SMMEs challenges with non-financial support services, with Kings of Midlands as a case study

Small Business Development

17 June 2015
Chairperson: Ms N Bhengu (ANC)
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Meeting Summary

The King of Midlands cooperative of taxi owners in Pietermaritzburg includes community development initiatives and a business model that aims to include a petrol station, tyre fitment centre, spares shop and cooperative bank. They had bought 26 taxis for their members on their own by putting their savings together and got the taxis at cost price. However, a consultant representing the Department of Trade and Industry defrauded King of Midlands to the tune of R270 000 for work that was not done. This revelation came to the attention of the Committee when it approached the Committee for assistance to get funds for its enterprise development after a failed attempt to get funding from the Department of Trade and Industry (dti).

The Chairperson said the experience of the King of Midlands should be used as a case study. They had shown enterprise and organised themselves as members of the taxi industry into a co-operative, growing their business and developing other enterprises. Secondly, it provided an assessment of the relevance of the government services that the Department of Small Business Development (DSBD) had inherited from the dti.

She reasoned that the Committee has a right to do its own assessment of the relevance of the DSBD programmes to its mandate. The Committee should use the case study of the King of Midlands to identify changes that the Department needs to make to address the needs of SMMEs and co-operatives.  It would use that information in developing its Budget Review and Recommendations Report later this year.

The Department should use the case study of the King of Midlands and draw lessons from the Mondragon Cooperative model in Spain which uses this self-reliant approach. DSBD should conduct a self-assessment with regard to its capacity and capabilities in carrying out its mandate of developing effective and sustainable SMMEs and co-operatives. It should do its own introspection and look at its financial and non-financial support service it provides to SMMEs and co-operatives. The Committee suggested the DSBD develop a similar model to the King of Midlands cooperative that can be followed throughout the country.

Members asked if King of Midlands was given a choice of consultants to select from or if this consultant was merely presented to the co-operative; if the dti sent the King of Midlands officials for assessment; what was the process followed when an application is made up until the money is transferred. Members remarked that what the King of Midlands is presenting is disputing the perception that taxi members do not know how to deal with people. The suggestion was made that Members should speak to taxi associations in their respective provinces so that they channel their energies on positive agendas rather than fighting.

Meeting report

Ms Sthandiwe Mthembu, spokesperson for the King of Midlands, enlightened the Committee about the poor treatment they received from the dti that resulted in the co-operative losing thousands of rands when it sought funding from the dti.

The co-operative was unsuccessful in its application but the consultant the dti presented to them received her remuneration from the co-operative. The King of Midlands was required to pay her 10% of what they were asking from the dti at the time. This added up to R350 000 because they were asking for R3,5 million. The consultant advised them to open 10 co-operatives so that they could access the Co-operative Incentive Scheme (CIS) and get the required R3,5 million.

The consultant then asked the co-operative to advance her R150 000 before she could commence with her services. The King of Midlands paid her a total of R270 000 in split payments excluding flights, accommodation and other necessities she needed to fulfill her job. The consultant had done nothing and was never to be seen again.

The King of Midlands is a co-operative founded by taxi owners from the Grange and Westgate Taxi Association in KwaZulu-Natal. Its business model aims to build a petrol station, tyre fitment centre, spare parts shop and a co-operative bank.

The Committee also heard about the social responsibility programme of the co-operative. The King of Midlands clothes and feeds the poor; giving out food parcels and blankets to the disadvantaged members of its community. It has a School Outreach Programme. The co-operative gives out school uniforms to under-privileged children in its community each year with 100 children go to school clothed each year. The co-operative has also decided to purchase sewing machines for inmates in the Westville Prison so that they could provide more uniforms to children each year. It believed this would decrease the number of re-offenders and help integrate them back into the society. But the lack of funding is proving to be a hindrance in carrying out their work.

The King of Midlands has a co-operative bank. They started it because commercial banks charge high interest rates and this resulted in perpetual debt and repossession of taxis.  The co-operative saved money and purchased 26 vehicles for its members so that no owner loses a vehicle. The co-operative bank assists members and community members with savings and loans, and it strives to instill the culture of saving in members. It also wants to provide loans to people with reasonable interest rates to start their own businesses.

Ms Mthembu concluded that the King of Midlands has exhausted its resources and channels to find assistance and funding. They would like government to subsidise unemployed graduates to assist them in their co-operative and to have a manager who would be paid by the government to ensure funds are appropriated correctly. The King of Midlands would like to expand its school outreach programme and provide uniforms for a larger number of children. This could end up in a partnership with the Department of Social Development to provide uniforms to children while making use of and transferring skills to prison inmates. This would help inmates to form their own co-operatives when they get out of prison. They are entrepreneurs and visionaries who have ideas but do not have the know-how for implementing them because their education and qualifications are limited. So, they need the assistance of a project manager and they hope government would see their co-operative financial institute as a worthwhile cause.

Mr S Mncwabe (NFP) suggested that the representatives of the King of Midlands be allowed to interact with the Committee in their own language (isiZulu) and be provided with an interpreter so that they could express themselves better because they have indicated their level of education is limited.

