As the Fourth Industrial Revolution takes hold, thought leaders worldwide are pushing the cause of entrepreneurship and, in particular, small businesses. Because while the Goliaths are retrenching, it is only the Davids who will be able to provide the jobs that will arrest growing unemployment. Ben Bierman, CFO of Business Partners explains how Nenegate shook the confidence of these eternal optimists and tells Biznews.com’s Alec Hogg about his wish list of changes that will help SMEs to help South Africa.
In this special Budget podcast brought to you by Brightrock, Ben Bierman the Chief Financial Officer of Business Partners is with Alec Hogg in the studio. Thanks for coming along Ben. Being a bit of a veteran in financial journalism I remember your business as the Small Business Development Corporation, as a young journalist interviewing Doctor Anton Rupert, who I think was the Chairman at the time. This has evolved since 1994.
They have Alec, good afternoon. The Small Business Development Corporation was created by Doctor Anton Rupert, way back in 1981, so we actually celebrated 35 years of being around on the 1st February but yes, subsequent to 1994 and the new government we’ve changed our focus slightly and we’ve become more private sector led, with private sector shareholders dominating our company. Still very much focused on small businesses, entrepreneurship, and the promotion of economic growth, through the support of small business.
You said private sector led – who are your shareholders today?
Our primary shareholders are Rembrandt, but we also have big shareholdings held by some of the big banks and some of the mining houses.
And Government stake now?
Government stake has been decreased but it is still about 20 percent.
All right, so you are a private sector initiative, helping small businesses to fund themselves.
We do funding but we also believe that one of the primary things that you should do for small business is to actually, provide some sort of assistance, some technical assistance, or support. We have a very, exciting mentorship program that actually, supports those small businesses that we do fund.
I remember at one stage you used to offer loans that were a little below the market. Is that still the case?
We don’t do cheap loans anymore. I think it’s fair to say that the products that we offer are very market related, in terms of the pricing but we do take quite a bit of risk, and I think that what differentiates us from the normal financial institutions.
Where would you play? Where’s your sweet spot?
Our sweet spot, in terms of ticket size, is around R2.5m but we would be funding small businesses with turnovers of perhaps around R50m and our ticket size, as I mentioned, is about R2.5m.
All right, the ‘Budget’ is coming up tomorrow. We have all kinds of parties giving us wish lists. Presumably, you have a wish list as well, and maybe we can start-off with taxation. Small businesses do get a tax benefit at the moment. Just unpack that for us.
Small businesses do get some relief from the current taxation legislation, in terms of registration, obligations for VAT that are less onerous than big companies they also have turnover taxes, which simplifies their tax administration to a large extent. I think at this stage, it is probably unrealistic to expect some additional relief for small business in terms of what we expect Mr Gordhan to say tomorrow. We believe within the broader framework that there could be other relief for other initiatives that should promote small business.
You mentioned VAT. As we have a small business ourselves, something that really irritates me is I have to wait for big companies to settle their accounts, 90 days and sometimes 120 days, but I have to pay the VAT on it within the period that SARS demands. Sometimes it means you are carrying that VAT for quite some time.
A big concern for small business because the implications from their cash flow because as you mentioned, quite correctly, they’ve got to pay the output VAT across to the Receiver, before they’ve even receive the payment from the person that they supplied their product of service to. It has a bigger consequence in that if they are not fully compliant with all of their tax administration, you find that the Receiver doesn’t issue a VAT compliance or a tax compliance certificate, and that sometimes prevents those businesses from actually, pursuing additional business because as part of a due diligence the other new supplier might require a tax compliance certificate, which they haven’t been obtained. We would recommend that specific dispensation is agreed for small businesses but they’re not that technical on issuing the tax compliance certificate. If they have a good standing with the Receiver of a period of time, issue the tax compliance certificate is much easier and much quicker.
Read also: Matthew Lester: Budget Bets – VAT a last resort.
That’s not rules based and we know that SARS loves to work according to the rules.
Yes, that is true, and that’s where we would like them to consider what the implications are of some of the legislation and even broader, on the red tape of the compliance burdened on small businesses. I think it just constrains their growth.
Ben, a simpler thing is just to allow small businesses to pay VAT when they get the cash in. Why this requirement that on invoicing you have to account for it in your VAT return?
Well, I’m fully in your court, in terms of supporting the fact that they provide more relief as to when the VAT should be paid. As far as the Receiver is concerned, why they actually insist on getting it on an invoice basis – I don’t know.
Well, maybe that’s one thing that Pravin could look at, on your wish list.
One thing that they should try, absolutely on my wish list, yes.
Red tape?
We find that when new businesses get established, Alec there are so many compliance rules that they need to adhere too and what we would wish for is that Government can actually put some infrastructure down, where you get almost like a one-stop shop. Where a small business owner can go to and get all the certifications, all the registrations, and everything completed in a short space of time – done very effectively. We also believe that it would actually save Government money because they could consolidate some of the infrastructure, which they have to try and facilitate the registration of business. If something in that realm can be created just to make that registration and compliance burden a bit more, less onerous for small businesses.
