Meeting SummaryThe Committee was briefed by the Department of Trade and Industry (dti), Economic Development Department (EDD) and Small Enterprise Finance Agency (SEFA) on their initiatives to assist Small, Medium and Micro Enterprises (SMMEs) with funding.
The dti noted that after a review in 2004, Cabinet had approved the Integrated Strategy on the Promotion of Entrepreneurship and Small enterprises, which had encompassed a 10-year plan, with annual reviews that would assess current SMME and cooperative support programmes, to enable recommendations on ways to improve coordination and rationalisation, and five-year reviews. The plans would encompass spheres of government, departments, institutions and programmes, and the review would also look at accessibility, responsiveness and transaction costs. There were three main pillars to the Integrated Strategy – namely, increasing the supply of financial and non-financial support, creating demand for SMME products and services, and reducing regulatory constraints. The programme areas for each were summarised. The main challenges were then set out. The small business policy formulation within government remained fragmented, and the role of provincial and local government was not clear, with some issues troubled by institutional mandate and political difficulties. There were problems also with resources. There was a need to increase demand for SMME goods and services, by improving the local business environment, encouraging break-out and business diversification and strengthening access to public sector procurement. Regulatory constraints should be addressed by government taking better steps to avoid negative regulation, building capacity to formulate better regulations and reducing the burden of existing regulation.
The EDD focused on the challenges faced by SMMEs in South Africa, noting that the main and common problem remained access to finance, which ranged from difficulties in meeting the qualifying criteria to the adequacy of business plan assessment and excessive pricing of loans. Demand challenges were compounded by slow pace of economic recovery, socio-economic factors, such as unemployment, poverty, inadequate services delivery, corruption and crime. Other limiting factors identified by research were government tax and regulation, bureaucracy, legislative compliance, restrictive labour legislation, and onerous administrative and legal requirements. EDD was partnering with the Africa Growth Institute to develop an index on regulatory impediments. The New Growth Path had mentioned that unnecessary red tape had to be eliminated. Part of that had been done by the merger of three development finance institutions – Khula, SAMAF and the business finance activities of Industrial Development Corporation (IDC) into SEFA. Various aspects of the dti Review were outlined. IDC would try, wherever possible, to combine funding with business support, and regional and provincial offices were structured to offer funding through a wide array of instruments. The overall value and number of funding approvals had risen steadily, with the exception of the two years following the global economic crisis.
The SEFA presentation focused on the challenges that led to the establishment of this Agency, which were enumerated as previously limited success in fostering a strong and large SMME sector, weak small business performance, poor uptake of Khula and Samaf products, poor visibility among small businesses, duplication of services amongst government agencies and high cost of delivering financial services to SMMEs. SEFA was established on 1 April 2012. Its mission and vision were described and it could offer a range of finance from loans of R500 up to R5 million. The wholesale model differed from other institutions because SEFA partnered with stronger financial intermediaries, would develop demand driven products, and it wanted to increase the utilisation of the Credit Indemnity Scheme by all intermediaries through improved processes, and to influence interest rates charged by intermediaries to SMMEs, for instance by capping of rates. It provided finance directly to SMMEs that could not access private sector funding, through more simple procedures and it aimed to improve its processing times and pricing of products. It tried to locate with other DFIs or IDC and would proactively target businesses in sectors identified by the New Growth Path. It had introduced a Co-Operatives Support Programme, and had a set target for numbers to be supported, and the values. Of the funding disbursed, 30% was targeted towards youth-owned enterprises, 45% towards priority rural provinces, 40% of funding towards women-owned businesses, progressively increasing in subsequent years, and 70% towards black-owned businesses.
