Small and Medium Enterprises (SMEs) access to funding: public hearings

Economic Development

15 November 2010
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Chairperson welcomed four delegations to the meeting, which had been convened to discuss issues affecting the access of SMEs to finance.

Money Mentors Finance described its system to assist small, medium and micro enterprise (SMME) contractors by supplying materials, delivering performance guarantees and guaranteeing payments to other creditors, such as plant hire suppliers. The amounts financed varied from R10 000 to R100 million, but was conditional on the contract being awarded by Government departments.

The SA Constitutional Property Rights Foundation (SACPRF) proposed that the government should expropriate land so that unemployed families could be settled in modern rural villages, with schools and clinics, where they could build houses, grow their own food, and then take temporary jobs or work the land. Economic growth was stifled when taxes were levied on property, capital, employment and trade, because these costs all rose, and would flourish under a land rent as the single tax, as the costs would then fall. The solution therefore was to persuade the Minister of Finance, Mr Pravin Gordhan, to gradually replace Income Tax Acts and VAT, with a single tax on land.

Ntshongolanga Management Services (Ntshoms) and National Accommodation Association (NAA), in a joint presentation, told the Committee that in July this year, hotels provided 43 518 graded rooms, while graded non-hotel accommodation amounted to 67 698 rooms. The latter were mostly SMMEs, and self-funded. The graded guest houses were generally compliant with the various legal requirements, but there were challenges due mainly to inefficient municipalities and access to funding.  Furthermore, access to information on how to go about obtaining funding was almost non-existent. Commercial banks did not generally understand the guest house market. Apart from meeting normal grading criteria, such as fire and health regulations, the industry was now being asked to conform to “green” initiatives. The cost of compliance could be in the region of R250 000, which most guest house operators could not afford, and banks did not see the benefit of providing funds for this purpose. The establishment of a public/private partnership which would allow funding to be made available through knowledgeable and experienced industry programmes was proposed

Battle Bay Trading pointed out that while micro enterprises and informal sector entrepreneurs were largely catered for, through access to seed capital, micro-credit and leasing arrangements, and the larger companies could depend on the commercial banks, private equity, and foreign direct investment for funding, the entrepreneurial SMEs fell into the “missing middle” financing gap. Attention needed to be focused on helping this middle group, which had a major impact on job creation, to obtain the required funding for their various needs. The Government should be supported in implementing an expansion of the Black Economic Empowerment (BEE) policy, as well as policies in favour of investment in the “middle segment” of the private sector. Other possible actions included reforms to the legal and regulatory framework, the provision of integrated assistance from the public sector and private sector in terms of commercial banks and venture capital to make SME finance more attractive, and the strategic plans and projects of national, provincial and local government being harnessed in a two-pronged approach to SME development management. Big corporate organisations needed to become more involved with SMEs, even if it were on a “big brother” basis.

Meeting report

The Chairperson welcomed the delegations to the meeting, which had been convened to discuss issues affecting the access of SMEs to finance, and expressed the hope that their presentations would assist the Committee in finding ways to meet these challenges.

Money Mentors Finance
Mr Andrew Jordaan, Director of Money Mentor Finance (MMF), said the company was born out of the frustration experienced by small, medium and micro enterprises (SMMEs) in gaining access to finance. Government, through its procurement programmes, allowed small businesses to participate, but before they could actually take part, they were “dead in the water”.  MMF had been established in 2002, when nobody wanted to assist SMME contractors with finance, materials or plant and equipment. Since that time, the company had grown to the stage where it provided a “total solution” by ensuring service delivery, quality of service and completion of projects within budget and time deadlines. The system was working well in many parts of the country.

Mr Christo Clifford, also a Director of MMF, said SMMEs experienced challenges related to the National Credit Regulator (NCR) and the Financial Intelligence Centre Act, where some contractors were not creditworthy, so a system had to be developed around those restrictions. Funding problems included guarantees to the government for new contracts, the purchase of materials, the hire of plant and machinery, and the cost of mentorship. The solution provided by MMF was to finance the SMMEs by supplying materials, delivering performance guarantees and guaranteeing payments to other creditors, such as plant hire suppliers. The amounts financed varied from R10 000 to R100 million, but was conditional on the contract being awarded by Government Departments. For example, they had worked with the Departments of Public Works, Education and Health.

The system worked by providing the SMME contractor with a debit card, with which he would purchase the materials on the Bill of Quantity from MMF’s preferred suppliers. MMF settled the debt with the suppliers, and received a settlement discount which provided the income it needed to function. The contractor paid 2,5% of the contract value for the use of the system over the period of the contract. The contractor paid what it owed MMF when it received payment from the Government. The benefit of the system was the contractor did not need funds up front, materials required to fulfil the contract could be bought, and financial controls and facilities were made available.

Discussion
Mr S Marais (DA) asked if contractors were compelled to use only preferred suppliers.

