Small & Medium Enterprises access to funding: public hearings

Economic Development

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

The Committee heard four submissions in its public hearings on access to funding for small and medium enterprises.

A private submission from Mr F Abrahams covered support to small and medium enterprises, mentoring advice and promotion of services by Government supported agencies. Issues outlined in the submission included the fact that more support was needed for small businesses, which could kick-start the economy with regards to jobs creation. Aggressive marketing was required to focus on small business development. There was also no programme for transfer of skills and knowledge through a formal structure of training. Mentorship unlocked South Africa’s unlimited possibilities by raising the standard of individual performance and helping to set and achieve realistic goals. Mentors could come from established business or from among retired business men. Structured, positive mentoring would have positive spin-off for development in South Africa. Big businesses and corporations could all rally around Government’s call to support small businesses. Quality, ability and improved performance should be the criteria for a better life.

Members asked for a further understanding of the ‘red tape’ referred to in the presentation, asked what the role of Government was in mentorships, how the sector education and training authorities could help small businesses, and who was responsible for marketing them.

Mobicom submitted on access to funding for small and medium enterprises and possible solutions to improve their sustainability. Available funding for small and medium enterprises was currently a function of sustainability of cash flows from operations, competitiveness of product delivery and consumer awareness and loyalty among others. Some of the biggest challenges to small and medium enterprises in South Africa were strong and efficient value chains that had been developed in industries such as construction, retail and communication over years of limited economic participation. The bank funding model was further not designed to support a low transaction base and higher risk investment exposures. The provisions in the code of good practice were not really financially supportive. Some of the possible solutions to improve the sustainability of small and medium enterprises were to establish effective cross sectorial community-based incubating platforms for collective actions such as business model advocacy.

Members asked if the stakeholders at community level were as empowered as the presentation had indicated, what was needed to improve funding to small and medium enterprises, if it was felt that Government and business had not done enough to make consumers aware of small business, and what the Government needed to do to address the challenges that had been outlined.

Katleho Chemicals’ submission covered small and medium enterprise access to funding and its own experiences. Katleho Chemicals had experienced problems in accessing funding. The company had approached most funding institutions such as the Industrial Development Corporation, the National Empowerment Fund, the Mpumalanga Economic Growth Agency and the Free State Development Corporation. Katleho Chemicals was about to close its doors due to lack of access to finance. Some of the negative experiences had led to the realisation that access to funding depended on whom you know. The company had lost millions of rands because of wrong funding products from the Industrial Development Corporation. African black entrepreneurs were perceived as failures and associated with risk. Katleho Chemicals concluded the submission by stating that the small and medium enterprise sector could create jobs, add value and make an impact in the economy if doors of funding were opened.

Members were disturbed that Development Finance Institutions were not helping small businesses sufficiently, and asked for views on Broad Based Black Economic Empowerment, what practices had caused the company to lose millions of rands, and how development finance institutions could be improved to ensure that small and medium enterprises got the necessary funding. A Member also said that there was potential for growth for small and medium enterprises but there were obstacles. He asked if there were any practical experiences of instances where small and medium enterprises were able to access funding ‘only if they knew someone’, and who held the view that black business were bound to fail. Another Member asked if small and medium enterprises were not organised as peers and so could not speak with one voice.

Africa Empowered submitted that it had carried out a national study, Eyethu Sonke, on people’s perceptions of Broad Based Black Economic Empowerment. The study reviewed problems that were being faced by communities. The findings in order of the issues most frequently complained about were skills development and training, access to funding, access to opportunities, access to information and job creation. Africa Empowered had established an Ambassador programme to address these problems. This would be done with relevant departments and agencies. The Ambassador programme would include picture based learning materials, selecting ambassadors from communities and understating cultural nuances. Other aspects of the programme would include providing materials in local languages to cut out any barriers and ensuring a more sustainable understanding of topics. 

Members asked if Eyethu Sonke had made any findings on why departments delayed in making payments, why departments were not complying with Broad Based Black Economic Empowerment regulations, what the role of Community Development Workers would be when the Ambassador programme was constituted, and sought an analysis of findings to outline the challenges faced by women and people with disabilities.

The South African Institute for Entrepreneurship, a non-governmental organisation, sought to change mindsets from dependency to self-generated engagement. It developed active learning programmes for small and medium enterprises. It worked for and with local and provincial government departments and agencies, various funders, non-government organisations, and development finance institutions.  The key challenge was to identify some key constraints impeding greater success of applicants for working capital when they applied to development finance institutions for help in establishing small and medium enterprises.  Funding agencies tended to wait for applicants and their marketing was weak and sporadic. They over-relied on mediocre intermediaries. Small and medium enterprises failed to understand the need for developing their own business plans rather than depending on consultants. Mentorship was insufficient because most agencies offered mentorship only afterwards. Mentorship should be combined with practical business and management training. It was necessary to reconsider how applicants who were declined were treated. There was poor awareness of the development institutions. Provincial development institutions were better known than the national ones. Perceptions of both types of institution were negative. The South African Institute for Entrepreneurship had developed a new national business competition – “the spirit of enterprise” - to inspire, identify, develop and fund a corps of entrepreneurs with high potential to run and sustain their businesses.

