Small Enterprise Development Agency Annual Report for 2008/09

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Meeting Summary

The Small Enterprise Development Agency (SEDA) briefed the Committee on its Annual Report for 2008/09. In this year, SEDA had amalgamated from three organisations, which precipitated a period of adaptation and growing pains, which had led to a degree of financial mismanagement and administrative difficulties. In this year there had also been a qualified audit. The Minister and Department of Trade and Industry (dti) had realised the need for change, and had terminated some contracts and appointed a new Chief Executive Officer, with a specific brief to turn around the organisation. In the past year, several changes had been instituted and an unqualified audit was achieved. Challenges still included the limited financial resources. SEDA set out its structure, described the work done, and the location of the branches throughout the provinces. The mandate had shifted from a wholesale model to a retail model, which involved interacting directly with small businesses. The target market was now more on the smaller enterprises. A further 27 incubation centres would be handed over to SEDA from dti. There were two main categories of products for start-up businesses, and for established businesses. The Hotline was set up to address problems in government making payments on time to small enterprises. There had been a moratorium on work on branches for six months, but there was training offered to two groups, who would be traveling respectively to Taiwan and Brazil, to observe and learn from how those countries managed their small businesses. SEDA had managed to improve its services and was focusing on better performance. There was to be a shift away from using consultants, phased in to coincide with training of SEDA’s own staff. Statistics were provided for the numbers of walk-ins, the numbers assisted and the numbers with whom SEDA was currently working. SEDA planned to establish the SEDA Learning Academy as a skills development tool. It realised that there was also a need for a more aggressive communication strategy.

Members congratulated SEDA on its turnaround but noted that it still had to achieve more. There was a generally feeling that it was still biased towards the urban areas and a number of members questioned the location of the branch offices, what was to be done to establish new branches, and the partnerships with municipalities. Members also questioned whether there were financial implications when the budget was frozen, and queried several financial items, including payments to board members and the former Chief Executive Officer, as well as the amounts paid for traveling, indicating that there was a need to cut internal costs. Members asked where the Entrepreneurs Day would be run and the numbers of consultants, and specific questions were raised about offices in Northern Cape, Vryburg and Richards Bay, as well as whether SEDA could assist in training in Eastern Cape schools. Members questioned the figures in respect of those assisted, the numbers of consultants, the number of Board members, and why SEDA was not employing any people with disabilities. Members also wondered if SEDA was focusing on the correct strategies and whether it was achieving what it set out to do as yet, as the numbers assisted were much lower than those seeking help. They stressed that there should be continuous and active marketing.

Members adopted the minutes of meetings held on 17 and 24 June 2009.

Meeting report

Small Enterprise Development Agency (SEDA) Annual Report 2008/09 briefing
The Chairperson noted that the Committee had previously met with the Small Enterprise Development Agency (SEDA) in Pretoria. He noted that he would have to leave the meeting early, and asked that Mr F Adams (ANC, Western Cape) stand in for him as Acting Chairperson at that point.

Mr Linda Mngomezulu, Chairperson, Small Enterprise Development Agency, said that when last SEDA met with the Committee, one of the key points raised was the adverse audit opinion it had received. He noted that for the past financial year an unqualified audit had been given. The Board of SEDA was still investigating the reasons for the adverse opinion in the previous year; it had initially been a disclaimer, but was reduced to an adverse finding when challenged. In the past financial year SEDA had worked closely with the Auditor-General (AG) to ensure that there were no misinterpretations of processes, that matters were rectified, and that it had a competent management and executive. SEDA had come through a few difficult years. There had been merger of three  organizations; Ntsika Enterprise Promotion Agency, The National Manufacturing Advisory Centres (NAMAC) and the Community Public Private Partnership Programme, as well as other programmes initiated by the Department of Trade and Industry (dti). Human and financial resource management had been difficult, and some appointments were made that were not conducive to sound administration and management. The Board realised that there were challenges and had adopted a turnaround strategy, which led to the departure of some executive staff. Some board members also left owing to the problems that SEDA was going through. However, with the support of the dti, the Board had managed to turn SEDA around. The Chief Executive and Chief Financial Officers were appointed. Several other executives were appointed by the CEO in consultation with the Board. The internal problems were therefore solved, and the Board was determined that it would not revert to the previous position. SEDA was concentrating on utilising the opportunities available in the market and everywhere else, to ensure that small enterprises were receiving the support they should receive.

