SEFA, SEDA, DSBD Quarter 1 Performance 2019/20

Small Business Development

18 September 2019
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

The Small Enterprise Finance Agency, the Small Enterprise Development Agency and the Department of Small Business Development all acknowledged a below par Quarter 1 performance. Reasons were provided  for the unachieved targets. DSBD had to wait for the confirmation of the priorities of the new Administration and ensure it had resources to implement those priorities. SEFA said the unavailability of quality wholesale deals due to the lack of financial viability of intermediaries and state of readiness had made this lending channel underperform The SEDA said its performance below targets was not acceptable and they have developed a catch-up plan. Some projects were delayed as SEDA wanted assurance post-elections that the new Minister would not change SEDA’s objectives.

Main discussion points by Members was the uneven roll-out of resources to provinces, the underspending of budget by SEFA, SEDA and the DSBD, the lack of achievement of targets and the lack of collaboration between agencies and what can be done to remedy these challenges.

Meeting report

Small Enterprise Finance Agency (SEFA) briefing on 2019/20 Quarter 1 Performance
Mr Martin Makosi (Interim SEFA board chairperson) referred to slide 4 of the SEDA presentation and explained how SEDA is trying to stabilise the board. Key vacancies at an executive level such as CEO are also in the process of being filled with recruiting underway after the former CEOs departure. Mr Setlakalane Molepo is the acting CEO of SEFA. The process is anticipated to lead to an appointment by 1 November 2019 at the latest. There is focus on development of the corporate plan for the 6th administration so that it is aligned to the 6th Parliament State of the Nation Address (SONA) and the Minister’s Budget Speech, especially the organs mentioned in the budget speech including: Small Business and Innovation Fund (SBIF), European Union Fund (EU Fund) and the Blended Fund or Blended Finance Fund. To do this, Mr Makosi has collaborated with the SEDA board Chairperson, Mr Mbulelo Sogoni, and they had their first meeting. They have given themselves ‘practically by around October’ when SEFA will be having a strategy planning session. At which point they would have already met with SEDA to have more detailed meetings that will enable alignment of SEFA and SEDA strategic plans and their collaboration. SEFA is also focused on other government agencies (NYDA, NEF, IDC) to get better collaboration and co-ordination on the entire eco-system for funding of small enterprises. Slide 5 explains broadly at a governance level what SEFA has done, and the board committees and sub-committees and how these committees will help to convert the funds they have received and allocate them as quickly and accurately as possible.

Mr Setlakalane Molepo, Acting CEO of SEFA, took the Committee through the Performance Dashboard which reflected approvals, disbursements, number of SMMEs and the number of jobs which have been funded. He stated that the economic challenges make it very difficult to get transactors who are willing to work with them. But he believes they have implemented strategies to ensure they have covered ground, and he will show this in the Q1 presentation and going forward in Q2 and Q3.

Slide 10 gives further elaboration on the dashboard. The amortised loan book at 30 June 2019 is R1.6 billion. R850 million is through the SMME lending channel of wholesale lending through intermediaries while R761 million is lent directly through SEFA internal processes to SMMEs. The accumulated impairments commonly referred to as bad debt, are on the loans and investments advanced. However, they exclude direct lending since the time they started on 30 March 2016, due to the high impairments specifically around contract finance. This line item was then excluded to arrive at 37% as at 30 June 2019. For Q1 a total of R160 million was approved, that represented 86% of the Q1 target. Disbursements is the money that has gone into the economy and that is R96.5 million, which represents 61% of the quarterly target. Development impact is a measure of the impacts SEFA has when disbursing the money to the economy. 14 385 SMMEs were given financial support, and this talks to where SEFA disburses the money, this does not talk about approvals. This resulted in the creation and the maintenance of over 15 000 jobs. R83 million dispensed to black-owned SMMEs. This is more than 50% of the R160 million of Q1 approved loans. R17 million dispensed to township based SMMEs, with R50 million to women-owned SMMEs and R28 million to youth-owned enterprises. SEFA is ‘pursuing with all their might’ to ensure the money disbursed into the economy comes back to SEFA, and just over R74 million was collected through direct lending and wholesale lending channels.

With direct lending, Slide 12 on loan book approvals dissects the actual disbursements and shows the inroads made. Of the R53 million of direct lending, most loans go towards short-term funding which is bridging finance, which will be finances provided to people which one could equate to an overdraft, where one funds primarily short-term contracts, and this is where the majority of SEDA money goes.

With wholesale lending, R40 million of this went to an organisation called Akwandze Fund  which is fifty-fifty owned with the co-operatives in Mpumalanga. These are sugar-cane growers and SEFA lends to these entities through the Akwandze partnership. SEFA has been a partner with this Fund since 2009, and to date R160 million was approved which empowers small-sugar cane growers that have ‘TSB, SB’ on paper of the sugar-cane which is grown. Another interesting partnership is ‘Praxis’ where SEFA approved R60 million, and this facility is exclusively ear-marked towards helping black-owned panel-beaters to access capital, as they perform body-building for most insurance funds. SEFA put this facility together to help with working capital, parts and other accessories from original equipment manufacturers, since these are normally the terms of an insurer, which insures the individual based on acquiring original replacement parts during claims.

The underperformance of SEFA is acknowledged. The unavailability of quality wholesale deals is due to the lack of financial viability of intermediaries and their poor state of readiness but they are working very hard on the wholesale deals and his colleague will speak to the pipeline they have built.

