Small Enterprise Finance Agency (sefa) on its 2016-2020 Corporate Plan

Meeting report

Small Enterprise Finance Agency (sefa) on its Corporate Plan for 2016/17 - 2020/21
Mr Thakani Makhuvha, CEO of sefa, noted that the development of the Corporate Plan was shaped by an extensive consultation process and organisational review that included ongoing engagements and consultation with the Executive Authority, the Department of Small Business Development (DSBD), regular reporting and feedback from sefa’s shareholder, the Industrial Development Corporation (IDC), sefa’s quarterly reporting and engagement with the Portfolio Committee on Small Business Development and the Select Committee, sefa's Divisional Corporate Planning – assessment of year-to-date divisional performance and the identification of divisional priorities and targets, sefa’s Executive Committee on strategic planning sessions, sefa's Board Corporate Planning session on review of organisational performance and the identification of key strategic priorities, and Government Economic Policy.

Sefa support from the national budget is projected to decline by ±R200m per annum for the MTEF period, therefore a cost and revenue management programme will be aggressively implemented focusing on amongst others, the containing of operating expenses, reduction of impairments, and an increased focused on loan repayments of specialised collections and post investment management. He noted that the Corporate Plan is aligned with the mandate of the DSBD and its Strategic Plan.

Sefa's corporate performance from 2012 - 2015 in terms of the impact of development for SMMEs and cooperatives includes 113 052 informal and micro enterprises with the approval amount of R462 million; Small and Medium Enterprises funded were 2 079 with the loan approvals amounting to R1.6 billion; black-owned included 96 607 SMMEs and cooperatives funded with loan approvals amounting to R1.5 billion; Youth-Owned included 26 710 with loans approvals amounting to R449 million; and Women-Owned amounted to 110 970 SMMEs and cooperatives with funding approved amounting to R846 million. The agency has devised five programmes that will intensely focus on development and which will ensure that all clients of the agency are catered for and allocated to the relevant programme. Under Programme 1 there are five sub-programmes which include:
Programme 1.1 - Informal and Micro Enterprise
Programme 1.2 - Direct Lending
Programme 1.3 - Wholesale Lending
Programme 1.4 - cooperative Enterprise Lending
Programme 1.5 - Khula Credit Guarantee

Programme 2 is about post investment management, which seeks to reduce the level of impairments and establish a developmental approach towards client sustainability. Programme 3 focuses on building an efficient and effective sefa that is performance driven and sustainable and seeks to develop and implement an effective and efficient back-office support system. Programme 4 focuses on building a strong and effective sefa brand emphasizing accessibility to SMMEs in order to position sefa as a funder of choice amongst SMMEs and cooperatives. Programme 5 focuses solely on property management in order to ensure that the value of the sefa property portfolio is preserved and maintained and strategically utilised to provide affordable infrastructure to small and medium enterprises.

The loan approvals and disbursements over the five-year Strategic Plan for disbursements to SMMEs and cooperatives were outlined (see document). The number of SMMEs and cooperatives financed over the Strategic Plan will amount to 297 641, and 497 499 are the number of jobs that will be facilitated over this period.

The budget objectives included working within current funding available and maintain positive cash balances over the MTEF period; reduce losses over the five year period and break-even by 2021; decrease impairments especially in the direct lending operations to 24% by 2020/21; and downscale the direct lending operations in the short-term to enable collection strategies to be put in place.

Discussion
The Chairperson said the scrutiny of the sefa's Strategic Plan is to ascertain whether it is aligned to the Strategic Plan of the DSBD. Essentially it is also important to note whether the DSBD has addressed the cooperative's mortality rate of 88% in its Strategic Plan, so one of the key issues the Committee will be looking at when the DSBD presents its strategic plan is how the DSBD plans to address that failure rate and if key instruments and mechanisms have been put in place to eliminate this failure rate. It was reported that SMMEs in SA have a failure rate of 40% , so it is essential for the DSBD to ensure that key instruments and mechanisms have been identified to address the failure rate of SMMEs as well. The key performance indicator will then be what will enable the Committee to see if the DSBD is addressing the failure rates of both SMMEs and cooperatives, and identifying the key risks to achieving this performance indicator, and most importantly how the Committee can assist the DSBD in mitigating the risk. So this is how the Committee and the DSBD is going to engage going forward.

