AGSA laid out the criteria that it will use to carry out the 2016/17 audit of the department. It did not provide any specific audit related information because the audit will commence only in July. Once the audit is completed, the AG will return in September to report on its audit findings and make its recommendations.
DPSA reported on the formula and processes for its advisory role in the organisational restructuring of DSBD. The responsibility for the restructure lies with the minister and senior management of the department going through restructuring. The allocation of funds towards the change in structure is a necessary concomitant for the DPSA to play its advisory role in assisting in a smooth transition in the restructuring process. The Minister of Public Service and Administration will only concur with the proposed structure if the funds are available. Following the deliberations on the draft proposed organisational structure, the following resolutions were agreed upon:
- DSBD will incorporate input from the DPSA on the proposed organisational structure
- DSBD will finalise the job evaluation process on the newly created and affected posts
- DSBD will accommodate posts transferred from DTI that were not part of the approved start-up structure
- DSBD should finalise the service delivery model and the business case to reflect its evolving nature as informed by operational requirements.
DPSA reported that the organisational restructuring of DSBD has been smooth, except for some technical issues regarding employment and capacity, and those issues have been since resolved.
FFC shared some observations on DSBD performance indicators, financial performance and strategic and operational risks, as well as the budget for programme spending. FFC reported that DSBD and its agencies have targeted to support over 600 SMMEs. The regulatory environment is a major setback that obliterates SMMEs from thriving, but it appears that the Department has programmes in place to address the issue of red tape. To assist in minimising red tape the FFC aims to work with SARS to reduce the red tape around tax related matters for SMMEs. FFC said that the DSBD Administration experienced the highest growth and growth occurred substantially over the medium term. The compensation of employees was the main cost driver, accounting for 63% of total expenditure. It asked if this had delivered on the DSBD mandate. The Department spent R304.3 million versus a projection of R379.7 million translating into R75.4 million (19.86%) under expenditure. The under expenditure was due to non-processing of transfers and late interface of office accommodation. DBSD was very constrained by capacity, and this has a severe impact on its performance.
The Department of Planning, Monitoring and Evaluation reported on its performance assessment of DSBD regarding the 2016/17 targets as of Quarter 3. DSBD supported 95.7% (1388 of 1450) enterprises coming from townships, whilst only 33.8% from rural areas were supported. 1120 informal businesses were supported through the refresher training, whilst only 48 cooperatives were supported by DSBD. Its programs have increased SMMEs support that drive towards empowerment and transformation, placing a renewed focused on building township economies and on public procurement as a lever to drive growth. Government did this by ensuring that 30% of procurement expenditure goes towards SMMEs. To give effect to the implementation of the 30% set aside, National Treasury has reviewed the Regulations of the Preferential Procurement Policy Framework Act and gazetted amendments in January 2017.
DPME gave feedback on the DSBD 2017/18 draft Annual Performance Plan (APP), reporting that the quality of plans has slightly improved in terms of planning principles and measurability compared to its first APP when DSBD was established. However, there are still some areas that require improvement including misalignment between the APP and the Strategic Plan. DSBD has revised its strategic goals and objectives in the Strategic Plan which reflect the new strategic direction being embarked on, but the revisions are not reflected in the APP.
Members asked if AGSA ensures that when auditing, it takes into account crucial legislative prescripts and policies, such as the National Development Plan; whether when it exposes areas of non-compliance that it then provides solutions and guidelines to solve those deficiencies; AGSA’s view on the independence of parliamentary committees in their oversight reports; whether the AG looks at the recommendations made by the committee; how involved is the AG in its engagements with the external auditors that audit the Small Enterprise Finance Agency (SEFA). DPSA was asked if it applies any monitoring tool when exercising its advisory role; what tools are there in place to rectify challenges picked up during the organisational restructure; what takes the prerogative between funds and the transfer of functions – what should happen first; whether donor funding contributes towards the funds required for the transfer of functions, and consequently the initiation of the restructuring process; whether DPSA has a clear understanding of the mandate and core business of DSBD; and what appropriate measures DSBD can adopt to resolve its lack in reporting and monitoring. Members were concerned that SEFA and the Incubation Programme had not been moved to DSBD. FFC was asked about the purpose of the research unit it proposed; the FFC’s thoughts on legislating for red tape reduction and whether red tape reduction for SMMEs and cooperatives is a DSBD responsibility. DPME was asked if it would prioritise DSBD as a mechanism to drive employment and economic growth considering that it has been lacking in the delivery of its core functions; and if DPME is satisfied that DSBD is moving in the right direction, based on DPME monitoring and evaluation.
