Description
A dynamic small business sector can make an important contribution, not only in employment creation.
Small Business Development,
Entrepreneurship and Expanding the
Business Sector in a Developing Economy:
The Case of South Africa
¤
John Luiz
University of the Witwatersrand
ABSTRACT: A dynamic small business sector can make an important
contribution, not only in employment creation, but also in lessening
concentration in South Africa’s generally oligopolistic industrial structure.
However, for the small business sector to make a meaningful contribution to the
economy it needs to be integrated into the mainstream. This is going to require a
concerted e¤ort both from government and the formal private sector. The paper
investigates how the South African private sector views small business and
whether it is making a concerted e¤ort at integrating this sector into the
framworkof the economy as a whole.
¤
This paper is based upon a report by the author commissioned by the Centre for
Development and Enterprise
Small Business Development 1
1 Introduction
The 1990s saw a remarkable shift in emphasis on the role of small busi-
ness development within overall economic development strategies. In the
past small-scale enterprises were defended on the basis of social reasons as
a panacea for the unskilled, surplus labour in existence in developing coun-
tries. It provided income-earning opportunities for the informal sector. As
such it was perceived as a marginal sector and integrating this sector into
mainstream economic activity was considered unimportant. However, more
recently it has been demonstrated that small-scale enterprises have a valid
claim to greater importance and strategies have been developed world-wide
to expand and integrate this sector (Steel, 1993).
This paper investigates how the South African private sector views small,
medium and micro-enterprises (SMMEs) and whether it is making a serious
e¤ort at promoting this sector and integrating it into the framework of the
mainstream economy. It is a qualitative study which combines a series of
in-depth interviews with business organisations and chambers, and provides
concrete case studies highlighting current business practices. Apartheid in
South Africa created extreme distortions in the business world - big business
isolating itself from SMMEs and white business isolating itself from black
business. This study attempts to illustrate that destroying these mindsets
not only makes for positive social development but also for good business
practice.
2 Small business development: Atheoretical and com-
parative perspective
The policy environment faced by SMMEs determines their capacity to con-
tribute to the process of development. It is important therefore to identify
possible policies that retard the growth of this sector, such as import licences
that small …rms …nd di¢cult to obtain. Market imperfections may constrain
small …rms’ access to resources by failing in the area of …nancial intermedi-
ation, for instance (Steel, 1993: 39). To develop a conducive framework for
SMMEs to thrive in, the government may have to correct such distortions
and ‘level the playing …eld’.
Governments worldwide have assisted SMMEs for various reasons. Rwigema
and Karungu (1999: 111-112) and Harper (1984) maintain that these include
Small Business Development 2
propositions that:
² Small enterprises, broadly de…ned, have shown a remarkable capacity
to absorb labour.
² Assistance to small enterprises displays sensitivity to poverty mitiga-
tion. Small enterprise promotion then becomes a political necessity.
² SMMEs are usually locally owned and controlled, and can strengthen
the extended family and other social systems and cultural traditions.
² Indigenous people in South Africa have been prevented from playing
their due role in the economy, and their …rst attempts are likely to be
in SMMEs. Indigenous businesses are usually small, requiring various
forms of assistance.
² The products of SMMEs tend to originate from indigenous craft tradi-
tions, and they are also more likely to satisfy the needs of poor people
than are the products of large enterprises and foreign technology.
² Because the pro…ts of small enterprises are not dependent on long pro-
duction runs, small …rms can manufacture smaller quantities of prod-
ucts which have a regional or even a local market. In poor commu-
nities, with less e¢cient communications, local di¤erences in taste are
far more pronounced, and only small enterprises can economically cater
for them.
² SMMEs satisfy local needs not only by making di¤erentiated products,
but by also being scattered throughout the country. This ensures a
more equitable distribution of employment opportunities.
² Local technology is more likely to use locally produced raw material
and equipment, saving foreign exchange. When transport is expensive
and internal communications are ine¢cient, there is merit in promoting
local small units using local materials to satisfy local needs.
² Research in industrialised countries suggests that people working in
small enterprises are happier in
their work than those who work in large …rms, despite generally lower
wages and poorer working conditions (see Harper, 1984: 13).
Small Business Development 3
² SMMEs provide a nursery and proving ground for entrepreneurship and
innovation. They also provide a valuable outlet and proving ground
for the entrepreneurial ambitions of government employees wishing to
switch careers.
² SMMEs provide employment to, and sometimes exploit the entrepre-
neurial talents of, women. Particularly in rural areas, cottage indus-
tries or informal …rms (sewing, knitting, food preparation etc) serve
as a valuable source of income and personal development, as well as
outside contacts, for the otherwise unemployed.
² SMMEs tend to use less capital, a scarce resource, than large …rms.
They also use less management, which is even scarcer.
² For the economy as a whole, Harper (1984: 16) argues that:
² ‘small businesses are likely to be more resilient to depression, and to
o¤er a steadier level of employment than large ones; their activities
and locations are diverse, they depend on a wide variety of sources and
types of raw material, and their owners, if only for the want of any
alternative, are likely to stay in business and maintain at least some
activity and employment in conditions where foreign investors... would
have closed their factories...’
² Comparative studies of large and small businesses, carried out in coun-
tries at all stages of development, con…rm that small …rms generally
employ more labour per unit of capital, and require less capital per
unit of output, than do large ones (Harper, 1984: 16).
Small businesses typically complain that shortage of capital is their major
problem and that this impacts their ability to invest in a particular asset,
whether it be raw material, equipment, customer credit or …nished prod-
ucts. Another issue often raised is de…cient demand (Harper, 1984: 26).
In South Africa, government has attempted to attend to the …rst issue of
…nance through organisations such as Khula Enterprise Finance Ltd. The
latter issue of ine¤ective demand is perhaps a more serious problem which
the government has attempted to address through its procurement strategy.
Inadequate demand arises from inadequate access, disadvantages of scale,
and lack of skill and initiative in marketing; and here assistance programmes
can try to …ll these gaps. Hence, the establishment of Ntsika Enterprise
Small Business Development 4
Promotion Agency by government, which seeks to address access to markets,
training, technology, information, counselling and infrastructure. The private
sector has a more important role to play in addressing SMMEs’ inadequate
demand problems by promoting complementarity between small and large
…rms. Steel (1993: 41) points out that in some Asian countries (e.g. Taiwan)
with well-developed urban industrial and …nancial systems, small enterprises
have bene…ted from subcontracting arrangements with larger …rms and as a
result have gained easier access to …nance. To ensure that such arrangements
are mutually bene…cial it is vital to avoid policies that favour imported inputs
and in ensuring that the tax system does not penalise inter-…rm transactions.
Direct interventions, such as India’s policy of reserving certain products for
small enterprises, may be counterproductive if they protect expensive, low
quality goods.
In South Africa, years of capital controls made it di¢cult for South
African companies to invest abroad and the result was that it generated verti-
cal and horizontal integration by South African …rms. Hence the oligopolistic
nature of the economy. Large …rms faced no incentive to subcontract to small
…rms because surplus funds could be used to produce non-core activities in-
house. With the lifting of capital controls it is likely that large …rms will
increasingly shed non-core activities through subcontracting and outsourc-
ing and that this will stimulate small business development. Likewise, recent
labour legislation aimed at the larger …rms may result in raising the costs of
size and may foster subcontracting.
3 SMMEs in South Africa
The National Small Business Act of 1996 classi…es small businesses into four
categories: micro, which includes survivalist enterprises; very small; small;
and medium. Ntsika (1997) estimates that in 1995 the overall contribu-
tion to the total GDP was 20.8% for small enterprises, 11.9% for medium
enterprises, and 67.3% for large enterprises. As regards contribution to for-
mal employment it was estimated at 29.5% for small enterprises, 15.3% for
medium enterprises, and 55.2% for large enterprises. In 1995, there were an
estimated 591,000 self-employed and employers with a turnover less than the
VAT limit of R150,000. Approximately 200,000 of these enterprises should be
considered as survivalist, since their turnover is less than R1000 per month.
These enterprises have largely been created as a basic source of income by
Small Business Development 5
the unemployed. An additional 400,000 enterprises are micro-enterprises, of
which approximately 137,000 employ at least one employee. Of the total
estimated private sector enterprises in 1995, 23.3% were survivalist, 31% mi-
cro (with no employees), 16.4% micro (1-4 employees), 19.7% very small,
7.6% small, 1.4% medium, and 0.7% large. However, the distribution of
private sector employment reveals an entirely di¤erent picture: large enter-
prises employ 39.3%, medium 13.8%, small 19.9%, very small 13.3%, micro
(1-4 employees) 6.8%, micro (no employees) 3.9%, and survivalist 3% of the
workforce.
The small business sector in South Africa has the potential to contribute
to job creation and economic growth, whilst at the same time redressing his-
torical imbalances and increasing black economic participation. Ntsika (1997:
28) warns that ‘the current state of economic participation of black entrepre-
neurs is of great concern’. It estimates that only about 1.4% of the African
population are entrepreneurs compared with 7.5% among whites. The high-
est percentage of involvement by the black population is in the survivalist
class where returns are very low and limited value is added to the economy.
As the size of the enterprise increases, the percentage of black entrepreneur-
ship decreases substantially. Blacks make up 86% of survivalist enterprises,
64% of micro-enterprises (no employees), 40% of micro-enterprises (1-4 em-
ployees), and only 29% of very small enterprises. Ntsika (1997: 28) states
that there ‘does not appear to be any meaningful “weaning” of successful
black entrepreneurs from low to high enterprise levels’.
A major World Bank survey (2000) of SMMEs in Johannesburg reveals
several interesting facts with national relevance which informs this study:
² The most important constraints faced by SMMEs are insu¢cient de-
mand (primary constraint), cost of capital, crime, and infrastructure.
² Of concern is the fact that almost 60% of SMMEs reduced their em-
ployment between 1997 and 1999. When asked what the necessary
conditions for the addition of 10 employees was, SMMEs responded as
follows in order of importance: increase in demand, increased business
visibility, fall in the interest rates, government promotion of SMMEs,
more contracts from government and large businesses, fall in real wage,
increased exports, cheaper imports, and a decline in foreign competi-
tion. Insu¢cient demand was again the primary reason given for their
lack of expansion, followed by a lack of access to capital.
Small Business Development 6
² Policy stability, lower interest rates, education and training, promotion
of SMMEs in public services, ‡exible wages, and business information
were cited, in that order, as the main ways in which the central author-
ities can help SMMEgrowth. In the case of local government, the main
methods of assistance were safety and security, infrastructure, ethical
local o¢cials, public transport, the improved attitude of local o¢cials,
and investment support.
² SMMEs made extensive use of temporary workers with 90% citing ‡ex-
ibility to expand or contract as their primary motivation for this.
² SMMEs engaged in manufacturing, IT and tourism complained about
the di¢culty of …nding skilled or semi-skilled labour.
² Government procurement seemed to have a very limited impact with
just over 10% of the …rms surveyed having been awarded a govern-
ment contract. The average time taken in preparing a submission for a
government contract was 3.1 months and the ratio of successes versus
failures in terms of contracts submitted was just over 3:1.
² SMMEs had very little knowledge of DTI (Department of Trade and In-
dustry) promotion programmes whilst other local and national govern-
ment promotion programmes had a higher awareness. Start-up capital
was primarily sourced from individual and family savings with bank
loans playing a very subordinate role. More than 50% of SMMEs sur-
veyed had not used formal bank loans in the past …ve years.
The issue which came out time and again in the World Bank study is the
lack of linkages that exist between large and small businesses and hence this
paper’s focus.
4 The role of business in the development of SMMEs
in South Africa
Big business can act as a powerful stimulus for the SMME sector by providing
a real and steady source of demand. However, companies may have to work
closely with the SMMEs to ensure that the product they produce is of the
necessary quality and that delivery targets are met. The advantage of this
Small Business Development 7
approach is that it also creates a positive externality in that the SMMEs ben-
e…t through skills transfers. Tendler (1994) argues that limitations currently
exist as regards this approach in South Africa:
² the corporate sector is not really interested in outsourcing notwith-
standing knowledge of international experience;
² links that do exist are merely ‘cosmetic’ to look politically correct;
² the subcontracting relationships which exist have a monopsonistic ele-
ment to them leading to dependence.
This study …nds that these limitations have been exaggerated. Almost all
of the companies examined saw real commercial opportunities in outsourcing
and nothing cosmetic was apparent. Likewise, no real evidence of monopson-
istic relationships was evident (with the possible exception of the state, which
through its late payment was holding companies …nancially hostage). How-
ever, outsourcing in South Africa is still very much in its infancy and many
opportunities still exist for outsourcing. South African companies appear to
be slow in adapting their practices to reap the bene…ts of links with SMMEs.
Section 4.1 outlines the linkage programmes of a number of companies and
business chambers.
4.1 Linkage programmes
4.1.1 Anglo/De Beers
1
Small Business Initiative
In 1989 Anglo and De Beers established their Small and Medium Enter-
prise Initiative (SMEI) to formalise and dramatically expand their links with
SMMEs. This represents one of the …rst such initiatives in South Africa. In
its …rst 10 years, the cumulative value of business placed through the SMEI
amounted to roughly R1 billion. In the 1995/96 …nancial year, the SMEI fa-
cilitated business transactions with a value of R200 million for 185 emerging
businesses employing 3298 people (Sikhakane, 1997: 8). The SMEI consists
of about a half dozen consultants who scour Anglo/De Beers’s centralised
1
Anglo American is South Africa’s largest industrial conglomerate with major interests
in most sectors. It is also the world’s fourth largest mining company. It recently put
in a bid to buy the diamond cartel De Beers in which it has always had a substantial
shareholding.
