SME policies and policy formulation in SADC countries .

FES

SECTION of DOCUMENT:

The Evolution of South Africa's SME Support Policies 1994 - 1997
Wolfgang H. Thomas

Introduction
The Preparation of the SME White Paper
The Unfolding of the Policy Framework
General Conclusions

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The Evolution of South Africa's SME Support Policies 1994 - 1997
Wolfgang H. Thomas

Introduction

The structure of this paper closely follows the framework set by the workshop facilitators. Much has been written about the background for South Africa's White Paper on Small Business Promotion, which was accepted by government in February 1995, less than a year after the formation of the new government. This paper focuses on the unfolding of the process, both in the preparatory phase and in the implementation of the White Paper's core recommendations. The perspective is one of an informed "outsider" rather than an official "insider" of the relevant government departments or parastatals. This may be the most effective way of combining process details and critical assessment of the outcome of the process.

This paper is both brief and candid. There is little need for a detailed report on the whole process of White Paper preparation or the unfolding of the strategy framework. Every SADC-country will have to follow its own path, shaped by its own political, social and economic structures. Yet there is a lot to learn from each other, with respect to both successes and problems experienced over the past few years.

In order to make these lessons meaningful, and also to encourage other SADC countries to pursue this road of a fundamental transformation of small enterprise support, the paper does not play down failures, lack of progress and remaining challenges. After all, if at the technical (sectoral)

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level of SADC we cannot share these operational experiences, there is little we can expect from the regional networking process.

The Preparation of the SME White Paper

The preparatory phase of the 1995 White Paper on Small Business Promotion goes much further than the political transition of 1994. Soon after the unbanning of the ANC in 1990 it became clear that black micro-entrepreneurs and the many people relying on self-employment for a living constituted a vital segment of the electorate. In 1991/92 ANC economic planners - facilitated by foreign support groups like the Friedrich Ebert Foundation - took up the challenge and initiated working groups to rethink an appropriate approach towards small business development in the country.

This process was in tandem with the gradually broadening base of the South African small business sector, which followed world wide trends of the 1980s and which in South Africa was characterized by a proliferation of NGOs and lobbying groups active in the SME sector. It also included increased attention by the government to SME support, in particular through the Small Business Development Corporation (SBDC), which in the early 1990s had a staff of 800, spread over 50 branches and regional offices, about 80 small business hives and a similar number of information points.

Up to the April-1994 election SME support policies had little political prominence and did not reach the grassroot level of small enterprise development across the country. It was generally felt that government only paid lip-service to SME support, that established support agencies - like SBDC - neglected the mass of (black) small and micro-enterprises and that in most of the rural areas and black townships no effective institutions addressed the needs of SMEs.

Three months after the change of government - at the July 1994 Nafcoc Conference in Transkei - the new Minister of Trade and Industry announced the government's intention to push a radical revision of the SME support strategy as a priority issue. He promised that within three

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months a draft White Paper would be circulated as a discussion basis for broad consultation.

Between August and October 1994 a small team of consultants, including several of those involved in the workshop phase of the early 1990s, co-operated to mould the many working papers and conference reports into a brief discussion paper (of just less than 50 pages), which was released for consultations towards the end of October 1994. It highlighted the background of the unsatisfactory state of SME support in South Africa and indicated major policy thrusts needed to set off a national support movement.

Whilst the discussion paper was being finalized the consultancy team shifted its attention towards the preparation of a large Presidential Conference on Small Business, to be held in Durban at the end of March 1995. It was felt that such an event was essential to spread the message of the new strategy and to get broad-based endorsement for the government's approach. The 2000 delegates expected at the conference were to be representative of the full spectrum of urban/rural, small/medium/micro enterprises of the country.

The first consultation phase around the discussion paper was completed before the end of 1994, allowing the drafting team about 8 weeks (Jan./Febr. 1995) to revise the initial document and shape it into a White Paper. Since it had been decided that the White Paper - endorsed by Cabinet and Parliament - was to be presented to the March Conference, the team had to work to an extremely tight schedule. In the end the final parliamentary approval was obtained a few days before the start of the conference.

