Issue 9 February - May 2002

Soon after South Africa’s first democratic elections in 1994, consensus was reached by the South African government on the need to generate wealth and create employment through the development of a strong small, medium and micro enterprise (SMME) sector. Once the decision was taken to promote and support the development of SMMEs, a structure had to be put in place to facilitate implementation.
No off-the-shelf blueprint existed, so extensive research had to be conducted into SMME support organisations throughout the world to find a system that could best be adapted to suit the South African environment, and the dynamics that drive it. What resulted was an amalgamation of the most suitable elements from various international models—making the SMME support structure developed in South Africa one of the most advanced in the world. NAMAC Trust, an agency of the DTI (Department of Trade and Industry), was given the mandate of implementing certain aspects of government’s SMME policies and programmes.
Natalie Uhlarz spoke to Malcolm Boyd, CEO of NAMAC Trust, Johann Geldenhuys, NAMAC’s business manager, and Shawn Cunningham, a NAMAC Project Leader, to gain insight into the organisation’s strategy, its products and the benefits it can offer to SADC.

Please give a brief overview of NAMAC’s structure and objectives.
To best understand NAMAC’s role, the Government’s entire SMME development model should first be described.

At the top of the structure is Parliament, whose role is to make policy decisions that create the right political climate for the promotion of SMME development. The second tier of the integration model is the DTI, whose function it is to develop a strategy to support small business development. The DTI is required to muster the necessary resources, mainly financial, give political support, and manage the strategy at a high level to ensure that all plans are implemented and properly carried out.

Next is the partnership level consisting of donors and specialist service providers such as Ntsika, the CSIR and the NPI (National Productivity Institute). These organisations design programmes in line with the DTI’s strategic plan and manage them. NAMAC implements the plan through set structures.

With regard to our objectives, there is currently over a million informal, survivalist type businesses operating in South Africa. The ideal would be to grow these informal businesses into very small enterprises and provide the necessary support and information systems for entrepreneurs wishing to form their own businesses. We have a population of 48 million, of which approximately 40 million are economically inactive. These figures do not look good, but either we can choose to despair at the situation or we can become excited about the part we can play in creating a solution.

The first step in a long process is job retention. When a job is lost in South Africa, approximately 15 to 23 people in the worker’s extended family are affected. Before we can create jobs however, we first need to stabilise businesses. Statistics show that 80% of new businesses fail within their first two years as a result of poor yield management, low productivity, long process flows, old plant equipment, etc. The MAC Programme addresses these issues.

What is the MAC Programme?
Manufacturing Advisory Centres, or MACs, are proactive outreach programmes that provide hands-on advice and support to SMMEs in the manufacturing sector. MAC improvement advisors visit SMMEs and conduct diagnostic surveys, which allow them to identify opportunities for the business and formulate solutions. The industrial advisor then looks for at least three service providers who can deliver services to the SMME. The SMME owner weighs up the options and decides which one to use. The MAC Programme brokers the deal for the service provision and manages the project to its conclusion.

We have also set up a Small Enterprise Development Fund (SEDF). Measured against a five-step checklist, the fund offers access to up to 90% of the costs incurred in the process of developing an enterprise. For example, if an ISO accreditation to the value of R50 000 is required, our expenses would be absorbed, the SMME would be requested to contribute R5 000, and we would access R45 000 from the SEDF fund. As a result, the SMME could very well end up with R100 000’s worth of consulting fees for a R5 000 outlay. Additional expenses would be charged for according to a regressive scale of first 90%, and then 65%, of the fee.

The MAC Programme is currently working with just over 2 000 small businesses. Initially the model was tested in Durban and Port Elizabeth, and through the businesses it targeted, helped retain over 20 000 jobs and create just under 1 000 new ones. Additional indicators of its success are the increased figures for the production of good quality, saleable products, a reduction of yield management, and the acquisition of substantial export contracts.

