Department of Small Business Development on its 2015/16 Annual Performance Report, with Minister

NCOP Economic and Business Development

14 February 2017
Chairperson: Mr M Rayi (ANC, Eastern Cape)
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Meeting Summary

Annual Reports 2015/16 

The Department of Small Business Development briefed the Committee on its 2015/16 Annual Performance Report.

The Minister of Small Business made preliminary remarks before the presentation. In her remarks, she conceded that there were areas that required improvement when it came to the Department’s performance. Not all performance targets had been achieved. The service delivery model of the DSBD was also important. The DSBD had budgetary constraints. The DSBD had inherited programmes but some had to be reviewed. The vacancy rate of the DSBD was 24% at September 2015 but it had reduced to 16.3% at the end of the financial year under review. The DSBD had tried to strengthen its performance management system. Some areas that needed to be focussed on were the need to create an enabling environment, to optimise procurement and to build on providing market access. She emphasised that the DSBD could not succeed alone and needed partnerships with private sector and communities.   Furthermore, she highlighted that the National Development Plan (NDP) was of great importance to SA. The Department would endeavour to stick to the NDP for social, political and economic development. 5% was considered the ideal growth that SA needed, especially since 11m jobs had to be created by 2030.The DSBD was driven by the NDP. Part of the DSBD’s job was to get everyone within government talking about small and medium enterprises. The DSBD was tasked with changing mindsets. The DSBD had a plan in place to unlock the potential of small and medium enterprises. A question that needed to be asked was how much of government departments’ funds went towards small and medium enterprises. The DSBD was a small department that was in desperate need of additional funding.

The Committee was then given insight into the overall performance and financials of the DSBD for 2015/16. The DSBD had a total of 31 Key Performance Indicators (KPIs) of which 13 KPIs with targets had been achieved. There was a total of 8 KPIs with targets partially achieved with those not achieved sitting at 10. Performance of the DSBD thus sat at 41.9%. The total budget of the DSBD was R1.127bn. Expenditure totalled R1.098bn. The DSBD thus spent 97.5% of its budget with under expenditure being 2.5%. Performance achievements were touched on as the Minister had already elaborated upon them. None performance was highlighted as well. On cooperatives the Incubations Support Programme was not achieved and Enterprise Incubation Programme would be implemented in 2016/17. On informal businesses the pilot programme on infrastructure development and upgrading had not been successful. The DSBD had revised guidelines and had aligned its approach with development plans. Members were provided with a provincial breakdown of where co-location points were to be found. The briefing continued with an overview of the performance of the DSBD as per Programme:

Programme 1: Administration - the Programme had a total of 9 KPIs of which 7 KPIs with targets were achieved. The remaining 2 KPIs with targets had been partially achieved and these related to the DSBD’s vacancy rate and persons with disabilities. The total budget for the Programme was R88.85m and it had spent R66.44m. The Programme had therefore spent 82.2% of its budget. The under expenditure amounted was17.8%. Reasons given for the under spending was vacancies, related goods and services and capital requirements.

Programme 2: Cooperatives Development - the Programme had a total of 6 KPIs of which only 2 KPIs with targets were achieved. A total of 3 KPIs with targets had been partially achieved. There was 1 KPI with targets that had not been achieved. The total budget for the Programme was R12.24m and it had spent R11.69m. The Programme had therefore spent 95.5% of its budget. The under expenditure amounted was 4.5%. There were no material variances on the under expenditure.

Programme 3: Enterprise Development and Entrepreneurship - the Programme had a total of 16 KPIs of which only 4 KPIs with targets were achieved. A total of 3 KPIs with targets had been partially achieved. There were altogether 9 KPIs with targets that had not been achieved. The total budget for the Programme was R1.034bn and it had spent R1.020bn. The Programme had therefore spent 98.7% of its budget. The under expenditure amounted was 1.3%. Reasons given for the under spending was vacancies, related goods and services and capital requirements.