While SEDA Head Office had problems, the 42 branches and sub-branches in the provinces and regions functioned unhindered. There was minimal impact on their functioning. The Board wanted to build on the SEDA strengths. He was confident that SEDA had the kind of management that could take it to a much higher level with the limited resources that were available. He hoped to convince National Treasury and everyone else that SEDA's mandate was much bigger than it was currently understood to be. If the resources allocated to SEDA were improved, it would be able to offer a much better service with better co-ordination to the people.

Ms Hlongela Lupuwana, Chief Executive Officer, SEDA, noted that in the period April 2008 to March 2009 SEDA suffered from scarcity of resources, and that three organizations had also happened, during which time SEDA had not had a network. The budget of R240 million had remained despite the increased size, including 42 branches and 8 provincial offices. Thus, at the beginning of 2009, SEDA only had money to function for six months. This had a major influence on its ability to deliver. In each of its years of existence, there had been a moratorium on provision of services for a period of six months. The focus was on the merger and restructuring, as well as on establishing the 42 branches and 8 provincial offices, not on change management issues or organisational culture issues. The problems that plagued SEDA resulted from this lack of change management and proper restructuring. The work still continued in the branches and provincial offices, although only for six months of the year. The key assets of SEDA were the skills that emanated from organisations that it was born from, the 42 branches that were established, and the partnerships that it built over the years. However it was still hampered by a lack of operational funds.

Ms Lupuwana set out the history of SEDA, and its mandate. She said that one of the points related to SEDA having to “integrate all government-funded small enterprise support agencies across all tiers of government.” This had been difficult. SEDA only did this through partnership with provinces. Provinces were autonomous. It was not easy for SEDA to impose its will. SEDA worked with whatever agencies it found were willing to form partnerships in the different provinces.

The mandate had shifted from a wholesale model to a retail model, which involved interacting directly with small businesses. SEDA’s target market had a focus of small, micro and “self-survival” enterprises.

Ms Lupuwana noted that SEDA was about to establish its ninth office in Gauteng, as previous attempts to do so had failed because dti and the Provincial Government were unable to find common ground. There was  branch office in Gauteng and between three to six branch offices in each of the other provinces, with a total of 42. There were 58 Enterprise Information Centres( EICs), placed in libraries or other places that saw volumes of people moving through, or where information could be distributed. There were 4 Mobile units in partnership with municipalities, and 25 co-location points at local municipalities. There were 27 Incubation Centres under the SEDA Technology Programmes (STP), which were currently run under dti, but which would be handed over to SEDA. The distribution of the SEDA network was tabled.

Ms Lupuwana also tabled a slide showing staff allocation at the different levels of the network. There were more staff present at delivery points(72.6%) than at the national office(22.0%).

Ms Lupuwana then described the key products and services. There were two categories – one for start-up businesses and one for established businesses. A new addition to the products for established businesses was the Hotline, to address the fact that it took very long for Government to pay small, medium and micro enterprises (SMMEs) and interfered with their cashflow. The turnaround period to resolve issues was between five and seven days.

The SEDA Technology Programmes were support programmes for new and existing businesses. As yet there was no budget for programmes transferred from the dti.

SEDA noted that there was a moratorium for six months of the year on branches. Other hindrances were the impact of the economic recession, and current and continued restructuring in the organisation. SEDA was focusing on delivery, frontline staff and capacity building. Ms Lupuwana reported that, with the assistance of the government of Taiwan, 25 business advisers would be traveling to Taiwan for seven days to learn more about how this country managed its business support, with another 25 doing the same kind of training later in the year, in Brazil, once again sponsored by the host country. It was hoped that these experiences would help SEDA to drastically improve the quality of the service offered to small businesses.