By hosting network and linkages evenings, MAC promotes the establishment of partnerships. This is becoming increasingly important with the opening up of global markets. Manufacturing companies must concentrate less on competing locally, and shift their focus to increasing their capacity to supply larger markets.

MAC has also become the front end in South Africa for the World Bank’s Sector Partnership Fund. The MAC Programme helps SMMEs develop quality standards and operational methodologies which make them attractive to overseas companies looking for local partners.

What is BRAIN?
The Business Referral and Information Network Programme (BRAIN) offer assistance through local business support centres to aspiring entrepreneurs in all sectors. The first step is to ascertain whether the individual in question has the potential to make it in the business world. If so, we can help him or her develop a business plan. Business plans have many parts, but should always begin with a marketing plan, which should answer the following questions:
- Who will the products and services be sold to?
- Where are these people?
- How much are they prepared to pay?
- What quality will they expect?
- What attributes are they looking for?

Once the marketing plan is in place, the financial plan can be compiled through which an analysis is made. For example, “To meet market demand I have to produce 10 000 units a week. To make that quantity I need 5 machines and 25 trained people. Therefore, how am I going to finance the machines and where do I find premises? How do I get the manufactured goods to the customers? How do I finance the entire operation?” Once these questions have been answered, the entrepreneur moves on to the capacity plan. This examines human resource requirements and the training required before work can begin. It is usually costly to hire a consultant, but BRAIN offers the information free of charge.

Information and assistance can be obtained through the three pillars of BRAIN, namely:

1. National Affiliated Members
In order to bring the services to all communities in South Africa, the Programme has affiliated existing business support centres across the country, such as Chambers of Commerce. Centre personnel are trained to use the BRAIN information resources, and empowered to deliver an enhanced service to clients in their communities.
2. The BRAIN Website
Consisting of more than 250 pages and 1 300 hyperlinks, the BRAIN Web site offers access to vital business information such as how to formulate a business plan or a marketing strategy, etc. This resource is available to anyone at http://www.brain.org.za
3. The National Information Centre
Staffed by business information consultants with access to vast information resources, the centre processes queries received by phone, fax, e-mail, post and walk in. All inquiries are captured on a database and follow-up calls are made to ensure that clients have received the correct information.

What is your development strategy into the SADC region?
We would like to offer our basic structure for implementation to countries in the SADC region. We plan to expand into the SADC region by mid-2003 after having achieved our targets for South Africa. If a country requires SMME support, we would offer them access to our expertise and assist them to appoint and train local people. We believe that it is imperative that local stakeholders should have control over the process and that local cultures be respected. Involvement by the government and local government offices would also be vital in determining policies. Our job would be to set up the delivery structures and not to deliver the actual services.

Our approach is never prescriptive and must be an alignment of the top down and bottom up approaches. We have to match demand with supply, and therefore we must enter into consultation with all stakeholders, namely provincial governments, tertiary institutions, universities and technicons, business chambers, labour movements, etc to ascertain how the MAC and BRAIN Programmes can best be adapted to fit their own overall strategies.

Why SMMEs?
The worldwide trend is for employment to shift towards the SMME sector. In South Africa at present, between 60 and 70% of new employment is being created by SMMEs. Many people have the wrong impression about the revenue-generating potential of the SMME sector, and would probably be surprised to learn that many of the country’s multi-million Rand companies employ fewer than 25 people. Companies employing 25–50 staff members are considered to be small enterprises, and 50–100 employees constitute a medium-sized enterprise. Mark Shuttleworth’s Thawte Consulting, for instance, is a good example of a very small enterprise (when Verisign acquired it).

Most start-up SMMEs complains about restricted access to financing. Can you provide assistance or advice in this regard?
We can point people in the right direction. If they work with one of our centres, a NAMAC representative might even go with them to see a bank manager if necessary, but we do not provide finance.

