#OpenAfrica: SMEs key to beating low-growth trap
an #OpenAfricaMag feature. With South Africa’s economy stagnating, where is growth going to come from? According to Yogavelli Nambiar (@), who leads the Enterprise Development Academy at Gordon Institute of Business Science (GIBS), with about 80% of startups in SA failing within the first two years, the answer lies in bridging the gap between those businesses that fail and those that succeed.
SA is struggling to grow. July 2016 saw more evidence of this as the International Monetary Fund cut the country’s 2016 growth forecast to 0.1%, saying that SA’s economy was struggling to keep up with the increasing population. This was followed by the governor of the Reserve Bank of South Africa, Lesetja Kganyago, confessing that the economy was in a “low-growth trap”. Kganyago told Bloomberg: “The slowdown in the economy has nothing to do with technical factors that have to be dealt with by monetary policy. The slowdown in growth has to do with structural impediments.”
The sobering statistics on the ground? 11.6m South Africans are unemployed, of which 8.7m — some 75% — are youths, aged 15–34. Youths make up one-third of the SA population, yet they are the group with the highest level of unemployment.
But the Enterprise Development Academy at the GIBS is hard at work trying to tackle this challenge by stimulating employment in small-, medium- and micro-business sectors. Under the leadership of Nambiar, the academy provides quality business education and support services for these businesses in order to impact the economy.
The academy supports the government’s National Development Plan, which states that, in order for SA to meet its 2030 development goals, this country’s unemployment rate should have fallen from 24.9% in June 2012, to 14% by 2020, and to 6% by 2030. The latest figures show that unemployment increased to 26.7% in the first quarter of 2016, up from 24.5% in the first quarter of 2015.
“We’re a long, long way off from the target set by the development plan of some 90% of the expected 11m jobs that need to be created by small and growing businesses,” says Nambiar. “But bridging the inequality gap between smaller businesses that succeed and those that fail is the key to building a stronger economy.”
The big challenge
According to the Banking Association of SA, small- and medium-sized enterprises provide employment to about 60% of the labour force, while this sector’s total economic output accounts for roughly 34% of GDP. The big challenge, however, is that SA has one of the highest failure rates of new businesses in the world. “Why do these businesses fail? Our experience shows that people struggle with access to capital, access to markets, and then because of SA’s apartheid education legacy, a lack of business skills confound entrepreneurial growth,” she says.
The root of the problem lies in education. Nambiar says that entrepreneurship education is not given significance at primary level, and not enough people are being up-skilled at tertiary institutions or through apprenticeships. “Those who are meant to be gaining experience in the workplace are not, because businesses can provide few jobs for school-leavers due to the low literacy and numeracy levels that are currently being produced by the education system,” she says.
Research done by Africa Check found that some 80% of SA’s 25 000 public schools are ‘dysfunctional’ — most of them in black townships and rural areas. Dropout rates are high, and even those who manage to acquire a matric certificate are often still functionally illiterate and innumerate.
The need to survive has created a culture of ‘survivalist’ entrepreneurship — informal traders, spaza shops and hawkers. These are generally one-person operations that eke out a living day by day. But what if these micro-entrepreneurs could be assisted in formalising and growing their businesses, thereby becoming job-creators?
Educational and support
Nambiar says that there is an educational and support aspect to the academy. First, potential candidates must be identified, and steered into the appropriate training. Once trained, the candidate is assisted with support services, such as mentorship, coaching, peer learning opportunities, and access to finance and new markets through the Academy’s networks.
She explains: “Entrepreneurs often don’t know how to access finance or new markets, how to diversify income streams, how to make their operations more efficient or how to manage their finances. We teach the fundamentals of business to enable entrepreneurs to recognise and maximise opportunities; and to create, sustain and grow their enterprises, while providing them with the exposure, resources and networks available to a leading business school.”
