COMMENTS BY THE SMALL BUSINESS INSTITUTE “SBI” ON THE SMME AND CO-OPERATIVES FUNDING POLICY
The Small Business Institute (“SBI”) welcomes the publication of the draft SMME and Co-operatives Funding Policy. We also appreciate the invitation to make comments and recommendations on how best the objectives of the policy could be achieved. Our comments and recommendations should be regarded as constituting our preliminary assessment of the proposed policy, and as forming part of ongoing engagement with the policy.
About this Document
The document is made up of two broad parts: first, we will make general and specific comments arising from our assessment of the policy; and second, as far as possible, we will propose alternative approaches and recommendations to the problems the policy seeks to address.
SBI comments on the draft funding policy for SMMEs and Co-operatives
In general, we welcome the formulation and publication for comment of this policy. We believe it is an important step towards tackling the critical funding challenge faced by small businesses and co-operatives in South Africa.
For the purposes of this submission, we accept the definitions (turnover, size of workforce, etc) adopted in the proposed policy. However, it is significant to make a general point here: that is, the sector approach – combined with conflating small businesses as a segment with a sector – is not helpful. Our preference, as an advocacy organisation, is to regard SMMEs as a segment of the economy, not a sector, just like big business and multinationals are segments that cut across economic sectors in various jurisdictions.
Related to this preceding observation, we wish to submit that although distinctly different as they face different challenges, we think it is useful to not overstate the differences from informal sector and formal sector SMMEs or rural versus urban-based SMMEs to facilitate this conversation.
We especially welcome the structured approach the document’s authors adopt in trying to design policy solutions for distinctly different forms of businesses entities. After all, even though the phrases SMMEs and co-operatives are often used interchangeably, they are distinct entities, and require a nuanced approach to assessing the problems and proposing solutions.
The policy is an important intervention to addressing funding hurdles faced by SMMEs and co-operatives. It is welcome, though its publication comes as the problem has evolved thanks to rapid changes in the operating environment both in South Africa and across the globe.
We agree and fully endorse the objectives set out in the policy document. We return to this later in the document.
Similarly, we endorse the attempt by the document’s authors to insist on setting pre-agreed measurable outcomes and targets, and institutionalising performance monitoring to assess impact and efficacy of the policy as well as evaluate emerging problems and continued relevance. This dynamic approach is particularly important given the uncertain environment South Africa’s economic operators, especially SMMEs and Co-operatives, find themselves.
We also welcome and encourage the approach to base solution design on facts and empirical evidence. The drafters have to be commended for this approach, and indeed all policy makers and other players in the ecosystem should be encouraged to embed this approach in designing future interventions. This approach is useful in taking emotion out of the discourse about solutions, and limiting reliance on polarising ideology.
That some of the data sets relied on have since been overtaken by events such as covid-19 and the double blow of crippling load shedding and the cost-of-living crisis should not to be allowed to diminish the significance of relying on facts and evidence.
The SBI has some deep reservations about the proposed policy.
Generally, the biggest concern we have is the incidence, we’ve previously warned against, of layering new solutions to a problem that is evolving (and therefore not sufficiently understood) and an ever-changing environment.
It would seem that the policy is based on some false but critical assumptions. A few are worth pointing out.
- First, there seems to be a belief that the SMME and Co-operatives ecosystem exists, is dynamic and functional – our assessment is that this is not the case. There’s way too much fragmentation, and this has been worsened by regionalism and urban-rural divides.
- Second, the paper places the Department of Small Business Development (“DSBD”) at the centre of coordination. In reality, the Department is not only new, but is also under-resourced. Its positioning as an “ordinary department” (in other words, with no constitutionally-derived powers such as, say, the National Treasury) makes its coordinating powers blunt.
- Third, the future of the department is a subject of ongoing speculation. It might not survive in the next reconfiguration of government size and shape.
- Fourth, government is positioned as a unified system. This is probably aspirational, but not obtaining at the moment. A case in point is the red-tape reduction interventions residing in various spheres and agencies of
- Fifth, there is an assumption that the state is capable and a competent player to partner with other role players in the ecosystem. Evidence, both empirical and anecdotal, paints a different picture.
