EU Risk Capital Facility - Helping SMEs Create Jobs in South Africa
Joblessness is a longstanding challenge for South Africa where the unemployment rate is 26% - officially. Off the record it’s closer to 40%, according to Milly Chesire at the EU Delegation in Pretoria, and hits 70% among historically disadvantaged persons (HDPs). This group is made up of black South Africans, women and people with disabilities, and it is these people the EU is helping the South African government to reach with funding for small and medium-sized enterprises via the Risk Capital Facility. Capacity4dev visited Americandy, a confectionary business in Johannesburg, to see how it works.
|Americandy's Big Bom lollipops|
South African husband and wife team Hamint and Sunita Daya had a successful business importing Big Bom lollipops from Colombia. But when the Colombian government introduced subsidies encouraging sugar cane producers to make ethanol, the Dayas’ partner C.I. Dulces La Americana had a shortage of its key raw ingredient. And what lollipops they could send, the Dayas sometimes found challenging to import due to congestion at Durban harbour, and a fluctuating exchange rate. So the Dayas and their Colombian counterpart Eduardo Jaramillo Acosta decided to set up a manufacturing plant in South Africa: Americandy.
Mr Acosta agreed to ship one of his lollipop production lines from Bogota to Johannesburg, along with technical staff to train a local production team for three months. But they needed capital. Although the new business had experienced directors, valuable equipment, a proven demand for the sweets and a distribution network set up, they were not attractive to bank loan officers.
“A bank is in business to loan money – they will ask for guarantees, and they wouldn’t accept specialised equipment like our production line [worth around R7 million, or €480,000] as collateral,” explained Hamint Daya, Director at Americandy. “What would they do with it? They can’t just auction it like a house or a car.”
So Americandy approached IDC, the Industrial Development Corporation, which manages South Africa’s national Risk Capital Facility. This is a programme launched in 2002 by the South African government which received €88 million in budget support from the EU. It provides equity, quasi-equity and subordinated loans to SMEs, as well as business support and low or interest-free loans for technical assistance and training.
|At Americandy's Johannesburg factory|
“The risk capital facility is one of the EU flagship programmes in South Africa,” said Ms Chesire, who works on infrastructure investment and private sector development at the EU Delegation to South Africa. “One of the key challenges we identified in terms of economic growth and job creation was lack of access to funding for entrepreneurs – particularly those coming from previously disadvantaged backgrounds. When they go to banks to access funding for their businesses, most of the banks would say no – because they have no collateral, no track record, and they are considered quite risky. So the EU set up this Risk Capital Facility of €88 million to address the market failure of lack of access to funding for SMEs.”
“When we went to IDC for help, they took a chance on us,” said Mr Daya. “Our business plan was a projected plan based on what we were selling [from our import business], not on any actual production. In 2013, with all the training of staff, the amount of production wasn’t what we expected based on the plan, but the next year the business increased, and we were able to do what we set out to do. And now, we can’t keep up with demand, and we have to expand!”
Americandy has installed a second production line from Bogota and is planning to purchase a third line from European firms Bosch and GEA to operate alongside their original lines from Bogota. It will increase their production capacity threefold, and allow them to make all twelve of their sweet flavours in three days. “We’ve got customers phoning us and we can do nothing about it as we don’t have the production,” said Sunita Daya, Financial Director at Americandy. “When the new machines come in, we would most probably be making more than 120,000 cartons [of lollipops each month], and we have customers that will demand it all, 100%.”
When the factory opened in 2013 there were 52 staff receiving training from 10 workers from the Colombian sweet factory. By 2016 they were employing 83 people, and by early 2017 a further 55 jobs were created to support the second production line. When the third line is installed, Americandy expects to expand to over 250 staff.
Sunita Daya gave Capacity4dev a tour of the factory:
Currently about 95% of the staff come from the coastal Kwa-Zulu Natal province, according to Mr Daya. “For the first three months they lived in the factory, and we provided their food,” said Mr Daya. “As time went by they started looking for rentals and they’ve all moved out.”
Some are now buying a car in instalments, while others are using their savings for home improvements. “We taught them how to save,” said Mrs Daya. “At the end of the year, they were saving up to 15,000 rand [€1,035], plus a bonus, and for their families in rural areas it was a big deal. One man expanded his family’s house, and told his grandmother: I’ve built you three rooms, now rent them out and earn money from them. So people are learning to think on that level.”
|Sunita & Hamint Daya on the factory floor|
Americandy is also supporting two staff members through university, one to study health and environmental safety, the other engineering. “We funded their studies, and they’ll have a job with us waiting when they finish,” said Mrs Daya. “One man started as a production operator, and he’ll come back as an engineer.”
“When you see someone showing potential and wanting to learn more, you take them in and support them, and they have been brilliant. One of our staff came up with an improvement to a machine – he’s not an engineer or technician, but he’s working with it every day, so we said, let’s try it,” said Mrs Daya. “It worked brilliantly. That’s what motivates people.”
Risk Capital Facility
So far the Risk Capital Facility has supported 182 enterprises and helped to create around 17,000 jobs. It aims to see at least 30% of jobs created going to women, and 30% of shareholders to be black South Africans, and is exceeding both targets.
The Facility is designed to play a catalytic role and enable more risk-averse investors to lend their support to start-ups. “Sometimes there are contributions from commercial banks and other financial institutions, and in this case we can utilise the Facility to assist entrepreneurs on their contribution shortfalls,” said Siyabonga Mahlangu, Account Manager at IDC.
Americandy ended up meeting all its financing requirements through IDC. “This is one exemplary project that we’ve supported,” said Mr Mahlangu. “They are up to date in terms of repayment. The Facility is due to come to an end in February, and it’s really impressive the way that it has performed.”
