EDD Presentation to the Select Committee on Economic Development

EDD Presentation to the Select Committee on Economic

Development

SMME Strategy and Access to Finance

19 February 2013

Accessing Finance • Experienced across the board, with difficulties ranging from qualifying

criteria to the adequacy of business plan assessment and excessive pricing of loans

• The challenges are aggravated when emerging SMEs without a track record are concerned

Limited enterprise growth• Many SMMEs exhibit limited signs of growth and employment creation

potential

• Demand challenges are compounded by:o Slow pace of economic recoveryo Socio-economic factors, such as unemployment, poverty, inadequate

services delivery, corruption and crime

Challenges faced by SMMEs in South Africa

Late payment for services provided• Excessive delays in processing payment to SMEs, not only by public sector

entities, but also private sector businesses, compromise their cash-flow and often result in their demise.

Lack of entrepreneurial capacity• GEM (2006) report places SA’s Total Early-stage Entrepreneurial Activity rate

(TEA) below the average of most other countries.o Based on World Bank classifications, the report places SA in the ‘upper-

middle income countries’ group, but even here SA performs below average.

• Although SA’s TEA rate has risen from 5,3% in 2006 to 9.1% in 2011, it is still much lower than the previously the recorded high of 14.8% (and lower than the global average of 14.1%).

Challenges faced by SMMEs in South Africa (continued)

Regulatory constraints• Small business development is constrained by regulatory burdens

o Research conducted for the SA SMME Business Confidence Index Report (2011) reports government taxes and regulations to be one of the major limiting factors identified by SMMEs.

o The GEM report 2011 report lists the following as factors constraining entrepreneurial activity: bureaucracy, legislative compliances, restrictive labour legislation, and onerous administrative and requirements related to registering and starting a business

• EDD is partnering with the Africa Growth institute to develop an index on regulatory impediments.

Management skills• There is lack of business management skills, which is correlated to the level of

education and skills training in the countryo Poor management skills impede the growth of small businesses, whilst good

management skills enhance their growth

Challenges faced by SMMEs in South Africa (continued)

Challenges faced by SMMEs in accessing finance

• Does not have a bank account with the institution it approached

• No or poor credit history

• Applicant lacks security/collateral for the loan

• Limited cash flow

• Limited owners equity

• Lack of technical and management skills

• No financial records

• Consultant prepared the business plan – lack of understanding

• Lack of research on consumer base (market)

• Poor planning skills thus struggle to forecast the growth and financial cash flow of the business

Market gaps in SME financing• SA has a sophisticated

financial sector - wide range of specialised private and public funding intermediaries

• Micro and small businesses receive mostly short-term finance and are unable to access medium- and long-term finance for their enterprises

• Commercial banks typically start lending to small business from the R500 000 upward, and even here their appetite is often limited for emerging SMEs.

• With many micro-finance institutions funding only up to R50 000, this leaves a gap in the R50 000 - R500 000 range, where commercial banks and other lenders shy away from operating

GAP

Long

- ter

m

Shor

t- ter

m

TER

M

Micro Medium Large Small

MONEY-LENDERS

STOKVELS, BURIAL SOCIETIES

CONSUMPTION LENDERS

MICRO-FINANCE INSTITUTIONS

COMMERCIAL BANKS

MORTGAGE PROVIDERS

DEVELOPMENT FINANCE

INSTITUTIONS

INVESTMENT BANKS

CAPITAL MARKETS

TRANSACTION SIZE

Med

ium-

ter

m

R500 R500,000 > R5,000,000R50,000

The New Growth Path

The microeconomic package in the NGP includes:

Enterprise Development: promoting small business and entrepreneurship; eliminating

unnecessary red-tape

The NGP strives to strengthen and consolidate initiatives to support small and micro enterprises

Core components of SMME support in the NGP

1. Merger of samaf, Khula and the IDC small business finance activities into sefa

2. Strengthen access to micro-finance

3. Integrate small and micro enterprise support systematically into sector strategies

4. Government’s 30-day payment commitment

5. Red-tape elimination campaign

6. Access to business premises

Findings of the dti review in terms of Small Business Support

• Increasing the supply of financial supporto Paucity of SMME financing data

o Impact of SMME credit information asymmetries

o Lack of risk capital

o Underdevelopment of microfinance

o Impact of late payment on SMMEs

o Limited use of innovative SMME financing models

o Limited scale of public sector support programmes

• Reducing regulatory constraints

The dti review

Recommendations of the dti review

In terms of increasing the supply of financial support:

• Stimulate investment in SMMEs

o Through various means , such as tax incentives, funds from DFIs and building angel investor networks

• Dedicate substantial financial resources to scale-up microfinance activities in partnership with international financial institutions and private sector partners

Alignment between EDD and the dti

• Increasing the supply of financial support through the merger

• Addressing the underdevelopment of microfinance

• Business support programmes

• Tackling government’s 30-day payment to SMMEs

• Collaborating on the impact of SMME credit information asymmetries

• Red-tape reduction

EDD SMME Support Projects and Activities

Formation of sefa

• Merger of samaf, Khula and IDC small business activities into sefa

• Targets and performance of sefa must be significantly greater than combined Khula and samaf

