By Johannes Wessels*
The new multibillion fund announced by Jacob Zuma to provide venture capital funding and mentoring for especially black entrepreneurs as a key pillar to achieve accelerated growth, reminds Johannes Wessels of the comment by the Jew in Calvinia who when learning that the NG Kerk had organised a prayer service for rain, said: “They can try, but the wind blows from the west…”
Wessels, Director of the Enterprise Observatory of South Africa (EOSA) has little hope for the new initiative without evidence of a radical rethink by Government of policies and strategies that had wasted and continue to waste billions of rand on promoting small enterprise.
EOSA, a not for profit research company exploring the entrepreneurial space, reckons that rather than launching a new fund, Government would have enhanced the economy by immediately culling their drive to create cooperatives. Wessels says despite massive governmental funding and backstopping, less than 15% of cooperatives survive two years with only 2.4% indicating an increase in turnover and less than 0.5% recording increased profitability. Government and the public sector are both well aware of the failure, but the drive continues. It only recorded successes in two unforeseen fields:
- Setting a hitherto unknown standard for failure in an enterprise incubator programme (See Figure 1), and,
- Squandering not only billions of public sector money, but also the hopes of the poor.
The grotesque cooperative failure is unfortunately not a once-off side event that went wrong:
- Where are the sustainable jobs created through Ntsika, Khula, SEDA and SEFA?
- What is the percentage of GDP of all the loans and grants and hand-outs by the dti, the provincial governments and the provincial development agencies in pursuit of enterprise development?
- Where are the robust regional and local economic actors that came into being through the billions of rand wasted on ad hoc LED projects like a fraudulent wine producer in KZN, a steam rail travel project that never got on the tracks and Ace Magashule’s infamous Vrede dairy disaster to mention just a few?
- What are the returns for National Treasury in taxes as a % of state funds invested on the cumulative efforts aimed at “job creation”, “poverty reduction” and “enterprises empowering the previously disadvantaged”?
The announcement of a 50-50 Government-Private Sector fund is also a severe case of political Alzheimer: the 1994 ANC-led Government was not interested in continuing with (up to then probably the most successful public-private partnership) the Small Business Development Corporation. Government established Ntsika and Khula and the private sector reinvested their SBDC-capital in Business Partners. The latter is still financing through loans and equity positions a large number of successful small and medium sized businesses but the advisory services, grants and loans of Khula and Ntsika ended in shambles: the IDC had immense difficulties when the old loan books of various funding initiatives were rolled into a re-financed SEFA: there were no proper records for the vast majority of the loans.
To launch a new initiative whilst continuing with the 2012 – 2022 Cooperative Strategy simply doesn’t make policy sense, according to Wessels. The President’s announcement of the fund as part of a thrust “to reduce policy uncertainty and to shore up confidence in the government’s ability to deliver on its promise of boosting growth” thereby restoring investor confidence and avoiding a downgrade to junk status, therefore rings hollow.
Wessels says the creation of enterprises as a strategy to combat inequality, poverty and unemployment without understanding the world of enterprise may politely be interpreted as a well-intentioned but uninformed thrust. The Ignorance Hypothesis (often applied by development institutions) operates on the logic that if bad outcomes are the result of ignorance on the side of rulers and administrators, good policy advice and structured implementation strategies would be able to reverse matters and that all that was required was to convince the “well intentioned” rulers and their officials to embrace good economics and strategies.
Daron Acemoglu argues that the Ignorance Hypothesis can explain at best a small part of world inequality. The decades of failing development aid interventions, whether technical advice, sector development programs, budget support or any other form of development co-operation approach provide sufficient proof that the ignorance hypothesis is flawed.
In the South African context the Ignorance Hypothesis clearly did not apply to the visa chaos that had an immensely negative impact on the tourism industry: all the arguments that were eventually proven to be correct were on the table for Government at the time when they decided on the visa regulations and even the warning voice of Derek Hanekom as Minister for Tourism was not heeded. There was a deliberate choice to proceed regardless the consequences.
The same applies to the Cooperative drive: an EU funded report in 2011 already alerted to the misguided thrust and at least since 2010 the dti has been aware of the poor outcomes: but the throwing of money continues, deliberately.
Ignorance cannot explain the policy uncertainty that the President now alluded to as an issue that should be addressed. He himself is well documented as a cause for the policy uncertainty and a person who doesn’t believe in free trade and market forces as his comment last year in December demonstrates: “that definition – I rebelled against …that what determines the value of a commodity is the law of supply and demand. I define it differently, the value of a commodity. It is the necessary labour time, taking in the production of the commodity. That is what determines the value. I’m making these remarks deliberately because it’s important to understand ourselves fully.”
These examples prove Acemoglu’s conclusion is spot on for the South African situation when he stated: “Poor countries are poor because those who have power make choices that create poverty”.
Choosing a new vehicle to fund enterprise development without deliberately acknowledging the wastage in the cooperative drive and discarding it as fundamentally flawed and deliberately repudiating the economic gibberish uttered by the President will not reduce policy uncertainty.
The collapse in the demand for commodities has shown having iron ore and the ability to mine it is unprofitable unless there is a market for iron ore at the price higher than what it can be mined for. Despite that well known Kindergarten economic reality Government is pushing ahead with policies to create small black enterprises to the point of having created tens of thousands of registered cooperatives without considering whether there is a sustained demand for their products and services that are not already well served by the world of enterprise.
Wessels says Cooperatives, when formed voluntarily and pursuing objectives (based not on what can be produced but by consumer demand) and operating on sound business principles, may have a place in the world of enterprise. There are successful cooperative examples in the country that do not receive any public sector subsidy, grant or preferential treatment.
- Johannes Wessels, director at EOSA (Enterprise observatory of South Africa)