Small Business Development 8
purchasing function to identify possible areas of business which can poten-
tially be better performed by SMMEs. In July 1998 the Anglo/De Beers
SMEI was split up with Anglo, De Beers and Anglogold each setting up their
own initiatives along similar lines.
The establishment of the SMEI was aimed at the formalisation and drastic
expansion of Anglo and De Beers links with SMMEs. Their interest in this
area was based on the Paci…c Rim phenomenon of the dual economy, wherein
business is characterised by complex, yet e¢cient strings of suppliers of goods
and services competing …ercely for the custom of large corporations, which
in turn are kept lean and e¢cient (Sikhakane, 1997: 8). The SMEI is not
a non-pro…t organisation and the economic empowerment of the previously
disadvantaged is not its primary focus. However, it is expected that the
previously disadvantaged hold either a majority or equal stake in the business
before the SMEI will become involved.
It works as follows: The SMEI takes an equity stake of not more than
20%, expecting to be bought out by the entrepreneur within two to three
years based on an independent auditor’s commercial evaluation of their stake.
Although the SMEI only holds a minority stake, consensus must be reached
on all agreements. The SMEI makes its income in three ways, namely through
dividends, through the sale of their shares on a commercial basis, as well as
charging a small management fee. The SMEI will only get involved with an
entrepreneur if he/she takes a stake in the business venture from the outset.
The entrepreneur must have something to lose. The amount invested by the
entrepreneur may be matched by the SMEI even though its equity stake will
not exceed 20%. The SMEI will also provide loan …nancing of up to R250,000
at commercial interest rates. The collateral requirements are fairly ‡exible
and not as strict as that of commercial banks.
The SMEI receive a large number of requests for assistance by mail but
these by and large are not viable or do not interest the SMEI. Generally
the SMEI will identify opportunities …rst and will then attempt to …nd suit-
able entrepreneurs. Often if Anglo/De Beers wish to outsource or privatise a
function they will …rst approach those currently employed as potential entre-
preneurs before looking elsewhere. Interestingly the SMEI have invested in
entrepreneurs whose activities are not directly linked to those of Anglo/De
Beers. As such, the SMEI moves beyond the realm of outsourcing to becom-
ing a minor Small Business Development Corporation. Their aim is to be a
pro…t-making centre.
The SMEI has three foci: the investment arm in new business, facili-
Small Business Development 9
tation in businesses in which it will not become directly involved via in-
vestment but will provide assistance and advice, and contracting and pur-
chasing where they make use of existing businesses and introduce them to
Anglo/De Beers for possible outsourcing. The SMEI are aware of the dangers
of monopsonistic-type relationships with the SMMEs they create and thus
discourage entrepreneurs to be solely dependent upon Anglo/De Beers as
clients. As such, they do not require these entrepreneurs to work exclusively
for Anglo/De Beers.
The SMEI has involved itself in a range of activities with tremendous
results. Examples include, Simunye Engineering Services which cleans and
refurbishes a wide range of opencast mining equipment. This company was
formed in 1991 by an unemployed dragline cleaner and a retired foreman
with the help of the SMEI and a start-up capital of R54,000 and which
is now a multi-million rand enterprise. Stimela Rail, which maintains 120
kilometres of railway lines for Amcoal; Eland Bricks, which produces 200,000
bricks per month for housing construction and 30,000 to 40,000 specialised
underground support bricks; Ceza Conveyor Services, which maintains and
repairs the kilometres of conveyor belts connecting Amcoal’s …ve collieries
near Witbank to its Rapid Loading Terminal in Richard’s Bay; Duswan
Services, which recovers lifting tackle from mine scrap heaps, refurbish and
restore the equipment and sell it back to the mines - a turnover well in excess
of R1 million annually and with signi…cant savings to the mine; and Reef
Food Services, formed with a capital of R89,000 in 1990 and with a return
of in excess of R80 million for the year ending March 1997 (Sikhakane, 1997:
9-18).
Evaluation: The Anglo/De Beers SMEI is generally a success story which
shows the potential for establishing links between big and small business,
although they had their share of failures too. Their decade-long involvement
with SMMEs, with investments totalling R1 billion, has resulted in Anglo/De
Beers shedding a number of their non-core activities (thereby improving ef-
…ciency) in the process of creating SMMEs and has turned this unit into a
pro…t-generating centre. It shows that such links can be pro…table for both
partners. The experiences of this initiative should, however, be more widely
shared as it has the potential to stimulate similar endeavours by other large
corporations. The SMEI have no …xed formula for identifying successful en-
trepreneurs. Whilst a basic level of literacy is obviously a necessity, a higher
level of education is not a requirement. Rather the SMEI consultants watch
out for four warning signs: a) a reluctance to contribute start-up cash (not
Small Business Development 10
necessarily very much in absolute terms but an amount the entrepreneur
would be loath to lose); b) an unproven ability and aptitude for hard work;
c) a record of dishonesty; and; d) unrealistic expectations of quick wealth
(Sikhakane, 1997: 12).
4.1.2 Xerox
Xerox South Africa forms part of Fintech Limited which in turn falls under
the Altron umbrella. Fintech holds a 50% stake in Xerox SA with the other
50% equity being held by Xerox Ltd (UK). In 1991 Xerox, in an attempt to
increase its market share, adopted a strategy that seeked to incorporate the
best elements of franchising and agencies into its concessionaires programme.
The concept has proven successful elsewhere, with Xerox doubling its market
share in the United Kingdom in …ve years.
The concessionaire programme works as follows: In June 1998 Xerox
advertised nationally for potential entrepreneurs. Over 170 responses were
received with 65 candidates being interviewed. An induction day was held to
explain the programme and the candidates were asked to draw up a business
plan. As a result, 11 concessionaires were signed up, 3 from historically
disadvantaged backgrounds. The condition was that these entrepreneurs had
to possess some previous business experience. In addition, Xerox was looking
for entrepreneurs with vision, an appropriate strategy, and a viable business
plan. These concessionaires are granted an exclusive area, a vast product
range, Xerox back-up, and Xerox training. Xerox regards the concessionaire
programme as a joint-venture with potential entrepreneurs. The advantage
for Xerox is that they get to expand their sales force and thereby market share
whilst not carrying the entire overhead. The concessionaires are required to
be made up of at least 3 sales representatives. The experience in the United
Kingdom is that many will grow to a sales force of between 35 to 45 people.
The concessionaires themselves are aimed at targeting smaller businesses
(with less than 100 employees).
The concessionaires operate as sales organisations. They secure orders
and place them with Xerox, which will then process the orders and ensure
their delivery. The concessionaires do not therefore have to purchase the
equipment themselves. They are awarded dealer prices and are free to work
out their own margins as long as these do not exceed the recommended prices.
A service agreement must be sold with every machine sold, but Xerox will
pay an annuity for every such contract they bring in. Various incentive
Small Business Development 11
schemes are in place to reward sales, such as rebates based on their level of
purchases. Xerox will loan up to 50% of initial funding (total start-up cost
is anticipated at R100,000 - signi…cantly lower than franchise agreements).
Xerox also provides a comprehensive and continuous training programme
on various facets of the business: Xerox processes, product training, human
resource and sales training. For each concessionaire, a Xerox director will be
appointed to their board purely on an advisory basis. These Xerox people
will be appointed to compensate for areas in which the entrepreneur may be
lacking in skill.
Xerox Facilities Management (XFM): Xerox is a major player in the area
of outsourcing through its facilities management. Printing is a non-core ac-
tivity for most companies but it is the core activity for Xerox. As such it is
involved in the area of taking over print-rooms of large corporations. Em-
ployees in these corporate print rooms have no scope for career advancement
given that it is a non-core activity. But once Xerox takes over these print-
rooms it will identify, train and develop employees since this is a Xerox core
area. It will also remunerate employees on a pro…t share scheme which in
turn encourages productivity. Examples were cited of operators at copy cen-
tres becoming site managers at some XFM centres. Xerox is thus in a better
position to stimulate a¢rmative action on the output side of the IT industry
as it is better able to identify black entrepreneurs in this sector. Xerox will
also consider potential joint-venture companies with existing sta¤ (with a
distinct black focus), although this does carry a normal business risk for the
sta¤.
Evaluation: The concessionaire programme is innovative and holds much
potential for other South African businesses. It has the advantage that it re-
quires no royalty or franchise fees to be paid by entrepreneurs and thus makes
it more accessible to small businesses. These entrepreneurs gain access to Xe-
rox international technology and investment in R&D (which exceeded R10
billion for 1997). They indirectly become part of a multinational corporation
whose revenue exceeded R110 billion for 1997. They gain access to Xerox
training and sales skills and are able to free ride on its marketing strategy. A
drawback is that real equity is not acquired by the entrepreneur. The XFM
programme brings outsourcing to the fore and has potential spin-o¤s in the
realm of black economic empowerment through joint-venture companies.
Small Business Development 12
4.1.3 Company X: Construction and procurement
Company X chose to remain anonymous as it relies on government for 90% of
its business. It is a medium-sized construction company, currently employing
up to 250 people, and operates in the central regions of South Africa. It was
established in the mid 1960s by the current Managing Director as a one-man
operation. At that stage, most of its work came from subcontracting from
larger companies, and its success thus illustrates the potential of the SMME
sector. The irony is that it is now outsourcing a large part of its business to
newer SMMEs.
Company X, however, illustrates the dangers of government procurement
strategies. This historically white company relies very heavily on government
procurement. However, as a result of government procurement policy it has
had to …nd ‘innovative’ ways of circumventing these regulations. As a result
its board of directors was recently expanded from one to eight. Besides the
existing director (who maintains 60% control), he has added three female
family members, as well as four black directors. But these four black directors
(who were and are his employees) have no real say in the running of the
business, earn no pro…ts and are barely aware of their position. He did
this so as to maintain his relationship with government which requires joint-
ventures with the historically disadvantaged. As a result Company X has
secured a steady stream of government business. Not once has this company
provided the lowest bid on tenders and yet it has won the tenders because of
its ‘favourable’ composition. The Managing Director pointed out that almost
all his competitors have done likewise. He complained that the tender process
was rife with nepotism and corruption.
On a recently won R6 million tender (on which this company was not the
lowest bidder), the bid required that they subcontract 30-35% of the contract.
They have thus subcontracted R2.1 million worth of business. The Managing
Director maintained that he was not overly unhappy about being forced to
subcontract but pointed out that he had had some problems in the past. A
small company that he subcontracted to did not pay the necessary tax and
as a result Inland Revenue demanded payment from Company X. The law
does not permit Company X to deduct tax from the subcontractors. Also
he has taken on subcontractors in the past who proved to be incompetent
and now he ensures that they are …rst put on a probation period. He states
that subcontracting has its bene…ts as they are often cheaper because they
do not comply with government regulations such as labour legislation. This
Small Business Development 13
company has subcontracted various parts of its business, including brick-
laying, plastering, carpentry, plumbing, painting, glazing and metal-work.
Unions have not been happy with the subcontracting arrangements because
it excludes their members.
As regards government policies, the company maintains that it has always
subcontracted and would do so even if the government regulations were not in
place. However, the Managing Director pointed out that government policies
aimed at promoting SMMEs were futile and contradictory. For example,
government has been slow in paying for work done (often taking up until …ve
months to pay). This medium-sized company can only barely manage this
delay but it would certainly bankrupt a small enterprise.
Evaluation: Government procurement strategy has often resulted in com-
panies …nding a quick-…x solution to ensure access to government work. This
is not a healthy state of a¤airs. This company has created a dummy board
to circumvent government regulations. As a result its business is booming
and yet its previous practice was not a detrimental one, in that workers have
enjoyed pro…t-related bonuses, labour relations have been good, and it has
always subcontracted voluntarily. Also, it was apparent that it did have good
historical links with SMMEs.
4.1.4 South African Breweries
The South African Breweries Beer Division’s (SAB) commercial equity pro-
gramme seeks to engage or create enterprises that are owned and/or con-
trolled and operated by people from historically disadvantaged backgrounds
in sustainable and mutually bene…cial relationships. The objective was to
transform SAB’s supplier base so as to better re‡ect the realities of South
African demographics and thereby to spread the bene…ts of dealing with SAB
more equitably. Until recently, 90% of SAB’s suppliers were white whilst 85%
of its customers were black. This situation was clearly untenable in the new
political dispensation and SAB has thus tried to reposition itself to exploit
the opportunities that are currently available.
SAB believes that there are two areas that are important in the arena
of black economic empowerment, namely equity access (ownership of the
means of production), and operational management (skills transfer). SAB’s
commitment to black economic empowerment is based upon the following
premises:
Small Business Development 14
² it must make commercial sense;
² it needs to show that large companies can be good for socio-economic
upliftment;
² it will expand the supplier base;
² it has social and moral rami…cations.
SAB has examined its value chain looking for every conceivable oppor-
tunity to promote a¢rmative outsourcing. It has tried to ensure that black
…rms are made part of every aspect of the SAB value chain without compro-
mising quality, service or cost e¤ectiveness. The intention is to move beyond
SAB’s traditional small business ventures in shebeens and taverns, which
dates back to the 1960s where is was involved with e¤orts to bring about
deregulation of the black liquor industry. In the 1980s its Customer De-
velopment Programmes assisted shebeens and taverns in obtaining licences
and provided them with business management skills. SAB now wants to
engage in real value-added activities and the economic mainstream. SAB
encourages joint-ventures to make use of white skills and black potential. It
has redirected business opportunities to such …rms. Likewise, SAB expects
its suppliers to do the same and thus stimulate a second tier of a¢rma-
tive outsourcing. However, SAB does not undertake any evaluation of their
suppliers and does not place them under any legal compulsion. It simply
encourages them. SAB does not take an equity stake in any of these SMMEs
but makes the business opportunities available to them. It identi…es these op-
portunities and then looks for suitable suppliers. SAB prefers the previously
disadvantaged to have at least a 50% share although a smaller equity may be
acceptable if the deal is really large. This it terms ‘a¢rmative procurement’.
