Small Business Review Report: briefing by Department of Trade and Industry

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Meeting Summary

The Department of Trade and Industry said the Small Business Review Report was a review of the support programs that the government was providing to the SMMEs and re-look at the strategy for service provisioning SMMEs. The integrated strategy for the promotion of entrepreneurs and small enterprises had been approved by Cabinet in 2005. The strategy was a bit outdated and had been surpassed by many developments with the establishment of new departments such as the Department of Economic Development and the moving of agencies from the Department of Trade and Industry (DTI) to the new department. The review was informed by previous research done including benchmarks obtained from visiting other countries. The dti engaged an external panel of experts to work with the department in doing the review. The review process was finalising the report that would then be submitted to the Minister. Once the report was approved it would be presented to the Committee.

The review conduct an assessment of current SMME and co-operative support programmes and make recommendations on ways to improve coordination and rationalisation – across spheres of government departments, institutions and programmes - as well as accessibility, responsiveness and transaction costs. The focus and scope of the review was guided by the three pillars of the Integrated Small Business Strategy:  increasing the supply of financial and non-financial support, creating demand for SMME products and services and reducing regulatory constraints. The programme areas covered reviewed increasing access to financial support through debt, equity and venture capital, increasing access to non-financial support through incubation and technology transfer and lastly creating demand for SMME products and services through export promotion.

The approach and methodology used for the review covered all three spheres of government and assessed programmes across departments and institutions. Data was collected through extensive national and international literature review and stakeholder interviews. The review results could be classified into Small Business Policy, Small Business Support Practice and Small Business Market. Under small business policy, for example, the findings indicated that policy formulation within government was fragmented and the role of provincial and local government was not clear.

S
ome of the key recommendations of the review were:

 Rethink small business policy - By strengthening small business leadership capacity, by capacitating the National Small Business Advisory Council to cover work of key departments and agencies with SMME development responsibility.

 Review the National Small Business Amendment Act to:
- Clearly define the SMME support role for provincial and local government
- Review institutional mandates, especially that of
Small Enterprise Development Agency (SEDA).

 Rethink small business development practice
Increasing non-financial support

- Establish a programme for rolling out more incubators; and incentivise involvement of other actors in incubation. Establish a dedicated SMME research capacity. Undertake a resource review of key institutions. Review Small Claims Court system to increase amounts to give SMMEs affordable justice. 

 

 



Increasing financial support -

Stimulate angel investment in SMMEs (tax incentives, matching funds from DFIs and building angel investor networks). Dedicate substantial financial resources to scale-up microfinance activities in partnership with international financial institutions and private sector partners



Increasing demand -  Challenge the so-called ‘unconstitutional’ nature of set-asides for SMMEs and promote the application of set-asides for SMMEs in public procurement, including the Ten Products Initiative
- Partner with the SA Supplier Diversity Council and encourage synergy between private sector supplier diversity initiatives and dti funding mechanisms, especially
Black Business Supplier Development Programme (BBSDP).

Reducing regulatory constraints - Deliver educational programme on regulatory impact assessment and regulatory simplification, targeting relevant government personnel, in all three spheres of government. Roll out the dti / DCOG Red Tape Reduction initiative nationally, after completion of the pilot phase. Require agencies to review their access requirements and implement simplification measures

 

 



 Rethink the small business market - establish a limited-duration team to craft an integrated  national strategy to fostering entrepreneurship throughout society. Re-look and expand the activities of NYDA to support young entrepreneurs. Develop entrepreneurship promotional campaigns and start-up support packages.



 Rethink partnerships with various actors -

engage with BUSA and Institute of Business Advisers to fashion national private sector-led SMME support initiatives for business incubation and a programme to accredit SMME advisers. Establish a Chamber Support Unit within the dti to strengthen the capacity of national sector associations to deliver support to their SMME members.

Consider creating an SMME Promotion Challenge Fund. Provide only core funding to SMME support agencies and get them to bid for the rest of their funding through submitting proposals for project funding.

