Department of Small Business Development 1st Quarter 2015/16 performance

Meeting report

Department of Small Business Development on its first quarter performance
Mr Lindokuhle Mkhumane, Acting Director General (ADG), Department of Small Business Development (DSBD) took the Committee through the report.

Enterprise Development
Mr Mkhumane said that with a budget allocation of R1.1 billion, the Department had spent about R220 million so far, representing an under-expenditure of R90 million. This had been due to the transfers that the DSBD was supposed to have given to the Small Enterprise Development Agency (SEDA) which had been delayed owing to due diligence conducted by the Department on SEDA’s operations and plans.
The under-performance on targets by SEDA with client assistance had been mainly due to the poaching of SEDA’s business advisors by the private sector.

Co-operatives Development
The DSBD had decided to be conservative about funding new cooperatives (co-ops), as the Minister of the DSBD had appointed a new Cooperative Incentives Programme (CIS) adjudication committee, and also because it had decided to fund quality applications only, as in the past there had been an 80% failure rate for new co-ops.  Currently the DSBD was busy with workshops to ensure that SEDA and the Small Enterprise Finance Agency (SEFA) understood the new co-ops model.

Enterprise Development and Entrepreneurship
Mr Mkhumane said that the business case for establishing an enterprise and a supplier development fund would be implemented by SEFA. The DSBD had established a steering committee made up of developmental financial entities like the South African Revenue Service (SARS) and the Industrial Development Corporation (IDC), together with SEFA and SEDA, to facilitate the co-location service points, which were meant to support businesses.

The DSBD had adjusted the guidelines slightly on the Shared Economic Infrastructure Facility (SEIF) programme, since originally it had planned for the programme to be a partnership between municipalities and itself only. In the adjusted guidelines, the DSBD had included private sector partners so that whenever they wanted to support informal businesses they could then be allowed to come on board to do so.

Mr Mkhumane said that the DSBD had failed to achieve its target on the Bavumile Skills Development Programme for women’s skills development because there had been a shortage of accredited service providers (trainers) to provide particular skills training.

Ms Lindiwe Zulu, Minister of Small Business Development, said that the private sector had been showing an appetite to work with the DSBD. In that regard the DSBD had developed guidelines to assist and ensure that whenever it engaged the sector, delivery to small, medium and micro enterprises’ (SMMEs’) needs would be addressed.

Discussion
Ms N November (ANC) pleaded with the Minister that she should convince the National Treasury (NT) to approve a larger organogram because even the proposed one, which NT had said needed to be reviewed for reduction, was simply not going to work for DSBD’s mandate.

The training provided for the South African Women Entrepreneurs Network (SAWEN) members had to yield results, because to date the Committee could not point to one successful product from attendees of the training.

How was DSBD performing with its audit outcomes as per the Auditor-General South Africa’s (AGSA’s) standards?

How was the DSBD going to ensure that it reached all nine provinces, seeing that NT had rejected its proposed organogram?

Mr H Kruger (DA) recalled that in 2004, it had been reported that red tape cost SMMEs more than R70 billion. How effective had the red tape reduction unit been so far? If so, how had that been measured?
Who had been the host employers in the New Venture Creation programme? Where had they been sourced from? Could the DBSD also speak to its Human Resources (HR) challenge, as there were many unemployed graduates, while it was sitting with a high vacancy rate for funded posts?

Mr R Chance (DA) asked what the salary differential was for SEDA business advisors when still working for SEDA, and after being poached by the private sector. How was the DSBD identifying the companies which were its incubation partners? The secondary co-ops presentation that the Committee had received recently from a secondary co-op from Johannesburg, had indicated the importance of these co-ops in capacity building. He asked the DSBD to comment on that, as he felt they were quite important in that regard. What were the major differences in the former co-ops development model under the Department of Trade and Industry (DTI) and the new one adopted by the Committee? How was the DSBD communicating the selection criteria for the Critical Infrastructure Programme (CIP) to those Co-ops?
Could DSBD define what an upper-end SMME was? Could it also explain why it was that the Western Cape was leading in providing non-financial support over financial support compared to the other provinces?

