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An Exploratory Study into factors influencing an Enabling Environment for Social Enterprises in South Africa Copyright © International Labour Organization 2010 First published 2010 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office welcomes such applications. Libraries, institutions and other users registered with reproduction rights organizations may make copies in accordance with the licences issued to them for this purpose. Visit www.ifrro.org to find the reproduction rights organization in your country. An exploratory study into factors influencing an enabling environment for social enterprises in South Africa. ISBN 978-92-2-123725-9 (print) 978-92-2-123726-6 (web pdf) ILO Cataloguing in Publication Data The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. 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Catalogues or lists of new publications are available free of charge from the above address, or by email: [email protected] Visit our web site: www.ilo.org/publns Printed in South Africa AN EXPLORATORY STUDY INTO FACTORS INFLUENCING AN ENABLING ENVIRONMENT FOR SOCIAL ENTERPRISES IN SOUTH AFRICA Research by Dr Susan Steinman Centre for Social Entrepreneurship Faculty of Management CONTACT DETAILS [email protected] Tel.: +27 (0)82-459-2082 Commissioned by INTERNATIONAL LABOUR OFFICE (ILO) This document enjoys copyright protection through the ILO. The responsibility for opinions expressed in this study rests solely with the author, and the publication does not constitute an endorsement by ILO of the opinions expressed herein. Dr Susan Steinman joined the Faculty of Management at the University of Johannesburg in 2009 as the head of the Centre for Social Entrepreneurship. The Centre was established to promote social enterprises and social entrepreneurship and to inspire programmes that would assist the development of social enterprises in the region. She was awarded an ASHOKA fellowship in 2002 and realised that her experience could be of value for other social entrepreneurs. Her second doctoral thesis (awarded in 2008) dealt with social entrepreneurship. In the same year, Susan won the Nedbank Regional Social Entrepreneur of the Year award for her unique social enterprise (using a dual model) which effectively dealt with changing attitudes regarding violence in the workplace. Apart from being a flexible and internationally published researcher, Dr Steinman is also an international keynote speaker and, in addition, since 1997, she has published, authored and co-authored several books and programmes in her areas of expertise. i|Page Acknowledgements In addition to the contributions of the participants in the surveys, focus group discussions, conversations and interviews, the following people or organisations made significant and extraordinary contributions to the quality of the final paper. The researcher would like to thank them for their thoughts and insights that helped make this exploratory study a worthy starting place for our future discussions: • First and foremost, the ILO and, in particular, Tom Fox, Chief Technical Advisor for Social Enterprises of the International Labour Organisation (ILO), deserves praise and respect for his support. Apart from providing the infrastructure and data, he introduced the researcher to participants; arranged the focus group meetings and set up the facilities, and acted as note taker for the focus group meetings. Tom was supportive beyond the call of duty and eagerly engaged in many debates and discussions – adding insights and wisdom and encouragement at all stages of the research. His willingness to give time and support, and make contributions to the study, is deeply appreciated. Also, my appreciation is extended to Busisiwe Siyona who assisted Tom Fox by sending out letters to participants of focus group discussions and in the interviews. • Kathleen van der Linde, a professor in mercantile law at UJ, who revised Chapter 4 which deals with the regulatory environment • Sabine Zajderman, who assisted me with the preparation of final research document • Dr Arnold Beyleveld, who assisted me with various tasks • While a large number of persons participated in focus group discussions, personal and telephonic interviews – everybody cannot be listed individually – the following organisations played a prominent role in this study: o o o o o o Department of Social Development Department of Trade and Industry Department of Labour Ashoka regional office and several of its fellows The legal departments of the University of Johannesburg and the University of Pretoria African Social Entrepreneurs Network (ASEN) for facilitating on-going dialogue during the research o o o o o o o o o o Development Bank of South Africa Organised labour: Cosatu, Fedusa, Nactu and the Job Creation Trust National Youth Development Agency The Business Place Provincial Governments Local Governments SEDA Individual social entrepreneurs Companies creating social value Corporate social investors • The Faculty of Management of the University of Johannesburg, the researcher’s personal assistant and the language editor. • All who participated – you know who you are - thank you for your time and enthusiasm and for making this study possible. ii | P a g e Executive Summary This study explored the development of an enabling environment for social enterprises in South Africa, using a mixed methodology for research purposes. It became clear from the literary survey that a foundation for social enterprises to flourish has been laid through major policy documents such as the Medium Term Strategic Framework (MTSF) by the Minister for Planning in the Presidency (2009) and the Framework for South Africa’s Response to the International Crisis (2008). These documents pave the way for social enterprise development to create decent work opportunities, the alleviation of poverty and the promotion of high levels of investment through a favourable taxation system. While the intent of government is clear from the above-mentioned policy directives, it is apparent from this exploratory study that South Africa still has a long way to go in creating an enabling environment where social enterprises could indeed flourish and contribute to the economy. The challenges relating to capacity building for social enterprises are compounded by the fact that there is no reliable database available for the identification of the role-players in the social entrepreneurial space. Furthermore, it seems that, although the majority of social enterprises have been founded by white persons, the majority of beneficiaries of social entrepreneurial activities are black and so it is apparent that the racial profile of social entrepreneurs is not seen as an obstruction to the enabling environment for the creation of social enterprises. The study found that it was difficult to address legal and regulatory issues in the absence of a working definition and therefore adopted the following definition for this purpose: ‘A social enterprise’s primary objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose.’ In view of this definition, social enterprises currently exist as Section 21 nonprofit organisations, as trusts and voluntary associations and even as cc’s and companies; yet the business construct of ‘social enterprises’ is not defined in any legislation, which isone of the greatest obstacles to financial sustainability. It is to be noted that, according to this definition, social enterprises cannot obtain equity. Various options for accommodating social enterprises were considered: the amendment to existing company and nonprofit entity legislation; new legislation dedicated to social enterprises, and a fiscal solution by recognising social enterprises in the Income Tax Act. In the lastmentioned case, which is the preferred short and medium term solution, the legislator could, in the case of public benefit organisations (PBOs), allow for more robust trading by upwardly adjusting the current threshold for trading ) and by allowing a capped share equity for social enterprises. However, as part of a long-term strategy, South Africa will need to consider dedicated legislation for social enterprises, similar to the Community Interest Companies (CiCs) of the UK and the low-profit, limited liability corporations (L3Cs) of the USA. iii | P a g e Social enterprises experience the same problems as conventional business enterprises in gaining access to finance, loans and investment. Finance for scaling up remains one of the most pressing issues facing social enterprises; therefore, a dispensation where social enterprises could get some share equity for this purpose would certainly go some way towards ameliorating the problem. Business Development Service (BDS) providers do not actively encourage social enterprises to make use of their services nor do they provide the services most needed by social enterprises. The former are also perceived as not being informed or understanding of the concept of social enterprises. A significant percentage of respondents in the quantitative survey said that social enterprises are turned away from BDS centres. However, there is no data available on best practices for BDS providers or on the lessons learnt thus far. In terms of taxation, the thresholds for individual and business donations and trading by PBOs do not contribute to an enabling environment and are, indeed, restricting. It is felt that the South African Revenue Services (SARS) has a large contribution to make in terms of adjusting legislation to encourage social enterprises to flourish. Changes in legislation should go hand in hand with the extension of BDS products to social enterprises and in raising public awareness. Creating an enabling environment for social enterprises in South Africa is more than finding the correct definition. It requires commitment, on a political level, to bring about the changes needed on the legislative and regulatory level, in order to make access to finance easier for social enterprises and for the provision of social enterprises with the same BDS as is the case with conventional business. These challenges are not insurmountable and could be achieved within a short space of time. It requires the will and enthusiasm to put social enterprises on the agenda and to see this construct as a valuable tool to be used in the creation of meaningful employment and the alleviation of poverty. iv | P a g e TABLE OF CONTENTS CHAPTER 1 ......................................................................................................................................................... 1 BACKGROUND, SCOPE AND METHODOLOGY .......................................................................................................1 1.1. INITIAL PROPOSED TITLE ........................................................................................................................ 1 1.2. OBJECTIVE OF RESEARCH PROJECT ........................................................................................................ 1 1.3. RESEARCH QUESTION AND TERMS OF REFERENCE................................................................................. 1 1.3.1. RESEARCH .......................................................................................................................................... 1 1.3.2. BROADENING OF THE TERMS OF REFERENCE .................................................................................... 2 1.4. REVIEW OF TITLE OF THIS RESEARCH ..................................................................................................... 3 1.5. ONTOLOGY AND EPISTEMOLOGY........................................................................................................... 3 1.5.1. ONTOLOGY ........................................................................................................................................ 3 1.5.2. EPISTEMOLOGY ................................................................................................................................. 4 1.6. RESEARCH METHODOLOGY AND DESIGN ............................................................................................... 5 1.6.1. METHODOLOGY ................................................................................................................................. 5 1.6.2. RESEARCH PROCEDURE ..................................................................................................................... 7 1.7. RESEARCH CHALLENGES ....................................................................................................................... 12 1.7.1. QUALITATIVE SURVEY: THE VALIDITY OF FOCUS GROUP DISCUSSIONS & GROUP DISCUSSIONS ..... 12 1.7.2. REPRESENTATIVENESS OF SAMPLE: QUANTITATIVE SURVEY ........................................................... 13 1.7.3. TIME CONSTRAINTS ......................................................................................................................... 14 1.7.4. BUDGET CONSTRAINTS .................................................................................................................... 14 1.8. SIGNIFICANCE OF THE STUDY ............................................................................................................... 15 1.9. FINDINGS: AVAILABLE DATA ................................................................................................................ 15 CHAPTER 2 ....................................................................................................................................................... 16 CONTEXTUALISING THE STUDY......................................................................................................................... 16 2.1. GOVERNMENT PUBLICATIONS INDICATING POLICY DIRECTIONS ......................................................... 16 2.1.1. MEDIUM TERM STRATEGIC FRAMEWORK (MTSF) ........................................................................... 16 2.1.2. FRAMEWORK FOR SOUTH AFRICA’S RESPONSE TO THE INTERNATIONAL ECONOMIC CRISIS........... 17 2.1.3. THE DIRECTION ................................................................................................................................ 17 2.2. DEFINITIONS AND CONCEPTUAL CLARITY ............................................................................................ 18 2.2.1. TOWARDS A SOUTH AFRICAN DEFINITION ...................................................................................... 18 2.2.2. AMELIORATING SOCIAL PROBLEMS ................................................................................................. 19 2.2.3. THE DEVELOPMENT OF THE TERM “SOCIAL ENTERPRISE” ................................................................ 19 v|Page 2.2.4. 2.3. SOCIAL ENTREPRENEURSHIP ............................................................................................................ 20 AN ENABLING ENVIRONMENT ............................................................................................................. 21 2.3.1. POLICY, LEGISLATIVE AND REGULATORY FACTORS .......................................................................... 21 2.3.2. INSTITUTIONAL FACTORS ................................................................................................................ 22 2.3.3. POLITICAL AND CULTURAL FACTORS ............................................................................................... 22 2.4 FINDINGS: POLICY DIRECTIONS .................................................................................................................. 23 CHAPTER 3 ....................................................................................................................................................... 24 IN SEARCH OF A ‘HOME-GROWN’ DEFINITION ...................................................................................................24 3.1. FOCUS GROUP DISCUSSION ON 22 JULY 2009 ...................................................................................... 24 3.1.1. SOCIAL PURPOSE ............................................................................................................................. 25 3.1.1.1. BUSINESS ENTITIES TO BE CONSIDERED ‘SOCIAL ENTERPRISES’ ....................................................... 25 3.1.2. FINANCIAL SUSTAINABILITY ............................................................................................................. 25 3.1.3. COMMUNITY ENGAGEMENT ........................................................................................................... 26 3.1.4. VALUES AND OPERATIONAL PARAMETERS ...................................................................................... 26 3.1.4.1. VALUES ............................................................................................................................................ 26 3.1.4.2. OPERATIONAL PARAMETERS ........................................................................................................... 27 3.1.5. KEY QUALIFIERS FOR A SOCIAL ENTERPRISE .................................................................................... 27 3.2. INTERVIEWS......................................................................................................................................... 27 3.3. THE QUANTITATIVE SURVEY AND DEFINITION ..................................................................................... 29 3.3.1. SOCIAL PURPOSE ............................................................................................................................. 29 3.3.2. AMELIORATING SOCIAL PROBLEMS ................................................................................................. 30 3.3.3. PROFIT MAXIMISATION ................................................................................................................... 30 3.3.4. SUSTAINABILITY .............................................................................................................................. 30 3.3.5. COMMUNITY ................................................................................................................................... 31 3.3.6. GENERAL GOVERNANCE, MEMBERSHIP & OPERATIONAL PARAMETERS ......................................... 31 3.3.7. VALUES ............................................................................................................................................ 32 3.3.8. FINANCIAL GOVERNANCE IN THE EVENT OF A SURPLUS/PROFIT ..................................................... 32 3.4. CLARIFICATION THROUGH A BROADER BASIS OF INQUIRY .................................................................. 32 3.5. TOWARDS A DEFINITION FOR SOCIAL ENTERPRISES ............................................................................ 36 3.5.1. 3.6. EXPLANATION OF TERMINOLOGY .................................................................................................... 36 FINDINGS ............................................................................................................................................. 40 vi | P a g e CHAPTER 4 ....................................................................................................................................................... 41 THE LEGISLATIVE, REGULATORY & POLICY ENVIRONMENT ...............................................................................41 4.1. REGULATORY FRAMEWORK FOR THE NON-PROFIT ENVIRONMENT .................................................... 42 4.1.1. KNOWLEDGE AND AWARENESS OF THE DIFFERENT LEGAL OPTIONS ............................................... 42 4.1.2. NONPROFIT ORGANISATIONS ACT, NO. 71 OF 1997 (NPO ACT) ....................................................... 44 4.2. LEGAL STRUCTURES FOR SOCIAL ENTERPRISES .................................................................................... 47 4.2.1. NPO ENTITY: SECTION 21 COMPANY UNDER THE COMPANIES ACT NO 61 OF 1973 (TO BECOME A NON-PROFIT COMPANY IN 2010) ..................................................................................................................... 48 4.2.2. NPO ENTITY: TRUSTS UNDER THE TRUST PROPERTY CONTROL ACT, ACT NO. 57 OF 1988 ............... 49 4.2.3. OF 1977 NPO ENTITY: VOLUNTARY ASSOCIATIONS UNDER THE NON-PROFIT ORGANISATIONS ACT, NO. 71 49 4.2.4. FOR-PROFIT ENTITY: THE CO-OPERATIVES ACT, NO. 14 OF 2005 ..................................................... 50 4.2.5. FOR-PROFIT ENTITY: PRIVATE AND PUBLIC COMPANY UNDER THE COMPANIES ACT, NO. 61 OF 1973, AS WELL AS THE COMPANIES ACT, NO. 71 OF 2008 ................................................................................ 51 4.2.6. FOR-PROFIT ENTITY: CLOSE CORPORATION UNDER THE CLOSE CORPORATIONS ACT, NO. 69 OF 1984, TO BE AMENDED BY THE COMPANIES ACT, NO. 71 OF 2008 ................................................................... 52 4.3. CURRENT LEGISLATION AND PROPOSED AMENDMENTS AT A GLANCE ............................................... 52 4.4. OTHER IMPACTING LEGISLATION OR POLICIES..................................................................................... 56 4.4.1. BROAD-BASED BLACK ECONOMIC EMPOWERMENT ........................................................................ 56 4.4.2. TAXATION........................................................................................................................................ 60 4.4.3. SECTION 18A APPROVAL – PBOS AND ENTITIES ESTABLISHED BY OR UNDER LAW CONDUCTING APPROVED PBAS .............................................................................................................................................. 61 4.4.4. TRADING ......................................................................................................................................... 61 4.4.5. EMPLOYMENT LEGISLATION ............................................................................................................ 62 4.4.6. GOVERNANCE: THE KING III REPORT................................................................................................ 62 4.5. FINDINGS: THE LEGAL AND REGULATORY ENVIRONMENT ................................................................... 64 CHAPTER 5 ....................................................................................................................................................... 66 AN ENABLING ENVIRONMENT: BUSINESS DEVELOPMENT SERVICES (FINANCIAL AND NON-FINANCIAL) ........ 66 5.1. FINANCIAL BUSINESS ENVIRONMENT .................................................................................................. 67 5.1.1 ISSUES RELATING TO THE FINANCIAL ENVIRONMENT IDENTIFIED BY RESEARCH PARTICIPANTS ......... 67 5.1.2 DIFFERENT TYPES OF FINANCING MODELS FOR SOCIAL ENTERPRISES ................................................. 74 5.1.3 SOCIAL ENTERPRISE FRANCHISING AND REPLICATION ......................................................................... 77 5.2. NON-FINANCIAL BUSINESS DEVELOPMENT SERVICES (BDS) ................................................................ 78 5.2.1 WHAT DOES NON-FINANCIAL BDS ENTAIL? ............................................................................................. 78 5.2.2 ORGANISATIONS LENDING SUPPORT ................................................................................................... 82 5.2.3 GOVERNMENT AND ORGANISED LABOUR AND NPOS ......................................................................... 88 vii | P a g e 5.2.4 ACCESSIBILITY OF SERVICES AND PROBLEMS FACING THE BDS MARKET.............................................. 89 5.2.5 RELEVANCY OF BDS.............................................................................................................................. 90 5.3. IDENTIFICATION OF PRIORITIES ........................................................................................................... 90 5.4. FINDINGS: ENABLING ENVIRONMENT: ACCESS TO FINANCE AND BUSINESS DEVELOPMENT SERVICES 90 5.4.1. IN SOME INSTANCES, THE SAME FINDINGS APPLY TO FINANCIAL AND NON-FINANCIAL BDS AND FOR THAT PURPOSE THE FINDINGS ARE COMBINED. ....................................................................................... 90 CHAPTER 6 ....................................................................................................................................................... 93 RECOMMENDATIONS ....................................................................................................................................... 93 6.1 GENERAL RECOMMENDATIONS.................................................................................................................. 93 6.2 RECOMMENDATIONS: THE LEGAL AND REGULATORY ENVIRONMENT ................................................ 93 6.3 RECOMMENDATIONS: ACCESS TO FINANCIAL AND BDS ............................................................................. 94 6.3.1 ACCESS TO FINANCE ............................................................................................................................ 94 6.3.2 BDS .......................................................................................................................................................... 95 CHAPTER 7 ....................................................................................................................................................... 97 ROADMAP FOR THE FUTURE ............................................................................................................................ 97 7.1. ON THE POLITICAL AND REGULATORY LEVEL ............................................................................................. 97 7.2. FUNDING FOR SOCIAL ENTREPRENEURSHIP AND SOCIAL ENTERPRISES..................................................... 97 7.3. CAPACITY BUILDING AND RAISING AWARENESS ABOUT SOCIAL ENTREPRENEURSHIP .............................. 98 7.4. RESEARCH ARISING FROM THIS STUDY ...................................................................................................... 98 REFERENCES ..................................................................................................................................................... 99 ANNEXURES ................................................................................................................................................... 102 ANNEXURE A: TERMS OF REFERENCE ............................................................................................................. 103 ANNEXURE B: RESEARCH SURVEY .................................................................................................................. 106 ANNEXURE C: CASE STUDIES ON BEST PRACTICE IN SOCIAL ENTERPRISE DEVELOPMENT ............................... 116 ANNEXURE D: ILO CONFERENCE ON ENABLING ENVIRONMENT ..................................................................... 119 ANNEXURE E: DEPARTMENT OF SOCIAL DEVELOPMENT – BUSINESS PLAN .................................................... 124 ANNEXURE F: CASE STUDIES OF NON-PROFIT ORGANISATIONS FOR WHICH IT IS WISE TO RETAIN THEIR CURRENT STATUS ........................................................................................................................................... 143 ANNEXURE G: CASE STUDIES OF A VARIETY OF ENTITIES (FOR-PROFIT AND NON-PROFIT) THAT WILL BENEFIT FROM A NEW DISPENSATION FOR SOCIAL ENTERPRISES ................................................................................ 148 ANNEXURE H: LISTING OF SERVICES, CHALLENGES AND NEEDS BY STAKEHOLDERS IN THE SOCIAL ENTREPRENEURIAL SPACE AND BUSINESS DEVELOPMENT SERVICE PROVIDERS ............................................ 154 viii | P a g e List of Tables Table 1: Demographic Breakdown of Respondents ................................................................................ 10 Table 2: Matrix – Legal Structures for Social Enterprises at a Glance ..................................................... 53 Table 3: Recommendations for Government to Advance Social Entrepreneurship (Wolk A, 2009, p.9) 66 Table 4: Financial Models available to Social Entrepreneurs .................................................................. 75 Table 5: Needs of Different Sectors ........................................................................................................ 79 Table 6: Comparison of Priorities by each Stakeholder Group ............................................................... 81 List of Graphs Figure 1: Survey Respondents Breakdown ................................................................................................ 9 Figure 2: Primarily Social Purpose ........................................................................................................... 29 Figure 3: Ameliorate Social Problems ..................................................................................................... 30 Figure 4: Demonstrate Connectivity ....................................................................................................... 31 Figure 1: Need for Legislation ................................................................................................................. 43 Figure 2: Need for a New Entity .............................................................................................................. 43 Figure 3: Regulatory Framework on NPO ................................................................................................ 45 Figure 8: Gaining access to capital - difficulties by both SEs and entrepreneurs.................................... 68 Figure 9: Equity shareholding .................................................................................................................. 70 Figure 10: SEs operate as a for-profit to attract investors ...................................................................... 72 Figure 11: Loans by Government ............................................................................................................ 73 Figure 12: Non-financial BDS Ranking ..................................................................................................... 78 Figure 13: The Business Place Model ...................................................................................................... 88 Figure 14: % BDS Providers turning SEs seeking assistance away ........................................................... 90 Figure 15: SE awareness before changes in legislation ........................................................................... 92 List of Boxes Box 1: Case Study - WIZZIT Bank ............................................................................................................. 35 Box 1: Case Study - Rather Profit than Multiple Registrations with Non-profit...................................... 46 Box 2: Case Study - ECONOBEE on BBBEE code interpretation .............................................................. 60 Box 4: Case Study - Blended Value and Heart ......................................................................................... 70 Box 5: Case Study - Life College, Randburg ............................................................................................. 71 Box 6: Shonaquip retains independence ................................................................................................. 73 ix | P a g e CHAPTER 1 BACKGROUND, SCOPE AND METHODOLOGY The work of the International Labour Organisation (ILO) on the enabling environment for social enterprise development in South Africa can be linked to the work of the Social Enterprise Development Targeting Youth in South Africa (SETYSA) project. The aim of this project is the promotion of social enterprise development in South Africa by supporting progress towards an enabling environment. 1.1. INITIAL PROPOSED TITLE POLICY RESEARCH ON THE ENABLING DEVELOPMENT IN SOUTH AFRICA 1.2. ENVIRONMENT FOR SOCIAL ENTERPRISE OBJECTIVE OF RESEARCH PROJECT The principle objective of the research project is, according to the International Labour Organisation’s terms of reference (Annexure A), to contribute to the promotion of employment in social enterprises by assisting the SETYSA project to deliver on selected outputs in the project work plan, specifically the output concerning a widely accessible body of empirical evidence of social business development worldwide and in South Africa. 1.3. RESEARCH QUESTION AND TERMS OF REFERENCE 1.3.1. Research The assignment is that, with the above objective of the research project in mind, the University of Johannesburg (UJ) will, in collaboration with the ILO, engage in research analysing the enabling environment for social enterprise development in South Africa. For this purpose the following research question needs to be answered: What is the existing enabling environment in relation to the development of social enterprises in South Africa? 1.3.1.1. What is the existing enabling environment (comprising policy, legal, regulatory and institutional factors) in relation to the development of social enterprises in South Africa? {The following sub-questions arise: To what extent are there policies that specifically seek to encourage social enterprise development? To what extent are these existing policies being implemented? Which policies, regulations, laws and initiatives have an incidental impact on the development of social enterprises (e.g. BEE)?} 1|Page 1.3.1.2. 1.3.1.3. 1.3.1.4. 1.3.1.5. What examples are there in South Africa of what might be regarded as ‘best practice’ in social enterprise development? What preliminary recommendations could be put forward concerning changes to the overall policy, legal, regulatory and institutional environment for the development of social enterprises in South Africa? [These draft recommendations will be developed through a process of focus-group discussions with key stakeholders]. Regarding outcomes/deliverables, it is envisaged that the researcher participate in a national conference on social enterprise development to be held from 22 to 23 October 2009. In collaboration with the ILO, the preliminary recommendations developed in 3.1.3 above will be refined in line with the outcomes of the conference described in 3.2.1 above, and a draft roadmap for implementation of the recommendations will be developed. 1.3.2. Broadening of the terms of reference From the outset it was clear that the title of the research project did not capture the terms of reference adequately. This was not seen as a major obstacle, but as the study progressed it became clear that a number of issues required consideration: • The development of social enterprises remains the main focus of the research, but cannot be studied in isolation. Instead, it must rather be examined as part of the development of the social sector in South Africa using a holistic approach. • The emerging ILO approach that defines social enterprises as “sustainable market solutions to social problems” is regarded as being too vague and open-ended. However, the emerging ILO approach or definition relates to Emerson’s (2004) concept of ”blended value”1 rather than what “social enterprises” is understood to be locally. Therefore, broad debate and consensus about the characteristics of the phenomenon of social enterprises or a definition became very important. • The low level of public awareness about social enterprises • The historic development of the social sector in South Africa • The societal inequalities still reflected in this social sector (social enterprises are mainly embraced by the white section of the population) • Political and cultural issues 1 While all organisations attempt to create value of one kind or another, the central premise of the blended value proposition is that value is itself a combination, a “blend” of economic, environmental and social factors, and that maximising value requires taking all three elements into account. The five silos of activity identified are that of Corporate Social Responsibility (CSR), Social Enterprise (SE), Social Investing (SI), Strategic Philanthropy (SP) and Sustainable Development (SD). Retrieved from http://www.blendedvalue.org. 2|Page • New legislation envisaged for non-profit and for-profit entities to be introduced, according to government officials, in 2010. Therefore, the terms of reference were broadened to consider these factors as part of the investigations into an enabling environment. 1.4. REVIEW OF TITLE OF THIS RESEARCH Subsequently, in view of (3) above, and the fact that this study is aimed at preliminary recommendations, as was originally envisaged, it would be more appropriate to call it an “exploratory study” than “policy research” as the enabling environment identified by the ILO also includes financial and non-financial business development services. Therefore, the title of the research should be changed to read: AN EXPLORATORY STUDY INTO FACTORS INFLUENCING AN ENABLING ENVIRONMENT FOR SOCIAL ENTERPRISES IN SOUTH AFRICA 1.5. ONTOLOGY AND EPISTEMOLOGY Briefly, one may describe the concepts of ontology, epistemology and methodology in research as follows: • Ontology has to do with our assumptions about how the world is made up and the nature of things and • Epistemology has to do with our beliefs about how one might discover knowledge about the world. 1.5.1. Ontology What is the nature of the phenomena, the entities or things, the social reality you want to study, or your object of research? Mason (2002, p. 14) argues that: … this question requires you to ask yourself what your research is about in a fundamental way, and probably involves a great deal more intellectual effort than simply identifying a research topic. Because it is so fundamental, it takes place earlier in the thinking process than the identification of a topic. It involves asking what you see as the very nature and essence of things in the social world or in other words, what is your ontological position or perspective. 