The Department of Small Business Development briefed the Portfolio Committee on Small Business Development on its 2018/19 Annual Performance Plans and budget.
In order to be more effectively geared for roles it must play going forward to lead the construction of a vibrant and agile small business ecosystem, the Department must undergo a paradigm shift.
The research it commissioned confirmed the need to establish a sound ecosystem to support entrepreneurs and that all elements of the entire ecosystem must be mobilised to resolve the challenges faced by Small Medium and Micro Enterprises and cooperatives. To unlock the ecosystem, the Department organised business formation where it had multiple meetings with individual organisations and this culminated in a Ministerial Consultative forum with organised business and created the platform for a social accord. It also had roundtables with the academic and research institutions. This resulted in a consensus and commitment to strengthen entrepreneurship in tertiary education.
The Department co-hosted the Inaugural International Conference on Business Advising to expose the Small Medium and Micro Enterprises to Business Advisors. Consequently, 50 000 strong community business advisors, consultants and mentors, used by the entire government system, requested the Department to lead the regulation and professionalisation of this cadre.
The Department has unlocked a 5-year Euro 52 million fund for the Small Medium and Micro Enterprises support programme. However, the Department does not have a Partnership Management and Market Access policy or skilled and dedicated capacity to drive this unit of work. The European Union programme includes a dedicated Technical Assistance Team and the European Union is keen to support the building and establishment of a Programme Management Unit within the Department.
The Small Enterprise Finance Agency reported that from the period between 2012 and 2017, the Agency has through its human capital interventions, created a stable work environment with an employee engagement survey outcome indicating a positive perception by 77% of staff. During this period, The Agency also had to develop and embed its own internal systems or procedures whilst trying to play an innovative and catalytic role in the market. The entity stated it takes more than financing to help Small Medium and Micro Enterprises to develop and become sustainable.
Challenges peculiar to the Small Enterprise Finance Agency, unlike other Development Finance Institutions, have other things to respond and account to. The Agency has to reduce its finance activities. The demand is greater than supply. Its approach is to help the Small Medium and Micro Enterprises to get off the ground; if 50% close down, then that means 50% of the jobs the Agency tries to create have been lost.
Financial support received from the fiscus has been reduced. The Industrial Development Corporation has come to the party with R931 million loan which has been approved recently so that the Agency could deliver on its mandate. The loan has conditions that dictate that Sefa must invest in entities that are less risky.
The other challenge of the entity is that it inherited an unfunded property portfolio. The Minister has given the go-ahead to look into this matter and a strategy has already been developed.
Regarding the cooperatives portfolio, the entity is investing in skills sets so that cooperatives are better managed to be profitable.
The Agency further indicated it would like to provide loans with no interest, but, unfortunately, it had to change this approach though other entities are challenged by equity. The Agency has taken a longer route on this issue in terms of payment.
The Small Enterprise Development Agency has started to look at strengthening capacity to increase efficiencies internally, and to improve technology because most young people are into social media. The entity is also looking at capacitating business advisors and has managed to attract 55 000 clients.
The Annual Performance Plan makes focus on interventions in areas such as productivity improvement, market access and partnerships to scale up interventions in order to reach a sizeable number of Small Medium and Micro Enterprises.
The MTEF budget allocation has been reduced by R123 million, which is 5% from 2018/19 to 2020/21. The entity has also experienced reduced funding from partner institutions. Most of the fixed costs like office rental, goods and services have increased with rates that are mostly above the rate of inflation. This resulted in the amount available for programmes and projects being reduced accordingly as the total budget amount is limited. As a result, many strategic initiatives that had to be scaled down or postponed in previous financial years such as incubation expansion, the One Municipality One Product programme, and promotion of the entity’s interventions in the key growth sectors would be delayed or postponed due to limited resources.
Members asked the Department why the Small Enterprise Development Agency’s allocation appears to be more than what the Department remains with after the total allocations; wanted to know what the Department is doing to reduce red tape; asked if amendments to the new Act are going to be done during the current financial period or next; wanted to know if there is a plan to advertise the existing posts because the budget does not seem to accommodate new posts, and noted the Director General stated there is no concern about advertising posts yet there are posts that are being advertised; asked for clarity on the reduction of support to cooperatives for the 2018/19 period, from 270 to 122; and asked what could be done to ensure there is a movement towards the developmental phase regarding the existing Act.