Why was it that SEDA’s marketing campaign spoke only to the provision on non-financial support -- what about SMMEs that required financial support? Why were the two agencies providing mirror services required by small businesses? He reminded the DSBD that it had committed to returning to the Committee in October to speak about what activities, functions and entities inherited from the DTI and the Department of Economic Development (DEA) would be retained? What did Minister Zulu think were the main reasons behind the seeming reluctance from the NT to capacitate her Department?

Mr T Mulaudzi (EFF) asked who was responsible for DSBD finances -- the chief financial officer (CFO) or the acting CFO? What remedial action had the DSBD planned to take to curb the under-spending in the first quarter? What plans did SEDA have in place to service the 400 plus clients it had under-serviced in the first quarter? Could SEDA explain why it had failed to achieve 12 indicators of quarter one from its Annual Performance Plan (APP), and what was the way forward? Had the DSBD actually rolled out support for the Basic Entrepreneurial Skills Development (BESD) programme in the second quarter, as it was at its tail-end? Did the DSBD require the Committee's intervention regarding the duplication of functions with other Departments? Seeing that the finance unit would have its own Chief Directorate, it would be prudent for Minister Zulu to emphasize the need for that unit.

Mr T Khoza (ANC) asked the DSBD to indicate by when the vacancies in its structure would be filled.
It was concerning that the DSBD seemed to be dependent on other departments’ invitations to market itself -- could it speak to what its plans were in that regard? There was anecdotal evidence of staff turnover in KwaZulu-Natal (KZN); could DSBD elaborate on what the possible reasons for those were. What plans were in place for staff retention?

Mr X Mabasa (ANC) asked whether SEDA was building internal capacity while executing its mandate, as reliance on external capacity had the detrimental effect of dependence on outsourcing. Could the Department give more information as to why fewer co-ops were being supported through training and funding? On the 2 174 clients against the target of 2 553 that had received SEDA support, had the DSBD measured how much money had been paid for outsourcing versus funding for beneficiaries? What effect would 42 invoices being paid one day after the 30 days have on audit outcomes? Was there a plan to   curb such occurrences? Did the DSBD include training in the Intellectual Property Laws Amendment Act 2013 (Act No. 28 of 2013) to assist SMMEs in protecting their inventions? Could the DSBD comment on the percentages mentioned in terms of performance against the SEDA strategic objective, to strengthen the organisation to deliver on its mission? Could it also clarify why it was that “output” and “outcome” had been used interchangeably in the report?

The Chairperson said she understood SMMEs and co-ops to be two different types of businesses, with different values and expected end results. She said secondary co-ops provided services required by primary co-ops. SMMEs were for profit, with no interest in community development, as they bought labour through exploitative measures in most cases. The difference was that a secondary co-op focused more on community economic development. How possible was it then, to develop one national SMME and co-operatives development framework for two separate interest business models, or were there two frameworks? Who were the target group for bridging loans -- what were the minimum and maximum amounts, and at what interest rate was repayment expected?

The Chairperson's knowledge of SAWEN was that it was a women entrepreneurs’ network meant to avail opportunities where women could network to augment their value chain. Were exhibitions organised by SAWEN sector-specific? Were the delegations attending the exhibitions rotated, or were they the same individuals annually? Could the level of development be measured in the attendees of these exhibitions?
In terms of member exposure to incubation, between the incubator and incubated, was that confined to SAWEN board members only in terms of summit attendance, or was summit attendance also sector-specific for women from the said sectors? Was summit attendance measurable, in terms of the impact by returning attendees of summits? She commended SAWEN’s Co-operatives Enterprise Development Fund (CEDF) programme, as it targeted street vendors and spaza owners. 

Where there any plans to facilitate collaboration between the CEDF and the existing stokvels and savings clubs owned by women in communities in order to ensure co-funding of women-owned co-ops by both stokvels and the CEDF? All this would protect rural women from exploitation by butcheries or wholesalers that provided financial services without being certified to do so.

Mr Norman Mzizi, CFO, SEDA, said that business advisors’ salary packages ranged from R242 000 to R476 000, in which there were three levels of advisors. Level one advisors were entry level advisors, focusing on small businesses. with level two being the progression from small business to medium. Level three advisors were individuals with some business experience and could be sent out to companies to do assessments of company operations. SEDA was battling to retain level two and three advisors. Over and above that, it had a Sector Education and Training Authority (SETA) accredited certification that SEDA offered to its advisors as the sole entity doing so in the market. The exodus occurred after that certification, but SEDA was currently trying to career-path advisors from level one right to level three.