• Khula was under-capitalised but through the creation of sefa under the IDC, the IDC agreed to a significant shareholders loan

• More resources are however required for sefa from the fiscus over and above the baseline, in order to achieve the targets needed for the country

Microenterprise sector

Expanding Access to Credit for Micro-enterprise

• Creation of an inter-departmental working group to look at addressing the challenges facing the sector

• Engagement with key players in the industry to identify constraints, develop a vision for the sector and how best to address the challenges

o Partnership approach required to identify the challenges encountered by the micro-finance sector, and to find solutions.

o Key constraints, possible responses and action items to overcome the access to credit gap for microenterprises in South Africa

Microenterprise sector: Constraints inhibiting growth

Market constraints• Payment culture

o Credit bureau for micro-enterpriseso Access to financial services and non-

financial services for both MFIs and micro-enterprises

• Encourage new entrants into the sectoro Product innovationo Institutional development

Institutional issues• High cost structure of MFIs

o Joint platforms to bring efficiencies and lower costs

o Cost of financeo Capacity building grants

• Skills and Capacity Developmento Need for an improved institutional

support modelo Improve and attract skills into the

sector

Environmental factors• Legislation

o Regulatory impact assessmento Dedicated banks billo Collateral

• Small Business Claims Court• National Credit Act

Microenterprise sector: Way Forward

• Development of a sector strategy and a clear outline of constraints to growth of the micro-enterprise finance sector

• Regular engagements between government and key players in the sector to get buy-in on implementation of the strategy and action

• Key role for sefa, which has the mandate to expand the number of micro-enterprises that receive finance

• Support specific actions indentified as constraints (market, institutional and environmental)

• Support is needed to: o Increasing the resources and number of players in the sectoro Bring down the costs of lendingo Improving the institutional performance of the Micro Finance Intermediaries

SAICA Business Hub

• In July 2012, a joint project between EDD and the South African Institute of Chartered Accountants (SAICA) established the Business Hub and Skills Training Programme

• The Training Programme provides training to 100 unemployed accounting graduates to enhance their practical accounting skills, following which they are either placed into employment within SMEs within the accounting sector, or employed in the Business Hub

• The Business Hub was established in January 2013 and is providing back-office accounting support to entrepreneurs with a turnover of up to R10 million. The target is those businesses that receive finance from SEFA and commercial banks

• EDD contributed R6 million to this programme, in a partnership between SAICA, Guarantee Trust, SoftlinePastel, sefa and EDD. EDD is considering a further allocation to the programme for 2013 to continue the work, which will enable it to expand into other provinces including Mpumalanga, Eastern Cape, KZN and Western Cape.

Progress on SAICA Business Hub

• The first intake of 50 students started in July 2012, and graduated at the end of November 2012. The second intake of 50 students have commenced their studies in January 2013.

• Of the 100 graduates trained, 15 will be placed in the Business Hub as associates. The first 7 graduates have already been placed into the Business Hub from the first intake of graduates.

• The Business Hub is located in the sefa Braamfontein office.

Programme aims to enhance the competitiveness and success of SMEs; and will contribute to the sustainability

of sefa

30-day payment• Government’s inability to pay services providers within 30 days has been

raised as a significant problem for businesses, and for small businesses in particular:

o Hampers their cash flow; may require firms to borrow (and pay interest) in order to meet their obligations; could result in closure of a business and loss of jobs

• Government is working towards improving its performance in this area

o National Treasury leading the process with enforcement of regulations and other departments have been providing support to address this complex problem

o the dti agency SEDA has a hotline that small businesses can call to assist them with delayed payment

• EDD is participating in an inter-departmental task team comprised of DPME, National Treasury, the dti and the Department of Tourism. Meetings are held quarterly.

• In addition, EDD has been hosting workshops with provincial departments in order to obtain a better understanding of the challenges that are faced in meeting the compliance obligations and channelled that information to NT and DPME.

• Minister Patel stated in his 2012 budget vote speech that EDD will commission a study on how to improve the economic development impact of small business spending across the three spheres of government and place proposals before Cabinet.

• An advisory committee was established to oversee this work, comprising Dr Thami Mazwai (Wits), Ms Sizeka Rensburg (Chair of sefa) and Ms Monhla Hlahla (Chair of IDC).

• Progress thus far: Work is currently underway to obtain information from government departments. The process involves a combination of :

– reviewing of all the annual reports of the departments– reviewing their websites– sending questionnaires to all departments (with follow up)– holding interviews with selected department to obtain qualitative information – engaging with a range of stakeholders.

• Report will be submitted to Minister Patel by the end of the first quarter of 2013.

Advisory Panel on Small Business

Key focus areas for EDD going forward

• Oversight over sefa and IDC activities

• Work with entities to balance sustainability of the intermediaries, issue of affordable finance and their developmental objectives

• More work needs to be done on micro-enterprise finance

• Essential to link finance and non-finance support o link sefa and SEDA for pre loan capacity building and support so that there is no

duplication of services

o Post loan mentoring / support is essential to ensure that the small businesses are sustainable … and sustainable enterprises pay back their loans!

o Collaborate with the dti on projects

• Supporting the government wide effort on 30 day payment

• Development of a regulatory impediments index

Thank you