IMPORTANT! This website will be taken down on 30 June 2017 as Atlantic Asset Management is now part of Ashburton Investments.

SGBs not SMEs for Job Creation…

Dean Hand
17 August 2015

The first quarter saw our unemployment rate rise to 26.4% - our worst for a long time.  

On the back of sluggish economic growth this is not a welcome statistic.  Scratch below the surface and it is even more daunting when you consider that of the 8.7 million people unemployed (including those that have given up looking), youth unemployment is staggeringly high (5.7 million of 8.7 million unemployed are aged between 15 and 34).  So, our potential as a nation is limited not only by our high unemployment but also because there are so many young South African’s for whom finding that first job is an almost insurmountable hurdle.  

In investment circles, we grapple with many things but with unemployment rates the way they are, we also contend with how investment can create growth in an economy such that more jobs are created – creating opportunities for people (especially young people) to become economically active.  The benefits are obvious.  Without trying to provide an Economics 101 lesson, when a nation is at work, its citizens are able to buy and pay for goods and services themselves and are less reliant on the state.  We are able to make better decisions around education, health and well-being – do this on a wide enough scale, and the demand for goods and services grow, the economy grows, the tax base grows and the nation is better able to service its debt.  And so the downward spiral turns into a positive growth trajectory. 

If this is so obvious, and our government’s watch word is very much centred around “job creation”, why are we struggling to make progress?  

There has been a plethora of strong opinion pieces recently on the issue of investing in small business as a way to foster the necessary progress.  

The Sunday Times published Toby Chance’s (the DA Shadow Minister for Small Business Development) piece on funding small business and the role that they are purported to play in creating jobs and narrowing our unacceptably high, and ever climbing unemployment rates. 

He highlights the fact that SMME’s^  are more likely to create jobs and yet there is insufficient funding available for SMME growth and development.  Despite the millions poured into it by the likes of government agencies like SEFA.   

It is intriguing to consider that blanket investment into SMME’s is not where the job creation happens.  Employment trend research shows that it is businesses that are either themselves developing or fostering the development of growing small businesses, is where job creation occurs.  Survivalist businesses (exactly where SEFA has chosen to fund) are unlikely to be net job creators beyond the business owner themselves (there is a caveat to this approach, but more on that later).    Big business is unlikely to be a net job creator as its very nature is to operate efficiently to create shareholder value – thus it will tend to exploit technology and business process re-engineering in order to employ less people over time, not more. 

Johannes Wessels in Moneyweb suggests that both the ANC and the DA’s strategists on job creation through small business or entrepreneurial development are “prophets of hope”. They are rather well-honed and considered tacticians on the matter.  He maintains that the National Development Plan’s support of the notion that “SMEs will generate the majority of new jobs” and the DA’s policy on entrepreneurial development generating millions of jobs, both are well off the mark.  Based on his research of 35,000 small businesses in South Africa and an examination of other longitudinal studies in emerging economies (Mexico & India) as well as those countries with more established economies, there are insights as to why job creation happens in the latter (emerged) and not the former (developing).  

Mr Wessels suggests that the reason is because Government is placing huge burdens on business to transform (its supply chain among others) coupled with Government’s provision of capital (grants and loans) to SMME’s (a Father Christmas approach).  We would do better, he suggests, if the policy framework supported “export-led growth” instead of “consumer-led growth” coupled with an incentive based framework as opposed to burdensome bureaucracy/administration for business.  In other words, focussing on businesses that are likely to grow themselves because they operate in market sectors where growth can be exploited (like light manufacturing and export).

Enter Herman Mashaba into the debate (Entrepreneur, founder of Black Like Me and Executive Chairman of Lephatsi Investments, a venture capital and private equity firm).  His article on BizNews passionately argues that there is far too much regulation for any small business growth or expansion and therefore job creation to occur.  In fact, the regulatory environment (from minimum wages to labour relations to who may employ whom) encourages small business not to grow and certainly not to employ! 

So, where does one invest to encourage growth?      

The Aspen Network of Development Entrepreneurs (ANDE) – a global organisation with strong chapters in Africa, South America and South East Asia focuses on the development of growing small businesses (not SMMEs as they maintain that SMMEs are often designed to stay just that – small), as it is the growth of these small businesses that results in creation of jobs and ultimately grow an economy.  In healthy, growing and developed economies, Small and Growing Businesses (SGB’s)*  contribute to GDP to a far greater extent than in emerging economies that are often growth poor.  This is not wishful thinking – the Kauffman Foundation, a research based foundation that works globally to foster a society of economically independent individuals through entrepreneurship, strongly backs economic growth through SGB’s and not survivalist businesses.

It seems obvious then; our investment in job creation must come as a result of investing in entities that leverage the development and growth of small growing businesses - SGBs.   Here’s the caveat:  one can (and should) invest in entities that support survivalist small business (SMMEs) thus providing South Africans (especially those in rural communities) access to basic financial services – this is so necessary in South Africa where the degree of financial inclusion for the very poor is unacceptably low.  But to focus investing in survivalist SMMEs and not have a far greater investment in SGBs that become the net job creators over time, will not grow our economy. 

Small but growing businesses do far more than create jobs.  They expand an economy by providing a broader range of goods and services – and that competition benefits the market as a whole.  They foster an environment of entrepreneurship that builds a strong middle class, and has the potential to transform the economic infrastructure of a nation.  

This is not academic wish wash – Brazil is a prime example.  

Brazil’s unemployment rate?  6.7%.  The ‘great conundrum’ that economists refer to in Brazil has its roots in the fact that a strong middle class supported by small growing businesses, has created jobs despite an economic slow-down.  

While we are not suggesting a full scale comparison with another emerging economy with its own set of problems, there are lessons to be extracted.  Lesson one is the investment into entities that are either themselves small businesses that are growing or are intermediaries that facilitate the development of small and growing businesses over time – in this way we create prosperity.  Lesson two is to improve the regulatory framework.   Government needs to consider one that cultivates growth (probably light manufacturing export orientated and not wishful thinking around consumer led growth) instead of stifling the development of SGB’s through a quagmire of tick boxes as a licence to operate.

This double pronged attack, should render better economic growth and job creation.    

The Atlantic Credit Enhanced Guaranteed Fund, invests in proven initiatives that seek expansion capital for the direct purpose of creating jobs. 

^  The National Small Business Amendment Act (26 of 2003) defines small businesses according a number of factors, namely:  sector classification, number of paid employees, turnover and asset value.  Medium businesses depending on the sector range in turnover from R5 million per annum to R49 million with employees up to 200.  Sector dependent, small businesses’ annual turnover ranges from R3 million to R19 million and employees typically not exceeding 50 employees.  Micro businesses on the other end, are those that employee 2 - 5 people an annual turnover of R200k hence the term ‘survivalist’.

*  Small and Growing Businesses (SGBs) are defined by ANDE as commercially viable businesses with five to 250 employees that have significant potential, and ambition for growth. Typically, SGBs seek to take on expansion capital to grow ranging from $20,000 to $2 million (R2.5 million to R250 million).