Small, Medium & Micro Enterprise support from Economic Development Department & dti: follow up

Economic Development

18 February 2013
Chairperson: Mr F Adams (Western Cape, ANC)
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Meeting Summary

The Portfolio and Select Committees on Economic Development, sitting jointly, were briefed by the Department of Trade and Industry (dti), Economic Development Department (EDD), Industrial Development Corporation (IDC), and Small Enterprise Finance Agency (SEFA) on their strategies to support small, Medium and Micro Enterprises (SMMEs).

The dti presented the reviews it had undertaken since 1999, and mentioned the adoption of the White Paper on the National Strategy for the Development and Promotion of Small Businesses in South Africa in 1995. The enactment of the National Small Business Act in 1999 was briefly mentioned. The dti had undertaken various evaluations and reviews of its policy and strategies around small enterprise support. The three main pillars to the integrated strategy involved increasing the supply of financial and non-financial support, creating demand for SMME products and services, and reducing regulatory constraints. It presented its recommendations, to increase investment in SMMEs and dedicate significant financial resources to increase microfinance activities, in partnership with international institutions and private sector partners. There was a need to increase alignment between the EDD and the dti in order to increase the supply of financial support through mergers. There was also a need to address the underdevelopment of microfinance, offer business support programmes, monitor government’s commitment to make payments within 30 days SMMEs, collaborate on the impact of SMMEs credit information asymmetries, and reduce of red-tape. The formation of the SEFA in the microfinance sector, constraints preventing growth and the way forward were also summarised. It was noted that, in combination with other professional bodies, a Business hub and Skills Training Programme and Advisory Panel on small business were established. 

The Small Enterprise Development Agency (SEDA) noted that it offered access to finance and technology, especially to businesses that employed other people. It managed the hot-line, and it provided services to rural entrepreneurship and other areas across the country.  

The Enterprise Development Department (EDD) summarised the main challenges faced by SMMEs in South Africa, which included lack of access to finance, limited enterprise growth, late payments by services providers, lack of entrepreneurship capacity, limited management skills, and regulatory constraints. The aims and objectives of the New Growth Path, and how these catered specifically for small enterprises, were given. Core components of the NGP included the merger of institutions that led to creation of the Small Enterprise Finance Agency (SEFA), government’s 30 day commitment, a red-tape elimination campaign, access to business premises, and integration of small and micro enterprise support systematically into sector strategies.

The Industrial Development Corporation (IDC) presentation focused on funding products, special funding schemes- cross sectoral schemes, industrial specific and regional development schemes, how it had increased its accessibility in all nine provinces, and its contribution to job creation.  IDC was established in 1940 as a development finance institution, and was a state owned company. Its vision, mission, objectives and values, and the approaches to SME development, were summarised. IDC funding products were noted, as well as special funding schemes. 

SEFA noted that it would focus only briefly on what had not already been presented by other presenters. It noted its presence in all nine provinces, and its establishment from the merger of Khula, SAMAF and a branch of the IDC.  Its models of funding were described – a direct lending model and wholesale financing. Its mission and vision, the range of offerings, and target markets were summarised. The six objectives for the organisation were also outlined. 

The MEC for Finance, Economic Development and Tourism in the Western Cape, and representatives of provincial departments responsible for economic development from Free State and Northern Cape were also given the opportunity to summarise what their departments were doing in relation to SME support, training, partnerships and other initiatives. 

Members of the Committees asked a number questions around the companies assisted by IDC, EDD and SEFA, the sustainability of businesses, the creation of jobs, inclusion of people with disabilities, and accessibility of these services in rural areas and  informal sectors. The dti and EDD were asked to explain what had happened to the Employment Creation Fund. SEFA was asked to explain how its lending model worked, and the recovery rate for the loans, as also to explain the cost of creating jobs. Members wondered why there was such a plethora of agencies who seemed to offer similar services, and the EDD and dti commented that indeed they accepted that closer cooperation would be desirable.

