Struggling NEF freezes new loans
More than 150 entrepreneurs were turned away this month from the country's biggest black development financier, the National Empowerment Fund (NEF), which has suspended the approval of new projects because of a lack of funds.
The NEF, which receives almost 2 000 applications from black entrepreneurs for finance every year and has approved more than R5-billion in assistance to entrepreneurs and investors since 2005, is in a catch-22 situation. Government and self-sustained funding to the organisation has run dry, but it is legally restrained from canvassing the private sector for funds.
"According to the National Empowerment Fund Act of 1998, the NEF must be funded through 'grants, loans, income generated by the trust or money appropriated by Parliament for that purpose'," the NEF's head of marketing and communications, Moemise Motsepe, told the Mail & Guardian.
In line with this, the NEF was capitalised in 2005 by the national treasury to the value of R2.4-billion. This amount was drawn down over a number of years, the treasury's chief director of communications, Jabulani Sikhakhane, told the M&G. "The last tranche of this funding was transferred to the NEF in 2009/10."
Asonge Share Scheme
Since then, the NEF has financed itself with the proceeds from dividends and interests from its investments. The organisation was also given 1.5% of shares in cellular company MTN when it was opened, and in 2007 the board of trustees took the decision to sell 0.75% of the shares at a "significant" discount to black investors. Known as the Asonge Share Scheme, the arrangement resulted in 87 000 black South Africans becoming investors in one of the country's leading cellular operators. And, according to Motsepe, the move yielded a further R1.3-billion for disbursement.
Overall, the various initiatives have allowed the fund to allocate R3.3-billion to applicants to date, in amounts ranging from R250 000 to R75-million per business.
But self-financing has only been able to take it so far. The economic recession of 2008 took its toll on the funder, as its beneficiaries struggled to pay back their loans.
"We had to recapitalise some businesses and allowed a repayment holiday during the recession," said Motsepe. That meant repayments were lower than they were initially envisaged, with 70% of long-term loans currently outstanding. Patient capital lending also meant an inherently slow turnaround time, averaging five to seven years for payback and, in some cases, as long as 10 years, Motsepe said.
In acknowledgement of its income dearth, the NEF applied for funding from the treasury through the department of trade and industry last year. In line with its three-year targets, the fund requested R4-billion from the state, foreseeing payouts of about R1.3-billion to applicants annually. But it has yet to receive a response.
A major obstacle
Nevertheless, Sikhakhane confirmed that the programmes and funding of the NEF were being discussed by the national treasury and the department.
Critics have suggested that the NEF may not have been making optimal use of the funds and that discussion with the government may have been dragged out for that reason. But Sikhakhane rubbished the claims. "Nothing of the sort," he said. Required processes merely need to be carried out.
A major obstacle in the fund's ability to bring in cash is the fact that it is listed as a "schedule 3A national public entity" under the Public Finance Management Act. This means that it is precluded from getting private funds and must rely on treasury allocations and yields from investment.
Three years ago, the fund applied to be recognised under the Act's "schedule 2 major public entity". If the national treasury recognises the new classification, the fund could get funding from development funding institutions and the private sector.
But, in the meantime, the NEF is turning away would-be entrepreneurs indefinitely; something which could be crushing to its applicants, it said. "With the Industrial Development Corporation [IDC] no longer funding black entrepreneurs, it has become the only home of hope for the black entrepreneur," said Motsepe. The NEF has experienced a major influx of applicants in the past two years.
The newly formed Small Enterprise Finance Agency — made up of Khula, the South African Micro Finance Apex Fund and small business activities previously housed within the IDC — also provides funding to black start-up companies. In May, it announced that it would lend almost R740-million to 15 000 companies.
"But it is a new organisation, and the size of the loans it extends is much smaller," said Motsepe. He maintains that no organisation fulfils the same function as the NEF.
Despite its unique role in the economic landscape, it cannot extend more offers to applicants until more finances have been secured.
"To do that would be reckless trading," Motsepe said. "We can't do that as an organisation that advises black business to trade prudently."
The organisation could, however, make good on its commitments to fund R5-billion worth of projects with existing cashflow, Motsepe said.
Ninety-five percent of cash outlaid by the organisation goes to the funding of small black organisations. The remainder goes to fund management projects such as Asonge and strategic project funds in areas identified by the government as "key drivers to economic growth".
Tackling a major concern
According to the findings of the 2012 SME Growth Index Report released by business environment specialist SBP, the NEF is tackling a major concern of would-be business owners. Its research showed that 14% of respondents ranked "lack of finance" as the biggest impediment to business growth.
But investment analyst Adrian Saville of Cannon Asset Management said this was only one problem faced by small and medium businesses. "South Africa has a poverty of small and medium enterprise creation," he said. "The South African labour force participation rate is lower than it has ever been. We have a very concentrated industrial structure, which has an [overall] negative effect on growth."
Instead, he said, financing was one of "a range" of critical ingredients. "They range from access to capital, to access to infrastructure, to skills mentoring," he said. "I wouldn't put it down to a single component."