Selection of incubator partners happened through partners approaching SEDA to establish incubators jointly, mainly because of the SEDA incubation model. Alternatively, SEDA was looking at Integrated Development Planning (IDP) documents at local government level and trying to identify opportunities therein. An example was SEDA’s exploration of clay mining in Grahamstown, where it was considering establishing a pottery plant together with the Makana Mining Trust and other incubation partners. 

The Chairperson asked what informed the process of an incubator approaching SEDA. Was the incubation programme driven by the needs of the market or by what the incubation partner presented to SEDA?

Mr Mzizi said SEDA conducted a comprehensive due diligence when approached by incubation partners, which were mostly non-profit organisations (NPOs) or section 21 companies, and because there was the multi-stakeholder governance side of incubation and market viability for incubatees. For example, in Middleburg where there were lots of steel players, the municipality would say SEDA should work with the local collage to establish an incubator, but market access would be a big consideration because incubating people for three years required that there be a market for them to service.
 
In defining the upper-end, the Small Business Act defined small businesses by number of people: small and micro would those employing below 20, so that 21 to 200 would be small to medium, which was what SEDA meant by upper-end. 

            The differences between SEDA and SEFA in the Western Cape (WC) was because SEDA had adopted the Red Door programme, its network had been augmented so that clients requiring non-financial support could be assisted, whereas SEFA did not have a comparative network.

On the 400-plus underserviced clients in KZN, Limpopo and Gauteng, SEDA had put remedial action in place so that its new business advisor could attend to these clients to improve their performance in the following quarters.

On the unachieved 12 indicators, Members would find that some were meant to be achieved only by the end of September 2015. Others were mainly because of advisor resignations in the first quarter, where SEDA had already put plans in place to catch up with the indicators.

Regarding the BESD, SEDA had identified young graduates whom it had trained to go and “hand-hold” the 1 000 potential entrepreneurs. The graduates had been trained and the 1000 entrepreneurs had been identified, so that in the subsequent quarters, work would have taken place and by the end of September there would be a change in the output of the indicator.  

On the issue of KZN resignations, Mr Mzizi said that the trend was prevalent across all SEDA offices in SA, to the extent that the leadership of SEDA had asked its HR department to survey what the key satisfaction drivers were for staff retention. SEDA was also conducting a salaries benchmark study in the market, to see if it was that which was causing the advisors’ exodus.

Mr Mzizi reiterated that SEDA had a SETA-accredited learning academy which it used to internally capacitate its structure. It was also consulting business schools on how it could further refine its learning programmes. However, in SA there was no exact qualification for business advising.

Mr Mabasa interjected, asking whether the focus of the consultations with institutions included all higher learning institutions, or was it just limited to universities specifically. What impact did that have in reaching deep rural communities?
  
Mr Mzizi replied that the learning material at the academy was a mix of theory and practice which had gone through accreditation by the Services SETA.

In terms of rural impact, SEDA was very mindful of locality dynamics when recruiting advisors. That was why one would see that level three advisors would be industrial engineers located in manufacturing, as that was where the demand was. Therefore the business advisor profile per branch mirrored locality dynamics as much as possible.

Regarding the exchange between what SEDA paid a service provider versus its return on payment, Mr Mzizi said that SEDA was currently differentiating between interventions it could institute with its own capacity, like business analysis, compared to areas where one needed to implement a Quality Management System (QMS), because that needed an accredited person. Only then did SEDA outsource, but even then when looking at the whole client journey model, SEDA considered what impact a QMS would have in accessing bigger markets, exporting and entry into bigger supply chains.

In terms of the ratio between direct service delivery costs versus total delivery costs, SEDA had received a business plan approved for implementation. In implementation, the head office was envisaged to be utilizing fewer and fewer resources, so that they would go to the provincial and branch networks. Two years ago, SEDA had been able to implement its business plan with 69% going to the provincial network, and the rest to head office. The fgure had moved to 71% in the last year, from which it was annually targeted at 73% towards the provincial networks. Though the target was 73% for the whole year, because a lot of projects had been initiated at head office for the first quarter, this had led to the skewing of the ratio towards provincial offices. An example would be that to compile an annual report, one would need to go and take pictures and collect success stories and complete the report, but that would be paid for in the second quarter. Therefore, with time and payments done, the ratio would even out back to the 73% instead of the 85.52% reported.