Members asked a number of questions, but noted that the responses must all be submitted in writing, due to shortage of time. The Departments were asked why it took so long to address the SMME challenges and to detail what kind of collateral was mentioned, in relation to SEFA. They believed that SMMEs must be equipped with management skills, and asked what pro-active means DFIs used to assist and equip new entrepreneurs. They still felt that costs were too high. A COPE member believed that South Africa was currently operating as a welfare state and asked how this could be changed. One critical issue that did not come out from the presentations was the role of the commercial banks and this was something that had to be addressed. The role of the DFIs also had to be closely examined, because many entrepreneurs became discouraged and closed their businesses. This Member recognised the objective of cooperatives but pointed out that their success rate was limited. EDD was asked to give a breakdown of its activities in Africa, and SEFA was asked to detail its structure. Members also asked for details of interest rates, the businesses in which the DFIs were investing, how they operated security checks, what had become of R35 million invested in Free State, and for details of the hotline, and the names of the municipalities mentioned in the reports. One Member asked what was different about SEFA that would make it able to address the challenges that the previous institutions had not, and also stressed that government had to take small enterprises more seriously. He doubted whether it was worth entrepreneurs time to apply for the smaller loans, and criticized the red tape. Members indicated that there was some inconsistency in the figures, asked for an explanation of what was meant by “sustainability”, whether the mentorship programme was working, and wanted details of projects. Finally the Chairperson commented that it would be useful for the DFIs to accompany the Committee, when it did oversight, to see what was happening on the ground, and be able to resolve matters more quickly, and he too emphasised that support and assistance had to be continued.
Small Medium & Micro Enterprises: Department of Trade & Industry initiatives
Mr Mojalefa Mohoto, Director: Enterprise Development, Department of Trade and Industry, noted, by way of background that after the political transformation of 1994, government had adopted a White Paper on the National Strategy for the Development and Promotion of Small Business in South Africa (1995). The National Small Business Act (NSBA), No 102 of 1996,was enacted to provide for the establishment of support institutions for small, medium and micro enterprises (SMMEs). The institutions were at that stage Ntsika, National Small Business Advisory Council, with Khula Development Finance being established through the provisions of the Companies Act. In 1999, a mid term evaluation and review of the Strategy was undertaken. In 2004, the Department of Trade and Industry (dti) led a 10-year review on the status of small enterprise support in South Africa. This led to the rationalisation of the support institutions, through the amendment of the NSBA, to form the Small Enterprise Development Agency (SEDA). Cabinet had then approved the Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises, which was based on the 2004 review. This Integrated Strategy presented the way forward for small-enterprise development in South Africa over the ten years from 2005 to 2014. Annual reviews of the state of small business in South Africa would provide timely feedback, and the five-year assessments would assess what progress and impact had been made, and what adjustments would be necessary.
Mr Mohoto said the purpose of the review was to conduct an assessment of current SMME and cooperative support programmes, and to make recommendations on ways to improve coordination and rationalisation, across spheres of government, departments, institutions and programmes, as well as to determine the accessibility, responsiveness and transaction costs.
Mr Mohoto said the focus and scope of the review was guided by the three pillars of the Integrated Small Business Strategy. These were increasing the supply of financial and non-financial support, creating demand for SMME products and services, and reducing regulatory constraints. He summarised the programme areas for each of these pillars.
The financial support included access to debt, equity and venture capital, credit indemnity and incentives and grants. Non-financial support included incubation and technology transfer, mentorship and capacity building, and technology stations and advice.
Mr Mohoto said the small business policy formulation within government was fragmented. The role of provincial and local government was not clear, with some issues bedevilled by institutional mandates and political directives, and there were conundrums around resources. The small business support practice lacked long-range planning, with weak coordination and integration of support, and poor monitoring and evaluation of support. There was a need to increase the supply of non- financial support, as there were inadequate business incubation programmes, too few mentorship programmes, and lack of technology transfer and manufacturing advice.
The need to increase demand for SMME goods and services would be addressed by improving the local business environment, encouraging break-out and business diversification and strengthening access to public sector procurement. Regulatory constraints should be addressed by government taking better steps to avoid negative regulation, building capacity to formulate better regulations and reducing the burden of existing regulation.
Economic Development Department briefing
Mr Saul Levin, Divisional Executive, Economic Development Department, said that one of the main and common challenges faced by SMMEs in South Africa related to accessing finance. The difficulties ranging from compliance with qualifying criteria to the adequacy of business plan assessment and excessive pricing of loans. The challenges were aggravated in the case of emerging SMMEs without a track record.
Another challenge was the limited enterprise growth, as many SMMEs exhibited limited signs of growth and potential for employment creation. Demand challenges were compounded by slow pace of economic recovery, and by socio-economic factors, such as unemployment, poverty, inadequate services delivery, corruption and crime. The late payment for services was another problem, since excessive delays in processing payment to SMMEs, not only by public sector entities but also by private sector businesses, compromised their cash-flow and often resulted in their demise.
