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Stimulating Growth and Employment Creation through SMMEs

CONFIDENTIAL NOT FOR DISTRIBUTION

Mzukisi Qobo

Meeting of the Presential Economic Advisory Council

11 January 2023

Summary of Main Points

• Much progress has been made by the government to overcome red tape. There is an opportunity to provide further support to the SMME and Cooperatives sector to drive growth and employment creation.
• Bold steps should lead to doubling the number of SMMEs and Cooperatives by 2030 so that they generate value in the economy, create jobs, and offer possibilities for sustainable income earning opportunities.
• Interventions should focus on ramping up support to boost the performance of the SMME ecosystem, enhance income earning opportunities of SMMEs and Cooperatives.
• Government should intensify efforts to improve market access opportunities including through ease of access to government procurement and in supply chains of large firms.

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…Summary of Main Points

• Collaborate with the private sector to enhance supplier and enterprise development opportunities for SMMEs; and explore innovative financing instruments including blended finance & de-risking instruments.
• Provide more support to SMMEs to participate more meaningfully in the emerging sectors such as green industries and digital platforms, while expanding their offering in traditional sectors.
• Additional efforts should be made to increase the productivity of SMMEs, particularly SMMES that are involved in manufacturing SMEs and to assist them to export products and services.

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What problems are we solving?

• Low growth and high levels of unemployment, especially among youth in townships.
• Regulatory barriers that constrain the SMMEs.
• Significant funding gap in the SMME sectors.
• Insufficient funding of agencies that are supporting SMMEs.
• Inefficient market concentration that limits the opportunities for SMMEs to participate meaningfully in the mainstream economy.
• Poor support for SMMEs in rural and township economies, and lack of sustained productive activities and employment creation in these areas.

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Excerpts from the International Finance Corporation Report

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Given the limited growth in MSME numbers, it appears that the sector is not making as meaningful a contribution to the South African economy as expected.

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Access to markets, finance and skills remain some of the biggest barriers to MSME growth. Increasing financial inclusion for South Africa’s small businesses requires support from financial institutions and the government.

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South Africa’s rate of established entrepreneurship is extremely low compared to other African countries. Given its GDP per capita, South Africa should have a rate of early-stage entrepreneurship three times greater than the current rate

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Excerpts from the International Finance Corporation Report

Black ownership declined in the past 10 years to 76 percent in 2017 from 79 percent in 2008. Black ownership remains heavily concentrated amongst

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micro enterprises, and then decreases steadily as the size of the business grows, representing less than a third of medium-sized enterprises. White ownership increases as firm size grows, from 8 percent amongst micro enterprises to 46 percent amongst medium-sized enterprises

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Female ownership declined significantly over the past decade to 38 percent in 2017 from 48 percent in 2008. Female ownership is also concentrated in micro and small businesses – 41 percent of micro enterprises are female-owned and then female ownership drops to only 27 percent amongst medium-sized enterprises, with male ownership dominating at 73 percent

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Proposed Measures

• First, we need to find new sources of growth and build capabilities within the state, and across the different spheres of government to support the SMME ecosystem and to grow new jobs.
• Offering support for SMMEs should be seen as another vital instrument in the toolbox of industrial policy to increase the supply of good jobs. Need for targeted support to enable SMMEs to grow their participation in the emerging sectors of the economy including green industries and digital platforms.
• SMME-focused localisation policy framework will need to be expanded to increase the number of products from SMMEs that receive shelf space in the retail sector.
• Second, government should leverage various initiatives in the ecosystem. It should look at various ways to boost the SMME ecosystem including supporting and working alongside private sector agencies that are providing financial and non-financial support and expanding digital platforms.
• Third, there is more work that government will need to do to enhance the capabilities of rural and township-based SMMEs so that they can participate meaningfully in the mainstream economy, catalyse employment creation, and build socio-economic resilience.

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…Proposed Measures

• Beyond financial support, we will need to pay closer attention to enhancing productivity gains of SMMEs so that they are competitive in their product and service offerings.
• Fourth, Broadening collaboration with other partners, including impact funders, venture capital, bilateral and multilateral development partners, could help in closing the financing gap that stands at over R350 billion.
• Government’s development finance institutions and state-owned enterprises will need to maximise their spend on the SMMEs to yield greater impact through job creation and expansion of new entrants in the mainstream economy.
• Some of the contribution government could be in the form of risk-sharing instruments and expansion of credit guarantee scheme to unlock finance for SMMEs.
• Implement interventions that can lead to reduction of inefficient market concentration that undermine the participation of SMMEs in the supply chains of large firms.

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Action Points for the Near-term

• Accelerate the red-tape reduction process. Scrapping of informal micro enterprise license charges at municipal level and relaxing some of the punitive bylaws that negatively affect SMMEs;
• Amending the Co-operatives Development Act to scrap the requirement for co-ops to submit audited financial statements;
• Implementing the Cabinet decision to merge the small enterprise development agency and small enterprise finance agency, together with the Co-operatives Banking Development Agency, to create a comprehensive one-stop shop that is significantly resourced for SMMEs and co-ops;
• Providing additional support to implement government’s flagship programmes focusing on: boosting the new economy start-ups; township economic development; expanding digital platforms and incubator programmes; recapitalisation of SMME financing package to close financing gap between supply and demand estimated at over R350 billion by the International Finance Corporation; and
• Give dedicated attention to township economic development by replicating nationally the Gauteng initiative in the form of Township Economic Development Act, with appropriate financing package, localisation programme, infrastructure support, and other non-financial support.

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Thank You

Presidential Economic Advisory Council

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