SMME Strategy: briefing by Department

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
14 AUGUST 2002
SMME STRATEGY: BRIEFING BY DEPARTMENT

Chair: Dr R Davies (ANC)

Documents Handed Out:
 

Integrated Strategy for Small Enterprise Support: Accelerating Service Delivery by DTI
National Productivity Institute presentation
Integrated Strategies for Small Business by NPI : See Appendix below

National Productivity Institute website
New DTI website

SUMMARY
The Department of Trade and Industry, together with the National Productivity Institute (NPI), made presentations to the committee on strategies for the support of SMMEs. These strategies focused on appropriate measures for supporting the small business sector in the country. The NPI's presentation was based on an audit of the current state of this sector countrywide - though their sample was based on experiences encountered in Gauteng.

MINUTES
Integrated Strategy for Small Enterprise Support
Ms Wawa Damane, from Enteprise Development: DTI, pointed out that the creation of new enterprises in this sector has not necessarily resulted in the creation of new jobs. Please refer to Power point presentation for the outline of her input.

Integrated Strategies for Small Business by the National Productivity Institute
[It was noted that the document circulated is a draft and not the final version.]
Ms Ramatlo, Head: Emerging Sector of NPI, pointed out that their presentation is based on the findings of an audit report. She added that the audit took the form of workshops with micro-businesses and service providers throughout the provinces and for this presentation; they have taken the Gauteng audit as an example for the committee.

She then showed a presentation video about this audit sample.

Questions and Comments
Mr D Lockey (ANC) noted that one of the conditions for the survival of an SMME is that it must have a market. If it has been limited in its concentration, the less chance there is to succeed because you need spending power in order for an SMME to flourish. Secondly, he also pointed out that whilst government procurement procedure has prioritised BEE initiatives, fronting by white companies to get around it should also be addressed.

- Mr P Nefolovhodwe (AZAPO) said that the problem is small enterprises cannot compete with the established names and even in the awarding of tenders, they are not very knowledgeable about the procedures, therefore, they largely lose out.

- Ms F Hajaij (ANC) pointed out that incubators are few and far between. In this context, how does the DTI plan to co-ordinate the whole process?

- Ms C September (ANC) asked what is the Department's strategy to put small businesses forward, for instance in procurement?

- The Chair pointed out that one of the shortcomings of the DTI's service providers is that they are not based on an integrated approach towards service delivery but rather on separate functions like finance, business advice, etc. On the issue of legislative amendments, he asked when these amendments are likely to come into the picture as there did not seem to be time this year.

- Dr B Turok (ANC) commented that the purchasing power in the disadvantaged areas is not necessarily weak; it is more of a case of this being spent in the towns/cities rather than in their own area. He added that a good strategy would be to locate the DTI's offices in these areas. Why are they not doing this?

- Ms Ntuli (ANC) said that the audit had been done and follows previously followed procedures with almost the same results which she found not very helpful, rather depressing. She felt that this audit and subsequent approaches should be more specific and unpack the details of the issues raised.

- Mr Bekker (NNP) commented that there is a need to level the playing field between the big players and the small business enterprises.

Response
Ms Ramatlou pointed out that the NPI seeks to engage audit coaches who will ensure that the expertise of the NPI will be transferred to the SMMEs in the various provinces. These coaches will also provide business advice taking into account the idiosyncrasies of the particular region. This is already beling being piloted in Gauteng with 8 coaches for the province and after this, they will move on to Kwazulu-Natal and Mpumalanga before year-end.

Ms Damane pointed out that their intention was to present the broad approach to address the issue of small business support. They admittedly had not yet gone into the finer details of how to do this.

Coming to the issue of access to finance, she noted that the government's view is that one cannot take it as merely an issue of access to finance only. The approach should be to offer a broad range of advisory and facilitatory services that are required by SMMEs.

Regarding the deadline for legislative amendments, she said that one area they wanted to address is the issue of institutional mandates, especially for those organisations which do not fall directly under the DTI. However she could not state exactly when this would happen.
On the issue of incubation, Ms Damane pointed out that they have realised that incubators are expensive, so they are looking at the pooling of resources to make sure that those which already exist, can be used effectively and efficiently for everyone's benefit.

The meeting was adjourned.

Appendix:
INTEGRATED STRATEGIES FOR SMALL BUSINESS

Foreword

The strengthening of small enterprises and their role in the economic-development process of South Africa is one of the most important challenges currently facing this country. Considerable progress has been made in the promotion of small enterprises since the acceptance of the 1995 White Paper, which preceded a new institutional framework for public-sector support. Yet, nation-wide consultations during the last two years have shown that strategies have to be reviewed, adjusted and supplemented in order to benefit from lessons learnt and adapt to changing needs. This review is the outcome of the consultation process.

