Department of Small Business Development on its 2015/16 2nd/3rd Quarter performance, with Minister

Small Business Development

17 February 2016
Chairperson: Ms N Bengu (ANC)
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Meeting Summary

The Director General of the Department of Small Business Development presented its quarterly reports for the second and third quarters of operations. These reports highlighted areas of success and shortfall, in the latter case notably of expenditure in the areas of staff vacancies and proper allocation of funding to small and medium enterprises. The challenge of staff vacancies was attributed, along with shortfalls in strategic planning and proper allocation of resources, in large part to the fact that the Department of Small Business Development had inherited its raison d’être and its operational model from the Department of Trade and Industry. However, policy was being put in place, despite shortfalls in the area of research within the Department, to deal with these, and the Director General hoped to have these addressed within the next financial year.

Another matter being considered was the need to amend the existing Small Business Development Act, to include much of the work of the current department, particularly in the area of co-operatives. Pending this amendment, the department was operating under the policy bill of National Treasury pertaining to it, as well as labouring under the assumption that presidential proclamations carried the weight of pending legislation, thus extending its mandate.

Certain case studies were dealt with, but these also called into question the degree of co-operation between the department and the local government. The Chairperson at several points criticised the department and highlighted the need for it to work at the municipal, rather than the executive level.

The meeting adjourned with an acceptance of the Director General’s report, but the expectation of feedback on staff vacancies, and the filling of these; the vetting and regulation of SMMEs receiving funds, and the need to expand the areas of Communication and Research within the department, both in logistical and budgetary terms. Comment was made as to the notable presence but lack of contribution of the sizable delegation from the Small Enterprise Finance Agency (SEFA).

Meeting report

It was noted that the Minister, Ms Lindiwe Zulu, was in a meeting and would be joining this briefing later, while Deputy Minister, Ms Elizabeth Thabethe, was in hospital and would be unable to attend.

Second Quarter Report
The Director General, Ms Edith Vries, presented the Second Quarter report. The Department distinguished between Performance Indicators and Milestones in its report, 26 of the former and 31 of the latter. 58% of these milestones were achieved in the 2015 financial year.

The Director General highlighted budget issues and areas of under-achievement: these included the vacancy rate in the department, which is currently double that of the target for the public sector, at 22%. The Department was unwilling to fill these positions until the current programme review was complete, particularly for higher-ranked posts. Employee compensation was underspent for this reason.

Co-operative development was, and is likely to remain an area of under-achievement: an insufficient number of incubators have been established and given support, but the lack of framework for SMME Development between the Department and provincial departments has been addressed.

The deliverable outcomes of the Enterprise Development and Entrepreneurship Programme were delayed by the reliance on other departments, or the public sector.

The Department’s total budget expenditure stood at 49,6% at the end of the Second Quarter.

The Director General highlighted the areas of success and under-performance outlined in the report, without going into greater detail. She mentioned that 88% of the department budget consisted of transfer costs to its entities. Goods and Services, mainly for travel and venue usage, cost the department R17.1 million, which was 28% below budget allocation.

The Department committed to filling 17 vacant positions in Quarter 3, and 12 in Quarter 4. However, the department had overachieved in the hiring of people with disabilities, resulting in the annual target being raised from the national average of 2% to 3,2%, which situation Ms Vries hoped to revise. The target for hiring women was below the national average, but the Department had met its own target in this regard.

A source of pride was the fact that the department had managed to pay all of its valid invoices within 30 days during this quarter, as well as providing a voice and a presence for SMMEs.

Programmes being run by the Department needed to be refined to fit in with the mandate of the Department of Small Business Development (DSBD), since these had originally been drawn up under the auspices of the Department of Trade and Industry. This also reflected in the preparation of future reports.

One of the outcomes of the department must be to assist in linking SMMEs to high value market chains, for example in Energy, Manufacturing and Clothing: 13 Co-operatives that were linked to the Agricultural sector, in this quarter, partnered with two private sector entities.

The Incubator Support Programme was, and will remain an area of under-achievement: this was largely blamed on the expectations of the private sector not being met by the department’s contribution to the programme, since it has not been budgeted for. This is part of the legacy of the DTI, which does not provide for funding of the retail sector.

