EMPLOYMENT- CREATION THROUGH SMEs IN SUB-SAHARAN AFRICA: EMERGING INSIGHTS AND CHALLENGES FROM BOTSWANA

Thando D. Gwebu Department of Environmental ScienceUniversity of BotswanaP.B.0022 GaboroneBotswanaPh. 2673552519E-mail gwebutd@mopipi.ub.bw

ABSTRACT

1

Central governments in Sub-Sahara Africa have been failing to cope with the worsening unemployment and employability crisis over the last three decades. However, a number of spontaneous attempts are being made by their citizens to provide home- grown solutions to the problem. This study is a SWOT analysis on the current need for and challenges to employment- creation, outside the formal sector on the Africa subcontinent, using Botswana as a case study. It is demonstrated that opportunities do exist for promoting small and micro enterprises. However, threats in the form of local structural and globalization factors, need to be addressed in order to facilitate the success of such efforts.

Keywords: Botswana, Employment, Small and Micro enterprises, Human Development

2

1.0 INTRODUCTION

Most Sub-Saharan Africa economies are currently either stagnant or experiencing negative growth rates. For a majority of them, economic growth rates continue to lag behind rates of population increase. The causes stem both from internal factors such as poor economic management, civil strife, rapid population growth and environmental hazards; and external ones associated with low Foreign Direct Investment (FDI),globalization and structural adjustment programs. Small and micro enterprises (SMEs) have assumed a significant role in galvanizing the self-help efforts of the marginalized and vulnerable groups such as the unemployed youth, female- headed households, and the disabled in both urban and rural areas to meet their basic needs. Unfortunately, most governments have either ignored, harassed or grudgingly tolerated this crucial economic sector. Globalization and increasing competition also continue to accentuate the volatility of the environment in which SMEs operate. They require better quality standards, access to inputs and markets. The risks surrounding these prerequisites combine to threaten the production, productivity and long term viability of the small and micro enterprises.

Economically, Botswana has emerged as a global success story, with a sustained annual economic growth rate of over 5 percent. In terms of the Human Development Index, it ranks higher than almost all the African countries, in spite of the high prevalence of the HIV/AIDS scourge. Because of an honest bureaucracy and political stability, Transparency International ranks it among the least corrupt countries in the world. However, Botswana is having to address HIV/AIDS, income inequalities and unemployment in order to meet its national development goals and vision for a healthy, just and productive society (Government of Botswana 1999).

One of the most prominent national strategies for realizing income redistribution and social justice is through its support for small and micro-scale enterprises (SMEs). The Government of Botswana appreciates the importance of this sector in meeting the national development objectives of rapid economic growth, social justice, economic independence and sustainable development. Such recognition is a bold step indeed for a nation whose citizens have always depended on formal sector employment and government support in times of natural crises such as periodic droughts. In response to the high costs associated with the AIDS scourge, central government is increasingly emphasizing cost recovery and self reliance in its provisioning of opportunities for economic growth.

This brief paper is a desk analysis on the current SMEs experiences in Botswana. It is divided into six main sections. After this introduction ,the significance of SMEs for employment creation on the African sub-continent is assessed. The national socio-demographic and macroeconomic context is then presented. Thirdly, the national, regional and international institutional environment within which Botswana’s SMEs operate is discussed. Then the configuration

3

of SMEs describes their characteristics. Fifth, a situational analysis of the strengths, weaknesses, opportunities and threats to SMEs towards employment creation is made before concluding the study.

2.0 SIGNIFICANCE OF SMEs TO EMPLOYMENT CREATION IN AFRICA

Since independence, most sub-Saharan African countries have experienced slower economic relative to population growth. Most of this growth derives from primary activities and urban industrialization. Whilst urbanization promotes secularization, modernization and agglomeration economies ; it has generated in its wake a shortage of social services, environmental degradation, unemployment and misemployment. In response to globalization, secularization and modernization; innovations have diffused from the modern towns and cities to the most tradition-bound peripheries of the national space economies, through trade, the mass media, formal and informal education. The rural areas are overpopulated and offer very limited employment opportunities. The result has been the education of the youth “out of” the rural milieu, by preparing them for blue and white collar urban employment . The youth and the uneducated are consequently forced to relocate to the enclaves of modern economic and commercial activities, particularly the main metropolitan areas, in search of better socioeconomic opportunities, further fuelling the dilemma of over-urbanization.

The employment profile of sub-Saharan African has been dominated by the government sector, commercial enterprises, and capital- intensive manufacturing industry (United Nations Development Report 1997:Table 16). Between the 1960s and 1990s the labour force in the service sector doubled from 12% to 25%. Structural factors such as unfair pricing and other market distortions continue to work against the agricultural sector whose labour force share declined from 81% to 66%. Furthermore, the apparent changes in climate within the tropics has made arable agriculture, the most labour- absorptive rural activity, to become a very risky enterprise even for the traditional farmers. Industrial employment share grew at a sluggish pace, from 7% to 9%, due to high capital-labour ratios, lack of spare parts to service machinery, and plant underutilization due to their inefficiency and competition from trade liberalization.

Since the 1980s, the modern sector, in tropical Africa, has become subjected to economic streamlining, prescribed by international structural adjustment regulations. Moreover, the hostile global economic order has caused protectionism of foreign markets, high debt service ratios and negative balance of trade. Globalized competition continues to either place numerous workers on the continent at risk of exclusion from formal sector employment or segregation into low paying and insecure segments of the labour market.

The above scenario therefore strongly suggests that the emergence of the informal and quasi-formal sectors is a rational response to the unfolding socioeconomic crisis facing Africa. The sectors are ideal for those skilled

4

workers who have been retrenched from formal sector employment, apart from providing apprenticeship to both the illiterate adults and young school-leavers with no skills to sell in the labour market.

