Start-ups could get access to millions of rands to finance government contracts, following an announcement this week by Finance Minister Malusi Gigaba (pictured here) of a new plan to get the economy going again.
The plan which was revealed today (July 13), includes a number of measures such as the partial privatisation of state-owned enterprises.
Among the measures Gigaba announced that the National Treasury would finalise a public procurement bill by March next year, while the Minister of Small Business Development Lindiwe Zulu will by February finalise a "complementary government fund" aimed at financing start-ups.
Start-ups need access to finance to undertake government contracts, all the more so with a 30% set-aside of state procurement for small businesses, which came into effect in April (see this story and this post).
The new regulations allow government departments, municipalities and state entities “if feasible” to ensure that those that win bids of R30 million ($2.2m) or higher subcontract at least 30% of the bid’s value to small businesses.
With the state spending about R500 billion on goods and services, small businesses are set to win big. Yet if winning bidders cannot secure funding to pay for equipment and staff, the measure could fail.
Late payments hindrance
In addition the government continues to pay late, despite regulations in effect since 2005 which instruct national and provincial departments to pay suppliers within 30 days on receipt of an invoice.
The problem is so acute that both the Department of Performance Monitoring and Evaluation and The National Treasury have units to track late payments and intervene on behalf of suppliers to get departments to pay late invoices.
In May in the budget vote for the Department of Performance Monitoring and Evaluation Minister Jeff Radebe said since the unit was set up in early 2015 the department had intervened in 207 cases of non-payment of valid invoices, and R327m had been paid to service providers, as at end of March.
According to a news report the National Treasury’s Office of the Chief Procurement Officer said last month that it had received over 5,000 queries about invoices unpaid by government departments, amounting to R620m, between July last year and the end of March. Just under half had so far been resolved.
There's perhaps no need to set up a new fund. Zulu's department could use the Small Enterprise Finance Agency (Sefa) to drive lending to start-ups. The agency lent out R1.1bn to over 43,000 small businesses in the 2016/17 year.
But the rapidly increasing rate of impairments, most linked to loans lent directly to small businesses (the agency also lends via intermediaries), is making it unsustainable to do so.
Impairments were at a massive 47% of total loans as of the end of March, Sefa chief executive Thakalani Makhuvha told MPs last month. This is up from 38% in of its loans book in 2015 and 25% in 2014 (see this earlier post).
Makhuvha in April last year said a number of business owners who took out bridging finance to bankroll tenders failed to honour payments. Some defaulted after not performing on contracts.
He said the agency often opens joint bank accounts with clients as a form of security, but that this has not stopped some from later changing to another account.
One way to resolve this would be for borrowers to cede contracts to the agency. But under current treasury rules this is prohibited. Makhuvha says the agency is in talks with national treasury to permit cessions.
It will be crucial to resolve this if the 30% set-aside is to have any substantial impact
Another way would be to increase the use of credit guarantees In the 2015/16 year Sefa issued just R40.5m to financial institutions (including banks and non-banking institutions) down from R50.7m the year before.
Banks have largely abandoned the scheme in recent years saying they have run up too many bad debts and that the claims procedures are too lengthy (see this post and here).
Sefa has now linked up with non-banking financial institutions, including micro-enterprise funding companies and private corporates to offer credit guarantees to groups of small businesses.
In its 2015/16 annual report Sefa said it had enhanced business processes and IT systems and added that it was in discussion with banks to formulate new portfolio guarantees with new terms and conditions, the most attractive change being the scrapping of co-vetting of transactions with the banks.
Zulu's department should learn from more successful credit guarantee schemes in India (see this post), Chile (see here) and Malaysia (see here)
Use Financial Sector Code
A third way is to compel banks – many of which are already involved in contract finance programmes with the state – to have bridging finance products for start-ups.
For example Nedbank has partnered with the Enterprise Public Works Programme and reported in March last year that it had lent R40m in contract finance to 180 start-up entrepreneurs, said spokesperson is Tracy Afonso, Head of Professionals and Small Business Banking at Nedbank.
The government can use the Financial Sector Code (an industry charter under the Black Economic Empowerment policy) to compel banks to lend contract finance to start-ups.
The Financial Sector Code compels banks to invest a collective R48bn between 2012 and the end of 2017 in various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing.
Banks have far exceeded this. Between 2012 and 2015 banks lent out over R209.3bn, the Banking Association of SA (Basa) said in March. Of this, R41bn went to black SMEs.
The new draft code has yet to be gazetted by the Minister of Trade and Industry Rob Davies.
Black business however is not satisfied. While the targets for the new code have not yet been finalised, Black Business Council secretary general George Sebulela wants banks to ring-fence at least R50bn for black SMEs, which could be geared four or five times.
Some of this money could be used to fund black start-ups seeking funding to undertake state contracts.
Perhaps the department need not go to the trouble of setting up a whole new dedicated fund. The government is already struggling to find revenue to fund other pressing needs.
Using a mix of credit guarantees, direct finance through Sefa which is backed by cessions and concessions from banks through the Financial Sector Code to fund black start-ups - the department could help make it easier for start-ups to contract with the state,
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a