Dodgeman has it correct. the top smaller outlet is for the water heated inlet manifold, while the righthand one is for the heater hose.
You dont have to use either outlet if you dont have a heater (brrrhhh) or the standard inlet manifold, but it helps with cold starting & cold weather if you do have these things. Go to an auto shop or a Holden dealer if you're in Australia & ask for heater blank off rubbers for the smaller size, these are little caps that go over the pipes. Before finding out about the blank off rubbers, i used a 1200 lower hose with the heater pipe take off & ran a small length of heater hose between that & the top of these two pipes & attached the heater hose to the other ( the car had twin webers).

OK, the "where does this small pipe connect to?" is most likely the fitting that connects to the inlet manifold but I would prefer to see the inlet manifold fitted up before I could be sure. It takes coolant from the front of the water heated manifold.
The other smaller fitting at the right of this fitting is for the heater. Both of these fittings suck coolant from their respective devices.

the little pipe of the lower water pipe go's to heater