ENTERPRISE SUPPORT AND FINANCE - SHAPE DURBAN PRESENTED BY: DATE: MILE
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ENTERPRISE SUPPORT AND FINANCE
SHAPE DURBAN
PRESENTED BY:
D.Ramklass
DATE:
21 | 11 | 2018
STRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Socio-economic Data Four major settlement types in South Africa: rural areas, urban townships (TS), urban informal settlements (IS), and other urban areas (OUA). T&IS has the highest population growth About half of South Africa’s urban population live in T&IS (Stats SA 2011a)
Socio-economic Data T&IS do not exist in isolation from rural and OUA; they are connected to the broader economy through the mobility of factors of production (labour and capital) as well as through the markets for goods and services. The IS typically are the first stops for migrants from rural areas and other foreign countries who are seeking employment opportunities. Subsequent movements from IS to TS and OUA occur as successful households improve their incomes over time.
Socio-economic Data In the rural areas, the poor employment trends in the past two decades have exacerbated the pressures on the T&IS, whose own economic structures are not geared to bear the added burden. According to national data sources, rural employment fell by 1.5 million in the past decade—from 4.4 million in 2000 to 2.9 million in 2011 (Stats SA 2000, 2011b). This was because of a fall in commercial farm employment, the virtual collapse of homeland agriculture which sharply reduced self-employment opportunities there, and job cuts in the mining sector. As a consequence, only one out of every four persons of working age in rural areas is currently employed
Socio-economic Data The broad unemployment rate has grown especially rapidly in rural South Africa, as job losses and lack of employment opportunities led to a sharp increase in the number of discouraged workers. The end result is that rural areas, despite out-migration in the past decade, still contain a reservoir of surplus labour. In spite of the bleak overall employment situation, per capita consumption improved and poverty rates decreased in all settlement types but the IS. The IS also have the lowest per capita consumption, followed by rural areas, TS, and OUA, whose share of national consumption is more than twice its population share.
STRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Size, structure and growth rates In the South African context, there are various types of Entrepreneur, each with distinct needs and aspirations.
Access to Funding is a Key Challenge for SMEs Various research reports have identified access to funding as one of the main challenges facing SMEs Source: SA SME Fund Presentation to DST and NT, September 2017
Segmenting the Market Source: SA SME Fund Presentation to DST and NT, September 2017
Size, structure and growth
Summary: Size, structure and growth rates
The formal SA business The number of SMMEs has
sector comprises c.700K decreased in recent years
companies and SMMEs (both informal and formal)
Owners of formal SMEs tend
Nearly 25% of entities are in
to live in urban areas, and are
financial services, followed by
more likely to be older, white
wholesale and retail trade, and
males with a higher level of
construction.
educationInternational comparison
SMEs across the globe, and in South Africa in particular, are still faced with numerous
challenges that inhibit entrepreneurial growth.
Apart from poor SME funding and access to finance, the Global Enterprise Monitor(GEM)
Report (2016) noted that South African SMEs also suffer from poor management skills,
which is a result of a lack of adequate training and education. This results in high rates of
business failure - SA has one of the lowest SMEs survival rates in the world.
Figure 1 below from the GEM 2016 shows that South Africa’s early stage entrepreneurial
activity is very low when compared to similar economies.Expert ratings of the Entrepreneurial Eco-system (ranked out of 65)
Industry attributes, key challenges and proposed solutions
The SME market in South Africa is severely challenged,
with many interlinked problems which cannot be fully
addressed via a single intervention
Highly Inadequate Insufficient/
Slow and
concentrated management inappropriate
costly CCMA
corporate skills for skills in the
processes
sector scale-up workforce
Inefficient High cost of Infra- Inability to
raise or
government regulatory structure access
agencies compliance constraints equity
capital
Poor cash Lack of
Inadequate
Low R&D flow due to appropriate
market
levels late business
linkages
payments supportIndustry attributes, key challenges and proposed solutions
Recommendations to address the industry challenges
focus on improving the regulatory burden on SMMEs,
access to finance and an improved support structure to
enable entrepreneurship
Provide Improve
entrepreneurial
support access to and
structures cost of
(mentorship available
platforms and finance
tools)
Improve Improve labour Improve
payment force entrepreneurial
timing of education education and
government (education access to
and big system) information
business
Provide
Decrease
greater tax
regulatory incentives
burden for
(SMEs and
SMMEs
investors)STRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Access to finance in Townships and Informal Settlements
Both households and businesses in townships are less
likely to own an account, and, if they do, are more likely to
be underbanked than their non-township counterparts.
