Small Business Development Minister Lindiwe Zulu estimates that over R70 billion ($5.5bn) was spent by national and provincial departments between April and November on procuring goods and services from small businesses.
With the total government procurement this year expected to be about R700bn ($55bn) and considering that the level for these eight months is similar to that of the four months following November, this translates to a projected R105bn ($8.2bn) for the 2017/18 financial year - or a mere 15% of procurement going to small businesses.
This is far off the government's aim to set aside 30% of government procurement for small businesses, under new rules which came into effect on April 1 under the Preferential Procurement Policy Framework Act (see this post). So are the rules really working?
In a media briefing on December 12. Zulu (pictured above) said between April 1 and November 30, 81 of the 184 national and provincial departments procured between 60% and 100% of their goods and services from small businesses.
Only 22 departments (both national and provincial) have not yet reached the 30% target. she said. She added that it would take time to implement the regulations as processes had to be followed.
The department did not appear to provide any figures on what the level of procurement was before the set-aside came into effect on April 1 this year. This makes it difficult to tell whether the policy has really had any success so far or not.
Experience elsewhere suggests it takes time for such procurement targets to be met.
A set-aside mandatory in India since April 1, 2015 mandates all central government agencies and departments to ensure that 20% of their procurement is sourced from small, micro and medium-sized enterprises.
Yet as of February this year just 61 of the about 300 public agencies under the central government had met the 20% target, according to SME news site KNN.
In Brazil, a 2006 law prioritises small businesses on all purchases below 80,000 reals (about R300,000). In 2014 72% of these state contracts went to small businesses.
The same law mandates the federal government to put in place a 30% set-aside for small business. Since the law took effect in 2008, small and micro-enterprises have seen their share of state procurement grow from 23% to touch 30% in 2013 (see this post).
There is also evidence from Brazil is that public procurement can provide small businesses with a boost.
A paper released in February by three authors which used data from Brazil found that winning at least one government contract in a given quarter increases firm growth by 2.2 percentage points over that quarter, with 93% of the new hires coming from either the unemployed or the informal sector.
'Taking its right place'
Zulu said there are indications are that the small business sector is “beginning to take its rightful place as the engine” of the economy. She pointed out that the SA Revenue Service (Sars) has reported that 18,000 new small firms had for the first time submitted tax returns.
In reality the number is minute, even going by the department's own data which suggests that there were about 2.175 million privately owned businesses in South Africa, 2.15-million of which were small, medium or micro firms.
Of these, 1.5-million were not registered for VAT or corporate income tax and could, therefore, be classified as informal. About 150,000 were medium-sized businesses; 450,000 small businesses; and 1.3-million micro-enterprises.
The department estimates that the contribution of SMEs to GDP was currently estimated to be between 42% and 47% but could be increased significantly.
What the department needs is accurate figures. These, together with raw data need to be made available to researchers and small business organisations.
A study must also be undertaken to assess the economic effects such as job creation, growth of small firms under the set-aside policy - and the additional price cost that comes from often procuring from small firms (see this post). Careful works needs to be done.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
New amendments to South Africa’s Competition Act, introduced last week, aim to open to economy to more new entrants – but they won’t ban economic concentration.
The draft bill was gazetted for public comment for 60 days (see it here), on Friday December 1, by Economic development Minister Ebrahim Patel (pictured above).
It follows advice received from a panel of legal and economic experts (see this earlier post) on how competition legislation can be sharpened to help open the economy to more small businesses and black entrepreneurs,
A recent analysis by the Competition Commission of 2,150 merger reports between 2009 to 2016 found that 70% of 31 economic sectors analysed are dominated by firms that hold more than 45% market share in that sector.
The existing Competition Act does not enable the Competition Commission or the Competition Tribunal to address concentration, but only collusion and market abuse, notes a memorandum attached to the bill.
Two options to regulate concentration
In the memorandum, the department notes that there were two options to regulate market concentration.
The first approach is to have predefined thresholds of concentration or untransformed ownership profiles, which if reached, would trigger measures to de-concentrate the market or restructure firms or a combination of both measures.
The memorandum however does not reveal what these measures are.
The second approach – which the department and experts favoured – is to opt for an evaluation of concentration, largely through the use of market inquiries.
The department argues in some cases economic concentration is a necessary feature in certain sectors where economies of scale are required. Furthermore the outlawing of concentration would not necessarily induce entry or lower barriers to entry for firms.
Banning market concentration would also difficult to implement because it would require the setting of thresholds of concentration in multiple specific product and geographic markets, which would have to be based on a prior detailed analysis of each market.
In addition there is no international precedent in either competition law or economics for outlawing concentration and ownership profiles without reference to the anti-competitive effects of abuse of dominance, or for that matter, merger control.
There was also some concern - voiced by commentators in a newspaper article on Sunday - that in the wrong hands, a ban on economic concentration could be used by politicians to meet their own means.
The department instead proposes to strengthen provisions of the act that prohibit collusion, abuse of dominance and price discrimination should be strengthened.