The Chairperson commented on the importance of the AG’s role in holding DSBD accountable.
Auditor-General of South Africa (AGSA) briefing
Mr Ahmed Moola (Senior Manager: AGSA) explained that AGSA is currently at the beginning stages of preparations for its audit of DSBD, the audit will commence in July and AGSA will return in September to present the outcome. Today’s briefing is on the criteria that AGSA will employ as a tool to conduct its audit. The Portfolio Committee is ideally placed to exercise oversight of the service delivery performance of departments and entities that are within the same portfolios.
For assessment criteria for the budget, AGSA recommends that the Committee should aim to complete the oversight process on annual reports timeously and develop department specific reports such as the Budgetary Review and Recommendations Report which express the Committee’s view on the budget of DSBD. AGSA peruses the BRRR as evidence to support compliance. The assessment of the budget usually refers to the auditing of the financial performance - the annual financial statements (AFS) of DSBD, whether they are complete, or the users of the AFS have been misled.
For assessment criteria for performance information and service delivery, the AG looks at the performance of DSBD and the effectiveness of its internal controls. AG peruses the Committee Reports after oversight meetings, and corroborates Committee reports against the Annual Performance Plan to ensure completeness. There must not be targets included in the APP that were not planned and approved by the Minister.
Mr H Kruger (DA) asked if the AG ensures that when conducting its audits it takes into account crucial external legislative prescripts and policies, such as the National Development Plan (NDP).
Rev K Meshoe (ACDP) asked if the AG exposes the areas of non-compliance and then provide the solutions and guidelines for how DSBD can solve those compliance deficiencies.
Mr Moolla responded that the AG does look at legislative prescripts, the MTSF (Medium Term Strategic Framework) and APP to ensure that there is alignment in all the relevant documentation. The NDP, MTSF and SONA (State of the Nation Address) are important policy statements that are crucial to the auditor to ensure that the auditor focuses on what is important as outlined in those documents, as they serve as the guiding benchmark to which DSBD sets its objectives and targets. When the AG engages with the auditee, it makes recommendations and looks into the root causes of the deficiencies, and recommends possible solutions. Management in the AGSA requires that audit reports are encompassed by recommendations.
Rev Meshoe noted the regular engagements between DSBD and the AG and said that the Committee is not looped into those so it can be updated on the recommendations coming from those regular engagements.
Mr Moolla suggested that it would indeed be ideal if DSBD could keep the Committee looped in on the outcomes of those engagements. The AG is happy to share this information with the Committee when it becomes available, and can furnish it to the Committee.
Mr Bekwa noted that DSBD had never received a clean audit. How far did the Department go in resolving the issues that led to a qualified audit.
Mr Moolla replied that DSBD actually received an unqualified audit with findings, and AGSA had made recommendations on those findings.
Mr N Capa (ANC) asked about the AG’s view on the independence of portfolio committees in their oversight reports.
Mr Moolla replied that when the AG assesses the Portfolio Committee, it looks at the evidence that supports compliance, and looks into other important documents like the Committee reports and minutes to corroborate information and find deficiencies. The AG also considers the efforts that a Portfolio Committee makes in fulfilling its responsibility, in instances where it could not proceed with its functions due to the government entity not fulfilling its role.
The Chairperson asked if the audit looks at the recommendations of the Committee and the adherence of DSBD to those recommendations.
Mr Moolla replied that the audit looks at the recommendations – to come to a conclusion. These will not have an impact on the audit outcome and in the general report, but AGSA will include a conclusion on its assessment of the Portfolio Committee’s oversight role.
The Chairperson emphatically suggested that perhaps that is where the challenge really is, because when the Committee makes recommendations, they are of substance. The Committee would have been on the ground conducting its oversight role before coming up with those recommendations. Therefore, it gathers critical information about the failures and the deficiencies that exist within DSBD. So what is the use of going on the ground and making recommendations, but then they are not considered for audit purposes? What is the purpose of looking at whether the Committee has done its work but to overlook whether the recommendations have been implemented by DSBD. With discontent, she asked if this means the Committee should go to the courts in order to have its recommendations considered.