3|Page Researchers have different and conflicting beliefs when it comes to their views of the nature of the phenomena they intend to study. The options one has here are to start from the premise that: • social phenomena exist “out there”, as well as outside people’s consciousness, and as researchers we need to study scholars’ views of these phenomena by “testing” hypotheses derived from the existing abstract scholarly literature; • instead of scrutinising existing constructs such as “theories”, in order to assist us in our understanding of phenomena, we should rather, at least initially, establish and describe people’s everyday experiences (that is, how they make sense of the their reality) by using methods sensitive to them; and • people constantly create social phenomena and when we study the phenomena we actually co-construct what we study. Like the exponents of interpretive and related constructivist paradigms (and also in the case of this research project), the researcher is interested in understanding the world of lived experience from the point of view of those who live it – the social enterprises, the social entrepreneurs, bodies or organisations representing them, the relevant government departments dealing with social enterprises and their environment, academics studying the phenomenon of social enterprises, the sponsors of social enterprises and so on. The researcher contends that social reality is not a given, but is built up over time through shared history, experience and communication. In other words, a person is an agent who actively constructs meaning within an ever-changing social and historical context. That which is taken for “reality” is what is shared and taken for granted as the way the world is perceived and understood. In order to appreciate the lived world of experience, we must engage and participate in it; we must actively interpret it (Locke, 2001). 1.5.2. Epistemology Epistemology or theory of knowledge is the branch of Western philosophy that studies the nature and scope of knowledge (http://www.wikipedia.org/epistemology). How do we know what we know? What is knowledge? What is reality? Schwandt (2007, p. 87) writes: This is the study of the nature of knowledge and justification. There are many theories of epistemology. For example, empiricist epistemology argues that knowledge is derived from sense experience. Genuine, legitimate knowledge consists of beliefs that can be justified by observation. Rationalist epistemology argues that reason is the sure path to knowledge. Rationalists may claim that sense experiences are an effect of external causes; that a priori ideas (concepts, theories, etc.) provide a structure for making sense of experience; and/or that reason provides a kind of certainty that the senses cannot provide. 4|Page Mason (2002) says that questioning what we regard as knowledge or evidence of things in the social world entails the epistemological question. In general, these questions are designed to: …help you to explore what kind of epistemological position your research expresses or implements. It is important to distinguish questions about the nature of evidence and knowledge — epistemological questions — from what are apparently more straightforward questions about how to collect, or what I shall call ‘generate’ data. Your epistemology is, literally, your theory of knowledge, and should therefore concern the principles and rules by which you decide whether and how social phenomena can be known, or how knowledge can be demonstrated. Different epistemologies have different things to say about these issues, and about what the status of knowledge can be … Epistemological questions should therefore direct you to a consideration of philosophical issues involved in working out exactly what you would count as evidence of knowledge of social things (Mason, 2002, p. 16). Epistemology also asks questions about how knowledge is constructed and here the following aspects are important: • Developing knowledge by applying the methodology of the natural sciences “objectively” to social phenomena and mathematically proving relationships between variables or causes • Building knowledge by applying non-quantitative methods to social phenomena and reconstructing the experiences and views of people involved in such phenomena • In building knowledge, acknowledging that researchers cannot remain aloof as the preceding positions suggest, since they co-construct the data required to create knowledge. The epistemological position of the researcher would be (iii) above. In other words, the relationship of the knower and what is known are inseparable. 1.6. RESEARCH METHODOLOGY AND DESIGN 1.6.1. Methodology Methodology has to do with the tools and techniques of research. The methodology can use either qualitative methods (such as such as interviews, focus groups, or participant observation), or quantitative methods using research techniques to gather data for information dealing with numbers and anything that is measurable. Statistics, tables and graphs are often used to present the results of these methods. Therefore they are to be distinguished from qualitative methods. The decision to use either qualitative or quantitative techniques largely depends on what is being investigated. 5|Page According to Borkan (2007): … the nature of quantitative research and its data collection tools allow the researcher to infer only about that which he or she is examining (you “see” only what you are “looking at”), whereas qualitative methods can expand the gaze to key elements that were never elucidated or even previously considered. Mixed methodology is about using both qualitative and quantitative research. While it can be said that a mixed methodology may be incompatible with ontological and epistemological stances, it is often overlooked that ontological theories do not entail epistemological ones and especially those methods wrongly associated with a given epistemological theory. Furthermore an ontological position (e.g. realism) does not commit one to a given methodology (Tashakkari & Teddle, 2002). Using mixed research techniques, or mixed methodologies, has advantages, for example the: • improved strength of the research • use of multiple methods in a research study helps one to research a process or a problem from all sides • usage of different approaches helps the researcher to focus on a single process and it also confirms the accuracy of data. Employing mixed research methods complements a result from one type of research with that yielded by another one. This research does not miss any available data. Hunt (2007) succinctly describes quantitative and qualitative methods as follows: For example, a quantitative component of a mixed research assumes the usage of deductive scientific method while a qualitative component assumes inductive scientific method. Moreover, a quantitative approach collects quantitative data based on exact measurement applying structured as well as validated information collection. For instance, rating scales, closed-ended items and responses. This approach produces a statistical report with correlations. A qualitative component uses qualitative information. For instance, interview, field notes, openended questions, etc. This approach considers a researcher to be the major means of information collection. At the end of a research, this approach supposes a narrative report with context description and quotations taken from research material. Therefore, the researcher is of the opinion that using mixed methodology and carefully reflecting on, and discussing, particular lived experiences through interviews, focus group discussions, and controlling interviews, and by also gathering data through surveys, in some instances, this will bring about important insights into what social enterprises entail, the role of social entrepreneurship within this context, and the current and desired enabling social environment needed to enhance the capacity of social enterprises in South Africa. 6|Page 1.6.2. Research procedure In the Terms of Reference (Annexure A) initially provided by the ILO, a qualitative method was indicated as the research methodology. However, the use of conferences and breakfast seminars are not good practice for gathering data because the validity of such data can be contested. At the outset, it was decided that the research procedure would include the following: • Identification of factors influencing the development of an enabling environment The researcher and the ILO’s senior technical advisor for the project identified such factors. However, as the research progressed, other factors emerged that were included in the study so as not to limit the study and to provide a comprehensive picture of these factors as they emerged. • Review of related literature and documentation This assignment requires a review of related local and international literature as well as investigation into policy, legislation and regulatory documentation about social enterprises as well as social entrepreneurship. Social enterprises and social entrepreneurship represent significant overlapping areas. Current South African policies, legislation and regulations have been studied and analysed for the purpose of this research project. In carrying out the study, the researcher was desk-bound while engaging in telephonic interviews, correspondence and gathering relevant information. • Telephonic and Personal Interviews Where possible, especially in the case of thought leaders or heads of departments, participants have been interviewed in person, while telephonic interviews sufficed in other instances. These interviews involved the relevant officials in all levels of government, government agencies and providers of financial and non-financial business development services to establish what they understand social enterprises to be; the level of awareness about social enterprises in that specific organisation; whether the organisation supports social enterprises; what policies are in place to support social enterprises or policies they wish to put in place, and what should be done specifically to support social enterprises. For purposes of confidentiality, the names of participants cannot be revealed. 7|Page • Survey (quantitative) The quantitative methodology became essential in the light of problems experienced with the qualitative data (see 1.7), especially in the case of focus group discussions, and represents a switch to mixed methodology for this study. For the purposes of the research project, the contact list, containing 356 names, was used as a database. Potential participants each received, from the researcher, a personal email with a link to the online survey, followed by an SMS requesting them to participate voluntarily. This process was repeated a week later. The Create Survey facility on CreateSurvey.com has been used for this purpose, and in those cases where people expressed the wish to complete a hard copy rather than using the online facility, a questionnaire was sent via fax/email and in the same manner for online processing. A copy of the questionnaire is attached as Annexure B. The contact list comprised the following categories of contact persons: o National government departments (Department of Trade and Industry, the Department of Social Development, South African Revenue Services and the Department of Labour) [42 potential participants] o Provincial government departments (Premier’s office or otherwise directed)[26 potential participants] o Local government (CEO or otherwise directed), which includes the capital cities of each of the provinces [28 potential participants] o Financial and non-financial service providers [79 potential participants] o Government agencies (such as National Development Agency [NDA]) and organised labour [68 potential participants] o Social entrepreneurs [40 potential participants] o Corporate social investors [79 potential participants]. While this list indicates a potential of 356 participants, some of these participants were was indicated as personal assistants of the contact person and, therefore, they were not expected to participate – but it cannot be excluded that they did, indeed, participate. Furthermore, 14 emails bounced because of incorrect addresses, and in 12 cases [3.4%] the correct email address could not be determined. Therefore, only 344 of the contacts had valid email addresses. The African Social Entrepreneur Network (ASEN) also sent out a link to the survey in a generic news flash and one may gauge that some of the social entrepreneurs who participated in this survey would have come from that source too. However, the response level of the participant social entrepreneurs remained consistent at 33.33% of all respondents throughout the survey, and even after the generic news alert of ASEN, did not result in an increase in the volume of participants. 8|Page The personalised emails, SMSs and telephone calls to participants were instrumental in driving participants to the online questionnaire. It can also be assumed that social entrepreneurs are more likely to participate as the issue of social enterprise affects them directly – more so than any other group on the contact list. It is then fair to assume that the 87 persons who participated in the survey, representing as much as 25.3% of those targeted from the contact list, signify a representative sample of persons known to be dealing with social enterprises or social entrepreneurs running social enterprises. Unfortunately, there is no reliable and comprehensive database for social enterprises available in South Africa. The graph below indicates the extent of participation in the different categories within the contact list: Figure 1: Survey Respondents Breakdown 48.28% of the respondents were male, while 51.72% of the respondents were female and 94.25% were South African citizens. It was evident from the data that the social enterprise space is still mainly occupied by white South Africans (53.5%) and that they are notably more active in the private or economic sector as indicated below 9|Page Table 1: Demographic Breakdown of Respondents (d) Provider of non- (b) Social (c) Provider QUESTION: financial (a) Entrepreneurial of financial How would business National, concern / business you be development Provincial or Social services services classified by Local Entrepreneur / (such as (such as the South Government Non-profit banking, training, African department Entity / Social investment, business government? Enterprise broker) (e) Both (c) and (d) (f) Corporate Social Responsibility(CSR) /Corporate Social Investment(CSI)/ Foundation / Fellowship or grantmaker (g) Other, please specify: plan, marketing) 50% 13.79% 20% 21.43% 50% 25% 8.33% 8 of 16 4 of 29 1 of 5 3 of 14 1 of 2 2 of 8 1 of 12 12.5% 68.97% 80% 57.14% 50% 62.5% 50% 2 of 16 20 of 29 4 of 5 8 of 14 1 of 2 5 of 8 6 of 12 31.25% 13.79% 0% 14.29% 0% 12.5% 33.33% 5 of 16 4 of 29 0 of 5 2 of 14 0 of 2 1 of 8 4 of 12 6.25% 3.45% 0% 7.14% 0% 0% 8.33% 1 of 16 1 of 29 0 of 5 1 of 14 0 of 2 0 of 8 1 of 12 5.88% 0% 0% 0% 0% 0% 1 of 17 0 of 29 0 of 5 0 of 14 0 of 2 0 of 8 (a) Black (b) White (c) Coloured or of Indian/Asian descent (d) Other, please specify 0% No response The fact that the social entrepreneurial space and the corporate social investor space are predominantly white is also evident from observing attendance at social entrepreneurial functions where the attendees are mainly white. The same is the case for providers of financial and non-financial business development services and investors in the social enterprises. The distribution of male and female respondents, as well as observations made in terms of the distribution of colour in the sector, indicates that the researcher was able to obtain a reasonably reliable sample, enabling the researcher to draw meaningful findings and to make the appropriate recommendations. 10 | P a g e • Focus Group Discussions and Pilot Studies Focus group discussions were arranged for the following dates to explore various aspects of the enabling environment: 22 July 2009 27 August 2009 3 September 2009 10 September 2009 Definitional Clarity Financial Aspects (Pilot Study) Legal, Policy and Regulatory Aspects (Pilot Study) Non-financial (In two instances, the desired number of representatives could not be obtained. The discussions took place nonetheless, and, therefore, the information gleaned from these discussions prompts this to be regarded as a pilot study). Criteria for selection for the focus group discussion were based on the following: • In the case of government departments, the relevancy of the topic under discussion to the participant’s scope of responsibilities was taken into consideration. • In the case of social entrepreneurs or social entrepreneurial representative bodies, their contribution regarding specific aspects (e.g. business development services) was considered. • In the case of private sector participants, the relevancy of their positions and degree of contact with social enterprises was considered. • Business development service providers (financial and non-financial) were invited to participate in the relevant discussion. • Academics were invited to participate where their knowledge and theoretical input could enhance the discussion. When it was not possible for focus group participants to be physically present, they participated via speaker phone. All the focus group discussions took place at the ILO offices in Pretoria. With the exception of the Legal and Regulatory Focus Group, all focus groups were moderated by the researcher, while the Senior Technical Advisor of the ILO acted as note taker. • Documenting examples of best practices in social enterprises in South Africa The interviews held prior to the focus group discussions led the researcher to examples of best practices in social enterprises. The example of “best practices” has been documented to include the following: o Demographic details of the enterprise (that is, number of years in existence; name; where situated; board members; area of operation; reliability; the business model being used and reason therefore) o Impact 11 | P a g e o Streams of income o Corporate governance o Sustainability. o Changes needed for upscaling. (A typical questionnaire used for this purpose is attached as Annexure C) 1.7. RESEARCH CHALLENGES 1.7.1. Qualitative Survey: The validity of Focus Group Discussions & Group Discussions It was difficult to put focus groups together and in two instances, despite the best attempts by the ILO office, participants could simply not fit it into their schedules, and so all the researcher could do was merely to use this information as a discussion or field study. Neither could the following be used for scientific purposes: the e-conference arranged by ASEN/ILO to deal with social enterprise definition; the legal and regulatory environment; access to finance and business development services. The unscientific structuring of such conferences made it unsuitable for data gathering. While focus group discussion and group conversations (or group discussions as was used at the conference after the survey) are useful tools, there are definite disadvantages such as facilitator bias; the dominance of strong personalities who tend to take over groups and “drown” other viewpoints, and the fact that agreement is usually built around strong individuals’ viewpoints rather than by consensus. The issue evokes associations with Heisenberg’s famous Uncertainty Principle2. Heisenberg argued that what we observe is not the real situation, but a situation exposed to our methodology of question or, for that matter, to facilitation. Similarly group dynamics play an important role. Indeed, the design of the focus group study (e.g. respondent selection, the questions asked, how they are phrased, how they are posed, in what setting, by whom, and so on) affects the answers obtained from respondents. The position of each of the participants may play a role, for someone lower down the hierarchy or who is in an acting position may not feel as free to express him/herself where his/her seniors or peers may be present. The focus groups or discussion groups in other circumstances are placed in an artificial environment, which can influence the responses generated. For this reason the ethnographic methodology is often preferred over focus groups because, in the case of the latter, the environment is real, whereas in the case of focus groups, people collect, by design, in a meeting room. Thus, participants might behave differently and that has an impact on how they respond. This fact was evident during interviews when a member who agreed to some principle in a focus group discussion would acknowledge that he could not express his real 2 Retrieved from http://en.wikipedia.org/wiki/Heisenberg on 6 November 2009 12 | P a g e opinion in the group (possibly because of the presence of a strong individual, or from being shy or because he did not want to offend the “majority”). One of the participants of a discussion group at the ILO conference held from 22-24 October, with hindsight, complained that the person who did the report-back for their group’s contribution misconceptualised what the group had said, and felt that what was presented did not adequately reflect the decisions taken by the group. The focus groups and group discussions were particularly problematic and, as Douglas Rushkoff (2005)3 argues, focus groups and group discussions are often useless and frequently cause more trouble than they are intended to solve, with focus groups often aiming to please (the facilitator, members of the group) rather than offering their own opinions or evaluations. However, the researcher’s experience is that focus group discussions are more successful in cases where the group is homogeneous in respect of status and position of the participants, age group and sex – for example, where the group comprises staff nurses working night shift, or a group of pharmacists. It was not possible to have a homogenous focus group or a group discussion in this study, which resulted in unreliable data being gathered in this manner. Amelioration of this challenge: The problem has been ameliorated through a large number of personal and telephonic interviews by large number of known stakeholders (almost 60 persons), who provided better background information for the quantitative survey – which was conducted towards the end of the survey in an effort to make it more valid. Therefore, the personal interview is regarded as a valid form of data gathering over focus groups, e-conferences and group discussions. 1.7.2. Representativeness of sample: Quantitative Survey The format of the research in the case of the quantitative survey was both a hard copy of the research questions and the opportunity for respondents to fill in the questionnaire online. While a somewhat different and, in some cases, significantly different response was obtained with the quantitative survey, the data gathered from the respondents in the quantitative survey was more reliable than that gathered through group discussions. However, it must be pointed out that the list of respondents used cannot be regarded as representative of the “sector” or of all stakeholders but representative of the available information. Amelioration of the challenge: 3 Rushkoff, D. (2005). Get back in the box : innovation from the inside out, New York : Collins. 13 | P a g e The quantitative survey represents a reasonably known stakeholder basis and so, in order to avoid criticism, the title of this research has been changed to an exploratory study rather than having it regarded as a fully-fledged research project. One cannot set aside that this was still the best possible way to obtain scientific data: therefore, the outcome of the quantitative survey is, for purposes of the study, valid. 1.7.3. Time constraints The conference was originally planned for the end of November 2009 (which could have led to a reasonable time frame in which to conduct the research) with a final report date scheduled for 31 December 2009. There was good motivation to move the conference forward and have it coincide with the social economy conference, but the unintended consequence was that the research suffered as a result of the rescheduling. Given the short period for the research – it must be remembered that it takes a much longer to conduct qualitative research than it does qualitative research – it was extremely difficult to meet the deadline. This affected the quality of the draft report which was used at the ILO conference from 22 to23 October. In terms of the time available in which to properly formulate the findings and recommendations and to pay attention to the legal section as well as the findings and recommendations, some quality was lost. A further problem is that time constrains not only affected the researcher but also those who had to be interviewed. While some of the interviews were very important, these could not take place because schedules could not be synchronised. Earlier in this progress report, the time constraints in terms of transcribing and inserting all the interviews were also mentioned. It was simply a nightmare for the researcher to pull all of these issues together in such a short period of time and, unfortunately, these constraints could not have been foreseen in the research proposal or by the ILO, for the need to delve deeper and consult more persons as well as other factors only became apparent during the course of the research project. However, some concerns around the definition emerged in December and it was dealt with in 2010 and included in this final report. 1.7.4. Budget constraints The additional work also led to the original budget being too small, resulting in a shortfall of income over expenditure in terms of this specific project and which is to be carried by the University of Johannesburg. 14 | P a g e 1.8. SIGNIFICANCE OF THE STUDY To the researcher’s knowledge, this study is the first of its kind in South Africa, and the findings and recommendations are largely expected to help point the way towards an enabling environment in South Africa where social enterprises could flourish. The findings of the study will also be used in e-conferences to be held after the focus-group discussions to stimulate broad dialogue among members of the general public. Moreover, the findings of the research will be presented at a national conference to be held from 22 to 23 October 2009 and hosted by the ILO. The University of Johannesburg will be hosting the Social Enterprise World Forum (SEWF) 2011 event, where this study and subsequent developments/studies could be among the topics discussed. 1.9. FINDINGS: AVAILABLE DATA The primary findings of the research study emerging from this first chapter are the following: 1.8.1. There is no reliable database on who does what in the social entrepreneurial space. 1.8.2. The social enterprise space is still predominantly white as evident from the data provided on page 10 of this report. 15 | P a g e CHAPTER 2 CONTEXTUALISING THE STUDY During the course of 2009, government published a few important documents that are indicative of policy pertaining to social and economic development for the country. The policy documents will provide a backdrop, or even a mandate, for the development of further policies and other factors that may influence the development of social enterprises in South Africa. 2.1. GOVERNMENT PUBLICATIONS INDICATING POLICY DIRECTIONS 2.1.1. Medium term strategic framework (MTSF) In July 2009, the Minister for Planning in the Presidency issued a framework to guide government’s programme in the electoral mandate period 2009 to 2014. While this lengthy document cannot be discussed in full here, it is worthwhile to note that the halving of poverty and unemployment by 2014 is envisaged, while economic and social infrastructure is identified as a priority area. It is of particular importance that the critical role that each sector has to play in addressing the challenges facing South Africa enjoys recognition in the MTSF: These efforts have the potential to lay the foundation for a social compact among South African social partners in ensuring a speedy recovery and setting the country on a higher and more inclusive growth and development trajectory. At the core of this should be efforts to build a developmental state with the strategic, political, administrative and technical capacity to give leadership to this process, and an active civil society. These capacities and partnerships cannot be decreed: they are meant to emerge in the context of the development and implementation of both the strategic vision of the South African nation and the medium-term strategy derived from the electoral mandate (p. 5). South Africa understands itself to be positioned within a global environment and acknowledges that changing the social and economic structure, and culture, of society would take a long time, but that a shared agenda should aim at securing an explicit social agreement commanding the support and commitment of all the major stakeholders in society that is arrived at through a process of social dialogue. 16 | P a g e It is also envisaged that the state and all sectors of society work with their counterparts in Africa and across the globe to build a better world. The main focus in the foreseeable future is to: minimise the impact of the economic down turn in the country’s productive capacity as well as jobs and poverty-reduction measures, to identify opportunities for new areas of growth and economic participation.... The document argues that it would require a change in mindset and performance on the part of the state, the private sector and all of civil society in a developmental state: “complementary and mutually-reinforcing activities among all social actors” are needed. The paper argues that growth did not accrue equitably to all sections of society because of factors such as weak support for small and micro-enterprises and co-operatives. In fact, the strengthening of the competitiveness and promotion of small and medium-sized (SMEs) and co-operatives “remains a cornerstone for the growth of the economy and the creation of decent work opportunities”. It is also argued that the taxation system should encourage higher levels of productive investment and employment creation in an effort to maximise the creation of decent work. While a number of developmental priorities are addressed in the paper, it is important to note that South Africa sees itself within the context of Africa, and as a regional player; bearing this in mind, the development of the social sector and particularly social enterprises must also be viewed in this light. (From: “Together Doing More and Better: medium term strategic frame (MTSF). A framework to guide government’s programme in the electoral mandate period from 2009-2014”) 2.1.2. Framework for South Africa’s response to the international economic crisis This document emphasises the role of co-operatives (and by implication social enterprises too) : “The parties recognise the important role that cooperatives can play in absorbing the unemployed and the poor into employment as well as in providing services in poor communities. Accordingly, the parties agree to promote the establishment and funding of cooperatives, including housing cooperatives and to ensure proper support for and regulation of the cooperative sector.” 2.1.3. The direction It is clear from the above policy documents (2.1.1 and 2.1.2) that the newly-elected South African government values, among other things, initiatives that seek: 17 | P a g e • the development of co-operatives (and, by implication, social enterprises) as one of the areas by which to increase the number of decent work opportunities • to align development in South Africa in the African and regional southern African context • co-operation between all stakeholders to alleviate poverty and stimulate development, including social development • to stimulate and strengthen SMEs for economic growth • to encourage high levels of investment through a favourable tax system. 2.2. DEFINITIONS AND CONCEPTUAL CLARITY Although not intended and not foreseen by the ILO, the issue of finding a definition or conceptual clarify formed a very important part of the study, because all policy and regulatory arguments and changes would be built around a definition and what is understood in South Africa and by South Africans. No other issue regarding this study was debated as fiercely as that of a definition, or of what would be meant when referring to a social enterprise. Therefore, the international literature review or conceptual framework, which was also commissioned by the ILO and lead by the Catholic University in Leuven, Belgium, acknowledges in the first paragraph that “despite the increasing academic interest in social economy and social entrepreneurship, there is no common conceptual agreement and understanding of these concepts” (Deraedt, 2009; p. 2). Some of these concepts are familiar in that they are widely used in South Africa, whereas others are not. It is notable that the bibliography indicates a strong European orientation. 2.2.1. Towards a South African definition It was felt that a “home-grown” definition and description of social enterprises would serve South African interests best. Therefore, for the purpose of the study, the researcher set out to understand what the different stakeholders understood “social enterprises” to mean; whether there is a need to call specific entities “social enterprises” and what the characteristics of such an entity should be so as to enable the researcher to propose a definition that would be acceptable to all stakeholders. The emerging ILO approach defines social enterprises as “sustainable market solutions to social problems”. In the same vein, Thompson & Doherty (2006) contend that: “Social enterprises – defined simply – are organisations seeking business solutions to social problems.” When this emerging approach and the definition posed by Thompson & Doherty are analysed, a sustainable market solution or business solution refers to “those enterprises 18 | P a g e with a viable business model, which may incorporate a variety of income streams, in line with the ILO understanding of ‘sustainable enterprises’. With this definition it is understood that “social problems” are addressed by making use of economically viable business models. When describing these models, it became clear that, although the definition can be considered very wide and vague – as is the case with the ILO definition – the characteristics described by Thompson and Doherty clearly distinguish a social enterprise from a conventional enterprise creating social value. 2.2.2. Ameliorating social problems It is clear from the above descriptions that social enterprises are specific to ameliorating social problems. In the process of moving towards conceptual clarity, one should also be clear as to what is considered a social problem. A widely acknowledged definition of social problems includes the following: • An existing and socially undesirable condition or phenomenon in society (three general areas of social problems are: deviant behaviour, social inequality and conflict, and problems relating to human progress and social change) • It compromises certain basic and generally accepted values in society • A significant number of people are affected by this condition/phenomenon • There is a strong feeling that something should be done about it by means of some form of collective action. 2.2.3. The development of the term “social enterprise” The concept of the “social enterprise” was first developed by Freer Spreckley in 1978: An enterprise that is owned by those who work in it and/or reside in a given locality, is governed by registered social as well as commercial aims and objectives and run co-operatively may be termed social enterprise. Traditionally, ‘capital hires labour’ with the overriding emphasis on making a ‘profit’ over and above any benefit either to the business itself or the workforce. Contrasted to this is the social enterprise where ‘labour hires capital’ with the emphasis on personal, environmental and social benefit.4 According to Jeff Boschee (2003), social enterprises developed when the non-profit sector began exploring earned-income strategies during the 1980s and 1990s when they were searching for new sources of revenue to help them maintain and expand their programmes. Boschee (2003) contends: “They were dealing with a simple, deadly fact: Traditional sources 19 | P a g e of revenue – charitable contributions and government subsidies couldn’t keep pace with social needs. So they set out to find the money they needed to serve more people...” A distinguishing feature of social enterprises is their emphasis on generating an income as opposed to simply venturing forth with a begging bowl. Even those social enterprises that receive donations tend to consider them as prepayments for a service purchased on behalf of their beneficiaries. Social enterprises actively sell the social changes they wish to create in society, and package their services and brand themselves accordingly (http://www.businesssculptors.com/social-enterprise-folder/social-enterprises-heralding-a-new-era). Seen from this point of view, therefore, it is clear that a large number of social enterprises would declare their “grants” as a type of income. Similarly, tax breaks or subsidies received from government (in the case of care for the elderly) would be seen in the same light. The Social Enterprise Alliance (SEA), that is based in the United States of America (USA) and has membership mainly from the USA and Canada, broadened its definition of Social Enterprise in March 2006 to read as follows: An organization or venture that advances its primary social or environmental mission using business methods. Previously, its definition was: “Any earned-income business or strategy undertaken by a non-profit to generate revenue in support of its charitable mission” (http://en.wikipedia.org/wiki/Social_enterprise). This change in definition specifically encompasses for-profit entities with social or environmental missions, since some organisations are choosing to incorporate as for-profit corporations (and some non-profits are creating for-profit subsidiaries). The focus here is on the enterprise being carried out by an organisation, and generating revenue, but not necessarily a surplus (http://en.wikipedia.org/wiki/Social_enterprise). It must also be remembered that, in the same way as any business, social enterprises may suffer losses in one year and have a surplus in the next. A surplus is not always an indication of the social enterprise status of the entity. A discussion of findings of research into social enterprises will indicate South Africans’ preferences for a social enterprise model. 2.2.4. Social entrepreneurship The terms social entrepreneur and social entrepreneurship were first used in literature about social change in the 1960s and 1970s5. It came into widespread use in the 1980s and 1990s, and was promoted by Bill Drayton, the founder of Ashoka: Innovators for the Public. 5 For example, the phrase was used as a description of Robert Owen in J Banks, The Sociology of Social Movements, London: MacMillan, 1972 20 | P a g e Social entrepreneurship is an emerging field of inquiry and therefore there is no single preferred definition. According to Bill Drayton, “leading social entrepreneurs” would: • provide unique solutions to social problems • have a huge social impact crossing regions and national borders • be replicable and sustainable • occurs within or across the non-profit, business and public sectors • be a dynamic process created and managed by an individual • strive to exploit social innovation with an entrepreneurial mindset • create new social value in the market and community. Dees (2001) contends that social entrepreneurs play the role of change agents in the social sector by displaying certain characteristics apart from adapting a mission to create and sustain social value, “recognizing and relentlessly pursuing new opportunities to serve that mission; engaging in a process of continuous innovation, adaptation and learning; acting boldly without being limited by resources currently in hand, and exhibiting heightened accountability to the constituencies served and for the outcomes created”. It is accepted that although not all social entrepreneurs might run social enterprises, and not all social enterprises will be lead by social entrepreneurs, these areas do indeed overlap. 2.3. AN ENABLING ENVIRONMENT For purposes of the research study the concept of an existing enabling environment would include policy, legal, regulatory and institutional factors that would play a significant role in bringing about social enterprises in South Africa. In Cabinet’s publication on the Third Sector, “Social enterprise action plan. Scaling new heights” (2006), it is clear that government does not create social enterprises, but that it can create conditions that enable social enterprises to thrive. In the United Kingdom (UK), the Government achieved this by: • fostering a culture of social enterprise • ensuring that the right information and advice are available to those running social enterprises • enabling social enterprises to access appropriate finance • enabling social enterprises to work with government. 2.3.1. Policy, legislative and regulatory factors Defining policy factors is not easy because the word “policy” itself is not tightly defined. Webster's dictionary has a number of closely related definitions. They are: • A definite course or method of action selected (by government, institution, group or individual) from among alternatives and in the light of given conditions to guide and, usually, to determine present and future decisions. 21 | P a g e • • A specific decision or set of decisions designed to carry out such a course of action. Such a specific decision or set of decisions together with the related actions designed to implement them. • A projected programme consisting of desired objectives and the means to achieve them (http://www.fao.org/wairdocs/ilri/x5547e/x5547e05.htm) All policies that have a bearing on social enterprises – whether the regulatory or policy environment governing social or conventional enterprises – will directly or indirectly influence the development of social enterprises in South Africa. Studying the policy, legislative and regulatory factors would naturally involve studying the environment as well as interviewing key stakeholders on the issue of creating an enabling environment for social enterprises. 2.3.2. Institutional factors There are a number of government and private institutions that serve to create an enabling environment for social enterprises. Apart from government agencies - such as the Small Enterprise Development Agency (SEDA) or the National Youth Development Agency and municipalities - providing financial and non-financial support, universities such as the University of Johannesburg, the University of Pretoria’s business school (GIBS), Stellenbosch University and the University of South Africa (UNISA) are also showing an interest by establishing special units dealing with social entrepreneurship. Furthermore, the World Bank Institute is also encouraging student participation in social entrepreneurial competitions. Ashoka and, to a lesser extent, Echoing Green and others, directly support social entrepreneurs with seed capital, while organisations such as the Skoll Foundation, Schwab Foundation, Acumen Fund and a number of other organisations operating locally and internationally are playing a role in creating an enabling environment by raising awareness, through competitions and by facilitating a variety of activities that would benefit social enterprises financially and otherwise. There are a number of business development agencies such as The Business Place, Social Incubators, The Greater Good South Africa, that are already in place in South Africa and delivering financial and non-financial business development services to stakeholders. 2.3.3. Political and Cultural factors Political factors and particularly the role of the non-profit sector during the struggle were considered too. There is also a need for “home-grown” solutions instead of South Africans merely copying foreign solutions and attempting to apply them successfully to local problems. One has to take the resistance to what is considered “foreign solutions” into consideration. 22 | P a g e One could also ask the question whether a philosophy such as “ubuntu”6 plays a role in creating an enabling environment for social enterprises in South Africa and, specifically, how co-operatives, as a form of social enterprise, could blend with the cultural disposition. Apart from a literature survey, dialogue with key stakeholders would be of importance. 2.4 FINDINGS: POLICY DIRECTIONS 2.4.1. A foundation has been laid for social enterprises to flourish through the provision of major policy documents such as the MTSF document by the Minister for Planning in the Presidency (2009) and the Framework for South Africa’s response to the International Crisis (2008). These documents encouraging social enterprise development to create decent work opportunities, the alleviation of poverty and the promotion of high levels of investment through a favourable taxation system. 2.4.2. There is a need for a ‘home-grown’ definition. The next chapter will deal with a ‘home-grown’ definition and the importance of clarifying the nature of the building blocks underpinning this definition – such as values and community engagement. 6 This is short for: Umuntu ngumuntu ngabantu – a person is a person through other people 23 | P a g e CHAPTER 3 IN SEARCH OF A ‘HOME-GROWN’ DEFINITION The search for a definition for ‘social enterprises’ and reaching consensus on the characteristics of a social enterprise have been fiercely debated in focus group discussions. These issues emerged as being important in the quantitative survey too. It was also viewed as imperative that South Africa adopts its own version of social enterprises rather than simply embracing a European or an American version. In other words, there should be broad consensus about what constitutes a social enterprise for South Africans. South Africans are not familiar with the word ‘social enterprises’. However, on 28 September 2009, Mr Gerry Higgins, chair of the Social Enterprise World Forum, conceded in a telephonic conversation with the researcher that the situation is similar in Scotland where his social enterprise, CEiS, is based. When you ask people in Scotland what a social enterprise is, they are likely to be uncertain, but if you direct them to examples of social enterprises (such as Divine chocolates, which is well-known in the UK) they immediately understand. The researcher also observed at the Social Enterprise World Forum in Melbourne, Australia in 2009 that, gauging from conversations and questions during presentations, many participants could not distinguish a charity from a social enterprise. There is a difference when participants debate the issue of social enterprise in a focus group and when they answer questions about the characteristics of a social enterprise in a quantitative survey. In the focus group, some participants’ viewpoints are more dominant than others, and this could sway the opinion to one side or another. When the majority opinion in the focus group discussion was tested during interviews with participants, the focus group’s opinion prevailed in the majority of cases. 3.1. FOCUS GROUP DISCUSSION ON 22 JULY 2009 It is, therefore, important to look more closely at the focus group discussion that took place at the ILO offices in Pretoria on 22 July 2009. The purpose of this focus group discussion was to explore characteristics and approaches to social enterprise in South Africa which could lay the foundation for establishing a definition. The sampling of participants was stratified to include the following stakeholders: • Academic interest • Representatives from the relevant government departments • Social entrepreneurial associations/networks/sponsors, • Tripartite constituents, and 24 | P a g e • Social enterprises not represented by any of the institutions. Seven people accepted the invitation and were present in person, while two participants were connected to the meeting through a speaker-phone. The summary below reflects the majority viewpoint in the discussions and acknowledges that one or two participants may, at times, have held different viewpoints. However, in terms of this summary, differences were accommodated, but in essence the summary reflects the majority viewpoint. The following key issues emerged: 3.1.1. Social Purpose A business is considered to have a social purpose if the social objectives are aimed at ameliorating social problems and creating social value. 3.1.1.1. Business entities to be considered ‘social enterprises’ Social enterprises would include the following business entities: • Entities operating as non-profit organisations (NPOs), Section 21 companies, cooperatives, social entrepreneurial concerns, NGOs and other business forms7 • Emerging social enterprises and ‘pre-cooperative entities’ working towards sustainability8. Social enterprises would exclude: • A corporate business entity or subsidiary thereof • A business whose primary purpose is profit maximisation, even if it is creating social value. 3.1.2. Financial sustainability Financial sustainability would imply financial or business practices that would ensure the continued viability of a product, practice or service well into the future. Therefore, financial sustainability includes: • An understanding that the social enterprise is a self-sufficient, income-generating entity, able to cover its operational costs and with the likelihood of generating a surplus 7 The diversity of non-profit and for-profit enterprises, such as NPOs, Section 21 companies, Trusts and other entities, results in the possibility of these being regarded as social enterprises, subject to key qualifiers for a social enterprise being t identified. 8 This means that these entities shall have the basic building blocks – such as a sustainability plan and a business plan –for becoming social enterprises. 25 | P a g e • • The extension of the term ‘financial sustainability’ to emerging social enterprises or pre-cooperatives who may be receiving seed money (start-up capital) or grants, provided that such entities have a definite business plan to work towards becoming an income-generating entity as described under the previous point Provision for the fact that a social enterprise often takes a longer period of time than a conventional business entity to achieve sustainability Financial sustainability excludes: • Dependence on corporate social investment (CSI) or grant funds beyond the start-up phase • Capital investment of a speculative nature. 3.1.3. Community engagement A ‘community’ can be dispersed with common characteristics (e.g. deaf people) or it could be geographically defined (e.g. residents in a particular area). Based on the cooperative model, it was accepted that the relevant community will be engaged and that; • Governance of the entity will be guided by democratic principles and open and equitable membership in the case of cooperatives. Other forms of social enterprises shall embrace an open and transparent process of governance. • Voting may not be along the lines of shareholding but should be based on the equality of each member. 3.1.4. Values and operational parameters 3.1.4.1. Values The following values are of importance for social enterprises: • The initial social mission is never compromised. The social enterprise stays true to its core social purpose • Motive is a central factor in determining social purpose. • To work towards societal good as encapsulated in the constitution of the Republic of South Africa. • The beneficiaries and objectives of the social enterprise are clearly defined by the community. • Members for the social enterprise are, as far as possible, recruited within the community they serve. 26 | P a g e 3.1.4.2. Operational parameters The following operational parameters are acknowledged as being useful in certain circumstances: • In the case of a dual model, the social enterprise must be clearly separated from the income-generating arm. • A social enterprise model can be geared towards systemic change. • The social enterprise model may be replicable in other parts of the country, region or world. 3.1.5. Key qualifiers for a social enterprise The group indicated that the key principles or features that would qualify an entity as a social enterprise include: • A clear social purpose aimed at achieving social good • engagement with the community the enterprise is serving • Financially sustainability • The practice of democratic , open and transparent governance • A financial surplus (if any) should be reinvested in the community or for the social purpose it serves. 3.2. INTERVIEWS The focus group was followed up with telephonic and face-to-face interviews where possible. Interview participants were selected from a contact list, provided by the International Labour Organisation (ILO) in Pretoria, containing names of government officials, providers of financial and non-financial business development services. In order to broaden the scope, the researcher further complemented the list with the names of representatives from provincial and local government in all the provinces as well as from government agencies providing business development services. While every endeavour was made to involve the government on the provincial and local tier of government, very few participated or responded to requests for an interview. Some requested the questions beforehand and then ’googled’ the phrase ‘social enterprises’ to get to a response. For the sake of confidentiality, the names of those interviewed are not listed. However, there were, apart from the 4 focus group discussions, close to 60 telephonic and personal interviews, the majority endorsing the aforementioned focus group findings when asked to express an opinion on the characteristics of a social enterprise. The reason that the question regarding a definition was asked in this way is that the concept was relatively unknown to a 27 | P a g e large number of participants and it was easier for the participants to simply comment on the majority view of the focus group rather than formulate what a social enterprise is. One may assume that, in some instances, the participants agreed with the focus group outcomes simply because they were not familiar with the concept of social enterprises. Taking these factors into consideration, the responses from the interview participants relating to what constitutes a definition may not be regarded as accurate and reliable in all instances. While the majority of respondents simply endorsed the focus group findings, others emphasised that all profits or surplus should be reinvested while others added: • ‘Leave the definition about surplus open so that all businesses, even for-profits can decide whether they want to be social enterprises or not.’ • ‘Sharing equity and venture capital is a problem, and if you can get a social investor they would like a financial return on investment too. They do not necessarily want to make a big profit.’ • ‘Requiring community involvement is absurd. If I want to do good, I need not ask the permission or involvement of the community.’ • ‘Cooperatives are not working. They are a disaster because the structure is too flat and nobody takes responsibility. Social enterprises need a flexible structure that allows for accountability from a board or management.’ • ‘The new trend is that an investor is willing to put money into a venture and does not necessarily expect a huge return on investment or any return at all. Social enterprises should allow for share equity.’ • ‘If you want to call yourself an enterprise, register a for-profit and pay tax. Why do you want to call yourself an enterprise and for taxation purposes be treated like a nonprofit?’ • ‘Any business can have a social purpose but a social enterprise should not exclusively do it for the sake of a profit – all business models should be included.’ • ‘Money should be ploughed back or, if there is a return on investment, it should be capped.’ • ‘The different business structures are required to deal with the issue of governance in a different way; therefore, one cannot prescribe the cooperative as the desirable model for social enterprises.’ It was clear after the focus group discussion that many issues still needed to be answered; therefore, it is important to take note that the quantitative survey, covering a broader target group than the focus group or telephonic interviews, delivered the following results: 28 | P a g e 3.3. THE QUANTITATIVE SURVEY AND DEFINITION The qualitative survey process – in the form of focus group discussions, interviews and telephonic conversations – was useful in enabling the researcher to construct questions that could address the issue of definition in a meaningful way. Instead of testing a specific definition, questions were asked about the characteristics of a social enterprise to enable the researcher to construct a definition. These questions also took into consideration minority viewpoints arising from the qualitative survey. Another difference between the qualitative and quantitative surveys is the broader base of the quantitative survey, allowing for opinions from social enterprise practitioners, investors and academics. For the purpose of drawing meaningful conclusions about the quantitative survey, the term ‘agree’ will include ‘agree’ and ‘strongly agree’, and the term ‘disagree’ will include ‘strongly disagree’ and ‘disagree’. Two-thirds – or 67%– will be regarded as ‘consensus’ while 50,1% will be regarded as a ‘majority’ in favour of. 3.3.1. Social purpose The consensus among respondents (94.25%) was that a social enterprise should have a primarily social purpose. Figure 2: Primarily Social Purpose Later in the questionnaire this question is tested further by asking the respondents whether a social enterprise should ONLY have a social purpose. There was broad consensus (78.16% of respondents disagreed) that a social enterprise cannot ONLY have a social purpose, which further validates the earlier consensus about a primarily social purpose. 29 | P a g e 3.3.2. Ameliorating social problems There is consensus (95.4%) that a social enterprise should ameliorate social problems as set out in the figure below. This strong association between social purpose and social problems is further strengthened by the fact that it was agreed by the overwhelming majority (94.25% constitutes consensus) that there must be a clear connection between the social purpose and the social problems. Figure 3: Ameliorate Social Problems 3.3.3. Profit maximisation The question whether a social enterprise’s primary purpose should be profit maximisation through the creation of social value, a majority of 54% agreed. When cross-tabulated with the relevant sector, it becomes evident that there is no consensus on this question because 71,43% of providers of non-financial business development (BDS) services agreed with this, while 62,5% of corporate investors indicated the same. All other categories or groups reflected a minority in their extent of agreeing or disagreeing with the statement. Therefore, it can be said that profit maximisation as a primary purpose mainly represents the viewpoint of investors and non-financial BDS providers. 3.3.4. Sustainability As far as financial sustainability is concerned, there was consensus among the participants on a number of issues: • 94.25% said that social enterprises include emerging entities (i.e. entities still receiving grants and/or seed capital at start-up and working towards financial sustainability). 30 | P a g e • • • 94.25% agreed that financial sustainability implies that the social enterprise generate enough income to cover its operational costs, and may even show a surplus. 89.65% agreed that social enterprises should be able to attract investors or equity shareholders, and a slight majority of 50.5% agreed that social enterprises exclude capital investment of a speculative nature, while only 36.79% disagreed, and 12.64% indicated that they did not know the answer. While there is consensus (72.41%) that social enterprises should have shareholders, only 57.47% felt that social enterprises should pay dividends while 77% of the respondents indicated that dividends should be limited or capped. 3.3.5. Community There was consensus regarding the question whether a social enterprise should show connectivity through engagement or consultation with the community it claims to serve. An overwhelming number of respondents (92%) agreed that community connectivity is important: Figure 4: Demonstrate Connectivity While the majority (59.77%) of the respondents felt that members of the social enterprise should emanate from the community, there was also realism, and 54.02% of the respondents agreed that social enterprise can create social value without being engaged or involved in the community it claims to serve. 3.3.6. General governance, membership & operational parameters As far as general governance, membership and operational parameters of a social enterprise is concerned, 97.71% of the respondents agreed that the entity must demonstrate participatory, transparent and accountable governance. Furthermore, there was consensus 31 | P a g e (67.82% agreed) that voting should not take place on the basis of shares held, but according to the equality of each member’s vote. The majority of participants agreed on the following issues: • 62.07% felt that a social enterprise can also be a ‘one man/one woman’ show. • 63.22% agreed that social enterprises could include traditional for-profit business entities. • 59.77% felt that social enterprise membership should be open. • 54.02% said that in the case of a dual model, the social enterprise and the incomegenerating arm be clearly separated. 3.3.7. Values There was an overwhelming consensus (95.40%) that a social enterprise’s business must be directed at societal good and, furthermore, 89.65% agreed that the initial mission or core social purpose of the social enterprises should never be compromised. It was also found that 82.76% agreed that a social enterprise’s business remain autonomous and not be influenced by a public entity. 3.3.8. Financial governance in the event of a surplus/profit First clarity was obtained about preference between the words ‘surplus’ and ‘profit, and consensus was reached (70.11% agreed) that ‘surplus’ is the preferred term. When asked whether social enterprises should do with the surplus what they wanted, a majority of 59.77% of respondents disagreed with the statement. When asked whether the surplus should be reinvested in the social business or community and nothing else, a majority of 58.62% agreed, but when asked whether the surplus should be PRINCIPALLY reinvested in the social purpose or community, the consensus was 73.56% of respondents agreeing on this issue, with 79.31% indicating again that dividends be limited or capped. Even though 56.32% agreed and only 32.19% disagreed (11.49% did not know) that social enterprises would be likely to be subject to the same tax exemption benefits as public benefit companies, when asked whether an exclusive tax regime for social enterprises were considered desirable, 61.07% of all respondents agreed. 3.4. CLARIFICATION THROUGH A BROADER BASIS OF INQUIRY A clearer definition as to what the South African definition should look like emerged from the broader basis of inquiry that took place in the quantitative survey. While regulations in the law could determine issues of community connectivity, governance (e.g. in the event of the 32 | P a g e social enterprise being a cooperative) and other key issues identified in the qualitative and quantitative surveys were that: • Respondents felt that the primary social purpose should be clearly connected to the social problem (that is, aimed at ameliorating a social problem). This finding validated the findings in the qualitative survey. • The entity should be financially sustainable and operate along the lines of a business model. ‘Grants’ and the streams of income have not been debated adequately. In the USA, subsidies and grants as streams of income, together with trading in services, are acceptable for a social enterprise while the USA definition also allows for mixed revenue streams for a social enterprise: Any organization, in any sector, that uses earned income strategies to pursue a double bottom line or a triple bottom line, either alone (as a social sector business) or as part of a mixed revenue stream that includes charitable contributions and public sector subsidies (http://www.socialent.org/beta/definitions.htm). It is clear that in a South African definition, mere charitable contributions and grants will not be regarded as ‘income’ for a social enterprise, and only acceptable as income in the case of ‘emerging social enterprises’. However, the requirement of sustainability implies that the social enterprise be not dependent on grants or donations. • The surplus must principally be reinvested, and respondents agreed that social enterprises should be able to attract investors/shareholders, but dividends (if any) should be capped or limited. Some realities need to be taken into consideration when drawing the boundaries within which social enterprises can operate. For instance, while it is clear that some for-profits are indeed social enterprises, it may also happen that a for-profit is perceived to be a social enterprise, but when examined closely, the pendulum of purpose would swing towards profit maximisation rather than the social purpose being the entity’s raison d'être.9 One such an example of a corporate for-profit entity creating social value is WIZZIT Bank. CASE STUDY: WIZZIT BANK WIZZIT Bank is a private company and Pty Ltd-registered enterprise. In order to trade as a bank, a company needs a bank licence, and WIZZIT Bank has therefore created an alliance relationship with the South African Bank of Athens. WIZZIT Bank only pays a fee for the use of their licence, and the South African Bank of Athens has no ownership within WIZZIT Bank. 9 Popular French phrase for “reason for being”. 33 | P a g e CASE STUDY: WIZZIT BANK WIZZIT Bank decided to go with a private company model as they are profit-driven and, therefore, a Section 21 Company would not have served their business rational. Their prime motivation is not for short-term profit, but to prove that an economically sustainable business case at the bottom end of the pyramid can, indeed, work. WIZZIT Bank’s primary social purpose is to lift people out of the poverty quagmire. Brian Richardson is the founding director and CEO of WIZZIT Bank. WIZZIT is a bank operating as a division of The South African Bank of Athens Limited aimed at the under-banked segment of the population utilizing cell phone technology. WIZZIT was launched in November 2004 and, in providing affordable banking to the mass market, it was the first to launch, as part of its offering, cell phone banking that works across all the networks, all phones and across all SIM cards. WIZZIT solves not only an accessibility and affordability issue and, from a convenience point of view, offers 24/7 real time transactions; hence, it is ‘your bank in your pocket’. WIZZIT is recognised as the global pioneer in mobile banking. Richardson is listed as a distinguished leader locally and internationally. He is an Ashoka fellow and was recently awarded the Netexplorateur Grand Prix award for innovation and has been featured in many international books, articles and TV shows. He has lectured and presented at seminars and conferences throughout the world and was invited by the Clinton Global Initiative to present the WIZZIT model as a means to Bank a Billion. WIZZIT banking provides the following services: • An alternative to the high costs and inconvenience of assessing, transferring and storing cash • A way to avoid the long queues, high travel costs, time and inconvenience • No monthly fees nor a minimum balance • Easy, secure shopping with a Maestro debit card • Easy, secure payments using a cell phone • Prepaid airtime, etc. • Person-to-person payments • Debit orders / stop orders. The WIZZIT transactional savings account is opened under FICA (Financial Intelligence Centre Act) regulations, Exemption 17. This means that the WIZZIT customer will only be able to conduct business on the account without exceeding R5000.00 on daily debit; or without having accumulated R25 000.00 per month on credit/deposit transactions, or without having exceeded a balance of R25 000.00 in their account. Once these limits are exceeded, a customer needs to submit required proof of residence documentation. FICA requires different types of documentation based on the South African residence status of a customer. Required documents (utility bill, account, bank statement, retail account etc.) must be less than 3 months old and reflect the physical address of the customer. 34 | P a g e CASE STUDY: WIZZIT BANK WIZZIT Bank only employs previously unemployed staff, and they have shareholders for the past 18 months which include the World Bank and some other banks that have representation on the board of WIZZIT Bank. Voting is in accordance with shareholding. WIZZIT Bank has not yet managed to achieve any surplus, but has paid out some dividends, and the current financial model is to reinvest profits for the foreseeable future. Initially WIZZIT Bank had problems securing loans and venture capital. Even though the IDC, PIC and Development Bank of South Africa were favourably disposed to the concept, these institutions did not understand why the larger and established banks do not offer this kind of service. They were of the opinion that in order to succeed a venture like this must have big bank backing and needed international investments and therefore were not willing to provide any loans or venture capital. WIZZIT Bank is interested in giving back to the community in the form of a financial literacy programme. They are also investigating the idea of group-based community-based loans. They are also willing to evaluate the concept of social enterprises but not in favour of switching over to a social enterprise. WIZZIT Bank is a good example of blended value, but is this bank a social enterprise? Creating social value is not the only criteria for a social enterprise because the surplus is not designated to be reinvested in the business or social purpose. Even if the surplus or profit is reinvested in business development, this is a natural progression in every business cycle at start-up and the first few years and unless it is written into the memorandum of association, one should be careful in classifying businesses creating social value as social enterprises. Box 1: Case Study - WIZZIT Bank Social value can be created in many ways by almost any type of business. However, it is the social purpose, aimed at ameliorating a social problem, and the manner in which the enterprises choose to deal with the surplus, which determines its status as a ‘social enterprise’. In this case it is not a social enterprise, although there is no doubt that Brian Richardson is a leading social entrepreneur irrespective of his business model. The researcher also bore in mind that one should approach the issue of social enterprises with great sensitivity and respect for the non-profit sector. Social enterprises should not affect the status of the non-profit companies or enterprises or grant-dependent entities delivering specific services, but rather should free up capital for entities that are grantdependent. 35 | P a g e However, the purpose for acknowledging social enterprises is not about giving a new name to something that already exists and/or working well or to create a new entity. The development of the concept of social enterprises is aimed at creating an opportunity for share equity in the case of nonprofits, to allow more flexibility and an injection of capital into the social enterprise market. In September 2004, the World Economic Forum, the Rockefeller Foundation and the International Finance Corporation hosted a workshop for a large number of stakeholders in the social entrepreneurial field to discuss the emerging blended value investing market. Private investment for social returns has the potential to have an equal or greater social impact, and can do more to establish the sustainability of an organization than pure grant-making. Unlike grants, capital invested for financial return – even at below-market rates – can be reused, multiplying its effectiveness. Microfinance is perhaps the best known global example of private investing for social returns (World Economic Forum, 2005). Blended value investing is currently carried out by a number of institutions in a variety of ways, and it is clear that blended value investing presents a tremendous opportunity to generate social value. It is important that South Africa’s definition of social enterprises allows for this opportunity without changing the concept of social enterprises into one which assigns this status to for-profit companies doing good and not answering to the main features of a social enterprise. While good corporate citizenship and social entrepreneurship may play important roles, a social enterprise is about answering to specific criteria within a chosen business model as set out earlier in this report. 3.5. TOWARDS A DEFINITION FOR SOCIAL ENTERPRISES The definition for cooperatives is descriptive and has stood the test of time: it has been around for almost one hundred years! What makes the definition of a ‘cooperative’ a good one? The definition, in less than 30 words, answers the following questions about the nature of a cooperative, for what reason it has been established; how it functions; what needs are being met, and how it is controlled . The longevity of the definition of a cooperative speaks to what the definition for its ‘sister’, a social enterprise, should be. 3.5.1. Explanation of terminology Better understanding of the functioning of a social enterprise is obtained by explaining the terminology used in the definition: • Financially sustainable business ‘Financial sustainability’ suggests an understanding that the social enterprise (SE) is a selfsufficient, income-generating entity, through its trading in services or goods, with the ability to draw investments or to share equity. The social enterprise is likely to generate a surplus. The 36 | P a g e requirement of ‘financial sustainability’ as part of the definition is extended to emerging SEs and pre-cooperatives who may be receiving seed money (start-up capital) or grants, provided that such entities have a definite business plan to work towards sustainability. Therefore, ‘financial sustainability’ excludes dependence on corporate social investment (CSI) or grant funds beyond the start-up phase. • Social purpose A business is considered to have a social purpose if the primary objective is aimed at ameliorating social problem(s) and creating social value. The Public Benefit Activities, as set out in the Tax Exemption Guide, could also be used as indicators of the social purpose. Examples: Social enterprises would include entities operating as non-profit organisations (NPOs), Section 21 companies, cooperatives, social entrepreneurial concerns, NGOs and other business forms as well as emerging social enterprises and ‘pre-cooperative entities’ working towards sustainability. Social enterprises would exclude a corporate business entity or subsidiary thereof or a business whose primary purpose is profit maximisation, even if it is creating social value. • Ameliorating social problems It is clear that social enterprises are specific to ameliorating social problems. In the process of moving towards a definition, one should also be clear as to what is considered a social problem. A widely acknowledged definition of a social problem includes the following: • An existing and socially undesirable condition or phenomenon in society (Three general areas of social problems are deviant behaviour, social inequality and conflict, and problems relating to human progress and social change.10) • It compromises certain basic and generally accepted values in society. • A significant number of people are affected by this condition/phenomenon. • There is a strong feeling that something should be done about it. • The amelioration of the social problem should not result in unintended consequences that would add to or create further social problems or consequences that would be against the law or values of a society.11 10 It is generally accepted that human progress is affected by economic and environmental conditions too and therefore social problems would include those caused by economic and environmental affairs. 