Department of Trade and Industry (DTI) on Tourism Assistance Programme, particularly for Small Micro and Medium Enterprises (SMMEs)

Committee: Tourism

Chairperson: Mr D Gumede (ANC)

Date of Meeting: 06 Sep 2010

Summary

The Head of The Enterprise Organisation (TEO), part of the Department of Trade and Industry, spoke on its Tourism Support Programme. This programme offered a grant to businesses in the tourism sector on condition that a specified number of jobs were created and maintained.  The programme was implemented in 2008 and insufficient data was available to indicate the impact and success of the programme.

Members of the Committee initially misunderstood that the grants provided had to be repaid to the programme and raised many questions in this regard.  It was explained that the grant was not a loan and the return expected was the continued provision of work opportunities by the enterprise receiving the grant.  To date, the programme had approved grants for 222 enterprises, of which 115 were operational.

The Members asked questions about the racial criteria applicable; the risk of promoting uncompetitive practices by providing an unfair advantage; the ownership of the businesses receiving the grant; the assistance provided to smaller enterprises; the marketing of the programme in the rural areas and the assistance available to complete the application forms and to compile acceptable business plans. 
It was clarified that the metropolitan areas of Cape Town, Durban and Johannesburg were excluded from the grant. A Member representing the DA felt that the grants should be subtracted when calculating the contribution of the tourism sector to the GDP; that the programme failed to address the failure of the tourism industry to correctly identify market demand as there was no demand for tourism products in certain rural areas, and that the grant was merely an election strategy by the ANC Government


Minutes

Tourism Assistance Programme: presentation by Department of Trade and Industry
Ms Tumelo Nkoane, Deputy Director-General: The Enterprise Organisation (TEO), briefed the Committee on the Tourism Support Programme of the Department of Trade and Industry (see attached document). The aim of the programme was to stimulate job creation outside the traditional tourism destination clusters. To this end, the programme was only available for businesses located outside the metropolitan areas of Cape Town, eThekwini and Johannesburg.

The six key objectives of the programme were to increase tourist volumes; to increase the length of stay of tourists; to improve the geographical spread of tourism; to improve seasonality patterns and to promote transformation in the tourism industry.

The presentation included statistical data since the inception of the programme in July 2008.  The Tourism Support Programme provided a grant of up to 30% of investment costs incurred and the minimum requirements for qualification for the grant was the establishment of three new jobs in black-owned enterprises and eight new jobs in other enterprises. Other conditions imposed included realising 70% of the projected investment, achieving 70% of the projected turnover, maintaining employee levels, paying wages in line with the hospitality sector and achieving and maintaining a broad-based black economic empowerment (BBBEE) level 4 contributor status.

Discussion
Ms J Manganye (ANC) requested a breakdown of the number of businesses assisted rather than the percentages provided in the presentation. She asked if applicants for the grants were informed of the reasons why applications were declined. She wanted to know what the strategy was for marketing the programme in the rural areas as marketing efforts were often biased in favour of urban areas.  The criteria for the programme appeared to be high in terms of the repayments to the programme by businesses.  She asked what limitations were placed and what types of ventures would be funded by the programme.

Ms Nkoane replied that the types of ventures funded were listed in the presentation. Services providing accommodation, transport and small museums were included as well. The criteria for the programme may seem to be relatively high but provided an incentive for businesses to create and maintain jobs.

Mr G Krumbock (DA) asked for clarity on several issues. He asked what the programme defined as “black-owned”.  The summary referred to the projected investment and the number of jobs created and he wanted to know if accurate information was available.  He asked if the funding provided was a grant or a loan that had to be repaid by the applicant. He asked how many applications had been received and approved as the statistics provided in the presentation was not clear. He referred to the statement made in the presentation that “it was too early to make an assessment” but R500 million of taxpayer’s money had already been spent on the programme since its inception. He felt that it could not be considered to be “too early” to provide an assessment of the effectiveness of the programme.  He found the racial requirements for the programme to be problematic and thought that economic circumstances would be a better qualification.  The focus on race had penalised many matriculants since 1994 and poverty affected all communities. He queried the financial aspects of the programme and asked what rate of interest was charged on the loans and/or grants.  He wondered if the programme had achieved the desired results.  He asked if the risks of the investments had been established by a bank and if the Department should not rather consider providing guarantees for bank loans to encourage banks to provide loans to customers with a higher level of risk.  He asked what the cost of the programme was to the taxpayer in terms of administration, salaries and written-off losses.

