Impact of State Capture on South African Small, Medium and Micro-enterprises (SMMEs) - Outsourced Finance

Small, medium and micro enterprises (SMMEs) are the lifeblood of any bustling economy.

SMMEs are often hailed as the key to achieving economic growth and are globally known to be the mechanism to generate new jobs. The Small Business Institute estimates that approximately 98% of all registered businesses in South Africa are SMMEs.

Despite President Ramaphosa’s assertion that ‘the growth of our economy will be sustained by small businesses’, a lot of entrepreneurs often feel left out of the economy and lament the lack of government support.

According to the Enterprise Observatory of South Africa, an average of 31 companies with taxable income of less than R10 million close down each week, and the number of employees hardly increases as SMMEs grow older. These statistics should be of great concern to a Government that purportedly wants to use SMMEs to drive the much required growth. Could it be that the Government says one thing and then does the opposite in practice?

 

State Capture

The level and extent of state capture continues to unravel, with each new report coming to light making it even more apparent how wide-spread the problem was/is. This is also compounded by the fact that the majority of the State Owned Enterprises (SOE’s)  that were involved in these activities are in bad shape, requiring massive bailouts from the public coffers.

The general focus of the reporting around state capture centres on the wasted resources, crumbling infrastructure and the resulting inability to deliver basic services. The one impact we hardly explore is how state capture has robbed the country of multiple opportunities to empower thousands of local SMMEs, building a capacity for continued economic growth.

 

Wasted opportunity

The Daily Maverick estimates that state capture cost the country roughly R1.5 trillion in the four years preceding 2019. These valuable contracts could have easily been used to stimulate the economy by making use of SMMEs. As opposed to large multinationals, SMMEs typically don’t work in isolation and rely on their networks to deliver their products or solutions. Empowering one SMME could easily result in many other SMMEs around them being introduced to the value chain.

 

Unfriendly Business Practices

For most entrepreneurs, doing business with the Government is a difficult and risky exercise as Cash Flow is critical to the survival of any SMME. We often hear with shock about how SMMEs have to wait for up to 90 days for payment to be processed after services have been rendered. This long turn-around time to process payment is just another example of the difficulties faced by entrepreneurs trying to conduct business with the state.

 

Impact on Innovation

The tendering process is often marred by tender irregularities, political interference, cronyism, and outright bribery. Beyond the obvious financial impact, corruption has a far wider reaching impact on the general business culture of the country. Once critical factors such as, professional competence, a solid track record, and the ability to deliver timeously are trumped by proximity to powerful individuals or groups, entrepreneurs start to become wary. The need to specialise, innovate and offer their unique solutions to the state is then gradually diminished. In an ideal setting, the state should be using SMMEs as a tool to innovate, however, many can argue that wide-scale corruption is a deterrent for honest, hard-working entrepreneurs.

If the Government is indeed serious about reaching its already low forecasted economic growth figures, they need to prioritise creating an environment where SMMEs can compete and take a more active participation in the economy.

Xavier Olivier


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