An ILO Report prepared for the 1997 International Labour Conference estimated that 61% of the African labour force, outside agriculture, was now employed in micro-enterprises (ILO 1997).The ILO World Employment Report of 1998-99 noted that the lack of jobs in the formal sector of the economy as well as the lack of skills among a large part of the labour force has resulted in the growth of a substantial informal sector in which most workers are engaged in low-paid employment, under unregulated and poor working conditions. Very small enterprises are defined by the Organization for Economic Cooperation and Development (OECD) as having less than 20 employees, while small enterprises engage between 20 and 99 employees. According to the ILO Report, among the different categories in the informal sector, small and micro enterprises represent the economically stronger and more dynamic element. The growth of SMMEs portrays aspects of economic and commercial changes such as the declining importance of centralized mass production, and the growth of the service sector which can be accommodated by their flexibility and specialization. Part of the sector is connected to the formal sector, through subcontracting arrangements. Santos has conceptualized these linkages and itemized some of the key elements of flexibility which make the informal sector strategic for creating employment in developing countries (Santos 1979:22).

The ILO has initiated various programmes to help improve the formulation of employment policies and to facilitate the creation of small and micro-enterprises throughout the continent. Such programmes, conceived within the framework of the UN system-wide Special Initiative on Africa, seek to ensure that employment generation is given central importance in national macroeconomic policies and that smaller enterprises realize their job creation potential. Mary Chinery - Hesse, ILO Deputy Director-General for Development and Technical Cooperation has observed that, in southeast Asia, with the right types of policies and institutional support, the informal sector can expand and develop to generate large numbers of productive and remunerative jobs from those micro-enterprises and self-employment activities which have strong production and marketing linkages with the formal sector (ILO/96/7).Case studies on the significance of this sector has also been noted in Thailand where, for example, micro and small scale enterprises served as a major employer for the unemployed during the Asian economic crisis of the late 1990s (Dickhoven, Bucherieder 2000).

Wallace shares these views and affirms that SME enterprise development has been considered key to economic development throughout the so-called Third World for several decades (www.sbaer.uca.edu/research/1999 ). He remarks that, with unemployment ranging from 25 to 45 percent in most developing countries,” self-employment” and micro-enterprise development is seen by many donor agencies as the only way to reach the” poorest of the poor” who feel that without strong private enterprises, in the form of SMEs, Third World countries cannot hope to enter international trading systems.

5

Donor agencies see SME development as central to social and economic development, on a continent plagued by exceedingly high levels of unemployment and poverty.

Although SMEs are regarded as fundamental to employment generation, innovation, and improved standards of living; serious challenges continue to confront the business ventures. These include the unfavourable regulatory environment in which they operate such as complicated registration/licensing procedures (Janssen, Sedaca 2000), restrictive zoning, crippling sales taxes, complex company laws; lack of marketing and management skills including record- keeping, inventory control and tendering procedures, negative customer relations ( Rwigima, Kerunju 1999);weak backward and forward linkages (Havers 1999); and precarious support financing (Manu 1998). There is moreover an overall need for them to develop a culture of entrepreneurship (Nnadozie 2000). In spite of the ongoing efforts to promote this since the early 1970s (Van Rensburg 1974), the school system has continued to nurture the development of an employee rather than a self-employment culture. The concept of education with production therefore needs to be assimilated and internalized to promote entrepreneurship among school pupils. A recent study on the service, trade, manufacturing and construction industries in Botswana, for example, revealed that most of the enterprises that had such problems mentioned labour deficiency features including laziness of workers, theft and frequent absconding from work (Dithato 2003).

3.0 THE NATIONAL SOCIO-DEMOGRAPHIC AND MACROECONOMIC CONTEXT

The Republic of Botswana has a population of 1.68 million and an annual natural growth rate of 2.7%, in spite of the HIV/AIDS pandemic (Sanderson, Hellmuth, Strzepek 2001). Only 3.5% is over 65 years of age. 40% of the population is below 15 years of age. Because of the youthfulness of the population, the momentum for future growth remains relatively high, in spite of an apparent decline in fertility.

6

The broad occupational profile of Botswana between 1960 and 1990 indicates that the agricultural labour force dropped precipitously from 93% to 46% (United Nations Development report 1997:Table 16). Today this sector contributes barely 4 percent to the GNP. The labour force employed in the Services sector expanded by close to 85 percent between 1960 and 1990.This has been closely linked with the mercurial expansion of government services, domestic services and the commercial sector. During the 1994/95 financial year, Government, Finance, Business and Business Services, and Trade contributed close to 44 % of the GNP (ROB,NDP8:2). Industrial labourers increased ten fold between 1960 and 1990.This could have been due to mining, the establishment of the Botswana Meat Commission and the opening up of the Hyundai Motor assembly plant. By the mid-1990s, the employment profile of Botswana by sector was Government (46%),Commerce (39%),and Manufacturing (15%) (Botswana Atlas 2001:279).

Sanderson and others have reported that in spite of the HIV/AIDS scourge, Botswana has been experiencing exceptional economic growth. Over the last decade, economic growth (adjusted for inflation) has averaged 5.5 % per year and there is no suggestion of a near-term economic collapse (Sanderson, Hellmuth, Strzepen 2001). During 2000/01 the economy registered a growth rate of 9.2%, compared to 8.2% in 1999/00. Real GDP growth was expected to average 6.5% during National Development Plan 8, an improvement over the original plan forecast of 5.2%. The international sovereign rating company Standards & Poor (S&P) has affirmed its long and short-term local currency rating of A+ and A- respectively on Botswana. S&P emphasized that Botswana’s ratings continue to be underpinned by its balance sheet strength, prudent economic policies and a stable political environment. Looking ahead, Botswana’s stable market-friendly environment, sound macro-economic policies, and investment in education and infrastructure should help attract the investment needed to secure medium term real GDP growth of 3-4% says the press release from the Bank of Botswana.