Mr Moolla replied currently the audit is not designed to address the issues outlined by the Chairperson.
The Chairperson replied this is where she has a bone of contention with the AG – because it should peruse the Committee’s work and whether DSBD has adhered to the Committee recommendations. This is something that the AG needs to seriously look into, because DSBD needs to be held accountable for not adhering to the Committee recommendations.
The Portfolio Committee Content Advisor referred to page 13 on Committee assurance and asked where the Committee is in adhering to the levels of assurance outlined there.
Mr Moolla replied about the commitments made by the Portfolio Committee, the root causes outlined are from the previous year and it is still early days to come up with this year’s audit outcomes. The ones mentioned are the main ones that are pervasive and recurring over the years. On the question about external auditors, Mr Moolla replied that the AG chooses which public entities it has the capacity to audit. However, those that are audited by external auditors – the appointment is overseen by the AG.
The Chairperson stated that the Small Enterprise Development Agency (SEDA) would not exist if there was no Department – SEDA is the implementing agent of DSBD. The Committee had to chase up both SEDA and DSBD to get their strategic plans aligned. They would present strategic plans that are not aligned, which is grossly erroneous because SEDA is an implementing agent of DSBD. So the APPs and strategic plans of the entities must complement each other. How does the AG assess the alignment of the strategic plans and APPs of SEDA and DSBD?
Mr Capa asked what the trend was in trying to improve the alignment of targets where the reports or APPs are not aligned. Has any improvement been happening about the misalignment as previously outlined by the AG to DSBD?
The Chairperson asked if the AG has seen the Committee’s own strategic plan.
Ms N Mthembu (ANC) stated that as the Committee does its oversight – what it recommends is what it has experienced on the ground and tallies it up with what DSBD outlined as targets in its APP and strategic plan.
Rev Meshoe asked if the AG looks at the recommendations made by the Committee. Otherwise, what is the point of the Committee conducting its oversight and coming up with recommendations if those recommendations are overlooked when the AG is conducting its audit? Does it look if DSBD adheres to Committee recommendations and ask DSBD about adherence if DSBD has failed to do so?
Mr T Mulaudzi (EFF) asked if the AG lacks the capacity to audit SEFA, and how involved the AG is in its engagements with the external auditor that audits SEFA.
Mr Moolla replied that when the AG does its financial statement audit it provides information from the financial perspective, and when it comes to APPs or DSBD performance – the AG looks at the performance indicators and the targets, and whether the indicators are well defined, specific, measurable and relevant. It is not within the mandate of the AG to look at the alignment of the strategic plans and APPs. This is taken into account when it comes to the understanding of the entity when the AG is conducting its audit to ensure that it comes up with solid and informed audit outcomes. So DSBD needs to have a function that is responsible for the oversight of its agencies. DPME also has the role in the process. There was an issue of capacity regarding SEFA being audited by an external auditor. However, the AG overlooks those audits. There is a lot of capacity required, and it must be noted that in some instances some audits eventually do come over to the AG when the issue of capacity has been dealt with. For instance, recently SAA, the SABC, as well as the SA Post Office are now being audited by the AG. He asked for the opportunity to get the report and consult with his superiors and come up with a way forward in looking into reviewing the implementation of the Committee’s recommendations by DSBD.
The Chairperson commented that she understands the AG’s perspective on this matter, and further consultation with his superiors would be appreciated, as well as the report back.
Department of Public Service and Administration (DPSA) on DSBD organisational restructuring
Mr Kenny Govender, DPSA Deputy Director-General: Human Resource Management & Development, gave apologies for the Director-General who was attending another meeting. He said that DPSA plays an advisory role in the organisational review or restructure of a department. The responsibility for the restructure lies with the Minister and senior management of DSBD because they best know its mandate and service delivery model. The change in structure is expected to have funds allocated for it – unfortunately the DPSA does not involve itself with the budgeting of the organisational structure, particularly the technicality of it. However it can offer an advisory role to best manage the budget in the process and allocate funds appropriately.
The Minister of Public Service and Administration will only concur with the proposed structure if the funds are available. Funding for the restructuring is a necessary concomitant. It is important that the unions are involved in the process as well, because the structure may affect their members, so DPSA encourages departments that are undergoing restructuring to make part of the process all relevant key players.