Mr Clifford said MMF strongly supported SMME suppliers that formed part of the Construction Industry Development Programme (CIDP), providing bridging financial assistance where they needed it, so contractors were not restricted to the three or four major suppliers. In cases like this, where a supplier was not on the database, the MMF would conduct checks on quality and provide mentorship.

Mr Marais asked about “kickbacks” and what the direct cost of using MMF was to the contractor.

Mr Clifford said the contractor had the freedom to choose his supplier and obtain quotations for materials. MMF then paid for the materials on behalf of the contractor, so the supplier was not at risk. The negotiated discounts, which varied between 1% and 5%, accrued to the MMF. There were no kickbacks.

Mr Z Ntuli (ANC) enquired about the relationship between the MMF and the National Home Builders Registration Council (NHBRC).

Mr Clifford said MMF had a good relationship with both the NHBRC and the CIDP, and ensured that contractors who were members of these two institutions were strongly supported.

Mr N Gcwabaza (ANC) asked why MMF limited SMMEs to securing contracts from only three government departments.

Mr Clifford said the programme had started with just the Department of Public Works, but had now expanded to include all government departments.

The Chairperson asked why MMF dealt only with government departments.

Mr Clifford said the MMF initially saw financing of government contracts awarded to SMMEs as a niche market, and viewed a government order as a “pay order”, provided the jobs were satisfactorily completed. Other non-government opportunities were currently being considered, but because of the current economic climate, the MMF was proceeding very carefully. The system allowed contractors to build up direct relationships with suppliers, creating the confidence to operate eventually without MMF support. More than 60% of contractors supported were women, and they were outperforming men in terms of progress.

SA Constitutional Property Rights Foundation (SACPRIF)

Mr Peter Meakin, Director of SACPRIF, proposed that the government should give consideration to settling unemployed families in modern rural villages, with schools and clinics, where they could build houses, grow their own food, and then take temporary jobs or work the land. Farming used the productive power of nature, with a pair of rabbits, for example, producing 800 progeny a year worth R24 000. All that was needed to grow food for a family of four was 200 square meters of arable land. The problem was that although South Africa had 27 million hectares of unused arable land, the cost of land was the highest in the world.

In Hong Kong and Singapore, there were no land prices – all land was leased from the state. Hong Kong’s gross domestic product (GDP) per capita was five times higher than South Africa’s. It was therefore important to make land affordable throughout the country.

Mr Meakin said his first law of economic growth was that “GDP is stifled when taxes are levied on property, capital, employment and trade, because these costs all rise. It will flourish under a land rent as the single tax, as the costs then all fall.” The solution therefore was to persuade the Minister of Finance, Mr Pravin Gordhan, to gradually replace Income Tax Acts and VAT, with a single tax on land. After announcing this step, 5 million hectares of the 27 million hectares of unused arable land, should immediately be expropriated.

He called on the Committee to prevail on the Minister to change the tax system, slowly but surely, so that he taxed land only, and relieved people of taxes on their initiative, their work and their capital.

The Chairperson said land was a very important commodity, and ways needed to be found to make use of it economically.

Ntshongolanga Management Services (Ntshoms) and National Accommodation Association (NAA)
Mr Donovan Muirhead, CEO of Ntshoms, described his organisation as a national hospitality consultant and management company, focusing specifically on SMMEs in the hospitality industry. In the hospitality, travel and tourism, and conservation and guiding sectors, there were 348 000 direct employees and 527 000 indirect employees. Within the sector, 95,67% were SMMEs. However, there was tremendous frustration surrounding access to funding in the tourism industry.

Ntshoms had developed a Tourism Business Incubator Programme, designed to accelerate the successful development of identified business ventures. As turnkey consultants who added a wealth of experience, knowledge and support to these businesses, Ntshoms could not access the numerous funding programmes currently available. It was not seen as a credible business entity by financial institutions, and was “sent from pillar to post with empty promises and unrealistic expectations”.

He proposed that a public/private equity fund be established to provide financing support, from R50 000 to R500 000, aimed at numerous activities with clearly defined exit strategies and activity benchmarking.  The qualifying criteria would be that an entity must be owner run, have at least three employees, have long term contracts in place, and a projected annual turnover of less than R2 million. The programme could be managed and administered through existing platforms such as the Small Enterprise Development Agency (SEDA).

Ms Caroline Ungersbock, NAA chairperson, Gauteng, said the organisation represented the “smaller” accommodation industry, such as guest houses, bed and breakfasts, self-catering accommodation, back packers, lodges and home stay, and had over 1 200 quality inspected members nationwide.  In July this year, hotels provided 43 518 graded rooms, while graded non-hotel accommodation amounted to 67 698 rooms. The latter were mostly SMMEs, and self-funded. The graded guest houses were generally compliant with the various legal requirements, but there were challenges due mainly to inefficient municipalities and access to funding.  Furthermore, access to information on how to go about obtaining funding was almost non-existent.

