Draft Small Business Strategy & Small Business Annual Review: briefing; Committee Programme & Reports

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
04 February 2005
DRAFT SMALL BUSINESS STRATEGY AND SMALL BUSINESS ANNUAL REVIEW: BRIEFING; COMMITTEE PROGRAMME AND REPORTS

Chairperson: Mr B Martins (ANC)

Relevant documents:
Draft Committee programme
Committee Annual Report
Report on the Induction Workshop at the DTI new Campus
PowerPoint presentation on Annual Review of Small Business in South Africa-2003
PowerPoint presentation on Annual Review of Small Business in South Africa-2003
PowerPoint presentation on Annual Review of Small Business in South Africa-2003
PowerPoint Presentation on rationale for reviewing the 1995 White Paper
Integrated Small Enterprise Development Strategy
Review of Ten Years of Small Business Support in South Africa 1994-2004
Annual Review of Small Business in South Africa- 2003
[these documents will be provided here as soon as they are electronically available]

SUMMARY
The Committee was briefed on the rationale for the small business strategy and the review of small business support in South Africa. The intention of the strategy was to build on the direction set by the government in the 1995 White Paper on small businesses. The Strategy was aimed at establishing a South Africa with a vibrant and competitive small enterprise sector with enterprises that grow in both turnover and employment.

There was general agreement that the Department should adopt "making poverty history" as one of its slogans. Members highlighted lack of start-up support and the cost of capital as some of the major problems facing small businesses. The Department did not believe that it was desirable to protect our industries by simply raising import tariffs. Experience in other countries had shown that this did not work. While there was a knee-jerk and quick response to say ’Let us put up tariffs to protect our industries’, it was not workable. One had to have a much more nuanced approach with both short-term safeguards and measures taken by industry to make them competitive in the long term. The Task Team would report to the Committee on what the industry should do to be competitive and what government should do to provide short-term security net. It would be wrong to say it was indifference if government did not respond to every lobby calling for an increase in tariffs. It was agreed that the International Trade Administration Commission would be called to explain why it was not dealing with applications for tariff increase.

MINUTES
The following people attended the meeting: Ms H Lupuwana (COO: DTI), Ms W Damane (CEO: Small Enterprise Development Agency), Ms M Johnson, Mr L October (Deputy Director-General: DTI) and Mr S Hanival (Trade and Industrial Policy Strategies).

Mr October said that it had been almost ten years since the Department had introduced the Integrated Small Enterprise Development Strategy. It was important to take stock of what had happened and see what could be learnt both at policy and implementation levels. A number of policy initiatives had been made since the enactment of the National Small Business Act. Black Economic Empowerment had come to the fore and the Black Economic Empowerment Act had been passed. The South Africa economy had liberalised significantly and it was more open to global forces. The growth of the second economy also necessitated the review of the Strategy.

Rationale for reviewing the 1995 White Paper
Mr Hanival presented the rationale for reviewing the strategy (see document attached). He said that the intention of the strategy was to build on the direction set by the government in 1995. The vision of the Strategy was establishing "a South Africa with a vibrant and competitive small enterprise sector with enterprises that grow in both turnover and employment". Its objective was to create an enabling environment for small enterprises, with a level playing field between big business and small enterprises, and to reduce disparities between urban and rural enterprises.

Discussion
Professor B Turok (ANC) commended the presenter for an impressive report. It was one of the best that the Committee had ever had. He referred members to the recent speech by former President Nelson Mandela in London about "making poverty history". Making poverty history should be the Committee and the Department's slogan. He felt that the presentation should have included a chapter on the Department's performance. It was important to put more emphasis on solutions instead of merely identifying problems. He noted that the main conclusions that could be drawn from the presentation were that there was stagnation and that the environment was not supportive of small enterprises. This was a cause for concern. One of the deficiencies of the current system was the lack of start-up support to small businesses. He asked if the Department assisted entrepreneurs with start-up resources. He had great difficulty in distinguishing between small and micro enterprises. He felt that micro enterprises were often ignored.

Mr October agreed that that the lack of start-up support was one of the weaknesses in the market. Banks were more likely to support established business and not new entrants to the market. The government was committed to addressing this issue. It had come up with the Black Business Support Development Programme to deal with this issue.

Mr Hanival replied that micro enterprises had between one and five employees whereas small enterprises had five to 20 employees.

Dr E Nkem-Abonta (DA) lamented the fact that the presentation only highlighted problems but did not list what the Department intended to do to address them. He complained about the lack of government action in dealing with the regulatory stranglehold on small, micro and medium enterprises (SMMEs). While this had been talked about for years, nothing had been done.

