MCV International Forwarding on export promotion strategy for SMMEs; Small Enterprise Finance Agency on its mandate

Meeting report

Chairperson’s opening remarks

The Chairperson said that because some major challenges the country faced were poverty, unemployment and inequality, the Committee had a responsibility for ensuring, firstly, that existing small businesses did not close down, and secondly, to grow and develop them to make them financially viable. The Department of Small Business Development expected to sign transversal agreements with other government departments so as to reduce red tape and duplication, to ensure productivity. The Department was in a transition stage, and change management was of vital importance. There was a need for a paradigm shift to align human resources and government resources with the thinking and mandate of the government. Another mandate that had been given to the Department was to coordinate the services from different spheres and departments of the government, to avoid duplication.

Ms Lindiwe Zulu, Minister of Small Business Development, had sent an apology indicating that she would join the meeting later, as she had another appointment.

MCV International Forwarding presentation

Ms Nontokozo Gxumisa, founder and Managing Director of MCV International Forwarding (Pty) Ltd briefed the Committee on the role played by Small, Medium and Micro Enterprises (SMMEs) in creating employment, promoting exports and economic growth. Challenges affecting the survival of SMMEs and cooperatives were saturation of the domestic market, competition from foreign businesses and transfer pricing. To succeed, SMMEs had to gain international experience and look for business beyond the borders. SMMEs did not play an active role in the international market due to lack of financial resources, export experience and limited information about international markets. Some new SMMEs had tried the export market, but had quickly turned into importers, as they had come back with foreign goods after facing similar challenges. A multi-coloured pie chart was used to present South African exports’ share in global markets. South Africa had a relatively small slice of the pie, representing 0.5 % of the global market.

Ms Gxumisa said that her company provided a solution to these challenges. To help increase the country’s share of the global market, MCV International Forwarding provided export management services to SMMEs, and acted as an external sales department for domestic companies in the international market. The company’s services to SMMEs included market research and analysis, export plan development, export readiness testing and market entry.

The company was requesting:

• Endorsement of its services;
• Government support through a subsidy of services offered to SMMEs and cooperatives;
• Introduction of Legislation that wwould promote the formation of export management companies to accelerate exports.
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Mr R Chance (DA) asked what response the company had received from the Department of Trade and Industry (DTI), as the DTI already had a Readiness Export Programme. Endorsement would be inappropriate and all other companies in the same business would want the same.

Ms Gxumisa responded that her company had been working with the DTI on various programmes, like the export awareness workshops, and forwarding cargo for companies exhibiting outside the country on behalf of the DTI. The company had identified the challenges facing the SMME exporters through such programmes. The same proposal had been sent to the DTI, and was under discussion.

Mr X Mabasa (ANC) requested further elaboration on how the Committee was expected to assist the company. Referring to the pie chart on export global markets, he asked if South African exports went mainly to the African market, or to other parts of the world.

Ms Gxumisa said that on the issue of a subsidy, they had a team of business experts in their employ that included market researchers, cost accountants and quality engineers, whose services were paid for. There was therefore a need for the government to subsidise the cost of these services to the SMMEs, to affordable levels. SMMEs paid only when they had successfully sold their products.

Rev K Meshoe (ACDP) suggested that the Committee should consider endorsing MCV Forwarding in order to increase exports. It was important to support companies which helped businesses. He asked what kind of marketing plan the company had in order to raise awareness about their services.

Ms Gxumisa responded that locally they had engaged with the Black Business Council, provincial development agencies and various other organisations. Internationally, they had been in contact with the German Chamber of Commerce and some international freight companies.

Mr T Mulaudzi (EFF) commended the company’s overall concept. He asked what kind of subsidy the company expected -- was it human resources, or financial?