Ms Nkoane replied that applicants were measured on the Black Economic Empowerment (BEE) scorecard and the race definition applicable was the same as the BEE definition. She took note of Mr Krumbock’s comments concerning applying race as a criteria and undertook to forward his comments to a strategic review of the programme which was would take place later in the year. The cost of implementing the programme included 30 administrators but she did not have the detailed information to hand. The projection of the number of jobs created resulted from the length of time taken between when an application was lodged and the time when the grant was claimed. Many of the claims on the programme had only commenced during the previous two months.

Ms M Shinn (DA) asked what the annual budget was for the programme. She asked if the loans were provided from a specific fund or were paid out of the budget. The focus of the programme was to create jobs but tourism was a cost-sensitive environment. She asked if the programme took the market demand into account.  She wondered if businesses were established solely for the purpose of creating jobs rather than the need to provide a service to customers. She asked how many of the businesses served by the programme had failed and if the State took any steps to recover the loss.  She asked if the DTI had any expertise in making money in the tourism industry.

Ms Nkoane replied that the Enterprise Investment Programmes had an annual budget of R347 million, which was divided between tourism and marketing. The business plans submitted by the applicants had to include a market analysis and a marketing strategy. The grant was not repayable and therefore the money invested could not be recovered if the business failed. When businesses applied for the grant, they applicant had to provide a starting date. The applicant was required to confirm within 60 days whether the business would commence on the date indicated or if there was a delay. There was a wide range of skills represented on the committee that adjudicated applications.  Representatives from the affected Departments as well as the tourism industry were included in the committee.

Ms T Tshivhase (ANC) asked how the programme monitored projects.

Ms X Makasi (ANC) was concerned that the presentation did not provide adequate information on the effectiveness of the programme.  The lack of data on the grants provided in the Western Cape, Gauteng and KwaZulu-Natal provinces was of concern as these provinces included large rural areas that had not been considered for tourism purposes. She asked if the programme facilitated loans to individuals who could not afford to pay back the loan within three years or who were unable to invest R5 million in their businesses. She asked if the DTI accommodated small ventures as well.

Ms Nkoane replied that the Gauteng, KwaZulu Natal and Western Cape provinces were not excluded from the programme.  Only the metropolitan areas of Cape Town, Durban and Johannesburg were excluded. She explained that the investments did not have to be a minimum of R5 million.  The programme defined categories of R5 million and less.  The businesses were required to sustain at least eight jobs and this requirement resulted in the exclusion of very small enterprises.

Ms M Njobe (COPE) asked what constraints were placed on the repayment of loans.  According to the information provided, both locally and foreign-owned businesses were supported. She asked what percentage of businesses were foreign-owned and if locally-owned businesses were protected.  The presentation had indicated that the disqualification of residential developments was under review. She asked if the review had taken place.  She queried the stringent conditions for repayments and wondered if the requirements for repayment were too onerous on the smaller businesses.  She asked if the money received in repayments was made available in addition to the grants budgeted for and allocated each year by the Department.

Ms Nkoane responded that the majority of the businesses that the programme supported were locally owned.  She was unable to provide accurate statistics but thought that as much as 95% of businesses were locally-owned.

Ms Njobe asked if there were any restrictions on the number of locally-owned or foreign-owned businesses that could apply for the grant.

Ms Nkoane replied that there was no policy to restrict foreign-owned businesses from benefiting from the programme. The experience of the DTI in similar programmes was that there was little foreign participation in such programmes.

Ms C Zikalala (IFP) asked if the programme applied only to the tourism sector.