DSBD had been successful in providing support to primary co-operatives under the Small Business Act and had piloted the programme of supporting secondary co-operatives, for instance helping farmers to access markets.

The target for the year was to develop a business case, and to lobby the private sector to establish a fund providing start-up capital to SMMEs: this had not been done by the end of the second quarter. A service provider also needed to be procured to provide assistance to five SMMEs, and this had been achieved.

The area of Co-location points, to assist SMMEs, was one of under-achievement: the department needed to work with Transnet on this matter. Municipalities had also failed to work at upgrading infrastructure to assist SMMEs.

Not enough programmes were benefitting from the Black Youth Supply Development Programme, nor was the Department providing enough training to ventures of entrepreneurial development. However, the number of female entrepreneurs who had been identified and supported by the department exceeded the target set, as had the number of informal traders identified and trained.

DSBD has been working within set guidelines to reduce red tape, by engaging municipalities on this matter, and monitoring progress: however, too few of these had been engaged in the second quarter. The guidelines also need to be widened to include provincial legislation. However, the terms of reference for studying this had still not been finalised by the third quarter.

While government has set the target of 30% procurement of goods and services from SMMEs, this is largely in the hands of the National Treasury, which controls the Preferential Procurement Framework Act.

Finally, Ms Vries highlighted the number of craft enterprises that had been supported by the Department in the Second Quarter.

Third Quarter Report
The Director General noted 61% of the Indicators and Milestones had been met in this quarter. The department committed itself to demanding evidence of performance wherever necessary. By the end of the Third Quarter, 71% of the budget had been spent. The record of paying invoices within 30 days had been maintained.

Co-operatives participating in the SAB maize programme had been visited, and the company’s stake in this programme had increased from R20 million to R49 million. The Director General expressed gratification at the difference made by irrigation in agriculture, as opposed to the lack thereof.

Co-location points had been established in the Third Quarter, compensating for the previous under-achievement.

Under-expenditure in the Department was in line with that expected, at R71 million, and could in part be blamed on the vacancy situation. While money had been committed to beneficiaries, it does remain in the Department’s account until all criteria for funding are met. The Incubation Programme has suffered from the fact that the Department is no longer under the aegis of the DTI, but still operates under its Adjudication Committee.

The vacancy rate has increased due to the creation of a number of new positions rather than resignations, which are in the process of being filled. The Department has been successful in the area of media and communications, despite having no budget for this, and only one person allocated to this task.

The successful process of linking co-operatives to high value market chains continue, mostly in the agricultural sector, although the Construction and Tourism sectors should offer growth opportunities. Increasing funding allocation of incubators is hoped to attract private sector investors.

A Policy and Research branch, which will also be responsible for monitoring, can now be formed, thanks to increased budget allocation, which is not the case in many departments.

The work of reviewing the Small Business Development Act is behind schedule; however consultations have been concluded, and the plan is being strictly monitored. This review should reach Parliament by the end of the year, but is only likely to be considered next year.

Retail co-operatives have been exposed to the market and linked to funding. Secondary co-operatives are being funded, but the requirements for funding and the application for this are too bureaucratic, and need to be streamlined to assist SMMEs outside of the traditional banking environment.

The terms of reference for appointing a service provider to assist in funding micro-franchises have been set, but this provider has not been appointed.

A Centre for Entrepreneurship was launched in Durban last year, of which the department is proud.

The infrastructure programme continues, but is held up by non-compliance on the part of municipalities: the department is keen to assist the Tshakhuma Market initiative, but must work with Makado Municipality: if the Infrastructure Fund works here, it will be a good example to other municipalities.

The Youth Enterprises initiative has shown improvement, but continues to under-perform in terms of training. However, the training of Informal Business Upliftment Programme remains a source of pride, having trained over 1000 informal traders. This pilot is in the process of being expanded.

The Red Tape Reduction programme has been delayed by reviewing and expanding the terms of reference of this study.

National Treasury needs to review the Small Business Development Act so as to open more windows of opportunity to entrepreneurs.

The Director General stated that the lessons learned in terms of the strategic plan and programme review should be reflected in the Fourth Quarter report, although 100% performance is highly unlikely.

