Analysis and Impact of SONA on SMMEs: Committee Researcher briefing

Meeting report

The Chairperson opened the virtual meeting and welcomed all present in the meeting. She then made brief opening remarks.

Committee Researcher, Ms Nwabisa Mbelekane, made a presentation to the Committee on the thematic perspective of the President’s State of the Nation Address (SONA) and the implications for the Portfolio Committee on Small Business Development.

Implications of SONA 2022 on the Small Business Development

Small- and medium-size businesses provide more employment than large enterprises and 90% of new jobs in South Africa are from the SMME sector. Unemployment would be reduced to six percent, as this would create 11 million jobs. The potential of small businesses, micro businesses and informal businesses should be assisted to unleash their potential. Labour market regulations must be reviewed to enable businesses to hire more people while protecting workers’ rights.

There is limited access to finance for SMMEs, and by-laws and the Constitution present inconsistencies where they intend to protect municipalities as opposed to empowering traders. In some instances, informal traders were unlawfully removed from their trading areas. Labour laws are also unfavourable to small business, as they are unable to let workers go if the business can no longer afford them or if they prove to be unproductive.

Government should improve conditions for informal traders and create an enabling environment where the private sector business, both big and small, can grow. The market is dominated by very few players where the top 10% of businesses earn 86% of the total income and the bottom 50% earn only 1,6% of the income. South African economic conditions are hostile to SMMEs and they undermine inclusion in job creation and the potential of the economy. Amongst the challenges SMMEs face in accessing new markets is the spatial mismatch, which leaves large geographical distances between areas of production for Africans and the economic hubs in the country due to apartheid policies. Transportation is costly to the economic hubs where the business is most likely to grow and many businesses need access to productive, suitable land and affordable premises that workers can access. This has caused SMMEs located in townships and informal settlements to operate illegally or in informal premises, which ultimately presents a health and safety risk for workers.

Often, crime and corruption are barriers to accessing new markets, as suppliers prefer not to operate in high-crime areas, and SMMEs have reported being expected to offer gifts to secure government contracts, import licenses or electrical and water connections.

A loan guarantee scheme is being introduced to enable small businesses to bounce back from the COVID-19 pandemic and civic unrest. This will consider the lessons learned from the previous scheme and will involve development finance institutions and non-bank SME providers to offer finance and thereby expand the types of financing available. Previously, the Loan Guarantee scheme did not perform well, as R200 billion was available but only R18.39 billion was approved by banks or taken up by small business.

The challenges SMMEs faced by the Loan Guarantee Scheme included not meeting eligibility criteria set by Treasury, the Reserve Bank and other banks; the requested value of the loan being too high for the business to be able to repay it, or the enterprise not being in good financial standing prior to the pandemic.

Red tape reduction will be addressed through the review of the Business Act and a broader review of legislation affecting SMMEs. The President announced the appointment of Mr Sipho Nkosi to lead a team that will focus on cutting down red tape and ensuring government departments pay suppliers within 30 days. Out of 40 national departments, only eight managed to achieve a 100% compliance rate on submission of 30 days, during the 2021/21 financial year; unpaid provincial invoices amounted to R26.6 billion in the 2020/21 financial year and R4.1 billion at a national level. Regulations and red tape include costly environmental protection, employee welfare and tax regulations, applying for tax incentives, the costs of compliance with obtaining black economic empowerment (BEE) certification, accessing a learnership through a sector education and training authority (SETA), compliance with labour laws, Municipal regulations and Licenses or sector-specific permit systems administered by local governments, amongst others.

The ‘Pay in 30” initiative calls on SMMEs to be paid within 30 days and is led by Business for South Africa, the SA SME Fund and Business Leadership South Africa. Its supporters include Business Unity South Africa, the Small Business Institute and the Black Business Council.

Several recommendations have been made to the Committee:

a) Listen to the Minister of Finance’s budget speech, for pronouncements on criteria for expanding participation in the Employment Tax Incentive that will make it easier for small businesses to employ young people. Further, request the Departments of Small Business Development, Treasury and Labour to brief the Committee on the implementation plan and implications as well as expected outcomes of expanding the criteria for participation in the Employee Tax Incentive for SMMEs.

b) When the red tape reduction has been established, consider requesting the Presidency, together with Mr Nkosi, to brief the Committee on the mandate and terms of reference of the team.

c) Request the Department of Small Business Development of Trade, Industry and Competition to present on the Continental Free Trade Area agreement and new market opportunities for SMMEs and cooperatives.

d) Request the Competition Commission to brief the Committee on their initiatives in relation to the levelling playing fields and opening up markets to new entrants, cooperatives and SMMEs owned by the historically disadvantaged can participate.

e) Invite Business for South Africa (B4SA) to brief the Committee on SMMEs that are owed money outside of payment terms by large companies, the “Pay In 30” days campaign and how it is monitored.

f) Ask National Treasury and Small Enterprise Finance Agency (SEFA) to brief the Committee on the bounce-back scheme and how to expand uptake for struggling SMMEs.

g) Invite the Department of Small Business Development to elaborate on the review of the Business Act and the reduction of the regulatory burden on the informal sector.

