Overview of the policy and institutional landscape for enterprise development and preferential procurement in South Africa

Transcription

1 Overview of the policy and institutional landscape for enterprise development and preferential procurement in South Africa Dr Ven Pillay and Dr Sean Phillips Directors Global Sustainable Development (GSD) 30 June 2009

2 centre for poverty employment and growth HSRC Human Sciences Research Council 30 June 2009 Centre for Poverty, Employment and Growth This paper forms part of the Employment through Private Preferential Procurement and Value Creation Project, with funding from the W.K. Kellogg Foundation and the Tshwane Metropolitan Municipality Produced by: Contact: Dr Ven Pillay and Dr Sean Phillips Global Sustainable Development On behalf of the HSRC Centre for Poverty, Employment and Growth Dr Miriam Altman Executive Director, CPEG Tel:

3 Enterprise development and preferential procurement in South Africa Contents Abstract Introduction: The Private Preferential Procurement and Value Creation Project 6 2. Background South African Historical Perspective Current Context Focus on preferential procurement and enterprise development Legislative and Policy Framework Broad Based Black Economic Empowerment (BBBEE) Broad-Based Black Economic Empowerment Strategy Broad-Based Black Economic Empowerment Act Broad-Based Black Economic Empowerment Code of Good Practice Skills Development Act Employment Equity Act Strategic Framework on Gender and Women s Economic Empowerment National Youth Enterprise Strategy Preferential Procurement Preferential Procurement Policy Framework Act Public Finance Management Act Enterprise Development National Empowerment Fund Act White Paper on National Strategy on the Development and Promotion of Small Business in South Africa National Small Business Act Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises The Micro-Economic Reform Strategy Accelerated and Shared Growth Initiative South Africa (ASGISA) Regional Industrial Development Strategy National Strategy for the Development and Promotion of Franchising in South Africa National Industrial Policy Framework Competitions Act National Industrial Participation Policy

4 centre for poverty employment and growth HSRC Competitive Supplier Development Programme Industrial Sector Charters Property Sector Transformation Charter Financial Service Sector Charter Agriculture Charter Media, Advertising and Communication Sector Charter Mining Sector Charter Petroleum and Liquid Fuel Sector Charter Integrated Transport Sector Charter Construction Sector Charter Forest Sector Transformation Charter Tourism Sector Charter King III Analysis of the policy and institutional landscape for enterprise development and preferential procurement in South Africa Overview Legislative and Policy Framework Requirements for Change Entrepreneurial Needs Key Notes Conclusion Definitions List of Abbreviations List of References

5 Enterprise development and preferential procurement in South Africa Abstract The South African policy and institutional landscape for preferential procurement and enterprise development are summarised in this document, with a specific focus on the use of these two BBBEE Code elements in broader socio-economic development. An analysis of the various Acts, government strategies and policies, and industry sector charters all reveal a common goal for the upliftment of previously disadvantaged individuals and their empowerment through meaningful participation in the South African economy. Whilst numerous and diverse, the frameworks which are meant to provide support for enterprise development and preferential procurement, also have the potential to create confusion. The overview has revealed various gaps and/or barriers to the full understanding, implementation and achievement of the socio-economic goals. The lack of linkages between the frameworks regarding how they support each other, and how they can ease the implementation of initiatives to support development goals, is evident. Specifically, guidelines on how enterprise development and preferential procurement can be achieved in private sector industries are also lacking. Importantly, the private sector needs to view transformation as a sound business case as opposed to a compliance requirement. From a developing enterprise perspective, regulatory and compliance requirements that impede growth and job creation and result in other negative unintended consequences should be addressed to ease the attainment of socio-economic goals. Initiatives also need to encompass strategies sensitive to the needs of women and people living with disabilities. 5

