Small Constitutional Review

Meeting report

ECONOMIC AFFAIRS SELECT COMMITTEE
8 May 2000
SMALL, MEDIUM AND MICRO ENTERPRISES

Documents handed out:
Address by Hon Alec Erwin, Minister: Trade and Industry
Address by Mr Alister Ruiters, Director General: Trade and Industry
Provincial Profiles and Impact Reports from nine provinces
Paper for discussion presented by SALGA

SUMMARY
The conference aimed to facilitate discussion on SMME development strategies being undertaken in the various provinces.

Minister Erwin apologised for some of the failures of the Department's approach and the resultant frustrations on the ground. He acknowledged that the Department had performed inadequately. He undertook to adjust areas of the programme and to reorganise the Department so that more units would work on the programmes relating to enterprise development and empowerment.
He criticised the banking sector for their failure to reach out to small Black businesses, thereby making it impossible for small business people to acquire start-up and growth capital. At the same time he expressed an understanding of the constraints within which that sector is functioning.

The most common problem experienced in the provinces was the SMMEs' lack of access to finance as banking institutions continue to be unwilling to provide finance. Furthermore, there is a distinct lack of coordination between provincial government and local government as well as with Ntsika and Khula. Most provinces recommended that the two agencies take up offices in each province so that their work could have a greater impact.

MINUTES
Minister Alec Erwin's address
The Department of Trade and Industry (DTI) faced a number of challenges in their attempts to implement the White Paper of 1995 and its national plan for small business. He admitted that the Department had "got it wrong and underestimated in many areas". Specifically, the Department had been wrong in their expectations of their ability to reach out to people and enterprises. The ability of the private sector financial institutions to support the SMME sector had been misjudged. The Department had underestimated the structural effects they had to redress.

Min Erwin has undertaken to make a number of changes and major reorganisation. More of the Department's human resources will now be diverted to SMME development as well as ongoing financial support. Regarding the future of the two development agencies, Ntsika and Khula, Ntsika will be revitalised and Khula has already been recapitalised. The Department is working on larger structural networks that will counter some of the weaknesses of community banking. It is hoped that a few new venture funds will be introduced in the area of financing.

Director General Alister Ruiters's address
The Department admitted that many of the key strategic objectives in the White Paper such as reducing inequality, empowering Black business, creating sustainable jobs and stimulating economic growth were ambitious. In 1994 many provinces did not have the capacity to deal with small businesses.

A number of lessons had been learned from the mistakes made:
- The job of promoting small businesses is not the task of one Department or one sphere of government alone. All government activities need to be integrated.
- There is a need for the synergising and timing of policy implementation.
-The substantial difference between micro and medium-sized business must be recognised. The kind of support needed for each category of business, that is, micro or medium, should be different.
- The level of support should grow to meet demands.
- Bad financial management within these institutions was another problem.
- It was often not recognised that there should be ongoing support by government to SMMEs in rural areas.
- There was a tension between national, regional and local input into programmes. Provincial budgets were not large enough to create programmes and furthermore there was no co-ordination between the three spheres.
-Self-sustaining finance institutions should serve 'unbankable' clients

After Khula and Ntsika had been set up, focus fell on them to the exclusion of other institutions. As the amount of money allocated to small businesses was primarily from the DTI, they need to rethink the kind of resources allocated to the Department, who were the recipients of the funds and whether there was a need to change support programmes.

Mr Ruiters concluded that in the area of finance the DTI should be aware of the following:
-There is a need to redesign finance to distinguish between commercial and development credit, between open and closed-ended subsidies.
-There is a need to manage resources and focus on institution building.

DTI have a number of short to medium-term plans:
- Establishing a legal and regulatory framework within which the small business functions.
- Access to information and advice should be facilitated. The website 'BRAIN' has been established (at www.brain.org.za).
- The pilot scheme for an integrated national procurement support programme is to be finalised in June. The scheme will provide integrated support when tendering in the areas of training, finance and technology and simplify tender documents and the information required.

DTI has a number of long-term plans:
- At provincial level a regional equity fund is soon to be launched in the Western Cape.
- The support in micro-enterprise funding is to be expanded. The credit guarantee scheme and micro-enterprise finance will be expanded.
- Other services that will be expanded are the mentorship schemes, local business service centres and manufacturing advisory centres.
- New areas would be developed such as the expansion of the national franchise programme. A regulatory review unit will be established as well as a small business advisory board.

Mr Ruiters pointed out that it was important to identify whom the DTI's partner was in the process. The Department was looking at establishing an advisory structure to advise the Minister, MECs and so forth. The DTI requires clarification on institutional mandates from Ntsika and Khula. For instance, are Ntsika supporting medium or micro-sized businesses? Lastly, they needed to work more closely with local government.