On the disbursements, SEFA has R31.5 million in the micro-finance space (slide 13). This space is where they primarily lend to people from as little as R500 to R50 000, and this constitutes the informal sector, which is predominantly in the rural areas. The provincial spread (slide 14) may spark the question: why not other provinces? Most micro-lenders are in the rural provinces: Limpopo, KZN. However, in the Eastern Cape and Free State this is where they tend to lend through their Retail Financial Intermediaries (RFI) and hence the volumes are lower. However, SEFA is engaging with some of these Micro-Finance Intermediaries (MFIs) so they can become national and their volumes both on the SMME side and provincially go up.

Slide 16 speaks to jobs facilitated with 82% of the target being achieved for Q1; for SMMEs 80% of the target was achieved. SEFA notes this and hopes as it starts to roll-out other programmes, they will see the ratio of the number of SMMEs increasing, due to the capitalisation of some of the projects they will be funding. It is important to note that most jobs facilitated are contributed by the micro-enterprise sector.

Slide 17 is a breakdown of how SEFA measures itself in terms of the targets it sets. It is important to note that when one looks at research, most funding is in the lower-echelon of the funding regime and so it is important to measure how many enterprises are receiving loans when SEFA lends less than R50 000 and SEFA notes 14 000 of these were supported in Q1. SEFA has collected through its Post Investment department working with ‘all its might as much as possible’. On the legacy book they are working on how they follow through to collect some of this money. SEFA is unfortunately the lender of last resort at times. Much of the legacy book is lying with the provincial governments that have given opportunities to ‘our people’, and SEFA is working together with the Department to ensure they follow through in collecting as much of the money owed to SEFA. SEFA will make strides to cover ground in Q2 and Q3.

Ms Tumi Sefolo, Executive Manager: Direct Lending at SEFA, spoke to the catch-up plans SEFA has, and how SEFA will fund SMMEs, youth-owned enterprises and early stage fund seekers.

Slide 21 notes that Direct Lending is anticipated to reach its Q2 targets as it achieved 90% Q1 approval target and 108% Q1 disbursement target. Projections indicate that in Q2 direct lending will finish just over 100% of its approval target and 112% of the Q2 disbursement target. The wholesale lending channel is where the majority of the catch-up is needed and SEFA is currently processing just over R600 million worth of applications of which R130 million will be approved in Q2, and the balance will be approved in Q3. Wholesale lending in Q2 is projected at 67% of its approvals target and 95% of its disbursements target.

Slide 28 shows the strategic initiatives SEFA will be embarking on in Q3. The Small Business and Innovation Fund (SBIF) is a R3.2 billion fund over the MTEF period that SEFA will be implementing. The idea with this fund is to target those businesses in the early-stage of their business life cycles i.e. ideation, proof-of-concept, early stage/market-entry and scale-up. These are the businesses that have the least amount of funding in the economy and need to be supported. In addition, the fund aims to empower the 100 000 youth owned enterprises (YOE), as was announced by the Minister in the Budget Vote, over the intake period. SEFA anticipates launching this fund at the beginning of October as processes are underway to transfer the first tranche to SEFA.

The second fund SEFA will be launching is the EU fund (slide 29). This fund is a collaboration between the SA government and European Union and has multiple stakeholders including SEFA, SEDA and DSBD. The SEFA portion equals to R450 million and SEFA is starting with the 1st tranche of R150 million which will be an Enterprise and Supplier Development (ESD) fund, which will be launched in October. The processes are advanced and through the ESD fund SEFA will aim to target small businesses in the value chains of private sector and SOEs, and through partners be able to support them so they can grow into bigger businesses in the economy.

The third initiative is the blended finance programme (slide 30) which is a partnership initiated by DSBD for SEFA to come up with a model that seeks to lower the gearing in small businesses. Many small businesses that obtain loan finance from various institutions are highly geared and have a lot of debt in relation to total equity or capital share in the business. Thus, the loan from SEFA along with a grant portion from DSBD, will be administered by SEFA. R100 million from the Department in the form of grants will be matched with R100 million from SEFA to create a R200 million ring fenced fund to fund SMMEs directly that require a mix of loans and grants.

The final partnership SEFA embarked on involving the Township Economy Revitalisation Programme was done through partnering with Pick and Pay, a leading retailer, where SEFA will empower township traders and retailers to remodel their stores and ensure these stores can offer competitive pricing through bulk buying, logistics, processes and systems of PnP. This is unique since the store-owners do not pay a franchise-fee to PnP. The stores are 100% owned by store-owners and SEFA has set-aside R60 million to fund 50 stores mainly in the Western Cape and Gauteng Province townships. Pick n Pay and DSBD provide an average of R550 000 and R800 000 grants respectively per store There are 8 approved stores on the programme and three opened stores.

Discussion
Mr H Kruger (DA) says he is struggling to understand the loan book disbursement provincially. SEFA has no respect for rural provinces. Mpumalanga Province should be looked at which is the province he and the Chairperson is from because only two SMMEs were helped in the past quarter. Mpumalanga is a province with lots of rural areas, poverty is high and only two SMMEs have been helped which signals a big problem. This is not acceptable. What is the footprint of SEDA? As he moves around in his province, he will per day receive 10-15 requests for finance from a body like SEFA to start a business and some of the business ideas are ‘unbelievably innovative’. The problem which he asks SEFA to help with is that SEDA’s footprint is not good enough in Mpumalanga and people do not know where to go to get finance. When people phone the DSBD, this is where the requests stop. No system exists within DSBD to channel these requests through to SEFA or SEDA. The same if SEDA gets a request, there is no communication between SEFA and SEDA. He does not think that these two are operational in rural areas. It is important the Committee strategise so that SEFA and SEDA become a single entity and is present in every single municipality and this is communicated to all communities. He struggles to get officials to these businesses which need them the most. Millions are spent but nothing reaches the smaller provinces which is a shame. Their mandate is to serve the people and they are not doing this.

Mr Kruger said that the SMME repayment rate back to SEFA concerns him too. SEFA is a development tool of government. One must understand it is not a loan, it is  a grant or loan/grant i.e. a hybrid instrument. What are the performance bonuses that the SEFA board and managers receive? Personally, he would not award any bonuses. He will ask the Minister what bonuses were paid out the previous financial year, since the executives live well while the rural person suffers.

Prof C Msimang (IFP) asked if there is a bias in the distribution of disbursements toward Limpopo province (26% allocated) versus the rest of SA. He pointed out that North West province has it the worst as it received a 0% fund allocation. The presentation stated that this uneven distribution across SA is due to greater activity of micro-finance institutions in Limpopo which mainly support women-owned businesses. The responsibility should be to ensure that there are SMMEs in areas like North West and Western Cape since the development finance institution needs to be proactive. The SEFA partnerships are unclear in terms of their advantages. If an applicant has applied directly to SEFA and SEFA refers the application to a partner, does the applicant then account to the partner or to SEFA? What are the advantages of partnerships?

Mr V Zungula (ATM) noted the PnP store partnership. The economy is accessible to major companies that essentially are benefitting only a few people. His understanding is SMMEs are a mechanism to redistribute wealth to ordinary South Africans. He is worried to see PnP enter and dominate the township economy since it means the citizens in townships will always remain slaves to the big companies. He asked how PnP benefits from penetrating the township economy and are the stores 100% owned by the owners. The township economy needs to benefit and be dominated by the people who reside in these townships. How will this relationship be managed so that it is to the benefit of locals?

Ms K Tlhomelang (ANC) asked for clarity about the grant-loan for SMMEs and co-operatives. Is it a grant that SEFA does not back? Which SMMEs and co-operatives qualify for these grant-loans? On slide 14 she asked if SEFA monitors the offices at provincial level? This is due to the uneven distribution and so involvement of SEFA is needed in the provinces. North West is her home province and she used to work in Office of the Premier. On one occasion, SEFA and SEDA did not turn up when requested to provide information. This is a poor reflection on SEFA and SEDA especially given the under-performance. If SEFA is monitored what are these officials doing if there is 0% loan disbursement in North West? There are a number of small businesses and co-operatives in this area, and she wants clarity. They do not get assistance. Along a 70km stretch near Vryburg there is a SEFA office where most of the time the officials cannot be found. If they are closed, how are they monitored? If they are not user-friendly to people, how will it work? The difference between direct and wholesale lending is confusing and the difference must be explained to service the constituencies. In general, the provincial disbursement is bad since 80% of provinces are rural, and this shows no commitment. She supports the view of SEFA and SEDA co-operating but monitoring must be at the centre of operations. The lack of monitoring will lead to fruitless and wasteful expenditure.

Mr M Hendricks (Al Jamah-ah) asked what the interest rate is on loans especially micro-loans. He asked about a 12-month moratorium on capital and interest. He wants to get a view from the officials, whether it is a pipedream or not, that micro-loans will be interest-free? Since in Al Jamah-ah’s view this will be real empowerment and a 12 months interest-free moratorium is a good start.

Mr H April (ANC) said that 26% loan book disbursements in Limpopo means that they are doing something right. Why can SEFA not do the same in the North West? Whatever Limpopo is doing is correct and SEFA has the blueprint to do this in the North West. The problem SEFA has is that they have a new Minister and she is from Limpopo. People will say the minister is making them spend the money in Limpopo.

The Chairperson pointed out that we also have a president from Limpopo.

Mr April agrees with the Chairperson and says as colleagues they must not do this. The PnP concept is commendable and progressive, as it is not a move which threatens small business, but enhances the participation of people in the larger value chains and allows them to acquire goods at better prices. Tuck shops are closing since people do not have the buying power and access to these markets where they can get things cheaper and collaborate on finance. He wants to see this happen in the Northern Cape in Kuruman, in Kimberly, in Klerksdorp. Spread this and do it with speed. Eight such deals are approved – how many deals still need to be done, why are they not coming through and how can the word be got out? On the ground people cannot tell how to access SEFA and the services it renders. He is not sure how much is spent on marketing.

Mr F Jacobs (ANC) thanked SEFA for a useful presentation. He agreed that there is lot that can be done to make improvements. His questions are addressed broadly to SEFA and SEDA and DSBD. Firstly, how are we exploiting the BEE codes that talk about enterprise development? These codes set aside 30% for each business to look at enterprise development. This means the budget is small, but if the state can enforce compliance with this they will multiply the loan book to more than R20 billion. SEFA has a duty to see how this can be done and if no plan exists, it can be progressively realised. Insource this process.

SARS collects lots of money through banks. Reliable sources say to him more than R850 billion is collected and stored in banks and the interest accrued from this is high, and many banks are not forced to put this into rural and township economies. What are the banks and finance agencies going to do? To ensure that even if it is 1% of the interest loan debt, it will say to banks that money must be ploughed back where the need is greatest. The DSBD, SEFA and SEDA should collectively apply these two examples even if they do not have all the answers but put a process in place to move on these in the interim. 

The vacancies are noted but these will not be a perpetual occurrence and it does not mean that since SEFA does not have staff, they cannot implement the targets. In Q1 SEFA needed to get themselves up and running - vacancies and capacity will not be a valid excuse for non-performance and non-delivery. Progress around critical vacancies is noted and the increased collaboration between SEFA and SEDA. This is welcome however they want to see the modalities of this collaboration. How? When? What? We want to see a progressive realisation and integration. What are the steps to this realisation? He asked the Acting DG to provide input on this, to guide them in this process. He agreed with the concern about the unevenness of the geographic distribution of the loan book. It speaks to the lack of transparency and SEFA and SEDA and the DSBD need to share their processes or partake in relational processing i.e. from the application process onwards, they need to share information and application processing. The Committee hears facts and figures but not stories of real people and their success, which the Committee wants to hear and maybe should be part of continual reporting and accounting. The Committee members should be empowered by starting with the basics of how to apply, what are the criteria, what are the steps, what is the decision-making. As members of the Committee they need to have this information. It should be available to all SA citizens. How do you market and what is your outreach programme?

The Chairperson agreed with her colleagues that the way money is disbursed is only to ‘particular groups’, but SEFA needs to take care of everybody. The calculation on job creation is challenged since the figures do not add up. Businesses are dissimilar and need to be categorised and recorded properly to monitor and help people. Proper monitoring and evaluation procedures are needed to recover money. We want to see stable entities which are growing and cadre deployment is urged not to be employed to fill the vacancies. It needs to be run as a business, and the skill-mismatched cadres are unable to cope if wrongly employed. Doing the correct thing to achieve objectives is urged.

There are policies and budgets but no results. This has been said by people in Parliament and outside, and people are ‘highly frustrated’. SEFA, SEDA and other agencies must understand they are servants and not frustrate people. They must not box themselves in like an arrogant doctor not being able to sympathise with a member of society by assisting them with oxygen when they walk into a ward.

It is a must to build agreement between SEFA and SEDA and if no relationship exists the process and people will suffer. For example, SEDA prepares a document for an applicant, but SEFA does not approve it. Challenges need to be identified and explained to make it easier for the Committee to follow up and help the agencies.  SEFA continually sends applicants back and forth. An applicant cannot apply and wait for a loan for two years yet SEFA and SEDA come to the Committee to account quarterly. Evidence is needed and the leadership of these agencies must ensure that monitoring happens properly. Challenges with discipline and commitment of staff must be accounted for and there must not be discrimination amongst provinces. Rural is rural and SEFA cannot create categories of rural, since people will always then go to urban areas for stability, and then they go to informal settlements in these urban areas to access opportunities. The job creation aspect is appreciated.

Response
Mr Martin Makosi (Interim SEFA board chairperson) reassured the Committee on behalf of the board and the entire SEFA family that there is a very strong consciousness to ensure they rise to the task despite the limited time to move as fast as possible. The best effort will be made to ensure the money committed will be converted as SEFA’s top priority and to support the Committee, and that SEFA and SEDA collaborate. The many new members in the Committee are acknowledged and these new members may not understand all their functions and he can sympathise – being a new board chairperson.

SEFA would like to respond with a formal response which explains this. This is inform members of the Committee, and any applicant to SEFA, how SEFA operates in a simplified way. This is trying to be done as part of the SEFA overhaul. On the visibility of SEFA, they have noted this and marketing SEFA will have more attention to ensure people know it exists, especially in rural areas where people are in most need of SEFA. There is an understanding between SEFA and SEDA that they do not just expect to meet and talk. The details on the modalities will be coming through in the October 2019 meeting, which will determine who focuses on what between SEFA and SEDA. The areas of collaboration will be decided on and in the next reporting session, the Committee will receive an update, and this will close the gap if any exists between SEFA and SEDA. Board fees and bonus figures are not on hand at this meeting and these would have been compiled had SEFA known it would be wanted by the Committee. But there is a remuneration policy at SEFA that drives exactly how the board members are to be paid. There are no bonuses paid to any SEFA board member. People are paid for their attendance at board meetings and other sessions held. If there is an increase in payment of board members, it would be due to more meetings held. The focus in SEFA’s first board meeting was an agreement to comply with the King Code which stated a maximum of 4 board meetings as a limit. Many meetings were discouraged, and it encourages matters to be addressed at a board committee level.

On the uneven distribution of loan disbursements in provinces from the time they assumed positions as a board, the Committee must consider the whole era state-owned institutions are coming from and moving forward this has created transparency expectations and equitability of funding distribution. All the board notes that ‘one or the other’ provinces are favoured. The CEO tried to explain that there is a higher uptake in Limpopo due to the distribution channels which SEFA uses. Direct Lending is funding that is processed directly within SEFA internal arrangements. Wholesale Lending is where the money is distributed through third parties/ intermediaries and these third parties tend to be more operational in Limpopo which ensures a higher allocation in Limpopo. There are two main third parties. It has been said to intermediaries which are sustainable that they must expand operations beyond the provinces in which there is higher uptake, and they need to focus on bringing other intermediaries on board. The North West status quo is shocking even to him and he did not expect to have zero distribution in any province not even two or three. These questions must be interrogated to understand why. But they cannot reduce such applications since this is the best SEFA can do, to ensure SEFA is visible, and that information is provided, and SEFA gets the necessary calibre of applications.

Two years to wait for an application is too long, and creative ways need to be found to reduce SEFA’s turnaround time. SEFA is putting systems in place for efficiency. It is all about systems, leadership and performance monitoring and this is unacceptable, and they are working on it. SEDA is the first institution SEFA needs to partner with for visibility. NEF and other state agencies must also partner to ensure effectiveness. The third layer of partnership is the private sector and big business, and many other funds in banks are being engaged with by SEFA. SEFA must determine how it effectively engages and determine this with all government departments. SEFA will need to look at the lending and collection rate for all businesses, doing business with government as SEFA needs government support in this e.g. cession arrangements to be put in place, so that when SEFA lends to enterprises doing business with government, they have access to the money that will need to be paid back to SEFA.

He replied about the issue raised by the Chairperson on slide 10 is there is so much information and too little time to explain in the meeting. This slide  should not create the impression that more money is given to failing businesses. This can be reference checked with slide 17 for better response. More money has gone to rural business and slide 10 was to elaborate on the developmental impact of the funding knowing that there is movement of people and that movement over the past few years has not been magnified by the Gauteng province in township enterprises in township economies. SEDA is responding to the call for the revival of the township economy and black owned SMMEs.

The Chairperson asked if using third parties is cheaper for the end user and SEFA has to come up with strategies to deal with the bottlenecks. SEFA must employ committed people and deal directly.

Mr Makosi replied that the written response to the Committee will show how SEFA will mitigate against higher costs to the end-user and to a better balance in money disbursed through SEFA gradually and that money is disbursed simultaneously, while SEFA works on building capacity.

Mr Molepo (Acting CEO of SEFA) said he will respond to the questions, not necessarily addressing individuals directly. The concern about disbursements is noted. There is a timing lag after transactions are approved. While SEFA is concluding agreements, there is normally a time-lag, between when they approve and disburse. They believe that in Q2 and Q3, SEFA will see a far better picture. In Mpumalanga they have a micro-finance institution called Phakamani Foundation, that is very active in the province which has good reach into the most remote areas of the province, which can be demonstrated to the Committee. The recommendation is that in future SEDA needs to come up with case studies for the Committee to reflect achievements. Akwanza is in Mpumalanga that SEFA is lending through, a cooperative ‘gugulethu’ where rural bodies are given 1 hectare to be sugar-cane contract growers has developmental impact in Inkomazi.

Mr Molepo continued that the socio-economic impact in these areas must be looked at for the Committee to see exactly what is done and the Committee will see the disbursements coming through. North West province which has a low uptake is one where serious engagements with micro-finance institutions and SEFA are happening where SEFA is saying it is willing to provide micro-financiers with money to be national, establish offices, since these micro-financiers do not have the capacity to reach all in need without partners.

On pricing, when SEFA approve facilities, they cap the level at which an intermediary must pass on funding to a non-beneficiary. They say to those interested, if you are not willing to cap funding at a certain level, then they cannot partner with SEFA since there is no way to increase the cost of capital. On blended finance, the Acting DG will speak to this. When Minister Ntshavheni was appointed, DSBD then deliberately had a strategy that stated they should no longer be providing only grants, especially to enterprises established without blending debt and repayable loans. DSBD can speak for itself on the intention behind this move and on other smaller amounts they will continue providing grants to, and SEDA also, since they do some training. SEFA will be measuring several items for one to qualify for blended finance. Five things they are looking for in their strategy is:
1  To touch young people - is the applicant a youth? If not, this does not mean the individual will not be funded, but the metrics to be used, will cause the individual to get fewer points. There will be an expanded definition of what constitutes youth as per Minister Ntshavheni i.e. 18- 40 years old will be youth.
2  Are you in a rural area or a township? Since SEFA wants to be biased towards businesses in rural areas and townships.
3  Number of jobs the individual will create, and these must not just be temporary jobs, but must be sustainable jobs.
4  Look at the priority sectors that are job-absorptive in line with government macro-economic policies e.g. agro-processing, manufacturing and the sectors announced the President and Economic Cluster. These are the sectors in line with industrial policy action plan.
5  Look at the stage of business. Is it less than three years old?
These metrics will provide the size of the grant provided.

During Minister Ntshavheni’s budget vote she mentioned that if one gets 100% on all the 5 points, then one will qualify for a maximum grant of R2.5 million, and this money will be mixed with repayable loans. Why repayable loans you may ask? Since this ensures business support, monitoring and other services from business development support to ensure there is sustainability since giving money to businesses in the form of grant with no M&E has left SEFA realising changes over time. The DG will also speak to the SETA / SEDA collaboration, but the Minister has given clear instructions that one business plan template must be used by agencies so that when SEDA prepares a business plan, there is no chance this business plan will be rejected, whether by SEFA, NEF, IDC. The enhancements done to this business-plan template is when someone applies for contract finance, if one has a contract, 1 to 5 above is required, so that SEDA personnel, once they have ‘marked’ this and passed it on to SEFA, will provide less of a chance of being rejected. This is the simplest process in the eco-system which the Minister gave agencies instructions on. The Minister said that all agencies and the executive and DSBD cannot have SMMEs going to multiple agencies aimlessly. SMMEs need to have one point of entry and an information system to ensure the applications are channeled to the required agency, so the applicant does not have to go from one agency to another. A type of one stop shop where the SMME can get everything in one place such as CIPC certificates and tax-clearance certificates. SEFA and other agencies are seriously working on this. Enterprise and Supply Development are the chains along which SEFA in terms of the BEE Codes wants to ensure that SMMEs take advantage of the 30% procurement opportunities set aside by government. Minister Ntshavheni has repeatedly said that over and above the allocation provided to SMMEs, there has to be monitoring of government to ensure this is not just talk but that it happens at all levels of government. The President together with the Premiers must take the lead.

Ms Sefolo replied that the PnP programme targets shop owners currently trading in the townships and whose stores have become uncompetitive. In Paarl for example the store is owned by a husband and wife who have been in the retail business for over 20 years. They approached PnP asking if it could remodel their store. They remain owners of the site and the store. All PnP does is to sign an agreement with them, to say we will introduce PnP systems, help with bulk-buying so they are more competitive. This store was trading at R200 000 per month before the changeover to PnP and it now does R1.5 million per month. This answers that the PnP project is ‘definitely economically empowering’ township people, not only from an ownership perspective but also from a job creation perspective. The store employed 30 new unemployed people from the local community so it empowered the people that work in the store also. At any point the store owner wants to leave the arrangement with PnP, they are not tied to any long-term relationship which they do not find beneficial. While retailers like U-Save are 100% owned by these retailers and there is no black ownership in these stores. How will this programme be spread? PnP is looking at growing a critical mass in the Western Cape and Gauteng Province and then exploring other provinces such as KZN and Mpumalanga. PnP has had engagements with stakeholders in these provinces. PnP wants to spread the programme but do it in a systematic way so that it is a success overall.

The ESD fund aims to leverage funding from the private sector. SEFA partners with an ESD partner, who if looking to access R100 million, they must match with their own R100 million. Ultimately more funding gets channeled to SMMEs in these value-chains, so there is a big leveraging effect, and they are looking to maximise the opportunity through the BEE codes which the private sector is obligated to comply with. SEFA hopes to grow this fund in the future.

Direct lending versus wholesale lending are two channels that can be likened to how a bank lends. If one walks into a bank and accesses a home loan or a car loan, this would be an example of retail model and how direct lending operates, where one interact with SMMEs directly when they apply via SEFA regional offices. Those applications are processed and funds are distributed directly. On the wholesale side, SEFA partners with different intermediaries, not just MFIs, some of them are other retail financial intermediaries, who come to them and say they want additional funding to do more loan funding and other funding to SMMEs. Using the two channels allowed SEFA to increase its reach and do more work. As Mr Makosi and Mr Molepo said close monitoring must take place. If a regional office in the SEFA network is not performing, these non-performers report to management quarterly and there are engagements with these regional offices on the non-performance. Turnaround in regional offices has happened where very strict consequence management is implemented.

[Short break]

Small Enterprise Development Agency (SEDA) briefing on 2019/20 Quarter 1 Performance
Mr Mbulelo Sogoni (SEDA board chairperson) noted that the last time SEDA appeared before the Committee it was going through board changes. Points made in the meeting about monitoring were acknowledged

Ms Mandisa Tshikwatamba (CEO of SEDA) stated the new board is now functioning and is at full steam in doing its work. Her briefing covered: Governance & Compliance , Performance Report , Human Resources Report, Financial Information.

All requirements were complied with and completed by the 2018/19 year-end but still SEDA finds that it has an unqualified audit with findings (slide 5).  There was a 62% achievement of targets for Quarter 1. The percentage looks low, since Q1 deals with the processing of new clients but as we go into year, it will pick up. Compared to Quarter 1 in the previous year, SEDA is still okay. Slide 11 is a performance statement for each programme and areas SEDA has not done well in with reasons provided. Diagnostic assessment is measured in terms of turnaround time, and SEDA is trying to mitigate the risk of fewer assessments by using partnerships. Intervention is the next stage after diagnosis, so if SEDA is lower on diagnostics, this will negatively affect the interventions target and here the target was not met. For the National Gazelles programme, the third cohort should have been taken on but this was delayed due to evaluating the second cohort. Enterprise coaching reached its target, expanding from three provinces and making it a national programme. Delays in recruitment of coaches and participants were felt but SEDA aims to get there by Q2.

The entrepreneurship in schools programme started slow but it is now working towards a national competition that with a build-up that closes in November, after the young kids have done their project concepts. Exhibition preparation during the year and all other areas on slide 12, are under the control of SEDA and nothing here poses a threat to SEDA. Slide 13 has sections in red which indicate where SEDA has fallen short in its targets. Slide 15 indicates the number of colocation points, which is the core of SEDA work in terms of eco-systems, support and eco-system capacitation, using SEDA tools and partners to increase access points for small businesses. Slide 16 shows the number of clients supported through incubation and going forward SEDA is scaling-up to increase the footprint of incubation and ensuring standards to assist those who are providing incubation services. SEDA is redirecting its investment as guided by the Minister where there is a gap in rural areas and townships, together with assistance in technology transfer and working closely with corporates as they have technology which SMMEs are looking for. SEDA is looking at partnership arrangements to provide facilities for technology transfer support to complete what is being done by SEDA.

Ms Tshikwatamba said SEDA has done well on its targets for stakeholder engagement (slide 17). Going forward SEDA is strategically choosing its stakeholders for different programmes to get partners that can help SEDA scale-up what SEDA is already doing, or to get partners to grow in disadvantaged areas, both rural and townships. This slide shows the enterprises' growth trends. Turnover is measured every 6 months.

Slide 18 looks at fund leveraging from various stakeholders in particular corporates and other government departments and agencies where projects can be worked on together. Customer satisfaction is measured over 6-month intervals where clients are asked if they are still satisfied with the support from SEDA and this is indexed from 1 to 5. The vacancy rate in the last row talks to SEDA capacity which sometimes drops below the 5% vacancy rate. However, SEDA has greatly improved turnaround time.

Slide 19 indicates sectors that top the list when entrepreneurs are spoken to and Information and Communications Technology (ICT) forms part of this. Slide 20 indicates the highlights for the different initiatives SEDA undertakes, one being to assist the entrepreneurs to go to market, and this involves competition or benchmarking stages with other entrepreneurs. SEDA entrepreneurs have come out on top in the textile and fashion sectors and people comment globally on the work entrepreneurs have done. Furniture, construction and the wine industry are also notable. Slide 21 looks at partners SEDA is targeting. Business development support involves targeting the industry sectors and working with them, on specific programmes to take-on entrepreneurs in the value chain or working with other departments in supporting their programmes. Examples were given of value-adding partnerships such as the Gibela incubator which was referenced as ‘ground-breaking’ and is working with Metrorail. SEDA is working with municipalities as co-location points. SEDA is targeting municipalities following the message they should be present in every municipality with a plan to impact ‘LED offices’ in municipalities.

SEDA is working with SEFA to facilitate contracts and funding with partners in the government or private sector ecosystems or looking for contract opportunities which arise, and then SEFA determines how to prepare entrepreneurs for this. Slide 25 provides examples of such contracts and funding. SEFA spoke about the PnP project. On SEDA's side, is not just looking at stores in township or rural areas but saying where PnP already has stores, how does SEDA get products on those shelves. A success story is the Kings of Midlands Secondary Co-operative in KZN which has been assisted to set up a tyre fitment centre for taxis.

The human resources report reflected vacancies and the footprint of offices and access points for SEDA with 27 areas of common service points between SEDA and SEFA.

The financial report looked at the underspending. This was due to salary negotiations that were not finalised and so the increases could not be paid out towards salaries; the Gazelle programme had to be reassessed but a pipeline of R22 million in deals exists. Disbursements to incubators was halted due to governance issues which SEDA is strict about – it needs to ensure financial governance is in place and these governance standards must be met before SEDA can give incubators money. Q2 will see SEDA offset this underspending when these issues are sorted out.

In conclusion key projects leading  to new strategic focus: National business  incubation standards (this involves building standards by ensuring business advisors have the credentials required, Ecosystem mapping to allow for partnerships, Rolling out incubators in townships and rural with specific targets this year, Digital channels where design of the referral system between SEDA and SEFA has been drafted.

SEDA's strategic shift  of being a facilitator in the ecosystem  will allow it  to reach more SMME through the coordination of interventions  and resources. Lessons learned, such as partners leaving them halfway, means it has  to  maintain a delicate  balance between high impact interventions for small and medium enterprises which demands more resources so  SEDA  has to remain to directly  close  the service gap.
The SEDA model attracts the micro and survivalist and it is difficult to measure  return on investment. A suitable business infrastructure gap  may delay  the District approach. Stakeholders and partners targeted for mobilisation of resources often do not make long term commitments so may require support from different role players.

Discussion
Mr Hendricks stated the nation is looking to ‘score’ business to create up to 5 million jobs. It seems a good foundation has been set to achieve it. But it is ‘all thunder and no lightning’ as no jobs are seen, and it is a grave concern that everything depends on the private sector in the form of intermediaries and partnerships. He said that the private sector does not want to and will not create jobs, so if we delegate the responsibility to create jobs to them, ‘we are stuck’. There needs to be a new narrative, a new look and capacity must be built so that the Minister and the DSBD is capacitated to create the jobs and not depend on SEFA, SEDA, and partnerships to do so. He is confident they are ready to carry out their mandate for the nation, but he thinks the channels used need to be relooked at, as the way they are going does not seem to create the jobs which the country needs. His previous questions were unanswered. If we are dependent on partnerships and intermediaries largely coming from the private sector, we will be disappointed.

Ms M Lubengo (ANC) referred to the mobile units that SEDA uses in some provinces. How are people serviced in provinces that do not have mobile units? 

Ms K Tlhomelang (ANC) refers to slide 16 on Programme 2: SEDA Technology Programme (STP) where it achieved 0 instead of 58 clients supported through pitching and innovation forums. Is there a plan? What were the challenges that prevent SEDA achieving the target? She asked for the plan to address the lack of mobile units. She asked about the inconsistency of SEDA budgets for provinces and the plan to address this.

Mr April addressed the Acting DG and said he is worried about seeing so many zeros for targets not achieved. That is bad. Learners participating in entrepreneurship in schools. The target was 3000 for Q1 but it achieved only 152. Zero achieved for pitching ideas which is a simple process. This is an indictment on the good work done and shared here. There are things SEDA is neglecting. SEDA is still outsourcing people to perform as business advisors - he referenced the 17 MOUs for business advisors. These days the talk is insourcing. What worries him is the 40.38% expenditure spent on employees, which implies the Department is run only for employees. There is underspending of almost R50 million and yet SEDA is saying it wants to increase its disbursements.