6 centre for poverty employment and growth HSRC 1. Introduction: The Private Preferential Procurement and Value Creation Project The Centre for Poverty, Employment and Growth (CPEG) at the Human Sciences Research Council (HSRC) has initiated an Employment through Private Preferential Procurement and Value Creation Project. The project involves developing and disseminating a knowledge base of procurement strategies to achieve socio-economic objectives. This will be achieved by working with a reference group of partner companies, the Tshwane Metropolitan Municipality and the National Business Initiative (NBI). Funding for the first two years of the project has been obtained from the Kellogg Foundation and the Tshwane Metropolitan Municipality. The project is being implemented in partnership with the NBI s Enterprise Linkage Initiative (ELI), which is funded by USAID. The NBI is working together with the South African International Business Linkages programme (SAIBL) on the Supplier Diversity Initiative, as part of the ELI. The NBI initiative is similar to the HSRC project in working with a reference group of large companies to develop and disseminate a knowledge base of procurement practices, with a particular emphasis on supplier diversity, whereas the scope of the HSRC project covers a broader range of socio-economic objectives. In October 2008 the CPEG commissioned Global Sustainable Development (GSD) to produce a preliminary report that would frame the establishment of a knowledge base on socio-economic value creation through preferential procurement. The desk top investigation, together with interviews with key corporate bodies, resulted in a proposal for the next phase of the research project 1. Included in the report was a recommendation to develop a synopsis of the current policy and institutional landscape for preferential procurement in South Africa; hence this report which identifies and analyses pertinent aspects of the various South African government Acts, policies and strategies, as well as business sector charters which promote the achievement of socio-economic objectives through procurement processes. This document will also provide context to various corporate best practice case studies that are currently being researched to highlight corporate value creation initiatives associated with preferential procurement. 1 HSRC (CPEG) Research report: Employment through Private Preferential Procurement and Value Creation Project. 6

7 Enterprise development and preferential procurement in South Africa 2. Background 2.1. South African Historical Perspective For many decades apartheid systematically prohibited the majority of black South Africans from meaningful participation in the economy through restricted access along racial lines 2. From an economic perspective, the deliberate underdevelopment of black communities was perpetuated through the denial of access to skills and jobs, and the undermining of self-employment and entrepreneurship. Many black people were confined to homelands that offered poor living conditions, infrastructure and business opportunities. Furthermore their forced removal from their homes to these homelands resulted in large capital losses, and the limitation of property ownership made the acquisition of assets impossible. The lack of assets impacted on their ability to obtain loan financing for the establishment of businesses even after the fall of apartheid. Since 1994 the democratic government developed numerous strategies and policies to address economic disparities. New laws were passed to restore the rights to land and tenure, abolish unfair discrimination, and support the access of black people to the economy; these include the Broad Based Black Economic Empowerment (BBBEE) Act, Preferential Procurement Policy Framework Act (PFMA), Skills Development Act and the Employment Equity Act, amongst others discussed in this document. Black economic empowerment (BEE) began to emerge in the mid-1990 s with an emphasis on deracialising business ownership. A few prominent black individuals benefited from the rush to sell equity stakes to black investors resulting in a skewed distribution of wealth. Unemployment, poverty and various inequalities based on gender, disability and geographic locality still persisted within the broader population. A broader strategy that embraced all black people, women, the youth, people living with disabilities, and residents of rural and under developed urban communities needed to be developed and implemented. In 2003 the government introduced the BBBEE Strategy and resultant Black Economic Empowerment Act, supported by the BBBEE Code of Good Practice (BBBEE Code), with the aim of redressing the imbalances imposed by the past whilst simultaneously broadening the country s economic base, creating jobs and alleviating poverty Current Context Preliminary case study research findings have indicated that private sector initiatives associated with preferential procurement tend to be aligned to two strategies; firstly, procurement from existing black empowered suppliers, and secondly, preferential 2 RSA, DTI Broad-based Black Economic Empowerment Strategy. 7

8 centre for poverty employment and growth HSRC procurement through enterprise development within the company s supply chain. Whilst the former is based on a supplier s level of empowerment assessed through the BBBEE scorecard, the latter is based on the company s direct interventions to support and develop new or existing enterprises to participate in the company s supply chain, with the aim of achieving broad based empowerment objectives. In terms of the enterprise development strategy, companies are using their knowledge and expertise to establish and develop small enterprises whilst simultaneously providing support to the enterprises through preferential procurement processes that ensure enterprise growth and sustainability over the long term. This form of enterprise development and preferential procurement linkage is supported, and often driven, by the BBBEE Code that allows companies to claim bonus points for preferential procurement if the supplier is the company s development beneficiary. Given the abovementioned linkage, the focus of this document has been extended to include the policy and institutional landscape for enterprise development. For the purposes of this document procurement, preferential procurement and enterprise development have been defined as follows: Procurement 3 is the acquisition of goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of corporations or individuals, generally via a contract. Preferential procurement encompasses the aforementioned procurement processes and includes other issues that directly impact on supplier selection to meet various socioeconomic goals, such as BBBEE or local supplier support. Preferential procurement does not impact on the type of goods and services that are procured but may impact on the way procurement is planned and executed. In this document, the term preferential procurement includes all procurement approaches aimed at achieving socio-economic objectives and is not limited to the application of preferences in the tender adjudication process, as the term is commonly understood in government. Enterprise development is the investment of time and capital in creating, expanding, or improving the governance, management and operations of a business thereby contributing to the growth and sustainability of the enterprise 4. In this document, the term enterprise development incorporates the term supplier development Focus on preferential procurement and enterprise development Given the preliminary research findings mentioned above, preferential procurement, enterprise development, the BBBEE Act and BBBEE Codes are a major focus of this Definitions of the various types of enterprises are found in section 7 of this document. 8