The first thing one needs to realise when looking for finance is that no-one in the world will finance an idea. The idea must first be implemented to prove that it works, and the entrepreneur or company will have to find the money to do this. Only when it has been proved that the concept or formula works, will investors be found. The magical figure for new finance into business is 50–50. This means that you have to put down 50% of your own money before anyone will consider investing in your business. Unfortunately there are no shortcuts. If an entrepreneur is not sufficiently convinced about the viability of its business and is not prepared to put down 50%, no one else will. This is the acid test. However, once this milestone has been passed, it becomes easier to get money. The World Bank has released an interesting report that shows the majority of successful businesses survived the first three to five years on personal savings. Only thereafter did they obtain funding.

Many small companies cite their biggest challenge as funding. Our research, however, indicates that funding only accounts for 24% of the overall problems experienced by start-up SMMEs. The biggest problem is marketing, which accounts for 32% of the pie. The United Nations and the World Bank confirmed this in a recent report. In addition, more significant for start-ups than a lack of funding is cash flow problems. This arises from the fact that they have to pay suppliers cash-on-delivery (COD), but give their own clients 30 days to pay. This imbalance can be controlled by using different strategies, including marketing plans and innovative ways of offering products and services.

Interestingly enough, we have often seen that early allocation of funding is detrimental to a start-up company because the proprietor is under immense pressure to make that money work. As a result, he or she does not take the time to put correct long-term strategies in place.

Are there any “secrets to success”?
A strong network of stakeholders is vital. South Africans must begin to realise that they do not have to do everything themselves. Let’s say, for example, that you want to start manufacturing cups, but in your area there are already five factories that can make cups, and they all run at less than 50% capacity. There is no reason to set up another factory. It is better to approach the existing factories, get them to sign secrecy agreements, and contract them to manufacture your cups for you. This way you can concentrate on selling them.

Entrepreneurs believe they have to own a resource in order to manage it, which is one of the biggest challenges we face. On the contrary, our view is that you have to manage the resource and don’t have to own it. When someone else owns the resource, it is their responsibility to upgrade it, etc. The BRAIN Programme operates on this principle: approximately 80% of the information we provide to clients does not belong to us. It is on other people’s Web sites, which they maintain—we just buy access to it. The secret lies in creating the right networks.

How do you get ahead if you are an operations-orientated and not necessarily a marketing person?
Again the right partnerships are vital. Linkages must be formed with people who are prepared to deliver services at reasonable prices and decent quality. It is not necessary to have the services in-house, and in fact it would probably kill the business if it did employ people to provide the services! It is essential to have access to networks of reputable service suppliers who work with the business. Chambers of commerce are the best places to find such partners.

Can you assist organisations with information on how they can maximise the opportunities offered by trade agreements such as the African Growth and Opportunity Act (AGOA)?
We are not trade agreement specialists but we know people who are and can refer them.

The AGOA is not an easy one. There are a lot of forms to process and administration to attend to, so there may be minimal administration costs involved. Non-trade barriers still exist between the United States and Africa. The US is an island when it comes to standards, and they do not use ISO standards nor the SIC codes used here for categorising commodities. SABS specifications are not compliant in the US. Classification must be according to their codes and standards, and understanding them is not always easy.

How is NAMAC funded?
NAMAC’s financial structure is as follows:
l 30% from the DTI (a memorandum of understanding was signed which provides a 10-year window)
l 30% donor funding
l 30% local and provincial government funding
l 10% is currently own revenue generation.

As businesses grow it is anticipated that this segment will also grow. The maximum obtained globally from own revenue generation in similar programmes is 25%. Local and provincial support should also increase in time, and as this happens, the DTI’s contribution will reduce.

NORAD initially funded the BRAIN Programme, and has now fulfilled its obligations. Currently BRAIN is funded 100% by the DTI. We are negotiating with other donor agencies in this regard. The donor window is very strong, but we know that it is closing for South Africa. It is, however, opening up for SADC and that ties in perfectly with our expansion strategy.

For further information contact:
Johann Geldenhuys on telephone: +27 12 349 0100