THE ROLE OF PREFERENTIAL PROCUREMENT IN
PROMOTING HISTORICALLY DISAVANTAGED SMMEs:
EVIDENCE FROM EKURHULENI MUNICIPALITY
Palesa Rantseli
Research report presented in partial fulfilment
of the requirements for the degree of
Master in Development Finance
at the University of Stellenbosch
Supervisor: Dr C. Adjasi
Degree of confidentiality: A
March 2011
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Declaration
By submitting this research report electronically, I, Palesa Rantseli, declare that the entirety of the
work contained therein is my own, original work, that I am the owner of the copyright thereof and
that I have not previously in its entirety or in part submitted it for obtaining any qualification.
P.P. Rantseli
31 January 2011
Copyright © 2011 Stellenbosch University
All rights reserved
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Acknowledgements
I wish to express my sincere gratitude to all who have assisted me in the compilation of this study. I
particularly wish to thank:

Dr Charles Adjasi, for his expert advice, support and guidance;

Ms Debbie Jacobs, for her assistance and support;

Mr Thabo Khanye, the Procurement Manager at Ekurhuleni Municipality, and his colleagues,
for their support, patience and for giving me access to Ekurhuleni Municipality database; and

My family, friends and colleagues, for their support throughout this study.
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Abstract
Small, medium and micro enterprises (SMMEs) play an important role in the economic growth and
development of any economy. They contribute to the goals of growth, equity, job creation and
poverty reduction in different ways. Given the importance of the SMME sector, governments
throughout the world including the South African government, have focused their attention on the
development of this sector to promote economic growth, income distribution and employment
opportunities.
Most SMMEs in South Africa fail due to a variety of reasons, including a lack of access to markets,
which is one of the critical factors for the survival and growth of SMMEs. The government of South
Africa has introduced the Preferential Procurement Policy Framework Act (Act 5 of 2000) to
address the challenge of market access for SMMEs. The Act is aimed at utilising the purchasing
power of government as an instrument of SMME development. SMMEs, especially those owned by
historically disadvantaged individuals, are afforded an opportunity to access markets they would
otherwise find difficult to penetrate.
Given the importance of access to markets to SMMES, the study seeks to analyse the role of
preferential procurement in Local Government with specific reference to Ekurhuleni Metropolitan
Municipality (EMM), as an instrument of promoting the development of historically disadvantaged
SMMEs in South Africa.
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Table of Contents
Declaration
i Acknowledgements
ii Abstract
iii List of Tables
iv List of Figures
v List of Acronyms and Abbreviations
vi CHAPTER 1: INTRODUCTION TO THE STUDY
1 1.1 INTRODUCTION
1 1.2 PROBLEM STATEMENT
2 1.3 RESEARCH OBJECTIVES
3 1.3.1 Overall objective of the study
3 1.3.2 Specific objectives of the study
3 1.4 RESEARCH DESIGN AND METHODOLOGY
3 1.4.1 Population and sample description
3 1.4.2 Data collection
3 1.4.3 Data analysis
4 1.5 SCOPE AND LIMITATIONS OF THE STUDY
4 1.6 DEFINITION OF TERMS
4 1.7 CHAPTER OUTLINE
7 CHAPTER 2: SMALL, MEDIUM AND MICRO ENTERPRISES SECTOR
8 2.1 INTRODUCTION
8 2.2 IMPORTANCE OF SMMES
8 2.2.1 Contribution towards economic growth
8 2.2.2 Job creation
9 2.2.3 Contribution towards skills development
9 2.2.4 Provision of goods and services
9 2.2.5 Contribution towards socio-economic transformation
9 2.3 CONSTRAINTS HINDERING THE SUCCESS OF SMALL BUSINESSES
9 2.4 CONCLUSION
12 CHAPTER 3: A SOUTH AFRICAN PERSPECTIVE OF THE SMME SECTOR
13 3.1 INTRODUCTION
13 3.2 SOUTH AFRICAN POLICY MEASURES TO PROMOTE SMMES
14 3.2.1 The Preferential Procurement Policy Framework Act (Act 5 of 2000)
14 3.2.2 Broad-Based Black Economic Empowerment Act (Act 53 of 2003)
18 3.2.3 Other SMME Legislation
20 3.3 EKURHULENI METROPOLITAN MUNICIPALITY PROCUREMENT PROCESSES
21 3.4 CONCLUSION
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CHAPTER 4: RESEARCH METHODOLOGY
27 4.1 INTRODUCTION
27 4.2 RESEARCH DESIGN
27 4.3 DESCRIPTION OF POPULATION AND SAMPLING FRAMEWORK
27 4.3.1. Population
27 4.3.2 Sample
28 4.4 METHOD OF DATA COLLECTION
28 4.4.1 Approaches to data collection
28 4.5 DATA ANALYSIS
30 4.6 CONCLUSION
30 CHAPTER 5: ANALYSIS AND INTERPRETATION OF EMPIRICAL FINDINGS
31 5.1 INTRODUCTION
31 5.2 PROFILE OF THE RESPONDENTS
31 5.2.1 Forms of business ownership
31 5.2.2 Number of business owners
32 5.2.3 Number of years in operation
32 5.2.4 Number of Employees
34 5.2.5 Location of Businesses
35 5.3 HISTORICALLY DISADVANTAGED INDIVIDUAL STATUS OF THE RESPONDENTS 35 5.3.1 Business ownership by Historically Disadvantaged Individuals
35 5.3.2 Historically Disadvantaged Individuals Status of the businesses
36 5.4 ACCESSIBILITY OF PREFERENTIAL PROCUREMENT CONTRACTS TO SMMES
37 5.4.1 Access to information about EMM preferential contracts
37 5.4.2 Ease with which information about EMM preferential contracts is accessible
37 5.2.3 Access to formal quotation forms
38 5.5 MARKET ACCESS
40 5.5.1 Sectors and services where opportunities exist for SMMEs through EMM preferential
procurement
40 5.6 PROPORTION OF REVENUES
PREFERENTIAL CONTRACTS
5.6.1 Proportion of revenues generated by SMMEs from EMM preferential contracts
41 5.6.2 Number of contracts secured by respondents from EMM
41 5.7 THE ROLE OF PREFERENTIAL PROCUREMENT
42 5.8 CONCLUSION
43 GENERATED
BY
SMMES
FROM
EMM
41 CHAPTER 6: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
44 6.1 INTRODUCTION
44 6.2 OBJECTIVES OF THE STUDY
44 5.2 OVERVIEW OF THE STUDY
45 6.3 SHORTCOMING OF THE STUDY
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6.4 SUMMARY OF THE RESULTS OF THE EMPIRICAL STUDY
46 6.4.2 Historically Disadvantaged Individual status of the respondents
46 6.4.3 Accessibility of preferential procurement to SMMEs
46 6.4.4 Sectors and services where opportunities exist for SMMEs
47 6.4.5 Proportion of revenue generated by SMMEs from EMM
47 6.4.6 The role of preferential procurement
47 6.5 CONCLUSIONS AND RECOMMENDATIONS
47 6.6 FURTHER RESEARCH
48 REFERENCES
49 APPENDIX A: COVERING LETTER FOR THE QUESTIONNAIRE
52 APPENDIX B: QUESTIONNAIRE
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List of Tables
Table 1.1: Classification of SMMEs
6 Table 3.1: The Generic Scorecard
19 Table 3.2: Summary of EMM Procurement Processes
22 Table 3.3: Specific goals approved by EMM
24 Table 3.4: Contracts awarded by EMM in the period July 2009–June 2010
26 Table 5.1: Number of years in operation
33 Table 5.2: Descriptive information for the number of years in operation
34 Table 5.3: Number of Employees
34 Table 5.4: Number of contracts secured from EMM
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List of Figures
Figure 5.1: Forms of business ownership ....................................................................................... 32 Figure 5.2: Number of business owners ......................................................................................... 32 Figure 5.3: Number of years in operation ....................................................................................... 33 Figure 5.4: Number of employees ................................................................................................... 34 Figure 5.5: Location of business ..................................................................................................... 35 Figure 5.6: Ownership by historically disadvantaged individuals .................................................... 36 Figure 5.7: Historically disadvantaged individual status (multiple responses possible) .................. 36 Figure 5.8: How respondents accessed information about EMM preferential contracts ................. 37 Figure 5.9: Ease of access to information about EMM preferential contracts ................................. 39 Figure 5.10: Access to formal quotation forms ............................................................................... 38 Figure 5.11: Ease with which respondents understood information required the quotation forms...40 Figure 5.12: Ease with which respondents met the requirements of EMM contracts ..................... 39 Figure 5.13: Sectors and services where opportunities exist for SMMEs through EMM preferential
procurement .................................................................................................................................... 40 Figure 5.14: Proportion of revenues generated by SMMEs from EMM preferential contracts ........ 41 Figure 5.15: Number of contracts secured from EMM .................................................................... 42 Figure 5.16: Do preferential procurement contracts assist businesses to grow.............................. 43 Stellenbosch University http://scholar.sun.ac.za
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List of Acronyms and Abbreviations
BEE
Black Economic Empowerment
BBBEE
Broad-Based Black Economic Empowerment
DTI
Department of Trade and Industry
EMM
Ekurhuleni Metropolitan Municipality
HDI
Historically Disadvantaged Individuals
ISBDS
Integrated Small Business Development Strategy
LED
Local Economic Development
RSA
Republic of South Africa
SMME
Small, Medium and Micro Enterprises
UNICITRAL
International Trade Law Model Law Model Procurement of Goods, Construction
and Services
USB
University of Stellenbosch Business School
VAT
Value Added Tax
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CHAPTER 1:
INTRODUCTION TO THE STUDY
1.1
INTRODUCTION
Since the attainment of political liberalisation in 1994, the South African government has made
great efforts in putting in place policies aimed at addressing social challenges facing the country.
Nevertheless, vast racial and gender inequalities in wealth distribution and access to wealth,
income, skills and employment have still persisted, arising from the system of apartheid which
skewed business ownership patterns on racial lines.
In order to attain the objectives of economic growth through increasing competitiveness,
employment generation and income redistribution, policy attention in South Africa has increasingly
focused on the promotion of the country’s small, medium and micro enterprises (SMMEs)
economy, (Berry, Blottnitz, Cassim, Kesper, Rajaratnam & Seventer, 2002). It was against this
background that the small business sector has played an increasingly important role in South
Africa’s economic growth and development. The focus has been on addressing constraints that
hinder the development of SMMEs and on SMMEs owned and controlled by historically
disadvantaged individuals with the aim of encouraging equality of opportunities for all citizens of
the country.
Amongst other constraints, the South African SMME strategy recognises access to markets as one
of the growth constraints facing SMMEs in South Africa, (DTI, 2003:10). The strategy aimed to
improve the access small businesses has to domestic and foreign markets by improving access to
public and corporate contracts. Opening state markets to SMMEs was therefore regarded as a
major step in resolving this constraint by the South African government. This led to the government
putting into law the Preferential Procurement Policy Framework Act (Act 5 of 2000).
The objective of the Preferential Procurement Act is to utilise the purchasing power of government
as an instrument of SMME development. Preferential procurement refers to the acquisition of
goods and services by organs of state. The Act prescribes that a preference point system must be
used when organs of state award contracts. Up to 80 per cent of the points must be awarded for
price and quality of goods and services, depending on the amount of the contracts. The remaining
20 per cent must be awarded for achieving specific goals, which include amongst others,
contracting enterprises wholly or partially owned by previously disadvantaged people (including
women and disabled people), job creation and SMME support. Preferential procurement is,
therefore, a measure designed to widen local market access for all businesses wholly or partially
owned by the historically disadvantaged communities of South Africa. The aim of the Act is to
encourage equality of opportunities for all citizens of the country.
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Given the consensus by the different researchers about the importance of SMMEs and access to
markets for their growth and competitiveness, this study seeks to analyse the role of preferential
procurement in Local Government with specific reference to Ekurhuleni Metropolitan Municipality
(EMM), as an instrument aimed at promoting the development of historically disadvantaged
SMMEs in South Africa. Local Governments as organs of state have been assigned the task of
promoting local economic development (LED). One of the ways that they achieve this objective is
through the development of SMMEs, thus the focus of the study.
The purpose of this chapter is, therefore, to present an overview of the research report by
providing background to the research. The following sections of the chapter will discuss the
problem statement of the study and its objectives, the research methodology, the scope and
limitations of the study and definition of terms.
1.2
PROBLEM STATEMENT
Small and medium businesses play an important role in the economic growth and development of
any economy. They contribute to the goals of economic growth, economic empowerment, job
creation and poverty reduction in different ways (DTI, 2003:7). Given the importance of the SMME
sector, governments throughout the world, including the South African government, have focused
their attention on the development of the SMME sector to promote economic growth, income
distribution and employment opportunities.
Most SMMEs in South Africa fail due to a variety of reasons, namely: lack of education and
experience by the owners; lack of entrepreneurial culture; lack of access to finance; and most
importantly, lack of access to markets. Access to markets is one of the critical factors for the
survival and growth of SMMEs. The study by (Berry et al., 2002:85) argues that access to markets
is a critical component of a competitive economy and that SMMEs show little signs of growth when
aggregate demand is shrinking.
Through preferential procurement, SMMEs are afforded an opportunity to access markets they
would otherwise find difficult to penetrate. The concern also lies in the level at which historically
disadvantaged communities participate in the SMME sector as the majority of South Africans have
been identified as falling under this category.
From the foregoing it is evident that there is a need to analyse the role of preferential procurement
as an instrument for promoting the development of historically disadvantaged SMMEs. It is further
important to establish the accessibility of these preferential contracts to SMMEs owned by
historically disadvantaged individuals and lastly to assess the contribution by organs of state like
EMM, in promoting SMMEs owned by historically disadvantaged individuals through preferential
procurement. This is the research gap that this thesis aims to fill.
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1.3
1.3.1
RESEARCH OBJECTIVES
Overall objective of the study
The overall objective of the study is to analyse the role of preferential procurement in Local
Government with specific reference to EMM, as an instrument of promoting historically
disadvantaged small businesses in South Africa. This is done by firstly investigating the process of
public procurement reform and the objectives of preferential procurement, followed by an analysis
of EMM preferential procurement processes.
1.3.2
Specific objectives of the study
The specific objectives of the study are the following:
1.3.2.1 to establish accessibility by SMMEs to EMM preferential procurement contracts;
1.3.2.2 to identify sectors where opportunities exist for SMMES, through preferential procurement
with the Ekurhuleni Metropolitan Municipality; and
1.3.2.3 to establish the proportion of revenue generated by SMMEs from the Ekurhuleni
Metropolitan Municipality through preferential procurement.
1.4
RESEARCH DESIGN AND METHODOLOGY
An analytical review was done using secondary sources of data collection including books,
academic journals, newspapers, and Government Gazettes.
To complement this information, structured questionnaires were distributed to SMMEs owned by
historically disadvantaged individuals, who have accessed preferential contracts from EMM.
1.4.1
Population and sample description
A random sampling of 50 SMMEs was drawn from the EMM database. Ten of these faxes, emails
and telephone numbers of the SMMEs could not go through and as a result, only 40
questionnaires were distributed to SMMEs owned by historically disadvantaged entrepreneurs in
Ekurhuleni Metropolitan Area. A random sample consisted of SMMEs that had accessed contracts
to the value of between R30 000 (VAT included) and R 200 000 (VAT included) from EMM in the
period, July 2009 to June 2010. In the year under review, EMM awarded preferential contracts