9 Enterprise development and preferential procurement in South Africa document. Clearly, in the South African corporate context, preferential procurement and enterprise development are interlinked. However the realities of the business environment within which small businesses operate can be limiting in terms of establishment and expansion. Access to finance, skills, tender opportunities and supply chains in both the private and public sector is limited due to various cultural, administrative and financial barriers. To address these issues, an assortment of policies, strategies and charters have been developed within government and the business sector, and these are discussed in the following sections. 9

10 centre for poverty employment and growth HSRC 3. Legislative and Policy Framework 3.1. Broad Based Black Economic Empowerment (BBBEE) Broad-Based Black Economic Empowerment Strategy To facilitate the meaningful inclusion of the majority of South Africa s black population into the mainstream economy, a Strategy for BBBEE was released in This strategy is intended to address the shortcomings of an initial concept of BEE which focused more on the transfer of economic asset ownership and control to a few prominent black individuals; whilst vast racial and gender inequalities were still being perpetuated through lack of access to assets, skills, employment and opportunities to create wealth. The skewed distribution of wealth and the continued marginalization of the impoverished do not favour a sustainable economy. As a point of departure, the BBBEE Strategy document notes government s definition of black economic empowerment as an integrated and coherent socioeconomic process that directly contributes to the economic transformation of South Africa and brings about significant increase in the numbers of black people that manage, own and control the country s economy, as well as significant decreases in income inequalities. To fulfill the requirements of the definition, black economic empowerment must include ownership and control of economic assets, skills development, preferential procurement, employment equity, enterprise development and general socioeconomic upliftment of black people, women, the youth, people living with disabilities and under-developed communities. Moreover, the combination of race/gender and/or disability exacerbates inequality, which further marginalises vulnerable groups and therefore these groups of individuals need to be targeted for empowerment. The key black economic empowerment principles of the Strategy are as follows: To be broad based thereby ensuring the deracialisation of the economy and fast tracking the entry of previously disadvantaged individuals into the mainstream economy To be inclusive and include all enterprises operating in South Africa in all sectors of the economy 5 RSA, DTI Broad-based Black Economic Empowerment Strategy. 10

11 Enterprise development and preferential procurement in South Africa To be associated with good governance by improving the quality and transparency of all economic activity To be part of South Africa s growth strategy by growing and developing new enterprises and not through redistribution of existing wealth only The Strategy describes two categories of instruments: The use of various government tools to promote BEE, such as preferential procurement, regulation, financing, and institutional support Developing partnerships with the private sector, through sectoral charters coupled with a balanced scorecard approach for measuring success. The avenues to promote BBBEE by government include the: the issuing of licenses and concessions, sale of state owned enterprises, public-private partnerships and preferential procurement development of partnerships with the private sector, through sectoral charters and the measurement of success using a balanced scorecard applicable across all sectors Broad-Based Black Economic Empowerment Act 6 The BBBEE strategy led to the promulgation of the BBBEE Act; the objectives of which are: promotion of economic transformation in order to enable meaningful participation of black people in the economy achieving a substantial change in the racial composition of ownership, management, and skilled occupations of existing and new enterprises increasing the extent to which communities, workers, cooperatives and other collective enterprises own and manage existing and new enterprises and increasing their access to economic activities, infrastructure and skills training 6 RSA. Broad-Based Black Economic Empowerment Act No 53 of

