Department of Small Business Development on Black Supplier Development Unit plans, in presence of Minister

Small Business Development

13 May 2015
Chairperson: Ms N Bhengu (ANC)
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Meeting Summary

The Department of Small Business Development (DSBD) briefed the Committee on the Black Business Suppliers Development Unit, which had recently migrated to this Department from the Department of Trade and Industry. This Unit had created several new sub-programmes, including the Shared Economic Infrastructure Facility  and the Youth, Women and People with Disabilities Business Development Programme. They were created specifically to address constraints experienced by black-owned small business enterprises in participating in the mainstream economy, and would be reviewed in 2017. The Unit provided incentives of up to R1 million, divided in a 80/20 split between tools and equipment and training, with cost-share structures. Over 3000 grants were approved to the value of R1.3 billion, across most provinces, with the Northern Cape showing the least spread. Most of the grants were based in Gauteng, and in construction. Qualifying criteria were at least 51% black ownership, with a predominantly black management team, and turnover from R250 000 to R3 million, which had been operating for a year, or, if less, which had a valid tender or contract. The demand for grants was high, but cancellations also occurred if applicants were able to pay their share. The numbers of jobs created had ranged from 6 205 in 2012, 18 546 jobs for 2013/14 and down again to 10 425 in 2014/2015. Successful case studies were presented. The Cooperative Incentives Programme (CIS) provided grants from R10   000 up to R350   000, on condition that the grant was matched by 100%. A Shared Economic Infrastructure Facility (SEIF) offered a 50:50 cost sharing grant targeted at municipalities to enable infrastructure, especially for the informal sector, up to R 5 million per project. The Unit was busy with developing new incentive programmes and reviewing existing ones, which were described to the Committee.

The Unit had supported 1 066 enterprises under the Black Business Supplier Development Programme for 2013/14 and 783 for 2014/15. It was intended that 200 recipients would be supported each year under women's programmes. 271 Primary cooperatives had received training, and five projects were planned for Shared Economic Infrastructure Facility. Although ideally the Department required R300 billion to run all intended projects, the budget fell far short. Other challenges included non-compliance by suppliers, there had been instances of fraud and false information in applications, the turnaround times for claims needed to improve, but the Department faced staff challenges, including requiring more staff and existing staff resigning to return to the Department of Trade and Industry. Its IT also needed upgrading, as claims were unable to be processed online. It would be working on the Informal Business Upliftment Scheme, with Sector Education and Training Authorities, and partnering with the Small Enterprise Development Agency to run out some programmes.

Members were concerned about several aspects of the presentation, asking why programmes were falling under other bodies, commented that many of these bodies merely made use of consultants, and asked for more information on the real successes of the project, particularly the numbers of new jobs created. Members wanted to know how the Department was monitoring businesses given grants to determine their success, and whether it had the capacity to detect fronting. They were disturbed to hear of the lack of IT and the impact of staff leaving, wondered if the Department was too top-heavy to achieve the best results, and suggested that impact studies would probably not be needed if the right IT was in place. They asked why the Department had decided to use grants rather than loans, and said that if this was the case, then it needed to do proper assessments on profitability, turnover, job creation and tax revenue to justify the use of public funding. They also pointed out that the failure rate must be determined, and the risk categories improved. A few Members made the point that grants may not be the best method since they provided no real incentives, and made the point that the programmes should be resulting in massive acceleration of economic growth. Members asked who was providing training and how it was done, and asked if research was being done. They asked the level to which the DSBD was involved with other departments, for instance in agricultural programmes. The Chairperson felt that not enough was being done to develop small businesses, saying that development should be happening on a community scale, using an integrated approach, and suggested that revolving loans should be considered. She also thought that differentiation into gender and age groups was not ideal, and this Department seemed to be merely duplicating efforts of other departments without having truly identified its niche target market, meaning that the Department should be more specific, and address, for instance, the potential in school nutrition programmes, using information available from Statistics SA.

