supplier development

How Corporate South Africa can support SMME Development

How Corporate South Africa can support SMME Development

by Karabo Mashugane for IOL, sourced by Fariba Bowen

A 2018 IOL opinion article by Karabo Mashugane argues that the BEE codes are hindering SA’s SME development. The Enterprise Development (ED) scorecard was introduced to drive entrepreneurship and SME development. These became accepted as key drivers of economic growth and job creation. ED requires corporates to invest 3% of Net Profit After Tax (NPAT) on developing SMEs. Unfortunately, most corporates simply donated the required money without bothering much about the development impact realised. What mattered was that the compliance box was ticked.

The amended B-BBEE Codes were introduced in 2013 and ushered in Supplier Development. Corporates were now required to spend a portion of the 3% (ie 2% of NPAT) on the development of black-owned SMEs from whom they procured goods and services.

The logic was that corporate companies would open market opportunities to SMEs and use the 2% of NPAT contribution to capacitate those SMEs. It was hoped that this would encourage entrepreneurship, increase the number of SMEs, drive economic growth and ultimately create jobs.

In the amended B-BBEE Codes, small businesses were split into two categories to ensure the codes really had a broad-based reach. SMEs with annual turnover below R10million were categorised as Exempt Micro Enterprises (EMEs), and those between R10m and R50m labeled as Qualifying Small Enterprises (QSEs).

Corporates are required to spend 15% of their procurement spend with each SME category (30% in total). For large corporates with billions in annual procurement, this created a serious headache. Corporates struggled to meet the targets and some simply gave up.

Unfortunately, those who succeeded were faced with a dilemma. The SMEs which they developed and gave market opportunities might grow turnover beyond the stipulated categories. If that happened, the corporate would not be able to claim the BEE points they sought in that category.

For example, issuing an EME with a contract for R20m per annum increases the EME’s turnover above the R10m threshold. When this happens, the corporate can no longer claim BEE points on that procurement spend in the EME category. It thus risks non-compliance despite acting in the true spirit of BEE.

The result is that, to maximise B-BBEE compliance, corporates avoid developing SMEs or issuing them with large contracts even when it is feasible. The SMEs only receive small purchase orders designed to keep them as unsustainable “one-man” businesses.

As a possible solution, Mashugane suggests corporate tax incentives to encourage corporates to issue large long-term contracts to SMEs (Business Report Opinion&Analysis, April 5). Treasury can lean on its years of experience with tax incentives to design a framework that would keep negative unintended consequences to a minimum. In addition to the tax incentives, another amendment should be introduced to the B-BBEE Codes.

The amendment should allow all procurement spend on a contract issued to an EME to be claimed in the EME category for the duration of that contract. This should remain, even if that EME grows turnover above R10m. Equally so with QSEs that grow above R50m.

For example, a corporate entity issuing a 5-year contract of R20m per annum to an EME should be allowed to claim R20m each year in the EME category on its B-BBEE scorecard. This must continue each year over the 5-year period, even though the turnover of that SME would obviously grow above R10m. This amendment would encourage corporates to issue large long-term contracts to SMEs. It would then lead to more meaningful SME development, economic stimulation and accelerated reduction in unemployment and poverty.

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Why SMMEs are so Important in South Africa, but Need Work

Why SMMEs are so Important in South Africa, but Need Work

by Alex Kinmont

The National Development Plan is government’s answer to South Africa’s social and economic crises. The Plan aims to eliminate poverty by the year 2030 “by drawing on the energies of its people, growing an inclusive economy, building capabilities, enhancing the capacity of the state, and promoting leadership and partnerships throughout society.”

Small, Medium and Micro Enterprises (SMMEs) are a major component of this plan. Global trends show SMMEs as forming the vast majority of formal businesses, and employing between 60 and 70% of the population. Where South Africa’s SMMEs form 98,5% of enterprises, they only employ less than 30% of the population.

South Africa’s unemployment rate has most recently been recorded at 29%, the highest it’s been since 2008.

So how do we better use the globally-recognised potential of SMMEs to improve our employment?

The first step is to better understand South African SMMEs in terms of current statistics.

Truthfully, we know very little about Small, Medium and Micro Enterprises in South Africa. Our reports on SMMEs differ drastically:

The Small Enterprise Development Agency (SEDA) is an agency within the government’s Small Business Development department and their 2018 report stated an estimate of between 2.3 and 2.5 million SMMEs in South Africa.

A year later, the Small Business Institute, a non-profit organisation and member of Business Unity South Africa (BUSA), estimated only 250 000 SMMEs.

Either South Africa lost over 2 million SMMEs in a year, or the numbers were wrong.

Regardless of which institute has the right estimate, it is enough to show how little South Africa knows about its small businesses.

If we don’t even know basic statistics about our SMMEs, how can we hope to be effective in nurturing them enough to employ more of the population?

Over half of South Africa’s unemployed are youth. With their unemployment rate sitting at 40%, it is just about double the rate of adults.

Why are our youth unemployed? Education specialist Nick Spaull believes the problem to be lying in primary school education where the reading and mathematics levels are far below 50%. If we are not giving our youth a decent foundation in basic skills, how can we expect them to cope in any working environment?

Part of the National Development Plan focuses on the younger generation, taking on a “youth lens”. Some of its objectives include open access to two years of early childhood development, boosting teacher training, literacy and mathematics levels above 50% and overall improvement of the school system.

The first step towards improving the lives of South Africans is to improve their education, giving them a stronger foundation from which to search for jobs. From here, we need to improve job opportunity, something which SMMEs have significant potential for.

Half of South Africa’s small enterprises fail within two years of starting up, due to lack of finance and “the inability and inexperience of their owners,” says the former Head of Small Enterprises at Standard Bank, Ravi Govender.

South African government and large corporates need to invest in small businesses, focusing on training and mentoring. If small enterprises are failing because of a lack of finance and guidance, then there is hope if those in positions of power take a stand.

If we concentrate on training and funding small businesses, then these businesses can fulfill their potential in providing jobs.

Where our SMMEs are currently employing only 30% of people, if we meet the global standard in terms of our SMMEs then these small business will double their job creation, making way for a rise in employment.

As ambitious as the NDP may be, SMMEs in South Africa have the potential to change our economic landscape. We need to understand them better. If we use our positions of influence to fund and train our country’s small businesses, then our SMMEs will succeed, thus employing more people, reducing the unemployment rate and providing a future for our youth.

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