Among others these include for instance guidelines on how to determine excessive prices and making it unlawful for dominant firms from requesting suppliers to set the sale of their goods or services at excessively low prices.
The bill also creates a mechanism for stopping “creeping concentration”, where companies acquire competitors slowly.
Getting dominant firms to back SMEs
Through the bill the department envisages that market inquiries (which will have to be wrapped up within 18 months) will become the chief mechanism for analysing and tackling the structural problems in a market.
Linked to this, the Competition Commission and Tribunal will be able to make an appropriate order regarding any condition relating to the merger. For instance it may rule on jobs to be retained or black small firms to be assisted.
The state wants to adopt the same approach it used for the Wallmart-Massmart merger in 2011 - where on condition that the deal was okayed Wallmart was made to set up a programme to develop local suppliers and guarantee the jobs of workers (see this post).
Similarly the 2015 merger involving ABInBev and SABMiller was approved on provision of support to small businesses - with R1 billion ($73m) to be disbursed over a period of five years to black farmers and suppliers (revealed in the Competition Commission latest annual report).
The idea then is to investigate markets and then force big dominant companies to provide support to small, mostly black firms,
This is perhaps a more wise and measured way to go about things, and black small businesses could ultimately benefit from more access to markets, funding and support. But only if it also leads to more jobs - that will be the crunch.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Argentina’s Secretary of Entrepreneurship and SMEs Mariano Mayer has been awarded for his work on developing a strategy to revive Argentina's entrepreneurial spirit, including a new law for entrepreneurs.
Mayer was among several individuals honoured for their role in policymaking and drafting SME programmes by the Global Entrepreneurship Network (GEN) at an awards ceremony in Estonia earlier this week during the Startup Nations Summit.
Mayer took home the Startup Nations Award for National Policy Leadership.
“Having successfully tested entrepreneurship policy levers as an intrapreneur in the Buenos Aires city government, upon assuming broader leadership as National Secretary for Entrepreneurs and SMEs, Mr. Mayer began a bold, multi-pronged strategy to revive Argentina's entrepreneurial spirit, including a new law for entrepreneurs,” GEN said.
The three other winners were former Minister of Argentina’s province of Cordoba Jorge Lawson for the Startup Nations Award for Local Policy Leadership, the Innovation and Entrepreneurship Team from the World Bank, for the Startup Nations Award for Groundbreaking Policy Thinking and Mikk Vainik of Estonia for the Global Entrepreneurship Network Award.
Plan to grow SME numbers
In an interview in September with online publication Nearshore Americas, Mayer said Argentina now has about 850,000 SMEs – which make up 99% of all firms in the country. He said about 50,000 to 60,000 new firms are created each year in Argentina.
However, he noted that there has been no net creation of companies in the last two to three years. It's this that his government is looking to change, to put the country back on growth after years of economic instability.
Recently his government introduced a new entrepreneur and SME law (see this post), which aims to among other things boost funding and reduce the time it takes to open a new business.
A new online company registration system, which went live on 1 September (see this post), allows for the registration in Buenos Aires province of a new type of company called an SAS in just 15 minutes – down from two months to over a year that it took before. Mayer says the ministry is helping other provinces to introduce a similar system.
He says a tax reform is in process and his ministry wants to next simplify the country’s gargantuan bureaucracy.
Mayer earlier this month said the country needs to create one million new small businesses to ensure that 300,000 survive so that two million new jobs (that Argentina needs to create) can be generated. To ensure this is achieved, he pledged that his administration will add not one new regulation for enterprises.
This week Mayer's department announced the names of the 13 accelerators and three funds (see this story) that - together with the state - will invest more than $86 million into new projects through an accelerator (Fondo Aceleración) and expansion fund (Fondo Expansión). About half of this amount will be contributed by the state.
The idea is based on Israel’s successful Yozma fund (see this post), in which the state there was able to help grow a venture capital sector in the early 1990s.
Earlier this month national newspaper La Nacion reported that to qualify local and foreign accelerators have to have liquid funds of at least $150,000. In all 31 accelerators applied.
The funds, as well as a seed fund, which invests up to 250,000 pesos in firms of no more than a year old, falls under a new fund of funds Fondce (Fondo Fiduciario para el Desarrollo de Capital Emprendedor) which was unveiled in September.
In the same month the government predicted that the economy will grow by 3.5% in 2018 - with inflation falling to 10% from 24% the same month. Things are then on the up.
Likely because of this President Mauricio Macri this week called Argentina the "best place in the world to bet on".
But what many will hope now is that the red tape and corruption that Argentina is famous for will be eradicated as quick as possible. Until then nice policies such as getting the state to co-invest with accelerators will benefit little more than the elite.
Timm is a South African who writes on small business in emerging economies. He speaks Portunhol (bad Spanish) and has visited Argentina in 2010 and 2014. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
The number of black-owned tech start-ups in South Africa may be on the rise, yet just four percent turn a profit currently, reveals a new survey. What then should be done about it?
In the survey - released on 22 November SA tech start-up publication Ventureburn - 50% of 260 tech startup founders reported that they were black founders (black African, coloured, Indian or Chinese South African). This is up from 26% in a 2015 survey of 197 founders by the publication.
