TIPED GGDA The Public SectorContext PFMA &MFMA Supply ...€¦ · pare financial statements, their...

TIPED

GGDAThe Public Sector Context

PFMA & MFMASupply & Value ChainManagement

What are the key constructs and cursory issues?

Dr Mogie Subban (UKZN)10 November 2017

Introductory approachCONCEPTS

CONTEXT

OPERATIONS

BPR…PARADIGM SHIFT

IT CANNOT BE BUSINESS AS USUAL!!!

WHAT IS THE MODUS OPERANDI?

Inputs-Outputs-Outcomes-ImpactWhat is the nexus?

Why this approach?

What are the cursory issues?

What is the linkage/synergy?

How can value be instilled?

Whereto from here?

Clean audits & unqualified audits …

3 EsEfficiency

Effectiveness

Economy

Fiduciary responsibilities

Public value system

S195 Constitutional obligations linked to TR

Transparency

Responsibility

Accountability

PFMAAccountability and responsibility framework: national & provincial

Regulate financial performance: individual vs institutional

PFMA provides a clear regulatory framework for the integration ofplanning and budgeting

Constitutional basis and imperatives

Sect: 214/5

3 significant typologies …

MFMAAccountability and responsibility framework: municipal context

Regulate municipal financial governance

Geared towards effective and efficient municipal service delivery

Decentralised fiscal autonomy

SPATE OF REFORMSFrom administration to management

Fiscal decentralization

Financial autonomy

Inputs to outputs

Silo to whole-of-government approach

Annual reporting to in-year monitoring

Cash-based accounting to accrual system

Linking planning to strategic planning

Normative guidelines: GRAP & GAAP, GAMAP, SCOA & MSCOA

WHAT IS THE STATE OF SUPPLY CHAIN MANAGEMENT & FINANCIALMANAGEMENT?CONFLICT OF INTEREST

FRAUD

CORRUPTION

DISHONESTY

UNETHICAL BEHAVIOUR

LACK OF VALUES

GREED

POOR M & E

LACK OF OVERSIGHT ROLE

POOR / NON SERVICE DELIVERY

POLITICAL PROFITEERING

PLUNDERING OF STATE RESOURCES

ROBBING THE POOR

POOR GOVERNANCE

FLOUTING THE LEGISLATION

OUTPUTS NOT LINKED TO OUTCOMES

FRUITLESS, IRREGULAR, UNAUTHORISED & WASTEFUL EXPENDITURE

FINANCIAL RISK MANAGEMENT& GOVERNANCE

Risk register

Pre-risk strategies

Post-recovery strategies

Mitigating factors

EWS

DRR

CONSTITUTIONALITY OF PUBLIC PROCUREMENT

… S217(1)“When an organ of state in the national, provincial or local sphere of government, or any other institution identified in the national legislation contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.”

LINKED TO SCM

“SCM in the public sector - integral part of Financial Management that seeks to introduce internationally accepted best practice.

Bridges the gap between traditional methods of procuring goods and services and the balance of the supply chain whilst addressing procurement related matters that are of strategic importance”

(Policy to Guide Uniformity in Procurement Reform Processes in Government: 2003)

KEY ELEMENTS OF SCM(link to outputs &outcomes)

DEMAND MANAGEMENET ( Planning, specifying, analysis, research)

ACQUISITION MANAGEMENT (Management,

compliance, bid documents, criteria for evaluation and adj.)

LOGISTICS (Stock/ inventory management, warehousing, transport, supplier payment, vendor, performance

DISPOSAL ( Obsolescence planning, disposal strategy)

National Treasury issued “General Procurement Guidelines” – basis for transformation of procurement practices within public sector:

◦ Enhance government’s commitment to preferential procurement

◦ Assist in transformation process

◦ Broader understanding by all stakeholders

PRINCIPLES FOR SCM

“…These guidelines are issued by the Government not only as a prescription of standards of behaviour, ethics and accountability which it requires of its public service, but also as a statement of the Government’s commitment to a procurement system which enables the emergence of sustainable small, medium and micro businesses which will add to the common wealth of our country and the achievement of enhanced economic and social well-being of all South Africans” (National Treasury)

Rationale for SCM Principles

FIVE PILLARS OF PROCUREMENT

Proper and successful government procurement rests upon the five pillars of procurement

FIVE PILLARS OF PROCUREMENT

VALUE-FOR-MONEYOPEN AND EFFECTIVE

COMPETITION

ETHICS AND FAIR DEALING

ACCOUNTABILITY AND

REPORTINGEQUITY

LEGISLATIVE FRAMEWORKLinkage between the Constitution and the other key acts affecting Local Government and Municipal Supply Chain Management

SIGNIFICANT CONSTITUTIONAL LINKAGE TO FINANCIAL

MANAGEMENT

Constitution

S217(1)“When an organ of state in the national, provincial or local

sphere of government, or any other institution identified in the

national legislation, contracts for goods or services, it must do so

in accordance with a system which is fair, equitable,

transparent, competitive and cost-effective.”

S217(3) issues national legislation with the requirement to

prescribe a framework which provides for preferential

procurement to address social and economic imbalances of the

past.

MFMA LINKAGE

S112(1) “The supply chain management policy of a

municipality or municipal entity must be fair,

equitable, transparent, competitive and cost-

effective and must comply with a prescribed

regulatory framework for municipal supply chain

management…”

ENABLING LEGISLATION FOR PREFERENTIAL PROCUREMENT SYSTEM

(PPPFA)

PPPFA gives effect to S 217 (3) of the Constitution

Provides framework for implementation of procurement policy contemplated in S 217(2) of the Constitution

Provide for matters connected therewith

CONTINUED…

Promulgation and implementation of PPPFA and regulations were followed by the publication of a “Broad Based Black Economic Empowerment Bill” and supporting strategy

Basis on which amendments to the Preferential Procurement Regulations were to be undertaken.

BBBEE PRINCIPLES (BBBEE STRATEGY)

ROLE-PLAYERS, FUNCTIONS AND SUPPORTSTRUCTURES FOR SCM

What are the responsibilities of some of the key-role players in SCM?

NATIONAL TREASURY:◦ Monitor implementation of SCM in all spheres of government

◦ Develop policies, procedures and practice notes/circulars to assist the three spheres of government in achieving the broader policy objectives as set out in the PFMA/MFMA and further legislation

CONTINUED…

PROVINCIAL TREASURY:◦ Promote co-operative government among role-players

◦ Assist NT by monitoring delegated municipalities in terms of compliance to National and Provincial Treasury norms and standards

◦ Measure improvements in supply chain performance

◦ Set complementary standards

◦ Monitor and publish reports by municipalities and share information

◦ Take intervention measures for breach of the act by a municipality

CONTINUED…

MUNICIPAL COUNCIL AND COUNCILLORS:◦ Provide political leadership and direction to a municipality’s operation

through policy and oversight responsibilities

◦ Oversee financial management and service delivery of a municipality

◦ Approve the SCM policy for a municipality

◦ Monitor and evaluate SCM implementation process through regularreporting to political structures.

Role of the Accounting Officer

ACCOUNTING OFFICER:◦ Implementation of SCM system

◦ Establish a SCM unit within the CFO’s structure with the necessary delegations.

◦ Develop municipal SCM policies and procedures in accordance with national and provincial guidelines and directives

◦ Establish the necessary SCM Committees with clear delegations and responsibilities

◦ Ensure that adequate controls are in place to prevent over- or

under-expenditure

◦ Ensure efficient anti-corruption and anti-fraud mechanisms are implemented

◦ Contribute towards local economic development, SMME development and BBBEE through targeted procurement spending

◦ Report to National Treasury/Provincial Treasury on SCM implementation

FINANCIAL GOVERNANCE FRAMEWORK

Responsibility

Oversight

Accountability

SALIENT ISSUES

Audit committees are required by statute to provide external independent assurance.

NDP 2030 highlights the need for a capable state, enjoining institutions to ensure effectiveness, and ultimately displays good governance in the delivery of services by government.

Africa Agenda 2063 published by the African Union Commission sets as a target “An Africa of good governance, democracy, respect for human rights, justice and the Rule of Law” as an aspiration and within which, the need for capable institutions and transformative leadership is established at all levels.

SUPPLY CHAIN MANAGEMENTPOLICY (value add)

S111 of the MFMA is very specific in the requirements of a

Supply Chain Management Policy (SCMP) within a

municipality and gives Effect to S217 of the Constitution.

The SCMP must:

be fair, equitable, transparent, competitive and cost-effective;

comply with the regulatory framework for municipal supply chain management;be consistent with other applicable legislation and with the nationaleconomic policy concerning the promotion of investments and doing business in the public sector;

not undermine the objective of uniformity in SCM systems between organs of state in other spheres.

COMBATING ABUSE OF SCM SYSTEM

It is the responsibility of the AO, through the SCMP to

provide measures:

To take reasonable steps to prevent abuse of the SCM system;

To investigate all allegations against an official or other role-player of fraud, corruption, favouritism, unfair or irregular practices or failure to comply with the SCMP and where justified◦ Take appropriate steps against such official or role-player;

◦ Report any alleged criminal conduct to SAPS;

How can SCM beimproved?CAPACITY BUILDING

WHISTLEBLOWING

RECOGNITION OF HONEST SCM STAFF

MORE MGT. VIGILANCE

EFFECTIVE INTERNAL AUDIT

MORE VISIBLE PUBLICPROTECTOR

CREATE CULTURE OF PRIDE AND PROFESSIONALISM

“CLEAN” SCM CAMPAIGN

PROFESSIONAL BODY OF SCM PRACTITIONERS

RESOURCE CENTRES

BENCHMARKING

SHARE BEST PRACTICES

POLITICAL WILL

Concluding remarks…

3 Cs:

Collective commitment (joint responsibility)

Compliance (intra-vires)

Corporate governance (ethical stewardship)

Thank You

Dr Mogie Subban

UKZN

Email: [email protected]

mailto:[email protected]

CASE STUDY

ABSTRACTIn spite of South Africa’s efforts in creating a suitable environment for survival of microenterprises, they are still struggling. One of the reasons is that many South African townships reflect both first and third world features. Thus, microenterprise support, in particular microfinance, be-comes a challenge. On the other hand, many South African townships, especially in Gauteng, already offer the necessary infrastructure and environment, and on regional as well as on national level there exist institutions and programmes which can be adapted and developed to provide more support for sustainable microenterprise development.

INTRODUCTIONIn South Africa small-scale entrepreneurship is practically identi-cal to self-employment. 2.7 million people are working in non-tax registered businesses (Rolfe et al., 2010). Even though most of these informal retail businesses are only small and intended to fulfil a specific purpose, they may still provide a living over the basic standard (ibid.). Since the poor are mainly living in impover-ished rural areas, improvement of financing in rural areas is a key issue, and micro business activity and self-employment supported by microfinance may give them the chance to help themselves (cp. Mwenda and Muuka, 2004; Ssendi and Anderson, 2009). Unfortunately, often this does not work out: the lack of ac-cess to finance is still the greatest obstacle to microenterprises´ successful performance (Gauteng Department of Economic De-velopment [GDED], 2011: 25, 75f.); high rates of illiteracy espe-cially in rural areas, lack of collateral, the combination of house-holds with micro business activities (which affects the business cash flow and credit repayments), the absence of adequate busi-ness concepts and considerable deficits in understanding financial terms, products, services and credits limit the benefit from micro-finance schemes (for Ga-Rankuwa cp. Klingelhöfer et al. 2012a; for Gauteng Chiloane and Mayhew, 2010; Maes and Foose 2006; Naidoo and Hilton, 2006). Since micro businesses need not pre-pare financial statements, their financial data are less reliable and comparable, and it becomes more difficult to obtain accurate in-formation about their credit ability. This may lead to increasing

loan processing and administration costs (Meagher and Wilkin-son 2006; Burke and Hanley 2002). Hence, providing only small loans may become uneconomical. Nevertheless, e.g. in Gauteng the Provincial Government is aware that small, medium and micro enterprises (SMMEs) can contribute to the reduction of poverty and inequality, the crea-tion of jobs and ownership, and the empowerment of the poor (GDED, 2014: 25f, 55f, Gauteng Department of Agriculture and Rural Development [GDARD], 2010: 24). These goals should be reached by “focusing on financial and non-financial support to SMMEs and Cooperatives” (GDED 2011: 32, emphases as in original, cf. also ibid.: 26, 76) and establishing an SMME Agency (GDARD, 2010: 24). The challenge facing South Africa and especially Gauteng is therefore to establish effective financial support institutions and products, and to develop effective policies and strategies that target microenterprises, particularly those in townships and rural areas.

