The small, medium and micro enterprise (SMME) sector has been identified as a priority for a number of reasons. Firstly, in South Africa, as in other developing countries, evidence exists that the labour absorptive capacity of the small business sector is high. The average capital cost per job created is in many cases lower than in big business and it has an innovative and technical contribution to make to the economic development of our country. Most private sector employment growth is usually forecast to come from SMMEs, though large firms will remain a major source of employment and crucial to national development, productivity growth and exports. Second, the SMME sector has been identified as critical to achieving the goal of empowering communities historically oppressed by apartheid. Small black owned businesses suffered various impediments under apartheid and creating conditions for the growth and development of the sector is an important goal of transformation of our country. The small and medium size enterprise sector of the economy is thus important to the future prospect of our country, in terms of employment, growth, black economic empowerment, innovation and competitiveness.
It was within the above context that the Trade & Industry Portfolio Committee, undertook a study tour in November/December 1996 of eight of the nine provinces to review progress of The National Small Business Support Strategy. This gave the Committee the opportunity to gauge the views of people on the ground and to hear the views and concerns of individual business people, business organisations, NGOs, CBOs and provincial government structures. The Committee also met with the National Government Structures responsible for promoting small business development. During an interaction with the Centre for Small Business Promotion (DTI), the Chief Director, reiterated the government's mission: "to create an enabling environment which stimulates the growth and development of small business, resulting in job creation, a redistribution of wealth and shifts small business from the margins of our economy to the centre."
As part of this commitment a White Paper entitled, 'National Strategy for the Development and Promotion of Small Business in South Africa' was presented to parliament on 20 March 1995 after it was accepted by cabinet and discussed by the Parliamentary Portfolio Committee on Trade and Industry. The White Paper made preparations for a national plan for small business which was as inclusive as possible. The document committed government to transparency in its support actions.
The objectives of the National Strategy outlined in the White paper include the following:
The creation of a supporting environment for Small, Medium and Micro Enterprises
Aiding greater spread of wealth and economic opportunities.
Creating and upgrading long term jobs
Strengthening the economic empowerment of black people and women in business
Stimulating internationally competitive sectoral growth
Strengthening links between big and small firms, as well as rural and urban business.
The National Small Business Enabling Act, which was passed during 1996, has provided amongst other things for:
1. The establishment as statutory bodies of the National Small Business Council and the Ntsika Enterprise Promotion Agency.
2. An obligation on all government departments to consider the impact of any measure on small business.
One of the key proposals flowing from this legislation is the creation of institutions to ensure sustainable support to SMMEs. The strategy involved the restructuring of some of the existing institutions and creating new entities in order to create an appropriate institutional framework. The committee notes that since the President's Conference on Small Business in March 1995, the focus of the Department has been on the design and establishment of four institutions. The following institutions have now been established.
At the national level the Department of Trade and Industry is the co-ordinating body for policies, programmes related to small business promotion. Within the DTI The Centre for Small Business Promotion has been set up as a Chief Directorate to fulfil this co-ordinating role and is charged with the overall co-ordination of implementation of the National Small Business Support Strategy.
Ntsika Enterprise Promotion Agency (NEPA) is responsible for promoting and co-ordinating non-financial support services to the SME sector. Non financial support services include enterprise management and entrepreneurship training and access to information, counselling, extension services, technology and markets.
Khula Enterprise Finance Limited, a public company promoting access to financial services for SMMEs. Khula is responsible for administering the National Credit Guarantee Scheme, as well as for providing financial and capacity building support to Non-Governmental Organisations, Provincial Development Corporations and Banks.
National Small Business Council (NSBC), which acts as a representative voice for SMMEs on policy and advocacy issues and which is responsible for making recommendations to government.
2. OBJECTIVES OF THE STUDY TOUR
A study tour, organised by the Portfolio Committee's Working Group on Small Business convened by Ms. Bongi Ntuli, was planned during the year end recess in 1996. It was intended to visit all nine provinces and interact with provincial government officials, NGOs, CBOs, provincial business councils, business organisations and business people. Unfortunately administrative problems on our side made it impossible to visit the Northern Cape. The visits to eight provinces were followed by an interaction with the national leadership of the four institutions in Pretoria on December 6 1996.
The Committee members met with the following role-players, at a national level, provincial level and regional level:
Centre for Small Business Promotion (Chief Directorate)
Operations and impact of Ntsika and Khula
Business Development Services
Local Business Service Centres
Manufacturing Technology centres
Business Associations
National Small Business Council: Regional and Provincial Business Council
Development Corporations
NGO's, CBO's
Commercial Industries, Banks and
Relevant Stakeholders
We are grateful to all those who provided information and especially to the Small Business Desks in the provincial Economic Affairs departments, who arranged our schedule.
The following section of the report provides an overview of the SMME environment and support institution development at the provincial level. In particular, it reflects discussions, impressions, and interactions that took place during, visits, sightseeing, workshops, in-depth discussions and investigations.
3.1 SMME SUPPORT ENVIRONMENT
The responsibility for providing support and assistance to small & medium enterprises falls upon a wide range of organisations, associations and agencies. During the course of the tour the Committee recognised the role of the above structures and appreciates the contribution they are making to the national small business support system. These organisations which formed part of the tour programme including the institutions established to implement the national Small Business Strategy, different structures of provincial government, a range of parastatals, numerous NGOs and community based organisations, a wide spectrum of business associations, private institutions and several donor agencies.
The support environment and institutions within the different provinces are unevenly developed. The Western Cape, Gauteng and KwaZulu Natal for example appear be relatively well endowed in terms of skills and capacity in SMME support. Compared to other parts of the country, they are favourably situated in respect of markets, raw materials and sources of energy, and they have a relatively large number of NGOs and CBOs committed to SMME promotion. These provinces are also endowed with established and relatively well resourced universities which are either providing an SMME programme and/ or conducting research for the provincial governments. These provinces also have a relatively strong infrastructure capacity including roads, electricity, transport etc. facilitating the development of the national support plan.
Infrastructure in the Northern Province, the Eastern Cape, North West and to some extent Mpumalanga and the Free State, on the other hand, is less developed and this impacts on the spreading of the support strategy to the far and remote places.
The Gauteng, KwaZulu-Natal and the Western Cape economies have always had a high proportion of small, medium and especially micro enterprises. Much of the major productive activity, included clothing manufacturing (CMT), chemical manufacturing, construction, transport and the service sector. With the abolition of apartheid, entrepreneurs are becoming further involved in farming, tourism and a wider range of emerging manufacturing activities. The Northern Province, Eastern Cape, North West and in certain cases Mpumalanga and the Free State, do not yet have a very active or developed small medium and micro enterprise sector.
In all provinces the heritage of our apartheid past continues to impact on the pattern of SMME development, though in different ways. Except for a tiny number of hive projects run by a few NGOs, most black owned SMMEs appear still to be confined to apartheid defined group areas. A very large proportion of businesses operated by Africans remain survivalist, micro enterprises. This reflects the still tenuous economic position of many African entrepreneurs in the different provinces which the Committee observed with some concern.
3.2 THE SBDC, DEVELOPMENT CORPORATIONS AND NGO SUPPORT INSTITUTIONS
The small business support institutions of the old order either no longer exist or are disintegrating as far as small and micro enterprises among communities disadvantaged by apartheid are concerned. The largest and most influential institution set up by the previous government, with private sector support, was the Small Business Development Corporation (SBDC). By agreement with government, the SBDC has now withdrawn the limited and admittedly problematic support it previously provided to the micro enterprise sector. The committee notes with concern that the majority of loans still issued by the SBDC are still going to white owned businesses e.g. in Gauteng and the Western Cape between 75% and 80%. The Committee is also of the view that the SBDC procurement policy needs to be reviewed. In Gauteng it was established that the SBDC still purchases overwhelmingly from white small and medium enterprises. Many of the entrepreneurs and stakeholders we visited felt that 'the SBDC has moved out of the reach for many small black traders' while others did not discuss it as being a role player in some provinces.
The focus of this report is not on the Development Corporations but the Committee feels it necessary to express some concerns. Several of the provincial Development Corporations are currently trying to amalgamate previous homeland development corporations. This task is not going smoothly as these Development Corporations have been over staffed, and some proved to be inefficient and corrupt. The current process involves strategic rethinking, realigning, transformation and rationalisation. The Committee regrets to report that it could see no major visible contribution being made by the Development Corporations towards SMME promotion in the provinces. In the case of the Northern Province, a large portion of the Development Corporation budget is going towards salaries and retrenchment packages. In the North West Province the small businesses organised within the Provincial Small Business Council did not think they were receiving significant assistance from the North West Development Corporation taking into account the historically accumulated resources under its control. The Eastern Province seemed more promising with well funded support though it is also clearly over staffed.
The Committee visited a wide range of support NGO's and CBO's. Some provided the committee with a renewed sense of hope and we can only express our admiration for those dedicated people who did not only want a better life for themselves but assisted other people selflessly. The Mamelodi Career Centre, SHAP (SOWETO), Vosloorus Community Project, Pretoria Metropolitan Council and the 17th Shaft Multi Purpose Centre, however different in purpose, are all examples of organisations that are adding value to the lives of people in the Gauteng Province by providing training in horticulture, computer skills, building and carpentry. Some of these institutions also provided a conference centre and a security service employing many previously unemployed people and running on business principles. Similar organisations operated in the Mpumalanga Province e.g. Mpumulanga Small Enterprise Development Network, The Bee Hive in Nelspruit (LBSC) and the KaNyamazane Small Industrial Park. The Mpumulanaga Small Enterprise Development Forum consists of support structures, co-operating engaging and co-ordinating support in the province. In the Northern Province the Committee visited the Elim Projects and the Seshego Industrial Area and in the Free State, we visited amongst other, the Mangaung Community Development Centre and the Mangaung - University of the Orange Free State Community Partnership Programme. The organisations and institutions visited by the committee, all made a meaningful contribution to SMME support in general. These organisations and institutions across the country should not operate on an ad hoc basis or in isolation. They need to be nurtured as many are still experiencing operating difficulties and some organisations the committee visited, are struggling to operate.
3.3 PROVINCIAL SMME DESKS
Many of the provincial government Small & Medium Enterprise desks have individuals who are both skilled and energetic. During our visit to the provinces, we were taken by officials of these departments to business organisations and in turn by some of these organisations to businesses operated by their members. The Directors of these Desks often demonstrated a sound understanding of issues within their provinces and were well connected to structures. Some Directors and Chief Directors expressed a concern that the implementation of the strategy would be enhanced if they could play a more active role which needs to be more clearly defined. Within the unfolding strategy, the improving of national and provincial government co-ordination, consultation and even communication is essential. Capacity building and project management should also be encouraged at the provincial level to enhance the contribution of Provincial Departments to the National Strategy.
3.4 SUSTAINABLE ACCESS TO FINANCE
The main demand encountered among the small business people we spoke to was, not surprisingly, for accessible and affordable finance. Established institutions are clearly not providing this need. As indicated above, the committee found that, the SBDC continued to provide the majority of its loans to White owned businesses. While some of the commercial banks have small business loan divisions, these are very small and most black owned SMMEs still find it impossible to raise loans from commercial banks. The Committee visited during the Western Cape tour, one of the commercial bank's small business divisions. This had a book of only 60 clients. Only 30% of these, or 40% measured in value, were what the manager called, 'other than white'. It was generally noted that the financial institutions including banks, money lending structures and community organisations which provide a financial service is unevenly spread and developed between the provinces. Small enterprises in the Free State, Mpumalanga, Northern Province, Eastern Cape and the North West shared a common experience of a lack of start up capital, operating capital and investment funds. The major source of funding was from own savings, friends and family. Access to financial resources from banks was only available to 'financially secure' enterprises. The unmet demand for financing is substantial, especially among newly established firms.
Among the business people, we spoke to who knew of the White Paper, the Durban Conference, The Provincial Small Business Council etc., many expressed great disappointment at the performance of Khula. Expectations appear to have been high that Khula would by now have been providing finance at affordable rates. The sentiment of the different Provincial Small Business Councils was that Khula was not providing sufficient funds, and that its loan guarantee scheme with commercial banks was sustaining the provision of finance at rates of interest as high, if not higher, than might otherwise have been the case.
The loan guarantee scheme, at least in its present form, is indeed a matter which seems to us requires urgent review. In the Orange Free State, Northern Province, Eastern Cape, Mpumalanga, Western Cape and Gauteng, the Committee was led to understand that Khula, offers guarantees for up to 60% of loans approved by commercial banks. This guarantee appears to have little impact in encouraging the banks to issue more loans, as they still have to bear a 40% risk. The Banks operate under a central co-ordination system and branch managers, it appears, routinely refuse loans. The Committee's visit to the Western Cape Absa small business division indicated that this bank at least insists on an extraordinary high level of supervision. Absa does not issue loans to micro enterprises. Its 60 clients have loans between R70 000 and R1 million. The bank receives around 100 applications a month, but maintains it can manage a portfolio of not more than 120 clients. The banks visited did not appear to have a significantly high default rate, yet they considered small business loans to be unprofitable, risky and labour intensive work. The Committee did not see any visible commitment from the banks for much further extension of these operations even with Khula guarantees. The assistance of commercial banks was at best patchy and in many cases the Committee did not see any visible impact.
The Committee on the other hand was encouraged when we heard of other schemes e.g. where Nedbank made a revolving credit available to a business association which on lent to its members, where an NGO managed to use an aid grant to leverage in additional bank credit and then on lend, or where a CBO involved in micro lending employed various devices such as lending to five clients jointly who where responsible for the loan, with very few defaults.
A conclusion that would seem to follow from the above is that NGOs, CBOs and Business Associations are more creative providers of retail finance to SMMEs than commercial banks.
3.5 LOCAL BUSINESS SERVICE CENTRES
The mission of the Business Development Services (BuDS) division is to create a network of non financial service providers to SMMEs needs, including information, counselling, training and marketing advice. At present 15 Local Business Service centres (LBSCs) have been fully accredited, by Ntsika 12 partially accredited, while 130 more are in the process of being evaluated. A dispute in 1995/1996 over the location of BuDS, we were told had a negative impact on the establishment of Ntsika linked institutions in the different provinces, although we understand that the tensions that had arisen have now largely been resolved.
There are presently between one and five fully accredited and between three to six provisionally accredited Local Business Service Centres in seven of the nine provinces. In the Northern Cape and the North West, however no Local Business Service Centres are operating. There is clearly a need to accelerate the process of establishing, a network of Local Business Service Centres in all Provinces. The Eastern Cape was recently involved in funding LBSCs using the BuDS accreditation criteria. A committee has been set up to look at applications of LBSCs to be accredited. Some of the LBSCs in the Eastern Cape are also being assisted by university students. The Committee visited several accredited and provisionally accredited LBSC, which differed in many respects from each other. We visited amongst other, the Mangaung-University of Orange Free State Community Partnership Programme(OFS), The Mangaung Community Development Centre(OFS) and the Stellenbosch Learning centre. Our overall impression of these institutions was encouraging and positive.
The Mangaung University of the Orange Free State community Partnership Programme is a comprehensive health care project established in April 1991 and is a partnership between the community of Mangaung, the University of the Orange Free State and the Health services in the area. Its focus is on the underprivileged sectors of the community. At the heart of the project is a multi purpose community centre whose aim is to provide for appropriate primary health care services, the training of community workers and other resources necessary for community development which included the growing of fruit and vegetables, clothing manufacturing, and a wide range of educational training. This successful project is a reflection of a partnership and strong community involvement. We only hope that other education institutions can learn from the University of the Orange Free State and build upon this example.
