Small enterprises and cooperatives: risk analysis and proposed cooperatives model: Centre for Risk Analysis and Ms N Bhengu briefings

Small Business Development

12 November 2014
Chairperson: Ms N Bhengu (ANC)
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Meeting Summary

The Centre for Risk Analysis (CRA) briefed the Committee on small business development and the risks over the next ten years.  CRA explained the  stages of economic growth in South Africa from the 1920s to date, using different economic indicators. The first analysis covered electricity supply which revealed that installed capacity was less than the demand. Statistics and comments were also given on the findings around the employment ratio, based on two races of white and black, income sources, the current structure of the middle classes. It was noted that South Africa, in terms of entrepreneurship judged on ownership of own businesses that were able to pay salaries or wages, lagged behind Russia, India , Brazil and South Korea The indicators of a middle class were explained, and it was noted that current statistics, based on these indicators, suggested that white South Africans still comprised the largest portion of the middle class, and that this had been entrenched through generations. Employment by sector showed that the prime sectors such as mining and manufacturing were not contributing as much as they should to employment. Pre-school to post graduate analysis showed that of the 7 000 students who enrolled in school only 5 000 completed school and graduated.  Living standard measures, in terms of access to basic needs, showed a steady improvement from 1994. It was noted that the South African developmental policy model resulted in a larger number of the population being welfare recipients as opposed to being self-employed.  Opinion polls generally showed that South Africa’s "glory days" were between 2002 to 2007, when the population seemed to be generally happy with the state of service delivery, but in 2014 only 50% indicated that they were happy with service delivery, because their expectations had been raised and promises not met. Incidents of public violence were seen between 2008-2009 and an upward trend between 2011 and 2013, with a record of 2 000 incidences of violence and public protests. It was noted that the provinces such as Western Cape and Gauteng, which had the highest GDP per capita, gave less support to the ruling party. Labour volatility was noted between 1994 and 2013,with links to the percentage of jobs created by government, and it was noted that it was interesting that labour negotiations for the public sector took place in the years when there were the most man-hours lost through strikes. The CRA made some differing proposals on the possibilities for indicators for reform policies. The first would be a narrow road with extensive economic reform processes, the second a wide road with a free and open political system, the third a rocky road with increasingly closed, patronage driven political system and the fourth, a toll road with limited economic policy reform. That last proposal was the one recommended for South Africa.

Members were concerned that the statistics did not show a development trend but rather a high level of dependence on social welfare for survival by the majority of the population. The number of students dropping out of school was a concern and an explanation was also sought for the policy reforms proposed by the Centre.  Other concerns were the high rate of unemployment, protests and public violence measured against opinion polls, showing that people were happy with the service delivery, and the decline in contribution to employment by the prime sectors of the economy.

The Chairperson then briefed the Committee, presenting a proposed Cooperatives Development Model, that would focus on job creation and poverty reduction. She said the model sought to implement the National Development Plan objectives, enable communities to participate in the process of building a developmental state, reduce dependency on grants  and instil a culture of responsibility among the community. She highlighted the existing challenges of the cooperatives system, and showed how the new Model would seek to address them. Particular focus was placed on poverty, unemployment and inequalities, neglected facilities, lack of a national Model that was understood  by target groups and negative perception about cooperatives. Her Model proposed a change in the way of doing things, mainly through a revised fiscal policy statement that called on government departments to move away from a consumption budget towards a productive budget, build a developmental state, improve service delivery and implement government policies. The Model proposed an implementation process that would encompass beneficiaries' prioritization process, skills and cooperatives development training and national branding backed by public procurement market for public services. Strong emphasis was placed on  partnerships and cooperation between relevant departments. This Model sought to work with supportive government policies in its implementation. Once successfully implemented,  the model would benefit poor families by making them self-reliant, create an exit from social grants for dependent families, decrease the culture of entitlement and create jobs at community level. The Chairperson suggested that the Committee should adopt the Model and instruct the DSBD to implement it.