THE CHALLENGE OF MICROFINANCE AND MICROENTERPRISE SUPPORT IN SOUTH AF-RICAN TOWNSHIPS ON THE INTERFACE BE-TWEEN DEVELOPED AND DEVELOPING WORLDRegarding effective financing strategies, in South Africa the most important challenge is to establish sustainable institutions that support microenterprises and impact positively on sustainable de-velopment as well as poverty reduction by ensuring wide access to credits and savings. This is different to many other countries because South African townships, especially in Gauteng, reflect the interface between developed and developing world. This im-plies that (micro) finance institutions are obliged to pay first world salaries for educated employees but can only provide small credits to entrepreneurs who often live under such conditions as would be found in typical third world countries, with third world sala-ries and often with an incomplete education, provided in terms of developing world standards. However, since financial institutions

© 2014 Africagrowth Institute Africagrowth Agenda 11

Microfinance And The Support Of Microenterprises In South African Townships – The Case Of GautengProf Heinz E KlingelhöferTshwane University of Technology

are required to be profitable and sustainable to continue offering their services, they tend to establish their offices concentrating on certain segments (the working class, highly developed industrial areas, preferred sections of the population) instead of focusing on microenterprises and the rural poor. For instance, according to a survey conducted in 2011 and answered by 8 of 10 microfinance institutions (MFIs) in 12 randomly selected townships of Gau-teng, only 2 operated branches in rural areas, while all the others – as well as the 2 financial cooperatives and the 2 retail develop-ment finance institutions (RDFIs) which were included – focused on urban areas, and the vast majority of micro entrepreneurs did not even know about microfinance (Klingelhöfer et al. 2012a; 2012b). This combines with the fact that most microfinance services in Gauteng are based on personal loans (8 of the answering MFIs and the 2 financial cooperatives), while only the remaining 2 MFIs and the 2 RDFIs offer finance (only) to SMMEs. Thus, especially in the rural areas, these enterprises are still unders-erved. Since, furthermore, most micro entrepreneurs are unable to provide adequate collateral securities and started their business through personal savings, but (being entrepreneurs) are not for-mally employed, the way to obtain finance through personal loans is often closed to them. Hence, especially in townships and more rural areas, it is actually difficult to find adequate microfinance.

Exploring the knowledge of both microenterprises and microfi-nance revealed major deficits: - first, most of the micro entrepreneurs possess very minimal knowledge not only about microfinance, but also about financial and management aspects,- similarly, loan officers struggle in understanding financial terms; many were not even aware of the programmes offered by their own institution and its marketing strategy.

This makes it difficult for the staff of microfinance institutions to establish an appropriate level of communication, which negatively impacts on the efficiency of microfinance services. Furthermore, 108 questionnaires were distributed to NGOs (94 answers), 44 to governmental institutions (23 answers) and 48 to Tertiary Education Institutions (TEIs; 29 answers) in 12 townships in Gauteng. Besides this, a Tshwane focus group, con-sisting of 15 NGOs (12 participated), of 22 microenterprises (15 participated) and 10 TEIs (8 participated), was invited for discus-sions and interviews. Both the surveys and the discussions with the focus group demonstrated that all participating stakeholders agreed that TEIs in conjunction with the NGOs and Govern-ment Departments in the study areas could actually assist micro enterprises through initiating programmes such as information

dissemination, training courses, skills acquisition, and consultancy services. However, NGOs as well as Government Departments and TEIs in fact do very little to have information disseminated. Workshops were playing by far the most important role (especially for dissemination between the NGOs), while other means (such as seminars, conferences, consultative groups, exhibitions, media education, leaflets/flyers) were not highly valued, with the mass media hardly being chosen. Thus, the outreach was very small, and – as already recognised by prior studies (e.g., Klingelhöfer et al., 2012a; 2012b; Chiloane and Mayhew 2010: 2595-2600) – most of the potential addressees (the SMMEs) were not aware of these programmes. Hence, these entrepreneurs lacked even the basic skills, especially with respect to business management.

CONCLUSION AND RECOMMENDATIONSMost of the owners of micro enterprises cannot access funds, ei-ther as a result of lack of collateral or of limited knowledge about microfinance, so that they rely on personal savings or loans from friends. The first recommendation, therefore, is aligned with the Gauteng Employment and Growth Strategy to focus more on the “financial and non-financial support to SMMEs and Coopera-tives” (GDED 2011: 26, 32, 76). A step in this direction could constitute an extension of the services of the Small Enterprise Foundation (SEF). Based in the Limpopo Province, it aims at poverty eradication by promoting sustainable income generation, job creation, and social empowerment. Adapting Bangladesh’s successful Grameen Bank’s methodology, SEF offers microcred-its for group lending where the members guarantee each others’ loans financially, and it trains and assists in the accumulation of savings. Furthermore, since, as mentioned, financial institutions are often required to be profitable and sustainable to continue pro-viding their services, the rural poor do not form part of their fo-cus. Therefore, some of government’s planned efforts to support SMMEs should be directed at encouraging MFIs to locate their offices in the rural areas. Since this already forms part of Gauteng’s Employment and Growth Strategy and because South Africa has already installed a significant degree of small and micro business development support, the necessary support infrastructure for such an initial incentive is already in place; the relatively short distances to the large metropolitan centres with the concomitant opportunities of obtaining qualified staff should ensure that MFIs are capable of reaching a state of sustainable operations without further (or only minimal) governmental funding. To support this development further, as a second recommen-dation, it seems appropriate that government extends the use of Development Finance Institutions (DFIs) as it already does for agricultural purposes with the Land Bank. DFIs are established

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to accelerate sustainable socio-economic development through funding. Their purpose is to ensure investment in areas where the market fails to invest sufficiently. Being utilised to implement po-litical targets and therefore, without the need to be sustainable, such extended use of DFIs by government not only for agricul-ture, but also for other SMME support, could assist the MFIs to establish offices in regions where they normally would not at-tempt to offer services. Regarding the lack of knowledge about microfinance, three further possible recommendations emerge as numbers three to five: The third one is linked to the implementation and devel-opment of the country’s Thusong Service Centres. Initiated by government to provide rural people with information and to give them access to government services, they could also be used to distribute information on microfinance and appropriate training facilities. Situated near to central places (e.g. big shopping malls) they would offer an easy, usable facility to provide the intended users of microfinance with the necessary information, thereby ex-tending the outreach of MFIs. Since a part of this lack of knowledge also results from an inadequate education (especially that of their clients, the owners of SMMEs) and communication, this recommendation should be bolstered by a fourth one that refers to training and education, also of MFI staff and, in particular, loan officers. Only if they re-ally grasp their institution’s programmes and are able to find an adequate level of communication, will they be able to advise their clients according to their actual needs. Since this is a structural problem of the microfinance sector whose clients are the SMMEs and the very poor, it should be addressed centrally and via staff education. SAMAF’s approach, to set a portion of prime loan aside for capacity building, appears to be the right one and should be increased for the purpose of effective training of the staff of MFIs. The fifth recommendation takes into account the fact that the environment in South African townships situated close to im-portant cities (in Gauteng near to the country’s capital, Tshwane (Pretoria) and Africa’s business hub, Johannesburg) and often near to industrial areas which require a large workforce, can be very different from other third world settings. Sometimes these areas even house their own industrial area and often tertiary edu-cation institutions (TEIs) which are given much support by the post-apartheid government to develop the previously disadvan-taged population. Thus, many townships include quite a number of first-world features, partially- and well-educated people, and a broad middle-class, which allows sufficient scope to develop a banking and a microfinance system as well as a market for micro enterprises. While infrastructure for a banking and microfinance

system in African rural areas is usually inadequate, the townships in Gauteng allow for infrastructural development. In particular, the TEIs are often already situated in less developed areas and re-cruit their students mainly from the neighbourhood. Hence, they could serve as a spark of knowledge development and distribution as well as of micro enterprise support: offering training, consult-ing services and programmes as well as opening up opportunities for spin-offs, they might well provide a viable option to develop a market of micro enterprises and for sustainable economic growth. Their students might do a part of their research in their own envi-ronment and, thereby, via both giving and taking, contribute to the development of the micro enterprises in these areas. Furthermore, since the poorer areas especially are not targeted by professional consultants, the students of the TEIs could fulfil this role at least partially. Backed up by and together with their supervisors, they should be able to contribute to enhancing the skills of the micro entrepreneurs and the MFIs. Taking into account that often even the basic skills are missing, while, on the other side, these are al-ready part of an early stage of the TEIs’ curricula, this would create a win-win situation at a relatively low cost.

REFERENCESBurke, A. and Hanley, A. (2002): “How do banks pick safer ven-tures? Theory and evidence of the importance of collateral, inter-est margins and credit rationing”, Economic Division Working Paper No. 73, Warwick Business School, University of Warwick, Coventry.

Chiloane, G.E. and Mayhew, W. (2010): “Difficulties encountered by black women entrepreneurs in accessing training from the Small Enterprise Development Agency in South Africa”, Gender and Behaviour, 8(1), pp. 2590–2602.

Gauteng Department of Economic Development [GDED] (2014): “The Gauteng Employment, Growth and Development Strategy”, Johannesburg, South Africa. Available at: http://www.gautengonline.gov.za/Business/Documents/GEGDS.pdf [ac-cessed 29/3/2014].

Gauteng Department of Agriculture and Rural Development [GDARD] (2010): “Comprehensive Rural Development Strat-egy”, Gauteng Provincial Government.

Klingelhöfer, H.E., Aiyepola, P. and Adewunmi, A. (2012a): “Mi-cro enterprises and microfinance for business women in rural ar-eas of South Africa: a case study of Ga-Rankuwa at the interface between first and third world”, International Journal of Entrepre-neurial Venturing (IJEV), 4(3), pp. 290-308.

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Klingelhöfer, H.E., Aiyepola, P., Adewunmi, A. and Fatoki, O. (2012b): “Microfinance operations for sustainable development in South African townships: a case study of Gauteng”, in: Bisschoff, C.A. (Ed.): 27th-31st August 2012, 6th International Business Conference – Conference Proceedings, Tropical South Coast, Mombasa, Kenya, ISBN 978-0-620-53287-7, Part 6: Financial Management and Investments, pp. 52-71.

Maes, J. and Foose, L. (2006): “Microfinance services for very poor people: promising approaches from the field and the US Law’s mandate to reach very poor people: what strategies are MFIs de-veloping, and what do they mean for the rest of the field?” Availa-ble at: http://www.microcreditsummit.org/papers/Workshops/6_MaesFoose.pdf, [accessed 25/10/2010].

Mashigo, P. (2011): “Group lending. a mechanism for deliver-ing financial services to the poor households: lessons for South Africa”, in: Delener, N. et al. (Eds.): Fulfilling the worldwide sustainability challenge: strategies, innovations, and perspectives for forward momentum in turbulent times; Global Business and Technology Association, 13th Annual International Conference, Readings Book, Istanbul, Turkey, July 12–16, 2011, pp. 605-614.

Meagher, P. and Wilkinson, B. (2002). “Filling the gap in South Africa’s small and micro credit market: An analysis of major pol-icy, legal, and regulatory issues”, Paper No. 02/11. IRIS Center, University of Maryland.

Naidoo, S. and Hilton, A. (2006) “Access to finance for women entrepreneurs in South Africa”, Department of Trade and Indus-try, Pretoria / International Finance Cooperation, Craighall / Fin-mark Trust, Marshalltown.

Rolfe, R., Woodward, D., Ligthelm, A. and Guimarães, P. (2010) “The viability of informal micro-enterprise in South Africa”, Pre-sented at the Conference on Entrepreneurship in Africa: Whit-man School of Management, Syracuse University, Syracuse, New York.

Ssendi, L. and Anderson, A.R. (2009) ‘”Tanzanian Micro Enter-prises and Micro Finance: The Role and impact for Poor Rural Women”, The Journal of Entrepreneurship, 18, pp.1-19.

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PERFORMANCE WITHIN THE PUBLIC

FINANCE MANAGEMENT ACT

LOCAL GOVERNMENT FINANCING

SUPPLY CHAIN MANAGEMENT ARTICLES

242

PROCUREMENT CHALLENGES IN THE SOUTH AFRICAN PUBLIC SECTOR

INTAHER M AMBE* JOHANNA A BADENHORST-WEISS

University of South Africa (Unisa)ABSTRACT

This article reports on an exploration of challenges experienced in the field of

procurement within the South African public sector. To institute procurement best practices,

a supply chain management system was adopted in South Africa in 2003. The procurement

process was granted constitutional status and has been used to address past inequitable policies

and practices. It promotes aims which are, arguably, secondary

to the primary aim of procurement. For the exploration, a conceptual analytical approach

was employed and some of the key guiding pillars of public procurement in South Africa

divulged. The challenges restraining effective and efficient implementation

of public procurement are also revealed. The article concludes by recommending

the development of competency through customised (separate) training materials and

programmes, the involvement of stakeholders in the bidding process and the employment

of good strategic sourcing practices.