The Committee considered, but did not yet adopt, its draft Report on the budget vote. Opposition parties indicated that they were not entirely happy with the wording, which not only referred to "the ANC government" but also was written in a style similar to the ANC manifestos, and reserved their right to object. Other points raised in observations and recommendations related to the use of the words "incentive", "upper-end", and "gazelles programme". Members were concerned about the withdrawal of the newsletter which had provided key information to the people in poorer areas, and lack of specifics on access to the funding, and it was clear that the Committee may need to assist the Department in developing assessment tools.   


Meeting report

Department of Small Business Development on Black Business Suppliers Development Unit
Ms Pumla Ncapayi, Acting Director General, Department of Small Business Development, explained that the Black Business Suppliers Development Unit had migrated from the Department of Trade and Industry (dti) and had been reconfigured within the Department of Small Business Development (DSBD or the Department) to cover additional activities and programmes.

Mr Kgolane Thulare, Director, Department of Small Business Development, took members through the slide presentation. The Unit had created several new programmes, such as the Shared Economic Infrastructure Facility (SEIF) and the Youth, Women and People with Disabilities Business Development Program (YWPWD).  The Black Business Suppliers Development Program (BBSDP) used to form part of the dti and had been moved to the Department of Small Business Development (DSBD). This programme was created to address the constraints experienced by black-owned small business enterprises in participating in the mainstream economy. The programme had been running from 2002 to 2009, after which it was re-launched in 2010 and would be reviewed in 2017. The programme was aligned with BBBEE policy and a two year impact study would be conducted of the programme.

The BBSDP provided an incentive of up to R1 million, which was divided in R800 000 for tools and equipment and R200 000 for business development and training. There was a cost sharing structure of 50% in terms of tools, machinery and equipment, and a 20% contribution the enterprise had to make towards enterprise support services in order to qualify for the grant. The programme had approved 3 368 grants during the period 2011 to date, to the value of R1.3 billion. Geographic spread was good, apart from one or two provinces which were problematic, such as the Northern Cape. Most of the grants had been allocated in Gauteng and most in the construction sector.

The qualifying criteria were that the business must be pre-dominantly black-owned (51%), have a pre-dominantly black management team (50%), R250 000 to R35 million annual turnover, operating or trading for at least one year. If it was operating for less than a year or operating at below the entry turnover threshold, but had a valid tender or contract, the applications may be considered at the sole discretion of the Department.

The total claims for the period since 2011 were R738 million, seen against the budget allocation of R550 million. The demand for grants was high, but there were many cancellations also as a result of the applicants’ inability to provide their share of the contribution. The number of jobs supported by the grants varied significantly over the years, from 6 205 in 2012, 18 546 jobs for 2013/14 and down again to 10 425 in 2014/2015.

Several examples of successful cases were presented to the Members (see attached presentation for full details).

The Co-operative Incentive Programme (CIS) provided grants from R10   000 up to R350   000, on condition that the grant was matched by 100%.
The Shared Economic Infrastructure Facility (SEIF) offered a 50:50 cost sharing grant targeted at municipalities to enable infrastructure, especially for the informal sector. The grant went up to a maximum of R5 million, which was reimbursable. It was project based, so one municipality could qualify for more than one grant at a time.

The Operations and Stakeholder Management Function was there to facilitate the establishment, maintenance and growth of strategic partnerships for the beneficiaries of the DSBD offerings. Some of these linkages included Eskom Supplier Holdings and Isivande Women’s Fund. This was important since many of the beneficiaries could not raise their part of the contribution.

The function of the Product Development Support Unit was to develop new incentive programmes and to review existing ones. Programmes that are in the pipeline were set out:

- The Youth, Women and People with Disabilities Business Development Scheme, of which the design and development had already been completed. This programme allowed for a grant of up to R200   000.
- The SEIF had been launched and would be implemented from the second to the fourth quarter. This would provide infrastructure necessary to crowd-in investment especially in townships.
- The Informal Business Upliftment Facility, a 100% grant offering to informal and micro enterprises to make them more competitive, was still in its conceptual stage. 
- The CIS existed already and required some amendments.
- The Creative Industries Incentive Programme, which was to design incentive programs for creative industries, was still in its conceptual stage.
- The Unit Performance Plan figures showed 1 066 enterprises supported under the BBSDP for the 2013/14 year and 783 for 2014/15.
- The intended number of recipients for the new WBDS programme for the next three years is 200 every year and so also for the YBBSDP.
- The number of primary cooperatives receiving funding, training and access to markets in 2014/15 was 270 and was planned to be 214 next year.
- Five projects were planned for the SEIF next year.