Members commended the Chairperson for her enthusiasm, hard work and the sound ideas behind the model idea, and proposed that it be adopted as a working document for the Portfolio Committee, with a mandate to the Department to fine tune it into an implementable tool.  A few concerns were raised on the low survival rate of cooperatives established after 1994, lack of understanding of how cooperatives work by the people, the amount of money that would be needed  to implement the model and whether the model was any different from the strategic plans that were in place. The Chairperson explained that this was, at this stage, a proposal rather than an implementation document and agreed that more work would be needed by the Committee. The Department expressed appreciation and its support. 

Meeting report

Small, Medium and Micro Enterprises (SMMEs) and cooperatives: Risk Analysis: Centre for Risk Analysis briefing
The Chairperson noted that the Centre for Risk Analysis (CRA) would be briefing the Committee on the risk analysis for small, medium and micro enterprises (SMMEs) and cooperatives (coops).  The Head of the CRA, Mr Boitumelo Sethlatswe, was due to have made the presentation, but had been involved in an accident on the previous day and his colleague would do so instead.  She noted that apologies had been received from the Minister and Deputy Minister responsible for small business development, and tabled apologies from Members. 

Ms Lerato Moloi, Head of Research, CRA, explained the stages of economic growth in South Africa from the 1920s to date, using different economic indicators. The first analysis covered electricity supply, and this revealed that installed capacity was less than the demand. The employment ratio, based on the two main races showed that there were 2 million black employed people in South Africa and 7million black unemployed, while there were 2 million white employed people and a very small number of unemployed white South Africans. Income sources showed that while 50% of black South Africans relied on  social welfare, only 11% of white South Africans relied on social welfare for their survival.

The entrepreneurship lags of South Africa, compared to other countries, showed that for people aged between 18 and 64 who were actively involved in setting up a business they would own, or owning a business that had paid salaries for 3 to 24 months, or owning a business that had paid wages for more than 24 months, South Africa was lagging behind Russia, India, Brazil and South Korea. Even where there was an improvement it was a result of government intervention through grants, and not people pulling themselves up.

She also explained the indicators of a middle class, as holding medical insurance, property valued over R1 500 000, household income worth R20 000 per month and rent/mortgage of more than R5 000 per month. The trend was that the black population comprised10 % of the  middle class while the white population was more than 60%, with  an entrenched middle class running through generations. Employment by sector showed that the prime sectors such as mining and manufacturing were not contributing to employment as much as they used to in the early 1990s, nor as much as they should to current employment. Pre-school to post graduate analysis showed that of the 7 000 students who enrolled in school, only 5000 would complete school and graduate. Some of the reasons for the high rate of drop outs included teenage pregnancy and poverty. Living standard measures, in terms of access to basic needs, showed a steady improvement but she noted that was due to government intervention through grants and free service provision. The South African developmental policy model  resulted in a larger number of the population  being social welfare recipients than earning from salaries and wages or self-employment. 

Opinion polls generally showed that South Africa’s "glory days" were between 2002 to 2007, when the population was happy with a degree of service delivery, but this was no longer the case in 2014, since only 50% were happy with the degree of service delivery, due to the principle of raising expectations. Incidents of public violence were seen between 2008-2009 and an upward trend between 2011 and 2013 with a record of 2 000 incidences of violence and public protests, to the extent that the military had to be deployed to calm the situation down. GDP per capita was measured against ANC support per province, and this showed  that in provinces like Western Cape and Gauteng, which had the highest GDP per capita as of 2014, the ANC enjoyed less support. Labour volatility between 1994 and 2013, linked to what proportion of jobs the government contributed was also measured, and ironically it was in 2007, 2010 and 2013, when labour negotiations were held for the public sector, that the highest number of man days lost were noted.

Finally, she explained  the proposals for South Africa’s policy reforms, which the Centre had developed with indicators. These included a narrow road with extensive economic reform processes, a wide road with a free and open political system, a rocky road with increasingly closed, patronage-driven political systems and a toll road with limited economic policy reform. She suggested that it would perhaps be most appropriate for South Africa to fall under the toll road, but that would be up to Members to decide where it would best fit.

