Dysfunctional municipalities, an overabundance of bureaucratic red tape and deferred payments from the public sector are serving to undermine the ability of entrepreneurial ventures to flourish, industry body Small Business Institute (SBI) CEO John Dludlu has said.

Without an environment to support small- to medium-sized enterprises (SMEs), South Africa has little hope of developing a growing economy that can sustain employment, he said at the SBI SME Indaba, on October 17, in Johannesburg.

To support the expansion of South Africa's economy and generate enough jobs to reverse the unemployment crisis, he said that about 39 000 new SMEs must be born each year. However, the severe dysfunctionality of municipalities continues to have a significant negative impact on SME growth and development, which falls far short of the numbers.

To determine the true costs of municipal dysfunctionality on SMEs and the informal sector, the SBI, with the support of insurance company Hollard, conducted a research report, which was unveiled at the event.

Enterprise and supplier development company Mtiya Dynamics founder and director Dr Thami Mazwai, who contributed to the report, explained that the study sought to empirically test the impact of municipal dysfunctionality on the SME and informal sector.

He asserted that SMEs have maintained their resilience in the face of a deteriorating crisis in service delivery that compromises the State's entire organisational framework. Nevertheless, despite their tenacity, Mazwai said the SME and informal sector is not geared to readily absorb the exorbitant costs of municipal service delivery failures.

According to the report, the most significant business concerns are the unreliable delivery of municipal services, the lack of adequate municipal support for business development, and the difficulty in locating reasonably priced and suitable commercial or retail space. The findings demonstrate that people are aware of the prerequisites for business licensing and permits and that the costs associated with obtaining some licences and permits are prohibitive.

One in ten respondents, according to Mazwai, claimed that they had in the past paid a person with connections to the municipality to obtain a business permit or trading permit.

The findings indicate that only a small fraction of SMEs actually submitted bids for any available municipal tenders. Mazwai told Engineering News that there was a widespread belief among the surveyed businesses that municipalities favour certain companies and that tenders are awarded corruptly.

"It appears that despair has set in regarding the functionality of municipal business support systems. There are very low levels of satisfaction with regard to municipal service delivery to businesses," he said, noting that these low levels of satisfaction were related to dealing with municipal officials in terms of their availability to deal with queries and requests, approachability, politeness and courtesy, honesty, information sharing, and remedies for mistakes. 

"The needle has not moved significantly in the last ten years. More needs to be done to improve municipal service delivery to the SME sector," Mazwai lamented.

Speaking to delegates at the event, he stated that stronger measures were needed to protect local government administrations from political interference, rent-seeking, and expediency, all of which affect service delivery to the broader community, but particularly to SMEs and informal businesses.

He stated that it was critical to accelerate the implementation of a District Development Model and to include business not only as consultative partners, but also as implementing partners. Municipalities should be reduced in number and integrated into viable service delivery units.

"There is too much politics in the municipalities. That is my concern. Municipal administrations should be relatively insulated from undue political contestation and interference, but this is not the case," Mazwai said, noting that the National Development Plan echoed these sentiments.

He stated that a capable State, at the municipal level, necessitated accountability and a sense of integrity, with accountability enforced through consequence management.

However, Mazwai noted that communities were increasingly incensed by what was perceived as a lack of consequence management within municipalities. While fruitless and wasteful expenditure, corruption, and fraud were rampant, there seemed to be very few that were held accountable for these governance failures which did not inspire confidence in the system.

He also stated that municipalities should be required to conduct economic impact assessments on all policies, bylaws, and regulations, as well as to simplify and standardise business permitting requirements and processes for SMEs and the informal sector. Further, they should conduct regular awareness campaigns of business regulations and processes, including through social media.

Importantly, Mazwai stated that vacancy rates must be addressed as a priority, and municipalities, in collaboration with the local business community, must investigate ways to allow for secondments where critical skills cannot be sourced.