SMME, Informal Sector and Cooperative Baseline Study

SMME, Informal Sector and Cooperative Baseline Study Executive Summary of Research Report for the Gauteng Provincial Government Department of Economic Development By: Prof. Ed Bbenkele Paper presented at the UJ CSBD 4th Annual Soweto Conference 28th & 29th October 2013 Turning Tangible and Intangible Assets/Resources in Townships into Business Opportunities Centre for Small Business Development (CSBD) University of Johannesburg Tel: +27 11 559 5649/5518 Fax: +27 11 559 5696 Potcheefstroom Road Soweto www.uj.ac.za csbdpa@uj.ac.za

Research Report Contents Executive Summary 1. Introduction 1.1 Gauteng Province as a smart province Objectives of the base line study: Why the baseline study? 2. Research methodology 2.1 Overall research design 2.2 Sampling frame 2.3 Sample selection 2.4 Questionnaire design 2.5 Data collection 2.6 Data processing and analysis 3. Results of the study: Knowing the SMMEs, informal sector, and cooperatives 3.1 Summary of the BSM 3.2 Socio-demographic profiling 3.3 Business profiling 3.4 Business start-ups and challenges 3.5 Business performance and entrepreneurial orientation 3.6 Registration and business compliance 3.7 Banking practices and behaviour 3.8 SMME credit, loan usage, and managing of finances 3.9 Small business support 4. Summary and recommendations 1 P a g e

Executive Summary This section provides conclusions and makes recommendations to the Department of Economic Development to promote and support the needed growth of SMMEs, cooperatives, and the informal sectors as potential engines of growth. For completeness, the conclusions and recommendations will draw in the major areas that the study used to profile SMMEs, the informal sector, and cooperatives. There are nine sections in the profiling study and, from these, some critical recommendations are made. Please note that numerous recommendations, areas for further research, and points which need further thought are provided. In the first instance, the profiling study used a robust methodology to ensure that the descriptions of the SMMEs, cooperatives, and the informal sector were not compromised. This involved conducting interviews in all five regions in Gauteng, for the study to have external validity. It was also deemed important to work closely with the local economic development officers in the various regions, to achieve appropriate sampling units. The conclusions and recommendations are as follows: 1. Categorisation of SMMEs and commensurate policies SMMEs have been segmented according to levels of business sophistication. Using critical sophistication variables means that the common BSM categories can be matched to government categorisations. What emerged is the existence of survivalist (BSM 1&2, lower end), very small entrepreneurs (BSM 3, lower medium), micro enterprises (BSM 4, medium), small enterprises (BSM 5, lower upper), and medium enterprises (BSM 6 &7, upper end). From this segmentation of clients, we recommend the following: a. There is a need to tailor interventions from SMME support agencies of the Gauteng Department of Economic Development (GDED) to the various SMME segments. In marketing of services, this is known as target marketing. This is imperative, as some clients are in the introduction phase, others want to stabilise, while others want to grow. Surely, the 2 P a g e

approach of one fit for all is flawed, and yet money is spent implementing this strategy. Let there be political directives, but these need to be operationalised in an entrepreneurial manner by the provincial government agencies. b. Following from the above, it is recommended that the Gauteng provincial government introduce a start-up sustainability and growth strategy to support and promote SMMEs, cooperatives, and the informal sector. It then becomes an imperative to inform the Gauteng provincial government s policy and strategy for the Gauteng province to become a smart province and an entrepreneurial state. c. 55% of SMMEs are managed by men, and women s involvement stands at 33%. It is recommended that cooperatives to empower female entrepreneurs be considered. This will move them into areas of wealth, and create employment opportunities away from the informal sector, where they often work as hawkers. d. An unpopular recommendation is to move entrepreneurs to start-up, sustain them, and grow them. The level of subsidies needs to decrease as one moves people up on the scale of entrepreneurship development. The study recommends that grants be used in a different way to support and promote SMMEs, cooperatives, and the informal sector. e. Using family income is very common among SMMEs, cooperatives, and the informal sector. However, there is no family business training currently provided to all sectors. This is seen as limiting sustainability and growth, and it is recommended that family business training programmes be introduced. The University of Johannesburg offers such a training programme as a short learning programme. 3 P a g e