From the Small Enterprise Finance Agency, Members wanted to establish where the entity fits in the fund management space or see its future in the space of grants and loans if it is a patient investor; asked for clarity on the financial sustainability because the entity is retaining earnings but accounting losses are depended on continued funding and increase year on year; wanted to find out about the status of tenants in their properties because the entity has written-off R27 million on its properties; and wanted to know how long does the entity take to grow the businesses it is funding because its developmental impact is difficult to assess and asked if it is planning to take the longitudinal approach.
Members remarked that the Small Enterprise Development Agency's targets are not measured and wondered what the benchmark would become when the Agency starts in the following years; wanted to find out how long it takes to close or open co-location points; wanted to establish how the entity does gradually measure impact in what it is doing; asked what STP stands for; enquired why the R174 million allocated to administration is higher than core business; and wanted to know how the rumoured proposal of merging the Small Enterprise Development Agency and Small Enterprise Finance Agency is going to affect the operations of Small Enterprise Development Agency and what the impact would be.
Ms Edith Vries, Director-General: DSBD, informed the Committee the Department has a long way to go, plus minus 2 to 3 years, before it stabilises. Its annual performance plan is determined by its budget. Its aspirational milestones include the approval and implementation of the final structure, including the filling of the DDG positions; institutionalised culture of compliance; the conclusion of the 2014 NMOS process and additional Cost of Employment budget to continue re-skilling, development and recruitment of specialists skills like research, economic modelling, project management, monitoring and evaluation, and proposal writing; and to develop an automated client interface systems to improve turnaround times.
Research that was commissioned confirmed the need to establish a sound ecosystem to support entrepreneurs and that all elements of the entire ecosystem must be mobilised to resolve the challenges faced by Small Medium and Micro Enterprises (SMMEs) and cooperatives. The Department identified challenges faced by entrepreneurs which, amongst others include:- access to development finance- access to information support and resources offered by government and private sector- access to training relevant to the life-cycle of the businesses- access to local and international markets, including enterprise and supplier development- mind-set shift from employee to entrepreneur.
To unlock the ecosystem, the DSBD organised business formation where it had multiple meetings with individual organisations and this culminated in a Ministerial Consultative forum with organised business and created the platform for a social accord. It also had roundtables with the academic and research institutions. This resulted in a consensus and commitment to strengthen entrepreneurship in tertiary education. The Department further initiated the inaugural National Local Economic Development (LED) Conference. The LED has been placed at the centre of the Back-to-Basics Programme and has a draft MOA with the Department of Cooperative Governance and Traditional Affairs (COGTA).
The Department co-hosted the Inaugural International Conference on Business Advising to expose the SMMEs to Business Advisors (BAs). Consequently, 50 000 strong community business advisors, consultants and mentors, used by the entire government system, requested the Department to lead the regulation and professionalisation of this cadre.
The Department has unlocked a 5-year Euro 52 million fund for the SMME support programme. However, the DSBD does not have a Partnership Management and Market Access policy or skilled and dedicated capacity to drive this unit of work. The EU programme includes a dedicated Technical Assistance Team and the EU is keen to support the building and establishment of a Programme Management Unit within the DSBD.
The DSBD must undergo a paradigm shift to be more effectively geared for roles it must play going forward to lead the construction of a vibrant and agile small business ecosystem.
Ms Vries then took the Committee through the 2018/19 MTEF targets of the four programmes of the DSBD.
Programme 1: Administration
The Department intends to achieve 100% compliance with Management Performance Assessment Tool (MPAT) standards at level 3; and to achieve 100% payments to eligible creditors processed within 30 days. It aims to get an unqualified audit outcome for both financial and non-financial performance data just like during the 2016/17 period. Two ICT system projects defined in the DSBD ICT Plan have been implemented. 25 interactions that deliver meaningful engagements with communities and the public would be facilitated. It intends to lessen the vacancy rate in funded posts by 10%.
