By Sid Boubekeur
For decades, a combination of governments and development organisations in Africa have responded to calls to assist small and medium sized businesses (SMEs) by launching an array of training and capacity building projects. These, while often useful, did not always generate the expected results and, in the vast majority of cases, frustrated the small enterprises.
For many years, the major problem voiced by SMEs has been the lack of access to credit finance, or subsidies, that would have alleviated their financial burdens. These requests did not receive the attention they deserved. And even when projects focused on access to finance were developed, SMEs have had no guarantee of getting funding.
Ironically, it has taken the COVID-19 pandemic to prompt governments and development banks to inject direct funding into SMEs. African governments reacted quickly to the crisis, in order to limit its negative impacts on the economy and the population. Actions to assist SMEs have focused on the need to reduce their financial burden, in a bid to lower the risk of a series of bankruptcies and the resultant increase in numbers of unemployed people.
African states that ultimately succeed in building dynamic private sectors will be those that can maintain the measures currently offered to SMEs within the framework of COVID-19. This would build a network of SMEs able to focus on their operations and on value chain development.
In short, the pandemic is teaching us to listen more closely to the needs of small businesses.
The current health crisis which has affected nearly all nations around the globe requires urgent solutions. This article shows how African governments, driven by a major event, were able to react very quickly to limit the negative impacts of this health crisis on the economy and the population. Paradoxically, the measures taken recently have been demanded for decades by the private sector, without success and, international aid agencies, which had been calling for similar solutions, responded with studies and training of SMEs, while African entrepreneurs which had for many years pointed out that financing is their major problem were largely ignored.
1. Limit of the conservative approach to development
As some recent macro-economic studies published recently by Africa Union Commission (AUC), the World Bank (WB) and International Monetary Fund (IMF) focused on the impact of COVID 19 on Africa economies, other sector studies determined the impact of COVID 19, and identified the challenges faced by businesses during this difficult period. To the extent that macro-economic studies can influence governments to adapt their monetary and fiscal policies and to improve their business environment, sector studies are simple observations, focusing on the difficulties experienced by companies before the onset of COVID-19. Consequently, sector studies do not offer any guidance on designing comprehensive emergency measures for businesses, at best they lead to capacity building actions for companies.
Undoubtedly, strengthening the capacity of companies in the field of management, financing, operations and marketing is not only desirable, but often times necessary. But the important question is, how many SMEs that have been formed over decades, and have improved performance, allowing them to play a greater role in the value chain, thus being able to access new markets, modernize and sustain their investment? Moreover, how many SMEs became globally competitive and have a been integrated in outsourcing activities offered by larger companies? In reality, capacity building solutions applied during the past decades have led to very modest results and frustrated many SMEs.
At a personal level, my whole career has involved designing and implementing capacity building initiatives for SMEs. It was at the end of my mandate as Head of the Centre for the Development of Enterprise (CDE) Regional Office for Southern Africa that I became aware of the obsolescence of this approach. On the occasion of my farewell in April 2016, an entrepreneur we had supported for three years in the field of management, operations and marketing of his products, and who had become a reference for the other companies that we assisted remarked, “Your organization has done a great job. In your own words, our company is now stronger, thanks to the various training courses we have benefited from. What do we do now?” His response was shocking to me. At that point, I understood that we did not meet his needs, and that we indirectly circumvented them.
I also recall the reaction of an entrepreneur who ran a manufacturing company offering marula products with export potential. We offered him a training seminar on standards and certification of products. The training was 10 days. Surprised by the duration of training, he told me ”You think that I can leave my business all this time, when I have to be in the workshop permanently to follow the production, and to go after customers who are late in paying”.
In the final analysis, I understood that the major challenge for them was the question of financing. It is this experience that led me to consider the importance of SME financing first, and to reflect on a facility combining loans with technical assistance, exclusively geared towards coaching the manager and senior staff.