Mr October agreed that the debate had been going on for some time. The Presidency had set up an interdepartmental team to looking at the issue and it would also establish a regulatory impact assessment unit. In addition a South African Revenue Service task team was looking at the tax regime and tax compliance by small businesses. The intention was to reduce the red tape and come up with a one-stop port for small business. There were three regulatory regimes that impacted on small businesses. They obviously had to pay tax, comply with labour legislation and also comply with regional service levies and local government by-laws. There was a need for intelligent debate on these issues because one could not just move to deregulation. People should still pay tax or else there would be negative consequences for the fiscus. One could also not just do away with labour legislation.

Mr M Stephen (UDM) said that "viable opportunities" were key to the growth of SMMEs. The biggest constraint to growth was the cost of capital. The same interest rates apply to different sizes of business. Small businesses should be treated differently from big businesses. Some business ideas could look very viable at first glance. However, the picture changed completely when one included the cost of capital. It would be preferable to bring the cost of capital down.

Mr October agreed that the cost of capital was an important factor. The cost of capital was high but there had been some reduction of the interest rate in the past 12 to 18 months. One could only reduce interest and the cost of capital if there was a benign macro-economic environment. It was important to have low inflation and a stable currency. Things were moving in the right direction and there would hopefully be a move towards reducing the interest rates and the overall cost of capital.

Ms F Mahomed (ANC) said that access to finance and the right policy framework were critical to the success of small businesses. Mentoring of small businesses was also important. She asked how the Department was dealing with the problem of unregulated "dumping" which was affecting SMMEs. Street vendors across the country had large numbers of unregulated dumped items for sale.

Dr K Durr (ACDP) asked if there was any attempt to measure the size of the informal sector. He felt that it was much bigger than people thought. He also asked if the Department had any plans to teach entrepreneurship. The old University of Potchefstroom had an entrepreneurship school. Entrepreneurship was taught in Scotland and this was very successful. He commented that it had often been said that South Africa was de-industrialising due to high interest rates. It had been suggested that if the interest rate was reduced, the exchange rate would also be reduced. This would be beneficial to the country.

He said that the presentation indicated that in the Free State, growth had occurred mainly in clothing SMMEs and fabricated metals with significant declines in the traditional food/agro-processing sector. It was shocking to hear that the International Trade Administration Commission had not looked at a tariff increase application for more than 18 months. It was important to know what the Commission's duties entailed if it did not do what significant sectors of the economy were asking it to do. The agricultural sector was highly subsidised and Europe, America and elsewhere. South Africa's agricultural sector was not subsidised and food and job securities were under threat. South Africa could apply tariffs lawfully in terms of international conventions but was not doing so. The textile industry was also transferring lots of jobs from Cape Town and Natal to China. The Minister of Finance could only say that our textile industry should think imaginatively instead of coming up with a solution to the problem.

Mr October agreed that the Rand was having an impact on the manufacturing sector. There were initiatives to address problem in the textiles industry. The problem could not be solved by simply increasing tariffs. The clothing and textile sector already had 40% protection and this was very high. The government was not saying that there should be some form of safeguard. There was a debate going on the appropriate form of safeguards.

Ms N Khunou (ANC) said that during a presentation to the Portfolio Committee on Environmental Affairs and Tourism, South African Tourism said that tourism was one of the biggest contributors to the country's GDP. She asked if the Department's knew what was the basis of the statistics used by South Africa Tourism. It was important to list challenges that the Department was facing. However, it was equally important to set out targets and plans on how the Department would address the problems. The strength of the Rand had continued to grow and this might impact on the textile industry. She asked if the Department had any strategy aimed at helping the textile industry. Some form of assistance was vital given the fact that the industry was labour intensive and there could be job losses if no assistance were given to the industry. It would be nice to see the number of small enterprises growing across the country.

Mr October replied that even the Minister of Finance wished that people did not have the amount of confidence that they had on the currency. The strength of the currency had some effect on the manufacturing sector. One should come up with measures to respond to the effects of the currency. The Constitution of the country provided that the South African Reserve Bank was independent and the government could not intervene and make the currency weaker. People have raised the issue of the cost of capital and suggested the lowering of the interest rate. The Reserve Bank was able to lower the interest rate because the currency was strong. The country would go back to the 2001 period if the currency was to weaken and one would have to push interest rates up to deal with imported inflation. It was difficult to strike a balance between lower cost of capital and lower interest rate.

Dr Nkem-Abonta criticised government for not using World Trade Organisation (WTO) rules to help the clothing and textile industries. Professor Turok said that the question of non-tariff barriers was very high on the agenda in international discussions.