Ms Lupuwana then tabled a slide on leadership and financial management. She had acted as CEO from October 2008 and was appointed on 1 May 2009. She had been asked to look at very specific issues, like the organisational restructuring, the turnaround in terms of the finances, and achieving an unqualified audit report. Those issues were resolved. The focus now was on service delivery. The appointment of additional board members helped to strengthen the Board. A Chief Financial Officer (CFO) and other executive management had been appointed, which made her confident that she now had a team equal to the task. Once the CFO was appointed, SEDA had embarked on a Financial Management Improvement Plan, and had addressed the issues raised by the AG, which was the reason for the turnaround to an unqualified audit.

Performance highlights were described as improved service provision and a focus on performance. The Board took a conscious decision to limit the use of consultants, because it affected the quality of the service provided, but this would happen simultaneously with business advisers being aggressively developed. The business advisers were graded on a sliding scale, to indicate the level at which they could advise. Consultants would only to be used for those functions that could not be done internally. SEDA would have better control over the quality of the service and products provided. SEDA would be better placed to measure its impact.

The business plan for the current year was well under way. It would be possible to measure what impact SEDA had, and what its sustainability levels were. SEDA's contact with businesses should be a client journey, rather than a once-off intervention, to better measure its impact, and it should know what exactly was being achieved for the money it invested in small businesses. It had partnerships with Belgium, Brazil, and India, which had existed prior to the India-Brazil-South Africa (IBSA) capacity building programmes, and had integrated into the IBSA programmes.

SEDA currently had 534 staff. It was implementing a very rigorous performance management system. It was focusing on graduation of businesses, from informal to formal, from small to medium and so forth. Performance of businesses was also being graded, and statistics compiled on, for instance, how many employees were able to be employed as a result of SEDA’s intervention, what had been the turnover increase, and its general impact.

The services provided to SMMEs were outlined. 200 000 potential small businesses accessed SEDA's network, 47 000 were assessed, and 14 000 clients were assisted. The Community Private Public Partnerships PPP) programme, under which co-operatives fell, was revived.

The statistics for client walk-in to the branches, the numbers of clients registered and the number of clients with whom SEDA was currently working, were tabled. In regard to the Sustainability and Impact Survey, 80% of clients said that SEDA had a positive impact on their business in terms of staff numbers, turnover, sales and customers. 60% of businesses were sustainable.

SEDA had been allocated R331 million, but this was not sufficient. SEDA would need support from the Committees to motivate for more funding. SEDA had recently entered a partnership with Old Mutual, in terms of which Old Mutual would contribute R5 million to SEDA offices to fund small businesses, and had also promised to offer grants to the PPPs. In future, SEDA planned to establish the SEDA Learning Academy as a skills development tool. It realised that there was also a need for a more aggressive communication strategy.

Discussion
Mr A Nyambi (ANC, Mpumalanga) welcomed the comprehensive report. He noted that small businesses were the key to economic growth in the country. He felt that SEDA was biased towards the urban areas, and was still not assisting the rural areas. He noted that although half a million people lived in Nkomasi, they must still travel more than 100km to Malelane, or 300km to Nelspruit, to access SEDA offices.

Ms Lupuwana noted that because of a lack of budget, no new SEDA branches were established, but only partnerships were formed with municipalities who had budgets or buildings to make available. SEDA had good partnership agreements with Eastern Cape municipalities in terms of the provision of buildings. SEDA was in the process of negotiating with Tshwane municipality.

Mr Nyambi asked if contracts had been cancelled when the budget was frozen.

Ms M Hoogendoorn, Chief Financial Officer, SEDA , said that the moratorium lasted for a short period of time, before SEDA had received an additional R140 million. It was not necessary to cancel contracts and there was no legal action.

Mr Nyambi asked in which provinces Entrepreneurs Day would take place.

