Ntsika & Khula on Small Business Empowerment: briefing

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Trade and Industry

21 May 2002
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TRADE AND INDUSTRY PORTFOLIO COMMITTEE
22 May 2002
NTSIKA AND KHULA ON SMALL BUSINESS EMPOWERMENT: BRIEFING



Chairperson: Dr. Davies

Documents handed out:

Ntsika Powerpoint Presentation
Ntsika Speech Presentation (see Appendix)
Khula Powerpoint Presentation

Relevant news articles
New agency to take over Khula's role 10/04/02
State under fire for tying up billions 20/02/02
Erwin plans to increase tally of small businesses 21/02/02

SUMMARY
Ntsika and Khula reckoned that they needed to review and refocus their functions in the light of challenges that they had faced since their inception. The committee noted that Khula and Ntsika's strategies were passive and needed to be proactive, focused and they should have concrete programmes and time schedules.

MINUTES
The Chairperson welcomed and introduced the delegates to the committee. The delegates were Mr. Brendan Mbatha, Marketing Executive of Khula and Mr. Lefa Mallane, Chief Executive Officer of Ntsika Enterprise Promotion Agency. The Chairperson specifically urged the delegates not present their agencies' visions and missions but rather to focus on "concrete issues". It was also suggested that Khula and Ntsika should work with MP constituency offices to get their message across to communities.

Ntsika
Mr. L Mallane (CEO) introduced Ntsika as a provider of non-financial services to develop small, medium and micro enterprises (SMMEs). He outlined the structure of SMMEs development strategy and positioned Ntsika as playing the role of making markets accessible to SMMEs. He reckoned that there was R145b available for procurements and that this money could only be distributed to SMMEs through the support and functions of Ntsika.

Khula
Mr. B Mbatha indicated that his presentation was similar to the one he had made on 8 May 2002 to the committee during the DTI's industrial policy hearings. Mr. Mbatha felt it was wise to reiterate the vision of Khula because the agency was undergoing an evaluative review and refocusing. He said the, " the vision of Khula was to become a financing partner of first choice in SMMEs finance". He emphasised that Khula was not working directly with SMMEs but that it worked through intermediaries such as commercial banks. He also announced that since 1996 up to March 2002 Khula had managed to create an estimated 788,650 direct jobs. He added that the total number of jobs when adjusted by a multiplier effect was more than one million:
Total new jobs since 1996 (66% of total direct jobs) 521,307
Total direct jobs (new and sustained) 788,650
Indirect jobs created and sustained = 394,325
Assumed multiplier of 1.5 X 788,650
Total jobs direct and indirect = 1,182,975

Questions
Mr. S. Rasmeni (ANC) commented that even though there were challenges in SMMEs development, some temporary measures should be taken to help poor people across the country and urged Khula and Ntsika to think about his comment. He then asked about Ntsika's relationship with SETAs (Sector Education and Training Authorities).

Mr. Mallane replied that Ntsika has held some workshops with SETAs where Ntsika wanted to know if they could be of assistance to the twenty-five SETAs. He added that the relationship between Ntsika and the SETAs was still at an initial phase because SETAs were new establishments.

Prof. Ripinga (ANC) asked how strategic are the locations of Ntsika service centres.

Mr. Mallane explained that the strategic position of Ntsika service centres largely depended on the location of intermediaries through which Ntsika functioned.

Prof. Ripinga (ANC) asked if Ntsika and Khula had evaluative measures to test their progress against their vision and goals.

Ms L Houston (Khula) agreed that it was important to evaluate an organisations' progress, however, she added that Khula would still have to look at that soon after it completed the review and refocus of its functions. Mr. Mallane expressed similar statements by pointing out that Ntsika still had to undergo a refocus due to challenges it faced when performing its functions.

The Chairperson commented that the functions of Ntsika and Khula were passive rather than pro-active. He added that the attitudes of the banks were too risk-averse to be co-operative with Khula and he asked Khula to comment on bank's attitudes towards providing loans to SMMEs. He also asked if Ntsika had any comparative analysis of service centres such as the Irish model.