The particular sequence of the preparation phases resulted in a White Paper which was both a 'final document' and a 'basis for broad consultation'. This dichotomy was clearly reflected in the proceedings of the Durban Conference. Delegates all received a copy of the (official) White Paper as well as summaries of input papers on all the key policy areas. In order to be manageable the 2000 delegates were divided into eight parallel groups, each of which discussed the key policy areas in workshop sessions. At the end of two days of intensive discussions

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summary recommendation papers were prepared and presented to the plenary.

This seemingly rigorous consultation process had its strengths and weaknesses. It undoubtedly created the opportunity for wide discussions around the core issues. It also gave consultants, experts, small business leaders and other stakeholders an opportunity to interact with grassroot representatives.

At the same time it was difficult to reach depth and give enough scope for problem differentiation in the many workshop sessions. At best it gave all the delegates "a taste" of the issues felt to be common to most of the SME interest groups and the direction which government wanted to move in its support strategy.

At the end of the conference the scene was set for

the establishment of a Centre for Small Business Promotion at the Department of Trade and Industry;
the establishment of a National Enterprise Promotion Agency as a vehicle for the co-ordination of support activities in the parastatal sector;
the preparation of a National Small Business Enabling Act;
the establishment of a National Small Business Council, to represent small business interests all over the country;
the institution of 'small business desks' in each of the nine provinces; and, finally,
the search for implementation 'vehicles' in a number of key policy areas (local business service centres, business linkage mechanisms, financing support instruments, etc.)

In none of these areas was there real consensus about the implementation process, but, realistically speaking, that could hardly have been expected.

The conference succeeded to capture a reasonable degree of media attention, given its high profile speakers and the intensive preparatory process. Undoubtedly, the conference and the release of the White Paper

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at more or less the same time helped to waken public awareness about the increasing significance of the small business sector and the government's commitments towards more comprehensive support to this sector, with particular emphasis on specific target groups, i.e., formerly disadvantaged groups - blacks, women, rural entrepreneurs, the youth and the disabled.

In retrospect it should perhaps be added that the media attention could easily be misleading, in as far as it is extremely difficult to effectively spread the message of such a new strategy to a few hundred thousand SMEs scattered all around the country. What is more, it was all too easy to fuel expectations, but far more difficult to spread the complex message of a comprehensive overhaul of the whole small enterprise culture of South Africa.

We should also mention that the conference particularly stressed the need for new structures and new operational support systems. This disregard for what had already been achieved made it relatively difficult in the months after the conference to get co-operation with the different existing support agencies.

The Unfolding of the Policy Framework

National Framework

The White Paper - as supplemented by the Conference Input Papers and the Workshop Conclusions - set a framework for two levels of development, viz.:-

the formation of certain key organizations destined to steer the SME support process, and, secondly,
the tackling of key policy areas.

Seen in broader perspective these two areas addressed all the important aspects of a comprehensive, national SME strategy. It can also be said that the different elements of each of these two areas closely reflect international 'conventional wisdom' about SME support and as such

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should be viewed in a very positive light. If each of the areas were to unfold in the way perceived by the drafters of the White Paper and the main stakeholders of the SME community, South Africa would undoubtedly have an optimal support strategy.

Due to its brief and relatively general nature the White Paper is a guide but no blueprint for action. Equally, the conference documentation does not constitute a detailed action framework. Even the 1996 National Small Business Act is a very general document which primarily constitutes NEPA (Ntsika Enterprise Promotion Agency) and the National Small Business Council, provides a quantitative framework for the differentiation of small, medium and micro-enterprises and outlines a few general principles of the national strategy.

Strategy Goals

The goals of the South African SME strategy have been detailed in the White Paper and all too often reiterated since then. There are, however, no quantified goals nor is a firm timeframe set for implementation.