12 centre for poverty employment and growth HSRC increasing the extent to which black women own and manage existing and new enterprises, and increasing their access to economic activities, infrastructure and skills training promoting investment programmes that lead to broad-based and meaningful participation in the economy by black people in order to achieve sustainable development and general prosperity empowering rural and local communities by enabling access to economic activities, land, infrastructure, ownership and skills promoting access to finance for black economic empowerment Broad-Based Black Economic Empowerment Code of Good Practice 7 A Code of Good Practice for BBBEE was published under the BBBEE Act in The BBBEE Code outlines the content for the development of the business sector charters and provides a generic scorecard for the measurement of BBBEE across all sectors of the economy. The BBBEE Code includes specific measurements and weightings for the following seven elements of BBBEE: the degree of ownership of enterprises by black people the degree of management control of enterprises by black people initiatives intended to achieve employment equity the extent to which employers carry out initiatives to develop the competencies of black people (skills development) the extent to which enterprises buy goods and services from BEEcompliant suppliers (preferential procurement) the extent to which enterprises carry out initiatives aimed at contributing to enterprise development the extent to which enterprises carry out initiatives aimed at contributing to socio-economic development and promoting access to the economy for black people. The BBBEE Code links the measurement and weighting of the BBBEE elements to a balanced scorecard rating system of seven levels of contribution 7 RSA. Broad-Based Black Economic Empowerment Code of Good Practice of

13 Enterprise development and preferential procurement in South Africa to BBBEE. Companies are allocated a particular BBBEE contribution level, depending on their balanced scorecard results. The BBBEE Act provides a link between the two categories of BBBEE instruments described in the previous section (the use of various government tools to promote BEE, and developing partnerships with the private sector). This is done by requiring public sector institutions to take an entity s BBBEE contribution level into account when carrying out procurement (Section 10 of the Act). Companies which supply to the state therefore have an incentive to improve their BBBEE status. The measurement systems in the BBBEE Code are such that companies which supply to the state also have an incentive to take BBBEE status into account in their own procurement practices. Their own BBBEE ratings will improve with their suppliers BBBEE ratings. The intention of the Act and the BBBEE Codes is therefore to use the state s procurement power in the economy to leverage BBBEE in the private sector. In theory, the state is a major buyer in the economy, and can therefore use preferential procurement as a tool to cascade BBBEE through supply chains in the private sector. The BEE Elements 8 a. Ownership Some narrow-based BEE deals have been flawed in their structuring through the sole participation of a select number of prominent black individuals in the enterprise, with the exclusion of broad-based beneficiaries, such as rural communities, black individuals living with disabilities, and black women. To address this flaw, three key aspects of ownership are assessed in the scorecard 4 : Voting Rights control of the enterprise through the exercising of voting rights at shareholders meetings by black people and black women Economic Interest the entitlement of black people, black women and various broad based black groups to dividends, capital gains and other economic rights of shareholders Net Value the accumulated net economic interest in the hands of the black shareholders after the deduction of monies owed by the black shareholders In addition, bonus points are awarded for ownership of the enterprise by black new entrants. 8 RSA. Broad-Based Black Economic Empowerment Code of Good Practice of

14 centre for poverty employment and growth HSRC Apart from the above mentioned recognition of ownership through equity shareholding by black people, an enterprise can also claim BEE ownership recognition through the disposal of business operations and assets that support a sustainable business opportunity for the new black owners. Sustainability of the new enterprise can be assessed through the transfer of skills, or access to other clients, customers or suppliers other than the selling enterprise. This access must not have unreasonable limitations that will prevent the new enterprise from prospering. The selling enterprise may claim ownership compliance for the first three years after the sale has been effected, and the extent of BEE recognition during this period will be dependent on the sustainability and success of the new enterprise, which will be assessed on an annual basis during this time. Foreign multinationals that are restricted from selling equity in countries in which they operate can opt for recognition of equity equivalents. These equivalents can include elements contained within the sector codes, programmes that support JIPSA (Joint Initiative for Priority Skills in South Africa), ASGISA (Accelerated and Shared Growth Initiative for South Africa), the National Skills Development Strategy, enterprise creation, and programmes that promote social advancement. b. Management Control The management control of an enterprise comprises the representation and decision making powers of black people at various management levels as follows: Representation of black people at executive board level Involvement of black people in daily operations and strategic decisionmaking at the most senior level Black people represented in positions that are key to the functioning of company Inclusion of black women in daily operations and strategic decisionmaking at the most senior level Measurements are adjusted for representation by black women in all categories. Bonus points can be obtained for black, independent, nonexecutive board members. c. Employment Equity Enterprise employment equity is measured against the following criteria: Representation of black employees living with disabilities Representation of black employees at junior, middle and senior management levels Inclusion of black women in managerial positions 14

