Cooperative Bank Development Agency: Treasury progress report; Department reviewed funding models & Market Access Unit

Meeting report

Opening remarks

The Chairperson asked Mr H Kruger (DA) to submit his comments before the meeting commenced.

Mr Kruger asked that the Committee postpone next week’s meeting due to possible unavailability of the DA Members as the party and its Members would be preparing for the State of the Nation (SONA) debate.
He also asked the Chairperson whether it was possible to write to Vodacom and Ericson to request a report of the previous meeting engagement with the companies in order to ascertain whether they committed themselves to paying the Small Businesses that procured with them. He lamented that one of the small business owners had called him, disheartened by delay of payment from Vodacom, and that she was in a position to dispose of her business’ assets in order to pay her employees. He appealed to the Members to follow this up.

The Chairperson agreed to the postponement of next week’s meeting. She then proposed that Members adopt the first quarter committee programme.

In response to the second issue raised by Mr Kruger, the Chairperson agreed that both Vodacom and Ericson have shown gross disregard for Parliament and compromised the agenda of economic development and job creation of the country. She suggested the Committee convene the companies back to Parliament.

Mr X Mabaso (ANC) seconded the proposal to convene the companies.

The Chairperson referred to the Cell C, Huawei, Boniswa Corporate Solutions and Brolaz matter that came before the Committee. Cell C paid Brolaz but not Boniswa, so if the committee fails to follow up on this matter, it would have failed in fights for corruption. It is important that the role of Huawei is determined and perhaps the Committee could start from here. She suggested that these companies be brought back to the Committee to clarify these matters, in addition to convening Vodacom and Ericson.

Mr R Chance (DA) suggested that the purpose of the meeting is made quite clear in order to bring proper documentation.

National Treasury on the capacity of the Cooperative Bank Development (CBDA) – progress and impact made thus far

Mr Desmond Golding, Chairperson of the CBDA briefed the Committee. He highlighted the following binding constraints in South Africa within the Cooperative banking/financial sector:

• Sector manages assets of about R280 million
• Cooperatives Banks and Corporate Finance Institutes (CFI) are seen as inferior and governed by the Cooperatives Act of 2005 to stay inferior and stunted growth 
• NACFISA represents 28 CFIs and 2 cooperative banks with a total membership of about 30 000
• Financial cooperatives face some regulatory burden making compliance cost very high
• Lack of capacity, skills, and have a futuristic vision and prepare for change
• Poor outreach strategy, poor governance and risk management structures; inability to attract the right talent; low product diversification; high operating costs; and low diffusion of technology innovation in operations
• Lack of participation on the National Payment System
• Low adoption of technological banking systems
• Tight cash flow positions
• Lack of innovation to develop appropriate financial products
• High operating costs making losses

Some of the accomplishments achieved by the CBDA were:

• Deepened stakeholder relationships
• Sector qualifications – University of Pretoria (UP) Certificate & University of Fort Hare (UFH) Diploma
• Sector curriculum - Governance, Financial Management, Supervisory committee, Credit committee
• Initiated the Banking Platform Project
• Developed sector performance standards and Rules
• Publications

Sector challenges that were highlighted were:

• Cooperatives Banks and CFIs are seen as inferior
• Absence of payroll deductions
• Regulatory burden making compliance cost very high
• Lack of capacity, skills, futuristic vision and preparedness for change
• Poor outreach strategy, poor governance & risk management structures; inability to attract the right talent; low product diversification
• Fragmentation of Government Support via Agencies & Products not aligned to the needs of the CFIs (high IR, CFIs excluded in support)
• Regulator & Development Agency not aligned – growth strategies for the sector (common bond, investments etc.)
• Lack of participation on the National Payment System
• Low adoption of technological banking systems
• Tight cash flow positions resulting in weak capital base
• Lack of innovation to develop appropriate financial products
• High operating costs & limited revenue generation opportunities

On overcoming the challenges, CBDA reported:

• Fast track the use of technology (Banking Platform Project must be fully funded)
• Establish a National Co-operative Bank with a government stake (eliminate the need to use the big 4 banks)
• Channel government funding for SMMEs and Co-operatives via the CFIs
• Allow payroll deductions for savings and loans
• Establish a deposit insurance fund for the CFIs (to be incorporated with the one for large banks)
• Need for political will & Government wide support to establish a Co-operative Bank for Public servants/Large SOC/MPs etc

In addition, the CBDA will:

• Intensify collaboration between CBDA and Stakeholders on a political level
• Increase the budget for the CBDA to R100 million  
• Establish provincial offices for the CBDA through SEDA/SEFA/Provincial Local Economic Development departments)
• Fundamental mind-set shift - perception that financial co-operatives are the poor person’s bank
• Need to separate regulatory regime, but integrate it with prudential regulation and market conduct

Latest developments reported:

• CBDA supervision unit moved to SARB on 9 October 2017
• The CFI rules are currently under revision
• Regulatory impact assessment conducted by International Credit Union Commissioned work – Development of National Co-operative Banking Strategy

Critical success factors:

• Finalisation and adoption of National Cooperatives Banking Strategy
• New Value proposition and Financial Sustainability Model
• Location of the CBDA (NT, DSBD, Market Conduct, Financial Sector Development Agency)
• Productive Support: government and private sector for Cooperative Banking
• CBDA Budget should increase from R20 million to R100 million

Discussion

The Chairperson agreed to the lack of political will assertions made by the Agency, perhaps there was a common understanding between the mandates of the Committee and the CBDA as far as cooperatives are concerned. She appreciated that the Agency made it clear in its assertions that the Committee was the key player in driving the development and success of cooperatives in the country. Furthermore,  there was a perpetual increase of social welfare programmes in the country – National Treasury keeps pouring money into these programmes and neglects the importance of the contribution of the cooperatives in the economy and job creation.

Mr Mabasa expressed appreciation for the quality and substance of the input. He asked to what degree this has been canvassed all over the country in terms of different spheres of government and municipalities. Outside government, he asked whether bodies like Sanacho had made any input, and asked how the Committee could assist.

Mr S Bekwa (ANC) said the presentation was not an eye-opener; however, he was pleased with the organisation for coming up with this information. He emphasised the need for a strong political will.

Ms N Mthembu (ANC) said the presentation assisted her a great deal, but the Committee would not fall short of playing its role in ensuring that there was a political will. The Committee would also ensure that it meets the CBDA half way in carrying out its mandate.

Mr Chance asked whether Mr Golding was in the Economic Transformation Committee for the ANC and a member of the COSATU about seven years ago.

Mr Golding responded that he was indeed working in those organisations.

Mr Chance asked whether he had a background in credit finance as well as a background in economic development in Kwa-Zulu Natal.

Mr Golding responded that for the record he is an ex investment banker, and used to be the Head of Department for Economic Development in KwaZulu-Natal (KZN), and was appointed by Minister Nhlanhla Nene.

Mr Chance said he asked these questions in order to ascertain whether he understood that he had the responsibility to drive the agenda. One of the main points brought up in the meeting was the lack of political will. He asked Mr Golding about the underlying cause of failure of cooperatives in the country. One of the problems facing the country is that a lot of cooperatives were told to be established, but the eventuality was invariably failure because up to 90% of the cooperatives in the country fail and those that thrive usually do not grow. In addition, his research indicated that cooperatives contributed the greatest proportion of the GDP in New Zealand. He wanted to know from Mr Golding why cooperatives are not successful in the country, and why they are not growing to a scale that makes it absolutely necessary to have a Cooperative Bank. Is it because there is not enough banking finance or cooperatives in the country to do banking at a grand scale?

The eco-system which the Cooperative Act legislates does not exist; money has not been made sufficiently available. People in communities have not been able to establish cooperatives and provide or sell products that are needed within their communities, which is essentially the purpose of the cooperative. Perhaps, the problem is the issue of land ownership that still rests within the traditional tribalistic which is the chief – who is in charge of everything. People do not have the mindset that they can actually establish cooperatives because the culture in which they live in does not allow for that sustainable mentality or mindset. The Agency needs to engage with the cooperatives on the ground and the people to ascertain what role it can play to ensure that established cooperatives are efficiently functioning.