Members asked why entrepreneurs could not access funding from the development finance institutions, how the South African Institute for Entrepreneurship managed the relationship between the mentor and entrepreneur, whether the Institute had engaged with the development finance institutions and what challenges it had encountered when it had met with them,  to what extent there was a negative perception about the development agencies, and what assistance the development finance institutions gave to the small and medium enterprises.

South African Paper and Pulp Industries Forest Products said that its industry was rural based and valued the services of small and medium enterprises which ensured competitiveness internationally and employed more than 170 000 in the sector. Small and medium enterprises could link the sector’s strategic drivers to black economic empowerment transformation, enterprise development, and preferential procurement. Also critical to small and medium enterprises was the land reform programme. The Industrial Policy Action Plan had highlighted forestry as the key driver of economic development in the country. The vision of South African Paper and Pulp Industries Forest Products was to enable small and medium enterprises to grow and become self-sustainable and competitive internationally. The forestry industry was highly technical and presented high barriers to entry, but opportunities existed for small and medium enterprises such as plantation management, plantation and weed control, fire fighting, harvesting and transport, pole manufacturing, charcoal manufacturing and sawmilling. Passion from entrepreneurs for their product drove the success of small and medium enterprises. Funding, access to markets, technical knowledge, business skills, and mentorship were crucial. Small and medium enterprises were not always aware of funding sources and financial institutions applied onerous criteria for assessing applications for loans. The regulatory environment was negative to the small and medium enterprises. Successful development of small and medium enterprises would require a strong partnership with the Forestry Industries Education and Training Authority, the private sector and the appropriate Government departments. It would also require the development of business support centres in the rural areas to provide much needed business support and advice. Guarantee and dedicated grant incentive schemes were also crucial. It was important to develop mechanisms to reduce transaction costs associated with funding and support services to small and medium enterprises.

Members asked whether South African Paper and Pulp Industries Forest Products was entering into transactions with the small and medium enterprises for funding or for equity partnerships in the black economic empowerment deals, how many equity transfer deals it had concluded recently, where it would prefer to place mentors, what it proposed to reduce transaction costs for small and medium enterprises, and how many small and medium enterprises existed in the forestry industry and how successful they were.

Ms Precious Msibi had bought a Steers franchise at Philani Valley, KwaZulu-Natal. However, the centre had failed to attract enough customers to sustain the tenants. A taxi rank in front of the store had been promised but had never materialised. Her business had closed down on 30 March 2010. When she tried to relocate to other premises her attempts were rejected. Ms Msibi sought help to get out of her debt even if it meant starting all over again. She had lost all her pension money. She sought also business mentorship that would allow her to gain more business skills and knowledge of starting and managing a business. 

The Chairperson advised Ms Msibi to be more specific and write a more detailed submission, and asked the Industrial Development Corporation to meet with Ms Msibi.

The Eastern Cape Youth Development Board submitted that there was limited data on credit conditions for business in South Africa. The main forms of finance used by small and medium enterprises were credit cards (46%) and overdrafts (36%), High growth firms were less likely to use overdrafts and leasing and higher purchase than non-high growth firms. There had been an increase in applications for finance across all firms. The average amount of finance sought by small and medium enterprises over the past three years had increased by 12%. The approval rate had fallen, particularly for micro firms, of which only 60% had been able to secure any amount sought, compared to approximately 82% in 2007. The Board alleged that Government institutions had done nothing concrete to address the backlog of funding applications. Commercial banks claimed that the economic climate or the industry was too risky for lending to small and medium enterprises, or cited issues of security. Government institutions such as the Industrial Development Corporation should review their policies in supporting the small and medium enterprises. Small and medium enterprises were failing in South Africa because of a lack of political commitment from Government. Moreover, they lacked any clear direction as to where they could access information and finance. The Board recommended the establishment of an independent tribunal or a commission for small and medium enterprises.
Members asked if the small and medium enterprises were registered with the Companies and Intellectual Property Office through consultants who charged high fees, what demands the state agencies made of small and medium enterprises, and advised the Board not to politicise issues.

Meeting report

Chairperson's Introductory Remarks
The Chairperson welcomed members of the Committee and those that were present to make submissions on the Small and Medium Enterprises (SMEs) access to funding. The meeting was a continuation from the previous week’s public hearings. The Committee was eager to hear the submissions from the public.

Private Submission by Mr F Abrahams
Mr F Abrahams’ private submission covered support to SMEs, mentoring advice and promotion of services by government supported agencies. By way of support to SMEs, more support should be given to small businesses, which could kick-start the economy with job creation far more quickly and more easily than corporate business could.