The briefing also spoke to the financial performance of the DSBD. The DSBD had spent 97.5% of its overall budget inclusive of transfers and it had spent 83.2% of its budget excluding transfers. In conclusion the DSBD had obtained an unqualified audit opinion. There had been one non-compliance matter worth R1.8m which amounted to irregular expenditure for not going on an open bid for services exceeding R499 999.99. Material misstatements to annual financial statements and predetermined objectives were corrected before the audit was finalised. The management report issued by the Auditor General of SA for the 2015/16 financial year reflected 35 findings. 

The DSBD was asked what its thoughts were on the State of the Nation Address 2017 mentioning that 30% of state buying power would be directed towards small businesses. The DSBD was also asked whether the NDP target of creating 11m jobs by 2030 would be attainable with SA’s growth rate being as low as it currently was. The understanding was that 11m jobs could only be created if the growth rate was around 5.4%. Members noted that they had received complaints from small businesses that the criteria for developmental funding were almost as difficult as that of commercial banks. Members asked for information and figures on small businesses to be found in their respective provinces. The DSBD was informed that a common complaint received from small businesses by members was about market access. To what extent were issues of market penetration addressed? How would the DSBD ensure that SMMEs would grow? The reality was that there were SMMEs that had received funding but had not grown. Members also asked to what extent Special Economic Zones (SEZs) and Industrial Development Zones (IDZs) benefitted small businesses. Members informed the DSBD about the practise of Chinese businesses setting themselves up as cooperatives in order to circumvent tax and labour requirements. Members felt that these types of acts should not be tolerated by SA. Members offered the DSBD assistance if they so needed it when it came to dealing with provinces and municipalities. How was the DSBD assisting women who had formed cooperatives in rural areas? The DSBD was also asked how it assisted miners to export their products overseas. Relating to the irregular expenditure by the DSBD for the financial year under review the DSBD was asked whether remedial action had been taken and whether an investigation was taking place. Did the irregular expenditure border on misconduct or on the criminal? At the time of the reporting period the DSBD had not had a Fraud Prevention Policy in place. Was there a Fraud Prevention Policy currently in place? Members highlighted the issue of a report that had been released the previous day about the findings of the Competition Commission around collusion by huge construction companies. The DSBD was asked how it was possible for a listed company to become a small business company. Members found the issue of incubation to be concerning. Members emphasised the importance of coordination when it came to small business development. The Committee urged the DSBD to inform it when it encountered a lack of implementation by departments. Provincial figures on cooperatives support was requested of the DSBD. Members pointed out that it would be interesting to compare budgets that were spent globally by countries on the development of cooperatives. Countries like Malaysia for instance spent much more than SA on the development of cooperatives. The DSBD was asked whether it assisted youth in growing their businesses. 

Meeting report

The Chairperson welcomed everone and acknowledged the Minister of Small Business Development’s presence.

Opening remarks by Minister
Ms Lindiwe Zulu, Minister of Small Business Development, said that the National Development Plan (NDP) was of great importance to SA. The Department of Small Business Development (DSBD) would endeavour to stick to the NDP for social, political and economic development. 5% was considered the ideal growth that SA needed, especially since 11m jobs had to be created by 2030.The DSBD was driven by the NDP. The DSBD was established in 2014. Its purpose was to assist small, medium enterprises and cooperatives. Championing the cause of small businesses was of utmost importance. The DSBD led the charge on small businesses and cooperatives. Part of the DSBD’s job was to get everyone within government talking about small and medium enterprises. The DSBD was tasked with changing mindsets. The DSBD had its own policies in place and at national level a great deal of inter-ministerial meetings took place. The DSBD had a plan in place to unlock the potential of small and medium enterprises. A question that needed to be asked was how much of government departments’ funds went towards small and medium enterprises. The DSBD was a small department that was in desperate need of additional funding. The DSBD had two agencies: SEFA and SEDA. A positive was that the Department had obtained an unqualified audit report in its first year. On employment equity the DSBD had 50.1% women representation at SMS level. It was important to focus on the development of women.