Furthermore, it was a problem that the Regulator and the Agency were not aligned. The idea that the Agency’s reporting chain of command is going to move from National Treasury to somewhere else might not work, in his humble opinion. He was off the view that the Agency should remain within the ambits of National Treasury. He suggested that there needs to be a dotted-line partnership between the Agency and the DSBD. However, he believed that the Agency was correctly positioned in the National Treasury as the bank institution for cooperatives.

Mr Chance noted the Government Technical Advisory Centre (GTAC) study was mentioned in the presentation – who commissioned the study and who is doing it?

Ms Olaotse Matshane, Managing Director: CBDA, responded that the commissioning of the study was assisted by GTAC within National Treasury to assist with the cooperative strategy. The strategy aims to help CBDA pull everything together along with other various departments that are supporting cooperatives or that have initiatives that support cooperatives, so that there is one strategy for government that would be followed by all the departments and agencies. The Agency has a lot of ideas in terms of the growth of the sector, for example, as the cooperative Bank it is asserting that it should be able to invest in exchange traded funds but the Regulator did not agree because it believed that this was too risky – this is one example that there is no alignment. How the Bank grows its money, the Regulator believes that can be done through loans.

Ms Nomadelo Sauli, Director Capacity Building: CBDA responded to the questions around the role of the Committee. The committee could facilitate an inter-ministerial cooperative committee so that the strategy can talk to the role of each ministry in terms of their role in the sector. Research has shown that corporate banking has a critical role to play in the sector. Secondly, CBDA proposed that the Department should amend the Cooperatives Act, because it excludes particularly cooperatives of financial institutions in nature to grant start-up capital to other cooperatives.

Thirdly, with regard to SEFA, some of the CFIs have been complaining that SEFA’s interest rates are too high instead of helping them, it is destroying their businesses. The CFIs have taken this up with the board of directors of SEFA that after paying up their start-up capital, they do not want any more money from SEFA. However, this was problematic because SEFA is the only government agency mandated to provide funding (capitalisation) for SMMEs, but it is not managed properly because of the lack of coordination. Perhaps, the interest rates could be lowered.

The Agency wants business development officers to support CFIs in order to channel SMMEs funds into small businesses in order to grow their businesses, but the DSBD should come in at this juncture so that money is thrown into businesses because SEFA is not getting its money from CFIs. The Department can extend support into those businesses through Extension Officers and have those Officers into the SMMEs that are beneficiaries of the CFI loans so that from the minute the loan is granted to the SMME they are married to the Officer to make sure that the money is being used for what it was intended. The Agency was appealing to the DSBD to work together in order to achieve this and grow the SMMEs.

Ms Sauli also proposed that perhaps SEFA could offer concessional loans to SMMEs and Cooperatives just up until the sector has gained some traction. The current Minister is willing to listen when the Agency seeks support.

The Chairperson said the manner in which the SETAs are structured in their training and accreditations is more about a person who is going to get a paper credit to continue with their studies into university level. What is offered by many service providers are two-day or five-day courses which do not really affect any impact on people who are legitimately on the ground and uneducated. There is no understanding of what cooperatives are and how they differ from SMMEs and other businesses.

Mr Chance asked about the extent of the Department’s involvement in the report. If the Department was not involved that would pose as a dangerous process. He stated that the current tribal system is detrimental to economic agency; it promotes the lack of economic activity and community participation. Thus, people should be given their title deeds and be encouraged to farm in their lands because currently there is a significant amount of land that is idle in the rural areas.

The Chairperson believed that the communal land system is the better system to promote cooperative development in the rural areas.

Mr Bekwa agreed with the Chairperson.  

Ms Sauli said the vision has died due to the fragmented system to support cooperatives – government agencies and departments that support cooperatives are not talking to each other in their efforts to assist cooperatives, and some of the regulations are not in favour of these cooperatives.