The question has to be put, whether such quantification is either possible or sensible. The essence of business promotion in a market economy is, after all, the facilitation of private initiative, the dismantling of access barriers, the encouragement of private (or parastatal) support agencies and the general streamlining of the SME support process. These processes are far too complex to be linked to a few quantifiable goals or to specific deliveries, given the broad scope of the goods of SME support, viz.:

improving access to finance
expanding access to business information and advice
strengthening access to training
improvement of the business infrastructure relevant for SMEs
improving access to markets and public procurement for SMEs, and

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expanding the capacity of business organizations to support member SMEs.

Target Groups

The White Paper stipulates specific target groups - black owned/controlled small enterprises, women entrepreneurs, the disabled, rural SMEs and the unemployed youth. Yet, these categories are far too large to allow a operational quantification of targets. What is more, much of the White Paper's "message" applies to all SMEs, including those currently owned by whites. In fact, there is an important dichotomy in the White Paper, which reflects the current state of the South African economy. The dominance of white owned SMEs in certain sectors of the economy cannot be denied or wished away, nor would it be reconcilable with the country's growth goals to drastically change SME ownership or control. At best a pro-active SME strategy along the lines of the White Paper can try to gradually rectify past omissions and discriminatory effects.

Vision of the SME Sector

The White Paper contains a brief vision statement about the SME sector as one of increasing importance in a national economy which faces the challenges of globalization and increased competition. Once again, the broad outlines are clear, but the details about SMEs in specific sectors of the economy remain vague. These have to be worked out in a regional and sectoral context.

Sector Differentiation

The sectoral differentiation of SME support policies is an area of increasing significance in the international literature. The White Paper stresses the need for such differentiation, but - within its limited scope - does not provide details. The sector-issue has two important dimensions, viz.:

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How can SMEs in different sectors be helped most effectively? Thus, the same support package will not be suitable for different sectors (e.g., retailing, jewellery crafts, taxis, small farmers).
Some sectors may be more promising for future growth or job creation and may thus warrant greater attention or larger resource allocations.

These issues constitute the crux of the search for effective and efficient SME support policies. It was not possible to do justice to them in the White Paper. In fact, South Africa is still at a relatively early phase in the sector differentiation of support packages and support strategies. Whilst there was relatively little interest in this differentiation in the first 12-18 months after the Durban Conference, it is now becoming clearer by the day that real success in the implementation of support will only result from sector focused efforts.

Role of Government as Opposed to NGOs and the Private Sector

The White Paper stressed the need for joint action by all the stakeholder groups. It also stressed the limitations of government in the funding of support action and the actual implementation of supportive action. Yet, the paradigm shift in the national strategy and the central role which national government played in the preparation of the Durban Conference and immediately thereafter, have created unrealistic expectations about its ability to actually "deliver". The inevitable "disillusion" about the state's apparent "non-delivery" is currently a significant obstacle in the unfolding of the support strategy.

Government is currently looking towards local authorities to play a more active role in the implementation of support strategies. In as far as this is a "passing of the buck" within the public sector, it is dangerous. Where it is a broadening of the spectrum of support agencies, it is a very positive development.

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Parallel to the disillusionment about the role of government we find a re-discovery or re-accentuation of the role of established bodies like business chambers, sector associations, NGOs, private service suppliers and self-help efforts. As a whole we are probably now in a more healthy phase of realistic expectations about the roles of the major stakeholders than ever before.

Decentralized Service Delivery

Once again the White Paper had stressed the need for this approach, but initial structures placed a lot of emphasis on top-down controls and direction. The last two years have shown that such decentralization is essential and that a bottom-up approach gives a lot more scope for grassroot initiatives and intensive, diversified learning processes.

It is ironic that, after many of the new support strategies do not seem to meet our expectations, we also start looking again at past (pre-1994) efforts and experiences - finding some encouragement in strategies that actually worked better than we dared to admit when we drafted the new strategies.