Examples include:
² Thuthuka Packaging (Pty) Ltd, which was formed in August 1997,
and is 51% owned by three black consortia, which prints the labels
for beer bottles. The white partners are able to provide indispensable
technical expertise because they have been in this business for many
years. Thuthuka has won a contract for the printing of one billion labels
during the 1999 …nancial year. This substantial order has enabled it to
borrow from a large commercial bank to purchase its own R6 million
printing machinery.
Small Business Development 15
² Seekers-Lesedi travel agency was established in April 1998 through
a 50:50 partnership between Seekers (a pre-existing, reputable travel
agency) and David Malakalaka. SAB had put out a tender for its
travel business but made it known that it would only consider doing
business with a company with a minimum 50% owned by the previously
disadvantaged and who will actively be involved with the day-to-day
business. Malakalaka, who has a background in the travel business, was
approached by Seekers for this joint-venture. It now operates in-house
from Beer Division’s o¢ces with 7 consultants.
² Uptrend Business Solutions have established an in-house stationery
shop at SAB but have retained their pro…table retail store in the Johan-
nesburg CBD. The company now intends to replicate this recipe with
other blue-chip companies and establish in-house stationery stores. Up-
trend now caters for both o¢ce automation (fax machines, copiers, PCs
etc) and stationery supplies.
² SAB has put in place various support systems to assist black farmers in
the growing of barley, essential for beer production. 56 black farmers
have already planted barley on a commercial basis this season. Most
black farmers have plots of around 10 hectares and should be able to
produce 5.5 tons of barley per hectare. SAB provided expert technical
advice and worked with the local agricultural bank to extend credit
facilities to black farmers (Enterprise, 1998: 111).
SAB’s commercial equity programme has its roots in the owner-driver
scheme which was launched in 1987. SAB believed that the delivery side had
outsourcing potential, but instead of looking outside the company, it realised
that it already possessed a ‡eet of trucks and had existing drivers who had
the necessary skills and understood SAB’s customer service ethos. However,
they did not possess the necessary entrepreneurial skills. SAB thus undertook
to support and train them in the area of business management including
book-keeping, income tax and legal requirements, cash ‡ow arrangements,
and industrial relations. Phase 1 entailed the loaning of the trucks to the
participating drivers who became responsible for the operating costs of the
trucks. SAB agreed to pay them a delivery rate per kilometre travelled and
cases delivered. Those drivers who were successful moved to phase 2 where
SAB took back the trucks, entering into long term …ve year contracts. This
enabled the drivers to enter negotiations with …nance houses to raise over
Small Business Development 16
R500,000 necessary to buy the trucks from SAB. It assisted the drivers in
arranging …nance with …nance houses. Finance houses proved to be willing
to assist given the long term nature of the drivers’ contracts which would
allow them to service the debt. Presently more than 60% of delivery occurs
through the owner-driver scheme.
SAB assists previously disadvantaged entrepreneurs by helping them with
the government tendering process, arranging up-front payment where work-
ing capital is proving problematic, facilitating …nance from third party in-
stitutions for capital expenditure, o¤ering technical assistance, and helping
with the acquisition of raw materials at better prices. The SAB programme
does not use a complicated tender document system, but rather calls for
basic quotes, which are thus accessible to SMMEs. SAB’s experiences with
SMMEs has been mixed. However, they have gone into this arrangement ex-
pecting as much. Some SMMEs have delivered wonderful service and others
less than satisfactory. But SAB has adapted its way of doing business to
try and accommodate them - it is ‘not business as usual’ when dealing with
SMMEs and it may require a more hands-on approach. Traditional busi-
ness practices do not necessarily work. Payment terms have to be reviewed.
SMMEs cannot a¤ord payment over protracted periods and SAB has ac-
commodated them through a cash on delivery payment system. SMMEs do
not have warehouses and as such business has to change the way it makes
orders. Instead of making huge orders infrequently, it may require smaller
orders more regularly. The lack of black suppliers in many areas was cited as
a problem that SAB has encountered. SAB is presently building corporate
linkages with other big businesses so as to share experiences and build up a
common database of potential black suppliers. Through the Corporate Sec-
tor Development Forum (comprised of about 20 large companies) they share
information and are building up a common database which will be made
available over the Internet.
In the …nancial year ending March 1998, Beer Division’s spending on
commercial equity arrangements totalled R264 million, up 29% on the pre-
vious year. The company spent R147 million on sales and distribution (167
owner-drivers), R15 million on o¢ce and site services (security, cleaning, gar-
dening), R11 million on catering, R11 million on packaging materials, R10
million on the creative disposal of by-products, R8 million on printing, R7
million on travel, and R12 million on maintenance of equipment (Enterprise,
1998: 110).
Evaluation: SAB’s commercial equity programme has stimulated SMME
Small Business Development 17
development in innovative ways. It has cost SAB relatively little as they have
insisted that they will not pay a premium or accept lower quality. SAB’s pro-
gramme really only makes the opportunities available and then searches for
potential entrepreneurs. In the process SAB has shed its non-core activities
which is in line with current international business practice. The SAB pro-
gramme is one which other South African …rms could quite easily adopt as
it requires little investment from the company.
4.1.5 Barlows Limited
2
Barlows has a number of programmes in place to assist the development
of the entrepreneurial class. However, as far as a¢rmative procurement is
involved, this is rather limited given the specialised and highly technical na-
ture of Barlow’s business. In addition, Barlow’s decentralised system makes
it di¢cult to implement and enforce an a¢rmative procurement strategy. As
such, outsourcing is minimal.
A rather interesting programme called the ‘Emerging Contractor Pro-
gramme’ has been in operation since 1995 and is organised by the Barlow
Equipment Company. Barlows has approached some of its traditional cus-
tomers and advised them on the advantages of encouraging their employees
to work independently as contractors. These entrepreneurs then receive assis-
tance from Barlows to get their business started. Barlows provides them with
…nancing through a repayment package to purchase the equipment (earth-
moving equipment costs around R750,000). Unlike commercial banks, Bar-
lows is willing to look beyond collateral and be more innovative. They are
provided with administrative support, 24 hour maintenance facilities, ten-
dering advice, and training. More importantly, the Emerging Contractor
Programme identi…es and establishes businesses with which these entrepre-
neurs can do business with and negotiates long term contracts for them (18
-36 months). Thus far, 36 entrepreneurs have been assisted in this way. Bar-
lows has an almost perfect record with no repossessions and most of them
are now buying their third or fourth machine. Whilst certain companies
were initially reluctant to do work with outside contractors, the Barlows
backing and the successful existing cases, have encouraged …rms to give the
programme a try. The advantages to companies include writing equipment
o¤ their books, improved delivery times and increased productivity. Bar-
2
Barlows is one of South Africa’s largest industrial conglomerates.
Small Business Development 18
lows gains by widening its client base. Another programme has just been
started which is aimed at entrepreneurs in the construction industry and is
directed at public sector contracts through the Public Works Department.
These programmes are all built around Barlow’s core businesses and rely on
sustainable practice. Barlows insists that these entrepreneurs must be able
to support themselves independently of Barlows after the initial paternalistic
relationship is concluded.
Evaluation: The only major Barlows programme (the Emerging Contrac-
tor Programme) is innovative and allows blacks to penetrate areas they would
traditionally not have access to. Barlows provides them with comprehensive
back-up. An area that needs to be pursued, however, is the still underdevel-
oped domain of procurement where unexplored opportunities exist.
4.1.6 NAFCOC
3
Initiative: Business Linkages for Under-
utilised Enterprises (BLUE)
BLUE is a USAID funded project established in 1995 in a co-operative agree-
ment with the National Industrial Council, an a¢liate of NAFCOC. The
BLUE project aims to increase, signi…cantly and sustainably, the business
done between large buyers and small suppliers, as its contribution towards
normalising South Africa’s economic structures. The project’s purpose is
to assist in structuring commercially viable long-term relationships between
big business and the government, and supply …rms owned or run by histori-
cally disadvantaged entrepreneurs. Up until February 1998 contracts worth
R105.8 million had been secured.
The Blue project has two components:
² Business and technical advisory services which includes training;
² Subgrants Contracts and Assistance Fund which fund the Business In-
formation and Advisory Centres (BIACs)
The BLUEproject is committed to business education and training which
forms the cornerstone of sustainable business success and provides such train-
ing in the following areas:
² Obtaining government tender business
3
NAFCOC is a black business umbrella/chamber association.
Small Business Development 19
² Labour relations
² The General Law of Contract and Public Tender Contracts
² Statutory Obligations
² Cost estimating and product pricing
² Purchasing and inventory control
² Improved productivity
² Production planning and control
Obtaining tender business represents a signi…cant opportunity for SMMEs
and this course has proven to be exceptionally popular. By December 1997,
entrepreneurs who attended the Tender workshops had secured contracts
worth over R9 million. BLUE has also assisted in funding certain clients to
achieve ISO 9000 accreditation, resulting in contracts worth R1 million being
awarded to them.
The BIACs provide crucial connectivity and back-up, with readily avail-
able support, to encourage and develop business linkages between previously
disadvantaged SMMEs and large companies, parastatals and government de-
partments. The activities of BLUE are decentralised, as entrepreneurs and
a¢rmative procurement opportunities exist throughout the country.
The BLUE project has more than met the initial targets it set, as is
outlined in the table below based upon its published documentation:
As is illustrated in table 11, BLUE by February 1998 had exceeded the
targets set for the project up until September 1998 in every category
BLUE does not involve itself in business start-ups but instead focuses on
the development of existing SMMEs with a minimum monthly turnover of
R7500 per month. The aim of BLUE is not to encourage handouts from big
business but rather to create a situation in which everyone wins. It will only
act as a go-between big business and emerging black business if it feels it
can guarantee quality and service. In order to be placed on BLUE’s data-
base, the applicant must …rst …ll out a form detailing the nature of business,
background, turnover, and list its major clients for reference purpose.
Evaluation: The BLUE project is to be commended. It exceeded its
mandate and forged necessary links between big and small businesses on a
commercial basis. Unfortunately, due to lack of funding it was shut down
Small Business Development 20
Figure 1: BLUE’s targets versus its achievements, 1995-1998
Achieved to Feb ‘98 Target to Sept ‘98
Value of contracts secured by historically disadvantaged
suppliers
105 886 912 15 000 000
Number of contracts secured 698 200
Number of suppliers participating 231 50
Number of large buyers purchasing 222 20
Number of training modules developed and tested 10 6
Number of training sessions and workshops 164 30
Number of entrepreneurs reached 4 126 1 000
at the end of September 1998. Attempts to secure funding from government
agencies failed and one must question government thinking in this regard.
BLUE had an established track-record and instead government seeks to du-
plicate its e¤orts in a terrain better served by the private sector itself.
4.1.7 Get Ahead Foundation
The Foundation was formed in 1984 as a development agency involved with
schooling, community health and the like. In 1987 it decided to become
involved in micro-lending. It relies on overseas donors (particularly the Kel-
logg and Ford Foundations and USAID) for most of its funding. It has two
foci: the …rst being as a …nancier of small and micro-enterprises (Get Ahead
Financial Systems) and the second related to development and training (Get
Ahead Development). However, it encompasses a much more multi-faceted
approach including an incremental housing loan scheme, technical training
in welding and panel beating, the formation of business associations, market-
ing for small-scale industry products, winter school programmes, job creation
projects including a car wash and aluminium can collection, a primary health
care project, capacity building with community-based organisations, and a
Small Business Development 21
commercial partnership programme that o¤ers informal retailers a short-term
line of credit through private sector wholesalers (see Churchill, 1995).
Its lending arm is focused on the micro/survivalist enterprises and is
based on the stokvel concept of group lending. Eligibility for Get Ahead
Foundation assistance is based on the following criteria:
² They …nance income generating business activities;
² Borrowers must be permanent residents with valid identity documents;
² Stokvel members cannot be from the same family;
² Borrowers must be in business for at least six months before they can
borrow from Get Ahead;
² Borrowers must have the capacity to enter into legal contracts.
As already mentioned, the Foundation provides …nancing on the basis of
group lending. As such it does not require any collateral but holds all the
members responsible for the debt and works on the principle of peer pressure
to recover its loans. Loans are issued to micro-entrepreneurs in self-selected
groups of …ve to ten members who are responsible for guaranteeing each oth-
er’s portion of the loan. Its recovery rate stands at over 90%. Its recovery
rates are this high because its geographical spread is so thin (only Soweto
residents in this case) and because of its reliance on joint and several liabil-
ity. Financing starts from as little as R100 to as high as R30,000 although
one has to graduate through the repayment of smaller loans to qualify. Get
Ahead keeps in close contact with its entrepreneurs providing advice and
monitoring their activities. It provides training internally on various aspects
of business including general administration and book-keeping. They under-
take no credit checks but merely verify the relationships of the applicants to
one another, ensuring they know and trust each other. Loans are made to
enterprises that have been in business for at least six months and are charged
a simple interest rate of 15% over four months. Presently, 11% of its lending
is in manufacturing, 3% in services, and the remainder in retail.
