/ 30 March 2009

The man with the crystal ball

Clem Sunter says going local -- and supporting small business -- is the only way to combat rural poverty. Photograph: Oupa Nkosi
Clem Sunter says going local -- and supporting small business -- is the only way to combat rural poverty. Photograph: Oupa Nkosi

Even when he was running the largest gold mining company in the world Clem Sunter was more interested in the future of business and society at large than in the gold price.

Now that he is a small businessman, spending his time on his own consultancy rather than pastimes such as the Anglo American Chairman’s Fund, he’s also more than casually interested in the support and encouragement of small business. It just so happens he believes the two are inseparable.

”There is no way we are going to get a handle on rural unemployment and poverty if we don’t create an environment for small businesses to thrive and grow,” he says. ”We need small and family-owned businesses to find the opportunities and then we need to allow those businesses to grow into big businesses; that’s how we’ll make our economy work for everybody.”

When Sunter isn’t working on strategic plans and scenario planning for big companies he spends time on the speaking circuit and, between that and his books, there are few executives in South Africa not familiar with his ­analogy of the fox and the hedgehog.

Sunter is passionate about business (and people) being quick and nimble, about the need for sustainable development rather than greed, and about mobilising government and big business as potential saviours of the poor and marginalised. And although the phrase ”local economic development” makes him think of the Nineties, the philosophy of LED meshes almost perfectly with his own.

Get radical
The oil pricing hitting outrageous levels during 2008 was a huge boost to at least the concept of local economic development, he says, because transport costs spiked so dramatically. Suddenly people paid attention to schemes to manufacture locally what is consumed locally. Then the world economy crashed along with the oil price and the mindset of seeking the cheapest supplier anywhere in the world reasserted itself. Sadly so, in his view, because localised economic development is probably the only way to combat rural poverty.

At least the inevitable next spike in energy prices should have the same galvanising effect and hopefully not just in the short term. But to be ready for that window of opportunity South Africa needs to make a few changes.

Sunter proposes two radical government incentives for the small business sector, what he calls ”dramatic gestures” that convey both a message and financial benefit.

The first is a cumulative R1-million of tax-free earnings for businesses below a certain size threshold. That means the business pays no tax until the first rand of profit it makes after its profits have reached R1-million. That, he says, will make up for the risk entrepreneurs take in doing their own thing rather than joining a large company and taking a safe, salaried job.

His second proposal is for an exemption to the capital gains tax for investors who put their money behind small businesses. At present, he says, investors willing to shoulder the risk of funding small businesses are penalised for whatever success they achieve, because if they sell their equity after the business becomes a success they pay tax based on the amount of value the business has accrued. Eliminating or even reducing that tax rate will make up for the risk of investing in a small business rather than in the safer shares of a JSE-listed company.

Banking on locals
But Sunter is also convinced that more formalised risk-management and application processes on the part of banks have largely discounted the human element in financing, to the detriment of development.

”One of the reasons finance in rural areas is so hard to come by is because the banks changed the way loans are administered. In the old days the branch manager had a lot of discretion in giving a loan to people known in the community, and would consider their background and family, using local knowledge. Now most loans are administered in Johannesburg and you have to make an application to a computer, almost. Your character has been taken out of the equation; now it’s all about statistics, about your income.”

What he would like to see, on top of an actual evaluation of the character of the person applying for finance, is a greater focus on micro loans at rates below those charged by the micro-finance sector, which largely provides personal rather than business ­development loans.

Instead, he’d like South Africa to establish something more along the lines of Bangladesh’s famous Grameen Bank: an institution dedicated to making a profit from micro loans that help establish and develop businesses. The attempts that have been made to date, through various government-owned finance institutions, have failed to reach rural areas, he says. And encouraging small business only in metropolitan areas misses the point.

”The big banks say that the cost of administering small loans is more than the interest they can earn over the lifetime of the loan and that it is not economic. We need to challenge that. There must be a way of changing that and getting costs down through creative methods and actually make a profit. There is a huge difference between the loan-shark rate and the formal interest rate and we need to close the gap, provide something in the middle.”