Access to Markets – Major Issues for consideration

Small Business Development

30 October 2019
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

There was a general consensus that the small business sector was the backbone for many emerging economies, and contributed massively to their Gross Domestic Products (GDPs). The main aim of the presentation was to identify the key snags restricting access by Small, Medium And Micro Enterprises (SMMEs) and cooperatives, to the market.

The importance of the small enterprise sector was increasingly being recognised in many countries, including South Africa, after many years of market domination by large enterprises. Current structures in the retail and wholesale sector that supported informal and small businesses appeared to be inadequate for new business start-ups, their long-term growth and sustainability. The barriers and facilitators to growth and sustainability needed to be clearly understood to drive economic growth within this sector. The participation of the small enterprises sector was still low, judging from its market share and overall contribution to the GDP.

Members were in agreement with a recommendation that the private sector needed to get involved in supporting SMMEs. It was not solely the responsibility of Government to support SMMEs. A common theme was that “small business was everyone’s business.”

It was emphasised that small businesses were generally unable to succeed because there was often no market for them. A recommendation was made that district models should be established where district industrial parks would be built. Those parks would supply products and services to all three spheres of government -- municipal, provincial and national. Government procurement from these suppliers would be guaranteed, and women entrepreneurs and young people involved in support services would be available, and they could manufacture secure in the knowledge that they already had a market.

Members commented that the fundamental problem was that South Africa had an unstructured economic framework. Many South African businesses were monopoly-controlled. As the Committee responsible for small business development, they needed to look at de-concentrating the country’s economies. They had to find ways – through legislation and other policy instruments – to try to break down the monopolies. It was agreed that a summit meeting should be convened, involving stakeholders from both the private and public sectors, to consider ways to accelerate the development of small enterprises into the mainstream economy.

Meeting report

Opening remarks by Chairperson

The Chairperson referred to the alarming unemployment statistics released by Stats SA, and said the Department of Small Business Development (DSBD) could assist in stimulating economic growth. However, there were stumbling blocks that were faced by entrepreneurs and small businesses, as they did not have access to funding. The meeting should assist the Committee in coming up with some resolutions on how best they could assist small businesses to grow. The truth of the matter was that bureaucratic red tape was a hindrance to small businesses.

Access to Markets – Major issues for consideration

Mr Sibusiso Gumede, Committee Content Advisor, said there was general consensus that the small business sector was the backbone of many emerging economies, contributing massively to their gross domestic products (GDPs). The main aim of the presentation was to consider the key snags as far as access to the market was concerned.

Constrained and limited access to markets for Small, Micro, Medium Enterprises (SMMEs) and co-operatives was one of the key barriers to South Africa’s attempts at growing the small enterprise sector. The complexity of sustainability standards was preventing small enterprises from accessing the market, both private and public. The sector was generally unaware of what standards they needed to comply with, and how to implement them. Rural and township enterprises, especially, had no support mechanism to guide them through onerous procedures.

The presentation emphasised some of the problem statements:

  • Very few instruments existed to compel the private sector to play a part;
  • The revised broad-based black economic empowerment (BBBEE) code was placing a great deal of focus on enterprise and supplier development (ESD), and there was a growing number of private incubators and accelerators, many of which were being established in response to ESD and BBBEE solely for compliance purposes, and therefore added little value to the entire small enterprise ecosystem;
  • Current structures in the retail and wholesale sector that support informal and small enterprise businesses appeared to be inadequate to support new business start-ups. Their long-term growth and sustainability needed to be clearly understood to drive economic growth within this sector;
  • Poor economic infrastructure was among the biggest hurdles facing the country’s ambitious programme to improve the nation’s manufacturing capabilities and support higher growth for generating employment;
  • Power generation and transmission remained a lingering threat, while transportation infrastructure capacity constraints continued to limit small enterprise performance and private sector investments;
  • South Africa did not have single overarching public procurement legislation, and this had led to a lot of fragmentation.

Referring to the international experience, the presentation showcased the UK and USA. In the UK, small businesses were of much greater benefit to local communities than large firms. For every £1 spent with a small or medium-sized business, 60p was spent in the local area, compared to 40p in every £1 spent with a larger business. In the US, minority business firms were being established and growing and employing minorities at a faster rate than other sectors of the population. Doing business with small and minority businesses was advantageous due to their being agile and adaptable.