Ms E Thabethe, Deputy Minister of Small Business Development, concurred that the concept was a good one. However, she wanted to know the background of the company, and who was working with it. She asked what the company meant Committee, Pick and Pay had indicated that the market was still open. She also expressed her displeasure at the company’s assertion that some SMMEs faced such serious challenges in the export market that they ended up importing on their way back. This was despite the government offering expert readiness programmes to these exporters through the DTI’s planned exhibitions and the Small Enterprise Development Agency (SEDA).

Ms Gxumisa answered that by saturation, the company was referring to the stiff completion brought about by economic globalisation, which had resulted in cheaper products in the market. Some companies imported cheaper components. Black-owned SMMEs would be lacking that kind of knowledge -- that they were able to import if they were in manufacturing. They were not aware of Third Schedule Rebates that allowed duty free component imports for manufacturing companies. Middlemen export management companies -- as opposed to export traders -- did not buy products from producers and sell them. They received commission from the seller only after the products had been sold.

The Deputy Minister was totally against the idea of traders paying commission, as they were mostly poor people who needed support in new markets and were not supposed to pay any commission. She argued that the domestic market could not be said to be saturated, especially the food market. Competition was going to be there.

Mr H Kruger (DA) asked the Deputy Minister who was supposed to pay the commission, since the company could not provide its services for free.

Ms Thabethe answered that the traders were not supposed to pay commission. They had to do things for themselves, since it was the ANC’s position that people must be skilled to do their work. Embassies were there to assist people in foreign countries. Unscrupulous dealers had abused the small businesses in the different countries.

The Chairperson said it was good idea and a good business case, and it was essential to expose the SMMEs to the global export market. The Committee could not endorse a particular company, however, although it may endorse the model.

On the company’s assertion that the market was saturated, the Chairperson agreed with the Deputy Minister that the South African market was not saturated. The retail sector presentation had revealed that it imported 70% and sourced only 30% locally. Saturation was not the correct word to use – one should rather say that SMMEs were marginalised. There was a market, but it was not open for SMMEs. This was not a reason to close one’s eyes and ignore the global market, however. It was a good idea to access the international market for SMMEs. The company’s idea was good, as it would help open and facilitate entry of SMMEs into the export market. The Committee would support the idea and discuss it, but would not consider a particular company .Overall, she was impressed by the presentation and the fact that the company had been founded by a black woman.

The Chairperson announced that there was supposed to have been a presentation by the Small Enterprise Finance Agency (SEFA), the Black Business Supplier Development Programme (BBSDP), the Isivande Women’s Fund (IWF), and the South African Women Entrepreneurs’ Network (SAWEN). SEFA was supposed to have made a presentation at the previous meeting when SEDA had presented, but they had excused themselves, saying their plans were not yet aligned and not in congruence with the Department’s plans. The same question had been put to the other presenters – whether they were ready and whether they had consulted the Department and if so, whether their plans were aligned with those of the Department.

Ms Pumla Ncapayi, Acting Director General, was asked to confirm if she had already met with the concerned agencies? She confirmed meeting only with SEFA, however, and was not convinced about the readiness of the others.

Mr Chance was surprised that the agencies had not discussed the issues all along with the Department, since their buildings were close to each other, citing poor management on the part of the secretariat. Why did they now come unprepared? The agencies should present so that the Committee could get an opportunity to interrogate their reports/presentations, otherwise it would be a waste of tax payers’ money to keep on postponing their presentations.

The Chairperson said from the ANC perspective it would not be a waste of tax payers’ money to continue with the meeting. It would be useful, because what would come out of it would be alignment to the Department’s strategies. The Department was at a stage of change management.

Small Enterprise Finance Agency (SEFA) presentation

Dr Sizeka Magwentshu-Rensburg, Chairperson of SEFA, confirmed that they had interacted with the Department, and their plan was in alignment with the Department. She then handed over to the Mr Thakani Makhuvha, CEO, to present.

Mr Makhuvha said SEFA was three years old. In terms of legislation, it had a mandate to provide access to finance to SMMEs to fight inequality, poverty and advance transformation. They provided funding of between R500 000 and R5 million. He said 218 000 jobs would be created through the funding of SMMEs.