Whilst most of their customers remain at survivalist level, the Foundation
has had some phenomenal success stories. A sewing enterprise, which was
started in 1964, approached the Foundation for …nance in 1987 because he
was unable to access loans anywhere else. Through a series of loans the en-
terprise expanded and has now outgrown Get Ahead. He currently has assets
Small Business Development 22
exceeding R500,000 and now trains over 300 students annually in sewing and
dress-making. Another such case is a bumper manufacturer started in 1990
by a young unemployed man. His …rst loan from the Foundation was granted
in 1991 and has also outgrown Get Ahead. He now has some contracts to
refurbish bumpers for big business.
The Foundation maintains the main impediments to SMME growth lies
not on the supply side (although training and …nance remain problematic)
but rather on the demand side (secure customer base, access to markets
and tenders). This is where business has an important role to feed into the
system. They opined that big business was not interested in establishing links
with SMMEs. They had attempted to contact large companies (including
clothing stores and car-part manufacturers) but to no avail. Big business
was concerned that SMMEs could not guarantee quality not meet delivery
targets. However, Get Ahead has some innovative SMMEs on its books that
would be in a position to link into business systems.
A study by Churchill (1995) found that between 1988 and 1994, Get
Ahead’s Stokvel Programme issued R13 million in loans to nearly 24,000
micro-entrepreneurs. The study compared Get Ahead borrowers to a control
group of prospective borrowers. It found that Get Ahead loans make a sig-
ni…cant contribution. Pro…t growth with borrowers is almost twice that of
the control group, and employment growth 86% higher. Likewise, it found
that the loans have a direct bearing on quality of life.
Evaluation: The Get Ahead Foundation focuses only on small and micro-
enterprises. It is innovative and it works. Its recovery rate is excellent and
it has made a meaningful contribution to its community. Its e¤orts could
be put to better use if business found a way of tapping into this resource.
A way should be found to accredit these small and micro-enterprises to deal
with the problems of adverse selection and asymmetric information problems
encountered by big business when dealing with this sector.
5 Thematic synthesis
The South African economy is currently undergoing a period of structural
adjustment as a result of South Africa re-entering the global economy after
the sanctions era. This period of liberalisation may have profound e¤ects
on the nature of the economy. The relaxation of capital controls, for ex-
ample, should result in the corporate sector shedding its non-core activities
Small Business Development 23
because foreign avenues will be available for surplus capital. This should
a¤ect the SMME sector in a positive manner as they stand to gain from
outsourcing arrangements. The labour legislation, which is particularly un-
friendly towards big business, may also result in further outsourcing. But
South African …rms are behind their international counterparts in this re-
spect . Everyone interviewed in this study agreed that outsourcing is still
in its infancy in South Africa and that many opportunities exist for South
African …rms to take advantage of. South African …rms are riddled with
non-core activities as a result of past practices.
This study, however, highlighted some innovative practices undertaken
by big business in South Africa so as to foster SMME development and
black economic empowerment. Almost all of these programmes were com-
mercially based although socio-political reasons seemed to underlie many of
them. Interestingly, the …rms that had adopted links for social responsibility
reasons have learned that it is in fact cost e¤ective and e¢cient to do so.
Programmes ranged from SAB’s procurement outsourcing, Xerox’s conces-
sionaire programme as an alternative to franchising, and Anglo/De Beers’s
highly pro…table small business initiative which has moved beyond procure-
ment and created joint-ventures. Almost all these programmes rely on …nan-
cial statements as their primary means of evaluation. Xerox will evaluate the
success of the programme by gains in market share, Company X is primarily
concerned with ful…lling government tender requirements, Anglo/De Beers
measures its success through returns on investments, and Barlows through
increased sales.
The length of the contracts awarded to SMMEs varied widely. Company
X outsourced only particular functions to SMMEs (be it painting, plumbing
etc.) and as such the contracts were of a very temporary nature although
they were used frequently. Barlow’s Emerging Contractor Programme has
a contract length of 18-36 months which is intended to provide the SMMEs
with a more stable revenue and thus facilitate repayment of loans. The
SMEI expects to be bought out within two to three years. SAB makes use
of a number of contract lengths. The owner-driver scheme makes use of …ve
year contracts, Lesedi was awarded a three year contract, whilst Uptrend
has an open-ended contract. It would appear that longer contracts are more
successful in assisting SMMEs for two main reasons: …rstly, SMMEs …nd it
easier to negotiate with …nance houses once they have been awarded long con-
tracts as these provide a guarantee of repayment, and secondly, SMMEs face
steep learning curves and are unlikely to prove successful immediately. They
Small Business Development 24
require more nurture and assistance in the short run and longer contracts
facilitate this.
Almost all the interviewees felt that although government was attempt-
ing to address the development of the SMME sector through bodies such as
Khula and Ntsika that its e¤orts were often misguided and that government
was su¤ering from real capacity constraints. Khula was criticised for relying
too heavily on commercial banks as intermediaries, whilst Ntsika’s system of
accrediting training institutes was also criticised. Many argued that govern-
ment was part of the problem. Its tendering system is complicated and often
inaccessible to SMMEs. Additionally, government has become infamous as
a late payer which places huge burdens on companies; SMMEs in particular
cannot cope with such a situation. The irony is that whilst government is
spending vast quantities of money in trying to stimulate the SMME sector,
it may also responsible for their demise through its payment record. Gov-
ernment labour legislation was seen as an additional impediment because it
has raised the cost of employment, by expanding the Basic Conditions of
Services for example.
The SMME sector was seen to be facing major obstacles and challenges.
These can be classi…ed under seven headings:
a) Finance - It was generally felt that this is an area which has been
signi…cantly addressed and that it has become less of a problem. However, it
remains an obstacle and commercial banks were singled out as being far too
conservative and risk averse in their lending which, in turn, negated Khula’s
e¤orts.
b) Labour - Labour legislation was criticised repeatedly for raising the
costs associated with employment. Complying with tougher labour laws was
a costly exercise. Small and micro-enterprises rely heavily on informal labour
contracts so as to keep costs down and this was being challenged by new laws.
The SMME sector …nd it di¢cult to attract skilled labour and the cost of
unskilled labour was seen as too high.
c) Trade - Although South Africa has seen signi…cant deregulation in
the past decade, some felt that overregulation was still an issue and that
licensing, health and safety laws and the like needed to be relaxed.
d) Tax - The complexity of the tax system raised the cost of doing business
because SMMEs do not have the capacity to administer this area and found
it di¢cult to a¤ord accountants.
e) Procurement - The public sector tendering system was regarded as
inaccessible to SMMEs. It was too complicated and tenders were too large
Small Business Development 25
for SMMEs.
f) Infrastructure - This is a particular problem in the townships where
inadequate roads as well as electricity and telephone networks hampered
SMME development.
g) Demand - This came up repeatedly as the primary challenge facing
SMMEs. The growth of this sector was being stunted by the lack of a steady
demand for their products. It is in this area that links with big business have
a critical role to play but these are as yet underdeveloped. The reasons given
by business revolved around problems of asymmetric information in that
there were enormous risks in awarding contracts to SMMEs with limited
track records. A further set of complications is linked to the way in which
management appraises results. Managers are very much performance driven
requiring immediate results and hence tend to be impatient about dealing
with SMMEs which have high learning costs. This puts huge strain on middle
management (who generally are responsible for day-to-day operations and
who would make the decision regarding doing business with SMMEs) which
is rewarded on the basis of short term delivery and as such face enormous
risk in engaging with SMMEs.
Important lessons have emerged from all the interviewees’ experiences
and some of these are discussed below. Anglo/De Beers small business ini-
tiative has been operation since 1989 and whilst they insist that they have
no …xed formula for identifying successful entrepreneurs, they do watch out
for four warning signs: a) a reluctance to contribute start-up cash (not nec-
essarily very much in absolute terms but an amount the entrepreneur would
be loath to lose); b) an unproven ability and aptitude for hard work; c) a
record of dishonesty; and; d) unrealistic expectations of quick wealth. Other
lessons were on a more practical level. Dealing with SMMEs cannot occur
along the lines of ‘business as usual’ and big business needs to appreciate
this. Payment terms may have to be changed from 120 days to cash on de-
livery, as they do not have extensive overdraft facilities. SMMEs often do
not have storage or warehouse facilities. To overcome this big business can
either assist with storage or alternatively specify smaller, more regular con-
tracts instead of infrequent bulk orders. This requires less storage capacity.
Big business can also help by buying in bulk, thereby gaining discounts, and
then selling to SMMEs at a reduced rate. Tenders proved to be a particu-
lar problem. Tender documents were often too complicated and as such not
accessible to SMMEs. Likewise tenders were often too large for SMMEs to
deal with as they do not possess the necessary capacity and …nancial back-
Small Business Development 26
ing required. This situation can be dealt with through the simpli…cation of
tender documents and ensuring that tenders are put out in smaller tranche.
The problems with tenders are true both for the public and private sectors.
Contracts awarded to SMMEs need to be of a su¢cient time period to en-
sure their sustainability. Lastly, I would argue that the appropriate level to
‘intervene’ and attempt to modify attitudes regarding the development of
linkages between big and small business is at the branch level rather than at
head o¢ce. Whilst it is important to in‡uence a company’s overall strategy,
actual implementation of linkages occurs at branch level. Non government
organisations (NGOs), such as BLUE and the Small Business Project, have
a critical role to play here in educating regional managers as to the bene…ts
of dealing with SMMEs.
The World Bank (1993: 58) states that SMMEs in South Africa would be
stimulated through the establishment of links with the large corporate sector
and government. These links would foster job creation whilst beginning to
align quality and productivity. It sees subcontracting as essential for the
establishment of these links but maintains that the preconditions for this are
not yet present in South Africa. These preconditions include incentives for big
business to subcontract work, the ability of supplier …rms to meet the stan-
dards and needs of other sectors, and the existence of practical opportunities
for small enterprises to become subcontractors. The World Bank (1993: 59)
argues that the …rst step in implementing a successful linkage programme
would be for NGOs and development agencies to intensify networking be-
tween their clients and big business or government. Existing mechanisms,
such as business opportunity centres, industry hives, matchmaker fairs, and
small business directories, should be encouraged, but additional projects,
such as the compilation of a national database, must be undertaken as well.
Ensuring access to programmes that train entrepreneurs and upgrade the ca-
pacity of small enterprises is an important function for NGOs. Gaining union
support for linkage programmes and providing incentives that encourage big
business to subcontract to SMMEs are also important. Lastly, an e¤ective
lobby would improve the chances that such initiatives would succeed. The
World Bank (1993: 59) outlines various methods which have been used inter-
nationally to link small and large businesses. Korea introduced mandatory
links, by requiring that 1,200 items in 40 industrial sectors be supplied by
2,200 contractors. In Korea today, 98% of all business falls within the SMME
sector and account for 66% of all jobs and 40% of all exports. The mandatory
links have been e¤ective because they have been integrated with other pro-
Small Business Development 27
grammes. By contrast, product reservation in India have not worked because
the choice of products is arbitrary, policy criteria are lacking, and product
reservation is not linked with other policy objectives. In Ireland, linkage
programmes are coordinated by a 20-person team that focuses on building
relationships between SMMEs and big business. On the demand side , it un-
dertakes research to discover what, when and how much the company buys,
at what cost and the technical requirements for products. On the supply side,
it aims to analyze which enterprises have the capacity to supply the product
and what upgrading is needed. As such, it seeks to match the capabilities of
the purchaser and supplier.
6 Conclusion
The SMME sector is already large in South Africa but it is not yet fully in-
tegrated into the economic mainstream. It exists often on the periphery and
often without links to the broader economy. For the SMME sector to realise
its potential as a dynamic, innovative centre it must develop links with the
rest of the business sector because only in this way will its business become
fully sustainable. These links need to be mutually bene…cial or otherwise it
will only be a temporary phenomenon. Coercive legislation from government
will result in businesses investing resources in …nding ways to circumvent
such legislation if it is not going to be in their best interests to comply.
Big business in South Africa is already feeling persecuted on all fronts and
more legislation will prove detrimental in the long run. Real pro…table op-
portunities exist in outsourcing and big business needs to be proactive in
exploiting these, otherwise the legislation will come. The compilation of a
national database must be undertaken so that big …rms are aware of SMMEs
capable of undertaking that business. A form of accreditation by some insti-
tution could do much to alleviate the problems of asymmetrical information
hampering the development of links between small and big business. South
African business will be making progress when it realises that doing business
with SMMEs makes for good business. Promoting links between big and
small business should be mutually advantageous - the social responsibility
should be a secondary consideration.
Small Business Development 28
7 Suggestions for Future Research
SMMEs in developing countries face challenges which are unique and im-
mense and thus present many challenges for future research. Five important
areas for research in this regard emanate from this study. First, research
must be undertaken on the mobility of SMMEs from the periphery and in-
formal sector into the formal sector and economic mainstream. There is
much to be learnt from the rather limited success stories in developing coun-
tries. Second, the phenomenal increase in outsourcing over the past decade
presented many opportunities for small businesses and these need to be doc-
umented. Third, the impact of government procurement on SMMEs must be
understood. Fourth, the recent emphasis on the ‡exible economy and indus-
trial districts has focused on the developed world and we need to understand
their impact in a developing country context. Last, more research on the
links between big and small businesses must be conducted to understand the
resistance of big companies to doing business with SMMEs. Only then can we
really begin to understand the obstacles facing SMMEs and their integration
into the economic mainstream.
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Tendler,J. 1994. Support for Small Enterprises in South Africa. mimeo.
MIT.
World Bank. 1993. South Africa: Characteristics and Constraints Fac-
ing Black Businesses. Washington,D.C.
World Bank. 2000. Small and Medium Enterprise Survey. mimeo. Jo-
hannesburg.
doc_782972009.pdf
A dynamic small business sector can make an important contribution, not only in employment creation.
