DSBD, Seda & Sefa 2018/19 Annual Reports; with Deputy Minister

Meeting report

Opening Remarks

The Chairperson opened the meeting and asked the Committee Secretary to read the apologies. The Secretary noted apologies from Committee Members. The Chairperson added the item of political overview by the Deputy Minister to the agenda for the meeting.

Deputy Minister Remarks

Ms Rosemary Capa, Deputy Minister of Small Business Development, provided an overview of the Department of Small Business Development (DSBD). She apologised on behalf of the Minister who was not in the country. The Department would today be presenting its 2018/19 Annual Report to the Committee. The Report outlines the successes and failures of the Department. She spoke to the mandate of the Department, which was introduced at the start of the Fifth Parliament. The programmes of the DSBD were mainly a continuation from the Department of Trade and Industry. DSBD needs to account when it comes to cooperatives and other small businesses. The Department needs to qualify every legal business or cooperatives to prevent illegal trading. The Department will soon be working with municipalities to regulate informal trading.

Small Enterprise Development Agency (SEDA) briefing on Annual Performance plan 2019/20

Mr Mbulelo Sogoni, board chairperson, SEDA, began by outlining the performance priorities of the entity and tracked outcomes.

Ms Mandisa Tshikwatamba, CEO, SEDA, said Seda Performed  well against set targets in its annual plan  - from a total of 29 strategic indicators that were considered for the review, the organisation performed well on 27 indicators, this reflect an organisational performance of 93%. The organisation did not achieve the following indicators:

•  Number of clients supported through enterprise couching
• Value of support leveraged through partners

Areas of concern included the number of clients supported through enterprise couching, value of support leveraged through partners, client clearing through diagnostics assessments and budgets demand.

Looking at the key performance indicators for the 2018/19 APP, these included outreach, companies assisted on specific projects receiving support, impact and responsiveness to shareholder specific requirements.

The presentation then looked at performance per programme – under programme one: enterprise development strategic objective: improve service delivery, the target not met was the number of clients supported through enterprise coaching while under the strategic objective to increase funding, the target to improve partnering with stakeholders was not met.

The presentation then detailed key client demographics, Seda delivery network, key partnerships and human resources.

The presentation then addressed the financial report including expenditure performance and portfolio spend per programme. Areas of concern included:

• the operating surplus of Seda as at 31 March 2019 is R45 million, which is 3.89% of the budget of Seda, any operating deficit amount is classified as an irregular expenditure. Amounts of:  
• R11 million on vacant positions, which were filled later in the year and in 2019/20,
• R24 million on National Gazelles project due to time taken to internalise the program as it was run by an External Service provider until April 2018, and transitional challenges in the payment of Gazelles grants from Black Business Supplier Development Programme (BBSDP) to the National Gazelles project that were resolved towards the end of the third quarter of 2018/19,
• R5 million on Capacity Building program due to expired Memorandum of Agreements and National Treasury Central Supplier Database (CSD) non-compliance by clients. These challenges were subsequently resolved, and
• Other small amounts of R5 million

Seda awaits the National Treasury response on whether to retain or surrender the operating surplus of R45 million.

In terms of addressing underspending in 2019/20:

• National Gazelles Project: Grant amounts of R22 million to clients have been adjudicated, and an additional adjudication taking place before the end of September 2019 of R13 million. Procurement processes already taking place for all approvals already made, year to date spend to August 2019 is R4 million. We expect to pay R18 million (60%) in quarter three and the balance of R13 million (40%) in quarter four
• Project Plan for CPPP Project and Cooperate Assistance Program (EDTEA) Project in KZN is finalised, thus the procurement process will commence in the next quarter to ensure spending to a sum of R13 million is spend by year-end. The KZN Provincial Government, which funds these projects, delayed to finalise its list of Co-Operatives interventions.
• Some tranche payments to incubators of R23 million were late due to expired MoA and CSD non-compliance matters, that had to be addressed before 2019/20 disbursements.  Tranche payments will improve from the next quarter. This amount will be paid in quarter 2.

