Small Business Strategy: Department briefing

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Trade, Industry and Competition

16 March 2006
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TRADE AND INDUSTRY PORTFOLIO COMMITTEE
17 March 2006
SMALL BUSINESS STRATEGY: DEPARTMENT BRIEFING

Chairperson:

Mr B Martins (ANC)

Documents handed out:

Department of Trade and Industry: Integrated Small-Enterprise Development Strategy: Unlocking the Potential of South African Entrepreneurs.
Department of Trade and Industry: Enterprise Development Strategy: Portfolio Committee Update

SUMMARY

 

The Committee was briefed by the Department of Trade and Industry on to the updated Enterprise Development Strategy that had been tabled to Cabinet and approved in October 2005. The Committee considered the changes to the strategy, offered critiques and advice. Members were concerned about the support given to SMMEs, particularly with regard to the provision of loans and banking facilities in rural areas. The DTI’s policies and projects for women and the disabled was questioned.

In their response, the Department noted that of the 2 million enterprises in South Africa, 1.5 million of were survivalist or micro enterprises which were 100% black-owned, while of the 200 000 formal enterprises in South Africa, very few of were black-owned. The Department acknowledged that more could be done by it to formalise micro enterprises that were run by women.

The Committee’s report on budget process was adopted

MINUTES
The Chair, Mr Martins expressed his sadness at the passing of Linda Locksten, a journalist who regularly and fairly covered the Portfolio Committee meetings. He noted that the Committee sends their condolences to Ms Locksten’s family and that the Committee appreciated all her work over the years.

Briefing by Department of Trade and Industry (DTI) on Small Business Strategy
Members of delegation: Ms Mandisa Mandemzi (Chief Director, Enterprise Development), Mr Lionel October (Enterprise and Industrial Development Division), Mr Mahlape Mohale (CEO: Enterprise Organisation)

Ms Mandisa, along with her team, listed the following changes in the small business and enterprise development strategy for the Department of Trade and Industry, as outlined in the accompanying report:
- The rationale for revisiting the strategy included the limited contribution of small business to formal employment and economic growth, lack of entrepreneurship culture, continued lack of access to finance between R10 000 and R250 000, high rate of failure for small enterprises, over concentration of micro enterprises among black people, inadequate market segmentation, limited capacity among implementing agencies, and poor co-ordination of small business support interventions.
- The objectives for the revised strategy include creating an enabling environment for small business, creating sustainable jobs in the small business sector, increase the competitiveness of this sector, increasing small business contribution to GDP, improving the co-ordination of government support to small business, and ensuring equitable representation of blacks in the sector.
- Cabinet approval of the strategy is conditional to the refinement of certain strategy elements, namely: augmenting the government’s procurement policies enabling preferential procurement in favour of SMMEs, the favoured 10 products for the National programme, and the government adherence to the 30 days payment cycle; improving access to financial loans between R10 000 and R250 000; encouraging the creation of women-owned, rural and community enterprises; refinement of the co-ordination arrangements at institutional and programmatic levels and research on regulatory impact assessment.
- A joint working group had been set up between the DTI and National Treasury to roll out these objectives.

Discussion
Dr Ghasman (ANC) apologised for being late, and thanked the DTI for its presentation. He noted that that particular unit of the DTI was at the cutting edge of policy and was actively presenting the public face of the Ministry to the poor and the second economy which had been neglected under Minister Alec Erwin’s reign in favour of big business. He acknowledged the role that the Department was now playing in terms of its outreach programmes and collaboration with CIDA, and gathering information from the ground. He asked about how the Department was going to align its objectives with the Accelerated Shared Growth Initiative of South Africa (ASGISA), how far the Department has come in terms of the equitable representation of blacks in the sector, whether the Department was working with the Department of Labour, and whether the Department had made a thorough assessment of the sector in more detail than an audit of the Company and Intellectual Property Registration Office (CIPRO) registration.

