The Portfolio Committee on Small Business Development met to discuss the 2016/17 performance of the Small Enterprise Finance Agency (SEFA) and Small Enterprise Development Agency (SEDA), with the Deputy Minister of Small Business Development in attendance. The Committee stated that it used a tracking tool to monitor progress made on its recommendations to Department of Small Business Development (DSBD), SEDA and SEFA. The Committee highlighted the recommendations that were outstanding for SEFA and SEDA and asked each entity to indicate the status of the recommendations during its brief.
Highlights of the briefing by SEDA included its revenue and expenditure profile, performance on strategic indicators, staff complement, AGSA’s opinion, Board structure and operations. SEDA highlighted reasons for underperformance in some of its programmes, indicated that it received an unqualified audit opinion with findings from the AGSA and stated the remedial actions that it took to address the findings and underperformance in the 2016/17 financial year.
The Committee asked SEDA questions on its depreciation costs, why it had under-performance on its Gazelles programme, why it was not Black Economic Empowerment (BEE) accredited, clients that were attracted to its programmes and clients it referred to SEFA for financing. Members also wanted to know currently registered cooperatives that enjoyed its support, jobs created, the tax paid on jobs created and how it serviced its over expenditure. The Committee expressed concerns on why SEDA did not correct corporate governance issues, despite its recommendations and allowed the AGSA to list its findings. The Committee also expressed concerns on the increase of office rentals and suggested engagements with Municipalities on the use of its offices to address high rent expenditure. The Committee also asked SEDA and the Department for clarity on why the Board was still unclear on the decision to take remunerating a State employee on the Board with fees which was against National Treasury regulation, the AGSA findings and the recommendation of the Committee on the 2016 BRRR. The Committee advised SEDA to fashion key performance indices on impacts rather than the number of clients serviced. The Committee mandated SEDA to give details on the actual support given to Cooperatives and SMMEs and the changes and impacts seen as a result of the support given.
Highlights of the briefing by SEFA included an overview of SEFA, a review of its performance in the 2016/17 financial year and the way forward. SEFA’s financial performance included five years unqualified clean audits, 27% growth in the net loan portfolio, 4% reduction in overall impairment portfolio and containment of operating expenses over five years. SEFA’s challenges were concerns on its impairments and inadequate capitalisation of poor performance on properties portfolio and high cost to income ratio. SEFA highlighted strategies for the improvement of its business in the 2017/18 financial year and proposed new initiatives for closer ties with SEDA.
The Committee remarked that SEFA was not making profit and would not stay afloat without Government grants. The Committee asked SEFA questions on its loan performance based on risks associated with the sector, jobs facilitated, status of Small Medium and Micro Enterprise’s (SMME’s) funded in Bloemfontein and the status of insurance on its clients’ buildings affected by fire. They also wanted to know about write-offs on impairment, the credit guarantee scheme, why its funding activities favoured SMME’s rather than Cooperatives and the status of the funds allocated to it for financing businesses by European Union Commission, The Committee recommended that SEFA should increase its reliance on financial intermediaries rather than reducing it and also rethink its investment strategy. The Committee requested for written information on black-owned financial intermediaries as stated in its earlier recommendation and proposed convening another workshop with development finance institutions and other relevant stakeholders in the private sector to solve the challenges of financing its clients and achieve developmental impact.
The Chairperson stated that the purpose of the meeting was to discuss the performance of the Small Enterprise Finance Agency (SEFA) and Small Enterprise Development Agency (SEDA) and welcomed the Ms Nomathemba November, Deputy Minister of the Department of Small Business Development and the delegation. She indicated that the effectiveness of SEDA and SEFA was measured by programmes that positively affected the wellbeing of cooperatives. In measuring the effectiveness of the Department of Small Business development (DSBD), SEDA and SEFA, the Committee developed a tracking tool to assist it to ascertain the level of compliance to its recommendations. She invited the Content Adviser to take the Committee through the outstanding recommendations on the tracking tool.
The Content Adviser highlighted the outstanding recommendations that SEDA and SEFA needed to address.
The Chairperson asked SEDA if the information requested was included in its presentation.
