/ 1 February 2023

SMMEs are key to the growth of South Africa’s cannabis industry

Gettyimages 1143094756 (1)
South Africa’s emerging cannabis economy is in full swing. Photo: Getty Images

The big business sweep of South Africa’s emerging cannabis economy is in full swing. Over the past few months, those diligently keeping abreast of local cannabis news may have noticed a growing tide of big business activity in the sector. 

Most recently, it was reported that billionaire Lebanese entrepreneur, Bassim Haidar, had scaled up the production of medicinal cannabis in South Africa through his company SafriCanna. The company intends to build five new medical cannabis facilities with a production capacity of 30 tonnes and by 2024 will own over 600 farms.

At the same time, the government has hobbled along rather slowly with regard to policy development — so suspicious and worrying that one may even wonder if there is a cabal-like political economy in operation benefitting a few people at the expense of the market? 

Speculative concern aside, the fact of the matter is that almost a year since President Cyril Ramaphosa swore to advance the development of the sector during his 2022 State of the Nation Address, which sent shockwaves of euphoria through the industry, not much progress has happened to create an enabling environment for all players to thrive. 

The National Cannabis Master Plan is yet to be finalised and government departments have not received concrete and complete mandates to support the sector. Little to no movement has been made in producing provincial cannabis plans to address emerging concerns, such as a lack of funding for small and rural businesses and the exclusion of indigenous farmers in the mainstream commercial industry. 

Of even more concern, nothing at all has been presented by the government with regard to a policy document. Such policy shortfalls hinder the industry at large, but more so smaller firms, as big businesses with endless financial muscle are able to identify and seize available opportunities. In this context, the front runners are expected to own a majority stake in the emerging market.

Small, medium and micro enterprises (SMME’s) are desperately trying to compete in the local market. These small companies are faced with a myriad of issues, including funding limitations, skills shortages, testing incapabilities, inadequate market linkages and seed supply constraints. 

In addition, because the regulatory climate is still unclear, SMMEs also take huge risks as many of their operations are conducted without much-needed insurance coverage. Banks and credit lenders in the country have been reluctant to either fund or insure cannabis farming operations. 

Big businesses, however, are usually able to muster international capital and well-priced insurance packages which dramatically reduce business risks and provide some level of investment cover. Implicitly, with such high barriers to entry for SMMEs, the lack of effective government support almost guarantees big players the benefits of little competition. 

If we are to learn anything from the past couple of months regarding South Africa’s cannabis economy, it is that big business alone cannot develop the sector. The failed special-purpose acquisition company (SPAC) initiated by Cilo Cybin Holdings and the dramatic drop in the share price value of Labat are cases in point. 

Full integration of SMMEs needed for local market growth 

Seasoned investors will know that, in emerging markets, big business cannot thrive without the necessary contributions of smaller firms. Witnessed throughout economic history, smaller firms are central in providing local markets with a range of growth imperatives, such as innovation, entrepreneurship, product advancement and diversification, skills development, employment and increased consumerism. 

Small businesses are essential in supporting the “creative destruction process” by disturbing existing market equilibriums, thus creating opportunities for new business ventures and increased market competition, which is a driver of higher quality goods and services as well as overall innovative growth economies. 

All these efforts are prototypical to sustained economic development. Simply put, small businesses serve as pivotal market building blocks and ought to be the priority of support.

In an article published by BusinessLive, Cannabis market stunted by misalignment of policy and law, I presented several policy proposals geared at supporting the development of South Africa’s cannabis SMMEs. These include introducing market-specific localisation initiatives, streamlining private-public funding into underdeveloped segments of the market and providing necessary incentives for larger companies to work closely with smaller businesses across their respective value chains. 

These value chains not only include cannabis-specific segments, such as cultivation, manufacturing and processing, but also related components such as shipping and security. 

Not only will such efforts breathe much-needed life into the National Cannabis Master Plan, which foresees small enterprises playing a central role in South Africa’s cannabis economy, such efforts are also a necessary imperative for sustainable long-term market growth. 

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.