Programme 2: Sector Policy and Research
12 municipalities would be assisted to roll out SMME and cooperatives Red-Tape Reduction Programme. 3 Municipal Action Plans on SMMEs and cooperatives Red-Tape Reduction have been assessed. The amendment of the National Small Business Bill would be done through the legislative process. 5 research reports on SMMEs and cooperatives' key areas of support would be approved. The 2018 Annual Small Business Review Report which is approved for publication would be submitted to the Minister
Programme 3: Integrated Cooperatives Development
100 cooperatives and SMMEs would be linked to market and procurement opportunities in the public and private sectors and state-owned entities. The Provinces of Mpumalanga and Free State would be supported to develop aligned provincial cooperative strategies. 122 cooperatives are going to be supported financially through the CIS. 5 district municipalities are going to be supported to integrate cooperatives’ support in their plans.
Programme 4: Enterprise Development and Entrepreneurship
Six Informal Business Infrastructure partnership agreements have been secured. 1000 informal businesses would be supported through the Informal Micro Enterprises Development Programme (IMEDP). 677 black SMMEs are going to be supported through the Black Business Supplier Development Programme (BBSDP). 11 SMME incubators are going to be supported through the Enterprise Incubation Programme (EIP). 4 stakeholder forums would be conducted during this financial year.
(Tables and graphs were shown to illustrate budget allocation, transfers, and MTEF estimates)
Ms Charmaine Groves, Chairperson for Human Capital and Remuneration Committee: SEFA, reported that from the period between 2012 and 2017, SEFA has through its human capital interventions, created a stable work environment with an employee engagement survey outcome indicating a positive perception by 77% of staff. During this period, Sefa also had to develop and embed its own internal systems or procedures whilst trying to play an innovative and catalytic role in the market.
The Institution created the new direct lending funding stream with the necessary decentralised footprint to provide accessibility to those previously neglected SMMEs and cooperatives. The dynamic wholesale lending activities were characterised by product innovation in informal sector funding, enterprise development platforms, and structured finance solutions. It also converted its Khula Credit Guarantee (KCG) product into a compliant insurance product. SEFA facilitated donor funding to the value of €35 million of which €5 million would be directed towards technical assistance to Sefa. The International Finance Corporation (IFC) is also providing technical assistance through diagnostic analyses of SEFA’s activities. All the institution’s activities were done within the limits of the fiscal funding allocation without experiencing any funding shortfalls. Its good governance practices were also rewarded by unqualified clean audits over the period.
The drive to reduce impairments in direct lending has resulted in improved investment quality, collections and a lower portfolio-at-risk for investments made after 1 April 2016. SEFA embedded a customer centricity as evidenced by 77.3% positive outcome of an independent customer satisfaction survey. SEFA has learnt that a focused, relationship-based and pro-active post investment monitoring approach is required to address challenges posed by lack of adequate collateral.
The Institution has adjusted its approach away from “cradle-to-grave” and implemented a dedicated focus on impairment reduction interventions, which are now starting to yield positive results. Additionally, capacity building programmes in Product Information Management (PIM) are being implemented. Productivity measures would be implemented to drive towards High Performance Organisation.
SEFA has also learnt it needs to be responsive to the needs of its target market. Consequently, it initiated an innovative approach to product development, which includes amongst others, the piloting of untested models, the development and implementation of new products such as structured finance solutions, SEFA Micro-direct, supplier credit, portfolio guarantees, a purchase order and invoice discounting loan products, a scheme focusing on the funding requirements of entrepreneurs with disabilities and guarantees aimed at the non-banking sector.
SEFA has realised there is a lack of adequately skilled staff for Direct Lending complex due diligence. As a result, human capital interventions range from (a) refocusing of the business to adjust to skills levels; (b) re-allocation of staff to positions more appropriate; (c) role clarity and focus; (d) detailed performance management; (e) learning interventions; (f) recruitment; (g) leadership coaching; (h) consequence management; (i) staff engagement; (j) internal capacity support; and (k) value and culture initiatives.