INTRODUCTION

Public procurement operates in an environment of increasingly intense scrutiny driven by technology, programme reviews, and public and political expectations for service improvements (Bolton, 2006; Eyaa & Oluka, 2011). Currently, in South Africa, procurement is of particular significance in the public sector and has been used as a policy tool due to the discriminatory and unfair practices during apartheid (Bolton, 2006). Procurement is central to the government service delivery system, and promotes aims which are, arguably, secondary to the primary aim of procurement such as using procurement to promote social, industrial or environmental policies (Cane, 2004). Prior to 1994, public procurement in South Africa was geared towards large and established contractors. It was difficult for new contractors to participate in government procurement procedures. However, public procurement in South Africa has been granted constitutional status and is recognised as a means of addressing past discriminatory policies and practices (Bolton, 2006: 193).

Reforms in public procurement in South Africa were initiated to promote the principles of good governance, and the National Treasury introduced a preference system to address socio-economic objectives. The reform processes were due to inconsistency in policy application

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and the lack of accountability and supportive structures as well as fragmented processes. Matthee (2006: 65) asserted that a uniform implementation approach to procurement was required, due to a research study on opportunities for reform processes in the South African government (2000) conducted by the Joint Country Assessment Review (CPAR) and the World Bank in 2001. The deficiencies and fragmentations in governance, interpretation and implementation of the Preferential Procurement Policy Framework Act (PPPFA) Act No 5 of 2000, resulted in the introduction of supply chain management (SCM) in the public sector as a policy tool (National Treasury, 2005: 8). In 2003, a SCM document entitled ‘Supply Chain Management: A guide for accounting officers/authorities’ was developed to guide the adoption of the integrated SCM function and its related managerial responsibilities (National Treasury, 2005: 5). This was government’s attempt to achieve the desired strategic policy outcomes through public procurement (McCrudden, 2004: 257).

Despite the reform processes in public procurement and the employment of SCM as a strategic tool, there are predicaments in South African public procurement practices, for example non-compliance with procurement and SCM-related legislation and policies as well as tender irregularities (Smart Procurement, 2011). According to De Lange (2011), ‘Taxpayers were fleeced of R30 bn. Corruption, incompetence and negligence by public servants’ were to be blamed. The South African government spent R26.4 billion in 2010 in ways that contravened laws and regulations (Smart Procurement, 2011).

Against this background, two very important questions can be asked:1. What are the procurement challenges in the South African public sector?2. How can public procurement in South Africa be improved?

Possible answers to these questions are discussed in the rest of this article.

RESEARCH METHOD

This article is of an exploratory nature and involves a conceptual analytical approach. Conceptual analysis is a technique that treats concepts as classes of objects, events, properties or relationships (Funer, 2004: 233). The technique involves defining the meaning of a given concept precisely by identifying and specifying the conditions under which any entity or phenomenon is (or could be) classified under the concept in question. Conceptual analysis is used in order to get a better understanding of procurement practices in the South African public sector. The study on which this article is based reviewed relevant literature sources on public procurement. Also, pertinent procurement policy documents from the National Treasury website, newspaper reports as well as other research documents relating to procurement in the South African public sector were reviewed and analysed. In light of the method discussed, the study examined: (1) the nature of public procurement,

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(2) public procurement practices in South Africa, (3) the challenges of public procurement in South Africa, and (4) the way forward for public procurement in South Africa.

THE NATURE OF PUBLIC PROCUREMENT

Public procurement has its origins in the fiduciary obligation of government administrations to deliver goods and infrastructure, for example roads and harbours and services, for example health care and education to the population of a country or a specific geographic region, city or town (Odhiambo & Kamau, 2003: 10). Public procurement refers to the government activity of purchasing the goods and services needed to perform its functions (Arrowsmith, 2010: 1). According to Odhiambo and Kamau (2003: 10), public procurement is broadly defined as the purchasing, hiring or obtaining by any contractual means, goods, construction works and services by the public sector. It involves the purchase of commodities and contracting of construction works and services if such acquisition is effected with resources from state budgets, local authority budgets, state foundation funds, domestic loans or foreign loans guaranteed by the state, foreign aid and revenue received from the economic activity of state. According to Hommen and Rolfstam (2009), public procurement is ‘the acquisition (through buying or purchasing) of goods and services by government or public organizations’. Arrowsmith (2010: 1) contends that the concept of public procurement can be referred to as procurement planning, contract placement and contract administration.

Based on the above discussion, public procurement can be defined as follows:Public procurement is the function whereby public sector organisations acquire goods, services and development and construction projects from suppliers in the local and international market, subject to the general principles of fairness, equitability, transparency, competitiveness and cost-effectiveness. It includes many activities that support the service delivery of government entities, ranging from routine items to complex development and construction projects. It also directly or indirectly supports government’s social and political aims.

Besides the fiduciary obligation to deliver goods and services to the constituents of the particular government administration, public procurement addresses a wide range of objectives (Uyarra & Flanagan, 2009: 2). It has been used by governments to achieve socio-economic objectives such as stimulating economic activity; protecting national industries from foreign competition; improving the competitiveness of certain industrial sectors; and remedying national disparities (Bolton, 2006; Thai, 2006). The objectives of public procurement are achieved through various means, and legal and regulatory rules on conducting public procurement (Arrowsmith, 2010: 4).

Public procurement is the sheer volume of funds channelled through government procurement and is the largest single buyer in most countries (OECD, 2007: 1). The size of

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public procurement varies between 5% and 8% of the gross domestic product (GDP) in most industrialised countries (OECD, 2007: 1). In the Middle East and Africa, central government purchases range from 9% to 13% (Gul, 2010: 1). This indicates that public procurement plays a vital role in a country (Odhiambo & Kamau, 2003: 10). Public procurement has important economic and political implications, and ensuring that the process is economical and efficient is crucial. This requires in part that the whole procurement process should be well understood by the actors: government, the procuring entities and the business community/suppliers and other stakeholders, including professional associations, academic entities and the general public (Odhiambo & Kamau, 2003: 10).

Public procurement is increasingly recognised as a profession that plays a key role in the successful management of public resources, and a number of countries have become increasingly aware of the significance of procurement as an area vulnerable to mismanagement and corruption and have thus made an effort to integrate procurement into a more strategic view of government efforts. As part of the efforts to adopt a long-term and strategic view of their procurement needs and management, most countries have resorted to using their annual procurement plans as a possible problem solver (Mahmood, 2010: 103).

After reviewing public procurement in general, the discussion now moves to public procurement in the South African public sector.

PUBLIC PROCUREMENT IN SOUTH AFRICA

Immediately after taking office in 1994, the new South African government initiated a series of budgetary and financial reforms on procurement. The intention of the procurement reforms was to modernise the management of the public sector, to make it more people-friendly and sensitive to meeting the needs of the communities it serves.

Background to procurement reforms

Procurement reforms in South Africa started in 1995 and were directed at two broad focus areas, namely the promotion of principles of good governance and the introduction of a preference system to address certain socio-economic objectives. The procurement reform processes were embedded in Section 112 of the Municipal Financial Management Act No 56 of 2003 (MFMA) and Section 76(4) (C) of the Public Finance Management Act No 1 of 1999 (PFMA) and the Preferential Procurement Policy Framework Act No 5 of 2000 (PPPFA). In 2001, the National Treasury completed a joint CPAR with the World Bank to assess procurement practices throughout the public sector. The CPAR identified certain deficiencies in the current practices relating to governance, interpretation and implementation of the PPPFA and its associated regulations (National Treasury, 2005).

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The systems of procurement and provisioning were fragmented owing to the fact that tender boards were responsible for procurement, whereas provisioning was largely underwritten by norms and standards in the logistics system driven by the National Treasury. Effective and efficient financial management in government was continuously questioned. Similarly, the logistics system as a tool for asset management raised concerns because of a lack of proper handling of movable assets in the government environment (Mkhize 2004: 4). The year 2003 saw the adoption of an SCM document entitled ‘Policy to guide uniformity in procurement reform processes in government’ in conjunction with provincial treasuries to replace the outdated procurement and provisional practices in municipalities. ‘Supply chain management: a guide for accounting officers of municipalities and municipal entities’ was also compiled to provide guidelines on the adoption of the integrated SCM function and its related managerial responsibilities assigned to accounting officers in terms of sections 62 and 95 of the MFMA. The guide explains how Chapter 11, part 1 of the MFMA, the municipal SCM regulations and the SCM policy of the council or board of directors can be adopted as an operational process for accounting officers to deal with each step of the SCM cycle. The principle behind the policy guide is that managers should be given flexibility to manage and ensure the constitutional requirements of transparency and accountability (National Treasury, 2005).

Management of public procurementIn South Africa, SCM is an important tool for managing public procurement. SCM is an integral part of prudent financial management in the South African public sector management (OGC 2005: 11). According to Hanks, Davies and Perera (2008), SCM operates within a regulatory framework set by the national government and extended by provinces and local government bodies to specific policies, legislation and regulations. The aim of SCM is to add value at each stage of the procurement process – from the demand for goods or services to their acquisition, managing the logistics process, and finally, after use, to their disposal. In so doing, SCM aims to address deficiencies in current practice relating to procurement, contract management, inventory and asset control and obsolescence planning. Adoption of an SCM policy thus ensures uniformity in bid and contract documentation, and options and bid and procedure standards, inter alia, will promote the standardisation of SCM practices (National Treasury, 2003).

The National Treasury regulations reinforce the provisions of the PFMA and MFMA, finalise the devolution of the SCM function to the accounting officer, and formalise the integration of various functions into a single SCM function. The National Treasury regulations provide the broad legislative framework for SCM by: • defining the various elements of SCM, such as demand management, acquisition

management, logistics management, disposal management and SCM performance• institutionalising the creation of a supply chain management unit in the office of the

chief financial officer

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• specifying the roles of the accounting officer in the management of the bidding process • providing for processes and procedures in the case of abuse of the supply chain

management system within a department • requiring the National and Provincial Treasury and municipal finance department to

establish a system to collect and report on the performance of the SCM system within their defined jurisdictions (National Treasury, 2005).

The legislation and regulations outline minimum requirements in the areas of supply chain and preferential procurement. National departments and provincial and local governments are allowed to extend and develop their policies, systems and structures within the ambit of the national regulatory framework (Hanks et al., 2008). Hence, to a large extent, public procurement is decentralised to departments, provinces and municipalities. Based on this decentralised structure, the National Treasury regulation stipulates that organs of state should establish three kinds of committee: bid specification, bid adjudication and bid award committees. Through this process of segregation of duties, greater efficiency and risk management is promoted. Some departments have decided to combine the bid specification and adjudication committees (Pauw, 2011).

Legislative framework for procurement

Section 217 of the Constitution of the Republic of South Africa Act No 108 of 1996 stipulates the primary and broad secondary procurement objectives, as indicated in Table 1. Section 217(3) of the Constitution requires that national legislation prescribe a framework within which the preferential procurement policy must be implemented. The PPPFA was promulgated in response to this constitutional imperative. Procurement by organs of state (national and provincial departments, municipalities, constitutional entities and public entities) is also governed by a number of other pieces of legislation. Table 1 indicates the objective of procurement in South Africa as contained in the Constitution.

Table 1: Public procurement objectives in South Africa as set out in the Constitution

Objective Reference

Primary Procurement system to be fair, equitable, transparent, competitive and cost effective

Section 217(1)

Secondary Procurement policy may provide for:1. categories of preference in the allocation of contracts and 2. the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination

Section 217(2)

Source: Pauw and Wolvaardt (2009, p.67); Bolton (2006, p.203); Watermeyer (2011, p.3)

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The PFMA (76[4] permits the National Treasury to make regulations or issue instructions applicable to all institutions to which the Act applies concerning ‘the determination of a framework for an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective’ (Watermeyer, 2011: 3). Also, the procurement provisions of the MFMA are similar to the provisions of the PFMA, but contain more detail on the system. Section 112 of the PFMA Act No 1 of 1999 permits the Minister of Finance to issue a prescribed regulatory framework for SCM that covers a number of specific issues. The SCM regulations issued in terms of the PFMA and MFMA Acts lay down the requirements for the governance of procurement processes and establish a high-level government policy. Each organ of state has to determine its own procedures and policies, which are consistent with the legislative framework (Watermeyer 2011: 3).