Mr. Mallane and Mr. Mbatha agreed that their functions were passive and that it was part of their refocus to eliminate passivity. Ms Houston agreed that banks were unco-operative and that Khula had a working team that was explaining and negotiating with bank executives about small business empowerment and the role of Khula. Mr. Mbatha noted that Khula had made a comparative analysis by visiting certain countries amongst which was Ireland.

Ms F Hajaij (ANC) asked if Ntsika was doing something for the crafts and tourism sector.

Mr. Mallane replied that Ntsika was undertaking a pilot project of servicing crafts and tourism in KZN and the progress of the pilot would determine how far the service would be rendered across the country.

Ms Hajaij also asked the kind of businesses that Ntsika was incubating and if the strategy had been successful.

Mr. Mallane explained that Ntsika was targeting technical colleges to link with technology industry to produce contemporary technology. He agreed that so far the progress was good.

Ms Hajaij asked Ntsika if they had interacted with the mining and farming industries.

Mr. Mallane said that Ntsika had some initiatives with MINTEC and the Farmers' Union regarding training.

Ms Ntuli asked Ntsika if they had a plan so that its team reaches out to people at grassroots level. She also asked if Khula had any plan to negotiate with banks about access to finance for poor communities wishing to start businesses. She argued that there was no business without access to finance.

Ntsika and Khula reiterated that they were still facing some challenges that would need them to review and refocus their functions. Khula added that it was a wholesale company working through intermediaries who also faced some challenges.

One member commented that there was too much duplication in SMMEs service provision and asked how that could be addressed.

Ms Houston replied that Khula was re-segmenting its functions to determine gaps and overlaps so that it could be able to solve the problem of duplication and start to look into co-ordination and fragmentation of roles by different players in SMMEs development.

Mr. Zita (ANC) asked if it would not be advisable for Ntsika and Khula to join the IDS 's strategy in forming development agencies. He also urged Ntsika and Khula to be proactive and reach communities so that they could be known to these communities.

Mr. Mallane replied that Ntsika had held discussions with the IDC because the IDC had funds from the European Union for business development. Khula added that they were running a mentorship programme with the IDC and that they met on a monthly basis. On the question of being proactive, Mr. Mbatha said that they were "moving away from supply side to demand side" and as an example, he noted that Khula had gone on a road show with the DTI to engage with provinces.

In answer to Ms Sono asking if their re-segmentation and refocusing was research-based, Ntsika said that it was.

Ms Sono also asked if Ntsika had access to development funds.

Ms Houston replied that they had no outside development funding.

Mr. Lockey (ANC) commented that he agreed with Ms Ntuli that there was no business without finance. He urged Ntsika and Khula to focus their strategies on how people could access finance.

Ms Ntuli (ANC) suggested that Khula and Ntsika should work with MP constituency offices because it was also the responsibility of the Committee to be directly involved in SMMEs empowerment.

The meeting was adjourned

Appendix
PRESENTATION TO THE PORTFOLIO COMMITTEE ON TRADE & INDUSTRY AND THE SELECT COMMITTEE ON ECONOMIC & FOREIGN AFFAIRS
22 MAY 2002

Held at DTI Committee Room V119, 5TH Floor Old Assembly Wing,
Good Hope Chamber, Cape Town

1. INTRODUCTION
South Africa's economy has historically been dominated by large corporations and a big public sector. There was a conscious absence of small businesses in the dominant sectors of the Economy, and little attention paid to small enterprise promotion in public policy.

With the new democratic era, since 1994, political and economic liberalisation, the 1990's saw massive restructuring of the corporate sector, which is still underway. As a result, the corporate sector has shed numerous jobs. South Africa's unemployment and poverty levels are disproportionately high for a country of our per capita income.

Growth, job creation and poverty alleviation are pressing priorities, both economically and politically. In an attempt to address the challenge of integrating South Africa's economy into global markets as a competitive economy, and overcoming internal problems created that were continuously reinforced over many years, by the apartheid system. We all know that Black South Africans were prevented from owning businesses except in designated areas. Indeed, the history of total discrimination against black ownership of assets as a result of economic marginalisation goes back to the nineteenth century.