In conclusion, over the last year, Seda supported a number of clients which ultimately made a huge success of their business after successful interventions. Seda’s interventions contributed to high impact in that these clients recorded improvements in their business performance and their financial position, including improvement in jobs created in some. For annual report purposes Seda selected a few to be added as part of Seda’s performance to showcases practical cases. These success stories are varied between Seda’s programmes: Enterprise Development, Seda Technology Programme CPPP and Cooperative Development.

Discussion

Mr M Hendricks (Al Jama-Ah) noted that SEDA endeavoured to the Committee that it would develop the template – had this been done?

Ms K Tlhomelang (ANC) noted that the coaching, which was supposed to last for ten months, was only coordinated for six months. She asked if there would be any opportunities for these enterprises to complete the ten month programme if they did not manage to do so.

Looking at the presentation, she highlighted there were a number of achievements recorded by SEDA and she appreciated the interventions the entity carried out. She recommended that the mobile offices should be allocated closer to district municipalities so that they form part of service delivery. She sought clarity on the partnership between SEDA and MECAD and the benefit thereof.

Mr H April (ANC) asked how far SEDA was with the development of the incubator model as announced by President Ramaphosa. As the Committee is busy with the Budgetary Review and Recommendations Report (BRRR), it must be clear how this is aligned with other priorities.

SEDA claimed many victories in terms of job creation however the entity worked with the Department of Tourism where there was agreement on a 12 month project however SEDA exited the project within six months. How many projects does SEDA commit to cover?

Mr F Jacobs (ANC) applauded of SEDA for the phenomenal work it did especially the clean audit. He sought clarity on the link between SEDA and the Small Enterprise Finance Agency (SEFA) in terms of opportunities and financial support. He asked for clarity on the learnership that SEDA provides.

He complimented the high school initiative that SEDA provides for young people – while this is excellent, there should be a bigger rollout. He found the number of jobs created by supported clients (+3 500 a year) and the number of diagnostic assessments (11 000 per year) high and asked if these jobs can be quantified through their impact.

The Chairperson applauded SEDA for the clean audit and advised Members to ask questions based on the Annual Report.

SEDA response

Mr Sogoni responded that SEDA is not only based on rural areas – there is a section in the presentation which indicated exactly where SEDA is located. SEDA is ensuring it is located in each municipality. The recommendations of the Committee are taken on board. He spoke to the importance of partnerships and the jobs associated with partnerships.

Ms Tshikwatamba added that list of SEDA offices and location points can be provided to the Committee. The staff have access to a limited amount of vehicles. SEDA is planning to brand its cars. Some of the entrepreneurs fall off within the stipulated ten months and SEDA has been observing difficulties in identifying the reasons for this falling out. However those which have fell off continue to be SEDA members and are always welcome to seek assistance at any time. She referred to slide 18, noting the value of R92 million, reflected on the slide, is money that has been given to SEDA as form of partnership.

She explained that SEDA and SEFA are interlinked and are sometimes located in the same office – there are about 20 such offices. SEDA has been looking at managing the work between SEDA and SEFA where both entities trace enterprises’ progress.

Ms Nosipho Khonkwane, SEDA Executive Manager: SEDA Technology Programme, said MECAD is a licence partner of the international company that is based in Centurion. The benefit of the partnership is that free licences are given to colleges. The incubation model, as pronounced by the President, is also available and has been adapted for five years. It can also be used for academic purposes. There are digital hubs in the townships and rural areas.

Small Enterprise Finance Agency (SEFA) briefing on Annual Performance plan 2018/19

Mr Andrew Martin-Robert Mahosi, SEFA board chairperson, provided an overview of the entity’s performance over the year under review on behalf of the board. He said in the entire SEFA family, there is a very strong consciousness to ensure it rises 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 this is SEFA’s top priority along with supporting the Committee and collaboration with SEDA. The many new Members in the Committee are acknowledged - these new Members may not understand all the SEFA functions and he can sympathise with this being a new board chairperson himself.