Mr H Kruger (DA) asked about the high failure rate that includes SMMEs and cooperatives and informal business owners as well as the drought. He asked if there any strategy to help informal businesses that are failing due to the drought, specifically financial assistance. Secondly, sefa is aiming to provide formal traders who buy from farmers some financial credit through credit cards, but what about the informal traders that also buy directly from farmers. Thirdly, what does sefa think is an affordable interest rate and also does sefa know where the informal traders are located, which provinces and towns. He referred to Elna who gave a presentation about a year ago on a business that had applied for funding. He asked the CEO to provide some feedback about the status of that application.

Mr X Mabasa (ANC) asked if sefa has good strategies for ensuring that the Auditor-General findings and warnings are noted, and if there are strategies in place to ensure that sefa does not have a qualified audit opinion. He noted sefa funds being radically cut as the years progress yet the numbers for jobs created seem positive. He asked for comment on whether job creation will be affected negatively in relation to the diminishing funds. If intermediaries also playing a role acquiring funds from sefa and providing them to end users, what percentage are they going to charge? Lastly, is sefa going to serve the neglected informal sellers who spread out are all over the country.

Mr T Mulaudzi (ANC) asked if the budget allocated to sefa is enough to radically transform SMMEs and cooperatives. How far is sefa going to ensure that 90% of the people are in a conducive employment with the budget allocated. Does sefa trying to pursue grants or donation from international structures such as the AU to inject funds into sefa to achieve its objectives? On page 43, the priority of provinces excludes the Western Cape, Gauteng, and KwaZulu Natal. However, KZN should not be excluded from the priority list because about 70% of people there are poor and living in the rural areas and the population there is higher than other provinces, notwithstanding the fact that is agriculture is prominent in driving the economy. Therefore, sefa should conduct more thorough research to pinpoint these areas so that KZN can be included on the priority list. With regards to loan interest, what is the exact interest rate charged to SMMEs and cooperatives, as well as the challenges faced in the repayment of the loans? What strategies and mechanisms and remedies are put in place to ensure that this is addressed and that the institution is sustainable? With regards to the money received from IDC, does sefa invest that money into portfolios that will generate some income over time, and if so, the Committee would appreciate the details of the investment portfolio?

Mr R Chance (DA) asked the CEO to think about the vision and mission of sefa. He said one of the key performance indicators is that by 2019 SA should ascend to the top of the Global Entrepreneurship Monitor (GEM) report amongst sub-Saharan countries; he asked if this is something that could impact on sefa's strategic planning. Secondly, he asked what are the measures of economic development and the value add of sefa to the local economy, specifically regarding economic development? The measures adopted by sefa are still very narrow and do not look at sefa's role as an economic development agency. The cost per job created varies from the lower end of the scale at around R951 per job created if you look at the Micro Enterprise Financing through to R260 000 per job created at the higher end of the scale which is essentially the number of jobs created per enterprise funded. How does sefa justify spending so much funding into a business that only creates about one and a half jobs, and there is no certainty whether sefa is sustaining existing jobs or creating new jobs. On the other hand some of sefa's interventions create 4 to 5 jobs? How much are those jobs paying because these are important and critical factors that contribute to the total value added into the economy. He believes that there is so much work that still needs to be done in the fundamental thinking about the purpose of the agency and sefa needs to be engaging with development economists around what actually is the business of sefa. He said based on the balanced scorecard, sefa is being evaluated on loan disbursements not its ability to recoup the money borrowed. However, if that is the mandate then so be it, but what is the value added to the economy from the money that sefa gives out in the development of SMMEs and cooperatives - the value of the return from loan disbursements and approvals?

