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
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