ENTERPRISE SUPPORT AND FINANCE SHAPE DURBAN PRESENTED BY: - - PowerPoint PPT Presentation

ENTERPRISE SUPPORT AND FINANCE

PRESENTED BY:

D.Ramklass

DATE:

21 | 11 | 2018

SHAPE DURBAN

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

• ther 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

• pportunities 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 sector comprises c.700K companies and SMMEs The number of SMMEs has decreased in recent years (both informal and formal) Owners of formal SMEs tend to live in urban areas, and are more likely to be older, white males with a higher level of education Nearly 25% of entities are in financial services, followed by wholesale and retail trade, and construction.

International 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 concentrated corporate sector Inadequate management skills for scale-up Slow and costly CCMA processes Insufficient/ inappropriate skills in the workforce Inefficient government agencies High cost of regulatory compliance Infra- structure constraints Inability to raise or access equity capital Low R&D levels Poor cash flow due to late payments Inadequate market linkages Lack of appropriate business support

Industry 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 entrepreneurial support structures (mentorship platforms and tools) Improve payment timing of government and big business Improve labour force education (education system) Improve access to and cost of available finance Improve entrepreneurial education and access to information Decrease regulatory burden for SMMEs Provide greater tax incentives (SMEs and 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 for start ups None  No public support Government export guarantees, trade credit Limited  Provided through DTI Export Credit Insurance Corporation of South 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 funding, business angel support Limited  Very limited – some funding through the Technology Investment Agency (Tia) under the DST  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/ code of conduct Available  Available under the National Credit Act and debt mediation services under the National Credit Regulator. Bank targets for SME lending, negative interest rates for deposits at central bank None  Previously some level of targeting in respect of lending supported through the Financial Sector Charter Central Bank funding to banks dependent on net lending rate None  None

Current 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 EC Dept of Economic Development, Environmental Affairs and Tourism 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 Tourism

Tax 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

• f 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 Analysis

Regulation and competition policy

• South Africa has had persistent and extremely high levels
• f 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 Analysis

Regulation and competition policy

• Government can also support small business development

through a concerted effort to reduce the regulatory burden

• n 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 Analysis

Public 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 DHS (RHLF) Incremental loans to retail intermediaries and CBO's for housing development in rural areas 222,015 277,667 324,461 824,143 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 DSBD Industrial Development Corporation: Craft customised Sector Programme 10,000 10,000 10,560 30,560 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 15,685,817

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

Funding Landscape

Source: SA SME Fund Presentation to DST and NT, September 2017; GTAC modifications

Don’t establish Failure Regress Continue as-is Regress Failure Medium and Publicly traded Angel Seed VC Growth large buy-out capital markets

New Private SME Fund Government & Pvt Funds Proposed Small Enterprise Innovation Fund

Fund 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

• ther 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 champions

Fund Concept – Products, Target Market & Channel

• The Small Enterprise Innovation Fund will provide “whole-sale funds” for:
• 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:

Youth Start-Up Grants SMME debt finance SMME equity finance Technology Venture equity/loan finance Target: Partners:

• SMMEs with locally

developed IP / technologies

• Venture Capital

Firms

• Technology

Incubators / TTOs /CoCs

• SMMEs (any sector)

with growth potential

• SMME Financiers -

private or public – (e.g. Banks, Specialist funders, SEFA, IDC)

• Youth with a

business idea within an incubator or related programme

• SMME Financiers -

private or public – (e.g. Banks, Specialist funders, SEFA, IDC)

• SMMEs (any sector)

with growth potential

• Incubators / Youth

Start-up Support Programmes (e.g. Awethu; SEDA)

35% 25% 25% 15% Technology Venture Equity Finance SMME Equity Finance SMME Debt Finance Youth Start-up Grant

Window:

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

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

Sources: SAICA, BER, SEDA, SiMODiSA, interviews, RAND Strategy analysis

Insufficient/ inappropriate skills in the workforce Infrastructure constraints Slow and costly CCMA processes High cost of regulatory compliance Inadequate management skills for scale-up Poor cash flow due to late payments Inefficient government agencies Inadequate market linkages Lack of appropriate business support Inability to raise or access equity capital Highly concentrated corporate sector Low R&D levels Key:

Potential targeted interventions

Conclusions

• 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

www.gtac.gov.za