the south african construction micro enterprise development · pdf filethe south african...

CIB2007-160

The South African Construction Micro Enterprise Development Challenge

Dr Winston Shakantu and Kahilu Kajimo-Shakantu

Department of Construction Economics and Management, University of Cape Town

ABSTRACT The South African government in partnership with parastatal enterprises is driving a five year investment plan in energy, transport, civic and sports infrastructure. The total expenditure for the period 2005-2009 is estimated at R320-R400 billion. Given this rate of investment in infrastructure, evidence from the Bureau for Economic Research (BER) suggests, the construction and civil engineering sectors will be over-extended and will face significant capacity constraints. To keep costs from rising, South Africa would have to utilise latent capacity residing in micro-enterprises which remains largely untapped. This paper reports on the desk research findings of an investigation into ways of harnessing and developing construction micro-enterprises in order to resolve the capacity problem. The paper concludes that micro-enterprises are relatively underdeveloped; constrained by limited access and high cost of capital, inadequate demand and weak support programmes. There is need for improving the sector’s effectiveness through enhancement of entrepreneurship skills thereby supporting Construction for Development. KEYWORDS: Capacity constraints, Construction industry, Development challenge and Micro-enterprises. 1. INTRODUCTION The South African building and civil engineering sectors currently generate an output of about R100 billion a year which contributes about 17.9% to the national gross domestic product [GDP] (StatsSA, 2006). As a major client to the industry, the South African government accounts for about 50% of

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the industry’s demand (Gadebe, 2006). The government’s share of the building and civil engineering sectors’ demand is likely to increase in the next few years. This is due to a major programme of capital expenditure by government in partnership with parastatal enterprises estimated at around R320 - R400 billion for the period 2005-2009 (Cheetham and Mabuntana, 2006). The government’s five year investment plan in energy, transport, civic and sports infrastructure is being driven through the accelerated and shared growth initiative for South Africa [ASGISA] (DTI, 2006).

By investing in infrastructure, the government seeks to raise gross fixed capital formation (GFCF) contributed by the construction sector to 25% of gross domestic product (GDP), and through this, increase national economic growth from 4.5% between 2006 and 2009 to 6% between 2010 and 2014 (le Roux, 2005a; National Treasury, 2006). Clearly, this government expansionary fiscal framework has implications for the South African construction sector. The implication is that the construction sector is expected to double its output by 2010 to be in line with the growth initiative (Creamer, 2005). This rate of investment in infrastructure also implies that the building and civil engineering sectors ought to grow by 10% between 2006 and 2010 (le Roux, 2005a).

The government in partnership with parastatal enterprises have placed the construction sector at the centre of the economic development agenda. As an engine of economic development, investment in infrastructure is expected to induce more economic activity which in turn would induce more infrastructure spending. (Mohamed, 2005; Siddiqi, 2005). It improves the business environment for existing businesses and creates further opportunities for investment as it reduces transaction costs (Mohamed, 2005; Siddiqi 2005).

However, of concern is that at this rate of infrastructure and macro-economic expansion, the building and civil engineering sectors will be extended beyond their limits (CIDB, 2006). There is evidence from the Bureau for Economic Research to suggest that currently there are significant capacity constraints within the construction industry (CIDB, 2006). Against this background, it is contended that a significant increase in the number of large scale projects will result in a supply gap at the lower end of the market where most small municipal infrastructure projects are found (Creamer, 2005; Mowson, 2005). This lower end of the construction market consists of small medium and micro enterprises (SMMEs), particularly survivalists and micro enterprises (Hauptfleisch, et al., 2005) which are the focus of this paper. As one of the ASGISA set of interventions is to support and promote SMMEs [including black and women owned enterprises], the entry of small enterprises into the construction market gives credence to this intervention (Creamer, 2005). Notwithstanding government and parastatal sector increase in investment and the forecasted outstripping of project delivery capacity, this paper argues that there is latent capacity in SMMEs which can be harnessed to reduce the looming construction delivery gap. However, realising the

CIB World Building Congress 2007 1903

potential inherent in SMMEs calls for a concerted effort in developing their capacity. While SMMEs have potential to contribute to the sector’s delivery capacity, one of the challenges is that in practice, there is currently, a dearth of small and medium enterprises (SMEs). This suggests that the majority of enterprises in the SMME sector are micro enterprises. Arguably, this means that there is need for targeted support towards micro enterprises in order for them to be nurtured so they can systematically and sustainably grow. By so doing, micro enterprises can grow into tax paying enterprises that could also create more employment opportunities and thus make a meaningful contribution to economic growth.

