What would it look like if 80% of your current enterprise and supplier development (ESD) budget were freed up for other projects, while your beneficiary still secured the full funding they needed? This was a question we posed to a team of ESD and procurement specialists at a recent engagement session, where we discussed some of the challenges in the current landscape.
The subject of the ESD landscape in South Africa has been placed front and centre with the Department of Trade, Industry and Competition’s (DTIC) proposal to introduce a centralised “Transformation Fund” – ostensibly to unlock more capital for small businesses in South Africa.
The effectiveness of ESD
Currently, organisations are rewarded on their B-BBEE scorecards for spending between 1% and 5% of net profit after tax (NPAT) on Black-owned businesses and suppliers.
This presents a significant investment when seen in the context of a low-growth economic environment that has been the hallmark of the domestic economy for over 10 years now.
While Minister Parks Tau has faced significant pushback around these proposals, it should be noted that there were already questions being asked about the effectiveness of ESD in South Africa.
The Gordon Institute of Business Science (GIBS) had been conducting research into the sector. Some of the high-level findings of this research included the comment that the ESD ecosystem had garnered something of a bad reputation.
Some of the core reasons for this included:
- Considerable leakage, with several intermediaries taking their cut along the way.
- Companies have a limited strategy to integrate ESD into their supply chains.
- Many of the programmes are short-term in nature – it is very difficult to just invest for the 12 months of a measurement period.
- Concerns that the R10m enterprise development (ED) and R50m beneficiary thresholds haven’t been reviewed since enterprise development and supplier development were introduced onto the scorecards in 2019.
- Many of the SMEs commented that sponsoring companies specifically want their ED beneficiaries to go on courses and offer business support (accounting, marketing, etc.), but provide very little in the way of direct financial support.
Funding vs support
During our engagement session, the last was a particular topic of debate with different stakeholders arguing for and against funding versus business support services.
While there is no question that there is value in basic financial systems, companies that are serious about supplier development need to invest in technical financial support that will ensure that these businesses stand on their own two feet and create long-term value for the owners, creating true transformation.
To emphasise this point, we showcased two real-world case studies that we had been involved in.
The first was for a mid-size downstream metals processor.
When we initially started work here, the company was in a liquidity crisis with a high dependency on a major mining house.
Over the next three years, the business was stabilised, margins improved, and the finances were restructured.
These developments saw nearly half a billion rand in blended funding – grants, loans, trade facilities – being unlocked.
The result: independence from its benefactor, a credible repayment profile, and strategic growth.
The second involved a major listed mining house and a Black industrialist project where the funder was facing a challenge: they had limited ESD budgets and the SME was highly dependent on them for viability.
Through structured technical financial interventions, we were able to secure over R60m in non-ESD funding for the beneficiary, and 82% of the corporation’s ESD budget was freed up to support other projects while the beneficiary accessed long-term growth capital – including a R50m Black industrialist facility.
We believe this dispels the notion that there is no growth capital for industrial and manufacturing businesses in South Africa.
To date, we have raised over R2.8bn in capital, with our most recent transactions averaging more than R120m each.
Growth journey
Here’s the catch. The amount of preparation needed to access capital depends on where a business is in its growth journey.
Some projects have required up to 5,000 hours of work to reach funding readiness and DTIC approval, while mature, well-structured businesses may complete the process in only a few weeks.
We have not only watched the comments around tools like the Transformation Fund, the Automotive Industry Transformation Fund (AITF), but also given input into the legislation and incentives.
One of our biggest pain points is people taking the R1bn number and asking whether we can find 1,000 entrepreneurs to give R1m to.
Socially, it might be well received to distribute R1m across 1000 entrepreneurs, but if we intend to rebuild the industrial base in South Africa, we need to be thinking in a completely different manner.
We alone have unlocked nearly R3bn in funding. Does this make us three times more impactful than a proposed Transformation Fund? Not in the least.
Rather, we have shown there is abundant capital in South Africa that doesn’t need to come from after-tax profits via ESD. To get this right, we need to reimagine the whole ecosystem.