The DSBD also managed to pay its service providers within 30 days. This was not an easily attainable goal for all departments and the DSBD scrutinised reports that were released by the Department of Monitoring and Evaluation. The Minister reiterated that the DSBD supported enterprises and that it also linked cooperatives with market chains especially in the agricultural sector. The intention was also to connect farms and manufacturers to markets. Access to markets was very important and so was the empowerment of cooperatives. People and especially women needed to understand the entire value chain of production. A total of 227 cooperatives had benefitted on skills development through the Cooperatives Incentive Scheme. A weakness of government was the turnaround time that it took to assist people. The DSBD also had a National Informal Upliftment Strategy which aimed to empower, amongst others, the everyday black woman who had an informal business on the street. People needed to understand their businesses and their customers. The DSBD provided tools of implementation as well. There were many Technical and Vocational Education and Training (TVET) colleges but that they did not have entrepreneurship programmes. The DSBD had launched five centres of entrepreneurship. There was also the National Gazelles Programme which offered high level support to SMMEs which had passed the entry level point. There was also Finfind which was a one-stop solution for financing SMMEs.

The Minister conceded that there were areas that required improvement when it came to the Department’s performance. Not all performance targets had been achieved. The service delivery model of the DSBD was also important. The DSBD had budgetary constraints. The DSBD had inherited programmes but some had to be reviewed. The vacancy rate of the DSBD was 24% at September 2015 but it had reduced to 16.3% at the end of the financial year under review. The DSBD had tried to strengthen its performance management system. Some areas that needed to be focussed on were the need to create an enabling environment, to optimise procurement and to build on providing market access. She emphasised that the DSBD could not succeed alone and needed partnerships with private sector and communities.   

Briefing by the Department of Small Business Development (DSBD) on its Annual Report 2015/16
Ms Edith Vries, Director-General, DSBD, gave insight into the overall performance and financials of the DSBD for 2015/16. The DSBD had a total of 31 Key Performance Indicators (KPIs) of which 13 KPIs with targets had been achieved. There was a total of 8 KPIs with targets partially achieved with those not achieved sitting at 10. Performance of the DSBD thus sat at 41.9%. The total budget of the DSBD was R1.127bn. Expenditure totalled R1.098bn. The DSBD thus spent 97.5% of its budget with under expenditure being 2.5%. Performance achievements were touched on as the Minister had already elaborated upon them. None performance was highlighted as well. On cooperatives the Incubations Support Programme was not achieved and Enterprise Incubation Programme would be implemented in 2016/17. On informal businesses the pilot programme on infrastructure development and upgrading had not been successful. The DSBD had revised guidelines and had aligned its approach with development plans. Members were provided with a provincial breakdown of where co-location points were to be found.

The briefing continued with an overview of the performance of the DSBD as per Programme:
Programme 1: Administration - the Programme had a total of 9 KPIs of which 7 KPIs with targets were achieved. The remaining 2 KPIs with targets had been partially achieved and these related to the DSBD’s vacancy rate and persons with disabilities. The total budget for the Programme was R88.85m and it had spent R66.44m. The Programme had therefore spent 82.2% of its budget. The under expenditure amounted was17.8%. Reasons given for the under spending was vacancies, related goods and services and capital requirements.
Programme 2: Cooperatives Development - the Programme had a total of 6 KPIs of which only 2 KPIs with targets were achieved. A total of 3 KPIs with targets had been partially achieved. There was 1 KPI with targets that had not been achieved. The total budget for the Programme was R12.24m and it had spent R11.69m. The Programme had therefore spent 95.5% of its budget. The under expenditure amounted was 4.5%. There were no material variances on the under expenditure.
Programme 3: Enterprise Development and Entrepreneurship - the Programme had a total of 16 KPIs of which only 4 KPIs with targets were achieved. A total of 3 KPIs with targets had been partially achieved. There were altogether 9 KPIs with targets that had not been achieved. The total budget for the Programme was R1.034bn and it had spent R1.020bn. The Programme had therefore spent 98.7% of its budget. The under expenditure amounted was 1.3%. Reasons given for the under spending was vacancies, related goods and services and capital requirements.

The briefing also spoke to the financial performance of the DSBD. The DSBD had spent 97.5% of its overall budget inclusive of transfers and it had spent 83.2% of its budget excluding transfers. In conclusion the DSBD had obtained an unqualified audit opinion. There had been one non-compliance matter worth R1.8m which amounted to irregular expenditure for not going on an open bid for services exceeding R499 999.99. Material misstatements to annual financial statements and predetermined objectives were corrected before the audit was finalised. The management report issued by the Auditor General of SA for the 2015/16 financial year reflected 35 findings. 