SEFA needed to grow in order to provide services to rural areas. The support from other agencies such as SEDA and the National Youth Development Agency (NYDA) was important to further this objective. The issue of franchising was very important to the organisation, as it involved businesses that were already tried and tested. However, challenges included demands for unencumbered cash of 50% upfront by financial institutions.

 

Priority had been placed on the provision of funding for women-owned and youth enterprises. Rural and township areas created 45% of businesses supported by SEFA, which had introduced bulk buying projects for spaza shops in Limpopo. A taxi industry fund had been created in Springs.

 

Challenges involved red tape, such as the turnaround time for processing applications. There was also a lack of security/collateral, as most people that were offered financing were poor and could not be funded by the banks.

 

Properties were in a poor condition and now required refurbishment. There was also a problem with the payment of rent on the properties by some of the tenants, with a low collection rate of 1% in some cases, and an average of 35%, with arrears of R68 million. Some tenants had 35-year lease agreements which, upon expiry, enabled them to assume ownership.

 

Discussion

Mr Mabasa asked what resources SEFA had to carry out research on behalf of SMMEs. With reference to partnerships with private companies, did these companies enter the partnerships as a community responsibility initiative, or on business terms? Had SEFA examined the agreement where SMMEs were promised ownership of the properties, because if there was no cost and strategy, even those who were capable of paying were not paying? He got the impression that SEFA served the bigger business people, not the smaller business owners – “aunties selling at the corner” -- whereas this should be an inclusive service. Did SEFA lend out money themselves, or did they use intermediaries?

Mr Kruger said the presentation was very informative. SEFA was an expensive agency to run. How much did it cost SEFA to finance per rand? Red tape was not only about turnaround times, but more about administrative costs and processes. What was the strategy of SEFA towards dealing with those costs? Was SEFA registered as a financial services provider with the Financial Services Board (FSB)?

Mr Mulaudzi asked how much interest was being charged. What kind of remedy did the Department have when companies were liquidated, and what strategies did they have in place?

Mr Chance asked whether the CEO was aware of the Endeavour Jobs Calculator, a mechanism to calculate the number of jobs to be created. Four months ago, SEFA had faced constraints in funding businesses that were fundable, what steps had been taken to resolve this? The properties that the Department rented out were in a shocking and appalling condition, and he also would not pay if he were one of the tenants. When it came to franchising, he thought the Department would have a tough time trying to persuade franchisees to relax the condition of the unencumbered cash contribution.

Mr B Mkongi (ANC) said the question of strategic opportunity in the market came out of the presentation, indicating a need to expose people to such an opportunity and provide funding, with the aim of maximising the success element. Business potential in townships existed. One could have an abundance of business opportunities in the townships, but they were ineffective without strategic skills. He said there was concern about businesses that were owned by previous generations which had now closed down, particularly in iGugulethu -- where he comes from -- because of the lack of funds to resuscitate these businesses.

Ms N November (ANC) asked if SEFA was saying it was moving at a fast pace. Why was it that SEFA did not have an office in Namaqualand? It indicated to her that they were moving slowly.

The Chairperson said that after 21 years of democracy, it was time for different municipalities to share success stories on what their achievements had been with different projects thus far, and how these projects had been implemented. There was also a need to have home-grown models. She was sad that there was a habit of expecting models that had been developed in other countries to work in the South African environment.

She supported Mr Chance’s point about why SEDA and SEFA were operating as different agencies, when they could be one. She also asked if SEFA had interacted with iThala Bank, as she felt they could have learnt a lot from them.

The Chairperson also spoke strongly on the issue of franchising, saying the sector had been governing itself for years and had managed to secure themselves against the entry of new players, thereby gaining monopoly capital. On the matter of the memorandum of understanding (MoU) between SEFA and the Franchise Association of South Africa (FASA), what had SEFA done about it? FASA had also secured space and allocated itself without government intervention, making it difficult to achieve transformation, especially in line with the Freedom Charter which states ‘wealth shall be shared’. A question had also been raised about why SEFA was not prioritising the Presidential Poverty Nodes.