11 Closely related to the social problem is the principle that by ameliorating a social problem another should not be created. An example is the selling of ‘charity wines’ to address foetal alcohol syndrome (FAS). Similarly, during the course of the study, the researcher was informed of some ‘township grannies’ obtaining goods through illegal, and even criminal, means to take care of child-headed households. Crime, and specifically theft, cannot ameliorate a social problem because such transgressions are social problems in themselves. Social entrepreneurship is value-driven. 37 | P a g e • Surplus (if any) principally reinvested The social enterprise will plough back the money into the social purpose, community or business in a way it may seem fit, without affecting the ability of the social enterprise to obtain share equity and to pay dividends to shareholders. The payment of dividends will depend on the constitution of the specific social enterprise and should be capped to strike a balance between encouraging people to invest in social enterprises and the principle that the assets and profits of the social enterprise should be devoted to its social purpose. The following definition is a succinct description of what a social enterprise is, its objectives and how it operates: A social enterprise’s primary objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose. • Proposed change of definition by the ILO Conference, 22–23 October 2009 Right from the outset the definition was problematic because of individual differences, (e.g. ASEN internet conferences) and this was compounded by the fact that, while it was stated that the definition was to be regarded as the working definition for the conference, it was introduced again as an issue to be debated. Use of language However, the assumption that the word ‘ameliorate’ was beyond the grasp of average South Africans was introduced at the opening of the ILO conference. This assumption cannot be verified as everybody apparently understood this in the quantitative survey where the word ‘ameliorate’ was used. The same goes for ‘principally’, which was also introduced as being problematic by one of the group facilitators at the same conference. In both cases the issue was introduced by persons whose first language is not English. Mr Gerry Higgins, head of the CEiS in Edinburg, Scotland and chair of the Social Enterprise World Forum (SEWF) responded: “In terms of ‘ameliorate’ or ‘address’, ‘ameliorate’ is a much less common term and is a little formal/academic/dated, but I like the implication that as well as addressing the problem, it actually tries to find a solution.” He further assumes that, in countries where English is not a first language, ‘address’ may be better. Mr Higgins feels that ‘principally’ is a stronger term than ‘mainly’ and should, therefore, not be replaced by the latter (E-mail from Mr Gerry Higgins to Dr Susan Steinman on 8 November 2009: subject line “SEWF position on a definition”). However, one can also educate people into the meaning of ameliorate because, to replace ‘ameliorate’ with ‘address’ skews the meaning, for one cannot, for instance, ‘address’ the issue of disability, but one can ‘ameliorate’ the situation for the disabled. Ameliorate remains the better word under the circumstances. Within the context of social 38 | P a g e enterprise ‘ameliorate’ succinctly captures the essence of the modus operandi of a social entrepreneur dealing with social problems. Reinvestment of surplus The conference statement of the ILO (Annexure D) states: ‘Note that this working definition embodies key principles that define social enterprise, notably (1) the primacy of the social enterprise’s social purpose and (2) financial sustainability. The clause on reinvestment of surpluses is an indicator and guarantor of the primary social purpose.’ The statement in the paragraph directly above is a deductive interpretation of the working definition and was not the intent of the researcher and neither is such an interpretation supported by research. Contrary to this statement, the research indicates that participants had strong feelings about the reinvestment of surpluses as an imperative for the identification of a social enterprise. (Telephonic and personal interviews, e-mail correspondence, the quantitative survey and the first FG discussion dealing with the definition refers). The definition does not need further explanation as it is clear and it offers unambiguous conceptual clarification. At the conference one of the delegates, a BDS provider, asked the researcher afterwards if the part of the definition dealing with the reinvestment of surplus “... where surpluses (if any) are principally reinvested for that purpose.” could be removed from the recommended definition to which she answered that the manner in which surpluses (if any) should be treated was indicated by participants as an imperative in defining a social enterprise. Also following the conference another participant also referred to a conversation after the conference, when people he spoke to argued that it is difficult for persons from disadvantaged communities to understand the concept of “surplus” as they perceive surplus or profit to be “the money left over to pay the salaries after all expenses have been paid”. According to this explanation, it becomes apparent that the enterprises in disadvantaged communities do not work on the basis of a set salary, and take home whatever is left over, which they call “profit”. Furthermore, confusion would arise if the “reinvestment of surplus” were to be introduced into the definition, because the members of the disadvantaged communities would be of the opinion that their salaries would be used for reinvestment purposes. It is argued that the reinvestment element of the working definition is therefore problematic and potentially exclusionary for some social entrepreneurs. However, the working definition already excludes the type micro enterprises described above on the grounds of sustainability but one could refer to some of these as ‘emerging social enterprises’. It is true that the definition for social enterprises would exclude some social entrepreneurs using for-profit models and not reinvesting the surplus (principally) while some social 39 | P a g e entrepreneurs who are grant-dependent would also be excluded (see case studies). Social enterprises are an organizational movement and the social purpose and business model (inclusive of what happens to the surplus) is at the heart of the definition. However, one of the fundamental principles of social enterprises is that decent jobs are created and that people are remunerated for their work – even though it may not be understood as such by emerging social enterprises at present. Because a definition is never constructed with the view of benefit to a particular group, but rather is phrased in such a way as to provide conceptual clarity, this argument indicates a problem with perceptions of what surplus is and the running of the micro enterprises: • The custom where a person would use income to pay expenses and then, if anything is left, pay himself a salary is typical of a start-up one-man (owner) enterprise or survivalist enterprises. These emerging social enterprises should be nourished by BDS providers to sustainability which requires that they understand basic concepts such as profit, losses and salary. [This argument is strengthened by recent research indicating that in a reasonably sophisticated urban area like Soweto, 65% of all micro enterprises are informal: 17% are registered and that 18% are unregistered but large enough to be formal. 69% of entities are run from home and most are involved in buying and selling while 70% of all enterprises are doing business at non-survival rates (Smallbone, 2010)] • The challenge is not in the understanding of the definition, but ensuring that emerging social enterprises receive the necessary support to understand the fundamentals of business and social enterprise so that they can flourish and become fully-fledged social enterprises 3.6. FINDINGS 3.6.1. The study, after taking all recommendations and comments into consideration, supports the research findings and therefore supports the following definition as being suitable A social enterprise’s primary objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose. 3.6.2. Not all social entrepreneurial activities can be defined as social enterprises while not all social enterprises are founded or run by individual social entrepreneurs. 3.6.3. Emerging social enterprises are in need of special education in the fundamental principles of social enterprises. 3.6.4. This study engaged the stakeholders such as bankers, venture capitalists, nonprofit organisations and government departments for opinions on the definition. One should take note that vested interested can sometimes pose as a matter of principle. This definition strikes a balance between the viewpoints of the different groups. 40 | P a g e CHAPTER 4 THE LEGISLATIVE, REGULATORY & POLICY ENVIRONMENT It is important to determine which laws have a bearing on the development of social enterprises in South Africa. It is also important to determine a distinction between those laws which relate directly to the social enterprise as a body corporate, and those which are intended to allow it to flourish. This chapter will also take into consideration the policy documents contributing to an enabling environment as set out in Chapter 2. During a discussion which formed part of a pilot study into the legal environment, held at the ILO offices on 3 September 2009, the following laws (some of which have been amended) were identified as having a bearing on the enabling environment for social enterprises: • The Companies Act, No. 61 of 1973, as well as the Companies Act, 2008, No. 71 of 2008, to be implemented in 2010 • The Nonprofit Organisations Act, No. 71 of 1997 (NPO Act) • The Trust Property Control Act, No. 57 of 1988 • The Close Corporations Act, No. 69 of 1984 • The common law on associations • The Income Tax Act, No. 58 of 1962 • The Broad-Based Black Economic Empowerment Act, No. 53 of 2003 • The Preferential Procurement Policy Framework Act, No. 5 of 2000 • The Co-operatives Act, No. 14 of 2005 • All Labour legislation (including measures related to volunteerism) • The Constitution of the Republic of South Africa. The pilot study into the legal, regulatory and policy environment also focused on the question as to whether the development of a policy framework could not be accommodated within an existing legal framework. It emerged that – while it is acknowledged that there is a need for an audit of legislation as it affects social enterprises – this study does not allow for that in-depth analysis, but rather, gives broad guidelines of what needs to be explored further. However, once an audit is done, it would be possible to remove hindrances blocking the development of social enterprises. According to the Department of Social Development, civil society, or the social sector of South Africa, is characterised by a wide variety of organisations across the political, economic and social spectra of society and which range from religious to community-based organisations, from charitable welfare to developmental and non-governmental organisations, including other social and sports clubs. This sector is being viewed as critical for the functioning of democracy and is believed to spend more than R12,5 billion per annum. 41 | P a g e The enabling legal environment for civil society supports and encourages the formation of organisations. The different entities within the regulatory framework are discussed below: 4.1. REGULATORY FRAMEWORK FOR THE NON-PROFIT ENVIRONMENT 4.1.1. Knowledge and awareness of the different legal options In the quantitative survey, only 49% of all respondents indicated that they are familiar with the NPO Act – which cannot be regarded as a satisfactory state of affairs as one would have expected a much higher percentage being familiar with this act, because 77% indicated in a later question that they are, indeed, familiar with for-profit and non-profit companies, trust and cooperatives, while only 38% indicated that they have a fair knowledge of the new Companies Act coming into operation in 2010. Just under half (46%) of the respondents indicated that they have a fair knowledge of how social enterprises operate in other countries, while others indicated that they had no knowledge. However, there is consensus (88.5%) among participants that the term ‘social enterprises’ is not well-known in South Africa, while 81.6% felt that the term ‘social enterprises’ exists under other names. As far as the legal and regulatory environment is concerned, only 27,6% agreed that the new legislation for nonprofits will address current problems experienced by social enterprises while the rest disagreed, and the majority indicated that they did not know. Respondents indicated a significant uncertainty when asked to what extent they ‘agree(d)’ or ‘disagree(d)’ that new legislation is not needed because existing laws could be amended to provide for social enterprises – as illustrated in the graph below: 42 | P a g e Figure 5: Need for Legislation The uncertainty in the graph above was affirmed when the question was turned around and respondents were requested to show their level of agreement or disagreement about creating a separate entity, which implies new legislation for social enterprises with its own rules and tax regime. Figure 6: Need for a New Entity 43 | P a g e A similar response emerged when the respondents had to indicate their agreement or disagreement as to whether SARS’s tax exemption for the non-profit sector is considered adequate. 4.1.2. Nonprofit Organisations Act, No. 71 of 1997 (NPO Act) Based on the fundamental principles of the Bill of Rights, the current legal framework on civil society organisations serves three purposes: • Enabling organisations to establish themselves as legal structures • Regulating the way in which such legal structures operate (including the registration of a legal entity with the government registration authority) • Providing for the sector, tax and other incentives towards sustainability. Organisations qualify as non-profit organisations under the NPO Act if they satisfy the following requirements: • The organisation must have a public purpose • Assets and income may not be distributed among the members or office bearers • When the NPO dissolves, the assets must be transferred to another similar NPO. In terms of the definition of a social enterprise, the NPO Act accommodates only those social enterprises that devote their income entirely to a public social purpose, thus excluding social enterprises that do so principally but not exclusively. Social enterprises with equity financing on which members can expect some form of return cannot operate as nonprofit organisations. The NPO Act also regulates organisations that do not qualify as social enterprises, such as charities that do not trade and which are not financially sustainable. Three types of organisation can register under the NPO Act, namely voluntary associations; trusts and section 21 companies. Each of these entities is also subject to other legislation or principles and, accordingly, their governance structures differ. The NPO Act attempts to mainstream the legislative framework for the registration of organisations by providing for voluntary registration of the mentioned entities. Primarily, the purpose of the NPO Act is to create an enabling environment in which NPOs can flourish and, by extension, to establish an administrative and regulatory framework within which organisations can conduct their affairs. Specifically, the Act is aimed at encouraging NPOs to maintain adequate standards of governance, transparency and accountability and at creating an environment within which the public may have access to information on registered organisations. The National Department of Social Development is administrating this Act. The regulatory framework on NPO is illustrated as follows in the business plan of the NPO directorate: 44 | P a g e Figure 7: Regulatory Framework on NPO The NPO Act is perceived to be the entry point in the regulatory framework for organisations to derive benefits from the enabling environment as registration is required for all public nonprofit entities. These benefits include access to benefits such as: • Tax exemption provisions provided for by the Income Tax Act, in particular following the recent amendments brought about by the Taxation Laws Amendment Act 9 of 2006 • Exemption from paying skills levies as stipulated in the Skills Development Levies Act 9 of 1999 • National Development Agencies (NDA) Act for funding purposes • Lotteries Act, also for funding. A recent audit Report by the Audit General and the Impact Assessment on the NPO Act identified a number of challenges in the implementation of the Act. It was found that the regulatory framework is fragmented; that there are challenges regarding the registration process. For instance, a section 21 company may have to register three times [Registrar of Companies, NPO Directorate and Tax Exemption Unit of SARS] and comply with the prescriptions of three different regulatory bodies that require different kinds of information, which in turn leads to amendments in the founding documents; and different reporting requirements lead to unnecessary duplication of work. 45 | P a g e CASE STUDY: RATHER FOR-PROFIT THAN MULTIPLE REGISTRATIONS WITH NON-PROFIT Multiple registrations can be frustrating and time-consuming and may result in a social entrepreneur registering as a for-profit instead of as a non-profit. The case of the social entrepreneur Carva Pop is a good example. He registered a closed corporation after receiving funding to train youth in entrepreneurship in the East Rand township of Daveyton. The name of the social entrepreneurial project is New Venture Creation. Due to time constraints, Carva did not see his way clear to wait for two months to get an NPO number to start his social enterprise and neither could he afford the costs and requirements for setting up a Section 21 non-profit company. Although this step is to the entity’s detriment in the case of taxation, Carva was prepared to cut his losses rather than being held ransom to a slow system and it is easy to buy a closed corporation off the shelve. This project would have qualified for tax exemption as a public benefit company if he registered it as a non-profit entity. This case study illustrates the need for central and fast registration. The new legislation envisaged to come into effect in 2010 will definitely make it easier to form non-profit companies but it will still not reduce the number of different registrations for legal compliance. Box 2: Case Study - Rather Profit than Multiple Registrations with Non-profit Social Development’s Impact Assessment also found that there were clear problems with a ‘one size fits all’ approach to NPOs, which is inherent in the NPO Act, due to a lack of recognition of the different categories of NPOs. The absence of an online database is seen as a challenge as is the lack of capacity of organisations in managing their affairs and complying with the NPO Act. Subsequently, the Directorate of Non-profit Organisations identified the improvement of the regulatory framework on NPOs; the maintenance of efficient registration of NPOs; access to information on registered NPOs; the enhancement of the institutional capacity of NPOs, and the enhancement of the Directorate’s internal institutional capacity to perform efficiently. However, while the ‘enabling environment’ is assigned to this department, it must be recognised that the legal entities necessary for enabling the environment are the responsibility of the Department of Trade and Industry. The financial and non-financial business development services are not the sole responsibility of this department and therefore the Directorate Non-profit Organisations is limited in what it can achieve in terms of an enabling environment. (See full report attached as Annexure E) South Africa does not have a law or policy on ‘social enterprises’ as such. It is an emerging concept and represents a generic term covering a range of business entities with a social purpose. South Africans are more familiar with the concept of social entrepreneurship, and a 46 | P a g e number of universities are paying attention to the subject matter by establishing centres or by incorporating social entrepreneurship into the business school curriculum. While there is reasonable clarity on what social entrepreneurship is, there is no consensus about what ‘social enterprises’ should be, and, therefore, the lack of definition became an obstacle early on in the study. It was clear that, apart from ascertaining a definition through the process of interviews, a focus group discussion may be the best way to establish what is understood by the term ‘social enterprises’ through participation by the main stakeholders, namely, the relevant government departments; representatives of social entrepreneurs such as Ashoka; academics; providers of financial and non-financial services, and social enterprises themselves. The uncertainty surrounding the concept and definition of a social enterprise also poses difficulties in assessing and developing an enabling environment. Cooperatives are not deemed to be part of the non-profit sector and are, therefore, not included for voluntary registration in the NPO Act. Similarly, close corporations and companies other than section 21 companies cannot register as NPOs. 4.2. LEGAL STRUCTURES FOR SOCIAL ENTERPRISES It is the case studies of social enterprises that, significantly, highlight the fact that there need to be different options for the number of diverse organisations. While some wish to remain non-profit organisations (Annexure F), others are already operating as social enterprises (Annexure G) but need some form of formalisation through the regulatory framework. Sustainability is not only measured by the balance sheet, but also by the vision, mission and social purpose of the organisation. An organisation may be perfectly sustainable and soundly managed, but it is fair to accept that, for example, an organisation involved in taking care of vulnerable babies between birth and 6 months on the one hand and a social enterprise engaging in training do not have the same needs or capacity to trade. For instance, it became clear in the course of the study that Masimayane Women Support Centre, Tomorrow Trust and others (See Annexure F) are highly sustainable organisations, but they prefer to remain non-profit companies, while the Job Creation Trust, Student Health & Welfare Centres Organisation (SHAWCO), the International Centre for Eye care Education (ICEE), WET Africa, Khulisa Crime Prevention and others (see Annexure G) would easily embrace a dispensation where social enterprises are not stripped of their tax exemption status should they do robust trading or obtain equity financing. The size and complexity of the organisation, as well as the requirements of potential funders, are determining factors when choosing a legal entity. The different legal entities available to social enterprises are discussed below. 47 | P a g e 4.2.1. NPO Entity: Section 21 company under the Companies Act No 61 of 1973 (to become a non-profit company in 2010) A non-profit organisation can register as a Section 21 company which is an association not for gain, incorporated under the Companies Act No 61 of 1963. Its name ends in ‘Association incorporated under Section 21’ or certain instances ‘incorporated association not for gain’. A company has to satisfy the following requirements in order to qualify as a Section 21 company: • It must be established for a lawful purpose • Its main objective must be a social purpose, which could be the promotion of religion, the arts, science, education, charity, recreation or any other cultural or social activity or a communal or group interest • The income and property of the association must be applied solely towards the promotion of its main object and no portion thereof may be paid by way of dividend or bonus to its members or office-bearers. However, members, office-bearers and employees may receive reasonable remuneration for work done. • Upon its winding-up, the remaining assets must be transferred to another association having objectives similar to the company’s main objective. In addition to the above, a Section 21 company must: • Appoint official auditors • Keep financial and accounting records • Hold an annual general meeting. A Section 21 company is an independent legal person and shall continue to exist even if the membership changes. The assets and liabilities of the organisation will be held separately from those of its members. Each member has to undertake to contribute an amount to the company’s estate if it is liquidated and cannot pay its debts. The minimum amount is R1. The founding documents are the Memorandum and the Articles of Association. The Memorandum sets out the purpose of the company while the Articles of Association describe how it will be governed. When the new Companies Act (Act No. 71 of 2008) comes into operation in the course of 2010, some of the current requirements will be relaxed. For instance, whereas now the company must have a minimum of seven members, it will be possible, in future, to form a non-profit company without any members. If there are members, they need not undertake to make a contribution should the company be liquidated. Where three directors will be required, two are currently sufficient. (For registration under the NPO Act, three directors are 48 | P a g e required in any case.) The auditing requirement will be replaced by another form of independent verification, except in the case of non-profit companies that exceed thresholds to be determined by the minister. 4.2.2. NPO Entity: Trusts under the Trust Property Control Act, Act No. 57 of 1988 It is easier to set up a trust than to incorporate a Section 21 company. One can set up a trust under common law and under the Trust and Property Control Act. A trust can be described as a ‘written agreement between an owner and trustees’. The owner hands over property and/or funds to the trustees, who use this to assist beneficiaries to meet a specific objective. The trust is run by a trustee or board of trustees in accordance with the powers and duties as set out in the trust deed. A trust generally does not have separate legal personality, but when a trust registers as an NPO under the NPO Act (in addition to registering with the Master of the Court), it becomes a body corporate with independent legal personality (s 16(1)(c)). 4.2.3. NPO Entity: Voluntary Associations under the Non-profit Organisations Act, No. 71 of 1977 The vehicle of voluntary associations (VAs) remains the easiest way to set up an NPO, and only three or more people are needed. The constitution will determine the management of the entity. However, for the VA to have an independent legal personality, the constitution must specify that the organisation will continue to exist even if the membership changes and that assets and liabilities of the organisation will be held separately from those of its members. The constitution of a VA will have information on: • The purpose and objectives of the organisation • Type of organisation • Membership of the organisation – who may become a member and rights and duties of members, how to become a member, resigned and under what circumstances a member can be expelled • The structure and main procedures of decision-making in the organisation cover areas such as o annual general meetings o elections and appointments to the different structures in the organisation o the powers and functions of members o who makes decisions and how o roles, rights and responsibilities 49 | P a g e o financial governance and what happens in the event of the organisation closing down. 4.2.4. For-profit entity: The Co-operatives Act, No. 14 of 2005 To co-operate means to work together and a co-operative, therefore, is a business that has a purpose in reaching a common goal, be it to build houses, or to grow vegetables for the export market. It has an unconventional method of raising and sharing monies. It is based on the value of self-help, self-responsibility, democracy, equality, equity and the ethical values of honesty, openness, social responsibility and caring for others. A co-operative operates on seven important principles. • Co-operatives are voluntary organisations, open to all persons able to use their services and who are willing to accept the responsibilities of membership, without any discrimination. • Co-operatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Elected representatives are accountable. • Members contribute equitably to, and democratically control, the capital of their cooperative. Part of the capital is the common property of the co-operative. Members receive limited compensation, if any. Surpluses are allocated for development, setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership. • Co-operatives are autonomous self-help organisations, controlled by members. • Co-operatives provide education and training for their members, representatives, managers and employees. • Co-operatives strengthen the movement by working together through local, national, regional and international structures • Co-operatives work for the sustainable development of their communities through policies approved by their members. Adapted from (http://www.capegateway.gov.za/xho/pubs/guides/U/85540/4/E#4h) The Act provides for various types of co-operatives, such as agricultural, housing, worker, social, services, marketing and supply, as well as consumer and burial society co-operatives. Some of these have a clear social purpose. A co-operative is a separate legal person and is established through the registration of its constitution. It is managed by a board of directors. There is no limit on the number of members it may have, but it must be formed by at least five persons. Members have equal voting rights. A co-operative must appoint an auditor to verify its financial statements. 50 | P a g e 4.2.5. For-profit entity: private and public company under the Companies Act, No. 61 of 1973, as well as the Companies Act, No. 71 of 2008 Under the 1973 Companies Act, the distinction between public and private companies is based on the minimum and maximum number of shareholders, minimum number of directors and on whether the entity may offer its shares to the public. A public company must have at least seven members and there is no upper limit to the number of members. A private company can have one or more members, but the maximum is 50. Public companies must have at least two directors and private companies one. Both types have to have their financial statements audited. A private company has to restrict the transfer of its shares and may not offer its shares to the public. Shares in a public company are freely transferable and may be offered to the public. The constitutive documents of a company are the memorandum of association and the articles of association. Companies are funded through equity capital. In exchange for the capital so contributed, the company issues shares to its shareholders. These shares entitle their holders to dividends and other distributions (subject to the solvency and liquidity of the company); to the return of capital; to surplus assets in the event of a liquidation, and to participation through voting rights. A company has to set out its main objective in its memorandum. This determines the capacity of the company as all the ancillary powers and objectives it must contribute to the realisation of the main objective. It is possible for a public or a private company to have a social purpose. Although it is not customary to do so, a company can voluntarily impose a restriction on dividends or distributions to shareholders, which could satisfy the requirement of a social enterprise that the profits be applied principally to the realisation of the main purpose. Similarly, a company could determine through its memorandum and articles that its assets will be transferred to a similar organisation when it is liquidated and dissolved, although this is not necessarily a requirement under the working definition of a social enterprise. The Companies Act of 2008 provides for two types of profit companies, namely public and private companies. It retains the basic distinction between public and private companies in relation to the offering and transfer of shares, but distinctions based on the number of members/shareholders fall away. Both a public and a private company could have a single member under the new Act and there is no upper limit for either of them. A private company must have at least one director and a public company three. Under the new Companies Act, companies will not be limited by a stated main objective or purpose, unless the powers of the company are expressly limited or restricted by the 51 | P a g e memorandum of incorporation. In order to satisfy the purpose requirement of the working definition of a social enterprise, a company under the new Act will have to restrict its powers in some way compatible with the definition. The memorandum of a company under the new Act can also potentially limit the distribution of profits so as to satisfy the social enterprise working definition. Public and private companies under both the 1973 Companies Act and the 2008 Companies Act will not qualify for tax exemptions on their income, as the possibility of distributions to shareholders militates against the characteristics of a PBO. They may, however, enjoy some tax relief to the extent that they make tax deductible donations to PBOs. If they are used as social enterprises, they will be at a tax disadvantage compared to NPOs that trade within the acceptable limits. 4.2.6. For-Profit Entity: Close Corporation under the Close Corporations Act, No. 69 of 1984, to be amended by the Companies Act, No. 71 of 2008 A close corporation is a separate legal entity incorporated under the Close Corporations Act. Its constitutive document is a founding statement and it can have an optional association agreement regulating the internal relations between members. A close corporation can have one to ten members. Companies and other juristic persons cannot become members. The members are not in principle liable for the debts of the close corporation, but there are certain instances where personal liability is used as a sanction for non-compliant behaviour. The members obtain members’ interests in exchange for their contributions to the close corporation. They can receive a return similar to dividends provided the close corporation complies with the solvency and liquidity requirements. When the new Companies Act of 2008 comes into operation it will no longer be possible to set up new close corporations, but pre-existing ones can continue in operation. As social enterprises, close corporations are in a similar situation as public and private companies in that they can restrict dividends or payments to their members and so devote most of their income and assets to achieving a social purpose. Close corporations can be formed for social purposes and need not even pursue gain. The above entities represent the range of business models used by social enterprises to fulfil their social purpose. 4.3. CURRENT LEGISLATION AND PROPOSED AMENDMENTS AT A GLANCE The following matrix is a summary of the current legal framework and also indicates the changes that will be brought about through the new Companies Act. 52 | P a g e Table 2: Matrix – Legal Structures for Social Enterprises at a Glance A social enterprise’s primary objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose. Legal structure Voluntary Association (VA) NPO Act [71 of 1997] Can its activities benefit those who own and/or run it? Ownership, governance and constitution Informal. Can be set up when 3 or more people enter into an agreement to form an NPO. No general regulation of this structure. Makes its own rules. Common law and the NPO Act. Governed according to own rules. If registered as an NPO it must reinvest all its profits in the social purpose May not distribute dividends or bonuses to members. For a VA to have an independent legal personality, the constitution must specify that the organisation will continue to exist even if the membership changes. The assets and liabilities of the organisation will be held separately from those of its members. Depends on own rules. But if registered under the NPO Act it has to provide that no distributions may be made to members and office-bearers. To achieve this, it needs to be stipulated in the constitution. Constitution has to stipulate this if VA to be registered under the NPO Act. Yes, if it meets the criteria for being a public benefit organization. Assets owned by trustees and managed in interest of beneficiaries in terms of the trust deed. No. Trustees are personally liable, but only out of trust funds. If a trust registers as an NPO under the NPO Act (in addition to registering with the Master of the Court), it becomes a body corporate with independent legal personality. Depends on trust deed. Possible to benefit founder and even trustee, provided there is sufficient separation of assets. Yes, if the trust deed specifies this. Yes, if it meets the criteria for being a public benefit organisation. However, if it registers under the NPO Act it is subject to governance rules. NEW LEGISLATION Will remain unchanged. Trust A way of holding assets so as to separate legal ownership from economic interest. NEW LEGISLATION Will remain unchanged. 