Establishment of the Small Enterprise Finance Agency: Minister's comments & briefing; Broad-Based Black Economic Empowerment: Follow-up Briefing by Empowerdex

Economic Development

04 March 2013
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Minister’s comments
Ebrahim Patel, Minister of the Economic Development Department (EDD), said that small and micro businesses and co-operatives were important in the economy because they had the flexibility to react quickly, they were the point of entry for entrepreneurs and they had a high labour absorption rate. Government policy mattered for small businesses and the state had extensive programs across its national departments to support them. Nine provinces and the main metro areas also had programs to support them. These entities would be spending in total R2.6 billion on small businesses. However, state support was duplicated, lacked coordination and was dispersed resulting in not enough concentration to build a viable small business sector.

In the past, Khula and the South African Micro-Finance Apex Fund (SAMAF) had relied on intermediaries to provide funding to the sector, but these entities together with the
Industrial Development Corporation’s (IDC) Small Business Funding Unit had now been consolidated and integrated into the Small Enterprises Finance Agency (SEFA). The objective was to have all national direct funding of small businesses under one roof to limit duplication. SEFA in future would be measured not only on its cash flow to small businesses but also by the number of jobs that it helped create.

The EDD would assess SEFA on a number of focus areas including how well it integrated systems and staff, how many people were using it, how many applications had been approved, the cost and distribution of money, as well as other factors. Other key areas for consideration by SEFA would include: assisting small businesses by strengthening private sector support through mentorship or through getting access to the supply chain of big business; to develop a co-operatives strategy which would yield targets for co-operatives development; and working on youth enterprise development and rural based enterprises. SEFA was less than one year old but had made clear gains which needed to be communicated better.


Members asked if the South African Institute of Chartered Accountants (SAICA) initiative would be replicated in other provinces. Why were co-operatives setting up an umbrella structure? They were concerned that the merger may result in job losses and that Khula had been favoured over SAMAF. They were interested in the involvement and types of assistance to small businesses. Members asked what the working relationship between Khula Direct and the Post Bank was. What were the failures of SAMAF and Khula and what were its successes?

SEFA Briefing
The SEFA board chairperson answered a number of the questions posed by Members after the Minister’s comments. Direct lending had been a critical challenge for SAMAF and Khula because they had not interacted directly with small businesses and therefore had not been able to respond to their needs. SAMAF’s way of working with co-operatives had not been the best. SAMAF had worked with financial services (savings) co-operatives whereas SEFA wanted to work with enterprise co-operatives. It had reached agreement with the DTI to exit savings co-operatives. Banks had huge reserves to release to small businesses and it was working on strengthening partnerships with banks especially because they had a national footprint. SEFA wanted to partner with big companies which had to have an enterprise development spending component which could be directed to small businesses.
 
SEFA said there had been a number of challenges surrounding the merger of SAMAF and Khula, but that they were beginning to find alignment. The merger had resulted in a significant portion of staff moving to new positions and there were some challenges around perceptions amongst staff that their move was a demotion. Two key positions were still outstanding, that of Chief Risk Officer and the executive in charge of direct lending. The reported number of jobs created still needed to be tested for auditing purposes. Total approvals and disbursements to date were a significant improvement from the old SAMAF and Khula figures. There was room for significant improvement in direct lending, which had to be given to targeted groups. Staff skills in direct lending were being up skilled as they had previously focused on the wholesaling of loans. It had hired experienced deal makers for the short term and was engaging with the IDC to assist with human resources to improve the level of direct lending. In both the Western Cape and the North West province, there were two offices which would be amalgamated into one.


Members wanted an account of how the three entities had been merged. They were concerned that SEFA’s distribution was biased towards the Gauteng in particular and that rural areas were going to suffer. Members asked how SEFA’s employment conditions differed from the basic employment conditions and whether it served people with disabilities. Members asked about SEFA’s relationship with agencies operating in the provinces.

Due to time constraints the Empowerdex presentation was postponed to a later date.