There was section in the presentation that dealt with opportunities for small enterprises. The objective of this section was merely to underscore the significance of private sector procurement, because whenever the subject of access to market was discussed, the attention was often and exclusively directed to the state as a procurer of goods and services. The approach was therefore to bring to the fore the role that could potentially be played by the private sector. These were the results/turnover of the few listed general retail groups:

  • The Spar group grew from R95 billion in 2017 to R101 billion in the 2018 financial year;
  • The Shoprite Group’s total turnover reached R145 billion in 2018;
  • The Woolworths Group’s revenue grew from R70 billion in 2017 to R75 billion in 2018;
  • Massmart had total sales of R90 billion;
  • Tiger Brands’ revenue declined to R15.4 billion from the previous year (this was probably due to the Listeriosis outbreak).

Total public spending over the medium term expenditure framework (MTEF) period was expected to reach R5.9 trillion. It was expected that the bulk of the spending would be allocated to learning and culture, social development, health and community development. Public procurement was a critical lever to change the production and ownership of the economy, to empower black people, women and the youth.

The importance of the small enterprise sector was increasingly being recognised in many countries, including South Africa, after many years of market domination by large enterprises. Current structures in the retail and wholesale sector that support informal and small businesses appear to be inadequate to support new business start-ups, their long-term growth and sustainability. The barriers and facilitators to growth and sustainability need to be clearly understood to drive economic growth within this sector. The participation of the small enterprises sector was still low, judging from the market share and overall contribution to the GDP. Numerous initiatives, however, were now being taken to redress past discrimination and improve the market environment.

The recommendations were indicative. There was no one-size-fits-all solution to the challenges facing the small enterprise sector. However, some of the key pillars that could form part of a wider access-to-market strategy could be as follows:

  • On the private sector front, a number of interventions such as lobbying the industry, the Wholesale and Retail Sector Education and Training Authority (W&RSETA) and other key players to develop a Charter may be considered;
  • A particular focus must be given to ESD and other BBBEE codes of good practice which were currently being used to comply, or tick box exercises, adding little value to the small enterprise ecosystem;
  • The Portfolio Committee should consider giving the sector an audience -- to date, only Spar had appeared before the Portfolio Committee;
  • The Department must consider having a structured approach and engagement with the National Treasury that would cover a number of issues: to lobby National Treasury to accelerate finalisation of the Procurement Bill, to outlaw sale of tender documents, all state tenders to be advertised and tender documents downloaded from a tender portal.

Discussion

Mr H Kruger (DA) agreed that the private sector needed to get involved in supporting SMMEs. However, he believed that before the private sector got involved, there were some challenges that needed to be addressed within small businesses. The reason he suggested this was because apart from big businesses not supporting small businesses, big businesses tended to bully small businesses – especially when it came to the 30-day payment. The minute small businesses contact them about outstanding payments, they blackmail and threaten to end their contracts. For the Committee to ensure that big businesses were getting on board, it was important to sort this issue out, as small businesses had nowhere to complain about big businesses.

Mr M Hendricks (Al Jama-Ah) shared the model of the Department of Labour. They wanted to create opportunities for people with disabilities, so they had built ten employment factories in six provinces. They then made sure that Treasury and Government outsourced all the bedding for the hospitals to these factories, all the furniture for Parliament and school benches, and a list of items was outsourced to these ten factories. In other words, the market was created before the actual jobs were created. The items that were manufactured in these factories were South African Bureau of Standards (SABS)-approved and of a high standard. In this way, sheltered employment workers were empowered because state procurement budgets were used, and whatever was produced had been pre-sold. However, later on there was a problem when the private sector interfered because they wanted to compete with these factories.

He described the model in KwaZulu-Natal (KZN) with the Halal industrial parks. KZN and three other provinces involved in the project presold the products, identified which products the $300 billion Halal market needed, and then presold those goods and started building a Halal industrial park. Businesses were encouraged to take part in this park and set up manufacturing. President Zuma had tried to promote manufacturing, and this had been one of the results. These small start-up businesses, which may consist of five women and a few teenagers, were all in the industrial park. There were facilities there that could assist them with all the financial and business expertise. The great thing was that whatever they manufactured was sold before-hand.