Discussion
Mr S Mthimunye (ANC, Mpumalanga) congratulated the DSBD on a good Annual Report. He pointed out that the 2017 State of the Nation Address (SONA) had mentioned that 30% of state buying power would be directed to small business. He asked the DSBD what its thinking around this was. He said that the Minister had stated that 90% of the NDP 2030 target of creating 11m jobs should come from small business. He explained that the target would only be attainable if there was a growth rate of 5.4% per annum. Would the target be attainable with the growth rate being as it currently was in SA? He stated that on access to funding for small businesses the complaint that members received was that the criteria for developmental funding was almost as difficult as that of commercial banks.

Ms Vries responded that the criteria for Developmental Finance Institutions (DFIs) were actually worse than commercial banks. The interest rates of DFIs were higher. The issue was about the funding formula for DFIs. The problem was that some DFIs had not been recapitalised since their inception. Another problem that DFIs faced was that sometimes finance recipients did not wish to repay. On job creation, the reality was that the South African economy was not doing that well. The DSBD unfortunately did not control the market. The DSBD still believed that small business was still at the heart of successful economies and countries like China and India were evidence of this.

Minister Zulu, on DFIs recouping funding from SMMEs, said that perhaps there was a need to relook at models that were being used. Perhaps SMMEs could be given extensions on paying back funds as conditions on the ground for SMMEs were difficult. SA was after all a developmental state. The figure on the number of SMMEs contributing to the tax base in SA was increasing. The sectors in which SMMEs were finding success needed to be identified. The targets set out in the NDP was perhaps ambitious given the current economic situation in SA but she felt that it was possible to meet targets if all departments came on board to support SMMEs. There were many places where SMMEs could thrive. One such area was Saldanha Bay. The DSBD did have discussions with the Department of Public Enterprises as the area had a great deal of economic activities. Oil storage was just one activity that Saldanha was earmarked for. Ways needed to be found to empower South Africans.

Ms Vries agreed with Minister Zulu that there were small companies who paid more Pay As You Earn (PAYE), skills development levies etc than their bigger counterparts. She felt that a difference could be made by way of public procurement. She noted that government procurement sat at R600bn. If 30% of the total could be disbursed to SMMEs it would be a good start. 

Mr E Makue (ANC, Gauteng) said that he was interested in figures on small businesses in the Gauteng Province. He said that there were cooperatives in the south of Johannesburg. A number of small businesses complained about access to markets. He asked to what extent Special Economic Zones (SEZs) and Industrial Development Zones (IDZs) benefitted small businesses. He was disgusted by the act of Chinese businesses setting themselves up as cooperatives in KwaZulu-Natal in order to circumvent tax and labour requirements. He pointed out that members were well connected with provinces and municipalities and if they could in any way assist the DSBD to smooth things over they should be informed.

Ms Vries explained that on access to markets the DSBD worked with provinces and municipalities. Local farmers and producers needed to be taken on board. The DSBD tried to encourage the participation of SMMEs in BRICS. The local company Nestle was importing 90% of its chicory from India. However it had opened up a plant in KwaZulu-Natal to source chicory locally. She appreciated the offer that the Committee could smooth over problem areas that the DSBD had with provinces and local government but luckily the DSBD had thus far not encountered problems. There was good cooperation. She noted that most applications received by the DSBD were from the Gauteng Province. The least active provinces were the Northern Cape, Free State and North West. Each province had a provincial local development agency besides the activities of SEDA. She added that SEFA had a profile of 53 industrial parks. Some industrial parks did better than others.

Minister Zulu, on market access, said that a point of departure could be government itself. An example was the food feeding schemes at schools. The Departments of Social Development and Basic Education could source the food from SMMEs instead of the traditionally used bigger suppliers. She stressed that the DSBD had to get information on the matter pertaining to the Chinese. The DSBD would follow up on the matter as it was not a good thing. SA had a good relationship with China and there was a need to clarify what was acceptable or not.  She proceeded to read out preferential procurement regulations.