Mr October replied that it was understandable that people were under pressure but one had to caution against populism. The question of safeguards is no panacea. The Department had introduced safeguards in 1996/97 in the leather and footwear industry). Mr A Erwin introduced quotas in order to protect the industry but this did not help. The United States had put quotas to protect its industries against Chinese imports without success. While there was a knee-jerk and quick response to say ’Let us put up tariffs to protect our industries’, it was not workable. One had to have a much more nuanced approach with both short-term safeguards and measures taken by industry to make them competitive in the long term. A task team would report to the Committee on what the industry should do to be competitive and what government should do to provide short-term security net. It would be wrong to say it was indifference if government did not respond to every lobby calling for an increase in tariffs. It was not possible to protect industries by simply creating borders. One had to take into account the fact that South Africa had many companies which imported goods to countries like China.

Mr Durr suggested that the International Trade Administration Commission must come and explain to the Committee how they were dealing with tariff increase applications. The Chairperson agreed with the suggestion.

Ms Khunou asked how the Department was helping to promote Proudly South African labels. She also asked how the Department was helping the informal sector of the economy.

Mr M Stephens (UDM) said that there should be a lower interest rate for SMMEs in order to deal with the problem of cost of capital. He wondered if the Department had ever considered direct subsidies to the industries instead of raising tariffs. High tariffs would have an impact on consumers.

Annual Review of Small Business in South Africa-2003
Ms Damane presented the annual review of small business in South Africa. (See document attached). On balance the environment was not supportive of small enterprises. Tax and labour regulation regimes remained unchanged and total administration costs were high. This discouraged graduation from the informal to formal sector of the economy. The liquidation rate of small enterprises increased and their contribution to the GDP remained static.

Discussion
Ms Mahomed said that the action plan was very exciting. However, it was important to deadlines attached to the plans. She noted that the Department wanted to establish a non-statutory National Small Business Advisory Council. She felt that it was important to have some Members of Parliament to serve as members of the Council.

Ms Damane replied that there were provisions dealing with the participation of various people in the Council. She would take the proposal around the participation of MPs to Cabinet.

Dr Nkem-Abonta said that he expected a radical departure from the past. He asked what weaknesses the strategy sought to address and if there was anything new in it.

The Chairperson said that it was important for members to be critical but yet constructive in their criticism. He encouraged members to provide possible alternatives or solutions when making criticisms.

Ms Damane replied that small business needed good enabling environment and support. The three pillars of the strategy would provide the necessary support and environment.

Dr Nkem-Abonta suggested that the Department should deregulate some economic sectors and remove obstacles for entrepreneurs who were determined to succeed. This was easy to do and did not cost money.

Ms Damane replied that regulations were critical policy instruments and were therefore necessary. The question was whether small businesses should be exempted from regulations. The key issue was how to ensure that regulations were not imposing burdens on small businesses.

Professor Turok felt that some of the statements in the Review of Ten Years of Business Support in South Africa needed to be changed. For instance, the document provided that Ntsika had been successful in establishing an important niche in the spectrum of national SMME support agencies. He disagreed that Ntsika was never successful. If it were successful it would not have been merged with another institution.

Mr S Njikelana (ANC) said that it was important to explore the redefinition of oversight so that the Committee could play a more facilitative role. It has often been held that oversight role entailed waiting for something to happen and reacting afterwards. He linked his comments to the suggestion that Members of Parliament should also sit on the Advisory Council. He agreed with Mr Nkem-Abonta that there should be political mobilisation of people be business minded.

Ms Damane agreed that it was important to encourage entrepreneurship. There were programmes in the Department designed to promote entrepreneurship. There was also a business incubation programme within the Department. Incubators would be established throughout the country.

Mr Durr wondered what had happened to the concept of "industrial hives". There was a lack of networking at community level. Municipalities should inform people about the services that their communities could offer. Municipalities could also provide premises from which people could run their businesses. It was wrong to think that problems would be solved by simply making laws.

Professor Turok understood Mr Durr's concern. The Small Business Development Council was successful and had a hive in Soweto. The problem with the Council and the reason why the government took a negative view to it was that it was not moving towards the rural communities. It remained largely within the white community. Countries like Nigeria and Kenya had hives and they were working properly. The Department should investigate the possibility of setting up hives inn every community. There was a need for integration across government. The government had set up a cluster system but yet there was no integration at lower levels. He asked if it would not be helpful for the Department to enlist the services of some MPs when drafting the Strategy.

The Chairperson said that there was merit in discussing documents from Departments but it was not desirable for the Committee to take the work of the Department upon its shoulders. The Committee was expected to play oversight role.

Mrs Damane said that the Department would welcome suggestions from the Committee. The Strategy was presented to small businesses for their input.

The Chairperson said that one of the responsibilities of the Committee was to do its best for the South African economic citizens. All criticisms and discussions should be aimed at that direction.

Committee Report on Induction Workshop at DTI New Campus
The Chairperson said the report was a true reflection of what happened at the workshop and asked members to adopt it. The Committee adopted the report.

The meeting was adjourned.