Meeting report

Support to Small, Medium & Micro Enterprises
Department of Trade and Industry strategy briefing
Mr Mojalefa Mohoto, Director: Enterprise Development, Department of Trade and Industry, started his presentation by mentioning policy perspectives, strategic pillars and types of Small Medium and Micro Enterprises (SMMEs), on whom his Department (dti) was focusing its support. The dti reviewed its strategies and policy annually to assess whether its drivers were achieving an impact. In 1995, government had adopted the White Paper on the National Strategy for the Development and Promotion of Small Businesses in South Africa. In 1999, the National Small Business Act (NSBA) was enacted, with the aim of providing support institutions for SMMEs. Dti had undertaken an evaluation of its policy and strategy in 1999, followed by a 10-year review on the status of small enterprise support. In 2011, it undertook a Mid-term Strategy review, followed later by rationalisation of the support agencies. This then led to the adoption of the support strategy, which dti was currently driving. About  6 million enterprises were driven by this Department, with some enterprises operating in informal sectors. There were about 2 million registered enterprises. Of these, about 566 000 were economically active, but the majority were at a lower level and still required substantial support from government. Dti provided market access for these enterprises.

Mr Mohoto said the focus and scope of the review was guided by the three pillars of the integrated Small Business Strategy. It had identified the need to increase the supply of financial and non-financial support, the need to create more demand for SMME products and services, and to reduce regulatory constraints. He briefly summarised the programme areas for each of these pillars. The dti and the Department of Economic Development (EDD) had supporting agencies, such as the Industrial Development Corporation (IDC) and Small Enterprise Finance Agency (SEFA), but the main challenge had been how to bring things together. Dti had picked up three programmes from the private sector. There was also support given to dti by the commercial banks.

Mr Mohoto said that coordination was an issue across all spheres of government. Generally, the supporting agencies had been efficient and effective. Overall, dti was guided by the National Development Plan in its initiatives and activities. Incubation programmes had been rolled out. There were currently 42 incubators, and the dti wanted to increase the number in the future. In the past, the informal sectors had been neglected. However, dti now had a specific strategy to assist them. Most women were operating their businesses in the informal sector. He mentioned the importance of the relationship between big and small businesses. Red tape at the local level should be improved, and there should be work done together with local municipalities to create a conducive environment for Small businesses.

Small Enterprise Development Agency (SEDA) briefing
Mr L Njenge, Chief Strategy and Information Officer, Small Enterprise Development Agency (SEDA), tendered the apologies of the Chief Executive Officer Ms Lupuwana. He gave an overview of the SEDA and its mandate, emphasising that one of its primary functions was to offer access to finance and technology, especially to businesses that employed other people. SEDA managed the hot-line, and it provided services to rural entrepreneurship. It was a stable entity with efficient financial management. It had 42 branches. It managed four trade points, and it facilitated R330 million of payments. Some students from the Further Education and Training Colleges (FETs) had been provided with training. SEDA also entered into partnerships, offered financial support, and played a project management role.

SEDA had managed to established corporate forums through the country. As it worked closely with dti, SEDA had established ten incubators in the current financial year. It undertook a review of its incubation programmes in order to ensure that incubators were of high value and created jobs.

Mr Njenge concluded that SEDA intended, in future, to retain skills, helped in improving SMMEs, and would have a look at how it managed service providers.

Department of Economic Development briefing
Mr Saul Levin, Divisional Executive, Economic Development Department, mentioned that the major challenges faced by SMMEs were access to finance, late payment to service providers, lack of entrepreneurship capacity and regulatory constraints. Small businesses did not have skills, often had no bank accounts, lacked proper understanding of the business, lacked financial records, and had not done proper research on their markets prior to setting up business.

Mr Levin mentioned that the New Growth Path (NGP) focused on small businesses. The microeconomic packages in the New Growth Path (NGP) consisted of enterprise development, by promoting small business and entrepreneurship, and removing unnecessary red-tape. The NGP further tried to strengthen and consolidate initiatives to support small and micro enterprises. The core component of SMME support in the NGP had resulted in the merger of the former Khula, Samaf and IDC’s small business finance activities, into the new Small Enterprise Finance Agency (SEFA). The government had made a commitment to pay within 30 days, and had also agreed on consolidating access to micro-finance, on integrating small and micro enterprise support systematically into sector strategies, had started a red-tape removal campaign, and had helped small businesses to access business premises.

