Forget Africa’s demographic dividend. If we don’t find a way to enable sustainable economic growth that creates lots of jobs, we have a demographic time bomb on our hands.
The figures tell it all: Africa is expected to account for more than half of global population growth until 20501 and its youth population will double by 2050, reaching 830 million.2
Many of these predominantly young people will battle to find work. More than half of South Africa’s youth are expected to remain unemployed, the highest in sub-Saharan Africa; in the rest of the region, the trend is expected to be downwards.3 Overall, South Africa’s jobless rate remains high at 26.7%.4
There’s consensus that the best solution is to grow the SME sector. This makes sense because already it is estimated that SMEs account for 95% of all businesses in Africa and they are therefore the biggest source of jobs. Globally, it is estimated that SMEs contribute 50% of jobs and more than 35% of GDP, and Africa is thought to be very much in line with these figures.5 Certainly, in South Africa, 35% of GDP is contributed by SMEs, with a target of 60-80% over the next 10-15 years.6
Also a plus: the huge majority of South African SMEs is black-owned: 92% of microenterprises and 82% of small businesses.7 By growing this sector, government can potentially achieve empowerment targets as well as provide desperately needed jobs.
Not surprisingly, the SME sector is currently the beneficiary of a growing torrent of money, advice and other sorts of help from government agencies, NGOs and the private sector.
All well and good. These youth development funds, incubators and other SME support schemes do good work. But all these well-intentioned initiatives are failing to address the one thing that SMEs need if they are to grow and employ more people: a stable client base.
It’s not about the corporates
A key problem is that policymakers and donors see things through corporate glasses. Too much emphasis is placed on forcing corporates and government projects to employ SMEs. Great idea on paper, but in practice it does not work so well. Large projects have punishing deadlines and hefty financial penalties. Corporates, if they are honest, see inexperienced, poorly capitalised operators who need constant hand-holding as a risk, an unpalatable cost of doing business.
Worst case: the SMEs employed on a big project to meet contractual or other requirements are often sidelined because they are just too much trouble. The contractor essentially pays twice, and the SME fails to get the valuable experience that would make it a better business.
And, frankly, we should not blame the corporates. Shareholders and citizens alike are the ones who suffer when big projects run late or experience quality problems. But, at the same time, we need to recognise that corporates can help and want to: a growing economy and low unemployment are very much on their agendas, just not at the expense of their businesses.
The same kind of dynamic, by the way, plays out with interns. Graduates focus on getting internships with corporates but end up learning little. Certainly, the corporate gets little value. Graduate interns would actually learn much more by working for an SME, and the SME would certainly benefit.
Another misconception is that access to funding is an SME’s primary need. Make no mistake, funding is critical but there are already many, many funding schemes. However, many of them focus on high-growth SMEs that offer investors potential returns in exchange for shares, whereas most SMEs are not looking for shareholders so much as operating capital.
In reality, the one thing that prevents an SME from obtaining funding in the normal way, from a bank, is a lack of clients and thus of cash flow.
Like calls to like
Those clients should ideally be other SMEs. An SME has a built-in advantage in servicing another SME. They are much more likely to speak the same language (in every sense), and will fit together better in terms of capacity and process maturity. The chances of building a lasting business relationship are good.
By contrast, any SME attempting to service a large corporate finds itself at an immediate disadvantage: it has to fit in with the corporate’s often onerous process and governance requirements, and it will have to tamely submit to its payment terms. A corporate-size order will often break an inexperienced SME.
Thus, while big jobs with corporates or government are nice, these really are not the foundations for a successful small business in the majority of cases. SMEs should be looking for their core client base amongst their peers – which makes sense as SMEs make up the majority of the economy across the continent.
Clients – the right clients – are what SMEs need to be successful. But our extensive experience across Africa is that while there is an abundance of SMEs run by good people, it is very hard to locate them. What you are looking for is probably there, but how do you locate it? It’s bad enough in Joburg, but in the rest of Africa it is really beyond challenging.
So yes, incubators can help SMEs get up and running, and access to first-round funding is critical. Corporates, NGOs and government can play a role as funders, clients and providers of information. But if we truly believe that SMEs are the engines for job creation and economic growth, then we have to look at their needs through their eyes, not through corporate eyes.
What SMEs really need, in short, is an ecosystem designed for their realities.
BOX:
Getting SMEs what they need
Based on our many years of experience in this space across Africa, and as investors, the following need to be put in place to create an SME-supportive ecosystem for the continent – and the world. SMEs lack time and capacity, so what they need is an easy way to access clients and everything else:
· Provide SMEs with a way to find clients and/ or suppliers within their peer group, and create lasting links.
· Provide corporates with a way to locate SMEs that could supply them with non-critical products and services. Examples would be running a coffee shop, refurbishing office furniture or running an event.
· Provide corporates with a way to identify innovators with an idea that could improve its brand image and could ultimately benefit its bottom line – and incubate that SME within the corporate organisational structure.
· Provide a way for SMEs to access all the educational, funding and other opportunities that governments and NGOs offer – in one place.
· Provide a way for SMEs and recent graduates to hook up. Interns get more hands-on experience, the SME gets a smart person to help
SOURCES
1 United Nations figures, available at www.un.org/en/sections/issues-depth/population.
2 International Labour Organisation figures, available at www.ilo.org/addisababa/media-centre/pr/WCMS_514566/lang--en/index.htm.
3 International Labour Organisation figures, available at www.ilo.org/addisababa/media-centre/pr/WCMS_514566/lang--en/index.htm.
4 Trading Economics figures for Q1/ 2018, available at https://tradingeconomics.com/south-africa/unemployment-rate.
5 Sokhna Ndaye, The rise of SMEs in sub-Saharan Africa, International Development Journal (20 May 2017), available at https://idjournal.co.uk/2017/05/20/africa-needs-smes.
6 Natasha Odendaal, Number of South African SMMEs growing, Engineering News, (26 June 2017), available at www.engineeringnews.co.za/article/number-of-south-african-smmes-growing-2017-06-26.
7 Natasha Odendaal, Number of South African SMMEs growing, Engineering News, (26 June 2017), available at www.engineeringnews.co.za/article/number-of-south-african-smmes-growing-2017-06-26.
York Zucchi and Anke Schaffranek are seasoned investors and passionate advocates of Africa business. They are part of the group setting up a global ecosystem for SMEs, www.smemovement.org.