Co-ordination Machinery

The new South African SME support framework is full of co-ordination jargon, bodies and processes. Yet, the effectiveness of such co-ordination - as the effectiveness of most of the new institutions - is another question. Lately, the emphasis in public concern is shifting from institutions and channels to the effectiveness of their operation. Inevitably, success with this adjustment takes time and calls for intensive training and system building efforts. In that context it is suggested that at SADC level networking should place more emphasis in the how rather than the what of existing or new institutions. It is easy to propose advisory councils, forums and boards - but the real challenge is how they operate or how we could improve their operation. Increasingly the challenges are managerial rather than structural.

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Subsidies and Protective Interventions

The White Paper has cautioned against large subsidies or protective barriers for the support of SMEs. The lack of funds for SME support in the national (and provincial) budgets also militates against subsidization. In fact, several of the key programmes, like the Local Business Service Centres and Local Industrial Parks already suffer from a lack of significant seed finance.

Compared to the practice in most semi-developed and highly-industrialized economies SME support still gets a negligible share out of South Africa's national budget - in 1996 less than R500 million out of a total national budget of close to R80 billion.

De-regulation

The White Paper clearly states that the regulatory framework has to be modified and the National Small Business Act of 1996 further stresses the need for such steps. The process is, however, highly complex, with most of the adjustments requiring action at the local, regional, sectoral or occupational level. During the past few years the process of deregulation has started and some results have already been achieved. Much of the attention now focuses on deregulation at the local authority level. It should, however, also be mentioned that world-wide, deregulation trends are to some extent countered by similarly strong regularity trends coming from stricter environmental, health, labour relations and quality considerations.

Demand-enhancing Support

In the South African scene, where black empowerment is an important element in the SME strategy, there is currently much emphasis on the reorientation of public procurement and big business contracting towards (smaller) black-owned/controlled enterprises. Changes in government and other public sector procurement practices and pressures on big business can create a very effective demand shift towards these SME target groups. At the same time we have only just started to address the supply challenges now facing these empowered enterprises. It will take a

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lot of experimenting, much systematic support and probably also some disillusion to expand SME supplies as fast as the expectations go.

Sustainability of Support Programmes

Concern about the sustainability of support programmes has always been on the agenda of reform planners. Since relatively few comprehensive programmes have so far been initiated and effectively implemented during the past two years, the issue of sustainability has not yet been topical in most of the areas needing support. Thus, in the LBSC-sphere uncertainty about the approach and how to expand the network has so far prevented the disbursement of large amounts by NEPA. Yet, this problem is more the result of inadequate systems and ineffective programme operators, than the lack (or proof) of sustainability.

Concerns about financial sustainability has also spurned the move towards more decentralized programmes, more sector-differentiated approaches and the propagation of greater private-public sector partnerships in the promotion of SMEs.

Given the limited allocation of state funds for SME support in South Africa foreign donor agencies have to date played a major role in the experimentation with new strategies. Yet, in the long run these external resources can only fill a small part of the funds needed for effective support for SMEs.

General Conclusions

South Africa has shown that a concerted, national effort towards a new SME support strategy is possible and that it can pave the way for a quantum leap in perceptions about the role and potential of the SME sector. At the same time the experience of the past three years has shown that national strategies, white papers, presidential conferences and consultative mechanisms are all but a few early steps in the complex, slow and highly disaggregated process of small enterprise promotion.

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The wide gap between SME success patterns (as illustrated by statistical trends and case study evidence) and the actual impact of national SME support activities also suggests that we should not overrate the effect of national strategising. A lot of the current progress of individual SMEs is the result of longer run structural processes like urbanization, education, skill acquisition, inter-generational asset accumulation, local/regional and national/international networking and the spread of joint ventures and business partnerships. In the South African context the shift of political power from white to black may, in the final analysis, be more effective for black SME advancement and black-white business partnerships than any of the focused support strategies.

Thus, we need less general discussion and more exchange of staff interns, more scope for staff training at sister institutions, more detailed programme analyses and far greater emphasis on procedural and operational effectiveness. This should also include open-minded discussions about the day-to-day operational (in)efficiency and pitfalls of government and parastatals departments concerned with SME support. The challenge now is on the HOW rather than the WHAT and WHETHER.