There are, therefore, numerous legislative frameworks that guide procurement practices. These include the: • Constitution• Public Finance Management Act 1 of 1999 • Municipal Finance Management Act No 56 of 2003• Preferential Procurement Policy Framework Act No 5 of 2000• Broad-based Black Economic Empowerment Act 53 of 2003 • Promotion of Administrative Justice Act No 3 of 2000• Promotion of Equality and the Prevention of Unfair Discrimination Act No 4 of 2000• Construction Industry Development Board Act No 38 of 2000• Prevention and Combating of Corrupt Activities Act No 12 of 2004, and so on (Migiro &

Ambe, 2008).

Table 2 summarises the Acts and their functions in procurement practices in South Africa.

Table 2: Primary Acts that regulate procurement Act What it does in respect of procurement

Public Finance Management Act 1 of 1999

Establishes a regulatory framework for SCM, which includes procurement in national and provincial departments and state-owned enterprises.

Promotion of Administrative JusticeAct 3 of 2000

Establishes fair administrative procedures, permits those affected by unfair administrative action to request reasons for such administrative action and requires administrators to respond to such requests. (Administrative actions are presumed to have been taken without good cause where an administrator fails to respond within the prescribed period.)

Provides for procedures for the judicial review of administrative actions and remedies in proceedings for judicial review, including the prohibition of an administrator from acting in a particular manner, setting aside the administrative action, correcting the defective action and ordering the administrator to pay compensation.

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The Promotion ofEquality and thePrevention of UnfairDiscrimination Act 4 of 2000

Prohibits the state or any person from discriminating unfairly against any person on the grounds of race or gender through the denial of access to contractual opportunities for rendering services or by failing to take steps to reasonably accommodate the needs of such persons.

Preferential ProcurementPolicy Framework Act 5 of 2000

Establishes the manner in which preferential procurement policies are to be implemented.

Construction IndustryDevelopment Board Act 38 of 2000

Establishes the means by which the Board can promote and implement policies, programmes and projects, including those aimed at procurement reform, standardisation and uniformity in procurement documentation, practices and procedures within the framework of the procurement policy of government, through the establishment of:1. a national register of contractors (and if required, consultants and suppliers)

to manage public sector procurement risk and facilitate public procurement;2. a register of projects above a financial value with data relating to contracts

awarded and completed and a best practice project assessment scheme;3. best practices

Establishes a code of conduct for the parties engaged in construction procurement.

Broad-based BlackEconomic EmpowermentAct 53 of 2003

Establishes a code of good practice to inform the:• development of qualification criteria for the issuing of licences or

concessions, the sale of state-owned enterprises and for entering into partnerships with the private sector; and

• development and implementation of a preferential procurement policy.

Local government:Municipal FinanceManagement Act 56 of 2003

Establishes a regulatory framework for SCM which includes procurement in municipalities and municipal entities.

Prevention andCombating of CorruptActivities Act12 of 2004

Makes corruption and related activities an offence; establishes a Register in order to place certain restrictions on persons and enterprises convicted of corrupt activities relating to tenders and contracts; and places a duty on certain persons holding a position of authority to report certain corrupt transactions.

Source: Adapted from Watermeyer (2011: 3)

Having dwelt on the status of public procurement in South Africa, the focus of the discussion now turns to the challenges faced with the implementation procurement in the South African public sector.

PUBLIC PROCUREMENT CHALLENGES IN SOUTH AFRICA

It is important to note that SCM is an integral part of procurement in the South African public sector. Therefore, it is used as a tool for the management of public procurement practices. However, despite the employment of SCM as a strategic tool, public procurement in South Africa still faces enormous predicaments. These include, among others: • lack of proper knowledge, skills and capacity• non-compliance with SCM policy and regulations

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• inadequate planning and the linking of demand to the budget • accountability, fraud and corruption• inadequate monitoring and evaluation of SCM• unethical behaviour• too much decentralisation of the procurement system• ineffectiveness of the black economic empowerment (BEE) policy.

These predicaments are briefly discussed below.

Lack of proper knowledge, skills and capacity

To fully achieve SCM objectives, the National Treasury provides support by facilitating the development of appropriate training materials to government departments, municipalities and municipal entities (National Treasury, 2005). However, the shortage of skills has been a re-concurrent theme in public discussion. According to Sheoraj (2007), skills and capacity shortages have been identified as the single greatest impediment to the success of public procurement in South Africa. Adequate capacity in the form of appropriate structures with fully skilled and professional SCM personnel is a key success factor for proper SCM implementation. In some government entities, the quality of SCM personnel’s skills and ability are well below standard. Migiro and Ambe (2008) assert that many SCM actors in the South African public sphere have attended a number of training workshops on SCM, but they still lack the appropriate knowledge for proper implementation. McCarthy (2006) contends that there is a lack of capacity and knowledge by SCM actors to handle procurement processes that have led to bad governance. The South African government embarks on programmes that educate practitioners, but implementation of its programmes always falls short.

Non-compliance with policies and regulations

SCM is guided by a number of related policies and regulations (National Treasury, 2005). Compliance with these policies and regulations is a problem. As indicated by Matthee (2006), some of the practices relating to non-compliance with the rules and procedures relate to the tendency not to utilise a competitive process for both quotations and bids, and incorrect utilisation of the preference points system. Van Zyl (2006) also asserts that there is a lack of appropriate bid committees; use of unqualified suppliers, passing over of bids for incorrect reasons; utilisation of the incorrect procurement process in respect of the thresholds; extensions of validity periods; and incorrect utilisation of the limited bidding process. Furthermore, Ambe and Badenhorst-Weiss (2011b) noted that there are inadequate controls and procedures for the handling of bids; appointment of bid committee members not aligned to policy requirements; and insufficient motivation for deviations from SCM procedures.

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Inadequate planning and linking demand to the budget

Demand management is integral to the SCM process. It defines the decision-making process that allows departments to procure at the right time, at the right place and at the right cost. However, many government entities are still faced with the challenges of improper planning and linking demand to budget (Ambe & Badenhorst-Weiss, 2011a). Cost-effective procurement depends on a specialist’s skills to ensure that buying requirements are reliably determined, appropriate contract strategies are developed, contracts are well managed and opportunities are seized to secure the best deals at the right time and at the right price. The importance of drawing up accurate and realistic strategic plans cannot be overestimated. At times there is an absence of coherent plans. Some government entities cannot properly quantify the needs of those requiring their services or properly estimate costs, nor can they accurately track, control or report on expenditure (Luyt, 2008). Luyt (2008) indicates that there is a need to monitor the delivery of services properly to ensure that scarce resources are efficiently and effectively procured. Poor planning and budgeting have also affected the implementation of SCM. It is therefore vital that SCM practitioners adequately link demand planning to budget.

Accountability, fraud and corruption

Accountability constitutes a central pillar to public procurement (Soudry, 2007). Without transparent and accountable systems, the vast resources channelled through public procurement systems run the danger of being entangled with increased corruption and misuse of funds (Jeppesen, 2010). According to Mahlaba (2004), fraud and corruption cost South African tax payers hundreds of millions of rand each year. Over the last few years, the impact of fraud has led to the promulgation of special legislation and improvement in existing legislation that led to the creation, among others, of the Directorate of Special Operations, commonly known as the Scorpions, the Asset Forfeiture Unit, the Public Protector, the Special Investigation Unit, Commercial Crime Units, Internal Audit Units, Special Investigation Units within departments, and the appointment of forensic consultants (Mahlaba, 2004).

According to Boateng (2008), since 1994, South Africa has enjoyed unprecedented social and infrastructural programmes. Yet, the majority of people who had hoped freedom would bring with it relative socio-economic liberation and improvement are feeling increasingly bitter towards government over issues that include a lack of perceived quality of governance, service delivery failure, fraud and corruption in some spheres of the economy and disillusionment with empowerment policies (De Lange, 2011). The Public Service Commission Committee (2011) indicated that a total of 7 766 corruption cases had been reported through the National Anti-Corruption Hotline since its inception in September 2004 up till June 2010. De Lange (2011) notes that taxpayers were fleeced of R30 billion (3.675 billion USD). Corruption, incompetence and negligence by public servants were

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to be blamed (De Lange, 2011). About 20 per cent of government’s procurement budget alone ‘went down the drain each year. This was because officials had their fingers in the till, overpaid for products and services or failed to monitor how money was spent’ (De Lange, 2011). Among government entities probed for procurement irregularities was the Tshwane Metro where about 65 municipal officials were investigated for striking business deals worth about R185 million with their own Council (Pauw, 2011). The National and Provincial governments and their entities notched up R21 billion in irregular expenditure in 2010, a 62% rise (R13 billion) over the previous year (De Lange, 2011). The auditor general highlighted weaknesses in SCM, controls over information technology, human resource management, and capital assets and performance reporting during a briefing to Parliament’s Standing Committee on Public Account (Smart Procurement, 2011).

Hence, there is an urgent need to rethink innovative ways of curbing corruption and some other administrative malpractices within South African spheres of government. To fight the scourge of maladministration, mismanagement of finances, fraud and corruption, government needs to strengthen and review existing internal control systems to detect deficiencies.

Inadequate measures for monitoring and evaluation of SCMEffective policy-making requires information on whether governments are doing things right and whether they achieve the results intended (Acevedo, Rivera, Lima & Hwang, 2010). Strong monitoring and evaluation systems provide the means to compile and integrate this valuable information into the policy cycle, thus providing the basis for sound governance and accountable public policies (Acevedo et al., 2010). Inadequate monitoring and evaluation is linked to the absence or the poor presence of a control environment, and the government entities are placed in a difficult position to give effect to or implement SCM as required by the policy. Hence, deviations or non-compliance goes undetected or is identified after the fact. According to a Business Day report (2011), procurement actors in government have spent millions of rand in ways that contravened laws and regulations. The national and provincial governments and their entities have notched irregular, unauthorised, fruitless and wasteful expenditures that contravene laws and regulations. There is lack of proper monitoring and evaluation as required (Stemele, 2009).

Unethical behaviour Ethics is the study of moral judgements and right and wrong conduct. Ethics and conflict of interest greatly affect SCM implementation. Enormous power is wielded by some chief financial officers but there is also a lack of proper consultation with other senior officials. While the National Treasury’s guide to accounting officers prescribes a standard approach towards SCM procedure, in many instances there is lack of compliance and application of the guidelines. This has resulted in differentiation in approaches and a lack of standardisation. According to McCarthy (2006), the completeness of tender documents in many municipalities is difficult to verify.

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Too much decentralisation of the procurement system

In South Africa, government procurement of own or local requirements (materials, equipment and services) is to a large extent decentralised to departments, provinces and municipalities. If one takes the number of cases of tender fraud and lack of services on all levels of government into account one should ask oneself whether these parties have the knowledge and/or the intention to get the best value for tax-payers’ money. Arguments for a larger extent of centralisation of procurement to knowledgeable, accountable procurement officials/agents or procurement consortiums could be put forward.

‘Centralization leverages scales to reduce costs. Decentralisation relies on local knowledge to build relationships’ (Fawcett, Ellram & Ogden, 2007: 310). Centralisation offers advantages such as leverage due to volumes, reduction of duplication of purchasing effort, better control and development of specialised expertise of purchasing personnel (Handfield, Monczka, Guinipero & Patterson, 2011: 160–61). On the other hand, decentralisation often leads to better responsiveness to purchasing needs, a better understanding of unique local needs, and is closer to suppliers and taking ownership of decisions that impact on one’s own budget (Handfield et al. 2011: 162). However, if the advantages of centralisation are to be realised, efficient contract management and supplier relationship management is a pre-condition. The schoolbook saga in various provinces of South Africa in 2012, where textbooks had not been delivered to schools by the third term of the school year is an example of what can happen without proper contract management.

Ineffectiveness of broad-based black economic empowerment

The South African government adopted the provision of BEE to empower all historically disadvantaged people rather than only a small group of black investors. To this end, it adopted the Broad-Based Black Economic Empowerment Act (BBBEEA), which calls for expanded opportunities for workers and smaller enterprises as well as more representative ownership and management. Current BEE provisions have, however, in many instances failed to ensure a broad-based approach, instead imposing significant costs on the economy without supporting employment creation or growth. The present BEE model remains excessively focused on transactions that involve existing assets and which benefit a relatively small number of individuals. The following shortcomings have emerged in the implementation of BEE: First, ownership and senior management issues receive disproportionate emphasis. The unintended consequences of this trend include ‘fronting’, speculation and tender abuse. Secondly, the regulations do not adequately incentivise employment creation, support for small enterprises and local procurement. The preferential procurement regulations aggravate this situation by privileging ownership over local production. Finally, the BBBEE regulations penalise public entities as suppliers. The democratic state owns public entities on behalf of its people yet the regulations do not count them as ‘black empowered’ (Zuma, 2009).