The financial inclusion challenge for both poor households
and MSMEs is thus twofold:
Expanding access to financial services to currently
excluded parts of the population and business
community
Decreasing the percentage of “underbanked” in the
system—that is, those who are technically financial
included but make low use, if any, of formal payment
and savings products.Access to finance in Townships and Informal Settlements Access to financial services is uneven. While individuals and businesses in non-township urban areas are primarily served by formal financial institutions such as banks, those in townships rely disproportionally on informal financial services such as savings clubs, Stokvels, and burial societies as well as friends and family to access saving products and credit. The lack of greater uptake of formal sector financial products among township residents might in part be explained by the lack of financial products tailored to their needs; such as low-cost accounts.
Use of informal financial services
Urban firm size, by location
Sectoral distribution of urban firms, by location
STRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Mapping OECD Policy Response against SA Government Support
Policy response Status Government Support Available
Government loan guarantees Limited Small Enterprise Finance Agency (SEFA) provides a credit guarantee
scheme, which provides credit guarantee products to lenders
(commercial banks and other financial institutions) for SME
borrowers.
The Guarantee is underfunded, inefficient and under-utilized by banks
Special guarantees and loans None No public support
for start ups
Government export Limited Provided through DTI Export Credit Insurance Corporation of South
guarantees, trade credit Africa SOC Ltd (ECIC) but does not target SME’s
Direct lending to SMEs Available Small Enterprise Finance Agency (SEFA) has Direct lending products:
These are loans that sefa provides directly to Small and Medium sized
Enterprises as well as co-operatives operating in all sectors of the
economy. The facilities range from a minimum of R50 000 to a
maximum of R5 million.
Subsidised interest rates Available Small Enterprise Finance Agency (SEFA)
Venture capital, equity Limited Very limited – some funding through the Technology Investment
funding, business angel Agency (Tia) under the DST
support There is equity funding available from the IDC and NEF but generally
for large significant transactions only, i.e. not SMMEs
Significant funding is also available through a number of grant
programmes, notably the Jobs Fund, although these are typically
targeted at specific projects rather than enterprises.
SME banks None There are no publicly supported / funded SME banks, however SEFA
does operate a direct lending loan portfolio.Mapping OECD Policy Response against SA Government Support
Policy response Status Government Support Available
Business advice, consultancy Limited Mainly through the Small Enterprise Development Agency (SEDA) but
also SEFA.
Effectiveness of SEFA and appropriate linkage between financial and
non-financial support is problematic.
Tax exemptions, deferments Limited SARS Section 12J - A tax incentive for investors in SMME’s through a
registered venture capital company (VCC) regime. There are no special
tax benefits for VCC, only standard tax rules will apply. It impact has
been limited to date because of key conditions attached.
Simplified Tax Regime for enterprises with less than R1 million
turnover per year. Currently excludes the bulk of formal employment
generating SMEs
Credit mediation/ review/ Available Available under the National Credit Act and debt mediation services
code of conduct under the National Credit Regulator.
Bank targets for SME lending, None Previously some level of targeting in respect of lending supported
negative interest rates for through the Financial Sector Charter
deposits at central bank
Central Bank funding to None None
banks dependent on net
lending rateCurrent government support
Government has established extensive institutional and organizational
infrastructure for SME financing, including wholesale and retail financing as well
as credit guarantees, and other ancillary services, such as business development
services and implementation of special sector schemes
There are seven direct support programmes for SMMEs and twenty five
indirect support programmes throughout broader government.
Number of agencies dedicated to supporting small business development
such as the Small Enterprise Development Agency (SEDA) and the Small
Enterprise Finance Agency (SEFA), PDFIs at regional level, Local
government business development agencies and publicly financed
incubators.
Specific sectoral programmes housed within the various national departments
i.e. the Loans to emerging contractors programme (Department of Human
Settlements) and the Tourism Incentive Programme.
Although in many instances similar in nature, these programmes do not
necessarily overlap.
Variety of programmes and approaches to support are aimed at providing the
broadest possible range of support to SMMEs across various sectors, whose
needs may differ substantially.DFIs supporting SME development
NDFI National shareholder department
Development Bank of Southern Africa National Treasury
Industrial Development Corporation Economic Development Department
Land Bank National Treasury
National Empowerment Fund Department of Trade and Industry
National Housing Finance Corporation Department of Human Settlements
National Urban Reconstruction and Housing Agency Department of Human Settlements
Rural Housing Loan Fund Department of Human Settlements
Small Enterprise Finance Agency Subsidiary of IDC, under executive authority of Dept. Small Business Development
PDFI Prov Provincial shareholder department
Eastern Cape Development Corporation Dept of Economic Development, Environmental Affairs and Tourism
EC
Eastern Cape Rural Development Agency Dept of Rural Development and Agrarian Reform
Free State Development Corporation FS Dept of Economic Development, Tourism and Environmental Affairs
Gauteng Enterprise Propeller GP Dept of Economic Development
Ithala Development Finance Corporation Ltd KZN Dept of Economic Development, Tourism and Environmental Affairs
Limpopo Economic Development Agency LP Dept of Economic Development, Environment and Tourism
Mpumalanga Economic Growth Agency MP Dept of Economic Development, Environment and Tourism
North West Development Corporation NW Dept of Economic Development, Environment, Conservation and TourismTax measures to support SMEs
Government support for small business development through
changes in tax policy has been especially evident in recent
Budgets. Measures announced in the 2014/15 Budget Speech
include:
A commitment to a simplified tax regime, as recommended by
the Davis Tax Commission. For example, micro businesses
with a turnover of up to R335 000 will enjoy a zero tax rate,
while the remaining elements of the turnover tax regime will
be simplified, and thresholds and tax rates adjusted.