Therefore, the objective of this paper is to report on the findings of a research investigating ways of harnessing and developing construction micro-enterprises in order to resolve the capacity problem. The paper is based on a review of literature. 2. THE SIGNIFICANCE OF PROMOTING CONSTRUCTION MICRO-

ENTERPRISES World over, SMMEs play an important role in any economy. The promotion of SMMEs is a crucial component of the South African government’s strategy to create employment opportunities, redistribute resources and foster economic growth. SMMEs provide a vehicle through which most of the underprivileged South Africans, who lack financial resources and skills, can typically gain access to economic opportunities (Gounden, 2000).

SMMEs encompass a wide range of firms, from established traditional family businesses employing up to 300 hundred people, down to self employed informal enterprises. SMME can be categorised into four (4) broad groups as shown in Table 1.1 below. Table 1.1 Categories of SMMEs Category Annual Average Turnover

(million Rand) Number of Employees

Survivalist Enterprises Variable but <1 <5 Micro Enterprises <1 1-5 Small Enterprises 1.1 -12 6-60 Medium 12.1 -60 61-300 Source: Adapted from Construction Transformation Charter, DTI, 2007

The majority of SMMEs, namely the micro enterprises, are concentrated at the very lowest end of scale. The South African Construction Industry 2004 Status Report gives support to this claim by reporting that the emerging contractors are entering the market at the lower end and in the general building contracting category (CIDB, 2004). Even at a provincial level for example, statistics from the CIDB website reflect this


trend in that of the 609 contractors registered in the Western Cape, 447 are in the lowest category of the general contractor division (1GB) (wwww.cidb.org.za). This constitutes 73% of the total contractors registered in the province. Contractors in 1GB can handle contracts of only up to two hundred thousand rand (R200, 000). From this, one would assume that most of the small municipal infrastructure projects mentioned earlier fall within this range.

Further, there are also opportunities for micro enterprises to be used as subcontractors by small, medium and even large firms. Siddiqi (2005) posits that micro enterprises are the potential engines of wealth creation, value re-orientation, job creation and poverty eradication in South Africa. This is particularly crucial for South Africa which is characterised by the legacy of big business dominance and huge unequal distribution of wealth (Gounden, 2000; Hirsch 2005). The economic and social rationales for promoting micro enterprises are also highlighted by Kesper (2000) who says that they are more labour intensive and perceived to have a high labour-absorptive capacity.

However, while it is recognised that micro enterprises have the potential to contribute to the socio-economic development of the country (le Roux, 2005b) the paper identifies several constraints to achieving the desired objectives. These are elaborated in Section 3. 3. FACTORS HINDERING MICRO ENTERPRISE DEVELOPMENT AND GROWTH The range of problems confronting micro enterprises is not different from those faced by SMMEs in general. The key constraints to micro enterprise development and growth include labour regulations, scarcity of skilled labour, restrictive environmental, business, trade and tax regulations, inadequate infrastructure, high tax rates and cost of capital, changing government policies, corruption, volatility of the rand, crime and theft and keen competition for limited opportunities (Bhorat et al., 2002). The impact of these constraints on construction micro-enterprise development varies. Four of the constraints that have a significant bearing are discussed below. 3.1 INSUFFICIENT OPPORTUNITIES Earlier in Section 2, it was highlighted that there are large numbers of emerging contractors (survivalist and micro enterprises) entering the general building work category at the lower end. Consequently, competition within this sector has increased tremendously leading to the difficulty, particularly for new entrants to keep a sustainable workflow. This inability to sustain workflow has a negative impact on enterprises’ ability to create sustainable employment and economic empowerment (CIDB, 2006).