Mr Levin mentioned that the dti Review had recommended that there should an increase in the supply of financial support, and reduction of regulatory constraints. As part of providing support to SMME, the Review recommended that there should be an increased investment in SMMEs. This would be achieved through tax incentives, funds being made available from Development Finance Institutions (DFIs), building angel investor’s networks, and by giving dedicated and substantial financial resources to scaleup microfinance activities, in partnership with international financial institutions and private sector partners. Alignment between EDD and the dti was important, in order to increase the supply of financial support through the merger, to address the underdevelopment of microfinance, to set up business support programmes, to further the government’s 30 day commitment to making payment to SMMEs, to ensure that there was reduction of red tape and to collaborate on the impact of SMMEs’ credit information asymmetry.

The SEFA, as already mentioned, resulted from a merger. It was agreed that the set targets and performance of SEFA should be higher than combined Khula and Samaf targets. More resources were required for SEFA from the fiscus, in order to achieve the targeted needs for South Africa. The Minister of Trade and Industry would be making an announcement on this point next week.

Mr Levin mentioned the importance of expanding access to credit for micro enterprises. He noted the  creation of an inter-departmental working group to tackle the challenges facing the sector.  The importance of regular engagement with key role players in the industry, to identify constraints, formed part of the EDD. It would create the vision for the sector, and how best to deal with challenges. As for the micro-enterprise sector, there were constraints inhibiting growth, which included market constraints, institutional issues and environmental factors.

Mr Levin noted that the way forward would encompass the development of sector strategy, regular engagements and support of specific actions to address the identified constraints. In addition, a joint project between EDD and the South African Institute of Charted Accountants (SAICA) had established the Business Hub and Skills Training Programme. The programmes provided training to 100 unemployed graduates. The Business Hub was established in January 2013, and the programme helped SEFA with access to finance and technical skills. The Minister of Trade and Industry established an advisory panel on small businesses.

Mr Levin finally drew Members’ attention to the key focus areas for EDD in the future (see attached document)

Industrial Development Corporation (IDC) presentation
Mr Godfrey Qhena, Chief Executive Officer, Industrial Development corporation, gave some background information on the IDC and its establishment and also briefly described its vision, mission, objectives and values. The IDC focused on SMEs, and provided funding to SMEs and large businesses. IDC was structured using different instruments, such as debt, equity, quasi-equity, guarantees, trade finance, bridging finance and venture capital. The funding was R1 million and more. SEFA was a subsidiary of IDC. IDC provided pre-investment support, provided funding to small and medium size businesses, and funded products. Venture capital was mentioned as a high risk type, especially when people started to develop their market.

Mr Qhena said that IDC was different from other institutions in the sense that it allowed for a grace period for repayment, particularly in the construction sector. IDC would, however, check the financial security of businesses it funded, to ensure sustainability. IDC did not just fund for the sake of funding businesses. It had cross-sectoral schemes that it ran from its own funds, and other funds from other sources. All business sectors, such as mining, textile and construction, could access IDC funding as long as they had the ability to create jobs. IDC also managed funds from dti and the EU grant.

Mr Qhena mentioned the industrial specific development and regional schemes that IDC had running, including those on balance sheet funds and funds managed on behalf of third parties, with specific reference also to the Competition Fund. The textile industry was mentioned as the most difficult industries to manage. Some sectors had the ability to create jobs at cost less than R450 000.

IDC had recently increased its regional presence to improve accessibility, and now had offices in all nine provinces in the country. The number of funding approvals had increased progressively over the past year, and the IDC had now reached a transaction value of a total of R3 billion.

In relation to funding of SMEs, Mr Qhena noted that it was important to invest in large projects, and with the help from SEFA, the IDC’s work would be much easier. Under sectoral funding, the IDC mentioned the high risk of venture capital, due to the fact that majority of investors were very small.  IDC’s interventions had managed to create and save jobs since the global economic crisis hit the world.

Mr Qhena reiterated  that the IDC had been involved in different business sectors across all provinces and submitted a table setting out some achievements (see attached document for full details). He again noted that its subsidiary, SEFA, was an important tool for SME development, by way of increasing the  impact of development finance in South Africa. It assisted IDC and it made sure that resources were available.