Aggressive marketing was required to focus on small business development. Less red tape was required when these businesses were in need of assistance to register their business or seek advice. To date there was still a struggle for these businesses to get the necessary advice, support and necessary training for transfer of skill and knowledge.

Mentorship could unlock South Africa’s unlimited possibilities. It raised the standard of individual performance and helped them to set and achieve realistic goals. Potential members should be trained to become mentors to other emerging businesses. Mentors could come from established business or from among retired business men. There was a need for exposure to structured, positive mentoring, which in turn would have positive spin-off for development in South Africa.

As to promotion of services by Government-supported agencies, there was no formal advertising from Government-supported agencies to make their agencies and their services known. For example, who knew that Khula had moved from Claremont to Cape Town or that there was a Red Door in Retreat? There was also no programme for transfer of skills and knowledge through a formal structure of training.  The only form of advertising was from a magazine like Big Issue which did not reach the focus market, the small business man.

The only money really available to small business was from the commercial banks. It had to be asked why there was no Government-supported bank similar to the Land Bank.

Big business and corporations could all rally around Government’s call to support small businesses, whether be it requests for tenders, quotations or to grow the SME sector and support the ongoing transfer of skills and development. Quality, ability and improved performance should be the criteria for a better life.    

Discussion
Mr Z Ntuli (ANC) asked if Mr Abrahams had had an opportunity to engage with Government development funding institutions (DFIs) to encourage them to work on community awareness.

Mr Abrahams replied that there had not been a meeting with the Industrial Development Corporation but most agencies were not advertising their services.  

Mr S Marais (DA) asked for a further understanding of the ‘red tape’ referred to in the presentation.  

Mr Abrahams replied that it was easier now for businesses to register but there were a lot of criteria that needed to be met such as the Black Economic Empowerment (BEE) certificate which was not cheap.

Mr Marais said that mentoring business advisors was important. What was the role of Government and private business in the mentorship?

Mr Abrahams replied that the only group with a pool of mentors other than Khula were the business partners and this was in a controlled business environment. The business advisors should meet on a regular basis and give feedback and advice small businesses.  

Ms H Line (ANC) asked how the sector education and training authorities (SETAs) could help small businesses.

Mr Abrahams replied that the different SETAs were doing their bit in providing necessary services and were also making sure that criteria were followed. There was a possibility that agencies could further work with the SETAs to ensure that small businesses were helped.

Mr X Mabaso (ANC) asked who was responsible for marketing small business.

Mr Abrahams replied that more aggressive campaigning on marketing needed to be carried out by agencies that supported Government to advertise their services than what was currently being done.

Submission by Mobicom
Mr E Scholtz made the submission on behalf of Mobicom. The submission covered SMEs access to funding, SMEs’ biggest challenges in South Africa and possible solutions to improve SMEs’ sustainability. Under SMEs’ access to funding, Mr Scholtz submitted that availability of funding for SMEs was currently a function of sustainability of cash flows from operations, competitiveness of product delivery and consumer awareness and loyalty among others. Some of SMEs’ biggest challenges in South Africa were strong and efficient value chains that had been developed in industries such as construction, retail and communication over years of limited economic participation by all. The bank funding model was further not designed to support low transaction base and higher risk investment exposures. The provisions in the code of good practice chatter were not really financially supportive. Some of the possible solutions to improve SMEs’ sustainability were to establish effective cross sectorial community-based incubating platforms for collective actions such as business model advocacy. Education was needed for consumers and other stakeholders in fundraising and syndication. Mr Scholtz concluded the submission by informing the Committee that Mobicom had implemented these solutions in Gugulethu by establishing value creating ecosystems.   

Discussion
Mr Mabaso asked if the stakeholders at community level were as empowered as the presentation had indicated.

Mr Scholtz replied that stakeholder involvement was important and Mobicom was going at lengths to involve stakeholders in empowering and educating the people.

Mr Mabaso asked if the knowledge presented was widespread within the communities.

Mr Scholtz replied that Mobicom had educational secessions on a weekly basis with the community. Mobicom worked with structures within the community to ensure that no one was left behind.

Ms H Line (ANC) asked what was needed to improve funding to SMEs

Mr Scholtz replied that SMEs in communities needed to be empowered. The community had the spending power and there was enough money within communities to help SMEs grow.

Mr N Gcwabaza (ANC) asked if the concern was that government and business had not done enough to make consumers aware of small business since the presentation had referred to consumer development and apathy.

Mr Scholtz replied that the people were not ignorant but were never just educated on the power of their money.

Mr Marais asked what the Government needed to do to address the challenges that had been outlined.

Mr Scholtz replied that the consumers needed to be made aware of the alternatives that existed within the market through consumer education programmes.

