Workshop for Small Business Development: Day 3

Meeting report

Welcome and Opening remarks
Mr X Mabasa (ANC) welcomed the Spanish Embassy to the Committee and indicated that South Africa was a divided country prior to 1994. The division was based on race and tribal belonging and this was conveniently done to ensure that it would be impossible to formulate a united country. Former President Nelson Mandela was at the forefront in fighting against the oppressive apartheid regime, which was intended to liberate both black and white people. Mr Mandela wanted to fight the oppression of black people while dismantling a false superiority complex that was led by Dr Hendrik Verwoerd. It must be highlighted that Mr Mandela believed that forgiveness was possible and should be inculcated in every South African.

Although the country obtained political freedom in 1994 but this was not accompanied by economic freedom, as there were still visible and key challenges of racial inequalities, poverty and unemployment in our society. The Committee was cognisant of the role that had been played by the international community in contributing to the liberation of South Africans. The international community had highlighted that it would not abandon South Africa now that it had obtained political freedom, as it still needed to be assisted towards achieving a just and equal society.

Mr Mabasa added that South Africa is amongst the most unequal countries in the world. There was a strong awareness that it was through the Small Micro and Medium Enterprises (SMMEs) and cooperatives that the country could be able reduce these racial inequalities. The Committee was also cognisant of the fact that this would require cooperation between all South Africans, including government and funding institutions, to reverse these entrenched inequalities. The Committee appreciated the visit by the Spanish delegation, who could share their wisdom on ways that SMMEs and cooperatives could put a dent on the triple challenges of unemployment, poverty and inequality.

Department of Trade and Industry (dti) briefing
Ms Malebo Mabitje-Thompson, Deputy-Director General: Incentive Administration, dti, mentioned that there are five goals that are driving the work of the Department, which included the facilitation of the transformation of the economy, promotion of industrial development, investment and employment creation. These goals are achieved through the cooperation with the manufacturing sector. The presentation by the Department would focus on the incentives like grants and tax rebates that are meant to assist in the development of SMMEs and cooperatives.

The Department has a scheme called 12I Tax Incentive which is designed to support Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets), as well as Brownfield investments (i.e. expansions or upgrades of existing industrial projects). The incentives offer support for both capital investment and training.

The Automotive Investment Scheme (AIS) is an incentive designed to grow and develop the automotive sector through investment in new and or replacement models and components that will increase plant production volumes, sustain employment and/ or strengthen the automotive value chain. The Capital Projects Feasibility Programme (CPFP) is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services. The Critical Infrastructure Programme (CIP) aims to leverage investment by supporting infrastructure that is deemed to be critical, thus lowering the cost of doing business. The South African government is implementing the CIP to stimulate investment growth, in line with the National Industrial Policy Framework (NIPF) and Industrial Policy Action Plan (IPAP)

Ms Mabitje-Thompson added that the Export Marketing and Investment Assistance (EMIA) scheme develops export markets for South African products and services and helps to recruit new foreign direct investment into the country. The purpose of assistance under the scheme is to partially compensate exporters for costs incurred in respect of activities aimed at developing export markets for South African products and services, and to recruit new foreign direct investment (FDI) into South Africa.

The Manufacturing Investment Programme (MIP) is a reimbursable cash grant for local and foreign-owned manufactures who wish to establish a new production facility, expand an existing production facility, or upgrade an existing facility in the clothing and textiles sector.

The South African Government also offers a package of incentives to promote its film production and post-production industry. The incentives consist of the Foreign Film and Television Production and Post-Production incentive to attract foreign-based film productions to shoot on location in South Africa and conduct post-production activities, and the South African Film and Television Production and Co-Production incentive, which aims to assist local film producers in the production of local content. The South African Emerging Black Filmmakers Incentive, a sub-programme of the South African Film and Television Production and Co-production Incentive, is aimed to assist local emerging black film-makers to nurture and grow them to take up big productions and thus contribute towards employment creation. The Foreign Film and Television Production and Post-Production Incentive (Foreign Film incentive) is designed to encourage and attract large-budget films and television productions and post-production work that will contribute towards employment creation, enhancement of international profile, and increase the country’s creative and technical skills base.

The dti had initiated the Incubation Support Programme (ISP) to develop incubators and create successful enterprises with the potential to revitalise communities and strengthen local and national economies. In continuing to strengthen economic development through broadening participation in the economy, the ISP aims to ensure that SMMEs graduate into the mainstream economy through the support provided by the incubators. The ISP is one of the support measures to encourage partnerships in which big business assists SMMEs with skills transfer, enterprise development, supplier development and marketing opportunities. The objective of the ISP is to encourage private sector partnerships with Government to support incubators in order to develop SMMEs and nurture them into sustainable enterprises that can provide employment and contribute to economic growth. The intention of the programme is to provide funding for incubators that, over time, can generate revenue through the provision of services and initiatives that can be self-sustainable.

The incubation support is available on a cost-sharing basis between the Government and private sector partner(s). It is available for infrastructure and business development services necessary to mentor and grow enterprises to ensure that within two to three years the enterprises will graduate to a level of self-sustainability by providing products and services to the market. It must be highlighted that these schemes are not necessarily directed at small businesses and cooperatives but there is a way of ensuring that SMMEs are able to benefit through the procurement process.

National Empowerment Fund (NEF) Briefing
Mr Setlakalane Molepo, Divisional Executive, NEF, noted that this organisation was established by the National Empowerment Fund Act No 105 of 1998. He emphasised that the mandate of NEF is to deal with the economic divide that had been inherited from the apartheid regime. The National Development Plan (NDP) clearly indicates that there should be a diagnostic to deal with the fact that 80% of South Africans are still excluded from the mainstream economy. The NEF’s role is to support Broad-Based Black Economic Empowerment (BB-BEE). As the debate around what constitutes meaningful and sustainable BB-BEE evolves, the NEF anticipates future funding and investment requirements to help black individuals, communities and businesses achieve each element of the Codes of Good Practice. These include a focus on preferential procurement, broadening the reach of black equity ownership, transformation in management and staff and preventing the dilution of black shareholding.