15 Enterprise development and preferential procurement in South Africa Measurements are adjusted for representation by black women in all categories. d. Skills Development The skills development element is assessed on the following key issues: Skills development spend focusing on priority skills within the sector or the economy Skills development spend on SETA (Sector Education and Training Authority) accredited training Skills development spend on informal in-house training Number of black employees in skills development programmes as a percentage of the total number of employees However, before the above mentioned assessments can be made, the company has to comply with the following criteria: Compliance with the Skills Development Act 9 and the Skills Development Levies Act 10 Registration with the applicable SETA Development of a Workplace Skills Plan Implementation of programmes targeting priority skills amongst black people Prioritisation of adult basic education and training Measurement categories are adjusted for representation by black women and people living with disabilities. e. Preferential Procurement The preferential procurement practice element is intended to: Drive transformation throughout the economy through procurement from BBBEE compliant suppliers Support Qualifying Small Enterprises (QSE s) and Exempted Micro- Enterprises (EME s) Enhanced recognition of procurement spend can be claimed if the BBBEE supplier is: 9 RSA. Skills Development Act No. 97 of RSA. Skills Development Levies Act No. 9 of

16 centre for poverty employment and growth HSRC the measured company s development beneficiary a value adding supplier (suppliers that add value to local raw materials or manufacture and produce locally thereby supporting local production as opposed to reliance on imports) f. Enterprise Development A key principle of the BBBEE strategy 11 is to ensure that BBBEE is part of the country s economic growth through the development and support of new enterprises across all sectors of the economy as indicated in the following statement: In order to grow our economy, more enterprises are needed to produce value added goods and services, to attract investment, to employ more of our people in productive activities. Thus a core component of the BEE strategy is the creation and nurturing of new enterprises undertaking new forms of economic and value adding activities. We seek in BEE a new vitality in our economy by facilitating new entrants to all aspects of the economy. According to the Small Enterprise Development Agency 12, small enterprises already contribute to 35% of the country s gross domestic product and employ over half the number of people who work in the private sector. Furthermore, one in five of all exports products is said to be produced in the small to medium sized business sector. The BBBEE code therefore seeks to move QSE s and EME s from survivalist or micro enterprises status to levels of sustainability and profitability. The scorecard compliance target for enterprise development is expenditure of 3% of net profit after tax. To encourage support from measured enterprises for QSE s and EME s, scorecard recognition is provided for the following: investments, loans, grants, guarantees and seed capital access to credit, interest free loans, relaxed collateral requirements training, mentoring and skills transfer to black entrepreneurs early payments for goods supplied infrastructure support beneficiation labour intensive production investment and support to enterprises operation in rural communities To ease the administrative burden on small and micro-enterprises of verifying their BBBEE status, the Codes provide for all entities with a turnover of less 11 RSA, DTI Broad-based Black Economic Empowerment Strategy. 12 RSA, DTI Interpretive Guide to the Codes of Good Practice. 16

17 Enterprise development and preferential procurement in South Africa than R5 million per annum (EME s) to be considered as Level Four Contributors, which has a BEE recognition of 100%. In the case where such entities are also more than 50% owned by black people or 50% owned by black women, their status is elevated to that of Level Three Contributors with 110% BEE recognition status. The BBBEE Codes also define a simpler scorecard for QSE s (with an annual total turnover of between R5 million and R35 million), which require measurement of the BEE status on only 4 of the 7 elements; all of which are equally weighted. Furthermore, compliance targets for these enterprises are set lower than those on the generic scorecard. Generally, an enterprise in the first year of establishment is exempted from determining their BEE status regardless of the company turnover during that period. Should the company tender for a contract between R5 and R35 million however, then the QSE scorecard is applicable; and for tenders above R35 million, the company must comply with the requirements of the generic scorecard. A qualifying criterion for enterprise creation is that the new enterprise must be value adding through job creation or job retention. g. Socio-Economic Development Whilst the other elements of the scorecard focus on enterprise related issues, the socio-economic element seeks avenues to uplift black communities in a manner that will promote their ability to participate in the economy in a sustainable manner without continued dependence on the benefactor. This can be achieved through the following: Provision of development capital for communities Training or mentoring in communities that will assist in their financial capacity Providing preferential financial support for purchase of their goods and services Beneficiaries of the socio-economic development must be black individuals or groups that contain at least 75% black people to obtain full recognition from the scorecard. Furthermore community projects should focus on rural and underdeveloped urban areas with appropriate socio-economic development needs. The BBBEE Code sets a compliance target of expenditure of 1% of net profit after tax for socio-economic development. 17