The Chairperson thanked Ms Mbelekane for the detailed research and analysis presentation. She said the Committee should stick to the recommendations made by the Researcher, as this would assist the Committee, moving forward.

Discussion

Mr H Kruger (DA) expressed that he was very happy to hear that bureaucrats were informed about red tape reform. This is good news; he had sat at the edge of his chair when the President started talking about red tape. He has been working on red tape reform since 2014, and there was no politician in South Africa that knows more about red tape reform than himself. He agreed 100% that the formal sector was carrying the brunt of red tape and this was his reason for being passionate about red tape reform.

The Global Entrepreneurship Monitor should be looked at for statistics, as it measured early entrepreneurship in South Africa and around the world. In South Africa, 6.9% of people are in the early stages of entrepreneurial activity and just 10.1% of adults intend to start a new business in South Africa. The education system must be looked at to develop entrepreneurs from an early age.

The mandate of the Committee and Department must be sorted out. If the Department’s mandate changes from red tape development, the Committee must consider the budget, as a lot of money was allocated for red tape reform; the President must enforce this. There is some work to be done to sort the mandate and budget. He referred to Takealot, One Day Only and other online businesses, saying that it seemed that these businesses were running the online business industry, but all of them started out as small businesses. Very small businesses must be reformed to become big businesses. “We should not hit, for example, Takealot, with a stick, but we should find out how they managed to come from being garage businesses before transforming into big players in online business. He said Prof Nieuwenhuizen from the University of the Witwatersrand wrote a research paper in 2019, on The Effect of Regulations and Legislation on SMMEs in South Africa.

The Chairperson said that he should circulate the paper amongst Members.

Mr G Hendricks (Al-Jama-ah) said that the recommendations by the Content Advisor and Researcher were very informative and revolutionary. He looked forward to the briefings that would arise from this. He said he would have liked to hear more about the roadside businesses that the President referred to in his State of the Nation Address (SONA) and how the Committee would deal with municipalities that would use its by-laws to sabotage such initiatives. One of the stakeholders not included in the individuals who should appear before the Committee is the President himself. He has to be invited to explain to the Committee why he has said that the private sector would create jobs. He remarked: “we have heard that this is a pipe dream because the private sector does not create jobs. It is important for the Committee to engage the President on his views, which may change later on. This is a conundrum that will change everything around, as we gear up to assist the country and the President with the enthusiasm of the informal sector and the SMMEs. The private sector does not create jobs elsewhere”.

Mr J De Villiers (DA) said that when the current Minister did her roadshow, she very courageously, vigorously and very aggressively proclaimed how she and the Department of Small Business Development would shut down businesses that are non-compliant; they would be at the forefront of closing down these businesses. “Just two weeks later, during the SONA, the President has a completely different attitude, which the DA completely supports – that we should support small businesses and help non-compliant businesses become compliant, and that we should not go on a witch hunt to shut these businesses down.” The Minister and President are in contradiction, and this is creating a lot of confusion. It does not look like there is a lot of confidence in the current Minister; quite frankly, Small Business Development deserves better than that. “We deserve a Minister who is competent and can account to us. We need to be able to work with the Minister.”

He thought it was important that the Committee have a meeting with Mr Nkosi to try to understand his job description and what his obligations would be in the Presidency so that the Committee could fulfil its role in effectively working with him and so that there will not be a duplication of services and this could streamline the process. He looked forward to the meeting with Business South Africa about the ‘Pay in Thirty Days Campaign’, which is something that the DA wholeheartedly supports. It is absolutely unacceptable that government and the private sector take so long to pay small businesses. Small business is used to finance the big businesses or to finance government’s cash flow. It is highly unfair that the cash flow of small businesses is negatively affected by big businesses and the government, who simply do not pay small suppliers within thirty days. They are using small business as if they were banks and abusing the positions they have, as they know small businesses do not have a lot of firepower to challenge them. The review of the Business Act is very important, and he looks forward to working with other committees on this.

The Chairperson said that this was very important and that job creation was key.

Mr Kruger said that he missed his last point. He tabled two red tape reduction Bills during his time at Parliament, and there are not many Members who have tabled two Private Members Bills. “If one listened to the President, it seems like he took a page out of my Private Members Bills. This is what is worrying me – when the opposition has a lot of input, but nobody takes this to heart. If my Private Members Bill was taken seriously in 2016 already, imagine how far we would have been now because then the environment would have been equal for all businesses.”

The Chairperson said that the Committee was assisted by its Researcher and such issues would be addressed. What was important now was to have a common goal. “At the end of the day, we all want to see small businesses growing.”