Other proposals include requiring annual rather than biannual
tax returns and making grants received by SMEs tax exempt.
There have also been enhancements made to the venture
capital company (VCC) tax regime, especially to encourage
investment into small businesses and junior mining
companies
Other tax incentives include incentives for R&D (12i) and
Innovation (12j)Government procurement supporting SMEs
Procurement policy is one of the key avenues through
which government aims to support small businesses.
The PPPFA regulations are currently being amended to
make explicit provision for the support of small businesses
through the points scoring system.
However, procurement is a relatively blunt tool:
There is a cost raising element due to how points are
allocated in the scoring system;
The developmental objectives are geared towards larger
companies and not always aligned to the best interests
of SMMEs
In practice, despite government’s intentions, delays in
payment processes disproportionately jeopardise the
viability and sustainability of many small businesses.
Source: National Treasury Public Finance AnalysisRegulation and competition policy
South Africa has had persistent and extremely high levels
of concentration in key sectors such as agriculture, mining,
telecommunications and electricity due to entrenched
dominance of a few firms.
Government can provide support to smaller firms through
more rigorous application of competition policy.
An economy characterised by the existence of highly
concentrated industries and numerous regulatory and other
barriers to entry, stifles innovation and investment, tends to
lead to higher prices, and a less competitive economy.
The Competition Act should be amended to ensure that
more consideration is given to smaller players and new
entrants
Source: National Treasury Public Finance AnalysisRegulation and competition policy
Government can also support small business development
through a concerted effort to reduce the regulatory burden
on businesses in general and on small businesses in
particular.
Surveys of small businesses consistently rank regulation as
a key obstacle to sustained growth. When reviewing
current or drafting new legislation/ policies/ regulations,
competition and market structure issues should be taken
into consideration in socio-economic impact assessments,
where applicable.
Current BBBEE legislation makes provision for points to be
earned for enterprise development which indirectly creates
a lot of support for SMMEs, as well as supporting
transformation.
Source: National Treasury Public Finance AnalysisPublic funding
Total direct funding for SMMEs across government has been
substantially increased and now amounts to R15.5bn over the MTEF
Department Incentives/Initiative/Public Entity 2017/18 2018/19 2019/20 Total MTEF
R'000 R'000 R'000 R'000
DHS (NURCHA) Loans to emerging contractors 345,000 285,000 420,000 1,050,000
DHS (NURCHA) Loans to emerging contractors 180,000 270,000 150,000 600,000
Incremental loans to retail intermediaries and CBO's for
DHS (RHLF) 222,015 277,667 324,461 824,143
housing development in rural areas
DSBD Black Business Supplier Development Programme 256,750 270,953 286,126 813,829
DSBD Cooperatives Incentive Scheme 78,750 83,318 87,984 250,052
Industrial Development Corporation: Craft customised Sector
DSBD 10,000 10,000 10,560 30,560
Programme
DSBD National Informal Business Upliftment Scheme 99,406 103,138 108,914 311,458
DSBD Enterprise Incubation Programme 49,665 54,737 57,802 162,204
DSBD Small Enterprise Development Agency 743,132 786,233 817,113 2,346,478
DMR Industrial Development Corporation of South Africa (IDC) 28,805 30,476 32,183 91,464
DMR Marginal Mines 5,555 5,877 6,206 17,638
Tourism Tourism Incentive Programme 171,888 202,548 173,545 547,981
DST Technology Innovation Agency 70,237 71,339 40,486 182,062
RURAL Rural Enterprise and Industrial Development 583,500 627,500 669,000 1,880,000
DAFF Comprehensive Agricultural Support Programme 1,638,088 1,747,037 1,994,158 5,379,283
DAFF Cooperatives and Rural Enterprise Development 70,895 74,488 79,098 224,481
DAFF Agroprocessing and Marketing 63,911 67,200 71,316 202,427
NT Co-operative Banks Development Agency 19,300 20,400 21,500 61,200
EDD Small Enterprise Finance Agency 223,780 236,759 250,018 710,557
Total Spending on SMMEs 4,860,677 5,224,670 5,600,470 15,685,817STRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Funding Landscape
Government & Pvt
Funds
New Private SME Fund
Proposed Small Enterprise Innovation Fund Medium and Publicly traded
Angel Seed VC Growth large buy-out capital markets
Regress
Continue
as-is
Regress
Failure
Don’t establish Failure
Source: SA SME Fund Presentation to DST and NT, September 2017; GTAC modificationsFund Objectives
The Fund will target the first four stages of the (DSB)
business life cycle (inclusive)
The Fund will not exclude sectors but will grant preferential
access to certain sectors to accelerate transformation and
other agreed-upon objectives (i.e. environmental).