18 centre for poverty employment and growth HSRC Skills Development Act 13 The purpose of the Skills Development Act is, amongst others, to: promote self employment employ persons who find it difficult to be employed assist work-seekers to find work improve the employment prospects of persons previously disadvantaged by unfair discrimination and to redress those disadvantages through training and education To assist the private sector in fulfilling the requirements of the Act, SETA s have been established in accordance with the Act to meet the skills development needs of each specific sector Employment Equity Act 14 The stated objectives of the Employment Equity Act are to: eliminate unfair discrimination in employment ensure implementation of employment equity to redress the effects of discrimination achieve a diverse workforce representative of the people of South Africa promote economic development and efficiency in the workforce Strategic Framework on Gender and Women s Economic Empowerment 15 A key objective of the Strategic Framework on Gender and Women s Economic Empowerment is to challenge the direct and indirect barriers in enterprise, industry and trade which prevent women from having equal access to, and control over economic resources. The focus areas for gender support include the provision of information on business, education and training, financing, research and statistics, science and technology, international trade and the support of rural women. 13 RSA, Skills Development Act of RSA, Employment Equity Act No 55 of RSA, DTI Draft Strategic Framework on Gender and Women s Economic Empowerment. 18

19 Enterprise development and preferential procurement in South Africa National Youth Enterprise Strategy 16 The main objectives in support of youth in enterprise are as follows: The enhancement of skills, experience and talent amongst the youth to participate in the country s social, economic and community life. The recognition of the youth as a resource in the development of small enterprises To ensure their access to financial and non-financial resources 3.2. Preferential Procuremen Preferential Procurement Policy Framework Act 17 According to the South African Constitution 18 (section 217, subsection 1), organs of state must contract for goods and services in a manner which is fair, equitable, transparent, competitive and cost-effective; but does not prevent organs of state (subsection 2) from implementing a procurement policy providing for: Categories of preference in the allocation of contracts The protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination The framework to achieve the above is provided by the Preferential Procurement Policy Framework Act (PPPFA) applicable to all government intuitions and state owned enterprises, as follows: A preference point system must be followed during procurement processes For tenders with a Rand value above a prescribed amount, a maximum of 10 points may be allocated for specific goals provided that the lowest acceptable tender scores 90 points for price For tenders worth a Rand value equal to or below a prescribed Rand amount, a maximum of 20 points may be allocated for specific goals provided that the lowest acceptable tender scores 80 points for price 16http:// RSA, DTI Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises. 17 RSA. Preferential Procurement Policy Framework Act No. 5 of RSA The Constitution. 19

20 centre for poverty employment and growth HSRC Specific goals may include: Contracting with persons, or categories of persons historically disadvantaged by unfair discrimination on the basis of race, gender or disability Implementation of programmes of the Reconstruction and Development Programme as published in the Government Gazette No The contract will be awarded to the tenderer who scores the highest points, unless the specific goals noted above justify the award to another tenderer Public Finance Management Act 19 The main objective of the Public Finance Management Act (PFMA) is to secure transparency, accountability and sound management of the revenue, expenditure, assets and liabilities of all public sector departments and entities. Accounting officers of these departments and entities are to establish and maintain an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective Enterprise Development National Empowerment Fund Act 20 The National Empowerment Fund Act is intended to establish a trust for the promotion and facilitation of ownership of income generating assets by historically disadvantages persons by: Providing these individuals with the opportunity of directly or indirectly acquiring shares or interest in state owned enterprises or private enterprises Encouraging and promoting savings, investments and meaningful economic participation Promoting and supporting business ventures pioneered and run by historically disadvantaged individuals Promoting the understanding of equity ownership amongst historically disadvantaged individuals 19 RSA. Public Finance Management Act No 1 of RSA. National Empowerment Act of

21 Enterprise development and preferential procurement in South Africa Encouraging the development of an inclusive competitive and effective equities market Contributing to the creation of employment opportunities White Paper on National Strategy on the Development and Promotion of Small Business in South Africa 21 The development and support of small enterprises in South Africa is crucial for job creation and the generation of sustainable equitable growth amongst the millions of unemployed and underemployed members of society. Compared to big businesses, the labour absorptive capacity of the small business sector is high. However numerous constraints for start-up and growth are faced by the sector; of particular note are the problems and needs faced by black owned enterprises and other previously disadvantaged groups, such as women, rural communities and people living with disabilities. Such constraints relate to access to finance, markets and business premises, acquisition of skills and managerial expertise, and access to appropriate technology and infrastructure, amongst others. Therefore the objective of the national small business development strategy is to create an enabling environment for small enterprises with a focus on the following areas: Facilitating greater equalisation of income, wealth and economic opportunity for black people as well as women and rural communities Creating long term employment Stimulating economic growth Strengthening cohesion amongst small enterprises to address development obstacles, take up opportunities and build collective efficiency Leveling the playing field between small and big business National Small Business Act 22 As part of the enabling legal framework for small enterprises noted in the White Paper on National Strategy on the Development and Promotion of Small Business in South Africa, the National Small Business Act provides for the establishment of the National Small Business Council and Ntsika 21 RSA White Paper on National Strategy on the development and promotion of Small Business in South Africa. 22 RSA. National Small Business Act of