The Committee commented that there had been much research but too little implementation for SMMEs.  Members that provincial and local government were contravening the law as they were the ones that were not paying SMMEs within 30 days. They asked if the small claims court the right solution. The Committee noted that on a study tour to India, Indian businesses had stated that it was “too tiresome to open a business” in South Africa. These conditions had an effect on foreign direct investment. Members asked what was going wrong with cooperatives. In India 92% of the jobs were from the informal sector while 8% were public sector. Perhaps youths should be targeted at a young age and not just at universities.


Meeting report

Department of Trade and Industry Introductory Remarks
Mr Sipho Zikode, Deputy Director General: Empowerment and Enterprise Development Division, informed the Committee that the review was prompted by two main reasons. The first was the requirement in the Minister’s contract with the President. The Department was working towards Outcomes Four that dealt with inclusive growth. This required the Minister to do a review on the support programs that the government was providing to SMMEs. The second reason was the need to re-look the strategy for service provisioning to SMMEs. An integrated strategy for the promotion of entrepreneurs and small enterprises was approved by Cabinet in 2005. The strategy was a bit outdated and had been surpassed by many developments with the establishment of new departments such as the Department of Economic Development and the moving of organisations from the Department of Trade and Industry (DTI) to the new department. Therefore the old strategy needed to be reviewed and updated in light of the new developments. This was also informed by previous research done including benchmarks obtained from visiting other countries. The DTI had engaged an external panel of experts to work with the department in doing the review. The review process was at the stage of finalising the report that would be submitted to the Minister. Once the report was approved it would be presented to the Committee.

Briefing by the Department of Trade and Industry on the Intellectual Property Amendment Bill
Mr Mojalefa Mohoto, Chief Director: Enterprise Development, noted the presentation covered five main areas:
Purpose of the review, Review focus and scope, Review approach and methodology, Review results and Key recommendations. The purpose of the review was to conduct an assessment of current SMME and co-operative support programmes and make recommendations on ways to improve:
▪ coordination and rationalisation across spheres of government departments, institutions and programmes.
▪ accessibility, responsiveness and transaction costs
▪ overall efficiency and effectiveness and
▪ monitoring and evaluation practices.


The focus and scope
of the review was guided by the three pillars of the Integrated Small Business Strategy:
▪ of increasing the supply of financial and non-financial support,
▪ creating demand for SMME products and services and
▪ reducing regulatory constraints.
Added to this were the Ministers’ call for a short list of key recommendations and the Director General’s call for a ‘step-change’ in SMME promotion.

The programme areas covered were increasing access to financial support (debt, equity and venture capital, credit indemnity, incentives and grants), increasing access to non-financial support (such as incubation and technology transfer and mentorship), creating demand for SMME products (public and private sector procurement including dti’s targeted procurement of 10 products; expediting payment to SMMEs, export promotion) and regulatory impact (through current and new government initiatives)

 

.

The approach and methodology used for the review covered all three spheres of government and assessed programmes across departments and institutions. Data was collected through extensive national and international literature review and telephone interviews with SMMEs. The review results could be classified into Small Business Policy, Small Business Support Practice and Small Business Market.

Under small business policy, findings indicated that
policy formulation within government was fragmented and the role of provincial and local government was not clear. Small business support practice findings could be summarized into general policy and programme implementation issues such as:
Lack of long-range planning

Weak coordination and integration of support

Weak monitoring and evaluation of support

Weak human resource capacity

Operational inflexibility

Paucity of small business information



In terms of
increasing the supply of non-financial support, the factors were:

 Inadequate business incubation programmes

 Lack of mentorship programmes

 Lack technology transfer and manufacturing advice

 Access to quick and affordable legal process

 General management and capacity building support

In terms of increasing supply of financial support:

 Paucity of SMME financing data

 Impact of SMME credit information asymmetries

 Lack of risk capital

 


• Underdevelopment of microfinance

 Impact of late payment on SMMEs

 Limited use of innovative SMME financing models

 Limited scale of public sector support programmes



I
ncreasing demand for SMME goods & services by:

 Improving the local business environment

Encouraging break-out and business diversification

 Strengthening access to public sector procurement

 Building market access into private sector value chains



Reducing regulatory constraints by:

 Preventing negative regulation ex-ante

 Building capacity to formulate better regulation

Reducing the burden of existing regulation

 Simplifying access procedures and requirements.