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Subsequent to the discussion presented above, it is evident that there are constraints in procurement practices in the South African public sector. These predicaments can to a large extent be attributed to lack of proper knowledge, skills and capacity. Therefore, the South African government will need to address these dilemmas in order to fully achieve the policy objective of public procurement.

THE WAY FORWARD FOR PUBLIC PROCUREMENT IN SOUTH AFRICA

There are a number of issues that could be considered to enhance procurement in the South African public sector. Therefore, it is critical that policy- and decision-makers consider developing skills and knowledge through specialised training programmes, involve stakeholders in the bidding process and employ centralisation and decentralisation for different categories of goods and services as discussed below.

Developing skills and knowledge through teaching a two-model curriculum

Institutions of higher learning and other service providers have a critical role to equip learners and practitioners with appropriate skills and knowledge. The capacity for qualified practitioners would only be available when educational institutions contribute to the challenge by way of developing a curriculum that meets the needs of the country. Such programmes should provide for an understanding of the knowledge of the South African public sector and its regulations.

Figure 1 illustrates an example of a two-model curriculum where learners have a choice to focus on the private or public sector. In this model, the skills required are general procurement skills and industry-specific skills. The private sector-oriented, programme-specific skills require an understanding of the general business environment (enterprise management), while the public sector-oriented programme concentrates on the legislative environment (to sensitise learners to an integrated approach in the management of procurement within the highly regulated public sector environment). Both programmes require general procurement skills which should include, among others, the knowledge of and insight into the purchasing and supply environment, sourcing strategies, purchasing and supply tasks, integrated supply management, globalisation, and technological advancement. Figure 1 illustrates a framework for a two-model curriculum for procurement in South Africa.

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Private sector-orientedObjective: Profit maximisation

Public sector-orientedObjective: Quality service delivery

Skill

s ne

eded

Enterprise management Sector-specific skills - Public financial management

- Public procurement and supply chain management

Skills needed

Knowledge on the business environment

Knowledge on the SA public procurement environment

- Purchasing and supply management

- Purchasing and supply tools- Legal aspects in purchasing- Storage and inventory

management

General procurement management

- Purchasing and supply management

- Purchasing and supply tools- Legal aspects in purchasing- Storage and inventory

management

Figure 1: Two-model teaching curriculums

Stakeholders’ involvement

Public procurement malpractices could be limited through the employment of stakeholders such as civil society organisations to be part of the procurement process. The current status of the procurement system requires the creation of three bid committees, namely the bid specification committee, the evaluation committee and the adjudication committee. For the purpose of compliance and to minimise unethical and corrupt practices, stakeholders should be involved in the evaluation and adjudication process. This will ensure and support open governance. Open governance creates the conditions for effective collaboration between governments and citizens in a process that enhances legitimacy and accountability of public decision-making.

Stakeholder involvement will also encourage public servants to be more deliberate about decisions they make and will provide citizens as well as stakeholders with the opportunity to hold their leaders accountable. It will improve the efficiency of government institutions, reduce fraud and waste of public finances, strengthen the management of natural resources and ensure better service delivery.

Strategic sourcing (centralisation versus decentralisation)

Another improvement strategy for public procurement is the use of centralised and decentralised procurement strategies for different categories of goods and services. There are many arguments for centralisation, specifically better control and expertise. However, the answer for poor public procurement practices should rather be sought in strategic sourcing. An analysis of public procurement requirements at all levels of government should be done and high risk–low cost items (known as bottleneck items) and high risk–high cost items (strategic items) should be purchased on a centralised basis with longer-term contracts and high levels of contract and supplier management. Leverage items that are

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low risk but high cost can be purchased through one agency, for example a procurement consortium. The different public institutions then order from the contractor/supplier against a contract, typically through e-procurement, and distribution takes place on a decentralised basis. Here, contract management, and particularly feedback on supplier performance, is essential for this type of purchasing to be efficient. Non-critical, low risk–low cost items (also known as routine items) can be purchased on a decentralised basis by means of quotations from local suppliers (Simchi-Levy, Kaminksi & Simchi-Levy, 2009: 287).

Over and above the proposed recommendation, it is important that departments, municipalities and municipal entities engage with the employment of qualified procurement practitioners, training and employment of internship programmes, development of an effective monitoring and evaluation tool, creation of incentive programmes to motivate good performance, tools (information communication technology) and also good leadership (Ambe & Badenhorst-Weiss, 2011b).

CONCLUSION

Within the framework of a conceptual analytical approach, an examination of relevant literature and public procurement practices, challenges faced by the South African public sector is discussed in this article. Public procurement is increasingly recognised as a key concept that plays a significant role in the successful management of public resources. For this reason, several countries have become more aware of the importance of procurement as an area vulnerable to mismanagement and corruption, and have thus instituted efforts to integrate procurement in a strategic position of government efforts. As part of the need to adopt a long-term and strategic view of their procurement and management, most countries have resorted to turning to their annual procurement plans as a possible ‘problem-solver’ (Mahmood, 2010).

Public procurement primarily aims to be fair, equitable, transparent and cost-effective. Because of its importance, it can also be used at a secondary level as a problem solver. Due to the huge problems faced in South Africa, especially because of the country’s inequality in the past, public procurement is of particular significance and has been granted constitutional status (Bolton, 2006). In this regard, there are categories of preference in the allocation of contracts as well as the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.

In South Africa, SCM is an integral part of the procurement process. It is a policy tool used in the management of the procurement process. Despite the importance of procurement as a policy tool, and the effort by government through the introduction of programmes such as SCM, procurement remains challenging in South Africa. These challenges include

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among others lack of proper knowledge, skills and capacity; non-compliance to the national treasury policies and regulations; inadequate planning and linking of demand to the budget; lack of proper accountability; fraud and corruption; inadequate response to and inconsistency in risk management/irregularities in SCM; inadequate measures for monitoring and evaluation of SCM; unethical behaviour; too much decentralisation and ineffectiveness of the BBBEE policy.

Against this background, it is evident that public procurement practitioners in South Africa require specific knowledge about the procurement objective, SCM policy, preference procurement policies and so forth in order to manage the procurement process effectively. Specialised training programmes are therefore required to equip actors with the skills to achieve procurement objectives. Key issues such as employment of qualified procurement practitioners, training and employment of learnership programmes, development of an effective monitoring and evaluation tool, and the creation of incentive programmes to motivate good performance should be employed. In addition, institutions of higher learning and other service providers should equip learners and practitioners with appropriate skills and knowledge through the development of a syllabus that ensures sustainable procurement in South Africa. In addition, it is important to involve stakeholders in the bidding process and employ centralisation and decentralisation for different categories of goods and services.

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Table of acronyms

BBBEE Broad-Based Black Economic Empowerment

BBBEEA Broad-Based Black Economic Empowerment Act

BEE Black Economic Empowerment

CPAR Joint Country Assessment Review

GDP Gross Domestic Product

MFMA Municipal Financial Management Act No 56 of 2003

PFMA Public Finance Management Act No 1 of 1999

PPPFA Preferential Procurement Policy Framework Act

SCM Supply Chain Management

286 iSouthern African Business Review Volume 20 2016

Supply chain risks and smallholder fresh produce farmers in the Gauteng province of South Africa

A. Louw & D. Jordaan

4A B S T R A C T7A survey of 52 smallholder fresh produce farmers was conducted in the Gauteng province of South Africa to grasp how risk and its management affect the mainstreaming of smallholder farmers into formal, high-value markets. The study employed a supply chain analysis approach, which focused on the functions and risks that occur along the fresh produce chain. The results highlight the risks that impede the participation of smallholder farmers in formal, high-value chains. At the production level, risk is prominent from input procurement through to the post-harvest stage of the chains. At the retail and consumption level, risks are linked to the adherence to quality and quantity standards, including prescribed packaging, grading, labelling and traceability and transport requirements. As a result of these risks across the formal chain, smallholder farmers often resort to distributing their products in low-value informal markets. The consequence is that smallholder farmers tend to remain trapped in poverty, in part, because of their risk appetites and their ability to bear risk.

8Further research is required in the areas pertaining to smallholder farmers’ risk appetite and risk-bearing ability and mechanisms to deal with the particular risks in the value chain that impede their all-round ability to escape the “smallholder dilemma”.

9Key words: Smallholders, supply chain risks, fresh produce, high-value markets

Introduction1In the region of 1.5 billion people are estimated to be engaged in smallholder agriculture globally. They include 75% of the world’s poorest, whose food, income

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and livelihood depend on agriculture in one way or the other (Ferris et al. 2014). The South African context is no different – with up to 20% of all households in South Africa described as agricultural households most of whom depend on subsistence or small-scale agriculture for part or all of their sustenance and livelihoods (KPMG, 2013).

There is general consensus that economic participation continues to be the best approach to address the smallholder’s challenge and to improve the livelihood prospects for most rural households. The supposition is that growing populations, urbanisation, and improved communications and infrastructure globally generate opportunities to expand domestic and export markets for those farmers who can consistently link production with sales (Ferris et al. 2014).

Despite the opportunities offered by economic development, a general view of smallholder farmers’ prospects globally, however, reveals a more discouraging situation. Ferris et al. (2014) notes that studies show that the majority of smallholders do not transition from subsistence to commercial operations. Obi, Van Schalkwyk and Van Tilburg (2012) confirm this observation in the South African context by noting that too little visible change in the circumstances of the rural, small-scale producers of South Africa is observable, despite far-reaching efforts by government to address the plight of these producers. A reasonable inference is therefore that most smallholder farmers face challenges that perpetually leave them locked in poverty.

The primary and ongoing themes in addressing the ‘smallholder dilemma’ globally focus on market access, capacity building and access to resources and institutions (Lyne & Martin 2008). Similar themes have been identified in the South African context by Obi et al. (2012). These themes are seemingly the primary stumbling blocks for typical smallholder farmers in making the transition to commercial status and transforming their economic outlook.

This paper adds to the discussion of the ’smallholder dilemma’ in the South African context and offers further points of view in terms of the underlying reasons for their battle to access profitable and sustainable markets. The paper does not therefore aim to restate the well-known struggles that smallholder farmers face in accessing markets or which measures are generally recommended in addressing their dilemma. The approach is rather to posit whether supply chain risks influence smallholder farmers’ success or lack thereof in accessing markets. To this end the influence of supply chain risks for smallholder fresh produce farmers in the Gauteng province of South Africa was studied in order to probe the idea.

Smallholder farmers typically face numerous challenges such as the following: production yields that tend to be low; post-harvest risks that are high; many barriers to market access with consistency of quality, inadequate volumes, spoilage, lack and

Supply chain risks and smallholder fresh produce farmers in the Gauteng province of SA


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cost of transport and storage (Baliyan & Kgathi 2009; Hewett (2012); Humphrey 2006; Munyeche, Story, Baines & Davies 2011; Murray-Prior 2011; Shepard 2007; Torero 2011). Furthermore, with current trade liberalisation and globalisation trends prominent in agricultural food chains, the agri-food sector has become more concentrated, with increased vertical integration between sectors. This increase has raised issues of food safety, quality and traceability, which have become important requirements for market entry. Owing to these global changes, farmers are increasingly challenged to compete in markets that are far more demanding in terms of quality and food safety, more concentrated and integrated and much more open to international competition (Albert & Spinger-Heinze 2006). This set of demands causes smallholder farmers to forego market share to commercial producers who have the appetite for and the capacity to bear and manage the risks associated with producing ‘commercial’ volumes of good-quality produce on a consistent, long-term basis.

This study sought to identify the risks that create challenges for smallholder farmers to grow and distribute their produce in South Africa in a provincial setting with the focus on fresh produce in the Gauteng province. The study was conceptualised with the proposition that the range of risks along the fresh produce chain, and particularly those faced by smallholder producers, are the major contributors to the entrapment of these producers and of the consequences for them failing to sustainably engage mainstream markets.

Owing to the contentious nature of defining smallholder farmers, it is suggested that for the purposes of this discussion, smallholder farmers should be considered as those farmers who are somewhat land constrained, poorly linked to markets and more vulnerable to risk than larger farmers in the same area (Chamberlin 2008). Although this definition also has limitations, it is known that smallholder farmers are usually only associated with limited land availability, whereas many other aspects of smallness are just as important in characterising resource-poor, small farmers. In the specific case of this research, it implied black farmers with new and/or small farms who were on the database of the Gauteng Department of Agriculture and Rural Development (GDARD) and who were known to produce vegetables.