1. Nature of businesses to be supported The study concluded that most of the businesses are not involved in value-creating activities. They merely buy and sell, with no value addition. This does not contribute to wealth and employment creation. a. We recommend that the medium and upper SMME segments be encouraged to engage more in value-adding activities. The lower segments should be supported to get to this level, but this will take three to four years. This incubation period should be accepted, and there is a need to retain and support the entrepreneurs, so that they can sustain their businesses. Women seem to have a higher need in this regard than men. This means that policy and strategy need to actively promote divapreneurs. This concept is new, and needs to be embraced fully. b. The informal sector is very active, and a clear policy needs to be formulated to respect this sector, as the current practice of the municipal police harassing these informal entrepreneurs is self-defeating. International best practices testify to this. c. The study shows that cooperatives present a more stable business structure than that of survivalist, very small, and micro entrepreneurs. We thus recommend that cooperatives be encouraged to engage in the construction sector through appropriate training, so that they may benefit from the Public Works Programme. Expecting entrepreneurs in BSM 1 to BSM5 to participate in the construction sector is unrealistic. Gauteng Enterprise Propeller (GEP) needs to provide skills programmes in construction, and thus also need to work very closely with the Public Works Programme to link the cooperatives to tenders. This would be more productive than the current intervention model that is being used. Close liaison with the Department of Social Development is needed. d. Business space is a serious challenge for many entrepreneurs. We recommend that business parks be built near the townships, to avoid transport costs for business owners. GPG needs to subsidise the rentals, to allow businesses to stabilise and grow. It is also strongly recommended that common boardrooms and photocopying facilities be provided. This will be complemented by practical business training and market linkages. Business networks start and thrive in such environments. 4 P a g e

3. Supporting business start-ups a. The study has found that SMMEs are usually young firms, and have less than five years entrepreneurial experience, and, as such, are very vulnerable to business risks. They are also mainly opportunity entrepreneurs. It is recommended that the right clients be targeted for support interventions (BSM 6 and 7, Small and Medium) for growth, otherwise money spent on chancers or survivalists and micro entrepreneurs will be wasted. Of course, keeping them in business for poverty alleviation is another developmental agenda. Will Gauteng Province continue being an entrepreneurial or developing state? b. Sourcing capital has been reported as a problem for all SMMEs. We recommend that deliberate interventions take place to rehabilitate SMMEs, so that they can access funds from financial institutions. This is important, as finance exists, but SMMEs are considered unbankable. Israel does this at present, why can t GPG? 4. Promoting business growth and entrepreneurship a. The study found that SMMEs are struggling, except for cooperatives, which seem to be growing, but are still in the early start-up stages. We recommend that national government be advised of the strain the financial crisis causing in SMMEs in general. More financial support interventions are needed in this sector. The government support framework in response to the financial crisis shies away from assisting SMMEs, and this needs to be redressed, not through Business Unity South Africa (BUSA), but through the provincial agencies, like GEP, that work with SMMEs. b. There is a spirit of entrepreneurship among SMMEs. The challenge lies in tapping into this spirit. We recommend that all training interventions in this sector be re-examined, with an emphasis on two things: first, to motivate entrepreneurs to achieve their dreams by getting them together with those who have made it; secondly, to provide appropriate training by recognised training institutions, and to continuously mentor SMMEs in the suggested business parks. We believe that private-sector training providers are often motivated by financial gain, and ignore the fundamentals of empowering the SMMEs. Further, SETA, in collaboration with merseta and the Faculty of Management, recently received a delegation of professors from the University of HAMK in Finland. Finland uses a 5 P a g e

model that emphasises the training of trainers in entrepreneurship. This model needs to be introduced to the GDED support agencies, so that their service providers are up to scratch. The University of Johannesburg has bought into this model. 5. Reaching lucrative markets and tenders a. There is a heavy dependency on local communities to provide the market for entrepreneurs. Even when other communities in Gauteng and the nation provide market opportunities, especially for small and medium enterprises, such opportunities are not taken advantage of. We recommend that short programmes in entrepreneurial growth strategies and mentorships be intensified. The Business Management Department at the University of Johannesburg offers this as part of their core academic programme, and it can easily be converted into and offered as a short-term programme. b. As pointed out above, it will be important for GPG to work closely with national institutions that give out tenders, especially in value-creation sectors like construction (Extended Public Works Department). c. Business growth at present is stunted amongst SMMEs, as GPG might not be giving tenders to these businesses. This is as a result of a market demand failure. We recommend that supplier development programmes be provided to targeted SMMEs in BSM 5, 6, and 7. Again, the Department of Business Management at the University of Johannesburg offers such short learning programmes. d. The business support organisations also need to disseminate tender information to SMMEs on a regular basis. This can be very easily done using information and technology (IT) as a business enabler, as all entrepreneurs have cell phone connectivity. Tender information could be flashed, and GEP regional offices and the service providers can assist SMMEs to bid for these tenders. However, this strategy requires transparency in the awarding of tenders at provincial and municipal levels. Corruption will work against this. 6 P a g e