Questions
Mr Theron (DP-Gauteng) asked Minister Erwin whether it was not time for bold leadership and a turbo-charge (referring to the title of Min Erwin's address) now so that they could create jobs and help the unemployed members of their constituency. Mr Theron named two initiatives off the top of his head that could be implemented immediately. Subsidising training and development programmes at universities and technicons in the areas of marketing and procurement. Subsidising capital and infrastructure development in rural areas.

Min Erwin agreed that now was the time for a turbo-charge. He reiterated that, across government, attempts to intensify employment creation were being made. They were also trying to tighten up structures and inter-departmental co-ordination. He is not in favour of subsidies to universities or technicons. He prefers a more sustainable approach - working with specific technicons and institutions to develop new training programmes to meet the challenges of increasing industrialisation. These institutions themselves must take up the challenge. In response to the second initiative he said that this was largely what the existing programmes are doing. But there was a need to synergise the programmes to increase their impact.

Mr Motala, a representative from SALGA referred to the White Paper, which had given a mandate to local government in respect of SMMEs. They were still unclear on how this mandate fitted in with the programme.
Mr Ruiters said that at the Conference in 1997 the task of local government had been set out. SALGA had also been involved in many pilot projects such as in the Pretoria Metro. A number were still under way. For instance in Stutterheim there was an economic development programme in place. He stressed that it was not a one-sided approach. There were also particular needs at local level which local government was tasked with identifying. Other possibilities were the facilitation of electronic registration that would decentralise registration.

Mr Hamilton, (IFP- Free State legislature), suggested a mobile unit to visit schools. In Durban a programme had been set up to train and certify persons in artisan skills. School leavers should be encouraged to participate and then go into small businesses.

A Free State delegate asked whether fiscal measures could be used to solve the country's unemployment problem? Min Erwin was not sure if this was strictly so. He said that presently there were many more Closed Corporations being registered and that could be explained by the recent tax incentives for closed corporations. He was prepared to say that, yes; there was a need to change the fiscal environment to make it more attractive to medium and small enterprises. However, such incentives very often distort it.

Mr Cas Coovadia, a representative from the Banking Council of South Africa, said the Council would like the opportunity to put forward their views on the restructuring of Khula and Ntsika. Min Erwin said the government was not initially equipped to engage with the private sector. Having done the research and the work, they are now ready to talk.

Provincial Profiles and Impact Reports
[Although provinces had prepared comprehensive documents delegates were asked by the Chair, Mr Moosa, to confine their presentation to a brief impact analysis of the policy and the current state of SMMEs in their province.]

FREE STATE
The Chair of the Free State Portfolio Committee on Finance said that, in regard to the SMME strategy, there was still a discussion document circulating in the province. The national White Paper is therefore still the working document in terms of interacting with the SMME sector.
There was no proper co-ordination between the Department and SMMEs at local level. There was little activity by either Ntsika or Khula. Only three SMMEs have been funded in the province so far, in the Qwa Qwa area. There was no activity in other areas, only around ostrich farming. A delegation had recently visited Bloemfontein, Welkom and Qwa Qwa. From this visit it appeared that due to the poor condition of SMMEs there should be co-ordination of SMMEs at local level by municipalities including Khula and Ntsika. Because these agencies are located around Gauteng there is little assistance in rural areas. There should be decentralisation of these promotion agencies. There was also no land for grazing and the Department of Agriculture together with the Land Commission should facilitate a process of redistribution.
The budget for SMMEs was small; R 5.5 million, which was for economic and SMME development. The province requires grants for SMME development.

There was a problem regarding access to finance for the SMMEs. The province's response to Khula is negative. There is no impact due to a lack of capacity and synergy between Khula and the provincial government. Also, financial institutions continue to be reluctant to finance SMMEs.
Ntsika had established four accredited business centres which offers training to people but there are still other needs. A gap exists in the co-ordination with local sectors. The Centre for Small Business played a crucial role in the past. Where is it now? The Small Business Development Corporation had also left a gap that still needs to be filled. A trade research centre has been put into place in conjunction with the Flemish government. The centre helps to assist SMMEs with conferences and so forth. The SMME desk in the province helps with this function. The Free State Development Corporation is not playing a meaningful role in the development of SMMEs, being riddled with corruption and poor administration.

The priorities for the province are as follows. Provincial representatives should sit on the Boards of Ntsika and Khula. There should be an equitable share formula in provinces. Expediency and urgency is a recommendation.