Mr S Rasmeni (ANC) asked what the DTI had done to ensure that procurement in Parliament and government went to blacks; whether the strategy of small business banks for small businesses who require finance would be useful given the failure of the co-operative banks set up by the Department of Finance in 1994; and exactly how the small business unit of the DTI, which came in so many different forms including CIDA, Khula and IDC, had actually helped small businesses. He showed the Committee a four-page list of small businesses in his constituency of one community in the Western Cape. Dr Rasmeni noted that he would send the list to CIDA and provide the DTI representatives with the list.

The Chair noted that in terms of fairness and procedure, this list could not be distributed at the Portfolio Committee meeting or to the DTI, regardless of how good or well-intentioned the list might be.

Dr Nkem-Abonta (ANC) explained that having looked at the document, his feelings remained the same as in previous presentations. There has not been much of a change of strategy except for a shift in focus from wholesale to retail, and that the interventions remained the same. He noted that he had doubts as to whether the staff of the DTI had the competence or ability to undertake the social engineering needed to roll out this type of strategy, and that these objectives had not to his knowledge been achieved anywhere in the world.

Dr Nkem-Abonta agreed that an enabling environment for small business should be created but differed strongly with the DTI as to how this could be achieved. He put forward that an enabling small business environment could be achieved by removing all regulations and disseminating information widely to small business. Small business was done a disservice when harassed on the streets, and when the focus of the DTI and government prioritised the needs of big business. He noted that the DTI should "be humble when setting targets and to do a few things and do them well".

Dr Nkem-Abonta asked how exactly the Department was going to promote alternative forms of banking and loans, and what practical interventions were in place to promote black, female and rural enterprises. He was concerned that micro enterprises were flagged as a challenge, whereas he saw these enterprises as a means of survival and not necessarily a problem. He added that the challenge of rural businesses was also over flagged and that ‘locational’ economics dictated where businesses chose to set up shop, that spatial disparities are normalised throughout the world and that even in highly developed nations like France the capital city provided 60% of GDP (Gross Domestic Product). He asked questions about the preferential procurement policy, stating that while it sounded good, he felt that there needed to be a sunset clause in the policy to stop the ongoing artificial demand.

Mr L Laubschagne (DA) first raised a number of housekeeping issues, asking the DTI to furnish the full particulars of the presenters on the first page of the presentation, and to distribute business cards as a matter of course. He noted that the presentation was a good testimonial, but that the delivery of the objectives remained questionable. Mr Laubschagne asked about the staffing capacity of the DTI, noting that it operated at a professional and managerial vacancy of 30%. He also expressed concern on the unintended consequences of the policies of support from the DTI that may adversely affect small white business, and that the preferential procurement process should be very cautious on these issues. He gave the example of a white-owned engineering firm on the East Rand that had employed 60 skilled black workers for the production of equipment for the police services. Another company owned by a white man and two black women had tendered for the same job and had won it. They then imported product from China, and 60 black families were effectively disadvantaged. He asked about the mentoring aspect of the DTI’s programme, specifically who would be identified as mentors and what set of skills mentors would be required to have. He noted his concern that government officials should not be allowed to be business mentors as they lacked the necessary skill set.

Ms D Ramodibe (ANC) thanked the Department and explained that, as highlighted previously by her fellow Committee members, she was concerned as to how the policies and objectives were going to be rolled out and met by the DTI. She asked what standards were set up for bridging the two economies, how businesses were supposed to graduate out of the informal economy, and what set of programmes the Department had in place in terms of franchising.

Mr M Sefularo (ANC) stated that a number of projects and pilot projects had been initiated by the DTI in the past, and asked specifically about the plans for a bank for rural villages. He also noted that it was problematic for government to be the voice of small business, and wondered whether there was a mass feeder organisation for entrepreneurship in South Africa outside of the University of Cape Town’s entrepreneurship initiative at the Graduate Business School. Dr Sefularo explained his doubt that small businesses were geared towards export or even had access to foreign and export markets, and touched on the subject of the replacement of indigenous businesses by foreign business people. He cited the example of people from the East, China and India renting pavement space away from South African informal and rural enterprises.