The Mangaung Community Development Centre was innovative in the creation of an 'incubator' at the LBSC. Other than the services of an LBSC it also provided premises for emerging entrepreneurs for the crucial stages of their development. During the visit the centre was in the process of expansion with the assistance of several private sector partners. The Stellenbosch Learning centre provides a hive for several small business enterprises, and runs a number of training programmes. Similar to the above examples, it appears to be staffed by skilled and innovative people. The centre was established in 1995, and sees itself as one of the new institutions envisaged by the national small business strategy. However the centre also owes much of the support it has received from the Gilbeys distillery, and indeed without this support could probably not sustain its activities.
Other LBSCs visited, reflected a strong need for capacity building and programme management and general assistance. People spoke of their difficulties in maintaining contact with the Ntsika headquarters. They expressed the view that this might ease up with the formation of the Association of LBSCs that might function as a body to mediate with Ntsika. Ntsika is generally perceived to be understaffed, and having difficulty servicing existing LBSCs. What our provinces generally requested from Ntsika was an information flow, assistance in training of staff and targeted resources. They felt that at present they were not getting adequate support in any of these areas. Many people also expressed frustration at the slow process of accreditation and lack of report back during this process.
3.6. PROVINCIAL SMALL BUSINESS COUNCILS
The role of the Provincial Small Business Council is to co-ordinate the interests of the SMME sector and to make representation to government on policy and advocacy issues relating to this constituency. The PSBCs have been established but still have to develop their methods of operations in most provinces.
Many PSBCs expressed frustration at the lack of resources including, insufficient support and unclear channels of communication. It was frequently stated that requests for grants or budgets were not forthcoming. The councils had to raise its own funds to set up offices and members had to use personal resources for council business. The honorarium of R100 per month caused much dissatisfaction. In the Western Cape the recent appointment of an official of the Department of Economic Affairs and the RDP to work with the council would, it was hoped, improve communications with government - hitherto seen to have been haphazard. In other cases members of the provincial government either did not recognise the PSBC or another parallel structure existed. In the Free State, a business association expressed hesitation at operating under the 'umbrella' of the PSBC for fear of loosing its independence. The PSBCs are trying to develop their methods of operating under different and difficult conditions.
Council members generally felt that the precise mechanism of consultation also needs to be spelt out. Council members expressed views on matters like the Labour Relations Act, municipal by-laws, and an amnesty to allow small business people to be taken off the credit bureau black list, but felt that they were not being listened to.
Further points raised included a sense that the tendering procedures had not yet been reformed in ways that made government contracts accessible to small business. The Eastern Cape intended to establish an SMME forum to address the question of tendering and the Tender Boards. The above sentiment was expressed by many individuals, organisations and even some provincial government officials.
3.7 OVERALL PICTURE
The overall picture presented to us in many of our discussions with knowledgeable persons in LBSCs, NGOs and provincial governments is that the new institutions are taking longer to put in place, with more problems, than initially envisaged. Not many of the potential clients are receiving services at present, and existing networks and structures are widely perceived as not yet being fully and efficiently serviced.
On the other hand we encountered what appeared to be widespread general support for the overall aims and strategic vision of the new policy. The basic structure - a body to provide wholesale finance, a network providing non financial support, and representative councils - appears to be sound and widely supported. Certainly, nobody suggested going back to the old approach - although some argued that it would be essential within the framework of the new strategy, to pay more attention to utilising more effectively the capacity of the SBDC. There was also understanding for the staff of the DTI, Khula and Ntsika nationally. A number of people expressed the view that there are far too few people in these structures to service even the existing network, let alone cope with the projected extension.
