Small, Medium and Micro Enterprises (SMME) development: briefing by Department of Small Business Development with Deputy Minister

Meeting report

Ms Dudu D Lenzie, Head of Office, Department of Small Business Development, apologized for the Minister’s absence. The briefing would appraise the  Committee on  the existing  policy perspective on small business development and financing to support economic growth, innovation and employment.

Ms Pumla Ncapayi, Acting Director-General, Department of Small Business Development, and Mr Mojalefa Mohoto, Acting Deputy Director General: Small Business, presented on the policy environment and the various vehicles used for small business development. These included:

▪ The Small Enterprise Development Agency (SEDA) whose mandate was to provide non-financial business development and support services for small enterprise in partnership with other role players. A breakdown of its branches and satellite offices by province was provided.

▪ The Small Enterprise Finance Agency (SEFA) aimed to foster the establishment, survival and growth of SMMEs and contribute towards poverty alleviation and job creation. Its lending channels were noted. 46 407 SMMEs had been funded and R822 million disbursed since inception. It provides funding through:
- Delivering Wholesale and Direct Lending credit facilities or products;
- Providing credit guarantees to SMMEs;
- Supporting institutional strengthening of Financial Intermediaries so they can effectively assist SMMEs;
- Creating strategic partnerships with a range of institutions for sustainable SMME development / support;
- Monitoring effectiveness / impact of our financing, credit guarantee and capacity development activities
- Developing (through partnerships) innovative finance products, tools and channels to speed up increased market participation in the provision of affordable finance.

▪ The National Empowerment Fund (NEF) is a driver and a thought-leader in promoting and facilitating Black economic participation through the provision of financial and non-financial support to Black empowered businesses, as well as by promoting a culture of savings and investment among Black people. Funds the NEF managed included  the Rural Community and Development Fund, Strategic Projects Fund, Pre-Investment  Fund, the iMbewu Fund for supporting entrepreneurship, procurement and franchise finance  and the uMnotho Fund supporting funding of new ventures, acquisition, project finance, expansion, capital markets, liquidity & warehousing needs.

▪ The Independent Development Corporation (IDC) Risk Capital Facility (RCF) supported the development of historically disadvantaged person (HDP) controlled small and medium size enterprises (SMEs) with a significant HDP job creation impact, including female employment. Most lending was done in Gauteng, Western Cape, and the Northern Cape. The majority of jobs were created in the agro-industry. A breakdown of loans per province was provided. The average deal size was R4.3 million.

▪ Department of Trade and Industry (DTI) Incentive Schemes are grant funding in nature and amongst these incentives are those tailor made to support small businesses:
- Black Business Supplier development programme: In 2011/12 306 projects were approved. In 2012/13 1212 projects were approved. In 2013/14 projects were approved. DTI disbursed less than the total allocation for all three years.
- Inceptive schemes for business process outsourcing (BPO) programme
- Incentives scheme related to creative industries such as film.
The Cooperatives Incentive Scheme performance was also noted  and  the number of approved applications over the past three years was provided.

▪ Small Business Technology Platforms create a conducive environment and fund innovation and new inventions.  Among these are Technology for Women in Business, Technology For Human Resource and Industrial Innovation, Special Project for Industrial Innovation, Seda Technology Programme (STP) and Technology Venture Capital the latter being funded through RCF reflows. The aim of Technology and Human Resource for Industry Programme (THRIP) is to facilitate industry competitiveness and broadened collaborations generating skills and technologies. It participates in leveraging collaborative partnerships on a cost-sharing basis, for research and development in science, engineering and technology, to produce highly skilled human resources and technology solutions. The mission of the Seda Technology Programme is to develop innovative technology-based platforms that result in the creation of sustainable, globally competitive SMMEs that contribute towards the accelerated growth of our economy. The aim of Support Programme for Industrial Innovation (SPII) is promoting technology development and commercialization in South Africa. It provides financial assistance for the development of commercially viable, innovative products and/or processes and facilitate commercialization of such technologies.

Discussion
The Chairperson commented that it is good to see travel and see competition and new ways of doing things that can be applied to the South African context. He warmly welcomed the department.

Mr W Farber (DA; Northern Cape) asked how many success stories are there in the Northern Cape. He insisted that help is needed to get SMMEs going, money should not just be spent on nice offices. He asked who exactly is getting the money given to the Northern Cape out of the R47 million. He does not see the results and wants exact information.

The Chairperson said he does not want to hear that.