To realise the objectives of economic growth through competitiveness on the one hand, and employment creation, as well as wealth re-distribution on the other, small business has become the major challenge.

Thus, since the democratic era, awareness regarding the importance of Small, Medium and Micro Enterprises [SMMEs] for employment creation, economic growth and transformation of the economy has increased dramatically.

2. SEGMENTATION OF THE SMALL BUSINESS SECTOR
Given the existence of more than a million SMMEs and more than two million "survivalist entrepreneurs", it is essential for a realistic and systematic approach to small business support, to differentiate between strategies on the basis of broad target groups.

A meaningful differentiation has to distinguish between broad categories of small businesses and a refinement of support according to the uniqueness of the needs according to the target groups.

Small Business support has a three-fold differentiation of support strategies, seems both logical and necessary, viz.:

· Mainstream small and medium enterprises
· Small businesses in growth sectors
· Survivalised micro-enterprise

In addition to these three very basic categories, we also have to differentiate support efforts according to economic sectors as well as locational [urban / rural, CBD / periphery] characteristics.

Thus, appropriate differentiation of support strategies is not only essential, but has to be the foundation of an effective cost-efficient SMME support framework.

2.1. DEFINITION OF A SMME ACCORDING TO THE BANKING COUNCIL

For the sake of clarity, the Banking Council uses the categorisation in the below mentioned table to define what is an SMME. However, it must be highlighted that the different banks use different definitions, making it difficult to directly compare their statistics.

 

ANNUAL TURNOVER

EMPLOYEES

LOAN

Micro

< R100,000

1 - 2

< R10,000

Very Small

< R500,000

1 - 5

R10,000 - R50,000

Small

R500,000 - R24 m

2 - 20

R50,000 - R2 m

Medium

R24 m - R60 m

20 - 200

R2 m - R5 m


Difficulties experienced at arriving at solutions arise from a failure:

· To agree what we mean by the terms Small, Medium and Micro Enterprises,
· As a consequence of that, to identify the different needs of the different categories of SMME,
· And as a further consequence of that, to collect data on the different categories of SMMEs.

While the National Small Business Act 102 of 1996 contains a definition of micro, very small, small and medium enterprises, it is complicated by the differences between the sectors. Experience shows that this is not widely accepted and therefore was implemented as the norm.

2.2. THE CREATION OF A VIABLE BUSINESS

At the most basic level of analyses, a viable business is one which has

· Entrepreneurial Energy,
· The managerial skills and resources necessary to manage the business,
· A market which is willing and able to pay a profitable price for its product, and
· Adequate risk and loan capital in the appropriate ratios.

3. MARKET ACCESS

Not many very small businesses attempt to break into international markets, and so they are likely to be dependent on the domestic markets. Thus, competition could be very intense, especially for the entrepreneur still trying to establish its client base.

3.1. CONTRIBUTION OF BUSINESS SEGMENTS
 

FIRM SIZE CATEGORY

AVERAGE EMPLOYMENT PER FIRM [incl. owner]

% CONTRIBUTION TO GDP

% CONTRIBUTION TO EMPLOYMENT

Micro

4,7

9

17

Small

15,3

14

16

Medium

35,1

15

21

Large

330,7

61

46


· SMMEs contribute about 40% to South Africa's Gross Domestic Product [GDP], with micro-enterprises making up about 9% and the other two segments each approximately 15%. The SMME share is even larger in agriculture, construction, retailing and transport.

· The SMME contribution to overall employment [in the formal and informal sectors] is well above 50%, with 75% of this achieved in trade, agriculture and business services.

· In sharp contrast to the widespread shedding of labour in the public and corporate [large enterprise] sectors, the SMME sector has over the past decade, maintained positive employment growth in most of the economic sectors.

· According to Statistics South Africa [2000], informal-sector activities [which incorporate micro- and very small enterprises] absorbed 2,7 million persons or 26% of the employed labour force in 1999.

· In 1999, Statistics South Africa estimated the number of entrepreneurs [self-employed persons] to be about 1 630 000 or 3,7% of the population. This rate is relatively low compared to many of the dynamic, small-business-driven economies around the world, but it is already much higher than two decades ago.