The Chairperson said that seeing that SEDA was indicating clearly how many jobs were created under the incubators, it would be helpful if the entity did the same at incubatee level. SEDA was not reporting how many jobs the incubatees had created after incubation. 

Mr Thakani Makhuvha, Chief Executive Officer (CEO), said that the minimum facility for a bridging loan was R50 000, and the maximum was R5 million. The average size of the bridging loan was R662 000. The interest rate charged on the bridging loan was 14.16%. SEFA also provided asset base finance for plant and equipment acquisition, where the pricing was 12%, the instalment sale was 13. 5%, and revolving credit 14%, so that the term loan paid over five years would be 13.7%. That made SEFA’s average for indirect lending facilities to be 13.9%. The average term of the bridging loan facility was about four months. 

Regarding the correlation between the training provided by SEDA in the Western Cape versus funding activities provide by SEFA, as Mr Mzizi had alluded to earlier, both entities were now capacitating internally with SEFA having been in the Western Cape from 7 September 2015 to recruit more staff in order to be on a par with SEDA. Indeed, fewer cooperatives had been supported through funding, but the presentation had indicated where SEFA was headed in that regard.

Mr Riaan Coetzee, Executive Manager, SEFA, said that regarding the application for funding by Golden Steel and Engineering, SEFA and SEDA had collaborated. SEDA had concluded the business plan in the middle of August 2015. SEFA had gone through the business plan and submitted questions on it, and had subsequently met with Elna in Emalahleni, Mpumalanga. There was work that she had had to do herself that the entities could not assist with, but SEFA was in constant contact with her.

Ms Ruth Masokoane, SAWEN, Acting CEO, said that in terms of whether SAWEN was facilitating value chain contributing activities for women, the network had been facilitating exhibitions that were mainly a trading platform, where women could sell their wares. However, member entrepreneurs had been observed to be trading across sectors.

The Chairperson interjected that she had been answered, and her suggestion was that SAWEN needed to tailor make its exhibitions to facilitate the development of value chains for each sector, over and above selling specific products.

Ms Masokoane informed the Committee that SAWEN was recently in some part of the Free State where it had found that malnutrition and infant mortality rates were quite high in the hospitals. It would then work to collaborate and develop with women’s co-ops to supply hospitals with the services and goods required to reduce those ills.

Regarding whether global summits were attended in a rotational matter by members, SAWEN indeed rotated members where delegations were generally about 20 individuals. Only 20% of that contingent was board members. The delegates were selected in conjunction with the Deputy Minister and from different sectors. The summits were an exchange of best practice methods for economic empowerment of women, where attendees were required to share in the networking forums what they had learned in the summits after returning.  
   
The Chairperson said that in the next summit report, the Committee would require SAWEN to report on measurable indicators of development for the members that had attended. 

In terms of facilitating co-funding of women co-ops with stokvels and savings clubs, SAWEN had started consultations with some and were still in the research stages of developing such a tool. It would certainly engage with the Chairperson for more input in that regard. The CEDF was an exciting instrument for the establishment of a mini-factory in textiles.

Minister Zulu added that at the last briefing her Ministry had had with the Committee, it had presented on a stokvels collective with which the DSBD had had preliminary discussions. Going forward, the DSBD would possibly arrange conversations where SAWEN would also be present.

The Chairperson emphasized the need for the DSBD to work with SAWEN in approaching stokvels, as there was anecdotal evidence that approximately R65 billion circulated amongst those types of savings clubs. Tapping into that revenue stream would reduce state funding dependence and develop sustainable self-funding.

Mr Mabasa said that something worth looking into was the cost of burials amongst disadvantaged families, where families borrowed large amounts for such events. Burial savings schemes were another revenue stream that DSBD could look into assisting by streamlining in a similar manner, as had been suggested by the Chairperson.

The Chairperson asked SAWEN to present also on what criteria it used to select delegates for global summits and exhibitions. It should also report on the outcome of national and provincial networking sessions conducted and reports produced. The Committee was supposed to be given information on why there were such events in the first place. Hosting the event could not be an outcome -- the products or up-skilling of members from such events were supposed to be the outcome.