Ms Lupuwana noted that Entrepreneurs Day was started by the Belgians. SEDA respected the autonomy of local government and provinces. This year it would be done with provinces who were ready.

 Mr Nyambi asked if the Fixed Asset register was now in place.

Ms Hoogendoorn noted that the fixed asset register was in place. Part of the controls were set up to manage it on a monthly basis. SEDA had employed an external service provider, and physical assets counts would happen more regularly, twice a year.

Mr Nyambi questioned the difference between the clients registered, and the numbers of clients with whom SEDA was working.

Ms Lupuwana noted that the numbers of clients registered, and those with whom SEDA was working, was a filtering process. Not all could or would start businesses. Slide 20 showed that 46 000 were assessed but 14 000 were assisted.

Mr Nyambi asked for further details on the numbers of consultants.

Mr K Sinclair (COPE, Northern Cape) said that there had been a major turnaround, and this was appreciated. However, he agreed that there were serious problems around rollout in the rural areas. SEDA’s primary mandate was to assist potential entrepreneurs to start and sustain a small business. Other partners like banks were not very supportive. He wondered if it would not be necessary to engage local government in terms of the roll out of the activities of SEDA.

Mr Sinclair noted that in the Northern Cape, the staff of SEDA were unlikely to cope with the volumes, nor with assessing the quality of the business plans, if the consultants were not present. He wondered if it would not be better to have a structured transition away from using consultants, when the SEDA staff were able to cope with the demands.

Ms Lupuwana replied that there would be a phased-in approach. She personally would look into the situation in Northern Cape. The limitation on the use of consultants had to be gradual

Mr Sinclair noted that SEDA was a small organisation in terms of finances and wondered why it was necessary to have 15 Board members.

The Chairperson commented that he agreed with this observation.

Ms Lupuwana noted that the size of the Board was set by the legislation, and this did not lie in SEDA’s jurisdiction to change it.

Mr Sinclair also asked if these Board members would fly business or economy class, as costs must be cut at the offices. He asked for details on the remuneration of A N Damane, listed under ‘other’ in the expenses. He also questioned the irregular expenditure mentioned, of R 3 627 290. He further asked why Mr Feinstein, who lived overseas, was on the Board, as his traveling expenses were much higher than the other members.

Ms Lupuwana noted that Mr Feinstein in fact lived in Cape Town. He was a member of various committees, which involved him flying to Gauteng often for all these different committee meetings. This explained why his traveling expenses were higher. The other Board Member, Mr Faull, had been absent, but his apologies had been tendered.

Mr Mngomezulu stated that members flew business class.

Mr Mngomezulu noted that the remuneration to Mr Damane was paid by way of a golden handshake.

Mr M Maine (ANC, North West) asked for clarification on the second point of the performance indicators, on page 61 of the Annual Report. He also asked for comment on items 13 and 14 on page 60, and on item 20 on page 61.

Ms Lupuwana noted that performance information was information about what was in a business plan, and there were also measurements on client performance information.

Ms Hoogendoorn noted that in respect of the irregular expenditure (about which further questions were asked later), the note clearly showed the turnaround strategy, and this was not repeated in the 2009 financial year. In respect of page 60, the CEO and CFO’s plans made subsequent to this had prioritised items, but some smaller items were left to be handled in the following year.

Mr Maine noted that although this was not covered in the report, he noted that government had promised that there would be a focus on rural areas. He noted that Vryburg had a population of 18 000. Taung had a population of 120 000. He questioned whether SEDA wanted to work in urban rather than rural areas, and questioned the location of the offices in North West.

Mr Mngomezulu noted that Gauteng had fewer resources than rural- based areas. SEDA was at one stage told to stop establishing offices in rural areas. Ms Lupuwana had indicated that partnerships with municipalities in respect of premises were working, and it must be noted that in some municipalities, people were very protective of their ‘turf’. SEDA was hoping to extend the municipal strategy to the wider rural areas, and was open to suggestions on how best to penetrate rural areas.