Mr Setlakalane Molepo, Acting CEO, SEFA, took the Committee through the presentation which included performance of the three lending models i.e. direct lending, wholsesale lending and the credit guarantee scheme. Performance highlights for direct lending included:

-Direct Lending achieved 39% increase in approvals year on year at R272mil and 33% increase in disbursements year on year at R158mil. Reversing the declining trend of Direct Lending Approvals and Disbursements that had been in place for three years

-Introduced and implemented a strategic partnership with Pick n Pay that resulted in a R60mil facility for investment in the townships - a key targeted development focus for Sefa. During the financial year R30mil worth of individual stores were approved to be disbursed in Q2 FY19/20. This partnership not only ensured achievement of Direct Lending approval targets for the year but also ensured traction in a key targeted development economic area for Sefa

-Developed and implemented a new strategy for Direct Lending embedded in a sector driven investment strategy that will lead to ensuring portfolio diversification, technical skills specialisation and sustainable portfolio construction. The sector investment strategy also seeks to ensure that sector concentration is mitigated and income for Direct Lending is generated through a bias towards medium term investments that yield longer interest income and sustainable jobs.

Highlights of performance of the informal sector and micro-enterprises included:

- 68 032 number of enterprises (or 99.8%) supported were women-owned based in rural areas to the value of R240 million

-A 32% growth in the amount disbursed to micro-enterprises compared to the previous year

-The Micro Finance and Informal Sector lending programme is channelled through micro financing institutions and partnerships with corporates who implement enterprise and supplier development programmes

-A value-adding partnership with the Wholesale and Retail (W&R) seta was established, resulting in the training of some Sefa supported microenterprises at the Mangaung Fresh Produce Market

Funding activity performance highlights for whole SME and cooperatives included:

-Sefa has developed an in-house fund management capacity to deliver third-party funds. The management of third-party funds is intended to leverage existing financial and non-financial resources in order to improve access to funding for SMEs

-The European Union Commission has allocated budget support of €30m of the “Employment Promotion through SMME support Programme” (EPSSP) to Sefa. €10m for ESD projects and €20m is earmarked Innovation projects in the outer years. This funding affords Sefa to increase access to finance, crowd-in private sector investment and scale up support to SMMEs

-Small Business and Innovation Fund: Sefa has been appointed as the implementing agency for an R3.2bn Small Business and Innovation Fund commencing in 2019/20 FY

Highlights for the Khula Credit Guarantee included:  portfolio guarantee facilities approved in 2018/19 amounted to R210m against a target of R182m. These facilities were granted to financial institutions in the Agribusiness and SME sectors and indemnities taken up amounted to R135 million, with supplier credit guarantees accounting for 67%, Corporates 14%, Commercial Banks 10% and Non-Bank Financial Institutions 9%.

Highlights of the post investment monitoring, workout and restructuring included: Sefa’s total portfolio amounted to R1.9bn as at 31 March 2019. This consists of R1.2bn in Wholesale Lending and R726m in Direct Lending. The portfolio remained unchanged year-on-year largely on the back of a decrease in Direct Lending. Sefa is the appointed fund manager of the Land Reform Empowerment fund with a portfolio of R285m (2018: R272m). Sefa, through the Wholesale Lending channel, collected R197m against an expected collection of R172m, whilst through Direct Lending, the organisation collected R150m against the target of R193m during the year under review

Ms Shoki Ralebepa, CFO, SEFA, took Members through the financial performance for the entity for the year under review, where highlights included:

-Unqualified clean audit opinions since Sefa’s inception 1 April 2012

-Direct Lending attracts lower impairments on new disbursements (28% of loans disbursed in 2019)  

-Operating expenses contained at approximately R79 million over the past five years. In addition Sefa incurred a R7 million cost saving from 2018 financial year

-Raised €35m European Union facility and R3 billion SBIF facility

-R28m improvement year on year in net investment property results

-Reduced reportable irregularities and fruitless expenditure from R4 million in 2014 to R16k in 2019

The main challenges included:

The low growth macroeconomic environment is adversely impacting on the performance of Sefa funded clients, resulting in the impairment coverage ratio of 47% and negative loan book growth (29% decline in Loans and Advances, year on year)

-Cost to income ratio remains high (105% per BSC)

-Reduction in interest income generated by Sefa over five years

-The fiscal constraints and reprioritisation of government expenditure resulted in lower MTEF allocation than in previous years (i.e. below inflation increases)

The presentation then detailed the statement of comprehensive income, statement of financial position and performance against predetermined objectives.