The Chairperson thanked Ms Moloi for the comprehensive presentation. She said that the reason for inviting CRA was to get an independent opinion on the status of affairs in the country so that the Committee could better assess the mandate of the Department of Small Business Development (the Department). These kinds of presentations would also help the Committee understand  the nature of the problems they were dealing with and inform their decision on the programmes that were needed from the Department of Trade and Industry (dti),  to avoid a "cut and paste" duplication. The debate on the programmes of dti had to continue, but must be informed by the real situation using recommendations to direct the focus of the Department, and thus empower the Committee to analyse the progress.

 Mr X Mabasa (ANC) conveyed his sympathy to the person who had been involved in an accident. He requested more details on the slide that indicated that that the number of recipients of grants was more than the number of people who were employed.

Mr S Mncwabe (NFP) thanked Ms Moloi for the presentation. The report indicated that of the 7 000 students who start school only 5 000 were able to complete, and he wanted to know about the employment situation with those who dropped out.

Mr R Chance (DA) needed clarification on the statistics showing that the white South Africans took up a large percentage of the middle class, because a report that was released two years ago showed that blacks made up a larger percentage of the middle class in South Africa. He also asked whether CRA had statistics that indicated the school dropout rate per province and asked whether this could be a result of the change in the grading system.

Mr T Ramokhoase (ANC) asked which commodities the country was presently concentrating on, in the manufacturing sector, to take it through difficult times, since there was a decline in the mining sector. He also asked whether the new methods of providing electricity were included in the assessment when doing this analysis. On the issue of opinion polls, he wanted to know what could be the cause of the major protests and public violence, since the people were getting access to the services.

The Chairperson said that there was a time when school students rioted and dropped out of school, and since they were adults now, she wondered if they were now catered for. She also asked whether the freedom fighters who acquired skills from outside the country, when fighting to bring it to its current state, were catered for, because some of their skills may not have been officially recognised. She also asked if inmates who acquired skills whilst in prison were taken into consideration.

Mr B Mkongi (ANC) wanted to understand what motivated CRA to talk about policy reform. On the development policy model, the numbers indicated that in 2009 there was equilibrium, and he asked whether it was possible to go back to  that equilibrium in order to reduce dependence on social welfare and motivate people to generate income.

Mr T Mulaudzi (EFF) thanked CRA for the objective presentation and commented on the findings, which seemed to show that the government was correct in introducing the new Department.

Ms Moloi responded to the question on what motivated CRA to talk about policy reform and said that policy reform was effected whenever there was something wrong that needed to be changed. The issue of going back to equilibrium as it was in 2009 was a problem because there were few people who were employed. On the issue of whether a special consideration was applied to students who dropped out of school, and freedom fighters who acquired skills from abroad which were not recognised in the country, Ms Moloi said most job qualifications were informed by the internal education system and the the issue could only be addressed from that angle. On the issue of school dropout rate per province, the difference in grading system contributed to it, but she did not have the statistics per province at the moment. She noted that most of the girl drop-outs were caused by pregnancy, poverty and related reasons.  

Ms Moloi explained that the people going on the streets to protest were not necessarily complaining about lack of service delivery. She said that most times these were social protests linked to the quality of service delivery and high levels of unemployment.

On the issue of mining contributing less to employment, she explained that the purpose of the slide was to show that the major sectors were contributing less to job creation and GDP.

Ms Moloi clarified that other statistics that showed that the black South Africans occupied a bigger percentage of the middle class was commonly known as" blood diamonds". She said middle class indicators were difficult to define, and most of the statistics were market driven, so they did not present an accurate picture of the situation.

Ms Moloi confirmed that where she had been unable to give specifics to the questions, she would check back and send through a written answer to the Committee.

The Chairperson said that social welfare grants were not an absolute solution to poverty. The grants were slowly turning the country into a welfare state and creating a culture of entitlement without responsibility among the people. She said it was not a developmental approach and would not develop strategy. The missing link was a policy shift that  required social welfare to be tied to some condition, to make recipients perform a social service or sign agreements to acquire skills. It looked difficult but it could be done, and what was required was a paradigm shift.