- And sixth, but not less important, the document assumes the ease of collaboration between various role players. This is not the case. South Africa has a poor track record of partnerships. Successful ones are few. These include the partnership between Business and government in rolling out the covid-19 vaccination programme. Government procured the vaccines, and the private sector – through Business for SA (“B4SA”) – helped put the jab on arms. Other attempts at partnerships, including a grand social compact, have not yielded positive outcomes.
The scope of the policy’s aspirations is unrealistically broad. As it stands, it seeks to be a cure-all policy intervention to funding problems of SMMEs and co-operatives. The danger with this approach, we fear, is that the likelihood of failure or sub-optimal outcomes is high. A focus on a few key issues (not necessarily the so-called “quick wins” or easy ones) might yield better outcomes, and provide scope for learning and quick refinement.
The policy also lacks ambition in some of the areas. One example that stands out is the 30-day payment of suppliers by government departments, organs of state and state-owned enterprises. It would be churlish to not recognise the monitoring work that has been done by government, notably the National Treasury and Public Service Commission, to keep the spotlight on state organs that continue to kill SMMEs by late payment or no payment at all. Where progress has been slow is in the area of enforcement of this government policy.
In 2020, the private sector rallied behind a long-standing SBI campaign to get all SMME suppliers to be paid within days. In excess of 50 CEOs of South Africa large corporations publicly endorsed the campaign and pledged to implement it in their firms. A pity is that although government was invited, it did not sign up.
Equally, it is concerning that as a result of tardy payments of suppliers a new industry of invoice discounters/bridging finance has been allowed to flourish. Wittingly or unwittingly, this has had the perverse effect of normalising late payment especially by the public sector.
Whilst the draft policy makes reference to the financial inclusion policy being spearheaded by National Treasury, the link between the two is tentative and not institutionalised. This raises the risk of duplication of effort and confusion among intended beneficiaries.
Our other concern is that the policy will be implemented during a major institutional reorganisation of the development finance institutions including the ones aimed at assisting SMMEs and co-operatives. Again, whilst this review is ongoing, the proposed finance policy makes no reference to this process or its impact.
It is worth reiterating the SBI’s broad support for both the spirit and the letter of the policy. The challenges we have highlighted are not fatal. This is the spirit we would like our submission to be received.
Within this context, we make the following proposals:
In consultation with the ecosystem, we would like to suggest that the scope of focus of the policy be narrowed so that it enhances prospects of success with implementation. The SBI believes there are too many “nice-to-have” elements in the policy. A consensual prioritisation exercise would assist greatly in identifying pressing issues.
This exercise would also help with sequencing the work and outcome of the institutional reorganisation of the DFIs with the implementation of the policy.
There are enough mechanisms provided for in the small business enabling legislation to institutionalise ongoing dialogue and consultation with the players in the ecosystem. An example that comes to mind is the National Small Business Advisory Council. If this were set up, involving thoughtful players in the ecosystem, bodies such as the
SMME Access to Finance Working Group and Co-operatives Access to Finance Working Group, could be the expert resource part of the Council instead of being standalone structures.
A key project of the Council ought to be the development of a functional and an effective SMME and Co-operatives ecosystem that will outlive both political and administrative institutions.
On payment of SMME and co-operative suppliers, we propose penalties – such as interest on late invoices and disciplinary sanction against offending officials – to enforce the 30-day payment policy. Some of these have been proposed by the National Treasury.
If government, private sector and SOEs were diligent in paying SMMEs timely, the need for invoicing discounting would be far less than at present. In instances where there is a long-standing relationship between an SMME supplier and an organ of state or big corporate, there ought be very little reason to not advance 50% of the invoice
or 25% to ease cashflow for the SMME in executing the work. This, again, would obviate the need for bridging finance.
Finally, the issue of the data base compilation is important. Our preference, however, is that this should not be linked to funding. Rather a dedicated process should be instituted working together with the National Treasury’s Central Supplier Database and the Office of the Chief Procurement Officer and financial and non-financial players in
compliance with the provisions of the Protection of Private Information Act. Also, during covid-19, there were many thoughtful suggestions made regarding databases as well as retrofitting compliance for SMMEs that received help.
Once more, we are grateful for the opportunity to make this submission. And, we remain available for further engagement.