With regards to the progress of DSBD, on 5 April 2017 DPSA and DSBD officials met to discuss the service delivery model and the draft proposed organisational structure. Following the deliberations on the draft proposed organisational structure, the following resolutions were agreed upon:
- DSBD will incorporate input from the DPSA on the proposed organisational structure
- DSBD will finalise the job evaluation process on the newly created and affected posts
- DSBD will accommodate posts transferred from DTI that were not part of the approved start-up structure
- DSBD should finalise the service delivery model and the business case to reflect its evolving nature as informed by operational requirements.
As soon as the key legislation is transferred to a new Minister, it is then imperative to organise the structure to support and ensure that the legislation and mandate is adhered to by the new department. The Minister of Public Service and Administration does not issue a determination until there is a legitimate agreement between the two ministers that are involved in the transfer process, i.e. the Ministers of Small Business Development and of Trade and Industry. It is safe to say that the process has been very smooth with DSBD. Although there were technical issues that came up, such as employment or capacity absorbed from the Department of Trade and Industry (DTI), these have since been resolved.
Mr Mulaudzi, noting the advisory role DPSA plays in the process, asked if there is any monitoring tool applied by the DPSA and what tools are in place to rectify any issues that are picked up during the process. Lastly, on page 14, about the meeting held on 5 April 2017 – when will the process be finalised, is there anything that was said at the meeting about the time frame for when the process will be finalised.
Mr Capa was concerned about the transfer of functions and funds. The fact that the functions cannot be transferred without the funds is problematic. However, what should come first – the function or the funds, because in some instances the function will be needed but the funds will be held up by technical formalities?
Mr Kruger said, with regards to the organisational functionality assessment (OFA), when DPSA peruses the DSBD mandate and other documents, one will find that DSBD is one of the most important departments in the country. So was this considered at any stage of the transfer, based on DPSA evaluations. With regards to the transferred functions, why was Rural Development not transferred to DSBD, because its mandate speaks directly to this as well in developing the rural economy?
Mr Govender advised that the role of DPSA is an advisory one; normally at provincial level as well the role played by the DPSA is the same. When the letter of concurrence is issued, DPSA instructs the relevant department to send the letter of agreement (between the two relevant Ministers) to the DPSA and to ensure that there is no deviation and if there is any, it is clearly outlined and stated in the letter. On a weekly basis the DPSA monitors all advertisements for posts that are issued out by DSBD changing its structure, and the DPSA checks whether the posts advertised are actually within the proposed structure and according to what is stipulated in the documentation of the process.
The 5 April meeting indicated a number of things that need to be done and there was no time frame that was put out, that is the responsibility of DSBD. When DPSA deals with the issue of transfer of functions, it does not get involved in the political debates regarding the establishment of departments; it plays an administrative role to make the transition smooth and ensure that it adheres to all relevant legislative prescripts. It ensures that all personnel in DTI responsible for the function being transferred to DSBD moves to it, as well as all the funds linked to that function and assets (equipment, vehicles, cash equivalents), liabilities and resources linked to that function must also move. It is difficult to approve a structure without the funds being approved to the proposed structure. The funds are a concomitant to the approval of the structure.
Mr Kruger asked about the funds from the EU donor – 2 million euros, whether the funds will contribute towards the funds required for the transfer of functions or what role will those funds play in this process.
Mr Govender explained that the funds coming from the national fiscus actually facilitate the function of DSBD and the funds that come from donor are limited and are only granted as once-off in some instances. From the 5 April meeting, the evolving nature of DSBD has been prevalent.
Mr Govender said the Department of Rural Development is its own department guided by its own legislation and mandate, although there may be an overlap in some functions but that is where the role of coordination and transversal agreements come in to ensure that such departments collaborate to effectively deliver the required services to the public. The Executive Authority (EA) has the final say in terms of the finalisation of the process, and it will consider the DPSA’s input, but the final decision lies with the EA.
When the functions are transferred to the new department, DPSA ensures that it no longer appears on the structure of the department it is being moved from. There is a formula that is employed by DPSA when the personnel is being transferred to another department, there is a certain number or threshold that determines the required support staff to be moved along as well. During this process with DSBD, there was a delay in the transfer of certain personnel from the DTI and the accommodation of extra resources, but this has since been dealt with and resolved.