The entity realised it is experiencing a low uptake of Khula Credit Guarantee from commercial banks. SEFA's responses included: (a) extending the Credit Indemnity Scheme to non-bank financial institutions; (b) introduction of portfolio guarantees; (c) roll-out of guarantee to facilitate supplier credit; (d) active training and marketing of Indemnity Scheme to financial institutions to stimulate current products; (e) supporting a National Treasury led study on Partial Credit Guarantees; (f) FSB compliance; and (g) efficient processing for approvals and claims.
There is potential stagnation in SEFA's development impact. The entity is expected to contribute meaningfully to the creation of 90% of the 11 million job opportunities by 2030 envisioned in the National Development Plan (NDP) and to address the SMMEs and cooperative funding gap estimated at 10% of Gross Domestic Product. SEFA’s ability to deliver on these expectations is threatened by limited capitalisation and other internal factors such as high operating costs and impairments.
The long-term client sustainability struggle is another challenge. The current stressed macro-economic conditions and the sensitivity of SMMEs and cooperatives to these conditions, place strain on SEFA's target market and client-base. These conditions do not only affect clients’ ability to repay SEFA’s loans, but also change their projected growth trajectory, and this is leading to an increased need to reschedule loans and to provide business support. There are sub-optimal operational efficiencies and effectiveness.
The Institution has several areas where operational efficiencies could be improved. These relate to internal human capital capacity, client orientation, information systems automation and products. These challenges do not only constrain client service/satisfaction/turnaround but also optimal risk management and post-investment monitoring and require people and leadership development as well as cultural improvements across the organisation.
In her presentation of the SWOT analysis, she stated they are engaged in a high-risk environment. They do not require collateral or owners' contribution just like the commercial banks. She identified some of the following opportunities:
- Political support to grow SEFA’s loan book
- Huge demand for SMME and cooperative finance- Public sector 30% procurement set aside
- Private sector enterprise development (ED) activities and BEE code alignment
- Leveraging of R15,5 billion allocations to SMMEs and cooperatives across government departments
And these were some of the threats picked up:- Diverse stakeholder expectations
- High risk target market (10.2% impaired upon disbursement)- Continued weak macro-economic conditions and global geo-political uncertainty
- Inadequate entrepreneurial eco-system- Fiscal constraints and reduced fiscal grant allocation- Unwillingness of certain entities to provide cessions
Key focus areas for the 2018/19 financial year.
Ms Groves stated SEFA would make the following key changes to the business model:
- Recalibrate Direct Lending investment model to make provision for a balanced portfolio comprising of start-up financing, contract-based financing (Public and Private sector procurement) and more franchise-based system of financing
- Dispose non-strategic and loss-making properties- Implement an Integrated Service Delivery model with SEDA and the IDC to provide seamless pre- and post-investment developmental support to SMMEs and cooperatives
- Contain costs by optimising the national distribution access points, implementing back-office initiatives and reducing other operational costs
- Introduce low-risk, high volume products such as the Invoice Discounting and the proposed Township Financing Solution
- Accelerate automation of key business processes- Complement state funding with the International Donor support
Ms Groves further reported the cash status of SEFA has worsened with the depletion of cash resources over the 5-year period because of high staff costs, high impairments, and worsened properties portfolio. The MTEF allocation has been reduced by R24 million over the MTEF. This has exacerbated the cash situation. The Institution's profitability has seen an improvement with the entity's income base covering its costs and the maintenance of cost to income ratio, including the government grant hovering at 100%.
With regard to the integrated service delivery model, SEFA and SEDA participate in the DSBD's strategic planning process. The CEO of Sefa is a non-executive director of SEDA. Quarterly meetings are held between the CEOs of SEFA, SEDA and DSBD Director-General. SEFA and SEDA share 39 co-location points in various districts in SA. Clients are referred to between Seda and Sefa and there is close and regular cooperation between Sefa and Seda regional managers.
(Tables and graphs were shown to illustrate figures in development outcomes; financial analysis; financial outcomes; and 2018/19 balanced scorecard)
Ms Mandisa Tshikwatamba, CEO: SEDA, provided the Committee with key insights on the SMME sector. SEDA's client base continues to be predominantly informal and very small enterprises with about 85.9% employing less than five people. Although most SMMEs are in the informal sector, most of the jobs are created by formal SMMEs. To make an effective contribution towards job creation targets, SEDA needs to graduate the SMMEs it assists from informal to formal businesses.