The Director General explained that a total of R300 billion was the budget required for all these programmes, as well as other costs adding up to about R22 million. However, a budget of R225 million had been allocated by National Treasury, which had not budgeted for the YWBDS and YBBSDP and SEIF programs.

Some of the challenges faced by the Department included non-compliance by suppliers. Beneficiaries committed fraud and provided false information in applications and claims. Additional staff were required. The turnaround time for applications and claims needed to improve. Budgetary constraints meant that the number of applications being received exceeded the capacity of the Department to process them.

Key projects the Department needed to work on were the Informal Business Upliftment Scheme, where it would be working with Sector Education and Training Authorities (SETAs) to address the informal sector economy. DSBD would also be working on the Youth and Cooperatives Projects and partnering with Small Enterprise Development Agency (SEDA) to roll out CIS and YWBDS.

The Department had inherited an IT which needed upgrading, as it was currently unable to do claims online. The Micro franchising Project and the Isivande Fund were newer projects. The Director would be using the SETAs and SEFA to fulfil some of the functions in implementing the Informal Business Programme and the Youth Programme. Ideally, the Department required 34 additional staff. 
Mr H Kruger (DA) asked why these programmes had to fall under SEFA and what would the impact study cost. What were the successes of the Department since the re-launch in 2010 and how much had been spent on training during that period? He referred to slide 17 of the presentation, which alluded to jobs supported, but was more interested to know how many jobs had actually been created with the grants. Supporting existing jobs was not enough, jobs needed to be created. He asked what strategy was being used to monitor the businesses who were given grants in order to determine their level of success after intervention. He asked whether municipalities would be able to tap into the SEIF fund on behalf of a group of informal traders. He asked what the "cost to company" was of the incentives. 

Ms N November (ANC) asked which university would be used for the impact study. She commented that often businesses that had a predominantly black management were just fronts. She wanted to know whether the staff were adequately trained to determine who the owners and managers really were in a business. She asked if vacancies were at a national level, and whether applications were submitted provincially or directly to the national department.  

Mr R Chance (DA) asked whether the reason staff were reluctant to stay in the new Department was because of salaries or their terms of employment. It was obviously having an impact on the performance, as evidenced by the processing of two thirds of the grants in the last years by comparison to the year before. He was shocked to hear that the system was still manual. This had to be slowing down the process considerably and the lack of an adequate IT system also denied availability of data for analysis. He felt an impact study would be largely redundant if a decent IT system was in place. He wanted to know who was going to be involved in setting up these systems and whether they could be relied upon to do a good job.

Mr Chance questioned the strategy by the Department to use grants rather than loans since it was using public funds and needed to be able to justify the efficacy of such a disbursement mechanism. Proper assessment was needed, on profitability, increase in turnover, job creation and tax revenue. Anecdotal evidence was not enough. The effect of the grants had to be measured, aggregated and a multiplier effect had to be established. These grants should be resulting in massive acceleration of economic growth. The assessment needed to determine where the greatest impact was being made. He asked that the Committee be involved in determining the terms of reference for the impact study. It was disturbing to see the cancellation rates of grant applications. He questioned to what extent the failure rate had been determined on grants provided. He explained a grant was not an incentive, as it did not reward the recipient for any achievement, and did not imply any further efforts to perform from the beneficiary. Incentives, on the other hand, continued to provide the beneficiaries with good reason to achieve, such as tax breaks and the National Treasury providing further grants should certain targets be achieved. He asked on what basis the five municipalities had been identified for the franchising project and commented that R2 million for this purpose was not much. It concerned him that the risk attached to this project had been categorised as high, and he wanted to know what measures would be put in place to mitigate this risk level down to at least medium.          