Ms Mandisa Tshikwatamba, CEO, SEDA, indicated that 60% of the outstanding items was covered in the report.
The Chairperson remarked that during SEDA’s presentation, the CEO should indicate the outstanding recommendation by its number and state where it was covered in the slide. She also requested that the CEO should make commitments on any outstanding recommendation that was not yet covered in the report.
Mr R Chance (DA) advised the Content Adviser to categorise the recommendations into those meant for DSBD, SEDA and SEFA.
The Chairperson accepted the submission and invited SEDA for its brief.
Briefing by SEDA
The Board Chairperson, Mr Cedric Dwane, introduced members of his team which included the CEO, the Provincial Manager (PM) KwaZulu-Natal and the Senior Manager of Finance. He invited the CEO to present the briefing.
Ms Tshikwatamba highlighted the entity’s revenue and expenditure profile, its performance on strategic indicators, its staff complement, AGSA’s opinion, Board structure and operations. She explained why SEDA had over expenditure in administration, ICT depreciation and personnel costs. Also, she gave reasons for under expenditure in programme and project costs. She stated that SEDA had an overall achievement rate of 85%. The number of clients participating in incubation support programmes increased due to an improved framework on incubation centres that encouraged clients to maintain incubatees. She said that although the number of clients that accessed technology transfers increased, inadequate budgets led to fewer clients being supported. Hence, under performance was recorded in the technology transfer programme and the number of Gazelles that was serviced was reduced from 200 to 40. SEDA realised that Black Economic Empowerment (BEE) accreditation assisted it in securing funding, hence, it assisted more clients that were BEE accredited in order to boost its own BEE points. She highlighted notable client benefit programmes for SMME’s and cooperatives such as supplier development, trade facilitation, development of basic entrepreneurial and support with systems implementations. She indicated the reasons why SEDA received an unqualified audit opinion with findings from the AGSA and the remedial actions that it took to address the findings.
The Chairperson asked the CEO to address the portion of the tracking tool that pertained to SEDA.
Ms Tshikwatamba highlighted actions taken by SEDA on the relevant recommendations and where the responses were located on the slide. They included feedback on the exclusion of the SEDA CEO in Board meetings which was a violation of Section 11 (5) of the National Small Business Act of 2004. The non-inclusion of the CEO and Director of Finance in SEDA’s Board and certain corporate governance issues were not addressed.
The Content Adviser reminded Ms Tshikwatamba that a SEDA PM committed to respond in writing to a request to show that 98% of survey clients were satisfied with SEDA services during its brief on the 2016/17 first quarter report.
Ms Tshikwatamba stated that the document was sent initially but the document could be sent again.
The Chairperson remarked that the Committees’ questions were related to what was observed during oversight visits. The recommendation was supposed to address lack of coordination between the DSBD, SEDA and SEFA but the Committee did not observe any changes.
Ms Tshikwatamba admitted that the response given did not address the issue. She made commitments to create avenues of feedback between the DSBD and its entities and send written reports to the Committee.
Mr Chance observed that SEDA must have invested a lot of funds on IT to have almost 100% increase in IT depreciation costs. Hence, he asked SEDA to state how many staff it employed newly and the positions of these staff. He asked for more information on why under performance on the programme of Gazelles occured which led to the selection of 40 Gazelles out of 200 for technology transfer. He also asked SEDA if it had enough data on the Gazelles selected that showed that the selection led to greater impacts. He observed that the indicator on technology transfer through Gazelles was flawed if it had to reduce its number of clients from 200 to 40. Hence, he advised SEDA to fashion key performance indices on impacts rather than number of clients serviced.
Mr Chance asked why SEDA was not yet Black Economic Empowerment (BEE) accredited. He asked the CEO to give more information on currently registered cooperatives that enjoyed its support. He also asked SEDA to state what happened to clients that were attracted to its programmes but were not supported and why these clients were not supported. He asked if SEDA did a mapping of demands not met in areas where it did not have a footprint. He asked SEDA to state the number of clients it referred to SEFA for financing, the number of jobs it created and those clients that were supported by SEFA. He asked SEDA to clarify if the business would survive if it was not supported by SEFA. He asked for more information on jobs created in terms of how much was earned and the amount of tax paid.
