Enterprise Development Initiatives Need a New Vision

Posted by Kevin Lester
Tuesday, 3 March 2009  |  3 comments
Kevin Lester is a BEE Specialist at Transcend Corporate Advisors
Read all of Kevin Lester's Posts

This is my first blog ever, and I’m all pent up with things to say, so you’ll find this offering a little long. But I have waited too long to get some of these issues off my chest.

I was thinking recently that when every political party is pontificating on how the future of Broad-Based Black Economic Empowerment is Enterprise Development and when every other company is chomping at the bit to create ever more beading or sewing collectives, spaza shops or car-wash businesses, isn’t it time we gave this idea of Enterprise Development some serious reconsideration?

I suspect that we have long lost sight of the differences between the objectives of Enterprise Development and Socio-Economic Development. Using the definitions contained in the Codes of Good Practice, the two concepts have very different definitions:

Enterprise Development Contributions consist of monetary or non-monetary, recoverable or non-recoverable contributions actually initiated and implemented in favour of beneficiary entities by a Measured Entity with the specific objective of assisting or accelerating the development, sustainability and ultimate financial and operational independence of that beneficiary. This is commonly accomplished through the expansion of those beneficiaries’ financial and/or operational capacity.

Socio-Economic Development Contributions consist of monetary or non-monetary contributions actually initiated and implemented in favour of beneficiaries by a Measured Entity with the specific objective of facilitating sustainable access to the economy for those beneficiaries.

There is in my view a vast difference between “facilitating sustainable access to the economy” and “assisting or accelerating the development, sustainability and ultimate financial and operational independence” of beneficiaries and a simple reading of the two definitions should be sufficient to eliminate the so-called “blurring” that my fellow BBBEE consultants are always on about. There is no blurring at all, the target beneficiaries of Socio-Economic Development are the economically marginalised whose access to the economy is blocked by unemployment, poverty, skills deficit and economic underdevelopment. The target beneficiary of Enterprise Development is a business entity (whether a startup or pre-existing) that requires assistance in order to establish its financial and operational independence.

Indeed, when we look more carefully at the two definitions, we soon see that the sustainability sought by the two initiatives differ significantly – Enterprise Development wants us to help build sustainable business entities, Socio-Economic Development is encouraging us to provide sustainable welfare substitution. So why can’t we claim our beading collective as a sustainable business entity? My view, for what its worth, is that beading collectives have marginal sustainability in a modern global economy, and unless our Enterprise Development aims to capacitate those collectives to become modern businesses with real access to genuine markets (not charitable NGO’s selling beaded flags of the South Africa), one should not pretend that one is actually creating genuine sustainable business.

I was talking to my friends Luanda Tlhotlhalemaje and Sizile Mabaso of SM Business Consultants recently. SM Business Consultants is one of the country’s most experienced Socio-Economic Development implementation consultancies. Sizile, who is no stranger to beading, sewing and craft initiatives, narrated a tale of woe, reflecting on how most such collectives she had ever encountered all had one terribly sad secret – a room filled to overflowing with unsold hand made crafts. Creating artificial and charitable markets may well help people to earn an income where they were previously destitute, but it will not create sustainable businesses.

Take your average Spaza Shop – we need to be proud and patriotic about how these entrepreneurs faced down the Apartheid bureaucracy to build their little businesses when business was near impossible in the townships, but the market has changed and the mega-retailers with their aggressive pricing strategies have set their sights on the township market – Spaza Shop’s just aren’t that competitive and sustainable in this new reality. And your car wash company’s long term sustainability is fixed to a point in time when Shell or BP or one of the other petroleum giants establish a full service-service station with an organised and volume-based car wash business in competition.

Yes, there may be a few “second economy” entrepreneurs who survive long enough to scale up to fight-off the encroachment of bigger businesses, but if we are really honest about this issue, teaching people to fish in a pond next to the Cape Town Fish Market serves only the limited purpose of keeping the fisherman and his/her family fed. Encroachment of the “first economy” onto the limited entrepreneurial space in the townships, inner cities and rural areas is real and we need to accept that as being part of life – and design our approach to Enterprise Development to take account of this.

My point then is not to dissuade anyone from helping establish the craft or micro businesses in the townships, inner cities or rural areas – no, in fact I really want to encourage that! But please lets be honest, the objective of Enterprise Development is to create something a little more substantial and enduring than these developmental micro-businesses or collectives. In my view, Enterprise Development is our opportunity to create chunky black owned businesses with real sustainability - plumbers, auditors, IT companies, franchise retailers, outdoor advertising businesses, security companies, yes even BEE consultants.