The original concept was born out of the Goldman Sachs 10,000 Women Initiative, a global programme that ran 2008–2013, in which 330 SA women participated. Nambiar says that they showed remarkable progress, resulting in job creation and revenue growth. “Because it was so successful, it served as the basis for creating the academy, which now deals with men and women across the country, and the continent in future.”.
Candidates range from people who have not obtained a matric certificate right through to people who may have a masters degree. Most of the candidates come from underserved and marginalised communities. The academy has worked with over 1 000 entrepreneurs to date.
How is this funded? Nambiar says that the academy approaches private and public sector institutions to obtain funding and in-kind support to be able to ensure affordability is not an inhibitor.
Sometimes synergies emerge. For example, Massmart wanted to support businesses that supply it. A development budget was assigned to the academy, to help in identifying these suppliers and assisting them to improve their quality of service to the merchandising giant.
“Many entrepreneurs start their businesses with a ‘survivalist’ mentality,” she says, adding: “They identify an opportunity and take it to a certain level, but then don’t know how to grow and scale.”
The academy provides the necessary training and support to take these businesses to the next level. “It’s not theoretical, it’s very practical education customised for that group and geared towards implementable outcomes. During the course work they develop a business growth plan, which they then present to the adjudicators — these are financiers, business entrepreneurs and experts, who give feedback. It’s a four-month process, normally. This helps them articulate their vision for growth but also to understand the components required for growth. It’s not a conventional business plan,” she explains.
Individual business performance
The next phase takes six months, during which the candidates learn to deliver on the plan. It’s a mentorship and coaching programme that places a focus on the individual business performance.
Bespoke programmes include the National Home Builders Registration Council (NHBRC) Women in Construction Programme, which was recognised at the third annual Women in Construction awards as the “Most Innovative Training Programme” in 2015.
The academy assists entrepreneurs who depend on tender-based work. “We teach them how to manage the work more efficiently, and to diversify their income and customer base through seeking and entering new markets,” Nambiar says.
A grassroots programme was held for spaza shop owners in Mamelodi and Ivory Park. “We taught 60 spaza owners how to run their stores more efficiently. It was very practical — the training was done in the township, and the challenge to each one was: how do you go back to your stores today and do something differently?” says Nambiar.
These small and micro-businesses are very important to the SA economy, Nambiar says. “If you look at the demographics of the country: 60% of households in the metros are based in townships. Then look at the way that townships are constructed on the outskirts of towns, with a lack of infrastructure; as explained by the Gauteng premier, they are just dormitories of labour as people work and spend their money elsewhere with no creation of wealth or production of goods happening in those townships,” she explains.
One must bear in mind that this is a large number of people — the majority of the black population, who are inhibited by poor infrastructure. “This is a contributing factor to issues like xenophobia,” says Nambiar, adding: “We have lower levels of opportunity recognition than other sub-Saharan countries that have a less sophisticated infrastructure and economy than us.”
In India, Nambiar notes, children are encouraged from a young age to take up an entrepreneurial activity — even to earn their own pocket money. Entrepreneurship is supported as a career choice.
Overall, Nambiar feels we are doing worse than countries that are smaller or less sophisticated than ours. “The SMME environment is poor — not only the lack of skills, but also inhibiting regulations, extreme red tape, and local economic conditions. In terms of markets, small businesses are unable to access corporate supply chains or new markets, and there is a concentration of the economy in certain areas.”
“The informal economy is important to economic growth,” says Nambiar, pointing out that the country needs those businesses to become formalised and to add to the tax base.
But it’s going to take dramatic interventions, from the policy level to the programmatic interventions on the part of all stakeholders to get the informal economy and small businesses to the level where they become an even greater, and measurable, contributor to the GDP.
This feature first ran in Open Africa, the definitive guide to business, branding and marketing in Africa, brought to you by Ornico in partnership with GIBS Business School, with MarkLives.com as its official media partner. Download the entire publication free of charge (registration required).