The main challenge appears to us to be to find ways, within resource constraints, to extend the services of the new institutions to reach a significant section of the potential client base. This will clearly require additional resources. As one informant put it: 'It will not be able to promote an SMME revolution with 10 staff in the DTI and 35 at Ntsika'. At the same time however, it is not merely a question of multiplying what already exists. Efficiency gains are clearly needed and a review of implementation strategy is thus in our view urgent, involving consultation with stakeholders. A clear timetable for extension and some overall idea of the level of government commitment, and of where governments responsibility end and that of the sector begins, appears to be needed if we are to avoid a situation in which cynicism sets in.
4. CONCLUSIONS AND RECOMMENDATIONS
The Committee is aware of the fact that its investigation took place at an early point in the implementation phase of the National Small Business Support Strategy.
The four new institutions - the Centre for Small Business Promotion (CSPB); Khula Enterprise Finance Limited (Khula); the Ntsika Enterprise Promotion Agency (Ntsika) and the National Small Business Council (NSBC) - have only been operating for a relatively short time (at most for a little over a year). The Committee appreciates that establishing four new institutions by a small team through a process involving a considerable amount of consultation represents a considerable achievement. The fact that this process took longer than anticipated, and that unanticipated difficulties were encountered along the way, is also understandable.
According to information provided to us by the Chief Director of the Department, Khula had by mid-December 1996 issued two operating grants (interest free loans repayable if performance targets are not met) to the value of R 1,19 million to the Rural Finance Facility and IBEC. It had negotiated, or was negotiating, credit guarantee arrangements with ABSA, Standard, First National, Nedcor, African, Boland, Fedgen and Future banks, and between August and October 1996 had approved 49 applications for indemnity cover for loans amounting to R 12,8 million. Applications by 8 micro lending institutions for credit guarantees to commercial banks in respect of on-lending projects to micro enterprises were also under consideration.
As indicated earlier 15 Local Small Business Centres (LSBCs) had been fully accredited by Ntsika and 12 had been partially accredited by mid-December. 130 others were in the process of being evaluated. A network of Manufacturing Advice Centres was also being planned by Ntsika to address the technology and technical needs of small business.
Provincial Small Business Councils are up and running in all provinces, as is the National Council. Ntsika and the NSBC are now operating as statutory bodies following the passage of the National Small Business Act.
While the implementation of the National Small Business Support Strategy agreed at the 1994 President's Conference is thus generally on track, the fact remains that the new institutions have at present little more than a pilot presence on the ground. Very few small businesses operated by historically oppressed communities have thus far received significant concrete support from the new institutions. This is compounded in some cases by the fact that the Small Business Development Corporation has in terms of an agreement with the CSPB withdrawn the limited and admittedly problematic support it previously made available to some small and micro businesses. The programme is, in our view, now clearly at a point where it needs to expand its operations and where the new institutions need to be seen to be delivering on the ground.
Each of the institutions and the programme as a whole, in fact, have plans to expand their activities in 1997. Khula anticipates providing loan finance totalling R 117 million, and capacity building support to the value of R 8,1 million to 11 retail organisations and provincial development corporations over the next twelve months. Ntsika anticipates accrediting a number of the 130 applications for LSBC status, and it also has several programmes to strengthen capacity of retailers, LSBCs and provincial SMME desks as well as improve communications. A second President's Conference on Small Business is also planned for April 1997 with a particular focus on the role of local government.
A major priority, in our view, needs to be an improvement of communication and networking. Consultation and communication, which was very intense in designing both the programme and the legislation, seems to have become more problematic now that the new institutions are in place. We found that there is considerable ignorance and misunderstanding about what the institutions are supposed to do. For example, Khula's role as a provider of wholesale finance to a series of retail institutions appears to be widely misunderstood. Many business people we spoke to expect to see branches of Khula established all over the country. There are also numerous complaints about difficulties in communicating with the new institutions, particularly Ntsika. Several of our informants said that they had great difficulty in contacting staff at Ntsika, getting faxes answered or calls returned.