The Chairperson expressed concern that the Minister and Director General were absent from the meeting. She hoped that the officers representing the DSBD would respond to the issues of SEFA CEO’s Board fees. She also expressed concerns on why the corporate governance issues were not corrected despite the Committees recommendation and asked why the Minister, Director General and the Board allowed the AGSA to pick up the governance issues in its findings.
Mr S Bekwa (ANC) expressed concern on the increase of office rentals. He advised SEDA to consider using Municipal offices rather than paying increased office rent fees. He asked for the criteria used to select 40 Gazelles out of 200 under the technology transfer programme. He asked SEDA why it did not increase its capacity instead of receiving assistance from Department of Trade and Industry (DTI) for its export and packaging trade facilitation programmes.
Mr T Mulaudzi (EFF) asked SEDA to state where it received the funds to service over expenditure and the strategies it would use to avoid it in the future. He asked if SEDA under estimated its annual targets because almost all its programmes had high over achievements. He asked for reasons why the number of clients attracted to its programmes continued to decline in the three financial years 2014/15, 2015/16 and 2016/17. He asked SEDA to state how it generated its revenue.
The Chairperson remarked that during the 2016 Budget Review & Recommendations Reports (BRRR) process, the Committee raised certain corporate governance issues that were outlined in recommendation 86 of the tracking tool which were later picked up by the AGSA. In the brief she observed that the CEO stated that the remedial action was that the CEO was still awaiting guidance from DSBD and the Minister in respect of a possible exemption as per National Treasury regulation (NT) 20.2.3. Hence, she asked for the status and response on timeframes to address the issue of remunerating a State employee on the Board with fees which was against NT regulation.
Ms Tshikwatamba accepted that AGSA brought up the issue as a finding although SEDA already noted it through its internal structures. She indicated that if the AGSA observed that the Department observed the finding already, more emphasis was placed on the entity by indicating it as a finding.
The Chairperson remarked that the question was not for the SEDA CEO and she invited the Deputy Minister and DSBD’s representative to speak.
Mr Chance pleaded with the Chairperson to allow the Board Chairperson of SEDA to reply.
The Chairperson admitted that the Board should reply but she did not want the Board to reply because the matter concerned the Board. Hence, she wanted a reply from Deputy Minister and DSBD because it was a corporate governance issue.
Mr Dwane stated that it was allowed because it happened with other Boards.
The Chairperson asked Mr Dwane to specifically quote where he received the information.
Mr Dwane stated that it came up during a Board meeting.
The Chairperson asked Mr Dwane to confirm if the Board was governed by the Act or by what happened in other Departments.
Mr Dwane replied that the Board was governed by the Act.
The Chairperson asked for clarity on why the Board was still unclear on the decision to take despite the Act, the AGSA findings and the recommendation of the Committee on the 2016 BRRR.
Mr Dwane remarked that SEDA stopped the remuneration since June of the financial year but wanted clarity on moneys paid earlier.
The representative of the Minister and DSBD, Ms Tshego Magooa, Chief Director: Office of the Director General, DSBD, stated that she was not in position to give an answer.
The Chairperson asked if DSBD did not have a legal unit.
Ms Magooa stated that DSBD had a legal unit but she did not have full information on the matter.
The Chairperson asked the Deputy Minister for her comments on why the DG did not respond to the Committee when it asked the question in through emails sent on the 26th of June and July 2017.
Ms November stated that the matter was in the DG’s office and would be resolved soon.
The Chairperson remarked that it was unacceptable for the DG not to respond when the Committee raised issues on governance and also sent follow-up letters. Also, it was unacceptable for the DG not to be present for meetings that dealt with its entities performance.
Ms Tshikwatamba indicated the reasons for depreciation recorded on IT finance costs. Positive results were observed in the pilot Gazelles programme apart from turnover and jobs created. They included the ability to market the company and attract partnerships. Some companies attributed new business growth through exposure to Gazelles programmes and Gazelles secured long-term contracts. The project was costing SEDA more, hence, it was seeking funding from donor organisations. She admitted that the indicator on the Gazelles programme was flawed and as a result was reviewed. She said that SEDA was not aware that it needed to have BEE accreditation. SEDA recently discovered that the funds spent on enterprises did not count towards BEE accreditation hence the process was being reviewed. SEDA did not do enough on corporate social investments and skills development and the programmes were being reviewed.
