Does govt give too much to start-ups?

The government might be giving away ‘too much’ money to start-up businesses in form of capital through programmes such as Hanga Umurimo which could result in heavy financial loss, an expert at the just-concluded World Export Development Forum (WEDF) in Kigali has said. June Lavelle, a business incubation expert based in Poland, was speaking to The New Times on Tuesday, shortly after appearing as the only female panelist of four experts who were discussing the topic, “Spurring innovation through SMEs incubators.” “Too much government subsidy, while a brave and bold statement aimed at promoting SMEs, I fear, is not a good idea because it affects the ‘entrepreneurial edge’ of the beneficiaries,” Lavelle, who helped to establish the American-based National Business Incubation Association (NBIA) in 1984, an organisation with 2,200 members in over 60 countries, said. The expert was surprised to learn that in Rwanda, start-ups benefiting from the government initiatives such as ‘Hanga Umurimo,’ which means ‘create a job,’ receive up to 75 per cent in loan guarantee assistance from commercial banks with the help of Business Development Fund (BDF). “That’s risky, risky, and risky! In my view, it kills the whole element of ‘hustling’ to make it and ownership among beneficiaries also tends to be low in such cases,” the expert said. Nonperforming loans Recently, Janet Kanyambo, BDF’s fund manager, revealed that some beneficiaries under Hanga Umurimo pilot phase are already struggling to keep afloat, while more than 50 others have already been written off with the credit extended to them earmarked as ‘nonperforming loans.’ A look at BDF’s consolidated data for the period between 2011 and 2014 shows that the Fund has 145 SME projects listed in its nonperforming loans portfolio (including 51 from Hanga Umurimo) and has already paid out for 77 of them to the tune of Rwf203.3 million of which 30 per cent was for Hanga Umurimo projects. Officials at the BDF attribute this negative development to beneficiaries having a ‘charity mindset’ which could explain the lackadaisical approach to managing their loan obligations. “This attitude threatens the whole idea of BDF and if we don’t work together to sensitise the public that BDF money is not for charity, the fund’s future is at risk,” Kanyambo said. However, Lavelle said it is the excessive generosity of government that might be the problem. “People are the same everywhere. Give them money and they get excited and many will divert it to nonproductive expenditures,” Lavelle argued. The expert added that in economies such as the US, start-ups must have something to get help. Normally, this should be at least half the total budget they need. Loans worth a total of Rwf835 million from commercial banks, of which Rwf670 million was guaranteed by BDF, was given to more than 50 start-ups in the pilot phase of Hanga Umurimo. Dishonest applicants In a separate interview with The New Times, last week, the Minister for Trade and Industry, Francois Kanimba, said while it is true that the Hanga Umurimo pilot phase was marred by some cases of dishonest applicants who simply wanted to get the money and exploit the process, those cases have been weeded out. “That’s why it was a pilot phase and we have learnt from it and I can assure you that the programme has now stabilised and beneficiaries are performing very well,” Kanimba said. The minister added that people are now seeking smaller loans after being sensitised about the importance of starting small and growing big which also enables them to manage their repayment obligations. However, Lavelle further opined that government should work toward attracting private investors to run these initiatives with the state providing partial support to ensure their success. “Governments are not the best when it comes to doing business, maybe its different here, but elsewhere, the private sector has played a pivotal role grooming start-ups,” she said. Averting losses In order to move away from the current model of funding, Lavelle advised that government should consider providing the start-up entrepreneurs with technical assistance rather than cash in order to avoid mismanagement. “Rather than give them cash which excites them, government could look at the critical things that these startups need to get started such as operational premises, processing equipment, leasing land, give them things to improve their management skills,” the expert said. This model, she said, is less risky compared to dishing out liquid cash because the equipment can be recovered in case the start-up somehow fails to grow due to other factors. Lavelle also said most African governments are ‘misplacing’ money by investing it into the wrong sectors and ignoring those with the most potential to create jobs and widen exports. “Take the example of performing arts. If aspiring artists in Rwanda were, for instance, to be given the necessary support such as recording studio facilities, talent management and promotion, Rwanda could soon earn big from music exports and promote tourism through music videos,” she said. In 2011, Rwanda Development Board started business incubation programmes aimed at helping prepare and nurture entrepreneurs to start and grow successful business through comprehensive class entrepreneurial training services, networks and tools they need to make their ventures successful. Active incubation centres include one at Masaka Sector in Kicukiro District, targeting SMEs operating in leather, goods making, bamboo products, cheese making and fruit processing. Another centre is run by Kigali Institute of Science and Technology providing support services to accelerate the development of technology based start-ups. The Kigali Integrated Polytechnic Regional Centre, run by the Work Development Authority, nurtures start-ups in hospitality and tourism, construction and building services, technical manufacturing, agriculture and food processing, among others. During the just-concluded WEDF, experts agreed that while business incubation programmes are facing certain challenges here and there, they play a significant role in nurturing SMEs which have been the focus of this year’s forum.

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Does govt give too much to start-ups?