Ms Nkoane confirmed that the programme was only applicable to the tourism sector.

Ms JM Maluleke (ANC) wanted to know how many of the businesses that had received grants were successful.  She asked what was being done to market the availability of funding and the investment opportunities to communities in the rural areas.  The application process appeared to be onerous and she asked if the Department provided any assistance to applicants in this regard.

The Chairperson asked what the success rate was of the programme. He asked if the Department had effective processes in place to monitor the enterprises.  He wondered how the Department had established that the loans provided could be repaid within 2-3 years.  He asked if the Department offered mentoring services.  He asked if the Department had considered using the village bank model to make small loans available to entrepreneurs.  He asked how the programme communicated with its target market.  He asked if the application forms and information on the programme was available at Government offices in all areas of the country.

Ms Nkoane replied that the success rate could only be determined after a period of three years.  The programme had only been in place for two years.  The impact of the programme could only be assessed after three years but certain indicators were monitored to verify that the scheme was going in the right direction. Applications could be made as early as one year before investments were made.  Adequate time had to be allowed for the project to get off the ground. This was the reason why much of the information provided in the presentation was based on projections.  The funds made available was not a loan but was a grant.  The amount of the grant made available was budgeted for on an annual basis.  The grant was tax-free and was determined in accordance with the size of the project. The repayment was not in financial terms but in the creation of jobs. For investments below R5 million, the grant would be 30% of the establishment costs of the business. The payments referred to in the presentation were not monetary repayments but payments associated with the administration of the programme.  The programme did not have the capacity to mentor businesses but worked closely with other programmes, such as the Tourism Enterprise Programme (TEP). Applicants were informed of the reasons why the application was declined and were provided with assistance in the completion of the application document. The Department of Trade and Industry had other programmes dedicated to smaller enterprises, such as the Co-operative Incentive Scheme, and the Black Business Supply Development Programme. To date, the programme had supported 220 enterprises.  115 of these businesses had commenced operations.

Mr Krumbock was concerned that the grants provided would be considered to be a gift and would encourage uncompetitive behaviour as it provided unfair advantages.

Ms Manganye commented that there were many vacant factories in the former homelands. She asked if the programme encouraged the creation of jobs in the former homelands and if the migration to the cities could be curtailed.

Ms Zikalala observed that many applications were turned down because the business plan submitted by the applicant was not acceptable.  She asked if the Department made a pro forma or recommended outline of a business plan available as many entrepreneurs had the expertise to run a business but did not know how to draw up a proper business plan.

The Chairperson asked what rates of interest were charged by initiatives such as KHULA in comparison to the rates charged by the commercial banks.

Ms Nkoane replied that the presentation had indicated the position of the Tourism Assistance Programme within the national strategy. The manufacturing programme of the DTI focused on the factories established in the former homelands. The programme made a standard business plan format available and assistance in compiling a business plan was offered to applicants. The Department intended that the interest rates offered by KHULA would be competitive.

Mr Krumbock repeated his earlier question on whether the programme encouraged anti-competitive behaviour and that certain entrepreneurs were favoured over others.

Ms Nkoane replied that the programme had no control over how the money was used once the grant was paid out.  The programme required that the enterprises supported had to have been in business for a period of at least five years.

Ms Shinn observed that when the contribution of the tourism sector to the Gross Domestic Product (GDP) was calculated, the grants should be taken into account and subtracted. She felt that the programme did not address the development of the tourism industry but was rather an attempt at social engineering by the ANC Government. She pointed out that there was no demand for tourism products in certain rural areas. She felt that the programme was used to finance the ANC’s election strategy.

The Chairperson said that there were flaws in the approach of the Tourism Assistance Programme but concluded that the programme had only been in existence for two years.

The Chairperson announced that the Annual Report of South Africa Tourism for the 2009/10 financial year had been tabled for consideration. The Committee was invited to attend a World Tourism Day event in Limpopo on 27 September 2010. He informed the Committee that Ms Shinn had been redeployed to serve on another committee and would be replaced by Ms Terreblanche.

The meeting was adjourned.