You know what’s interesting here. Pravin Gordhan is talking to big business. Zuma is talking to black business. You’ve got a Minister of Small Business, who seems to be invisible. Who indeed is listening? Who is hearing the lobbying from SMEs?
We were hoping that the Small Business Ministry and they’ve only been around for about a year-and-a-half, but they would actually take charge of that issue and ensure that any legislation that is almost issued by different and various Government Departments. Sometimes it is very, good objectives but the unintended consequence often that we see for small business, is actually, quite negative. If an environmental impact assessment, like you have for big mining projects – if a small business impact assessment can be done for any new legislation, to try and ensure that at least, whatever they are wanting the private sector to comply with. It doesn’t negatively impact small business or at least if they could make some alterations to allow small business to operate more effectively. That would be on top of our Christmas and our wish list for tomorrow.
Read also: Wikus Furstenberg: Pravin must show business he’ll walk his talk
Surely, at some point the penny has to drop. Big businesses are not employing more people, if anything they’re applying technology and employing less, so where are the jobs going to come from?
Exactly, big business is focusing on innovation and innovation doesn’t always drive additional job opportunities. If you look at what could create effective and decent jobs, is often in the political realm as well. We believe that small business is the way to go. If you can get entrepreneurial activity increased, more business is established, and then I think job creating would come from that. If we look at what Pravin Gordhan is facing tomorrow, with decreased tax revenue and, also having to cut Government spending. We are concerned about that for small business as well because small business has, basically three customer groups. They supply to Government, they supply to big business, and they supply to the man in the street like you and me. Everybody is feeling the strain of maybe more austerity facing us (the lower economic growth) and less… Interests rates are going up, so consumer spending is down, so small business as a group or as a sector, is actually feeling all of these and we believe that if something can be done to improve their growth prospects. That is where you can really, effectively see job creation.
Yes, and by definition – you aren’t as well resourced as a big company is, if you’re little. Your advantage, of course, is that you are more nimble. If you can be David as against the Goliath, but these are not easy times to be even a David.
Absolutely, the agility of a small business is its one saving grace but they do not have the shock absorbers or the buffers to actually, carrying them through long periods of slow, economic growth or difficulty. We saw that especially last year with the load shedding, where the difficulties in the electricity supply actually has a much greater impact and often let’s small businesses fail. They don’t have that resource capacity to overcome big head winners.
Yes, big businesses can go and get a big generator.
They can.
If you can’t afford a couple of R100 thousand, you probably close up shop. Are you finding that? Are you finding with your clients, the people who borrow from you that your bad ratios are going up?
It’s sad to say but we’ve seen that. We’ve seen that on our portfolio of clients that the credit risk or the credit losses are slowly picking up. We think we’ve reached the bottom of the cycle about 12 months ago, and depending on what happens over the next 12 months, we can expect that to increase even more. I don’t know if we are going to touch, the same levels as we did in 2009, but it all depends on South Africa incorporate it, delivering on some of the promises that we hope we can.
What about the events in December 9/12 as they call it at Treasury, the ‘Nenegate’ – what happened with ‘Nenegate’, as far as the small business sector is concerned?
I think it’s the broader shock of what happened in December that affected small business as well. We do a quarterly survey on the confidence levels in small business and it was fascinating for us to see, after December. Is that where you have a small business owner, normally believing that they can change the world. Regardless of what their expectations are about economic growth in general, they still believe that their businesses are going to grow over the next 12 months. For the first time in our analysis, and we’ve been doing this for about two years. We actually saw that the trends coincided. Their confidence levels about South African growth came down to below 50 percent and even their expectations about their own business growth – showed a material decrease, after the December event. I think it’s about confidence. It’s about knowing what the future holds and that has had the biggest implications, of a small business.
Read also: BRILLIANT: John Battersby unpacks Nenegate, Jacob Zuma’s greatest blunder
The most optimistic people in the world are certainly small business owners.
Very true.
And they are now not so optimistic. They are getting pessimistic as well. That’s a warning signal.
That gives us a very, strong signal coming through from them that they believe that they don’t necessarily have the same tools to ensure that their business grow. If one analyses that confidence statistic. It had to have something to do with the fact that broader economic policy was suddenly, very uncertain, and I’m sure. That he head winds that we’ve seen, globally arriving in South Africa has also started having an effect on their own ability to grow their business. I think it all boils down to having certainty around where the country is going, so the small businessperson can plan. That they can invest in that extra piece of machinery, and I think what we’ve seen with our clients is that they hold back. There is so much uncertainty in the environment that even if they have realistic chances of expanding they are waiting for certain things to become a bit more clear.
That’s very interesting because we’ve seen big businesses holding back now for a couple of years already. Cash balances of big businesses are growing. The small companies – they always have more agility as you’ve said, they’re more optimistic. They don’t really care about the big trends but if they are starting to feel that lack of confidence then what can Pravin Gordhan do, in this ‘Budget’ if anything, to try and lift that?