Meeting report

Minister’s Comments
Ebrahim Patel, Minister of the Economic Development Department (EDD), said that small and micro businesses and co-operatives were important in the economy because they had the flexibility to react quickly, they were the point of entry for entrepreneurs and they had a high labour absorption rate.

Government policy mattered for small businesses and the state had extensive programs across its national departments to support them. Nine provinces and the main metro areas also had programs to support them. These entities would be spending in total R2.6 billion on small businesses. However State support was duplicated, lacked coordination and was dispersed resulting in not enough concentration to build a viable small business sector.

In the past, Khula and the South African Micro-Finance Apex Fund (SAMAF) had relied on intermediaries to provide funding to the sector, but these entities together with the
Industrial Development Corporation’s (IDC) Small Business Funding Unit had now been consolidated and integrated into the Small Enterprises Finance Agency (SEFA). SEFA would be connected to the IDC’s pipeline of projects to allow small businesses to be brought to the central part of the economy. SEFA would be connecting with provincial small business offices and to the Small Enterprise Development Agency (SEDA). It wanted to see all national direct funding of small businesses under one roof to limit duplication. Cabinet had decided that SEFA should be a 100 percent subsidiary of the IDC and Cabinet had nominated the board members of SEFA. SEFA in future would be measured not only on its cash flow to small businesses but also by the number of jobs that it helped create.

The EDD would assess SEFA on a number of focus areas:
• On how well it integrated systems such as Information Technology and payroll and had been given until June to do so.
• On whether the staff had been fully integrated and whether each province had a manager, with a target of 90 percent completion by the end of March 2013 and 100 percent by the end of the first quarter of the new financial year.
• On how many people were using SEFA and whether it had a presence in all communities, as well as on its communication and marketing outreach. By February 2014 it had to have undertaken road shows in nine provinces with 50 percent of them being in small towns and rural areas. Satellite offices were to be set up in post offices.
•  On how many applications had been approved. It would use the combined SAMAF and Khula results of 2011/12 as a baseline. To date SEFA approvals had increased over 100 percent and disbursements had increased by just under 100 percent while direct lending showed an increase of 400 percent.
• On the cost per distributed rand.
• On whether the money was being distributed equitably between rural and urban areas.
• On how SEFA had interacted with intermediaries. SEFA needed to work in partnerships but many intermediaries’ fees were high, so SEFA had to work with those that supported a lower interest rate. SEFA had also embarked on a partnership with chambers of business and commerce, namely the National African Federated Chamber of Commerce (NAFCOC) and the Foundation for African Business and Consumer Services (FABCOS) in a joint fund where the latter two would act as intermediaries.
• On how SEFA had built up its capacity to lend directly.
• On how far SEFA had integrated its activities across government programs so that public entities supported business at a single venue.
• On how much SEFA was leveraging off the IDC programs, for example working with Transnet or the R25 billion green economy fund to find opportunities for small businesses?

Other key areas for consideration by SEFA would include: assisting small businesses by strengthening private sector support through mentorship or through getting access to the supply chain of big business; to develop a co-operatives strategy which would yield targets for co-operatives development; and working on youth enterprise development and rural based enterprises.


Discussion
Mr S Ngonyama (COPE) asked if the South African Institute of Chartered Accountants (SAICA) initiative would be replicated in other provinces. Why were co-operatives setting up an umbrella structure?

Mr K Mubu (DA) asked if the merger of SAMAF and Khula would result in job losses. To what extent would small businesses be involved in the infrastructure rollout?  What plans were there to assist small businesses in relation to the cost of taking out a loan?


Mr Z Ntuli (ANC) asked what the working relationship between Khula Direct and the Post Bank was. What were the failures of SAMAF and Khula and what were its successes? Could he clarify the relationship of co-operatives in relation to the Department of Trade and Industry (DTI) and the EDD? He asked for comment on allegations that Khula had been favoured over SAMAF in the merger. How would the new work ethic and philosophy be implemented when SEFA was staffed by the same people who had been in the previous entities?