Mr Rabie said that consumers bought where the prices were low. Was Mobicom thinking of expanding to other areas?

Mr Scholtz replied that it was well understood that market prices determined consumer preferences but what consumers did not understand was the power that some value chains had. The consumers needed to be educated on this.

Submission by Katleho Chemicals
Mr Thapelo Mokoena, Chief Executive Officer/Managing Director, Katleho Chemicals, submitted SME access to funding and the experiences of Katleho Chemicals experiences. The Committee was informed that Katleho Chemicals had two factories in Free State and Mpumalanga where the company manufactured cleaning chemicals. Mr Mokoena submitted that Katleho Chemicals had experienced problems in accessing funding. The company had approached most funding institutions such as the Industrial Development Corporation (IDC), the National Empowerment Fund (NEF), the Mpumalanga Economic Growth Agency (MEGA) and the Free State Development Corporation (FSDC). The business was at a stage where it was about to close doors due to lack of access to finance. Some of negative experiences had led to the realisation that access to funding depended on who you know. Furthermore funding institutions lacked understanding of the environment where SMEs operated. The company had lost millions of rands because of a wrong funding product from the IDC. African black entrepreneurs were perceived as failures and associated with risk. Therefore if you were black and partnered with a white-owned company the chances were higher of getting support than if a black business partnered with another black-owned company. Government departments also took long to honour payments and therefore it was difficult to pay back monies that were sourced from non-financial institutions. Mr Mokoena concluded the submission by stating that SME sector could create jobs, add value and make an impact in the economy if doors of funding were opened.

Discussion
Mr Marais thanked Mr Mokoena for his honest presentation. There was a need to get a picture of what was being practiced. It was disturbing that development finance institutions (DFIs) were not helping small businesses which they needed to support.  

Mr Marais asked why DFIs responded negatively. Did Katleho Chemicals have any business plans when approaching these institutions?

Mr Mokoena replied that business plans had been submitted but the DFIs had responded negatively.   

Mr Marais asked Mr Mokoena his views about Broad Based Black Economic Empowerment (BBBEE) and the new announcement of the BBBEE review.

Mr Mokoena replied that the Government made a big mistake. In the past it used to encourage entrepreneurship through the historically disadvantaged approach. This was good because it looked at who was running the businesses. The change to BEE meant that small enterprises were now competing with big businesses who were now claiming to be BEE compliant by simply using two people to front. This had killed SMEs.  

Mr Rabie asked what practices had caused the company to lose millions of rands

Mr Mokoena replied that the IDC had given Katleho Chemicals the wrong finance product. This was a revolving credit fund which was not ideal for business and was also only provided after nine months.

Ms Line asked how DFIs could be improved to ensure that SMEs obtained the necessary funding.   

Mr Mokoena replied that it was all about having love for the people. In most cases the people employed in these offices were ‘our own brothers and sisters’ but they not willing to help.

Mr Gcwabaza said that it touched one’s heart that there was potential for growth of SMEs but there were obstacles. Had Katleho Chemicals made any enquiries as to why its the application was not understood?
 
Mr Mokoena replied that an enquiry had been made but had not yielded any positive results. The problem was that the funding institutions did not understand the needs of SMEs.

Mr Gcwabaza asked if there were any practical experiences of instances where SMEs were only able to access funding ‘only if they knew someone’.

Mr Mokoena replied that some companies had submitted unsustainable business plans and their businesses had collapsed after a few months of funding. Katleho Chemicals was a sustainable business but could not access funding. It was therefore about ‘who you know’.
           
Mr Gcwabaza asked which section held the view that black business were bound to fail.

Mr Mokoena replied that African black entrepreneurs were perceived as failures and associated with risk. Therefore if you were black and partnered with a white-owned company the chances were high of getting support than if a black business partnered with another black-owned company.

Mr Mabaso asked if it could be that SMEs were not organised as peers and so could not speak with one voice hence the challenges they were facing

Mr Mokoena replied that Katleho Chemicals was willing to interact with other SMEs so long these platforms were meaningful.

Submission by Africa Empowered
Mr X Xaba made a submission on behalf of Africa Empowered. The Committee was informed that Africa empowered had carried out a national study on people’s perceptions of Broad Based Black Economic Empowerment (BBBEE) called Eyethu Sonke. The study reviewed problems that were being faced by communities. The findings in their order of the most frequently complained about were skills development and training, access to funding, access to opportunities, access to information and job creation. Also added were no gains, business growth, networking, ownership and experience. Africa Empowered had lined up an Ambassador programme to address these problems. This would be done with relevant departments and agencies. Mr Xaba concluded the submission by outlining that the Ambassador programme would include picture based learning materials, selecting ambassadors from communities and understating cultural nuances. Other aspects of the programme would include providing materials in local languages to cut out any barriers and ensuring a more sustainable understanding of topics.     