between R30 000 and R200 000 to about 159 SMMES. The sample of 40 SMMEs represents 25
per cent of the population.
1.4.2
Data collection
Data collection commenced on 18 November 2010 and ended on 18 December 2010. The
questionnaires formed a major part of the measuring instruments and were designed using closeended questions aimed at establishing the role of preferential procurement on SMMEs, and the
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accessibility of these contracts to SMMEs owned by historically disadvantaged individuals, as well
as assessing the proportion of revenues generated by SMMEs from preferential contracts. Data
obtained from the structured questionnaires is qualitative in nature. (Refer to Annexure B)
1.4.3
Data analysis
Primary data was analysed using qualitative descriptive statistics methods of organising and
presenting data such as frequency tables, graphical techniques, cross-tabulations or other
statistical techniques using the Excel statistics computer program.
1.5
SCOPE AND LIMITATIONS OF THE STUDY
The unit of analysis for the study is limited to SMMEs owned by historically disadvantaged
individuals who have accessed contracts with the value between R30 000 (VAT included) and
R200 000 (VAT included) from the EMM in the period July 2009 to June 2010. The study further
limited SMMEs to those located in the Ekurhuleni Metropolitan Area.
1.6
DEFINITION OF TERMS
Ekurhuleni Metropolitan Municipality – Ekurhuleni is a metropolitan municipality that was
established in 2000. It forms the East Rand region of Gauteng, South Africa. It is one of the six
districts of Gauteng province. The municipality includes areas such as Alberton, Benoni, Boksburg,
Brakpan, Edenvale, Germiston, Kempton Park, Nigel and Springs.
Ekurhuleni has a total land area of 2 000km² that accommodates a total population of 2.5 million
(Census, 2002). This constitutes 5.6 per cent of the national population and makes up 28 per cent
of Gauteng's population. It contributes 7 per cent to the country's spending power and 7.4 per cent
to the nation's production.
Ekurhuleni has a network of roads, airports, rail lines, telephones, electricity grids and
telecommunications - a first world infrastructure supporting a well-established industrial and
commercial complex. Ekurhuleni can in fact be regarded as the transportation hub of the country.
The municipality is home to the OR Tambo International Airport, the busiest airport in Africa.
Four major concentrations of historically disadvantaged communities exist in the area. All of these
communities are situated on the outskirts of the main urban area and are in the areas furthest
removed from where most of the job opportunities are situated. These four communities are:
Tembisa; the Katlehong, Thokoza and Vosloorus (Katorus) complex; the Kwathema, Tsakane and
Duduza (Kwatsaduza) complex; and the Daveyton/Etwatwa complex. Together they accommodate
approximately 65 per cent of the total population of the Metropolitan area, of which 24 per cent are
situated in the Katorus complex, 14 per cent in the Tembisa and Kwatsaduza complexes
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respectively, and approximately 12 per cent in the Daveyton complex (Ekurhuleni Metropolitan
Municipality, 2007; Ekurhuleni Metropolitan Municipality, 2010).
Historically Disadvantaged SMMEs – These are SMMEs owned by persons historically
disadvantaged by unfair discrimination on the basis of race, gender or disability, (Preferential
Procurement Policy Framework, Act 5 of 2000:4).
Preferential Procurement – This applies to all contracts for the provision of goods and services to
be awarded by organs of state. According to the Preferential Policy Framework Act (Act 5 of 2000),
organs of state are defined as national or provincial departments, municipalities, parliament, the
provincial legislature or any other institution included in the definition of the ‘organ of state’ in the
constitution.
Small, medium and micro enterprises - The definition of SMMEs according to the South African
Parliament’s White Paper on National Strategy for the Development and Promotion of Small
Business in South Africa, 1995 is set out below.
Small Enterprises – They tend to be more established than micro enterprises and their business
practices tend to be more complex. Most often, the enterprise has outgrown direct supervision by
the entrepreneur, and has developed a secondary co-ordinating mechanism distinguishing it from a
micro enterprise. In employment terms, small enterprises employ from 11 to 50 paid workers. They
have a total turnover of between R2 and R6 million and gross assets of up to R1.75 million.
Medium-sized Enterprises – The number of employees is 100, except for mining, electricity,
manufacturing and construction where the limit is 200 employees. They have a total annual
turnover of between R6 million and R25 million, depending on the industry sector, and total gross
assets of up to R7.5 million. Enterprises are still owner-managed, but have a decentralisation of
power to an additional management layer, and also a division of labour and functional
differentiation that distinguishes them from small and micro enterprises.
Micro Enterprises – These are the smallest enterprises in the small business sector. They can be
found in both formal and informal economies. Because of their size, they do not usually qualify for
VAT registration. They have informal accounting and operation procedures. They are enterprises
that are self-managed with no employees up to an enterprise with fewer than 10 paid employees
(except for mining, electricity, manufacturing and construction where the limit is 20 employees).
The South African government has also defined the SMME sector according to various factors
namely, ownership, employment size and formality (National Small Business Act (Act 102 of
1996:17) resulting in a classification of business as shown in Table 1.1 below:
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Table 1.1: Classification of SMMEs
SECTOR OR
SUB-SECTOR IN
ACCORDANCE
WITH
INDUSTRIAL
CLASSIFICATION
SIZE OR
CLASS
TOTAL FULLTIME
EQUIVALENT
OF PAID
EMPLOYEES
(LESS THAN)
TOTAL
ANNUAL
TURNOVER
(LESS THAN)
TOTAL GROSS
ASSETS VALUE
(FIXED
PROPERTY
EXCLUDED)
(LESS THAN)
Agriculture
Medium
Small
Micro
100
50
5
R4
R0.40
R4
R2
R0.15
Mining and
quarrying
Medium
Small
Micro
200
50
5
R30
R7.50
R0.15
R18
R4.5
R0.10
Manufacturing
Medium
Small
Micro
200
50
5
R40
R0.40
R0.15
R15
R3.75
R0.10
Electricity, gas
and water
Medium
Small
Micro
200
50
5
R40
R0.40
R0.15
R15
R3.75
R0.10
Construction
Medium
Small
Micro
200
50
5
R20
R5
R0.15
R4
R1
R0.10
Retail and motor
trade and repair
services
Medium
Small
Micro
100
50
5
R30
R15
R0.15
R5
R2.5
R.10
Wholesale trade,
commercial
agents and allied
services
Medium
Small
Micro
100
50
5
R50
R25
R0.15
R8
R4
R.10
Catering,
accommodation
and other trade
Medium
Small
Micro
100
50
10
R10
R5
R0.15
R2
R1
R.10
Transport, storage
and
communication
Medium
Small
Micro
100
50
5
R20
R10
R0.15
R5
R2
R.10
Finance and
business service
Medium
Small
Micro
100
50
5
R20
R10
R0.15
R4
R2
R.10
Community, social
and personal
services
Medium
Small
Micro
100
50
5
R10
R5
R0.15
R5
R2.5
R.10
Source: National Small Business Act (1996:17).
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1.7
CHAPTER OUTLINE
The structure of this research report is set out below.
Chapter 1
The first chapter provides the purpose and background of the study. This is followed by the
problem statement and the overall objectives of the study. Thereafter, the specific objectives of the
study, the research methodology, definition of terms and the limitations of the study are discussed.
Chapter 2
The chapter will focus on the theoretical background relating to SMMEs followed by the role and
importance of the sector as well as a discussion of factors that hinder the development of SMMEs.
Chapter 3
The chapter will deal with the SMME sector in the South African context including the role that
government plays in promoting the sector. Particular focus on the role of government will be on
SMME legislation, and other legislation supporting SMMEs such as the Preferential Procurement
Act (Act 5 of 2000) and Broad-Based Black Economic Empowerment Act (Act 53 of 2003).
Chapter 4
This part of the paper will discuss the research methodology, analysis and findings of the study.
Specific topics to be researched include the research area, the data and sampling design and the
actual methods that were used to collect and analyse data.
Chapter 5
This chapter presents the data analysis and provides a discussion of the results in terms of the role
of preferential procurement on SMMEs owned by historically disadvantaged individuals who have
accessed contracts with the value of between R30 000 (VAT included) and R 200 000 (VAT
included) from Ekurhuleni Metropolitan Municipality in the period July 2009 to June 2010.
Chapter 6
The chapter provides the conclusion and recommendations of the study.
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CHAPTER 2:
SMALL, MEDIUM AND MICRO ENTERPRISES SECTOR
2.1
INTRODUCTION
This chapter will focus on the theoretical background relating to SMMEs followed by their role and
importance, as well as the constraints hindering their development.
Given the vast amount of literature on SMMEs, this chapter should not be regarded as a
comprehensive review but merely as serving to highlight the important issues relating to the
research topic. The chapter draws upon previous studies dealing with both specific and general
issues relating to SMMEs. The vast majority of studies on SMMEs are empirical in nature and in
general, surveys have been used to generate basic information. These studies have not sought to
test any hypotheses but instead have described the characteristics of small enterprises.
A number of features distinguish small businesses from large firms.
These enterprises are
normally owner-managed and the owner-managers usually possess general rather than specific
expertise. In the South African context, the definition of SMMEs focuses on the number of workers
a business employs ranging from 100 to 200 paid employees, and with a particular annual turnover
and gross assets (refer to the definition of small and medium enterprises in Chapter 1).
2.2
IMPORTANCE OF SMMES
There is general agreement that small businesses have played a crucial role in the process of
economic development in many countries. The small business sector represents a statistically
significant proportion of the world economy. For example, they represent 99.7 per cent of all
employers in the United States and 96 per cent of all business in non-agricultural industries in
Australia. Japan’s SMME sector accounts for the bulk of the country’s business establishment,
providing vital support for employment, for regional economies and, by extension, for the day-today life of the Japanese people (Morrison, Breen & Ali, 2003:417). The next section presents some
of the positive attributes of SMMEs.
2.2.1
Contribution towards economic growth
In general, the advantages claimed for SMMEs are various including, their contribution towards
economic growth. According to Green, Kirkpatrick and Murinde (2005:33) and the DTI (2003:7)
SMMEs comprise a high percentage of businesses and account for between 30 per cent and 60
per cent of the GDP of many countries.
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2.2.2
Job creation
SMMEs are also a significant source of employment. Given the failure of the formal and public
sector to absorb the growing number of jobseekers, increasing attention in many countries have
focused on entrepreneurship and new firm creation as a source of job creation. Small businesses
utilise labour-intensive technologies and thus have an immediate impact on employment
generation (Berry & Levy, 1994 cited by Green et al., 2005:333); (DTI, 2003:7). Olawale and
Garwe (2010:729) further add that one of the best ways to address unemployment is to leverage
the employment creation potential of small businesses and to promote their development. The
study by Storey, (1994) cited by Davidsson et al., (2002:333) further argue that smaller firms grow
more than large firms and therefore have greater job creation opportunities.
2.2.3
Contribution towards skills development
The other positive attribute of SMMEs is their contribution towards skills development. According to
Nixson and Cook cited by Green et al., (2005:334) SMMEs enhance the acquisition of managerial,
marketing, financial and technical skills through training and ‘learning by doing’.
2.2.4
Provision of goods and services
SMMEs further promote entrepreneurship and innovation and contribute towards the production of
appropriate goods and services. Provision of these goods and services may extend to foreign
customers thereby contributing to overall export performance, (Berry et al., 2002:4). The study by
Olawale and Garwe (2010:729) further found that as an important source of innovation, new firms
bring competitive pressure to bear on established firms. They compete against large companies
and improve the nature of competition in the competitive environment.
2.2.5
Contribution towards socio-economic transformation
Furthermore, SMMEs contribute towards socio-economic transformation of many countries.
Promotion of SMMEs has become a political necessity, as they are a means of bringing social
change; equitable distribution of employment and income generating opportunities; exploring the
entrepreneurial talents; empowering of marginalised segments of the population; improving
community’s standard of living; creating conditions for sustainable livelihoods; and eliminating
conditions of extreme poverty (Berry & Levy, 1994 cited in Green et. at., 2005:334; DTI, 2003:7).
2.3
CONSTRAINTS HINDERING THE SUCCESS OF SMALL BUSINESSES
The success of small businesses has been the subject of a great deal of analysis (Everett &
Watson, 1998; Lussier & Pfeifer, 2001) cited by Lighthelm (2004:2). Success can be measured
based on different variables, including turnover, profits, profit margins, assets and employment.
According to Lighthelm (2008:369), factors that lead to business success can be grouped into
three categories namely, economy-based, industry- or sector-based and firm-based.
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Economy-based factors are associated with national economic variables related to the state of the
economy, such as the specific phase of the business cycle, growth policies and economic
environment created by the national government for business growth. Industry-based factors are
associated with the sphere of the industry in which the business operates, and can relate to supply
and demand factors inherent in the sector such as ease of entry and the degree of
competitiveness, amongst other things. Firm-based factors are those internal to the business in the
form of the availability of resources, especially entrepreneurship and the effective use of resources
to achieve favourable outcomes. Industry- and economy-based factors are of an external nature
(exogenous) and firm-based are more internal to the business (endogenous).
Many studies have been conducted regarding the factors that contribute to SMMEs failure. Nixon
and Cook cited by Green et al., (2005:339), argue that SMMEs suffer from a number of
weaknesses that may well constrain their ability to survive and grow. The study by Rwigema and
Karungu (1999) further concluded that typical problems hampering SMMEs everywhere include
constraints on marketing, financing, lack of information and training. They argued that these
shortcomings inhibit competitiveness and imply a limited ability of SMMEs to grow beyond
localised markets.
Empirical research has also shown that factors such as human capital of the owner manager, firm
age and size, location, investment in information technology, the cost of production and
industry/market that the business serves are related to its growth rates (Olawale and Garwe,
2010:731). The results of the study by Davidsson et al., (2002:332) further showed that business
age and size are related to its growth rate. Younger firms grow more rapidly than older firms and
smaller businesses (size) grow more than larger businesses. The study by Johnson, Conway and
Kattuman (1999:106) argued that aging businesses may run out of corporate energy, an argument
which can be reconciled by the nonlinear relationship between age of the business and growth,
with the relationship being positive.
The growth constraints identified in the literature can be grouped into two categories: those of an
internal nature (entrepreneurship, management) and those of an external nature, for example,
(access to resources, exploitation by larger enterprises (Schmitz, 1982:430). Furthermore,
according to Mintzberg (1989) cited in Clover and Darroch, (2005:240) barriers to SMME survival
and growth are likely to be faced in all four functional areas of the business operation namely
management, operations, finance, marketing, and may be directly related to the size and start-up
conditions of the business.
Management skills: Critical to the success of business is the management knowledge and that of
staff, so as to add value to production and services rendered by the business. The research by
Morrison et al., (2003:418) regards the human factor as being the overwhelming force that