Prof B Turok (ANC) opened his comments with a story about Schweppes in Benoni who employed thousands of workers from the black townships, which was its largest and most profitable market, and who were persuaded to outsource the manufacture of staff overalls to small informal black-owned and staffed businesses in the townships. He explained that this way of doing business was not regulated but was sustainable and was a way in which big business could give back to the community. Prof Turok thanked the DTI for its presentation, especially Mr October, but emphasised Mr Laubschagne’s concern about staffing capacity. He made a suggestion that an independent and voluntary panel of business advisors be appointed to assist the DTI with this lack of senior management staff. The Professor clarified that experience in business was vital and that the DTI was lacking in business experience. He further suggested that the DTI draw up performance indicators and report back to the Committee on target achievements every six months.

Prof Turok said that the presentation was valuable, but that he had seen this type of document all too often and that a simpler, clearer and more action-oriented and goal-achievement document would be more useful to the Committee. He stressed that the DTI was "quite wrong" in its assessment of micro enterprises as a concern. He argued that in all developing nations survivalist enterprises formed the backbone of economies and that this was stymied in South Africa by apartheid policies. He noted that it would be sound economic policy to build from the bottom up by supporting the proliferation of micro enterprises, stating that "that’s the RDP and that’s the philosophy of this government".

Ms N Khunou (ANC) apologised for being late. She thanked the DTI for the presentation and asked if, given the number and variety of agencies in the DTI, it could produce a two-page document with contact details and brief information about the agencies. She stated that the government had to come up with ways to find simpler accessibility to loans and banks for small businesses in order to halve poverty by 2014. She noted the usefulness of mentoring, but asked the DTI to keep in mind that many small business owners and entrepreneurs were illiterate and so could not be mentored to develop business plans, for example when unable to read or write.

Ms Khunou then brought up the issue of BEE and the way that the policy is being used by some whites to hold on to the economic muscle of the country. She declared that a strategy was required to "really help our people". Ms Khunou detailed the links between small rural businesses run by women and Parliament by noting that the opening of Parliament was festooned by the women who wore beautiful beadwork created by rural women entrepreneurs. She asked the DTI to elaborate on any of their successes in the rural areas and to present stories of those successes to the committee.

Dr P Rabie (DA) emphasised the importance of rural communities. He noted his and other Members’ moral responsibility to their rural constituencies and asked whether it would be possible for the Committee to visit rural co-operative ventures in the primary agricultural sector. Dr Rabie explained that many agro-industries, such as the canning sector, had become sunset industries and were often the only sources of income for rural communities. He highlighted the importance of supporting and developing small, medium and micro enterprises (SMMEs) in the agricultural sector.

Mr Sefularo asked the DTI representatives if there would be a register of small businesses set up for tendering for the ten products of the national programme.

Mr Njikelana (ANC) commended the DTI on its presentations and said that acknowledgement of weaknesses made an organisation stronger. He elucidated that, as law makers, the members of the Committee had a moral and constitutional duty to realistically solve problems, and that the allocated time for the meeting was not sufficient to delve in detail into the strategy and changes. He asked what the Committee’s role was, as the document had already been presented to Parliament, and whether their comments were redundant. He then showed support for the DTIs application of Affirmative Action policies and its minimisation of unintended and unfortunate consequences.

Mr Njikelana agreed with previous comments as to the usefulness of mentorship, and the practicalities of the targets set by the Department. He noted that 6% of people in South Africa lived with physical challenges and wondered why this sizeable minority was excluded from specific policies around vulnerable groups. He asked about the accessibility of non-financial support to small businesses and entrepreneurs, for example business skills; the incubation of businesses to avoid lapsing back into poverty; and how well integrated the DTI agencies were when approaching those issues. Mr Njikelana concluded by noting that the DTI must take into account the beneficial and unfavourable aspects of international trade agreements.