The Chairperson noted that when DSBD was established, a new Minister was appointed and there was also a deputy minister who had been part of DTI – responsible for small businesses and cooperatives. During the process of negotiations for the transfer of resources to DSBD, the Deputy Minister kept on saying that there were functions that were not migrated to DSBD, which meant that DSBD would then fall short of achieving its mandate on service delivery. This would create a massive overlap, and confusion on the ground. There was also a similar concern that she raised with the Department of Economic Development, this creates a problem in the alignment of strategic plans and it becomes difficult to hold the entities accountable, so can the DPSA provide the advice that it furnished to the departments regarding this. Perhaps the DPSA can provide some explanation why SEFA seemingly reports to the IDC, and its perspective on the relationship between SEFA, IDC and DSBD – will the new structure take into account this relationship?
Mr Govender replied that the problem with SEFA is it is not a stand alone organisation, it is a subsidiary of IDC and the SEFA board is appointed by the IDC and the IDC reports to the Minister of Economic Development. The DPSA was aware of the complexity, and wrote to the State Law Advisor for a legal opinion on this. The Minister of Economic Development must consult with the Minister of Small Business Development and of Trade and Industry, on this matter.
The Chairperson stated that the issue is not about the appointment of the board but the service provided by SEFA and where the target for SEFA services is. SEFA needs to be de-linked from the Department of Economic Development (EDD).
Mr Govender replied that the Minister has also been very clear that SEFA needs to report directly to DSBD, because its functions speak directly to the mandate of DSBD. But legal opinion will be looked into from the Office of the State Law Advisor on how to go forward and deal with the matter. The macro-organisational process states that it needs to be resolved by the two departments involved.
The Chairperson shared her discontent with the fact that SEFA does not report directly to DSBD. It does not make sense that administratively the de-linking has not yet taken place when the political decision was already taken at the National Executive Committee.
Mr Govender suggested that moving forward, DPSA will try to fast-track the de-linking process with SEFA and then come back to the Committee to report on its progress.
The Chairperson asked what is DPSA’s understanding of the core business of DSBD, and does the DPSA have a clear understanding of the mandate of DSBD – because this tends to be the case, even with its entities.
Mr Govender replied that from the DPSA perspective and when the President made the announcement about the creation of DSBD, the DPSA took its guide from those announcements made by the President at that particular point in time. Those were the key elements that the DPSA took into account before it undertook the restructuring process.
Ms Bazamile Jamile, DPSA Director: Organisational Design, stated that the organisational structure for SMMEs and Cooperatives has now been split. Previously there was only one DDG occupying both branches, but now with new proposed structure, there will be two DDGs – one for SMMEs and the other for Cooperatives and both posts are funded. Another very important fact that needs to be considered involves the mentorship programme (commonly referred to as the post monitoring and evaluation process), because some small entrepreneurs lack financial management and organisational management skills which then leads to mismanagement of funds provided by the State. Consequently, this leads to the failure of the SMME or cooperative.
Mr R Chance (DA) noted that there is a very important programme that is within the DTI that was supposed to have been moved to DSBD – the Incubation Programme. This will then translate to a duplication of programmes between departments, if it does not move to DSBD. If possible, the Committee appeals that this be taken up with the DTI when the DPSA engages with it.
The Chairperson stated that almost all departments will have something to do with cooperatives and SMMEs, but the role each department is playing in the development of SMMEs and cooperatives should be facilitated by DSBD as the custodian or mandated department. Now, the way these programmes are structured across these departments is not the best structure to foster development, and the skills that participants attain from other departments through their respective programmes are not technical, which in turn makes them not useful or contribute towards skills development, SMME and cooperative development. The other departments should be playing a complementary role to DSBD, because there is so much duplication and confusion across departments whereas DSBD is the only department mandated to develop and facilitate the development of SMMEs and Cooperatives.
Financial Fiscal Commission (FFC) on Departmental Medium Term Expenditure Framework (MTEF)
Mr Hammed Amusa, FFC Program Manager: Macroeconomics and Public Finance Unit, took the Committee through the presentation, highlighting that growth is still improving in SA but not at a fast rate. The growth between the major economies has a number of downward risks which resulted from Brexit and its impact on local economy will be most felt by the smaller players in the economy. Therefore, this leaves some key challenges domestically such as the weakening in investments in the country. In 2006 investment growth in the private sector was 26% but now has slowed down to 2%. Consequently, this has translated into significant unemployment. In the previous year there was a net loss of jobs close to 600 000. In light of these circumstances the stimulus in investment is now pressured to come from the SMME sector. SMMEs by their very nature do not have the financial resources and facilities of big businesses, and so that puts them in a position where they are forced to cope with an economic downturn in the country, and having to face decreased revenues, consequently leading to no significant contribution to employment.