Small Business Development,
Entrepreneurship and Expanding the
Business Sector in a Developing Economy:
The Case of South Africa
¤
John Luiz
University of the Witwatersrand
ABSTRACT: A dynamic small business sector can make an important
contribution, not only in employment creation, but also in lessening
concentration in South Africa’s generally oligopolistic industrial structure.
However, for the small business sector to make a meaningful contribution to the
economy it needs to be integrated into the mainstream. This is going to require a
concerted e¤ort both from government and the formal private sector. The paper
investigates how the South African private sector views small business and
whether it is making a concerted e¤ort at integrating this sector into the
framworkof the economy as a whole.
¤
This paper is based upon a report by the author commissioned by the Centre for
Development and Enterprise
Small Business Development 1
1 Introduction
The 1990s saw a remarkable shift in emphasis on the role of small busi-
ness development within overall economic development strategies. In the
past small-scale enterprises were defended on the basis of social reasons as
a panacea for the unskilled, surplus labour in existence in developing coun-
tries. It provided income-earning opportunities for the informal sector. As
such it was perceived as a marginal sector and integrating this sector into
mainstream economic activity was considered unimportant. However, more
recently it has been demonstrated that small-scale enterprises have a valid
claim to greater importance and strategies have been developed world-wide
to expand and integrate this sector (Steel, 1993).
This paper investigates how the South African private sector views small,
medium and micro-enterprises (SMMEs) and whether it is making a serious
e¤ort at promoting this sector and integrating it into the framework of the
mainstream economy. It is a qualitative study which combines a series of
in-depth interviews with business organisations and chambers, and provides
concrete case studies highlighting current business practices. Apartheid in
South Africa created extreme distortions in the business world - big business
isolating itself from SMMEs and white business isolating itself from black
business. This study attempts to illustrate that destroying these mindsets
not only makes for positive social development but also for good business
practice.
2 Small business development: Atheoretical and com-
parative perspective
The policy environment faced by SMMEs determines their capacity to con-
tribute to the process of development. It is important therefore to identify
possible policies that retard the growth of this sector, such as import licences
that small …rms …nd di¢cult to obtain. Market imperfections may constrain
small …rms’ access to resources by failing in the area of …nancial intermedi-
ation, for instance (Steel, 1993: 39). To develop a conducive framework for
SMMEs to thrive in, the government may have to correct such distortions
and ‘level the playing …eld’.
Governments worldwide have assisted SMMEs for various reasons. Rwigema
and Karungu (1999: 111-112) and Harper (1984) maintain that these include
Small Business Development 2
propositions that:
² Small enterprises, broadly de…ned, have shown a remarkable capacity
to absorb labour.
² Assistance to small enterprises displays sensitivity to poverty mitiga-
tion. Small enterprise promotion then becomes a political necessity.
² SMMEs are usually locally owned and controlled, and can strengthen
the extended family and other social systems and cultural traditions.
² Indigenous people in South Africa have been prevented from playing
their due role in the economy, and their …rst attempts are likely to be
in SMMEs. Indigenous businesses are usually small, requiring various
forms of assistance.
² The products of SMMEs tend to originate from indigenous craft tradi-
tions, and they are also more likely to satisfy the needs of poor people
than are the products of large enterprises and foreign technology.
² Because the pro…ts of small enterprises are not dependent on long pro-
duction runs, small …rms can manufacture smaller quantities of prod-
ucts which have a regional or even a local market. In poor commu-
nities, with less e¢cient communications, local di¤erences in taste are
far more pronounced, and only small enterprises can economically cater
for them.
² SMMEs satisfy local needs not only by making di¤erentiated products,
but by also being scattered throughout the country. This ensures a
more equitable distribution of employment opportunities.
² Local technology is more likely to use locally produced raw material
and equipment, saving foreign exchange. When transport is expensive
and internal communications are ine¢cient, there is merit in promoting
local small units using local materials to satisfy local needs.
² Research in industrialised countries suggests that people working in
small enterprises are happier in
their work than those who work in large …rms, despite generally lower
wages and poorer working conditions (see Harper, 1984: 13).
Small Business Development 3
² SMMEs provide a nursery and proving ground for entrepreneurship and
innovation. They also provide a valuable outlet and proving ground
for the entrepreneurial ambitions of government employees wishing to
switch careers.
² SMMEs provide employment to, and sometimes exploit the entrepre-
neurial talents of, women. Particularly in rural areas, cottage indus-
tries or informal …rms (sewing, knitting, food preparation etc) serve
as a valuable source of income and personal development, as well as
outside contacts, for the otherwise unemployed.
² SMMEs tend to use less capital, a scarce resource, than large …rms.
They also use less management, which is even scarcer.
² For the economy as a whole, Harper (1984: 16) argues that:
² ‘small businesses are likely to be more resilient to depression, and to
o¤er a steadier level of employment than large ones; their activities
and locations are diverse, they depend on a wide variety of sources and
types of raw material, and their owners, if only for the want of any
alternative, are likely to stay in business and maintain at least some
activity and employment in conditions where foreign investors... would
have closed their factories...’
² Comparative studies of large and small businesses, carried out in coun-
tries at all stages of development, con…rm that small …rms generally
employ more labour per unit of capital, and require less capital per
unit of output, than do large ones (Harper, 1984: 16).
Small businesses typically complain that shortage of capital is their major
problem and that this impacts their ability to invest in a particular asset,
whether it be raw material, equipment, customer credit or …nished prod-
ucts. Another issue often raised is de…cient demand (Harper, 1984: 26).
In South Africa, government has attempted to attend to the …rst issue of
…nance through organisations such as Khula Enterprise Finance Ltd. The
latter issue of ine¤ective demand is perhaps a more serious problem which
the government has attempted to address through its procurement strategy.
Inadequate demand arises from inadequate access, disadvantages of scale,
and lack of skill and initiative in marketing; and here assistance programmes
can try to …ll these gaps. Hence, the establishment of Ntsika Enterprise
Small Business Development 4
Promotion Agency by government, which seeks to address access to markets,
training, technology, information, counselling and infrastructure. The private
sector has a more important role to play in addressing SMMEs’ inadequate
demand problems by promoting complementarity between small and large
…rms. Steel (1993: 41) points out that in some Asian countries (e.g. Taiwan)
with well-developed urban industrial and …nancial systems, small enterprises
have bene…ted from subcontracting arrangements with larger …rms and as a
result have gained easier access to …nance. To ensure that such arrangements
are mutually bene…cial it is vital to avoid policies that favour imported inputs
and in ensuring that the tax system does not penalise inter-…rm transactions.
Direct interventions, such as India’s policy of reserving certain products for
small enterprises, may be counterproductive if they protect expensive, low
quality goods.
In South Africa, years of capital controls made it di¢cult for South
African companies to invest abroad and the result was that it generated verti-
cal and horizontal integration by South African …rms. Hence the oligopolistic
nature of the economy. Large …rms faced no incentive to subcontract to small
…rms because surplus funds could be used to produce non-core activities in-
house. With the lifting of capital controls it is likely that large …rms will
increasingly shed non-core activities through subcontracting and outsourc-
ing and that this will stimulate small business development. Likewise, recent
labour legislation aimed at the larger …rms may result in raising the costs of
size and may foster subcontracting.
3 SMMEs in South Africa
The National Small Business Act of 1996 classi…es small businesses into four
categories: micro, which includes survivalist enterprises; very small; small;
and medium. Ntsika (1997) estimates that in 1995 the overall contribu-
tion to the total GDP was 20.8% for small enterprises, 11.9% for medium
enterprises, and 67.3% for large enterprises. As regards contribution to for-
mal employment it was estimated at 29.5% for small enterprises, 15.3% for
medium enterprises, and 55.2% for large enterprises. In 1995, there were an
estimated 591,000 self-employed and employers with a turnover less than the
VAT limit of R150,000. Approximately 200,000 of these enterprises should be
considered as survivalist, since their turnover is less than R1000 per month.
These enterprises have largely been created as a basic source of income by
Small Business Development 5
the unemployed. An additional 400,000 enterprises are micro-enterprises, of
which approximately 137,000 employ at least one employee. Of the total
estimated private sector enterprises in 1995, 23.3% were survivalist, 31% mi-
cro (with no employees), 16.4% micro (1-4 employees), 19.7% very small,
7.6% small, 1.4% medium, and 0.7% large. However, the distribution of
private sector employment reveals an entirely di¤erent picture: large enter-
prises employ 39.3%, medium 13.8%, small 19.9%, very small 13.3%, micro
(1-4 employees) 6.8%, micro (no employees) 3.9%, and survivalist 3% of the
workforce.
The small business sector in South Africa has the potential to contribute
to job creation and economic growth, whilst at the same time redressing his-
torical imbalances and increasing black economic participation. Ntsika (1997:
28) warns that ‘the current state of economic participation of black entrepre-
neurs is of great concern’. It estimates that only about 1.4% of the African
population are entrepreneurs compared with 7.5% among whites. The high-
est percentage of involvement by the black population is in the survivalist
class where returns are very low and limited value is added to the economy.
As the size of the enterprise increases, the percentage of black entrepreneur-
ship decreases substantially. Blacks make up 86% of survivalist enterprises,
64% of micro-enterprises (no employees), 40% of micro-enterprises (1-4 em-
ployees), and only 29% of very small enterprises. Ntsika (1997: 28) states
that there ‘does not appear to be any meaningful “weaning” of successful
black entrepreneurs from low to high enterprise levels’.
A major World Bank survey (2000) of SMMEs in Johannesburg reveals
several interesting facts with national relevance which informs this study:
² The most important constraints faced by SMMEs are insu¢cient de-
mand (primary constraint), cost of capital, crime, and infrastructure.
² Of concern is the fact that almost 60% of SMMEs reduced their em-
ployment between 1997 and 1999. When asked what the necessary
conditions for the addition of 10 employees was, SMMEs responded as
follows in order of importance: increase in demand, increased business
visibility, fall in the interest rates, government promotion of SMMEs,
more contracts from government and large businesses, fall in real wage,
increased exports, cheaper imports, and a decline in foreign competi-
tion. Insu¢cient demand was again the primary reason given for their
lack of expansion, followed by a lack of access to capital.
Small Business Development 6
² Policy stability, lower interest rates, education and training, promotion
of SMMEs in public services, ‡exible wages, and business information
were cited, in that order, as the main ways in which the central author-
ities can help SMMEgrowth. In the case of local government, the main
methods of assistance were safety and security, infrastructure, ethical
local o¢cials, public transport, the improved attitude of local o¢cials,
and investment support.
² SMMEs made extensive use of temporary workers with 90% citing ‡ex-
ibility to expand or contract as their primary motivation for this.
² SMMEs engaged in manufacturing, IT and tourism complained about
the di¢culty of …nding skilled or semi-skilled labour.
² Government procurement seemed to have a very limited impact with
just over 10% of the …rms surveyed having been awarded a govern-
ment contract. The average time taken in preparing a submission for a
government contract was 3.1 months and the ratio of successes versus
failures in terms of contracts submitted was just over 3:1.
² SMMEs had very little knowledge of DTI (Department of Trade and In-
dustry) promotion programmes whilst other local and national govern-
ment promotion programmes had a higher awareness. Start-up capital
was primarily sourced from individual and family savings with bank
loans playing a very subordinate role. More than 50% of SMMEs sur-
veyed had not used formal bank loans in the past …ve years.
The issue which came out time and again in the World Bank study is the
lack of linkages that exist between large and small businesses and hence this
paper’s focus.
4 The role of business in the development of SMMEs
in South Africa
Big business can act as a powerful stimulus for the SMME sector by providing
a real and steady source of demand. However, companies may have to work
closely with the SMMEs to ensure that the product they produce is of the
necessary quality and that delivery targets are met. The advantage of this
Small Business Development 7
approach is that it also creates a positive externality in that the SMMEs ben-
e…t through skills transfers. Tendler (1994) argues that limitations currently
exist as regards this approach in South Africa:
² the corporate sector is not really interested in outsourcing notwith-
standing knowledge of international experience;
² links that do exist are merely ‘cosmetic’ to look politically correct;
² the subcontracting relationships which exist have a monopsonistic ele-
ment to them leading to dependence.
This study …nds that these limitations have been exaggerated. Almost all
of the companies examined saw real commercial opportunities in outsourcing
and nothing cosmetic was apparent. Likewise, no real evidence of monopson-
istic relationships was evident (with the possible exception of the state, which
through its late payment was holding companies …nancially hostage). How-
ever, outsourcing in South Africa is still very much in its infancy and many
opportunities still exist for outsourcing. South African companies appear to
be slow in adapting their practices to reap the bene…ts of links with SMMEs.
Section 4.1 outlines the linkage programmes of a number of companies and
business chambers.
4.1 Linkage programmes
4.1.1 Anglo/De Beers
1
Small Business Initiative
In 1989 Anglo and De Beers established their Small and Medium Enter-
prise Initiative (SMEI) to formalise and dramatically expand their links with
SMMEs. This represents one of the …rst such initiatives in South Africa. In
its …rst 10 years, the cumulative value of business placed through the SMEI
amounted to roughly R1 billion. In the 1995/96 …nancial year, the SMEI fa-
cilitated business transactions with a value of R200 million for 185 emerging
businesses employing 3298 people (Sikhakane, 1997: 8). The SMEI consists
of about a half dozen consultants who scour Anglo/De Beers’s centralised
1
Anglo American is South Africa’s largest industrial conglomerate with major interests
in most sectors. It is also the world’s fourth largest mining company. It recently put
in a bid to buy the diamond cartel De Beers in which it has always had a substantial
shareholding.
Small Business Development 8
purchasing function to identify possible areas of business which can poten-
tially be better performed by SMMEs. In July 1998 the Anglo/De Beers
SMEI was split up with Anglo, De Beers and Anglogold each setting up their
own initiatives along similar lines.
The establishment of the SMEI was aimed at the formalisation and drastic
expansion of Anglo and De Beers links with SMMEs. Their interest in this
area was based on the Paci…c Rim phenomenon of the dual economy, wherein
business is characterised by complex, yet e¢cient strings of suppliers of goods
and services competing …ercely for the custom of large corporations, which
in turn are kept lean and e¢cient (Sikhakane, 1997: 8). The SMEI is not
a non-pro…t organisation and the economic empowerment of the previously
disadvantaged is not its primary focus. However, it is expected that the
previously disadvantaged hold either a majority or equal stake in the business
before the SMEI will become involved.
It works as follows: The SMEI takes an equity stake of not more than
20%, expecting to be bought out by the entrepreneur within two to three
years based on an independent auditor’s commercial evaluation of their stake.
Although the SMEI only holds a minority stake, consensus must be reached
on all agreements. The SMEI makes its income in three ways, namely through
dividends, through the sale of their shares on a commercial basis, as well as
charging a small management fee. The SMEI will only get involved with an
entrepreneur if he/she takes a stake in the business venture from the outset.
The entrepreneur must have something to lose. The amount invested by the
entrepreneur may be matched by the SMEI even though its equity stake will
not exceed 20%. The SMEI will also provide loan …nancing of up to R250,000
at commercial interest rates. The collateral requirements are fairly ‡exible
and not as strict as that of commercial banks.
The SMEI receive a large number of requests for assistance by mail but
these by and large are not viable or do not interest the SMEI. Generally
the SMEI will identify opportunities …rst and will then attempt to …nd suit-
able entrepreneurs. Often if Anglo/De Beers wish to outsource or privatise a
function they will …rst approach those currently employed as potential entre-
preneurs before looking elsewhere. Interestingly the SMEI have invested in
entrepreneurs whose activities are not directly linked to those of Anglo/De
Beers. As such, the SMEI moves beyond the realm of outsourcing to becom-
ing a minor Small Business Development Corporation. Their aim is to be a
pro…t-making centre.
The SMEI has three foci: the investment arm in new business, facili-
Small Business Development 9
tation in businesses in which it will not become directly involved via in-
vestment but will provide assistance and advice, and contracting and pur-
chasing where they make use of existing businesses and introduce them to
Anglo/De Beers for possible outsourcing. The SMEI are aware of the dangers
of monopsonistic-type relationships with the SMMEs they create and thus
discourage entrepreneurs to be solely dependent upon Anglo/De Beers as
clients. As such, they do not require these entrepreneurs to work exclusively
for Anglo/De Beers.
The SMEI has involved itself in a range of activities with tremendous
results. Examples include, Simunye Engineering Services which cleans and
refurbishes a wide range of opencast mining equipment. This company was
formed in 1991 by an unemployed dragline cleaner and a retired foreman
with the help of the SMEI and a start-up capital of R54,000 and which
is now a multi-million rand enterprise. Stimela Rail, which maintains 120
kilometres of railway lines for Amcoal; Eland Bricks, which produces 200,000
bricks per month for housing construction and 30,000 to 40,000 specialised
underground support bricks; Ceza Conveyor Services, which maintains and
repairs the kilometres of conveyor belts connecting Amcoal’s …ve collieries
near Witbank to its Rapid Loading Terminal in Richard’s Bay; Duswan
Services, which recovers lifting tackle from mine scrap heaps, refurbish and
restore the equipment and sell it back to the mines - a turnover well in excess
of R1 million annually and with signi…cant savings to the mine; and Reef
Food Services, formed with a capital of R89,000 in 1990 and with a return
of in excess of R80 million for the year ending March 1997 (Sikhakane, 1997:
9-18).
Evaluation: The Anglo/De Beers SMEI is generally a success story which
shows the potential for establishing links between big and small business,
although they had their share of failures too. Their decade-long involvement
with SMMEs, with investments totalling R1 billion, has resulted in Anglo/De
Beers shedding a number of their non-core activities (thereby improving ef-
…ciency) in the process of creating SMMEs and has turned this unit into a
pro…t-generating centre. It shows that such links can be pro…table for both
partners. The experiences of this initiative should, however, be more widely
shared as it has the potential to stimulate similar endeavours by other large
corporations. The SMEI have no …xed formula for identifying successful en-
trepreneurs. Whilst a basic level of literacy is obviously a necessity, a higher
level of education is not a requirement. Rather the SMEI consultants watch
out for four warning signs: a) a reluctance to contribute start-up cash (not
Small Business Development 10
necessarily very much in absolute terms but an amount the entrepreneur
would be loath to lose); b) an unproven ability and aptitude for hard work;
c) a record of dishonesty; and; d) unrealistic expectations of quick wealth
(Sikhakane, 1997: 12).
4.1.2 Xerox
Xerox South Africa forms part of Fintech Limited which in turn falls under
the Altron umbrella. Fintech holds a 50% stake in Xerox SA with the other
50% equity being held by Xerox Ltd (UK). In 1991 Xerox, in an attempt to
increase its market share, adopted a strategy that seeked to incorporate the
best elements of franchising and agencies into its concessionaires programme.
The concept has proven successful elsewhere, with Xerox doubling its market
share in the United Kingdom in …ve years.
The concessionaire programme works as follows: In June 1998 Xerox
advertised nationally for potential entrepreneurs. Over 170 responses were
received with 65 candidates being interviewed. An induction day was held to
explain the programme and the candidates were asked to draw up a business
plan. As a result, 11 concessionaires were signed up, 3 from historically
disadvantaged backgrounds. The condition was that these entrepreneurs had
to possess some previous business experience. In addition, Xerox was looking
for entrepreneurs with vision, an appropriate strategy, and a viable business
plan. These concessionaires are granted an exclusive area, a vast product
range, Xerox back-up, and Xerox training. Xerox regards the concessionaire
programme as a joint-venture with potential entrepreneurs. The advantage
for Xerox is that they get to expand their sales force and thereby market share
whilst not carrying the entire overhead. The concessionaires are required to
be made up of at least 3 sales representatives. The experience in the United
Kingdom is that many will grow to a sales force of between 35 to 45 people.
The concessionaires themselves are aimed at targeting smaller businesses
(with less than 100 employees).
The concessionaires operate as sales organisations. They secure orders
and place them with Xerox, which will then process the orders and ensure
their delivery. The concessionaires do not therefore have to purchase the
equipment themselves. They are awarded dealer prices and are free to work
out their own margins as long as these do not exceed the recommended prices.
A service agreement must be sold with every machine sold, but Xerox will
pay an annuity for every such contract they bring in. Various incentive
Small Business Development 11
schemes are in place to reward sales, such as rebates based on their level of
purchases. Xerox will loan up to 50% of initial funding (total start-up cost
is anticipated at R100,000 - signi…cantly lower than franchise agreements).
Xerox also provides a comprehensive and continuous training programme
on various facets of the business: Xerox processes, product training, human
resource and sales training. For each concessionaire, a Xerox director will be
appointed to their board purely on an advisory basis. These Xerox people
will be appointed to compensate for areas in which the entrepreneur may be
lacking in skill.
Xerox Facilities Management (XFM): Xerox is a major player in the area
of outsourcing through its facilities management. Printing is a non-core ac-
tivity for most companies but it is the core activity for Xerox. As such it is
involved in the area of taking over print-rooms of large corporations. Em-
ployees in these corporate print rooms have no scope for career advancement
given that it is a non-core activity. But once Xerox takes over these print-
rooms it will identify, train and develop employees since this is a Xerox core
area. It will also remunerate employees on a pro…t share scheme which in
turn encourages productivity. Examples were cited of operators at copy cen-
tres becoming site managers at some XFM centres. Xerox is thus in a better
position to stimulate a¢rmative action on the output side of the IT industry
as it is better able to identify black entrepreneurs in this sector. Xerox will
also consider potential joint-venture companies with existing sta¤ (with a
distinct black focus), although this does carry a normal business risk for the
sta¤.
Evaluation: The concessionaire programme is innovative and holds much
potential for other South African businesses. It has the advantage that it re-
quires no royalty or franchise fees to be paid by entrepreneurs and thus makes
it more accessible to small businesses. These entrepreneurs gain access to Xe-
rox international technology and investment in R&D (which exceeded R10
billion for 1997). They indirectly become part of a multinational corporation
whose revenue exceeded R110 billion for 1997. They gain access to Xerox
training and sales skills and are able to free ride on its marketing strategy. A
drawback is that real equity is not acquired by the entrepreneur. The XFM
programme brings outsourcing to the fore and has potential spin-o¤s in the
realm of black economic empowerment through joint-venture companies.
Small Business Development 12
4.1.3 Company X: Construction and procurement
Company X chose to remain anonymous as it relies on government for 90% of
its business. It is a medium-sized construction company, currently employing
up to 250 people, and operates in the central regions of South Africa. It was
established in the mid 1960s by the current Managing Director as a one-man
operation. At that stage, most of its work came from subcontracting from
larger companies, and its success thus illustrates the potential of the SMME
sector. The irony is that it is now outsourcing a large part of its business to
newer SMMEs.
Company X, however, illustrates the dangers of government procurement
strategies. This historically white company relies very heavily on government
procurement. However, as a result of government procurement policy it has
had to …nd ‘innovative’ ways of circumventing these regulations. As a result
its board of directors was recently expanded from one to eight. Besides the
existing director (who maintains 60% control), he has added three female
family members, as well as four black directors. But these four black directors
(who were and are his employees) have no real say in the running of the
business, earn no pro…ts and are barely aware of their position. He did
this so as to maintain his relationship with government which requires joint-
ventures with the historically disadvantaged. As a result Company X has
secured a steady stream of government business. Not once has this company
provided the lowest bid on tenders and yet it has won the tenders because of
its ‘favourable’ composition. The Managing Director pointed out that almost
all his competitors have done likewise. He complained that the tender process
was rife with nepotism and corruption.
On a recently won R6 million tender (on which this company was not the
lowest bidder), the bid required that they subcontract 30-35% of the contract.
They have thus subcontracted R2.1 million worth of business. The Managing
Director maintained that he was not overly unhappy about being forced to
subcontract but pointed out that he had had some problems in the past. A
small company that he subcontracted to did not pay the necessary tax and
as a result Inland Revenue demanded payment from Company X. The law
does not permit Company X to deduct tax from the subcontractors. Also
he has taken on subcontractors in the past who proved to be incompetent
and now he ensures that they are …rst put on a probation period. He states
that subcontracting has its bene…ts as they are often cheaper because they
do not comply with government regulations such as labour legislation. This
Small Business Development 13
company has subcontracted various parts of its business, including brick-
laying, plastering, carpentry, plumbing, painting, glazing and metal-work.
Unions have not been happy with the subcontracting arrangements because
it excludes their members.
As regards government policies, the company maintains that it has always
subcontracted and would do so even if the government regulations were not in
place. However, the Managing Director pointed out that government policies
aimed at promoting SMMEs were futile and contradictory. For example,
government has been slow in paying for work done (often taking up until …ve
months to pay). This medium-sized company can only barely manage this
delay but it would certainly bankrupt a small enterprise.
Evaluation: Government procurement strategy has often resulted in com-
panies …nding a quick-…x solution to ensure access to government work. This
is not a healthy state of a¤airs. This company has created a dummy board
to circumvent government regulations. As a result its business is booming
and yet its previous practice was not a detrimental one, in that workers have
enjoyed pro…t-related bonuses, labour relations have been good, and it has
always subcontracted voluntarily. Also, it was apparent that it did have good
historical links with SMMEs.
4.1.4 South African Breweries
The South African Breweries Beer Division’s (SAB) commercial equity pro-
gramme seeks to engage or create enterprises that are owned and/or con-
trolled and operated by people from historically disadvantaged backgrounds
in sustainable and mutually bene…cial relationships. The objective was to
transform SAB’s supplier base so as to better re‡ect the realities of South
African demographics and thereby to spread the bene…ts of dealing with SAB
more equitably. Until recently, 90% of SAB’s suppliers were white whilst 85%
of its customers were black. This situation was clearly untenable in the new
political dispensation and SAB has thus tried to reposition itself to exploit
the opportunities that are currently available.
SAB believes that there are two areas that are important in the arena
of black economic empowerment, namely equity access (ownership of the
means of production), and operational management (skills transfer). SAB’s
commitment to black economic empowerment is based upon the following
premises:
Small Business Development 14
² it must make commercial sense;
² it needs to show that large companies can be good for socio-economic
upliftment;
² it will expand the supplier base;
² it has social and moral rami…cations.
SAB has examined its value chain looking for every conceivable oppor-
tunity to promote a¢rmative outsourcing. It has tried to ensure that black
…rms are made part of every aspect of the SAB value chain without compro-
mising quality, service or cost e¤ectiveness. The intention is to move beyond
SAB’s traditional small business ventures in shebeens and taverns, which
dates back to the 1960s where is was involved with e¤orts to bring about
deregulation of the black liquor industry. In the 1980s its Customer De-
velopment Programmes assisted shebeens and taverns in obtaining licences
and provided them with business management skills. SAB now wants to
engage in real value-added activities and the economic mainstream. SAB
encourages joint-ventures to make use of white skills and black potential. It
has redirected business opportunities to such …rms. Likewise, SAB expects
its suppliers to do the same and thus stimulate a second tier of a¢rma-
tive outsourcing. However, SAB does not undertake any evaluation of their
suppliers and does not place them under any legal compulsion. It simply
encourages them. SAB does not take an equity stake in any of these SMMEs
but makes the business opportunities available to them. It identi…es these op-
portunities and then looks for suitable suppliers. SAB prefers the previously
disadvantaged to have at least a 50% share although a smaller equity may be
acceptable if the deal is really large. This it terms ‘a¢rmative procurement’.