It is however undeniable that this impressive economic growth record cannot be sustained indefinitely because of the HIV/AIDS scourge (BIDPA 2000). S&P has cautioned that the HIV/AIDS crisis could require extra health and social spending of 3-4% of GDP annually. With nearly 30% of the adult population estimated to be infected by HIV/AIDS, cases continue to rise sharply, and will increasingly affect GDP growth, domestic savings, and public finance negatively over this decade. Gross Domestic Product is projected to be 24-38% less than it would be without HIV and AIDS in 2021. Also, in spite of rapid economic growth, 36% of the population currently lives below the poverty datum line although this was a significant improvement compared to the poverty levels of 47% in 1993/94 and 59% in 1985/86 (UNDP 1998 ) .

7

4.0 THE CONFIGURATION OF SMMEs IN BOTSWANA 4.1 Types and Distribution of Units

There continues to be uncertainty over the numbers of units and the significance of the SMME sector to the national economy. Dithato, referring to the recent study , however claims that SMMEs are the country’s largest employer (Dithato 2003:11). It has been estimated that SMMEs account for 50% of private sector employment and 15-20% of national GDP (http;//www.bidpa.bw/Bbrief3.PDP).

Self employment has increased steadily from 3.1% in 1981 to 7.5% in 1991 and 9.6% in 2001 (CSO 1987,1995,2001).It has been estimated that there are 56 000 small, medium and micro enterprises (SMMEs) in Botswana (Briscoe 1998), which employ about 125 000 persons. Recent BIDPA estimates of employment in Botswana, by type, suggest the following breakdown ;Government (36%),Large firms (32%) and SMMEs (32%) (http;//www.bidpa.bw/Bbrief3.PDP). Employment contribution by the various SMMEs sub-categories are ; Micro (14%), Small (14%) and Medium (4%).The Citizen Entrepreneurial Development Agency (CEDA) approved 1042 loan applications valued at P581 million for SMMEs by September 2003 which was expected to create 7000 jobs. In terms of sectoral distribution, 45% of the projects were in the service sector, 28% in retailing,7% in agriculture,12% in manufacturing, and 8% in property development.

The SMME Policy Task Force of Botswana has categorized the entrepreneurial entities as micro, small and medium, mainly on the basis of their of their labour force size and annual turnover (ROB 1998: 9-10). The smallest units are micro enterprises which employ one or two persons, including the owner, with an annual turnover of less than P60 000. About 50 000 of these operate in Botswana. Functionally, 65% of micro enterprises are involved in trading whereas 25% are small scale manufacturers.Close to 70% of these are located in the rural areas and about three quarters of them are owned by women. Most lack formal registration and operate from residential premises.

Small scale enterprises, on the other hand employ about 6 paid employees, including the owner, and have an annual turnover of between P60 000 and P1.5 million. Some 6 000 such enterprises are operational in the country. They span a broader occupational spectrum compared with the micro-enterprises. 40% operate in the service sector, 20% in manufacturing, 16% in retailing, 10% in transport, 8% in agriculture and 6% in construction. Close to 80% are urban-based.

About 300 medium-sized enterprises are found in Botswana. These units employ less than 100 paid employees each and have an annual turnover ranging between P1.5 million and P5 million. Most are involved in manufacturing. According to Task Force findings, a majority of these have no particular need for government assistance.From the preceding discussion,it is apparent that SMEs constitute the most important national employment

8

base. Also, it is the SMEs which seem to be confronted by many operational hurdles. This subsector will therefore be the focus of this analysis.

4.2 Human and Capital Resource Base

SMEs employ single youthful persons below 25 years of age. Proprietors have low levels of education, at most five years of primary schooling. This implies that most operate on the basis of informal and self-learnt skills. Working hours are longer for less wages relative to the formal sector. The wage differential between the two sectors is as high as 58% (Anand, Sunny 1993).

Apart from taxi-drivers, formal institutions play an insignificant role, compared with formal apprenticeships and family tradition, in providing potential entrepreneurs with the requisite start-up training. Such training would shorten the learning curve and significantly improve prospects for business survival.

SMEs depend mainly on internal financing for both initial investment and capital expansion. For instance 51% of them rely on owner savings for initial investment whereas 41% relied on loans from relatives and friends. Similar figures have been noted for capital expansion programmes (Anand 1993).Government Financial Assistance Policy (FAP) took the form of a grant to support feasibility studies, subsidize their wage bill and provide free basic skills training. In spite of this, only 1.3% of the SMEs availed themselves of this facility. For their part, commercial banks and non-bank financial institutions are reluctant to lend money to SMEs mainly because:

they give them low credit rating since they lack appropriate business skill and experience;

they regard them as a high cost risk; and they concentrate on lending for short term and overdraft financing rather than for projects with a long gestation period in order to realize better profits.

Non-bank financial institutions were established strictly to meet needs other than those pertaining to SMEs. For example, the National Development Bank was established to cater for the farming sector whereas Building Societies are designed to finance the construction of residential and commercial properties.

The new SMME policy is intended to establish a micro credit scheme for providing small loans and a credit guarantee fund to assist SMME access to bank credit by providing partial loan guarantees. Entrepreneurs are also expected to benefit from help provided for the preparation of funding applications to financial institutions.

9

4.3 Capacity Utilization

There exists a large discrepancy between the fixed costs and variable costs incurred by SMEs. Fixed overhead costs account for 77% of the total costs whereas direct/variable costs account for the remaining 23% (Anand, 1993). This wide disparity implies excess capacity or under utilization. SMEs therefore appear to neither optimize their production levels nor their employment generation efforts.