Discussion

Mr Ntuli asked if the study had made any findings on why departments delayed in making payments.

Mr Xaba replied that Africa Empowered had engaged with certain Government departments but this was not to a great extent.

Mr Ntuli asked why departments were not complying with BBBEE regulations.

Mr Xaba replied that Africa Empowered had noted the issues that had been raised by the communities and would soon be engaging with Government.

Mr Ntuli asked what the role of Community Development Workers would be when the Ambassador programme was constituted

Mr Xaba replied that the ambassadors that would be appointed would prominent members of the communities who were engaged in similar processes but just lacked the necessary knowledge.  

Ms Line said that it would have been useful if the presentation had analysed the findings to outline the challenges being faced by women and people with disabilities.

Mr Xaba replied that Africa Empowered was engaging with the research team to ensure that the requirements of women and the disabled were captured. The Ambassadors would also help in assisting these groups.  

The Committee paused for lunch.

South African Institute for Entrepreneurship (SAIE) submission
Mr Robin Stead, Chief Executive Officer (CEO), South African Institute for Entrepreneurship (SAIE) said that his non-governmental organisation (NGO) had a passion for changing mindsets, from passivity, dependency and fatalism, to self-generated active engagement with future opportunities. It was a developer of active learning programmes. It specialised in small and medium enterprise (SME) development programme design and implementation. It worked exclusively for and with local and provincial government departments and agencies. It also worked with various funders, NGOs and development finance institutions (DFIs).

The key challenge was to identify some key constraints impeding a more effective rate of application success between seekers and providers of early stage SME working capital from DFIs. Funding agencies tended to wait for applicants and their marketing was weak and sporadic. They over-relied on mediocre intermediaries. There was lack of understanding by applicants because generally SMEs applied on the basis of a business plan authored by a consultant and their plans lacked real ownership. Mentorship was also insufficient because most agencies implemented mentorship only as the main aftercare programme. Mentorship should be combined with practical business and management training. There was also a lack of inter-agency synergy because an applicant who was unsuited to one agency was unlikely to be referred to the more appropriate agency. He or she was left to her own devices to figure out whom to approach. Declined applicants were usually given cursory and generic reasons for the decision. What was needed was a complete re-think of how declined applicants were treated. There was a very low awareness of the institutions and frequently the provincial institutions were better known than the national DFIs. Those who were aware had negative perceptions about them.

SAIE had developed a new national business competition – “the spirit of enterprise” - to inspire, identify, develop and fund a corps of entrepreneurs with high potential to run and sustain their businesses.

Discussion
Mr S Marais (DA) asked why entrepreneurs could not access funding from the DFIs. Secondly, he asked how SAIE managed the relationship between the mentorship and the entrepreneur in relation to the risk involved in the business venture.

Mr Z Ntuli (ANC) said that the DFIs were in consultation with Government in terms of their programmes. He asked whether the SAIE had engaged with the DFI’s, what their responses were, and what challenges SAIE had encountered when it met with them.

Mr X Mabaso (ANC) said that the provincial development agencies were better known that the national agencies and there was a negative perception about the agencies. He asked if the SAIE could highlight some of the negativity which was perceived about the agencies, and asked what assistance the DFIs gave to the SMEs in development. Who was responsible for training the mentors?

Mr Martin Feinstein, Managing Director, SAIE, responded that this kind of business launch pad and business plan competition was held in Free State, Gauteng, Limpopo, Mpumalanga, Eastern Cape and the Western Cape. The competition was always held under the auspices of the provincial development corporations and the economic development department of each province. There were national business plan competitions and Khula Enterprise Finance Ltd (Khula) was involved in one of them which was run by an NGO. The success rate varied between 30% and 40%of the winners of the competition who succeeded in getting funding.

The training of mentors could be conducted by a number of institutions, including the SAIE, and it could be done at the provincial level by a provincial entity.

Mentors were involved in decision-making on the funding. The entrepreneur needed to listen to the mentor irrespective of whether the entrepreneur would get funding or not. The mentor needed to have some authority regardless of the final decision on the funding.

An institution like the National Youth Development Agency (NYDA) or Khula would fund a consultant to write a business plan for a client.

The best way for funding would generally to release the funds in phases linked to certain deliverables.

SAIE had engaged with various DFIs. SAIE had spoken to the South African Music Education Forum (SAMEF), the Industrial Development Corporation (IDC) and they were interested. He was not sure that other institutions had seen the potential for hosting what he called “Idols for Entrepreneurship”. He imagined the potential of seeing entrepreneurs who became winners and started their own businesses. It was important to promote a real culture of entrepreneurship in South Africa.

Applicants to DFIs did not understand the need for business plans, and thus perceived DFIs negatively.  