The Chairperson asked which part of the IDC Act informed SEFA. To whom was SEFA accountable, the IDC or the Portfolio Committee? She wanted SEFA to record the number of jobs it had played a part in creating. How would the new intermediaries be managed?  

Mr Patel replied that the critical skills shortage in the country was not necessarily at the top end but rather that it was at the mid-level. The SAICA initiative was to develop mid-level accountants of which there were a dearth, to assist small businesses. It wanted to expand the program to three more provinces.

He said it was proper for co-operatives to have an umbrella body because co-operatives were independent and had a role to play along with government. There had been many examples of successful co-operatives in the past in South Africa. Co-operatives like Clover and KWV which had gone on to become successful businesses.

There were no job losses due to the merger.

SAMAF and Khula were not being welded together. They were trying to develop a philosophy of service amongst staff. Staff would have to change and if they underperformed there would be consequences.

On the infrastructure roll out, 49 mud school projects had been identified which could be driven by small business participation. It was government’s job to nurture small businesses involved in big projects in such a way that small businesses were not destroyed in the process of tackling big projects.

On the question of loan fees and the finance charges of intermediaries, government had to measure the intrinsic and extrinsic costs. Costs were determined by the level of default risk involved, and the state had to take some of the risk; however intermediaries with low interest rates had to be supported at the expense of those with high interest rates.

SEFA was waiting for Post Bank to be launched which would act as an agent of SEFA.

The mistakes of Khula and SAMAF were that the administration costs had been too high, access to loans had been too low, it had too low a risk appetite, it had not operated in areas where it was needed and it had not used the IDC, one of the main industrial drivers, effectively.

SAMAF and Khula were a merger of both parties.

The IDC reported to the EDD and when it reported to the Portfolio Committee, SEFA also had to be there.

Regarding a uniform spread of loans across all the provinces, he said that rural area costs were bigger than urban areas. This, together with the risk profile of the person being loaned money, was the only valid reasons why loan distributions might be unequal.

He would make the request that the job numbers be monitored. He was concerned with the numbers given in the presentation because they had been inherited from SAMAF and Khula which had used a formula to derive them. The numbers needed to be tested to ensure that they were credible and justifiable.

A member of the Committee asked how SEFA would manage the new intermediary, which had co-funded the venture. How soon would the current model be changed to the new one.

Mr Patel replied that the Committee and the Department had to develop a set of protocols which would allow trade secrets not to be revealed in the public domain.

He said SEFA was less than one year old but had made clear gains which needed to be communicated better.


SEFA Briefing
Ms Sizeka Rensburg, SEFA board chairperson, said the new intermediaries had to be seen as partners having local knowledge and it would be costly for SEFA to establish offices. Financing fees would be an important factor and the new intermediaries, the business chambers, should have a lower cost as it had to share in the development objectives of the state.

On how soon there would be a changeover to the new intermediary model, she said that SEFA wanted the best social returns and the best cost returns and it was anticipated that the new model could provide this. A trust would be established which would include a SEFA trustee and two other independent trustees. No chamber would be favoured over the other and loans, in fact, were issued to all small businesses whether they belonged to a chamber or not. Membership of a chamber was beneficial as the chambers promoted the repayment of loans.

Direct lending had been a critical challenge for SAMAF and Khula because they had not interacted directly with small businesses and therefore had not been able to respond to their needs. The SAMAF/ Khula staff’s skill set had been more on the wholesaling of loans than direct lending.

SAMAF’s way of working with co-operatives had not been the best. SAMAF had worked with financial services (savings) co-operatives whereas SEFA wanted to work with enterprise co-operatives. It had reached agreement with the DTI to exit savings co-operatives.

She said banks had huge reserves to release to small businesses and it was working on strengthening partnerships with banks especially because they had a national footprint. SEFA wanted to partner with big companies which had to have an enterprise development spending component which could be directed to small businesses.
 