Mr S Mthimuney (ANC; Mpumalanga) would like to hear that. Perhaps a note could be written. He believed that the department transferred funds properly. He understands that as a new department the DSBD does not have their own plan yet and asked when their strategic plan will be available. People are hungry today and they cannot wait. He asked how provincial cooperation in Mpumalanga will have an impact now. He asked whether the organizations mentioned in the presentation are under the DSBD. The provincial split shows that Gauteng had the most funding and asked how to distribute the funds so the rural areas benefit without suppressing Gauteng as Gauteng is still part of South Africa

The Chairperson asked that the Committee members remember about all the small towns.

Mr M Khawula (IFP; Kwa-Zulu Natal) agreed that the provincial breakdown of branch offices and project approvals do not reflect an adequate spread; Kaw-Zulu Natal has few branches. The rural people are still disadvantaged. People are not informed that the department will not reach its disbursement targets by the end of the financial year. R123 million was given to Gauteng. The spread  does not reflect the population distribution. Additionally, people in towns and cities with information benefit the most, but rural areas with the least amount of information continue not to receive information and will remain disadvantaged. Offices must be where the need is. He asked the about the approvals over the past three financial years.

Mr L Mokoena (EFF; Free State) commented that he would like a more specific breakdown of what the department’s responsibility is because most of what he sees falls under Economic Development and DTI. He suggested that perhaps the last five months should have had a more specific policy perspective and that perhaps the Committee “was jumping the gun”. The Small Enterprise Finance Agency (SEFA) is relatively new and just as ineffective because it is not reaching the people. He had only heard about it in the last month. He wanted to discuss new businesses, especially those in the townships, that die a natural death because they are not being monitored. As businesses develop they need new money, but they need to be taken through that development. From a purely EFF perspective, he feels that South Africa needs a National Bank in order to manage and consult on these matters. The DTI believes in the concept of a more protective economy by safeguarding businesses through state-owned enterprises South Africa needs more state owned enterprises to support small businesses. The China model has 117 state-owned entities and these companies hold the centre for small businesses. He hoped that South Africa can grow in that direction as well.

Mr Farber interjected, asking if Mr Mokoena was making a presentation because he can present on capitalism too. Mr J Londt (DA; Western Cape) agreed.

Mr Mokoena said that South Africa really needs a state bank and apologized for the “rude interruption” by some of the members.

The Chairperson said that he is patient and another party agrees with Mr Mokoena. All input is valuable.

Ms E van Lingen (DA; Eastern Cape) commented that the free-market system is working well. She asked how the legislation fits in with the Public Finance Management Act (PFMA) framework. She said that is one thing to say that there is a “footprint” of the offices because they exist but she wanted exact contact information made available. People need to know how far away the offices are and how to contact them. She asked what a loan cost from the department versus commercial banking loans and suggested that it may be better to let the banks run the system. Looking at the table, she asked why it takes R2 mill to create one job in Limpopo. There is a crisis in her constituency, and she hopes that this department can reach the people as soon as possible.

Mr J Londt worried about the corruption levels. He asked if the departments keep track of what funded businesses fail and why so that the department does not keep funding the same businesses. Does the department check whether or not these business have links with officials and higher-ups in the database.

Mr E Makue (ANC; Gauteng) appreciated that this department had only started in June of this year and he was convinced that a smooth transfer from DTI and EDD had begun. In the Black Business Supplier Program the number of projects approved in 2011/12 was 306, it increased in 2012/13, only to decrease again in 2013/14. The Committee knows the problem was inherited from DTI. The Committee does not want to see a massive underexpenditure considering the large need. The Committee encourages the department spend the amount of money approved with consideration of all the precautions that the other members had expressed. He asked if there is an explanation for the under-expenditure. The information provided is very important to the Committee and it needs to be conveyed to our constituents. More of this information must be made available on a website and the office locations must be advertised more. People are looking for these opportunities but Members do not have the contact information.

Mr Makue referred to several institutions that the department should be forming relationships with such as the Council for Scientific and Industrial Research (CSIR) which were involved in the agro-industry, the Innovation Hut, NECSA might be controversial but the infrastructure is there and they are doing a lot of skills training. The young people were excited because they were already engaged in small enterprises. They have experiential learning to sharpen their performance and lastly, one of the lecturers at the University to Johannesburg is looking into engaging in dialogues. He was sure that other universities would like to work closer with the Department. Being from Gauteng, he would love to talk about the township economy, but he would not for the sake of time.

Dr Y Vawda (EFF; Mpumalanga) also appreciated that the department is new. He noticed that the presentation is taken largely from the strategic plan but remarked that this is okay. He inquired if there were any methods or means to monitor the activities of SEDA or SEFA. This is important because the activities taking place in these offices will largely determine the department’s success rate. There needs to be a follow-up on in the provinces. A database of existing funded businesses can be beneficial. The database information can also help to identify successes and failures linked to certain businesses or activities to better help small businesses correct their errors and maximize their success. More comprehensive feedback would help in a big way. The department cannot be "stuck in its early phase" for too long.

The Chairperson said that people are itching to begin businesses and that he is looking forward to the day when the newly formed department has its own budget. He suggested that the department provide a booklet with all the information on how to direct their constituents on where they need to be. It should be in a question and answer format in different languages. He wanted to caution the department not to give too many promises so that they fall short. The propaganda material can give the Committee information. Local media houses may be used as well. Information dissemination is critical, especially making people aware of the conditions of the loan. The department cannot just give people money. People must be empowered in order to have a successful business. The department needs to discuss the under-expenditure. The department is sliding in its allocation of funds.

Ms Ncapayi responded that DSBD had met two weeks ago and it is currently working on finalising its strategic plan. Work is migrating to the new department and by the start of the next financial year, they will receive their own budget. Hence there are currently overlaps with DTI. The SMME startup success rates, and failure reports can be made available. Some businesses die very young, but some grow. Some businesses are even exporting to other countries. She promised to look into compiling success stories on both SMMEs and cooperatives. The SEDA offices cannot be used to generalise but if the Committee points out specific offices that are underperforming, it can be addressed. The SEDA office spread will be under the auspices of DSBD. Unfortunately, budgets are going down and cost containment measures are in place. One must do more with less. There is a moratorium on developing more agencies and one has to look at alternative measures but the department will speak to National Treasury and report back to the Committee. She noted the recent review on State Owned Enterprises, most of these were established during apartheid and needed to be assessed to act as a vehicle to serve the people in terms of a developmental state. Very few of these institutions were established after 1994. On the point that SEFA was not well known, she said that SEFA was not in existence prior to 2012. Government agencies assist those who do not meet  bank loans requirements. Such government agencies are necessary. SEFA was an amalgamation of South African Micro Apex Fund (SAMAF), the Khula agency and the small business activities of IDC. DSBD would help with office spread and they would also rely on each provinces' own agencies as all this funding came from government as a source.

Ms Ncapayi agreed that some businesses do double-dip and get loans from agencies at all three government levels. The system does need to be tightened a little as the department wants to reduce that double-dipping. The payback rates on loans has improved. However, some are grants on a cost-sharing basis such as the Black Business Supplier development programme  where money is given out in the form of a grant that does not need to be fully paid back. Not all the money is expected to return; the amounts to be returned are agreed upon. Government absorbs between 90 and 50% of the grant for cooperatives. The majority of people pay it back. The marketing scheme encourages people to upgrade to exporting internationally. The department welcomes innovation and NECSA is innovative. The department intends to have transversal MOUs with departments that are working in the same space so departments can benefit from working with each other. She agrees that NECSA does a lot of helpful innovative research such as on isotopes. There are positive parts to nuclear energy, not just negative aspects. There are university agreements with many institutions such as University of Johannesburg. There is one program initiative in Gauteng on the East Rand and at a college in Butterworth to assist our young people in developing entrepreneurship. Of course 2013/14 was an election year but government operates whether or not there are elections. Government must continue working all the time. There might be reasons why targets were not met as there are many other challenges that can affect implementation. The EFF wants a state bank and this has been mooted even from the ruling party side. There is no harm in working with them to realise this. Members of Parliament want to ensure there is change for the better in their areas. If you deal with poverty and unemployment, it affects everyone in every political party. Government must support everyone, even those who did not vote for them. It cannot discriminate. It is not an easy task considering our background and education system.

Ms Ncapayi agreed that it is always an issue that Gauteng gets the biggest share of incentives and schemes. Some of the people who apply for loans come from elsewhere but they end up in Gauteng because Gauteng is the economic heartbeat of the country. People can access things and the markets quickly there; therefore, people flock there and to the Western Cape as their business is not growing fast enough elsewhere. Some of these people have two or three houses. They move to new cities so they can grow their business as the business was not growing elsewhere. This spread includes Gauteng people and people from elsewhere who have businesses there.