5.0 INSTITUTIONAL ENVIRONMENT FOR SMEs OPERATIONS IN BOTSWANA

Both the Central Government and the private sector have been instrumental in initiating programs designed to promote small and micro enterprises. This section will consider the national, regional and international institutional environment within which SMEs operate.

5.1 Local level institutions

The first Government approach towards the creation of an indigenous cadre of entrepreneurs was the Botswana Enterprise Development Programme, operated by the Botswana Enterprise Development Unit (BEDU).Set up in 1974, it was meant to provide integrated support for citizen entrepreneurship development. Perhaps the most important limitation of BEDU was that it became too paternalistic to the extent that a dependency syndrome on the Government developed (Dewah 1995). Subsequently, the Integrated Field Service unit(IFS) was established in 1987 to support the initiatives of entrepreneurial cadre. It sought to merge three extension service units that used to operate more or less independently. These were the Botswana Enterprises Development Programme, the Rural Industrialization Programme (RIP) and the Business Advisory Service (BAS).

IFS aims at increasing both the number and scale of manufacturing enterprises throughout Botswana by providing assistance to prospective as well as existing entrepreneurs who want to expand their businesses. Its main strategy for promoting the development of SMEs consists of training programs designed to improve the management and production skills of entrepreneurs. Management skills courses include record-keeping, costing, business planning, marketing, buying and stock control. Production related courses are provided by IFS technical staff. They include metal work, carpentry, garment manufacturing, pottery, leather work and concrete products. Its construction unit trains small citizen contractors in construction, management, estimating and tendering.

10

IFS works in partnership with parastatals and the private sector. The Rural Industries Innovation Centre (RIIC) of Rural Industries Productions, a parastatal organization of the Ministry of Commerce and Industry, cooperates with IFS in promoting small industrial ventures in Botswana. For example it operates a Village Artisans Training programme in carpentry, skin-tanning, blacksmithing and wire mesh production. The Food Technology Research Services which collaborates with the Botswana Technology Centre is another such parastatal . It is primarily concerned with the development of food processing enterprises in Botswana. IFS also employs the services of some private sector entrepreneurs to impart some knowledge and skills to SMEs. These are expected to offer subsidised short courses relevant to entrepreneurship and business training.

Government provides premises and equipment to assist set-up SMEs. Such premises include factory shells and workshops equipped with machinery. Such support seems to subsidize the SMEs because such premises and equipment would be too expensive for them. Unfortunately SMEs eventually become reluctant to vacate such premises because they are cheaper than the rented premises. Another problem is that workshops are not easily accessible to all the potential users.

In the past Government used to provide financial assistance to the entrepreneurs who either wished to go into business or expand their enterprises, through the Financial Assistance Policy (FAP). Unfortunately such grants have not always been optimally utilized for productive investment but for the purchase of conspicuous consumption non-durable goods. Also, such grants and micro-credit schemes, while seemingly helpful to the beneficiaries, make the ventures permanently dependent upon subsidies and undermine their long-term sustainability.

Finally, the Government attempts to encourage citizen involvement in Business though a Reservation Policy in areas such as the manufacture of school uniforms, protective clothing, school furniture, burglar bars, cement bricks and sorghum milling. Although this may prima facie be assumed to promote citizen empowerment, it represent a serious distortion on market forces which will be analysed later.

Government has now instituted a Small Business Act to raise the profile of SMMEs and provide a legal framework for its support services. The Act will also establish an autonomous advisory body, the Small Business Council, supported by the Small Business Agency, to oversee the development of the SMME sector. The latter will need staff with right training, experience and business management attitudes to be effective.

It is in the national development context that central government has established the SMME policy which is aimed at: creating an enabling environment within which SMMEs will flourish and

grow; providing an integrated approach to SMME development which ensures

cohesion and linkages between the various programmes;

11

ensuring that the SMME policy is implemented effectively and assessed against measurable objectives; and

discouraging dependency upon Government.The most important objectives of the SMME Policy include: fostering citizen entrepreneurship and empowerment; achieving economic diversification; promotion of exports by small and medium enterprises; development of an efficient competitive and sustainable SMME

community; creation of sustainable employment opportunities, development of

vertical and horizontal linkages between SMMEs and primary industries in agriculture, mining and tourism; and

improved efficiency in the delivery of services to businesses.

The private sector is involved in assisting SME development.The Botswana Confederation of Commerce, Industry and Manpower (BOCCIM), which has extended its functions to include the promotion of Small Business Divisions, was originally formed to spearhead the aspirations and address special problems of SMEs. BOCCIM runs a two-pronged outreach business extension and the Botswana Management Assistance Programme (B-MAP). Between 1991 and 1993 BOCCIM managed to train, with support from USAID, 2373 small business owners in such fields as productivity improvement , bookkeeping and accounting , computing, marketing and sales promotion, personnel management, taxation, business record keeping, and responding to tenders.

The Small Enterprise Promotion Trust (SEPROT) is an association of agencies providing support to micro, small and medium enterprises (SMMEs). It exists to lobby and advocate for the interests of SMMEs. It also builds an integrated agency network in sharing information on small business development. SEPROT was formed in 1993 as a member organisation with representation of Government, Non- Government and private sector institutions involved in the development and promotion of micro, small and medium enterprises in Botswana. Its mission is to "strengthen capacity through information exchange and co-operative action to provide quality service to SMME's".

5.2 Regional level institutions

The Small Enterprise Promotion Advisory Council SEPAC was established in November 1996, at a conference in Gaborone as a multi-country support agency in the Southern Africa Development Community SADC. Membership consists of delegates from SADC countries, representing governments (ministries or parastatals), private sector (chambers of commerce or business associations), and NGOs providing business services.   The objectives of SEPAC, are to:

Facilitate the exchange of information on SME promotion between SADC countries;

12

Act as a reference/advisory body for the SADC Secretariat in matters relating to SME promotion; Promote capacity building of institutions in the SADC region concerned with SME promotion; Facilitate other activities in support of SME development (as e.g. research).