Mr Jeffrey Ndumo, Chief Director: Co-ops Development Support, said that the difference in the new co-ops model compared with the old one under the DTI was that subsequent to the Committee's adoption of the new model, the DSBD had also adopted it. That meant that the new broader generic strategy of the co-ops model was tailor-made, with a focus on community as a target. It also targeted groups that were already on social security, youth and women, in creating opportunities so as to move them from being indigent to being active participants in the economy by generating income for themselves. 

Secondly the new model deliberately targeted the public sector market which would be used to empower beneficiaries, where they would be trained to access markets using instruments such as transversal agreements and the 30% procurement opportunities. Inter-departmental and private sector partnerships would also be part of the enablers of this new model.

The Chairperson said the only thing not mentioned by Mr Ndumo was that the new co-ops model linked skills development to service delivery processes. The budget of SETAs would no longer be targeting people that simply wanted to learn a particular trade, but would also be informed by profiling localities to identify schools in localities with dilapidated infrastructure and poor sanitation, so that the skills training and the indigent would be targeted to addressing those service delivery needs.

Mr Mojalefa Mahoto, Chief Director, enterprise development, DSBD said that in terms of red tape reduction, DSBD was already rolling out a programme. The programme had been piloted in 12 municipalities, where the Department had developed guidelines and were currently training municipal officials on red tape reduction. There were about 102 municipalities that were already covered, with 490 participants having taken part.

Anecdotal evidence had exhibited a change in the way things were being done in some municipalities, though the DSBD was cognisant that it would have to do a scientific review to quantify the impact of the red tape reduction programme.

Regarding the National SMME and Co-operatives Development Framework which had been developed whilst the DSBD was still part of the DTI, Mr Mahoto said it was singular, with two components. One was enterprise development and the other was co-op development. All it sought to do was to look at how best the DSBD and its agencies could implement its existing programmes in conjunction with other departments.  However, the two types of businesses were not combined but the framework had been built on efficiencies, recognising the differences between the two components.

The Chairperson asked if DSBD did not feel there was a need to review the framework so as to make it speak to the thinking outside of the DTI, seeing that it had been developed before the DSBD had become a separate Ministry.

Mr Mahoto replied that he had left out that the framework had been infused within the programmes of the DSBD. The Ministry had gone further by engaging provinces on how it could do integrated planning with them on SMME and co-ops programmes, so that the national body could speak with one voice with provinces.

The Chairperson said the Committee would only be convinced about DSBD’s understanding of the two components when it returned to brief the Committee on how it understood the national school nutrition programme needed to be coordinated throughout the country. The Committee would want to know how the co-ops development framework enabled the DSBD to work with provinces in having the same approach on how the schools’ nutrition programme needed to be delivered. 

Mr Mkhumane said that in terms of the vacant posts at DSBD, the Ministry's HR department was in the process of filling 28 priority positions. Finalisations of interviews would be fast tracked between September and October, since the DSBD had to be completely independent of the DTI by January 2016.

Regarding the DSBD’s CFO position, he said that the DTI had been assisting in terms of administering finances. However, recruitment had started in that regard, in that the DSBD now had a Director of Finance who was also responsible for CFO activities until the recruitment of a full-time CFO. 

On the under-spending, the reasons were the issues which DSBD had alluded to earlier, which were due to the shareholder’s compact. The DSBD did not expect such large amounts of under-spending going forward.

On the marketing matter raised by Mr Khoza, that was indeed an ongoing challenge for the DSBD, as Minister Zulu always complained to her staff that even the DSBD’s website was not as eye-catching and user-friendly as it could be. That was one of the issues on which the DSBD was lobbying NT -- that the Ministry could not operate without the basic necessity that all other Departments had, and which the DSBD did not have.
 
Regarding Ms November's concern about first impressions from AGSA concerning the DSBD’s performance to date, Mr Mkhumane said the Ministry had met with AGSA and it had briefed DSBD on its auditing processes and how the Ministry would need to assist its auditors. AGSA would have two follow-up engagements with the DSBD towards end of September and October, since it had to start with interim auditing around November 2015. The engagements so far had been constructive.