53 | P a g e Is it a legal person distinct from those who own and/or run it? Summary - most typical features Assets "locked in" for community benefit? Can it get Tax Benefits Legal structure Section 21 company NEW LEGISLATION Non-profit company Cooperatives NEW LEGISLATION Summary - most typical features Ownership, governance and constitution Is it a legal person distinct from those who own and/or run it? Can its activities benefit those who own and/or run it? Most frequently adopted corporate legal structure for non-profit activities. Can be adapted to suit most purposes. Income applied solely to the promotion of main objectives. Upon winding up, remaining assets to be transferred to similar organisation. Directors manage the business on behalf of members. Considerable flexibility over internal rules. Auditors, AGM required. Yes. Members' liability is limited to amount each undertook to pay by way of guarantee in event of liquidation (minimum is R1 each). No distributions may be made to members. All assets and profits to be applied towards, e.g. charitable purpose. Yes, determined by specified main objective of company. Yes, if it meets the criteria for being a public benefit organisation. Used for, e.g. public benefit, community, cultural, communal objectives. Existing Section 21companies will automatically become NPCs. Can be formed with or without members. Directors manage business. Internal rules flexible. Yes. No need for members to make any contribution or to give a guarantee. May levy membership fees. No distributions to members are allowed. Yes, assets and income to be used entirely for stated purpose, e.g. community benefit. Yes, if it meets the criteria for being a public benefit organisation. For bona fide cooperatives that serve members' interests, by trading with them or otherwise supply them with goods or services. Managed by board of directors. One member, one vote (regardless of, e.g. size of respective shareholdings). Shares optional. Could have membership fees or subscriptions. Yes. Members' liability is limited to unpaid nominal value of shares. Yes. Depends on patronage, i.e. dealings with cooperative. At least 5% of annual surplus must be allocated to a reserve fund which may not be distributed. Would need bespoke drafting in constitution (which could be amended by members). No. Will remain unchanged. Entities NOT commonly associated with social enterprises 54 | P a g e Assets "locked in" for community benefit? Can it get Tax Benefits Legal structure Close Corporation (CC) Summary - most typical features Most popular incorporated business form in SA, but need not have a profit motive. 1 to 10 members. Ownership, governance and constitution Managed by members/owners. Members do not hold shares; they have members’ interests. Very flexible. Capacity not limited to specific objective. Is it a legal person distinct from those who own and/or run it? Yes. Members not liable beyond initial contribution. In exceptional circumstances members can incur personal liability. Can its activities benefit those who own and/or run it? Assets "locked in" for community benefit? Can it get Tax Benefits Yes. But members could agree in constitution that profits will not be distributed to members. Members have a right to share in assets on dissolution. Although they could exclude this right in the constitution, it would be unusual. No. No new close corporations to be formed, but existing ones will continue. NEW LEGISLATION Public or private company Companies with share capital, public or private. Shareholders are owners. Directors manage affairs. Main objective in memorandom of association determines capacity. Yes. Shareholders not liable for debts. (Shares fully paid upon issue – this is the only amount shareholders risk in business.) Yes, Memorandum and articles could limit or exclude distributions, but this would be unusual. Shareholders are entitled to assets on dissolution. Although they could exclude this right in the memorandum and articles, it would be unusual. No. NEW LEGISLATION Profit company, public or private Shareholders are owners. Directors manage affairs. Has full capacity of a natural person, but memorandum of incorporation may limit this. Yes. Shareholders liable only for amount outstanding on shares (shares need not be paid up prior to issue). Yes. Memorandum could limit or exclude distributions, but it would be unusual. Shareholders are entitled to assets on dissolution. Although they could exclude this right in the memorandum it would be unusual. No Public or private company 55 | P a g e 4.4. OTHER IMPACTING LEGISLATION OR POLICIES 4.4.1. Broad-based black economic empowerment BBBEE is defined as ‘an integrated and coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the numbers of black people that manage, own and control the country’s economy, as well as significant decreases in income inequalities (http://www.fmd.co.za) Elements of human resource development, employment equity, enterprise development, preferential procurement, as well as investment, ownership and control of enterprises, form part of the total BBBEE process. The BBBEE Codes of Good Practice indeed favour social enterprises and are among the most enabling factors for social enterprise development in South Africa. • BBBEE status A PBO with a turnover of less than R5 million is automatically accorded a level 4 status for BBBEE purposes, which means that, by procuring goods or services from a PBO, another entity will have the procurement recognised for their own BBBEE scorecard purposes. PBOs with a turnover of between R5 million and R35 million that carry on an approved socioeconomic development programme (SED) will secure BBBEE scorecard points for contributors to the PBO. The full value of the contribution may be recognised if at least 75% of the value of the contribution directly benefits black people (Seccombe, 2009) • Verification Verification of suppliers is crucial – no guidelines for the verification process have yet been set – and each verification agency uses and applies different standards and methodologies. The South African National Accreditation System (SANAS) has been tasked with the accreditation process of verification agencies as well as to develop accreditation standards. However, SANAS does not provide the necessary directives and refer people back to the Department of Trade and Industry for a directive in the case of uncertainty. • BBBEE Codes The BBBEE Codes and regulations are too lengthy to attach to this research document as annexures; thus, readers are referred to the website of the Department of Trade and Industry to the specific section on the BBBEE Codes (http://www.thedti.gov.za/bee/beecodes.htm) where all relevant codes can be studied and/or downloaded. The Preferential Procurement Policy Framework Act, No. 5 of 2000 Draft Preferential Procurement Regulations, 2009 56 | P a g e (Notice 1103 of 2009) can be downloaded by http://www.thedti.gov.za/bee/DraftPreferentialProcurementRegulations.pdf going to From the results of the quantitative survey, it is clear that respondents reached consensus (72.3%) that the procurement process should favour social enterprises, NPOs and cooperatives, while 85% of the respondents felt that BBBEE Codes should accommodate social enterprises specifically. • Ownership Code Regarding BBBEE, the ownership code refers to NPOs and PBOs, so it should, theoretically, be scored. But as these entities do not have ‘owners’ in the usual sense of the word, it is difficult to apply the ownership code. This would need to be changed. There is already an exception for Section 21 companies, which would need to be extended. Readers can also glean more information on the interpretation of ownership codes by visiting http://www.beescorecard.co.za/bbbee_codes_of_good_practice.htm In addition to ownership, social enterprises are also particularly relevant to the BBBEE scorecard elements of enterprise development, and under the residual element as socioeconomic development. This could create difficulties in arriving at the most appropriate rating. The case study below is a perfect illustration of a situation where the verification agency interpreted the BBBEE codes in a manner that was to the disadvantage of the social enterprise involved: CASE STUDY: KEITH LEVINSTEIN, CEO ECONOBEE ON THE INTERPRETATION OF BBBEE CODES 1. Introduction Barrier Breakers and Skyward Bound are both divisions of the Association for the Physically Disabled (APD). The Association is a voluntary association and has no ownership. The beneficiaries of the association’s activities are disabled people, with more than 75% of them being black. In terms of the BBBEE Codes of Good Practice, the Association is a Social and Economic Development (SED) beneficiary. However, both Barrier Breakers and Skyward are business activities of APD. As such, it would appear as though they were also potential enterprise development (ED) beneficiaries. 2. Background to Enterprise Development 57 | P a g e CASE STUDY: KEITH LEVINSTEIN, CEO ECONOBEE ON THE INTERPRETATION OF BBBEE CODES 2.1 Definition ‘Enterprise development (ED) means monetary or non-monetary contributions carried out for the following beneficiaries, with the objective of contributing to the development, sustainability and financial and operational independence of those beneficiaries12’ Therefore, the APD is an exempted micro-enterprise (EME) because its annual revenue is below R5 million. The issue at hand is that APD is a voluntary association and has no ownership. 2.2 Interpretation Econobee’s view is that the operating/profit-making entities (Skyward Bound – SB and Barrier Breakers - BB) of the APD can be regarded as a Category A ED beneficiary because: • The fundamental principle for measuring BBBEE compliance is that substance takes precedence over legal form (para. 2.1 of Code 000, statement 000). This implies that under certain conditions, the legal form can be relaxed if the intention of the enterprise is to achieve the exact goals as in the ED definition. • The beneficiaries of the APD are more than 80% black: any profit is ploughed back to the key stakeholders, exactly as if the APD were a “normal” business. The objectives of SB and BB are to make a profit for its stakeholders and to grow their own businesses to further benefit the stakeholder. The fact that the stakeholders are all disabled and at least 80% black cannot be ignored. Both SB and BB should not be unduly punished because its structure is that of an association and not a sole proprietor, sole trader, cc, proprietary limited company, etc. Code 000, statement 004, specialised enterprises specifically talks about the issues of companies limited by guarantee, Section 21 companies, NPOs, and public benefit organisations. Para 2.3 states: ….This does not imply that companies limited by guarantee and Section 21 Companies sharing in the ownership of other Enterprises as broad-based ownership schemes cannot contribute towards black ownership to such enterprises... Para 2.4 states: ….This does not imply that Non-Profit Organisation and Public Benefit Organisations sharing in the ownership of other Enterprises as broad-based ownership schemes • • 12 Category A Enterprise Development (A ED) contributions involve enterprise development contributions to exempted micro-enterprises or qualifying small enterprises which are 50% black-owned or black-women owned Category B Enterprise Development (B ED) contributions involve enterprise development contributions to any other entity that is 50% black-owned or black-women owned; or 25% black-owned or black-women owned with a BEE status of between level one (1) and level six (6); 58 | P a g e CASE STUDY: KEITH LEVINSTEIN, CEO ECONOBEE ON THE INTERPRETATION OF BBBEE CODES cannot contribute towards black ownership to such enterprises... (Bold and italic emphasis added). The codes do not refer to voluntary associations. Econobee believes this omission is not intended, but came about due to the low incidence of voluntary associations that could contribute to ownership, and that is why substance over form takes precedence. The minister could have no conceivable reason to penalize voluntary associations. Econobee submit that the APD be classified from a BEE viewpoint in the same way as a Section 21 Company. • The codes do recognise that even if an organization has no ownership it can be deemed to have ownership under certain conditions. Code 100, Statement 100 para. 6 refer: Para 6. Section 21 companies and companies limited by guarantee: A measured entity may elect to include or exclude Section 21 companies or companies limited by guarantee for the purposes of measuring ownership in terms of this statement. 6.1 A Section 21 company, or company limited by guarantee that houses a broadbased ownership scheme or an employee ownership scheme, is subject to the provisions governing those types of schemes and not to this paragraph. 6.2 When a measured entity elects to exclude such companies, it can do so by excluding up to 40% of the level of their ownership completely from the determination of its compliance with the ownership target. 6.3 A measured entity electing not to exclude Section 21 companies or companies limited by guarantee, when it is entitled to do so, may either treat all of that ownership as non-black or obtain a competent person’s report estimating the extent of black rights of ownership measurable in the measured entity and originating from those Section 21 companies or companies limited by guarantee. 6.4 Black participants in a Section 21 company holding rights of ownership in a measured entity may contribute: 6.4.1 A maximum of 40% of the total points on the ownership scorecard of the measured entity if they meet the qualification criteria for broadbased ownership schemes as set out in Annexure 100(B); 6.4.2 100% of the total points on the ownership scorecard of the measured entity if they meet the additional qualification criteria set out for broad-based ownership schemes in Annexure 100(B). 3. Econobee’s recommendation • Based on para. 6.3 of the codes above, Econobee submit that since more than 80% of the participants of the businesses of SB and BB are black, both entities can be viewed as more than 50% black-owned enterprises for the purposes of 59 | P a g e CASE STUDY: KEITH LEVINSTEIN, CEO ECONOBEE ON THE INTERPRETATION OF BBBEE CODES Code 100, ownership, and this also applies to code 600, enterprise development. • By extension, therefore, SB and BB are Category A ED beneficiaries. Any ED contributions as outlined in Annexure 600 of the Codes of Good Practice to SB or BB can be recognized at 125% of the original amount. Box 3: Case Study - ECONOBEE on BBBEE code interpretation 4.4.2. Taxation According to the Tax Exemption Guide for Public Benefit Organisations in South Africa, the Taxation Laws Amendment Act, No. 30 of 2000, which came into operation on 15 July 2001, introduced two new concepts of a ‘public benefit organisation’ (PBO) and a ‘public benefit activity’ (PBA). The Minister has approved a list of qualifying PBAs which he may expand from time to time by notice in the Gazette. Specific sanction measures have also been introduced to deal with situations where a PBO misuses its exempt status or does not comply with the provisions of the Act. The following types of organisations are deemed to be PBOs: • A company incorporated and registered in the Republic under Section 21 of the Companies Act, 1973 whose founding document is a memorandum and articles of association • A trust established in the Republic and registered with the Master of the High Court whose founding document is a trust deed • An association established in the Republic, as a voluntary association of persons whose founding document is a constitution adopted by its members • A branch established in the Republic by a foreign charitable organisation which is exempt from income tax in its country of origin (SARS 2007, p.5). Public benefit activities are categorised as: welfare and humanitarian; health care; land and housing; education and development; religion; belief and philosophy; cultural; conservation; environment and animal welfare; research and consumer rights; sport; providing of funds, assets and other resources to approved organisations carrying on PBA, and there is also a general category. It is required that the formal requirements for being regarded as a PBO be incorporated in the founding document, namely: • Fiduciary responsibility (at least three unconnected persons to accept fiduciary responsibility for the organisation). 60 | P a g e • • • • The sole and principle purpose must be to carry out one or more PBAs and utilise its objectives, and that surpluses (if any) are invested for income and future use. Trading activities must form a source of income for the approved PBA. It is not acceptable for a PBO to have the sole or principle object of conducting a commercial business activity in order to fund a PBA. The PBO may not distribute its funds directly or indirectly to any person. Investment of surplus funds: the Act no longer describes precisely how surplus funds of the PBO may be invested. The PBO may distribute funds as desired, provided this does not amount to an indirect distribution of profits or the award of an impermissible benefit. The PBO may not, on dissolution, distribute any of its funds to individuals or other taxpaying entities (Adapted from SARS, 2007). 4.4.3. Section 18A Approval – PBOs and entities established by or under law conducting approved PBAs A PBO that is tax exempt in terms of section 10(1) c(A)(i) of the Act, and carries on any approved PBA, may apply for Section 18A of the Act, which provides for the tax deductibility of donations made to approved public benefit organisations, institutions, boards or bodies or the government, provincial administration or local authorities, carrying on certain approved PBAs as listed in Part II of the Ninth Schedule to the Act (SARS, 2007). This enables other persons and entities which provide funding to PBOs to enjoy some tax relief. It will also make it easier for PBOs to obtain funding. 4.4.4. Trading Before 2006, PBOs were only permitted to carry out limited trading activities within permissible rules. A system of partial taxation was implemented, which allows PBOs to carry on trading activities outside the permissible rules without losing exempt status as long as the proportion of income earned from trading does not exceed R150 000 or 5% of total income. The PBO’s secondary trading activities must support the aims and objectives of the PBO. Certain trading activities are excluded from tax where they are central to the purpose of the NPO, e.g. employing disabled people. In the pilot study in the legal environment, it emerged that Treasury had already been approached on the 5% limit on untaxed trading income for PBOs. The Treasury’s response was that PBOs are not intended for enterprises, so they do not want to encourage PBOs to trade. In fact, this was further validated in an interview with SARS: the researcher established that a PBO may not trade in competition with a for-profit company. 61 | P a g e According to the Tax Exemption Guide for Public Benefit Organisation in South Africa, a PBO may only conduct a trading activity or business undertaking ... where the activity is utilised as a source of funding for the approved PBAs, provided that the carrying on of a business involving a commercial activity with the intention of earning a profit does not, in effect, become the sole or principal object or activity. Where PBO approval has been granted, but where it subsequently transpires that the PBO does not comply with these requirements, the exempt status may be withdrawn retrospectively (SARS, 2007, p.11). It is almost certain that one would need to develop a solid business case if one wanted to raise this limit for trading by PBOs. The motivation would have to address the issue of unfair competition between PBOs and for-profit organisations which are subject to taxation. 4.4.5. Employment legislation Employment legislation could provide a barrier to volunteerism because South Africa does not have a dispensation for volunteers, as volunteers are not treated as employees by law. There is also an issue for cooperatives in terms of employment law, as there is no employer/employee relationship. This aspect should be explored in a separate study. 4.4.6. Governance: The King III Report The King Code of Governance Principles (King III) was released on 1 September 2009 and will become applicable on 1 March 2010. While the release of King III represents a significant advance in good corporate governance, it falls short of responding to the needs of the social sector. In a joint statement by Inyathelo - The South African Institute for Advancement - and Ricardo Wyngaard Attorneys on 7 September 2009, the parties refer to a public submission to the Institute of Directors, endorsed by 57 civil society organisations and by 17 individuals, on the Draft King III report. This submission pointed out the key differences between non-profit and commercial entities and how the draft King III Code failed to give recognition to the distinctive features of non-profit entities. The submission cautioned against enacting superficial changes in addressing the Draft King III’s fundamental shortcomings with regard to NPOs. The submission further recommended that a sub-committee be appointed to develop a chapter within King III that specifically addresses non-profit governance. King III remains unquestionably designed for businesses. Although components of King III will benefit some NPOs, the final version of King III remains wanting in its 62 | P a g e appropriateness and applicability for the non-profit sector as a whole. More particularly, King III has not take into account the following important factors: 1. That the majority of South African NPOs are small community-based organisations. Procedures such as “integrated reports”, “audit committees”, “corporate citizenship policies” and “business rescue proceedings” would not find place amongst such organisations. Yet, NPOs will effectively be required to discern which of the principles contained in King III apply to them and explain to their stakeholders why other principles may not be applicable. 2. The Directorate for Nonprofit Organisations is tasked with the responsibility under the Nonprofit Organisations Act of 1997 to ensure that the standard of governance within NPOs is maintained and improved. One of the objectives of that Act is to encourage NPOs to maintain adequate standards of governance, transparency and accountability and to improve those standards. The Directorate for Nonprofit Organisations is accordingly a key stakeholder with reference to non-profit governance in South Africa. Contrary to its message of ‘inclusivity of stakeholders’, the committee has seemingly excluded this important stakeholder in developing King III. 3. Section 8 of the Companies Act of 2008 recognises two types of companies, namely: profit companies and non-profit companies. This Act notes that the main objective of a non-profit company is to pursue a broader public objective or to promote social change as opposed to generating profit. King III’s main emphasis remains firmly on business. The non-profit sector is however not a sub-sector of the marketplace and it cannot be assumed that governance principles aimed at governing commercial entities should apply to NPOs. King III has however addressed some key concerns with regard to its relevance and applicability to the non-profit sector, namely that: 1. King III now deems a company’s stakeholders as its ultimate compliance officer, thus considering the fact that NPOs are not marketplace led. 2. Noting that NPOs do not have “shareholders”, performance is deemed to be the ultimate responsibility of the board. Appropriately, King III applies the notion of “improvement of economic value” only in relation to “trading entity” and not to NPOs. (Inyathelo, 7 September 2009) 63 | P a g e 4.5. FINDINGS: THE LEGAL AND REGULATORY ENVIRONMENT 4.5.1. The following laws were identified as having a bearing on the enabling environment for social enterprises: • The Companies Act, No. 61 of 1973, as well as the Companies Act, 2008, No. 71 of 2008, to be implemented in the course of 2010 • Nonprofit Organisations Act, No. 71 of 1997 (NPO Act) • Trust Property Control Act, No. 57 of 1988 • Close Corporations Act, No. 69 of 1984 • Common Law on Associations • Income Tax Act, 1962 (No. 58 of 1962) • Broad-Based Black Economic Empowerment Act 53 of 2003 • Preferential Procurement Policy Framework Act, 2000 (No. 5 of 2000) • Co-operatives Act (No. 14 of 2005) • All Labour legislation (including measures related to volunteerism) • The Constitution of the Republic of South Africa. 4.5.2. The NPO Act, No. 71 of 1997 already has space for social enterprises as it answers to the principles of public purpose, non-distribution of assets among members and that when the NPO or social enterprise dissolves, assets must be transferred to a similar organization but should allow for trading by social enterprises and share equity. However, it covers only those social enterprises that devote their income exclusively to the social purpose, leaving no room for entities which make limited distributions to their members or investors. It also covers entities that do not trade and which, therefore, do not have the same needs as social enterprises. 4.5.3. Multiple registrations frustrate social enterprises and lead to bona fide social enterprises registering as for-profits because of bureaucracy. For instance, a Section 21 company may often have to register three times (Registrar of Companies, NPO Directorate and Tax Exemption Unit of SARS). 4.5.4. For a vendor, multiple registrations at the different government institutions are timeconsuming. There is no central database on which to register vendors in the provinces, let alone for the country. A small social enterprise, not to mention small businesses, finds it time-consuming and costly to register. 4.5.5. There are various avenues for the provision of social enterprises including amendments to the NPO act, amendments to the Companies Act and acts governing trusts, cooperatives, close corporations and the Income Tax Act, all of which need to be explored. One may consider: (a) a fiscal solution by only amending the Income Tax Act and/or 64 | P a g e (b) amendments to all legislation relating to the different entities under which social enterprises function; and (c) new legislation dedicated to social enterprises. 4.5.6. Because of the number of institutions involved with BBBEE (DTI, SANAS and accreditation agencies), it is essential that DTI takes the leadership in policy interpretation as there are still instances where the codes are not correctly interpreted (see page 50). Regarding BBBEE, the ownership code refers to NPOs and PBOs, so it should, theoretically, be scored. But as none has a vested interest in these entities, it is difficult to apply the ownership code. This would need to be changed. There is already an exception for Section 21 companies, which would need to be extended. 4.5.7. Under certain circumstances a VA, a Section 21 company and a trust may receive tax exempt status as well as Section 18A approval (tax deductibility of donations). Social enterprises are only allowed to trade under certain circumstances, provided the earnings from the trading do not exceed R150 000 or 5% of total income. 4.5.8. There is a need for a self-regulatory Code for Good Governance for social enterprises (and NPOs) as the King III report failed to adequately address governance issues for social enterprises and nonprofits. 4.5.9. Social enterprises are not allowed to get share equity or to pay dividends. 65 | P a g e CHAPTER 5 AN ENABLING ENVIRONMENT: BUSINESS DEVELOPMENT SERVICES (FINANCIAL AND NON-FINANCIAL) The financial and non-financial business development services (BDS) is, second to the regulatory aspects, very important in creating an enabling environment where social enterprises will be able to flourish. This chapter examines the financial and non-financial business development services (BDS) currently available in South Africa. It is very important to take note of research regarding an enabling environment in a country such as the USA. In a ground-breaking research document, A Wolk (2008) listed 13 recommendations to be considered by the USA government for laying the foundation for a new era of social entrepreneurship; for setting policy to enable and encourage social entrepreneurship and for developing financial and non-financial resources for social entrepreneurship as set out below: Table 3: Recommendations for Government to Advance Social Entrepreneurship (Wolk A, 2009, p.9) 66 | P a g e Wolk (2008; p.8) provided the following conceptual clarification of terminology used in Table 3 above: 1. Encourage social innovation – For any entrepreneur, the start-up period of an organisation is critical. Government can encourage social innovation and help spur the testing of promising new approaches to solving social problem. 2. Create an enabling environment for social entrepreneurship – The very nature of innovation means that social entrepreneurs will be heading into new territory, and they often encounter unexpected barriers along the way. Government can set policies, encourage public-private partnerships, and lift such barriers for social entrepreneurs so that they can make progress more swiftly and easily. 3. Develop standards and produce knowledge for understanding performance – Government already serves as a critical source of standards and data that can advance the field of social entrepreneurship. Government can further that role by helping to develop clear performance standards and producing knowledge that will inform future social entrepreneurship. 4. Reward social-entrepreneurial initiatives for exceptional performance – Access to reliable sources of funding is essential to the growth and sustainability of solutions that work. By tying decisions about funding and purchasing to performance, government can help ensure that solutions that work will sustain and grow their impact. 5. Scale successful approaches – Expanding the reach of a proven solution is critical if it is to become truly transformative. Yet acquiring the recognition, support for dissemination, or funding to scale a successful initiative is notoriously difficult. Government can play a crucial role in scaling successful solutions by seeking out what works and enabling the expansion of proven programmes. The South African realities are discussed below: 5.1. FINANCIAL BUSINESS ENVIRONMENT 5.1.1 Issues relating to the financial environment identified by research participants • Access to capital As illustrated below, respondents indicated that they realised that social entrepreneurs faced the same difficulties seeking access to capital from banks and investors, where the majority (61% of the respondents) agreed that social entrepreneurs and conventional entrepreneurs find it equally difficult to get access to loans or venture capital. 67 | P a g e Figure 8: Gaining access to capital - difficulties by both SEs and entrepreneurs It is, therefore, important to note what the Small Enterprise Development Agency (SEDA) indicated as challenges for small enterprises. One may readily accept that social enterprises would face the same challenges as set out below: • Inadequate capital for start-up and for expansion • Inaccessibility of the relevant financial products • The enterprise’s limited knowledge and understanding of how the lending market works • Inability to comply with minimum financing requirements due to inadequately prepared business ideas and poorly compiled business plans. Banks are treating conventional and social enterprises in the same manner when each approaches them for finance. They do look at cash flow and regular and consistent streams of income, collateral, references, proven ability, success in other ventures, the probability of repayment, reputation for paying commitments, previous dealings with banks, and interests in other business properties. It is important to note that the bankers interviewed for the purposes of this survey were familiar with the concept of social enterprises, and they are excited about the future relationship between bankers, investors and social enterprises. To a large extent, banks are creating an enabling environment through the development of community trusts: the Tutuwa Community Trust initiative of Standard Bank is a case in point, which is about: • Black small and medium enterprise (BSME) development • Community development 68 | P a g e South African banks are engaging in community banking and microfinance, and supporting organizations which offer micro or developmental financing. An example is the Women’s Development Bank. • Blended Value The blended value proposition has been described earlier in this report. Banks and the private investors who were interviewed claimed that there is more evidence that a large number of double-barrelled investments (social and financial return) are now materialising. At one of South Africa’s largest banks, this happens in micro finance where investment funds invest in micro funds. The investor is usually a private sector entity (for-profit). Non-profit organisations are being reformatted in the process. This bank has a specific unit with the absolute focus on the double barrelled investment objective. There must be profit plus social impact. Operating group lending always works with NGOs in community to interact with community. They are measured on impact. There can be no contract if there is no impact. In South Africa, HEART’s Blended Value Funds aim at incubating high growth and high-impact social enterprises that are sustainable, scalable and replicable. The focus is exclusively on ventures that address social and environmental challenges facing local communities. CASE STUDY: BLENDED VALUE AND HEART HEART is a registered Section 21 Company and a registered nonprofit, whose mission is to transform quality of life by creating, incubating and establishing social enterprises that work long term. According to HEART, start-up social enterprises by their nature simply do not have access to traditional funding channels such as banks, nor the resources to afford strategic and operational expertise. Therefore, HEART combines its business development services with venture loans, thereby enabling social entrepreneurs to finance their operations. They combine their business development services with Blended Value Loans from social investors to enable social entrepreneurs to finance their operations through various phases of business development. HEART is, therefore, a nexus between the social entrepreneurs needing capital and support in order to develop their social enterprises and investors seeking social and financial returns, otherwise referred to as Blended Value (Shrimpton & Pichulik, 2009) Accordingly, HEART is pioneering a new way of giving called Impact Plus. In this structure, investors have the opportunity of creating social impact, plus the potential to get their principal back at some future point. By creating social enterprises that are both impactful and financially sustainable, investment opportunities are created that offer investors the potential for both social and financial returns on their capital. Investors do not, however, make Blended Value Loans with gratuitous intent. Financial returns are expected. Investors will have no legal recourse on the funds should the loans fail 69 | P a g e to mature. It is a contradiction in terms that HEART is very vocal in advocating non-grant dependent social entrepreneurship, but yet is raising millions in grants as a registered Section 21 (nonprofit) company to finance its incubator. Box 4: Case Study - Blended Value and Heart Similarly, when we talk about blended value, the issue of share equity is also relevant. This has been discussed in the previous chapter too, but it is important to note what the quantitative survey revealed: • Scaling and replicating – raising capital On the issue of equity shareholding, there was consensus (68.6%) that equity shareholding would facilitate capacity building and scaling up – as illustrated in the graph below: Figure 9: Equity shareholding The increasing rise in blended value or double-barrelled investments is sure proof of the fact that South Africa is ready for a new dispensation, where social enterprises and robust trading, replication and scaling could ameliorate the high levels of poverty still experienced in this country. The need for equity and the frustrations experienced by social entrepreneurs in a quest to raise capital are further illustrated by the innovative ways in which social enterprises raise capital. The case of Life College is of specific interest. 