Ms Lenzie explained that there has been no finality on the discussion about which agencies will migrate to the DSBD except for SEDA. There is still going to be discussions on SEFA as well as how we are going to work with the National Empowerment Fund (NEF), possibly by means of a transversal agreement. There is an existing information toolkit that can be disseminated to all Members. The department will take on board the recommendations about MPs are empowered with information dissemination. Engagement between government and these agencies is done through a shareholder compact. The compact with SEFA is through the Department of Economic Development. There are verification and a declaration process to ensure there is no conflict of interest between the officials who manage the applications for loans and the applicant. The Auditor-General has strengthened this measure over the years. Managing the success and failure rate of the entities, certain measures have been considered. The department intervenes at various stages. It has an incubation phase, mentorship programme, and partnerships with various institutions such as Productivity SA. 200 companies have been helped and the incubator programme has 300 entrepreneurs. Success rates and failures across various measures should be available soon. As a new department, it should upscale existing programs to ensure that there are requisite measures in place to intervene and assist.

Mr Mohoto noted that DTI had had a very active small business programme from 2006 onwards. The department does not just go to big towns. They go to very remote areas like Ikwezi and Sekhukhuneland and get information from the people to see if businesses or cooperatives can be formed. For example, one such cooperative is exporting peanut butter overseas and employing more people so there are good stories to tell. The department tries its level best to go to the remotest area.

Ms Lenzie responded that the department is currently working on a website from a strategic communication point of view. The department will take the Committee’s suggestions into account. The actual disbursement can result in over or under-expenditure because it relies on when the loan approval committee meets and when applicants apply.

Mr Mohoto added that the DSBD is still housed in the DTI campus and they would welcome a visit from the Committee.

Ms Ncapayi said in 2013 and 2014 the R75 million figure becomes cumulative because of what disbursement was left behind from the previous financial year. The department still has a lot of paperwork to do before the actual disbursement. It needs a lot of information to make sure that the money they are giving will yield a return on investment. Due to this, there is a delay in loan approval and fund distribution. The department plans to increase efficiency in this area, including using their agents. The shareholder compact needs to be strengthened so that the agents ensure that loan recipients are paid on time and that the turnaround is quicker. Additionally, Gauteng gets the majority of the spread because of the nature of the province’s economy. Effort is put toward other economies. The Western Cape and Gauteng will always need money because of the nature of their economy.

The Chairperson wanted to ensure that there is a measured turnaround time and that there is accountability. The Committee will check what the agreed turnaround time is.

Mr Makue stated that there is still an overlap between the three departments. He suggested that a more concise mandate be made so that they divide responsibilities and know what to realistically expect from the department. The Committee knows it will be difficult to get the Minister to approve more funds. He is not clear about what the distinction and similarities are between these three departments. The Members deal with all these ministries and he is not clear himself.

Mr Farber said he had not heard any answers about the Northern Cape, specifically agriculture. He needs to see how this program for approximately R70 million works. When any money comes to the Northern Cape he smiles, but he wants to make sure that the money gets results. Oversight cannot be done if the Committee does not know what or where to oversee. He needs details on which agricultural programmes this presentation refers to.

Mr E Makue hoped that they could answer about the wineries. The wine industry was a big investment, specifically exports to Thailand. The department took it over from DTI.

The Chairperson responded that the members “know that story”.

Ms Ncapayi responded that it is still within DTI; in a year the department will take it over. After that, it will be the DSB. When the department hosted the Cooperatives International Day three businesses were visited: a bakery that is doing well; a lodge/ bed and breakfast funded from the DTI schemes that has grown into a big business; and the wineries. Companies from all over are supported.

Ms Ncapayi said that the turnaround time and 30 days payment information can be sent to the Secretary. It has already been brought back 40million to small businesses. The SEDA hotline number was provided: 0860 103 703.

The Chairperson asked if it was based in Pretoria.

Ms Ncapayi answered that anyone from the any constituency can access this hotline.

Mr L Mokoena remarked that during their constituency weeks, the needs of the people which MPs had identified should be given to the department for consideration. If not, DSBD runs the risk of becoming another DTI. This contribution would make their role better.

The Chairperson thanked him for his brevity and thanked the Deputy Minister. The Chairperson accepted the apologies for the Minster’s absence.

Committee Programme
The Committee discussed its upcoming oversight visit.

Meeting adjourned.