Small Enterprise Finance Agency (SEFA) presentation
Mr Thakhani Makhuvha, Chief Executive Officer, Small Enterprise Finance Agency, noted that he would skip over some slides which had already been touched upon by other presenters. He noted that SEFA provided access to finance through its offices, which were in all nine provinces. It engaged with commercial banks from time to time to improve access to finance for small businesses, and it had partnerships with financial institutions that were not banks. Funding was provided through two main models  - direct lending and wholesale financing (see document for full details).

Mr Makhuvha said that SEFA provided capacity building to SMEs, in order to ensure stability of the SMEs it funded. The main target markets were outlined. Youth enterprises got 30% of funds, rural provinces got 40% of funds, women accounted for 45% of funding and black-owned enterprises got 75% of funds. Its target market included hawkers and street vendors. The survivalist enterprises (which he defined as those who provided the means for their families to live upon) were funded through micro-enterprise funding, of between R500, up to R50 000, and would offer funding to small enterprises, from R50 000 to R1 million. It could provide loans to medium enterprises between R1 million and R5 million, through direct lending.

Mr Makhuvha set out the six strategic objectives for SEFA. The first had to do with increased access and provision to finance to SMMEs, thereby contributing towards job creation. The second had to do with development and implementation of a national footprint for effective product and service delivery. The third related to building an effective and efficient SEFA that was a sustainable performance driven organisation. Strategic Objective 4 was about building a learning organisation. Objective 5 called upon SEFA to build an organisation that meets all legislative, regulatory and good governance requirements. The last objective was about building a strong and effective SEFA brand, emphasising accessibility to SMMEs.

Mr Makhuvha mentioned that SEFA received funding from the fiscus. It had two offices in North-West and Western Cape, but those offices would be merged in order to make sure that there would be more effective delivery. Finally, he noted that the number of SMEs funded by SEFA was 29 000 and that 400 000 jobs had been created. A performance review would take place soon.

The Chairperson asked that the MEC for Finance, Economic Development and Tourism from Western Cape, Mr Alan Winde, should be given the opportunity to comment.

MEC for Finance, Economic Development and Tourism, Western Cape comment
Mr Alan Winde thanked the presenters for their good presentation. He noted that the partnership between SEDA and the Western Cape Department of Economic Development and Tourism worked very well, and there was about R61 million rand budgeted for the partnership. The West Coast business sector came on board as well. However, what was still disturbing was that according to a study done in 2010, 75% of businesses did not know about funds that were available. There would be roadshows done in March 2013, to talk to people about businesses, and promote what was available.

Mr Winde mentioned the problem of skills shortages, and said that there would be skills training programmes to ensure that people were able to gather together the necessary documents and information about how to apply for funds. R450 million had been budgeted for skills programme. The Western Cape Department of Economic Development interacted with those doing business with the department. It was dealing with, and fully understood, the issues around red tape and the informal economy. A study was in progress as to how best to intervene in the informal economy. The payments by government within 30 days were monitored. Incubators were important as they brought some new information technologies.

He concluded that the Department was running a competition to recognise entrepreneurs, who then would tell and spread the story about their businesses. The overall entrepreneur winner would go to overseas to attend workshop to the value of R100 000.

Department of Economic Development and Tourism, Northern Cape comment
Mr Louis Wessels, Representative, Department of Economic Development and Tourism, Northern Cape, said that SMEs in the Northern Cape got financial support from his Department, which would go out to the districts, where it met and spoke with people about access to finance, having already checked up all the options that were available. Rural entrepreneurs had been identified, and there were incubators. The Northern Cape Department provided training, marketing, business management skills, and branding skills. The Department worked together with service providers. Some SMEs had been referred to ABSA bank for assistance, but SMEs were not allowed to withdraw money until approvals were made. The Department had an Economic Growth Development Fund, which focused on manufacturing and microenterprise. The National Development Agency also helped this Department. It planned to access funds from other government departments. It had noted that the definition of R250 000 turnover was projected for the SMEs.

Department of Economic Development, Free State comment
Mr Thabang Selemela, Representative, Department of Economic Development, Free State, said that the Free State department provided both financial and non-financial support to SMEs. The Free State Department had drafted the grant funding that addressed the challenges faced by SMEs in this province. It had interventions that addressed business resources, such as working tools, machinery and premises. The informal sectors, and those who needed help to start business, were assisted, getting help to the tune of R5 and up. On  12 and 13 March 2013, the Department would host cooperative summit where it would listen to people’s requests.