Ms S Chen (DA, Gauteng) expressed the hope that SEDA would be able to turn around. She questioned why Gauteng had only one branch, and what SEDA was intending to do to make further resources available.

Ms Lupuwana noted that the numbers of branches in rural areas had been a historical issue. She was only able to comment on the future. At the moment, it was not possible for SEDA to establish new branches, and municipalities or provinces would determine whether and how SEDA could  roll out further offices. Although it was recognised that Gauteng province was an enterprise propeller, there had been negotiations with the Mayor of Tshwane to use buildings. In the Eastern Cape SEDA used buildings of municipalities.

Ms Chen was pleased to hear of the partnership with Taiwan, and asked if there would be assessments presented after those trips.

Ms Lupuwana noted that the Taiwan programme was part of the course at the Academy. A thorough assessment would be done to determine levels of expertise on the return of the participants, and they would also have to do a project applying what they had learnt.

Ms Chen asked for SEDA’s views on labour brokers.

Mr Mngomezulu said that there were no brokers used by Enterprise Information Centre in the SEDA environment.

Ms E van Lingen (DA, Eastern Cape) agreed that the future of SEDA looked exciting. She asked for figures as well as percentages on Slides 21 to 23.

Mr Mngomezulu said that he would do a proper calculation and would send through the figures.

Ms van Lingen noted that a number of schools had computer rooms, but no staff, and wondered if SEDA would be able to help with teachers.

Ms Lupuwana noted that SEDA could only interact when people wanted to open a business. Training alone did not fall within SEDA's mandate.

Mr F Adams (ANC, Western Cape) congratulated the delegation on a clean audit and successful turnaround strategy. He commented that the fruitless and wasted expenditure as reported on page 64 was lower than the previous year. He felt it important to give credit where credit is due.

Ms Hoogendoorn explained that most of the fruitless expenditure was due to interest paid on travel accounts. When the Chief Financial Officer had decentralised travel accounts to the provinces, this had saved on the interest.

Mr Adams remarked that there were many vacancies and asked if this would affect performance, whether SEDA was making counter-offers in the case of resignations, what the plans were to fill posts, and if those leaving were key professionals.

Ms Lupuwana noted, in respect of the 15% vacancy rate, that there was a “mini-restructuring” taking place to gear SEDA up to do more, and this could not be done simultaneously with the filling of vacancies. The provinces had now begun to fill the vacancies. Advisors would often be recruited by the private sector, once they had some experience, and it was recognised that there would be a high staff turnover as long as this continued.

The Chairperson was sorry to see that no people with disabilities were employed, as this was going back on government’s plans. He said that he would ask the disability sector to engage with SEDA.

Ms Lupuwana agreed that this was disappointing, but stated that SEDA now had a strategy for disabled recruitment, and she hoped that the situation would be different soon.

The Chairperson asked how the R331 million budget was spent. He noted that SEDA should not be asking for additional funds to pay board members.

Ms Hoogendoorn responded with details of the breakdown. The Staff Costs were 38%,(which she said was quite reasonable as the norm was around 40% to 60%). The Board costs were 0.6%, administration accounted for about 14%,  capital expenditure for 3 %, and direct expenditure for about 45%.

Mr Mngomezulu noted that SEDA was working with about 14 000.There were not many entrepreneurs. However, SEDA did not only respond to people walking in, but would actively approach SMMEs, to get them involved. Such approached had been made in the case of Gautrain, Coega and other projects. It worked with other departments and then drew in SMMEs to take advantage of opportunities.

The Chairperson asked for explanation on the provision of bonuses on page 81, especially the large increase in these.

Ms Hoogendoorn said that there was usually a high accrual on leave pay by December, but this would drop in December as people took their leave. The bonuses paid before year-end were based on a 13th cheque, not linked to performance. New management systems would be performance linked.

The Chairperson referred to page 82, item 14 and asked why there had been such a large liability incurred in respect of the Commission for Conciliation, Mediation and Arbitration.

The Chairperson noted that A N Damase attended 3 meetings, was paid R 1.8 million, and then resigned, and called for an explanation on this.