Proposed cooperatives model that focused on poverty reduction and job creation: Briefing by Chairperson, Ms N Bhengu
The Chairperson noted that her own interest in cooperatives and development stemmed from her training as a community development economist, and was shaped by her experiences. The Department of Small Business Development (DSBD or the Department) had been invited to listen to the proposals on the model, and assess whether it could be adopted.

She noted that the  model sought to implement the National Development Plan (NDP) objectives of reducing poverty, creating jobs and mobilising communities to participate in the service delivery process as well as  their own development. It was aimed at enabling communities to participate in the process of building a developmental state and bringing about sustainable community development. The model further sought to reduce dependency of poor families on government social grants and free services, would enable communities to pay for services, thereby broadening the revenue base of municipalities rendering municipalities financially viable, as well as to instil a culture of responsibility and ownership of public facilities at community level.

The main challenges that the Model sought to address were:
- The "triple challenge" of poverty, unemployment and inequality. She noted that the current approach to cooperatives development did not massively impact on poverty reduction and job creation at grass-roots level
- The number of poor families who depended on social grants was increasing, with no proper plan for their exit from social grant and indigent registers
-The majority of unemployed youth were those who dropped out of school before matriculating, meaning that they did not have skills that would make them employable
- The skills development programmes were not linked to service delivery challenges, and did not target the unemployable youth from poor families who depended on social grants and free services
-Maintenance and facilities were neglected, resulting in existing facilities that were rapidly  degrading, such as roads with potholes, schools with broken windows, lack of sanitation, tall grass and broken furniture
- Most of the existing Cooperatives innovated after 1994 were not financially viable
- There was no national model that was understood by all government departments and target groups
- This contributed to the negative perception about cooperatives, and there was also confusion caused by different structures positioning themselves as cooperative developers, yet who had no experience in the fields of cooperatives development
- There had been a lack of a "hands-on" approach, firstly by the dti and now by the Department of Small Business Development (DSBD), so that the Department was abdicating its responsibility of developing cooperatives to the Cooperatives Development Agency
- There was little clarity in the strategic plan of the DSBD on how the cooperatives would reduce poverty and create jobs as well as the role that will be played by DSBD to make this happen
- The small budget allocation for cooperatives development, which was 2% of the DSBD budget, indicated a lack of understanding of how the development of cooperatives was linked with poverty reduction, job creation, and sustainable development, as well as SMMEs' development using the cooperatives development concept
- There was a lack of adequate and effective training programmes for cooperatives, cooperatives managers and cooperatives developers
- The performance measures of the DSBD were similar to those used by dti when the programme of cooperatives development was under dti. These looked at the number of cooperatives registered and assisted, instead of relating to improved levels of poverty and job creation
- The development approach to cooperatives development made it difficult to measure value for money
- Poor families who could not afford to pay for services rendered to them by the municipality contributed to lack of revenue of municipalities, and that resulted in municipalities failing to deliver services.
- This was further compounded by no coordinated and creative approach to maximise benefits of the limited available financial resources located in different structures of government - these included the Sector Education Training Authorities (SETAs), divisions of the dti, the local government, the Centre for Scientific and Industrial Research, private sector training, and the enterprise development accord signed by all constituencies represented in NEDLAC.

Ms Bhengu said the model that she would outline sought to change the way things were done. Its fiscal policy statement called on government to move away from a consumption budget, towards a productive budget (to reduce dependency on social grants and free services). It would support the NDP creating 11 million more jobs by 2030, and would reduce poverty to 0%. It would build a developmental state, mobilise communities to participate in their development, improve service delivery, implement government policies such as developing SMMEs and cooperatives through public procurement and infrastructure, the National School Nutrition Programme and supply of school furniture,

