Development finance: Fragmented initiatives amount to a feeble effort
MONEYWEB / 15 JANUARY 2019 - 00.10 / FAREED BRUINTJIES
There is no shortage of economic and small business development initiatives in South Africa.
Despite the resources being availed, however, our economy continues to grow at a snail’s pace and entrepreneurs find it difficult, if not impossible, to get government assistance.
Development finance institutions are meant to correct market failures, but the lending focus has shifted towards acquisition funding and expansion capital, rather than the start-ups and early stage investments that would actually grow the economy. Picture: Moneyweb
Bureaucracy and fragmented interventions are key stumbling blocks. Furthermore, undercapitalised development finance institutions (DFIs) have to operate like self-sustainable businesses while mandated to fund high-risk, loss-making endeavours.
Instead of continuous bailouts to state-owned enterprises (SOEs), more ongoing funding is required for strategic economic development initiatives to grow the economy, together with an overhaul of the DFI landscape.
The landscape is defective by design.
South Africa has three ministries responsible for small business and economic development, namely the Department of Trade and Industry (Dti), the Economic Development Department and the Department of Small Business Development.
Fragmentation at policy level, coupled with a lack of coordination, is a recipe for disaster.
SMME development institutions
Nationally, the Industrial Development Corporation (IDC) remains the apex DFI and is self-sustainable, with a large balance sheet (R142 billion in assets). It is accountable to the Economic Development Department. In 2018, only R28 billion of its assets comprised loans and advances. Well over R100 billion is invested in associates and listed subsidiaries. The latter is what ensures the organisation’s sustainability. However, some of its investments are under-performing; Scaw Metals is one example. More of the balance sheet should be invested in smaller ventures. The IDC’s mandate is questionable as average loan values are high. This indicates that, to drive economic growth, more should be done for smaller businesses.
The IDC owns 100% of the Small Enterprise Finance Agency (Sefa), which funds much smaller enterprises. Its total assets are R2.5 billion, and it operates in the market segment where true development is required. This market faces high business failures, placing continuous pressure on Sefa’s sustainability due to high impairments. Many of Sefa’s performance problems are inherent to its target market. However, more interventions are desperately needed in this market as it is the engine room for employment creation. The DFI key performance indicators should focus less on loan impairments. It is insane to measure Sefa on high impairments and low levels of self-sustainability when this is inherent to the institution’s mandate. Sefa reports to the Department of Small Business Development.
The National Empowerment Fund (NEF), which has assets of R5 billion, reports to the Dti and straddles the mandates of the IDC and Sefa. The January 2017 announcement of a merger with the IDC remains unexecuted. The NEF also battles with high impairments and low self-sustainability.
The NEF and Sefa are the major SME-facing funding institutions but are poorly capitalised in relation to their mandate and face continuous uncertainty regarding future capital injections.
The Small Enterprise Development Agency (Seda) is another player in this mix. It also reports to the Department of Small Business Development, and provides non-financial support to SMEs. It is funded through government appropriations. Each DFI also provides non-financial support, with limited co-ordination. Some national and provincial departments also target direct economic interventions. The landscape is speckled with provincial institutions such as the Free State Development Corporation, the Limpopo Economic Development Agency, the Mpumalanga Economic Growth Agency, the Eastern Cape Development Corporation, the Ithala Development Finance Corporation in KwaZulu-Natal, and so it goes.
In short, there are many activities but low co-ordination.
Impact on entrepreneurs
DFIs invite entrepreneurs to apply for assistance and become employment creators. The marketing message creates hope. The realities faced by entrepreneurs are different. Institutions are riddled with excessive bureaucracy and it often takes many months to get a negative response – which, when finally delivered, takes the form of a one-line rebuttal. Additional information requests often add no value. With so many institutions, entrepreneurs battle to place their proposals with the right DFI, resulting in repeated negative responses and eventual disillusionment.
The fact that there are three overlapping ministries is a recipe for poor execution.
It creates silos and limited integration. South Africa needs a single, co-ordinated approach to small business and economic development. The plethora of agencies and institutions reflect the lack of a plan, without which the objective to meaningfully grow the economy will remain an illusion.
Fragmentation results in substantial cost leakage to sustain the operations and replicated structures.
Various government agencies often fund the same initiatives, and the consolidated national development dividend is potentially overstated. There are too many cockerels crowing on small perches in separate chicken coops. The resultant noise does not necessarily result in eggs hatching.
Resource allocation for SME development is inadequate.
Economic development initiatives cannot be driven in the same way as service or product delivered through SOEs. Measuring smaller DFIs on self-sustainability is not appropriate, given the inherent risks in the SMME market. The failure rates of these enterprises are high, but this is part of the territory.
Given the emphasis on loan impairments, DFIs continue to migrate to safer, lower-risk clients with predicable, sustainable cash flows, and start operating like quasi-banks.
The lending focus shifted towards acquisition funding and expansion capital, rather than higher risk start-up ventures and early stage investments that would grow the economy.
Government does not continue to invest in DFIs through appropriations to allow them to fund higher risk businesses. The buzzword is funding against proven take-off and secured markets. In the end, we create too few new businesses and entrepreneurs, and thus low economic growth. Smaller DFIs remain poorly capitalised and continue to drift towards safer transactions to ensure their own survival.
Restructuring of the economic and SMME development approach is required – a complete overhaul, with clear plans and appropriate long-term resources. National departments and institutions must be consolidated. There is no justification for the current approach.
The measurement of the success of DFIs requires review. The private sector is risk-averse and operates sustainable lending businesses that generate acceptable shareholder returns. DFIs, on the other hand, are meant to correct market failures. The measurement metrics of DFIs became narrow and misaligned with their mandate, with lack of appropriations to fund loss-making mandates.
Their impact, and economic growth as a whole, will therefore remain low. More resources, deployed smartly, are required to increase the tax base. An improved economy will create the increased electricity and air travel demand for SOEs to become sustainable. The Medium Term Expenditure Framework allocated R59 billion for SOE bailouts, while our economic development institutions suffer from mandate shift due to limited resources.
Fareed Bruintjies is an independent corporate governance and SME consultant and former SME funding and development executive with over 25 years’ related experience.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER