Small Business Development Budgetary Review and Recommendations Report

Meeting report

Cooperatives Amendment Act DSBD: Budgetary Review and Recommendations Report
Mr Jeffrey Ndumo, Acting Director General: Department of Small Business Development (DSBD) briefly described the Cooperatives Amendment Act, N0 6 of 2013, and emphasised it was critical to give a background to what had happened between 2005 and 2013 regarding the bill, to fully understand the current situation and to plan the way forward.

The amendment was based on four core objectives. These were:

Strengthen cooperative governance, accountability and transparency and provide for a differential dispensation for cooperatives to reduce the regulatory burden for cooperatives;
Strengthen the cooperative structure to allow for organic growth informed by own needs and requirements and enable unity;
Enhance compliance, coordination, administration and sustainability of cooperatives;
Establish cooperative institutions in order to streamline support for cooperatives and ensure alignment across all three spheres of government.

Discussion

The Chairperson thanked Mr Ndumo, and opened the floor to comments and requests for clarifications from members.

Mr R Chance (DA) asked about the size difference in the number of members between each of the three categories of primary cooperatives. What was a justified meaning of ‘open’ vs ‘closed’ cooperatives? He asked what the core purpose of cooperatives was, seeing it as a solution to uncovering why many coops had not succeeded. People looked at the social objective and ignored the economic objective – which was a misunderstanding of their reason to exist. He wanted to know if the guidelines for the manner in which records in respect of reserves must be kept, were ever published. He sought clarification on the 5% rule, as it did not seem to make logical sense in the instance of a cooperative with fewer than 30 members, for example. What act of Parliament governed the function of education and training for small business development, as well as setting up the Cooperative Development Agency (CDA) -- did that not require an amendment in itself? Had the Treasury agreed to this proposal?

Mr Chance also questioned the functioning of the apex. It seemed that there was a structural flaw, leading to contestation of organisations that claim to be apex cooperatives but were not. An apex coop had to be appointed by the Minister. It was his conclusion that the 2013 act was not being amended, but rather being “implemented with a few amendments,” because nothing in it seemed to have been implemented so far.

Mr B Bongo (ANC) said It was worrisome that the 2013 act had not been implemented. It seemed there was no agency to turn around the failure rate of cooperatives. He was generally concerned that time was running out. He also asked if the cooperative principles of governance had been published and if not, highlighted the lack of agency; if the supervisory committee was indeed elected; and if the DSBD had met with the Department of Education and made an agreement regarding the academy.

Mr N Capa (ANC) requested clarification and evidence on how exactly the bill’s amendment would reduce the regulatory burden. He also asked how the proxy category on succession worked, for example when a family member was to take over. He questioned the meaning of ‘inclusive cooperatives’ and the practicality of setting up a training academy. He was of the view that academic institutions should be trusted with the mandate of incorporating small business training into their curricula, rather than establishing a new entity altogether. He finally stated that he would like to know which part of the cooperative model needed review.

Mr S Mncwabe (NFP) said the presentation had shown only the placement of directors without showing the process flow in appointing directors. What were their qualifications and experience? He added that the act should accommodate coaching for cooperatives, and urged that the agency must be developed.
He said that higher education could not be trusted for training cooperatives, arguing that pure academics were stronger in the area of research rather than offering practical skills training. He was also sceptical about the discussion of a partnership with Mondragon, saying it was an exciting idea but he doubted the practicality of its execution. He insisted on seeing more action than plans on paper.

Rev K Meshoe (ACDP) wanted to know the extent to which consultation had taken place with the Department of Higher Education.

DSBD’s response

Mr Ndumo stressed that the Department was serious about meeting the time targets. He said they had already written to Mondragon through the ministry, expressing the desire to partner. The letter had been very clear on the desired kind of support and interactions. They were to come, observe and advise the Department, helping them to adjust their solutions to South African conditions. He admitted that not enough had been done in relation to education. Implementation of the existing act had been a challenge.

Mr Lindokuhle Mkhumane, Deputy Director General: DSBD, gave the definitions of an open and closed cooperative. Open cooperatives transacted with both members and non-members, whilst a closed cooperative transacted only with members. The Act also states both open and closed cooperatives must include financial records on all transactions for taxes to be tracked.

He defined a primary cooperative in terms of employment and services. Those involved in the primary sector, i.e. in production, still provided jobs in the primary industry. The secondary cooperatives were those that were service-oriented -- providing support in the form of services to members, all which was economic engagement. However, he recognised that the emphasis seemed to be placed more on the social benefits, and cooperatives thus seemed more social in character than economic, but it was incorrect to say they were only socially driven in character.

Regarding the process of appointing of directors, Mr Mkhumane said that the department was closely following through with the guidelines clearly stated in the regulatory act which would be presented by the president in December. There were criteria for appointing directors and those that meet those criteria were the ones that received recognition.

He said did not grasp the heart of the question on the 5% raised by Mr Chance,but explained that they did not want a situation where a board member had more than a 5% share in the cooperative.

The main aim of the agency was to provide non-financial support, and the main issue they had been sitting with was receiving a cut of the budget from the National Treasury. Once the budget was received, they would be able to set up the agency.

He answered what a supervisory committee was, saying companies had board directors who were able to guide the governing of the company. That was similar to what supervisory committees did. They wanted members at annual general meetings involved in electing supervisory committee members to observe democracy. They assisted in sharpening performance, which was a similar role to that which boards play.

Rev Meshoe asked when the Department of Basic Education (DBE) would be engaged

The Chairperson added to the Rev Meshoe’s question, asking at what level the DBE was to be engaged, assuming it would require the Minister to do so.

Mr Ndumo said the Department had just engaged the Department of Higher Education and Training (DHET) regarding entrepreneurship, and that discussions were under way at the Deputy Director General (DDG) level. It would be escalated to the minister’s office only if they faced resistance.

The Chairperson asked if they had made any agreements as a portfolio committee on what action to take if something planned was not executed. He said that blame and responsibility was always placed on someone else when things went wrong. He asked why the academy was not yet established. Was it because they had not adequately insisted on the DHET implementing it? Mondragon were competing with the private sector in carrying out the training, but it should be carefully considered whether the training should fall under the DSBD or if it was still better placed in the hands of the DHET. What had the Department done to push the DHET to deliver? Perhaps the problem was that the DSBD had never advanced their position on the matter, and had simply requested progress reports.
 
Mr Ndumo said that the request to open an academy had been inspired by the DHET’s inactivity, and the proposed solution was to consider developing a curriculum for them to implement, instead of leaving that up to the DHET as well.

The Chairperson probed again on what the Department’s approach had been in engaging the DHE

Mr Mncwabe strongly asserted that the DHET could not and should not train cooperatives. He did not see university professors being able to handle the task, and neither had he heard of professors majoring in cooperatives. He said, “We need to develop our own people and understand what we need to produce. We need to practically deliver what would sustain them.”

Mr Capa said the Department needed learn how the training cooperatives was done, based on experience. There was a lot of information lying somewhere -- knowledge which was not as coordinated as the Department would like. However, the solution did not lie with the DHET. Those who had this information might undermine their capacity. The DSBD must be assertive because it was the bearer of the necessary information for training cooperatives. It must therefore take responsibility and not rush to outsource from other departments who had contrary interests and passions, and other agendas of their own.

Mr Chance said his question on the Cooperative Banks Development Agency (CBDA) had not been answered. Which part of the legislation governed it?

Mr Ndumo said the CBDA was governed by the National Development Agency Act. There was also a working relationship with the board, especially the chairperson of the Cooperative Development Agency (CDA) board.

Mr Mojalefa Mohoto, Acting Deputy Director General (ADDG): DSBD, responded on the issue of the difference in size between primary sector categories, and said that the cooperatives were categorised according to revenue. These were included in the regulations that would be proclaimed. They were defined in terms of monetary value. Category A1 (Primary Production) had up to R1.5 million. Category A2 (small primary cooperatives) must have at least R1.5 million but no more than R10 million. Category B (Small to medium primary cooperatives) must have at least R10 million but less than R25 million. Category C (Medium to large cooperatives) must have R25 million or more. The categorisation was not necessarily based on membership, but mostly on revenue.

Budgetary Report and Recommendation Report

The Chairperson requested the Content Advisor, Mr Sibusiso Gumede, to go through the Budgetary Report and Recommendation Report (BRRR) for the financial year 2017/2018 so they could deliberate on the important points.

Mr Gumede read through the entire report as members took note of outstanding issues.

He started by stating the purpose for the report, which was to evaluate the performance of the DSBD with reference to term estimates of expenditures, strategic priorities and measurable objectives; reporting the department’s expenditures and prevailing strategic plans among others. The BRRR assessed the effectiveness and efficiency of the Department’s use and forward allocation of available resources; including recommendations on the use of the resources in the medium term. It consists of eight (8) sections.

Section one briefly outlined the mandate of the Committee and the Department, the purpose of this report and the methodology followed in preparing the report.

Section two sets out the key policy focus areas for the Department. This includes an overview of the relevant national priorities as outlined in the government policies and plans such as the National Development Plan, New Growth Path, the Medium Term Strategic Framework and the State of the Nation Address to which the Department had to contribute to achieve them. Thereafter, an overview of the strategic plans of the Department and its entities were highlighted with a view to assessing whether they address the broader government priorities and plans originating from the afore-said policies and plans or not.

Section three revisits the previous recommendations and responses for the past two financial years to ascertain if any of these were at all implemented.

Section four considers the Department’s financial performance against its allocation for the financial year 2017/2018. It briefly examines the 2018/2019 medium term economic framework (MTEF) programme allocation in terms of the economic classification, and per sub-programme.

Section five deals with an overview of the service delivery performance including programme performance and key performance indicators.

Section six interrogates the Departmental entities, the financial and non-financial performance. Forward-looking budgetary and/or performance requirements were evaluated.

Section seven discusses the Committee’s observations and perspectives with regard to the strategic plan of the Department concerning its mandates, strategic objectives and core issues previously and currently identified by the Committee. In addition, this section sums up all the issues of interest and concerns to the Committee that could have been handled differently, and issues that require the DSBD’s attention going forward.

Section eight synthesised the recommendations, past and present, based on the deliberations informed by the assessment of the Department in each of the above sections. The recommendations were categorised into two: funding recommendations and governance-related recommendations.

Mr Chance proposed that the Committee adopt the report the same day so that Members did not have to come in for a second meeting for adoption on another day. He also made the same proposal for the Spanish report, seeing that the next day’s meeting had been cancelled.

Mr Xaba seconded the suggestion, followed by the rest of the Members present.

The Chairperson consented and said that they should deliberate and move to adoption thereafter.


BRRR: Discussion

Rev Meshoe questioned how more funds could be lobbied for seeing as the report indicated that the DSBD seemed to be under-spending. It was their responsibility to create jobs.

Mr Chance said they were faced with a dilemma. The Department had not yet requested extra funds and yet the CDA were petrified at being turned down by the Treasury. The CDA and the CBDA would cost money to do the job properly. They could not request more money until they knew how much it was going to cost to do what needed to be done, otherwise it would be irresponsible for the Committee to ask for more money for job creation. The Department had not fulfilled its mandate yet, so the structure for small business support needed to be redesigned, otherwise people would be angry that more money was being given to this ‘useless’ department.

Mr Xaba said they may not be ready to request more funding

Mr H Kruger (DA) said a D-date must be assigned to speed up the creation of the Cooperative Development Agency if possible. This was in order to champion and fast-track the creation of cooperative financial institutions (CFIs) and cooperative banks, and the promotion of community stokvels with a view of converting or formalising them into CFIs and cooperative banks. There must be some agreement on consequences for government departments and state-owned entities (SOEs) that did not commit themselves to the 30-day payment agreement. Different strategies applied in the private sector, but discrepancies from government hurt small businesses and it was about time consequences were applied.

In response to Mr Kruger, Mr Gumede said it could be added as an observation under recommendations. The DSBD complied with the 30-day period payment, and it was there on the PFMA, but accounting officers seemed to completely ignore it.

Mr Chance felt the Department deserved applause for being compliant, but they must also include a clause to address the misconduct about the delay to respond to the Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA). He had personally written to the President on the matter, but was yet to get a response.

The Chairperson said that it was unclear whether they were tweaking here on behalf of stake holders vis-à-vis departments, where the stakeholders provided services to other departments.

Mr Chance said that one of the mandates of the Committee was to produce a conducive environment for small businesses to operate. This needed to be championed so that this compliance was observed across all departments.

The Chairperson asked if all Members agreed to note an observation and make a recommendation, to which they all agreed. The Chairperson then made a plea for the Committee to ensure their proposal for a bigger budget was not a vague one.

Mr Chance said that the only problem was that there was currently no budget for the CDA from the Department. As such, the Department was risking an unfunded mandate. The Chairperson agreed.

Mr Kruger said the whole point then was to make sure there was a budget. It was important to have that development agency.

The Chairperson said that he was under the impression that the suggestion to place the Agency in the DSBD had not been a unanimous one. They should not make a mistake on the matter. It was better not to be specific than to be specific and go for something unrealistic. He did not have complete trust in the Department’s ability to drive the academy successfully, and asked if the other Members were comfortable with it. They did not want to pressurise the DHET, but must nevertheless be absolutely certain that asking the DHET to run the academy was the route to be taken.

Regarding the budget and requesting for funds for the year ahead, the Chairperson said that the Treasury was used to giving the Department ‘cents’. If, for example, the Department of Health requested funds, Treasury would doubtlessly release the money -- “a bucket full, but a cup for us.” If the DHET asked for money for the Academy, they stood a chance of receiving more funding for it, as compared to if the DSBD requested for money for the same purpose, unless there was strong evidence otherwise.

Mr Chance said if left to the DHET, the Academy would never materialise. It was not a priority for them. He felt it was up to the DSBD to drive it because the DHET was not going to drive it for them. He also reminded Members that the position of Director General (DG) was yet to be filled, as they were waiting on the complete reorganisation of government. That places the Department under a continuing burden of a lack of leadership. An Acting DG did not act as a DG, and thus left the Department incapacitated.

The Chairperson asked if all Members were in agreement, and they all agreed.

Mr Chance said he was unhappy with first statement of recommendation 8.1. He felt it was too congratulatory, bearing in mind that there were many unanswered questions. He proposed to take first sentence out, or say the Department had taken steps to address some of the issues it faced regarding spending, but still had a long way to go.

He said it was erroneous to say that the Department had no oversight over the transfer and reconfiguration of some of the units and functions of the CBDA. Perhaps the matter to be examined was the effectiveness of the chairperson of the board. There seemed to be a lack of communication between the Department and the Agency. He asked the content advisor to investigate when the board chairperson had been appointed, and how many board meetings he had chaired since that appointment. He speculated that ineffective chairing was seriously concerning.

The Chairperson gave a directive for the content advisor to follow up on the board chairperson, as Mr Chance had proposed.

Mr Xaba noted that the non-financial performance of the Small Enterprise Finance Agency (SEFA) was not presented in the report, causing an inconsistency in the report’s structure.

The content advisor said he would include SEFA’s expenditure, and explained that its absence was the result of a reporting dilemma, since SEFA also reported to the Department of Economic Development (EDD). He added that he felt hurt about the misreporting by the Small Enterprise Development Agency (SEDA) about the Committee reporting something ‘‘untrue and unacceptable.” He requested further follow up on the repayment of the flagged payments to the former CEO of SEFA.

Mr Gumede said that the expenditure was correctly flagged as irregular by SEDA, but the chairperson of the board, Dr Zwane, had acted ignorant of the matter.

Mr Chance said his recollection was different. He remembers the irregularity being flagged and acknowledged by Dr Zwane, but that nothing further had been done about it. The former CEO had not yet paid the money back to SEDA. The money had been paid to the Industrial Development Corporation (IDC), not to him as an individual, and this had to be rectified in the report.

The Chairperson questioned whether it was a matter worth investing time in, especially now that the payments were no longer made to the IDC account – the payments had ceased in April. He got clarification that the money needed to be repaid and the report should be rephrased accordingly, to which the content advisor agreed.

Study Tour to Spain

The Chairperson, with the consent of Members, asked the Content Advisor not to go through the report on the study tour to Spain page by page, but rather to simply focus first on Members’ observations and then recommendations.
Mr Chance asked that the gross domestic product (GDP) per capita of Spain must be stated and compared to South Africa’s, which was eight times smaller. He also asked for rectification of the percentages in Section 8.7 to be 25% and 20%, not 35% and 10%.

The Chairperson then asked the Content Advisor to guide whether he felt confident about the quality of his work on reporting the recommendations. If he felt it had not been meticulously done, the Members could go through them one by one again before concluding. He asked if Members would like to go through them one by one. It was first agreed that the Content Advisor would just take Members through the recommendations that had been amended. Mr Gumede, however, said he did not have the document with the tracked changes and was unable to do so, and had to mention them singularly.

Mr Gumede read through the entire recommendations section of the report.

9.         Recommendations:

9.1        South Africa's Cooperatives Act was up for review. The Cooperatives Development Act as amended needs to be re-examined to identify enabling provisions of the Act which need implementation as well as hindering clauses of the Act which have created bottlenecks and hindered bottom-u[p development of cooperatives;

9.2        There were a number of aspects of Spanish and Basque political and economic systems such as 'decentralisation' of policy-making that could be replicated or serve as an inspiration for cooperatives. There was therefore a need to overhaul the entire system designed post-1994 for the development of cooperatives, as the system had proved to be a huge failure leading to an 88% failure rate of cooperatives. Assuming these had been results of the Department of Health, the outcomes would have been regarded as a national catastrophe. The same should be attributed to these results in terms of community socio-economic development, poverty reduction and the NDP goal of creating 9.9 million new jobs through small businesses by 2030;

9.3        South Africa needed to broaden its perspective about the concept of cooperatives as effective instruments for changing the ownership and structure of the economy to bring about a mixed economic system in South Africa;

9.4        There was a need for the Portfolio Committee to re-assess proposals made by the Department of Small Business Development on a programme review regarding the Cooperatives Development Programme in the DSBD, including the delegation of the functions to establish the Cooperatives Development Agency (CDA) to the Small Enterprise Development Agency (SEDA);

9.5        The role of the Cooperative Banks Development Agency (CBDA) needed to be revisited. It should be more developmental than regulatory;

9.6        The role of the government-owned National Cooperatives Training Academy also needed to be examined;

9.7        There was more than one Apex body of cooperatives in South Africa competing amongst themselves. These included two structures of the South African National Apex Cooperative (SANACO), the National Cooperative Association of South Africa (NCASA) and the National Association for Cooperative Financial Institutions (NACFISA). The lessons learnt from the Spanish Business Confederation of Social Economy (CEPES) could assist in restructuring the cooperatives movement in South Africa;

9.8        The Department must brief the Portfolio Committee on how it plans to assist the cooperatives movement in South Africa to establish one Apex body, similar to CEPES in Spain;

9.9        The Portfolio Committee must invite all national bodies of cooperatives, including the two structures of SANACO, NACSA, NACFISA and SANCOC, as all these were national organisations which were positioned as representatives of cooperatives. The engagement with them should be aimed at understanding how the cooperatives movement was structured in South Africa and how existing national structures add value to their members, as well as how they relate to each other;
9.10      The role and impact of the incubators in South Africa providing services to cooperatives instead of a government-owned agency, needs interrogation;

