BUSA Presentation to CESA Small Firm Workshop Costa Pierides- Executive: Chambers and Membership 6 th April, 2011
SOME BACK GROUND INFORMATION- FACT FILE- According to the ILO Score Project SME S EMPLOY MORE THAN 95% OF THE WORLD S WORKING POPULATIONS According to the University of Johannesburg there are conservatively estimated to be around 3 million SMME s in South Africa today In the government s New Growth Path Strategy, 5 million jobs need to be created, and it is increasingly being recognised both here and abroad that the SMME sector is the dynamo that can make this happen.
Small, medium and micro enterprise access to loan finance- the financial challenges 1. In the start-up phase of SMEs, entrepreneurs are almost always unable to adequately demonstrate the potential of their businesses to deliver the required rates of return to financiers. 2. For the recently-announced Growth Path Plan to succeed, a strong SME base is required 3. Although our purpose today is to highlight the essential role of small business, in the long run we see the interests of small and big business as interdependent, not separate-( to this end BUSA has publicly called on the business community to settle accounts with SMME s within 30 days) 4. The provision of finance is one of several variables for small business support. Access to markets and management know how play an equally important role. 5. Local government business retention and expansion programmes can be harnessed to assist in the improvement of SME sustainability
Challenges faced by SME s in accessing finance 1) the regulatory burden and bureaucracy which makes it difficult to set up a business, is also costly and administratively complex to maintain a business and challenging to move from informal to formal status 2) SME s preferring to self finance when start-up funding and business insurance would have been helpful. 3) Financial Institutions requirements often call for collateral which new SME s do not necessarily have. 4) The relatively high interest rates and risk profiles of the SMME s sector is not conducive to loan financing for these small enterprises on a sustainable basis 5) Approaching DFI s* is perceived to be daunting and the processes to elicit assistance considered to be too challenging. *Direct Foreign Investment
SELECTED GLOBAL COMPETITIVENESS FACTORS AFFECTING SMALL BUSINESS- SOUTH AFRICA S RANKING WITH 139 COUNTRIES 2009/10 2010/11 Venture capital availability 33 39 Number of procedures to start a business 26 34 Time required to start a business 64 75 Quality of overall infrastructure 43 56 Business costs of crime 133 137 Pay and Productivity 105 112 Burden of Government Regulation 65 94 Burden of Custom procedures 51 55 Ease of access to loans 31 41
Organised Business s Desire to work with Government on Programmes to assist SME s As a rule, financial institutions generally do not provide finance in the region of R500 000 to R2,5 million. Small business people are forced to take personal loans, thus exposing the individuals personal risk, which in turn affects risk taking. 1) Development of strategically located one stop business support shops nation wide 2) Unblocking SMME barriers and constraints 3) Undertake Regulatory Impact Assessments and review strategy as this affects not only SMME, but business in general 4) Stem collusive and anti-competitive behaviour in our markets 5) Maximize state and business procurement links with SMME s through sub contracting out sourcing and joint venture arrangements in the value chains 6) Stimulate a culture of entrepreneurship 7) Benchmark off practices that have been tried and tested 8) Make venture capital more easily available
Organised Business s Desire to work with Government on Programmes to assist SME s cont...d... Value chain analysis 1) We believe that one of the key components in the debate centres on the analysis of the value chain (debtors/creditors/suppliers) and the effect on cash flow of SMME s-to illustrate this: customers place orders and pay for example 60-90 days after receipt of goods or services... SMME suppliers are often reluctant to provide goods and services on account/or on consignment basis Debtors too, will have a propensity to stretch out payments further affecting the cash flow of an SMME
Organised Business s Desire to work with Government on Programmes to assist SME s cont...d... The benefits of moving from informal to formal Studies from other parts of the world have shown that considerable value lies trapped in the informal sector. Alignment of incentives for SME financing with other policy incentives, for example youth employment incentives. A national SME database is considered both supportive in promoting SME business opportunities as well as in facilitating interaction between SMEs and DFIs. DFIs must develop and offer working capital funding more readily to SMEs and pursue the use of innovative financing products such as Invoice discounting, particularly where government is a client. Initiatives to make DFI s more accessible such as the Khula Bank initiative must be accelerated and supported. To this end, government top up facilities to assist both the SMME and financier may need to be investigated in so far as marketrelated interest rates are charged to SMME s with government sponsoring the rate top up to the prime rate in the market.
Organised Business s Desire to work with Government on Programmes to assist SME s cont...d... Government must create conditions condusive to venture capital development Primary igniters for this might be-tax incentives and breaks to encourage risk taking. The creation of a state venture capital fund aimed at funding SMEs can focus on a wide range of financing needs from start up capital, to working capital and cash flow funding. Small business is a partnership between the private sector, government, organised business and the educational sector.the Regulatory Impact Assessment Mechanism needs to conduct an impact assess on the role of all existing and new legislation so as to prevent situations like the demise of small pharmacies as a result of a law passed by parliament. Concluding Remarks The capacity of business to employ is currently limited by the capacity of businesses to sustain themselves. It is generally recognised that small and emerging business have the greatest potential for job creation. Nonetheless, business does not favour policy interventions and support programmes to the extent that a dependency culture is fostered.
Concluding remarks continued. Actions being taken- BUSA has set up an SMME Task Team which will be meeting in early May 2011 for the first time (1/3 of BUSA s 112 members have nominated representatives onto this Task Group. This is a first for BUSA) Organised Business has started engagements with Khula to leverage new ways of financially assisting SMME s We hope to engage with government on areas where red tape can be drastically reduced Our constituent's want SARS to become a lot more user friendly to small business in light of the critical role we expect this sector to play in job creation in the months and years ahead. I thank you for your indulgence