Small enterprises can benefit from SEPAC's support in many different areas: Access to information, advice and mentors relevant for business decisions; Access to finance at reasonable conditions; Access to modern technology and IT; Access to markets, export opportunities and public procurement; Physical infrastructure facilities related to informal markets, light industrial parks, and incubators;  Streamlined regulations and legal controls; Specific sector support; and Improved access to business networking and lobbying.

Currently, SEPAC is in the process of transforming itself from an advisory council to an implementing SADC Agency that will incorporate best practices into its management activities and serve as a regional voice for SMMEs.

5.3 International level institutions

At the international level,the Southern Africa Global Competitiveness Hub or more commonly called the TRADE Hub supports governments, public,and private sector associations, and businesses in their efforts to improve the efficiency of regional markets, be more competitive in global markets, and to increase exports.(Vodraska 2003).The U.S.Africa Growth and Opportunity Act (AGOA) has created unprecedented opportunities for expanded exports to U.S. markets.

In 2002,duty free exports from Southern Africa to the US under AGOA were $1.9 billion.

The African Growth and Opportunity Act is intended to prime the development of the apparel

industries. The largest number of jobs have been created in the textile and apparel sector

as a result of AGOA. In 2002,AGOA exports from Botswana increased almostfour-fold over the previous year, driven by an increase in apparel exports.

The TradeHub is facilitating AGOA business linkages. For example, it developed a

program with the International Cotton Council to introduce US buyers of apparel to Botswana manufacturers. This included factory visits to communicate buyer

expectations

13

as well as to provide recommendations on quality and productivity improvements.

It has assisted local businesses with market research, US buyer identification, and export

investment services. In other words, the TRADE Hub provides assistance to get goods

and services to market by establishing standards, creating and promoting business

linkages, and facilitating trade. Its competitiveness strategy will also strive to mitigate

the impact of HIV/AIDS on profitability, productivity and markets for goods and services

for governments, private sector associations and business development service providers

to develop methodologies to implement their economic growth strategies.

Botswana and the European Union (EU) have identified and agreed on about P218 million development programme aid, under the Indicative Programme (IP) (Mmegi Business Week,vol 20,10,1). The IP is part of the Cotonou Agreement between the African Caribbean and Pacific countries and the EU for the 2002-2007 period. An additional 52 million Euro (about P291 million) is also available for use in cases of emergencies as well as to cushion Botswana against export earning fluctuations, should the need arise.

6.0 A SITUATIONAL ANALYSIS OF SMEs IN BOTSWANA

6.1 Survival Rate

Unfortunately, little is known about the conditions under which SMME projects succeed or fail. There has been little systematic collection of data on new entrants in each category of enterprises, their survival and growth, numbers of business failures and job creation potential. Available evidence nonetheless shows that a majority of SME’s in Botswana are of recent origin because most are less than 10 years old (Briscoe 1993, Daniels and Fisseha 1992).There seems to be a high failure rate among start-up businesses. 80-85% of enterprises disappear within five years of start up (ROB 1998:4 ). A substantial proportion of micro-enterprises however neither disappear nor grow. They survive because the proprietors have no alternative or other potential source of income. It has been estimated that although many small business owners try to expand, only about 2% actually succeed in significantly expanding their business, beyond the typical very marginal existence (ROB 1998: 11), to the extent of progressing from micro to small scale entities.

6.2 Human and Capital Resource Base

A University of Botswana recent study, conducted by the Economics Department, mentions low productivity due to lack of skills, non-repayment of debts, lack of finance, competition from large firm or foreign chain stores, low demand for products, lack of storage facilities, and costly utilities such as

14

water, electricity and phone charges (Dithato 2003:11). Although physical infrastructure are well developed to minimize transaction costs, the prices of utilities such as electricity and telecommunications tend to be high .

In an earlier survey of SMMEs, sectoral variations in success factors were observed among them (Duncombe,Heeks 2003). The need for finance was regarded as 'critical' or 'very important' by 88% of non-exporting manufacturers, compared with 30% of service-based enterprises and 26% of manufacturing exporters. For the service-based enterprises, the three commonly- stated critical success factors were increasing the volume of sales, increasing the skill level of the workforce, and making improvements in the marketing of services. For manufacturing exporters, increasing skill levels was considered the number one critical factor, and increasing sales through entering new export markets was the second critical factor for success.

A range of priority factors, shown in Figure 1, has been deemed most critical for the business success of SMEs (Duncombe,Heeks 2001).

Source: Duncombe and Heeks (2001)

Access to skills, markets and finance are seen as the key factors for SMME success in Botswana. They are self, or family financed and obtain their skills training through informal apprenticeships or the family tradition. One notable exception are taxi drivers who have to attend driving schools. Lack of financial resources is usually viewed as a major problem facing SMMEs. Evidence from consultations conducted in 1998 and from other earlier empirical studies indicated lack of finance as the greatest constraint reported by SMMEs. Daniels and Fisseha (1992) found that 53% of the micro

15

and small business proprietors cited lack of finance as a start-up constraint and 24% of those facing expansion problems attributed this to lack of finance.A study by Rempel etal. on micro-enterprises, reported that 74% of business owners cited lack of finance as the greatest constraint to business development. Specific aspects of this constraint included lack of information on source of finance (35%), inadequate capital (20%), security (14%) and complicated lending procedures (10%). Several reasons may account for why SMEs shun external finance, particularly from banking and non-banking institutions. These include (Babikayisa , Anand 1993):

lack of collateral; lengthy formalized screening and appraisal of prospective

applicants; requirement for prefeasibility studies to establish the viability of

projects; mandatory maintenance of books and accounts; repayment obligations, regardless of performance of the project; high handling and interest rates which make external funds

expensive; and and lack of awareness of the existence of such schemes.