The majority of SMME owners are older than 40 years. There is now contraction in SMMEs owned by 50 to 59-year olds, and this is leading to a loss of experience. Also, there is some attrition in younger age groups (25-34). The failure rate is high because the entrepreneurs are still at nascent stages. The key hurdle for SMMEs is to be in operation longer than 5 years. Many SMMEs do not make it beyond first or second year.
Most provinces have similar SMME industry structure, except Gauteng and Western Cape which have a relatively larger financial services sector. The Northern Cape has a relatively larger agricultural sector while the rest of the provinces have larger trade and accommodation sector.
The Annual Performance Plan (APP) focuses on interventions in areas such as productivity improvement, market access and partnerships to scale up interventions in order to reach a sizeable number of SMMEs.
Over and above ensuring alignment of the SEDA APP 2018/19 - 2020/21 to the Portfolio Strategic Framework 2015/16 - 2019/20, SEDA has identified priority areas to contribute to. First, SEDA wants to be part of the ecosystem development initiatives such as the Economic Community Development Institute (ECDI) under the Services SETA and SA Business Technology Incubation Association (SABTIA), and SEDA would prioritise new access points in under-serviced areas.
Second, SEDA has harmonised its demographic indicators and targets with those of the Portfolio Strategy Framework. Partnerships would be entered into to improve the level of support to people with disabilities.
Third, SEDA has partnered with SALGA to prioritise SMME support to small towns while also working on a model to assist township enterprises.
Fourth, Seda has implemented the balanced scorecard system to ensure sound management and optimal resource allocation.
Fifth, SEDA continues to work with partner institutions towards the development and professionalisation of the small business development sector such as the Institute of Business Advisors SA (IBASA).
It was noted SEDA is still offering the same services as in previous years but has only made improvements on service delivery partners and research work.
Ms Tshikwatamba highlighted some of the following major considerations from the 2017/18 strategic planning cycle:
- Continued refinement of the SEDA corporate level scorecard and development of divisional level scorecards
- Reduction in budget of R123 million over the next three years and implications on programme delivery
- Partners no longer continuing to fund part of the running costs of branches that were jointly established
- The drive towards the professionalisation of business advisory services
- Establishment of the Entrepreneurship and Cooperative Development Institute under the Services SETA
- Improved governance, especially in the areas of ethics and ICT
Concerning budget implications, the MTEF budget allocation has been reduced by R123 million which is 5% from 2018/19 to 2020/21. SEDA has also experienced reduced funding from partner institutions. Most of the fixed costs like office rental, goods and services have increased with rates that are mostly above the rate of inflation. This resulted in the amount available for programmes and projects being reduced accordingly as the total budget amount is limited. As a result, many strategic initiatives that had to be scaled down or postponed in previous financial years such as incubation expansion, the One Municipality One Product (OMOP) programme, and promotion of SEDA’s interventions in the key growth sectors would be delayed or postponed due to limited resources.
SEDA is a service organisation and needs to allocate adequate funds to the compensation of employees. The current allocation to compensation of employees is below the industry benchmark due to available financial resources.
(Tables and graphs were shown to illustrate organisational capacity; Seda's budget allocation; and allocation per programme)
Mr T Chance (DA) remarked that the SMMEs would never be ready for exports. The Department needs to prioritise them in order to for SA to increase its export rate. He further pointed out there has been defensiveness in explaining the 4 years it took to establish the Department. The Department is not working to its full capacity and it should have taken it 2 years to get going.
He also stated large businesses are still contributing more to the economy. The Department needs to ensure small businesses are growing.
He wanted to know what the Department is doing to reduce red tape; and asked if amendments to the new Act are going to be done during the current financial period or next.
He also wanted to establish why Seda’s allocation appears to be more than what the Department remains with after the total allocations.