Mr S Maja (ANC) enquired as to the number of small business in the rural areas that the DTI had supported, whether the DTI was ready to eradicate poverty in those areas, and whether there was a disability empowerment strategy in place in the Department.

Mr Maake (ANC) expressed his concern that people were only able to see short term monetary gains and not long term financial stability and growth. He gave an example of seeing a buck in terms of being meat and not in terms of the potential for tourism. He asked that criteria for the selection of the ten products for the national programme be explained, and whether this strategy of preferential procurement could be transferred to the private sector, possibly by means of legislation. He echoed and supported Mr Njikelana’s comments about the role of the Committee in overseeing even the Executive, and noted that it was "intimidating" for the committee to comment on strategy that had already been passed by Parliament. Mr Maake then offered the assistance of the Committee in identifying the ten products.

The Chair then broke for a tea break.

When the session reconvened, Mr October of the DTI initiated the responses. He prefaced his comments by noting the difficulty of responding to so many questions and that he and the rest of the team had grouped the questions into clusters:

A detailed and comprehensive list of all functions and agencies of the DTI would be made available to the committee.

There was a need to give a consolidated report of the support given to small business and that the Industrial Development Corporation (IDC) loan book had been growing. Mr October estimated that over 10 000 enterprises were assisted by the DTI per annum.
The Khula mandate of 1994 was limited by the World Bank to be an incentivising agency to the private sector not a lender, in order for government to reduce some of the risk of lending by the private sector. Over the years, government has learnt that this model required amendments, but there remained no consensus in Cabinet and so the model was only quasi-retail.

In terms of entrepreneurship, very few countries in the world had difficulty promoting entrepreneurship. The DTI was determined to shift to help create opportunities for small businesses. Because government was the biggest procurer in any economy, government could create market opportunities for small business. This occured all over the world, and England was the only developed nation that did not have a financial development institution to assist business development.

Government agencies had to be staffed by suitably qualified persons and government officials could not and would not provide mentoring to businesses.

The DTI boasted too much about CIPRO registrations as an indicator of the activity level of entrepreneurship in South Africa. The DTI currently looked at the levels of liquidation and cancellation of VAT registration as indicators of the levels of business operation.

The DTI understood the spatial development of economies and recognised that Johannesburg would always produce 60% of GDP, but did not see this as a reason to neglect the rural areas.

Of the 2 million enterprises in South Africa, 1.5 million of were survivalist or micro enterprises which were 100% black-owned. Of the 200 000 formal enterprises in South Africa, very few of were black-owned. While micro enterprises did not need government interventions to exist (they were by nature survivalist), these enterprises were a sign of the underdevelopment and poverty of the nation. The task for the State was to open markets elsewhere and to promote graduation out of survivalist mode, not to replicate the economies of other developing countries.

There were examples of co-operatives in the Northern Cape, where women raised and bred unique cattle to sell at auction; and brick-making enterprises in Mafikeng. The DTI could bring interventions to these types of enterprises to formalise and register them and then upscale the enterprise.

There was a need to recapacitate partner organisations in the Apex fund and to create a regulatory mechanism to extend financial services to the rural areas. Mafisa, an agency of the Department of Agriculture, was similar to Apex but was more sectoral in its scope.

There needed to be a centralised information system which recorded the details of which interventions have been utilised by which SMME. This could be used to prevent the duplication of interventions, and to monitor use and success of interventions. This system should be national, centres should be able to talk to one another and it should be integrated with other Departments.

There was a plan to look at a strategy to ensure a fair spread of opportunity and access to markets for SMMEs who want to tender for the ten products.

In terms of BEE, government has specific policies to advance, and it took great pains not to marginalise any sector of the community.

The Chair opened the discussion for follow-up comments from the floor.