What they were suggesting, as Al Jama-Ah, was that they needed to support the President with his district models and put up district industrial parks. These district industrial parks would cover all three spheres of government -- municipal, provincial and national. They would have procurement money available. All that money would be used to buy manufactured products that they may need. So if all those procurement spends were guaranteed for the district model industrial parks, and women entrepreneurs, teenagers and even men were involved and were in an industrial park that had many support services and SABS standards to ensure that they produced quality goods, then they would manufacture knowing that they already had a market. He thought that these opportunities should be considered.

Small businesses could not succeed where there was no market. They take a chance and do not know whether their products would be sold.  With this model, there was a guaranteed market where their products would be sold. He also believed that the Committee should take advantage of the trillion-rand procurement spending that was available.

Mr Z Mbhele (DA) said he had only one broad comment on the theme of access to markets, and a proposal in addition to one of the recommendations in the presentation. It seemed that when it came to the prospect for success for SMMEs in gaining sustainable access to markets, there were several factors involved. The first was that those SMMEs would occupy a particular niche. It might be a geographical niche where they were filling a gap that had not been catered for-- for example, spaza shops which were providing fast moving consumer goods in communities that were catered for by the formal retailers. Or it might be catering to a specialised niche market -- for example, all those fancy boutiques and clothing stores. Or an underserved market, such as the hair salon sector in townships because the established hair care industry was not catering to black hair care – so that was the gap.

The second crucial factor was that of SMMEs finding their place in the value chain. He sought to highlight one particular example which he had witnessed first-hand after participating in a study tour in Taiwan. 80% of the Taiwanese economy, both in GDP output and in the number of enterprises, was comprised of SMMEs. This was due to the way that the economy was structured. SMMEs were deliberately put into a value chain. He worried that had happened in South Africa was that there was a rather limited understanding of what an SMME supplier was. People had not quite unpacked and developed the notion of SMMEs being plugged into a value chain, where they feed into a production process.

He believed that the recommendation made -- for a joint portfolio committee meeting -- was very valuable. He suggested that the Committee consider a joint meeting with the Tourism Portfolio Committee. The tourism sector was crucial to South Africa’s economy. It was where the easiest job opportunities for first time labour market entrants and unskilled and inexperienced job seekers could be found. Many operators in the tourism sector, such as bed and breakfast (BnB) establishments, tour guides etc, were themselves SMMEs and so there was a lot of value to be unlocked in having a joint discussion with the Tourism Committee about how to harness that potential for SMMEs in tourism, feeding into job creation, economic growth and skills development.

Mr M April (ANC) emphasised that small business was everyone’s business. He felt that the presentation supported the notion that suggests that small business was only government’s businesses. This was a fundamental problem when looking at the unemployment statistics that were recently announced. Government was being identified as the sole responsible entity to ensure the growth of small businesses, and this kind of thinking would not work. When looking at the economies of scale, it was not government that produced the biggest turnover, but rather the private sector. He was of the view that the country was not aggressively addressing the status quo, as the responsibility still lay with the government. Perhaps as lawmakers, the Committee should look at how to come up with solutions to ensure that everyone became involved when it came to small business development.

The presentation had spoken about how the complexity of sustainability standards was preventing small enterprises from accessing the market. He felt that this addressed his point of the role-players for developing small enterprises.

Mr April said the inflexible and excessive requirements identified in the presentation – such as building standards, organic content certification, ethnic/religious requirements, experience and financial capability -- were still being used perversely to eliminate small enterprises from acquiring huge and lucrative contracts, and this was like a thorn in his flesh. There was nothing as inhibiting as these measures to keep a young black African child out of the mainstream of the economy. These were the red tape measures imposed by the government on small businesses that made it so difficult for an African child to participate meaningfully, and left them on the periphery of the economy. When they did not have access to the capital that others did, they just did not have a chance to get into the economy. This meant that those who were already empowered, stayed empowered, while the rest were on the periphery.