Rev K Meshoe (ACDP) asked how the term "incentive" was defined by the Department, since he considered these to be grants. He asked what percentage of approved grants had resulted in successful outcomes. Since the BSDP had been re-launched in 2010, he asked why the impact study had not been conducted before. He questioned whether the structure of the Department was not top heavy since it seemed that the Department lacked the necessary resources to employ personnel to conduct regular business inspections. Perhaps too much money was being spent on directors’ salaries, which could be better used for this purpose. He asked how the Department was measuring the effect of its grants.

Mr T Ramokhoase (ANC) asked who was providing the training and how was this training being conducted. He wanted to know what qualifications were required for the work and whether the people were well equipped to the work required of them. He asked whether there was a research unit, since this was essential. He asked whether there were legacy reports available. Were the projects the Department was funding creating additional jobs and to what extent did their work results in a skills transfer and skills development? Capacitating people was an essential aspect of the Department's function.     

Mr X Mabasa (ANC) pointed out an error on page 17 of the presentation. He asked to what degree informal traders were being assisted, in the rural areas especially, and how the Department would ensure these grants were being applied in the manner for which they were intended. He asked if there was a feedback system in place to measure performance within a certain time frame. He asked whether the Department was also involved in initiatives with other departments, such as the Department of Agriculture.

Ms Ncapayi agreed with the need for changing and improving the delivery of the programmes by integrating other departments and entities involvement. The Department was bringing other departments, like SARS, SIDA and SEFA on board. The use of their branches would improve access to the Department's own services. He commented that when the DSBD was created, several directors charged with that work had resisted migrating and had returned to dti; they were perhaps not comfortable with the changes required to make the new department effective. It remained a challenge to find the right people.

He agreed that travel was costly and time consuming and the use of SETA and SEFA branches spread out across the country was a more effective means of obtaining assessments of potential beneficiaries. Typically, these employees were also better equipped to assess whether businesses were making effective use of the funding. Deciding on which sector to invest in was also guided by local input from these entities. The Department had to make use of outside assistance as a result of budget constraints.

Rev Meshoe said the response was not a satisfactory explanation and what was cited were purely economic reasons, in the presentation, making no reference to the use of SETA and SEFA representatives.

The Chairperson related her experiences of working in the community and her experiences of SETA, namely that they seemed to be employing consultants to do the work.

Ms Ncapayi said the use of SETA and SEFA branches to do some of the work was covered elsewhere in the presentation, in the context of strategic partnerships. He said the Department would have to investigate the concern around outsourcing a little further. He said that the training was very people-development orientated and a measure of how successful they were was that very often these trained personnel were poached by the banks, who were in a position to pay them better salaries. The fact was that the Department was under capacitated at this point, and that until this changed, it would have to make use of the services of SETA and SEFA.

The Chairperson pointed out that consultants were profit driven, whereas NGOs were progressive organisations providing genuine help to communities. They provided skills and had experience in community development. Very often, consultants were former government employees who were seeking fast remuneration. The Department needed to ensure oversight of the SETAs to ensure capacity was actually being built. It was her experience that university degrees in public administration were not necessarily the appropriate qualification for community development.

Ms Ncapayi thanked the Members for their suggestions and agreed that explorations around these issues would have to be more robust, and oversight of the services provided by SETA and SEFA could be improved. He assured the Members that the DSBD would be involved in setting the terms of reference for the impact study.

Mr Mabasa asked why the Department had decided to conduct an impact study.

Mr Thulare said systems were in place for the monitoring and evaluation of all the programmes, but that some of them had limitations, especially the new programmes. Performance reports over the past three years were available from the dti. Inspections were conducted periodically, and here he explained that applications, in  from each area were allowed to accumulate for a short time, so that all the inspections could be conducted simultaneously, in a batch, to save time and money. All projects were inspected and successes monitored and evaluated. He confirmed that groups of traders could come together and approach the Department though the municipalities. The Department would in future also incorporate other government organs in the vetting process. It currently relied on source documents provided and site visits to provide the information needed. Currently two vacancies needed to be filled, and the Department was holding meetings at the moment to work on a suitable IT system. The representatives would take the comments regarding the appropriate financial instruments for these units into consideration.

