30 July 2014

South Africa: Provincial Centres for Entrepreneurship? South Africa's New Small Business Ministry Gets Off On Wrong Foot

analysis

South Africans of all stripes often lament the general lack of entrepreneurial success and limited support for its development in the country.

So when President Jacob Zuma created a new small business ministry, the Department of Small Business Development (DSBD), soon after entering his second term in office, the news was well received all round. The new ministry has its work cut out for it, but its minister, Lindiwe Zulu, appears confident that it will be up and running and producing results.

In the inaugural budget vote speech for the DSBD, Minister Zulu announced that the new ministry would support small businesses through a new institutional structure, provincial entrepreneurial centres, introduced as Centres for Entrepreneurship. These centres, it appears, will be places where entrepreneurs and small business owners will be able to connect with government on regulatory issues as well as access general support and funding.

Opening up centres in every province provides an important signal that government intends to decentralise support and create a national footprint for the newly formed ministry. However, a different approach centred on urban centres holds better prospects for connecting government with entrepreneurs and for supporting local economic development.

Thus far the provision of services by government to entrepreneurs has consisted of three major features.

First, there is a separation between financial and non-financial government support. Government provides financial support via the Small Enterprise Funding Agency (SEFA) and non-financial support through the Small Enterprise Development Agency (SEDA).

Second, the approach from government to providing these services has been to create agencies instead of providing services through line departments. This approach has been criticised for perpetuating a "contracting state". Third, several attempts to link government services to those provided by venture capitalists, non-governmental organisations and financial institutions have been initiated.

The work in all of these areas is encouraging, as it shows a stronger commitment to small business over the last five years. The system is however far from optimal with entrepreneurs having difficulty navigating a system characterised by complexity and fragmentation. If one adds requirements related to taxation, labour laws and auditing, the system being created looks even more complex.

Urbanisation is one of the key factors overlooked in the design of this system to create nine provincial centres. Businesses located in urban areas have higher rates of success, and even rural businesses are reliant on accessing urban markets to be successful.

The literature on rural enterprise development notes that "thin markets" exist in rural areas characterised by low formal employment and few people. For this reason, existing proposals are about creating intermediaries to promote goods and provide logistical support for rural enterprises.

Urbanisation patterns provide a method to locate the newly formed entrepreneurial centres more effectively, strengthening the prospects of government support to entrepreneurs potentially leading to sustainable job creating businesses. The question that arises is: Should services be decentralised to provinces or even lower to metropolitan governments?

The problem with locating offices in current metropolitan local governments is that it reinforces current patterns of development with investment centred in large cities. At the same time, the problem with creating provincial offices is that it diffuses resources too thinly, and in areas with limited demand for services.

One route out of this quandary is to embrace the concept of secondary cities. Secondary cities are smaller urban centres. Cities Alliance, a global partnership for urban poverty reduction and the promotion of the role of cities in sustainable development, which the South African government belongs to, argues for a hybrid definition of secondary cities to include geographic and population size, function and the role of the city within national and global systems of cities.

The South African Cities Network (SACN) has already identified secondary cities. It argues that these secondary cities will encourage growth that is more balanced and dispersed. SACN contends further that secondary cities "are also catalysts for surrounding areas, acting as markets for agricultural produce, as administrative and service centres and as links to the primary cities."

This insight is important as it may link small rural markets to larger urban ones. In practical terms, it could result in a huge expansion of the number of entrepreneurial centres from the envisaged nine to around 30 across the country.

This is potentially feasible and affordable if existing infrastructure used by SEDA, SEFA and local resources are pooled together. Using secondary cities and metros as criteria for deciding where these offices should be located has much better prospects for supporting inclusive growth than establishing nine provincial offices.

City level entrepreneurial ecosystems however require extensive support beyond a physical office. The nascent attempts at creating entrepreneurial ecosystems in Durban, Cape Town and Johannesburg show encouraging signs at the level of having stakeholder support.

This is hugely important, as stakeholders have an initial plan in place, which indicates some infrastructure of sorts supporting consultation and coalition building. Providing national funding to scale up these initiatives would support the development of these ecosystems as well as provide political and administrative oversight on a day-to-day basis. Supporting existing processes are likely to yield quicker results and be more sustainable simply because local councils already have processes running.

Local economic plans are however just starting points and local strategies tend to lack differentiation with a focus on conferencing, attracting technological businesses, "mega projects" or the current "hot idea".

Examining the issue from a provincial perspective, one finds that a provincial entrepreneurial centre could potentially play a better role in assisting local councils to develop more credible economic development strategies as well as leverage government and other sources of financing.

What we can glean from current government recommendations is a role for the provincial entrepreneurial centre as a "one-stop-shop". Envisaged is a physical space that brings together various support services from government and the private sector. This is an idea that should have been implemented ages ago. But here again, this role is potentially best played at the municipal level.

At the most basic level, it simply requires an office or offices with various government departments deploying officials to these places. These offices are likely to be busy, but could reduce the time for small businesses to solve issues requiring government support and interventions. For example, business owners could resolve issues on taxation, labour law and registration in one trip to the office.

More innovative iterations of a government entrepreneurial centre would be to create "maker shops", which are community centres with tools. Makers of products rent the tools and thus do not require ownership of expensive tools to prototype an idea.

The small business ministry will be allocated a budget for the first time in the next budget speech. In the interim, strategies such as entrepreneurial centres will be debated and funding decisions taken.

In making these decisions, cognisance must be taken of our urbanisation patterns. Locating entrepreneurial centres within urban local governments rather than at a provincial level will hold better prospects for assisting local economic planning and the plans of entrepreneurs. In so doing, it would support inclusive economic development.

Hassen is the founder of Zapreneur and Proposal Desk, both websites aimed at answering the question, "Can the Internet help South African small business?"

Read more articles by Ebrahim-Khalil Hassen.

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