Literature review

Risk and agriculture

1Jaffee, Siegal and Andrews (2010) succinctly describe the changing risk landscape in agriculture and agricultural value chains. They (2010: p vi) note that ‘risk and

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uncertainty are ubiquitous and varied within the agricultural context and are as a result of a range of factors’. These include the vagaries of the weather, the unpredictable nature of biological processes, the pronounced seasonality of production and market cycles, the geographical separation of production and end uses, and the unique and uncertain political economy of food and agriculture. Cervantes-Godoy, Kimura and Antón (2013) confirm this view by noting that agriculture is characterised by highly variable returns and is associated with unpredictable circumstances that determine the final output, value and cost of the production process. According to Chuku and Okoye (2009), shocks in agriculture are triggered by a system of multi-scalar stressors or risks. They (2009: p 1525) also note that ‘these stressors interact in complex and messy ways to increase the vulnerability of agricultural role players and reduce their resilience to effects of disasters’.

Jaffee et al. (2010) highlight the fact that in light of the omnipresence of risks and massive structural changes in global and national agri-food systems, farmers, agribusiness firms and governments face new challenges in the design of risk management strategies. In terms of this, it is becoming increasingly important to understand and appreciate the risks and their impacts on the agri-value chain and to develop strategies and policies to overcome these perils. The value of characterising risk from an agri-supply chain perspective is therefore clear both for policymakers and stakeholders in order to shape policy and decision making. Torero (2011) emphasises the influence of risk by noting that the high risks of production and cycles of oversupply and price depression create financial risks throughout the distribution chain that inhibit investment and access to capital.

Table 1 summarises the general categories of major risks that the agricultural chain faces, with overviews of such risks. This summary contextualises risks in agriculture as a point of departure in analysing and understanding the impact of these risks for smallholder farmers in the Gauteng province of South Africa.

Smallholder farmers and the impact of risk

1Although agriculture is generally associated with risk, a factor to consider is the impact of the different dimensions of risk on smallholders and their ability and appetite to participate in the agricultural chain. According to Cervantes-Godoy et al. (2013), smallholder farmers are most likely to be disproportionately vulnerable to the impacts of risk. Owing to this vulnerability, the consequences of these risks can be extreme, usually trapping smallholder farmers in a poverty trap or pushing them into deeper poverty. Eakin (2005) notes the relationship between risk and the fortunes of smallholder farmers, Torero (2011) also mentions the impact of risk along



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Table 1: Categories of major risks facing agricultural supply chains

mcviType of risk mcviiExamples

mcviiiWeather-related risks mcixPeriodic defi cit and/or excess rainfall or temperature, hail, storms, strong winds

mcxNatural disasters (including extreme weather events)

mcxiMajor fl oods and droughts, hurricanes, cyclones, typhoons, earthquakes, volcanic activity

mcxiiBiological and environmental risks

mcxiiiCrop and livestock pests and diseases; contamination related to poor sanitation, human contamination and illnesses; contamination aff ecting food safety; contamination and degradation of natural resources and processes contamination and degradation of production and processing environment

mcxivMarket-related risks mcxvChanges in supply and/or demand that impact domestic and/or international prices of inputs and/or outputs; changes in market demands for quantity and/or quality attributes, market demands for quantity and/or quality attributes; changes in food safety requirements, changes in market demands for timing of product delivery; changes in enterprise/supply chain reputation and dependability

mcxviLogistical and infrastructural risks

mcxviiChanges in transport, communication, energy costs, degraded and/or undependable transport, communication, energy infrastructure, physical destruction, confl icts, labour disputes aff ecting transport, communications, energy infrastructure and services

mcxviiiManagement and operational risks

mcxixPoor management decisions in asset allocation and livelihood/enterprise selection; poor decision making in use of inputs; poor quality control; forecast and planning errors; breakdowns in farm or fi rm equipment; use of outdated seeds; lack of in-farm or fi rm equipment; lack of preparation to change product, process, markets; inability to adapt to changes in cash and labour fl ows

mcxxPublic policy and institutional risks

mcxxiChanging and/or uncertain monetary, fi scal and tax policies; changing and/or uncertain fi nancial (credit, savings, insurance) policies; changing and/or uncertain regulatory and legal policies and enforcement; changing corruption); weak institutional capacity to implement tenure system; governance-related uncertainty (e.g., market policies; changing and/or uncertain land policies and and/or uncertain trade and regulatory mandates

mcxxiiPolitical risks mcxxiiiSecurity-related risks and uncertainty (e.g., threats to property and/or life) associated with politico-social instability within a country or in neighbouring countries, interruption of trade due to disputes with other countries, nationalization/confi scation of assets, especially for foreign investors

1Source: Jaff ee et al. (2010:p 10)

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1with high transaction costs, which has a snowballing detrimental effect on their ability to get markets to work for them. Chamberlin (2008: pp 1) highlights the fact that ’most smallholders in most developing areas are probably somewhat land constrained, poorly linked to markets, and more vulnerable to risk than are larger farmers in the same areas. However, not all smallholders are equally land constrained, market oriented, or vulnerable to risk.

In the sub-Saharan setting, Livingston, Schonberger and Delaney (2011) observed that smallholders in disbursed supply chains (cereals, rice, vegetables) are exposed to a larger number of business risks and lower returns than those operating in integrated markets (fair trade cocoa, specialty coffee) where risks are more widely shared among chain actors. The result is that smallholder farmers generally remain constrained by their capacity to manage their risk-return trade-offs, which curbs their ability to exchange stable crop production for intensified agriculture.

Harvey et al. (2014) studied the vulnerability of smallholder farmers to agricultural risks and climate change in Madagascar. Malagasy farmers were found to be particularly vulnerable to any shocks to their agricultural system owing to their high dependence on agriculture for their livelihoods, chronic food insecurity, physical isolation and lack of access to formal safety nets. Unless well managed, risks in agriculture slow development and hinder poverty reduction.

The significance of risk to smallholder farmers is obvious, as it pertains to global, regional and local dimensions in the South African context. The difficulties that smallholder farmers have to navigate are likely to drive them into deeper vulnerability and trap them in a state of underdevelopment if there are no mechanisms to manage risks. These aftermaths can be ill-afforded in the South African setting where the development of smallholder farmers is a huge imperative for rural expansion, economic development and social cohesion.

Risk and the poverty trap

1In light of their precarious situation, many smallholder farmers tend to be risk adverse and they are thus less inclined than non-poor groups to move up the ‘risk-return’ ladder towards potential higher incomes and returns. According to Livingston et al. (2011), this contributes to the growing income disparities in developing countries.

The consequences of the difficulties that smallholders face can be explained by the distinctive ‘poverty trap’ (Figure 1) as described by Dorward, Kirsten, Omamo, Poulton and Vink (2009). The ‘poverty trap’ is a typical, self-enforcing cycle in which the poverty stricken are inescapably caught. This trap is caused by a weak institutional and infrastructural environment where smallholder farmers’ strategies



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result in low economic activity, thin markets, high transaction costs and risks and high units cost that limit access to markets and development, which in turn result in constrained economic development of those farmers. The premise is that a change in smallholder farmers’ risk-bearing or management capability is critical to escaping from the poverty trap. It is postulated that the central ‘market access’ theme as a stumbling block to the development of smallholder farmers is actually the result of farmers’ inability to endure or manage risks rather than a superficial view of market access independently.1

Figure 1: The classic poverty trap (adapted from Dorward et al. 2009)

The South African fresh produce sector

1The South African fresh produce sector is economically significant and contributes 25% of the gross value of the country’s agricultural economy. The main vegetables produced in South Africa include potatoes, tomatoes, onions, green maize and pumpkins. Vegetable production in South Africa has also been increasing generally, with a 2.7% annual growth in vegetable production over the past 28 years. This growth has tracked population growth but is also ascribable to, respectively, a 19% and

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7% increase in the per capita consumption of potatoes and other vegetables during the past ten years (Department of Agriculture 2014). Fresh produce production and distribution in South Africa reflects the dualistic economic system of the country where a sophisticated, developed economy exists alongside a developing economy.

Fresh produce is produced by a small number of relatively large, established commercial producers, on the one hand, and a multitude of small-scale producers, on the other. Smallholder farmers who produce crops valued at no more than R100 000 (± US$ 8 500) per annum, have a small market share in the formal fresh produce chain, accounting for only 3% of total supplies to the Johannesburg Fresh Produce in 2009 (Louw & Geyser 2009). In the same year, large-scale producers accounted for 16% of total supplies with harvests valued in excess of R10 million (±US$ 850 000). Producers supplying produce falling in the R1 million to R10 million (±US$ 85 000 – 850 000) category accounted for 60% share of total produce supplied.

Fresh produce in South Africa is marketed through formal channels (consisting of a relatively small number of large players) and informal channels (consisting of a relatively large number of small role players). The bulk of fresh produce in South Africa is marketed through formal channels mostly through fresh produce markets (FPMs). Direct marketing of fresh produce has been popular across South Africa because it offers producers security of payment, lower marketing costs, a better bargaining position for producers, lower prices for wholesalers and retailers, convenience, less handling and better quality (HSRC 1991). Historically, the direct marketing of fresh produce is also influenced by the quality, freshness and the availability of specialised farmers’ facilities (Mollen 1967). Informal trade continues to play a part in the distribution of fresh produce in South Africa. Informal trading in South Africa is largely influenced by the history of the country, with many consumers in townships where informal shops (shebeens & spaza shops) and street traders (hawkers) generate large volumes of product sales on a national scale. Stalls situated along the roadside are a common phenomenon in South Africa, on roads where there are large volumes of traffic and that are situated close to urban consumer markets and the product source area. The marketing of fresh produce in South Africa is influenced mainly by transportation and storage, as well as the grading and packing of fresh produce (HSRC 1991).

Fresh produce in South Africa is distributed through the following channels: FPMs, export channels and direct sales to wholesalers, retailers, hawkers, processors, institutional buyers and consumers. A portion is also held back for producers’ own consumption and for seed for the coming seasons. The distribution channel that is used to market fresh produce is largely influenced by the nature of fresh produce. A large proportion of fresh produce is distributed through FPMs. Statistics released by



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the Department of Agriculture, Forestry and Fisheries (DAFF 2011) show that 48% of fresh produce in South Africa was distributed through FPMs in 2011, with direct sales and own consumption accounting for 42% of the fresh produce distributed, while processors and exports accounted for 7% and 3% of the fresh produce sold in South Africa respectively (Figure 2).1

Figure 2: Distribution of fresh vegetable sales according to distribution outlet (2010/1) (compiled from DAFF 2011)

Methodology

1This study employed the supply chain analysis approach (Rich, Baker, Negassa & Ross 2009) and made use of both primary data to conduct the supply chain risk assessment. Data was collected through individual interviews with the supply chain participants involved in the relevant chains. Sources of data that were used in the study included the following: farmer surveys, structured interviews with FPMs (markets and agents), supermarkets, processors, representatives of local/regional government departments and institutional buyers. Structured questionnaires were administered to a total of 52 smallholder farmers in the three farming regions of the Gauteng province by way of visits to these farms and one-to-one interviews.

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These farmers were randomly identified from a database provided by the Gauteng Department of Agriculture and Rural Development (GDARD). The regions included in the study were Randfontein, Germiston and Pretoria. Semi-structured interviews were used to gather information from the other chain stakeholders pertaining to the demand attributes for farmers to compete in their various markets, as well as their perceptions of the risks affecting smallholder farmers and their ability to participate in formal markets. The country’s two fresh produce markets (Johannesburg & Tshwane), one wholesaler, three supermarkets, one institutional buyer and one processor who procures produce, among others, from producers in Gauteng, were interviewed.

The number of smallholder farmers in the survey ended up being somewhat less than ideal owing to the limitations in interviewing more farmers. However, assuming a smallholder farmer population of 10 000 in the province, a 95% confidence level and an 87.5% confidence interval yielded the minimum sample of 52 that was required. Despite the fact that the confidence interval for the particular sample was suboptimal, it was deemed tolerable in light of the general homogeneity of issues and responses among the farmers.

A supply chain risk assessment was conducted for farmers as well as various end markets, with risk being assessed at key transaction points along the supply chain. These transaction points were input supply, production and marketing. Activities that formed the supply chain risk assessment are indicated below.

• Supply chain analysis: This section used the supply chain mapping technique for the smallholder fresh produce industry using baseline data gathered from the field survey. Mapping techniques were used to trace the flow of fresh produce from the smallholder farmers to the end markets and the various intermediaries along the chain, together with their functions and value-adding activities.