Mr R Chance (DA) highlighted the “orphan” status of the Incubator Programme, which has no budget allocation from either the DTI or DSBD, and asked what is to happen to incubators that have already been set up, or whether they are able to sustain themselves.

His next question pertained to the huge budget disparity between Programmes 2 and 3, dealing with Co-operative and Small Enterprise development, the former being so hugely under-funded as to scarcely merit the title of “Programme”. Could the Director General comment on this?

Why is the department still under-spending by R71 million, even after budget adjustment? While the Director General did highlight the lack of a Policy and Research programme in the department, can she provide details of how this lack is being addressed?

Mr Chance expressed great interest in the DG’s report on the strategic review in next Wednesday’s meeting, particularly since the review recommended handing over all of the Department’s programmes to the agencies. What will the department’s response be to these changes in its management?

Since the department is currently undertaking policies which exceed the mandate given it by the Small Business Act, does it perceive any legal ramifications of this?

Could the Director General please address the Bulk Buying policies shown, but not addressed in the report, in particular whether it is working with any third parties in this regard?

Finally, Mr Chance highlighted the fact that the question of 30% procurement by government from SMMEs is not a matter of legislation, and should not be considered as such, but he did question when the Treasury is likely to decide on this policy, as well as those pertaining to government tenders, and whether the department expected this issue to be addressed in the practice note to be issued by the Treasury prior to the Amendment of the Small Business Development Act.

The Chairperson interjected in response to Mr Chance’s last comment: since the President had announced in his 2015 State of the Nation address that government would follow the 30% SMME procurement policy, this should become policy of the country, as should any proclamations made in this Address. She vehemently declared that it should be the responsibility of departments to make these official policy, and to ensure compliance from others, to “unlock any bottleneck” in implementing this.

Mr Chance politely disagreed with this, stating that until the legislative framework is in place, departments cannot act on Presidential proclamation, and have in the past been thwarted in attempting to do so.

Mr S Mncwabe (NFP) asked for clarity about the Durban University of Technology’s Centre for Social Entrepreneurship: what is the relationship between this school, and the Department, and will they be working together in the future?

Mr T Mulaudzi (EFF) asked for clarity on the number of co-operatives being referred to in the quarterly reports, and also at what stage the Department hoped to address the vacancy issue. Also, will the planned amendments to the Small Business Development Act include the term “Co-operatives” in the name?

How will the department reduce under-expenditure by the end of the financial year, given how many programmes are supposedly underfunded?

Relating to Programme 3, what has the department done for Tshakhuma Market, given that the same problems are highlighted in the Quarter 2 and Quarter 3 reports? Has the market been visited, and is the department working with local municipalities to address these problems?

Rev K Meshoe (ACDP) asked the Director General to explain the delay in filling vacancies, since this is affecting the under-expenditure of the department. Also, how was the department giving grants to entrepreneurs if they did not require detailed banking documents? Was not book-keeping part of the training offered? He also asked how the department regulated informal traders in terms of meeting standards of hygiene and safe practice as well as business standards.

Mr X Mabasa (ANC) asked how the department’s pilot projects were linked to market value, and by what criteria the success of these were being judged. He asked if the incubators are allocated to specific provinces, or are these moved according to specific areas of expertise? Finally, could Ms Vries explain what is meant by the phrase “SMMEs packaged as micro-franchises”, which appears on page 24 of the report?

Mr S Bekwa (ANC) congratulated the department on correcting some areas of underperformance thus far. However, he did highlight the need for a review of co-operative development to be done, as well as the appointment of a service provider to assist in financing start-ups. The Chairperson added that she wished to comment on this matter before the department responded.

Mr T Khoza (ANC) questioned the lack of budget for departmental communication. How was it communicating or being marketed? He asked for a breakdown of the numbers of informal traders per province, to determine whether these were biased towards urban or rural areas.

The Chairperson at this point gave clarity on the proposed amendment of the Small Business Development Act. The proposal for the name to reflect co-operatives has been made on behalf of stakeholders. She also addressed the question of the Tshakhuma market, as to how officials engage with the project, and which role-player is responsible for what; this is still unclear.