Based on this, the authors concur with the view that if this state of affairs persists, the ASGISA objective of reducing unemployment by 50% by 2014 may not be achieved and thus will remain a prime concern for South Africa (Rebello, 2005; Cheetham and Mabuntana, 2006).

At present, with an unemployment rate of about 25.5%, job creation seems to be an elusive concept for economic planners despite good economic growth of about 4% per annum for the last few years. According to the global entrepreneurship monitor (GEM), the main reason job creation eludes economic planners is that micro and survivalist enterprises by definition, are unlikely to create significant numbers of jobs (Jewell et al., 2005; Von Broembsen, 2005). Moreover, there seems to be a mismatch between the policy objectives of promoting SMMEs as vehicles for poverty alleviation and that of touting them as employment generation agents within the expanded public works programme [EPWP] (Von Broembsen, 2005). This mismatch lies in that currently, SMME policies tend to focus on redistribution of wealth or poverty alleviation and not so much on training and education for small business owners in entrepreneurship. This apparent mismatch compromises the potential of SMMEs to create more jobs and to nurture the majority survivalist and micro-enterprises into profitable and sustainable SMEs (CIDB, 2006). Acknowledging this inherent characteristic of micro and survivalist enterprises, Von Broembsen (2005) proposes that in the short run, government should shift its focus away from SMME programmes that support the redistribution of wealth or poverty alleviation to those that develop entrepreneurial skills and create jobs. As Kajimo-Shakantu and Root (2006) also concur, the government’s priority should be to grow the economy so that it can expand and increase opportunities in which the majority of the South African population can participate. Kajimo-Shakantu and Root (2006) conclude that identification of factors in the construction sector which are crucial to enhancing economic growth is a critical success factor.

Job creation is one of the most effective sustainable strategies within the government SMME policy that has potential to alleviate poverty and reduce socio-economic inequality (Shakantu et al., 2006). Embarking on a policy shift that actively promotes job creation opportunities would be consistent with the objectives of the small enterprise development agency (SEDA), which are to provide increased support to small businesses by focusing on the promotion of entrepreneurs (Rebello, 2005). In addition, the typical structure of the construction sector characterized by a preponderance of small firms bodes well for the policy of promoting SMME entrepreneurs (Shakantu et al., 2006). Likewise, its labour intensive nature and low barriers to entry signify the sector’s potential for job/employment creation. 3.2 LIMITED ACCESS TO FINANCE


SMMEs generally suffer from lack of financial resources which impacts negatively on their ability to grow and develop particularly survivalist and micro enterprises. Shakantu et al. (2006) report that government’s targeted programmes for increasing access to finance have recorded only limited success because of low awareness and usage by the intended beneficiaries. The problems of insufficient access to finance are further compounded by high interest rates. In addition, Gounden (2000) reports that micro-enterprises have difficulties in accessing information, lack market exposure and are discriminated by financial institutions because they lack sufficient collateral.

Moreover posit Govender and Watermayer (2001), the requirement for a performance bond presents significant financial hurdles for micro enterprises. Also, because of their greater risk factor presented to sureties, micro enterprises are forced to obtain their performance bonds at significantly higher rates than well established enterprises. Even the changes to bond requirements such as reduction of bond amount to between 2.5% and 10% depending on the risk classification of a contract has barely reduced this problem (Govender and Watermeyer, 2001). This inadequacy of external finance deters potential micro enterprise growth and expansion (Nissanke, 2001). Therefore, while government has made some notable efforts to increase SMME’s accessibility to finance, by and large, the majority of SMMEs have very limited access. 3.3 PROHIBITIVE REGULATORY ENVIRONMENT Legislation is one of the external business environmental factors affecting performance of enterprises. Since coming to power in 1994, the democratic government of South Africa has enacted a significant amount of legislation and policies. Undoubtedly there is a cost associated with compliance. For micro enterprises the commonly perceived constraint are the labour laws which are said to raise the cost of employment, artificially prolong retrenchments or corrective action and do not allow for adequate flexibility especially in wage settings and the arrangement of working time (Kesper, 2000). Some of the Acts and their perceived negative impacts are given below:

• The Labour Relations Act (LRA): Act 66 of 1995 The LRA outlines rights and frameworks for collective bargaining and dispute resolution. Enterprises complain about bargaining councils not incorporating their interests and about cumbersome dispute resolution procedures (Kesper, 2000).

