Dear Ministers Pravin Gordhan and Lindiwe Zulu
As is the case with most governments across the world – certainly ours – its plans are paved with good intentions. Many well-meaning programs are initiated but when the real work starts unfortunately the wheels come off.
The world of tenders is not all bad, despite many negative perceptions. Government rolls out massive projects that require supplying of goods and services, construction and renovations of government buildings, including schools. Instead of awarding one or a couple of large tenders to credible brands they carve the project up into a myriad small tenders so that hundreds of small black owned businesses stand to benefit.
Of course one can criticize such an approach. Worth considering – how can a micro enterprise build a sustainable business from small, uncertain tenders by government? On the other side of the coin, I have personally met small business owners that started out that way and then successfully ventured into the “real” and competitive world of the private sector.
One could also argue that this system does not make economic sense as in many instances government could procure directly from large suppliers at much more competitive prices – imagine the buying power of government! Instead it awards a tender, which necessitates that the tenderer or purchase order holder buy from the large supplier, add a margin and sell on to government. Does this make commercial sense? Of course not. But my impression is that this is government’s investment into the small business sector. It is a price they are willing to pay.
But Ministers, here is the problem. Small black business owners fight for tenders, all above board. They excitedly and with great expectation and hope win it, but then have to implement at a cost. Many of them do not have the needed capital to purchase material to start their labour intensive projects – like construction of RDP houses, hospital renovations and so on or to purchase the dog food from Makro that they quoted for and that government agreed to.
These small business men/woman don’t have fathers or family members with access to capital, paid off bonds or pension money that can be lent to them. So the next best option is a government agency like SEFA and others. But the need for capital is real time, it’s urgent, and a government agency just doesn’t move fast enough for the small business owner to deliver. These agencies work at a slow pace and their requirements of SMME’s are more or less the same as your traditional banks, the only difference being that their policy mandate is to support SMME’s. However, in practice, movement is much too slow.
This protracted process more often than not has a negative effect on service delivery, which makes government look unprofessional, uncaring and unsuccessful.
The next best thing for SMME’s is to approach a registered micro lender for bridging capital, at much higher interest rates – understandably so because it is a high risk and quick turnover game. On face value this looks like a good deal for the small business owner – who accesses much needed capital fast – and the financier who simply makes good money. Well, it may be, except for one stakeholder who does not come to the party – government! Let me explain
Government is the entity that starts this entire cycle with good intention, but then they end up being the destroyers of their own intention.
When a small black owner borrows money from a micro lender there are provisions. One is that the money will be paid back to the lender at high interest rates. If however government payment exceeds thirty or sixty days the business owner incurs additional penalty fees, a certain percentage per day.
Far too often payments drag out for sixty, ninety or more days and eats into the already reduced profit (because of the loan) of the small business owner who is working so hard to get ahead in life. Thousands of black small businesses are strangled to death because government, starting out with the intention of helping them, simply doesn’t pay on time. For some it becomes a disaster when they lose possessions to creditors.
Why can’t the Small Business Ministry do something about this? You could start by implementing a policy internally that penalizes government when it exceeds thirty days on payment to micro enterprises. That will help so many of them with cash flow, which is not only one of the central reasons why many small businesses fail within the first eighteen months, but clever cash flow management is also one of the most important success factors of small businesses; any business.
It is crucial that these businesses succeed during this phase of their life cycle where they depend on tenders, which is not ideal to begin with. But while this “good intention system” is in place, at least make it work!
Ensure the board members of these state finance institutions understand small business needs, from a practical point of view. These individuals must also understand government’s economic development agenda.
Treasury should implement a 30 day payment policy for SMME’s with a watchdog committee where non-compliance can be reported for investigation. Punitive measures should be implemented against heads of departments that don’t adhere to this policy.
The above should be implemented with immediate effect, and then extended to the private sector. Not only government but private companies should adhere to a 30 day policy. We cannot as a country promote and encourage small business growth, for mission critical job creation, yet strangle them on the other end of the value chain.
Another good question is why should SMME’s or SME’s for that matter, pay VAT on month of invoice? Why not on month of payment by their clients? When government or private sector ends up paying SME’s outside of the invoiced month SME owners have to pay VAT from their own pocket, which impacts negatively on their business cash flow. This challenge will also be addressed partly if government implemented a strict policy of “payment within 30 days”.
Please act on this as a matter of urgency Ministers. Practically there is so much you can do to assist SMME’s to survive in today’s challenging economic environment.
Do you recognize some areas in yourself or your team that need improvement? Email Adriaan on firstname.lastname@example.org for more on creating “Leadership Fit” leaders that generate successful movement (performance) inside your organisation. Follow him on Twitter: @AdriaanG_LP or @LeadershipPform.