Ms Vries admitted the SMMEs would never be ready for the exports. There is a need to create a market for them, first, with innovative ideas needed by the world. It is not the big companies that contribute to the GDP. The breakdown of the R1.3 trillion indicates it is the small businesses that have contributed a lot. The narrative to support small businesses has to change and there is a need to take interest in the formalisation of these businesses, not only at the money that is being thrown at them.
On amendments to the existing law, the legislation would be presented to the Minister, Cabinet and Executive at the end of the calendar year.
Concerning the SEDA allocation, from the R1.4 billion budget given to the Department, the Minister and DG remain accountable for money going to SEDA. None of the transfers to the entities absolve the Minister and DG. SEDA is the implementing agent of the DSBD. Regarding red tape, they have a new research director in their Sector Policy and Research unit. She could not give specifications on the pieces of legislation to be tackled. The government has made things complex and there is a need to reduce that complexity.
Ms Bridgette Petersen, Chief Director for Corporate Services: DSBD, added that in the previous year they used to focus on the municipalities. Last year they started to look at provincial hindrances for the development of SMMEs. They are now waiting for the finalisation of the study on red tape reduction.
Mr N Xaba (ANC) remarked that the strategic goals and strategic objectives of the Department seem to be the same. He asked for clarity on the SMME Fund.
He also wanted to know if there is a plan to advertise the existing post because the budget does not seem to accommodate new posts, and he noted that the DG stated there is no concern about advertising posts yet posts are being advertised.
He further asked for clarity on the reduction of support to cooperatives for the 2018/19 period, from 270 to 122. And he asked what could be done to ensure there is a movement towards the developmental phase regarding the existing Act.
Ms Vries stated that strategic goals speak to things they need to do as part of their mandate. She said the SMME Fund would come into operation next year. It is money that comes from the European Union. Information would be provided to the Committee around August 2018 on targets and how it would be disbursed.
Mr Mojalefa Mohoto, Acting Deputy Director General for Enterprise and Entrepreneurship: DSBD, stated the process of making the existing Act developmental has started already. They have put some insertions to enhance the provisions in the Act on Minister’s guidelines and powers. This would assist in the implementation of the SMME development in the country. They are also looking at definitions and regulations.
Ms Petersen informed the Committee there are 25 vacant posts. 23 posts have been advertised. The remaining two posts have not been advertised. One post is waiting for grading from the DPSA while the other one is waiting for approval from the DPSA.
Ms Vries added that for the Department to succeed it needs more than that. The Department does not have a bid office and there is a capacity challenge on procurement. On cooperatives, she would be more than happy to present guidelines on cooperatives. The SMME Innovation Fund would be available in the next financial year. The first tranche of 52 million euros has been transferred to SA, and the rest would come next year. The Department is still working on the criteria and the final product would be ready around September 2018.
Mr Jeffrey Ndumo, Acting Deputy Director-General for Cooperatives Development: DSBD, further stated they are busy implementing the new guidelines. Primary cooperatives are given a minimum of R400 000 while the maximum is R1.5 million. They are also going to fund cluster or secondary cooperatives. A model is already being adopted. That is why the numbers are changing. The new Innovation Fund meant to leverage start-up cooperatives is also expected to affect the numbers.
Mr S Mncwabe (NFP) suggested the DSBD should adopt a new strategy to monitor and evaluate the implementation of the new guidelines to avoid the repeat of past mistakes or their re-occurrence.
Mr N Capa (ANC) asked for clarity on the reference to IDC regarding transfers; and he stated the presentation made no mention of job creation targets.
Ms Vries said the transfer to IDC was for the craft sector fund. It is the entities that do implementation for the Department with regard to job creation.
Mr S Bekwa (ANC) remarked that municipalities seem not to have capacity to do the work because that is where the Department relies on SMME development. He asked the Committee to be given a list of municipalities to be visited during oversight.
He further appealed to the Department and its entities to put a lot on capacity building to speed up service delivery. Assistance to cooperatives is not enough because some of them are dying without having received the necessary help.
Ms Vries replied that municipalities expect the Department to fund everything because they do not want to use their own resources when they want something done by the Department e.g. workshops. The Department has a budget for only 25 community facilitations. It has signed an agreement with LG SETA to train cooperatives. Another agreement is on training LED officials so that they could do the work. The government has to come at a different level.
