Murendi case shows how blanket anti-graft rules are hurting entrepreneurs
30 MAY 2021 - 17:35
We can only welcome the government’s determination to stamp out corruption, even if parts of the Covid-19 procurement plan seemed to slip through the still-rather-large holes in the net.
One unintended consequence of the anticorruption crusade is, however, causing serious problems for entrepreneurs seeking support from government investment incentives. The situation has surfaced with a disgruntled black-owned firm, Murendi Properties & Building Supplies, which was approved for a grant under the Black Industrialists Scheme, taking trade, industry & competition minister Ebrahim Patel to court for refusing to disburse the funds.
The Supreme Court of Appeal ruled against the minister, accepting the argument that Patel’s department wrongly concluded that the entrepreneur had failed to reach the eligibility criteria for incentive support worth R14.2m. It is a worrying situation when a set of rules is announced by the government, and an applicant for an incentive meets all the requirements, but is still refused support.
I see many applications for government incentives and I am disturbed to note that this is not an isolated case. Murendi had the resources to pursue legal action, but many other unsuccessful applicants don’t. The problem seems to arise partly from poor communication on the part of the department of trade, industry & competition, but probably also has its roots in the concern that corruption must be stamped out.
The department refusing to disburse the grant to an applicant has a knock-on effect for entrepreneurs who have factored the expected grant into their financial models.
The composition of several incentive schemes involves co-funding of projects. As most developmental finance institutions (DFIs) will place a cap of 55%-60% on equity or loan funding support, applicants will also need to put skin in the game and come up with their own funding of 40%-45%. This additional funding, which can take the form of a departmental incentive grant, is imperative to close the gap.
If the department withdraws the funding during the implementation of a project, this leads to severe unintended consequences. In most cases the project will no longer be commercially viable, because industrialists might have to also provide some form of security as part of the co-funding — using their own house or lifetime savings. When this occurs, the creation of a black industrialist can bite the dust.
It seems that in such instances grants and incentives are not helping where they should and must, due to a lack of trust. Good projects end up failing if the department withdraws support, and the momentum of transformation is halted as it is caught up in compliance issues.
Of course, there does need to be rigour and scrutiny, as the government’s incentive budget is tight and shrinking annually. However, the application process can be a minefield as an entrepreneur can get approval for an incentive and order factory equipment on that basis only to subsequently find that the rules have been changed, that he or she is no longer eligible for support, and the expected payment has evaporated.
A lack of communication can mean realising too late that the goalposts have shifted, the playing field has been tilted against the applicants, and through no fault of their own the entrepreneurs are left stranded.
There have been instances in which a five-day deadline has been given for the last-minute provision of paperwork, such as a BEE certificate, with the department seemingly oblivious to the difficulty of meeting such a deadline. Yet we also see that when issues that require urgent attention are raised by an applicant, they might not always get a reply. It can take months to get a response out of the government when speed is essential.
The department's decision-making should be open, transparent and coherent. If there are problems, sometimes no opportunity is offered to fix them. There is no discussion or dialogue. Hence the recent court case.
The Black Industrialists Scheme is intended to empower black businesses. Yet it seems that in some instances the government overlooks the big picture and actively seeks non-compliance, sabotaging its own incentive programme.
This problem is not just with the scheme. We have recently also seen deep frustration among filmmakers seeking government incentive support.
Problem-solving should be the top priority when things go wrong, and officials should not automatically assume corruption. There may have been confusion; an innocent mistake may have been made.
Because of the need to combat corruption, these incentive schemes can be complicated, placing many hurdles in the way of an applicant. To do things better, improved communication and a problem-solving attitude are required, rather than a bureaucratic response.
Our entrepreneurs deserve better from the government.
• Tshishivhiri is an assistant manager at Cova Advisory.