Mr S Bekwa (ANC) said people living with disabilities are neglected, so what is sefa going to do to uplift and prioritise them and utilise the available structures mandated to assist them. The pilot projects in Durban/Mangaung should be taken to the rural areas to assist in the economic and SMME development in those areas.

The Chairperson asked whether sefa is biased towards municipalities with no revenue base. Is this plan together with the DSBD's strategic plan aligned with the Department of Rural Development's plan  for the agri parks initiative and the revival of the fresh produce market by municipalities? The Ugie Local Municipality is currently in talks about the revival of the fresh produce market in its district. It is also in the plans of the KZN Government that each and every district municipality must have a fresh produce market because KZN National Spatial Development Perspective believes that agriculture will grow the economy and then it specifies which districts will be lucrative for that. The Department of Rural Development is on board to initiate agri parks. Therefore, was the Strategic Plan of both the DSBD and sefa developed in an integrated manner, and also touches base with the targeted areas at district municipality level? Are these prioritised projects related to the national spatial development perspective of each area? These are projects that when their applications are being assessed, you will know are important to respond to because they address and relate to the national spatial development perspective. Where do we put the private sector in relation to the support role they play in developing SMMEs and cooperatives?

Mr N Capa (ANC) asked if the alignment of the DSBD and sefa's Strategic Plans were taken into account when preparing the presentation. How will the drought affect the programmes and what is sefa planning to do to address the effect of the drought on its programmes? He spoke about interacting with seda to highlight areas of cooperation. Are there no possibilities that the small vineyards or small wine makers in the Western Cape can be identified and assisted, instead of excluding the Western Cape, because there are poor people in the Western Cape as well?

Mr T Khoza (ANC) said on page 8 of the presentation an indication of the number of cooperatives would be appreciated, because the composition of the large number reflected could be just SMMEs making up the large number whilst cooperatives are just a small portion. He asked for an indication of the geographical spread of these cooperatives and if they are part of the number.

Responses
Ms Edith Vries Director General: DSBD, said the DSBD is tasked to provide policy leadership and direction to all other national departments that play a role in contributing towards the development of SMMEs and cooperatives. It is not a necessity for the agencies to interact with the national departments in pursuit of inter-governmental relations (IGR) obligations, because that is part of the role of the national departments. The question on drought and the alignment of strategic plans are areas that are dealt with in the economic cluster unlocking the potential of SMMEs and cooperatives. So essentially the DSBD provides that policy direction to sefa and seda, however, that conversation has taken place between sefa, seda and the DSBD, but it is something that will be initiated moving forward. The DSBD will set a target for integrated planning with national departments, monitoring and targeting in terms of their mandates, as well as on the provincial level. So next year around this time, the framework for integrated planning would have been established.

The DSBD has not engaged with district local municipalities because the DSBD does not have the capacity to engage with all the district municipalities, and she was uncertain whether sefa, seda and the DSBD should be engaging with the district municipalities whilst there is COGTA to do that. She believes that the DSBD does not want to overstep another national department's mandate. It is also not cost effective for the DSBD, sefa and seda to be out there engaging with district municipalities.

Mr Makhuvha said some of the points raised in the meeting are taken quite seriously and as an input to build on as sefa progresses. sefa does not have a specific strategy or programme around the drought. The fresh produce market funding programme does not preclude any SMME or cooperative from receiving funding from the programme even if they buy their fresh products directly from the farmers and not through the fresh produce market. On the affordable interest rate in the informal sector, if you look at the fresh produce market credit facility, the traders are provided with a credit facility to be able to purchase products on credit, and if the trader does not default on payment (i.e. pay within the set period), then the trader will be entitled to an interest-free repayment. With regards to the direct lending activities, the interest rates charged average at about 13.7% on approved loans. However, sefa does not require collateral or owner's contribution. That leaves the organisation with a high appetite for risk, therefore, the interest rate charged better positions the organisation from absorbing a much higher level of risk. The location of the informal traders is still unknown by sefa at this point, however, more needs to be done to identify their locations.