She listed the people dependent on social grants and free services. These included child headed households, women headed households with no source of income, households dependent on a social grant of a pensioner, households dependent on a social grant of a disabled person, households appearing on the indigent register of  a municipality. The model, if accepted, would be implemented through a number of processes. She expanded upon these (see attached presentation for more detail) and said that they would include:
- market research to balance supply and demand
- technology identification
- partnership agreements with the private sector, educational institutions, government Departments and State Owned Companies (SOCs)
- awareness programmes at community level
- household profiling and verification in the Department of Social Development and municipalities, household profile data-bank development at ward level, kept in the Local Economic Development (LED) office of each municipality and of DSBD
- beneficiary prioritisation process
- skills and cooperatives development training
- cooperatives establishment and registration
- national branding, back up support and monitoring and evaluation.

The public procurement market was an integral part of the model and would extend to National School Nutrition Programme, roads maintenance and potholes repair, school cleaning and renovation, Working for Water programme, Clean Communities programme, expanded public works programmes, renewable energy projects, on grid electrification and maintenance, Peoples Housing Programme, upgrading of informal settlements, solar street lights installation, recycling, security services, the Mud Schools Eradication programme, street lights repair and maintenance.

The model required partnerships and cooperation between departments for its implementation. These included the Departments of Social Development,  Cooperative Government and Traditional Affairs, Public Works, Trade and Industry, Labour, Transport and its entities, Department of Energy and its entities, Department of Basic Education, Health, Public Enterprise and its entities, Higher Education and Training, Correctional Services, Rural Development and Land Reform, Agriculture, Forestry and Fisheries, Environmental Affairs and Human Settlements.

The model hoped to support government policies for grants and support services for cooperatives. It hoped to also support establishment of the Cooperatives Development Agency,. Skills development support services would be provided by the Department of Higher Education and Training. It would further tie in with the  preferential procurement policy, the set aside products policy for supply by cooperatives and SMMEs, the financial support services targeting enterprise development and job creation. It was in line with the National Development Plan on mobilising communities to participate in their own development, the Cooperatives Development Act 2005, the Masakhane Campaign launched by former President Mandela (on the principle of balancing rights and responsibilities), the NDP targets on poverty reduction and job creation, the reprioritising of budget towards production and sustainable development. It was also in line with the powers now given to portfolio committees to re-prioritise budgets, through the Budgetary Review and Recommendation Reports, and to ensure that programmes of departments did address issues of poverty and job creation.

She outlined the benefits of the model, which were largely addressing the challenges that she outlined earlier - for example, poor families presently reliant on social grants would be able to exit from the social grants system. Payments by them would increase revenue bases of municipalities. The new proposals would address the culture of entitlement that was emerging at community level, and see to its decrease. Jobs would be created at community level. Skills training would relate directly to service delivery challenges, and in the long run would build the capacity of communities and enable them to participate in their own development. There would be improved use of financial resources and value for money regarding the development of cooperatives. The quality of services at community level would improve, because matters such as potholes in roads, public schools infrastructure, graveyards, dirty roads and illegal dump-sites would improve. There should be less vandalism, better kept grass verges and school playgrounds, paved school yards and access to schools. The levels of poverty would decrease and with that the levels of crime committed by poor people in  order to survive, such as stealing and prostitution.

The Chairperson thus proposed that the Portfolio Committee should adopt the model. It should recommend that the Department of Small Business Development implement the model, She suggested that the Minister of Small Business Development should treat the model as a special project that would be driven by a special team, coordinated and led by her. She suggested that together, the Portfolio Committee and the Department should identify places where the pilot project could be implemented, and the pilot should be started in the 2015 financial year. She suggested that a template for implementation of the model be developed and used by DSBD and LED offices in all municipalities. A full scale roll out of the model should be implemented after a monitoring and evaluation report on the pilot project, and after making any necessary improvements. Finally, she suggested that the ANC Lekgotla resolution on NSNP and school furniture supply by cooperatives be implemented.

Mr T Mulaudzi (EFF) said this document was the way forward to meeting the development needs of the people in South Africa.  His only concern was  how it was going to be pushed through to the Minister to make sure it was implemented.  He urged the Acting Director General of the DSBD, Ms Pumla Ncapayi, to take it up. 