• The Basic Conditions of Employment Act (BCEA): Act 75 of 1997 The BCEA lays down basic working conditions of workers in enterprises. Micro enterprise owner managers indicate that wage


levels and maternity leave entitlements inhibit employment of young women and unskilled labour entrants (Bhorat et al., 2002).

• The Employment Equity Act (EEA): Act 55 of 1998 The EEA aims to prevent unfair discrimination by employers. Enterprises have problems identifying equitable representation in all occupational assignments. Moreover, it is difficult and expensive to source highly skilled candidates from some designated groups (Bhorat et al., 2002).

It follows that any change in the legislative framework disrupts the modus operandi of business. As a result of the provisions of the above Acts, enterprises feel a profit squeeze which also impacts on their willingness to create jobs. 3.4 SHORTAGE OF SKILLED PERSONNEL South Africa generally suffers from a skills shortage as a result of many years of systematic under-investment in human capital. Given its historical background, a large percentage of the population are either unskilled or have very limited skills. The current labour force in the construction sector has a highly skewed distribution of managerial and craft skills.

To address the skills imbalance, government enacted the Skills Development Act (SDA) of 1998 among other things. The aim of the SDA 1998 is to create the structures and framework for the national employment and skills development strategy (ESDS). The Act working in conjunction with the Human Resource Development Branch (HRDB) of the Department of Labour provides for the National Skills Fund (NSF) and construction education and training authority (CETA) via employers monthly skills development levies of 1% of their budgeted payrolls. However, micro enterprises express concern about the administration costs associated with recovering levies in the form of grants for training undertaken (Kesper, 2000).

Further, Kesper (2000) points out the cost of designing a workplace training programme in lieu of external training institutions and the relatively high charges by private training institutions after the closure of the former industrial training boards. The industrial training boards used to be subsidised through levies from industry. The current lack of management, entrepreneurial and craft skills in the sector, coupled with micro-enterprises’ reluctance to embrace the SDA, present barriers to growth and development. 4. ADDRESSING GROWTH CONSTRAINTS


So far, the paper has highlighted the potential that lies in micro-enterprises and constraints to realising that potential (growth and development). This section focuses on exploring some of the ways to address the identified micro-enterprise growth constraints in order to address the capacity challenges in the construction sector. 4.1 SOCIO-ECONOMIC CHALLENGES The South African government’s economic policies are making a positive impact on the economy that was in crisis prior to the 1990s. The South African Reserve Bank indicates that this period of expansion may continue for the foreseeable future. The GDP growth has recorded a steady increase of 2.7% in 2001 to 5.1% in the first quarter of 2007. Two selected economic indicators are shown in Table 1.2. Table 1.2: Selected South African Economic Indicators 2001 2002 2003 2004 2005 2006 2007 Real GDP Growth % 2.7 3.6 2.8 3.7 4.3 4.2 5.1 Unemployment % 29.5 30.5 28.2 26.2 25.3 26.7 25.5 Source: http://www.SouthAfrica.info Although continuous growth of an average of 3.5% has been achieved, it is not enough to keep up with the high levels of unemployment in the country. As Table 1.2 indicates, the unemployment level reached its highest in 2002 at 30.5% before reducing slightly to 25.5% in the first quarter of 2007. According to GSIC (2003), the level of unemployment has increased because many people are now seeking work.