Prof Turok opened the discussion by respectfully disagreeing with his colleagues about moving people out of survivalist enterprises. He explained that the second economy was structured to keep people in poverty by restricting entrepreneurship, but that asking survivalist enterprises to interact with big business on an equal footing was unrealistic. Prof Turok noted that in his constituency of Masiphumulela and Vrygrond, there were no micro enterprises, only spaza shops that could not exist sustainably let alone do business with, for example, Woolworths. He suggested that the Department focus more on providing support to these enterprises instead of pushing them beyond their means. Prof Turok also asked why the DTI had failed to comment on his suggestion of performance indicators, and suggested that a voluntary advisory panel of business people be convened to assist the Portfolio Committee.

The Chair noted this suggestion as friendly and worth pursuing.

Dr Nkem-Abonta stated that he supported the notion of outsourcing, but that he worried about legislation to force big business to assist communities and that this type of legislation would require a sunset clause. He strongly noted that Mr Sefularo’s comments about foreigners stealing South African businesses were dangerous and should not be entertained in the Portfolio Committee. Dr Nkem-Abonta supported Prof Turok fully in terms of supporting micro-enterprises, and asked about the tax implications of new programmes by the DTI. He also expressed his view that Affirmative Action policies did positively discriminate against white people.

Mr Laubschagne commended the DTI on its policy of providing funding to small business, but cautioned against the corrupt distribution of funding. He gave an example of innovative town planning in Taiwan were government housing also provided a space for businesses in neighbourhoods as a possible further support to non-financial funding.

Mr Maake asked about the product lines and the preferred procurement of the ten products.

Mr Njikelana referred to the fact that the Department had failed to address the issue of incubation of small businesses. He noted that the panel of business people would be helpful to the Committee, but asked for the panel to be balanced in its interests. He discussed the issue of Chapter 9 Institutions to limit corruption and labour laws as human rights in opposition to Dr Nkem-Abonto’s earlier contribution.

The Chair noted that Mr Rabie, who had been about to excuse himself, was the last remaining opposition member. He asked the Portfolio Committee to consider the Budget, and Budget Vote 32 was accepted and passed.

Mr Njikelana picked up his discussion asking the DTI to explain how small sectors, for example the jewellery industry, would be prioritised. He concurred with earlier speakers about the need for appropriate and experienced mentorship for entrepreneurs, and monthly performance indicators. He suggested that electronic versions of reports be circulated prior to meetings for Committee members to become acquainted with the information, and wondered about the viability of a webpage for SMMEs on the DTI website. Mr Njikelana introduced the concept of social capital into the discussion, arguing that it was the "glue that holds [companies and society] together" and that this notion of social networks should be included in the Department’s approach to SMMEs.

Dr Nkem-Abonto retracted his statements about the labour laws and taxes, explaining that he had used exaggeration for effect. He added that even the Minister of Finance has said in the past that the labour laws did cause some problems for businesses, but conceded that these laws were in themselves human rights. Again he noted his concern about spatial economics and laws prohibiting the sale of land to foreigners.

The DTI responded with the following points:
- The DTI would take on board the suggestion of six-monthly performance indicator reports, which would improve discipline and target setting.
- Khula guaranteed banks that lend to black people and businesses 80% security. This would be left in place, but the Department would provide measures through their agencies to promote direct lending to small businesses.
- The DTI accepted that BEE was "less of a science and more of an art", but it quoted National Treasury figures that showed that 50% of government’s procurement was from black-owned business, and that government procurement was 50% larger than pre-1994. This data would be made available by Treasury.
- It stressed that while it was important to concentrate on the second economy, the first economy had to be grown in order to eradicate poverty and the second economy.
- They noted the power of the procurement process of ten preferred products to build solid entrepreneurs and not to create a false sense of demand.
- The webpage for SMMEs was noted as a good undertaking which would be pursued.

Mr Martins noted that time had run out and that all issues could not possibly be exhausted.

The meeting was adjourned.


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