Submission Presented by the SBI (Small Business Institute)
[31 October, 2018]
In response to the Updating of Schedule 1 of the National Definition for Small Enterprises in South Africa
(Gazette Notice No 41970: published 12 October 2018)
E-mail to: Legislation@dsbd.gov.za
The SBI (Small Business Institute) formerly known as the AHI is a 75-year-old not-for-profit organisation constituted to promote the economic and business interest of its more than 100 chamber organisation members and thousands of small and medium enterprises (SMEs) in the wider economy of South Africa. As a member of Business Unity South Africa (BUSA), the SBI participates in Nedlac and the SBI stands for sustainable, market-led job creation, inclusive economic growth, transformation and ethical leadership.
The SBI Response to the Updating of Schedule 1 of the National Definition
Definitions do matter. Clear and simple definitions provide certainty and a common base for all of government, its agencies, the private sector and academia to apply when considering policies, making laws and regulations, targeting support measures and for statistical analysis and research. The definition of which company qualifies as a micro, small, or medium-sized enterprise has to provide certainty, be simple to apply and capture the group of companies that face the specific challenges of smaller businesses. A lack of clear and inappropriate definitions has, over the years, hampered our knowledge and understanding of this vital segment of our economy, ranging across all sectors. As a result, South Africa now laments a mismatch of costly support measures, contradictory policies and laws and little coordination across government and the private sector for small enterprise support.
The proxies used to define smaller enterprises are complex to apply, track and verify and outdated. Regardless of the impact of factors such as inflation and the dynamics that have evolved to influence the nature of business, updating the proxies in Schedule 1 of the National Small Business Act is long-overdue; they were last updated 15 years ago. The contribution of smaller enterprises to GDP and employment remains unclear and in dispute. Therefore, how we define micro, small and medium-sized enterprises is of vital importance for their development and growth in our economy.
The SBI thus welcomes the Updating of the National Definition for micro, small and medium-sized enterprises in Schedule 1 of the Act, which now presents threshold values that are sensible, rooted in statistical research, reflective of the operational conditions of our country’s smaller enterprises and are realistic to the current business environment.
The SBI also welcomes the use of only two proxies in the updating of Schedule 1 – turnover and employment – and the removal of the proxy “Total Gross Asset Value”. Furthermore, the SBI welcomes the Department’s recognition that the class category “very small enterprises” is superfluous; unique only to South Africa and out of step with international practice. The SBI therefore supports the removal of the class category “very small enterprises” in the updating of Schedule 1.
It is the view of the SBI that the updating of the national definitions in Schedule 1 requires greater certainty and clarity, especially for their application in policy, law making and statistical research and analysis. In line with international practice, the SBI recommends that:-
Recommendation 1: Insertion of an “either/or” option is applied to the turnover and employment classifications in the updating of Schedule 1:
The updating of Schedule 1 is unclear as to whether both turnover and employment are to be applied in combination of the other. Modern economies have adopted an “either/or” option to definitions for smaller enterprises for simplicity and consistency, especially for statistical research and purposes of analysis. The “either/or” option is widely used across all EU countries, in OECD countries and in other emerging economies such as Malaysia. The application of an “either/or” option when applying turnover or employment as threshold criteria provides flexibility in applying
Eurostat, the EU’s statistics agency applies a definition based only on employment for the use of counting the number of micro, small and medium-sized businesses. Also for statistical purposes, the OECD applies the same definition using employment as the proxy to define SMEs
the definition for smaller enterprises, especially for statistical analysis and research and in capturing the SMME contribution to employment; a national priority for South Africa.
Most especially, the benefit of adopting the “either/or” option between turnover and employment classifications will obviate the necessity by government to regularly adjust Schedule 1 of the Act to account for fluctuations in enterprise turnovers and the changes in business patterns as enterprises adapt to global dynamics in the business environment. Adopting the either/or option would benefit both government and SMMEs.
The SBI therefore recommends the insertion of the word “either” in the clause “Definition of Small Enterprise” (page 4 of the Updating of Schedule 1) to read thus: …
…”Small enterprise” means a separate and distinct business entity, together with its branches or subsidiaries, if any, including cooperative enterprises, managed by one owner or more predominantly carried on in any sector or subsector of the economy mentioned in column 1 of the Schedule and classified as a [very small] micro, as small or a medium enterprise by satisfying either in columns 3 and 4 [and 5] of the Schedule.
Recommendation 2: Insertion of the symbol “≤” (less than or equal to) throughout columns 3 in the Updating of Schedule 1
For the purposes of clarity, especially for statistical analysis and research, the SBI recommends that the symbol “≤” (less than or equal to) be inserted prior to all the threshold employment numbers throughout column 3. This would provide certainty for research and statistical purposes and will mitigate the use of divergent cut-off thresholds adding to current disharmony. For example: one statistic may use a cut-off between 11 and 49 employees, while others may use between 10 and 50 employees. Inclusion of the symbol (less than or equal to) will thus provide for clear distinction between the different size classes of the enterprises defined in the updating of Schedule 1. In using this symbol a “small business” would therefore be classified from 11 employees and a medium enterprise classified from 51 employees.
Recommendation 3: Delete clause “Limitations of this Statement” (page 3) in the Updating of Schedule 1.
The SBI recommends deleting the clause “Limitations of this Statement” from the updating of the Schedule. The updating of Schedule 1 accommodates all enterprises and their activities in the economy (those that do not fall within the employment and turnover thresholds are deemed large). Referencing the informal sector – as a limitation of Schedule 1 – creates ambiguity. It also implies that informality is acceptable by exclusion when in fact informal businesses operate outside the law. Instead, every effort should be made to assist informal businesses to transition to compliant, formal businesses, rather than excluding them from this schedule. The “limitations” clause is superfluous to the purposes of the updating of the national definitions in Schedule 1 and should be deleted.
The SBI recognises that the updating of Schedule 1 for the national definitions for smaller enterprises now provide for better alignment with the transformation policies of government, particularly the BBB-EE Codes. It is noted however that the DTI will need to review the BBB-EE Codes regularly to ensure they are sensitive to enterprise turnover fluctuations and adjusted accordingly.
Finally, the SBI urges the DSBD to work closely with all government departments, especially CoGTA and the DPME to ensure a new commitment to transversal coordination across government in applying the updating of the national definitions contained in Schedule 1. Research conducted for the SBI that recently reviewed over 70 laws and policies relevant to SMEs has shown that there are divergent definitions applied to smaller enterprises across all government departments.
The provisions contained in Section 18 of the National Small Business Act provide for the publication of Guidelines for the review of all of government’s policies and laws and their impact on smaller enterprises. We urge the Minister and her department to consider issuing these Guidelines as a matter of urgency.
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