THE ROLE OF PPPs IN DEVELOPING AN SME SECTOR 

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CHAPTER 3: THE ROLE OF PPPS IN DEVELOPING AN SME SECTOR

Introduction

Chapter 2 defined PPPs and discussed their economics and their institutional, regulatory and legal frameworks. It found that strong institutional, regulatory and legal frameworks are imperative for a PPP programme to succeed. It showed that to have a viable PPP market that can support SMEs development, there need to be a well-functioning legal, regulatory and institutional framework that will protect the interests of consumers, the private and the public sectors. This shows that without strong legal, regulatory and institutional frameworks, it can be difficult to develop a viable SME sector through PPP projects, since a viable PPP market is a necessary condition for SMEs to participate in PPP projects. This chapter therefore discusses the role PPP projects can play to develop a sustainable SMEs sector, especially for developing countries.
SMEs differ from large organisations in many ways. SMEs differ from big enterprises in resource limitations, in their informal strategies and flexible structure. As a result, SMEs have a higher failure rate compared to large firms. This causes a slow growth of SMEs, especially in developing countries (Hussain et al., 2012:1582). The lack of key resources, such as human capital, finance and technology affects their growth. The question that one can ask is: can PPPs address these challenges? The answer is: not all SME challenges can be addressed through PPPs. However; PPPs can improve the sustainability of SMEs through subcontracting them to provide certain goods and services. In that way the challenge of access to markets for SME goods and services would have been mitigated to a certain extent, as SMEs would have a guaranteed market for their products and a sustainable income as long as the PPP project continues to operate. This means that more PPP projects in a country can result in more opportunities for SMEs. This can happen only if the PPP market is supported by a well-functioning legal, regulatory and institutional system that supports the growth of the PPP market, thus opening more opportunities for SMEs to sell their goods and services to the growing PPP market. This also requires a policy that would force PPP projects to use SMEs as suppliers of their (PPPs) goods and services.
As mentioned in the first chapter, the main objective for using PPPs is to provide public infrastructure services to citizens, as many governments around the world struggle to provide more and better services due to limited budgets (De Bettignies and Ross, 2004:135). Although the lack of public infrastructure to provide public services is seen as a problem by many governments, it presents an opportunity for the development of a sustainable SMEs sector for both developed and developing countries. The bigger the infrastructure backlog, the bigger the opportunity for countries to develop a viable SMEs sector that has the potential to create jobs and alleviate poverty, while at the same time addressing the challenge of inequality.
The advantages of addressing these triple challenges (unemployment, poverty and inequalities) through SMEs compared to large companies is that SMEs create new jobs through small investments opportunities that may not be attractive to large companies, thus maximising local economic opportunities; SMEs use local raw materials that would otherwise be neglected, they offer people with little income and little education opportunities to develop and contribute meaningfully to the economy, they provide a route through which previously disadvantaged persons can own and control a larger percentage of the economy, and more SMEs means more of the wealth generated by them stays within the country to be used further to generate even more opportunities compared to large firms which normally repatriate their profits to their country of origin (Mutsigwa, 2009:81; Fatoki and Odeyemi , 2010:128). Compared to larger firms, SMEs tend to use less capital per worker, as most SME activities are more labour-intensive compared to big firms. A study in countries such as Ghana, Colombia and Malaysia found that small firms have significantly higher value added to fixed assets ratio (Hussain, 2000:2).
It is projected that South Africa’s infrastructure may not meet future demand for infrastructure needs (NEPAD Business Foundation, 2012). This has already been experienced with power supply shortages in 2008. South Africa’s infrastructure deficit was estimated at R1,5 trillion in 2012 (NEPAD Business Foundation, 2012). In the 2012 budget speech, the Finance Minister, Pravin Gordhan announced that R850 billion would be allocated to infrastructure investment over the next two years. The projected cost of the South African government’s infrastructure programme over the next 30 years is estimated to be R4,3 trillion (Paton, 2013). This backlog cannot be automatically converted into opportunities for SMEs and the country as a whole without government intervention. The high number of unemployment in the country of approximately 24,3% in 2014 (South Africa. Statistics South Africa, 2014a) and the high level of poverty, which is estimated to be about 45,5% of the population living on less than R620 per month in 2011, and high inequality levels as indicated by a Gini-coefficient of 0,65 in 2011, present a big challenge for the country (Republic of South Africa. Statistics South Africa. 2014b). The infrastructure backlog presents an opportunity for the country to effectively address these triple challenges of unemployment, poverty and inequality. What the government needs to do is to find a way of changing its infrastructure backlog problems into opportunities for job creation and poverty alleviation and developing a policy that will encourage or force companies involved in PPP projects to use SMEs as their suppliers of intermediate goods and services.
The objective of this chapter is therefore to show how PPPs, especially during both construction and operational phases, can be used to develop a sustainable SME sector and address the triple problem of unemployment, poverty and inequality. This chapter is organised as follows: the second section discusses the role of SMEs in economic development. The third section discusses challenges facing the SME sector in general and in South Africa, followed by a discussion on the potential role that PPP projects may have in developing a sustainable SME sector in Section 4, while the fifth section discusses South African government’s initiatives to support SMEs