The Chairperson said not enough was being done to develop SMMEs, and that development should happen on a community scale and level rather than focusing only on individuals. It required an integrated approach. In this way, disadvantaged areas should be targeted. Providing tax rebates would incentivise people to start up their own businesses and municipalities should also provide incentives in the form of reduction in certain rates. Other departments needed to be involved in this process. Similarly the Road Accident Fund, which paid out significant amounts of money, could be involved since the recipients of benefits here could be encouraged to start businesses with such payouts. In her view, grants only retarded rather than stimulated business. People needed to take responsibility and needed to be taught how to manage businesses by being given revolving loans. Stokvels were already a grant system in place in communities.

Ms Lindiwe Zulu, Minister of Small Business Development, conceded that a lot still needed to be done. The fact that until recently this unit had fallen under the dti had not advanced the goals of empowerment and development. However, she assured Members that the DSBD was certainly not simply in the business of dishing out money, and acknowledged all comments made by the Committee. Changes would have to be made and opportunities had to go hand in hand with appropriate training, to ensure beneficiaries understood the nature of what they were undertaking, and the responsibilities that went with it in light of the conditions of the grant.

The Chairperson did not agree with the differentiation of the programmes into gender and age groups, and queried why it was felt that this was a sensible basis of qualification for the grants. She suggested that something more appropriate would be the stage which the business had reached. The fact that the unit was looking at businesses that had been operating for just over a year and had a turnover of between R250    000 and R35 million indicated to her that the Department did not understand who was its target market, and it seemed to be targeting similar businesses to those considered by dti. This Department needed to be more specific about the nature of its intervention and what it was trying to achieve, so that these interventions addressed specific problems, rather than continuing along the same vein as the unit had done under the dti, when very little progress had been made. The grants needed to speak to specific goals such as school nutrition, to which the government had allocated R18 billion. The reduction of poverty and job creation had to be the main objectives, and this Department should at all costs avoid the duplication of what other funds of other departments were already doing. This Department had to be very specific about which level of enterprise it was aiming to assist, since medium enterprises were already being targeted by the IDC. The need was great at the micro and small enterprise levels. These incentives also needed to be informed by what was going on in the country at this level. She pointed out that information was available through such sources as Stats SA.

Consideration of the Committee's draft Report on the Budget Vote
The Chairperson said that Members would not need to adopt the draft Report (the Report) on this day, and suggested that the Committee take a few hours to finalise it on the following Tuesday.

Various spelling and grammatical errors were pointed out by members and the necessary corrections and amendments were made immediately. Observations and recommendations were to be compiled and inserted at the end of the document.     

Mr Ramokhoase said the draft was clear and practical.

Rev Meshoe suggested the removal of “ANC” from page 22, no.8 referring to the “ANC government”.

The Chairperson insisted that the reference to "ANC government" must remain. She pointed out that whenever the opposition wanted to criticize government, they referred to it as an "ANC government", so similarly in this instance it should be defined as such.

Rev Meshoe referred to page 5 and queried the use of the word "incentive", which, as had been discussed, was actually not being used in the correct sense of the word.

The Chairperson suggested that reference be made to the use of "incentive" under the observations and a recommendation made to use the correct terminology for the financial instrument being used.

Mr Chance questioned whether the use of the description “developmental” was accurate and said this reflected an ANC perspective. Similarly the objective of “radical economic transformation” as stated in the draft, was not necessarily a goal and vision shared by other political parties. Other terminology in the draft clearly made it an ANC-flavoured document.

The Chairperson responded that the NDP referred to South Africa as a developmental state and that a programme of government had to be in alignment with the election manifesto since the government was expected to answer to the electorate on what it had done to achieve its promises. 

Mr Chance said the DA broadly supported the NDP, but not all its aspects and the use of the term was not relevant to the draft. He noted the document had the imprint of the ruling party.

The Chairperson said there would be an opportunity to debate the issue again during the budget and she had made it clear at the outset that the ANC had provided the first input on the document and that changes could be instituted by other parties.

Mr Chance indicated that since the ANC had the majority vote, there was little chance of making such changes and asked that his objection that this document did not reflect the views of all parties should be noted. He also pointed out that no provision had been made for a research function in the unit.