She said that SEDA had statistics on performance of Cooperatives in terms of the survival rate and the PM in KwaZulu-Natal would reflect on the statistics due to the success in the province. She stated that SEDA did not identify why the number of clients attracted to its programmes was declining. SEDA was reviewing strategies to assist in making clients come back after attending SEDA workshops. SEDA identified that it needed infrastructure to support informal business to satisfy clients that demanded its services in the rural areas. In the past, municipalities used SEDA to repair its buildings and took it back after some time. Hence, SEDA wanted engagements with SALGA and municipalities to get infrastructure that would be of use to it without spending funds that could be used for Cooperatives.
She added that SEDA would report on referrals made to SEFA to assist its clients with loans. Incubator costs were discounted because it was a shared facility. SEDA had statistics to show that without its intervention, jobs would be lost. SEDA identified that without external support it would be difficult to service some of its programmes. SEDA collaborated with DTI because DTI had source funding that allowed SEDA’s clients to be taken for group exhibitions abroad. She explained that over expenditure was funded through SEDA’s approved additional funds, however, SEDA was now aware that despite its possession of approved additional funds, it still needed to go back to get additional approval to use the funds in subsequent financial years. Exceeded targets did not occur because SEDA under estimated its targets but due to extra work allocated to it by the DSBD.
Mr Cedric Mnguni, PM SEDA, KwaZulu-Natal, stated that SEDA had programmes that attracted job seekers that had business ideas. However, the number of clients that were attracted and registered was declining because some got jobs as a result of the newly acquired skill. He said that client satisfaction was accessed through two surveys. Assessments were done immediately after the intervention and six months after the intervention and the data was available. He explained why there was an increase in the cost of office rentals.
Mr Chance asked for comments on issues related to the CEO eThekwini’s office paying rent from his own pocket because the office was not fully funded.
Mr Dwane stated that the eThekwini office was a private incubator that was not under SEDA’s jurisdiction.
Mr Chance asked for the trade name of eThekwini office.
Mr Dwane stated that the eThekwini office had no trade name and SEDA asked it to use another name.
The Chairperson remarked that the eThekwini office was not started by the national SEDA office but by the eThekwini office.
Mr Chance asked SEDA if it collected statistics on salaries and Pay As You Earn (PAYE) tax on the jobs created and if it received return on investments on these businesses.
Ms Tshikwatamba replied that it was possible to track the variables in terms of wages based on the Basic Minimum Wage Amendment Act.
Mr Chance observed that it would be good to relate the report on wage dynamics produced by Trade and Industrial Policy Strategy and DTI to SEDA and SEFA programmes.
Ms Tshikwatamba stated that the entity would look into it.
The Chairperson mandated the Content Adviser to categorise recommendations in the tracking tool based on the specific one for the DSBD, SEDA and SEFA. She stated that SEDA briefs mostly referred to things achieved and did not mention its challenges. She stated that the Committee wanted SEDA to mention its challenges to ensure that it assisted SEDA. Assistance would come through integrated planning developments that involved the departments and municipalities to ensure that SEDA focused on business that funded economic drivers in the community. The Committee observed that SEDA focused more on Incubators rather than Cooperatives and SMMEs. The Committee mandated SEDA to give details on the actual support given to Cooperatives and SMMEs and the changes and impacts seen as a result of the support given. She advised SEDA to plan its programmes to address Government’s focus areas of reducing poverty, unemployment and inequality to ensure that the impact of reducing people on Government welfare packages such as Social Grants was achieved.
Briefing by SEFA
The representative of the Chairperson of the Board, Ms Charmaine Groves, stated that the Board took alignment of SEFA with SEDA and the DSBD and sustainability of SEFA seriously. She indicated that the briefing would deal with the performance of SEFA and issues that arose for the Board.
Mr Thakhani Makhuvha, CEO, SEFA, stated that the briefing included an overview of SEFA, a review of its performance in the 2016/17 financial year and the way forward. He stated that the channels that Cooperatives and SMME’s used to access funds from SEFA were credit guarantee schemes, direct and wholesale lending. He stated that despite the challenging macro-economic conditions, SEFA had a high appetite for risk to ensure its high developmental impact in the society. He gave statistics on funding approvals, total loans disbursed, number of businesses financed and number of jobs facilitated. He also presented data on loans disbursed to businesses owned by youth, women, and black people. He outlined the funding channels to the informal sector and micro-enterprises in the 2016/17 financial year, based on the Committees recommendation in the Budgetary Review and Recommendation Report (BRRR).
He indicated that SEFA was working in a turnaround strategy on its investment properties. SEFA also implemented its Board’s decision to monitor loans given to its clients by the Post Investment Strategy to reduce its impairments. SEFA recorded under achievements in objective one, two and three. In objective one, SEFA did not meet targets in financing Cooperatives, SMME’s and business owned by people living with disabilities which resulted in less jobs facilitated. Also, SEFA did not meet the target of building its financial sustainability in objective two. The target of turnaround times on bridging and term loans was also not met. SEFA’s financial performance included five years unqualified clean audits, 27% growth in the net loan portfolio, 4% reduction in overall impairment portfolio and containment of operating expenses over five years. SEFA’s challenges were concerns on its impairments, inadequate capitalisation, poor performance on properties portfolio and high cost to income ratio. SEFA highlighted strategies for the improvement of its business in the 2017/18 financial year and proposed new initiatives for closer ties with SEDA.
Mr Chance observed that Mr Makhuvha stated that SEFA had an appetite for high risk. Hence, he asked SEFA to define market failure and clarify if it would lend money to business that did not pay back if it did not receive Government funding. He also asked him to confirm if SEFA’s clients paid back the loans received and if not, why. He remarked that SEFA was not making profit but Government grants allowed it to stay afloat. He also observed that its impairments were still high. He asked him to clarify how SEFA obtained the data that it facilitated 55 000 jobs. He asked him to state what types of jobs were facilitated and how much the jobs were paying. He asked for the status of SMME’s funded in Bloemfontein. He also asked if the buildings affected by fire were insured. He asked why SEFA did not acquire the Parks for its clients to ensure that business created at the Parks was a success model. He asked the CEO to confirm if the write-offs on impairment were not deferred to another year. He also asked for explanation on how SEFA managed to reduce the impairments in 2016/17 by a huge margin compare with that of 2016/17.
Mr Mulaudzi asked SEFA to give clarity on the credit guarantee scheme in terms of the SEFA client Awethu that was funded to the tune of R20 million against the figure of R5 million captured in the report. He expressed happiness in loans disbursed to women-owned business but encouraged SEFA to do more. He remarked that SMME’s had a higher failure rate compared to Cooperatives and observed that SMME’s increased SEFA’s impairments. Hence, he asked why SEFA’s funding activities favoured SMME’s rather than Cooperatives. He asked SEFA to state the rate of loan repayments by informal business clients. He asked for the interest rate of loans granted to women informal businesses and the rate of growth of women informal businesses. He asked SEFA to explain what it used the funds allocated to it for financing businesses by European Union Commission. He asked SEFA to state why it charged different interest rates for certain category of clients and the strategy it used to assist loan defaulters.
Mr Makhuvha stated that it believed it was subject to high risk based on the capacity of clients it serviced. This was evidenced by information collected by SEFA on the ability of clients to service loans. He admitted that SEFA was supposed to be self-sustainable and without the Government grants received it could not stay afloat. He stated that the data on jobs facilitated was received through ID verification of staff payroll of clients serviced. He remarked that SEFA did not acquire the Parks for its clients because some of its clients did not pay. The figure on amount disbursed was high because facilities that were not paid were regarded as disbursements. The minimum for the Credit Guarantee Scheme was R5 million but SEFA mandates allowed it to facilitate loans up to R100 million thus SEFA guaranteed the Awethu project to the tune or R20 million. He said that underperformance on loans facilitated to clients was due to a combination of challenges in the sector and staff capacity. The European Union Commission funds were not yet issued. SEFA received funds from the State to service its loan facilities. Loan defaulters were assisted through the Post Investment Monitoring Unit which was recently inaugurated. The Unit allowed SEFA to warn clients that had a high risk on repayments to adjust. SEFA looked at clients differently and interest rates were based on the risk profile of clients. SEFA also granted incentives to clients that developed society.
Ms Vuyelwa Matsiliza Executive Manager: Wholesale Lending, SEFA, stated that it was still working with the Awethu project and they would brief the Committee on quarterly basis. A review of Women Informal Businesses (WIB), such as in the fresh produce market initiative, revealed some issues that triggered defaults on loan repayment and why it occurred. The interest rates on loans facilitated to SEFA clients were heavily subsidised and was based on projects and client profiles. She assured the Committee that the interest rates were below market rates.
Ms Shoki Ralebepa, CFO, SEFA, stated that the insurance company reimbursed SEFA on the buildings affected by fire in Port Elizabeth and Mamelodi. However, there was a shortfall that SEFA had to pay back but the buildings were reopened. She said that there was a dispute on the insurance for the property at Pennyville, therefore there was no insurance pay-out. SEFA partnered with some government departments, such as DTI, to rebuild and Gauteng approved some grants to rebuild. SEFA did not defer impairments but it posted a high impairment charge in 2015/16. It has been more prudent since, resulting in the huge margin of reduction in impairments.
Mr Rian Coetze Executive Manager: Direct Lending, SEFA, stated that it was a responsible lender and considered risks to a certain level, however, private sector priced risks higher than what SEFA did. He said that this was evidenced by how long SEFA carried its debt before it was written off. SEFA was putting strategies in place to become sustainable but financial sustainability took time to achieve. SEFA actively engaged with clients to try to pick up early warning signals although clients hid its status from SEFA. When SEFA found out, it put measures in place to assist its clients but when it tried and failed, SEFA reviewed and litigated.
Mr Makhuvha stated that it submitted responses to the tracking tool in May 2017 but was not able to present it to the Committee. He stated that based on the Committees recommendation on Cooperatives, SEFA put in place strategies to grant loan facilities to cooperatives. He outlined the new SEFA access points and access points with its partners to increase SEFA’s footprint in rural areas. He indicated interventions on partnering with Agricultural Research Council to conduct its research to ensure the creation of markets. He indicated that SEFA did not have facilities to work without intermediaries in assisting micro and survivalist enterprises. He outlined the different strategies used by SEFA to assist micro and survivalist enterprises without intermediaries. The strategies include fresh produce market initiative, supplier trade credit programmes and structured financing solutions. He indicated that one of the measures to increase its performance was to receive a BEE facilitation status. He discussed SEFA’s interventions on the start-up capital fund. He indicated that SEFA would present details on the turnaround strategy on impairments to the Committee later. He stated the different interventions to ensure compliance on corporate governance.
Ms Matsiliza stated that the challenge with black-owned financial intermediaries was that they were foundations rather than Pty Ltd.’s so benefits did not apply to individuals but communities. She stated that the benefit was based on enterprise developments for women informal businesses. The black-owned financial intermediaries included joint venture clients such as the SEFA-Awethu and farm management programme.
The Chairperson insisted that the Committee wanted the information on black-owned financial intermediaries.
Mr Makhuvha admitted that the information was not sent to the Committee and made commitments to send it.
Mr Chance suggested that SEFA should increase reliance on financial intermediaries rather than reducing it because financial intermediaries had more experience on loan books and also to rethink its investment strategy. He also suggested that the Committee convene another meeting with development finance institutions to ensure that funding served as drivers for development impact.
The Chairperson stated that the Committee would have another workshop with development finance institutions and other relevant stakeholders to address development impact. She remarked that Mr Chance’s (DA) suggestion was that SEFA and the Department try other means to solve the challenges of financing its clients by involving the private sector to develop the economy. She appreciated the Deputy Minister, the DSBD and its entities and stated that the Committee would continually deliberate with the relevant stakeholders in terms of facilitating finances to Cooperatives and SMMEs. This would ensure that value was added to the society in terms of addressing poverty, unemployment and inequality by adding new jobs that would result in less social grant pay-outs by Government.
The meeting was adjourned.
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