Frontline Africa Advisory

The Role of SMMEs has become more vital in our economy

The Role of SMMEs has become more vital in our economy

South Africa’s unemployment rate reached 29.1 percent in the Third Quarter of 2019. Big corporates such as Standard Bank, ABSA, Multichoice, PPC Cement, Tongaat Hulett, and Sibanye Stillwater, among others, shed a combined total of approximately 15,000 jobs. Already companies like Massmart have announced plans to cut 1440 jobs, Telkom 3000 and Sibanye Stillwater 5000. Added to that, SOEs like SAA are also facing prospects of shedding jobs.

In the current circumstances, the role of small, medium and micro enterprises (SMMEs) as drivers of job creation and economic development becomes even more vital. The South African government has long identified the need for an enabling environment for the development and expansion of SMMEs at local and national levels. The 1995 National Strategy and Promotion of Small Businesses in South Africa was an important intervention by government, and indeed subsequent policy choices, including the establishment of a national department (the Department of Small Business Development) in 2009 dedicated to small businesses.

It is estimated that South Africa now has more than 2.5 million SMMEs, which account for 3.5 million jobs in the country’s economy. The biggest challenge, however, is that nearly 75 percent of newly established SMMEs shut down within two years of their operations.  This has been attributed to a number of factors; including, but not limited to, lack of access to capital/ funding, inability to access the markets, poor managerial skills, tendency to lag behind technological advances, as well as the rigid and sometimes inefficient regulatory environment

South African SMME’s generally have access to funding. Government and private sector players have put in place several initiatives to support SMME development. A plethora of national and provincial funding agencies have been created over the years to plug funding gaps that generally bedevil all small businesses. With that being the case, there is still a shortage of well targeted funding and sustainability interventions that would ensure that access to funding is paired with access to markets to ensure funding recipients are able to trade themselves into sustainability.  

One of the related challenges that SMMEs face, especially those doing business with the State, is what former Trade and Industry Minister Rob Davies called “slippage” in State entities’ compliance with local procurement regulations, because of corruption that often influences tenders and procurement resulting in products being imported, instead of being sourced locally.

Local procurement should be one of the priorities of government, not only at the national level but also at the local level, and the so-called ‘set-aside’ quotas must be enforced through an effective procurement law. While setting quotas it is quite straightforward, some of the risks inherent to this policy are lower quality in the government purchases and a decrease in the value for money for the government. In addition, it has not been uncommon for the State and entities to miss targets set for SMME public procurement contracts, mostly because of the inability of SMMEs to meet the standard requirements.

In addition to enforcing set-aside quotas, procurement laws can enhance access to SMMEs by easing the process of submitting tenders and ensuring the timely payment of contracts by the State. Failure by the State to pay SMMEs or paying them long after the 30-day period has passed has, in many cases, crippled SMMEs. 

It is also critical that innovation in SMMEs is encouraged through calls for tenders which integrate new standards or demand new products or by financing the research and development (R&D) expenses of those SMMEs which have won State contracts involving innovative products and solutions.

Written by Zamokwakhe Somhlaba
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