Mr Mohoto concluded by noting the key recommendations of the review:
1. Rethink small business policy

 By strengthening the small business leadership capacity, through capacitating the National Small Business Advisory Council to cover the work of key departments and agencies with SMME development responsibility. This was to ensure long-range planning and ensure coordination, integration & monitoring and evaluation of support.

 Review the National Small Business Amendment Act (2004) to:
- Clearly define the SMME support role for provincial and local government
- Review institutional mandates, especially that of SEDA (about coordination, research, regulatory environment, sector focus / alignment with industrial policy)

2.

 Rethink small business development practice
Increasing non-financial support


- Establish a clear programme for rolling out of more incubators; and encourage / incentivise involvement of other actors in incubation
- Establish a dedicated SMME research capacity, preferably within Stats SA and develop a national small business research programme
- Undertake a mandate-resource review of key institutions and close resource gaps
- Review Small Claims Court system to increase amounts handled by these Courts thereby providing SMMEs with access to quick and affordable justice 

 

 



Increasing financial support


- Stimulate angel investment in SMMEs (through various means i.e. tax incentives, matching funds from DFIs and building angel investor networks)
- Dedicate substantial financial resources to scale-up microfinance activities in partnership with international financial institutions and private sector partners



Increasing demand
- Challenge the  so-called ‘unconstitutional’ nature of set-asides for SMMEs and promote the application of set-asides for SMMEs in public procurement, including the implementation of the Ten Products Initiative
- Give official recognition to the activities of the SA Supplier Diversity Council and partner with the Council to encourage greater synergy between private sector supplier diversity initiatives and dti funding mechanisms, especially BBSDP

Reducing regulatory constraints
-
Develop and deliver a national educational programme on regulatory impact assessment and regulatory simplification, targeting relevant government personnel, in all three spheres of government
- Roll out the dti / DCOG Red Tape Reduction initiative nationally, after the completion of the pilot phase.
- Require agencies to review their procedures and  access requirements and develop and implement  simplification measures

 

 



3.

 Rethink the small business market
-
Establish a limited-duration team to craft an integrated  national strategy to fostering entrepreneurship throughout society
- Re-look and expand the activities of NYDA to enhance the support  young entrepreneurs
- Develop and implement dedicated entrepreneurship promotional campaigns and start-up support packages targeted at encouraging employed persons and graduates to start their own businesses



4.

 Rethink partnerships with various actors


-
Engage with BUSA and Institute of Business Advisers, respectively, to fashion out national private sector-led SMME support initiatives in the areas of  business incubation and formulating a national programme to develop and accredit quality SMME advisers
- Establish a Chamber Support Unit within the dti to strengthen the capacity of national sector associations to deliver support services (information, advocacy) to their SMME members. Over time delegate certain basic functions to Sector Associations
-

Consider the possibility of creating an SMME Promotion Challenge Fund and fund innovative and high-impact project proposals from various actors (business, business membership organisations, academia).
- Provide only core funding to SMME support agencies and get them to bid for the rest of their funding through submitting proposals for project funding.


Discussion
Mr B Mnguni (ANC; Free State)
noted that it was not the first time that the Committee was hearing findings and recommendations. Six years ago Statistics South Africa conducted a survey and found that most needy people were not provided with funding but started their business from their pensions and help from relatives. Had the Department looked at these studies which were done by Statistics South Africa and other studies? Were not the findings of the study a repetition of previous findings? The problem was that there had been no implementation.

Mr Zikode agreed that a lot of research had been done. Some of the research was done on behalf of DTI while some was done independently. The current review was to look at the support programmes of the government. Most of the previous research was on the impact side but the review had looked at the support programmes. Was the DTI efficient and were the people requiring support being supported? What were the gaps for improvement? The panel looked at all the research that had been done previously.

Mr Mnguni stated that there were institutions that could be used as conduits to support SMMEs. Did the government need to change its attitude towards these structures so that they could complement each other for job creation?

Mr Zikode replied that the department had employed people to work with chambers at all levels in the townships and rural areas to assist businesses to formalise themselves into associations so that they could speak to government with one voice in terms of the services they needed. The department would also use these associations to deliver some of the services to their members as they were in a good position to access their members.