Accessing finance has been a major problem. Applicants for finance from banks will henceforth be assisted by government.The Citizen Entrepreneurial Development Agency (CEDA) is also increasingly playing a pivotal role in providing finance for SMEs. The major complaints from SMEs are, however, that the project proposal preparation procedures, demanded by CEDA, are too complicated for the expected beneficiaries. These need to be simplified. Secondly, there is poor monitoring of projects due a shortage of human resources. This underscores the need to involve the private sector when such programmes in order to ensure their cost-effectiveness. Thirdly, training for the entrepreneurship portfolio must be broadened to include business units in the productive sector. Currently, applications have been skewed in favour of the service sector. As a result there has been a suspension of applications in the trucking, general dealership and supermarket businesses. Alternatively, the commercial sector could focus on other lucrative sub-sectors such as eco-tourism,etho-tourism and urban agriculture in which few Batswana are involved.

It has been noted that a perceived lack of finance was mostly a symptom of other problems such as poor management or a lack of entrepreneurial skills. Respondents most often stated poor existing management skills, lack of access to improved management skills, the inability to acquire and retain skilled workers, and the lack of access to skills training as their most significant constraints. The main constraint to SMME growth is lack of entrepreneurial and management skills and experience, compounded by problems in accessing finance, restrictive regulations and a shortage of business premises (http;//www.bidpa.bw/Bbrief3.PDP).

Although attempts have been made to improve skills by Integrated Field Services, the process has traditionally been too generalized and supply-driven and sometimes delivered by ill-qualified people in inappropriate top-

16

down teaching styles, with insufficient awareness of cost control and/or the need to encourage trainee commitment and follow up to apply on the job what is learned .However, recently there appears to be a realization that there should be a shift towards demand-led, market-oriented training programmes. The overall inculcation of an entrepreneurial culture, in the context of the Revised National Policy on Education,should assist in the provision of requisite skills for business acumen. Hopefully central government will increasingly play the role of facilitator and allow more active involvement of NGOs and the private sector to independently impart business management skills in such key areas as strategy planning, marketing and financial management.

The biggest threat to the human resource base is HIV/AIDS. Although the government has invested in social capital in terms of health, education and nutrition, with particular emphasis on primary education and preventive healthcare, there are however serious challenges such as the impact of the AIDS epidemic on the economically active population. Fortunately, in its competitiveness strategy, the Trade Hub will strive to

mitigate theimpact of HIV/AIDS on profitability, productivity and markets for goods and

servicesof governments, private sector associations and business development

service providersto develop strategies to implement their economic growth strategies. Also

Botswana is at the forefront of implementing programmes to reverse the impacts of this

pandemic.However, real progress will only come when there is genuine behaviour

change.

6.2 Linkage Effects

Locally, most SMEs supply their goods and services directly to individual and household consumers, rather than to manufacturers (Daniels and Fisseha 1993). In this way, they have a strong output non-production link but weak production linkage. Conversely, SMEs source their inputs directly from intermediaries and government agencies. Procurement policies discriminate against smaller firms e.g. only large firms can supply large orders and can afford the payment of security bonds.This indicates that SMEs have a strong backward production linkage but a weak non-production link with the rest of the economy (Anand , Babikanyisa 1993).

Daniels and Fisseha found that forward linkage effects had a significant effect on the growth rate of respective SMEs. Those selling to the final consumer experienced an average annual growth rate of 8% whereas those selling to other firms showed average growth rates of 25%. This differential tends to underscore the important role of inter industrial linkages for SMEs growth. SMEs are unable to compete with larger companies either in supplying goods to the public or in meeting Government tenders. Marketing constraints could

17

be due to; lack of transportation, inadequate facilities, lack of advertisement, complicated marketing procedures, locational difficulties and stiff competition (Anand 1993).

Regionally, SEPROT and SEPAC are increasingly facilitating SME linkages. BEDIA is at the forefront of attempting to establish and strengthen global linkages; based on an openness to trade, investment, technology and ideas, low trade barriers, and by encouraging exports through a realistic exchange rate. The role of the Southern Africa Global Competitiveness Hub has also been mentioned.Formal Trade Agreements such as AGOA and the Cotonou protocol are strengthening linkages with markets in the developed countries.

There is still a broad scope for the private commercial entities to act as “brokers” to buy inputs or sell outputs from The SME sector. According to Wallace, such brokers have become major market players through activities, which are sometimes designed to offer “fair “ conditions, including prices, to producers in Africa who export to industrialized nations (Ibid.). Such business linkage interventions through subcontracting, franchising, and business clusters could help overcome the commercial isolation of African SMEs.

Biggs and his colleagues at the World Bank studied how European and North American firms in garments and handicraft home products developed commercial linkages with African firms (1996). Of special promise are linkages between North American firms in the handicrafts and “Afro-centric” garment sectors (Biggs etal. 1994).According to Wallace,firms such as J.C.Penney,Montgomery Ward,K.Mart.and Dayton Hudson,have been especially active in “Afrocentric” garments imported from Africa since 1992(Ibid).Companies such as Pier 1 and Associated Merchandise Corporation have been active in importing African Handicrafts for several decades. Their performance provides strong evidence that African firms can compete in the industries that developing countries traditionally use to break into global trade.

Four areas however still need to be addressed if they are to reach their full potential. First, attention needs to be paid to pioneering buyers, especially through commercial attaché sections of embassies. Most agencies ignore these key linkages where maximum leverage could be attained in improving export performance. Second, the biggest barrier is the difficulty and high costs that buyers face in identifying reliable suppliers of garments and handicrafts. The focus should be on reducing these search costs for importers. Third, stable economic and political environments are prime concerns for buyers. Finally, agents must take a long term view of business linkages because once an African firm enters the export market, it can quickly be swamped by international demand. Botswana needs to pay particular attention to the last issue, by improving the supply side of the process, in its attempt to strengthen linkages with competitive external markets.