Ms K Tlhomelang (ANC) welcomed the presentation by the Researcher and said it was very informative. She welcomed the Researcher's recommendations and agreed that the campaign for payment to be made in 30 days to small businesses was very important, as longer delays negatively affected small business. She also agreed to the review of the Business Act. She was concerned about red tape and said a discussion with Mr Nkosi from the Presidency was necessary for the Committee to be able to deal with many other issues. She had a few proposals to make to remove red tape. She said more time should be spent on helping small businesses budget for emergencies. Businesses need to be empowered. Spending limits must be set for small businesses so that their internal processes can be improved. Communication must be improved with the Department so that issues are raised timeously. Coaching and mentoring must continue up until a point where there is certainty that the business will be a success. Some small businesses become frustrated along the way after making certain requests and then end up failing. When small businesses pick up an issue, they should be able to access help immediately, so communication channels should be opened. She supported the recommendations by the Committee Researcher.

Mr E Myeni (ANC), referring to what Mr De Villiers said in his previous comments, said he heard what the Minister said and the Member was quoting her correctly and the Committee needed to deal with this. Most South African banks do not support small businesses, and this needs to be addressed. The domination of big businesses over small businesses needs to be dealt with by the Committee immediately.

Mr F Jacobs (ANC) said that he shared the sentiments of all Members who spoke before him. All the recommendations are supported and the officials now need to put this into practice. There needs to be far reaching changes in the sector to unleash job creation since 90% of jobs are with informal traders. The Committee needs to unlock this. The President also spoke about industrial hemp and the creation of possible 130 000 jobs. “We have seen situations where multinational companies will buy cannabis and hemp and decimate small businesses. This should not be allowed. All industrial master plans should incorporate a “Local is Lekker” approach. National Treasury and the Banking Association of South Africa (BASA) must be approached to share the lessons they have learned. If banks do not make profit, so be it. It is easy for banks to sell loans, but there needs to be productive use of our economy. There should be incentives for both lender finance and loans. Development finance is also needed. There needs to be legislative clarity and the Department has a key role to play here.”

He agreed that Mr Nkosi needed to clarify his role and the South African Local Government Association (SALGA) needed to be dealt with, as they continued to victimise informal traders who were often chased off the streets in Wynberg in Cape Town and Johannesburg. By-laws need to be friendlier toward informal traders.

“We also have huge infrastructure projects that the President spoke about, such as the R100 billion project and the Water Project. There is about R1.8 billion allocated for bulk infrastructure and R2.6 billion from the private sector. We need to ensure that all of these projects are a success and have local set aside projects. People have misinterpreted the President’s call on the private sector assisting with job creation. It is not an ‘either or’ but an ‘and’. The private sector should come to the party and provide incentives. We want to get South Africans working and investment in South Africa. We want to thank Foschini, as more than 80% of their products are made in South Africa. Supermarkets, pharmacies and other companies should also follow suit. He questioned why monopoly capital was still working in South Africa. The Competition Commission should account to the Committee. He questioned how the Committee would ensure that Shoprite, Pick ’n Pay and others should have local products.

He referred to the African Free Trade Agreement and said the Committee should refer to its sister Department. “We need to ensure that women, local youth and black South Africans are involved in this.” He thanked the Researchers and said the Committee should hold itself accountable and ensure oversight, as it was the Committee’s job to push for the betterment of all South Africans.

The Chairperson said that the Committee needed direction, and agreed that entities needed to account to the Committee.

Mr V Zungula (ATM) welcomed the presentation. He said that the Minister should regularly account to the Committee on the Department’s issues so that everyone could work together. Legislative directives should compel state organs to utilise SMMEs in their spending. Over 80% of government’s spending goes to big businesses. The dominance of non-South-Africans in the SMME sector should be noted. The North West Business Chamber released a report stipulating that 82% of informal businesses are run by non-South Africans. This cannot be ignored. If this is the case in the North West, perhaps it is also the case in other provinces. “We cannot allow such dominance to occur in this country.”

He agreed with Mr Jacob’s comments and that South Africans needed to benefit. The Committee cannot be silent on non-South African trading and not following laws in the SMME space. When by-laws are enforced, they disadvantage South Africans. “If we have a country that lacks law and order, we do not have a country at all. It cannot be that people come from Asia and other places and settle here and trade outside of the law. Something must be done about this. This is a ticking bomb, as organisations have gone to stores operated by non-South Africans to check if the goods sold are not expired. If the Committee does not provide proper oversight and leadership, it will fail; when it fails, people will lead themselves, which could potentially lead to violence and loss of life. The Committee needs to be proactive. Locals must dominate and laws must apply equally to everyone.”

The Chairperson said that SALGA would be called, as the Committee could not continuously lament on an organisation that was part of it. “If we want to heal, we need to diagnose the cause. By-laws are the stumbling blocks. Stakeholders should be called to account.”

The Chairperson said that there was no need for a response, as Members have simply added to the presentation.

Ms Mbelekane noted the comments made by Members. She said the full document of research was circulated to Members. The Secretariat would get together to consider how it can assist the Committee in its oversight role.

Committee minutes

The Committee then considered and adopted its meeting minutes for Wednesday, 16 February 2022, without any amendments.

The Chairperson thanked everyone present in the meeting for the constructive engagement. In closing, she said it was one of the best meetings since joining the Committee, and she believed that action would be taken on issues of oversight, moving forward. She believed every Member spoke from their heart and that, working together, the battle of poverty would be won.

The meeting was adjourned.