Is South Africa’s Department of Small Business Development about to be axed?
The department – which has long come under fire for doing too little to support small business (see this post), was set up in 2014 by Jacob Zuma, who last month stepped down as president.
Cyril Ramaphosa, who took over as head of state, has vowed to down size the cabinet. In his State of the Nation Address last month he said a review would be carried out on the number and size of government departments.
Following the speech, Small Business Minister Lindiwe Zulu survived a cabinet reshuffle Ramaphosa carried out last month.
But a report by City Press earlier this month quoted an unnamed insider as saying the department is likely to be dissolved and allocated a director-general in the trade and industry department.
At present the Department of Small Business Development is struck with having to carry out a R1 million forensic audit into a poultry co-operatives project in the Mpumalanga.
This, after the Small Enterprise Finance Agency (Sefa) released the findings of a forensic investigation into a R20-million loan deal, in which instances of embezzlement, fraud and theft were uncovered.
In addition it has struggled to get a Sefa enterprise development fund off the ground that intends to take private-sector commitments from businesses which can then score Black Economic Empowerment (BEE) points by capitalising the fund.
Last month Parliament was told that the fund has been held up for over two years, because the Department of Trade and Industry has not given Sefa the go ahead to allow those firms that make commitments, to score BEE points.
Adding to a long list of promises it has yet to fulfil, the department has yet to set up a promised Co-operatives Development Agency to support co-operatives.
More than two years after a review of its programmes (see this post), the department is only now finalising its new approach to assisting small businesses, in what it calls the “portfolio for architecture” project.
The department outlined in Parliament last month that the approach would see the department tailor-make support programmes depending on the phase a business was in – whether this be pre-start-up, start-up, growth or decline (see the presentation here).
But DA member Toby Chance asked why since a review conducted by the department in 2015, it had taken over two years to develop a portfolio architecture that had merit.
He noted too that the presentation did not recognise what was happening in the private sector in the business life cycle.
Zulu responded by saying that the department is still fairly new and that it would take time for things to be developed. She said the that the department is still deciding on what aspects should be dealt by Sefa and Seda.
This doesn't do much to justify the continuing funding of a separate department - to the tune of almost R1.5 billion ($130m) in the 2018/19 financial year. This will climb to almost R2.6bn as the first tranche of a R2.1bn fund for start-ups is allocated to the department.
Keep minister, cut department?
Better perhaps would be to do away with a separate department, but to perhaps keep the role of a minister - which is what Canada and New Zealand do, where the small business minister is part of the trade or economic department.
South Africa could benefit from the co-ordinating role a minister could play, But this might work better if the minister were to be placed in the presidency - such as Brazil did in 2013 when it selected a small business minister, Guilherme Afif Domingos.
The position was cut in 2015 as part of a downsizing of ministries carried out by then president, Dilma Rousseff. Domingos now heads the state's small business agency Sebrae.
The department’s Lindokuhle Mkhumane last month told Parliament that it had established a national interdepartmental coordinating committee made up of representatives from 24 government departments which meets once a quarter.
Mkhumane said the committee has for example engaged with the Construction Industry Development Board (CIDB) about aligning its Contractor Incubator Programme (CIP) with Small Enterprise Development Agency (Seda) incubators.
This could play a valuable role -- similar as that played by Malaysia's SME Development Council. Perhaps Ramaphosa - a former businessman himself - needs to head the South African one up, to ensure its effectiveness.
This, together with keeping a small business minister close to Ramaphosa in the presidency could just be what the country needs. What it surely can do without - is more of the same poorly performing bloat.
Only a few countries have small business ministers - here they are:
Democratic Republic of Congo
Timm is a South African who writes on small business. He was briefly on holiday in February. Follow Small Business Insight on Twitter at @Smallbinsight.
Banks' lending in South Africa to large corporate companies over the last five years grew at almost double the pace of that to SMEs, reveal Reserve Bank figures.
While lending to corporates expanded by 60% in the last five years (between November 2012 to November 2017), loans to SMEs grew at a slower 39%, but still faster than the overall expansion in credit of 32% over the same period (see Graphic 1, below), figures drawn from the Reserve Bank by Small Business Insight show.
The figures are from the Reserve Bank's Bank Supervision department BA200 forms (see them here).
Those for SME lending include two categories – namely: SME Retail lending (retail loans of up to R7.5 million - or $600,000 for businesses) and SME corporate (loans to firms with an annual turnover of up to R400m - $33m).
The latest report follows a 2016 Financial Mail story which revealed that banks' credit exposure to small businesses had remained almost flat since the 2008 recession, while increasing for large businesses (see this post).
The financial sector code compels banks to invest billions of rands for various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing. This should therefore be driving far more lending to small businesses.
Will new code driving SME lending?
Yet increased credit does not necessarily mean more black SMEs are getting funding. While Nedbank’s loans to black SMEs increased from R1.5bn in 2012 to R4.5bn last year, the number of firms financed fell from 4,300 to 2,500.
The new amended financial sector code was gazeted by Trade & Industry Minister Rob Davies in December last year.
Banks must lend a further R32bn collectively to finance equity deals for big investors to buy stakes in large companies (B-BBEE transaction financing) as well as for black business growth and SME funding.
It remains to be seen whether the new, higher targets will drive up the increase in bank lending to small businesses, in line with the recent increase in credit to large companies.
To do so, the Reserve Bank should look at regularly publishing easily accessible figures -on both overall bank lending to SMEs in general and that to black SMEs in particular.
This may go some way to clearing up whether indeed banks are (as they claim) doing enough to fund small businesses and black-owned small firms - or not.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
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.
Stephen Timm is a