“Our role is to provide facilities that are as patient as possible to entrepreneurs,” said Mr Mahlangu. The Facility used to ask for a 10% return after tax, but found that SMEs struggled, so lowered its rates to 3% before tax. This is much less than commercial banks’ rates, and is also cheaper than the rate normally offered by development finance institutions such as IDC, which is about 11% after tax, according to Mr Mahlangu. “Over the years we’ve reviewed the Facility and we’ve dropped the rates; we don’t just go for this one bullet return requirement, we say, let’s get the minimum, and if the business does happen to do well, then we also participate in the upside.”
This is typically a percentage of the net profit or revenue in the years when the business is profitable. “We would give the business a lower rate as an absolute return required (in this case typically a 3%) and then say the balance (targeting the 10%) will be recouped by way of upside,” explained Mr Mahlangu. For businesses which do not take off and cannot afford to make consistent payments, “we would structure a bullet payment at the end just to get to 3%. 3% is then the return we look for in a business that didn’t do well.”
|'Turning the pasta'|
“Our primary role is to help the guys at the beginning,” explained Mr Mahlangu. “We wouldn’t want reliance on the Risk Capital Facility forever – we can provide follow-on investment, but we would like to see the entrepreneur graduating to a commercial financing type of level.”
The Risk Capital Facility will run till the end of 2018, but should continue ‘revolving’ – the money made back from the first wave of start-ups will be reinvested in a new generation of enterprises. “Of course, it can only revolve for so long,” said Ms Chesire. “Given the fact we are supporting risky enterprises, there is a high write-off rate of about 30%, meaning you will receive 70% back so the nature of the facility has a finite timeline.”
The IDC may be able to continue the programme on its own, or with funding from other partners, according to Mr Mahlangu. “This was a Facility that was meant to [show IDC], OK, you’ve got this money, you can take risks, you can do deals that you wouldn’t ordinarily have done, but beyond that you would have learnt a thing or two and make sure that going forward you can actually do this type of deal on your own, or you could attract funding from other partners to continue with such a programme.”
The EU will also continue to support employment creation in South Africa, and has designed a new SMME (Small, Medium and Micro-sized Enterprises) Support programme to begin in 2017 worth €52 million.
The Clothing Bank
Besides financing through the Risk Capital Facility, the EU also supports South African non-profit organisations via a call for proposals under ‘Employment Creation’, one of the sectors in the country’s 2014-20 Multi-Annual Indicative Programme with the EU. One enterprise which has benefited is The Clothing Bank (TCB), which gives unemployed single mothers the skills to start their own businesses.
The project began in Cape Town in 2010 when Tracey Gilmore and Tracey Chambers saw an opportunity in the excess clothing stock generated by retailers such as Woolworths, Pick n Pay, Edcon, Mr Price and Clicks. These companies agreed to send their leftover clothing and other items to The Clothing Bank, where they are sorted, bought and sold on by women on a two-year Enterprise Development Training Programme.
The women learn business skills such as accounting, budgeting and marketing, as well as receiving mentoring on parenthood and relationships. Their goal is to earn R4,000 a month (€275), enough to feed, clothe and educate their children. Within a year of joining TCB, women on the programme reduced their debt levels by 63% on average, and many began to save. They also found that their children started to do better at school, benefiting from more stability at home. After graduation, the women have the skills to start their own businesses, and many establish micro-enterprises through TCB’s Micro Franchise Accelerator project.
In the following video Anthea Ridderhof, TCB Gauteng’s branch manager, gives Capacity4dev a tour of the facility and explains the model. Arno Schaefer, Head of Operations at the EU Delegation to South Africa, explains how it fits into the EU’s poverty eradication agenda; and Jeanette Sekole shares her experience of becoming a businesswoman through the programme:
The EU began supporting the Clothing Bank in April 2015 with €583,571 over two years.
TCB recruits around 300 women each year at branches in Cape Town, Midrand, Paarl, Durban and East London (South Africa).
How does this fit into the EU’s wider support for SMMEs?
The challenges associated with SMMEs, especially in partner countries, are well known to EU institutions. They can include a combination of:
- weak financial infrastructure
- lack of information systems capturing beneficiaries’ credit history
- lack of relevant risk assessment tools in the banking sector tailored to the specificities of this sector
- weak legal frameworks regarding protection of creditors’ rights
- gaps in registration of movable or immovable assets as collateral
This can mean a critical gap in access to finance for what is considered the most significant part of an economy in terms of number of companies, employment or contribution to a country's economic growth. The use of risk capital to provide access to equity and debt finance to SMMEs, and leveraging additional financing from financial institutions and the private sector, have been part of the EU's international development cooperation efforts for a number of years.
|Big Bom lollipop seller, Johannesburg|
From the establishment of the ACP Investment Facility in 2003 with €3.36 billion during its first 10 years to the launch of blending facilities in 2007, where another €2.7 billion of EU grants were combined with loans or equity from other public and private financiers, the EU has helped leverage additional public and private resources for development and sustainable economic growth as an instrument for reducing poverty. The allocations to blending operations have contributed to mobilising €23 billion from financial institutions, which supported 278 projects for a total budget of €50 billion.
In September 2015 the European Commission proposed an ambitious External Investment Plan to support investment in its partner countries in Africa and the European Neighbourhood, to strengthen its partnerships, and to promote a new model of private sector participation to contribute to achieving the Sustainable Development Goals. One of its main aims is to help reach those countries where investments are currently difficult and to facilitate investments by (private) actors that would otherwise invest less or not at all in these areas. With a focus on job creation, SMME needs are well recognised and integrated in this plan, which is based on the allocation of €3.35 billion from the EU budget and the European Development Fund, with an initial target of mobilising €44 billion of additional investment.