KEYNOTE ADDRESS BY THE HONOURABLE MINISTER OF THE SMALL BUSINESS DEVELOPMENT, MS LINDIWE ZULU, AT THE D GROUP CORPORATE FORUM

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1 KEYNOTE ADDRESS BY THE HONOURABLE MINISTER OF THE SMALL BUSINESS DEVELOPMENT, MS LINDIWE ZULU, AT THE D GROUP CORPORATE FORUM 26 November 2014 (Illovo) Programme Director, Distinguished guests, Ladies and gentlemen I am delighted to be part of this important event and to share my thoughts with you. Entrepreneurs are vital to a healthy economy. They look for unmet needs in society and then try to fill them with a new good or service. They take risks without any certainty of reward. They push forward new technology. They try things that others might consider unlikely to succeed, and occasionally this result in successes that would never have even been attempted. In difficult economic times entrepreneurs help in multiple ways by creating jobs and finding unique and creative ways to provide society with the goods and services they desire. It is hard work, and many new 1

2 endeavours fail, but the contribution of entrepreneurs to a productive economy cannot be overstated. The performance of any business is inextricably linked to the person who runs it, in the case of most small businesses, this is the entrepreneur who started the business. Our economy needs entrepreneurs, but what do entrepreneurs need? This is the primary question that my Ministry will try to answer as it builds an effective nurturing and enabling environment for small businesses in South Africa. One of the first things that we are prioritizing is the setting up of the Ministry, and this will involve aligning multiple entities, namely the Small Enterprise Finance Agency (SEFA), the Small Enterprise Development Agency (SEDA) and small business workstreams into a coherent small business development ministry that provides holistic, integrated and seamless support to our small businesses and entrepreneurs. Furthermore, the setup of the Ministry will allow us to align, coordinate and monitor issues of small business development at provincial, district and municipal levels through local government economic planning mechanisms such the IDP and LED processes, as well as close working relationships with the chambers of commerce. The Ministry will embody and propagate best practices with regard to stimulating small business and cooperatives development in a manner that unambiguously demonstrates this government s commitment to empowering entrepreneurs and the small businesses they run. The Ministry will develop unique targeted programmes that address limitations that small business face as they strive to grow or expend. 2

3 Small businesses in South Africa are plagued by a range of impediments that stifle their growth and expansion. Key amongst these is the regulatory burden or red tape and skills shortages. The SME Growth Index 2013 revealed that SMEs spent an average of 75 hours a month dealing with red tape in 2013 the equivalent of eight working days. The majority of business owners expressed concerns about frequent changes in the regulatory environment and the lack of easily accessible information causing many to worry that they may be falling short on compliance requirements they are not even aware of. For example, certain studies have pointed out that SARS inefficiencies were identified as a major red tape burden. While SARS is efficient at collecting revenue, it is less efficient at paying refunds, resolving problems, and issuing tax clearance certificates. In one instance a business owner reported having to wait over a year for their objection with SARS to be resolved. My Ministry is working with SARS to deal with these challenges. We are encouraged by SARS s openness and commitment to deal with challenges facing small businesses. While it is beyond the scope of this address to list all the impediments experienced by small businesses in our country, this Ministry will provide a focal point for both registering these impediments and developing inclusive and collaborative solutions to address them. This Ministry realizes that mechanisms which permit small businesses to communicate, consult and provide feedback to government are of utmost importance. Such mechanisms can improve service delivery and implementation across spheres of government on programmes related to small business development. 3

4 Furthermore, in order to engage in an effective dialogue with small businesses on the existing policies and programmes, we believe that Governments should also set up ICT/ social media-based platforms in cooperation with small businesses to obtain on-going and real time inputs on issues affecting them with suggestions on how these could be addressed at a policy, systemic and institutional level. This Ministry knows and acknowledges that small and medium enterprises are very important in contributing to economic growth and development, but also empowering particularly our own people, black people, who have been excluded in the mainstream economy of the country. In this regard, we are convinced that government policies must focus on historically marginalized groups on a national scale. Such policies would support funding for small businesses (e.g. crowd funding, seed funding, soft loans, micro-financing, cooperative markets, etc.); mentorship and small-business incubators, with periodic economic audits measuring the impact of such policies on the growth and development of them. We also realize as a Ministry that the inequalities and established patterns of discrimination are deeply ingrained in the South African psyche and social structures and were institutionalized under the apartheid system implemented by the previous non-democratic regime in our country. Persistent inequalities and exclusion of black small businesses have significant impact for black entrepreneurs, their small businesses, their communities and our country as a whole. 4

5 While the formal systems reinforcing inequality of access to opportunities have been largely removed, it is the more insidious nonformal networks that still restrict access to opportunity for many of our small businesses this Ministry realizes that addressing these ingrained inequalities will be a battle that it will have to fight and win in order really level the playing field for black small businesses to grow, complete, excel and thrive! This Ministry will actively focus on innovation and fostering enterprises and job creation in high impact sectors (such as those included in the Industrial Policy Action Plan of the dti), including agriculture, information technology, sustainable development and tourism, needs to be pursued as a strategy, in order to nurture and develop small businesses in highimpact sectors and enhance their job creating and value-adding effect to our economy. In a nutshell, we are talking about marrying small business to big business. In this regard we will be driving a supplier development programme. This Ministry will constantly keep an eye on the small business world around us, to ascertain what they are doing and the impact they are making. We want to go from assimilating best practises to creating them in the world of small business. We want to develop small businesses in a manner that will set us on a sustainable growth trajectory with a minimum of 5% growth per annum for the next decade. Access to funding continues to be one of the most significant challenges for the creation, growth and survival of SMEs, particularly innovative ones. Challenging financial conditions continue to pose a threat to the survival of entrepreneurial businesses. An effective funding environment 5