2. SMEs financing is at the heart of the problem
Managers are seriously concerned about the long-term impacts of COVID-19 and worry about the survival of their businesses. Presently, the most important issue faced by SMEs in Africa is the lack of cash reserves and cash flow to survive in the next couple of months. This affects the operations and distribution of their products seriously. However, the question of cash flow is not new because the condition existed before COVID-19. The current crisis amplifies an ongoing problem experienced by SMEs regularly, and weakens them even more. To a large extent, this explains why so many businesses are closing.
Companies that will survive through the crisis will be those taking advantages of Government financial package for shifting their business model towards innovative products and niche markets. Strong support needs to be provided to companies which have implemented good practices in financial management and institute measures to reduce operating costs, while maintaining core staff. Complementary actions that could be undertaken by companies include, among others, selling some fixed assets in order to generate cash, reducing customer payment terms and negotiating with the concerned creditors for deferral of some expenses (rent, utilities, taxes…). This needs to be supported by innovative and aggressive marketing campaigns for securing existing and additional clients. Ultimately, the company should be able to develop a credible business plan that indicates a clear vision and a roadmap for dealing with the crisis. It is under these conditions that capital could be released in the form of Government grant/subsidy combined with short-term loan (s) from the banks, backed by Government guarantee.
3. Emergency responses to SMEs financing
The countries that have reacted most effectively to the COVID-19 crisis are those that have understood the real needs of businesses and have responded by putting in place emergency action plans, that include injection of funds and other incentives such as tax deferral. The IMF has confirmed that the majority of sub-Sahara countries took actions for limiting the economic and social impact of COVID-19. Key policy responses were provided at fiscal, monetary and financial levels.
The objective of this article is not to compare the measures taken by all countries. I will introduce the case of Botswana as it appears to be one of the countries which went furthest in developing measures aimed at providing support to SMEs. More specifically, Botswana put in place a partnership arrangement with national finance institutions to share the financial risks of the businesses and called for innovative solutions in response to COVID-19. These measures are expected to decrease the financial stress on companies, thus allowing them to refocus on their operations.
On April 2, 2020, the Government of Botswana responded to the crisis by establishing a Pandemic Relief Fund of P 2 billion (approximately Euro 152 million), most of which intended to consolidate the activities of businesses as well as provision of working capital. Additional contribution towards this fund came from commercial banks and Corporates such as Debswana. The fund has five mains goals:
- Support to workers
A wage subsidy is provided for citizen employees from April to June 2020. It covers 50% of salaries/wages of affected companies. This operation is managed by the Botswana Unified Revenue Services (BURS) which developed the ‘’wage subsidy guidelines’’, which informs potential applicants about the eligibility criteria and the documents to be submitted in order to benefit from the subsidy. A team dedicated to managing this process and to guide the applicants who need clarification for preparing their application has been put in place. Parastatal organisations and companies working directly with Government are excluded for transparency reasons.
- Financial support for businesses for consolidating their activities A loan guarantee financed by Government (80%) and commercial banks (20%) has been put in place. The guarantee covers up to a maximum amount of Pula 25 million (approximately Euro 1, 9 million) per company and has a duration of 24 months duration. The leading agency managing this action is the Botswana Export Credit Insurance (BECI). In addition, companies could benefit from tax deferral of up to 75% for a period of two quarters starting from March 2020 and ending March 2021. Finally, Government reduced the duration of Value Added Tax (VAT) refunds to 21 days instead of 60 days and eliminated training levy to be paid by companies for 6 months. Within the framework of the diversification of the economy, priority is put on companies active in horticulture, livestock and dairy value chains and supplying the local market.
- Partnering with financial institutions
Appropriate measures were taken for reducing bank interest rates, providing cash-flow relief and loan repayment holidays of three months without penalty, and for encouraging banks to provide additional loans to businesses in financial destress in light of the government guarantee. The National Development Bank (NDB) is the lead institution in the implementation of these measures.
The Citizen Empowerment Development Agency (CEDA) which specializes in SMEs financing is another focal point. This Development Finance Institution provides short-term financing including working capital and restructured loans to its clients. It is waiving interest payments for 12 months. The objective is to allow companies to continue their operational activities without the burden of funding. CEDA has provided very comprehensive documents and guidelines to its clients for benefitting from this facility.