The NEF differed from other funders not only by its focused mandate for BB-BEE, but by also assuming a predominantly equity-based risk to maximise the Empowerment Dividend. The reward should balance the risk with the application of sound commercial decisions to support national priorities and government policy such as the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) or targeted investments through the Department of Trade and Industry’s Industrial Policy Framework (IPF). The work of the NEF therefore straddles and complements other Development Finance Institutions (DFIs) by allowing the organisations to work in close collaboration in the promotion of BB-BEE. The NEF can then enhance other DFIs and their mandates by sharing its specialist sector expertise and knowledge of BB-BEE.

Mr Molepo highlighted that NEF is a driver and thought-leader in promoting and facilitating black economic participation by providing financial and non-financial support to black empowered businesses, and by promoting a culture of savings and investment among black people. The operations of the NEF are governed by the Public Finance Management Act (PFMA), and the National Treasury Regulations, the King III Report on Governance for South Africa and the Protocol on Corporate Governance in the Public Sector, 2002. NEF’s vision is to become the leading provider of innovative transformation solutions for an economically inclusive South Africa. The NEF implements its mandate in several ways.

Firstly, it structures accessible retail savings products for black people through its Asset Management Division, which is a custodian of certain equity allocations in State-Allocated Investments (SAIs). It aims to foster a culture of savings and investment among its beneficiaries.

Its Fund Management division, as a facilitator of the Codes of Good Practice under the BBBEE Act, supports the pillars of black enterprise by providing financial and non-financial solutions across a range of sectors to black empowered businesses, for start-up, expansion and equity transformation purposes.

Its Strategic Projects Fund is a leader in venture capital finance, which allows entrepreneurs to participate in projects that are at an early stage within sectors identified by the South African government as key drivers of economic growth. The Fund also provides project finance and private equity in these projects once they are regarded as bankable.

The NEF had, to date, disbursed R4 billion to companies that are aimed at empowerment of black people. The NEF is proud to have obtained an unqualified audit opinion for the past nine years, which demonstrates the organisation’s ability to manage and allocate funding appropriately. Through its products, it had contributed to creation of around 80 000 jobs, mainly in the industrial projects sector, particularly in line with the reindustrialisation strategy. It must be highlighted that a transaction worth R1 billion was made available on 12 million MTN shares to over 87 000 investors across the country; and 49% of those were women. Those companies that had been assisted had managed to repay over R1 billion, so that the NEF could be able, on a rolling basis, then to assist other companies that are focused on the empowerment of black people. Its Women Empowerment Fund had been established. This Fund is aimed at improving women's representation in the mainstream economy. The NEF needed to be aligned to the macroeconomic policies and the key imperatives of government like acceleration of economic growth, reduction of triple challenges and skills development.

Discussion
Mr Mabasa welcomed the presentations that had been made by NEF but expressed concern that the funding model that was used by NEF seemed to be focused on small businesses, but was excluding the cooperatives. The NEF needed to clarify whether there was funding that was specifically targeting cooperatives, as this was how the majority of poor people were involved in business.

Mr Trevor Tshuma, Executive Chairperson: KOHWA Holdings; stated that the majority of poor people faced limited employment opportunities and were often located in rural areas. However, it was of concern to him to note that the NEF was not funding primary agriculture, as this was the main source of income in most rural areas around the country. It was also not clear how much funding had been spent on the development of agriculture in rural areas, in order to fight unemployment and poverty. He wanted to know if NEF had any targets for funding projects that are focused on development of agriculture in rural areas. The rate of funding projects in rural areas was very slow and it looked like the creation of 11 million jobs by 2030 would remain an illusion, unless drastic action is taken to accelerate funding.

Mr R Chance (DA) said that the Committee had been questioning why the ISP fell under the dti instead of DSBD, as its main focus was on small business development, and asked what the rationale was behind this arrangement. He wanted to emphasise that the numbers of jobs that are being created by agencies like Small Enterprise Development Agency (SEDA), Small Enterprise Finance Agency (SEFA) and NEF were still a very small fraction of the plan for the 11 million jobs that are supposed to be created by SMMEs and cooperatives by 2030. He asked what measures were required by the economy in order create adequate jobs without the necessary intervention of DFIs?

The Chairperson wanted to know if both dti and NEF were able to reach out to the grass roots so as to increase the participation of SMMEs. Why was the dti not reaching out to more people? It was unfortunate that the dti had been in the spotlight in media reports around public complaints that this Department was not dispensing funding to the applicants, and that the applications are often unduly delayed. It was indicated that it was costing NEF R57 000 per annum to create a single job. This was likely to impact on the broader scope of creation of 11 million jobs by 2030.

Ms Mabitje-Thompson responded that some schemes, like Cooperative Incentive Scheme (CIC) and Black Business Supplier Development Programme, had been subsequently transferred to DSBD. It must be highlighted that CIC was still under the dti but was administered by the DSBD, which deals specifically with the development of cooperatives. In relation to the question on the ISP, the support measure is a partnership between big enterprises and the Department to support SMMEs and cooperatives. The Department would give quarterly reports on partnerships created with these big enterprises. The understanding of the ecosystem of the economy is that everything is interrelated and therefore it was irrelevant whether the ISP was located within the dti or DSBD. There is an awareness of the separation of mandates between the two departments but there is also an understanding that what was being done by one department would impact on the other. The dti had managed to spend the entire budget that was allocated by National Treasury (NT) in the previous financial year for different schemes aimed at assisting the SMMEs and cooperatives.

Ms Mabitje-Thompson pointed out that the number of applications for funding exceeded the budget allocated for funding. The Department was not allowed by NT to overcommit the state and this was where the delays in the processing of applications were coming from. She noted that the Department did have enough capacity to process the funding applications. The role of dti was not to simply award money to SMMEs and cooperatives but to leverage the particular national priorities of creating employment, increasing export competitiveness and making sure that there will be a diversification of the economy.

The Chairperson clarified that the Committee was trying to assess the relevance of financial instruments that are provided to SMMEs and cooperatives. The workshop was aimed at scrutinising what had been done by the country in the past 20 years, through the DFIs that had been established by the ANC government. The Committee was looking at the impact of these DFIs in addressing the triple challenges highlighted in the NDP. The workshop would also need to identify existing gaps that could be addressed, analyse the funding model that is used by the funding institutions and recommend ways forward to ensure that any existing gaps are closed. The dti would need to look at some of its programmes, and consider whether these should be completely transferred to the DSBD. The mandate of developing SMMEs and cooperatives had been shifted from dti to DSBD.