The role of SMEs in economic development

Before discussing the role of SMEs in economic development, it is imperative to first define SMEs in order to ensure that all readers of this thesis have the same definition of SMEs, as the term SMEs is defined differently from jurisdiction to another.
There is still no universally accepted definition of SME as is the case with the definition of PPPs. SMEs differ in their levels of capitalisation, sales/productivity and employment. If SMEs were defined based on measures such as number of employees, turnover, profitability and net worth, this may lead to firms being classified as small, whereas, when the same size definition is applied to a different sector it might result in all firms being defined as large. Even though SMEs constitute the central pillar of all economies, there is still no single definition in the literature on SMEs for which global consensus is assured. Although the South African National Small Business Act of 1996, amended in 2003 and 2004 (Republic of South Africa. Department of Trade and Industry, 2004), gives an official definition for SMEs in South Africa, different agencies and research institutions do not use this definition consistently and that makes it difficult to benchmark different studies and data on SMEs (Republic of South Africa. National Credit Regulator, 2011:26). The many definitions of SMEs are based on many factors, such as the level of industrialisation, economic level, technology employed, number of machinery, workbench, size of the market, the business line of operation, to mention but a few. The most common definition of SMEs is based on the number of employees that a firm may have or the turnover that the company generates in a year.
According to the National Small Business Act of 1996, as amended in 2004 (Republic of South Africa. Department of Trade and Industry, 2004), an SME is defined as:
“… a separate and distinct business entity, including co-operative enterprises and nongovernmental organisations, managed by one owner or which, including its branches or subsidiaries, if any, is predominantly carried on in any sector or sub-sector of the economy mentioned in Column 1 of the schedule…”
The National Small Business Act of 1996, as amended in 2004, also distinguishes between survivalist, micro, very small, small and medium enterprises; hence the use of the word SMMEs. However, the term SMMEs and SMEs are used interchangeably in South Africa. Even for the purpose of this study the two terms are used interchangeably. The broad definition of SME in SA is summarised in Table 3.1.
As mentioned earlier, SMEs face challenges that make them vulnerable and prevent them from attaining growth, especially when they have to participate in PPP projects. These problems range from lack of human resources development, technological capability, access to markets and finance. If left alone SMEs would always find it difficult to penetrate local PPP markets. Having defined SMEs, the following discussion is on the role of SMEs in economic development.
Small and medium enterprises (SMEs) are vital for the development of the economy of any country, especially in the developing world. SME contribution to economic development is through job creation and poverty reduction (Hussain et al., 2012:1582). They provide the potential for women and other traditionally disadvantaged groups to gain access to work under better conditions, to be productive, sustainable and have access to quality employment opportunities (Al-Dairi, McQuaid and Adams, 2012:181). Sometimes it is not feasible for large firms to produce the goods and services they need as inputs in their production process. The fact that SMEs manufacture these products makes them vital for any economy, as they function as suppliers of intermediate inputs to local firms. It is worth noting that SMEs are faced with the need to overcome significant challenges such as access to finance, skill development and access to markets; however their strategic importance cannot be over emphasised. According to Al-Mubaraki and Aruna (2013:157), the following are some of the roles that SMEs play in an economy: (a) they are responsible for growing employment at a faster rate than large organisations (b) they increase the competitive intensity of the market and reduce the monopolistic positions of large organisations; and (c) they encourage the deployment of entrepreneurial skills and innovation. SMEs are therefore effective job creators and are sources of income for a big proportion of a country’s population. They provide on the job training opportunities and important basic services for disadvantaged people (UNIDO, 2007). SMEs are a primary vehicle through which new entrepreneurs provide economies with a continuous supply of innovative ideas and skills. According to Hussain et al. (2012:1581), the main reason why governments worldwide support SMEs is because SMEs are believed to be making substantial contributions to aggregate economic growth