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determine whether or not the business will prosper. They propose that small business growth is
based on clear, positively motivated business intentions and actions on the part of the owner
manager to achieve the desired outcome. The human capital of the owner-manager and that of
staff therefore has a positive effect on growth of the business, (Johnson et al., 1999:110).
Specialised management is often rare in small businesses, with only one or very few persons
performing a wide variety of tasks: production, administration, marketing, and many other
functions. In some cases, businesses fail because of the lack of skills necessary for running a
business as owners often have to multi-task. Owner-managers may be good in one area of the
business such as having the technical skills but may be deficient in other operations areas to run
the business efficiently. The research by Herrington and Wood (2003) cited in Olawale and Garwe
(2010:731) points out that lack of education and training has reduced the management capacity of
new firms in South Africa. This is one of the reasons for the low level of entrepreneurial creation
and the high failure rate of new venture.
Access to finance: The other challenge hindering the growth of SMMEs is access to credit for startup, working capital and expansion of small businesses. The availability of resources is important
for business development and enables SMMEs to secure the necessary expertise and raw
materials to put entrepreneurial ideas into practice, to be competitive, to survive during
unfavourable conditions and to grow (Robertson, 2003:313).
Despite a wide range of finance options, most studies have shown the significance of access to
finance to be a constraint to SMME development (Rogerson, 2008:63). Commercial banks are the
main sources of finance for SMMEs but history has shown that these banks are reluctant to finance
small businesses due to the lack of collateral, lack of available credit track record and their high
risk nature compared to bigger firms as small businesses do not have significant assets to secure
the debt in their early years of establishment. According to Akhtar (1997:1472), banks have further
been reluctant to finance SMMEs due to high transaction costs and the risk of default associated in
financing them.
Access to markets and cost of production: The study by Nixon and Cook cited by Green et al.,
(2005:339) further argues that imperfect markets for the purchase of inputs and the sale of outputs
due to monopolistic structures represent another hindrance to the success of SMMEs. In their
study, Berry et al., (2002:85) further argue that access to product markets is a critical component of
a competitive economy. Entry to product markets naturally depends on the extent to which both
regulatory and structural barriers are not biased against potential clients, and in particular small
firms in favour of incumbent or monopolistic firms. They add that the government has an important
role to play in ensuring, via a range of policy instruments that those firms, that are able to compete
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do not encounter disadvantages by firms that control distributional chains, or entry barriers are
particularly high due to collusion.
Location and industry: Location is also noted by as an important factor to business success since
firms that are located in places where there are no resources or markets for their products will not
grow as rapidly as firms located in better locations with more markets and resources. Industrial
sector and markets have accordingly been found to affect business growth. Growth rates vary by
industrial sector and/or market. Different sectors have been found to grow differently, and there is
evidence revealing different growth rates of firms in different sectors (Storey, 1994), cited in
Davidsson et al., (2002:332). The location of the business and the sector in which it operates, are
both crucial for its success and growth.
Infrastructure: In other cases, small businesses may fail due to lack of that infrastructure which is
necessary for business survival and growth. Availability of infrastructure such as water, electricity,
serviceable roads and telecommunications has a positive impact on the growth of a business. If
such infrastructure facilities are absent or deficient, the chances of small businesses succeeding
are very slim.
2.4
CONCLUSION
This chapter has shown that SMMEs have played an important role in the economic development
of many countries. Amongst other positive attributes, the chapter has shown that SMMEs are
important for their contribution towards economic growth, job creation, the development of skills,
provision of goods and services and stimulation of economic competition as well as contributing
towards socio-economic transformation. These positive attributes have led to many governments
including the government of South Africa, initiating interventions aimed at promoting and
developing the SMME sector. These interventions are aimed at addressing both the external and
internal constraints hindering the development of SMMEs and thus contributing towards the
success, growth and sustainability of SMMEs.
The next chapter will discuss SMMEs in the South African context and initiatives that the
government of South Africa has put into place to support and promote the SMME sector. Particular
attention will be paid to initiatives that seek to address the challenge of access to market, which
has been identified as one of the major constraints hindering the success of SMME development in
South Africa.
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CHAPTER 3:
A SOUTH AFRICAN PERSPECTIVE OF THE SMME SECTOR
3.1
INTRODUCTION
As mentioned in the previous chapter, governments throughout the world have focused on the
development of the SMME sector to promote economic growth, income distribution and
employment opportunities.
As in the rest of the world, South African SMMEs play a tremendous role in the social and
economic development of the country. According to the Ntsika Annual Review (2000:111) in South
Africa, SMMEs constitutes 97.5 per cent of all businesses. Diedrich (2001:61) further adds that the
sector generates 48 per cent of the gross domestic product, contributes 42.7 per cent of total value
salaries and wages paid in South Africa and employs 54.5 per cent of all formal private sector
employees. The study by Rwigema and Karungu (1999) supports the statistics and adds that, in
South Africa, about 90 per cent of formal businesses are thought to be small, micro and medium.
This excludes informal business and survivalist activities.
South Africa suffers from a high rate of unemployment with an official estimate of approximately
24 per cent (Statistics South Africa, 2009). One of the strategies that the government has adopted
in addressing these high levels of unemployment is to leverage on the employment generating
potential of SMMEs. According to Foxcroft et al., (2002:16) start-up businesses are estimated to
have created 140 000 jobs and new firms are estimated to have created nearly one million jobs in
South Africa between January 1999 and July 2002.
Finmark Trust (2006:6) further adds that, for various reasons, South Africa’s large businesses have
not been creating jobs on the scale needed to lower the unemployment rate. In the twenty-year
period from 1985 – 2005, no more than 10 per cent of all new employment positions were
produced by large established firms. This is in line with previous empirical research, which showed
that age is inversely related to growth. That is, older firms grow more slowly than younger firms,
(Storey, 1994 cited by Davidsson et al., 2002:333).
To address the challenge faced by SMMES concerning access to markets, in the 1995 President’s
Conference, the South African government resolved to use the purchasing power of government
as an instrument for SMME development (Ntsika, 1997:1).
This is in line with the review of Berry et al., (2002:85) that if demand is a constraint because of the
concentration in product markets, there is a great deal that government can do directly to ensure
better access by SMMEs to product markets. They further add that public policy can help in various
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ways including active competition policy to level the playing field, or indirect interventions such as
procurement policy.
Despite studies that have been conducted on government preferential procurement, consensus
has not been achieved with regard to understanding the contribution and accessibility of
preferential procurement contracts to historically disadvantaged SMMEs, and hence the
importance of this study.
This chapter will therefore focus on the SMME sector in the South African context. The chapter will
discuss the role of government in promoting the development of the sector. Particular focus will be
on SMME legislation in general and other legislation supporting SMMEs with a particular focus on
access to markets such as, the Preferential Procurement Act (Act 5 of 2000) and the Broad-Based
Black Economic Empowerment Act (Act 53 of 2003).
3.2
3.2.1
SOUTH AFRICAN POLICY MEASURES TO PROMOTE SMMES
The Preferential Procurement Policy Framework Act (Act 5 of 2000)
Other research studies have identified the significance of developing an appropriate regulatory
environment for small enterprise development. The significance of regulation has been a
continuous thread in South African policy discussion about the development of the SMME
economy for more than a decade and this is recognised most clearly in the Integrated Small
Enterprise Development Strategy of the Department of Trade and Industry (Rogerson, 2008:62).
Amongst other initiatives, the South African government put into law the Preferential Procurement
Policy Framework Act (Act 5 of 2000) to address the challenge of access to markets to SMMEs.
The objective of the Act is to give effect to section 217 (3) of the constitution which prescribes that
a framework within which preferential procurement must be implemented. Section 217 of the
constitution requires that when South African government officials procure goods and services,
they must do so within a system that is fair, equitable, transparent, competitive and cost-effective.
The Preferential Procurement Policy Framework Act requires the accounting officers and
accounting authorities (the board or other governing body or where there is no board or governing
body, the chief executive officer) in organs of state to conduct their procurement within this
overarching framework (Watermeyer, 2003:11).
Synonyms for procurement are to obtain, acquire, buy or purchase. According to Watermeyer,
Letchmiah and Mnikati (2000:11), procurement is the process which creates, manages and
terminates contracts. Procurement as such is concerned with: establishing and documenting what
is required; inviting enterprises to bid or sent quotations for the provision of goods and services;
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awarding contracts to successful service providers; monitoring that goods or services that were
contracted are indeed provided; and paying contractors for executing their contracts.
In the South African government procurement system, the Preferential Procurement Policy
Framework Act specifies how government procurement officials are obliged to award contracts. It
creates a points system for the evaluation and adjudication of bids in terms of which points are
awarded based on price, quality and technical considerations and the attainment of specific goals
for preference purposes. This is done within a system that is fair, equitable, transparent,
competitive and cost-effective. All these principles always find application when organs of state
issue contracts, but the weight attached to each principle will differ depending on the
circumstances (Bolton, 2005:56 cited by Pauw & Wolvaardt, 2009:68).
In the South African government procurement system, an attempt has been made to strike a
balance in quantitative terms between equitableness, cost-effectiveness and competitiveness.
According to Pauw and Wolvaardt (2009:68), the South African government has found a way to
harmonise all the criteria structurally, with only the value of the weights remaining an open
question.
This is achieved by (a) an open functionality formula determined by the purchasing institution for
every tender, and (b) a prescribed set of price formulas. Furthermore, a distinction is made
between smaller and larger tenders. The formula either has the parameters of 90 and 10 or 80 and
20 (Pauw and Wolvaardt, 2009:80). The parameters represent weights between the criteria of
equitableness and price in the awarding of public tenders. The price component adequately
represents the component of cost effectiveness from a purchasing point of view. If minimum
specifications and functionality requirements are satisfied, price becomes a valid proxy for cost
effectiveness from a purchasing point of view (Pauw and Wolvaardt, 2009:82).
The Act introduced what has become to be known as the “90/10 and 80/20 rules”, (Jack & Harris,
2007:18). If a contract is above R500 000, it must be awarded based on the 90 per cent between
traditional consideration based on prices, quality and technical considerations of goods and
services and price. The other 10 per cent must be awarded to specific goals, which may allow only
enterprises that have prescribed characteristics to compete for contracts or portions thereof, which
have been reserved for their exclusive execution. These are sometimes referred to as “set asides”,
and include contracting with persons or categories of persons who are historically disadvantaged
by unfair discrimination on the basis of race, gender or disability, or implementing programmes of
the Reconstruction and Development. Contracts below R500 000 are evaluated using 80/20 rule,
where technical considerations and price are measured at 80 per cent and specific goals
considerations at 20 per cent.
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The four-price formula enables officials to calculate points in accordance with the provisions of the
Act. If a bidder offers the lowest price and achieves full preference points, the bid will score the
maximum of 100 points for price. Other bidders will score fewer points commensurate with their
offers in terms of price and their number of preference points. For smaller contracts, the affirmative
action impact is stronger (20%) than for bigger contracts (10%), (Pauw and Wolvaardt, 2009:82).
Preference points are awarded in the first instance on the grounds of the make-up of persons
involved in a bid as individuals, shareholders or managers, to level the playing field. Although the
Act stipulates historically disadvantaged individuals and other categories of preference such as the
Reconstruction and Development Programme, organs of state are free to decide on the
composition of the preference points, if at least one point is awarded for historically disadvantaged
individual (HDI) status. Other goals that may be taken into account in terms of paragraph 2
(1)(d)(ii) of the Act, include the promotion of South African owned enterprises, the promotion of
SMMEs and the upliftment of local communities through various measures, (Pauw and Wolvaardt,
2009:82).
According to Watermeyer et al., (2000:14) procurement when used as an instrument of BroadBased Black Economic Empowerment (BBBEE) creates demand for the services of black
businesses irrespective of size, age or sector focus. As such, procurement creates access to
markets that these businesses would otherwise not be able to penetrate. The authors insist that
supply side interventions such as skills, access to information, legislative and regulatory
impediments and access to finance, are required to ensure that demand is balanced by supply.
Furthermore, Bates and Williams (1996:295-297) discussed how damaging it can be for small firms
to rely heavily on sales to the state. They argued that selling to government has several
drawbacks. The study revealed that firms heavily reliant upon government contracts are more likely
to discontinue operations than those for which government sales represent less than 25 per cent of
total sales. Their study further revealed that firms selling to government have the same survival
prospects as those not selling to government. They concluded that reliance upon a diversified
clientele, rather than relying heavily upon sales to government appear to be a prudent strategy for
firms seeking to remain in business.
3.2.1.1 Objectives of preferential procurement
Preferential procurement seeks to ensure that public funds are expended in such a way that all
segments of the South African population benefit from such expenditure through job creation and
commercial activity. It makes the government tender process accessible to the target group without
guaranteeing work, and links the flow of money in targeted business enterprises.
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According to Watermeyer (2003:11) the United Nations Commission for the International Trade
Law Model Procurement of Goods, Construction and Services (UNICITRAL, 1995) suggests that
the immediate procurement objectives are as follows:

maximising economy and efficiency in procurement;

fostering and encouraging participation in procurement proceedings by suppliers and
contractors, especially where appropriate, participation by suppliers and contractors
regardless of nationality and thereby promoting international trade;

promoting competition among suppliers and contracts for the supply of goods, construction
or services to be procured;

providing for the fair and equitable treatment of all suppliers and contractors;

promoting the integrity of, and fairness and public confidence in, the procurement process;
and

achieving transparency in the procedures relating to procurement.
3.2.1.2 Socio-Economic Objectives of Preferential Procurement
According to McCrudden (1995) cited by Watermeyer (2003:12) procurement is used
internationally to support a number of socio-economic or political (secondary) objectives including:

stimulation of economic activity;

protection of national industry against foreign competition;

improving the competitiveness of certain industrial sectors;

remedying regional disparities; and

achieving certain more directly social policy functions such as;
o
fostering of the creation of jobs;
o
promotion of fair labour conditions and use of local labour;
o
the prohibition of discrimination against minority groups;
o
the encouragement of equality of opportunity between men and women; and
o
the promotion of the increased utilisation of the disabled in employment.
Preferential procurement is therefore most compatible with the primary procurement embedded in
the constitution and is the method that is potentially acceptable to the international community and
to foreign investors (Watermeyer, 2003:16). In their study, Jack and Harrison (2007:26) further
argue that preferential procurement becomes the driver in the Broad-Based Black Economic
Empowerment (BBBEE) process and drives the business necessity for Black Economic
Empowerment (BEE). The Act encourages organs of state and public entities to procure from
suppliers who have contributed to transformation in accordance with the BEE Codes. Any
company wishing to contract with the state will have to substantiate its contribution to
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transformation by way of a certificate verifying the level of contribution to transformation as per the
BEE Codes.
The following section will discuss BBBEE in detail including how it is a driver of preferential
procurement.
3.2.2
Broad-Based Black Economic Empowerment Act (Act 53 of 2003)
3.2.2.1 Background
Post-apartheid era, the government of South Africa has been faced by huge challenges of
economic inequalities, high rates of poverty and levels of unemployment. The social and economic
implications of the previous laws of apartheid excluded the majority of South African people, mainly
black people, from the mainstream economy. Vast racial and gender inequalities in the distribution
of, and access to wealth, income, skills and employment persisted. As a result, in January 2004,
the government signed into a law, the Broad-Based Black Economic Empowerment Act (Act 53 of
2003). The BBBEE Act provides a framework for the BEE regulations known as the Codes of Good
Practice. The Codes take their meaning from various Acts, including the Employment Equity Act,
the Skills Development Act and the Preferential Procurement Policy Framework Act (Jack &
Harries, 2007:28).
According to Jack and Harries (2007:28) BBBEE can be defined as the economic empowerment of
black people including women, workers, youth, people with disabilities and people living in rural
areas through diverse but integrated socio-economic strategies that include, but are not restricted
to:

increasing the number of black people that manage, own and control enterprises and
productive assets;

facilitating ownership and management of enterprises and productive assets by communities,
workers, cooperative and other collective enterprises;

human resource and skills development;

achieving equitable representation of all occupational categories in the workforce;

preferential procurement; and

investment in enterprises that are owned or managed by black people.
BBBEE includes elements of human resource development, employment equity, enterprise
development, and also preferential procurement, as well as investment, ownership and control of
enterprises and economic assets. The BBBEE Act defines black people as Africans, Chinese,
Coloureds and Indians.
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3.2.2.2 BBBEE Codes of Good Practice
In accordance with the terms of the BBBEE Act, the codes of good practice give guidance in
regard to BBBEE processes of organisations and companies. The Codes ensure that BBBEE work
is consistent in all industries, giving a clear indication of what is required for empowerment
credentials. They provide details on the measurement of the different components of BEE and
acceptable BBBEE scorecards weighting and targets on each element (De Klerk, 2006:9). The
broadbased elements of the Codes and weighting are set out in Table 3.1.
Table 3.1: The Generic Scorecard
Element
Code Series
Weighting
Ownership
100
20
Management
200
10
Employment equity
300
15
Skills development
400
15
Preferential procurement
500
20
Enterprise development
600
15
Socio-economic development
700
5
Total
100
Source: Jack & Harris (2007:82)
The scorecard measures and weights each element of empowerment to assess the company’s
empowerment credentials. The rating is the sum of all the elements with an allocated total
weighting of 100 per cent (De Klerk, 2006:9). Based on the total score of the seven elements, the
company can achieve empowerment levels of one (1) to eight (8), with eight (8) being the highest
compliance and one (1) the least compliant. Any score below one reflects non-compliance with
BEE.
Any private company doing business with organs of state should provide its BEE certificate
indicating the level of compliance with the BEE legislation. Unlike organs of state, private
companies are not obliged to comply with the BBBEE Act, but will not be awarded government
contracts should they want to provide goods and services to government if they do not comply with
the Act. In this way, the South African government uses government procurement as a tool to
ensure that transformation objectives are achieved and therefore historically disadvantaged
businesses access markets they would otherwise not be able to access.
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3.2.3
Other SMME Legislation
In response to the need to change and promote growth of SMMEs, the government of South Africa
promulgated several laws including the White Paper on Small Business in 1995, the National Small
Business Development Act of 1996 and the Integrated Small Business Development Strategy
(“ISBDS’) in 2003.
The 1995 White Paper on National Strategy for the Development and Promotion of Small Business
in South Africa was the first major effort by the South African government to design a policy
framework particularly targeting the entire spectrum of the small enterprise sector (Berry et al.,
2002:34). The overall objective of the strategy was to create an enabling environment for the
accelerated growth of small businesses following a history characterised by the dominance of large
capital-intensive firms and continued neglect of small enterprises (DTI, 2003:7). According to the
White Paper on small business development, the goals of the South African SMME promotion
strategy can be summarised as:

economic growth and development;

poverty alleviation;

income distribution;

employment creation;

economic empowerment of previously disadvantaged population groups;

democratisation of economic participation; and

replacing the present rather oligopolistic structure of the economy with one that allows a far
higher degree of competition.
The White Paper essentially centred on a number of specific strategic considerations. The first was
attaining broad-based legitimacy for government’s new SMME strategy, which represented a
marked change from the apartheid era. A second critical issue was addressing the apartheid
legacy of the disempowerment of black business. The final and critical strategic issue was that of
establishing a set of new national institutions to support, coordinate and monitor the process.
Following the promulgation of the White Paper, the government further launched the Small
Business Act 102 of 1996 whose aim was to increase entrepreneurial activity in the country and
create an enabling environment for the survival and growth of small business by providing financial
and non-financial assistance to South African entrepreneurs.
In 2003, the Department of Trade and Industry further developed an Integrated Small Business
Development Strategy (“ISBDS’), which presented the way forward for small business
development in South Africa for the years 2004 to 2010. The strategy dealt with the changes in the
post-1995 environment that had occurred since the preparation of the 1995 White Paper. New key
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issues affecting SMME development that emerged since 1995 are those of local economic
development, black economic empowerment and DTI’s own changing economic frameworks.
3.3
EKURHULENI METROPOLITAN MUNICIPALITY PROCUREMENT PROCESSES
Due to the historical discrimination, unfair practice and marginalisation of its people, Ekurhuleni is
faced with various groups of people who have been denied the privilege of being economically
active. Preferential procurement is used as a vehicle to rectify this imbalance. The EMM Supply
Chain Policy and Preferential Procurement Policy, (2005:16) sets out the procurement processes
of goods and services by the municipality is as discussed below.
(a)
Petty cash is used to purchase goods and services up to a transaction value of R1 000
(VAT included). Petty cash purchases are for minor items and are purchased for up to
R1 000 (VAT included) where it is impractical, impossible or not cost-effective to follow the
official procurement process. A monthly reconciliation report from each manager must be
provided to the chief financial officer, including –
(b)
(i)
the total amount of petty cash purchases for that month; and
(ii)
receipts and appropriate documents for each purchase.
Written quotations are used for procurement of goods and services of transaction value
over R1 000 (VAT included) up to R30 000 (VAT included). The written quotation process
requires that quotations must be obtained from at least three different providers whose
names appear on the list of accredited prospective providers of the municipality.
Quotations may also be obtained from providers who are not listed, if such providers meet
the listing criteria in the Supply Chain Management Policy. The policy requires that at
least once a year EMM should invite prospective providers of goods or services to apply
for evaluation and listing as accredited prospective providers. This is done through local
newspapers, EMM website and any other appropriate ways. The prospective providers
must submit proof of compliance with:
(i) SARS tax clearance, municipal rates and tax payments; and
(ii) the Occupational Health and Safety Act, 1993 [Act No. 85 of 1993].
(c)
Formal written price quotations are used for procurement goods and services of
transaction value over R30 000 (VAT included) up to R 200 000 (VAT included). The
operational procedure for such goods or services through formal written price quotations
requires that the formal written price quotations must be advertised for at least seven
calendar days on the website and an official notice board of the municipality.
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(d)
A competitive bidding process is used for the procurement of goods and services above a
transaction value of R200 000 (VAT included), and the procurement of long-term
contracts.
The above procurement process is summarised in Table 3.2.
Table 3.2: Summary of EMM Procurement Process
PROCESS
VALUE
ADVERTISEMENT
Petty Cash Purchases
Up to R 1 000 (VAT included)
No
Over R1 000 (VAT included) up to
Written Quotations
R 30 000 (VAT included)
Formal Written Price
Quotations
Over R 30 000 (VAT included) up to
No
Yes
R 200 000 (VAT included)
Over R 200 000 (VAT included)
Competitive Bidding
or
Yes
Long-term Contracts exceeding one (1) year
Source: EMM Procurement Policy (2005:16)
For the purposes of this study, focus will be on the contracts between R30 000 and R200 000
which require formal written price quotations.
The process starts with the preparation and compilation of the quotation documents by the
municipality. The public are then invited to supply the municipality with quotations. Available
contracts are advertised on the EMM notice board or website whereby the municipality invites
interested suppliers to submit quotations for the provision of the advertised goods or services. The
EMM Preferential Procurement Policy requirement is that, the goods and services required by the
municipality for contracts in excess of R30 000 (VAT included), must be advertised for at least
seven calendar days on the EMM website and official notice board. Suppliers wanting to supply the
advertised goods and services to the municipality can then collect the formal quotation forms from
the EMM offices or download them from EMM website. The formal quotation forms provide the
following information:

the product specifications;

the clearly defined specific goals that would be taken into consideration by the municipality
when the contract is awarded, where applicable;

payment terms; and

closing date for submission of quotations.
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Interested suppliers need to fill the quotation forms, providing the required information and then
submit the quotations to the municipality before the specified closing date for consideration.
According to the EMM Preferential Procurement Policy (2005:17), a formal written price quotation
may not be considered by the municipality unless the provider has provided the following general
preconditions.
(a)
The provider must furnish:
(i)
full name of the company;
(ii)
identification number or registration number of the company;
(iii)
the company’s tax reference number and VAT registration number, if any;
(iv)
the company’s tax clearance certificate from the South African Revenue Services
that the provider’s tax matters are in order; and
(b)
indicate whether the supplier is in the service of the state, or has been in the service of the
state in the previous twelve months.
On receipt of the quotations, municipality personnel evaluate the quotations based on the product
specifications, price and the quality of the goods or services. In addition to these, the evaluation
process takes into account the size, infrastructure, resources, experience and financial ability of
the business to execute the contract. If the supplier meets the first stage of evaluation, the next
level of evaluation is to determine if the supplier meets specific objectives as per the requirements
stipulated on the quotation.
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Specific Goals of Ekurhuleni Metropolitan Municipality
The points identified as specific goals approved by the EMM are set below in Table 3.3.
Table 3.3: Specific goals approved by EMM
Specific target proposed
Points allocated for
contracts below
R500 000
Points allocated for
contracts above
R500 000
(80/20)
(90/10)
1. Contracting enterprises wholly or partially owned by previously
disadvantaged people
8
4
2. Contracting enterprises wholly or partially owned by women
(disadvantaged by previously dispensation due to gender)
2
1
3. Contracting enterprises wholly or partially owned by disabled people
1
1
4. Job creation
3
1
5. Support for small enterprises
2
1
6. Local RSA content
1
1
7. Promoting enterprises located within Ekurhuleni Metropolitan Area
3
1
Total Points
20
10
Source: EMM Preferential Procurement Policy (2005:59)
3.3.2.1 Ownership by historically disadvantaged individuals
Bidders reflecting an ownership by historically disadvantaged individuals are given preference
points to the maximum of eight for contracts below R500 000, and four for contracts above R500
000. Benefits associated with HDI equity ownership may only be claimed in respect of individuals
who are actively involved in the management and daily business of the enterprise, who share in
the profits of the enterprise, and who exercise control over the enterprise in line with their
ownership level. Where individuals are not actively involved in the management and daily business
operations and do not share in the profits or exercise control over the enterprise commensurate
with their degree of ownership, the benefits associated with equity ownership may not be claimed.
3.3.2.2 SMME status
Bidders who reflect SMME status, according to the criteria outlined for each sector and sub-sector
of the economy are also given preference points as per the Table 3.3 above.
3.3.2.3 Use of sub-contractors
Preference is also given to bidders who sub-contract work to enterprises that have HDI equity
ownership. A maximum allocation for each category is one (1).
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3.3.2.3 Job creation
Bidders who are able to employ labour intensive work methods (where appropriate) are also given
preference. Three (3) points are allocated for contracts below R500 000 and one for contracts
above R500 000.
3.3.2.4 Local content
Bidders who provide products developed, manufactured, assembled and/or distributed in South
Africa are given preference where applicable. Local content is divided into two components: local
content of product, staff, material and management and then Ekurhuleni based companies. The
maximum point allocated for each category is one (1).
3.3.2.5 Capacity development
Where practically possible, formal quotation forms must be prepared in such a way as to reflect a
commitment to capacity development and skills transfers.
3.3.2.6 Community empowerment
Bid documents or formal quotation forms should also be prepared in such a way, as to reflect a
commitment to community empowerment. The municipality may define the community it is
targeting and the empowerment objectives that it wishes to achieve for each individual contract.
Particular specifications included in the bid document will make provision for community
empowerment in terms of the procurement process. The municipality may define its understanding
of the community, including the following aspects:


geographical community (for example) o
residents of the Ekurhuleni Metropolitan Area;
o
residents of specific areas within the EMM;
o
ethnic/cultural/religious community;
community of interest (for example) o
women;
o
small business owners; and
o
industry sector representatives, etc. Once all the above requirements have been evaluated, the supplier with the highest points is
awarded the contract.
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Table 3.4: Contracts awarded by EMM in the period July 2009–June 2010
CATEGORY
CONTRACTS
AWARDED
VALUE OF
CONTRACTS
PERCENTAGE
HDI
311
R36.3 million
80%
NON-HDIs
68
R9.2 million
20%
TOTAL
379
R45.5 million
100%
Source: EMM Database
During the period under review, EMM entered into procurement contracts with values between
R30 000 and R200 000 to the value of R45.5 million. Of the contracts awarded, 80 per cent were
given to historically disadvantaged individuals, whilst 20 per cent were given to non-historically
disadvantaged individuals. Table 3.4 clearly illustrates that EMM is promoting the Preferential
Procurement Policy as part of the process of transformation.
3.4
CONCLUSION
This chapter has described the interventions that the government of South Africa has put into place
in supporting and promoting the development of the SMME sector. Most of the interventions are
aimed at creating an enabling environment for the development of the sector. There are, however,
specific pieces of legislation which seek to address specific challenges hindering the development
of SMMEs such as access to markets. These include the Preferential Procurement Policy
Framework Act and Broad-Based Economic Empowerment Act. The chapter has discussed these
laws in detail including the objectives they aim to achieve. Lastly the chapter looked at the
procurement processes adopted by the EMM and key requirements taken into consideration for
awarding contracts valued between R30 000 and R200 000 (VAT included).
The next chapter will cover the description of the method used to conduct the study. It will also
explain the research design, the unit of analysis, the instruments used for data collection and lastly
how the data will be analysed.
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CHAPTER 4:
RESEARCH METHODOLOGY
4.1
INTRODUCTION
The purpose of this chapter is to describe the method used to conduct the study. It explains the
research design, sampling framework, the instruments used to collect data and lastly how the data
is analysed.
4.2
RESEARCH DESIGN
This study is empirical and descriptive in nature. According to Kumar (2005:8-10), empirical means
that any conclusions drawn from the study are based upon hard evidence gathered from
information collected from real-life experiences or observations. A descriptive study, on the other
hand, is one which attempts to describe systematically a situation, problem or provides information
about a situation or problem.
The study is an example of descriptive and qualitative research describing the role of preferential
procurement in Local Government with specific focus on EMM as an instrument of promoting
historically disadvantaged SMMEs in South Africa. This is done by: investigating the process of
public procurement reform and the objectives that preferential procurement aims to achieve;
establishing the accessibility of preferential procurement contracts to historically disadvantaged
SMMEs; identifying sectors where opportunities exist through preferential procurement within EMM
for SMMEs; and further establishing the proportion of revenues generated by historically
disadvantaged SMMEs from EMM through preferential procurement.
Qualitative research was used because the study is more exploratory in nature, providing a more
detailed inquiry into the problem and aiming primarily to describe the role of preferential
procurement to historically disadvantaged SMMEs and not to determine its extent or explain the
problem.
4.3
4.3.1.
DESCRIPTION OF POPULATION AND SAMPLING FRAMEWORK
Population
The population of interest in this study is historically disadvantaged small, medium and micro
business owners in the Ekurhuleni Metropolitan Area, who have accessed contracts with the value
over R30 000 (VAT included) up to R200 000 (VAT included) from the Ekurhuleni Metropolitan
Municipality in the period July 2009 to June 2010.
The study analyses the role of preferential procurement in promoting the development of SMMEs.
It also establishes accessibility of these preferential procurement contracts to historically
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disadvantaged SMMEs. It identifies sectors where opportunities exist for the SMMEs through EMM
preferential procurement contracts and calculates the proportion of revenues generated by these
SMMEs from EMM through preferential procurement.
4.3.2
Sample
The study used a simple random sampling design to select the sample from the population. This is
because this design has the advantage of being representative of the population in the sense that
it does not favour one unit of analysis over another. All elements of the population had an equal
chance of being selected therefore preventing bias.
A random sample of 50 SMMEs was drawn from EMM database. Ten of the faxes, emails and
telephone numbers to these SMMEs could not go through and as a result, only 40 questionnaires
were distributed to SMMEs owned by historically disadvantaged entrepreneurs in the Ekurhuleni
Metropolitan Area, who have accessed preferential procurement contracts with a value of between
R30 000 and R200 000 in the period under review. Of the 40 questionnaires distributed, 21 owners
responded representing a 53 per cent response from SMMEs.
4.4
4.4.1
METHOD OF DATA COLLECTION
Approaches to data collection
Both secondary and primary data was collected for the purposes of this study. Secondary data was
collected using sources including books, academic journals, newspapers, the internet and
Government Gazettes. Primary data was collected by the use of questionnaires, which were faxed
or emailed to the selected entrepreneurs on the 18 November 2010. The business owners were
given a month to complete the questionnaires and responses were received by the 18 December
2010.
Questionnaires were used as a research instrument because the respondents were scattered over
a wide geographical area, and interviewing would have been time consuming and extremely
expensive. Salkind (2000:136) provides the following advantages of using questionnaires.