Effective strategies to promote small, medium and micro-enterprises have to be embedded within the full spectrum of the country's economic-development strategies. These include, among others, an integrated manufacturing strategy, a local economic-development strategy, a black economic-empowerment strategy and an agricultural strategy. In each of these strategies, small enterprises figure as prominent participants, with support programmes also geared towards the particular needs of small businesses. Effective coordination of these different thrusts is critical to the success of implementing an integrated small business strategy.

National government cannot be the only supporter of small enterprises. In fact, over the past decade it has become clear that the vast number of small enterprises can only be "reached" with appropriate support if national, provincial and local authorities, parastatals and all segments of organised business as well as NGOs etc. work together. As it is necessary to approach small enterprises in each sector or industry and each region or location in a properly adapted way, support thrusts will have to contain inputs from each of these support agencies. National government establishes the overall framework and has put in place core institutions, with the other bodies and levels of government complementing through their support programmes.

This document should be seen as a guideline in the unfolding of South Africa's small-business support - and will provide a blueprint for state action and key indicators for progress. As such it should encourage all the players and stakeholders In this field to co-operate and to make our national small-business support process as rich and tailor-made as practically possible.

Executive Summary

1. Background

1.1 Small, medium and micro-enterprises (small businesses) currently contribute about 40% to South Africa's Gross Domestic Product (GDP) and more than 50% to overall employment. In sharp contrast to the widespread shedding of labour in public and corporate (large enterprise) sectors, the small business sector has over the past decade maintained positive employment growth in most of the economic sectors. The estimated number of entrepreneurs in South Africa was about 1 630 000 in 1999 (3,7% of the population), which is relatively low compared to many of the dynamic small-business-driven economies around the world, but is already much higher than two decades ago.

1.2 Notwithstanding the growing size of the small business sector in the South African economy, the "sector" is still dominated by micro and very small enterprises; large segments of small businesses are not competitive, either with bigger firms or with foreign competitors; the majority of small business operators still lack entrepreneurial and business skills, display only limited innovativeness and lack even basic technical skills; there is widespread lack of understanding of government policies and it is extremely difficult to substantiate the impact of past support programmes of the public sector.

1.3 Against this background the dti initiated a review process of the need and scope for revisions in the national government's small enterprise support strategy in line with other policy initiatives i.e. integrated manufacturing strategy and black economic empowerment. The Integrated Small business Strategy document is a concise summary of the revised approach to be followed by the public sector through its national, provincial and local authority institutions. It is a holistic presentation of an approach, which is to drive small business support in a world of rapid and far-reaching economic, social and other changes.

1.4 Given these changes within South Africa and in the international scene it has to be clear from the outset that an effective support strategy for small business has to be closely integrated with all the other areas of economic and regional development support. Small business support, thus, cannot function in isolation of sector support (in industry, agriculture, etc.), local economic development (LED) support, competition policy, export support and other important strategies.

2. Towards greater differentiation of support

Given the existence of more than a million small, medium and micro-enterprises, and more than two million 'survival entrepreneurs' it is essential to differentiate strategies on the basis of broad target groups. A threefold differentiation of support strategies distinguishes between;

· mainstream small and medium enterprises,
· small businesses in growth sectors, and
· survivalist micro-enterprises.

The first category covers the majority of small and medium sized enterprises, with the creation of an SME-friendly regulatory environment and business infrastructure on the one hand and black economic empowerment as well as black access to business opportunities on the other hand the main focus of strategies. In the category of growth sector SMEs the focus falls on appropriate sector strategies and policies to improve our international competitiveness. With respect to survivalist micro-enterprises there is need for a combination of poverty relief strategies and personal education and training.

Apart from these categories support programmes also have to be geared towards the particular needs of different economic sectors and different locational spheres (urban/rural, CBD/periphery, etc.). In fact, appropriate differentiation of support strategies is not only essential, but has to be the foundation of an efficient, cost-effective small business support framework.

3. Strategy focal areas

Three support-thrusts are proposed as a framework for the clustering of support strategies.

3.1 Motivation towards self-employment: This category includes programmes to foster entrepreneurship at school and post-school level, the denser spreading of information and advice facilities to reach small businesses all over the country, the more effective dissemination of research results, and the strengthening of business associations.