Small business development was further constrained by regulatory burdens. Mr Levin said the research conducted for the South African SMME Business Confidence Index Report (2011) reported that government taxes and regulations were one of the major limiting factors identified by SMMEs. The Global Entrepreneurship Monitor (GEM) Report of 2011 listed the following as factors constraining entrepreneurial activity: bureaucracy, legislative compliance, restrictive labour legislation, and onerous administrative and requirements related to registering and starting a business. The Economic Development Department (EDD) was partnering with the Africa Growth Institute to develop an index on regulatory impediments. A lack of business management skills was correlated to the level of education and skills training in the country. Poor management skills impeded the growth of small businesses, whilst good management skills enhanced their growth.
Mr Levin said that the microeconomic package in the New Growth Path (NGP) included enterprise development by promoting small business and entrepreneurship, and eliminating unnecessary red-tape. The NGP tried to strengthen and consolidate initiatives to support small and micro enterprises. The core components of SMME support in the NGP saw the merger of Samaf, Khula and the Industrial Development Corporation (IDC) small business finance activities into the new Small Enterprise Finance Agency (SEFA). Government had made a 30-day payment commitment, and had also agreed to strengthen access to micro-finance, integrate small and micro enterprise support systematically into sector strategies, had started a red-tape elimination campaign, and was assisting with access to business premises.
Mr Levin said the dti Review had recommended increasing the supply of financial support and reducing regulatory constraints. In relation to financial support, this Review suggested the stimulation of investment in SMMEs through various means, such as tax incentives, funds from Development Finance Institutions (DFIs), building angel investor networks, and dedicated substantial financial resources to scale-up microfinance activities, in partnership with international financial institutions and private sector partners.
Mr Levin said the Industrial Development Corporation approach to SME development combined its funding with business support, where applicable. The Pre-Investment Business Centre (PIBC) at IDC’s head office in Gauteng, along with its regional offices, provided support to entrepreneurs wishing to access funding from IDC. Several funding products were available to deliver a custom financial solution to the business. Other business support services could be provided if there were specific functional skills that were lacking in the small business.
Mr Levin said IDC’s funding could be structured by using a wide array of instruments, including debt, equity, quasi-equity, guarantees, trade finance, bridging finance and venture capital. Special funding schemes were available that offered more attractive terms and that would target cross sectoral issues such as job creation or development of specific sectors. These also included funds managed on behalf of other organisations, mainly the dti. IDC’s Business Support Programme addressed non-financial support to entrepreneurs.
Mr Levin reminded Members that IDC had offices in all provinces and had improved its regional presence to improve accessibility. The IDC regional offices were fully fledged operational offices that formed part of the Small Business Unit value chain. Access to IDC also included on-line applications and an on-line tool to assist businesses to develop business plans.
He concluded that he overall value and number of funding approvals, other than in the two years following the economic crisis, had increased steadily over the past decade, and 2011/12 saw the highest overall level of funding approvals.
Small Enterprise Finance Agency briefing
Mr Thakhani Makhuvha, Chief Executive Officer, Small Enterprise Finance Agency, said that the challenges that had led to the establishment of the Small Enterprise Finance Agency (SEFA) had included limited success in fostering a strong and large SMME sector, weak small business performance, poor uptake of Khula and Samaf products, poor visibility among small businesses, duplication of services amongst government agencies, and the high cost of delivering financial services to SMMEs.
Mr Makhuvha said the establishment of SEFA was supported by Cabinet as the means to achieve a more integrated approach. SEFA was established on 1 April 2012, as a wholly owned subsidiary of IDC (through the merger of Samaf, Khula and the small business activities of the IDC). It was established in terms of the IDC Act. There was a shareholder compact between IDC and EDD covering SEFA. SEFA’s corporate plan was informed and guided by a number of legislative and policy prescripts, like the New Growth Path, Government Outcome 4 and other national imperatives and legislation.
The vision of the SEFA was to be the leading catalyst for the development of sustainable survivalist, micro, small and medium enterprises through the provision of finance. Its mission was to provide access to finance for all these businesses, throughout South Africa, by providing finance on a wholesale and direct basis, providing credit guarantees to small businesses, supporting the institutional strengthening of financial intermediaries so that they could be effective in assisting small businesses, and creating strategic partnerships for sustainable small business development and support.
Mr Makhuvha said the target market consisted of small businesses that had not been able to access finance from banks and the finance sector. These included survivalist and micro enterprises, who might require loans of between R500 and R50 000, small enterprises requiring loans of between R50 000 and R1 000 000, and medium enterprises needing loans of between R1 million and R5 million.