22 centre for poverty employment and growth HSRC Enterprise Promotion Agency, and provides guidelines for organs of state to promote small business in the Republic. The functions of the small Business Council are to: represent and promote the interest of small business with an emphasis on small, medium and micro-enterprises (SMME s) advise the 3 tiers of government on social and economic policy that promotes the development of small business The functions of the Ntsika Enterprise Promotion Agency are to: expand, co-ordinate and monitor the provision of training, advice, counseling and other non-financial services to small business in accordance with the National Small Business Support Strategy provide financial support to service providers that provide abovementioned services consult with organs of state, service providers or National Small Business Council to: facilitate provision of business advice or counseling to small business facilitate access by small business to raw materials and other products facilitate international and national market access for products and services of small business strengthen the capacity of service providers to support small business and support small businesses to compete successfully in the economy formulate and coordinate a national programme of policy research, collection and dissemination of information concerning small business Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises 23 The emphasis of the Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises is on integration" of: different socio-economic policy areas programmes within the public sector and between the public and private sectors 23 RSA, DTI Integrated Strategy on the promotion of Entrepreneurship and Small Enterprises. 22

23 Enterprise development and preferential procurement in South Africa activities amongst the different entrepreneurship and small enterprise development institutions, in support of small business startup and development. The strategy identifies a number of issues which need to be addressed as part of the process for better co-ordination and integration of policies, systems and processes to ease the burden on small enterprises and create an enabling environment for growth. These are discussed below. Public Sector Support Initiatives Regulation and Compliance Easing of the regulatory and compliance requirements on small enterprises through a system of regulatory impact assessments to reduce or eliminate unintended consequences of laws and regulation, especially on job creation. Introduction of measures by Treasury and the South African Revenue Service (SARS) to reduce the administrative and cost burdens on small enterprises Access to Finance Establishment of the South African Micro-Finance Apex Fund (Samaf) to provide access to micro-loans and support for the mobilization of social capital. Khula Enterprise Finance Limited has developed various financing products including Credit Guarantee Scheme in partnership with commercial banks to support lending to small enterprises. The Thuso Mentorship Scheme provides business plan development and other advice to small enterprise seeking access to the Credit Guarantee Scheme. The National Empowerment Fund provides a variety of business start-up and growth financing products with a focus on black economic empowerment. The Industrial Development Corporation provides sector focused financing products for small business development and black economic empowerment. Various departments and institutions, such as the Land Bank and Micro-Agricultural Finance Institute of South Africa (Mafisa) under the Department of Agriculture provide sector focused support. Business Development Services Small Enterprise Development Agency (SEDA) provides access to business development services nationally through various partnerships such as with the Gauteng Enterprise Propeller, 23

24 centre for poverty employment and growth HSRC Limpopo Business Support Agency and the Western Cape s Red Door. Municipalities provide support through their Local Economic Development Programmes and public-private partnership based incubation centres Youth Enterprise Development The Umsobomvu Youth Fund provides financial and business development support to the youth-owned enterprises. A linkage programme links these enterprises with private and government sector procurement opportunities. Support for Women-owned Enterprises Various networks have been established to support women owned enterprises in various sectors such as: Sawen ( South African Women Entrepreneurs Network) which is an advocacy network for women in business ensuring that policies and strategies are gender sensitive TWIB (Technology for Women in Business) supports the use of science and technology in the advancement and competitiveness of business through innovation Other sector specific networks include Sawic (South African Women in Construction), Woesa (Women in Oil and Energy South Africa) and Sawima (South African Women in Mining Association). Incubation and Technology Acquisition and Transfer Services The SEDA Technology Programme provides access to incubator and technology support centres as well as access to funding for technology and technological services. The SEDA programme has established the South African Business and Technology Incubation Association which encourages support of incubation best practice in South Africa through links with counterparts elsewhere in the world Tshumisano Trust established by the department of Science and Technology has established technology stations located at universities to facilitate the transfer of technology between tertiary institutions and small business Productivity Enhancement Measures The Ministry of Labour has established a National Productivity Institute that works in partnership with SEDA to train small enterprises in productivity concepts such as entrepreneurship, life skills, economics and productivity improvement 24