The decision to shift some of the programmes that belong to dti would need to be juxtaposed with the fact that the Minister of Finance had announced in the 2015 Medium Term Budget Policy Statement (MTBPS) that the country would not be borrowing more money. The Minister maintained that the country had sufficient money, but there was a problem that many departments were still working in isolation and there was duplication of services offered by government departments and DFIs. She wanted to know if the decision to retain the ISP was made together with the DSBD.

Mr Molepo responded that the Chairperson had already covered most of the key points. The priority of the NEF was to ensure that there is no duplication of services y government departments and funding institutions. The DFIs and funding institutions like SEDA, SEFA and NEF needed to ensure that end-users knew exactly where to go to look for funding, and that the distinctions between the institutions was quite clear. The NEF was indeed funding primary agriculture projects, but this kind of funding was not so extensive, because LandBank was primarily mandated to fund primary agriculture, precisely in order to avoid the duplication of services. The Committee was at liberty to talk to the National Treasury, and perhaps ask that NEF should be able to ring-fence specific facilities in order to increase the funding to primary agriculture projects. The NEF was also focused on funding cooperatives, hence the establishment of the Rural and Community Development Fund. It must be pointed out that provinces could take on as many projects as they wanted to do, depending on what was coming though their doors and their allocated budgets. In essence, there was no limit on the projects to be funded per province. The NEF had never received a cent from the fiscus, and this showed that the organisation was run efficiently.

Mr H Kruger (DA) commented that although NEF said that clients knew where they needed to go when seeking funding, the presentations by SMMEs and cooperatives in the previous two days in fact suggested quite the opposite and it was clear that most of the potential clients did not in fact know where to seek funding from various funding institutions.

The Chairperson agreed, and added that the SMMEs and cooperatives had highlighted the difficulties in getting information on where to go to seek funding. The SMMEs had also complained about the fact that that the people that were processing funding were not sector specific. She asked what were the measures in place to address this problem?

Ms Harriet Nkosi, Director: Ugqozi-Lwethu Secondary Co-operative, wanted to know if the dti had any monitoring systems in place of the Corporate Incentive Scheme, to ensure its effectiveness. It was also unclear as to how the dti was appointing the service providers that supplied the cooperatives. It was encouraging to see that dti was supporting film and television production, but it would be important to know if the Department also supported other forms of arts, like dancing, and the recreational industry. She wanted a comprehensive response as to why the ISP was still located under dti instead of DSBD.

Mr Molepo replied that the NEF was trying to reach out to all of South Africa in order to promote awareness on the type of work that was done by DFIs, and where they are located. There is an initiative that is aimed at ensuring that the clients are able to be referred to the relevant DFIs when making application for funding, and this would assist in reducing the time it takes for applicants to submit funding applications. In relation to credit profiling, it must be remembered that NEF was not asking for a single percentage of owner’s contribution, as the priority is to establish the economic merit before looking at collateral. The NEF is responsible for assisting SMMEs and cooperatives that had experienced market failure. The NEF was unwilling to fund people that were merely interesting in building investment vehicles without wanting to “roll up their sleeves” and come to their businesses.

Ms Mabitje-Thompson added that the NEF had a panel of mentorship that was offered to clients, and this was important for the growth of SMMEs and cooperatives. The NEF was different from the banks in the sense that even clients that had been blacklisted were also allowed an opportunity to access funding.

The Chairperson said that the Committee would need to have a follow up meeting on some of the responses that had been provided by both dti and NEF. It was important for the Committee to know if the dti had ever organised a meeting where all the DFIs would sit together to discuss their mandates, roles and responsibilities, so as to prevent the duplication of services. It was certainly clear that the ISP needed to be under the DSBD as opposed to dti, as the word “incubation” implied that the focus was on development of small businesses instead of big enterprises.

Mr Mziwakhe Ngwane, Facilitator of the Workshop; reiterated that the purpose of the workshop was to identify challenges that are experienced by SMMEs and cooperatives in their quest to access funding. The workshop was also intended to look at ways in which small businesses could address the triple challenges that had been highlighted in the NDP.

Ms Mabitje-Thompson said that there were discussions between the two Departments at the time of the separation of roles but it would be important, once again, for the two Departments to have further discussions on where ISP should be located. The development of SMMEs implied different levels of incubation and there are some enterprises that would still be at early development stage and others that were ready to supply to the market. This is where the decision would be taken on whether to integrate those enterprises on a global or local supply of goods and services.

Industrial Development Corporation (IDC) Briefing

Mr Davis Dervish, Division Executive: Cooperate Strategy, IDC, said that the IDC is mandated to provide finance for industrial development projects, and plays a catalytic role in promoting partnerships across industries within and outside South Africa in order to promote economic growth. This is done by proactively identifying and funding high-impact and labour-intensive projects, leading to the creation of viable new industries, and using South Africa's diverse industry expertise to drive growth in priority sectors. The combined contribution of the DFIs to the Gross Domestic Product (GDP) of South Africa was around 5% while in other countries it was hovering at around 30%. South Africa had a smaller size of DFIs contributing to the economy. The support of the SMMEs was being encouraged by IDC so that 60% of its clients are SMMEs. However, this was only 14% of the value of funding that is offered to SMMEs. The organisation is aiming to reduce the time taken on the processing of funding applications, to ensure that it was reasonable and responded well to the needs of SMMEs and cooperatives.

Various projects have been funded by IDC. These include the Green Energy Efficiency Fund (GEEF) with a fund of R500 million that was launched in 2011, with the aim of improving South African SMMEs' energy efficiency and the country’s green economic development. The GEEF supports projects that will provide significant energy savings and/or emissions reductions, by giving loans to entrepreneurs and businesses that want to invest in energy efficiency and renewable energy technologies. The priority is given to companies with yearly revenues of less than R51 million, with assets of less than R55 million and employing no more than 200 people. The benefits that are derived for funding enterprises that are focused on energy saving included:
- Technical support for energy assessments based on the size and complexity of a proposed project
- Investment risk reduction through energy efficiency validation checks
- Modernisation of industrial equipment and the use of energy efficient technologies that result in reduced energy and other costs
- Improved product quality and production capacity, while increasing the company's profitability

Mr Dervish pointed out that the organisation has approved over R8.3 billion with about 700 transactions to the SMMEs in the past five years. The focus of the funding is on black industrialists, provinces where there are manufacturing plants, and the consideration of community empowerment in the particular province. The organisation is also funding primary agriculture, with a particular focus on rural development and addressing triple challenges.