6.3 Enabling Environment

18

The political and economic climate in Botswana is ideal for SME development because the country has a democratic and stable economy, prudent financial discipline and management and low inflation. There exists a regulatory framework which guarantees legal and property rights which facilitate the enforcement of contracts .Prices and markets provide clear signals to producers and consumers.

There have, however, been inherent biases against SMEs development due to the absence of clear government policies which govern this sector. Like most states in the Southern African sub-region, the country has, until very recently, lacked clear Government policies aimed at creating an enabling environment in terms of clearly defined SMME development objectives and the required institutional mechanisms to guide and implement such policies. What has been characteristic is a proliferation, complexity and rigidity of Government laws and regulations which often impeded the development of SMEs. Such an excessively regulated environment has either imposed unnecessary costs on them or forced them to operate illegally. In this context, abolition of licence requirements for hawkers and vendors, the discontinuation of sales tax for businesses with a turnover of less than P75 000, and the introducing a simplified form of incorporation for small companies are welcome developments. Start-up business often find the process of registration time-consuming and burdensome, and small businesses, in particular, have limited administrative resources to deal with these procedures. Many countries in Asia and Latin America have brought about reforms to make the registration procedures of these enterprises much simpler. Botswana could draw useful lessons from their experiences

Judicious deregulation and legal relaxation ,subject to health and environmental considerations , could go a long way towards creating a suitable climate for SMEs to flourish. In the sub-region, it is becoming clear that of zoning regulations that prohibit SMEs from operating in residential areas are unnecessary and allowing vendors and hawkers to operate in public areas permits them to have ready access to their customers. Slow space allocation procedures have often forced proprietors to squat. Therefore developments to carter for their land requirements such as those at the Broadhurst Mall are steps in the right direction.

The economic environment for SMMEs tends to be less competitive because of Botswana’s Reservation Policy. The Government attempts to encourage citizen involvement in entrepreneurship through a such a policy in areas such as the manufacture of school uniforms, protective clothing, school furniture, burglar bars, cement bricks and sorghum milling. Although politically expedient, the practice will preclude individuals from elsewhere who could otherwise enter the sector and generate the much needed jobs. The practice distorts the market processes by reducing competition and leading to higher prices and less choice among consumers. It also has a tendency of restricting the market for potential buyers into the reserved activities thus lowering value of such businesses. Finally, it encourages “fronting”, a corrupt practice by which the foreigners who are excluded from

19

participating in reserved activities, but have the requisite capital, bribe the locals to register and operate the units on their behalf.Ideally joint ventures would create a situation in which there is joint transfer of skill and capital to up-coming local entrepreneurs.

Government has indicated its willingness to provide a facilitating environment rather than being paternalistic. Such a removal of the invisible overprotective hand, through privatization, will go a long way towards promoting an entrepreneurial culture and the establishment of cost-effective and efficient business units.

7.0 CONCLUSIONS

The paper has examined the significance of SMEs for employment creation on the African sub-continent, using Botswana as a case study. Although the sector provides an attractive option towards creating jobs and improving livelihoods among the economically vulnerable, the study has shown that there are threats and weaknesses to be overcome before sustainability can be assured.

There are several compelling reasons why self-employment in the form of SMEs is of crucial importance to national development. Diversion of funds from productive sectors by central government to the social sectors is inevitable, due to the HIV/AIDS threat. First, in the case of Botswana, expenditure on health and social welfare is set to increase by 7- 18%. Government revenue will, as a result, shrink by 10%. The implications are that free government handouts will no longer be affordable because of more urgent health demands.National development strategies which promote income redistribution effects need government, donor, private sector and non-governmental support.

Secondly, the declining competitiveness of Botswana in the rapidly globalizing world has been undermining investor confidence. Indications are that in the mid- 1990s, Botswana was ranked the 23rd most attractive economy for investment, by 2002 it has slipped precipitously to 123rd

position. Therefore, most of the country’s economic growth will have to be endogenously generated. Thirdly, apart from the fact that minerals, which earn most of the foreign currency, are a finite resource; the sector remains susceptible to price fluctuations in the international market. Moreover, mining is capital intensive and thus has relatively weak linkages with the rest of the economy. Mining cannot therefore generate adequate employment to carter for the growing labour force. Formal sector employment is growing at only about 1.5% annually whilst the labour force is expanding at over twice that rate. The official unemployment rate has remained almost stagnant since the mid-1990s, fluctuating between 20% and 24%.

Fifth, for economic and political reasons, South Africa has been trying to restrict the Migratory Labour System (MLS) from neighboring countries in order to stabilize its local mining workforce by offering better working

20

conditions in terms of wages, housing, career advancement and longer contracts. Consequently, the number of seasoned mine labour recruits from Botswana dropped from 40 390 in 1976 to 19 648 in 1986 and the proportion of novices among all recruits declined from 25 percent in 1976 to only 1.6% in 1985 (Taylor 1990). South Africa is attempting to address its own unemployment situation. 4.2 million people out of a possible economically active population of 14.32 million are unemployed (Republic of South Africa,1996:48). This means that South Africa’s unemployment figure stands at 32%.The growth of its labour force is about 2.8% per annum. An average real economic growth rate of approximately 6% per annum will be required to keep pace with labour force growth. A growth rate of only 3.2% was expected for 2000 . This was well below the required sustainable rate.Under such conditions, Botswana labour should expect increasing exclusion from the South African market.