70 | P a g e CASE STUDY: LIFE COLLEGE, RANDBURG Life College is a social enterprise, functioning as three legal entities. The first entity, Life College Association, has been in operation for twelve years as a Section 21 Company with Section 18(a) tax exemption. Then there is Life Trust, a water-tight trust, which owns 100% shares in LifeCo Investments (Pty) Ltd and ,and its only beneficiary is Life College Association. LifeCo Investments (Pty) Ltd is a for-profit company, seeking to invest opportunistically. It was started for the purpose of raising private equity for the purpose of upscaling and replication to allow other investors to get involved. It is impossible for other investors to get involved in a Section 21 company. However, with LifeCo Investments, Life College is suddenly able to structure equity deals, and to deal with companies who want to use their BBBEE status. They are also able to raise capital on the basis that they are able to trade. Pat Pillay, the founder and CEO of Life College Association, says that in order to function and upscale, a number of entities had to be created to get around the system. The frustration is that under South African company law, there is no space for social enterprises to do all of this at once. This, however, is the case in the USA where the L3C, or Low-Profit Limited Liability Company, recently came into operation and in the UK, where Community Investment Companies (CIC) address the specific needs of social enterprises who are trading in the market. A social enterprise should be a ‘no loss, no dividend’ business. Life College Association wants to scale up and to franchise their model throughout South Africa. According to Pat Pillay, society should remain the stakeholder in social enterprises: it should not have any private shareholders. We need to change our mindset about sustainability, because sustainability is not only linked to the balance sheet but to vision, mission and social purpose. The vision of Life College is to eradicate poverty in the lifetime of their students. Our vision is a nation of champions. The college seeks to build a champion mentality in each of its students. Life College Association is an innovation hub: groups of about 12 people are supported by 250 volunteers. Their gap in society is providing for the mentality of someone who will be successful, no matter what. Its curriculum uses a unique model for that purpose. More about Life College is available by going to www.lifecollege.org.za Building this nation of champions will require franchising and replication. Box 5: Case Study - Life College, Randburg • Procurement One may ask whether the procurement process in government departments and in the private sector really favours social enterprises on the issue of procurement. While the BBBEE 71 | P a g e Codes are favourably disposed towards social enterprises, one social entrepreneur, in an interview, indicated that it is difficult to obtain work from government. However, marketing is an important aspect of the procurement process. The researcher got the distinct impression that the social entrepreneurs’ difficulties may have something to do with the marketing of their products, services or enterprise. While preferential procurement is embedded for social enterprises in the BBBEE Codes and in the legal framework, access to government contracts remains elusive – this may be an unrelated issue. The issue of successful bidding for government quotes or tenders and the social enterprise’s relationship with marketing and presentation needs to be explored further. • Operate as a for-profit entity to attract investors There are circumstances, such as the Life College example earlier above, where adopting a for-profit entity alongside a non-profit entity is done to attract investors. Respondents to the quantitative survey are well aware of the fact that some social enterprises are, indeed, forprofit entities: Figure 10: SEs operate as a for-profit to attract investors • Switch to for-profit to avoid donor interference Prescriptive donors or social investors can also drive a social enterprise into opting for a forprofit entity. This case is clearly illustrated by Shonaquip, providers of wheelchairs. CASE STUDY: SHONAQUIP RETAINS INDEPENDENCE While the owner, Shona McDonald, started two non-profit organisations over a period of ten years, the restrictions of being funded by organisations with their own agenda was simply too frustrating because of the funding criteria laid down by the sponsors. This interfered with the 72 | P a g e social purpose and she felt that she was never able to do what needed to be done and to do so openly. The funders’ needs took precedence over that of the people that needed to be served. An example of such a frustration is as follows: a funder has Rx amount of money and is interested in the quantity of chairs (20 wheelchairs costing R4 000 each rather than 10 wheelchairs for special needs at R8 000 each.) An example of the need for special wheelchairs is that people in rural areas need special chairs because of problems such as uneven surfaces. The wheelchair needs to address the needs of the user. The frustrations led her to start up her own for-profit company because she could make her own decisions how to spend money and how to respond to the need of people with disabilities. However, Shonaquip reinvests all surpluses in business development. Shonaquip is basically driving change in the field of wheelchair provision, now impacting at a global level– demanding that wheelchairs address needs of the user in terms postural support and prevention of secondary health complication, which costs a great deal. In order for this to work, Shonaquip provides associated services and training for all involved: user, parent, carer, rehab worker and professional. Shona MacDonald started a foundation to raise money to pay for these additional activities to make the model work and to get access to funding for disadvantaged people. Box 6: Shonaquip retains independence • Government involvement expected While there is eagerness on the side of the SEs to perform and to become financially sustainable, there was also consensus (75.9%) that government should provide SEs with seed capital, while 86,23% of respondents agreed that government should either make loans available or facilitate access to loans for social enterprises. Figure 11: Loans by Government 73 | P a g e 5.1.2 Different types of financing models for social enterprises Table 3 explains the different types of financing models for social enterprises currently available. 74 | P a g e The following financial models are of importance to social enterprise development: Table 4: Financial Models available to Social Entrepreneurs Funding Option Venture Capital Traditional Financial Investment 75 | P a g e Supplies capital and other resources to entrepreneurs in new business with high growth potential for a high rate of return on invested funds Normal financial planning which involves various investments and savings issues to achieve long-term profit from present wealth Investment Objective The objectives of corporate venture capitalists vary from one to the other: some corporate investors want, mainly, to identify and get stakes in companies they may someday acquire; others want to tap into promising technology, and there are still others that are like traditional venture capitalists– purely interested in return on investment. Capital Types Private equity, often exchanged for part ownership or shares in the new business Return on Investment Seek financial return Rate of ROI High rate of return Purely profit-driven Market rate capital Seeks financial return Above market rates Funding Option Blended Value Investment opportunities inclusive of social and/or environmental factors for investment decisions Investment Objective High Social Return - Social mission with financial return and promotes specific social and/or environmental agenda, OR Some Social Return – Market-rate financial return with some broad social return, and reflects investor’s moral and ethical beliefs Traditional Philanthropy 76 | P a g e The effort or inclination to increase the wellbeing of humankind, as by charitable aid or by donations for the love of humankind in general. Maximizes social return with no financial return Capital Types High Social Return – Below market capital or mix of donations and market rate capital, OR Return on Investment Seeks both social and financial return Rate of ROI Risk-adjusted or below market rates No return N/A Some Social Return – Market-rate capital Donations and grants 5.1.3 Social enterprise franchising and replication Social enterprise franchising as business models is developing momentum within the United States of America (USA) and the United Kingdom (UK). The aims of this business model are to assist existing social enterprises to expand their social business through replication and to afford existing and new social business ventures access to the required infrastructure resources and systems, business knowledge and venture capital through replication. Social enterprise franchising and replication are still in its infancy in South Africa and this business model should be researched and investigated further within the South African context. ‘Sport for All’ claims to be the only social enterprise franchise within South Africa. The best current available study on social enterprise franchising, conducted in Scotland, is the study by Gerry Higgins, Kevin Smith and Russell Walker on Social Enterprise Business Models: An Introduction to Replication and Franchising, 2008. For the purpose of this study, the research done by these authors will be used to explain social enterprise franchising and replication. Commercial franchising recognises two kinds of franchising models, namely, ‘business format franchising’ and ‘product and trade name franchising’. The latter focuses on the rights to distribute and sell products and services to one or more countries: this type does not include royalty fees, and the franchisor provides trademarks, logos, and national advertising campaigns. The motor industry and soft drink companies are good examples of ‘product and trade name franchising’. The key features of ‘business format franchising’ include purchasing of a licence, use of branding, an allocated geographical territory, rules of operation, payment of ongoing fees to cover ongoing support and marketing (Higgins, Smith & Walker, 2008). Social enterprise franchising is different from the commercial franchising agreements that exist and is, at present, not recognised by the commercial sector in the UK as ‘franchising’. Currently within the UK two main streams of ‘social franchising’ exist. The first stream is where one or more manufacturer participates in a scheme where a NGO is licensed to distribute its products free of charge to developing and/or underprivileged communities. In this instance there are no business systems involved, no marketing and no sales activity, and its purpose is mainly for the NGO to get products from manufactures into developing and underprivileged communities without distorting the First World marketplace of these products. In the second instance, some formal replication in the social enterprise sector is being termed ‘social franchising’ when, in fact, no franchising is involved. It involves more of a social enterprise collaboration to take the systems and experiences of one enterprise and to apply it to another (Higgins, Smith & Walker, 2008). • Engaging the personnel from one enterprise to support the development and establishment of another, similar enterprise; 77 | P a g e • Allowing another business to access systems, business information or other intellectual property to assist them to develop a new social enterprise (Higgins, Smith & Walker, 2008, p. 13) The authors (Higgins, Smith & Walker, 2008) of the UK study found that the franchising method most suited for a social enterprises is the ‘business forma franchising’ model as it offers a variety of services to potential franchisees. The franchisor will provide the franchisee with the use of trademarks, logos and a complete system of doing business, business advice, interior layout and design, hiring and training of staff, national and local advertising and marketing, and could even assist in the supply of products and/or raw materials. A potential South African social enterprise that can benefit from social enterprising franchising is the Life College case study presented earlier in this study. 5.2. NON-FINANCIAL BUSINESS DEVELOPMENT SERVICES (BDS) The purpose of this study is not to index the services available but rather to provide an overview as to whether there are, indeed, non-financial services available and how these impact on the enabling environment for social enterprises in South Africa. It is important to note what services are available to social enterprises. Unfortunately BDS are, in many instances, only available to conventional enterprises as is illustrated in the graph below: 5.2.1 What does non-financial BDS entail? There are a number of BDS providers offering either the same or different services. While these services vary, respondents were requested to indicate the five most important nonfinancial BDS. Below are the results: Figure 12: Non-financial BDS Ranking 78 | P a g e The seven most important services listed are: • Marketing • Monitoring and evaluation of projects • Linking up social entrepreneurs with business opportunities • Business plans • Business advice • Project management • Strategic management planning. One realises why there are difficulties when comparing the needs of the different sectors: for instance, what government deems important versus what is deemed to be important by the social enterprises themselves, as set out below: Table 5: Needs of Different Sectors Please select and tick the FIVE (5) most important non-financial Business Development Services that should, in your opinion, be provided.... (d) Provider of (c) Provider of (b) Social non-financial (a) National, financial Entrepreneurial business Provincial or business concern / Social development (e) Both (c) Local services (such Entrepreneur / services (such as and (d) Government as banking, Non-profit Entity / training, department investment, Social Enterprise business plan, broker) marketing) (f) Corporate Social Responsibility(CSR) /Corporate Social Investment(CSI)/ Foundation / Fellowship or grantmaker (g) Other, please specify: 82.35% 44.83% 60% 57.14% 50% 62.5% 33.33% 14 of 17 13 of 29 3 of 5 8 of 14 1 of 2 5 of 8 4 of 12 29.41% 44.83% 0% 35.71% 50% 25% 33.33% 5 of 17 13 of 29 0 of 5 5 of 14 1 of 2 2 of 8 4 of 12 23.53% 31.03% 20% 7.14% 50% 25% 25% 4 of 17 9 of 29 1 of 5 1 of 14 1 of 2 2 of 8 3 of 12 41.18% 34.48% 40% 28.57% 50% 62.5% 33.33% 7 of 17 10 of 29 2 of 5 4 of 14 1 of 2 5 of 8 4 of 12 29.41% 27.59% 60% 28.57% 0% 12.5% 25% 5 of 17 8 of 29 3 of 5 4 of 14 0 of 2 1 of 8 3 of 12 Marketing Legal Advice Tender Assistance Accounting Services Financial Statement Literacy 79 | P a g e Please select and tick the FIVE (5) most important non-financial Business Development Services that should, in your opinion, be provided.... (d) Provider of (c) Provider of (b) Social non-financial (a) National, financial Entrepreneurial business Provincial or business concern / Social development (e) Both (c) Local services (such Entrepreneur / services (such as and (d) Government as banking, Non-profit Entity / training, department investment, Social Enterprise business plan, broker) marketing) (f) Corporate Social Responsibility(CSR) /Corporate Social Investment(CSI)/ Foundation / Fellowship or grantmaker (g) Other, please specify: 41.18% 31.03% 40% 42.86% 50% 25% 41.67% 7 of 17 9 of 29 2 of 5 6 of 14 1 of 2 2 of 8 5 of 12 35.29% 37.93% 60% 57.14% 50% 37.5% 41.67% 6 of 17 11 of 29 3 of 5 8 of 14 1 of 2 3 of 8 5 of 12 41.18% 48.28% 40% 42.86% 50% 37.5% 66.67% 7 of 17 14 of 29 2 of 5 6 of 14 1 of 2 3 of 8 8 of 12 23.53% 58.62% 40% 57.14% 50% 50% 58.33% 4 of 17 17 of 29 2 of 5 8 of 14 1 of 2 4 of 8 7 of 12 5.88% 13.79% 40% 14.29% 0% 12.5% 33.33% 1 of 17 4 of 29 2 of 5 2 of 14 0 of 2 1 of 8 4 of 12 70.59% 34.48% 40% 28.57% 50% 50% 41.67% 12 of 17 10 of 29 2 of 5 4 of 14 1 of 2 4 of 8 5 of 12 17.65% 37.93% 40% 50% 0% 62.5% 33.33% 3 of 17 11 of 29 2 of 5 7 of 14 0 of 2 5 of 8 4 of 12 47.06% 41.38% 20% 42.86% 50% 25% 33.33% 8 of 17 12 of 29 1 of 5 6 of 14 1 of 2 2 of 8 4 of 12 Financial Advice Business Advice Linking me with business opportunities Monitoring and Evaluation of projects Proposing best business model Business Plan Strategic management advice Project Management 80 | P a g e Please select and tick the FIVE (5) most important non-financial Business Development Services that should, in your opinion, be provided.... Computers, faxes and internet facilities at a centre (d) Provider of (c) Provider of (b) Social non-financial (a) National, financial Entrepreneurial business Provincial or business concern / Social development (e) Both (c) Local services (such Entrepreneur / services (such as and (d) Government as banking, Non-profit Entity / training, department investment, Social Enterprise business plan, broker) marketing) (f) Corporate Social Responsibility(CSR) /Corporate Social Investment(CSI)/ Foundation / Fellowship or grantmaker (g) Other, please specify: 11.76% 3.45% 0% 7.14% 0% 12.5% 0% 2 of 17 1 of 29 0 of 5 1 of 14 0 of 2 1 of 8 0 of 12 0% 10.34% 0% 0% 0% 0% 0% 0 of 17 3 of 29 0 of 5 0 of 14 0 of 2 0 of 8 0 of 12 0% 0% 0% 0% 0% 0% 0 of 17 0 of 29 0 of 5 0 of 14 0 of 2 0 of 8 Other, please specify: 0% No response One can understand why the services of BDS providers are perceived to be unsatisfactory when comparing the priorities identified by each of the important groups. The BDS providers and the government are clearly not on the same page as the social enterprises or those associated with the latter. Table 6: Comparison of Priorities by each Stakeholder Group Social enterprises and those associated with SEs Monitoring and Evaluation tools (58.62%) Links to business opportunities (48.28%) Marketing (44.83%) Legal advice (44.83%) BDS providers All levels of government Marketing (60%) Marketing (82.35%) Financial literacy (60%) Business plan (70.59%) Project management (47.06%) Links to business opportunities (41.18%) Project management (41.38%) Financial advice (40%) Financial advice (41.18%) Strategic management Advice Links to business opportunities Accounting advice (41.18%) (37.93%) (40%) Business advice (37.93%) Monitoring and Evaluation Financial Services (41.18%) (40%) Proposing best business model (40%) Business plan (40%) Strategic Management Services (40%) 81 | P a g e Business advice (60%) Accounting (40%) During the interviews with business development service providers, it became clear that, although assistance is provided with some of the above, not all the priorities are addressed. This information should be valuable to BDS providers – for them to reinvent their outreach to social enterprises – and perhaps valuable to conventional enterprises too. The BDS providers are spread all over South Africa, together with government agencies in an effort to stimulate small business. In a focus group (FG) discussion which took place on 10 September at the ILO office in Pretoria, FG participants agreed that BDS is needed by conventional and social entrepreneurs. 5.2.2 Organisations lending support It is impossible to have had interviews with all organisations which are lending support to social enterprises or who could fulfil this role. The organisations that were in a position to provide the researcher with information are listed below. Where it is feasible, the groups are clustered into, e.g. banks, BDS consultants and educational institutions.. The list of BDS providers were selected randomly and do not appear in any particular order below: • Ashoka Ashoka is a catalyst for systemic social change and a dynamic global organisation that aims to build a strong citizen sector by developing the profession of social entrepreneurship. Ashoka works on three levels. First, it provides support to individual social entrepreneurs who deliver high-impact solutions to society’s most pressing problems —financially and professionally— throughout their life cycle. Second, it brings communities of social entrepreneurs together to help leverage their impact, scale their ideas, and capture and disseminate their best practices. Finally, it helps build the infrastructure and financial systems needed to support the growth of the citizen sector and facilitates the spread of social innovation globally. Upon election, Fellows enter a robust learning community and gain access to programmes to support their efforts. Ashoka offers to fellows: - - Individual mentoring, exposure, media support, lifelong access to its growing global network of Fellow social entrepreneur and to new fellows, a three-year living stipend, allowing them to focus full-time on building their institutions and spreading their ideas. A variety of business development support services and consultancies as well as pro bono legal advice Access to group collaborations and funds allowing for the meeting of other fellows, exploring potential partnerships, combining expertise, developing joint projects, replicating a successful methodology and starting initiative to induce policy change. Ashoka has presently over 2000 Ashoka Fellows around the world. The Southern Africa programme initiated in 1990 has to date elected over 115 Fellows in Bostwana, Mozambique, South Africa, Zimbabwe and Zambia. (Adapted from www.ashoka.org and http://usa.ashoka.org/fellowship). 82 | P a g e • Schwab Foundation The Schwab Foundation does not offer grants but rather works to create unique opportunities for accomplished social entrepreneurs. With the World Economic Forum (WEF),the Schwab Foundation values relationships and networks and arranges high-level access to government and, through the WEF networks, to philanthropists, funders, donors, social venture funds and high-network individuals. They also bring social entrepreneurs into contact with auditing firms, strategy firms and with the Lex Mundi Pro Bono Foundation, which provides legal advice. Besides identifying and connecting the world’s leading social entrepreneur at regional and global meetings of the WEF, the Schwab Foundation: - sponsors scholarships in social entrepreneurship at the largest universities in the USA, in the UK and in Europe. - advocates community building by encouraging the peer-to-peer exchanges between social entrepreneurs and by supporting the replication of their methodologies among each other. - works to generate solutions in partnerships to advance specific activities of social entrepreneurs or initiatives that support social entrepreneurship. - sponsors the social entrepreneur category of the World Entrepreneur Competition organised, worldwide, by Ernst and Young. (Adopted from www.schwab.fond.org) • Banks To a very limited extent, some banks provide BDS apart from financial services, such as assistance with a business plan and meeting / conferencing facilities. However, not all the banks in the country were interviewed and therefore the banks which were represented in this study will not be identified so as to avoid the perception of bias. South African banks, through micro financing and community banking, are making a difference. One of the bank’s finance division targets the poorest of the poor, and its basic business skills programme enhances rural women’s micro-enterprises. Empowerment takes place through a computer literacy programme and some banks stimulate business by making meeting facilities available to small businesses, including social enterprises. Please see p.74 for a review on the different options for access finance. • Examples of BDS consultants and agencies interviewed The services provided by these entities are indeed exciting, but most of them only recently started focusing on social enterprises as the activities were previously viewed as being projects and so could not benefit from the available business products. o Community Self-Employment Centre (COMSEC) COMSEC is geared towards enterprise development and poverty alleviation. They are known nationally and internationally as a small business development centre of 83 | P a g e renown which consistently adapts itself to the changing small business environment that requires innovative methods to create impacts. They do training and follow a holistic programme to help people improve their businesses. They replicate the model and provide a full replication manual. COMSEC train the incubator staff for a two-week period and provide aftercare to ensure adherence to the replication model. The integrated package of services in support of entrepreneurship and BDS is an integral support function performed by full-time, multi-skilled business counsellors, who provide assistance with feasibility studies, marketing plans, business mentoring and advice, project management, assistance with business registration, tender advice regarding policies and company profiles. (Adapted from www.comsec.co.za) o Small Business Development Agency (SEDA) The aims of SEDA are to: - strengthen support for SMMEs, including social enterprise access to finance - expand market opportunities for specific categories of SMEs - localise small business support through a grid of SEDA-coordinated information and advice access points - initiate a national entrepreneurship drive, and expand education and training for small businesses. - co-fund minimum business infrastructure facilities in local authority areas across the country. (Adapted from www.seda.org.za) According to the Eastern Cape branch of SEDA, the essence of support of a social enterprise is needs-driven. SEDA provides support with financial performance and does scenario planning – ’What if?’. SEDA also provides SEs with packages and diagnostic tools. SEDA makes it its business to establish where a company is at and where it wants to go and the gap between the scenario and the reality. SEDA will plan non-financial interventions for SMMEs regarding the direction they wish to take, e.g. implementation of official systems, website development, and they will define the interventions in gap. SEDA will also ‘grow' terms of reference and send the terms to three consultants for a quote. The entrepreneur will select a consultant and SEDA then funds up to 90% of interventions down to 20%: the funding scale drops off because a maximum of five projects over a three-year period can be facilitated. SEDA does project management in collaboration with the entrepreneur and, in the process, creates a market for business services. SEDA also trains the entrepreneur in project management skills to ensure that the consultant delivers before SEDA signs off. The role of SEDA cannot be underestimated because of its valuable know-how in this area. However, no impact assessment has been done 84 | P a g e o National Youth Development Agency (NYDA) The NYDA is the result of the merger of the National Youth Commission (NYC) and the Umsobomvu Youth Fund (UYF). This organisation is aimed at creating and promoting coordination in youth development matters. As the primary custodians of youth development in the country, the NYDA’s mandate is to: - advance youth development through guidance and support to initiatives across sectors of society and across spheres of government. - embark on initiatives that seek to advance the economic development of young people. - develop and coordinate the implementation of the Integrated Youth Development Plan and Strategy for the country. The two documents serve as guiding instruments in advancing youth development at all levels of government. The functions of the NYDA include the following: - national youth service and social cohesion - economic participation - policy, research and development - governance, training and development - youth advisory and information services - national youth fund (Adapted from www.nyda.gov.za). In an interview, the NYDA stated that it is aware of the need for social entrepreneurship and that the main thrust and part of the strategy is to take it to a national level. The NYDA also described some of the existing BDSs for social and business entrepreneurs and also the challenges faced by the organisation on various levels of the service delivery: - information and referral information using electronic databases on the NYDA portal . This intervention works well in affluent areas and not in rural areas. - business consulting services voucher to help business set up, expand or develop. This is a flagship programme which had a major success but was cut back, due to budgetary constraints. - walk-in youth advisory centres, that provide and disseminate relevant and up-to-date information so as to assist young people in making informed decisions about their livelihoods. These centres also provide outreach activities covering a broad spectrum of young people even in remote areas. Branches are located in every province and at smaller points in immediate communities. However, the reporting line was somewhat flawed because NYDA staff were reporting to the municipality, finding themselves without the 85 | P a g e quality of support needed. This has generated adverse publicity for the centres despite the fact that the bulk of complaints was not related to core services offered by the NYDA. The NYDA will tidy up the reporting line in the future and provide appropriate support to centres. Municipalities are to set up infrastructure and the NYDA is to set up the necessary services. - Masisizane Women’s Enterprise Fund, resulting from a partnership between Old Mutual’s Fund and UYF, was a R200-million development finance initiative for the advancement of women-owned enterprises. The fund aimed at women of all ages, mainly in peri-urban and rural areas, and where enterprises are economically viable. Loans range from R100.00 to R5 million, with a maximum repayment period of five years. No loans are provided for property development, primary agriculture, gambling, tobacco, gaming and socially undesirable activities. The Masisizane Women’s Enterprise Fund was working well, but it came to an end and will not be restarted. However, the concept and focus of the fund might be revisited but only to service, according to the NYDA Act, people in the 18-35 age group. Other criteria for eligibility will be those operating a cc and companies that are economically viable. It is also important to note that the awareness and the focus will be on social enterprises too. - Registration. The registering a legal entity, e.g. a cc or a company. - Cooperative training: cooperative training is a service provided by NYDA branches, covers demand or need for training and training groups while linking trainees with the Department of Trade and Industry to receive methods of financing. - The Entrepreneurship Education Training: This programme is designed by the UYF is a great new way for someone starting out to get the right skills to become an entrepreneur and, thus far, has received a very good response from the market. This programme teaches an aspirant entrepreneur how to start his or her own business; how to grow an existing business, and even how to create jobs for other people. Part of Entrepreneurship Education Training is – instead of getting consultants to perform these tasks – learning how to develop concepts and ideas; getting marketing skills; polishing one’s communication skills; learning about different types of businesses, and understanding the basics of money management. o The Business Place The Business Place is well-known for the services it offers to both conventional and social entrepreneurs. On its website, The Business Place provides a list of their services, adapted below: - One-on one consultations - Access to confidential consultations with trained staff about the business development process 86 | P a g e - - Presentation of a structured series of ongoing progressive business skills workshops Participation in and offering to clients an ongoing series of industryspecific networking forums with sector specialists Direct connection of clients to relevant business opportunities Provision of access to computer facilities, the Internet and business research materials Quick response to client queries Support own services with further referral to a wide range of additional service agencies from a comprehensive directory of business support organisations. Comprehensive client-tracking processes and monitoring of business impact and progress Research into strategies and interventions that impact the SMME environment which helps The Business Place to develop further services and advise clients regarding up-to-date strategies. Other initiatives listed are: - The Opportunity Exchange: Many established businesses lack relevant industry-specific information or knowledge on how to access available opportunities. The Opportunity Exchange creates a relevant forum for clients in key sectors such as construction, tourism, arts and crafts, women in business issues and other. This connects entrepreneurs to relevant information and support from its [The Business Place’s] broad network of sector leaders. - Enterprise Development Initiative: The Business Place has formulated a strategy to link its clients directly to business opportunities within key industries. This programme enables The Business Place to form strategic partnerships with leading private and public sector companies that are interested in supporting small business. - Accounting Mentorship Programme (AMPS): Recognizing that a large number of clients lack proper bookkeeping systems, The Business Place has set up a programme to help clients develop a proper computerized bookkeeping system through a ‘learning-by-doing’ approach. During the 8 four-hour training sessions, clients are helped to set up their own bookkeeping system. The programme also links each client to a mentor in order to transfer necessary computer literacy skills. - SMME Loan Fund: The Business Place is connected to a fund offering loans between R 25 000 to R 500 000. An intermediary agency serves as a portfolio manager working with a loan committee to identify reasonable clients for this special programme. - Regional Centre for SMME Support Excellence: [Its] vision is to become a recognized international standard of quality support to SMMEs, and [to] help consolidate some of the practices implemented in [its] sector. The Business Place wants to establish an SMME Support Sector ‘Learning Academy’ to serve as an international centre for learning, research and methodologies focused on best practices in SMME support. 87 | P a g e (Adapted from www.thebusinessplace.co.za) The model below allows one to glean, at a glance, the services offered by The Business Place. Figure 13: The Business Place Model 5.2.3 Government and Organised Labour and NPOs With the exception of one province, most of the provincial efforts are into local economic development, with the emphasis on the development of cooperatives to alleviate poverty in rural areas especially. However, it must be noted that there is not a high level of awareness about the nature of social enterprises. In one of the provinces the provincial government is actively engaging with stakeholders and potential partners to drive systemic social change in the province and to encourage the development of social enterprises. The general secretaries for Fedusa and Nactu were interviewed, and in both cases they expressed support for social enterprises and said that the union federations jointly established the Job Creation Trust to stimulate social and conventional enterprises and to reduce joblessness. They have had a lot of success with this venture. The social development coordinator of COSATU was interviewed and he expressed support for the development of a new dispensation for social enterprises. 88 | P a g e A number of case studies of BDS providers that could, for practical purposes, not be added to this chapter, is attached as Annexure H. 5.2.4 Accessibility of services and problems facing the BDS market • Policy implementation In the FG discussion it was said that policy implementation is of utmost importance, wherein the DTI policy on cooperatives was cited as an example of an excellent policy which is challenged when implemented. In this case, there is a need for the effective use of community meetings and ‘imbizos’, usually held in multi-purpose centres, as conduits or vehicles for information gathering and dissemination and also as a skills audit exercise. This can bring government departments and information closer to the people. The blockages to the implementation of developmental policy need to be researched in depth • Coordination of services As stated in the FG discussion, there is a need for mapping and coordination of the services of BDS providers throughout the country so that more can be done to better service enterprises. Some of the BDS providers work with municipalities, but there should also be consultation with structures on the ground, such as the Local Economic Development departments, ward committees, local councillors and chiefs so as to avoid duplication of services by BDS providers. While one person in the FG discussion felt that government should coordinate a database for BDS providers, the feeling was that government should not coordinate, but that social enterprise organisations need to coordinate and own such a network, while liaising with government and recommending what government should do. The public-private service partnership is important and there should be an office in the presidency for social enterprises. Oversight will be best achieved with the Planning Commission in the presidency. • Discrimination against social enterprises Many social entrepreneurs, when they approach BDS providers they get declined because they are not seen as conventional enterprises: they are told that they do not qualify, and many of them find themselves needing the service. They restructured themselves to become cooperatives and now they become eligible for assistance by the BDS providers. It is a fact that ‘the projects’ were scorned in the past and probably many BDS providers may still be unaware of social enterprises. A significant number (30%) of respondents agreed in the quantitative survey that BDS providers turn away social enterprises seeking assistance, while more than 44% indicated that they do not know whether this is the case. 89 | P a g e Figure 14: % BDS Providers turning SEs seeking assistance away 5.2.5 Relevancy of BDS While respondents did not speak about it openly, it became evident that the BDS market is facing a crisis or even collapse because of the following reasons: • Those using BDS providers’ services flit between BDS providers, and sometimes the service is inappropriate. For example, a person gets a voucher to develop a website for his business, but does not have internet access. In other cases it is difficult to check whether businesses are established and what their impact is. • Central information management system is necessary between BDS providers, but that is not possible because of competition and the drive to meet targets. This problem needs to be overcome. • There is a need to screen entrepreneurs: this is essential because there is no way in which one can establish whether a person is an entrepreneur and whether the service is appropriate. 5.3. IDENTIFICATION OF PRIORITIES Respondents of the quantitative survey indicated their three priorities for creating a more enabling environment for social enterprises. Below are the priorities as they emerged from a data analysis: (1) Business development services (2) Improved attitude by business and access to capital (3) Government and public support. 