BBBEE Commission releases study on improving ESD

Study on improving ESD

Yugen PillayThe need for investment and facilitation in assisting SMMEs with pre-investment and post-investment support, is growing, says National Director – Business Consulting, ESG and Energy & Natural Resources, Yugen Pillay. Commenting on the enterprise and supplier development (ESD) research report released last month by the Commission for Broad-Based Black Economic Empowerment (BBBEE Commission), he said one of our key focuses as a country should be on the transitioning from traditional finance to development finance, and the enablement of such funds.

The report looks at how ESD funds can be effectively implemented for the purposes of promoting the development and growth of black-owned businesses.

“The report is very informative and is spot on in terms of some of the key challenges faced by organisations and SMMEs in the space. One of the major challenges we are seeing in today’s times is the availability of quality in the SMME pipeline. On the one hand many SMMEs are unable to access grants or loans with some of the reasons being compliance and accounting issues, or basic business plan development. On the other hand, we have organisations who have funds but are unable to disburse them effectively,” said Pillay.

Mohamed MajapaMohamed Majapa, Managing Partner of Bora Growth, said the report shows an increased focus towards improving the quality of support offered by ESD Programmes. “It’s still a long way to go, especially as most of the corporates are still treating these interventions as ‘programmes’. There is little evidence of long term impact on SMMEs beyond the cushions of these supports,” he said. “Moreover, there seems to be a critical lack of Monitoring and Evaluation designed to assess the true nature of operational improvements made by beneficiaries. Since most of the impact reported focuses on spend metrics, revenue and jobs created, it would be ideal to also monitor how these SMMEs are guided towards scalable operational efficiency. They need to survive longer beyond the timelines of such interventions

Elmarie GoosenElmarie Goosen, ESD Director, Smart Procurement, explained that the purpose of ESD is to identify the gaps or constraints for the suppliers in scaling up in order to provide ESD support that allows them to develop. The most common obstacle highlighted in the research is that the beneficiaries are not ready to scale up yet – most ESD strategies were found to mostly include monetary support by means of grant contributions (45% of entities). An equal portion of entities (34% respectively) was found to include mentoring programmes and the early payment of suppliers as part of their ESO strategy.

“This support does not address the needs of SMMEs as the research highlighted that beneficiaries were not ready to scale up their businesses due to a lack of proper financial systems, strong financial management structures, sound business plans and governance structures,” she said. “This challenge highlights the need for ESO strategies to provide support in this regard so that these companies can start operating competitively and productively in a sustainable way.”

She believes there is therefore clearly a need, from both policy and operational perspectives, to revisit and revitalise ESD through innovative approaches, informed by the true needs of SMMEs. Support should move away from the standard support approach to one that works in collaboration with the business owner to identify needs and gaps to make the most of grants and other support on offer. More emphasis should be given to providing access to specialist consulting and support to improve operational efficiency, reduce waste and develop the holistic wellbeing of the owner, staff and company.

“If training is offered it should be provided to the most appropriate staff member in the company and not just the owner. It makes no sense to train the director in sales and not his sales staff. Funding should be made available to procure professional services to design and implement solutions, such as business plans or financial systems,” she said. “ESD could also be more targeted within an ecosystem. For instance, support to an existing supplier can be enhanced by spending ED funds to support and develop their suppliers too.”

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Here follows an article on the report, first published by Creamer Media’s Engineering News.

The research, which benchmarks South Africa with international experience, asserts that, if ESD is implemented more strategically, it can make an effective contribution to the sustainability of black-owned enterprises in particular, and to their skills and innovation capacity, and create decent jobs.

The study contains findings on the performance of measured entities on ESD spending, and recommends improvements which the commission will discuss further with the Department of Trade, Industry and Competition and other stakeholders in government and the economy.

The research validated government’s policy of promoting small and medium-sized enterprises through targeted support, as well as ESD as a tool for this purpose, against international experience.

“The issues highlighted by the study include the need of many measured entities for assistance to comply with BBBEE legislation and correctly implement the ESD element,” said the Commission.

“Further, there is misalignment between preferences for one form of contribution to ESD, mainly financial support, such as grants, early payment to suppliers, and the requirements of beneficiary enterprises for support with, among others, operational effectiveness, market penetration and sustainability.

“Also, the research highlights that sometimes beneficiaries are unready to scale up their businesses owing to lack of strong financial management structures, sound business plans and governance structures, which indicates the need for ESD strategies to provide additional support so that smaller companies can operate competitively, productively and sustainably.”

The study reveals that the quantum of resources available for ESD is significant, with reported budget categories ranging from R101 000 to R999 999; R1-million to R5-million; and R21-million or more. The bulk was in the R1-million to R5-million range, with the overall total for 2021 being in the region of R26-billion.

However, the study also found that, in 2021, only 61% of the funds allocated to ESD were implemented, which is a continuing trend over the past five years, with 44% in 2017, 60% in 2018, 51% in 2019 and 61% in 2020.

“The study puts the spotlight on critical issues that require attention in the ongoing implementation of BBBEE, and which should be on the policy agenda of government and on the compliance agenda of private and public sector entities,” says Commissioner Tshediso Matona.

“For example, the survey results show that only 62% of participating entities confirmed having ESD strategies, most of which operate in the property, construction and financial services sectors. This suggests the prevalence of ad-hoc approaches to implementing ESD, which reduces the intended impact of ESD as B-BBEE lever,” he notes.

Further, in addition to recommending that measured entities should develop a long-term approach to ESD and for senior managers to commit to its realisation, the study also recommends the reinforcement of government’s commitment to BBBEE and the implementation of ESD.

The study also highlights the need for collaboration between measured entities and the BBBEE Commission towards the empowerment of exempted microenterprises and qualifying small enterprises through improved implementation of ESD funds.

The research study assessed the abilities of measured entities to implement the portion of funds allocated for ESD, as required by the BBBEE Codes of Good Practice, which sets the targeted ESD spend at 3% of net profit after tax for ESD, as well as challenges and opportunities in this regard.

By Schalk Burger
Creamer Media Senior Contributing Editor

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