I think it is all about direction. The sentiments and the noises that we’ve been hearing and the narrative that’s been going on about Business and Government collaborating – I think that is very positive. I’m expecting, despite what happens tomorrow that there would be an increase in confidence levels, purely because it seems as if everybody is working together a bit better.
This is perceptions, so not necessarily a reality yet.
Not reality yet but I think as we’ve seen all along, it’s all about execution. I think the Minister has a challenge tomorrow, in delivering his ‘Rubicon Speech’, as everybody has been calling it. It is all going to boil down again to execution. If there’s a political will and a private sector will to execute whatever is in the Budget tomorrow. I think then we are looking at maybe a turnaround in the downward spiral that we’ve been experiencing since December.
Getting back to your wish list – we’ve heard people like Gerhard Papenfus saying that he would like to see these Bargaining Councils excluding small business. Big business can perhaps afford certain increases, smaller companies – not so much. Is that something that you would like to see changed?
Absolutely, we’ve seen a few case studies where the minimum wage or the Sectoral Bargaining Council, where something is negotiated with big business, gets imposed on the small businessperson with dramatic adverse affects. I believe that the Free Market Foundation is currently in the Constitution Court to purely, allow the Minister to have the discretion, instead of must, he has the right to, or he may change the law.
One word – from must to may.
From must to may.
Is it really, that important?
I think it’s a big step forward, in the sense that at least there’s a level of discretion and that whatever is agreed between big business and labor, does not necessarily get imposed by everybody within that sector because that can have dramatic effects for a small businessperson. That can’t, necessarily afford those wage agreements.
Ben, what about the BEE requirements? We are now seeing increasingly that, I’m sure previously disadvantage groups love the idea of BEE Legislation. They get a significant advantage, but those traditional, small white businesses – lots of white people unable to get into corporations anymore. They can’t work for Government anymore. They have to start on their own. Then they’re told to participate – in essence you have to give away 51 percent of your company. Is that a real concern?
I think it becomes very difficult for a small business owner to try to take in an equity partner. I think it makes more sense to look at a diversified equity or ownership structure, when the business is a bit bigger. Often you need to recognize that the majority of small businesses are what we refer to as ‘lifestyle businesses’. They employ between five to 15 people. It is normally family owned. What that business does is it provides the employees and the owner of the business with a comfortable lifestyle. They can drive a nice car. They can own a nice house, those businesses do not lend, and then to have a passive investment or an equity stake, and they neither lend themselves to have multiple stakeholders within the business. If one looks at the new codes, especially for the QSEs (Qualifying Small Enterprises) and the Emerging Micro Enterprises – there is specific rules and regulations that benefit black ownership, which I think we all agree if that stimulates additional businesses that’s good. The compliance burden for the non-black owned businesses are pretty much, similar to the compliance burden, in terms of getting your BEE accreditation to the big businesses. Whether it’s about enterprise development or whether it’s about procurement or skills development, it does impose an additional layer of compliance, number one. That is often costly. You have to get accredited but it also, imposes certain transformational objectives on the business, which often they can’t afford and if one of your big clients is Government, and you don’t meet the necessary standard. I think if you are below a level of four, you cannot supply to a State owned enterprise. It is problematic but I don’t think it is that extensive because you still have other customer groups that you can supply too.
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The private sector is now becoming increasingly sticky on that, the private companies.
Big business does, yes.
Big businesses, they are exactly, the same as Government, so you almost have a disincentive to grow that business, ten million Rand – if you are below ten million Rand then you are excluded. Perhaps the answer there would be to bump up that to perhaps R20m a turnover.
They recently increased those levels from I think it was five, then it went up to ten, and it was R35m turnover for a qualifying, small enterprise up to R50m. Maybe it is time to revisit those levels and provide just a bit more scope for those specific small businesses that need to also, and then comply with specific rules and regulations.
I saw a lovely cartoon by Zapiro today, where he has Pravin Gordhan in a chariot, the Gordian knot tying the economy, the chariot called the economy, to a pole and he’s about to slice through the knot to release the chariot. Do you think that’s possible? Do you think that with all the structural issues that are bedevilling the South African economy – Pravin Gordhan might just swish them all away?
I’m a bit more skeptical over the short term, whether the economy can be unburdened so quickly. I think if we get rain, then it can add one percent to our GDP growth (lots of rain). If we have our electricity, supply sorted out – I think it can add another one percent. If Mr Molefe at Eskom sorts out our electricity supply, which he seems to be doing that could also increase the growth. I think from a policy direction perspective and seeing what important role Government played, especially post 2008, in actually softening the blow of the global financial markets crisis in the recession. I’m not sure if they’ve got enough arrows in their quiver to get the economy growing over the short term. I believe that if they provide strong direction that we can see this chariot starting to move a bit quicker. Over the short term, I’m a bit more skeptical, to see if he can actually unleash it, in the way that you’ve just described, which I think was quite visual.
Let’s home that the Finance Minister surprises friend and foe tomorrow. This was Ben Bierman, the CFO of Business Partners. This special Budget broadcast was brought to you by Bright Rock.