5.4. FINDINGS: ENABLING ENVIRONMENT: ACCESS TO FINANCE AND BUSINESS DEVELOPMENT SERVICES 5.4.1. In some instances, the same findings apply to financial and non-financial BDS and for that purpose the findings are combined. 90 | P a g e 5.4.2. It is as difficult for a social entrepreneur as for a conventional entrepreneur to gain access to loans from banks. 5.4.3. Theoretically speaking, social enterprises can, if allowed to trade, free up money that can be used for non-profit organisations. However, the experience thus far in countries such the United Kingdom (UK) and the United States of America (USA) does not suggest that this is achievable. 5.4.4. Finnancial BDS providers are mainly from a capital investment background and are sometimes perceived to be anti-NGO. 5.4.5. BDS providers do not actively encourage social enterprises to make use of their service. They are furthermore perceived as not understanding the concept of social enterprises: a significant percentage of respondents in the quantitative survey said that social enterprises are turned away from BDS centres. 5.4.6. One of the problems facing social enterprises is that there are more opportunities for the development of SMEs than is the case with social enterprises. 5.4.7. Social entrepreneurs need share equity to replicate or to scale up, but it is not possible to obtain share capital for this purpose as a non-profit entity and as social entrepreneurs often have to employ dual models to be able to raise capital. 5.4.8. Donors often do not understand the environment of the social enterprise and they are prescriptive with what funds should be allocated for which: this could sound good in an annual report but may not always work well for those whom the social enterprise needs to serve (see the case study on page 62). 5.4.9. SARS has increased the maximum number of deductible donations from 5% to 10% in respect of both individuals and companies, which is not sufficient stimulation for the private sector to contribute to the development of sustainable social enterprises. 5.4.10. There is a need to further investigate social enterprise franchising and replication. 5.4.11. Most social enterprises are in need of seed capital and are hopeful of government providing support. 5.4.12. In terms of sustainability, there is uncertainty as to when a grant is a donation or when it can be regarded as payment for a service to be delivered. The issues around grants and payments for services need to be explored in further research. 5.4.13. Social enterprises differ from one another and it may be unfair to expect the same sustainability performance from all. Some NPOs will retain their status but should be eligible to receive the same BDS as social enterprises. 5.4.14 Accessibility of BDS remains a problem, especially in the rural areas. Where agencies are partnered with municipalities (approximately 200 in NYDA’s case), it does not always work because of the various problems encountered.. 5.4.15. Policy implementation (for cooperatives) is perceived to be problematic. 91 | P a g e 5.4.16 There is a problem of integrity experienced with the users of BDS, which leads to further problems because these users flit between providers. 5.4.17 Users of BDS need to be screened for entrepreneurial flair before they are allowed to use the services. 5.4.18 There is no data available on the successes or failures of the users of BDS products. 5.4.19 The seven most needed BDSs identified by SEs or by those working for SEs differ drastically from what BDS providers and government perceive the most needed services to be, which indicates that better communication between the parties and a better understanding of the SE environment is absolutely necessary for the development of SEs. 5.4.20. Changes in legislation should go hand in hand with the raising of awareness. There is a warning about the readiness of the public and various stakeholders from the respondents of the quantitative survey: Figure 15: SE awareness before changes in legislation 5.4.21. People do not always recognise the term ‘social enterprises’, they know what a social enterprise is when you give them an example. Social enterprises are part of the landscape of South Africa, and South Africa is destined to take the lead in Africa to make social enterprises a viable option for creating social values and for making a difference to society. 92 | P a g e CHAPTER 6 RECOMMENDATIONS 6.1 GENERAL RECOMMENDATIONS 6.1.1. The government should be requested to consider a focal point in the Office of the Presidency to assist with the streamlining of social enterprises and with the development of the entities. (This should be similar the Office for the Third Sector in the Office of the Prime Minister in the UK, or to the Office for Social Innovation in the White House). 6.1.2. There is an urgent need for a database categorising and indexing everybody in the social entrepreneurial and social enterprising space. Such a database should preferably be the priority of the focal point in the Office of the Presidency or in any other organisation or network. Mapping the role-players in social enterprise development in South Africa is of utmost importance. 6.1.3. Outreach to social enterprises in raising awareness must be countrywide. The definition in this study should be accepted as a working definition. 6.1.4. The Department of Trade and Industry should consider raising awareness about social enterprises (in its various forms, including cooperatives) in targeted campaigns such as advertising on television and radio, holding a national cooperatives week, a national social enterprise week and a national nonprofit week to stimulate interest in these entities 6.2 RECOMMENDATIONS: THE LEGAL AND REGULATORY ENVIRONMENT Using the working definition for social enterprises, the following amendments or steps could bring closer social enterprises, robust trading and share equity: 6.2.1. The amendment and alignment of existing legislation pertaining to models used by nonprofit organisations (VAs, Section 21 companies, Trusts) to accommodate social enterprises are not recommended as this could change the essence of such organisations. 6.2.2. In the short-term, a fiscal solution through the amendment of taxation legislation [Income Tax Act, 1962 (Act 58 of 1962) as amended] to include the concept of social enterprises into legislation is recommended. [Currently a social enterprise, especially a social enterprise functioning as a for-profit entity cannot receive tax deductible donations, even if it reinvests its profit to serve the social purpose. Neither can it register as a public benefit organisation (PBO). A social enterprise registered as a nonprofit organisation cannot obtain share equity and also loses its preferential tax treatment if it engages in trading, exceeding the threshold determined by SARS.]. 6.2.3. The following adjustments could be considered with regard to 6.2.2 above: 93 | P a g e • The social enterprise definition should be used to determine PBO status in terms of the PBA of the entity – the same as for non-profits. • Tax legislation currently discourages social enterprises from trading, especially in competition with for-profit companies. There could be relief for public benefit organisations (PBOs) by changing the cap of 5% or R150,000 to a more reasonable level to encourage robust trading that may lead to sustainability for social enterprises. • There should be a dividend cap to strike a balance between encouraging people to invest in social enterprises and the principle that the assets and profits of the social enterprise be devoted to the social purpose. Like the CIC, the social enterprise should provide for a maximum dividend per share, which limits the percentage of the paid-up value of a share (which could be, for example, 5 percentage points higher than the Reserve Bank’s lending rate), and the aggregate dividend could preferably not exceed 35% of the distributable profits. • The interest cap could, as in the case with CICs in the UK, be fixed at a suggested 4 percentage points higher than the Reserve Bank’s lending rate. 6.2.4. In the medium- and long term, South Africa will need to consider dedicated legislation for social enterprises, similar to the Community Interest Companies (CiCs) of the UK and the low-profit, limited liability corporations (L3Cs) of the USA. 6.2.5. The threshold for earnings from trading should be adjusted upward to allow for more robust trading by social enterprises. 6.2.6. There is a need to address the ownership codes for BBBEE to provide clarity on the status of social enterprises and voluntary associations. The Department of Trade and Industry should also appoint an ombudsperson for BBBEE to provide directives regarding the interpretation of codes in the case of a dispute. 6.2.7. There should be a separate Code of Governance, similar to the King III for social enterprises, and it should be developed with social enterprises by the focal point in the Presidency suggested earlier on. 6.2.8. As in 6.2.5 above, there should be a code for social venture funders too and this code should include guidelines relating to values, the amelioration of social problems and to good corporate governance. 6.2.9. The process of registration as a vendor for all three levels of government in South Africa should be centralised ideally by the Department of Trade and Industry (DTI). A social enterprise should be able to provide the DTI with all the necessary information and latest tax update so that information can be obtained and confirmed online by government departments. 6.2.10. The impression should not be created that the social enterprise movement is antinonprofit organisation. 6.3 RECOMMENDATIONS: ACCESS TO FINANCIAL AND BDS 6.3.1 Access to finance 94 | P a g e • • • • • • • • • • There is a need to create a better understanding of social enterprises with financial and non-financial BDS providers through education and raising awareness. Supplementing the regulatory recommendation 6.2.2 the following practical: A database of investors, willing to invest in social enterprises should be set up. This ought to be a separate research project. Financial arrangements have to be appropriate and should recognise that social enterprises take longer to break even than conventional enterprises. Social enterprise franchising should be investigated in a further study on social enterprise franchising and replication. Government should assist with the provision of seed capital for social enterprises or should facilitate ‘soft loans’ for social enterprises in the start-up phase. The maximum deductable for donations could remain at 10% in the case of individuals and companies, but individuals and companies should be allowed to make, over and above the donation, a tax-rebatable, dividend-free investment in social enterprises for a maximum of an additional 10% of taxable income in order to stimulate investment in the social enterprise market. The issue of ‘when is a grant a donation’ and when could it be regarded as ‘money in advance of services to be rendered’ needs to be explored in further research. Further research is necessary to determine the level of sustainability that would be required for the different social enterprises, e.g. those taking care of vulnerable children as opposed to a social enterprise with a strong focus on training. Awareness about the different options of access to finance for social enterprises such as the ‘blended value model’, venture capital, seed capital and the option of availability of share equity should be raised among social enterprises so that they can be better informed, should they want to scale up the social enterprise. 6.3.2 BDS • • • • Social enterprises should receive the same treatment as conventional enterprises by BDS providers. Legal and accounting services should be available at discounted costs to social enterprises. Social enterprises should have easy access to markets to trade their products or services. Government-created or supported agencies/parastatals such as SEDA, IDT, NDA and NYDA should be better informed and should become champions for the cause of social enterprises and accommodate them in the financial and non-financial services made available. 95 | P a g e • • • • • • BDS providers should have an impact assessment study to determine whether these services are indeed effective because indications are that they may be missing the point due to lack of understanding of the market and/or the lack of communication. BDS providers should ascertain whether candidates using their services have entrepreneurial skills before making these services available. An example is to make it a prerequisite that a candidate have experience in running his/her own business for least six months before being eligible for assistance by BDS providers. There should be dialogue between CSI and social enterprises so that the interest of the beneficiaries and not the donor is best served. Best practices with good examples in BDS must be documented. It must be noted that social enterprises identified the services most needed in the following order: monitoring and evaluation, linking up with business opportunities, marketing, legal advice, project management, strategic management advice and business advice. BDS providers should gear their services to social enterprises in accordance with needs identified in the different regions of the country. Government should consider establishing BDS providers for dealing with the needs of social enterprises exclusively because SEs still experience discrimination by a number of BDS providers and need focused support. 96 | P a g e CHAPTER 7 ROADMAP FOR THE FUTURE 7.1. ON THE POLITICAL AND REGULATORY LEVEL A period of advocacy and raising awareness through the targeting of politicians is necessary so that the issue of social enterprises can be addressed on the political and regulatory level. While promising indications of access to the political level emerged during the study, there needs to be buy-in from the whole Cabinet –in particular, from those ministers whose domain will be affected – and on official level too. It is imperative that the modus operandi include, inter alia, the following: o Bringing about a better understanding of what social enterprises entail on the political level o The establishment of a South African leadership core for the promotion of social entrepreneurship and enterprises. Such a leadership core should comprise a limited selection of social entrepreneurs, universities, organisations such as Ashoka and ASEN representing social entrepreneurs, BDS providers, government officials and CSI representatives to form an advocacy group that can talk to government and promote social enterprises in general o The exploring of the different regulatory and fiscal options with the departments by participating in meetings, gathering information and reaching consensus on the official level of what the best possible solution would be. 7.2. FUNDING FOR SOCIAL ENTREPRENEURSHIP AND SOCIAL ENTERPRISES Government, through the Department of Trade and Industry, the Department of Social Development as well as government agencies/parastatals made funds available in the form of soft loans and/or seed capital to conventional business enterprises. However, it is time to recognise social enterprises through: o A dedicated social entrepreneurship fund providing seed capital and soft loans to social enterprises – in particular to emerging social enterprises that function as nonprofit organisations o Improvement of advocacy for broadening the mandate of government departments, agencies and parastatals to be inclusive of social enterprises in furthering the agenda of social and economic development o Looking into the possibility of providing start-up social entrepreneurs with a living stipend. o 97 | P a g e 7.3. CAPACITY BUILDING AND RAISING AWARENESS ABOUT SOCIAL ENTREPRENEURSHIP Government should take the lead regarding the introduction of a new approach to social entrepreneurship by: o Canvassing the public, private and nonprofit sectors on critical social issues to advance solutions o Developing awards programmes and competitions to recognise and reward innovative, effective and sustainable solutions o Engaging in celebratory events such as ‘National Social Entrepreneur Week’ and other public relations ventures to promote awareness. 7.4. RESEARCH ARISING FROM THIS STUDY The following issues have been alluded to in this study and should be explored in research or investigations arising from this study: o Best practices BDS for social enterprises need to be documented to serve as guidelines for BDS providers on a national basis. o Impact Assessment on the BDS products offered by the different providers as a longitudinal study to enable this sector to be relevant in product offerings. o Social enterprise franchising and replication are still in its infancy in South Africa and this business model should be researched and investigated further within the South African context. o The obstacles to the implementation of developmental policy – with specific reference to social and economic development in South Africa – need to be researched in depth. o Streams of income for social enterprises and the sustainability thereof. In terms of sustainability, there is uncertainty as to when a grant is a donation or when it can be regarded as payment for a service to be delivered. The issues around grants and payments for services need to be explored to determine whether organisations are bona fide social enterprises. o A national database of financial institutions, government departments, agencies, parastatals and investors willing to invest in social enterprises, as well as terms and conditions attached to such investment, must be set up so that social enterprises can have access to all the options available at a glance. o Develop a national database categorising and indexing SEs in their different stadia of development o Research into what constitutes financial sustainability for social enterprises is necessary and this study should take international trends, and particularly trends in other developing countries, into consideration to develop a uniquely South African model o Compile a position paper on ethics and social entrepreneurship. 98 | P a g e REFERENCES Borkan, J.M. 2004. Mixed Method Studies: A foundation for Primary Care Research. 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Vol 33 No. 5/6, pp. 361-375. World Economic Forum. 2005. Private Investment for Social Goals: Building the Blended Value Capital Marketing. World Economic Forum global Foundation Leaders Advisory Group in partnership with IFC and the Rockefeller Foundation. Retrieved from website www.weforum.org. Wolk, A. 2008. Advancing Social Entrepreneurship Recommendations for Policy Makers and Government Agencies. The Aspen Institute/Rootcause/MIT. Websites: Ashoka information. Retrieved from http://www.ashoka.org and http://usa.ashoka.org/fellowship on 17 October 2009. Broad-based black economic empowerment. Retrieved from fmd.co.za on 14 October 2009. Companies. Retrieved from http://www.capegateway.gov.za/xho/pubs/guides/U/85540/4/E#4h on 9 October 2009. COMSEC information. Retrieved from htt://www.comsec.co.za on 19 October 2009. National Youth Development Agency http://www.nyda.gov.za on 19 October 2009. (NYDA) information. Retrieved Epistemology. Retrieved from http://www.wikipedia.org/epistomolgy on 28 July 2009. Life College at http://www.lifecollege.co.za. 100 | P a g e from Reading about BBBEE Codes: http://www.thedti.gov.za/bee/beecodes.htm) where all relevant codes can be downloaded and Preferential Procurement Policy Framework Act, Act. No. 5 of 2000 Draft Preferential Procurement Regulations, 2009 (Notice 1103 of 2009) can be downloaded by going to http://www.thedti.gov.za/bee/DraftPreferentialProcurementRegulations.pdf and ownership codes by visiting http://www.bee-scorecard.co.za/bbbee_codes_of_good_practice.htm. Schwab Fondation information. Retrieved from http://www.nyda.gov.za on 19 October 2009. Small Business Development Agency (SEDA) information. Retrieved from www.seda.org.za on 19 October 2009. Social enterprise definition. Retrieved from http://www.socialent.org/beta/definitions.htm on 9 October 2009. Social enterprises heralding a new era. Retrieved from http://www.businessculptors.com/social-enterprise-folder/social-enterprises-herhalding-anew-era on 17 October 2009. The Business Place information. Retrieved from www.thebusinessplace.co.za on 19 October 2009. The word ‘policy’ according to Webster’s dictionary. Retrieved from http://www.fao.org/wairdocs/ilri/x5547e/x5547e05.htm on 15 July 2009 Various forms of registration. Retrieved from www.hospicepalliativecaresa.co.za/.../Annexure%202%20Various%20forms%20of%20registra tion.pdf on 29 September 2009. 101 | P a g e ANNEXURES 102 | P a g e ANNEXURE A: TERMS OF REFERENCE 103 | P a g e 104 | P a g e 105 | P a g e ANNEXURE B: RESEARCH SURVEY 106 | P a g e CENTRE FOR SOCIAL ENTREPRENEURSHIP – FACULTY OF MANAGEMENT UNIVERSITY OF JOHANNESBURG/ILO SURVEY ON SOCIAL ENTERPRISES Dear Participant The ILO Pretoria Office has commissioned the University of Johannesburg to carry out research on the current enabling environment for social enterprise in South Africa. The research forms part of the ILO's SETYSA project which supports progress towards a conducive and enabling environment and the development of appropriate business development service products for potential social enterprises. In order to understand first-hand the extent of the perceptions and existing enabling environment for social enterprises in South Africa and what steps need to be taken to create a conducive environment for these entities to flourish, the University of Johannesburg wishes to undertake a survey. For this purpose a survey instrument has been developed, responses to which will provide very helpful insight into the current and desired enabling environment for social enterprises. Your response is ANONYMOUS and all information provided by you will be treated as confidential at all times. Information will only be reported in collated (summated) format. You have the option to: • complete, save and email this questionnaire in MS-Word to [email protected] or • print it out, complete and fax it to 011-507-5628 or 086-612-3158 or • complete the questionnaire online: http://cs.createsurvey.com/c/87/1187/survey/8128-3Kpkwg.html Please answer ALL the questions, unless it is indicated as optional. Should you have any queries, please feel free to call my office or send an email as per contact details below. Thank you for your participation and your time to further the cause of social entrepreneurship and social enterprises in South Africa. DR SUSAN STEINMAN Tel.: 011-664-6527 Fax: 011-507-5628 E-Mail: [email protected] 1. DEMOGRAPHIC DATA 1.1 OPTIONAL: What is the name of the organisation you represent? * 1.2 Please choose the sector you currently belong to by highlighting or ticking the appropriate block. Should you see yourself as belonging to more than one category, please choose only that category where you are employed or spend more than 50% of your time: 107 | P a g e (a) National, Provincial or Local Government department (b) Social Entrepreneurial concern / Social Entrepreneur / Non-profit Entity / Social Enterprise (c) Provider of financial business services (such as banking, investment, broker) (d) Provider of non-financial business development services (such as training, business plan, marketing) (e) Both (c) and (d) (f) Corporate Social Responsibility(CSR) /Corporate Social Investment(CSI)/ Foundation Fellowship or grant-maker (g) Other, please specify: * 1.3 Sex (Please indicate by ticking or highlighting the appropriate box) Male Female * 1.4 Are you a South African citizen? (Please indicate by ticking or highlighting the appropriate box) Yes No 1.5 OPTIONAL: How would you classified by the South African government? (Please indicate by ticking or highlighting the appropriate box) (a) Black (b) White (c) Coloured or of Indian/Asian decent (d) Other, please specify 2. POSSIBLE CHARACTERISTICS OF A SOUTH AFRICAN SOCIAL ENTERPRISE Please indicate to what extent you agree or disagree about the following possible characteristics of social enterprises in question 2.1, 2.2, 2.3, 2.4, 2.5 and 2.6 below. (Please indicate your choices by completing ALL questions, ticking one box per line only) 2.1 What is a social enterprise? (a) Strongly agree * 2.1.1 A social enterprise has a PRIMARILY social purpose or mission * 2.1.2 A social enterprise should ameliorate social problems * 2.1.3 Social enterprises should 108 | P a g e (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't know exclude businesses whose primary purpose is profit maximisation, even when it is creation social value * 2.1.4 A social enterprise has ONLY a social purpose or mission * 2.1.5 The social problem connected to the social purpose must be clearly stated 2.2 Financial Sustainability (a) Strongly Agree * 2.2.1 Social enterprises include emerging entities (i.e. entities still receiving grants and/or seed capital at start-up and working towards financial sustainability) * 2.2.2 Financial sustainability implies that the social enterprise generate enough income to cover its operational costs and may even show a surplus * 2.2.3 Grants or donations by corporate or public entities to social enterprises earmarked for specific services to be delivered should be considered income generated through trading or services * 2.2.4 Financial sustainability of a social enterprise excludes capital investment of a speculative nature * 2.2.5 To be financially sustainable, social enterprises should be allowed to attract investors or equity shareholders * 2.2.6 A social enterprise should be able to pay dividends to investors * 2.2.7 If a social enterprise is allowed to pay dividends, such dividends must be limited * 2.2.8 A social enterprise should have no shareholders 109 | P a g e (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know 2.3 A community can represent residents in a geographic area or its members can be dispersed with common characteristics, for example deaf persons. Should social enterprises relate to their communities? (a) Strongly Agree (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know * 2.3.1 The social enterprise should demonstrate connectivity (involvement and/or consultation) with the community it claims to serve. * 2.3.2 Members of the social enterprise emanate from the community *2.3.3 A social enterprise can create social value without being engaged or involved in or based in the community it aims to serve 2.4 The following statements refer to the general governance, membership and operational parameters of a social enterprise (a) Strongly Agree * 2.4.1 Social enterprises should have the same governance system as cooperatives * 2.4.2 Social enterprises should demonstrate participatory, transparent and accountable governance * 2.4.3 A social enterprise can also be a "one man/woman" show" * 2.4.4 Voting at meetings should not be based on shares held in the social enterprise, but based on the equality of each member's vote * 2.4.5 Social enterprises should include traditional for-profit business entities * 2.4.6 Membership to a social enterprise must be open * 2.4.7 In the case of a dual model the social enterprise should be clearly 110 | P a g e (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know separated from the incomegenerating arm 2.5 The following statements refer to the values of a social enterprise (a) Strongly Agree (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know * 2.5.1 The initial social mission or core social purpose of a social enterprise should never be compromised * 2.5.2 The social enterprise must be autonomous (i.e. not influenced by any public or private entity) * 2.5.3 Social enterprises must be directed at societal good 2.6 The following statements refer to the financial governance relating to the surplus or profit of the social enterprise (a) Strongly Agree * 2.6.1 I prefer to use the term "surplus" to "profit" when referring to social enterprises * 2.6.2 The financial surplus/profit (if any) should be reinvested in the community or in the social purpose of the social enterprise and nothing else * 2.6.3 Social enterprises should be allowed to do with the profits what they want * 2.6.4 Social enterprises should be subject to the same rules for tax exemption than any other Public Benefit Organisation (PBO) * 2.6.5 There should be a an exclusive tax regime for social enterprises * 2.6.6 The financial surplus of a social enterprise should be PRINCIPALLY reinvested in the community or the business allowing for the payment of interest and dividends 111 | P a g e (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't know * 2.6.7 The payment of dividends to shareholders in social enterprises should be limited 3. LEGAL, POLICY AND REGULATORY ISSUES RELATING TO SOCIAL ENTERPRISES Please indicate your agreement/disagreement with each of the following statements by clicking the option that best describes your opinion 3. 1 The following statements refer to your knowledge of legal, policy and regulatory aspects the legal and regulatory options available to social enterprises (a) Strongly Agree (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't know * 3.1.1 I know the NPO Act of 1997 as amended * 3.1.2 I have a fair knowledge of the different options in the company act for the different business entities (nonprofits and for-profit companies, trusts and cooperatives) * 3.1.3 I have a fair knowledge of the new companies act that will come into operation in 2010 * 3.1.4 I have a fair knowledge of how "social enterprises" operate in other countries * 3.1.5 The term "social enterprises" is not well-known in South Africa * 3.1.6 People in South Africa do not use the word "social enterprises", they call it by other names 3.2 The following statements refer to the legal/regulatory Options available to social enterprise (a) Strongly Agree * 3.2.1 The new legislation for nonprofit companies will address most of the problems experienced by social enterprises * 3.2.2 We don't need new legislation, we only need to amend existing legislation to provide for social enterprises 112 | P a g e (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know * 3.2.3 Procurement regulations should favour social enterprises, non-profits and cooperatives * 3.2.4 BBBEE Codes should accommodate social enterprises and all-forms of non-profit organisations * 3.2.5 We need a new entity and new legislation for social enterprises with its own rules and tax regime * 3.2.6 SARS's tax exemption for Public Benefit Companies(PBOs)is adequate for the non-profit sector and social enterprises 4. FINANCIAL BUSINESS DEVELOPMENT The following statements refer to the role of financial business development services in enabling and facilitating the growth of social enterprises 4.1 It is equally difficult for a conventional entrepreneur and a social entrepreneur to get access to loans or venture capital 4.2 A non-profit entity cannot raise capital through equity shareholding 4.3 Some social enterprises operate as for-profit entities because they cannot attract investors otherwise 4.4 Equity shareholding for social enterprises will facilitate capacity building and scaling up of the organisation 4.5 Bank charges are discounted for nonprofit entities 4.6 Government should provide social enterprises with seed capital 4.7 Government should make loans available or facilitate access to loans for social enterprises 113 | P a g e (a) Strongly Agree (b) Agree (c) Strongly Disagree (d) Disagree (e) Don't Know 5. NON-FINANCIAL BUSINESS DEVELOPMENT SERVICE 5.1 What is the current situation with Business Development Services (BDS) of a nonfinancial nature for social enterprises? (a) Strongly Agree (b) Agree (c) Strongly Disagree (d) Disagree * 5.1.1 BDS Providers focus only on the conventional businesses * 5.1.2 BDS Providers turn nonprofits/social enterprises seeking assistance or services away. * 5.1.3 BDS Providers do not understand social enterprises * 5.1.4 BDS Providers provide relevant training or consulting services for social enterprises * 5.1.5 There should be more BDS Providers for social and conventional enterprises in South Africa * 5.2 Please select and tick the FIVE (5) most important non-financial Business Development Services that should, in your opinion, be provided through training, consultative means or in an open environment/learning centre. 5.2.1 Marketing 5.2.2 Legal Advice 5.2.3 Tender Assistance 5.2.4 Accounting Services 5.2.5 Financial Statement Literacy 5.2.6 Financial Advice 5.2.7 Business Advice 5.2.8 Linking me with business opportunities 5.2.9 Monitoring and Evaluation of projects 5.2.10 Proposing best business model 5.2.11 Business Plan 5.2.12 Strategic management advice 5.2.13 Project Management 5.1.14 Computers, faxes and internet facilities at a centre 114 | P a g e (e) Don't Know 5.2.15 Other, please specify: 6. GENERAL SECTION 6.1 Please indicate which of the following statements you believe to be true and which false: (a) True (b) False (c) Don't Know * 6.1.1 Social enterprises is just a passing "fad" * 6.1.2 There is a real need for social enterprises in South Africa * 6.1.3 Organisations that are dependent on grants will be adversely affected by awarding social enterprises' special status * 6.1.4 More awareness about social enterprises is needed before legislation can be introduced * 6.2 What are the three priorities, according to you, towards creating a more enabling environment for social enterprises in this country? 6.2.1 6.2.2 6.2.3 115 | P a g e ANNEXURE C: CASE STUDIES ON BEST PRACTICE IN SOCIAL ENTERPRISE DEVELOPMENT 116 | P a g e CASE STUDIES BEST PRACTICE IN SOCIAL ENTERPRISE DEVELOPMENT Title, Name & Surname Organisation Department / Section Position Email address Tel/Cell numbers Type of Business Date completed: QUESTIONS: SEMI-STRUCTURED What type of social enterprise do you have (e.g. Section 21, association, trust, cooperative)? Any reason why you chose this model? What is the social purpose of your organisation? What are your primary activities (Website material and brochure could be provided as additional background material for the researcher to use) What community do you serve and how do you relate to the community13 or engage them? 13 A community can be dispersed with common characteristics (e.g. deaf people) or it could be geographically defined (e.g. residents in a particular area). 117 | P a g e Are members of the community also members of your organisation? Tell me about your corporate governance and management structures/ membership What are your values What do you do with your surplus or profit Do you experience any problems such as financing, staff shortages or frustrations not being able to fulfil your social purpose Is bureaucracy a problem? Do you have problems in obtaining loans or venture capital? If so, why? If so, how do you overcome it or what needs to change (e.g. legislation) for you to overcome this? Is there any changes that you would like to see in the law/attitudes/from corporate sector that could benefit the work you do better? Do you think that creating a new entity such as a social enterprise, where the key issue is the social purpose of the organisation to ameliorate a social problem and financial sustainability14, would solve the problem? 14 Financial sustainability acknowledges that a social enterprise has a growth cycle and a need to receive seedcapital and grants at start up but that there is a definite plan towards financial sustainability. 118 | P a g e ANNEXURE D: ILO CONFERENCE ON ENABLING ENVIRONMENT 119 | P a g e 120 | P a g e 121 | P a g e 122 | P a g e 123 | P a g e ANNEXURE E: DEPARTMENT OF SOCIAL DEVELOPMENT – BUSINESS PLAN 124 | P a g e 125 | P a g e 126 | P a g e 127 | P a g e 128 | P a g e 129 | P a g e 130 | P a g e 131 | P a g e 132 | P a g e 133 | P a g e 134 | P a g e 135 | P a g e 136 | P a g e 137 | P a g e 138 | P a g e 139 | P a g e 140 | P a g e 141 | P a g e 142 | P a g e ANNEXURE F: CASE STUDIES OF NON-PROFIT ORGANISATIONS FOR WHICH IT IS WISE TO RETAIN THEIR CURRENT STATUS Msimayane Women Support Centre Tomorrow Trust Small Enterprise Foundation Youth Empowerment Network 143 | P a g e Small Enterprise Foundation (SEF) Mr John de Witt SEF is a not-for-profit Section 21 company of which the social purpose is the eradication of poverty by creating a supportive environment through pro-poor (proper?) microfinance where credit and savings services foster sustainable income generation, job creation and social empowerment. SEF has since 1992 successfully concentrated on the provision of loans to women in the lowest income groups. SEF is particularly active in rural areas in the Limpopo and Eastern Cape Provinces. The organisation starts working in a community by initially conducting wealth ranking of all households. Thereafter field staff visit the poorest households to motivate the women to start or resume an income generating enterprise. They then apply the Grameen Bank of Bangladesh’s methodology to form a group of five people to obtain a loan, each of them guaranteeing each other’s payments. No other collateral is required. SEF’s loans are only for enterprise and a series of checks are in place to ensure that loans are not diverted for other purposes. SEF is currently working with 57,000 people in groups of five according to the Grameen model, accommodated by 373 staff members through 36 branches scattered across Limpopo Province, the north eastern part of Mpumalanga and the Eastern Cape. SEF defines itself as a social enterprise but uses the non-profit model as it suits its needs best. All regulations are the same as for a normal company, however profits cannot be distributed and are all reinvested for either further expansion or to increase the organisation’s capital to further address small borrowings which are provided to their clients. SEF finances its operations with soft loans from various ventures and grants sourced locally or internationally. Although it is important for the financial sector to recognise the enterprise as a social business which is operated efficiently and transparently, SEF does not experience any problems in obtaining funds. SEF is a good example of a social enterprise that has made efficient use of a non-profit legal structure to reinforce its credibility to achieve its social mission. Youth Empowerment Network (YEN) David Litnaitzky YEN’s social purpose is to enable unemployed and disadvantaged youth, aged between 17 and 26, to overcome inner oppression, develop inner qualities of confidence, resilience, social conscience and responsibility, as well as encourage them to become creative and productive members of society. They do so through ‘Facing the Future with Courage’, a nine week intensive, full-time selfdevelopment and empowerment programme run in different communities. This programme is augmented by the ‘Youth Support Unit’, which provides follow-up coaching and other support to graduates of the above mentioned programme. 