Response
Mr Sogoni (SEDA chairperson) replied about job creation, saying SEDA aims to capacitate SMMEs to create jobs. The mobile units are used with the intention is to make services available where ordinarily not, otherwise we do not need these mobile units. SEDA will take into account comments made about making itself sufficiently available. SEDA acknowledges there are areas where they have achieved less than they had planned to and they take these comments by Members seriously. The performance below targets is not acceptable, hence they have developed a catch-up plan. Some projects were delayed since SEDA had to get a sense of assurance post-elections that the new Minister would not change SEDA’s objectives.

Ms Tshikwatamba (SEDA CEO) replied that the mobile units are vehicles with wifi that act like a mobile office. Where there are not many mobile units is where there are a large number of SEDA offices in core locations. Where more money is spent, there will be more incubators, and these provide walk-in services. Staff there are not necessarily consultants but they act as an extension to the SEDA staff and a link to core locations. Sometimes municipalities will give spare resources to SEDA and it is not able to take these staff permanently onto its payroll hence the MOUs.

The Chairperson wanted to challenge SEDA but did not require immediate answers. Entrepreneurship participation between the ages of 25 to 34 is behind in South Africa compared to certain other countries. SEDA must find out why. 25% of people are aware of SEDA but only 4% have used the programme. If one does not deal with these challenges, people will not be fully motivated. He noted the 2848 learners who had not participated in a school entrepreneurship programme in Q1 and said that sometimes one need to be realistic about targets, otherwise one has a problem when reviewing them. Red tape is causing bottlenecks, can these please be unlocked. Intervention is there but not clear. If saying it will extend, how many to each province?

Department of Small Business Development (DSBD) 2019/20 Quarter 1 Performance
Mr Lindokuhle Mkhumane, Acting Director General: DSBD, reported that 25 of the 33 quarterly targets (75.7%) were achieved: Programme 1: Administration 5 out of 8 targets achieved, Programme 2: Sector Policy And Research 8 out of 9, Programme 3: Integrated Co-Operatives Development 8 out of 10, Programme 4: Enterprise Development And Entrepreneurship 4 out of 6. Reasons were provided for the seven targets that were not achieved. The main reason for the slowdown in Q1 expenditure was that DSBD had to wait for the priorities of the Sixth Administration and ensure it had resources to implement those priorities. The DSBD had an unqualified audit opinion which is good.  

Ms Semphete Oosterwyk, CFO: DSBD, presented the financial report. The main reason for underspending is the non-processing of these transfers payments (R87.5 million) due to reviewing claims to ensure full compliance to guidelines:
            (a) Black Business Supplier Development Programme (R50 million):
            (b) Small Business Innovation Fund (R16.7 million) (Delays in finalising the operating systems)    
            (c) National Informal Business Upliftment Strategy (R7.8 million) (slow processing of applications)
            (d) Co-operatives Incentive Scheme (R10.6 million) (Non-compliant claims) 
            (e) Craft Customised Sector Programme (R2.5 million): DSBD took over from IDC and governance logistics led to the delay in adjudicating and contracting with beneficiaries.

Compensation of Employees underspent by R3.6 million due to vacant posts. Goods and Services also contributed to the low spending by R2 million due to outstanding invoices from the Auditor General.

Planned action to mitigate challenges:
            (a) BBSDP (R80 million) to be transferred to SEFA to implement blended finance facility
            (b) SBIF (R16.7 million) new operational model introduced by the new Board       
            (c) NIBUS (R7.8 million) transfer some of the funding to SEDA to enable to process backlog
            (d) CIS (R20 million) transferred to SEFA to implement blended finance  
            (e) Craft CSP (R2.5 million): DSBD to support them to meet compliance requirements.
Some targets were removed from the revised APP due to budget constraints. Targets are being fast-tracked to ensure achievement without compromising compliance.

Discussion
The Chairperson requested that the Department respond in writing to the questions due to time constraints.

An ANC Member stated that government – from local to national level – owes business almost R3.4 billion from close to 70 000 invoices. What has government done to fight for the payment of those invoices to SMMEs? Our role as a Committee is to influence the National Assembly on the drafting of legislation. DSBD is best placed to advise which pieces of legislation are hampering the growth and operation of small business. Does DSBD have plans to review and table amendments to legislation that is counter-productive to small businesses? He named the Public Finance Management Act (PFMA) and the Preferential Procurement Policy Framework Act (PPPFA) as examples.

Mr T Langa (EFF) asked about the continuity of operations and requested an update on the suspension of nine officials.

The Acting DG replied that the disciplinary hearing started last week on Wednesday and Thursday. There had been challenges with postponement and inspection. He replied that they are planning to review related Acts. Parallel processes on the revised Annual Performance Plan are happening and DSBD is talking about the National Small Enterprise Act and will be submitting this to the Office of the Chief State Law Advisor to assist in reviewing the Act since it does not have enough legal staff. It is planning to review and amend the Cooperatives Act as some issues have arisen. It is suggested that several Acts addressing a single mandate should instead be under one Act which the Minister is pushing for and to assist in establishing an SMME ombudsman service. The Department has provided input to National Treasury on the PFMA to provide support to SMMEs and there is a document which DSBD can share.

In reviewing the National Small Enterprises Act not much movement has happened. There is a call for harsher punishment of government and the private sector which are owing SMMEs – by asking for an interest rate to compensate for wasted time and resources – which must be part of amendments to the National Small Enterprises Act, and for DSBD to have a trumping clause for the Act to prevail in disputes.

The meeting was adjourned.
 

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