Mr Mzoxolo Maki, Acting Deputy Director-General, DSBD, responded on behalf of the Director General to the vacancy issue. He repeated that the ongoing programme review is hampering the appointment process. One of the recommendations is that the department’s current structure is insufficient to address the needs of SMMEs, and will be redesigned by the 1 April 2016. The budget allocation from National Treasury has also changed the number of vacancies, since new positions have now been made available. The processes of recruiting and vetting necessary for these positions has also held up the appointment process. Ms Vries spoke more on this matter. He added that the department only practised headhunting under particular circumstances.

Mr Shumani Mathobo, Director, DSBD, told the Committee that the budget projections were outdated, but that the approval of new budget recommendations were still pending, which was a factor in reducing the  under-spending by the department. However, plans were also in place to reduce this.

The Chairperson re-interpreted these statements, adding that the DSBD was still in a transitional phase after inheriting programmes from the DTI.

Rev Meshoe asked how many posts were not funded, so that action could be taken on this front.

Ms Vries responded that the department needed to fill 31 funded posts in Quarters 3 and 4, but could not say how many unfunded posts existed. She would address that in a future report, but added that if the unfunded posts were removed from departmental structure, these would be difficult to recover if they became necessary in the future.

Mr Mathobo, responding to Mr Chance’s question as to the legalistic interpretation of the Act, and the department’s mandate, once again cited the fact that the presidential proclamation on the matter provided sufficient legal power until the amendment to the Act takes place. As to the matter of bulk-buying, he clarified that a private logistics company is being used to allow SMMEs access to economies of scale. As to micro-franchisers, the department is hoping to allow SMMEs to access markets not already dominated by major franchises, since these would have smaller start-up costs, and help transform the franchise industry.

The Chairperson expressed her desire to broaden the base of franchisees as part of this transformation. This must be a radical process, not a soft one. She claimed that the economy follows the same structure as land distribution once did in South Africa, and remains racially biased. In responding to Mr Chance’s observation that the programme of co-operative development is massively underfunded, she entirely agreed with him, and insisted that:
- Communities needed to actively participate, as communities, in the economy;
- Rural areas were grossly underdeveloped compared to urban areas, and
- South Africa’s mixed economy needed to be driven by all the role-players in this, namely, the State and its Enterprises, the private sector, and co-operatives.

Unless the department took cognisance of these facts, Treasury budget allocation was not useful, since it was not being allocated correctly. However, she did state that the department is beginning to properly reflect on the importance and nature of co-operatives, as shown by its funding of secondary co-ops. Do these secondary co-operatives work both ways, however, in buying and selling to primary co-operatives? And since the department has chosen to focus so greatly on co-operatives in the Agricultural sector, is it working with the relevant Departments of Agriculture and Land Redistribution to fund all levels of these?

Mr Lindo Mkhumane, Deputy Director General: DSBD, responded that the Act is currently concerned only with the administration of the department, but a plan is being finalised as to the level of engagement with local chambers on matters of small businesses. The relationship with municipalities and provinces remains a work in progress, often due to a lack of simultaneous policy planning, and the fact that the department has no real power over provincial governments. Local municipalities often do not prioritise local economic development, viewing this as a fund for other projects.

Minister Zulu added at this point that they wish to meet with provincial premiers and MECs to discuss matters of infrastructure development, who are often already working with the agencies of SEFA and SEDA. the department relies on local government in these matters, as is addressing the issue of elevating the importance of local economic development.

The Chairperson remarked that District Municipalities are responsible for drawing up development plans, but these are not taken seriously enough by government. The latter should be communicating with these municipalities, not provincial governments to address infrastructure and economic development.

Mr Mkhumane responded to Mr Mulaudzi’s question about the co-operatives in the SAB programme. There are 18 of these functioning, with two not functioning due to the drought. In answer to Mr Chance, he explained that the incubator programme is handled by the DTI, who in the past years approved 42 projects, but cancelled 25 of these due to no-performance.

Pilot programmes, like those of the SAB planting scheme, will continue as long as is necessary both to yield results and teach valuable lessons. However, continuous monitoring of projects such as Tshakhuma is not possible under the existing service delivery model, but this is being addressed.