SA has a unique situation where small businesses account for significant rates of employment. Close to 70-80% of businesses starting up fail in their first year, and there is poor long term viability, this leads to a significant overall reduction in work force. As per the NDP targets, 90% of employment is expected to come from the SMME sector and they are the forefront of government’s objective, so without a sound and solid plan in place, the target will not be achieved.
On the spending priorities of DSBD, there is a targeted number of SMMEs that DSBD wants to achieve (over 600 SMMEs will be supported). Departments of Energy, Mineral Resources and Communications have set aside significant funding to develop SMMEs, but if there is a silo mentality amongst departments, the development will not be steady, and may not lead to achievement of the targets.
The regulatory environment is another major setback that obliterates SMMEs from thriving, but it appears that DSBD has programmes in place to address the issue of red tape. There is a need for DSBD to play a role in facilitating partnerships with other departments, and spheres of government. The FFC aims at working together with SARS to reduce the red tape around tax related matters for SMMEs. The FFC will also work together with other regulatory bodies to reduce red tape.
On DBSD programme spending over the MTEF, FFC noted that Administration is experiencing the highest growth and growth occurred substantially over the medium term. The compensation of employees is the main cost driver, accounting for 63% of total expenditure. FFC is concerned that the compensation of employees is the highest cost driver, but one needs to see those costs being translated to impact and outcomes. Basically, DSBD cannot spend that much on compensation with no yield in return. FFC appreciates that over 90% of the funding is allocated to SMME business support, but it shares some concerns about this because it is too much, perhaps some of the funding can be channelled towards research.
In terms of financial performance, the key issue is expenditure – the total budgeted (20%) expenses, this is quite significant given the fact that the Minister also highlighted that this is too high. If the SMMEs are not receiving the support, the development of SMMEs becomes compromised. DSBD spent R304.3 million versus a projection of R379.7 million translating into R75.4 million (19.86%) under expenditure. The under expenditure was due to non-processing of transfers and late interface of office accommodation. Notably, over the medium term DSBD plans to evaluate the strategy for the development of small businesses and entrepreneurship (R91.6 million); increase its support for small enterprises - R2.3 billion (50.3%); develop and provide incentives to cooperatives (R25.6 million); and support incubators for small businesses (R193.5 million) of its medium term budget. Overall, the total allocation will increase at an annual rate of 7.1% from R1.2 billion in 2016/17 to R1.6 billion by 2019/20, which is effectively an increase above inflation and higher than most other departments, and the budget allocations are now aligned to the strategic objectives.
DSBD is very constrained by capacity, and this has a severe impact on the performance of DSBD. The non-compliance to legislation, as already highlighted by the AG is another issue that needs to be dealt with. SEDA’s spending has decreased, but the FFC welcomed the fact that in the medium term, SEDA has made significant improvements, and that it is projected to increase to R839 million in 2019/20.
In conclusion, it is imperative to increase the coordinating role of DSBD, so a range of intergovernmental programs aimed at promoting small business development, is very key. The Departments of Energy, Mineral Resources and Communications all have specific programs aimed at ensuring value chain and procurement processes incorporate the development of small businesses.
Mr Chance, referring to page 22, asked for any thoughts on what would be the appropriate measures that DSBD can adopt to try and resolve its lack in its reporting and monitoring role.
Rev Meshoe noted that FFC stated that a research unit is essential and money should be allocated to it instead of putting all the money into funding SMMEs but also focus on creating skills and training people to gain important skills as skills are very low. He asked what FFC thinks needs to be researched further by DSBD. Secondly, would the FFC prefer the compensation of employees to decrease, and if so, what is the ideal amount based on FFC’s evaluation.
Mr S Mncwabe (NFP) asked for clarity from Mr Amusa about having some of the money channelled into research instead of skills development.
Mr Kruger asked for the FFC’s thoughts on legislating for red tape reduction and whether red tape reduction for SMMEs and cooperatives is a DSBD responsibility or not.
Mr S Bekwa (ANC) commented that the FFC is focused more on existing businesses, based on its presentation, whereas DSBD is trying to focus more on developing new SMMEs and cooperatives. So what is FFC’s thoughts on the development of SMMEs and cooperatives - nothing much was said about this in the presentation.
