Government doesn’t have the cash to finance the development of the South African cannabis economy but it will put in place measures attractive to private sector financiers.

This emerged from The Phakisa, where delegates grappled with the practicalities of how to finance the transformation of an illegal market into the mainstream and came up with some creative solutions.

“Industrialization cannot exist with criminalization” was one of the take-out lines of The Phakisa Hemp and Cannabis Action Lab Final Report on the Pretoria cannabis summit of 19 – 23 June 2023.

This is particularly pertinent to the relationship between capital and cannabis as current legislation prohibits any mainstream financial institution from putting money into the sector. As we all know, capital is a scarce resource.

The Presidency’s holistic approach to cannabis reform identifies “ecosystem finance as one of the critical enablers to any industry” but points out: “However, the cannabis industry has faced enormous obstacles in relation to investment and financing owing to the existing legislative framework”.

The law has been identified as the main inhibitor to funding cannabis projects, and Government has acknowledged that it can do little more than enact a change in this respect.

Simply put, state coffers are dry, public debt is starting to look edgy, and, although certain SOE’s are in the market for strategic financing in key areas of the value chain, the weight will be on the private sector to put up the cash.

This is not necessarily a problem as Goodleaf’s Warren Shewitz has pointed out. There are billions of rands available to invest in South African cannabis once there’s a proper regulatory framework in place that incentivizes and protects investors. Cannafrica's Herschel Maasdorp says there's over R100 billion of potential investment in the cannabis industry waiting in the wings, funds that could be unlocked if the right laws are enacted.

Private sector stakeholders have made it clear through numerous Parliamentary submissions that the priority in releasing funding to kick-start the fledgling cannabis economy is to urgently change prohibitionist laws.

But to date their submissions have fallen on deaf ears as the Department of Justice has steamed ahead to present to Parliament the ragged mess of a Bill narrowly enacting the historic 2018 Constitutional Court decision to legalize the private consumption and growing of cannabis.

Part of The Phakisa’s mission is to fix the problems created by the Department of Justice during the passage of the Cannabis for Private Purposes Bill, which has been devoid of underlying rationality, and, bluntly put, based on the principle of feeding the poor those scraps left over from the rich man’s table.

The Phakisa has identified three main barriers to cannabis funding:

• “Legislative and regulatory uncertainty, especially the criminalisation of cannabis trade, particularly when this is often treated (inviting harsh penalties) as organised crime, money laundering and racketeering”. At the core of this problem are the Drugs and Drug Trafficking Amendment Act of 2022 and the Medicines Act of 1994.

• The lack of a cohesive industry strategy to guide investment to ensure industry growth.

• The lack of a consolidated industry body for public and private investors to engage with each other”.

Government told The Phakisa participants that it had initiated a research project “which is developing proposals for financing arrangements across the value chain, with an emphasis on private sector funding. Nevertheless, several potential funding sources were identified that included both public and social institutions, for investing across the entire value chain. These include:

1. Trade Union investment vehicles.

2. Pension funds that invest in strategic sectors.

3. SETA’s.

Much of the responsibility for tackling the barriers to financing the cannabis sector will lie with The Phakisa’s Workstream 1, one of three “action groups” involving public and private sector participants, and the one tasked with urgent regulatory overhaul.

Among the ideas being thrown around is the introduction of regulatory “sandboxes”, or special zones, that can be used to develop an industrial cannabis economy that have a different set of economic rules from the rest of the country.  Theoretically, Mpondoland could be turned into a “regulatory sandbox” thus enabling legacy growers to continue growing their high-THC landraces, now conveniently falling under the umbrella of “industrial cannabis”.

Workstream 1 will also look at a single over-arching cannabis law that provide a regulatory framework for full adult legal-use consumption and trade in cannabis products. Their point of departure is opening up “demand pathways”.

The Phakisa revealed that the Industrial Development Corporation (IDC) is the first state enterprise to begin financing the cannabis industry with a R50 million war chest.

The IDC has made two cannabis investments – one in the cultivation space and the other in the processing environment.

Discussions are also underway between the Land Bank, recently rescued from financial disaster, and the Department of Agriculture (DALRRD), who are putting together a financial support scheme for cannabis entrepreneurs that involve a blend of loan and grant finance.

The CSIR is also providing support in incubation, product development and testing services, which although might not translate into any mega-investment, is proving to be a key enabler for the industrialization of South African cannabis.

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