SPEECH BY MINISTER OF SMALL BUSINESS DEVELOPMENT, MS LINDIWE ZULU, ON THE OCCASION OF THE PROCUREMENT INDABA

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1 SPEECH BY MINISTER OF SMALL BUSINESS DEVELOPMENT, MS LINDIWE ZULU, ON THE OCCASION OF THE PROCUREMENT INDABA AUGUST 2015 (DURBAN) Programme Director, Premier of Kwa-Zulu Natal, Mr Senzo Mchunu, MEC for Economic Development, Tourism and Environmental Affair, Mr Michael Mabuyakhulu, MEC for Human Settlement and Public Works, Mr Ravi Pillay Distinguished guests, Ladies and gentlemen I am extremely delighted to be part of the Procurement Indaba. Emerging from this Indaba must be a bold and unequivocal message that says: Together we will utilize procurement as an effective and strategic tool for empowering small businesses and redistributing wealth. We are gathered hear, fully conscious and keenly aware of this sad reality: Big companies have for a long time managed to crowd out small businesses through their financial muscle, cash reserves and economies of scale. For example, It is much easier for big companies to sell products at lower prices and in the process squeeze out small businesses when competing for government procurement opportunities, especially because government considers the lowest price over development considerations when procuring goods.

2 As government, the private sector and other relevant stakeholders we carry a responsibility to stimulate and support the growth and sustainability of the co-operative and small business sector. Together, we must address lack of business opportunities in both the public and private sectors. We must proceed from the premise that supporting small businesses and co-operatives is not a philanthropic gesture on the part of either government or big business. In fact, it is in our collective interest to help grow and sustain small businesses. The growth and sustainability of big business depends on a strong small business sector, both as consumers and suppliers. An inclusive economy that benefits all is also a guarantee for the social stability that is required for business to flourish. We are therefore encouraged that the revised Broad Based Black Economic Empowerment Codes present added opportunity for small enterprises to access the supply chains of large organisations. There are lessons that we can draw from our BRICS partners. The Indian government has effectively subsidised small businesses that do business with the state. In India should a big company out price a small business during a bid, the policy allows small firms to lower their price to match that of the big company, if their price is no more than 15% higher. India also has long had a priority purchasing programme with currently 358 items reserved for purchase by the state from the small business sector. In Brazil, a 2006 law which grants set-asides to small businesses allows small suppliers a 10% cost premium. Among other things the law also

3 gives priority to the sector for all purchases of under reals (last year 72% of these contracts went to small businesses). Recently Brazil s Planning Ministry revealed that between January and December 2014 (last year) the state procured 27% or 16.7 billion reals out of a total of 62.1 billion reals in goods and services from small and micro enterprises. With, at least 42% of South Africa s national budget spent on the acquisition of goods and services, South Africa cannot afford to squander the opportunity this investment affords to support economic recovery, and to ensure that all SMMEs benefits in the growing of the country s economy. The Department of Small Business Development believes that public procurement must be about more than delivering goods and services, and that both Provincial and Local government procurement in particular must be used strategically to employ the services of the locally-sourced suppliers and enterprises to deliver social and economic gains. More specifically, we believe that it must be used to support local growth and local jobs by using local and emerging businesses to keep more of local municipalities money in local economies. In this way we can all benefit from the economic multiplier effects of this investment through the development of local economies. We warmly welcome the progress that provinces like the KZN have made to date by amongst others setting aside 30% of the provincial procurement to SMMEs and Cooperatives. However, sustaining the momentum in driving this progress requires coherent and effective

4 procurement policy and strong leadership both from national, provincial and more importantly from within local governments throughout the nine (9) provinces. Perhaps at this point, we need to confront an unpalatable truth: Among the many reasons for the collapse of small businesses is corruption. Small businesses are the hardest hit by procurement corruption. Their bids or quotations get overlooked by procurement officials because they cannot afford the bribe price. Some of those who get opportunities, it is largely on condition that they have to pay a bribe. This is unsustainable for small businesses because, in essence, they are made to pay tax twice an official tax to SARS and plastic bag tax. One of the key things we must address if we want to build thriving and sustainable businesses is to confront the issue of procurement corruption head-on. Having said that, however, we must caution against painting the public service as inherently corrupt. Indeed the are a few bad apples, but the vast majority of our public servants are people of integrity. State procurement practices show that a number of countries already set aside a certain percentage of state procurement for small businesses (including the Chile, US, Brazil and South Korea). India has a policy requirement which obligates state-owned enterprises and departments from its central government to source 20% of goods and services from small enterprises.

5 Public procurement is increasingly recognised as a key concept that plays a significant role in the successful management of public resources and in the development of SMMEs. For this reason, several countries have become more aware of the importance of procurement as an area vulnerable to mismanagement and corruption, and have thus instituted efforts to integrate procurement in a strategic position of government efforts. While acknowledging that much still needs to be done to make sure that we have equitable procurement for our SMMEs, there is no doubt that considerable progress has been registered over the last two decades. The post-1994 public procurement system primarily aims to be fair, equitable, transparent and cost-effective. Due to the huge problems faced in South Africa, especially because of the country s past inequality, public procurement is of particular significance and has been granted constitutional status. The department was established specifically to support the development and growth of small businesses and co-operatives with a particular focus on improving the entrepreneurial culture and the inclusion of black enterprises in the economic mainstream particularly the designated groups: women, youth and people living disability. Our role is to ensure that SMMEs and Co-operatives are fully developed to supply products and services. In the 2015 State of the Nation Address (SONA), President Jacob Zuma emphasized the big role the Micro, Small and Medium-sized enterprises has in advancing economic development in South Africa. In his speech, he announced government s Ten Point Plan which included unblocking challenges faced by SMMEs.

6 They include access to finance, lack of managerial expertise, and access to market. In order to tackle the access to market challenges, the president announced in the SONA that 30 per cent of state procurement in appropriate sectors and goods would be sourced from SMMEs, cooperatives, and township and rural enterprises. The Department believes that a large-scale black supplier capacity can be collectively created through a supplier diversity programme to give emerging suppliers an access to public sector market. Supplier Diversity is a business strategy that ensures a diverse supplier base in the procurement of goods and services for any business or organization. Supplier Diversity emphasizes the creation of a diverse supply chain that ensures the inclusion of diverse groups in the procurement plans for government and private industry. Diverse Supplier can be defined by common examples used to identify diverse businesses including: Small Micro or Medium Enterprises (SMME), Black owned enterprises (BO), Black-Women Owned Enterprise (BW0) and Designated Groups Owned Enterprise (DGO). As a Department we believe that there are a number of steps that could be considered by all to enhance and increase SMMEs participation in procurement in the South African public sector. The Department has identified procurement opportunities for cooperatives and small enterprises that should be unlocked throughout government spheres. All economic-cluster Departments (both national, provincial and local), government agencies and state-owned enterprises

7 need to negotiate and sign transversal agreements with our department to ensure SMMEs have access to these opportunities. We believe that, through interdepartmental collaboration and coordination, the implementation of the 30% target for public procurement by SMMEs and Cooperatives will ensure increased participation by emerging enterprises into the economy. Local municipalities must ensure that their procurement strategies explicitly recognise the significant benefits of procuring from local small businesses when tendering for goods and services without compromising their legal stipulations and quality of the products and services procured. Public sector procurement at Provincial and Local government should have local economic development strategies that take into account the needs of the existing local economy and inform procurement strategy based on a comprehensive analysis of spend. All government departments across spheres should have mechanisms in place to record and analyze where and with which businesses their money is spent. This should include measuring the size of enterprise medium, small or micro to ensure that the 30% (per cent) set aside is used effectively for the benefit of the designated group (women, youth and people living disabilities). All government spheres and state-owned enterprises must ensure that they have initiatives to support local SMMEs with the tender process and to develop the potential of their local small business supplier base through the full use of available, accessible and local Seda branches.

8 The government must develop the potential to provide detailed, specific and timely feedback to all small businesses that request it in order to improve their bidding capabilities. In addition, municipalities and government departments need to ensure that regular training opportunities and supplier pre-engagement activities are available for small businesses in their area, to ensure that capacity is built ahead of opportunities becoming available and support market shaping. We are aware that when it comes to bidding for the procurement work - SMMEs were historically shut out. Bureaucratic, complex and costly procurement practises invariably favoured the big suppliers and smaller suppliers were essentially disadvantaged from the outset. By failing to create a level playing field for smaller suppliers, government and private sector have, unintentionally, excluded some of the most competitive and innovative suppliers. Working together we can move small businesses and cooperatives forward through procurement! I thank you

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