CHAPTER 1: INTRODUCTION
1.1 Introduction
1.2 The role of infrastructure in economic development
1.3 New developments in financing infrastructure projects
1.4 Public-private partnerships and SME development
1.5 Infrastructure funding gap for Africa and South Africa
1.6 Trends for South African PPP projects
1.7 Why use PPPs to create jobs through SMEs?
1.14 Research methods
1.17 Limitations of the study
1.18 Chapter overview
CHAPTER 2: PUBLIC-PRIVATE PARTNERSHIP: THEORY AND PRACTICE 
2.1 Introduction
2.2 Public-private partnerships (PPPs)
2.3 The economics of public-private partnerships
2.4 The costs and benefits of public-private partnerships
2.5 The efficiency notion of the private sector
2.6 Institutional and regulatory requirements for PPPs
2.7 Institutional requirements for PPPs
2.8 Regulation and public-private partnerships
2.9 Institutional framework for public-private partnerships
2.10 The South African PPP institutional developments
2.11 Chapter summary
CHAPTER 3: THE ROLE OF PPPs IN DEVELOPING AN SME SECTOR 
3.1 Introduction
3.2 The role of SMEs in economic development
3.3 Challenges facing SMEs
3.4 The potential role of PPPs in addressing the challenges of SMEs
3.5 South African governmental initiatives to support the development of SMEs
3.6 Chapter summary
CHAPTER 4: RESEARCH METHODOLOGY
4.1. Introduction
4.2. Theoretical overview of a research framework
4.3 The research approach and design for the study
4.4 Research question
4.5 Research setting
4.6 The study population and the sampling criteria
4.7 Data-collection techniques
4.8 Data-collection method and procedure used for the study
4.9 Response rate
4.10 Data reliability, validity, credibility and analysis
4.11 Data analysis
4.12 Identifying the type of model approach appropriate for this study
4.13 Chapter summary
CHAPTER 5: RESEARCH RESULTS 
5.1 Introduction
5.2 Analysis of research results
5.3 Presentation of research data on current industry practice
5.4 Improving participation of SMEs in PPP projects
5.5 Conclusion
CHAPTER 6: SYNTHESIS AND ANALYSIS OF RESEARCH RESULTS 
6.1 Introduction
6.2 Contextual overview of the research results
6.3 Answering the main research sub-questions (MRQs) and their respective propositions
6.4 Summary of data and research propositions
6.5 Summary of challenges faced by SMEs in PPPs and possible solutions
6.6 Chapter summary
CHAPTER 7: THE PROPOSED INNOVATIVE CONCEPTUAL PPP MODEL FOR DEVELOPING A SUSTAINABLE SME SECTOR 
7.1 Introduction
7.2 The two South African PPP model approaches
7.3 Revisiting the current PPP model and incorporating the survey results into the proposed model development
7.4 Building the conceptual innovative PPP model for SME development1
7.5 The proposed PPP model for SME development
7.6 Addressing the shortcomings of the traditional PPP model
7.7 The structure of the innovative conceptual PPP model
7.8 Model validation and evaluation
7.9 Working of the proposed model
7.10 Risks and benefits associated with unbundling PPP projects
7.11 Incentivising PPP firms to contract more SMEs
7.12 Implementation and evaluation of the success of the proposed model
7.13 Chapter summary
CHAPTER 8: CONCLUSSION AND RECOMMENDATIONS
8.1 Introduction
8.2 Conclusions
8.3 Recommendations
8.4 Recommendations for further research
References
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