9.11      The Department needs to present to the Portfolio Committee the total investment made by the South African government on cooperatives. This should include the total package of the services provided to cooperatives by the DSBD and other departments, detailing the success rate of cooperatives, including the members/workers/owners of cooperatives assisted. All this needs to be assessed against the background of the 88% failure rate;

9.12      There was a need for the Department to do a skills audit to assess the knowledge of the concept of cooperatives by officials within the Department who were tasked to facilitate development of cooperatives, and also to assess how that knowledge was applied to enable communities to establish community-owned enterprises and transform the economy in South Africa to bring about a mixed economic system. If it was found that there was a knowledge deficit, those officials in the Department should either be provided with the necessary training, or be deployed in programmes which matched their training background and skills level.

9.13      In 2017, the Chairperson of the Portfolio Committee, Ms Ruth Bhengu, had presented to the Committee a cooperatives-based community economic development model which she said she had worked to develop over a period of ten years. The model had features of the Mondragon Cooperatives Model in it. At the same meeting, the Chairperson had informed the Committee that in the 2016, the Institute for Cooperatives and Community Economic Development (ICCED) – a non-governmental organization (NGO) -- had adopted the cooperatives-based community economic dDevelopment model. The ICCED operates from the Merrivale in Howick. The Portfolio Committee on Small Business Development and the DSBD should therefore invite the ICCED to present the on implementation plan of the model and progress made thus far to the Portfolio Committee in order to assess the relevance of the model to address South African challenges.

9.14      South Africa must move swiftly on social economy. The DSBD needs to form part of the steering committee in order to guarantee that the voice and interest of social enterprises was heard and protected. The tripartite project on the development of country's social policy seeks to take advantage of the favourable conditions for developing a social economy policy for South Africa, following the implementation of a range of projects that have enhanced existing knowledge and built a community of actors and agencies committed to growing and developing this sector;

Conclusion

The committee expresses its sincere appreciation to its hosts in Spain, the Mondragon Corporation and the South African Embassy, who made time to meet and had an extensive interaction with the Portfolio Committee.

Mr Chance said that CEPES was not an Apex cooperative body, but a social economy Apex body

Mr Capa said the committee had become too polite. Social economy was the way to go, and reference was made to it here and there, but it would have been wise if it was concretely noted somewhere in the recommendations or observations. The whole nation needed this, and something must be done to ensure they know and realise that this was the way to save the economy and also have poor people participate. It was not designed to make a profit in the conventional capitalist way, but for general living. A symposium could be organised so that more people could know how it works. People need to be made aware.

In reference to section 9.1, the Chairperson asked if there were any clauses in the act that articulated a bottleneck and were against a bottom-up development of cooperatives. They must differentiate between a practice that fights against what is articulated in the Act. He said to check the Act carefully.

The Chairperson said Mr Capa’s concerns must be noted under observations, as they also address the issue of inequality. He added it was not wrong to make a profit, and it was important that the DSBD did not seem to come across as anti-profit, but rather emphasised that profit-making was not to the detriment of social objectives.

Mr Capa asked if, in 9.9, it was the duty of the Committee or the Department to engage the various national bodies of cooperatives.

Mr Gumede said there was nothing stopping the Portfolio Committee from doing this.

It was also noted that the Academy in question (9.6) was not existing, but was rather an envisaged one.

Adoption

The Chairperson led the team in the adoption of the Spain study tour report, with seconding from Mr Chance and Mr Mabasa. He then proposed the adoption of the BRRR, with seconding from Mr Xaba and Mr Kruger.

The Chairperson notified the Members that the Chairperson had been admitted to hospital. Good wishes for a speedy recovery would be sent on behalf of the Committee, and Members were encouraged to visit her. He cancelled Friday’s meeting, as both reports for the day had already been adopted.

The meeting was adjourned.