Mr Makhuvha outlined the strategic objectives of SETA, noting that it firstly aimed to increase access and provision of finance to small businesses, contributing to job creation. Secondly, it aimed to implement a national footprint of effective delivery, and build itself into a sustainable and performance-driven organisation, with a strong brand, emphasizing accessibility to SMMEs.
Mr Makhuvha outlined the main aspects of the SEFA’s wholesale model. It would partner with stronger financial intermediaries, such as Small Enterprise Finance (SEF) and Women’s Development Business. It would develop demand driven products that could be distributed through intermediaries that operated in line with SEFA’s developmental objectives. It wanted to increase the utilisation of the Credit Indemnity Scheme by all registered banks and other non- bank financial intermediaries, through improved processes, and to influence interest rates charged by intermediaries to SMMEs, for instance by capping of rates.
The difference between the SEFA model and others was that SEFA focused on providing finance directly to SMMEs that were unable to access private sector funding. It would implement simpler loan and approval processes. It aimed to increase its efficiency in processing of applications, and here he mentioned that the current average turnaround time was 60 days, to be reduced to 30 days in the next 18 months. SEFA also aimed to provide affordable pricing of products. If had tried, wherever possible, to locate its regional offices with IDC or other development finance institutions (DFIs) to enhance cost efficiencies. It would be pro-actively targeting businesses in sectors identified in the New Growth Path, such as the green economy, manufacturing, agro-processing and tourism.
Mr Makhuvha noted that SEFA had introduced a Co-Operatives Support Programme, and had a set target on the number of co-operatives to be supported, and the value to be disbursed. It had set clear outcomes in terms of the support provided. It intended to benchmark internationally, including against other African states. It also intended to provide capacity building support and mentorship to co-operatives.
Mr Makhuvha finally noted that, of the funding disbursed, 30% was targeted towards youth-owned enterprises, 45% towards priority rural provinces, 40% of funding towards women-owned businesses, progressively increasing in subsequent years, and 70% towards black-owned businesses.
The Chairperson noted an apology from the Director General of EDD, who had been called to the House to sort out a problem. He noted that a workshop was scheduled for this Committee, the Portfolio Committee on Economic Development, local municipalities and South African Local Government Association (SALGA) which would focus on the same presentation, and would explain how the DFIs reached those in provinces and municipalities, where implementation actually happened.
Because of time constraints, he requested Members to ask their questions, but noted that the responses must be given in writing, by not later than Friday of the following week.
Mr B Mnguni (Free State, ANC) asked why it took so long for the Departments to address the SMME challenges. He asked why SEFA was taking long to come up with the collateral, when SMMEs requested funding from the commercial banks, and asked SEFA to explain what kind of collateral it was speaking of. He stressed that it was crucial that SMMEs be equipped with management skills, and asked what pro-active means the DFIs were using, to ensure that they assisted and equipped new entrepreneurs with business and management skills. He asked why there were such high costs when DFIs had to service SMMEs. He asked for further clarity on what was meant by total entrepreneur activity, and how that would be measured.
Mr Mnguni noted that SEFA’s presentation listed venture capital as the highest, and mining as the lowest, and he asked for figures noting the relative values, how much was funded in venture capital and how much was funded in mining, and for the number of jobs that were created in both sectors.
Mr K Sinclair (Northern Cape, COPE) noted that there were many dynamics involved in addressing the challenges of unemployment and poverty. In essence, South Africa was at the moment operating as a welfare state. In order to address that, the country needed serious interventions. The noble objective of all those programmes was to address the questions of unemployment and poverty. The critical issue and interventions, however, which had not come out in the presentations, had to do with the role of commercial banks in the welfare state, and whether, at some stage, they were required to invest to fulfil a social responsibility. Banks could do better in terms of their commitment to addressing the issues set out in these presentations. Linked to that was the role of the DFIs in the funding process. Many entrepreneurs became so disillusioned with trying to get assistance with funds to run their businesses that many simply closed shop and walked away.
Mr Sinclair also felt that government put too much emphasis on the potential of cooperatives, despite the fact that the success rate of cooperatives was less than 30% currently. Certainly, it was a noble objective, but at the end of the day it was necessary to address the serious challenge that people had to be paid and rewarded for their contribution. HE noted that whilst government was still emphasizing cooperatives, this Committee had found that in the cooperatives, perhaps two or three would be proactive, and the rest stagnant, and that was a problem right across the country. The fundamental issues had to be addressed.