6 means that entrepreneurial companies must be able to access finance at every stage of their development. Traditional approaches to financing these businesses envisage a series of funding stages, whereby companies move from pre-seed and seed, through to start-up, emerging growth and expansion. At each stage, there should be sources of finance available, and at least in theory, a smooth transition should be possible between forms of finance. Small businesses at the very earliest stage of their development (Preseed or seed stage) face enormous challenges in securing access to funding. They have great difficulty in gaining access to traditional sources of financing. Because they tend to have little experience and few assets, financial institutions tend to see them as too risky, despite the modest amounts of investment that many require. And because they are starting from scratch, they are often too small to be of interest to most angel investors and venture capitalists. Government intends, therefore, to support alternative mechanisms and institutions that provide small business entrepreneurs with the capital they need to start and grow their businesses, focussing mainly on those stages where private market mechanisms are risk averse to enter. At the start-up stage, an entrepreneur begins the process of demonstrating the commercial viability of their business. The goal will be to earn initial revenues, identify sales and distribution channels, and build awareness of the business. Financing needs often increase at the start-up stage because entrepreneurs must recruit employees, invest in infrastructure and put business plans into action. 6

7 Yet, for many investors, the start-up stage is still considered high-risk because the management team and business model remain unproven. This means that many of the issues facing companies at the start-up stage will be similar to those at the pre-seed and seed stage. There will still be reliance on bootstrapping and friends and family, although some business angels may start to be interested. Again, government will assist to close the gap. Once an entrepreneur has been able to demonstrate a market for their product or service, the venture enters the emerging growth stage. The company will be earning revenues but is unlikely to be sufficiently profitable to fund its own expansion. This means that external finance will be needed to hire employees, move to bigger premises and invest in new infrastructure. With a track record now behind it and a management team that has demonstrated its competence, it becomes somewhat easier for companies at this stage to access finance, and the range of options broaden. Venture Capital firms may start to show an interest, provided the company meets their criteria, and bank finance should be easier to access because collateral can be provided. But despite this improved access, there are several trends that are hampering the ability of companies at this stage of growth to secure the funding they need. The financial crisis (2008) has made banks and Venture Capital firms more risk averse and limited the funds that they have available to lend or invest. This means companies at the emerging growth stage face a highly competitive funding environment, and many will find that their growth prospects are constrained by a failure to secure the financing 7

8 they need. At this stage, government envisages mechanisms that employ co-funding arrangements. Government has a vital part to play in facilitating access to funding and encouraging small business development along all of these phases. Because business development is not a single-stage process, government incentive programs needs to recognize the life cycle of small business companies. The combination of multiple stages of business development and multiple funding sources available at each stage creates a complex group of touch points where incentives could impact the funding ecosystem. This Ministry sees its role as being to stimulate that funding ecosystem and provide comprehensive support within this very complex space. There is a huge diversity of incentive programs that target different stages of the entrepreneurial journey, but these can essentially be broken down into two categories: direct funding and indirect funding. The list below represents some of the common incentive strategies that will be explored by the Ministry to stimulate entrepreneurship and the funding of small businesses: Direct funding o Government grants to businesses in all phases of development o Low interest start-up loans sponsored by governments o Partnerships between investment funds and governments to provide funding via multiple stakeholders o Grants for specific business activities such as technical development, R&D or job creation o Mixtures of loan and grant funding. 8

9 Indirect funding o Preferential tax treatment for companies and individuals investing in new business ventures o Tax deductions or exemptions for companies performing certain activities or at a certain stage of development o Grants available to investment companies researching the viability of initiating investments in SMEs and new ventures o Grants designated for specific non business or advisory functions such as hiring development consultants or executive advisors o Incentives geared to encourage big business to support small business through developing their suppliers. The Ministry sees the mainstreaming of small businesses as suppliers to government procurement needs at all levels of government and State Owned Enterprises (SOEs) as key. Targeted procurement and set asides in the state sector will be used as an instrument to grow and develop our small businesses and entrepreneurs. Given the increasing demonstrable positive economic spinoffs from including entrepreneurship education into the curriculum, it is evident that South Africa is lagging behind in preparing her workforce for the challenges of the rapidly changing global economy. It is concluded that improved and sustainable global economy development depends on a strong entrepreneurship education. It is against this background that the following recommendations are proffered for effective entrepreneurship education in South Africa: Government and other education stakeholders should make sure that entrepreneurial educational programme at all levels of education are 9

10 made relevant to provide the youth and graduates with much needed entrepreneurial skills. The Private Sector in collaboration with Government should support Enterprise Education involving the creation of programmes, seminars and trainings that provide the values and basics of starting and running a business should be encouraged. These programmes should also guide youth through the development of a bankable business plan. The Private Sector in collaboration with Government should support Experiential Programmes which provide youth with placement and experience in the day to day operation of a business. In other words, it involves the development of a youth-run business that young people participating in the programme work in and manage. Most importantly, the Private Sector in collaboration with Government should support Enterprise development. This is a third and the most critical factor for effective entrepreneurship education. It goes beyond entrepreneurship education and experiential programmes, by helping youth to access small loans that are needed to begin business operation and by providing more individualised attention to the development of a viable business idea. As a new Ministry, we are confident that we can, working in partnerships with small businesses and entrepreneurs take steps towards a vibrant small business environment. I thank you 10