Dr Magwentshu-Rensburg said it was the first time SEFA was presenting to the Committee, and that every committee had its own approach to issues. SEFA had to adjust to the new way of how things were done in this Committee.

SEFA responses to questions

Mr Makhuvha dealt with the question on private sector partnerships. The private sector companies entered into these partnerships to assist and promote SME suppliers, which also helped them with their Black Economic Empowerment (BEE) scorecards. An example was given of BHP Billiton, which assists energy and aluminium beneficiators.

While he was providing details on interest rates, Mr Mabasa interjected and requested immediate intervention on SEFA’s charges. He also suggested that the Department review the figures and resolve the issues of intermediaries, as they gained a lot of money while the benefactors suffered. The intermediaries had to be eliminated.

Subsequent to this, a series of interjections followed from the Committee Members.

The Chairperson repeated the question asked by Mr Kruger as to how much per rand was charged on SEFA loans, since this was also related to interest.

Mr Mkongi said that even in the presentation, SEFA had expressed its dissatisfaction with the loan process, but had not elaborated why. He also proposed that the Department review and resolve the issue of intermediaries.

Mr Chance said the Committee should avoid jumping the gun, thinking they would get rid of intermediaries. SEFA would not be able to manage direct lending without problems.

Mr Makhuvha continued, pointing out that not all the intermediaries were charging high rates of interest. However, there had been problems with some that were providing services, as they owed the government a lot of money, and removing them would still leave the government at risk of not recovering it.

Mr Mabasa again interjected, saying intermediaries were holding the government to ransom. He asked how they could to owe the government so much when they were charging rates as high as 110%.

The Chairperson supported the question, and requested an answer. She asked why it was possible for the government to act swiftly on issues such as electricity charges, but were not able to charge intermediaries when they borrowed money at 6% but lent to businesses at 110%. Why was the government so scared of intermediaries?

Mr Makhuvha continued by saying intermediaries owed the government R82 million.

Dr Magwentshu-Rensburg added that there were different types of intermediaries. Some did not have excessive pricing, but the problem was with the micro financing institutions, who charged at short-term rates. It was possible to transform stockvels and cooperatives into banks as a home grown solution, since stockvels were some of the best savers.

Mr Makhuvha admitted SEFA had not used the Endeavor Jobs Calculator.

On the issue of only the high-end sector benefiting from SEFA loans, he said SEFA covered all sectors, including the small businesses. They also looked at the job creation potential.

Regarding franchising, he said it was difficult to enter into a franchise agreement, and that was why the Agency had entered into a MoU with FASA. Their intention was to promote transformation from within.

SEFA had visited the likes of Brazil to determine how they handled SME challenges. Brazil legislated a fixed percentage on what was allocated to SMEs.

SEFA looked at the jobs created to assess the success of their performance. They looked at the financial assessments, but had not advanced and were working on it. They were currently looking at the number of developmental returns at a number of the SMMEs.

The Chairperson advised SEFA to strongly consider working with iThala Bank, as they had presented in Parliament before and their success was very well known.

Mr Kruger requested feedback on the red tape question, in reference to a young lady who had required financial backing for her business.

Minister Lindiwe Zulu responded that she had not been present when the matter of the young lady in question had been raised. However, she stated that this matter reflected on the difficulties encountered where there were good ideas, but they could not be put on paper.

In reference to Mr. Chance’s question about the amalgamation SEFA and SEDA, Mr Makhuvha responded that this was long overdue.

At the conclusion of the SEFA presentation, the Chairperson called on SAWEN to present.

SAWEN responded that they were not ready to present, since they still had to consult with the Department. They requested that the Chairperson allow them a period of one month to prepare for a presentation.

The Chairperson expressed her disappointment over the lack of planning and preparation on the part of SAWEN leadership.

PMG did not attend the rest of the session. We able obtain the missing information and add this later.