Also applicants did not always appreciate the length of time that it took to process their applications and the need to provide adequate information. Also applicants were slow to respond to correspondence from the institution to which they had applied. Moreover, applicants failed to understand why they needed collateral when applying for funding from a funding institution. Such applicants had unrealistic expectations that the funding institution should fund the applicant’s business fully: this showed a weakness of entrepreneurship.

SAIE conducted pilot programmes such as that in the Western Cape of “mentor connect”. SAIE had already recruited a group of mentors who sought the necessary experience needed to help young and upcoming entrepreneurs. There were many people who wanted to give something back and loved the idea of assisting young emerging entrepreneurs. It was important to offer excellent mentorship with a high level of trust while remaining independent of commercial interests.

Mr Stead wanted to move away from the requirement to judge everything in the competition according to the business plan. He preferred to introduce a process whereby applicants could assess themselves.

SAIE had some questionnaires which could help people to assess themselves in terms of entrepreneurship potential and some successful simulation business games which SAIE used to enable people to form a case for their business idea and demonstrate their own ability to run a business – hence a business plan. The aim was to build experience and educate the applicants before they developed their business plan. This would help them to develop a more realistic business plan by themselves. SAIE also sought a multi-steaming approach whereby some would go for funding and others would be given a completely different alternative such as “business-in-a-box”.

SAPPI Forest Products Presentation
Mr Winston Smit, Strategic Manager, South African Paper and Pulp Industries (SAPPI) Forest Products said that its industry was rural based and valued the services of small and medium enterprises (SMEs), which ensured competitiveness internationally. The SMEs provided jobs to more than 170 000 people in the sector. SMEs could link the strategic drivers in the sector to the BEE transformation of two years ago, enterprise development, and preferential procurement.

Another area critical in the SMEs was the land reform programme where property was transferred to new owners or claimants who could operate their businesses there. The Industrial Policy Action Plan (IPAP) had highlighted forestry as the key driver of economic development in the country. The Government through the Department of Agriculture, Forestry and Fisheries (DAFF) still had the plantations under its control. Categories B and C would be transferred to claimants in order to open up opportunities for SMEs.

SAPPI was formed in 1936 as a global pulp and paper company and had operations in four continents. SAPPI subscribed to the principles of Broad Based Black Economic Empowerment (BBBEE) principles and had recently completed an empowerment deal worth R842 million, of which 10% went to the neighbouring communities. SAPPI was currently a level 3 contributor and scored 14.96 out of 15 for enterprise development. SAPPI had its in-house SME development programme. It had been realised that SAPPI could be a bench mark for SMEs as they grew their businesses. SAPPI’s vision was to enable SMEs to grow and become self-sustainable and competitive internationally.

The forestry industry was highly technical and presented high barriers to entry, but opportunities did exist for SMEs in the value chain, such as plantation management, plantation and weed control, fire fighting, harvesting and transport, pole manufacturing, charcoal manufacturing and sawmilling.

Passion from entrepreneurs for their product drove SMEs’ success. Funding was crucial in at the different stages of growth. Access to markets was also crucial. It was also important to have technical knowledge about the product and the industry. Business skills and knowledge of running a business and managing it were the key. Such skills included being able to operate business systems, for example, financial, human resources (HR), and risk management. Mentorship was crucial to any business especially before and during the start-up, start-up and in the phases of growth.

There were many ways to fund SMES, for example, preferential capital and private equity and bank loans. SMEs were, however, not always attractive for the banks. On the other hand, an SME was not always aware of funding sources and how to access them. Financial institutions applied onerous criteria for assessing applications for loans. SMEs tended to lack credit-worthiness and the ability to provide security. The regulatory environment was negative to the SMEs.

Commercial banks, the IDC, which was involved in the entire forestry value chain, Ithala Bank, the Development bank of South Africa, forestry companies such as SAPPI Forest Products, Mondi Packaging South Africa and Hans Merensky Holdings, the National Empowerment Fund, and governmental support programmes under the Department of Trade and Industry (DTI), the Department of Rural Development and Land Reform (DRDLR) and DAFF were currently funding SMEs.

The success of SME development would require a strong partnership with the Forestry Industries Education and Training Authority (FIETA), the private sector and the appropriate Government departments. It would also require the development of business support centres in the rural areas to provide much needed business support and advice. Guarantee and dedicated grant incentive schemes were also crucial. It was important to develop mechanisms to reduce transaction costs associated with SME funding and support services.

Discussion
Mr Marais asked whether SAPPI was entering into transactions with the SMEs for funding or for equity partnerships in the BEE deals.

Mr Mabaso asked where SAPPI would prefer to place mentors. He also asked SAPPI what alternative it proposed to intermediaries in developing mechanisms to reduce transaction costs for SMEs.

Mr N Gcwabaza (ANC) asked how many black SMEs there were in the forestry industry, what their rate of success was, and at what level of operation they were. He was concerned about land reform and restitution.