Mr Mngomezulu noted that CEOs were better paid than other Board members for attending meetings. Mr Damase was the former CEO. When there was trouble with SEDA, the dti and Minister approved that some people should be asked to leave, so that instead of addressing issues one by one, a new person would be appointed to conduct an entire turnaround. The decision was taken that Mr Damane would be given a golden handshake, and a new CEO would be appointed. It had been a good decision.

Mr Gamede noted that he came from Richards Bay, and people were complaining about the quality of the SEDA office there. He recounted that some people living 75 km outside Richards Bay had been to the SEDA office, but were told to go home and wait to be called. They were phoned and an appointment was set up, but when they drove through, they were seen for only five minutes, and then told that another appointment would be arranged for another day.

Ms Lupuwana said that she visited branches unannounced. She would go to Richards Bay personally to see what the problem was.

Mr Adams took over as Acting Chairperson.

Mr Adams noted that if 200 000 people walked into a retail business, but only 14 000 bought, then he would think that there was a problem, because clearly that business was not catering for the needs of the people. He questioned whether the services of SEDA were really catering for needs.

Mr Mngomezulu agreed that this was a matter for research. He agreed that there was a real need for training and SEDA needed to find out exactly what the training needs were.  SEDA, by holding competitions, was trying to instill a sense of entrepreneurship in society. He noted that an entrepreneur and a business could be compared to a horse and a jockey, where one could be wonderful but the other would fail. Only when there was a good entrepreneur and a good business would there be a winning combination. He noted that in addition, some people could be trained and would not return, as those who succeeded as true entrepreneurs would develop their own ideas. Those who were not necessarily entrepreneurs could be catered for through cooperatives. An internal monitoring system was planned to monitor the impact of programmes and to produce a better level of staff .

Mr Nyambi noted that Members of parliament, as public representatives, regularly interacted with people on the ground facing challenges. The SEDA officials had claimed that the budget given to SEDA was not sufficient, but he questioned in that case why only 90% of the budget had been spent.

Ms Hoogendoorn answered that it had not been possible for SEDA to complete the procurement documentation, and funds could not be spent on time as a result. There had been R 77 million under spending, as reflected on page 66 of the Annual Report, but this must be read with page 82, which noted that SEDA had received additional funding at a later stage. National Treasury had agreed to allow SEDA to roll over the surplus funds.

Mr Nyambi also noted that the auditors had stated that the information on the feedback with Standing Committee on Public Accounts was not provided.

Mr Nyambi noted that the Chief Executive Officer’s report had made mentioned of some contracts that were cancelled (page 70) and asked what had been the financial implications.

Ms Hoogendoorn repeated that there were no monetary implications.

Mr Nyambi noted that the slides giving the numbers of clients in the provinces did not seem to tally and called for further explanations.

Mr Lusapho Njenge, Senior Manager: Strategy and Organisational Performance, SEDA, said that the percentages were measured against the total figure, so that the percentage that SEDA was working with could be more than the percentage actually registered.

Mr Nyambi asked for the names of the provinces who had participated in the Entrepreneurs Day, and asked for clarity on the duration of matters.

Ms Lupuwana noted that Entrepreneurs Day would be held in Western Cape, Gauteng and Limpopo

Mr Nyambi noted that marketing must be continuous, and active.

Ms Van Lingen expressed the view that spending only R3 892 for training on each client was good value as she would think that the rates were normally around R7 000.

The Acting Chairperson congratulated SEDA on the steps so far taken to turn around. He noted that there was a need to sustain it, and he hoped for continued good reports.

Other business: Adoption of Committee Minutes
The Acting Chairperson tabled the Minutes of 17 and 24 June 2009. They were adopted, subject to minor technical corrections.

The Acting Chairperson announced that the oversight trip had been approved, to last for three days, from 25 October, and outlined the programme. The Committee Secretary commented upon logistics and arrangements.

The Department of Energy would brief the Committee on 11 November.

The meeting was adjourned.

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