Mr Amusa replied that when the FFC went through the DSBD Annual Report, what was missing was the lack of the ‘why’, because if one understands the ‘why’ you can then institute measures for challenges that may face DSBD from achieving its targets. There are a range of reasons why small businesses fail in their first year, and a lot of these reasons come from lack of capacity, funding, red tape etc. and it appears that there is sound research on why the number of businesses fail but lacking is the research on why these businesses fail. We cannot apply the one size fits all mentality because businesses fail for various reasons across different sectors. Innovation and entrepreneurship is geared by research. For instance, the support that is aimed to be geared by Department of Energy fosters a lot of research even within the SMME sector.
Mr Amusa replied that DSBD’s role is not to reduce red tape but to ensure that the environment is conducive and favourable for SMMEs and cooperatives, so DSBD needs to work with all the entities that are within the regulatory environment, such as the FFC, to come up with measures on how the regulatory environment can be made conducive for SMMEs and cooperatives. On the ideal percentage of the budget that should be spent on compensation of employees, there is no ideal funding allocation but there needs to be adequate capacity for people who are able to assess and evaluate, and not spend money on employees yet there is no value for the money spent and the capacity to deliver the mandate.
Rev Meshoe stated that there was not much said about the lack of capacity and skills for SMMEs.
Mr Amusa suggested that the lack of capacity and skills relates to the lack of research, holistically.
The Chairperson stated that the “felt needs” have been presented to the Committee by small businesses across the provinces, which clearly points to what contributes to their failure – the failures are very common right across different businesses in different provinces. If the research directs to what the felt needs are, that is something that is already known. So why spend money on researching something that is already known as opposed to spending money on intervention (and, corrective measures on the felt needs) and development. Therefore, the focus should be more on coming up with the mechanisms to resolve the issues faced by the SMMEs and cooperatives on the ground. It should also be spent on developing technical and managerial skills, because the people on the ground have expressed these felt needs, and the lack thereof contributes towards the failure that has been experienced.
Mr Amusa replied that FFC makes recommendations to the organs of state. Perhaps in the next set of recommendations and submissions, the FFC needs to focus more on some of the issues that have now been raised by the Committee to the FFC. The Local Economic Development (LED) function carried out by municipalities is another aspect that the Commission had a problem with. The mandate of local government mainly focuses on basic services, so for whatever reason, the budget is not adequately allocated for LED.
The Chairperson emphatically disagreed with Mr Amusa, stating that budgets are set aside for local economic development by municipalities. She however thanked the FFC for its input.
Department of Planning, Monitoring and Evaluation (DPME) briefing
Mr Rudy Dicks, DPME Deputy Director General: Budgets, noted that the DPME conducted a 2016/17 performance assessment for DSBD. DPME noted DSBD performance on 2016/17 targets as of Quarter 3. DSBD supported 95.7% (1388 of 1450) enterprises coming from townships, whilst only 33.8% from rural areas were supported. 1120 informal businesses were supported through the refresher training, whilst only 48 cooperatives were supported by DSBD.
With regards to the performance assessment by the DPME, while big businesses remain the biggest source of job creation and employment, the largest job creators across the world are SMMEs. The SME Growth Index reveals that, contrary to the global trend, smaller companies in SA are showing stagnation in turnover and employment. Township enterprises have been hit hard, due not only to lower economic activity and purchasing power in these areas, but also due to deficiencies in access to finance, skills in running new enterprises and high barriers to entry in many markets. DSBD programs have increased SMMEs support that drive towards empowerment and transformation, placing a renewed focused on building township economies and on public procurement as a lever to drive growth. Government did this by ensuring that 30% of procurement expenditure goes towards SMMEs. To give effect to the implementation of the 30% set aside, National Treasury has reviewed the Regulations of the Preferential Procurement Policy Framework Act and gazetted amendments in January 2017.
However, this many not be an effective solution as from the onset there are critical issues that need to be taken into consideration, such as:
- The capacity of the State to manage sub-contracting agreements and mitigation of disputes that arise between the contractor and the sub-contractor.
- Currently departments are struggling with contract management – cash flow management of one party, now adding another layer of sub-contracting in a system that still has loopholes has to be thought through, which may time a long time.
