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.
Stephen Timm is a