Discussion
Mr Chance indicated that an argument could be advanced that the country only needed to have one IDC and one Small Business and Cooperative Development Cooperation, and then scrap all the other DFIs. There is a lot of duplication of services and confusion in terms of roles and responsibilities. The sort of support that was being provided by IDC is very valuable and this once again showed that this is a credible institution with lots of expertise. The presentations that were done by Ithala Development Finance Cooperation (IDFC) and Small Enterprise Finance Agency (SEFA) spoke about the importance of hybrid finance in order to expand the footprint of the DFIs, so as to increase their contribution to the GDP from 5% to 20%. It was however unclear as to how exactly employment would be increased, when the reality showed that the impact of the DFIs was minimal in reducing the number of people who are unemployed.

Ms Nomsa Mazwai, Spokesperson: National Stokvel Association of South Africa (NASASA), commented that the organisation had managed to reduce the time taken to respond to funding applications, but asked what was considered to be an appropriate time for such responses. The organisation should talk to various SMMEs and cooperatives on ways to access the funding institutions.

Mr Ngwane commented that it was clear that the presentation of the IDC was mostly focused on the macroeconomic terms. There was little interest being shown in microeconomic policies. The presentation also showed that the support of IDC to the SMMEs was a “drop in the ocean” as far as job creation, poverty alleviation and inequality is concerned. The mandate of DSBD must be measured the backdrop of the need to deal with the triple challenges facing the country. It is clear that government and taxpayers’ money is not being used to progressively deal with these challenges. He expressed his concern that the IDC is not partnering with the private sector. This is one of the reasons the organisation is failing to empower SMMEs and cooperatives.

Mr Mabasa asked about the amount of money that had been distributed by IDC to cooperatives in the previous financial year, and how this compared with the amount distributed to other forms of business. He also wanted to know how much would be distributed to the cooperatives in the current financial year, in comparison to other businesses. He requested information on how the dti and associate DFIs outsource and appoint service providers who provide mentorship and support to SMMEs across the country.

Mr Dervish replied that the DFIs are aware that it will be difficult to achieve the impact ideally sought in the economy. It will thus be imperative for the DFIs and other government institutions to partner not only within the government sector, but also with the private sector, in order to increase the impact to the economy. The IDC was leveraging R2 to the private sector and the plan was to increase this to R3. This was part of the plan to increase the impact of the private sector in the economy. The IDC was currently working with the Presidential Infrastructure Coordinating Committee (PICC), to look at localisation opportunities, at the back of massive infrastructure programmes, with a main focus on working with organisations like Eskom and Transnet. There are advantages and disadvantages to having multiple existing DFIs. The IDC has opted for a model that says there should be a specialised service for particular opportunities in the DFI space, and this was the logic behind the formulation of SEFA. It was unfair for SMMEs to do the same funding applications as larger enterprises, as they require some form of assistance.

Mr Dervish added that the organisation tried to make sure that there would be an on-referral for SMMEs and cooperatives that did not qualify with a particular funding institution. The IDC was in support of the “one-stop shop” where there would be multiple services offered to clients who are interested in getting information about relevant DFIs for accessing funding. There are timeframes for processing and responding to the funding applications, but this is once again dependent on the complexity of funding being sought. The intention of the IDC was to turnaround the small funding applications within 15-17 days. The common delay that was experienced by SMMEs and cooperatives is most often linked to late submission of a tax clearance certificate. He said that he could give the Committee a written response on the amounts of money that have been distributed by IDC to cooperatives in the previous and the current financial year, with a comparison also for distribution to other businesses. IDC had not set aside the investment targets for cooperatives, and this was something that needed to be expedited, as it was part and parcel of a plan to tackle the triple challenges. In terms of the sourcing of service providers, the IDC had established a panel to deal with the selection of service providers and mentorship. Occasionally, the organisation also goes to the market to look for people who can offer support with the business turnaround.

Briefing by Mondragon Corporation
Mr Oscar Goitia, Vice Chairman, Mondragon Corporation, indicated that Mondragon Corporation is the embodiment of the co-operative movement that began in 1956, with the creation of the first industrial cooperative in the province of Guipuzkoa, Spain. The business philosophy of Mondragon Corporation is outlined in its corporate values, which include cooperation, participation, social responsibility and innovation. The Corporation’s Mission combines the core goals of a business organisation competing in international markets with the use of democratic methods in its business organisation, the creation of jobs, the human and professional development of its workers and a pledge to development of its social environment. The organisation has four divisions: Finance, Industry, Distribution and Knowledge. Today, Mondragon is the foremost Basque business group and the tenth largest in Spain. In 2005 there were 74 000 people working for Mondragon Corporation, across different sectors, with 50% working in the retail sector and another 50% working in the industrial area. In total, 14 000 people of the Mondragon Corporation are working overseas.

Mr Goitia clarified that Mondragon Corporation was not a commercial brand, as each company in the Corporation was able to choose the path to be taken. The Corporation was a very diverse group with more than 118 different cooperatives under the group. It was critically important that a cooperative is competitive in the market and can become sustainable in the long run.

Discussion
Mr Thami Ngwenya, Member of the National Youth Development Agency, asked how the Corporation had managed to deal with the challenge of vastly different political and ideological views in the Basque region.

Mr Goitia responded that Mondragon Corporation comprises about 74 00 people and there has been a significant growth in the number of people that are involved in different business sectors. The Corporation did not have any political or religious affiliations, which makes it far easier to work with cooperatives that have vastly different political structures.

Ms Nkosi wanted to know if a cooperative, according to the Mondragon Corporation, could refer to a single person business.

Mr Goitia responded that the minimum size of a cooperative, under the law applying in the Basque, was three people. However, it must be taken into consideration that most of the cooperatives under the Mondragon Corporation were created from the 1950s to 1980s and there were no limits at that time as to the number of people that were required to form a cooperative.

The Chairperson asked if the members of Mondragon were required to pay tax and whether there was a way of administering and collecting that tax. It was unclear as to how the Corporation was able to manage the competition that was likely to exist amongst cooperatives.