The presentation listed a host of laws which govern procurement -- the Public Finance Management Act, the Finance Management Act and the Municipal Finance Management Act -- and he accepted they had been put in place with good intent. However, they kept small businesses from doing business with the government. As Members, they could no longer sit in committee meetings, in government and in Parliament, and not address these matters. They should not turn a blind eye to the fact that it was the very same acts that they had put in place that were causing the biggest obstacles for the African child to contribute meaningfully to the economy.

He heard the point that had been made by Mr Hendircks. However, it was these bodies -- such as the SABS, Halal for the Muslims and kosher for the Jewish – all acting as different authorities which were sidelining many of these businesses. There should be a focused approach to see what it was about slaughtering a sheep that determined why that very same sheep could be sold in the township, but not sold at Woolworths. This sort of thing should be looked into, because they were the tools used to keep small businesses out of the space where money was generated. Many of them were being used as an excuse to exclude an African child from meaningful participation into the economy. It could no longer be something that Members could be quiet about. It was something that really needed to be looked into and perhaps addressed through legislation. They needed to follow an aggressive approach -- one that emphasises that it cannot be business as usual. There was a need for small businesses that could create jobs, but those jobs could be created only where there were markets. People could try to start a small business, but if there was no market or the barriers to markets were so stringent that they would never make money, it was pointless to start a small business.

Lastly, the government’s cumulative spending was over R1 trillion. However, less than 30% of that spending went to small enterprises – the rest went to big businesses. Members could not talk about transformation in the sector if they were not serious about addressing this. This was something that should be looked at with the urgency and necessity that it deserved.

Ms K Tlhomelang (ANC) said that since unemployment was such a major problem in SA, there was a dire need to support SMMEs so that they became a source of job creation. The presentation had highlighted that the biggest challenge faced by SMMEs was access to markets, and so the approach would be to figure out how government and large companies could buy from SMMEs. She proposed that Members should go beyond the provision of funding and early-stage mentorship to SMMEs, and should rather focus of finding ways to help SMMEs to gain access into various markets. There were a number of successful industries, and each should play a part, as small business was everyone’s business.

Another recommendation would be to revitalise local businesses through business chambers. By doing so, they would create partnerships with big businesses, government and the private sector. These chambers would allow for monitoring and assessment. Furthermore, they needed to create enterprise development zones in each province which they could later extend to villages and townships. The reason for this was because there was a concern regarding big businesses bullying smaller businesses. However, up until they had a structure in place that allowed all relevant stakeholders to check in with municipalities, big businesses and the private sector to be aware of what was going on, not much would be achieved.

Mr F Jacobs (ANC) said a fundamental problem was that SA had an unstructured economic framework. Most of its businesses were monopoly-controlled. In the retail sector, in the wholesale sector – in all the sectors -- monopolies were in control. If one looked at the history, it had been engineered that way. As the Committee responsible for small business development, they needed to look at de-concentrating the country’s economies. They had to find ways – through legislation and other policy instruments – to break down the monopolies. When looking at the monopolies, such as Spar, Pick n Pay and Woolworths, all of them had easy extraction and maximisation of profit without ploughing money back into the local economies. The Committee needed to ensure they got a seminar going to indicate that what was being done was not enough, and that it was not happy with the untransformed retail space. Fundamentally, these monopolies create niche markets, and if small businesses were given the right environment, they would be able to provide that niche market. Essentially, the sector remained largely untransformed.

However, the public sector also needed to get its house in order and lead by example. If the procurement budgets of the state were approximately R6 trillion, fundamental economic change could be made for South African people. The big challenge was that the country was consuming material goods as well as debt, but was not becoming a value-adding producer. There needed to be a deliberate attempt to change this. He echoed the sentiments shared by the rest of the Members that small business was everyone’s business.

He said that by tracking the spending of the government and its entities, it would be possible to determine how much was being spent in different geographical areas. An economic model could then be planned to ensure the money spent in these areas did not only going to the malls. The big problem was that the malls were extracting all the surplus value out, all the money was going to the supermarkets. There was not a circular economy. The money that used to go to the local entrepreneur, such as the spaza shop, was now going directly to multinational companies. For example, approximately R80 million went into a town like Beaufort West on a monthly basis for foster care and SA Social Security Agency (SASSA) grants. Was that money being tracked? Was it being used beneficially? In the Western Cape, one could see that SASSA money was not being used in a productive way. People were using that money in shebeens. From a very young age, people were not being productive.