The Chairperson acceded to the request.

Mr H Kruger (DA) asked the organisation to tell the Committee what the consultant advised them to do.

Mr Philip Zondi, Chairperson: King of Midlands, told the Committee the consultant advised them to establish 10 primary co-operatives and 1 secondary co-operative after they told the consultant they wanted a loan of R3,5m. The consultant informed them the CIS grant allocates R350 000 per co-operative. So, the R350 000 per co-operative would make the R3, 5m they are requesting. When they started the co-operative they did not have the technical know-how. They bought a plane ticket and paid for the accommodation of the consultant. She promised them they would get the funding. The co-operatives were registered according to her advice and she got paid for the registration of the business. After everything was done, they waited for further developments. But she never came back or contacted them.

Mr R Chance (DA) asked if they were given a choice of consultants to select from or if this consultant was just presented to them. He asked to what extent is the organisation informal and if it is registered.

Mr Zondi, on the choice of consultants, reported they were given two telephone numbers. They phoned only one and did not bother about the second one. This consultant represented a company called Sgegede Consultancy Management Agency. She instructed the King of Midlands to buy her a plane ticket and pay for her accommodation. She then asked for a 10% upfront payment and promised them the loan would be through soon. They have never heard from her since then. He indicated that the entity is formal. It is registered with the Department of Transport and has got a business certificate.

The Chairperson asked if the Department of Trade and Industry sent officials to them to make an assessment.

Mr Zondi stated they were sent a certain Mr Mpololo and two ladies who share the name of Mpho. They have never heard from them since that visit.

Mr T Ramokhoase (ANC) remarked that the case study of the King of Midlands should be used to guide the establishment of future co-operatives. He suggested that all documents related to the project should be gotten and forwarded to the Committee to understand what went wrong rather than point a finger at anyone. He commended the King of Midlands for moving very fast in providing social responsibility despite the numerous challenges it faces because such an initiative needs a well-planned and coordinated scenario.

Mr S Bekwa (ANC) commended the King of Midlands for the work they do for schools. Already, the King of Midlands has started with a great idea for a co-operative though it is struggling to get finance. It is sad to learn that the co-operative paid a consultant money for work not done. So, it is the responsibility of the Department and Committee to investigate why the application for funding was rejected yet they are have a good project which needs to be piloted. It is sad that the King of Midlands was not helped and people had played around with them.

Mr S Mncwabe (NFP) asked the King of Midlands about the kind of assistance they need and what they want to do with the R3, 5 million. He asked if the R270 000 was paid to the consultant because it appears the King of Midlands was defrauded as no service was rendered to the co-operative.

Mr Zondi, concerning the kind of assistance they need, stated they want a tyre fitment centre and a spare parts shop. Their main problem is the middleman. A tyre in Durban costs R1000 but the middleman sells it for R1 400 to the taxi owners. They have discovered that the mark-up varies from 60% to 80% when work is done via a middleman. They are trying to assist each other and obtain cheaper prices for spares. R270 000 was the total amount paid to the consultant. Members of the association are not happy with the money they lost and are still asking about its whereabouts.

Mr Zondi added they also need to improve their co-operative bank so that they can find better ways of servicing their members. For instance, if you buy a taxi from Taxi SA, the money you earn becomes the installment for the car. Now this leaves you with no money to look after your family. When a member needs a car, they negotiate and put funds together and get the car at a cost price. For example, they bought 26 taxis for their members. They have done that on their own. They put their savings together and went to the dealer to get the taxis at a cost price. Every month they bought two taxis until all the 26 members received cars. The members were happy with the action taken because no middleman was involved.

The Chairperson asked the King of Midlands to brief the Committee about its Schools Outreach Programme, Westville Prison Sewing Project and Pietermaritzburg Prison Reconciliation Project.

Mr Mfana Nkomo, Treasurer: King of Midlands, stated that the schools project was started between 1998 and 2000. Where they work there is a low cost housing programme for people who were staying in shacks. They were so impoverished to a point that their kids did not have school uniform and were wearing the jerseys of their grandmothers. They depended on the pension money of their grandmothers. Then King of Midlands decided to intervene. They started to fundraise and paved the school. Every year 20 learners get a school uniform. The programme was further extended to the grandmothers of the children. They were bought blankets. Food parcels were given to those living with HIV/Aids and TB. This programme has been extended to the uMgungundlovu region and is being rolled-out by taxi associations in the whole province.

The Westville Prison Sewing Project was started to avoid paying marked-up prices for the uniforms they were giving to the children. Because they have members of the taxi industry in prison, they learnt there are many things they do in prison with their hands. Then they held discussions with Correctional Services authorities about supplying the inmates with material and sewing machines so that they could learn to cut uniforms for the school children. They also saw an opportunity for the inmates to cut and sew uniforms for nurses as well. Correctional Services has bought the idea. The material and machines were sent to the prison. The programme is to be launched soon.

The Maritzburg Prison Reconciliation Project was initiated by the taxi industry members to make peace with the families wronged by members of the taxi industry who are in prison. This is done to avoid the re-occurrence of violence and fights when they get released from jail.

