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Are some governments killing small businesses by not paying?

8th November 2021

Everyone says we need thriving small and medium enterprises (SMEs) to reduce unemployment, but not everyone puts their intentions into practice. Management scholar Chris Argyris used the term “espoused theory” for what we think explains our behaviour and “theory-in-use” for what actually guides what we do. Government’s espoused theory supports SMEs, but its theory-in-use often seems to lead in another direction in practice.

As part of a series on creating a supportive ecosystem for SMEs, this column looks at the role of government. I have never been in government, so do not fully appreciate the undoubted constraints under which government operates, but there are some low hanging fruits that are quite doable.

One is to pay SMEs on time. [South Africa’s] National Development Plan provides for SMEs to contribute 60%-80% to GDP (according to the IFC it’s currently at 34% of GDP) and generates 90% of the 11-million new jobs wanted by 2030. Yet in practice, government at all levels is killing many of the small businesses that do exist through persistently delayed payments.

One person who was doing a great job in the private provision of housing left, “because my job became one of perpetually nagging (mainly) provincial housing departments to pay our contractors on time, otherwise, they could not repay the loans, their work on-site stopped as they had no cash flow, interest accrued and soon there was not enough value left in the project to complete it.”

Back in 2019 then small business development minister Khumbudzo Ntshavheni said that invoices older than 30 days worth R6.5bn had not been paid by provincial departments for the 2018/2019 financial year, including R2.6bn in Gauteng and R2.1bn in the Eastern Cape. It’s no better in 2021. So the government is very aware of the problem and has apparently been committed to solving it for years. Yet it remains. The 30-day payment period has been government policy since Thabo Mbeki was president.

So why does the government not pay on time? Problems persisting year after year usually indicate that obvious solutions fail to address the root causes. I can’t believe that this sustained lack of payment just represents a lack of ability – government departments have the capacity to pay on presentation of invoices. Some SMEs lack the capacity to create invoices that meet government requirements, but that can be remedied with a bit of initiative by anyone who wants to see SMEs paid. So there must be perverse incentives at work, rewarding officials for not paying invoices on time.

Maybe there is a lack of consequences for failing to pay on time. Corruption comes into it, either directly (pay me if you want your invoice settled on time) or indirectly (diverted payments to cronies reduce what’s left to pay legitimate invoices). The auditor-general does report that cash flow problems from over-spending leads to delayed payments. Processes for authorising payment may be complex and non-payment always seems to be someone else’s problem.

This clearly suggests a failure of management. Managers are meant to anticipate, identify and solve this kind of challenge, even when elements lie outside my job description. Managers should be evaluated not just on what they do, but on the results for which they are responsible – like invoices being paid on time at a middle manager level and, at the top level, SMEs thriving.

Payment of invoices is just one example of how government administration supports or hinders small businesses. Others include the procedures, time and cost to open a business, obtain permits, register property, enforce contracts, pay taxes, trade across borders, use electricity, and so on. These represent operational management. Next time, I’ll look at what government might do at the level of leadership to make a friendly ecosystem for small businesses.

 

Jonathan Cook is a counselling psychologist and chairman of the African Management Institute. He is also the host of AMI’s weekly Rise reflection series focused on supporting you in your business and your personal wellness.

This article was originally published on BusinessLive on 25th October 2021 and is republished with permission.


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