- Effective payments of suppliers within 30 days as stipulated in the PFMA Regulations to sustain the SMMEs and cooperatives. It is important to note that this is the biggest shortfall, and a major contributing factor to why many SMMEs that do business with the State fail. Some SMMEs struggle and end up failing, because they cannot afford the payment delays they experience from local municipalities and government departments. This is a serious issue that needs to be quickly resolved. However some progress has been made as the number of SMMEs that go without being paid within the stipulated 30 days has decreased.
- The fact that the government payment system prevents an up-front payment of even a portion of the tender, bearing in mind that some small businesses cannot carry the cost until first delivery of goods and services.
The DPME recommended to DSBD that in light of the township and rural enterprises supported, DSBD and the DTI need to speed up the transfer of systems and support so that improvement in delivery can come to fruition. DPME recommended that public sector procurement opportunities have the capacity to stimulate growth of township economies, however, training and development are required to improve numbers if these opportunities are to be leveraged sufficiently. In addition, to fully implement these revised regulations, a Socio Economic Impact Assessment (SEIA) needs to be conducted.
DPME, in conjunction with National Treasury, conducted an assessment of the DSBD 2017/18 draft APP, looking at its alignment to its budget. Its feedback was that DSBD’s quality of plans has slightly improved in terms of planning principles and measurability compared to the first APP when DSBD was established. However, there are still some areas that require improvement which include misalignment between the APP and the Strategic Plan. For example, DSBD has revised its strategic goals and objectives in the Strategic Plan which reflect the new strategic direction being embarked on, but the revisions are not reflected in the APP. This then distorts the monitoring and reporting of the Strategic Plan and the APP, as there should be a link between the strategic goals and objectives and the associated budget in the APP. DSBD performance indicators were not well defined. These should be well defined to reflect measurability of the intended outcomes and outputs. Some of the indicators in the APP are not clearly crafted and this makes it difficult to understand and monitor what is being measured and may result in disjuncture between the strategic intent reflected in the Strategic Plan and what is being measured in the APP.
There is also misalignment between indicators and targets. Alignment of performance indicators and targets ensures consistency between what is being measured and the level of performance targeted for the purposes of reporting on planned outcomes and outputs.
DPME held a performance dialogue with DSBD in November 2016. The discussion involved the duplication between the work performed by DSBD and its entities; the lack of guidance and direction to its entities and overseeing the work of the provincial departments for small business development as well as failing to cascade the impact DSBD needs to have in the sector into measurable components. The dialogue assisted DSBD to ensure it focuses on its core mandate by strengthening its public entity oversight role to address duplication with regards to programmes implemented. It also assisted in considering revising its Budget Programme Structure to reflect its core functions which relate to coordination and oversight of the sector.
In conclusion, the refocus in the strategic direction led to the revision of DSBD’s 2017/18 APP and the development of a Portfolio Strategic Framework document, which is meant to guide and provide strategic direction for the Small Business Sector (DSBD and its entities).
Mr Chance asked about if there was more money in Treasury, would the DPME prioritise DSBD as a mechanism to drive employment and economic growth considering that it has been slacking in the delivery of its core functions.
Mr T Khoza (ANC) asked DPME if from its monitoring and evaluation exercises, it is satisfied that DSBD is moving towards the right direction in performing its work.
Mr Kruger asked where the Committee’s strategic plan comes into play and where it fits into DSBD’s, and whether DPME can share some light on this.
Mr Dicks responded that separating the DSBD budget and allocation of the funds is two different things. DPME thought it would be useful to reflect to Cabinet that DSBD is given is very important mandate, therefore the budget allocation should reflect that. Seeing that DSBD is improving in terms of performance, the DPME would consider allocating more money to it if Treasury had the means to.
As uncomfortable as this would sound, apartheid discouraged black people to start businesses, so instead black people have become accustomed to focusing more on full time employment rather than applying themselves to start businesses and create employment. This is something that needs to change and so DPME would put money into DSBD but it would require extensive discussions and clear objectives and strategic goals and indicators on how DSBD would utilise the monies to achieve its targets, although there are issues with capacity in the Department. DSBD also needs to focus on how that 30% procurement plan is going to be channelled towards SMMEs, youth-, black- and women-owned businesses, and ensure that adequate mechanisms are developed to ensure that these SMMEs grow to become job creating drivers.
The Chairperson thanked the team, and declared the meeting adjourned.
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