Ms Nomeliso Mkiva, Representative, Department of Economic Development, Free State, added that the grant funding came about as a result of certain SMEs being unable to meet the requirements for other funding.

Discussion
An apology was made on behalf of the Mpumalanga MEC, who was not present.

Mr H Hoosan (ID) said that presentations were good. Many people in rural areas and informal sectors were not aware of resources available for them. Those who knew about availability of resources remained rich, and those who did not know remained poor. He stressed that all these institutions, essentially provided the same or similar services, and he was worried that this amounted to a duplication of services. He asked why one agency was not, instead, established that would be accessible to everyone.

Mr Hoosan asked if there was a comprehensive list of companies that received assistance. He also enquired abut the success rate of agencies that provided assistance to small businesses, and what was the recovery rate of the loans granted to small businesses.

An ANC Member asked SEFA how sustainable were the jobs that were created. He also asked what documentation was required when loans were requested, and whether there was a record of loans to people with disabilities. Finally, he wanted to know about the repayment rate for the loans.

Ms S van der Merwe (ANC) asked SEFA about how businesses ensured that they were not indulging in “reckless lending”, as defined under the Credit Act. She wondered if there was any indication of what it cost to create a job. She noted the reference to red tape, but wanted to know more about what the issues were. Finally, she requested more information on the connection between Khula Development Agency and SEDA.

Ms M Dikgale (ANC, Limpopo) requested that the presentation should focus on main issues, and that SEFA offices should be available in rural areas.

Mr Z Ntuli (ANC) also was worried that it seemed that every department was “doing its own thing”. He asked why there was separation of entities such as SEFA, IDC, EDD and dti. He enquired as to who the target market was in each case, and wanted to know from IDC how many businesses had been established in rural areas.

An ANC Member noted that most viable economies, such as China, Vietnam and Brazil were very strong on supporting SMEs, and their SMEs contributed to the GDP. He asked how comparable South African was in that regard. The presentation did not say much about developing SMEs. He was worried that it appeared that SEDA and dti never met together. Both were apparently good in their support of cooperatives. He wanted to know, from IDC, how it defined an SME. He asked SEFA what criteria it used when  funding businesses of hawkers and other street vendors.

Mr X Mabaso (ANC) noted that cooperatives should be seen as a tool not just for economic development, but for addressing the inequalities of the past. If this was not done, the rich would continue to get richer, and the poor would continue to get poorer. He noted that capacity building was important, and establishment of working relationships with departments of Higher Education were also important. He wondered if the death of intermediaries would signal the end for South Africa.

Mr K Sinclair (COPE, Northern Cape) stressed that many of the dilemmas had to do with coordination and implementation. He noted the Employment Creation fund of R1.4 billion, of which 600 million was available and asked for more detail on that.

Mr Levin (EDD) responded that the EDD had had a dialogue on the Employment Creation Fund, and progress had been made although the funding was not yet released yet. There would be follow ups, so that the Department could move on with the projects.

In responding to the question of people with disabilities, IDC, SEFA, SEDA and dti all said that people with disabilities were not excluded, and they formed part of the funding landscape.

IDC’s definition of SMEs followed the same approach as SEFA. Rural companies were funded. Incubators in rural areas were available and they should be improved.  The South African SMEs contributed very little to GDP as compared to Middle income countries. To date, 6 000 SMEs had been supported annually.

Mr Makhuvha (SEFA) responded that documents needed for borrowing funds included a one page information about the business, the identity book, and big businesses also needed to fill out application forms that clearly set out all the regulatory requirements. Credit blacklisted candidates were not discriminated against, and there was a process of checking what the candidate was doing that would make the business succeed.  The recovery rate of loans was from 5% to 98%. In regard to costs of job creation, Mr Makhuvha said that it had cost R150, but SEFA had shown improvements. He explained that SEFA came about as a result of a merger involving Khula as well, and there had been challenges, but that SEFA and others had worked around the clock to ensure the targets were met.  SEFA had a detailed strategy that outlined targets in the next financial year.

Mr Levin agreed that coordination could be improved, and there should be realignment of how departments work together. The dti’s index had already started, and dti would circulate these in few weeks.

The meeting was adjourned.

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