Mr Goitia replied that the Corporation paid taxes, like any other company, and all the tax was collected by the Spanish Government. The tax was based on the profit that had been generated, very similar to South Africa. The Mondragon Corporation had managed to handle the possible conflict that could arise amongst the cooperatives, as proven by the fact that it had stayed operating since 1956. The Corporation made it a priority to ensure that there is competition, dialogue and innovation amongst the cooperatives.

Mr Mabasa asked in what ways the Corporation was able to carry out the training of its members to ensure that there is competitiveness, and what strategy it adopted to ensure that rich values of competition, dialogue, cooperation and innovation were to be transferred to young people.

Mr Goitia responded that there was currently no education in schools or institutions of higher learning that focused on these “rich values” of the Corporation. However, the founders of the Corporation did ensure that they transferred these values to all young people in the conglomerate. It was worrying that the values of people had been changing, as the focus was now on individualism instead of collectivism, which ran directly contrary to the values of the conglomerate. There are regular seminars within the management employed in different cooperatives, which provide details and progress the training that does focus on transferring the rich values of the conglomerate. It would also be important for the Corporation to be involved in schools and institutions of higher learning in order to instil these values in young people.

Mr Chance wanted to know the gap between the highest paid and the lowest paid individuals in the Corporation, and how this figure would compare to the norm in Spain. He asked why the Mondragon Corporation model had not been adopted in the wider society of Spain.

Mr Goitia replied that the difference between the highest paid and the lowest paid individuals were not as visible now as when the Corporation was established in 1956. However, there was evidence that the inequality had been widening recently. The style of the Mondragon Corporation had been widely adopted in the Basque country because of the values that are attached to the conglomerate, and the legislation there had been amended to allow for the establishment of similar corporations, but this did not apply to other areas in Spain. The model of the Corporation has been well accepted in cases of crisis, as it was recently, but tends not to find favour when the economy is booming.

Mr Tshuma welcomed the enlightening presentation by the Corporation, and noted that its model had survived many years. The cooperative movement in South Africa was still in its infancy, despite the country's democracy now entering its 21st year. He asked what were the key industries that were prioritised at the beginning of the Mondragon Corporation.

Mr Goitia replied that the whole conglomerate started with manufacturing activities, with a particular focus on the development of electronic and housing appliances. There was no clear direction at the beginning as to which key industries that needed to be prioritised. The banks had developed strategies to minimise all the possible risks in the cooperatives. It was also unclear as to how the Corporation was able to mitigate the challenges faced by cooperatives in accessing funding. The decision that was taken by Mondragon Corporation to formulate a bank was a real success story to keep the cooperatives growing financially. The cooperatives were not only growing financially, but also in terms of management of finance and resources. Various companies decided to put money into starting a bank to deal with access to funding. 51% of the money of the Mondragon Corporation belonged to the cooperatives, while the remaining 49% belonged to people that were working in the bank. This was probably one of the decisions that helped cooperatives to be able to get direct access to funding in the early stages of development of the conglomerate.

The Chairperson said that the model of Mondragon Corporation was similar to that which had been adopted by The King of Midlands. This co-operative was founded by taxi owners from the Grange and Westgate Taxi Associations in KwaZulu Natal, and its business model was aimed at building a petrol station, tyre fitment centre, spare parts shop and a co-operative bank. This clearly illustrated the point that SMMEs and cooperatives would play a key role in addressing the challenges in South Africa. The DFIs should be able to influence the government as to how the services should be provided to the SMMEs and cooperatives. She reiterated that the ISP should be completely transferred to DSBD, as the mandate of that Department was precisely intended to address the challenges that are experienced by the small businesses.

Department of Small Business Development (DSBD or the Department) briefing
Mr Kgulane Thulare, Acting Chief Director, DSBD, stated that his presentation would focus on giving an overview of the incentive grants unit that are offered to SMMEs and cooperatives. The Department currently has five incentive programmes, as follows:
- Informal and Micro Enterprise Development Programme - currently being finalised based on leadership strategy.
- Shared Economic Infrastructure Facility Programme (SEIP) has been approved by the leadership in the Department and it would be rolled out to SMMEs and cooperatives throughout the country.
- Co-operative Incentive Scheme is a programme aimed at assisting cooperatives from all industries in order to allow their businesses to grow. The scheme was mainly targeting black-owned cooperatives that would assist in the creation of employment and fighting poverty and inequality.

He said that there is a dedicated unit within the Department that is focused on facilitating, implementing and monitoring grant incentive programmes that are given to small businesses, so as to address the market failures. The success of the unit would be based on the need to build strong strategic partnership with other stakeholders and other “sister” agencies.

Mr Thulare added that the incentive grants are meant to deal with challenges that are affecting SMMEs and cooperatives, particularly the issue of funding. The mandate of the Department is to develop programmes and effective mechanisms that would assist SMMEs to grow. The Committee has already been presented with the vision and mission of the Department. The Department aims to create a conducive environment for the SMMEs and cooperatives to be able to deal with triple challenges and to ensure that there will be coordinated efforts between local and provincial governments to assist SMMEs and cooperatives. The Department needs to enhance the support that is given to SMMEs and cooperatives, and also to informal businesses. He stressed that the informal sector is struggling greatly and it needs to be given proper infrastructure in areas where these informal businesses are operating. The Department is optimistic that other funding institutions like SEDA will be able to assist in coming up with training and business and development interventions that will assist the SMMEs and cooperatives. It will be important for the Department to partner with the private sector in order to lower the infrastructure costs.

Discussion
Mr Tshuma indicated that the purpose of the workshop was not to merely do a talk shop where the focus would be on “hammering the Department and the Executive”, but to ensure that those present may be able to suggest a way forward on how the DFIs should cooperate in a manner that would avoid duplication of services. The Committee should perhaps call for a full-day meeting with all the DFIs, clearly understand their roles and focus on building a value-chain. It seemed clear that there is still confusion within the DFIs on their roles and responsibilities and how their mandates are meant to address the triple challenges. The DFIs that are intended to assist SMMEs and cooperatives would need to commit to a specific deadline for such a meeting.

Mr Ngwane interjected and advised that perhaps NEF should be given an opportunity to make the final remarks as its members needed to catch a plane.

Mr Kruger complained that it was unfair that some members should leave before the workshop had even reached a resolution on the way forward. All the stakeholders were provided with the programme of the three day workshop, and everyone should have made a commitment to sit for the whole workshop.