· About 70% of these 1,6 million entrepreneurs operate in the informal sector and 41% are women, which illustrates two of the main challenges of any SMME support strategy.

· Registered Close Corporations [CCs] operating in the trade and business-services sector [which are mostly SMMEs] increased in number by 395 000 between 1990 and 2000. This represents 71% of all new close corporations. In manufacturing as well, small and medium-sized close corporations increased very rapidly, almost ten-fold over the decade.

· In terms of private enterprise numbers, SMMEs constitute no less than 97% of the total number of business firms in South Africa.

· The density of business differs considerably between the various provinces - as a result of different urbanisation rates and differences in economic participation rates. Thus, relatively speaking, Gauteng and the Western Cape have the highest SMME densities, whereas it is much lower in the rural regions. Naturally, this is also reflected in the rates of new private companies and close corporations registered.

4. CHALLENGES FOR SMALL BUSINESS SUPPORT

Public-sector support for micro-, small and medium-sized enterprises is based on a number of core objectives and a range of important additional goals. Awareness of these goals and objectives and their reconciliation is critical for the evolution of an effective SMME support strategy. The following derived from DTI's core objectives, can be viewed as fundamental goals of small business support:

· Creation of sustainable jobs
· Stimulation of the competitiveness of the economy
· Growth of the GDP through higher levels of investment and technology transfer
· Spread of entrepreneurship in the business community
· Black Economic Empowerment
· More balanced spread of business, opportunities and personal wealth
· Poverty alleviation
· Higher levels of export
· Support for women's business

5. SECTOR GROWTH POTENTIAL

The scope for further small business involvement differs widely between sectors in the South African economy. The following sectors have been identified as potential growth sectors for SMEs, and, by indication, areas warranting concerted support efforts:

· Agriculture - especially high value-added products and the processing of agricultural products
· Retailing
· Tourism and cultural industries
· Manufactured components, niche products and "smart manufacturing"
· Business and professional services
· Construction and repair / maintenance services
· Transport services

Given the diversity of economic sectors and niches as well as resource limitations for concerted public-sector support, prioritisation of sector support will depend on:

· Sectors earmarked for black economic empowerment
· Growth sectors prioritised within the central government's industrial and other sector-growth strategies; and thirdly
· Sectors earmarked for growth stimulation at provincial or local level.

6. NTSIKA"S FUNCTIONAL AREAS

6.1. SUPPLIER DEVELOPMENT

Supplier Development is aimed at developing potential entrepreneurs to start new ventures and existing entrepreneurs who are at the growth and expansion stage of the business life cycle to enhance their capacity to service market opportunities.

6.2. MARKET DEVELOPMENT & BUSINESS LINKAGES

Market Development is aimed at identifying relevant business opportunities for entrepreneurs and working with buyers of goods and services to procure more effectively from these entrepreneurs. Market Development will include business linkage activities aimed at assisting SMMEs to access appropriate buyers and markets through linkages, partnership development and fostering sustainable business relationships benefits to these suppliers.

6.3. PROGRAMME DESIGN, RESEARCH & INFORMATION [PDRI]

PDRI co-ordinates and conducts research regarding SMME development, the provision of high quality and relevant SMME-related information, and to provide expert advice regarding SMME programme and strategy design.

7. CONCLUSION

Experience has awarded Ntsika with the realisation that the implementation of non-financial support requires a focused and targeted approach.

Ntsika recognises that markets are very important for the development of SMMEs and all interventions should be designed to assist SMMEs to take advantage of market opportunities in order to make them globally competitive. This approach ensures that assistance and support given to enterprises translates to economic impact that can be measured. SMMEs would therefore be supported through training, information provision and technical assistance to succeed in creating wealth and jobs, by accessing and servicing the markets. Ntsika will continue to pursue these goals through an integrated programme of action in our 3 functional areas, hence for the year past after this realigning on programmes, we were able to assist in the creation of 30 000 jobs against an institutional target of 28 000 compared to the average of 23 000 per year for the years up to 2001, whilst 92% [up to the 2000 year] of our support has been targeted to the women, rural, disabled and previously disadvantaged entrepreneurs.
 

 

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