The steady economic growth has thus not had the desired effect on poverty and unemployment reduction as many expected. As for government, its view is that to achieve the desired impact i.e. reducing unemployment to below 15% and halving the poverty rate to less than one sixth (1/6th ) of households, the key is to boost GDP growth to at least 6% per annum.

According to DTI (2006), over-coming the socio-economic challenges will require the economic integration of South Africa’s historically disadvantaged majority, sustained and strategic economic leadership from government and effective collaborations amongst stakeholders such as labour unions and the business community. Achieving socio-economic objectives requires that government create an enabling environment for business and opportunities for more labour intensive activities (DTI, 2006).

However, for government’s vision to become a reality, including achieving a sustainable economic growth of about 6% per annum, a number of imbalances need to be addressed. These include that backlogs in infrastructure and investment, lack of sufficient skilled professionals,


managers and artisans, the uneven quality of education, marked duality of a sophisticated financial and industrial economy having developed alongside an underdeveloped informal one and regulatory burden leading to mediocre performance of small and medium businesses are countered. As ASGISA initiatives focus on infrastructure delivery, they have three main implications for the construction industry which could counter some of the identified constraints. The first is building up small businesses to bridge the gap between the formal and informal economies. The second is ramping up of government and public enterprise investment expenditure for the period April 2005 and March 2008 to about R320 –R400 billion. The second initiative is supportive of the first in that as the large contractors’ order books and capacity become over-extended opportunities will open up for small business to enter the construction market. The third is the revamping of specific sectoral regulatory environments, which unnecessarily hamper the development of businesses (DTI, 2006; Creamer, 2005).

One of the key mechanisms that will be used to leverage the first economy to address the second is the increased levels of public investment expenditure to promote small businesses and address such issues as the review of the impact of regulations on labour-intensive sectors. Linking small businesses to opportunities deriving from the 2010 FIFA World Cup is another task for government (DTI, 2006). The construction industry has a number of characteristics which make it particularly attractive to promoting SMMEs. In addition, because the industry’s products are of a capital investment nature, it’s economically logical that the expansionary fiscal framework is aimed at increasing construction demand and in turn increase employment creation capacity (Rebello, 2005). 4.2 DEMAND AND SUPPLY-SIDE CHALLENGES The government through the Department of Public Works (DPW) and in collaboration with other stakeholders such as CIDB and CETA, has embarked on a variety of interventions to support micro-enterprises. The interventions are located on both the demand and supply sides. Some of the seemingly more relevant interventions include the following: 4.2.1 Preferential procurement Preferential procurement policies are one of government’s strategies to bring historically disadvantaged enterprises (HDEs) into the main stream economy. As a practice, preferential procurement entails giving preference to HDEs in the awarding of public sector contracts. In other words, the government uses its procurement capabilities as a leverage to purchase


goods and services from HDEs and through that promote some of its wider socio-economic objectives. Coincidentally, the majority of the HDEs are micro-enterprises as was highlighted in Section 2. Through preferential procurement large contracts are broken down into small packages in order to make them more accessible to SMMEs who would otherwise not be able to access them through the traditional procurement route. Preferential procurement thus aims at engaging existing and new SMMEs owned by historically disadvantaged persons (HDPs) while increasing income generation of marginalised sectors of society (Govender and Watermeyer, 2001).

Using preferential procurement, a number of programmes aimed at contractor development, such as emerging contractor development programme (ECDP), extended public works programme (EPWP) learnership programme and Department of Public Works (DPW) contractor incubator programme have been set up. These aim to stimulate access to markets and develop entrepreneurial skills of targeted beneficiaries through public sector construction contracts.

However, despite government’s perceived good intentions through preferential procurement there are a number of shortcomings that cloud this potential. These relate to poor targeting of beneficiaries, inadequate planning, onerous tender specifications to be met and poor monitoring and evaluation procedures (Manchindi and Harmond, 2002; CIDB, DPW, and CETA, 2005). Moreover, the work opportunities provided through preferential procurement are limited and the increased competition further erodes them. 4.2.2 Subcontracting As has been highlighted in the paper, many micro enterprises face problems of lack of market exposure or access to work opportunities. The government attempts to provide work opportunities through preferential procurement, but these are limited due to the large numbers of SMMEs. Given that not many SMMEs can access public sector contracts, subcontracting tends to provide a viable option for micro-enterprises to deal with product market problems. Besides, subcontracting is one of the ways that HDEs can participate in public sector procurement.