• Risk analysis: This section was conducted from both the demand and supply side, identifying and characterising the range of risks faced by the players operating in the supply chain. The demand side focused on the risks faced by end markets when procuring produce from smallholder farmers, while the supply side focused on the risks affecting farmers’ fresh produce business that are likely to limit their participation in formal value chains.

• Risk management and vulnerability assessment: This section focused on identifying the existing risk management strategies and measures undertaken by supply chain participants and third parties, such as government institutions and private companies.



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Results and interpretation

Farmers’ socioeconomic characteristics

1Part of the study considered the socioeconomic characteristics of the smallholder farmers in order to understand the context of the various characteristics of the farmers that could have an impact on the risks that influence their business, as well as their ability to mitigate or manage the various risks (Table 2).

Table 2: Socioeconomic and demographic variables of 52 respondents

mcxxivSocioeconomic or demographic variables mcxxv% of respondents

mcxxviOwnership structure of enterprise Private Cooperative Partnership Company

mcxxvii

mcxxviii83%mcxxix9%mcxxx6%

mcxxxi2%

mcxxxiiGender Male farmers Female farmers

mcxxxiii

mcxxxiv44%mcxxxv56%

mcxxxviAge Percentage younger than 35 years Percentage older than 35 years

mcxxxvii

mcxxxviii19%mcxxxix81%

mcxlHighest level of education Completed primary education Completed secondary education Completed tertiary education

mcxli

mcxlii8%mcxliii58%mcxliv35%

mcxlvAccess to fi nance Self-fi nanced External fi nance

mcxlvi

mcxlvii77%mcxlviii23%

mcxlixTypes of fi nance Commercial banks Mining companies Local government institutions Family and friends Self-fi nanced

mcl

mcli4%mclii6%

mcliii8%mcliv3%

mclv77%

mclviComplementary farming enterprises Livestock

mclvii

mclviii58%

mclixAccess to farming infrastructure and equipment Access to greenhouse Privately owned tractors Hired tractors Hand implements

mclx

mclxi56%mclxii15%

mclxiii40%mclxiv46%

1Source: Survey conducted by authors

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Supply chain and distribution channels for smallholder fresh produce

1The smallholder fresh produce supply chain is characterised by various distribution channels used by the farmers who were surveyed. These include FPMs, retail supermarkets, hawkers, local consumers, greengrocers and institutional buyers such as government hospitals.1

Figure 3: Smallholder fresh produce supply chain

1According to information supplied by the farmers, markets are selected on the basis of the highest prices offered, as well as markets that have the lowest marketing costs and that offer security and swiftness of payment. Marketing channels were classified into formal (FPMs, greengrocers, institutional buyers and supermarkets) and informal markets (hawkers and farm-gate sales to local consumers). Farmers do not distribute all their produce through one channel, but use various markets, depending on demand and accessibility. Figure 4 shows the distribution channels used by the farmers to sell their fresh produce. Because farmers can use multiple channels for the marketing of their produce, it was possible to note one or more channels. The percentage value indicates the percentage of farmers who use the particular marketing channel.

Most smallholder farmers sell their produce in informal markets. The primary informal channels include sales to informal traders or hawkers (62%) and direct sales to local consumers (52%) through farm-gate sales. Although the informal channel is synonymous with low prices, its marketing costs were far lower since this channel does not require produce to be graded, packaged and labelled, and there are no transport requirements since products are sold directly at the farm gate. In addition, farmers reported that farm-gate sales to traders and local consumers offered more

mclxxxixConsumers

mcxcRetail supermakets

mcxciGreen grocers

mcxciiFarm gate sales

mcxciiiOwn consumption

mcxcivProcessing

mcxcvTraders & Wholesalers

mcxcviFresh Produce MarketsmcxcviiSmallholder farmersmcxcviiiInput supply

mcxcixInput supply mccProduction mcciSpot marketmcciiIntermediarties mcciiiConsumermccivRetail


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1

Figure 4: Fresh produce distribution channels

1security and swift payments, as they received payment at the point of sale as opposed to selling through FPMs, where payments were received several days after the produce had been delivered. In some instances, farmers also failed to receive payment if their produce could not be sold.

Wholesale FPMs

1Wholesale FPMs are the primary spot market for fresh produce in South Africa. South Africa’s FPMs function as commission markets with agents who trade farmers’ produce on their behalf. Prices for the produce are determined by market forces and farmers receive payment after their produce has been sold, which may take two to three days after delivering their produce to the market. FPMs have various requirements for farmers, which include sorting, grading, packaging and labelling of their produce to provide for traceability. These requirements are legally determined by the Agricultural Product Standards Act 119 of 1990. Farmers are also required to deliver their produce under clean and hygienic conditions that will maintain the quality of the produce. Deliveries are often required to be done under specific temperatures to avoid spoilage and to maintain the freshness of the produce. Farmers were again required to make consistent deliveries and to make sure that they delivered their produce on time.

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Institutional buyers

1The role of institutional buyers was assessed through interviews with the Gauteng Shared Service Centre (GSSC) procurement department, which was responsible for procuring fresh produce for government hospitals and social development entities in Gauteng. Smallholder farmers who sell to government institutions do so through contract arrangements set up by the GSSC. Farmers enter into a contract with the GSSC whereby they commit themselves to deliver fresh produce to public hospitals around Gauteng against a specified purchase order.

Under the contract, with the exception of the winter season, farmers are compelled to deliver 80% of the vegetables harvested from their farms. The products delivered are required to meet packaging requirements, which take into account the absence of damage or deterioration resulting from transportation and/or storage. Farmers are also supposed to produce a R918 certificate from the Provincial Department of Health, which states that produce from the farms is acceptable on the basis of the following: the hygienic conditions of the farm; produce being delivered in closed clean transport; the provision of records of their production, pest control and packaging processes; and the farm having access to a pack house. Notwithstanding these requirements, GSSC procurement is increasingly leaning towards freshly cut, processed, ready-to-cook vegetables delivered under specific temperature conditions. This additional requirement introduces further impediments to smallholder farmers accessing this channel.

Processors

1A structured interview was conducted with a major South African fresh produce processor who processes 75% of South Africa’s processed fresh produce. The business model adopted by the processor that was interviewed is that growers are contracted to grow produce for processing for the particular grower. Processors source their produce directly from smallholder farmers and indirectly from FPMs.

Retailers

1Retailers generally operate from a system of central procurement where a national or regional procurement division is responsible for the acquisition of the necessary fresh produce for distribution. The primary procurement channels that retailers employ from a central procurement point of view are directly from farmers through growing programmes or via the FPMs. Through this approach, retailers seek to secure appropriate quantities of a variety of fresh produce within minimum quality parameters.



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Smallholder producers, however, are not the major suppliers for retail channels that largely rely on commercial production for obligatory volume and quality demands. Some supermarket groups have significant numbers of smaller suppliers and encourage smaller producers to become suppliers within the confines of their requirements.

Nevertheless, most retailers have pilot programmes with smallholder producers, the aim of these programmes being to mainstream these producers. These vary in success because retailers aim to find workable models. Some have become sceptical about such programmes as a result of financial losses and vast numbers of man hours, funding and other investments made into such programmes. In many instances it was reported that the initial planning and conceptualisation of these programmes does not match what happens in reality.

Supply chain risk analysis1Farmers provided information on the key risks that affect their fresh produce businesses at the input supply stage, during production and at the post-harvest and marketing stages. A demand-side analysis took into account the risks faced by various end markets when they procure fresh produce from farmers. The analysis investigated the perspectives of the stakeholders further along the chain with regard to the risks impacting on smallholder producers that prevent the mainstreaming of smallholder farmers into formal high-value markets.

Supply-side risks: farmers

Input supply risks1According to information supplied by the farmers, two major risks are encountered during the input supply stage, namely the costs and quality of the inputs. Most of the farmers in the sample (62%) complained about the costs of the inputs, citing that they were too expensive. Hence farmers were forced to cut back on their input purchases and reduce their levels of production. The yield and income realised also declined. In addition, the low production levels may exclude farmers from selling to formal markets that require consistent deliveries to the market. A number of farmers (15%) reported that some of the inputs they purchased were of poor quality, that seed germinated poorly and often produced vegetables of poor quality, which failed to sell in formal high-value markets.

Production risks

1During the production stage, farmers reported inclement weather (e.g. frost, hail and drought), pests, diseases and wild animals, water shortages and unskilled labour

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as the major risks affecting their fresh produce business. Over 72% of farmers cited weather-related risks; 79% reported pests and diseases; 27% reported the shortage of water; and 15% reported the lack of skilled labour.

Weather-related risks, pests and diseases were reported to affect both the quantity and quality of the produce, thus creating challenges for farmers to sell to the high-value markets. A shortage of water was reported by farmers who use municipality water for irrigation. They stated that because of the high cost of water, they had reduced the amount of land cultivated to reduce water consumption. This reduction in land cultivated resulted in farmers producing a limited quantity of produce. Farmers who reported unskilled labour as a challenge indicated that some of their workers lacked the knowledge on how to apply chemicals properly, and in some cases, workers were reported not to weed properly, which affected the quantities harvested and the quality of the produce.

Post-harvest and marketing risks

1Post-harvest and marketing risks that were identified in the study were low market prices, lack of access to markets, lack of transport, competition, poor produce quality and a lack of packaging material. Several farmers in the sample (32%) reported low market prices as the major challenge they faced in marketing their produce. These farmers associated low prices with the informal market as a result of oversupply to the specific market. Closely related to this risk was the significant competition between the farmers. Farmers who highlighted competition as a challenge reported that competition leads to the oversupply of produce in the market, which results in farmers receiving low prices for their produce. Some of the farmers (19%) reported that they were faced with a challenge in accessing markets to sell their produce. Failure to access markets was found to be related to other challenges cited by the farmers, which included an oversupply of produce in the market, poor quality produce (10%) that failed to sell on the market and lack of transport to deliver produce to the market (15%). Lack of packaging material was mentioned by 17% of farmers, who reported that this limited their ability to sell their produce to high-value markets.

Demand-side risks: formal end markets

FPMs

1It emerged from the interviews that the main risk faced by FPMs when facilitating the sale of fresh produce from smallholder farmers related to the quality of produce



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delivered by the farmers. FPMs reported that as a result of poor storage and transport facilities and, in most cases, poor packaging and grading, farmers often delivered poor-quality vegetables to the market, which failed to sell. Poor quality was also ascribed to poor agricultural practices by smallholder farmers. Another challenge for FPMs when facilitating the sale of fresh vegetables from smallholder farmers related to the untimely delivery of produce. Produce often arrived at the market late after the market had closed, and producers therefore had to wait for their produce to be sold the next day. Inconsistent delivery was also reported as a challenge for FPMs as they failed to secure sufficient produce from farmers. Farmers often choose not to sell through FPMs because of the packaging and labelling requirement, which requires all fresh produce to be branded, labelled and graded at the farm to enable traceability and to comply with the requirements of the Agricultural Product Standards Act. Packaging and labelling often come at a high cost for these farmers, as they have to purchase the packaging material and seldom have ready access to infrastructure to facilitate sorting, grading, packaging and labelling.

Institutional buyers1Interviews with the GSSC revealed the various challenges and risks faced by public hospitals and institutions in sourcing fresh vegetables from smallholder farmers and their perspective on the challenges facing smallholder farmers. The following challenges and risks were identified:

• failure to invoice quantities correctly• contracted farmers opting to purchase produce from other farmers in order to

meet their contractual obligations, which is against the stipulations of the contract• poor farming capability and production skills• transport and logistics problems, as some farmers are located far away from the

hospitals• poor quality produce• inconsistent supply

Processors

1Interviews with the processors revealed general challenges and risks for producers and processors in relation to the sourcing of fresh produce from smallholder farmers. The processors identified the following challenges and risks:

• Location: Firstly, from a processor’s perspective, the location of the fresh produce in relation to the location of the processing facilities is of critical importance. Moreover, sufficient volumes are required to constitute a commercially viable location.

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• Water and irrigation rights and infrastructure: Processors noted that without access to water and irrigation, the producers of vegetables are unlikely to be able to produce vegetables that meet commercial processing requirements. These requirements are essential to ensure that fields grow and ripen evenly so that fields can be harvested at one time and within a short space of time. In addition to the availability of water, it was also noted that water quality is a significant risk in terms of fresh produce production. The risk factors, in terms of water quality, relate to biological, heavy metal and uranium contamination.

• Safety and quality: In light of the significant risks that accompany food products, the processor highlighted the need for food safety and quality. This is a non-negotiable dimension in production and is one of the significant risks in the value chain. The processors tend not offer growing contracts to producers who are unable to maintain a minimum food safety and quality standard. Most farmers, irrespective of their background, battle to produce within the guidelines of Good Agricultural Practices (GAP). In this regard, the processor was working with all its suppliers towards GAP certification.