Mr T Khoza (ANC) remarked it is painful to hear that a consultant has defrauded people in this way. The King of Midlands has taken a long time before crying for help. They are supposed to get their money back, especially if you look at the kind of work they are doing. The project has got the potential to be rolled-out to the rest of the country.

Ms N November (ANC) stated it was good for the President to create this Department. This means there are people who are doing work but who get conned. Now they have a channel for voicing their problems. She suggested that municipalities should have units of this nature for local communities to assist small businesses.

Mr X Mabasa (ANC) remarked that what the King of Midlands is presenting is disputing the perception that taxi members do not know how to deal with people. Many people can learn from the initiatives they are starting. Unfortunately, the media failed to report about such a good initiative so that other people can copy it. The Committee has to find ways of helping the King of Midlands to overcome their challenges.

Rev K Meshoe (ACDP) suggested that Members should try to speak to taxi associations in their respective provinces so that they channel their energies into positive things rather than fighting. He asked if the dti knew about the 10% paid to the consultant.

Mr Nkomo said the dti did not know about it. They did not report it to the dti because they felt it was a deal between them and the consultant. The consultant demanded to be paid R150 000 before starting with the work. The 10% is the sum of what they were asking from the dti at that time.

The Chairperson wanted to establish why the dti did not refer the King of Midlands to the Small Enterprise Development Agency (SEDA) in KwaZulu-Natal, and why the money was paid by the King of Midlands and not by SEDA or the dti.

Mr Lindokuhle Mkhumane, Acting Director General: DSBD, indicated the case needs to be followed up because it is clear there has been fraud in the process. The Department is looking at employing unemployed graduates to assist in the assessment of applications. The Department is prepared to assist the King of Midlands to lodge a complaint against Sgegede Consultancy Management Agency. He noted that his Department has heard many stories about Sgegede.

Rev Meshoe asked why the Department allowed Sgegede to do the work if it has heard unsavoury stories about Sgegede.

The Acting Director General remained mum.

Mr Noko Manyelo, Parliamentary Liaison Officer: Department of Small Business Development, said it appears King of Midlands was ill advised about the process they had to follow. The Department needs to know whom they spoke to and who referred them to Sgegede. The Department would have to access the call centre telephone calls to find out who spoke to the King of Midlands. It seems as if the applicant is the consultant, and the whole King of Midlands value chain was overlooked in this matter hence the application was not successful.

Mr Kruger asked the Department to tell the Committee about the process that is followed when an application is made until the money is transferred.

Mr Manyelo explained that when an application is submitted, an acknowledgement is made. Then an evaluation and inspection on site is made. This is followed by adjudication. Approval is granted if the project looks good. If it is rejected, reasons are given to the applicant. The Department, in this case, is dealing with a coordinated fraud approach. He further noted that the 10% scheme is a cost-sharing grant where the Department would pay 90% of what is needed by the applicant and the applicant would pay only 10%. But for this project the King of Midlands scheme does not require 10% and the consultant was not supposed to charge it.

The Chairperson wanted to know why this project needed a consultant if it does not need 10%.

Mr Manyelo said the project looks legitimate but the Department needs to find out who captured it and if it has got a reference number. He noted they are dealing with a fraud syndicate.

Mr Zondi wanted to know why the consultant was in a meeting with Mr Mpololo in Pretoria if she was not supposed to be there and be involved in the project.

The Acting Director General and Mr Manyelo remained mum and giggled.

The Chairperson asked the Acting Director-General and Mr Manyelo if they agree that this means there is fraud within dti.

Both nodded to signal there is fraud.

The Chairperson asked for the date when the application was made.

Mr Zondi said 2012.

The Chairperson enquired if the fuel garage the King of Midlands wanted is existing or if it is going to be built from scratch.

Mr Zondi said it is an existing garage but it has been sold to another buyer. If they have to find another station, it is going to be far from their routes.

The Chairperson asked the King of Midlands what they want the Committee to do.

Mr Zondi stated they need help so that their idea could see the light of the day and escape from the middleman. Currently, they need to be assisted in the formation of the tyre fitment centre, spare parts shop, improvement of the co-operative bank and get assistance with their cooperative financial institution (CFI). He noted they were able to get 26 taxis from the stokvel money. The money they amass gets too much and that is against the law. That is why they want to get a properly set up CFI. They still want to continue to buy taxis but it is difficult to do that through a stokvel. They buy Siyaya minibuses more than Quantums because the price difference between the two is R200 000, the latter being the most expensive. He added that the commercial banks charge too much interest. They want to help their members to get funding and pay low interest while they continue working. So, the Committee must assist them to find ways of getting help.

The Committee gave the DSBD four months to conduct an assessment of the programmes inherited from the dti and Economic Development Department to ensure their relevance to the broader mandate of the Department and the felt needs of SMMEs and co-operatives. The report regarding the matter is expected by the end of October 2015.

Lastly, the Committee resolved to embark on a study tour to Spain to learn more about the Mondragon Cooperatives model. The tour is expected to take place in 2016 after the local government elections.

Meeting was adjourned.

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