Ms B Abrahams (DA; Gauteng) stated that it was important that all programmes were linked with mentorship as most people did not have the experience.

Mr Zikode replied that mentorship was very important. DTI together with the Department of Higher Education was trying to better coordinate and formalise such training. This was with a view to standardise mentorship training in South Africa in partnership with big business.


Ms E Van Lingen (DA; Eastern Cape) stated that it was too tiresome to open a business. This was one of the concerns raised by Indian business when the Committee visited India about foreign direct investment in South Africa. What was going wrong with cooperatives? With cooperatives in place like in India, 92% of the jobs were from the informal sector while 8% were public sector.

Mr Zikode replied that DTI would get an opportunity to present the Cooperatives Amendment Bill and Cooperatives strategy as the department was amending the Cooperatives Act. Public comment on the draft bill had been obtained. The Bill aimed at establishing a cooperatives agency that would piggy back on existing infrastructure such as SEDA. The agency would provide financial and non financial support to cooperatives in the regions. The Bill would also look at establishing a cooperatives academy that would provide skills from certificate level to degree level.

Ms Van Lingen stated that the lack of capacity in the Department was worrisome. Was this connected to vacancies or unfunded posts. What were the main causes of the lack of capacity?

Mr Zikode replied that capacity within the government was a big issue that needed to be tackled. The department had designed a programme with the University of Johannesburg that would be rolled out to other universities. The aim of the programme was to sponsor government officials at all levels to study economic development. These officials would then apply these skills in their municipalities and localities and start economic development programmes.

Ms Van Lingen stated that the country was sitting with 800, 000 job vacancies according to economists. The country was also sitting with 600, 000 graduates that were unemployed. The two were not corresponding. Why was the country sitting with so many graduates that were doing nothing? What courses had they done that they could not utilise?

Mr Zikode replied that this was a big problem. There was a program within the DTI called Workplace Challenge. The department was working very closely with the private sector to take on unemployed graduates. The department assisted by providing stipends for those graduates and students taken up.

Ms Van Lingen stated that the provincial and local government was contravening the law as they were the ones that were not paying SMMEs on time. Was the small claims court the right solution?

Mr Zikode replied that government relied on Treasury to come up with regulations as they were the custodians of this. The process had been delayed by two years after Cabinet approved the 30-day payment condition. It was understood that Treasury had finally come up with the regulations which put an obligation on senior managers at all levels to ensure that their departments or organisations paid SMMEs within thirty days.

Ms M Dikgale
(ANC; Limpopo) said that the support for young entrepreneurs was a good idea. The youths needed to be kept busy as they were busy engaging in vices such as drugs.

Mr Zikode replied that SMMEs were an engine of growth. Without entrepreneurship there would be no growth. The focus was to work with universities and support them financially to provide entrepreneurship education.

The Chairperson stated that all countries that were doing well had a strong SMME base such as Malaysia. The review should have looked at the definition of small-medium enterprises. How small or medium should a business be. People were being sent to and fro.

Mr Zikode replied that this was being dealt with through the amendment of the Small Business Act. The Act provided the definition. The department was also exploring setting up a one-stop service to avoid people being sent to and fro.

The Chairperson noted that generally justice was expensive and time consuming in South Africa. The idea of using a small claims court would just frustrate small business further. SMMEs should be helped before they go to court. The Department should be preventative and not reactive.

Mr Zikode agreed with the Chairperson. SMMEs needed to get the necessary service so that they could avoid going to court. The Department needed to look at this as this needed to be changed.

The Chairperson pointed out that youths should be targeted at a young age and not just at universities.

Mr Zikode replied that the department was supporting Wits University and the University of Johannesburg but would take the advice on board and support young people at an earlier age.

The Chairperson observed that there was need to cut down on red tape. There were too many pre-approval processes that were time consuming.

Mr Zikode, Deputy Director General: Empowerment and Enterprise Development Division, replied that it was hoped that in the new financial year starting April the department would role out a Red Tape Reduction Programme. The DTI had been conducting a pilot with a few municipalities over the past 13 months. The results were very good. The department was hoping to get more funding for this programme so that it could be rolled out to all the provinces.

The meeting was adjourned.


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