Examples include:
² Thuthuka Packaging (Pty) Ltd, which was formed in August 1997,
and is 51% owned by three black consortia, which prints the labels
for beer bottles. The white partners are able to provide indispensable
technical expertise because they have been in this business for many
years. Thuthuka has won a contract for the printing of one billion labels
during the 1999 …nancial year. This substantial order has enabled it to
borrow from a large commercial bank to purchase its own R6 million
printing machinery.
Small Business Development 15
² Seekers-Lesedi travel agency was established in April 1998 through
a 50:50 partnership between Seekers (a pre-existing, reputable travel
agency) and David Malakalaka. SAB had put out a tender for its
travel business but made it known that it would only consider doing
business with a company with a minimum 50% owned by the previously
disadvantaged and who will actively be involved with the day-to-day
business. Malakalaka, who has a background in the travel business, was
approached by Seekers for this joint-venture. It now operates in-house
from Beer Division’s o¢ces with 7 consultants.
² Uptrend Business Solutions have established an in-house stationery
shop at SAB but have retained their pro…table retail store in the Johan-
nesburg CBD. The company now intends to replicate this recipe with
other blue-chip companies and establish in-house stationery stores. Up-
trend now caters for both o¢ce automation (fax machines, copiers, PCs
etc) and stationery supplies.
² SAB has put in place various support systems to assist black farmers in
the growing of barley, essential for beer production. 56 black farmers
have already planted barley on a commercial basis this season. Most
black farmers have plots of around 10 hectares and should be able to
produce 5.5 tons of barley per hectare. SAB provided expert technical
advice and worked with the local agricultural bank to extend credit
facilities to black farmers (Enterprise, 1998: 111).
SAB’s commercial equity programme has its roots in the owner-driver
scheme which was launched in 1987. SAB believed that the delivery side had
outsourcing potential, but instead of looking outside the company, it realised
that it already possessed a ‡eet of trucks and had existing drivers who had
the necessary skills and understood SAB’s customer service ethos. However,
they did not possess the necessary entrepreneurial skills. SAB thus undertook
to support and train them in the area of business management including
book-keeping, income tax and legal requirements, cash ‡ow arrangements,
and industrial relations. Phase 1 entailed the loaning of the trucks to the
participating drivers who became responsible for the operating costs of the
trucks. SAB agreed to pay them a delivery rate per kilometre travelled and
cases delivered. Those drivers who were successful moved to phase 2 where
SAB took back the trucks, entering into long term …ve year contracts. This
enabled the drivers to enter negotiations with …nance houses to raise over
Small Business Development 16
R500,000 necessary to buy the trucks from SAB. It assisted the drivers in
arranging …nance with …nance houses. Finance houses proved to be willing
to assist given the long term nature of the drivers’ contracts which would
allow them to service the debt. Presently more than 60% of delivery occurs
through the owner-driver scheme.
SAB assists previously disadvantaged entrepreneurs by helping them with
the government tendering process, arranging up-front payment where work-
ing capital is proving problematic, facilitating …nance from third party in-
stitutions for capital expenditure, o¤ering technical assistance, and helping
with the acquisition of raw materials at better prices. The SAB programme
does not use a complicated tender document system, but rather calls for
basic quotes, which are thus accessible to SMMEs. SAB’s experiences with
SMMEs has been mixed. However, they have gone into this arrangement ex-
pecting as much. Some SMMEs have delivered wonderful service and others
less than satisfactory. But SAB has adapted its way of doing business to
try and accommodate them - it is ‘not business as usual’ when dealing with
SMMEs and it may require a more hands-on approach. Traditional busi-
ness practices do not necessarily work. Payment terms have to be reviewed.
SMMEs cannot a¤ord payment over protracted periods and SAB has ac-
commodated them through a cash on delivery payment system. SMMEs do
not have warehouses and as such business has to change the way it makes
orders. Instead of making huge orders infrequently, it may require smaller
orders more regularly. The lack of black suppliers in many areas was cited as
a problem that SAB has encountered. SAB is presently building corporate
linkages with other big businesses so as to share experiences and build up a
common database of potential black suppliers. Through the Corporate Sec-
tor Development Forum (comprised of about 20 large companies) they share
information and are building up a common database which will be made
available over the Internet.
In the …nancial year ending March 1998, Beer Division’s spending on
commercial equity arrangements totalled R264 million, up 29% on the pre-
vious year. The company spent R147 million on sales and distribution (167
owner-drivers), R15 million on o¢ce and site services (security, cleaning, gar-
dening), R11 million on catering, R11 million on packaging materials, R10
million on the creative disposal of by-products, R8 million on printing, R7
million on travel, and R12 million on maintenance of equipment (Enterprise,
1998: 110).
Evaluation: SAB’s commercial equity programme has stimulated SMME
Small Business Development 17
development in innovative ways. It has cost SAB relatively little as they have
insisted that they will not pay a premium or accept lower quality. SAB’s pro-
gramme really only makes the opportunities available and then searches for
potential entrepreneurs. In the process SAB has shed its non-core activities
which is in line with current international business practice. The SAB pro-
gramme is one which other South African …rms could quite easily adopt as
it requires little investment from the company.
4.1.5 Barlows Limited
2
Barlows has a number of programmes in place to assist the development
of the entrepreneurial class. However, as far as a¢rmative procurement is
involved, this is rather limited given the specialised and highly technical na-
ture of Barlow’s business. In addition, Barlow’s decentralised system makes
it di¢cult to implement and enforce an a¢rmative procurement strategy. As
such, outsourcing is minimal.
A rather interesting programme called the ‘Emerging Contractor Pro-
gramme’ has been in operation since 1995 and is organised by the Barlow
Equipment Company. Barlows has approached some of its traditional cus-
tomers and advised them on the advantages of encouraging their employees
to work independently as contractors. These entrepreneurs then receive assis-
tance from Barlows to get their business started. Barlows provides them with
…nancing through a repayment package to purchase the equipment (earth-
moving equipment costs around R750,000). Unlike commercial banks, Bar-
lows is willing to look beyond collateral and be more innovative. They are
provided with administrative support, 24 hour maintenance facilities, ten-
dering advice, and training. More importantly, the Emerging Contractor
Programme identi…es and establishes businesses with which these entrepre-
neurs can do business with and negotiates long term contracts for them (18
-36 months). Thus far, 36 entrepreneurs have been assisted in this way. Bar-
lows has an almost perfect record with no repossessions and most of them
are now buying their third or fourth machine. Whilst certain companies
were initially reluctant to do work with outside contractors, the Barlows
backing and the successful existing cases, have encouraged …rms to give the
programme a try. The advantages to companies include writing equipment
o¤ their books, improved delivery times and increased productivity. Bar-
2
Barlows is one of South Africa’s largest industrial conglomerates.
Small Business Development 18
lows gains by widening its client base. Another programme has just been
started which is aimed at entrepreneurs in the construction industry and is
directed at public sector contracts through the Public Works Department.
These programmes are all built around Barlow’s core businesses and rely on
sustainable practice. Barlows insists that these entrepreneurs must be able
to support themselves independently of Barlows after the initial paternalistic
relationship is concluded.
Evaluation: The only major Barlows programme (the Emerging Contrac-
tor Programme) is innovative and allows blacks to penetrate areas they would
traditionally not have access to. Barlows provides them with comprehensive
back-up. An area that needs to be pursued, however, is the still underdevel-
oped domain of procurement where unexplored opportunities exist.
4.1.6 NAFCOC
3
Initiative: Business Linkages for Under-
utilised Enterprises (BLUE)
BLUE is a USAID funded project established in 1995 in a co-operative agree-
ment with the National Industrial Council, an a¢liate of NAFCOC. The
BLUE project aims to increase, signi…cantly and sustainably, the business
done between large buyers and small suppliers, as its contribution towards
normalising South Africa’s economic structures. The project’s purpose is
to assist in structuring commercially viable long-term relationships between
big business and the government, and supply …rms owned or run by histori-
cally disadvantaged entrepreneurs. Up until February 1998 contracts worth
R105.8 million had been secured.
The Blue project has two components:
² Business and technical advisory services which includes training;
² Subgrants Contracts and Assistance Fund which fund the Business In-
formation and Advisory Centres (BIACs)
The BLUEproject is committed to business education and training which
forms the cornerstone of sustainable business success and provides such train-
ing in the following areas:
² Obtaining government tender business
3
NAFCOC is a black business umbrella/chamber association.
Small Business Development 19
² Labour relations
² The General Law of Contract and Public Tender Contracts
² Statutory Obligations
² Cost estimating and product pricing
² Purchasing and inventory control
² Improved productivity
² Production planning and control
Obtaining tender business represents a signi…cant opportunity for SMMEs
and this course has proven to be exceptionally popular. By December 1997,
entrepreneurs who attended the Tender workshops had secured contracts
worth over R9 million. BLUE has also assisted in funding certain clients to
achieve ISO 9000 accreditation, resulting in contracts worth R1 million being
awarded to them.
The BIACs provide crucial connectivity and back-up, with readily avail-
able support, to encourage and develop business linkages between previously
disadvantaged SMMEs and large companies, parastatals and government de-
partments. The activities of BLUE are decentralised, as entrepreneurs and
a¢rmative procurement opportunities exist throughout the country.
The BLUE project has more than met the initial targets it set, as is
outlined in the table below based upon its published documentation:
As is illustrated in table 11, BLUE by February 1998 had exceeded the
targets set for the project up until September 1998 in every category
BLUE does not involve itself in business start-ups but instead focuses on
the development of existing SMMEs with a minimum monthly turnover of
R7500 per month. The aim of BLUE is not to encourage handouts from big
business but rather to create a situation in which everyone wins. It will only
act as a go-between big business and emerging black business if it feels it
can guarantee quality and service. In order to be placed on BLUE’s data-
base, the applicant must …rst …ll out a form detailing the nature of business,
background, turnover, and list its major clients for reference purpose.
Evaluation: The BLUE project is to be commended. It exceeded its
mandate and forged necessary links between big and small businesses on a
commercial basis. Unfortunately, due to lack of funding it was shut down
Small Business Development 20
Figure 1: BLUE’s targets versus its achievements, 1995-1998
Achieved to Feb ‘98 Target to Sept ‘98
Value of contracts secured by historically disadvantaged
suppliers
105 886 912 15 000 000
Number of contracts secured 698 200
Number of suppliers participating 231 50
Number of large buyers purchasing 222 20
Number of training modules developed and tested 10 6
Number of training sessions and workshops 164 30
Number of entrepreneurs reached 4 126 1 000
at the end of September 1998. Attempts to secure funding from government
agencies failed and one must question government thinking in this regard.
BLUE had an established track-record and instead government seeks to du-
plicate its e¤orts in a terrain better served by the private sector itself.
4.1.7 Get Ahead Foundation
The Foundation was formed in 1984 as a development agency involved with
schooling, community health and the like. In 1987 it decided to become
involved in micro-lending. It relies on overseas donors (particularly the Kel-
logg and Ford Foundations and USAID) for most of its funding. It has two
foci: the …rst being as a …nancier of small and micro-enterprises (Get Ahead
Financial Systems) and the second related to development and training (Get
Ahead Development). However, it encompasses a much more multi-faceted
approach including an incremental housing loan scheme, technical training
in welding and panel beating, the formation of business associations, market-
ing for small-scale industry products, winter school programmes, job creation
projects including a car wash and aluminium can collection, a primary health
care project, capacity building with community-based organisations, and a
Small Business Development 21
commercial partnership programme that o¤ers informal retailers a short-term
line of credit through private sector wholesalers (see Churchill, 1995).
Its lending arm is focused on the micro/survivalist enterprises and is
based on the stokvel concept of group lending. Eligibility for Get Ahead
Foundation assistance is based on the following criteria:
² They …nance income generating business activities;
² Borrowers must be permanent residents with valid identity documents;
² Stokvel members cannot be from the same family;
² Borrowers must be in business for at least six months before they can
borrow from Get Ahead;
² Borrowers must have the capacity to enter into legal contracts.
As already mentioned, the Foundation provides …nancing on the basis of
group lending. As such it does not require any collateral but holds all the
members responsible for the debt and works on the principle of peer pressure
to recover its loans. Loans are issued to micro-entrepreneurs in self-selected
groups of …ve to ten members who are responsible for guaranteeing each oth-
er’s portion of the loan. Its recovery rate stands at over 90%. Its recovery
rates are this high because its geographical spread is so thin (only Soweto
residents in this case) and because of its reliance on joint and several liabil-
ity. Financing starts from as little as R100 to as high as R30,000 although
one has to graduate through the repayment of smaller loans to qualify. Get
Ahead keeps in close contact with its entrepreneurs providing advice and
monitoring their activities. It provides training internally on various aspects
of business including general administration and book-keeping. They under-
take no credit checks but merely verify the relationships of the applicants to
one another, ensuring they know and trust each other. Loans are made to
enterprises that have been in business for at least six months and are charged
a simple interest rate of 15% over four months. Presently, 11% of its lending
is in manufacturing, 3% in services, and the remainder in retail.
Whilst most of their customers remain at survivalist level, the Foundation
has had some phenomenal success stories. A sewing enterprise, which was
started in 1964, approached the Foundation for …nance in 1987 because he
was unable to access loans anywhere else. Through a series of loans the en-
terprise expanded and has now outgrown Get Ahead. He currently has assets
Small Business Development 22
exceeding R500,000 and now trains over 300 students annually in sewing and
dress-making. Another such case is a bumper manufacturer started in 1990
by a young unemployed man. His …rst loan from the Foundation was granted
in 1991 and has also outgrown Get Ahead. He now has some contracts to
refurbish bumpers for big business.
The Foundation maintains the main impediments to SMME growth lies
not on the supply side (although training and …nance remain problematic)
but rather on the demand side (secure customer base, access to markets
and tenders). This is where business has an important role to feed into the
system. They opined that big business was not interested in establishing links
with SMMEs. They had attempted to contact large companies (including
clothing stores and car-part manufacturers) but to no avail. Big business
was concerned that SMMEs could not guarantee quality not meet delivery
targets. However, Get Ahead has some innovative SMMEs on its books that
would be in a position to link into business systems.
A study by Churchill (1995) found that between 1988 and 1994, Get
Ahead’s Stokvel Programme issued R13 million in loans to nearly 24,000
micro-entrepreneurs. The study compared Get Ahead borrowers to a control
group of prospective borrowers. It found that Get Ahead loans make a sig-
ni…cant contribution. Pro…t growth with borrowers is almost twice that of
the control group, and employment growth 86% higher. Likewise, it found
that the loans have a direct bearing on quality of life.
Evaluation: The Get Ahead Foundation focuses only on small and micro-
enterprises. It is innovative and it works. Its recovery rate is excellent and
it has made a meaningful contribution to its community. Its e¤orts could
be put to better use if business found a way of tapping into this resource.
A way should be found to accredit these small and micro-enterprises to deal
with the problems of adverse selection and asymmetric information problems
encountered by big business when dealing with this sector.
5 Thematic synthesis
The South African economy is currently undergoing a period of structural
adjustment as a result of South Africa re-entering the global economy after
the sanctions era. This period of liberalisation may have profound e¤ects
on the nature of the economy. The relaxation of capital controls, for ex-
ample, should result in the corporate sector shedding its non-core activities
Small Business Development 23
because foreign avenues will be available for surplus capital. This should
a¤ect the SMME sector in a positive manner as they stand to gain from
outsourcing arrangements. The labour legislation, which is particularly un-
friendly towards big business, may also result in further outsourcing. But
South African …rms are behind their international counterparts in this re-
spect . Everyone interviewed in this study agreed that outsourcing is still
in its infancy in South Africa and that many opportunities exist for South
African …rms to take advantage of. South African …rms are riddled with
non-core activities as a result of past practices.
This study, however, highlighted some innovative practices undertaken
by big business in South Africa so as to foster SMME development and
black economic empowerment. Almost all of these programmes were com-
mercially based although socio-political reasons seemed to underlie many of
them. Interestingly, the …rms that had adopted links for social responsibility
reasons have learned that it is in fact cost e¤ective and e¢cient to do so.
Programmes ranged from SAB’s procurement outsourcing, Xerox’s conces-
sionaire programme as an alternative to franchising, and Anglo/De Beers’s
highly pro…table small business initiative which has moved beyond procure-
ment and created joint-ventures. Almost all these programmes rely on …nan-
cial statements as their primary means of evaluation. Xerox will evaluate the
success of the programme by gains in market share, Company X is primarily
concerned with ful…lling government tender requirements, Anglo/De Beers
measures its success through returns on investments, and Barlows through
increased sales.
The length of the contracts awarded to SMMEs varied widely. Company
X outsourced only particular functions to SMMEs (be it painting, plumbing
etc.) and as such the contracts were of a very temporary nature although
they were used frequently. Barlow’s Emerging Contractor Programme has
a contract length of 18-36 months which is intended to provide the SMMEs
with a more stable revenue and thus facilitate repayment of loans. The
SMEI expects to be bought out within two to three years. SAB makes use
of a number of contract lengths. The owner-driver scheme makes use of …ve
year contracts, Lesedi was awarded a three year contract, whilst Uptrend
has an open-ended contract. It would appear that longer contracts are more
successful in assisting SMMEs for two main reasons: …rstly, SMMEs …nd it
easier to negotiate with …nance houses once they have been awarded long con-
tracts as these provide a guarantee of repayment, and secondly, SMMEs face
steep learning curves and are unlikely to prove successful immediately. They
Small Business Development 24
require more nurture and assistance in the short run and longer contracts
facilitate this.
Almost all the interviewees felt that although government was attempt-
ing to address the development of the SMME sector through bodies such as
Khula and Ntsika that its e¤orts were often misguided and that government
was su¤ering from real capacity constraints. Khula was criticised for relying
too heavily on commercial banks as intermediaries, whilst Ntsika’s system of
accrediting training institutes was also criticised. Many argued that govern-
ment was part of the problem. Its tendering system is complicated and often
inaccessible to SMMEs. Additionally, government has become infamous as
a late payer which places huge burdens on companies; SMMEs in particular
cannot cope with such a situation. The irony is that whilst government is
spending vast quantities of money in trying to stimulate the SMME sector,
it may also responsible for their demise through its payment record. Gov-
ernment labour legislation was seen as an additional impediment because it
has raised the cost of employment, by expanding the Basic Conditions of
Services for example.
The SMME sector was seen to be facing major obstacles and challenges.
These can be classi…ed under seven headings:
a) Finance - It was generally felt that this is an area which has been
signi…cantly addressed and that it has become less of a problem. However, it
remains an obstacle and commercial banks were singled out as being far too
conservative and risk averse in their lending which, in turn, negated Khula’s
e¤orts.
b) Labour - Labour legislation was criticised repeatedly for raising the
costs associated with employment. Complying with tougher labour laws was
a costly exercise. Small and micro-enterprises rely heavily on informal labour
contracts so as to keep costs down and this was being challenged by new laws.
The SMME sector …nd it di¢cult to attract skilled labour and the cost of
unskilled labour was seen as too high.
c) Trade - Although South Africa has seen signi…cant deregulation in
the past decade, some felt that overregulation was still an issue and that
licensing, health and safety laws and the like needed to be relaxed.
d) Tax - The complexity of the tax system raised the cost of doing business
because SMMEs do not have the capacity to administer this area and found
it di¢cult to a¤ord accountants.
e) Procurement - The public sector tendering system was regarded as
inaccessible to SMMEs. It was too complicated and tenders were too large
Small Business Development 25
for SMMEs.
f) Infrastructure - This is a particular problem in the townships where
inadequate roads as well as electricity and telephone networks hampered
SMME development.
g) Demand - This came up repeatedly as the primary challenge facing
SMMEs. The growth of this sector was being stunted by the lack of a steady
demand for their products. It is in this area that links with big business have
a critical role to play but these are as yet underdeveloped. The reasons given
by business revolved around problems of asymmetric information in that
there were enormous risks in awarding contracts to SMMEs with limited
track records. A further set of complications is linked to the way in which
management appraises results. Managers are very much performance driven
requiring immediate results and hence tend to be impatient about dealing
with SMMEs which have high learning costs. This puts huge strain on middle
management (who generally are responsible for day-to-day operations and
who would make the decision regarding doing business with SMMEs) which
is rewarded on the basis of short term delivery and as such face enormous
risk in engaging with SMMEs.
Important lessons have emerged from all the interviewees’ experiences
and some of these are discussed below. Anglo/De Beers small business ini-
tiative has been operation since 1989 and whilst they insist that they have
no …xed formula for identifying successful entrepreneurs, they do watch out
for four warning signs: a) a reluctance to contribute start-up cash (not nec-
essarily very much in absolute terms but an amount the entrepreneur would
be loath to lose); b) an unproven ability and aptitude for hard work; c) a
record of dishonesty; and; d) unrealistic expectations of quick wealth. Other
lessons were on a more practical level. Dealing with SMMEs cannot occur
along the lines of ‘business as usual’ and big business needs to appreciate
this. Payment terms may have to be changed from 120 days to cash on de-
livery, as they do not have extensive overdraft facilities. SMMEs often do
not have storage or warehouse facilities. To overcome this big business can
either assist with storage or alternatively specify smaller, more regular con-
tracts instead of infrequent bulk orders. This requires less storage capacity.
Big business can also help by buying in bulk, thereby gaining discounts, and
then selling to SMMEs at a reduced rate. Tenders proved to be a particu-
lar problem. Tender documents were often too complicated and as such not
accessible to SMMEs. Likewise tenders were often too large for SMMEs to
deal with as they do not possess the necessary capacity and …nancial back-
Small Business Development 26
ing required. This situation can be dealt with through the simpli…cation of
tender documents and ensuring that tenders are put out in smaller tranche.
The problems with tenders are true both for the public and private sectors.
Contracts awarded to SMMEs need to be of a su¢cient time period to en-
sure their sustainability. Lastly, I would argue that the appropriate level to
‘intervene’ and attempt to modify attitudes regarding the development of
linkages between big and small business is at the branch level rather than at
head o¢ce. Whilst it is important to in‡uence a company’s overall strategy,
actual implementation of linkages occurs at branch level. Non government
organisations (NGOs), such as BLUE and the Small Business Project, have
a critical role to play here in educating regional managers as to the bene…ts
of dealing with SMMEs.
The World Bank (1993: 58) states that SMMEs in South Africa would be
stimulated through the establishment of links with the large corporate sector
and government. These links would foster job creation whilst beginning to
align quality and productivity. It sees subcontracting as essential for the
establishment of these links but maintains that the preconditions for this are
not yet present in South Africa. These preconditions include incentives for big
business to subcontract work, the ability of supplier …rms to meet the stan-
dards and needs of other sectors, and the existence of practical opportunities
for small enterprises to become subcontractors. The World Bank (1993: 59)
argues that the …rst step in implementing a successful linkage programme
would be for NGOs and development agencies to intensify networking be-
tween their clients and big business or government. Existing mechanisms,
such as business opportunity centres, industry hives, matchmaker fairs, and
small business directories, should be encouraged, but additional projects,
such as the compilation of a national database, must be undertaken as well.
Ensuring access to programmes that train entrepreneurs and upgrade the ca-
pacity of small enterprises is an important function for NGOs. Gaining union
support for linkage programmes and providing incentives that encourage big
business to subcontract to SMMEs are also important. Lastly, an e¤ective
lobby would improve the chances that such initiatives would succeed. The
World Bank (1993: 59) outlines various methods which have been used inter-
nationally to link small and large businesses. Korea introduced mandatory
links, by requiring that 1,200 items in 40 industrial sectors be supplied by
2,200 contractors. In Korea today, 98% of all business falls within the SMME
sector and account for 66% of all jobs and 40% of all exports. The mandatory
links have been e¤ective because they have been integrated with other pro-
Small Business Development 27
grammes. By contrast, product reservation in India have not worked because
the choice of products is arbitrary, policy criteria are lacking, and product
reservation is not linked with other policy objectives. In Ireland, linkage
programmes are coordinated by a 20-person team that focuses on building
relationships between SMMEs and big business. On the demand side , it un-
dertakes research to discover what, when and how much the company buys,
at what cost and the technical requirements for products. On the supply side,
it aims to analyze which enterprises have the capacity to supply the product
and what upgrading is needed. As such, it seeks to match the capabilities of
the purchaser and supplier.
6 Conclusion
The SMME sector is already large in South Africa but it is not yet fully in-
tegrated into the economic mainstream. It exists often on the periphery and
often without links to the broader economy. For the SMME sector to realise
its potential as a dynamic, innovative centre it must develop links with the
rest of the business sector because only in this way will its business become
fully sustainable. These links need to be mutually bene…cial or otherwise it
will only be a temporary phenomenon. Coercive legislation from government
will result in businesses investing resources in …nding ways to circumvent
such legislation if it is not going to be in their best interests to comply.
Big business in South Africa is already feeling persecuted on all fronts and
more legislation will prove detrimental in the long run. Real pro…table op-
portunities exist in outsourcing and big business needs to be proactive in
exploiting these, otherwise the legislation will come. The compilation of a
national database must be undertaken so that big …rms are aware of SMMEs
capable of undertaking that business. A form of accreditation by some insti-
tution could do much to alleviate the problems of asymmetrical information
hampering the development of links between small and big business. South
African business will be making progress when it realises that doing business
with SMMEs makes for good business. Promoting links between big and
small business should be mutually advantageous - the social responsibility
should be a secondary consideration.
Small Business Development 28
7 Suggestions for Future Research
SMMEs in developing countries face challenges which are unique and im-
mense and thus present many challenges for future research. Five important
areas for research in this regard emanate from this study. First, research
must be undertaken on the mobility of SMMEs from the periphery and in-
formal sector into the formal sector and economic mainstream. There is
much to be learnt from the rather limited success stories in developing coun-
tries. Second, the phenomenal increase in outsourcing over the past decade
presented many opportunities for small businesses and these need to be doc-
umented. Third, the impact of government procurement on SMMEs must be
understood. Fourth, the recent emphasis on the ‡exible economy and indus-
trial districts has focused on the developed world and we need to understand
their impact in a developing country context. Last, more research on the
links between big and small businesses must be conducted to understand the
resistance of big companies to doing business with SMMEs. Only then can we
really begin to understand the obstacles facing SMMEs and their integration
into the economic mainstream.
References
Enterprises in South Africa: A Study of Get Ahead Foundation’s
Stokvel Lending
Churchill,C.F. 1995. The Impact of Credit on Informal Sector Pro-
gramme. Clark University.
Enterprise. 1998. ‘Building a New Breed of Entrepreneurs’. August
1998: 110-114.
Harper,M. 1984. Small Businesses in the Third World. Chinchester:
John Wiley & Sons.
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