144 | P a g e Through informal partnerships with local government and community groups, providing them with a platform for recruitment of participants, access to venues, and facilitation of post programme followup, YEN has conducted its programmes in Gauteng in Thokoza, Soweto, Alexandra, Tembisa and Joubert Park and in the Western Cape in Elsies River. A decision was made to operate YEN as a Voluntary Association as it was the simplest process with the least onerous requirements. The operations and finances of the organisation are overseen by a management committee, while the operational team is responsible for the day to day running of the organisation following the set of values that underlies its programmes: Wonder, Compassion, Conscience and Self-transformation. YEN does not in reality produce a profit. The organisation does not generate any significant income, and depends on funding, donations and grants. All monies are used to fulfil the organisation’s aims. When funding is in short supply, YEN reduces its activities accordingly and conversely, when funds are adequate, activities are expanded. Since the organisation is reliant on grants, financing is a major challenge and source of frustration which threatens its survival and considerably affects its social mission and related potential impacts. YEN illustrates the case in point that not all social enterprises can become financially self-sustainable due to the nature of their activities. Certain social activities such as education, art, health, etc will never become entirely financially sustainable, resulting in an ongoing need for funding. Tomorrow Trust Kim Feinberg Tomorrow Trust’s social purpose is to have a meaningful and sustainable impact on the lives of orphans and vulnerable children through education. Tomorrow Trust is therefore committed to assisting children in passing their schools exams through a Holiday School support programme which provides these children with the tools and opportunities to become self-sustainable and selfempowered, as well as compassionate and proactive members of their economy and society, instead of being reliant on charity. Tomorrow Trust chose to adopt a Section 21 and Section 18 (a) strategy to pursue its social mission as its main income is generated from grants and general fundraising. This legal structure also allows individuals or companies to obtain tax rebates on their donations. The organisation does not realise a surplus or a profit, however, it always endeavours to maintain a reserve to progress its activities. Tomorrow Trust, as is the case with many other non-profit organisations, faces challenges related to fundraising to finance its operations, but will not consider diversifying its source of finance through obtaining loans or other venture capital. Instead, its aspiration is for government to realise where funds are truly required and to provide more accessible funds to NGOs involving less bureaucracy and administration. In this regard Tomorrow Trust encourages more grants to be allocated to children up to the age of eighteen years in order to address their educational needs. 145 | P a g e Due to the nature of its operations, Tomorrow Trust will benefit more from a non-profit status than by moving to a social enterprise status as it is understood from the working definition adopted in this research study: ‘A social enterprise’s objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose’ (Steinman, S., 2009). Masimanyane Women Support Centre (MWSC) Lesley Ann Foster MWSC is a world renowned international women's organisation based in East London, South Africa. With a specific focus on gender-based violence, sexual and reproductive health and rights and the gendered nature of HIV and Aids, it aims to build the capacity of women and human rights advocates to claim and realise women's human rights. This is achieved through the development of new knowledge and the utilisation of a rights-based approach. MWSC opted for a Section 21 company structure to achieve its social purpose and promotes the values of professionalism, integrity, accountability and honesty. The organisation does not generate any surplus as it operates through the support of grants and has not experienced any significant problems in terms of financing and staff shortages or frustrations from not being able to fulfil its social purpose. A new legal social entity or operating under such a new structure is not an attractive prospect for the type of social activities pursued by MWSC. Conquest For Life (CFL) Glen Steyn CFL’s social purpose is to create alternatives for young people and to revitalise communities through a variety of programmes aiming at developing a sense of self, strengthening family structures, strengthening community structures and promoting youth development and empowerment. CFL is registered as a Section 21 company as it seemed practical considering the organisation’s activities. Such a structure creates more opportunity to trade without having to set up a separate entity to administer all the projects. CFL has become financially sustainable by using a mixed source of funding that includes grants and innovative income generation strategies. The surplus realised is reinvested into the organisation, property and CFL’s staff. Despite this success, the organisation still faces various challenges, especially when it comes to obtaining loans or venture capital as banks and other service providers are not open to providing loans to social enterprises, despite the provision of collateral security. 146 | P a g e The administrators of CLF believe that there is a definite need for the creation of a new entity such as a social enterprise and the establishment of a government body that will administer the development of sectors as is the case in other countries such as the United Kingdom and the United States. 147 | P a g e ANNEXURE G: CASE STUDIES OF A VARIETY OF ENTITIES (FOR-PROFIT AND NON-PROFIT) THAT WILL BENEFIT FROM A NEW DISPENSATION FOR SOCIAL ENTERPRISES Student Health & Welfare Centres Organisation (SHAWCO) International Centre for Eyecare (ICEE) Greater Good South Africa Greater Capital Trevor Mulaudzi 148 | P a g e Student Health & Welfare Centres Organisation (SHAWCO) University of Cape Town Director: Mr Varkey George SHAWCO is a dynamic, innovative student-run Section 21 non-profit company based at the University of Cape Town, constantly striving to improve the quality of life of individuals in developing communities within the Cape Town metropolitan area. The organisation emerged from being a welfare organisation to taking on the social entrepreneurial model of community development. The model provides some leeway to engage with profit-making initiatives. The social purpose of SHAWCO is to provide free health services, educational outreach, food to the needy and help for starting up small businesses in the townships. It serves the community around Cape Town and owns multi-purpose centres in the townships manned by staff that are from the community. A part of the profit or surplus is kept as start-up capital for social business and the rest is kept as a reserve or for investment. SHAWCO experiences challenges to obtain funding without collateral, however, it is supported by those who would rather invest in a social business than merely hand out charity. SHAWCO supports the idea of social enterprises because it already owns three private companies that are legal, pay taxes and where surplus funds are being ploughed back into the non-profit organisation. International Centre for Eyecare (ICEE) Prof Kovin Naidoo ICEE supports, as its social purpose, the prevention of blindness. Prof. Naidoo has developed a comprehensive, sustainable and horizontal economic service delivery model for poor rural communities in South Africa. Errors in visual refraction correction that are left untreated contribute to 10 percent of world blindness. In South Africa, where eye care is expensive and reaches only about 25 percent of the population, the rural poor have virtually no access to vision treatment, creating a barrier to education and employment. Kovin’s model has extended the reach of eye care in South Africa by training community-based health care workers and staffing small clinics with student interns. To make glasses more affordable, he works with companies to obtain cheap frames and lenses, and has trained local young people to do the lens fitting — cutting the price of glasses from $80 to $2-10 while generating income for the community. 149 | P a g e ICEE measures social impact through socio-economic factors - looking at the loss of productivity and the quality of life issues as indicators. A study in Cambodia measured the impact on factory workers pre and post correction of vision. When vision is corrected, there is an impact on the opportunities for children and adults. ICEE employs full time staff, including an Africa director, COO, financial manager, programmes manager and 42 staff members for various programmes. Surpluses are reinvested for the purpose of business development. ICEE established a global resource centre and supplies various institutions throughout Africa, however, obtaining finance remains a big problem. Social enterprise will be the answer for ICEE as long as equity shareholders have a minority share. This will allow ICEE to scale up and receive donations at the same time. Greater Good South Africa Managing Director: Sophie Hobbs Greater Good (GG) South Africa Trust is a registered Trust, NPO and Section 18A Public Benefit Organisation (PBO) The nature of the work of Greater Good South Africa is entirely for public benefit with no intention of trading, but with a desire to establish significant levels of public trust in its work. The organisational structure chosen was in support of that. Greater Good South Africa brings good causes and committed givers together in meaningful and innovative ways to end poverty in South Africa. GG is a social networking and communications platform that uses online technology and offline outreach, engagement and marketing campaigns, to encourage giving through facilitating direct engagement between all kinds of social investors, philanthropists and charitable givers and thousands of non-profit development organisations, social enterprises and social mission businesses across South Africa. To reach its objectives GG makes use of a number of online platforms, significant offline outreach activities, workshops, training programmes and advocacy forums including: GG’s primary social networking tool – www.greatergoodsa.co.za – which is South Africa’s first online social marketplace. The site promotes the concept of social benefit networking where over 1,000 registered causes connect with donors and GG’s call-to-action campaigns. Giving accounts create an online space for donors, connecting them with great causes and other givers in their area. Dedicated Cause Spaces for registered causes make it easy for non-profit organisations to showcase their work online and connect with potential donors for free. 150 | P a g e The South African Social Investment Exchange (SASIX) The SA Social Investment Exchange (www.SASIX.co.za) is GG’s most financially successful channel. SASIX provides independent research, evaluation and monitoring to ensure that listed projects meet a set of criteria, including the ability to deliver measurable returns. The SASIX Giving Foundation was created in November. This is a personalised online charitable fund that investors can set up as a family, an individual or as a business. SASIX also provides investors with financial return opportunities through SASIX Financial. This enables investments in responsible initiatives with market-related financial returns. The first R70m investment into SASIX Financial projects is already yielding positive returns – both socially by, for example, supporting low income housing for families or establishing livelihoods for rural women, and financially by performing better than typical comparative benchmarks. A central part of GG’s work is to level the playing field by giving small, pioneering non-profit organisations the same access to funds and capacity development as the better-known causes. It also operates various training programmes and networking forums – each targeting different sectors. GG contends that establishing an enterprise that could accept public equity and be listed on a stock exchange would be useful to attract and raise significant finance as other listed entities could do. Creating a new form of legal structure for social enterprises/social purpose businesses could be useful and would provide an environment to enable particularly equity investments in such businesses and could significantly address the issue of going to scale. Greater Capital Managing Director: Dean Hand Greater Capital is a Section 21 company (although their ‘parent’ organisation is a Section 18A trust – see separate responses for Greater Good South Africa Trust). Greater Capital was established to commercialise the intellectual property developed by the GG South Africa Trust. As such it was a trading organisation but had no external shareholders and did not intend to make distributable profit beyond that for the trust itself. Services cover the full range of CSI consulting activities including research, investment opportunity identification and origination, due diligence, risk benefit analysis, output monitoring, outcomes measurement, evaluation and reporting, as well as related grant, social 151 | P a g e economic development and social investment advisory services. See www.sasix.co.za and www.http://www.myggsa.co.za/csiservices/. Greater Capital could effectively be seen as an intermediary serving two communities which themselves have significant diversity viz. “issuers” or “fund seekers” on the one hand and “investors” or funders on the other hand. Greater Capital is only two-and-a-half years old and although it has more than tripled revenues and earnings in this time, there is as yet no surplus profit given the overheads it carries to support the trust and its operations to remove the donor dependence of that entity. Greater Capital is already a social enterprise but could benefit from a new dispensation. The Clean Shop Managing Director: Mr Trevor Mulaudzi The Clean Shop (TCS) is a 100% black-owned cleaning company (close corporation) and its social purpose is to solve the social issues around hygiene and sanitation in schools. In 2007 TCS employed 350 people and had a turnover of R1,2 million per month. Since then the business has been going through a rough time because of lack of government support. Sadly, in spite of this pioneering initiative, neither the education authorities nor the schools have contracted TCS for toilet cleaning purposes. There are not many schools contracting TCS because schools still do not appreciate the advantages of clean toilets which is a serious indictment on the Department of Education. According to TCS there is a correlation between pupils' performance and the availability of good facilities. Such is the dedication of the former AngloGold employee to his calling that he has gone as far as developing a school toilet charter. Besides cleaning school toilets, TCS has been awarded various contracts to clean corporate toilets, change houses, kitchens, hostels and residential flats for mining companies. TCS is currently struggling financially and feel that the current business model (close corporation) is adequate but that, should social enterprises receive soft loans or preferential procurement, the close corporation could benefit by becoming a social enterprise. Khulisa Crime Prevention Initiatives Managing Director: Lesley Ann van Selm 152 | P a g e The purpose of the Khulisa Crime Prevention Initiative (hereafter referred to as Khulisa), is to contribute to building a healthy and crime free South Africa. Ideally this would be achieved through prevention, early intervention, youth leadership, reintegration, restorative justice and skills development. South Africa is one of the countries in the world with the highest crime rates, especially violent crimes. Cognitive Behavioural Therapy is the preferred methodology for intervention and therefore Khulisa offers a uniquely holistic approach which employs innovative and experiential learning methods to build capacity and individuals and communities through innovative life-changing programmes in order that they may completely break away from the cycle of violence. At the core of Khulisa’s programme offering lays the spirit of restorative justice. During the past two years Khulisa has developed a strategy to generate non-donor streams of income for the organisation which will eventually lead to financial sustainability. Khulisa has identified markets for the export of their programme to the UK and USA, Australia and other parts of southern Africa. Furthermore, Khulisa has developed a separate profit making division which focuses on the development of skills and the provision of accredited training to various SETAs. Khulisa is most certainly a prime example of an organisation that moved from grant dependency to sustainability and it is therefore eager to embrace a new dispensation where social enterprises will be acknowledged. 153 | P a g e ANNEXURE H: LISTING OF SERVICES, CHALLENGES AND NEEDS BY STAKEHOLDERS IN THE SOCIAL ENTREPRENEURIAL SPACE AND BUSINESS DEVELOPMENT SERVICE PROVIDERS 154 | P a g e SERVICES, CHALLENGES & NEEDS BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED CHALLENGES & NEEDS ABSA The microfinance division creates an absolute focus on the double Upscaling of enterprises. Working towards a barrel objective – profitably on the economic level, while the social solution of bringing banking to the community – impact is obtained through community development. The small this would involve social enterprise development. business division has a clientele of half a million – the emphasis is on contributing to communities and making a profit. ABSA supports social enterprises and focuses on profit plus social impact. Impact is measured within the community and there is no contract or business if there is no social impact. TSIBA EDUCATION Tsiba provides support to social enterprises on a limited basis – it has Including social enterprises in the curriculum of its an entrepreneurial support centre also used by the SEs and the business degree and looking to include education around SEs in entrepreneurial curriculum. Short training material of the ILO is being used. courses for entrepreneurs and follow through with training and ongoing mentorship. Regards financial sustainability as essential. 155 | P a g e BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED CHALLENGES & NEEDS CITY OF CAPE TOWN High level of awareness of social enterprises and all types of businesses. Positioning it to be the leading enabler of social enterprises, including social enterprise development. City of Cape Town (CT) in partnership with Raymond Ackerman Academy of Entrepreneurial Development paid for students to attend a six month entrepreneurship development programme. Percentage of Capetonians who pursue business opportunities almost three times the national average while Johannesburg is 60% above the national average. CT provides tax rebates on land for non-profits – they are empowered and encouraged by city council. Policy is that project must have social impact. Cape Town is positioning itself to be the leading enabler of enterprise and social enterprise development in South Africa and has an annual trade fair. Encourages and showcases its social enterprises, awards grants and provides other forms of support. The “red door” in Cape Town also provides support to social entrepreneurs. SANGOCO North Province (NWP) West As an existing community-based organisation (CBO), SANGOCO has not done much membership supporting capacity building countrywide. However in the NWP water is a catalyst for development. SANGOCO came in as coordinators of integrated water resource management (IWRM) which was very helpful for building social enterprises – about 40 programmes. Farmers, for instance, developed into commercial farmers. In the process HIV/Aids orphans are also fed. Grass-roots and Millennium Development Goals are SANGOCO’s reference point. DANIDA funded. 156 | P a g e Social enterprise development will be supported by plans to introduce the new IWRM. SANGOCO wants to be able to develop an environment for social enterprises, providing skills at local level and move them to the next level so that they can become income-generating and sustainable. Legislation will help to create an enabling environment for social enterprise but enterprises also need to have access to skills that allow them to access market opportunities. The procurement processes of SANGOCO assists their social enterprises in developing their own government and private business should favour budgets, business plans, time sheets and go to beneficiaries. social enterprises. Encourages NGOs to keep minutes and to be accountable for projects. Beneficiaries are linked to other stakeholders. SANGOCO supports income-generation by their members and provides business services. BDS PROVIDER OR STAKEHOLDER IN SE SPACE THE JOB CREATION TRUST SERVICE PROVIDED CHALLENGES & NEEDS Following agreements reached at the Presidential Job Summit held in 1998, the Congress of South African Trade Unions (Cosatu), the National Council of Trade Unions (Nactu), and the Federation of Unions of South Africa (Fedusa) founded the Job Creation Trust and workers of South Africa contributed one day’s wages in the year 2000 to the value of R89 million. The funds contribute to the establishment of co-operatives and community driven projects where all the unemployed work together to make a livelihood for their families. The Job Creation Trust is actively participating in the debate on social enterprises in South Africa as this is another way of job creation and the upliftment of poor communities. It is also clear that some of these projects would benefit from evolving into social enterprises. To date more than 38 000 jobs have been created and nearly 25 000 people were trained in various skills. Many indirect job opportunities have been created through procurement and supply of goods and services. All those people now possess the capacity to train others and/or create their own small businesses in which other people get employed and trained. Examples of projects started through the Job Creation Trust are: Bophelo Community Project, Virginia; BoiteloLetsie HIV/Aids Care and Support, Welkom; Bhongo Meat and Vegetable, Zastron; Center for Uplifting Rural Economies (CURE), Bloemfontein; Ntabiseng Joint Agriculture, Bloemfontein; Thosang Garden Project, Selosesha; Kungwini Welfare Society, Zwaelpoort; Philadelphia National Youth Directorate, Zuurbekom/Lawley; Twanano Paper Making, Ivory Park; Siyaya Fisheries, Mkomasie; Bombani World Travel & Tour Operators; Griqua Ratelgat Tourism; Murraysburg Fire Wood Strand, Bricks Ovens and Vegetables; Greater Moutse Cotton. 157 | P a g e BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED CHALLENGES & NEEDS The municipality provides its non-profit organisations with donations, on condition that the social purpose is clear and that the municipality is provided with financial statements. The municipalities provide nonprofit organisations with land while district municipalities provide donations and help these organisations to engage in social capacity building. There are no specific policies regarding social enterprises but they have community-based officers in the district working with nonprofit organisations as well as HIV/Aids. The municipality cannot provide money or expertise. It does not have trade shows, but can promote its social enterprises. The Local Economic Development (LED) section needs to get people together to share experiences and do a needs assessment. Workshops and consultation should inform the development of social enterprises. MHANI GINGI SOCIAL Mhani provides specific support to social enterprises through training, ENTREPRENEURIAL NETWORK marketing, introducing capital where possible and making networks available for technical training – working closely with ten such enterprises. Mhani is in the process of registering a non-profit entity to supply a form of social development funding where small entities can borrow from. However, these funds will be supported by training. Examples of the Mhani enterprises are: indigenous plants (orchids), education, skills, sewing and designing, catering, traditional dancing, mobile catering for building sites, food processing (community bakery), vegetable gardens, tour guides (from the taxi industry), B&Bs, property development, printing, caring for orphans and an internet cafe. There needs to be a change to the bureaucratic way funding is done – change the funding and supply a voucher to go to a supplier. The criteria and processes involved are not helpful. There needs to be a marketing space where production and sales can take place at the same time. KIMBERLEY MUNICIPALITY 158 | P a g e BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED KWAZULU NATAL PROVINCE KZN’s activities are specific to cooperatives – by assisting cooperatives in setting up, providing training and trying to assist in aspects of (KZN Province) running a business, start-up capital to buy small implements, seeds, fertilizer and so on. KZN further favours cooperatives and NGOs in the procurement process. CHALLENGES & NEEDS KZN will focus on cooperatives in the agricultural arena rather than on social enterprises – training is the key to capacity building. Alleviation of poverty is the biggest challenge and big business needs to support the small enterprises in the procurement process and with sponsorships. Partnerships between big business, social enterprises and cooperatives are essential. CENTRE OF DEVELOPMENT Although social enterprises are not included in the mandate of CDE, Clear guidelines for entrepreneurship in South there is awareness and interest to support social enterprises with Africa and how to support social enterprise is AND ENTERPRISE (CDE) necessary. There should be a shift from enterprise research and training. support to government-private partnerships and expertise should be provided to support social entrepreneurs. Better monitoring and evaluation of the social enterprise sector is necessary. Identify, celebrate and publicise social entrepreneurs to encourage them. LEARN TO EARN 159 | P a g e Learn to Earn already provides specific support to social enterprises by Need to develop social enterprises besides being a creating job opportunities and facilitating people to start their own business resource centre. The unemployed must be businesses – this support is provided irrespective of whether they are developed and trained. SEs or not. BDS PROVIDER OR STAKEHOLDER IN SE SPACE NATIONAL COUNCIL TRADE UNIONS (NACTU) NELSON MANDELA MUNICIPALITY SERVICE PROVIDED OF There is a level of awareness about social enterprises at NACTU – more on the level of the non-profit organisations and vulnerable workers, for example, people living with disability. NACTU feels that it can become a vehicle to help social enterprises. NACTU is also one of the founders of the Job Creation Trust. CHALLENGES & NEEDS Greatest impact is needed by focussing on the youth in rural areas, but also on women. Skills development is needed for the sustainability of social enterprises. BAY The concept of social enterprises is still very new at the Nelson The primary objective of the municipality is to have Mandela Bay Municipality. There is a need to make grant funds appropriate tools to assist social enterprises and to available and offer support to social enterprises in the form of grants. raise awareness. LIMPOPO PROVINCE The Limpopo province is focussing its efforts on cooperative programmes, but it is also assisting the Limpopo business agency. Cooperatives are encouraged because rural development is of utmost importance in a developmental state. New avenues for business development are currently being explored. The biggest challenge facing the province is a lack of infrastructure. Communication remains problematic and needs to expand. Business development is of utmost importance. KUMBULANI TRUST Kumbulani believes that job creation is not in the formal sector and therefore creating small business is very important and its focus is on profit-making small businesses. However, Kumbulani provides equipment, material and training to social enterprises in some instances, e.g. a project for food security in KwaZulu Natal. The challenge is to influence attitude: one of the biggest challenges faced is the change in mindset and attitude of all stakeholders to develop social enterprises. 160 | P a g e BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED DEPT OF WOMEN, CHILDREN The DWCPA had its first consultation with the women’s gender and AND PERSONS WITH groupings represented and the initial discussion on issues of empowerment and how to take it from there. There is a need to ‘scan’ DISABILITIES (DWCPA) the environment, identify gaps – people are trying to run businesses but don’t have access to the right tools. There is a need to bring in mentorship and know-how. The DWCPA would like to see a partnership between business and government and for social enterprises and big companies to form partnerships for procurement purposes. CHALLENGES & NEEDS Women in rural areas should be empowered to get access to markets. There should be plenty of communication and information going out to communities about the different options available. Knowledge should be shared and people living with disabilities should be brought into the main stream of the national agenda. FEDERATION OF UNIONS OF The Job Creation Trust acts as the agent for Fedusa in the The term ‘social enterprises’ is unknown and there should be greater awareness. However, Fedusa is SOUTH AFRICA (FEDUSA) development of social enterprises. making its contribution through the Job Creation Trust. CONGRESS OF AFRICAN TRADE (COSATU) 161 | P a g e SOUTH COSATU also contributes to the Job Creation Trust and the alleviation Social enterprises could lead to job creation for UNIONS of poverty and upliftment of the poorest of the poor is of utmost South Africa and should be explored. importance. BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED DEPARTMENT OF SOCIAL The role of the Department of Social Development in regulating the non-profit sector is discussed in Chapter 4 of this document. However DEVELOPMENT (DSD) it should be noted that it is the mandate of the DSD to create an enabling environment for the non-profit sector, and by implication for social enterprises. CAUSE AND EFFECT 162 | P a g e CHALLENGES & NEEDS Interdepartmental meetings are to be encouraged to promote the integration and sharing of ideas. An interdepartmental task team has been proposed in order to create a platform where people who are unemployed and poverty stricken will be able to participate in the economy. The DSD, Department of Labour, Department of Education, the Department of Trade and Industry and National Treasury should take the lead in forming a task team. Cause and Effect is capacitating NGOs through strategic planning and Challenges are to raise awareness about social training, a fundraising plan and a marketing plan. By creating a enterprises and find sponsorships for events to networking forum for NGO fundraisers and marketers to share assist the non-profit organisations. knowledge and experience; to maximise resource development and offer opportunities for creation and implementation of successful fundraising campaigns; to bring them into contact with experts in their field and with senior corporate CSI and other executives and to provide education and professional support. BDS PROVIDER OR STAKEHOLDER IN SE SPACE DEVELOPMENT BANK SOUTH AFRICA (DBSA) SERVICE PROVIDED CHALLENGES & NEEDS OF The DBSA aims to provide a full package of support to development Interested in social enterprise development but initiatives within South Africa and the Southern African Development looking at financing on a large scale – more into the Community (SADC) region, in the realization that infrastructure area of local economic development. delivery has broader socio-economic and cross-border implications and impacts. The Bank is primarily concerned with promoting the economic integration of the SADC economies, enabling individual economies to use internal resources more effectively and the region to become more competitive in the global economy. To qualify for funding, projects must meet certain key criteria. In the first instance, a project must be consistent with the DBSA’s sectoral and geographic mandate, i.e. in support of infrastructure development within South Africa and the SADC region. WOMEN DEVELOPMENT WDB now operates in four provinces and branches increased from 3 to 27, creating about 178 jobs. WDB Micro Finance is the second BANK (WDB) largest developmental micro finance institution in South Africa and is rural-based. Since its inception in 1992, about 247 000 loans have been disbursed to rural entrepreneurs. Goal is to make WDB Micro Finance sustainable and independent from its donors. WDB Trust also continues to work towards the expansion of the Enterprise Development Unit. INDUSTRIAL DEVELOPMENT The IDC recognises the importance of a dynamic private sector in The IDC has taken an interest in social enterprises securing and stimulating rapid and sustainable economic growth, and will be developing directives in support of CORPORATION (IDC) creating employment and reducing poverty. IDC believes in the these entities in the future. development of a holistic socio-economic model that combines social inclusion, social capital and economic development. 163 | P a g e BDS PROVIDER OR STAKEHOLDER IN SE SPACE SERVICE PROVIDED NATIONAL DEVELOPMENT The NDA’s mandate is 1) poverty reduction through grant funding for community projects; 2) institutional strengthening of civil society AGENCY (NDA) organisations; 2) research and publication aimed at providing the basis for development policy, and 4) encouraging dialogue, consultation and sharing development experience between civil society and relevant organs of state to inform/debate policy development. The NDA is currently piloting a business support programme targeting youths, entrepreneurs and SMMEs. The programme includes funding support, mentoring and training. 164 | P a g e CHALLENGES & NEEDS Although the NDA does not define social enterprise as yet, they could consider extending similar services to social enterprises. This, indeed, could play a major role in the development of the social enterprise sector in South Africa in terms of capacity building and seed capital. SETYSA Social entrepreneurship development targeting unemployed youth in South Africa Project summary SETYSA is a project facilitated by the International Labour Organization (ILO), a specialized agency of the United Nations, in collaboration with various South African institutions. The project seeks to support the ILO’s constituents and partners in their efforts to promote social enterprise development in South Africa, supporting progress towards a conducive enabling environment and the development of appropriate business development service products for potential social entrepreneurs, with a particular but not exclusive focus on youth entrepreneurs. What we do Encouraging informed debate on the enabling environment for social enterprise development in South Africa: The project is supporting a comprehensive programme of research and policy dialogue intended to strengthen the capacity of South African policy level stakeholders to conceptualise social enterprise development, and to make informed decisions regarding possible policy options in South Africa. Developing appropriate business development service products for potential social entrepreneurs: In collaboration with the African Social Entrepreneurs Network and local business development service (BDS) facilitators and suppliers, the project is developing and piloting a toolbox of tailored training materials, adapted to the reality of social enterprises. The project is also working with BDS facilitators and providers to develop tailored social BDS products drawing on the toolbox content, and aims to promote access to these products through existing institutions and delivery mechanisms. The toolbox and other outputs of the project are hosted at www.asenetwork.org. Stimulating awareness of social enterprise and demand among potential social entrepreneurs for social enterprise training and advisory services: The project is working with business development service providers at local level in pilot communities to run social business plan competitions which seek to raise awareness, identify potential social entrepreneurs and to create demand for social business development services. Contacts International Labour Organization - Pretoria Office Crestway Block C 3 Hotel Street, Persequor Park, Pretoria PO Box 11694,Hatfield 0028, South Africa Tel: +27 (0)12 818 8000 Fax: +27 (0)12 818 8090 The SETYSA project is funded by the Ministry for Foreign Policy of the Flemish Region of Belgium