6. Formalisation of business entities and compliance issues Business ethics require that any established business complies by first registering and complying with the various laws and Acts. The study found that, in the informal sector, there are many businesses that operate without any proper registration, or do not comply with the municipality by-laws. Even SMMEs registered with CIPC are not complying with many of the requirements of the Companies Act. a. We recommend that the informal sector be allowed to offer goods and services in the various sectors without being harassed. It is felt that strict legislative requirements are killing the sector and counteracting the possible benefits that could otherwise be realised. Minimal administrative burdens are needed for the informal sector to flourish. b. Furthermore, those who wish to expand their markets through government tenders should be allowed to register as formal business entities. Most think of themselves as too small to tender, and this perception needs to be changed by providing training on how to craft winning tenders, and empowering them with the skills they need to effectively execute the tenders. This implies confidence-building, which, at present, does not exist amongst SMMEs in South Africa. 7. Banking practices and behaviour a. The study concluded that the banking practices and behaviour of SMMEs need to be addressed, as they introduce risk into business operations. The simple separation of personal and business banking accounts, for example, does not exist. This has resulted in difficulties in the financial management of businesses. b. We strongly recommend that behavioural change be promoted in the financial management interventions received by many of the SMMEs. To know what should be done is one thing, to implement the required behaviour is another. At present, SMMEs know what needs to be done, but are not doing it. The cooperatives, however, are, to some extent, addressing the issue of financial management, because, in order to receive funding, they have to follow certain financial procedures. c. This means that certain financial requirements need to be adhered to before SMMEs can qualify for interventions from GPG and its agencies. However, this should not be an 7 P a g e

exclusivity criterion, but one that identifies deserving SMMEs and prepares them to meet the financial requirements of interventions. d. This study has found that the SMME sector is largely ignored with regard to the various financial products on offer from financial institutions. The numerous financial products do not seem to be relevant to the SMME sector, and, thus, their relevance needs to be examined. We strongly recommend that SMMEs be linked to deposit-receiving institutions like Pick n Pay, Shoprite, other private sector selected retailers, and the Post Office, and for GEP to open agencies that operate near the places where SMMEs are found. This will promote deposit-banking behaviour. This strategy is, for instance, currently sustaining the efforts of Bank Rykhayt in Indonesia. The introduction of saving points would improve the saving behaviour of SMMEs, thereby making them more bankable. e. A question that arose is whether GEP could use its regional offices and work with retailers to facilitate the opening of deposit accounts by SMMEs, like Pick n Pay and Shoprite are doing at present, and very successfully too. 8 Credit usage and financial management concerns a. The study found that SMMEs expose their businesses to risks by not buying insurance products. This risk needs to be addressed. GPG agencies should partner with insurance companies to cover this business risk. GPG offering useful services to SMMEs is one area that requires urgent attention. b. Many SMMEs do not consider it important to keep financial records of their business. We strongly recommend that a massive training campaign be started to show how financial records should be kept, by using the internet platform for simple cash book transactions. Moreover, financial institutions have financial records packages to assist SMME clients. GEP as an agency of government should encourage their clients to use simple financial management tools. Then, as a follow-up, bookkeepers can consolidate these into quarterly financial statements, to show a record of the performance of SMMEs. This is one mechanism banks need, and could be used to improve the chances of SMMEs obtaining funding. 8 P a g e

c. A saving culture should be promoted by making it easy for SMMEs to deposit their daily takings. Regional offices of GEP need to engage in strategic alliances with retail institutions and financial institutions, which can offer these services in close proximity. Pick n Pay and Shoprite Checkers have achieved very good penetration in this regard. These points could also be established at local post office banks and village banks. d. Most SMMEs operate as family businesses, as they borrow start-up capital from family members, and these family members will invariably influence decisions in the business. Unfortunately, training in managing, sustaining, and passing on business skills to the next generation is rare. e. Family business short programmes are offered at the Business Management Department at the University of Johannesburg. 9. Importance of business networks and government support The study found that, unfortunately, SMMEs perform poorly in networking, as few are members of local business membership organisations (BMOs). This limits their access to information on business opportunities in terms of tenders, training opportunities offered by government, and any other support interventions. The BMOs have to show that they are useful and can meet the needs of their members in order for them to be seen as adding value. Government knows that BMOs have become very political, and that there is a lack of representation. This state of affairs is unfortunate, and needs to be addressed. a. We strongly recommend that GPG create links with progressive BMOs to meet the needs of SMMEs, cooperatives, and the informal sector. This will require the identification of these institutions, and their governance structures need to be influenced in a constructive manner. b. The creation of business parks will assist in building business networks. Entrepreneurs need to be encouraged to join networks; however, they will have to see the benefits before they will freely participate. It will take time to realise the benefits of such business parks and networks, and they should thus be set up as soon as possible by GEP. 9 P a g e

Overall, the various agencies are encouraged to move closer to the river to hear the fish talk! This is the only way an impact can be made in supporting and promoting the SMME, cooperative, and the informal sector in Gauteng. 10 P a g e