Expectations generated in previous consultations appear to us to be very high, and indeed unrealistic. A number of the business people we met who were involved in, or knowledgeable of, the previous processes of consultation seem to have imagined that the new institutions would by now have been delivering services (and particularly making available finance at concessional rates of interest) to a significant part of the potential client base. The fact that very few businesses are at present receiving services and that communication is problematic threatens, in our view, to fuel an attitude of cynicism and alienation among the small business community, which could seriously hamper the programme.
Recommendation One
A first recommendation that follows from the above is that there is an urgent need to improve communication with the potential client base. Information about what services are available, how the strategy is evolving, and what difficulties it is confronting needs urgently to be communicated in the provinces. A particular concern, frequently expressed to us, is that small businesses have little or no knowledge of how they can access the government tendering system. Although we are aware of the fact that there are problems in making the tendering system accessible to small business (a point to which we return below) better information on what is available needs urgently to be communicated to business associations, LSBCs, NGOs and CBOs.
Expanding the programme and beginning to deliver to a more significant part of the potential client base requires, in our view, both a critical review of the experience of pilot activities to date, and the taking of major decisions about resource allocation and the level of commitment government is prepared to make to support small business.
Expansion clearly cannot be based on simply extending what already exists. Addressing a number of problems that have already been encountered, refocusing some of the activities, improving overall efficiency and defining a clear programme of achievable objectives are all essential.
The most pressing demand we encountered was for affordable finance. We are aware of, and appreciate, the argument that when businesses cite their inability to raise finance as their major obstacle, this is often reflective of other needs and problems of a non-financial nature. It, nevertheless, also appears to us to be the case that the combination of the restrictive attitude of established financial institutions and of the prevailing high interest rates do indeed create major obstacles to the development of small business.
While we encountered widespread support for the idea that there should be a provider of wholesale finance, some aspects of Khula's present policies need, in our view, to be subject to further debate and reflection. Khula's policy at present is that the subsidies it makes available to retail institutions should be passed on to their clients in the form of non-financial services rather than loans at concessional rates of interest. Khula's return on funds deployed is 7,5%, which means it requires capitalisation from the fiscus each year. It plans to offer loans to retail institutions at 14%, and provide them with other non-financial services. These retail institutions, in turn, on lend funds provided by Khula to individual businesses at market rates, but also provide other non-financial services that amount to a subsidy. Khula management argued that this policy was in accordance with international best practice, and the advice of international financial institutions. They argued that small businesses needed to be encouraged to gear themselves to absorb loans with commercial rates of interest, and that making discount finance available would not encourage them to become self sufficient. They also pointed to the experience of various provincial and former "homeland" development corporations, several of which were close to bankruptcy, to argue that providing subsidies of this nature was neither sustainable nor affordable.
During our investigation, however, we became aware that a considerable body of opinion within the Department as well as among business people exists that supported the idea of making finance at subsidised interest rates available to carefully targeted small enterprises in priority sectors. This, it was argued, was essential to kick start the programme, and was said to be in line with the practice in a number of countries that had successful small business programmes - including, Japan, South Korea and Singapore. It was also pointed out that South African institutions like the Land Bank and the IDC offer loans at below market rates, a fact that is well known in the small business community. We were told that the Ministry has requested Khula to prepare a report on possible options in this regard.
Recommendation Two
The Committee fully supports an active exploration of the option of making finance available at concessional interest rates to targeted small businesses. It is our view that while the aim to create capacity for small business to be able to absorb loans at commercial rates is a laudable one, current interest rates are simply too high to facilitate the kind of expansion of the sector that is needed. Moreover, we are not convinced that the current non-financial support services are yet sufficiently viable and tangible to offer a meaningful alternative.