MPUMALANGA
The Chair of the Mpumalanga Portfolio Committee presented the province's work on the strategy.
Mpumalanga operates within the national framework as set out by the White Paper but SMMEs need to be promoted in the province. Implementation of the strategy has been a problem. Rural areas have been neglected. The province has set out different programmes for SMMEs. They include the following. Assisting entrepeneurs to compile business plans. Providing tender advice in general and specific projects. Researching and compiling business statistics. An emerging contractors support programme.

The programme has had a number of successes and failures so far. Training has been successful but there was a lack of funds to follow it up with after care. There is still a culture of non-payment amongst entrepeneurs.
The Tender Advice Centre helps the SMMEs win big tenders however some still lack the resources to fulfil those tenders. Access to finance is a problem. Loan sharks tend to exploit entrepeneurs through high finance rates because of the difficulty in obtaining finance from commercial banks.
The government procurement policy is not being applied by all departments.
The tax law is too complex for entrepeneurs. By- laws impede SMMEs at local level.

The micro credit outlets (MCOs) are the only ones able to assist micro enterprises with finance. Even where Khula gives guarantees banks remain unwilling to provide finance. Ntsika has been more successful, training business advisors and funding programmes for entrepeneurs. However, they are very slow to process claims and disbursements.

The MEC of Economic Affairs, Mr Mabena, clarified the impact of Khula and Ntsika in the province. Both are looking to expand access to finance. The Mpumalanga Economic Empowerment Corporation is being set up and developed. This body will control funds and become a loan structure to work with Ntsika and Khula especially wholesale funding.
The Provincial Communications Structure is working on a programme to co-ordinate communication in keeping with the five- year programme.
Programmes are being developed for special groups such as the youth, women and the disabled and rural dwellers. These include the Youth Business Initiative, mobilising youth to create jobs for themselves and the Nafcoc Women's Forum.
The MEC proposed that the National Parliament channel more resources to the DTI's Centre for Small Business Promotion to support Khula and Ntsika.

NORTHERN CAPE
Mr Pinasa, Chairperson of the Provincial Portfolio Committee of Economic Affairs and Tourism, pointed out that 94% of the province's population earn below R6000 per month. Earning potential is therefore low and there is a real need to support SMMEs to create more jobs.

Overall, the key findings from the research done in the province are as follows. Access to finance is the greatest need in the province. The role and functions of provincial government need to be defined. Access to training and business facilities need to be facilitated.

With the help of Ntsika, four business centres have been established. They suggest that Ntsika be given an office in the province to better understand the dynamics, rurality and so forth. A Tender Advice Centre has been set up in Kimberley. Entrepeneurial development among the youth is becoming increasingly important. Progress made to date: over a period of 18 months R1.2 million was used to assist small businesses.

The important issues are; to ensure that the business centres deliver an effective service and to establish an effective mentorship programme. Focus must fall on job creation projects for the youth and effective spending of the poverty relief fund. All these activities must be coordinated.

A number of interventions are being planned. These unclude ensuring, with the help of Ntsika, that the four existing Local Business Centres have the capacity to deliver an effective service. A mentorship programme for SMMEs must be established.

NORTHERN PROVINCE
As a rural province it depends mainly on government. At a provincial conference held in August 1999, a strategy for the implementation of SMMEs was agreed upon.

Rural upgrade programmes are important. A lack of electricity, water supply and roads has led to ghost businesses in the province. Local government structures are weak and local business centres do not have sufficient finances for equipment and so forth. In particular, unmarried women and the disabled have a problem securing loans from banks. Emerging entrepreneurs who lack an established credit record need to be assisted in securing credit. Skills development is needed but the province lacks technical colleges and specific programmes. It was asking the Department to ensure that the tender process conforms to the new Procurement Act to ensure that tenders go to entrepreneurs, allowing SMMEs to take off.

GAUTENG
Studies and public hearings have shown that different strategies are needed for micro and medium businesses. Women predominate in the micro enterprise area. In Gauteng these micro enterprises need more finance but women find it difficult to secure finance. White entrepreneurs dominate small enterprises. The micro-industry is overtraded in the foods and low profitability enterprises. Through the displacement of labour by illegal aliens there is some labour and remuneration distortion in the province.

Incubators, hives and hubs are being promoted where smaller and micro enterprises can share in resources in terms of marketing and finance. Access to advice is important. The cost of finance is increasing, exacerbated by non-payment, which necessitates overdrafts and late payments. Mechanisms to ensure that payments are made are required.

The packaging of training is being looked at; documentation and contact training during accessible hours, that is, not during working hours.
Khula and Ntsika have failed to be accessible or to communicate what they are doing.
In terms of procurement and market access, it is difficult to differentiate between fronting and genuine partnerships. There is a critical need for community banking. Collateral needs to be looked at more creatively. Why not look at skills as a basis for providing finance?