It is possible to survey a broader population as surveys can be mailed.

They are cheaper than one-on-one interviews.

People may be more willing to be truthful because their anonymity is guaranteed.
4.4.1.1 Reliability and validity of the questionnaire
According to Kumar (2005:6), research should be conducted using procedures, methods and
techniques that have been tested for their reliability and validity. He defines reliability as the quality
of the measurement procedure that provides repeatability and accuracy. Validity, on the other
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hand, is defined as the degree to which the researcher has measured what he/she set out to
measure (Smith, 1991:106 cited by Kumar, 2005:153).
The questionnaire that is used in the study was evaluated by an expert in the field of research to
ensure that it complied with the above validity requirements. The same questionnaire was
distributed to all SMMEs in the sample thus complying with the reliability requirements that it
should provide repeatability and accuracy.
4.4.1.2 Format of the questionnaire
The questionnaire was distributed to entrepreneurs in the Ekurhuleni Metropolitan Area who had
accessed preferential procurement contracts from the Ekurhuleni Metropolitan Municipality in the
period July 2009 to June 2010. The questionnaire was designed using close-ended questions and
the structure is described below.
Section A: General characteristics of the business
This section used closed-ended questions to gather information about the profile of businesses,
such as when the business was established, its form of ownership and location, the number of
owners and the number of people it employed. Participants were expected to mark with an (X) on
the answer, where the question was a multiple-choice question or provide the information required
where the question was not a multiple-choice question.
The objective of this section was to understand the general characteristics of the business and to
determine if it fell within small, medium or micro enterprise category in terms of the number of
employees it employed.
Section B: Historically Disadvantaged Individual status
This section sought to understand the historically disadvantaged ownership status of the
respondents.
Section C: Accessibility of preferential procurement contracts to SMMEs
This section used closed-ended questions to gather information such as how the respondents
found out about the EMM preferential contracts and if the information about the contracts was
easily accessible, to determine accessibility of EMM preferential procurement contracts to SMMEs.
Furthermore, section sought to find out if it was easy to meet EMM requirements and whether the
information required from the SMMEs was easy to understand and collate.
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Section D: Market Access
This section used closed-ended questions to gather information about the sectors in which the
SMMEs operated and the type of goods and services they provided to EMM with the aim of
identifying opportunities that existed for SMMES, through EMM preferential procurement process.
Section E:
Proportion of revenue generated by SMMEs from EMM through preferential
procurement
This section used close-ended questions to gather information about how much revenue was
generated from EMM in the period under review. The objective of the section was to establish the
contribution of EMM contracts to the overall revenues of the businesses.
The questionnaire was sent with a covering letter (refer to Appendix A). The covering letter
included the following:
•
an explanation of the relevance of the study;
•
a brief description of the objectives of the study;
•
instructions on how to administer the questionnaire;
•
assurance of confidentiality; and
•
contact details if any difficulties were encountered.
A copy of the questionnaire is attached in Appendix B.
4.5
DATA ANALYSIS
Primary data was analysed using qualitative descriptive statistical methods of organising and
presenting data such as frequency tables, graphical techniques or other statistical techniques
using the Excel statistics computer program.
4.6
CONCLUSION
This chapter described the research methodology used in the empirical study and the reasons why
particular methods were used for the research. In Chapter Five, the results of the empirical study
are presented.
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CHAPTER 5:
ANALYSIS AND INTERPRETATION OF EMPIRICAL FINDINGS
5.1
INTRODUCTION
The purpose of this chapter is to present, analyse and interpret the empirical findings of the study,
which focused on the role of preferential procurement on historically disadvantaged SMMEs. This
will be done based on the responses from respondents who participated in the survey. Although 40
questionnaires were distributed, only 21 survey results were received from respondents will be
presented, representing a response rate of 53 per cent.
The first section of the survey reports on the general characteristics/profile of the respondents. The
second section provides information about the HDI status of the respondents, while the third
section presents the findings on accessibility by historically disadvantaged SMMEs to EMM
preferential procurement contracts. The third section further provides information about whether
the information required by the municipality is easy to collate and understand. This section is
followed by a presentation dealing with market access and information about the sectors in which
the respondents operate and the type of goods and services they provide to EMM. The last section
reveals the proportion of revenues generated by the respondents from EMM in the period under
review and provides the opinion of respondents about preferential procurement with regard to
growth of their businesses.
5.2
5.2.1
PROFILE OF THE RESPONDENTS
Forms of business ownership
The forms of business ownership are presented in Figure 5.1. All the businesses in the sample are
registered as close corporations.
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Figure 5.1: Forms of business ownership
5.2.2
Number of business owners
Figure 5.2 presents the number of members/owners owning the businesses in the sample. Forty
eight per cent of the businesses are owned by one member and 38 per cent by two members, five
and nine per cent are owned by three and four to five members respectively. None of the
businesses are owned by more than five owners. The high percentage of businesses owned by
one or two members is in line with the definition of small businesses. Small businesses are
generally owner-managed and the existence of two owners normally happens as a result of a
husband and wife partnership.
Figure 5.2: Number of business owners
5.2.3
Number of years in operation
Tables 5.1 and 5.2, as well as Figure 5.3 provide descriptive information about the number of years
the respondents have been in business. The minimum number of years the businesses have been
in operation is two years, while the maximum is 14 years and the average six years. The highest
percentage of the respondents (24%) have been in business for four years, followed by three years
and above 10 years at 14 per cent, while the others are spread over different periods as per Table
5.1.
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Table 5.1: Number of years in operation
Analysis
1
2
3
4
5
6
7
8
9
10
Above 10
Total
Frequency (N)
0
1
3
5
2
2
2
2
0
1
3
21
Figure 5.3: Number of years in operation
Per cent
0%
5%
14%
24%
10%
10%
10%
10%
0%
5%
14%
100%
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Table 5.2: Descriptive information for the number of years in operation
5.2.4
Minimum
Maximum
Mean
Standard Deviation
2
14
6
4
Number of Employees
Table 5.3 and Figure 5.4 show the number of employees employed by the businesses in the
sample. Majority of the businesses in the sample (62%) employ from six to 50 employees (small
enterprises) while 33 per cent employ zero to five employees (micro enterprises) and five per cent
employ 50 to 200 employees (medium enterprises). One can conclude that this is in line with the
specific goals of supporting small businesses that the municipality wants to achieve.
Table 5.3: Number of Employees
Analysis
Frequency (N)
Per cent
0-5 (micro enterprise)
7
33%
6-50 (small enterprise)
13
62%
50-200 (medium enterprise)
1
5%
More than 200 (large enterprise)
0
0
Total
21
100%
Figure 5.4: Number of employees
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5.2.5
Location of Businesses
As discussed in the literature review, the location of the business is an important factor for the
success of the business. Businesses located in places where there are no resources or markets
will not grow as rapidly as those in economically active locations. Figure 5.5 presents the location
distribution of the businesses in the sample. Thirty four per cent are located in Germiston, 14 per
cent in Boksburg, Benoni, Kempton Park and Springs, while 10 per cent are located in Alberton.
None of the businesses in the sample are located in Nigel. The population density in Germiston
(Katorus) is the highest of the total population in Ekurhuleni Metropolitan Area (24%) which could
explain why there are more businesses located in Germiston. Greater population density could be
an indication that economic activity in the area is high and thus attracts more businesses.
Figure 5.5: Location of Businesses
5.3
5.3.1
HISTORICALLY DISADVANTAGED INDIVIDUAL STATUS OF THE RESPONDENTS
Business ownership by Historically Disadvantaged Individuals
Figure 5.5 shows that 95 per cent of the respondents are owned and controlled by historically
disadvantaged individuals (above 50.1% ownership) and 5 per cent are owned between 25.1 to
50.1 per cent by historically disadvantaged individuals. None of the businesses have less than 25.1
per cent HDI ownership.
This is in line with the conclusion by Berry and Levy (1994) cited in Green et al., (2005:334); DTI
(2003:7) that SMMEs contribute towards socio-economic transformation in many countries and that
their promotion has become a political necessity, as they are a means of bringing social change;
exploring the entrepreneurial talents and empowering of marginalised segments of the population
amongst other positive attributes. This clearly shows that EMM is promoting the Preferential
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Procurement Policy as part of the process of transformation as most of the contracts have been
awarded to historically disadvantaged SMMEs.
Figure 5.6: Ownership by Historically Disadvantaged Individuals
5.3.2
Historically Disadvantaged Individuals Status of the businesses
Figure 5.7 shows that all the businesses in the sample are owned by historically disadvantaged
individuals and 62 per cent of the businesses are owned by women in partnership with a
male/men. None of the respondents in the sample were disabled. One can conclude that EMM is
promoting the HDIs as part of the process of transformation as revealed in Figure 5.6 above.
Figure 5.7: Historically Disadvantaged Individuals Status (multiple responses possible)
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5.4
5.4.1
ACCESSIBILITY OF PREFERENTIAL PROCUREMENT CONTRACTS TO SMMES
Access to information about EMM preferential contracts
The study by Rwigema and Karungu (1999) concluded that typical problems hampering SMMEs
everywhere include constraints such as lack of information. Figure 5.8 presents the findings in
regard to how SMMEs accessed information about the EMM preferential contracts. Fifty three per
cent of the respondents accessed information from the EMM notice board while 21 per cent and 26
per cent accessed information from local newspapers and the internet respectively. From the
above findings, it can be concluded that information about preferential contracts is easily
accessible to SMMEs, thus eliminating the constraint represented by lack of information. EMM is
utilising different forms of communication to make information accessible to SMMEs or potential
suppliers.
Figure 5.8: How respondents accessed information about EMM preferential contracts
5.4.2
Ease with which information about EMM preferential contracts is accessible
In Figure 5.9, 90 per cent of the respondents found information about EMM preferential contracts
easily accessible, while 10 per cent were of the opinion that it is not easily accessible. This is in
line with the interpretation in 5.4.1 above.
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Figure 5.9: Ease with which information about EMM preferential contracts is accessible
5.2.3
Access to formal quotation forms
All the respondents collected the formal quotation forms from the EMM offices and of these, 14 per
cent of the respondents also downloaded them from the EMM website.
Figure 5.10: Access to formal quotation forms
5.2.4
Ease with which respondents understood information required on formal quotation
forms
Figure 5.11 presents the ease with which respondents understood information required on formal
quotation forms showing that 81 per cent of the respondents found the information required by
EMM easy to understand while 19 per cent sometimes found the information required not easy to
understand. This further shows that in general, information required by EMM is easy to understand,
minimizing the constraint of access to EMM contracts by SMMEs.
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Figure 5.11: Ease with which respondents understood information required on formal quotation
forms
5.2.5
Ease with which respondents met the requirements of EMM contracts
Figure 5.12 presents whether the information required for submission to qualify for EMM
preferential contracts was easy to collate showing that 95 per cent of the respondents found it easy
to collate whereas, 5 per cent found it difficult to collate. One can conclude that EMM requirements
are not unreasonable and therefore easy to collate. These are generally documents that SMMEs
have as they are normally company registration documents.
Figure 5.12: Ease with which respondents met the requirements of EMM contracts
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5.5
5.5.1
MARKET ACCESS
Sectors and services where opportunities exist for SMMEs through EMM
preferential procurement
According to Berry et al., (2002:85), there is a great deal that government can do directly to ensure
better access by SMMEs to product markets if demand is a constraint because of the
concentration in product markets. They further add that public policy can facilitate the development
of SMMEs in various ways including ensuring active competition policy to level the playing field or
can facilitate interventions such as a procurement policy.
Opening state markets to SMMEs through preferential procurement as shown in the literature,
addresses the constraint of market access for SMMEs. Figures 5.13 and 5.14 present sectors and
services the respondents provided to EMM. Most of the businesses (42%) operate in the
construction sector and offer construction services to the municipality. Twenty three per cent offer
electricity, gas and water services while 19 per cent provide wholesale trade, commercial agents
and allied services. The rest of the other sectors account for four per cent each with the exception
of community services and finance and business services, which account for nil per cent. The
results are in line with the argument of Watermeyer et al., (2000:14) that procurement when used
as an instrument of BBBEE, creates demand for the services of historically disadvantaged
individual’s businesses, irrespective of size, age or sector focus.
Figure 5.113: Sectors and services where opportunities exist for SMMEs through
EMM preferential procurement
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5.6
PROPORTION OF REVENUES GENERATED BY SMMES FROM EMM PREFERENTIAL
CONTRACTS
5.6.1
Proportion of revenues generated by SMMEs from EMM preferential contracts
Bates et al., (1996:295–297) discussed how damaging it can be for small firms to rely heavily on
sales to the state. The study revealed that firms heavily reliant upon government contracts are
more likely to discontinue operations, than those for which government sales represent less than
25 per cent of total sales.
Figure 5.14 presents the proportion of revenues generated by SMMEs from EMM preferential
contracts. It shows that 33 per cent of the respondents generated 0 to 10 per cent revenues from
EMM contracts in the period under review, 29 per cent generated 11 to 30 per cent, 19 per cent
generated 51 to 99 per cent and 14 per cent generated all of its revenues from EMM. This is in line
with the conclusion of Bates et al., (1996:295–297) that reliance upon a diversified clientele, rather
than heavy dependence upon sales to government appears to be a prudent strategy for firms
seeking to remain in business. The empirical results show that the respondents are not dependent
on EMM contracts for survival.
Figure 5.14: Proportion of revenues generated by SMMEs from EMM preferential contracts
5.6.2
Number of contracts secured by respondents from EMM
Of the revenue secured from EMM by the respondents, 24 per cent secured more than five
contracts, 33 per cent secured two contracts, 14 per cent secured one and three contracts, 10 per
cent secured four contracts and 5 per cent secured five contracts. The number of contracts is not
that significant to the study as their significance would depend considerably on the value of the
contracts and as shown above, respondents are not heavily reliant on EMM preferential contracts
for survival.
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Table 5.14: Number of contracts secured by respondents from EMM
No. of contracts
Frequency (N)
Per cent
1
3
14%
2
7
33%
3
3
14%
4
2
10%
5
1
5%
More than 5
5
24%
Total
21
100%
Figure 5.15: Number of contracts secured by respondents from EMM
5.7
THE ROLE OF PREFERENTIAL PROCUREMENT
Figure 5.16 presents the responses by respondents as to whether preferential contracts assisted
their businesses grow. Ninety per cent of the respondents agreed that preferential contracts
assisted their businesses to grow while 10 per cent of the respondents disagreed. The results are
in line with previous research in the literature which argued that access to product markets is a
critical component of a competitive economy and contributes to the growth of businesses. It can
therefore be concluded that preferential procurement assists businesses to grow as it opens
markets they would otherwise find difficult to penetrate.
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Figure 5.12: Do preferential procurement contracts assist businesses to
grow
5.8
CONCLUSION
The findings of the study have been presented and analysed and it becomes apparent that
preferential procurement is making a positive contribution to the growth of SMMEs and that
information about EMM preferential contracts is easily accessible to SMMEs. The findings further
reveal that SMMEs are not heavily dependent on EMM preferential contracts for their survival. The
next chapter will present the conclusions and recommendations of the study.
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CHAPTER 6:
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
6.1
INTRODUCTION
The study looked at the role of preferential procurement in promoting the development of
historically disadvantaged SMMEs. By means of a literature review, it was found that given the
importance of the SMME sector, governments throughout the world including the South African
government, have focused their attention on the development of the SMME sector in order to
achieve the objectives of economic growth, income distribution and job creation. The literature
review has further shown that most SMMEs in South Africa fail due to a variety of reasons,
including lack of access to markets. To address the constraint of market access to SMMEs, the
government of South Africa has put in a law the Preferential Procurement Policy Framework Act
(Act 5 of 2003).
As shown in the literature review, preferential procurement affords SMMEs an opportunity to
access markets they would otherwise find difficult to penetrate. Points allocated for specific
objectives in the Act ensure that historically disadvantaged communities participate in the SMME
sector.
To compliment the information from the literature review, a survey was conducted. This chapter is
therefore intended to draw some conclusions that were reached in the study, together with some
recommendations pertaining to it. Firstly a short summary of the study will be provided, including
the objectives of the study, the literature review, a summary of the results from the empirical study
and thereafter, the conclusions and recommendations where applicable will follow.
6.2
OBJECTIVES OF THE STUDY
The objectives of this study are discussed below.
Overall objective of the study
The overall objective of the study was to analyse the role of preferential procurement in Local
Government with specific reference to EMM, as an instrument of promoting historically
disadvantaged small businesses in South Africa.
Specific objectives of the study
These objectives were:

to establish accessibility by SMMEs to EMM preferential procurement contracts;

to identify sectors where opportunities exist for SMMES, through preferential procurement
with the Ekurhuleni Metropolitan Municipality; and
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
to establish the proportion of revenue generated by SMMEs from the Ekurhuleni Municipality
through preferential procurement.
5.2
OVERVIEW OF THE STUDY
The introductory chapter of the study presented the purpose and background of the study including
the problem statement, overall and specific objectives of the study, the research methodology,
definitions of terms and the limitations of the study. Following the introductory section of the study
the literature review covered the theoretical background on SMMEs, including the role and
importance of the sector as well as factors that hinder their development. The literature review also
covered the SMME sector in the South African context, discussing the role that the South African
government has played in promoting this sector. Particular focus on the role of government was on
SMME legislation, and other laws supporting SMMEs, such as the Preferential Procurement Policy
Framework Act (Act 5 of 2000) and Broad-Based Black Economic Empowerment Act (Act 53 of
2003).
Following the literature review, there was a detailed discussion of the research methodology which
consisted of primary data collection, using structured questionnaires. Thereafter, the study
presented and discussed the results obtained from the empirical investigation conducted on the
role of preferential procurement on SMMEs owned by historically disadvantaged individuals who
had accessed contracts with the value between R30 000 (VAT included) and R200 000 (VAT
included) from Ekurhuleni Metropolitan Municipality in the period July 2009 to June 2010.
Descriptive statistical methods of organising and presenting data such as frequency tables,
graphical techniques or other statistical techniques were used to analyse the data. Lastly, the
conclusions arising from the research study and recommendations where applicable will be
provided.
6.3
SHORTCOMING OF THE STUDY
The shortcoming of the study identified is that there has not been a great deal of documented
research on preferential procurement in South Africa. Most of the studies discuss the Act itself and
not much research has been done on the role, impact, success and failures of preferential
procurement.
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6.4
SUMMARY OF THE RESULTS OF THE EMPIRICAL STUDY
The questionnaire was used to study the aspects listed below.
6.4.1
Profile of respondents
This first section of the survey covered the general characteristics of the respondents such as the
form of businesses, the number of owners, the number of years the businesses have been in
operation, and the size and location of the businesses.

It is also clear from the study that all the SMMEs register their businesses as close
corporations as other forms of ownership were not used.

Most of the businesses are owned by one (48%) or two members (38%). Only 14 per cent
are owned by more than two members.

It is clear from the study that most businesses have been in operation for four years (24%)
with very few having been in operation for less than two years and more than ten years.

Sixty two per cent of the respondents employ from six to 50 employees falling under the
category of small enterprises.

The location of the businesses is widely spread in different areas in Ekurhuleni. Germiston
however, had the largest percentage of respondents (34%).
6.4.2
Historically Disadvantaged Individual status of the respondents
The study has further shown that most of the businesses are owned and controlled by historically
disadvantaged individuals having more than 50.1 per cent ownership (95%).
6.4.3
Accessibility of preferential procurement to SMMEs
The empirical research also covered accessibility to EMM preferential contracts by SMMEs.
Figure 5.9 shows that most of the respondents found information about EMM preferential contracts
to be easily accessible (90%). Most of them accessed the information from the EMM notice board
(53%), while 21 per cent and 26 per cent accessed it from local newspapers and the EMM website
respectively (Figure 5.8).
It is also clear from the study that respondents found the information required on the formal
quotation forms easy to collate and understand. One can therefore concluded that meeting EMM
requirements is not a challenge to SMMEs.
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6.4.4
Sectors and services where opportunities exist for SMMEs
The study has shown that EMM utilises a variety of services from SMMEs with construction
services (42%), electricity, gas and water (23%) and wholesale trade, commercial agents and
allied services (19%) being those sectors most frequently utilised by the municipality. 6.4.5
Proportion of revenue generated by SMMEs from EMM
The revenues SMMEs generate from EMM are widely spread with the highest percentage (33%)
ranging between 0 to 10 per cent of revenues. The findings show that SMMEs are not heavily
reliant on EMM contacts.
6.4.6
The role of preferential procurement
The study has further shown that the general feeling amongst respondents is that preferential
procurement contracts assist their businesses to grow.
6.5
CONCLUSIONS AND RECOMMENDATIONS
The conclusions drawn from the sample surveys of SMMEs who have accessed preferential
procurement contracts from EMM are consistent with those of other studies and reinforce what is
already known. Most of the studies, as already noted, argue that market access is one of the major
constraints hindering the development of SMMEs and that access to markets is critical for the
growth and sustainability of SMMEs.
There is a general agreement in the literature that government has an important role to play in the
development of the SMME sector through institutional support structures, the provision of credit,
provision of management and technical support and the creation of an enabling environment. The
study has shown that 90 per cent of the respondents agreed that preferential procurement
contracts have contributed to the growth of their businesses. It can therefore be concluded that the
Preferential Procurement Policy Framework Act (Act 5 of 2000) has to certain extent addressed the
constraint of market access for SMMEs and this has gone a long way in levelling the playing field
and creating a competitive environment for SMMEs.
The literature review has further shown that SMME growth constraints can be grouped into two
categories: those of an internal nature (entrepreneurship, management) and those of an external
nature, for example, (access to finance, infrastructure, access to markets and exploitation by larger
enterprises). Furthermore, according to Mintzberg (1989) cited in Clover and Darroch, (2005:240)
barriers to SMME survival and growth are likely to be faced in all four functional areas of the
business operation namely management, operations, finance and marketing. This leads to the
conclusion that for initiatives such as the preferential procurement to be a success, the government
should ensure that other challenges hindering the development of SMMEs are effectively
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addressed. Access to markets alone is not enough for the growth and sustainability of small
businesses.
The other constraint affecting the growth of small businesses identified in the literature review is
the lack of information or access to this information. The study has shown that access to
information about EMM preferential contracts is not a challenge for SMMEs, as information is
available from different sources. It is recommended that the municipality should maintain its current
information distribution channels and continuously explore other means of making information
more accessible if such means are available.
It can further be concluded that the EMM utilises different services in different sectors and
accordingly such opportunities should be taken advantage of by the SMMEs operating in various
sectors. In line with the literature, EMM uses preferential procurement as an instrument of BroadBased Economic Empowerment thus creating demand for the services of historically
disadvantaged communities irrespective of their size, age or sector focus.
The study has also shown that SMMEs are not heavily dependent on EMM contracts for survival.
The highest number of respondents (33%) generates 0 to 10 per cent of their revenue from EMM
contracts. However, due to the scope and limitations of the study, one cannot conclude that the
respondents are not heavily reliant on government contracts in line the argument of Bates and
Williams (1996:295-296) that firms heavily reliant upon government contracts are more likely to
discontinue operations. The study only focused on the proportion of revenues generated by
SMMEs from EMM preferential procurement contracts, not all organs of state. It is therefore
proposed that SMMEs should continue exploring other markets and diversify their customers to
mitigate the risk of relying too heavily on government contracts.
6.6
FURTHER RESEARCH
Further research that can be conducted includes the following suggestions.
1.
Research could be conducted to identify the challenges encountered by SMMEs in
accessing preferential contracts.
2.
There could be a review of the impact of preferential procurement contracts from all organs
of state on SMMEs and determine reliability of SMMEs on government contracts.
3.
Further research could also be done to review the process of awarding preferential contracts.
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REFERENCES
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Bates, T. & Williams, D. 1996. Do Preferential Procurement Programs benefit Minority Business?
American Economic Review, 8(2), 294-298.
Berry, A., Blottnitz, M., Cassim, R., Kesper, A., Rajaratnam, B. & Seventer, D. 2002. The
economies of SMMES in South Africa. Johannesburg: TIPS.
Clover, T.A. & Darroch, M.A.G. 2005. Owner’s perceptions of factors that constrain the survival
and growth of small, medium and micro agribusinesses in Kwa-Zulu Natal, South Africa. Agrekom,
44(2), June, 238-263.
Davidsson, P., Kirchhoff, B., Hatemin-J, A. & Gustavsson, H. 2002. Empirical Analysis of Business
Growth Factors Using Swedish Data. Journal of Small Business Management, 40(4), 332-349.
Diederichs, A.W. 2001. Whirlpool of change. Cape Town. Old Mutual. South Africa.
De Klerk, F.W. 2006. The FW De Klerk Foundation: Transformation and Black Economic
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2010.
Department of Trade and Industry. 2003. The integrated small business development strategy in
South Africa 2004 – 2014. [Online] Available:
http://www.dwaf.gov.za/war/documents/IntegratedSmallBusinessStrategyOct03.pdf Accessed: 06
May 2010.
Ekurhuleni Metropolitan Municipality. 2005. Supply Chain Management Policy and Preferential
Procurement Policy. Johannesburg: Ekurhuleni Metropolitan Municipality.
Ekurhuleni Metropolitan Municipality. 2007. About Ekhurhuleni Metropolitan Municipality. [Online]
Available: http://www.ekurhuleni.gov.za/content/view/890/479 Accessed: 10 July 2010.
Ekurhuleni Metropolitan Municipality. 2010. Ekurhuleni Metropolitan Municipality. [Online]
Available: http://en.wikipedia.org/wiki/Ekurhuleni_Metropolitan_Municipality Accessed 10 July
2010.
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2006.
Fiscope
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Business
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Foxcroft, M.L., Wood, E., Kew, J., Herrington, M. & Segal, N. 2002. Global Entrepreneurship
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Green, C.J, Kirkpatrick, C.H. & Murinde, V. 2005. Finance and Development: Surveys of theory,
evidence and policy. Cheltenham: Edward Elgar Publishing Limited.
Jack, V. & Harris, K. 2007. Broad-based BEE: The complete guide. Johannesburg: Frontrunner
Publishing (Pty) Ltd.
Johnson, P., Conway, C. & Kattuman, P. 1999. Small Business Growth in the Short Run. Small
Business Economics, 12, 103-112.
Kumar, R. 2005. Research Methodology: A step-by-step guide for beginners. London: Sage
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Lighthelm, A.A. 2004. Factors responsible for the growth of small business firms: Empirical
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Lighthelm, A.A. 2008. A targeted approach to informal business development: the entrepreneurial
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Morrison, A., Breen, J. & Ali, S. 2003. Small Business Growth: Intention, Ability and Opportunity.
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Ntsika Enterprise Promotion Agency. 1997. The state of Small Business in South Africa. Pretoria:
Ntsika.
Ntsika Enterprise Promotion Agency. 2000. Annual Review. Pretoria: Ntsika.
Olawale, F. & Garwe, D. 2010. Obstacles to the growth of new SMEs in South Africa: A principal
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from the South. Politeia: Journal for the Political Sciences, 28(1), 66-88.
Robertson, P.L. 2003. The role of training and skilled labour in the success of SMMEs in
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Rogerson, C.M. 2008. Tracking SMME Development in South Africa: Issues of Finance, Training
and the Regulatory Environment. Urban Forum, 19, 61-81.
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Procurement as an instrument for Black Economic Empowerment. Sandton: South African
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APPENDIX A: COVERING LETTER FOR THE QUESTIONNAIRE
THE ROLE OF PREFERENTIAL PROCUREMENT IN PROMOTING THE DEVELOPMENT OF
HISTORICALLY DISADVANTAGED SMMES: EVIDENCE FROM EKURHULENI MUNICIPALITY
My name is Palesa Rantseli and I am a student at the University of Stellenbosch. I am currently
pursuing the Master degree in Development Finance studies. As part of my course work, I am
required to undertake a research, and the results of this survey will provide the basis for a Master’s
thesis in which the role of preferential procurement in promoting the development of historically
disadvantaged small, medium and micro enterprises will be analysed.
The name and address of your business was randomly selected from the Ekurhuleni Metropolitan
Municipality database. If you are not the owner of this business, please be so kind as to pass
on this survey to someone who is.
Your understanding of the Ekurhuleni Metropolitan Municipality preferential procurement process
will assist in understanding the role that preferential procurement plays in promoting the
development of historically disadvantaged small, medium and micro enterprises.
Please return your completed survey by the 18 December 2010 by emailing it to [email protected]
or by faxing it to 086 210 3265. Please feel free to contact me at 083 759 7974 should you require
further clarification. Please rest assured that the responses of this survey will be treated, as strictly
confidential.
Should you wish to verify the authenticity of this project, you can do so by contacting Dr Charles
Adjasi, Lecturer at the University of Stellenbosch at this email address [email protected] or Mr
Thabo Khanye, Head of Procurement at Ekurhuleni Metropolitan Municipality at this number (011)
999-0106 or email him at [email protected].
THANK YOU FOR YOUR TIME. YOUR CONTRIBUTION IS OF GREAT IMPORTANCE TO THE
SUCCESS OF THIS RESEARCH.
Palesa Rantseli
Masters Candidate
Department of Business Management
University of Stellenbosch
Cape Town
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APPENDIX B: QUESTIONNAIRE
THE ROLE OF PREFERENTIAL PROCUREMENT IN PROMOTING HISTORICALLY
DISADVANTAGED SMMEs: EVIDENCE FROM EKURHULENI MUNICALITY
Please read every question carefully and answer each question by filling an (X) in the correct box provided or write your answer in the space provided. Questions
Q1
When was the business founded?
Q2
Where is the business situated?
Q3
Q4
______________
2.1
Alberton
1
2.2
Brakpan/Nigel
2
2.3
Boksburg
3
2.4
Benoni
4
2.5
Germiston
5
2.6
Kempton Park
6
2.7
Springs
7
2.8
Other (specify)
8
Which of the following is the form of your business of ownership?
3.1
Sole Trader
1
3.2
Partnership
2
3.3
Close Corporation
3
3.4
Private Company
4
3.5
Other (Please specify)
5
How many owners/members/shareholders does the business have?
4.1
1
1
4.2
2
2
4.3
3
3
4.4
4-5
4
4.5
More than 5
5
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Q5
SECTION B :
Q6
Q7
SECTION C :
Q8
Q9
How many people does the business employ?
5.1
0-5 (micro enterprise)
1
5.2
6-50 (small enterprise)
2
5.3
50-200 (medium enterprise)
3
5.4
More than 200 (large enterprise)
4
HDI Status
In which of the following categories does/do the owner/s of the business fall?
6.1
Black
1
6.2
Women
2
6.3
Disabled
3
6.4
Other (specify)
4
What is the HDI/BEE ownership status of the business?
7.1
Less than 25.1%
1
7.2
25.1% - 50.1%
2
7.3
Above 50.1%
3
7.4
Other (specify)
4
ACCESSIBILITY OF PREFERENTIAL PROCUREMENT CONTRACTS TO SMMEs
How did you find out about the contract from the Ekurhuleni Municipality?
8.1
internet
1
8.2
Ekurhuleni Municipality notice board
2
8.3
Local newspaper
3
8.4
Other (specify)
4
Where did you get the quotation form?
9.1
internet
1
9.2
Ekhurleni Municipality offices
2
9.3
Other (specify)
3
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Q10
Was the information about the preferential contract easily accessible?
1
YES
Q11
Was the information required on the quotation form easy to understand?
1
YES
Q12
Q13
2
NO
SECTORS WHERE OPPORTUNITIES EXIST FOR SMMEs THROUGH
PREFERENTIAL PROCUREMENT WITH EKURHULENI METROPOLITAN
MUNICIPALITY
In which economic sector would you classify your business?
13.1
13.2
13.3
13.4
13.5
13.6
13.7
13.8
13.9
Q14
2
NO
Was the information you were required to submit in order to qualify for the
contract easy to collate?
1
YES
SECTION D :
2
NO
Construction
Electricity, gas and water
Manufacturing
Wholesale trade, commercial agents and allied services
Catering, accommodation and other trades
Transport and storage and communication
Finance and business services
Community social and personal services
Other (specify)
1
2
3
4
5
6
7
8
9
What type of goods or services did your business provide to the municipality?
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9
Construction
Electricity, gas and water
Manufacturing
Wholesale trade, commercial agents and allied services
Catering, accommodation and other trades
Transport and storage and communication
Finance and business services
Community social and personal services
Other (specify)
1
2
3
4
5
6
7
8
9
SECTION E :
PROPORTION OF RENENUE GENERATED BY SMMEs FROM EKURHULENI
METROPOLITAN MUNICIPALITY THROUGH PREFERENTIAL PROCUREMENT
Q15
How much revenue/turnover (total revenue for the year) did the business
generate from the Ekurhuleni Metropolitan Municipality in the period under
review (July 2009 to June 2010)?
R____________________
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Q16
How much of the revenue in Question 15 above did the business generate in
the period under review (July 2009 to June 2010)?
R____________________
Q17
Q18
How many contracts did the business secure from the Ekurhuleni Metropolitan
Municipality in the period under review (July 2009 to June 2010)?
17.1
1
1
17.2
2
2
17.3
3
3
17.4
4
4
17.5
5
5
17.6
More than 5
6
In your opinion, does preferential procurement assist you in growing your
business?
1
2
YES
NO
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