The DSBD realised that its provincial structures were not getting the required support across the board from the national office. Together with its agencies, it was looking at how to prioritise those lagging provinces.

On the secondary co-ops, Mr Mkhumane reminded the Committee that there was an initiative being driven by SEDA. The DSBD was not saying it would completely ignore them, however. It needed to consolidate an approach, together with its agencies, that would link the support to those co-ops with the expenditure the government was targeting towards rural development and agriculture.

In terms of commitments, the DSBD had highlighted to the Committee that it was on track to finalise the review of functions and activities inherited from the Department of Environmental Affairs (DEA) and the DTI.

Regarding fewer co-ops being provided with training and funding, the DSBD had been trying to be more efficient by training sustainable co-ops.

Mr Mzizi said that whatever clients and partners worked with SEDA, confidentiality agreements were signed that any information exchanged would remain confidential. SMMEs that had ideas that they wanted to commercialize and patent would work within a network where SEDA partnered with the Council for Scientific and Industrial Research (CSIR), the Companies and Intellectual Property Commission (CIPC) and the National Regulator for Compulsory Specifications (NRCS). All those partners ensured that ideas were trademarked and protected.

The Chairperson replied to Mr Kruger’s question on who the host employers in the New Venture Creation programme were, saying it was where one would find a learner, a trainer, an employer and a SETA.
One would find a person that was supposed to be in a learnership related to information and communications technology (ICT), but the person would be placed in a company that was not ICT-orientated. The beneficiary of that arrangement would then be the company, and therefore the Committee required that the DSBD deal with the linkages between the employer and the skills required by the learner, so that the programme beneficiated the learner, rather than the employer.    

She outlined further issues the Committee would require the DSBD to address in forthcoming briefings, and asked what interventions the Department required from the Committee regarding its challenges. 

Mr Makhuvha said one of SEFA’s fundamental challenges related to collection of repayments from SMMEs and co-ops, particularly those that had contracts with the state. SEFA required assistance from both the Committee and the DSBD to get the cession of contracts through the NT. For example, the NT could issue a note to all spheres of government that if SMMEs and co-ops were funded by state agencies, then payments for work done would need to go directly to SEFA. That was because when SEFA engaged those spheres, no one wanted to enter into cessions. This had resulted in some SMMEs using their incomes for other purposes, without repaying SEFA first.

Mr Mkhumane said that there were serious challenges when it came to finances, both for the DSBD and its entities, and that had resulted in the entities charging somewhat high interest rates for loans to co-ops and SMMEs. The Committee could certainly assist in making the NT understand the DSBD’s mandate better, seeing that the NT’s budget allocation spoke directly to how it had probably misinterpreted the mandate.

Although there was a consensus on the inherited functions from the DTI, there were certainly other departments that had functions that were supposed to be with the DSBD. For example, the National Empowerment Fund (NEF) had a branch that dealt with SMMEs and rural enterprises, the IDC and the Department of Rural Development (DRD) also had rural enterprise development units, all of which belonged to the DSBD.

Minister Zulu reiterated the challenge of the limited resources being directed to DSBD. Over and above that, her Ministry had written to the Minister of Finance in that regard, and there was a forthcoming meeting of the political heads of the two Departments.

The DSBD was about to conclude the appointment of a full-time Director General.

She supported the Chairperson’s sentiments on what other departments were doing in supporting SMMEs and co-ops over and above value chain prioritisation, in terms of infrastructure development.   

The DSBD had completed its programme review. though it had been a lengthy and frustrating process.
The biggest matter for the DSBD currently was the closing of transversal agreements with the departments it had been consulting with on the matter. An Inter-Ministerial Committee (IMC) meeting had been held in that regard, where stakeholders had agreed that SMMEs could play a critical role in the solar water geyser installation and maintenance programme.

The Chairperson thanked the DSBD and entities for availing themselves for the briefing. She said that everyone had to be observant about how SAWEN needed to be turned around to doing more developmental work for women, instead of only networking.

Ms Elizabeth Thabethe, Deputy Minister, said that indeed SAWENs current mandate of advocacy would not be able to deal with the needs of women entrepreneurs, and if young people of the country had an agency like the National Youth Development Agency (NYDA) to cater for their entrepreneurial development, then surely women also needed to have a similar agency, as they were better able to multitask.

The meeting was adjourned.