The Chairperson asked for these observations and recommendations to be noted.   

Ms Bekwa pointed out that the draft budget no longer made provision for the publishing of the newsletter that had been issued previously and it had provided a very important function in capacitating the poorer people in the past by providing essential information.

Mr Chance agreed the Department should continue funding such a magazine.

The Chairperson also agreed that it was not correct to discontinue this service to the client base of the Department.

Mr Chance referred to page 10 of the Draft, which stated (under Programme 3: Enterprise Development and Entrepreneurship): “400 start-ups and growth oriented SMMEs and co-operatives that access the fund”, but did not specify which fund. It seemed to him that there was the possibility of duplication here if these funds were not specified accurately.

The Chairperson spoke about the phenomenon of double dipping where recipients were in the habit of misusing funds.
Mr Chance made the observation that too many funds with overlapping mandates created an opportunity for misuse.

The Chairperson said this necessitated the proper analysis of target markets and longitudinal studies to determine impact of the funds.

Mr Chance referred to page 11, where a target of 80 municipalities had been stated for adopting a considered approach. Mr Chance asked how these had been identified.

Mr Kruger said that these had in fact been identified already.

Mr Chance asked that the word “institutionalised” be taken out of the reference on page 11 to the reduction of red tape. He felt that guidelines for reduction of red tape should have to be legislated in order to avoid non- adherence. He could not understand why only 80 municipalities should be involved in such a campaign.

Ms Kruger said it was his understanding that the 80 municipalities constituted a trial run of the campaign. Depending on how this went, possibly the guidelines could be legislated, in which case all municipalities would have to adhere.

The Chairperson suggested, in light of the previous conversation, that the word “continuous" be taken out and left only with “roll-out” of the guidelines. She also suggested that the Department should be called back at some stage to provide feedback on this campaign of reduction of red tape. 

Mr Chance said the term “upper end” was not clearly defined on page 14 of the draft. He asked whether this was determined by the size of the business or the rate of growth. An observation expressing this was noted and a recommendation made to define the term more clearly.

Mr Chance also wanted a recommendation for more clarity on the use of the term "Gazelles". He wanted a clear explanation of which kind of business qualified for the Gazelles programme. Did this programme include survivalist business or at which level of the micro, small, to medium ladder was the programme implemented? He suspected that the Department had overstated the extent to which this programme had already been implemented and that it probably still required proper development and implementation.  He said only a few survivalist or micro businesses had the potential of becoming high growth businesses. He mentioned the example of Discovery as an extremely successful business, that was started with R1 million and the business of Naspers, which after thirty years had grown into a R700 billion company. This business grew out of an idea to have pay TV, which became M-Net.

The Chairperson also mentioned the examples of Mark Shuttleworth and WhatsApp. She also said that while not seen to be interfering with the work of the Department, the Committee should become involved in assisting the Department to develop assessment tools to determine the kind of enterprise that would qualify for such a programme.

Mr Mabasa suggested that Ms Ncapayi be contacted immediately for an explanation.

The Chairperson agreed the Department’s use of terminology needed greater definition, including the use of the term incentive, where the use of the term grant seemed more appropriate. Accurate terminology and defined terms were essential in avoiding confusion. She said the Department needed to be more precise and mindful of its so-called branding.

Mr Chance referred to page 16 of the draft Report, which mentioned that 26.7% of the budget had been allocated to strengthening of the organization. This percentage was set to increase year on year. Mr Chance felt this was too high and wanted some explanation of what the amount constituted.

The Chairperson agreed and said it was higher than the accepted 80/20 split in a budget for such purposes. In addition, the Department was also still making use of consultants and outsourcing some of its services. She pointed out that there was no organogram for SEDA and that possibly the high percentage was accounted for by salaries.

Mr Mabasa said that a change in the percentage might result in the lowering of the final budget allocation.

Mr Chance referred to page 18 of the draft Report and questioned the reference to growing a micro loan book and made the observation that SEDA and SEFA needed to align their strategies, guided by the overall objective of economic growth and job creation.

The meeting was adjourned.

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