Mr M Chabangu (EFF, Free State) asked how the DSBD assisted women who had formed cooperatives in rural areas. He also noted that sandstone mining was based in rural areas. The DSBD was asked how it assisted miners to export the product overseas.

Mr L Magwebu (DA, Eastern Cape) referred to Programme 2 and said that only 2 of its 6 targets had been achieved. The reason given for the poor performance was a lack of funding. Apparently the funding had not been transferred to the DSBD but had remained with the Department of Trade and Industry (DTI). None of the incubation programmes had been funded. What was the response that the DSBD had received from the DTI? He also pointed out that on Programme 3 only four of the six targets had been achieved. On page 26 none of the five SMMEs and cooperatives had been identified and packaged as franchisors. The DSBD in taking remedial action had wished to appoint a service provider. Had a service provider been appointed? On page 30, mention was made of irregular expenditure by the DSBD. He asked whether remedial action had been taken and whether an investigation was taking place. Did the irregular expenditure border on misconduct or on the criminal? On governance at the time of reporting the DSBD had not had a Fraud Prevention Policy. Was there a Fraud Prevention Policy currently in place?

Ms Vries, on the matter of incubator funding, replied that the DTI had responded to the DSBD that it did not have the funds for it. The DTI also said that it did not fund incubators in certain sectors. On women and youth programmes they were not in place at the start of the 2015/16 financial year. 50% of incubators would benefit women with 30% benefitting youth. Concerning irregular expenditure, this was being investigated. The matter was one of the legacies that the DSBD had inherited from the DTI. Disciplinary action was being taken. She confirmed that the DSBD did have a Fraud Prevention Plan in place. In 2015/16 the DSBD had approved policies. There had been gaps in governance policies.

A DSBD official said that a service provider had been appointed. Much work was being done.  

Mr Mthimunye mentioned that he had read a report the previous day about the findings of the Competition Commission regarding collusion by huge construction companies. The companies would be required to perform remedial action by way of development initiatives. He also asked how it was possible that a listed company became a small business company.

Ms Vries replied that in most sectors there was a concentration of big companies that were usually white that kept out small business. Small business was labour intensive. The construction sector was one sector where barriers to entry could be broken. The DSBD would work with departments whose mandate it was to intervene in those sectors.

Minister Zulu, on the decision of the Competition Commission, said that the DSBD would look at what was said. There was corruption and collusion. She noted that there were many things that she was not happy with. Especially in terms of what these companies were required to do as remedial actions. She felt that all relevant government departments needed to be part of the decision making process on what the companies were required to do in terms of remedial action. She did concede that it was a complicated issue.

Mr B Nthebe (ANC, North West) asked to what extent were issues of market penetration addressed. He noted that the North West Province was a mainly rural province with a low skills base. He asked how the DSBD ensured that SMMEs would grow. There were SMMEs who received funding but did not grow. He noted that the issue of incubation was concerning.

Ms Vries stated that after three years an emerging small business should be able to stand on its own.

The Chairperson emphasised the importance of coordination as other government departments also dealt with small business development. Even coordination between provincial and local government was important. He pointed out that municipalities were not doing too well on the provision of infrastructure for small businesses. He explained that the DTI was one of the departments that the Committee’s sister committee ie Select Committee on Trade and International Relations did oversight over. Where there was a lack of implementation by departments the DSBD needed to inform the Committee. He said that the Committee would appreciate a provincial breakdown of figures on support that the DSBD was providing to cooperatives. He was not too convinced about the reason given for under spending on the incubation support programme. The excuse outlined in the 2015/16 Annual Report was around travel issues. He said that when it came to small business comparisons were made worldwide on initiatives. It would be interesting to compare budgets that were being spent by countries like for example Malaysia on the development of cooperatives. Malaysia invested much more than SA on cooperatives. As the Minister had said small business was after all the backbone of the South African economy.

Ms Vries said that the Committee needed to give the DSBD a list of names and sites that it wished the DSBD to focus on.

The Chairperson asked whether the DSBD assisted or coached youth in growing their businesses.

The meeting was adjourned

 

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