- Ease of doing business
The Government has committed to paying purchase orders within 5 days and to pay outstanding invoices in 2 weeks. Parastatals companies are instructed to pay purchase orders within 24 hours. The procurement processes have been simplified. SMEs are encouraged to use digital methods for payment of their expenses. The net impact of these measures is to increase liquidity in the economy.
- Call for innovative solutions
The Botswana Innovation Hub (BIH) launched a call for interest for solution to address COVID-19 challenges. Eligible applicants are SMEs, youth entrepreneurs, App developers, traditional knowledge holders and NGOs. The solutions to be proposed by the applicants are to cover the following:
- Health care systems using digital method (e.g. health surveillance, tracing, model test kits accreditation)
- Public services delivery (e.g. digital education, e-government systems)
- Transport (e.g. payment, tracking)
- Logistics and value chains (e.g. food, fresh produce…)
It is interesting to note that Botswana and many other African countries are now encouraging businesses in healthcare and logistics sectors, which are usually operated by foreign investors.
In summary, Botswana is offering this comprehensive package to contain the negative impact of COVID-19, thereby avoiding massive business closure. By reducing financial obligations (tax, credit) and salary costs, the Government aims to allow companies to preserve their cash flow in order to sustain their business activities. But it is only in a few months that we will appreciate if the measures taken by this country and by all African ones have been effectively implemented and have had a positive impact for SMEs.
4. National vs regional value chains
The SMEs which will benefit from this Governments assistance must be integrated into a value chain which offers them the opportunity to expand their businesses. The burning question is: What type of value chain? National or regional)?
The current crisis compels Africa countries to refocus on the development of national value chains, by prioritizing short circuits, with less intermediaries bringing the producers closer to the clients. ‘’Agrocenta’’ a company in Ghana has successfully connected small scale farmers to large buyers effectively bypassing middlemen and brokers and creating a system that provides the small-scale farmers with access to much needed financial services through access to microloans and insurance for crop protection. An innovative supply chain management platform named ‘’Twiga Foods’’company in Kenya guarantees market for farmers by aggregating orders from vendors made via mobile phones in urban centres which drives sourcing of produce from farmers in rural areas. Their distribution chain is supported by a network of collection centres and logistics providers who collect produce and deliver to vendors. These national platforms have utilized successful models that could be up-scaled regionally.
In other words, the growth of SMEs will determine their integration into regional value chains. This is why it is important to strengthen the national value chains taking in consideration the experiences, lessons learned, and best practices implemented in business development, investment promotion and trade.
The continent is full of success stories in the field of entrepreneurship and has seen the birth of many business leaders, some of whom are playing the role of mentors of SMEs and start-ups. Due to their network, business leaders from each country could be seen as the driver of the value chain development. In addition, Tech-Labs, Innovation Centres, accelerators supporting women and youth entrepreneurship could contribute actively to the emergence of innovative projects meeting the needs of the population.
Governments and Development Finance Institutions (DFIs) and commercial banks need to sustain their alliances established during COVID-19 and continue to support SMEs for at least 3 years, allowing them to regain their competitiveness, increase their investment and play a greater role in the value chains. Specific attention should be paid by this alliance to existing and new businesses using innovative solutions, respecting the environment, generating employment and ensuring social protection. Business Development Organisations could also play a key role in this alliance by providing efficient support and services to businesses, particularly in search of market niches.
African states able to build a dynamic private sector are those that can maintain the measures offered to SMEs within the framework of COVID 19. It is therefore important to concurrently work on post COVID-19 strategies in order to sustaining the businesses that would have survived at the crisis.
In conclusion, the author posits that a partnership between the Governments of African countries, financial institutions and the private sector, supported by Business Development Organizations and by technical support institutions (Tech-Labs, innovations centers, accelerators..) is the way to go in order to sustain the socio-economic development architecture. This has always been the mantra of African businesses, which has for long been largely ignored by decision-makers. COVID-19 is teaching us that it is now time to listen to and respond to the needs of these businesses.
*Sid Boubekeur is an economist with 30 years practice in leading trade and private sector programmes in Africa.The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the organisations with which he has worked.