The Chairperson added that it was unfortunate that the workshop was not being taken seriously and this was particularly the case from the DSBD. The Committee had made it clear that the Departments and funding institutions were supposed to be at the workshop for the whole day, as they are ultimately responsible for assisting SMMEs and cooperatives. She expressed her dissatisfaction that the Acting Director General of DSBD was not even present in this Workshop, which was an indicator that the Workshop was not being taken seriously.

Mr Molepo said that the NEF was not in any way trying to overlook or disregard the importance of the workshop. This organisation also believed that the DFIs needed to start talking to each other, in order to avoid duplication of services. The DFIs have the requisite skills to manage most incentive schemes that are offered to small businesses, in order to enhance whatever might have been done to assist the funding applicants. The incentive schemes would go a long way in addressing the challenges that are faced by many of entrepreneurs around owners’ contribution. It was now becoming clear that the SMMEs were not able to bargain on the minimum unencumbered cash that an SMME must have. The organisation believed that this challenge could be tackled with the existing concessionary and the incentive schemes in the DFIs. The Committee should also assist in dealing with the problem that many DFIs were losing huge amounts of money because the SMMEs were not honouring their contractual obligations.

Mr Nkosinathi Ntombela, Acting Property Executive, Ithala DFC, highlighted that the role of the DSBD was to be a catalyst in the creation of employment opportunities. One question that had not been tackled in the Workshop today was the vision of the country for SMMEs. The presentations had been focused on the funding models, incentives and development schemes that are offered to SMMEs, without delving into the vision for small businesses in the next ten years. The presentations by the Departments and various DFIs were also not clear on the strategic objectives to be achieved by SMMEs. The DSBD was supposed to provide overall guidance to the country on the policy direction, as the DFIs were responsible for incentive schemes for SMMEs. It was indeed important for the Department to partner with the DFIs in the delivery of incentive schemes. However, there should also be a priority in determining the delivery model of these incentive schemes. The DFIs are supposed to free up the time of the Department, so that it could think about the broader strategic issues, and not only incentive schemes. Whilst it was commendable that a huge amount of money had been given to the SMMEs and cooperatives, it was still unclear as to whether this amount had been able to solve the triple challenges that are likely to impact on the stability of the country. The proposed meeting with all the DFIs responsible for funding SMMEs would be futile if it did not deal with the broader mandate and the vision of DFIs.

Mr Chance wanted to know if the incentive programmes in the DSBD would be supplementary to or replace the existing ones at SEDA. He asked if it was possible for the Department to partner with Department of Cooperative Government and Traditional Affairs (COGTA) in order to expand the reach of these incentive programmes.

The Chairperson asked what problems the Department was responding to through the establishment of the Informal and Micro-Enterprise Development programmes, and whether this programme was part of the long-term intervention for informal traders. The qualifying criteria of the programme currently used by the Department excluded the informal traders, and this was an issue that should be rectified promptly.

Mr Kruger asked if the Department had a “red tape strategy” in place to assist the SMMEs and cooperatives to avoid some of the excessive regulations that are presently required in order to access funding.

Mr Thulare responded that three of the incentive programmes are currently operational, and the other two programmes are to be launched at the end of the first quarter. The programmes are complementary to those of SEDA and there is no duplication of services. He agreed that the Department would need to provide a strategic direction, as correctly pointed out by some delegates. The Department would certainly work towards collaborating with COGTA in order to expand the outreach of these incentive programmes. The qualifying criteria of the Informal and Micro-Enterprise Development Programme did need review so that it could speak to the needs of informal traders. The Department had already highlighted that the red tape strategy would be available in the current financial year, and more information on this was contained in the Department’s strategic plan.

Mr Themba Nkabinde, Chief Director, Small Enterprise Development Agency, added that the intention behind the Informal and Micro-Enterprise Development programme was to ensure that informal traders would be able to graduate from the lower level to the upper level, where they could be able to employ people and play a meaningful role in poverty reduction. The programme was also focused on the capacitation of the informal traders with business management skills and management of business accounts. The programme was not meant for the starters, but rather to grow those that had already ventured into small business but lacked adequate funding to potentially grow into a big business.

Mr Ngwane said that the Committee would now focus on the recommendations for the way forward. The focus should be on the government and funding institutions, dti and DSBD.

The Chairperson suggested that perhaps the best way to deliberate on the matter would be for the delegates to offer recommendations in the context of the triple challenges that are facing South Africa. The Department was formulated because there was a realisation that social grants and provision of free services to poor people would not be sustainable in drastically reducing poverty, unemployment and inequality. The ANC government was focused on building a developmental state with three pillars: State Owned Entities (SOEs), Private-Owned Enterprises (POEs) and cooperatives. It was high time for all government and funding institutions to look to a South Africa that would no longer have massive poverty, unemployment and inequality. The SMMEs and cooperatives needed to create about 761 000 jobs in order to reach the target of creating 11 million jobs by 2030. The pace at the moment towards this goal was disappointingly slow.

The Chairperson continued to say that the proposals already made on the way forward clearly indicated the need for change. The first proposal was to have an Indaba of all DFIs to look at the funding instruments and agree amongst themselves on what must be prioritised . This would assist in addressing the issue of duplication of services, which was costing the state a great deal. The second proposal, made by the Ithala DFC, was that the Department, government and funding institutions should have a shared future vision for SMMEs. It was also highlighted that the presentations had been focused on the funding models, incentives and development schemes that are offered to SMMEs, without delving into the vision of small businesses in the near future.

Ms Nontwenhle Mchunu, Managing Director, Ezulwini Chocolat, stated that all discussions at this Workshop should talk not only to the SMMEs and cooperatives actually present, but to all in the country. This workshop was meant to discuss the way forward, and specifically how to accelerate the creation of job opportunities to fight the triple challenges identified in the NDP. All government and funding institutions, DFIs and relevant stakeholders should come together to fight the one common enemy that was affecting South Africans. It was quite clear that there is no monitoring of the funding and incentive schemes that are given to SMMEs and cooperatives. Such monitoring and evaluation would be important in assessing the impact of these schemes and funding.

