IF SOUTH Africa is to create the millions of jobs it needs, the government must buy more goods and services from small businesses, by putting in place set-asides for small firms or by using e-procurement.
The National Development Plan describes several interventions that can result in faster and more inclusive economic growth. One of these is the promotion of procurement measures that will stimulate domestic industry and job creation.
The plan calls for state procurement opportunities to be made more accessible to small businesses and for an improvement to be made in transparency.
It also calls for buyers to leverage the local procurement accord to increase the purchase of locally manufactured goods.
It is vital that South Africa support more small firms, if the country is to forge a more equitable economy and create more jobs, particularly as 56 percent of the workforce is employed by small businesses.
Small businesses create the most jobs. Between 1985 and 2005, 90 percent of all jobs were created by small, medium and micro enterprises, according to Finmark Trust.
In assisting small businesses, the government can offer financial and non-financial support and reduce the burden of red tape that small firms face, but this will only go so far if it doesn’t also help small enterprises gain greater market access.
In the domestic market there are two ways for the government to do this.
One is to compel large companies to buy more from small suppliers. The Department of Trade and Industry is partly doing so, with the broad-based black economic empowerment (BEE) codes requiring companies to score BEE points if they procure from black-owned suppliers. The department wants to strengthen this by having firms adhere to a minimum threshold of procurement from black-owned suppliers.
Another way is for the state itself to buy more from small firms. This it can do by setting aside a certain portion of its procurement spend for small businesses and by using an e-procurement portal.
However, at present the state does not have set-asides for small businesses and makes scant use of any e-procurement portal. Preference points under new procurement rules, which came into effect in December last year, are based on a firm’s BEE rating and not its size.
Certain government entities have targets for how much they intend procuring from small businesses, for example the City of Cape Town (40 percent of spend) and the Gauteng provincial government (60 percent of spend). But these are mere targets, not backed by law and so can’t be rigorously implemented.
On top of this, a Department of Trade and Industry plan to allocate 85 percent of the spend on 10 key goods and services to small businesses – approved by the cabinet in 2007 – was torpedoed by the Treasury over concern that it constituted a set-aside, which was “unconstitutional”.
The reasoning is strange, particularly as many other countries have set-asides for small and micro enterprises (SMEs).
These include the US government, which in 2010 set aside 23 percent of the value of all prime contracts awarded by federal agencies, and South Korea (a country whose miracle economic growth was largely driven by the promotion of small businesses) which has had a set-aside policy for small enterprises since 1965.
India and Brazil also have set-asides. In April, a plan in India to set aside 20 percent of all procurement from the central government and public-sector agencies for small businesses came into effect, while Brazil initiated a set-aside policy for small and micro enterprises six ago.
In Brazil the government last year purchased over 400 billion reals (R1.6 trillion) in goods and services from SMEs, about 20 percent of all state procurement, against a 2013 target of 30 percent. Under articles 42 to 49 of its General Law for SMEs, all government tenders of up to 80 000 reals in value must be granted exclusively to SMEs and 25 percent of the value of tenders with a value exceeding this threshold must be reserved for these firms.
Added to this, under the law, 30 percent of subcontracts from large and medium businesses are to go to SMEs.
SMEs would also be favoured with an allowance for up to a 10 percent difference in price between the SME’s price and a medium or large firm’s price.
Two years ago Paulo Bernardo, Brazil’s then planning minister, reported that over 20 million Brazilians had been able to raise themselves out of the poorest sections of society between 2006 and 2010.
Further, the ministry calculates that every 1 billion real contracted to SMEs helps generate 7 600 jobs. This translates to about one job created for every R500 000 of procurement spend.
However, some countries, such as Chile, have opted not to use set-asides, arguing that they distort the market, and could raise procurement costs or lead to the purchase of inferior goods.
Some argue it is better to find a way to make it easier for smaller firms to do business with the state. This is why Chile opted to instead set up an e-procurement portal, ChileCompra, in 2003.
Between 2004 and 2011, the percentage of procurement from SMEs through ChileCompra has increased from 23.8 percent to 41 percent and in 2010, nine in every 10 tenders advertised on the portal went to SMEs.
Currently 850 public agencies source goods from more than 100 000 active small and micro-enterprise suppliers throughout the country, amounting to transactions totalling $6bn (R50bn).
While the e-procurement portal, which is under the Ministry of Finance, helped save the state about $230 million alone in 2010, or the equivalent of about 3 percent of the Chilean government’s procurement costs, it has also helped promote greater transparency, efficiency and access to this market for all.
Whenever a parastatal needs to purchase goods or contract a service, its officials complete a request on the website indicating the specifics for the respective tender. The system then automatically sends an e-mail to all suppliers registered on ChileCompra. The site also provides contact details of the relevant officials at the department or parastatal submitting the tender.
When suppliers’ bids are not successful, they are also given clear reasons why they did not win the tender. Suppliers can also see the results of the tender, who participated, the proposals, the economic and technical scores and who won. This all helps to reduce corruption.
ChileCompra, together with various municipalities, also set up a number of free internet and business information access points that entrepreneurs can access to learn more about how to navigate through the e-procurement portal. These 15 centres are usually co-hosted by municipalities which provide the building or space, while ChileCompra pays the cost of running the centres.
In all, 90 percent of SMEs that register on ChileCompra use the system. These centres also conduct information technology assessments on entrepreneurs and lectures that prepare them for bidding.
A 2008 report by the UK government found that South Korea and Australia had been successful in getting more small businesses into public procurement because they had developed e-procurement systems, which had the effect of bringing down bidding costs, therefore making tendering more accessible to all.
It also offers a speedier payment system. Since setting up an e-procurement site, the South Korean government has been able to reduce the time it takes to pay suppliers – from 14 days to just four hours.
While some Western Cape departments and the Nelson Mandela Bay municipality use e-portal Tradeworld to procure goods and services, too much buying is still conducted manually. All government departments and state-owned enterprises should shift their procurement to a single portal. If nothing else, it could make state procurement more transparent, provided the agency is managed by competent officials.
Meanwhile, small businesses deserve some kind of set-aside, at least until an effective e-procurement site is up and running. The problem is the chances of this happening soon are slim, particularly if the Treasury continues to hold a firm grip on the state purse and as long as the small business representation on business bodies remains weak and fractured.
This opinion piece appeared in Business Report on 22 August 2012. Stephen Timm is the author of the Trade and Industrial Policy Strategies report How the state and private sector can boost support to SMEs: Lessons from Chile & Malaysia, released in July 2012.
Stephen Timm is a