Commercial banks did not generally understand the guest house market, so when owners went to borrow money for expansion or to become compliant, they were first sent to “home loans”, and then to “commercial”, before either being sent back to home loans or advised to go to a private bank. This should be seen in the context of the graded non-hotel accommodation industry being 15% greater than the hotel industry, making it one of the largest contributors to the job market in South Africa.

Apart from meeting normal grading criteria, such as fire and health regulations, the industry was now being asked to conform to “green” initiatives. This involved saving electricity by installing solar powered geysers and heat pumps and changing light fittings and bulbs, separating waste, and using water efficiently. The cost of compliance could be in the region of R250 000, which most guest house operators could not afford, and banks did not see the benefit of providing funds for this purpose. She supported the establishment of a public/private partnership which would allow funding to be made available through knowledgeable and experienced industry programmes, and recommended that government institutions, together with the financial sector, create a small division that understood the hospitality and tourism industry, whose most difficult challenge was that it was not taken seriously.

Discussion
Mr S Marais (DA) asked to what extent SMME financing institutions such as Khula, South African Micro-Finance Apex Fund (SAMAF) and the Industrial Development Coorporation (IDC) had been considered, and what were the main stumbling blocks.

Mr Muirhead said the problem with the financing institutions was that they did not understand the small tourism entity, and classified guest houses with hotels. In addition, the process of applying for funding was difficult for the guest house owner, who had to “wear many hats”, while hotels had specialist individuals to deal with funding applications. Meeting the criteria set by funders was another problem, with the bar being continually raised during the lengthy application process.  There was also a lack of understanding of the value of the cash flow required to operate from month to month.

Ms Ungersbock said each munciipality had different sets of by-laws, and it was often difficult to get municipal officials to go to a guesthouse to sign off on health or fire certificates. In some cases, there were no people available to provide certification.

The Chairperson asked whether the proposals put forward, which included equity funding from the government, would help the development of tourism in the rural areas, where training and capacity building would be needed.

Ms Ungersbock said that during the past year a mentorship programme had been developed to guide people in disadvantaged areas on how to run a guest house. Mentors visited owners needing help for two to three hours a week. The Association had paid-up members in areas such as Soweto, Gugulethu and Tembisa, and was working to grow that sector of the industry.

Battle Bay Trading
Ms Kgomotso Selokane, Director of Battle Bay Trading, said the black-owned and controlled company proposed to establish an arm that would focus on helping SMEs to access funding. Research had shown that apart from lack of formal entrepreneurial knowledge and understanding of marketing, the main barrier to SMEs achieving success in developing countries was insufficient access to capital, both in terms of quantity and quality. In South Africa and other developing African countries, entrepreneurs relied predominantly on internally generated funds, such as retained earnings, and informal sources, such as friends and family, to obtain the capital they needed to invest in projects.

While micro enterprises and informal sector entrepreneurs were largely catered for, through access to seed capital, micro-credit and leasing arrangements, and the larger companies could depend on the commercial banks, private equity, and foreign direct investment for funding, the entrepreneurial SMEs fell into the “missing middle” financing gap. Attention needed to be focused on helping this middle group, which had a major impact on job creation, to obtain the required funding for their various needs – from start-up to normal operations, and then on to expansion.

She described the current macro-economic situation as one in which there was resistance to a reduction of inequalities and assistance to black entrepreneurs, and suggested the Government should be supported in implementing an expansion of the Black Economic Empowerment (BEE) policy, as well as policies in favour of investment in the “middle segment” of the private sector.

Other possible actions included reforms to the legal and regulatory framework which impacted on SMEs in the financial environment, and the provision of integrated assistance from the private and public sector and commercial banks to make SME finance more attractive.  The strategic plans and projects of national, provincial and local government could be harnessed in a two-pronged approach to SME development management, with the internal elements covering procurement, the supplier database and compliance factors, and the external elements focusing on the financial developmental and management aspects. Other areas requiring analysis and possible action included mutual guarantee funds, bridge financing, business associations and networks and clusters of grassroot SMEs.

Ms Selokane also proposed a quarterly supplier development summit, a side effect of which would be the creation of a procurement platform for the suppliers. Big corporate organisations needed to become more involved with SMEs, even if it were on a “big brother” basis.

Discussion
Mr Marais said he was concerned that all the presentations had spoken about the lack of access to funding, and asked whether the National Empowerment Fund had been approached, as it was “100 per cent” aligned with what Battle Bay Trading was doing for its target market, as well as other development finance institutions (DFIs).

Mr Maropa said the major challenge was the fact that many of the SMEs were in remote areas, and although DFIs such as the IDC, Khula and SAMAF were able to offer suitable products, these SMEs were simply unable to reach them in order to submit applications for funding. The DFIs needed to be closer to the SMEs.

The Chairperson said the problem might be that the different roles of the IDC, which funded industrial development, SAMAF and Khula had not been adequately communicated. This was one of the responsibilities of this Committee, to ensure that these DFIs sent the correct messages to their markets.

She said the information that had been presented would be processed by the Committee. The meeting was adjourned.


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