Mr Chance, first, wanted to establish where SEFA fits in the fund management space or see its future in the space of grants and loans if it is a patient investor. There is a government mandate around finance, and funding comes in many forms. SEDA may become an equity investor and that might change the SEFA mandate because funding comes in 3three forms. If SEFA decides to go to the equity funding space, that would change its focus. Second. he wanted to find out about the status of tenants in their properties because the entity has written-off R27 million on its properties.
Third, he wanted to know how long SEFA takes to grow the businesses it is funding because its developmental impact is difficult to assess and asked if it is planning to take the longitudinal approach.
Fourth, he remarked that SEFA's invoice discounting model has got value, but the entity could have explored better alternatives.
Fifth, he asked for clarity on the financial sustainability because the entity is retaining earnings but accounting losses are depended on continued funding and increase year on year.
Mr Thakhani Makhuvha, CEO: SEFA, on venturing into equity funding, stated they are taking an equity risk and have been involved in this space with other institutions in terms of equity. The issue is going to be on a case by case basis. It is easier for them on wholesale lending where they take a long-term view. This is something they want to explore and bring a blend to their portfolio.
The SEFA Board has approved mechanisms with which to negotiate with the tenants' association. He could not disclose the rate percentage because it is an internal matter. The Board has approved the rate percentage and that is what they sell to tenants at a discounted rate. The property portfolio has given them a lot of challenges. He also reported they want to go the longitudinal route to see how their clients are doing after 3 to 5 years. On direct lending the ratio is high and could go up to 12:1, but the biggest numbers are received from the micro-lenders and other SMMEs who, unfortunately, give them one number per SMME because they are small and, therefore, dilute the direct lending ratio.
Ms Shoki Ralebepa, CFO: SEFA, concerning accounting losses, replied this had to do with classification and accounting treatment. It is a classification issue. The ratio has remained at 25%. The loss continues to increase, but the equity line shows it remains constant. They are living within their means. The grant is on the same line as the equity line. On the property matter, she added that the Board has approved a new strategy and mechanism, and SEFA incurred losses during the rental boycotts.
Mr Mncwabe asked if the proposed Township Financing Solution would include businesses owned by foreigners because the majority of businesses in townships are owned by foreign nationals. He also wanted to know if rural owned enterprises were catered for in the disbursement strategy because it does not appear they are catered for. He further enquired if SEFA is using one firm of attorneys or if there is any harm in using one to pay less because government departments are using expensive white-owned legal firms instead of black ones. Then he asked for clarity on the OPEX and CAPEX properties.
Mr Alroy Dirks, Head of Strategy: SEFA, explained that SEFA is planning to implement a financing programme for township-owned businesses and it is based on the following components:
- bulk buying (stock)- logistics (transportation and warehousing)
- bridging finance (providing township businesses with trade finance for weekly and monthly stock)
- the use of a mobile app for stock ordering and other business support applications
He noted this programme is still in its conceptual stage and would be piloted during the 2018/19 financial year to test the market.
Mr Makhuvha reported that rural-based enterprises are included in the disbursement strategy. They fall under disbursements to enterprises located in priority provinces. He further pointed out they use predominantly black law firms because if you lend, you still have to use legal expertise.
Ms Ralebepa added it is also possible to piggyback on the same panel of attorneys if the Department has that panel or use some of its lawyers for particular projects if they could do the job. She further explained that OPEX deals with the day to day activities like maintenance and payment of rates while CAPEX deals with major items in terms of capital expenditure and development.
Mr Capa remarked the entity is talking of key challenges, but it is not mentioning recommendations. He further stated that SEFA’s map runs along the N2 and the rest of the coastal parts, and rural areas are not catered for. He suggested that SEFA’s job creation efforts should be accommodated in the reporting of the Department.
He asked if SEFA’s clients are happy with its interest rate.
Ms Vries stated that recommendations should be reflected in the strategic plans because you cannot raise problems and not propose solutions.