Dr P Rabie (DA) asked what type of export criteria SAPPI used when exporting mushrooms. He also asked how many equity transfer deals SAPPI had concluded recently.

The Chairperson thanked Mr Smit for his clear and informative presentation. It would benefit the SMEs present in the meeting. There was much improper exporting in the industry and SAPPI and Mondi were contributing their fair share to protect the SMEs. She asked the delegates to elaborate on what they were doing to assist SMEs to access international markets.

Mr Smit responded that SAPPI did provide funding for SMEs and all the listed forest companies had BEE deals or BEE partners SAPPI could offer mentorship through the book by transferring skills and knowledge and many people were willing to learn. Passion was the key driver for development in the forestry sector. In relation to the transaction cost mechanisms, Mr Smit emphasised that transaction cost mechanisms were between 30 and 40% mentorship. The challenge was to cut the costs of outsourcing consultants or intermediaries. In relation to the land reform programme, The figures or percentages were not ready available for the land reform programme, but there were SMEs which owned harvesting equipment and plantations and most black SMEs owned transport companies in the industry. Two types of forestry assets were transferred - category A transfers, such Singisi, SiyaQhubeka, and, down in the Cape, Mountain Ocean; and Government assets, which were being transferred to new owners, in the former Transkei, and in Mpumalanga and KwaZulu-Natal.

Steers Philani Valley. Presentation
Ms Precious Msibi, business owner, Lecebo Trading cc, explained briefly her background and experience. She had started her business in Durban after resigning from her job in the shipping industry. Her dream was to start her own business in the shipping and transport industry but she could not realise it because of the challenges faced by SMEs in the industry. It was especially difficult for SMEs to enter the fishing industry since there were many mafia operations within it. Because she was unable to venture into the shipping industry, she had decided to buy a Steers franchise in order to realise her dream of becoming a business owner.

The challenges
The lease agreement was on premises at Philani Valley, KwaZulu-Natal, was signed on 12 May 2008 while the shopping mall was still under development. The lease was negotiated by Steers on behalf of Ms Msibi. The centre was fully functional by 25 July 2008. The positioning of the store was chosen on the basis that in front of the store there would be a taxi rank, but that had not materialised even to the present day. The centre failed to attract enough customers to sustain the tenants. The projections of the business were based on R350 000 a month which was calculated in terms of the size of the store - 181 square metres. She injected R530 000 into the business as working capital and paid a deposit of R66 000 deposit to Old Mutual. The business had closed down on 30 March 2010. She tried to engage Old Mutual as landlord to reduce her monthly rental instalment but to no avail. When she tried to relocate to other premises her attempts were rejected. She attempted unsuccessfully to get help from the IDC. She had also tried unsuccessfully to get Steers to help her. She approached the Department of Economic Development, KwaZulu-Natal for financial assistance. The Small Enterprise Development Agency (Seda) in eThekwini appointed legal assistance for her. She also approached commercial banks but could not get the help she needed. Her current situation was that Old Mutual would not allow her to relocate to Mega City unless she paid R250 000 and renegotiated the rest of the balance that she owed. Old Mutual had demanded outstanding monthly rentals. IDC was still keeping her equipment in storage but required her to agree on the amount of repayments. Space was still available at Mega City for her to relocate, but there was no funding. She owed Old Mutual R469 000, IDC R130 000 and Famous Brands Development R94 000.

Ms Precious Msibi’s request
Ms Msibi sought help to get out of the debt in which she found herself, even if it meant starting all over again. She has lost all her pension money and she could not move forward with her life because of the big cloud that was hanging over her head. She was not only requesting financial assistance but also business mentorship that would allow her to gain more business skills and knowledge of starting and managing a business.

Discussion
The Chairperson thanked Ms Msibi but advised her to be more specific and write a more detailed submission.

The Chairperson asked the Mr Lizo Ntloko, Western Cape Regional Manager, IDC, who present at the meeting, to meet with Ms Msibi so as to find out whether he could assist her. She also asked Members to not to engage in the presentation of Ms Msibi until she, Ms Msibi, had spoken with Mr Ntloko.

The Eastern Cape Youth Development Board
Mr Viwe Sidali, Chairperson, Eastern Cape Youth Development Board (ECYDB) said that the Board was a non-governmental organisation established in 1999 to coordinate, support and promote programmes of youth organisations to maximise their development impact and influence the national Government on various  programmes affect young people.

There was limited data on credit conditions for business in South Africa. Research on SME access to finance was conducted by the Board in 2008/09 and early 2010 to provide an assessment of the demand for private sector debt finance in the SME sector, mainly in the Eastern Cape and among those who operated in rural areas with historically disadvantaged backgrounds.