WESTERN CAPE
A discussion document is still circulating in the province. The policy objectives of the province include fostering and developing a culture of entrepreneurship and effective business management, creating an enabling environment for the development of SMMEs, assisting SMMEs in preparing for the challenges of an internationally competitive economy and supporting SMME development, particularly amongst previously disadvantaged individuals and communities.

Their strategic initiatives include providing advice, enterprise support and expanding entrepreneurship and business management training programmes. Suggestions for a national strategy for SMMEs include the following. Developing a policy that clearly separates micro, small and medium enterprises in its strategy. Standardising programmes aimed at promoting SMMEs. Using procurement as a basis for SMME development. Government must involve the private sector in managing, advising or directing providers of services to SMMEs. Introducing mechanisms to enhance interaction between industry and research institutions.

EASTERN CAPE
Mr Andre de Wet, Chair of the Standing Committee on Economic Affairs outlined the financing for the SMME strategy. The Eastern Cape Development Corporation is the sole agent/parastatal responsible for the financing of SMMEs. It has an operating budget of R42 million from provincial government, strategic investment loan repayments and their housing portfolio.

There is an urgent need for capacity building. The contents of the programme include tender advice, business development courses and networking. The Business Support Programme is active in development. The Manufacturing Advisory Centres in Port Elizabeth are planning to extend their services to Umtata, East London and Kokstad.

The challenges of the strategy are as follows. Addressing the needs of women and rural development. Although Khula opened a provincial office in February officials are experiencing problems from banks in providing finance. Addressing the lack of co-ordination of SMME development programmes. Legal constraints in respect of trading and overregulation should be addressed. Impediments to the use of and ownership of land by SMMEs must be removed. By-laws must be developed in consultation.

Suggestions for a national SMME strategy include the following. Khula needs to combine its resources with the Provincial Development Corporation. Adopting a more vigorous approach to training and capacity building before finance is made available to SMMEs. Simplifying the tender procedures for easy access by SMMEs.

KWAZULU NATAL
Mr Langa, Chief Director of SMME development in the provincial department, outlined the programmes already initiated in the province. These include the Business Rehabilitation Fund, the Equity Fund-a fund manager has already been appointed, support for emergency contractors and Manufacturing Advice Centres, an incubator programme and a corporate support programme.

Funding is a problem. There is a need to make lending to SMMEs more transparent. Financial institutions have a limited capacity and a limited understanding of the needs of SMMEs. On the other hand the high rate of interest charged by micro lenders leads to exploitation and a spiral of debt. Fronting of small Black businesses for larger, established White-owned companies is undermining the Procurement Act and its aims.

NORTHWEST
A development strategy was launched in the province in January 1998.
Some of the successes of this strategy include the following:
-Business training has been offered to entrepeneurs and existing businesses. Three institutions were appointed to offer business-training programmes. Technology training is underway including access to Internet information and basic computer operations.
- A 'Women in Business' conference was held in the province with participants exhibiting products and sharing information.

Some of the problems include the following:
-Access to finance.
-Access to information. High illiteracy levels.
-Access to relevant business training.
- Too much reliance is still placed on government for funding of SMMEs.

Some suggestions were made for a national SMME strategy. National priorities should be viewed in conjunction with individual provincial priorities. Areas with fewer resources should be dealt with differently from developed areas. An integrated infrastructure at regional and local level, within and outside government needs to be developed.

SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION (SALGA)
Although the SMME strategy is not a priority for SALGA it forms a critical component of local economic development. The economic objectives of SALGA, which it implements through its member municipalities, include the following. Enhancing the global competitiveness of South Africa through industrial restructuring, increased productivity and human resource development. Assisting in efforts to broaden the base of the South African economy. Participating in national programmes and strategies aimed at redistributing income and opportunities in favour of the poor. Encouraging municipal policies and practices that promote an enhanced developmental role for local government.

Regarding the procurement strategy municipalities need to build their infrastructure development. SALGA believes the SMMEs can play a role in the service sector. Incentives such as cross-subsidisation could be used.

Referring to the point raised by many provinces that by-laws were impeding the progress of SMMEs, SALGA's response was that the regulatory review has been completed although the by-laws still remain on the statute books of provinces.

Ms Lindiwe Ngwane: Deputy Minister, Trade of Industry, commented that not enough was being learned about the challenges provincial governments faced with local government. SALGA 's presentation had been very broad and had not captured this aspect. The Chair, Mr Moosa, noted that none of the provinces had a cohesive strategy in place yet to address the problems.