Mr Makhuvha explained it is possible to improve on SEFA’s client base in the Eastern Cape. They already have offices in Port Elizabeth, East London, Mt Ayliff, Queenstown, and Umtata. They are charging interest rate at an average of 14% because the entity has to sustain itself. They are funding entities that nobody would not fund. e.g. the commercial banks.
Mr Xaba remarked the presentation has not mentioned anything related to the entity’s rate of collection. He asked for clarity on priority to enterprises in prioritised provinces. He reasoned they need a service delivery booklet to tell the people of SEFA’s success stories because the country is approaching elections. In addition, he wanted to know if the entity has a public participation programme because they need to meet communities and tell them of what SEFA is doing.
He also asked for clarity on the Khula Credit Guarantee.
He further wanted clarity on the net interest and dividend income after impairment.
Ms Ralebepa explained there is a R70m movement on impairments, loans, and equities. They do an impairment test where actuarial firms look at the history of default. All loans made in April 2016 are standing at 16% and are sitting in the current bracket of 30 to 60 days. All new loans are showing signs of recovery. There is an improvement. the Khula Credit Guarantee is a wholly owned subsidiary of SEFA. It provides guarantees to registered financial institutions. It is a wholesale funding product which provides funding to SMMEs that do not have collaterals and which would not get funding from the commercial banks. She mentioned they have been challenged by stakeholders and the Board to leverage or maximise for SMMEs. They charge a management fee which is plus minus 100% cost recovery.
Mr Makhuvha said their collection rate is around 70% in certain areas. On public participation, he explained that in terms of the Act it is the Minister of Trade and Industry who has to determine the need for it. It is not the mandate of SEFA, but the responsibility of the Department of Trade and Industries (dti).
Ms Vries informed the Committee the Department has mobilised for more budget. It has convinced National Treasury that SEFA is a conduit for development finance. The Department has also established workstreams to see what could be done with less budget because it continues to shrink. She further indicated when it comes to public participation, the Department works with the SETAs.
Mr Capa remarked the targets are not measured and wondered what the benchmark would become when SEDA starts in the following years.
Ms Tshikwatamba explained that on 80% to 90% of what they say there is no measure. It is something they have been doing and there is ground covered. It points to areas of intervention and bring everything to the scorecard. She said they have been researching the ecosystem to look at impacts of the intervention which would make it possible to reach many people.
Mr Xaba wanted to find out how long it takes to close or open co-location points.
Ms Tshikwatamba stated they like co-location points in terms of infrastructure development, but it is something frustrating. Most of the time, they would start the relationship with the municipalities and deploy personnel to the spaces. But what happens is, sometimes, the other parties would promise to bring personnel and they (SEDA) bring knowledge. Then when the relationship ends instantly, it means they must close the office abruptly or find BAs (Business Advisors) to do the work or close the gap.
Ms Vries added that what is clear is that the entities make research of where the next point should be. This should be a policy decision guided by the executive authorities. They have encouraged the CEO to discuss how this could be done.
Mr Chance wanted to establish how SEDA gradually measures impact in what it is doing. He asked what STP stands for.
He also enquired why the R174 million allocated to administration is higher than core business.
He wanted to know how the rumoured proposal of merging SEDA and SEFA is going affect the operations of SEDA and what the impact would be.
Ms Tshikwatamba explained that the allocated R174 million is part of the core business that is under administration. It deals with programme design and development. they measure impact by analysing their current data. Their interest is to institutionalise their impact measure. They learn as they go.
She explained that STP stands for Seda Technology Programme and that is a programme responsible for technology transfer, quality standards, and incubation.
Dr Zwane, Seda Chairman, added that they have a matrix behind when it comes to targets. There is a need to be more technical in coming up with targets because they did not measure the impact before. He further elaborated there has been a discussion regarding the merger of SEDA and SEFA tabled before the Board. It has gone beyond the workshop idea. They are only waiting for comments and plans to rationalise the staff complement. They do not know yet of the direction the process would take.
Ms Vries added that the entities need to ponder the kind of services they are going to offer. The Department is busy with a business case to merge the two entities. Technical details have been discussed between National Treasury, the Department, and entities. It would take plus minus 18 months before a conclusion is reached on this matter.
The meeting was adjourned.
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