Mr Golding responded that the developmental financial institution (SEFA) needs to change its model, because as a government agency it cannot use the prime rate (as it is the current situation) as the point of reference in determining its interest rate because SEFA gets funding and money from the government. Its mandate is to develop SMMEs and Cooperatives through the provision of financial assistance. Therefore, policy and legislative changes need to be affected through the strategy to eliminate dis-enablers. In order for cooperatives to be capitalised, cooperatives must go to SEFA for funding but SEFA itself does not have a correct model as the current model seems to defeat the purpose.

Mr Chance asked for the Department’s view on the GTAC report and to confirm whether it was engaging with the agency on this.

Ms Nomvula Makgotlho, Chief Director: Cooperatives Development, DSBD, responded to the Department’s involvement on the GTAC report, stating that the Department was very much aware of the developments in CBDA through the Acting DGG, Mr Jeff Ndumo. In all decisions and plans regarding CFIs, Mr Ndumo was also involved as well as in the terms of reference of the study or report. Thus, the department has been involved in the process.

The Chairperson advised that the Agency’s proposals are in line with the Committee’s views, particularly the amendment of the Cooperative Act; SEFA’s high interest rates as well as altering the entire funding model. The Committee believes that the CBDA understands its mandate, and this pleased the Members because this reflects that the Committee will work well in unison with the Agency. The Cooperative Act has to be overhauled altogether because it has a lot of hindrance factors for cooperatives to grow; one of the things is that a primary cooperative has to exist for two years before a primary cooperative can establish a secondary cooperative. What for? Because a secondary cooperative can provide services that a primary cooperative cannot provide. The people that were drafting the Act, may have been wrongly advised. Overhauling the Act would assist in unlocking the potential of CFIs and cooperatives and enable the communities to be masters of their destiny.

Mr Golding said he hoped that cooperatives will soon be viewed as the mainstream businesses in the economy. The strategy that is being developed will be as inclusive and integrating as possible to every government agency and department that support cooperatives and they will be consulted to ensure that there is proper coordination. The strategy will mirror the legislative challenges and policy challenges that need to be overhauled in order to continue growing the sector. The country needs a strong buy in on cooperatives because the country has a deficit of over R1.3 trillion and it is unsustainable, so cooperatives are a counter-measure to be able to give empowerment and economic freedom to communities instead of relying on social welfare.

Briefing by Department of Small Business Development – Market Access Unit

Mr Mojalefa Mohoto, Acting Deputy Director-General: DSBD took the Members through the functioning of the Market Access Unit. In terms of market access opportunity challenges, partnership collaborations seek to address the following market challenges faced by small businesses and cooperatives:

Limited market opportunities to SMMEs, especially where SMMEs are subjected to supplying non-core products and services into the supply chains;

• Limited market intelligence capacity within Government departments to support and deal with challenges facing SMMEs;
• Enterprise and Supplier Development (ESD) projects that are not intended or structured to derive positive impact;
• Lack of readiness by entities to access available opportunities;
• Lack of appreciation of the Government developmental imperative (transformation) agenda with regard to inclusive procurement by both public and private sectors;
• Expectations by Corporate Companies that DSBD should fund the entire cost of collaborative ESD Programmes without tangible contribution from the Corporate entities;
• Lack of a comprehensive database of previously supported enterprises
• Lack of clear ESD strategies and implementation capacity within Corporate Companies;
• Delay in committing to partnerships especially by Government’s Departments and
• Insufficient development funding resources without adhering to the inherent risk of SMMEs and cooperatives lack of funding
• Risk mitigation to government and enterprises

The Department’s approach to market access in galvanising support from partners is informed by the Constitution (Section 217), our mandate, Preferential Procurement Regulations 2017, 30% set aside, Broad Based Black Economic Empowerment (B-BBEE) Codes of Good Practice, etc.  Based on this, the Department has established a dedicated function that is responsible to develop, implement and monitor market access strategy and programmes for cooperatives and SMMEs. 

Functions of Business Units mandated to run with this body of work include:

• Identify market access opportunities and coordinate the implementation of Private and Public Supplier Development Framework/ guidelines.
• Unlock private and public-sector procurement through various policy levers for SMMEs and Cooperatives.
• Develop programmes to improve the quality of products and assist local suppliers to expand production capacity.
• Mobilisation of resources to contribute towards additional funding.
• Create networks (partnerships) to support the SMME, Cooperative and Informal Business Eco Systems.

On market access components, access to market opportunities focuses on corporate companies that will offer a guaranteed market for small businesses in the company’s value chain as suppliers of core and non-core products and services. DSBD will provide a repository of SMMEs that have been supported through incentives that could also be linked to the Enterprise and Supplier Development programme. Secondly, access to finance would focus on a mixed model (Loans and Grants) where corporate companies will offer interest free loans to small enterprise suppliers currently as suppliers of corporate. DSBD will support identified small businesses through the accessible incentive schemes within DSBD in accordance with qualifying criteria and adjudication processes. Lastly, access to business support interventions – needs an analysis and diagnosis, designing of appropriate interventions, and Monitoring and Evaluation.

The Unit has signed two transversal agreements with the Department of Environmental Affairs (signed in 14 August 2017) to develop SMME’s and Cooperatives that will partake in the value – chains of environmental sector (such as but not limited to the bio - prospecting, wildlife subsectors and waste sub – sectors).  Cross-cutting opportunities identified in the Chemicals and Waste Economy Phakisa and Oceans Phakisa. The second agreement included two agreements with South African Breweries (signed at 18 November 2015 – agreement 1, and 15 December 2016 for agreement 2), the first agreement aimed at Market Access, Funding and Capacity Building for SMMEs and Coops is a Tripartite Agreement with the Agriculture Research Council (ARC) and SAB. The other agreement with SAB Miller aimed at providing access to financial resources primarily through the Women in Maize) (WiM) grant fund while leveraging market access; developing skills of women farmers operating in underserved communities through training and mentorship; and share information for the benefit of the farmers. The unit also facilitated a bilateral agreement Masisizane Fund (MF) which was signed on 24 July 2017 to leverage on the resources of each party and work together for the benefit of SMME’s and Co-operatives to benefit from MF Post Investment Programmes, soft loans and capacity building. DSBD will also consider projects supported by MF from various incentive schemes.

Discussion

Mr Chance asked how many people are working in the unit and whether there is adequate capacity to achieve the mandate. He asked how the unit is collaborating with agencies that are monitoring the performance of companies in terms of achieving their BEE scorecard. He indicated that procurement in departments in government is very set in its ways – he believed that this was something that needed to be looked into to allow more room and space for SMMEs and Cooperatives to have ease of access to procurement in government departments.

Mr Chance also wanted to know how it was possible to develop rapid capacity to be able to develop the sector, and create large numbers of jobs. Lastly, what steps are being taken to ensure that departments and agencies report on their procurement ratios? In addition, does the unit see that as its role? The example on Santam is very interesting because barriers to entry in the industry (insurance) remain the biggest issue for SMMEs and Cooperatives.

Ms Mthembu wanted to know whether the unit had any plans to reach out to small businesses that have been disposed of due to lack of support from government agencies. Many SMMEs and Cooperatives have been dismantled and disposed of due to the lack of financial and technical support; most of these had a lot of potential in becoming successful businesses.

Mr Mabasa wanted to know what the gap between the theories as presented here is and the actual practical work, because when one looks at the theory, one gets worried as to what degree the theory is converted into practice. As for the establishment of malls in townships and rural economy – how does the Unit play a role such that that negativity towards SMMES and cooperatives is softened, particularly in township and rural malls? Thirdly, he wanted to know the relevance of the Unit for Spaza Shops and hawkers – do they see the Unit as a tool that they can explore? Lastly, to what degree do government and the Unit equip small companies to meet the demand of their consumers? In addition, he wanted to know whether the Unit considers marketing beyond the South African borders or it merely focuses on the country.

Ms Nonelelwa Qoboshiyana, Acting Director: Cooperative Development, DSBD responded that the Market Access Unit is capacitated with 5 individuals and it looks at market intelligence; it conducts research on market opportunities for SMMEs and Cooperatives; it looks at engaging with industry partners, DFIs, companies, and various departments; it looks at CSD of departments and companies to ascertain whether it fits with the plans of the department and enters into partnerships and develops implementation plans.

Ms Makgotlho responded that three people are responsible for identifying opportunities and procurement opportunities for cooperatives in the public sector and that the team goes through the Annual Performance Plans (APPs) of various departments and priority programmes driven by certain departments such as Operation Phakisa and Public Works programmes. The team focuses on strategic projects and positions those cooperatives towards those programmes. On the public sector, the Unit approaches departments and it is seldom that departments approach the Unit. Three people are driving partnerships and bilateral agreements in the private sector within the Unit. However, the challenge is the limited resources. Within the next few weeks the Unit will be looking into putting together a fund programme to assist in preparing SMMEs and cooperatives to be supplier ready and be able to participate in opportunities. In addition, a fund that will co-fund whatever partnerships SMMEs and Cooperatives enter into and lack funds.

The Chairperson emphasised that the Committee has been doing this with the Department for over four years now and Members are not fools, the Department does not live in its own planet. She asked Ms Makgotlho to explain the mandate of the unit.

Ms Makgotlho responded that it is to facilitate access to procurement and market opportunities for SMMEs and cooperatives.

The Chairperson interjected and asked how was that achieved.

Ms Makgotlho said it is either the Unit approaches or it is approached by other stakeholders.

The Chairperson interjected again, exasperated, emphasising that the mandate of the Unit or the Department is to develop SMMEs and Cooperatives in the country, first and foremost. Secondly, the Department needs to respond to the National Development Targets which was to create 9.9 million jobs by 2030. So how many years are left before 2030? Out of the 400 cooperatives that were funded by the Department none of them are supplier ready, so if the Unit goes out to negotiate it should be informing the Committee about the departments that it has engaged with, the products that are going to be supplied, the number of jobs to be created, the number of SMMEs and Cooperatives that are going to be developed to match the demand. That is not being said here. The Unit is speaking in a very general manner and the Committee is not going to continue to listen to such generic statements, it wants results. The personnel within the Unit get a salary every month to achieve a mandate, therefore the Unit cannot be telling the Members about MOUs right now but practical things that have been done. There are so many schools with broken furniture, and the ANC government took a decision that school furniture is going to be supplied by Cooperatives – this was a market opportunity for Cooperatives. The Committee was eagerly waiting to hear what was done by the Unit to take advantage of this market opportunity, and the outcome of taking that advantage in relation to job creation, number of schools supplied, etc. This presentation is a composition, and she last wrote a composition in primary school. The market is there, government has committed that 30% of procurement is allocated to SMMEs and Cooperatives. The Committee wants to hear what has been done to utilise those commitments, not this frivolous information presented here.

Mr Mohoto said the unit was already working with the procurement office of National Treasury to obtain the supplier database because the Unit needs to have some analysis of supplier development database. This will assist in obtaining a baseline of the number of enterprises that are supplying government.

The Chairperson interjected that the Unit was not supposed to be looking at the suppliers but focus on developing suppliers by looking into the goods that are being procured by government and which of those goods can be supplied by SMMEs and Cooperatives. The starting point is that there is a policy in place, and in total what does that 30% translate to in terms of Rands and cents, and which SMMEs are ready to take advantage of that market. The Unit is also failing to inform the Committee which goods cannot be produced by SMMEs and Cooperatives and provide the reasons for that and how that can be changed. The resolution that was taken by Cabinet had a list of things that can be supplied by SMMEs and Cooperatives; today the Unit has failed yet again to tell the Committee which products and services have been supplied from that list.

The Chairperson stated that the Unit needs to go back and do some research and present the required information and not waste the Member’s time.

Adoption of minutes was deferred to the next meeting because the Committee did not meet the quorum.

The meeting was adjourned.