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How Public-Private Partnerships Can Make MSME Development Funds Work Better

By Jan de Kock, Head: Corporate Funds Management Origination

For all the weight South Africa places on Micro, Small, and Medium Enterprises as engines of employment and growth, their access to capital still falls well short of the role we expect them to play, which is why development finance has become such an important part of the attempt to close the gap.

Every rand channelled into development finance carries an expectation that it will translate into something tangible in the economy, and much of the outcome rests on the quality of the institution trusted to administer the fund, because developmental capital can only travel as far as the judgement behind each lending decision allows it to. There is therefore a strong case for placing more of that administration in the hands of private financial institutions already accustomed to making those judgements, with the regulatory discipline and portfolio experience required to manage capital at scale.

Private-sector administration can also shorten the distance between an approved mandate and money reaching the businesses it was intended for, because the lending infrastructure needed to govern and manage the disbursement of the funds already exists. Many MSMEs need help strengthening the business around the funding, and an administrator with established relationships can bring in specialist support without having to build that capability afresh for every fund. If the administrator can then show clearly how the portfolio is performing and what the funding is achieving, other investors have a firmer basis on which to commit capital, giving the fund room to grow beyond its original allocation.

To drive genuine, inclusive economic growth, South Africa should make greater use of experienced private-sector institutions to administer development funds, with the public sector setting the mandate and retaining oversight. This arguably gives the fund a better chance of reaching the businesses it was created to support while preserving the discipline needed to manage it responsibly over time.

Government’s role in this model is to be precise about what the fund is expected to achieve.

Transformation goals need to be clear, with development funding directed towards MSMEs capable of supporting economic growth and job creation, while priority sectors and measurable criteria give both parties something concrete against which to judge the outcome. Without that clarity, the exercise can too easily become one of compliance.

A clear governance structure is equally important, with accountability shared through a joint public-private oversight committee. Reporting should track both the financial performance of the fund and the social outcomes it is intended to support, while fund managers should hold the appropriate licences where required and operate in line with applicable conduct requirements, including Treating Customers Fairly principles. External audits should support the transparent and ethical allocation of funds, while government can coordinate with relevant state agencies where training or market access is needed alongside the financial support.

Those requirements undoubtedly place a fairly high bar on who should be trusted to administer a development fund in the first place.

Experience matters because the administrator has to understand the segment well enough to judge how businesses are likely to perform once funded, while maintaining enough discipline around the portfolio to show where the money went and the outcome achieved. The objective should be a portfolio whose developmental purpose can be demonstrated without allowing impairments or non-performing loans to erode the fund’s ability to keep lending.

Where the administrator is a bank, its existing relationships across the economy can become part of the value of the fund. A bank working with large corporates may be able to connect smaller businesses to real procurement opportunities, while its relationships with investors and Development Finance Institutions can open further sources of capital as those businesses grow. When appropriate, private sector fund administrators may co-lend with public sector Development Finance Institutions (DFIs). Where multiple buyers or offtakers are involved, the bank is also in a position to understand how money moves through the chain and where an MSME may have a genuine route into the market.

South Africa does not lack ambition when it comes to what MSMEs are expected to contribute to the economy. What it needs is a better way of giving developmental capital the best possible chance of surviving the distance between intention and outcome.
Entrusting the private sector with the management of development funds ensures that the country’s limited resources are directed toward innovation and competitiveness[Jd2.1]. Under this model, the government’s role would shift from direct administration to strategic oversight, regulation, and facilitation. This approach aims to leverage private-sector efficiency while ensuring steadfast alignment with national socio-economic transformation mandates.

Bringing public purpose together with institutions that already know how to deploy and manage money responsibly offers one way of closing some of that distance, and perhaps of getting more from the development capital already available before asking where the next rand will come from.

By Jan de Kock, Head: Corporate Funds Management Origination

For all the weight South Africa places on Micro, Small, and Medium Enterprises as engines of employment and growth, their access to capital still falls well short of the role we expect them to play, which is why development finance has become such an important part of the attempt to close the gap.

Every rand channelled into development finance carries an expectation that it will translate into something tangible in the economy, and much of the outcome rests on the quality of the institution trusted to administer the fund, because developmental capital can only travel as far as the judgement behind each lending decision allows it to. There is therefore a strong case for placing more of that administration in the hands of private financial institutions already accustomed to making those judgements, with the regulatory discipline and portfolio experience required to manage capital at scale.

Private-sector administration can also shorten the distance between an approved mandate and money reaching the businesses it was intended for, because the lending infrastructure needed to govern and manage the disbursement of the funds already exists. Many MSMEs need help strengthening the business around the funding, and an administrator with established relationships can bring in specialist support without having to build that capability afresh for every fund. If the administrator can then show clearly how the portfolio is performing and what the funding is achieving, other investors have a firmer basis on which to commit capital, giving the fund room to grow beyond its original allocation.

To drive genuine, inclusive economic growth, South Africa should make greater use of experienced private-sector institutions to administer development funds, with the public sector setting the mandate and retaining oversight. This arguably gives the fund a better chance of reaching the businesses it was created to support while preserving the discipline needed to manage it responsibly over time.

Government’s role in this model is to be precise about what the fund is expected to achieve.

Transformation goals need to be clear, with development funding directed towards MSMEs capable of supporting economic growth and job creation, while priority sectors and measurable criteria give both parties something concrete against which to judge the outcome. Without that clarity, the exercise can too easily become one of compliance.

A clear governance structure is equally important, with accountability shared through a joint public-private oversight committee. Reporting should track both the financial performance of the fund and the social outcomes it is intended to support, while fund managers should hold the appropriate licences where required and operate in line with applicable conduct requirements, including Treating Customers Fairly principles. External audits should support the transparent and ethical allocation of funds, while government can coordinate with relevant state agencies where training or market access is needed alongside the financial support.

Those requirements undoubtedly place a fairly high bar on who should be trusted to administer a development fund in the first place.

Experience matters because the administrator has to understand the segment well enough to judge how businesses are likely to perform once funded, while maintaining enough discipline around the portfolio to show where the money went and the outcome achieved. The objective should be a portfolio whose developmental purpose can be demonstrated without allowing impairments or non-performing loans to erode the fund’s ability to keep lending.

Where the administrator is a bank, its existing relationships across the economy can become part of the value of the fund. A bank working with large corporates may be able to connect smaller businesses to real procurement opportunities, while its relationships with investors and Development Finance Institutions can open further sources of capital as those businesses grow. When appropriate, private sector fund administrators may co-lend with public sector Development Finance Institutions (DFIs). Where multiple buyers or offtakers are involved, the bank is also in a position to understand how money moves through the chain and where an MSME may have a genuine route into the market.

South Africa does not lack ambition when it comes to what MSMEs are expected to contribute to the economy. What it needs is a better way of giving developmental capital the best possible chance of surviving the distance between intention and outcome.
Entrusting the private sector with the management of development funds ensures that the country’s limited resources are directed toward innovation and competitiveness[Jd2.1]. Under this model, the government’s role would shift from direct administration to strategic oversight, regulation, and facilitation. This approach aims to leverage private-sector efficiency while ensuring steadfast alignment with national socio-economic transformation mandates.

Bringing public purpose together with institutions that already know how to deploy and manage money responsibly offers one way of closing some of that distance, and perhaps of getting more from the development capital already available before asking where the next rand will come from.