A sefa representative said sefa has engaged with Elna extensively together with seda and have assisted her in the development of a business plan, however, the big challenge relates to market access because she wanted to export relatively low priced products to Mozambique which was found to be unviable, and she wanted to set up a factory. At the moment she is engaging with seda to establish market access, and it would be impossible for her to compete with the current businesses in that area. Unfortunately at the moment the micro economic conditions have changed in terms of the steel commodity challenges and the construction industry which she is highly linked to, but she is still engaging with seda to search for solutions.

The Chairperson said that what the retail sector appreciated from the interaction with the Committee is that it opens an opportunity for the DSBD and its entities to know what is needed by the retail sector before production starts. In the past what small businesses would do was to decide on the products they want to produce without thorough market research. The retail sector said they are not the end users of the products, and they are also customer driven, so what is lacking from all the services offered by the DSBD, sefa and seda is market research services. Market research is the most important thing that makes a business a success. Funding an SMMEs or cooperative without a guaranteed and sustainable market is like throwing money away. This is essentially what needs to be examined when talking about the 88% failure rate of cooperatives and the 44% failure rate of SMMEs. The agencies need to mitigate the uncontrollable factors that are experienced by SMMEs and cooperatives, and ensure that the marketing of these SMMEs and cooperatives is also prioritised to ensure that sustainability persists.

Mr Makhuvha said sefa has received an unqualified audit opinion with minimal findings from the AG since its inception and he is confident that the agency will remain with an unqualified and clean audit opinion. The radical decrease of funding will not directly affect job creation due to the provision of funding through intermediaries. With regards to the interest rates charged by the intermediaries, sefa has recently taken on a new intermediary called Siza Capital and it charges about 20% interest to its customers, as with historical intermediaries they are not receiving new money from sefa they will be recycling the money received historically. Sefa provides some funding to an international organisation that in return provides financial and business support to some of the local business activities in the country. With regards to the priority provinces the focus is not necessarily to neglect the Western Cape, Gauteng and KZN based on the balanced scorecard but to ensure that the provinces that are under-developed have an intensified focus on their rural areas. Those SMMEs and cooperatives who default on payments are sent letters of demand and summoned for legal action so that they pay back the money so sefa can be able to do more.

Mr Makhuvha said that a Member said sefa's clients must be measured over a period of time, and the impact of that client in relation to micro-economic indicators. For example, the measurement of jobs can be done at three levels, firstly; at the firm level, disposable income level and livelihood and well-being of people. Sefa wants to measure the impact of its funded clients to long-term outcomes with regards to contribution to fiscus in terms of taxes and company tax, so in that sefa will be able to measure whether sefa's clients have a tax neutral effect or a tax-plus effect. For example, if sefa has funded over 60 000 informal enterprises, then if you take the average monthly income of those funded informal enterprises you can begin to calculate the disposable income and the tax effect that is accrued on that particular income of which in this case would be VAT (Value Added Tax) at a point of sale. With formal enterprises they pay income tax at 28% of which the tax effect is measured from the tax certificate of that particular enterprise, and this is where the post investment management procedure comes in and proves to be effective.

What the Global Entrepreneurship Monitor (GEM) is trying to measure is the eco-system in the economy, and that relates to hardcore infrastructure issues, micro-economic stability, educational infrastructure and entrepreneurial behaviour in a country. To set up the infrastructure that GEMS is referring to which relates to the creation of the eco-system is not a once-off activity and it is an inclusive process of all the role players in the economy, and sefa only addresses one aspect of the economy which is the provision of finance to SMMEs and cooperatives.

The meeting was adjourned.