While the “mokgolosa” statement has gone viral on social media, some public finance experts are sounding the alarm over the amounts of cash the government is pouring into unviable ventures, a persistent trend over the years.
Experts estimate that the general failure rate of SMEs in Botswana is about 80%, with over 70% of start-up firms failing in the first 18 months and less than two percent expanding their businesses.
Funders and investors have in the past bemoaned the copy-and-paste style of entrepreneurship in Botswana, where if citizens see an SME being profitable in a certain venture, they all run to the same sector in a chase for opportunities in that particular activity.
This has birthed necessity-driven entrepreneurship as opposed to the desired innovation-based entrepreneurship.
A study conducted on SMEs last year by the Local Enterprise Authority (LEA) revealed that enterprises in Botswana are failing to grow mainly due to fragmentation in services offered, leading to saturation and duplication of services offered in the market.
“Fragmented services leading to duplication of efforts, low business culture, inadequate access to market, and inadequate access to credit have made it hard for SMEs to thrive in 2023,” the report noted. “There is an increased number of informal SMEs, which could be due to necessity-driven entrepreneurship as opposed to opportunity-driven.”
The study suggests it is not necessarily financing that SMEs need in Botswana as there is a gross lack of enterprising culture. In addition, it notes a low understanding of entrepreneurship and capital dynamics amongst many Batswana as beneficiaries of government investment programmes.
The study, published last year, further revealed that for 2023, the services provision sector dominated entrepreneurial efforts in the informal sector with over 49,000 enterprises failing to transition to formal enterprises.
The report found there is a thin line between empowering citizens and spoiling them, and this line has remained blurred in most citizen investments. Every financial year, government showers Batswana with initiatives, funds, and programmes to bolster the performance of SMEs. Most of these funds have gone down the drain with the many enterprises failing to scale and take off, making government the biggest loser in enterprise investment in this country.
A recent draft study by the Botswana Institute for Development Policy Analysis (BIDPA) on entrepreneurship in Botswana revealed that in the last five years, government enterprise investment through the Citizen Enterprise Development Agency (CEDA) has performed below par, yielding few jobs and low returns for the government purse.
Government’s chief goal in investing in SMEs has been mainly for job creation, as the economy has been struggling with rising unemployment rates, particularly amongst youths.
However, with all these enterprises yielding a cumulative job return of 7,700, the report revealed that between 2017 and 2022, CEDA-youth-funded enterprises totalled 5,600.
According to BIDPA senior researcher, David Mmopelwa, the average job creation rate for CEDA-funded youth enterprises is below two jobs per enterprise, a worryingly low figure for government. Mmopelwa further revealed that the main reason for the slow job creation is the heavy funding of the services industry, which has proved to be a low-return industry.
“Of the 5,606 funded projects 3,789 were in the services industry which has over the years proved to be a low job creation industry unlike mature industries such as manufacturing and agriculture,” he said.
The truth behind these numbers is that government is investing in the wrong individuals who are not worth these investments. Government has weak feasibility models alongside weak monitoring and evaluation standards that keep letting in unfeasible ideas that drain the purse.
Perhaps it is a political ploy that keeps government in this vicious cycle of poor investments. Perhaps the ever-mounting pressure to create jobs compels government to calm the storm through countless initiatives to pump cash into the economy with the false hope that SMEs may turn some cash into jobs.
But the truth is SMEs are not machines where you put in cash on one end and jobs come out of the other end. It takes an array of support to fully enable SMEs to grow to scale and create mass jobs.
The real challenge faced by enterprises in the country is the lack of diverse capital options at various funding stages that contribute to the health and growth of an SME.
Another study by LEA on SMMEs published last year revealed that SMEs are saddled with a wide array of challenges, all linked to a lack of appealing finance options from lenders and investors. According to the study, the lack of finance options for the different stages of the organisations’ development in Botswana, is widening the finance gap in the local market.
The finance gap refers to the gulf between the funding options availed to SMEs and their actual needs. This means that most of the capital being pumped to support SMEs is not the actual capital they need to grow.
In the world of finance, raising capital is divided into more than five stages, starting with pre-seed going to seed funding, to Series A, B and C. All this funding represents the different stages of SMEs.
Government has taken the lion’s share of investing in SMEs by providing funding for Series A rounds, which is funding for commercialisation while SMEs have bemoaned the lack of support for innovation at the grassroots level.
According to the study, Botswana’s finance gap as a percentage of Gross Domestic Product (GDP) stands at 18.55% ranking the country third amongst SADC states.
Local finance institutions have traditionally taken a very conservative approach when it comes to lending to SMEs, citing a lack of bankable collateral and the inability to monitor SMMEs' operations.
The World Bank, meanwhile, reports that SMEs dominate emerging market economies and account for 50% of employment in these markets.
Locally, figures provided by Statistics Botswana indicate that 50% of private sector employment in Botswana is created through SME activity with their contribution accounting for 15-25% of the Gross Domestic Product.
A balancing act between targeted innovation financing, risk and skills’ handholding can be found to better channel government’s goodwill funding of citizen’s entrepreneurial appetite.
