not expect their businesses to survive. Survey estimates show that 15% to 19% of businesses have failed to reopen.
An analysis of data from the SA Revenue Service shows how there has been a substantial decline in the number of taxpaying companies between 2007 and 2018. This should be of concern to government given that it has policies to support small businesses, the SBI highlighted.
Knock-on effect
"Small firms operate across all sectors of the economy, the devastation shown in the primary and secondary industries in particular over the past decade has a knock-on effect on the survival and sustainability of SMEs," the report read.
The new Economic Reconstruction and Recovery Plan (ERRP), issued by the President Cyril Ramaphosa in response to the Covid-19 pandemic, places emphasis on localisation. The SBI puts forward that government wants to build its localisation strategy off an "unstable foundation" of declining small businesses.
The SBI noted that all sectors already have high local content requirements, but under the ERRP, these requirements will be tightened. "Possibly 80% to 100% of production costs will now have to be verified as local inputs for an increasing number of products and services to access government contracts."
The SBI said there was no evidence to indicate that there has been a positive effect for small businesses when it comes to government procurement or whether localisation policies have grown small businesses in small towns and rural areas.
According to the SBI, an aggressive localisation policy being pursued by the ERRP assumes small businesses are willing to access or participate in providing services to the government.
"[T]here has been a declining number of productive small firms in sector value chains even before Covid-19. Coupled with the deterioration in the country's economic conditions, sluggish demand does not favour new entrants or existing firms to scale up." The SBI also pointed out a longstanding problem of late payments from the government to small firms.
The SBI noted criticisms that the government's SME development policies are a "confused mix of strategies." However, small businesses are diverse and have different needs, so policy should reflect the diversity. Localisation requirements must be sector- and context-specific, the SBI recommended.
General recommendations were for the government to work towards transparent and evidence-based policymaking. Solutions so far have been detached from realities as problems are not adequately understood. The SBI also recommended that government reduce red tape and regulation hampering business growth and address infrastructure gaps such as power supply.