Why are businesses not investing, growing and employing more people?

BLSA CEO Busi Mavuso ponders important questions around SA’s unemployment crisis.
Busi Mavuso. Image: Moneyweb

The ANC lekgotla statement released last Sunday left me both in strong agreement but frustrated about solutions. The statement was absolutely right that unemployment of nearly 35%, and youth unemployment at 50%, is highly concerning. I’ve said many times that this is a crisis requiring dramatic action.

But the solutions left me frustrated. The statement calls for a “compact to decisively address unemployment and poverty”. The compact, according to the statement, would see all social partners make a “collective commitment” at all levels including small businesses involving “give and take” by all parties to “contribute to the cause of national development”. It says businesses will need to make “verifiable commitments to expand investment, and support localisation and black empowerment”. Somehow labour and communities would also “need to commit to improving levels of productivity, skills and entrepreneurship”.

Business is always happy to employ more people. Every business wants to grow. But we must be clear about the conditions under which businesses can employ more people, and I am afraid that the lekgotla statement displayed confusion about this.

Business is about generating profits. Saying this so starkly is overly simplistic of course. Businesses are lots of different things. They are embedded in communities and support the aspirations of many stakeholders from owners and customers to employees and their families. But when we think about how we should be incentivising business to achieve certain public policy objectives, we must be realistic. We cannot treat business as if it’s some single entity we can negotiate with and appeal to their social consciences. We must set up the environment such that we get the outcome we want.

Businesses do not invest because they have made commitments. There is no such thing – there are hundreds of thousands of informal and formal businesses in South Africa, many in fierce competition with each other. The only thing they can commit to – because it is implicit to being in business – is to try and survive and thrive as businesses.

We should instead be asking the real question: why is it that businesses are not investing, growing and employing more people?

The stark reality is that South African business is not nearly as profitable as it needs to be to grow. Statistics South Africa figures show that company profits collapsed in 2020, largely because of the pandemic. For the year, net profits were 86% lower than in 2019. This slump was somewhat understandable given the pandemic, but the longer-term trend is just as sobering – business profit margins have been falling since 2008. In 2019, after-tax profit margins across the economy were at 2%, reflecting a steady decline from 2008 when they were at 6%. 2020 will stand out in the record books – profit margins were only 0.3%.

This weak profitability has many consequences – businesses pay far less corporate tax, for one thing. But it also means they cannot invest. There are two reasons – without profits there are no savings to finance investment. But also, without profits there are no returns on that investment, so they can’t borrow to fund investment either.

This is the reality that I wished the ANC lekgotla had engaged with. If we are to address the unemployment crisis it has to be by changing the maths for business. They must see opportunities to generate returns that are commensurate with the risks they must take. It is only then that they will be willing to take on the risks of borrowing or investing their savings. It is only then that they will be able to grow and ultimately employ more people.

This cannot be achieved by compacting. It can only be achieved by seriously looking at the challenges businesses face in trying to generate profits – the high costs and unreliability of energy, the inefficiencies and costs of our ports and transport networks, the high cost of broadband and telecommunications, the quality of skills that employees bring from the education system, the safety and security situation businesses must operate in, the reliability of local government services.
There is much that can be done to address each of these and many other important issues. Organised business is certainly willing and able to engage with all social partners to find ways to do so. But this cannot be done through a compact based on impossible expectations of how business works. That will get us nowhere.

Busi Mavuso is BLSA CEO. 

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The local charity which I am a member of has been providing frail care services for the previously disadvantaged community at our registered facility with a capacity of 100 sub-economical individuals for 20 years now. Although there is a growing need for this service in the local community, we were forced to close this facility down, and lay off 30 employees, due to financial constraints. The escalation in the minimum wage was the straw that broke the camel’s back. The patients relied on the minimum wage plus a subsidy from the government. The same government that increased the minimum wage did not increase the grant to the same extent.

Who are the winners and who are losers? The employees who were supposed to benefit from the increase in minimum wages are now unemployed. The patients are back at their children or in the streets where they are abused for their grant money. I don’t have to work at fundraising events anymore.

Some say the minimum wage only increases with a few rands per hour and that it is not a living wage. This is not the point though. The problem is that the government that legislates an increase in costs does not at the same time mandate a higher selling price for the manufactured produce. The increase in the minimum wage comes from the profit margin of the enterprise and it amounts to hundreds of thousands, or millions even, for some businesses. Charities, per definition, do not have profit margins. The ANC, which promises a better life for all, basically closed us down and put all those destitute people back on the street. They call this ubuntu and people vote for it.

This is really heartbreaking, but as we all know here in the comment section, the ANC promises a better life for all its close cadres, Not the hard-done by of society.

Rule 1 = Do not hire if you cannot fire !!

Entrepreneurs buy low and sell high. They add value to the inputs. They certainly do not focus on job creation, but rather on consumer satisfaction. This is the crucial error made by the socialists – they believe the worker has rights that trump the rights of consumers and they ignore the fact that those workers are also consumers.

When a populist government intervenes in the entrepreneurial process it does not change the DNA of entrepreneurs, it simply makes the entrepreneur more determined to buy even lower. Where the entrepreneur was willing to invest in his employees to motivate and retain them, the labour laws now motivate the employer to purchase labour at the lowest price possible. That is the minimum wage. This process transfers income from skilled labour to unskilled labour. Those employees who deserve higher wages now inadvertently subsidise undeserving and underperforming employees.

No government is able to alter market forces. The entrepreneur is always one step ahead and uses the system to his advantage. If politics remove the opportunity to add value, the entrepreneur will sit on the sidelines and employ nobody.

In my opinion, the answer to the question is pretty simple.
Businesses are not growing, investing and employing more people because of the onerous conditions mandated by the Government of this county.
Red tape, Corruption, low education standards, racist BEE employment policies and no tax value are a few of the reasons…

End of comments.

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