New emphasis on promotion of entrepreneurship, and creation of opportunities for Small business

The current strategy identified the need to promote entrepreneurship. However in the design of programmes not enough emphasis was placed on investing on South Africa's entrepreneurial capacity. There are currently a number of fragmented interventions but there is no overarching strategy to ensure that there will be a continuous supply of entrepreneurs over time.

3.2 Unlocking opportunities for small business: Here the focus is on the improvement of market access (which also includes procurement support and export promotion), the creation of an appropriate regulatory environment, and the more effective and wider utilisation of incentive schemes available for small enterprises.

The current strategy also identified the importance of accessing markets (both Domestic and international) by small enterprises. On implementation however, there was no deliberate and dedicated attention to obstacles that confront small business in specific sectors.
Special attention will be given to ensuring that small businesses are significant role players in the following sectors:

· Agroprocessing
· Tourism
· Metal and Mining
· Construction
· Cultural Industries
· Automotives and transport
· ICT
· Chemical and Bio technology

3.3 Enhancing the capacities of small enterprises: This category relates to the ability of small enterprises to actually deliver what they have offered. This depends (i.e.) on business infrastructure facilities, programmes to facilitate technology transfer and incubation, improvements in the access to finance (especially micro-finance facilities in rural and small town areas) and access to sector or industry-relevant skills training.

The current strategy and its implementation focused mainly on capacity building for small enterprises through financial and non-financial support. The challenge has been to provide a package of support for the different needs of small businesses. Programmes will be designed in a manner that provides packaged support in the following areas:

· Access to finance
· Training and mentorship
· Adherence to quality and measuring standards
· Access to technology
· Improve productivity

3.4 Special target groups: Increased attention is to be given to support programmes aimed specifically at women entrepreneurs, rural small business, physically disabled in self-employment and the unemployed youth seeking self-employment. Besides, in all support programmes particular emphasis is to fall upon black business enterprises.

4. Role-players in supporting small business

4.1 To cover the full spectrum of small businesses within a constrained public sector budget is not possible, it is essential that "bottom up" or grassroots support - supplied at cost or on a voluntary basis by self-help initiatives, private sector service suppliers, NGOs, etc. - constitutes the broad basis of "support", with public sector, or "top down" support being facilitatory, complementary and catalytic. However, public sector support will be channeled to identified growth sectors and areas where there are opportunities for new enterprise creation.

4.2 Within the national government small business support programmes have to be embedded in the full range of national development strategies. Similarly, the parastatals do, through their normal action and through special programmes, exert major developmental influences on small business. Provincial governments, on the other hand, have only limited funds for dedicated support programmes, but have an important role to play in the coordination of private and public support programmes, the monitoring of provincial trends, and liaison between national, provincial and local authority efforts.

Local authorities have to play a very important role in the direct and indirect facilitation of small businesses, primarily within the context of Local Economic Development strategies.

4.3 Non-profit organisations like business and sector associations, NGOs and CBOs, education and training institutions and foreign donors all have the potential to address specific strategy elements, often in a technically efficient way, but often in a financially unsustainable way. The main challenge lies in the combination of these efforts with public sector support programmes, in order to enhance the grassroots level effectiveness of support. Similarly, private service suppliers to small businesses cover by far the largest number of small enterprises, even though the availability, quality and affordability of such services differ vastly across the country - and may, in areas of particular need have to be enhanced through publicly supported complementary programmes.

4.4 It is the intention of government to make the evolution of support programmes between all these agencies as transparent and practically efficient with sufficient leeway for local, regional and national initiatives.

5. Funding Small business Support

Significant expansions in the range and geographic coverage of small business support programmes will inevitably need higher funding. The challenge centres around the spread of this higher public sector outlay over the full range of public, non-profit and private support agencies. Even within the national government it is necessary to spread the funding over all the development strategies.

While there can be no doubt about the need to channel far more resources into support strategies, it is also critical to review each programme and strategy with respect to its effectiveness and optimal funding mechanism. In particular, the skillful combination of private/public co-funding and increasing cost-recovery from beneficiaries should pave the way for the gradual increase in programme coverage without an equivalent increase in state funding.

6. Institutional re-alignments

Although most of the implementation bodies involved in small business support need some reform or alignment in order to handle expanding demands and a more differentiated range of programmes more effectively, this document only proposes two institutional adjustments.

· a new National SB Advisory Board should replace the defunct NSBC, and
· a Micro-Finance Agency should be established primarily for micro enterprises

In addition, the mandates and interaction patterns of core support agencies at national level have been re-assessed and their interaction with provincial support agencies or initiatives reconsidered. An integration towards business development services at national level is being considered to ensure proper coordination through a single institutional interface.
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