Finally, self employment creates a culture of self-reliance, self-determination and economic independence among the population and curbs the dependency syndrome on the state. The enterprises are predominantly owned by citizens and therefore ensure economic empowerment of nationals. It is the most certain way ensuring income redistribution and social justice. The sector is the main source from which future entrepreneurial and managerial skills are likely to emerge.

REFERENCESAnand, V. K. 1993 Basic Characteristics of the Micro-enterprises in Rempel (ed.) The Empowerment Role of Micro-enterprises in Botswana: A Study of Selected Urban and-Semi-urban Areas. Gaborone. University of Botswana.

Babikanyisa, V. 1993 Ownership Patterns of MSEs in Rempel (ed.) The Employment Role of Micro-enterprises in Botswana: A Study of Selected Urban and Semi-urban Areas.Gaborone. University of Botswana.

Babikanyisa, V. 1993 Financial Dimensions of the SMEs in Rempel (ed.) The Employment Role of Micro-enterprises in Botswana: A Study of Selected Urban and Semi-urban Areas. Gaborone.University of Botswana.

Biggs, T.;Moody, G.L.;Leeuwen, J.and White, E.D. 1994 Africa Can Compete:Opportunities and Challenges for Garments and Products in the US Markets.World Bank Discussion Paper 242.Washington D.C.,World Bank.

Otto, C.; Miller, M. and Biggs, T. 1996 Africa Can Compete: Export Opportunities and Challenges for Garments and Home Products in the European Markets. Washington DC. World Bank.

Briscoe, A. 1998 The SMME Policy Task Force in Botswana. Gaborone.Fredrich Ebert Stiftung.

Central Statistics Office 1987 1981 Census Dissemination Seminar.Gaborone.Ministry of Finance and Development Planning.

21

Central Statistics Office 1995 1991 Census Dissemination Seminar. Gaborone.Ministry of Finance and Development Planning. Central Statistics Office 2003 2001 Census Dissemination Seminar. Gaborone. Ministry of Finance and Development Planning.

Daniel, L. and Fisseha, Y. 1992 Micro and Small Scale Enterprises in Botswana: Results of a Nation-wide Survey. Gaborone. Gemini Technical Report.46. MFDP and USAID.

Dewah, E. M. 1995 Private Sector Promotion of SMEs in Botswana. Briscoe A. (ed.) The Promotion of Small and Micro-Enterprises in Southern Africa. Gaborone. Fredrich Ebert Stiftung .

Dickhoven, K.P.and Bucherieder, G. 2000 self-employment of micro and small enterprises in northern Thailand After the Asian crisis. Savings and Development 26 2 117-132.

Dithato, D. 2003 SMMEs Hindered by Problems. Mmegi 20,10, 11.

Duncombe, R.and Heeks, R.2001  Information and Communication Technologies and Small Enterprise in Africa Lessons from Botswana. Botswana Institute for Development Policy Analysis / Institute for Development Policy and Management , University of Manchester

Government of Botswana 1999 A Framework for a Long Term Vision for Botswana. Gaborone.Government Printer. Haver, M. 1999 Microenterprise and Small Business Leasing-Lessons from Pakistan. Small Enterprises Development 10 ,3,44-51.

ILO 1997 General Conditions to Stimulate Job Creation in Small and Medium-sized Enterprises. Geneva.International Labour Organization.

Jansson, T.and Sedaca, S. 2000 Formalizing Small Business: The Case of Colombia. Small Enterprise Development 11,3,4-15.

Manu, G. 1998 Enterprise Development in Africa –Strategies for Impact and Growth .Small Enterprise Development 9,4, 4-13. Mayer, W.and Kayira, G.K. 1997 Addressing Unemployment Problems Through Expanding Labour-based Public Works Programmes. Gaborone. Friedrich Ebert Stiftung .

Nnadozie, E. 2000 African indigenous entrepreneurship Determinants of Resurgence and Growth of Igbo Enterpreneurship During the post-Biafra Period. Journal of African Business 3,1,49-80.

22

Republic of Botswana 1998 Policy on Small Medium and Micro-enterprises. Gaborone. Ministry of Commerce and Industry.

Republic of Botswana 1998 Policy on Small Medium and Micro-enterprises. Gaborone.Task Force Report.

Republic of Botswana 1997 National Development Plan 8 1997/98-2002/03. Gaborone. Ministry of Finance and Development Planning. Republic of South Africa 1996 October Household Survey 1995.Pretoria:Central Statistical Office.

Rwigima, H.and Kerunju, P. 1999 SMME development in Johannesburg’s Southern Metropolitan Local Councils: An Assessment Study. Development Southern Africa 16,1 107-124.

Sanderson, W.C.;Hellmuth, M.E.and Strzepek, K.M. 2001 Botswana’s Future;Modelling Population and Sustainable Development Challenges in the Era of HIV/AIDS. Laxenberg –Austria.International Institute For Applied Systems Analysis.

Santos, M. 1979 The Shared Space. London.Methuen

Sibanda, S. S. 1995 Government Promotion of SMEs in Botswana. Briscoe, A. (ed.) The Promotion of Small and Micro-Enterprises in Southern Africa. Gaborone. Fredrich Ebert Stiftung.

Sunny, G. 1993 The Linkage Effects of MSEs. in Rempel (ed.) The Employment Role of Micro-enterprises in Botswana: A Study of Selected Urban and semi-urban Areas. Gaborone. University of Botswana.

Taylor, J. 1990 The Migration Element in the 1981 Botswana Census.Botswana Notes and Records,17 89-91.

UNDP 1997 Botswana Human Development Report. Gaborone.TA Publications. Van Rensburg , P. 1974 Report from Swaneng Hill: Education and Employment in an African Country. Stockholm. Almquist and Wiksell.

Vodraska, A. 2003 Trade Between the United States and Botswana. Gaborone. American Business Council Breakfast for Senator Frist CODEL.

23