We are also of the view that the loan guarantee scheme, at least in its present form, requires review and possibly some modification. As indicated earlier, Khula, as we understand it, offers guarantees of up to 60% on loans approved by commercial and community banks participating in the scheme. While our own investigation into the practices of commercial banks was limited to a visit to the small business division of one bank in one province and what we heard from small business people themselves, it appears, as indicated earlier, that this scheme is having relatively little impact in encouraging at least the established commercial banks to issue more loans.
Recommendation Three
A provisional conclusion that would seem to follow from the above is that NGOs, CBOs, community financial institutions and business associations are likely to be more effective providers of retail finance to SMMEs than established commercial banks, and that Khula guarantees, as well as funding, might be more effective if re-focused at this level.
As far as Ntsika and the LSBCs are concerned, there is clearly a great need for capacity development and efficiency gains. Ntsika has been plagued by internal disputes and problems with individuals in key positions, all of which has held back progress. Fortunately, it appears to us most of these are now being resolved but the agency badly needs a period of stability to address pressing issues of capacity development and improving programme management skills. Ntsika also urgently needs to improve its liaison with LSBCs.
The PSBCs need to clarify their role and channels of communication to provincial government. As indicated elsewhere in this report, in some cases internal political problems also need to be sorted out. Questions of providing resources for LSBCs and of allowances for Council members also need to be addressed.
As indicated earlier, improving access to government tenders needs urgent attention. Although a number of meetings with tender boards have been held, small businesses complain that they still feel excluded from the process. In part, the problem is one of information. Small businesses and LSBCs still do not know what is being put out to tender, and how to go about submitting a tender. But, we also encountered numerous complaints from business people who say that tender boards are still not favourably disposed to small businesses and prefer to stick with established suppliers.
Recommendation Four
The Committee recommends that this matter receive priority attention, and that consideration be given to publishing formal guidelines for tender boards to promote the National Small Business Support Strategy as envisaged in Section 18 of the National Small Business Act.
The second President's council meeting scheduled to take place in April will hopefully provide an occasion for a thorough review of implementation strategy, involving consultation with stakeholders. The Committee fully supports the proposal to focus on improving the liaison between national and provincial government, and in particular finding effective ways to draw in local government. We encountered many misunderstandings between national and provincial government officials involved in the implementation of the strategy. A number of provincial officials and small businesses spoke of their concern that provincial governments were being marginalised in the process. National officials spoke, in turn, of the high turn over of provincial officials attending co-ordinating meetings, and of decisions taken at such meetings not being conveyed to provincial departments. Improving national/provincial government co-ordination is essential. International experience also points to the critical role of local government structures in this regard. A major lacuna in the White Paper was that it did not deal with the role of local government. Addressing this issue is, therefore, critical.
The review which the Second President's Conference will offer an occasion for should also, in our view, have as one of its explicit objectives the informing of major decisions about the level of commitment government is prepared to make to SMME development. The present programme is at the pilot stage, with a resource allocation that reflects this. While we have ourselves indicated that there is an urgent need for programme and policy refinement as well as restructuring, capacity development and efficiency gains, having the kind of impact on the ground that is both feasible and necessary to create the conditions for a take off by the SMME sector will clearly require the allocation of more resources to the programme.
Recommendation Five
As the Parliamentary Committee charged with reviewing the budget of the Department of Trade and Industry, we reiterate our opinion expressed on a number of previous occasions that the small business programme must be a major priority for the Department. With the Department's major expenditure item - GEIS - being wound down, we look forward to seeing significant additional resources made available to the National Small Business Support Strategy in the 1997/8 and subsequent budgets. This needs to be complemented by the introduction of quantitative and qualitative indicators to assess performance.
There will, nevertheless, be a need to find new ways to manage expectations. Even with feasible additional allocations of resources and efficiency gains, it is unlikely that Khula will in the near future be providing concessional credit on the scale many of our informants appear to think it should be already. Nor does it appear likely that LBSCs will in the near future be providing services to anything like the potential demand.
A clear timetable for extension, with some idea of the overall level of government commitment, and of where government's responsibility ends and that of the sector itself begins, needs, in our view, to be communicated at the Conference.
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