Of the current survey, four percent opted not to reveal their race, while 46% listed themselves as white.
Yet, while 16% of start-ups founded by white entrepreneurs are turning a profit, a mere four percent of black-owned tech start-ups are doing the same. In addition 61% of black start-ups have yet to generate an income, compared to 30% of white start-ups.
Added to this white start-ups accounted for 59% of all those start-ups that reported having tapped angel funding.
The survey also reveals that white start-up founders are significantly older than black founders. Over a quarter of white founders are 40 years or older, compared to just 13% of black founders. Almost three quarters of black founders are aged 35 and younger.
This might explain why so few black start-ups are making a profit compared to white start-ups. Older founders are usually more experienced, better networked and have more capital than younger entrepreneurs.
Aligns with increase in black SMEs
The survey results suggesting the growing number of black tech start-ups, are in line with a study released earlier this year by Trade and Industrial Policy Strategies (TIPS) which revealed that the percentage of black-owned formal small businesses grew from 38% of such firms in 2002 to 49% in 2015 (see this post).
The figure however still lags behind the national population where black population make up 92% of South Africans.
A lack of black angel investors means the state has to get more involved. Earlier this year Matsi Modise (pictured above), head of start-up advocacy group Simodisa, said more black high-net-worth individuals would help to grow the angel investors pool.
But this alone won't be enough. A “black tax”, where black professionals are compelled to financially support relatives, also holds many back from investing in start-ups, she says.
State support still lacking
Perhaps then the state should intervene?
To some degree the state is already doing so - by offering incubation and seed funding and by using Black Economic Empowerment (BEE) legislation to compel large IT companies (including multinationals) to support and fund black entrepreneurs.
Yet there is much the state still needs to do. Just nine* of the 62 incubators under the government’s Small Enterprise Development Agency (Seda) support software or high-tech firms. The agency added three new incubators in 2016/17, two of which are incubators aimed at the high-tech sector (see this post). It needs to fund more such incubators.
A Pretoria-based incubator and science park - The Innovation Hub - has of late broadened its reach to innovative entrepreneurs, by adding township hubs (the eKasi Labs programme) and running Startupbootcamp and Startup Weekend events.
But its head McLean Sibanda admitted in May that it’s still difficult to find black entrepreneurs with unique ideas in the township. Too many township startups are pursuing “me-too ideas” over innovative ideas. More exposure to the networks of more affluent entrepreneurs might help and better schooling could help.
The introduction of seed grants in 2012 by the Technology Innovation Agency (TIA) could well help fund more black technology start-ups. The agency disburses grants of up to R600,000 through universities and selected small business support organisations.
In the last financial year the agency channelled R74.3m to 133 innovative projects - up from R66.5m in the 2015/16 year. Though the initiative isn't aimed exclusively at black innovators or entrepreneurs, a large number of those the agency supports are black.
Black tech start-ups have also to thank the country’s BEE legislation for increased support and funding.
Large IT companies such as telecoms provider Telkom (in which the state still retains about 50% ownership), as well multinational firms such as IBM and Microsoft have introduced support programmes in recent years.
For instance Telkom Futuremakers head Litha Kutta says three hubs that the telecoms provider backs support over 1,000 tech entrepreneurs involved in black-owned start-ups.
Among IT multinationals, IBM has provided support and funding to three black-owned IT companies and four aspiring black tech entrepreneurs in the last two years. It includes R1.2m in incubation support and about R2.5m in funding to two of these IT black firms.
But Bhavya Rama, who oversees IBM’s R700-million Equity Equivalence Investment Programme, says it’s not always easy to find black-owned IT firms, says Rama. “We’re finding that the market has challenges. Every startup claims that they have ICT capability, but when you look it’s only a few that have it.”
She also notes that many black tech startups getting support currently through incubation programmes are serial incubatees.
These are the kinds of challenges to be expected initially, when black startups are still struggling
But limit state's role
In the end the state's role should be limited - to support such as training and incubation and seed funding.
Helping to nurture a venture capital sector could help too, if the state were to launch a co-investment fund. Here an idea by Discovery Health CEO Adrian Gore might be worth testing - where fund managers could be enticed to invest in black startups in return for higher management fees (see this post).
In addition the state could tweak its venture capital tax incentive - which is growing in popularity (see this post) to allow for greater deductions for those that invest in black tech startups. This might help fuel the creation of black angel investors.
Ultimately the state should be wary of any measures that distort the market. Black tech startups after all want to pitch their solutions on an equal as possible footing as their white counterparts. Some support will help. Too much might render black firms uncompetitive.
*Seda's nine high-tech and software incubators are: Sofstart, Invotech, Smartxchange Durban, Smartxchange Ugu, SA French Tech Labs, Savant, Tuksnovation, Singatha ICT Incubator College and Seda Nelson Mandela Bay ICT Incubator.
Timm is a South African who writes on small business in emerging economies. He is also the editor of Ventureburn (which conducted the tech survey). Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a