Mr Chance conceded that the development of SMMEs should be about dealing with the triple challenges, but the discussions should extend further, to enable wealth creation, and not purely to fight poverty. The priority should be about growing the economy, which was stagnant at the moment through the current mentality of wealth creation and enterprise development. It was still of concern to him that the cooperatives in the country comprised a minuscule component of the economy, and were predicted to be less than 1%. Nobody had actually yet asked what had to be done to devise ways to ensure that they would be able to contribute significantly to the economy. The Cooperative Incentive Programme had paid out close to R300 million but 90% of that “had gone down the drain”. He suggested that the DSBD had to abide closely to the NDP as the roadmap along which South Africa had to travel, in order to deal with the triple challenges, but also to address both wealth and enterprise development.

Mr Mabasa commented that it would be impossible for South Africa to win the battle against the triple challenges, without focusing on those individuals at the lowest rung of the ladder. Most of the inputs that had been made today had focused on individuals who had already started their businesses, but had neglected those who may have brilliant business plans but lack business management skills. It should never be assumed that people had any pride in receiving grants and hand-outs, rather than creating their own decent living. He felt that even if there were to be an indaba organised for DFIs, it would still not benefit those on the lower rungs of the ladder, as the majority of those attending would be likely to be those who had already started their businesses. The NDP and National Democratic Revolution were both complementary; both were aimed at addressing racially entrenched inequalities, poverty and unemployment.

The Chairperson observed that a number of presentations by the DFIs, dti and DSBD generally failed to talk about the impact of the funding and incentive programmes. The Committee would have been interested to hear if there had been any improvements in the SMMEs and cooperatives that had been assisted by the DFIs. The value for the investment that had been made to the SMMEs and cooperatives could not be assessed only on their financial gains, but must look also to creation of employment and broader community development. The DFIs also failed to mention the rationale behind choosing to fund one province over another. This would have assisted in determining the criteria that were being used to offer funding at provincial level. The workshop should also explore ways to address the infighting between South African and foreign nationals in the township.

Mr Molepo indicated that it was clear that there was no coordination between government departments, funding institutions and DFIs, and this had been a shortcoming for quite a while. The Head of Government would have to take a firm lead and prioritise cooperation between government departments. The procurement processes of government should be able to reserve the market for the SMMEs and cooperatives. For this reason NEF was in support of reserving a guarantee that SMMEs must supply at least 30% of government markets.

Mr Nkabinde stated that the confusion around the location of the DSBD was something that still needed to be addressed. It became apparent that most of the SMMEs and cooperatives were not even aware of the existence of the DSBD as they had often made reference to the dti when speaking of development of small business. The migration of functions from the dti to DSBD would not be a quick process. Some of the programmes were being simultaneously administered by the two Departments. The linkage between the two Departments would be crucially important in dealing with this migration of functions.

Ms Mazwai said that the workshop also needed to take into consideration the behavioural economics, which had proven successful in an organisation like NASASA. This organisation had taken what was already in existence, and created business out of it. There were about 800 000 stokvels in South Africa and around 110 000 are registered on the database of NASASA. The DFIs should consider utilising the stokvel markets and the manner in which NASASA communicated with stokvel members, thereby maximising on what people were already doing.

Mr Thakani Mahuvha, Chief Executive Officer, Small Enterprise Finance Agency, agreed that there was a need to have a DFI Indaba in order to address the duplication of services amongst these funding institutions, and ensure that there coordination and cooperation. The training and capacitation of the cooperatives had come out very strongly during the three day workshop and this would be something that SEFA would need to prioritise. The removal of excessive regulations (red tape) should be led by the DSBD. He repeated that 90% of the 11 million jobs by 2030 would be created by SMMEs. DSBD should create a dashboard, outlining ways in which the government and funding institutions could contribute to accelerating the creation of 760 000 jobs annually. SEFA had already started with the value-chain of DFIs and the referral of clients to relevant funding institutions. The Department and SEDA should be taking a leading role in communicating market research to the SMMEs and cooperatives.

Mr Kruger indicated that the three day workshop had confirmed that indeed government departments are working in isolation. The Department would need to create a “one-stop shop” where there would be multiple or variety of services offered to clients needing information about relevant DFIs, for accessing funding. This would have to be a political decision so that the impact of the DFIs could be felt by the SMMEs, cooperatives and informal traders.

Mr Molepo said it was clear that most of the instruments that are being used by the government and funding institutions and DFIs were not responding to the needs of SMMEs and cooperatives on the ground. The Department would need to adopt a multi-layer approach to dealing with dynamic businesses that are selling a variety of products or goods. No institution should attempt merely to conduct desktop research to reach its conclusion on the kind of service that is required by the SMMEs or cooperatives.

Mr Mabasa observed that most of government officials presenting in workshops asked to present first, and then tended to leave, so they did not seem to appreciate that it was vital to hear the comments, suggestions and recommendations or resolutions that are being taken. He proposed that for the future, the Committee must take a strong resolution that any officials making presentations would have to stay for the full day session. A radical shift in how things were done was now needed to address the inequalities.

The Chairperson noted that Mondragon Corporation highlighted that its conglomerate had started off as a training centre for the cooperatives, before developing into a large business. She expressed concern that some cooperatives in South Africa had been formed after 1994, and were operating in the same space as the SOEs. Mondragon Corporation also emphasised the setting up of a bank that would give loans and funding to the cooperatives.

She reiterated that it was impressive that NASASA, in the first day of the Workshop, had highlighted how it had plans and actions to deal with defaulters in the stokvels, without paralysing their development.

The Chairperson noted that South African society could still be said to suffer oppression when black people had little access to loans in order to start businesses. The target market of the Department was mainly poor black people who are interested in starting small businesses. Statistics South Africa (Stats SA) had revealed that the majority of small businesses in the country are self-funded, and these included spaza shops, the taxi industry and other informal traders in the streets and shopping malls. Large sums of money were sitting with Sector Education Training Authorities (SETAs), who were not providing any training assistance to the SMMEs and cooperatives.

The Chairperson expressed her disappointment that the officials from the Department and DFIs were not interesting in asking questions of the Chairman of Mondragon Corporation as to how the conglomerate was built, the challenges that were experienced and the way in which those challenges were dealt with. It was unfortunate that all the effort and money of the Spanish Embassy in coming to this Workshop had not resulted in proper deliberation and discussion on a possible emulation of its model.