Ms Vries explained the value of co-operatives already funded, to communities and in providing lessons for future projects. The department’s role is one of providing a business model, not continuous monitoring of projects. Nor, in response to Rev Meshoe’s question on informal traders, is the department’s mandate to take responsibility for every aspect of these, which would fall under the auspices of health and housing inspectors, for instance, but only those pertaining to business practices.

The Chairperson asserted that while government is divided into departments, these should be acting as one entity, and facilitating one another.

The Director General stated that a breakdown is available as to where much of the training of informal traders has taken place, but this is mostly not in the deep rural areas. In all areas, however, local municipalities are involved, as well as working with other Departments, such as Labour. This is particularly important, since the DSBD does not have the capacity to follow up on training.

The Minister stated that they are of the view that this programme of training must be expanded, and include all other available structures.

Ms Vries addressed the questions pertaining to the programme review, and how this will impact on the strategic plan and structures for next year. In terms of research, the department has spent time establishing what research has already been done on such programmes as public procurement, for instance the annual supply-chain management review. The department will work with others such as the Department of Planning, Monitoring and Evaluation to prevent duplication of research. The lack of budget is therefore not a problem to the department.

In terms of communication, the department piggybacks on to other programmes and opportunities to market itself.

Minister Zulu interjected that proper funding is, however, needed for this.

The Director General continued, explaining that at present, bank details ARE still required for the allocation of grants, in response to Rev Meshoe’s question. The Chairperson clarified that this question referred to the monitoring of grants and funds once allocated, to ensure that these are of value.

Mr Mkhumane explained the department works with local business chambers and community financial institutions to regulate economic development, but that real monitoring of the informal economy by the department is not entirely possible.

The Chairperson stated that this highlighted the need for co-operative banks, which are self-governing, to assist business co-operatives.

Mr Mkhumane and Minister Zulu explained that the department was working with the Durban University of Technology and the Centre for Entrepreneurship in training students, and thus using these as bases of research. He then clarified that incubators are generally sector-based, but are also able to travel as field operatives, in response to Mr Mabasa’s question.

The Chairperson asked what the department’s approach was to developing supplier bases and secondary co-operatives. are existing markets being targeted?

Ms Vries explained that the department is still in its infancy in funding all of its programmes, and is still developing markets rather than competing with existing entities.

The Chairperson, in closing, stated that the current economic downturn must be seen as an opportunity for this department. Strategic partners must recognize this. municipalities can expand their revenue base, SARS must appreciate that small businesses contribute, rather than draw on tax revenue, and prevent from becoming a complete welfare state.

As a final comment, Mr Chance asked why, if the President has committed to minimising needless expenditure, was a large delegation from SEFA and Small Enterprise Development Agency (SEDA) invited to attend, but had not presented to this Committee?

Minister Zulu in agreeing with this sentiment, explained that the delegation had been brought to witness these deliberations, necessary to their operations, and was also in Cape Town to attend other meetings. The Chairperson also noted that the presentation of both the Quarter 2 and 3 reports prevented SEFA from making any presentation.

Committee Programme
The Secretary read out the proposed programme of events for the upcoming term, or the last quarter, the 26 January until the 22 March. Today’s delivery of the Quarter 2 Report was as a result of the previous meeting being disrupted by labour unrest. On the 24 February, the Committee will sit to receive the developments and results of the Department’s quarterly review.

On Friday and Saturday, the 26 and 27 February, the Committee will have a strategy planning session for the period 2016 - 2019, this not having been done since the inception of the Committee. On the 2 March, there will be a meeting to consider the plan produced at this session.

On 8 March, the Committee will have a follow-up meeting with the Parliamentary Committee on Telecommunications and Postal Services to discuss opportunities available to Small, Medium and Micro-sized Enterprises and Co-operatives in this area. On Wednesday, the Committee will be considering and adopting its Oversight Report on the Limpopo Department of Small Business Development.

On 15 March, the Committee will be briefed on the annual Strategic Performance of the Department, with a view to preparing for the budget vote. All Departments’ Strategy Plans will be tabled in Parliament on the 10 March, with deliberations on these scheduled for the 15 March.

On the 16 March, the Committee will be briefed on the strategic annual performance of its agencies, the Small Enterprises Finance Agency (SEFA) and the Small Enterprises Development Agency (SEDA).

The Committee adopted the programme.

The meeting was adjourned.

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