Mr Sinclair asked EDD to give a breakdown of its activities in Africa, as he understood that it was involved throughout the Continent. He then asked SEFA to explain its legal structure, and give the breakdown of the shareholder agreement and the Board.
Ms E van Lingen (Eastern Cape, DA) noted that all the presentations said that the institutions offered “affordable” loans but there was no mention of the interest rates, and this was something that the Committee had to consider.
Ms van Lingen wanted more clarity on the businesses in which the DFIs were investing in the provinces. It was very important for Members to know this, as at the moment various projects were funded without clarity as to which DFI was involved. The needs of the businesses also had to be established. She also noted the mention of land reform projects, and asked if the DFIs were allowing the commercial banks to run their own security checks on the person being funded by the DFI, or whether the DFI guaranteed the project, and other details.
Ms van Lingen wanted to know, from SEFA, what had happened to the R35 million that was invested in the Free State. She also asked what SEFA’s hotline number was for reporting irregularities in municipalities.
Ms van Lingen asked dti what the errors were that had been found in the municipalities, and asked for the names of the 12 municipalities mentioned in the report who were not paying.
Mr D Gamede (KwaZulu-Natal, ANC) asked all the presenters to comment on the fact that the Parliamentary committees, together with the dti, was trying to encourage creditors to uplift the ban and blacklisting of SMMEs.
Mr Gamede noted that Khula (which meant “growth”) and SAMAF had both been established with much fanfare, and now SEFA was yet another new entity. He asked where SEFA saw itself in the future. He felt that there was not significant progress on SMMEs, and this was not acceptable. SMMEs were the backbone of any economy and were contributing towards the Gross Domestic Product (GDP), but South Africa did not seem to take them seriously enough.
Mr Gamede noted that SEFA had mentioned that the loans started at R500. However, he pointed out that for a small business entrepreneur, it could well cost that much to travel to the SEFA offices, to go through the bureaucracy and red tape requirements, and that it was hardly worth applying for this value of loan. He pointed out that the DFIs were supposed to fulfil a need and do justice to the SMMEs.
Mr Gamede asked why it was noted that 86% of budget had been spent, since only 80% expenditure was budgeted, and pointed out that over-expenditure was just bad as under-expenditure.
Ms B Abrahams (Gauteng, DA) said that SEFA appeared to have made contradictory information to that provided by IDC, in regard to the jobs sustained. She also asked for comment on what “sustainability” meant, saying that, for instance, seasonal work or jobs were not sustainable. She also noted the figure of 4 million informal enterprises but wanted to know how many were active, and why the institutions would register people if they would not get assistance. She asked what kinds of businesses had started with R500 and how sustainable they were.
Ms Abrahams asked whether the mentorship programme was really happening, and how effective it was. She asked what the seven selected key projects were, and their type, which provinces benefited out of those projects, and when they would be rolled out to all the provinces.
The Chairperson again referred to the lack of time to address issues further, but said that the main aim of this Committee was to ensure that the spending was efficient, focused and well coordinated. There had been concerns that the various DFIs were each doing their own thing. He suggested that it would be useful for the DFIs to accompany the Committee, when it did oversight, to see what was happening on the ground, and be able to resolve matters more quickly. It was important that the strategy should be coherent, so that delivery could happen faster where SMMEs had been supported. It was not just a question of giving them money and leaving them, as support and assistance should go all the way.
The Chairperson concluded that it was necessary to have very clear policy development, coordination and monitoring. The Select Committee on Economic Development and Select Committee on Trade and Industry would be conducting oversight in March, and their oversight extended to dti, Department of Tourism and Department of International Relations and Cooperation. There were attempts to work in the Cluster, and to avoid fragmentation and duplication; the same should apply to the government departments, so as to ensure smoother, faster and more efficient delivery.
The Chairperson requested all presenters to respond to the questions in writing by Friday of the following week.
The meeting was adjourned
- Industrial Development Corporation presentation
- Small Enterprise Finance Agency Presentation to Parliamentary Select Committee
- Economic Development Department Presentation: SMME Strategy and Access to Finance
- Department Trade & Industry Presentation: Integrated Strategy & Review of Government Support to SMMEs
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