With all that off my chest, I thought I would share the following with readers. I was recently sent a copy of the Global Economic Monitor 2003 Uganda Report (apparently downloadable off the internet) by a client. It was a fascinating read! In particular, a section that dealt with “Opportunity and necessity entrepreneurship” grabbed my attention. To distinguish the concepts, the report contained the following paragraph:

GEM distinguishes between entrepreneurship motivated by a good business opportunity and entrepreneurship motivated by necessity – the absence of any other work opportunities. Other common expressions for this distinction are “push versus pull entrepreneurship” or “replication versus innovation entrepreneurship”

I liked those differentiations! Looking at Uganda, GEM found a Total Entrepreneurial Activity (“TEA”) of 29.2% of adults. But, the report continued, only 58% of that immensely high rate of entrepreneurial activity was opportunity based while the rest was necessity based. They provided a shocking statistic for South Africa with a TEA of 4.3% - and I ‘m willing to venture that the bulk of that shoddy performance is about “necessity entrepreneurship”.

Looking at the performance of all 31 countries listed in GEM’s comparative survey, it was striking to note just how awful South Africa’s TEA was – 22nd out of 31, with countries like Argentina, Brazil, Chile, Venezuela all beating us by a fairly long margin. Indeed, when GEM’s TEA data is combined with the IMF’s GDP (nominal) per capita, it is interesting to note that the bottom 9 countries in the GEM survey from a TEA rate perspective, had an average per capita GDP of around US$ 10,300.00 and an average TEA of 14.6% while the top 22 countries had a TEA of 6.6% but an average per capita GDP of around US$ 50,600.00. I am not much of statistician, so the split of the top 22 as opposed to the bottom 9 needs be explained. Elsewhere on the internet, I found this interesting bit of information:

Entrepreneurial activity declines as countries attain higher national income, reaching its lowest point at about US $30,000 per capita GDP. Beyond that level, TEA begins rising slowly and steadily as GDP continues to rise. For example, Uganda, Peru and Ecuador have high TEA rates but low national incomes whereas the United States and Iceland have both high TEA rates and high national incomes.
Source here.

So, I split the 31 countries in the GEM Uganda report between the 22 countries with GDP per capita of over US$ 30,000.00 and the 9 countries with less than that amount.

South Africa’s position in the lower 9 is made more untenable by the fact that only Croatia and Slovenia performed worse than we did on the TEA index in that lower segment, and that everyone of Venezuela, Chile, Brazil, Argentina, China and Uganda (in the same segment) outperformed us. By this time though, my statistically untrained mind was beginning to run away from me. I cant vouch for the correctness of my conclusion, but given that the top 22 countries had such a high average GDP per capita, very respectable GINI coefficients and fairly advanced welfare nets (in most cases), I am suggesting that their average TEA of 6.6% is unlikely to be include much by way of “necessity entrepreneurship”.

Hence, I would suggest that the 6.6% is the minimum of what we should be targeting for “opportunity based” entrepreneurship under BEE. If we hit this target, that would account for 1,9 million new sustainable black owned businesses and if we (very conservatively) assume that each of these could benefit some 15 employees and members of extended families of owners and employees, not to mention suppliers and service providers, we can sustainably change the lives of 28 million people (more 6 times our unemployment rate).

This amateur journey into the statistical heart of Enterprise Development behind me, this is my call to everyone engaged in implementing BEE and in particular, Enterprise Development - let’s get out of this overly-simplistic version of a developmental approach to economics –there is nothing wrong with creating or supporting viable and sustainable “first economy” businesses. In fact, it has greater long term benefit for the economy to chase the 1,9 million new “opportunity” entrepreneurs. Instead of creating another Spaza, why not get a black owned Spar or Pick ‘n Pay franchisee to take over a bunch of Spaza’s. Instead of yet another sewing collective, how about a few more Stoned Cherry fashion businesses. Let’s leave the welfare substitution schemes for the Socio-Economic Development element of the Code and get some real black entrepreneurial activity in our economy.

The metaphor needs updating – its not about feeding the fisherman, let’s dare to dream about teaching, helping and financing our fisherman to sell his fish in 9 provinces, export his product and supply Vilamoura and Woolworths. That would be something to get excited about.
 

© Copyright 2010. Transcend Corporate Advisors. All Rights Reserved. See our Linking Policy.