Subcontracting arrangements occur between micro-enterprises and medium and small enterprises or between micro enterprises and large firms. This could provide a route through which micro enterprises can develop business linkages and eventually enter the formal economic sector. Large firms undertaking big infrastructural contracts could assist micro enterprises by subcontracting out some of the work to them as the ASGISA investment initiative gains momentum. It is anticipated that sub-contracting will have a major impact on micro enterprises which largely remain underdeveloped (Siddiqi, 2005).


4.2.3 Access to finance and venture capital Business angel finance and venture capital are two initiatives that have been created as alternatives to bank finance for emerging micro enterprises with collateral or equity resources that are too low or unconventional to qualify for a bank loan. These initiatives have, to a limited extent, proved useful to bridging the gap of micro enterprise funding (Siddiqi, 2005).The Small Business Act 1996 created three institutions namely Ntsika Enterprise promotion Agency, Khula Investment Finance and National Small Business Council to provide management support, funding and lobbying respectively for the SMME sector. In addition, to-date government has provided substantial start up capital to support small businesses. This has mainly been achieved through the DTI and its various agencies such as Ntsika and Industrial Development Corporation [IDC] (DTI, 2003). 4.2.4 Education and Skills development To be able to execute the ASGISA investment initiative properly, the growing skills gap needs to be addressed. In this vein, education and training policies need to be tailored towards improving labour employability, productivity and flexibility. Current training initiatives seem inadequate to deal with the magnitude of the skills problem. In addition, existing training initiatives tend to be focussed on addressing the skills problems of the already employed rather than equipping the unemployed with skills. The reasoning is that providing skills to the unemployed would potentially increase their employability. Thus, there is need to focus more resources on enhancing employability (Belt and Richardson, 2005). Government has directed resources towards education and skills development and set up Sectoral Education Training Authorities (SETAs) for each sector of the economy financed by the skills levy on the payroll. However, SETAs have been slow in meeting their objectives and employers slow in taking advantage of them (GSIC, 2003). 5. CONCLUSIONS In order to meet the demand and growth targets arising from the government and parastatals’ investment in infrastructure, the construction industry will have to double its output. To be able to do so, the industry will need more skilled workers. Therefore ensuring that there is sufficient skilled labour in the construction industry is imperative. Promotion of micro enterprises through targeted programmes can assist in this regard.


However programmes such as the preferential/affirmative procurement policies have had some limited success in achieving their objectives because they have only limited entrepreneurial training components. Entrepreneurial training and provision of finance should be the focus of the programmes for development of SMMEs. Doing this might make it plausible to harness the potential of SMMEs to improve construction competitiveness and infrastructure delivery in addition to the creation of jobs and consequent alleviation of poverty. 6. REFERENCES Belt, V. and Richardson, R, 2005, Social labour, employability and social exclusion: Pre-employment training for call centre work; Urban Studies 42, (2), 257 – 270. Bhorat, H., Lundall, P., and Rospabe, S, 2002, The South African labour market in a globalising world:Economic and legislative considerations.

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Stellenbosch, 8- 10 October, 2006. Siddiqi, M, 2005, Africa attracts growing global capital. Investment. Africa Review of Business and Technology, December 2004/January 2005; pp. 14-17. ISSN 0954 6782 StatsSA, 2006, Labour Force Survey, March 2006; available online at http://www.statssa.gov.za/Publications/P0210/P0210March2006.pdf Von Broembsen, M, 2005, Small business can create a lot of work; Sunday Times Comment, March 26, pp.6. Www.cidb.org.za, accessed 14th February, 2007 Www.SouthAfrica.info. (website) accessed 14th February, 2007.


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