Objectives:
Increase business formation to facilitate business
dynamism through a constant stream of new entries into
the market
Intensify formalization to incentivize innovation, growth
and promote fair competition
Raise productivity of SMEs to boost incomes and raise
standards of living
Expand number of high growth and innovative firms
and to grow these companies into regional and global
championsFund Concept – Products, Target Market & Channel
The Small Enterprise Innovation Fund will provide “whole-sale funds” for:
Window: Technology Venture SMME equity Youth Start-Up
SMME debt finance
equity/loan finance finance Grants
Target: ● SMMEs with locally ● Youth with a
● SMMEs (any sector) ● SMMEs (any sector) business idea within
developed IP / an incubator or
with growth potential with growth potential
technologies related programme
● Venture Capital ● SMME Financiers - ● SMME Financiers -
Partners: ● Incubators / Youth
Firms private or public – private or public –
Start-up Support
● Technology (e.g. Banks, (e.g. Banks,
Programmes (e.g.
Incubators / TTOs Specialist funders, Specialist funders,
Awethu; SEDA)
/CoCs SEFA, IDC) SEFA, IDC)
While broad performance parameters will be determined, individual partners will be
encouraged to utilise or develop their own funding instruments, for instance partners could
utilise debt finance for general business expansion loans or working capital etc.…
Proposed broad fund allocation: Technology Venture Equity Finance
15%
35% SMME Equity Finance
25%
SMME Debt Finance
25% Youth Start-up GrantSTRUCTURE Township Socio-economic data Challenges faced by SMMEs in South Africa Access to finance in townships and informal settlements Existing funding and business support mechanisms New Small Business and Innovation Fund Conclusions
Conclusions There is a distinct financing need for micro enterprises, and that loans would be the only feasible option for commercial providers. Micro enterprises are unable to access the finance they need to survive and grow. Funding requirements vary, but many enterprises seek financing in the range of R10,000-R50,000. In terms of instrument, debt or grant funding would be most suitable given lack of enterprise understanding of equity and limited exit paths. There are several existing funding providers in South Africa (SA) attempting to serve micro enterprises with loans, though this funding is being under utilised. Under utilisation is due to three main barriers: (1) difficulty identifying and sourcing pipelines of enterprises to consider for investment, (2) low survival rates of micro enterprises, which poses risk of default, and (3) high transaction costs due to small deal sizes and low business sophistication. While one may consider looking to international impact investors to get around these barriers, their constraints are likely to be even greater given factors such as lack of familiarity with local context and the need to manage foreign exchange risk.
Conclusions Significant enterprise support is needed to make micro enterprises investable; however, existing support services are expensive and unproven. Business Development Services (BDS) are currently provided to micro enterprises through a number of providers. Currently, this is very costly – estimates indicate that BDS costs can be as high as twice the level of actual investment/loan amounts for micro enterprises. Further, evidence suggests that current BDS has not created a significant pool of profitable micro enterprises, and that the majority are loss-making.
Conclusions
Many of the challenges faced by SMEs in South Africa are
structural, however there are targeted interventions which
could assist SME development
Highly Inadequate Insufficient/
Slow and
concentrated management inappropriate
costly CCMA
corporate skills for skills in the
processes
sector scale-up workforce
Inability to
Inefficient High cost of raise or
regulatory Infrastructure
government access
constraints
agencies compliance equity
capital
Poor cash Lack of Key:
Low R&D Inadequate
flow due to appropriate Potential targeted
levels market
late business
linkages interventions
payments support
Sources: SAICA, BER, SEDA, SiMODiSA, interviews, RAND Strategy analysisConclusions • Provide micro enterprises with critical development and financial support in the first years of operation • Prepare micro enterprises to access market- based finance from existing loan providers and portfolios • Bring micro enterprises to a point that allows them to hire more employees for strong job creation
THANK YOU
GTAC
Government Technical Advisory Centre
Private Bag X115
Pretoria 0001
GTAC
Government Technical Advisory Centre
240 Madiba Street
Pretoria 0002
info@gtac.gov.za
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