Mr R Chance (DA) commended the Chairperson for the idea. His comment was based on his understanding that African societies operated according to the federal model and not the cooperative model, and so he was worried how this model was going to work among the communities.  Secondly he advised that the name of the document was not quite correct; as it did not qualify to be called a model yet. He explained that a model had to show a value chain system of how decisions would be made and by whom. He wanted to know the point of departure of the model, from the existing strategic plans.

Mr S Mncwabe (NFP) said that he had served on several different Committees but this was his first time to see such a passionate Chairperson, and he applauded her for her commitment. He asked for an explanation why cooperatives before 1994 survived, while those established after 1994 collapsed.  He said the partnership of institutions with the private sector was a welcome idea but there was a need to educate private sector about cooperatives, in order to give them a better understanding of how they worked. He wanted to know how much money would be needed to implement the model. He also wanted to know whether the model would be open to a partnership with traditional leaders.

Ms N November (ANC ) added her voice to other Members of the Committee and thanked the Chairperson for the idea. She said the success of the model would depend on how well the departments worked together.

Mr S Bekwa (ANC) thanked the Chairperson for the model and said it would help the Department to move forward.  She suggested that DSBD establish a market union which would assist in the implementation of the model. 

Mr Ramokhoase commented on the fiscal policy statement which called on government departments to move away from a consumption budget towards a productive budget.  He said this policy needed to be the back bone of the model. He agreed that, once implemented, it would reduce dependency on social grants and free services, and enable people to fend for themselves by participating in their own development. He agreed with the idea of signing partnership agreements with the private sector, educational institutions, government Departments and SOCs.

Mr Mkongi thanked the Chairperson for her presentation and the idea. He said the reasons for the current challenges of poverty and unemployment were, amongst others, that there had been no national model against which the challenges could be addressed. He commended the model now proposed, for appreciating the fact that economics was a social science, as reflected in the proposed  fiscal policy to help people reduce their dependence on social grants. He proposed that the document should be treated as a working document of the Committee, because it raised important matters but did not yet go into detail. He suggested that the Committee adopt the document in principle, and mandate the Department  to fine-tune the model where necessary.

Mr Mabasa said the document highlighted challenges which the country faced and urged Members to contribute to ensuring that it was implemented. He applauded the fact that the model emphasised a productive economy over a social welfare economy. He concurred with Mr Mkongi and suggested that the model be adopted as a working document.

The Chairperson said that the Members had raised many comments , some of which had been answered by other Members. She reiterated that, in line with what Mr Mabasa and Mr Mkongi had said, the document did raise possible channels to change the current status, whilst also abiding closely by the mandate and current challenges of the Department. Portfolio committees comprised the representatives of the people and must work to address the challenges faced by people on the ground.

She said the point of departure of this model was that it took on a development economics perspective and sought to bridge the gap between economics and social development.  She said this perspective was shaped by her training as a community development economist.

As to how much would be needed for implementing the model, she said the document was not a business plan, but a model, and therefore did not delve deeply nor break down the figures or specify how much would be spent during the implementation process.

The issue of educating people on cooperatives and how they worked was something to be taken up by the Department.

Ms Bhengu said the issue of partnerships with traditional leaders was a valid point, because land use in rural areas was controlled by traditional leaders.

She disagreed with Mr Chance on the assertion that African communities were not used to the cooperative model, and used the federal system. She said African communities valued their extended families and in a way cooperation has been part of their thinking for a long time. She gave an example that things like foster homes, adoption and old age homes  were all foreign ideas. The issue of cooperative societies therefore needs to be interpreted in such a way that it would be understood  by the people of South Africa.

Ms Pumla Ncapayi, Acting Director General, DSBD, welcomed the presentation and thanked the Chairperson for the hard work of putting it together. She agreed with Members that the model should be adopted as a working document.

The Consideration and adoption of minutes of the meeting on October was postponed

The meeting was adjourned. 


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