25 Enterprise development and preferential procurement in South Africa Sector-focused Support Measures In partnership with the Business Trust, the Department of Environmental Affairs and Tourism has established the Tourism Enterprise Programme to support small business development in Tourism. The programme uses a peer leaning methodology that facilitates the transfer of business skills from successful small enterprises to other small enterprises. The Expanded Public Works Programme (EPWP) of the Department of Public Works has established the Vuk uphile initiative that builds capacity of emerging contractors to fulfill labour intensive construction works. Contractors receive formal institutional training as well as practical experience on construction sites. Upon exit from the programmes they should have the capacity to tender for and execute labour intensive projects that are part of the EPWP. The Department of Minerals and Energy s Small-Scale Mining Board provide a range of services in support of small scale mining at the pre-feasibility stages of mining such as the establishment of a legal business entity, identification of mineral deposits, environmental impact assessment, amongst other services Skills Development Measures Various SETA s are implementing small business skills development programmes. Private Sector Support Initiatives Numerous private sector initiatives exist; below are some examples of the private sectors response to small business development needs. Access to Finance Khula Enterprise Finance Limited has partnered with major banks to provide small business finance under the Khula Credit Guarantee Scheme Business Development Services Major banks have collaborated to establish Sizanani to offer advisory services to small business clients Individually, banks have also established a variety of support mechanisms for small business clients Fostering Business Start-up Large corporates have established in-house programmes to support entrepreneurs, such as South African Breweries 25

26 centre for poverty employment and growth Kickstart Programme and Shell Petroleum s Live Wire initiative. Facilitating Linkages between Small and Large Enterprises HSRC As mentioned in section 1, to increase procurement from small enterprises, the National Business Initiative (NBI) has established a linkage programme to facilitate (Enterprise Linkages Initiative) interactions between small businesses and large corporates. NGO and University Programmes Many universities are establishing centres for entrepreneurship or small business, providing various subject specific courses and research in support of small business, such as the University of Cape Town s Centre for Innovation and Entrepreneurship Numerous non-governmental organisations have also been established to provide educational programmes on business skills; such as the South African Institute of Entrepreneurship, Junior Achievement South Africa, the Foundation for Enterprise and Business Development, amongst others The Micro-Economic Reform Strategy 24 The micro-economic reform strategy encompasses BBBEE, gender equity and job creation in areas with high levels of poverty, especially in underdeveloped geographical areas. In support of small enterprises the strategy notes the need for the promotion of sectoral economic growth potential areas such as tourism, agriculture, Information and Communication Technology (ICT), cultural industries and export goods. This can be achieved through: the introduction of new small enterprise support services consolidation and co-ordination of existing support services technology development human resource development infrastructure development (transport, telecommunications and energy) access to finance access to markets 24 RSA, DTI A guide to the Microeconomic Reform Strategy. 26

27 Enterprise development and preferential procurement in South Africa Accelerated and Shared Growth Initiative South Africa (ASGISA) 25 For the acceleration and growth of small enterprises, ASGISA highlights access to procurement opportunities, access to finance (particularly venture capital), easing of cash flow through timely payments for enterprises doing business with government, and the easing of regulatory burdens; such as tax and labour laws. Furthermore a number of business opportunities in tourism and business process outsourcing have been identified as labour intensive and rapidly growing business sectors worldwide that also allow for opportunities that support BBBEE. ASGISA identifies a lack of both professional and technical skills as the single most important impediment to growth, and JIPSA was established to identify urgent skills needs and develop efficient solutions to address the skills shortage; such as skills transfer between newly qualified and retired professionals through mentorship and the encouragement of skilled expatriates back to South Africa. A special focus on women and the youth with recommendations for improved support measures have also been highlighted as key areas for intervention Regional Industrial Development Strategy 26 The Regional Industrial Development Strategy proposes the establishment of special economic zones such as industrial parks and innovation hubs to promote regional growth and support for enterprises. Innovative regional development initiatives will also be supported through the establishment of a Thematic Fund in support of various themes which may include capacity building, innovative business startup support and business retention and expansion. A Regional Industrial Development Fund may also be established to focus on infrastructure development in support of business in underdeveloped areas National Strategy for the Development and Promotion of Franchising in South Africa 27 The increasing popularity of the franchise sector locally has highlighted the potential of this sector to contribute to job creation and overall growth of the small business sector. 25 RSA, Presidency Accelerated and Shared growth Initiative. 26 RSA, DTI South Africa s New Regional Industrial Development Strategy. 27 RSA, DTI National Strategy for the Development and Promotion of Franchising in SA. 27