The Portfolio Committee needed to insist on becoming champions. The Department must ensure they knew how to take this matter forward. He welcomed the notion that if need be, they could call big the departments to this Portfolio Committee and question them over the amount of products they were procuring from small businesses. This could be done with the private sector as well.

Mr Mbhele gave an example of koeksusters being sold in big retails stores like Woolworths, and at the same time being available in places like the Bo Kaap, where the Cape Malay culture was a the root of that cuisine.  He felt it was worth exploring whether there was any economic linkage between city centre businesses and those a couple of blocks down the road?

Mr Hendricks addressed the remark that claimed that anyone could slaughter a sheep on Clifton beach or in a township, and it was Halal. He considered this remark to be very insensitive. The ecclesiastical issues around Halal were quite extensive, and he would like the Chief Whip to delve a bit deeper into the subject. As far as the Halal issue was concerned, 80% of the beneficiaries of Halal certification were outside the Muslim faith. Unfortunately in South Africa, the Halal standard did not meet international Halal standards, and there was a $300 billion market that South Africa was interested in. President Thabo Mbheki had launched that project when he was President, emphasising the need to tap into that market for the benefit of small businesses. There was therefore a bigger picture that there was a needed to ensure that South Africa complied with international Halal standards, because the current Halal authorities came nowhere near it. They were not 100% Halal certified. They were being propped up to appear to be 100% Halal compliant, but there an intensive study of all the Halal certifying authorities in South Africa had been done, and they had failed the test. There was a need for government intervention to ensure that South Africa could access that market. That was the bigger picture.

Mr April clarified that he had not said that Halal should be slaughtered by anyone. His stance was that there should be a study conducted to find out exactly what happened, why it happened and who did it. He was delighted to hear that 80% of people doing it were outside of the Muslim faith. A study should be done to find out how new entrants in the market were guaranteed.

Prof C Msimang (IFP) said it was both eye-opening and frightening to see what stood in the way of the development of small businesses in South Africa. The figures that were disclosed in the presentation were absolutely shocking. Given the revenue achieved by the big companies, they should not be competing against small businesses, because small businesses did not stand a chance. The Committee had had a presentation from the Small Enterprise Finance Agency (SEFA), which had explained that they granted applicants loans from R5 000 to R5 million. When one compared this to the revenue of big businesses such as Woolworths, they were achieving revenues of hundreds of billions – while SEFA could only loan up to R5 million.

What further complicated the situation was that consumers prefer big businesses. One would see malls mushrooming in townships and in rural villages, and the consumers think it is the best thing that could happen in the village. There were several reason for this: it was a one-stop shopping centre, the prices were much more reasonable than in small businesses, and there was variety that one could not get in small businesses. Therefore it would be unfair to say that big businesses should not compete in the townships because it would be depriving the consumers in the township. What was even more devastating was the fact that neighbouring countries had got syndicates that allowed them to order from overseas, and they could sell at much lower prices than South African small businesses. Many of them could start off with a 15% discount because they were not registered, so they did not pay VAT.

He echoed the recommendation to have a seminar.

Many people would prefer to order chicken from Brazil, Australia or even America than buy chicken from the local farm, so the argument that big companies were less concerned with promoting small businesses and more concerned with making profits was rather unfair. He also liked the idea of having an ombudsman who was going to go to big businesses to try and make them see the logic of also allowing small businesses to prosper. Based on the presentation, South Africa’s small business development was worse than Kenya’s. It was a “Catch 22” situation, because as a consumer one would want big businesses to be available at your disposal, while as a small businesses one would want them to be driven out.

The Chairperson thanked the Content Adviser for the presentation, and emphasised the idea of having a summit. By having the summit, the Committee would be better able to understand the issues. It was crucial to have the joint meetings with other Portfolio Committees.

There were many issues that needed to be looked into. The Committee had said that it needed to create jobs and reach a target of R11 million by the end of this term, but when looking at the pace that they were moving, it was clear that this may not be possible.

She liked the spirit of the Members. All they needed to do was to ensure that they unlocked the situation. They had to make sure that the public sector was involved.

The Committee would craft the recommendations which would be circulated. There had been a lot of issues that had been added into these recommendations.

The meeting was adjourned.

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