Mr Thakhani Makhuvha, Chief Financial Officer (CEO) of SEFA, said there had been a number of challenges surrounding the merger of SAMAF and Khula, but that they were beginning to find alignment. All staff had moved to the new offices by the end of October 2012 which had increased cohesion. SEFA‘s staff was unionised and SEFA was in the process of matching and placing staff. Management had tried to eradicate any symbol which reflected the old identities. The merger had resulted in a significant portion of staff moving to new positions and there were some challenges around perceptions amongst staff that their move was a demotion. Management was communicating with staff reminding them that it had been agreed that no one would move to the new structure at a level lower than what they had been in the previous structures. Management had engaged with the staff on its vision and mission. The staff was being up skilled on direct lending. A significant percentage of the executive management team had moved on. Two key positions were still outstanding, that of Chief Risk Officer and Executive in Charge of Direct Lending.

Due to time pressure Mr Makhuvha did not go through the whole presentation but only highlighted a few slides. On Slide 33, the job numbers given still needed to be tested for auditing purposes. Slide 37 represented the total approvals and disbursements to date. The disbursements were lower because there were sometimes conditions that had to be met before money would be disbursed. The figures were a significant improvement from the old SAMAF and Khula figures. Slide 38 reflected the provincial figures for approvals and disbursements. Slide 42 dealt with the SEFA/ NAFCOC/ FABCOS fund which would be aligned with BBBEE. A fund manager had been appointed. Slide 49 reflected the figures for direct lending which had to be given to targeted groups. There was room for significant improvement in direct lending and there was a need to improve staff skills. It had hired experienced deal makers for the short term and was engaging with the IDC to assist with human resources to improve the level of direct lending. Slide 59 dealt with its visibility, its participation in workshops and road shows. Slide 65 dealt with its footprint. It was in all the provinces. In both the Western Cape and the North West, where it had two offices, these would be amalgamated into one office.


Discussion
The Chairperson wanted an account of how the three entities had been merged.

Mr Ngonyama said that SEFA’s distribution was biased towards the Gauteng in particular and that rural areas were going to suffer. He wanted to know what was meant by a “permanent CEO”.

Ms D Tsotsetsi (ANC) said the figures given for the staff complement did not reflect the breakdown of the post levels people occupied nor did it give a gender breakdown. How did SEFA’s employment conditions differ from the basic employment conditions?


Mr X Mabasa (ANC) asked whether the Department was organised to serve South Africa in its entirety. He said that slide 49 did not contain any reference to people with disabilities.

Mr Ntuli said there were many agencies operating in provinces, each of them with their own objectives.  Did SEFA operate side by side with them or did SEFA integrate with them?

Mr Mubu asked what the term of the SEFA board was.


The Chairperson asked how long the trial period for the new intermediaries was.

Ms Jenny Schreiner, Director General of the EDD, said that the board consisted of 12 members who served for a period of three years until March 2015. Khula, SAMAF and the IDC were members for the sake of continuity plus additional members, all of whom had been appointed by the Cabinet.

Ms Rensberg said SEFA was working hard to change the equitable distribution picture. There had been an acting CEO, Mr Willie Fourie, since the start of November 2012, but SEFA now had a permanent CEO. SEFA had not done any marketing in this period and therefore had not responded adequately to the uneven distribution. It had been dealing with infrastructure issues but could now do marketing.

Mr
Makhuvha said he was acutely aware of the need to be present in rural areas as he came from a deep rural village. He said no one would lose their jobs because of the merger. The conditions of employment for SAMAF and Khula had been different and needed to be consolidated into one document for SEFA’s purposes. He said SEFA had engaged with the Mpumalanga Development Agency and Ithala but that these relationships had to be strengthened.

Ms Rensburg said that SEFA in fact had an agreement with Mpumalanga Development Agency and that this would be taken to all the other provinces so as to develop collaborative efforts. She said there were no time frames regarding the new intermediaries. If it was an effective model then SEFA would continue to use it, as NAFCOC and FABCOS had branches in rural areas.

The Chairperson said she expected written replies to questions not yet answered.


Due to time constraints the Empowerdex presentation was postponed to a later date. The meeting was adjourned.

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