The main forms of finance used by SMEs were credit cards (46%) and overdrafts (36%), High growth firms were less likely to use overdrafts and leasing and higher purchase than non-high growth firms. There had been an increase in applications for finance across all firms. The proportion of firms applying for credit, irrespective of whether it was granted or not, had increased from 39% in 2007 to 53% in 2009. Application for finance tended to increase with the size of a firm. The average amount of finance sought by SMEs over the past three years had increased by 12%. The approval rate had fallen, particularly for micro firms, where only 60% of firms had been able to secure any amount sought, compared to approximately 82% in 2007. For all those who were unsuccessful in obtaining 100% funding, around 62% of micro firms did not manage to secure funding, and those who manage to source funding obtained it mainly from family and friends. There were Government institutions who were suppose to address the major challenge of funding - the National Development Agency (NDA), the IDC, the National Empowerment Fund, the NYDA, Seda, Khula, the Land Bank and the Development Bank of South Africa (DBSA). All had done nothing concrete to address the above backlog

The reasons most often given by commercial banks since 2007 for not lending were the economic climate or that the industry was too risky. Issue of security were also increasingly cited as reasons for unsuccessful applications, particularly from high growth firms. This was another biggest challenge faced by the SMEs in accessing finance in South Africa. The Government institutions such as IDC and Khula should review their policies in supporting the SMEs. It has been reported that 18% of SMEs took out new lending or had to refinance some sort of credit facility in the last 12 months. Overdrafts accounted for over 80% of those applications. There had been a significant shift towards using this new finance for working capital requirements than previously. However, a greater number of non-growth firms showed a greater reluctance to borrow or refinance in the last 12 months, with 11% expressing the current climate as the reason for not doing so. Compared with 2007, there had been a 10% point increase in the proportion of SMEs who would consider raising equity finance in the future. That increase was due to micro and medium sized firms. However, a much smaller proportion of firms stated that they were actually planning to use equity in the next three years.

SMEs were failing in South Africa because of a lack of political commitment from Government to deal with policy making. Also some SMEs experienced a sense of inferiority when dealing with officials who appear to be uninterested in helping them. Another reason for the failure of SMEs was the lack of funding. The problem seemed to lay rather with inadequate planning, budgeting and the misuse of resources. A lack of coordination and cooperation between departments was also identified as another impediment to the sustainability of SMEs. Cooperation between sectors and departments were an on-going challenge, which left the SMEs to their own devices, with no clear direction as to where they could access information and finance.

The Board recommended the establishment of an independent tribunal or a SMEs commission. The tribunal would be tasked to advocate, facilitate and capacitate staff, and to resource special programmes within the municipalities. There was need for a dedicated team with special authority for the decision-making process. The tribunal should be the voice of SMEs so that it would be able to advance their development and sustainability. The SME national policy summit should be convened by the Department of Economic Development, the DTI and the Department of Public Enterprises. The Committee must also convene an intergovernmental forum and the relevant departments should be part of the imbizo. Partnerships with banks should be improved to enable SMEs to access finance from such institutions. The tribunal should have a list of all SMEs registered with the Companies and Intellectual Property Registration Office (CIPRO) in each municipality in order to allow space for planning and budgeting.

The Board urged and invited all stakeholders and decision makers at local, provincial and national Government to take joint ownership of these recommendations and to ensure that SMEs were successfully supported, developed and made sustainable.

Discussion
Mr Mabaso asked if whether the SMEs were not directly registered to CIPRO by themselves, but were registered through consultants who charge high fees.

Mr Gcwbaza asked that what the developments were in terms of engagement between the Eastern Cape Youth Development Board and the defunct Umsobomvu Youth Fund. What demands were the state agencies making on SMEs?

Mr Ntuli asked Mr Sidali not to generalise when making his presentation; he should come up with relevant points and not politicise issues.

Mr Sidali responded that if Members could visit a small town called Idutywa they would discover that there were offices that were advertising for business plans, CIPRO registration, and other matters. Those private consultants were charging people high fees because they knew most SMEs that were not registered were not aware where CIPRO was. Most SMEs in the rural areas were the victims of those private consultants because there were no CIPRO offices in most rural towns.

When the National Youth Development Agency was established, the Board was one of the NGOs to be invited to engage. The Umsobomvu Youth Fund had not yet directly engaged with the Board but it had written a proposal to the Agency and invited it to show the problems that SMEs were encountering in the rural areas. The Board had previously engaged with the Umsobomvu Youth Fund had identified the problem that the Fund  would help an SME with the drafting of the business plan but would leave that business plan with the SME without assisting it in accessing funding. Most state agencies like the IDC would demand a business plan drafted by a consultant on its pay role. An SME was not allowed to draft its own business plan but was expected to procure services of those private consultants.

The Chairperson thanked Mr Sidali for his presentation and assured him that all his concerns and recommendations would be looked considered. She thanked all the delegates from various organisations for their presentations and promised that the Committee would examine them in consultation with the relevant stakeholders and the Department.

The meeting was adjourned.


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