• Import competition: Competition from cheap, imported processed vegetable products poses a direct threat to the feasibility of food-processing enterprises in South Africa. Anecdotally, these imported products are predominantly from China and Brazil. The result is that local processing companies struggle to remain viable because they find it difficult to compete with such imports.

• Infrastructure: The processor noted that local, regional and national infrastructure plays a key part in the fresh produce sector. Transport infrastructure in particular fulfils a major role in the distribution of inputs and the collation of produce. Quality efficiency and cost are thus challenges and a risk for the fresh produce value chain. The poorer and the more costly the repairs required to the infrastructure are, the greater the detriment is to the whole fresh produce chain.

• Support to emergent and/or small farmers: Emergent and/or small farmers face specific challenges over and above those faced by established producers. These mainly include support from government agencies, which tends to be uncoordinated and a general lack technical know-how and advice. Both these factors limit producers’ ability to produce to expectations, which in turn, results in producers remaining in the poverty trap.

Retailers

1The interviews with retailers revealed general challenges and risks from both a producer’s and a retailer’s perspective. These challenges and risks were classified into the following three primary groups:



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Production1The fact was emphasised that access to pollution-free good-quality water is an absolute requirement for successful food production. Access, together with water infrastructure (including reliable irrigation systems), was highlighted as a key success factor for commercial vegetable production.

The input costs to produce a commercial quantity of good-quality vegetables of the desired variety are significant. Depending on the crop, these costs can run into many hundred thousands of rand per hectare. The challenge highlights the difficulties for most resource-poor smallholder farmers to produce fresh produce commercially.

Smallholder farmers, as individuals, struggle to produce sustainably and continuously to meet the requirements of scale required by market agents or the procurement divisions of retailers. Smallholder farmers produce too little, too inconsistently and in a too uncoordinated manner for retailers to be interested in procuring from them. Retailers are unable to accommodate inconsistent deliveries and/or inadequate products and consequently limit their exposure to smallholder producers. In principle, when farmers enter into growing programmes with retailers, they are expected, within reasonable limits, to deliver what they are required to deliver. Failure to do so will result in the relationship with the retailer not growing and eventually being terminated.

The retailers generally agreed that individual, uncoordinated production on landholdings of one, three or five hectares (ha) will not enable producers to enter formal markets, and the extent of these landholdings is insufficient to ensure sustainable, commercially oriented production. The more accurate and reliable the deliveries are, the better the chance of producers growing their business with retailers.

Post-harvest1Food safety and quality are non-negotiables for retailers, who have a legal and moral obligation towards consumers to offer high-quality, safe and authentic food for sale. Moreover, adherence to food safety and quality standards and other regulations is required and imposed by law. Supermarket representatives thus mentioned that they could not accept raw material that is not temperature controlled and that hazard analysis and critical control point (HACCP) compliance would become a non-negotiable throughout the chain.

To varying degrees, supermarkets now require producers to adhere to the South African Good Agricultural Practices (GAP) framework. In time, compliance with this framework will become mandatory for those producers wishing to delivery to supermarkets.

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The introduction of the Consumer Protection Act 68 of 2008 has also prompted retailers to draw a ‘line in the sand’ in terms of product quality and safety for suppliers. Given the risks that the above Act effected for retailers, their approach to procurement is more calculated and has influenced the requirements that producers need to comply with.

The general consensus among the supermarket representatives in terms of the port-harvest challenges that smallholder farmers face was that adherence to the quality and safety aspects of a product is the main challenge. Retailers stated that is particularly difficult to comply with the food safety and quality standards for fresh vegetables. Notwithstanding these challenges, many smallholder producers are engaged in vegetable production as a cash crop.

Marketing1It was the general view of retailers that most emergent farmers would not succeed in selling to them because of the continuity, transport and quantity shortcomings on the producers’ part and the range of strict requirements on the retailers’ part. In terms of the marketing options for small or emergent growers, if producers wish to enter the formal market, the obvious first step would be to link producers into the national fresh produce market system and to develop from there.

The rationale is that many farmers lack infrastructure, transport and the ability to coordinate activities. The concept of a coordinated receipt, sorting, grading and packaging facility is currently being supported by the national government and the private sector.

In terms of transport, retailers were able and willing to collect produce, but the majority required the produce to be delivered to the retailer’s distribution centre. It is therefore essential for producers to have this capacity. Not having access to transport or the ability to deliver produce are significant impediments in terms of accessing formalised markets. Retailers also require refrigerated transport to ensure maintenance of the cold chain throughout the process, from production to consumption. The transport requirements to access formalised markets are therefore significant and continue to grow in complexity and the number of requirements.

Retailers emphasised that a number of general challenges in the South African market impact on the fresh produce sector in general. These constraints were reported to stretch across the sector. Two constraints are discussed below.

– The production of fresh fruit and vegetables in South Africa is facing deteriorating conditions because of the challenging production environment, including declining water quality and availability, an unstable labour environment, detrimental climate change and increasing production costs and uncertainty.



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– Many government initiatives are making the fresh produce industry increasingly difficult, especially for new entrants and role players. These initiatives include stricter hygiene and quality requirements, packaging, sorting and grading standards.

1Major impediments for small farmers include exposure to all of the above-mentioned challenges and unfavourable terms of payment, both of which are problematic. Retailers are also not organised to handle hundreds of small suppliers and the possibility of success in this regard is therefore limited. At the same time, marketing avenues like the FPMs are well suited to handle large numbers of small suppliers, provided that the minimum requirements are met.

Risk management strategies

1The study considered the capability of smallholder farmers to manage risks affecting their fresh produce business. Strategies that were reported include the following:

Input supply risk management mechanisms

1Those farmers who reported that high input prices are a challenge seek inputs from cheaper markets and in some cases reduce input purchases as a means to avoid paying too much for inputs. Farmers who reported poor input quality as a challenge did not have any risk mitigation strategies to address the challenge. The lack of a mitigation strategy was mainly because farmers can only determine that their inputs are of poor quality after germination and the only option is for them to purchase other inputs.

Production risk-coping strategies

1Farmers reported using pesticides and chemicals to address the problem of pests and diseases. These chemicals, however, are reported to come at a high cost and farmers thus tend to apply less than the required amounts, and in some instances, they fail to apply any pesticides. For weather-related risks, farmers reported using greenhouses to protect their produce from harsh weather conditions such as hail and frost. The challenges of unskilled labour are addressed by mentoring the workers and demonstrating how to apply chemicals.

Marketing risk-coping strategies

1Farmers reported that they prefer to hold on to their crop until prices are more favourable in the market and when a strong demand for their produce arises.

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However, only 24% of the farmers reported having access to a storage facility either through private or shared ownership.

In other cases, farmers resort to selling to hawkers and local consumers if their produce fails to sell to formal markets, either because of failure to meet quality standards or to access packaging material. Farmers who were involved in livestock production reported that when their produce fails to sell they feed the produce to their livestock.

Risk management assistance

1The majority of farmers (54%) reported receiving external support from various institutions, which include farmer organisations, government, neighbouring farmers and private companies to help them with their risk management (Table 3).

Table 3: Institutions off ering risk management assistance to farmers

mclxvInstitution mclxviRisk management assistance

mclxviiGovernment

mclxviiiExtension servicesmclxixInput supportmclxxPack housesmclxxiBoreholes and water tanksmclxxiiAccess to markets

mclxxiiiFarmer organisations

mclxxivCollective marketingmclxxvProduction advicemclxxviTractorsmclxxviiReceive government supportmclxxviiiCredit

mclxxixNeighbouring farmersmclxxxTransportmclxxxiMarketingmclxxxiiCredit

mclxxxiiiAgricultural Research Council mclxxxivInputs

mclxxxvMining companies mclxxxviAccess to markets

1Source: Survey (2013)

1Government support, farmer organisations, neighbouring farmers, private companies and FPMs are discussed below.

• Government support: The most common support offered by government is through extension services where farmers obtain information on good agricultural practices to assist them with their production. Although all farmers reported that they are regularly visited by extension workers, 21% of the farmers reported that they



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did not find the extension services helpful. Government also supports farmers by providing inputs for their various agricultural practices, with 23% of farmers reporting having received inputs from government to help them. Government was also reported to offer infrastructural support to farmers in the form of pack houses, greenhouses, boreholes and water tanks. In addition, government also support farmers and help them to access markets through contract arrangements through the GSSC, where farmers supply to government institutions. Farmers also receive financial support through local government programmes like the Gauteng Enterprise Propeller which offers loans and enterprise and skills development support.

• Farmer organisations: Farmers also receive risk management support from farmer organisations where they receive a range of support, including funding, labour, farming equipment (tractors) and extension support. Farmers receive better assistance from government when they were in groups. Farmers also receive access to transport and markets by selling in groups, which helps them to reduce the transaction costs of selling their produce to the markets. However, not all farmers are members of a farmer organisation or union. The majority of these groups are informal and not registered.

• Neighbouring farmers: Farmers often receive external support from neighbouring farmers who provide support mainly through credit facilities and transport.

• Private companies: Private companies, which include mining companies and the Agricultural Research Council (ARC), also support farmers in coping with risk by offering input support and access to output markets.

• FPMs: These markets extend risk management support to smallholder farmers mostly through their market agents who offer farmers advice on quality and quantity requirements. Furthermore, FPMs advise farmers on suitable modes of transport and educated farmers on which products to transport together in order to avoid spoiling the products.

Conclusions and recommendations

1This research, based on a limited sample and geographic area in South Africa, confirmed the well-known and usual problems faced by smallholder farmers in this particular context. This study also suggested that risk in the value chain affects the quantity and quality of farmers’ produce in their specific supply chains and ultimately their ability to participate and compete in formal, high-value markets. These risks were categorised as input procurement, production, post-harvest and market risks. The impact of these risks is potentially severe and adversely affects

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smallholder producers in particular, who probably have a limited appetite for and ability to manage or bear these risks or their consequences. The surveyed farmers’ current risk management strategies are also underdeveloped with risk avoidance being a primary strategy. Ultimately, the inability of smallholder farmers to manage or bear risks and their general preference for rather avoiding risk results in decision making and outcomes that are not conducive to accessing markets feasibly and sustainably.

Based on the research and the conclusions, a number of specific recommendations can be made. These recommendations primarily relate to policies for developing smallholder farmers in the Gauteng province of South Africa. Broadly speaking, creating an enabling environment for the province’s smallholder farmers will provide the foundation for their economic development and overcoming their challenges, including the influence of risk. Christy, Mabaya, Wilson, Mutambatsere and Mlanga (2009) propose essential, important and useful enablers for such economic development. Access to infrastructure, risk management tools, value chain coordination mechanisms and human resource development are among the noteworthy elements of enabling environments relevant to smallholder farmers in the Gauteng province. Torero (2011) adds that accompanying institutions that can reduce the marketing risk and transaction costs in the process of exchange between producers and consumers are a further requirement for creating an environment for economic development.

In light of the findings of this study and the broad recommendations, a number of specific recommendations include the following broad guidelines:

• Develop programmes and funding models to improve access to infrastructure for smallholder farmers. This should include the following:

– production infrastructure (water and irrigation infrastructure, green houses, etc.)

– post-harvest infrastructure (sorting, grading, packaging and storage facilities) – supporting infrastructure (roads, fences, etc.) – equipment, human capital development

• Develop or improve access to risk mitigation mechanisms with specific consideration of insurance and disaster relief tools designed to ensure business continuity in response to risky events.

• Expand extension services to provide farmers with information on GAP as well as how to best produce, handle, harvest, store, sort, grade, package, label, transport and market their produce as per the market requirements and to reduce post-harvest losses.



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• Support the development of collective institutions for farmers to reduce transaction costs in their activities. This would include planning, financing and implementing programmes or schemes in collaboration with retailers and FPMs to forge closer relationships with smallholder farmers. A collective fresh produce hub falls within this sphere and would be an ideal platform from which to achieve economies of scale.

• Pursue closer relationships in the value chain to encourage more formalised relationships such as contracting, which is an inherent tool to manage specific dimensions of risk throughout the whole supply chain.

• Support smallholder farmer development in terms of capacity building in all aspects of agricultural production and management.

• In addition to the specific measures that are suggested, a culture of the well-developed ex-ante and ex-post risk management approaches should be fostered among smallholder farmers and stakeholders in their value chain.

1In conclusion, it is recommended that further research should be conducted in a number of areas pertaining to smallholder farmers’ risk appetite and risk-bearing ability and their mechanisms to deal with the particular risks in the value chain and how this impedes their all-round ability to graduate from small-scale to commercially oriented production.

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