South Africa’s development finance institutions not doing enough for SMMEs

South Africa’s development finance institutions (DFIs) only contribute about 5% of the country’s GDP whereas in Germany it is closer to 20%. This startling comparison was revealed by the IDC’s Divisional Executive for Corporate Strategy, David Jarvis, at a workshop convened by the Portfolio Committee on Small Business Development last week.

The purpose of the workshop was to understand the funding environment for small businesses and cooperatives and come up with strategies for improving it.

During three days of deliberations, the picture became more and more depressing as we listened to the difficulties facing entrepreneurs seeking financial support.

The workshop got off to a bad start when the programme revealed that not a single bank nor private sector financial institution had been invited to present at the workshop. When I objected to this, pointing out that according to the Banking Association of SA banks account for roughly 95% of finance for business, the Chairperson, ANC MP Ruth Bhengu, said they only wanted to have institutions there controlled by government so they could influence their policy.

This is the major flaw in the government’s “developmental state” narrative. It wants the state to play the leading role in South Africa’s economic development but refuses to recognise that state institutions are incapacitated and that without private sector investment our economy will continue to flat line.

It must have been excruciating to have been an executive from the National Empowerment Fund, the Small Enterprise Finance Agency, the National Development Agency and the IDC listening to the damning criticisms levelled at them by one small business or cooperative representative after another.

Ntombie Nonxuba, founder of Rise Uniforms, described how she first applied to SEFA for a bridging finance loan for her uniforms manufacturing business. They turned her down saying she needed a contract from a customer. She was already supplying some PicknPay stores in the Western Cape but that was not enough for SEFA.

She then got a contract to supply the over 300 PicknPay Express stores expected to be rolled out over the next five years. She took this contract, worth around R25 million, to SEFA and again they turned her down. They even went behind her back to PicknPay to see if she was telling the truth. Such lack of trust in her personal integrity was the last straw for Ntombie. She says she will never go back to SEFA.

A similar story came from Nontwenhle Mchunu, Managing Director of Ezulwini Chocolates who had contracts to supply several large retail stores with her up-market products. Like Ntombie, she had no luck with SEFA nor any other of the DFIs she approached. She was forced to close her business and return home to KZN to grow cabbages to make a living, while working on a strategy to re-design the chocolate supply chain which in South Africa is virtually 100% dependent on imported cocoa.

Another sad tale came from Tom Lombard, Managing Director of TFS Solar (PTY) Ltd. For the past four years he and his partner had presented a business model for transforming South Africa’s energy supply industry based on solar voltaics manufacturing plants and installing the panels across the country into homes and businesses.

This even included replacing the electric elements in the approximately 40 million hot water geysers with solar-powered elements, which would save the equivalent of two power stations worth of generating capacity.

The IDC turned them down. When I questioned the IDC executive why this was so he said the project risk profile was too high.

It is interesting to compare this attitude to the forceful views expressed by former IDC chief economist Lumkile Mondi in a recent interview with BizNews. He said South Africa has missed growth opportunities due to the ANC’s inability to take policy risks and its mistrust of the private sector.

At the workshop, we got some insight into why this might be so. DFIs seem to be trapped in a vice of policy contradiction whereby they are forced to apply tight lending criteria to loan applications while having government breath heavily down on them for not funding more businesses.

The ogre in the room appears to be the Treasury and the Public Management Finance Act (PMFA), in particular the 80/20 and 90/10 rules applying to adjudicating tenders where most points are given to price and fewer to BBE status.

This gives a clue as to why Treasury has been persuaded to introduce the 50/50 procurement rule, many would say against its own better judgement. This will allow black-owned companies to inflate their prices up to 50% higher than white-owned competitors and still get the contract.

But the PMFA is actually a red-herring trotted out by DFIs to shield them from their own failings. The real problems lie deeper.

DFIs operate in silos, with none of them communicating or co-operating with one another. The applications processes are complicated and obscure, and not tailored to their customers’ needs. They are not staffed by enough professionally qualified or experienced fund managers. Their investment mandates are too narrow and inflexible. And their reach is too limited in areas where they are most needed – township, peri-urban and rural areas.

The Portfolio Committee on Small Business Development has been tasked with investigating the systemic problems within DFIs. The DA will ensure banks and private sector institutions are included so that a fuller understanding of the overall picture is obtained.

What we need is a single point of entry for small and medium enterprises and cooperatives to obtain financial and non-financial support. We should seriously consider merging the NEF, SEFA and SEDA into a Small Business and Cooperatives Development Agency which focuses on loans and equity investments below R50 million, as well as training, mentorship and advice, reporting to the Department of Small Business Development, with the IDC taking care of larger deals.

Such streamlining would address the widespread confusion and capacity constraints which are holding back investment in the sector of the economy which is expected to contribute 90% of the 11 million jobs we need by 2030