Axing of finance minister – SMEs in SA to lose big

South African small businesses are likely to lose more than they gain from President Jacob Zuma’s axing of Finance Minister Nhlanhla Nene.

While Nene’s axing will likely hasten South Africa’s economic slide – with the currency hitting R15.29 on the news of his firing on Wednesday – it could also open the door for a significant amount of state spending to be channelled to small businesses.

The National Treasury has long been against set-asides (see this earlier post). Telling is that it has held off issuing a practice note to effect Zuma’s announcement in February that the government would source 30% of state procurement from small businesses.

The Minister of Small Business Development Lindiwe Zulu said in May that a practice note was intended to be issued by The Treasury by September this year, but nothing has yet been released.

The National Treasury had conceded to set-asides, but wanted to put certain checks and balances in place. Nene’s sacking could open the door to untrammelled state spending on small and black-owned firms.

Middlemen cometh

Though this may be good news for small businesses, the likely consequence will be an increase in thousands of middlemen who win contracts – on the basis that they are small or black-owned firms. Rather than produce these directly, they will source the necessary goods or services from larger firms or import cheaper products from China or elsewhere.

One need only look at the disputed deal for the country’s state-owned airline SAA, reportedly behind Nene’s sacking.

The deal, masterminded by the airline’s chairwoman and ally of Zuma, envisaged SAA buying Airbus airplanes and selling them onto a group of black financiers (a black empowerment company) which would then lease the planes back to SAA.

Expect to see more such deals going to dubious individuals who lean on the state and dub themselves “entrepreneurs”.

Disastrous move

Set-asides – along with a new move by Zuma’s administration to bankroll black industrialists (see this earlier post) will probably prove disastrous for the country.

These two policy moves alone risk propelling corruption and wasted spending to new heights in South Africa, leading it to a similar mess that Brazil now finds itself in.

Sadly as graft speeds up and the economy goes into a tailspin, small businesses will be the first to close their doors. Ironically the majority will be struggling black-owned firms, the very constituency Zuma says he wants to assist in the first place.

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This article by Stephen Timm originally appeared on Small Business Insight, a Burn Media publishing partner.