Mr Tshuma appreciated the work that had been done by Mondragon Corporation, and also agreed that this was one model of cooperatives that needed to be emulated by cooperatives in South Africa. It was becoming increasingly clear that the SMMEs, cooperatives and informal traders could not “sit and wait” for the funding from the DFIs and other funding institutions, in order to be able to grow into big businesses. He suggested that perhaps the Committee could recommend further interaction with Mondragon Corporation, from whom many SMMEs and cooperatives could learn a lot.

Mr Nkabinde wanted to know the kind of relationship that Mondragon Corporation had with other large cooperative movements in countries like England, Italy and Kenya. He asked if the Corporation had managed to get any funding or incubation from the Spanish government at the initial stages of development.

Mr Goitia responded that the Corporation did have a relationship with other massive cooperative movements around the world, and this had been important for the sharing and exchange of experiences to improve on legislation and best practices. Incubator funding was given to the Corporation by government at the initial stages of development, although this had not been very extensive. The Spanish Embassy was willing to cooperate and assist the Committee in any way possible to share the Mondragon Corporation's wealth of experience with the cooperatives in South Africa.

The Chairperson suggested that the Committee should resolve to visit the offices of Mondragon Corporation after the 2016 Local Government Elections.

Ms Mazwai suggested that the DFIs could use creative ways to provide funding to cooperatives, similar to stokvels. She asked if the bank established by the Mondragon Corporation was for transactions, or provision of loans to cooperatives.

Mr Goitia responded that the bank was started as a cooperative bank but was now operating like a normal bank in the market, following the regulations of the Spanish government and was also committed to the resolutions of the European Bank. It had essentially always been a regular bank, but focused primarily on development of cooperatives. The bank has an entrepreneurial business division through which the management of the bank were participating in the board meetings of the cooperatives. In essence, 20% of the business of the bank is still operated by the cooperatives while 80% was operated from outside.

Mr Nkabinde appreciated that the Committee had managed to organise the three day workshop, as it allowed different stakeholders to be able to share innovative ideas and the way forward. The major theme that had come out throughout the workshop was that the funding institutions should be able to talk to each other to avoid duplication of scarce resources. The Committee would also like to express appreciation to the Spanish Embassy for making a presentation on the massive work that had been achieved by Mondragon Corporation. He wanted to stress that the creation of 11 million jobs by 2030 would not be possible if the government departments and funding institutions continued to work in isolation. The taxi industry was probably the only fully-fledged and progressive black industry in the country. The focus of the Department, together with the funding institutions, should be on ways to make this industry more sustainable and successful.

It was impressive to hear that the stokvels presently account for about R45 billion in the country. However, the question that should be asked by everyone is where that money is located and the whose interests are being furthered. The NEF should be able to work with NASASA, as one of its core mandates is savings and investment. The idea of a “one-stop shop” for the DFIs needed to be strengthened and enhanced throughout the government institutions.

Mr Mahuvha said that the three day workshop had been a significant learning curve and SEDA had taken into consideration the criticisms and suggestions that had been made, to help it to move forward. It would be looking into how to rectify some of the challenges that had been identified in various funding institutions. The collaboration amongst the DFIs was important in accelerating job creation, so as to reach the target of 11 million jobs by 2030. The DFIs would need to take into consideration the need for the benchmarking with other institutions like Mondragon Corporation. There would be a need for partnership between the Department and DFIs on the formulation of the 2016/17 strategic plan.

Mr Ngwane said that the workshop should be able to help in closing some of the gaps that had been identified by the SMMEs and cooperatives. The SMMEs and cooperatives had already pointed out that it was difficult for the clients to know where to go in order to find the relevant DFIs that would respond to their needs. There should be a coordinated service provided to SMMEs and cooperatives so as to avoid the duplication of scarce resources. It was even more disappointing to discover that some of the SMMEs did not know about the existence of the Corporate Bank, SEDA and SEFA, which spoke again to the limited visibility on the ground of the DFIs. The requirement for the informal traders to have a residential address in order to be awarded funding was absurd when considering that most informal traders were living in dense shack settlements that did not have formal addresses.

Mr Mabasa suggested that the Committee would need to call on government departments and municipalities to start appreciating and embracing the role of cooperatives and informal traders in our society in order to create appropriate infrastructure for them. It was also evident that Mondragon Corporation was part of the fabric and accepted structure of the Basque country. He too expressed appreciation for the fact that it was willing to share its vast experience with the cooperatives in South Africa.

Mr Chance concluded that indeed Members shared a common vision to promote the development of SMMEs and cooperatives. It was disappointing to observe that the DSBD had been slow in responding to the needs of small businesses and informal traders. There should be a centralised strategy that would allow the DFIs to respond promptly and effectively to the needs of SMMEs and cooperatives, not only to deal with the triple challenges but also to assist with wealth creation and enterprise development. Many useful suggestions had come through this Workshop, and they should not be taken for granted. They should be captured succinctly and reviewed to track progress in future. He suggested that the DSBD and the Committee would need to highlight all the challenges that are experienced by SMMEs and cooperatives and find ways to unlock those challenges. If 90% of the jobs to be created must come from SMMEs and cooperatives, then the DSBD and DFIs had a major role to play. Political ideologies must be set aside for all to focus on pragmatic ways to address the challenges.

Mr Mabasa reiterated that it was an honour for the Committee to have a three day workshop in which the focus was specifically on the development of SMMEs, cooperatives and informal traders. The Committee particularly appreciated the presence of delegates of Mondragon Corporation who had shared their vast experience on the creation of successful cooperatives through a conglomerate. He also sounded his appreciation to those officials from the Department and DFIs who had managed to stay until the end of the Workshop. The lesson to learn was that informal traders needed to be offered adequate infrastructure to allow them to operate their businesses. All officials should share the inputs across the various government departments and DFIs. He sounded a special note of appreciation also to all organisations making presentations and highlighting particular concerns and grievances.

The Chairperson concluded by saying that transition was always difficult thing and most people are resistant to change. She too expressed appreciation to the Mondragon Corporation delegates, and said that all inputs from all organisations, government departments and DFIs needed to be taken on board in order to tackle the triple challenges that could well impact on the stability of South Africa. A particularly strongly made point was the need to find some way to deal with the duplication of services by the DFIs; this could be addressed initially by ensuring better cooperation between these funding institutions. The creation of 761 000 jobs annually, by SMMEs and cooperatives, was part of the overarching goal of creating 11 million jobs by 2030.

The meeting was adjourned.