Discussion

Mr Hendricks expressed his appreciation of the Minister, new board members and new administration. He was aware of the collaboration between SEFA and SEDA. He agreed with the observation that a large majority of micro businesses are owned by women – this speaks to the fact that women are good entrepreneurs. He suggested that SEFA should lend finances to women in both urban and rural areas.  He observed the statistics on development and job creation continues to decline – this is an indication that there is something not done well.

Ms Tlhomela referred to slide five of the presentation which spoke to the lending model and asked if there was a specific target that SEFA intended to accomplish in terms of the lending model. SEFA mentioned there are 82 access points - she asked if these access point are sufficient to cover those areas. She questioned the process of direct lending and how the R150 million was spent. How is SEFA planning to improve its performance?

Mr April noted that the quality of questions asked by Members would influence the quality of response given. He stressed the PicknPay model did not show figures or impact – more clarity on this model and its impact is required.

Mr T Langa (EFF) sought clarity regarding SEFA’s private auditing. He questioned the target for female entrepreneurship and why this was not met.

Mr Jacobs appreciated SEFA’s achievement. He sought clarity on direct lending process.

 Response from SEFA

Mr Mahosi responded that SEFA was aware of the statistics around the headcount and that it is not reflecting figures which are required. At the risk of it sounding like an excuse, SEFA is facing economic impact. Job creation relied on market access for those enterprises. He highlighted the PicknPay model that SEFA is piloting which targeted 15 enterprises based in the townships – the partnership supports the enterprises.

Mr Setlakalane Molepo, SEFA Acting CEO, pointed out that during the sixth administration, the Minister emphasised policy and that deployment of functions should be allocated to agencies. The blended finance model speaks to the entrepreneurs and the provision of capital - this money comes in the form of a grant.

SEFA has a target for each and every channel of lending. 82 access points are not sufficient - the partners that the Agency has, such as Phakamani, have no obligation to pay hence they count as the lending channel. He stressed that the agency should be able to navigate and utilise technology so it can provide loans cheaper. The youth enterprise will soon introduce projects such as “pitch perfect” where young people showcase their innovative ideas to be incorporated into the fourth industrial revolution. Overall, 99.8% of women-owned enterprises have been supported by SEFA - this includes women in urban and rural areas.

Ms Ralebepa responded that SEFA has been audited according to International Financial Reporting Standards (IFRS). SEFA is engaging with the AG however it did not have adequate resources and skills to audit SEFA directly.

Department of Small Business Development (DSBD) annual report 2019/20

Mr Lindokuhle Mkhumane, Acting Director-General, DSBD, began the presentation by taking the Committee through the reviewed organisational structure approved by the Minister in November 2018 and submitted to the Minister of Public Service and Administration for concurrence. The process was placed in abeyance pending the National Macro Organisation of the State (NMOS).

Looking at overall performance for the year under review, the Department set out to achieve 34 annual targets over the reporting period. The standards against which performance was measured were as follows:

• 21 or 62% of the targets were achieved
• 13 or 38% were not achieved
• The Department is no longer reporting on the partially achieved targets

Two (22%) targets were not achieved in programme one (administration), two (22%) targets were not achieved in programme two (sector policy and research), five (45%) targets were not achieved in programme three (integrated cooperatives development) and two (22%) targets were not achieved in programme four (enterprise development and entrepreneurship). In total, 13 (38%) of targets were not achieved in 2018/19.

The presentation then detailed overall performance over four financial years.

Highlights for programme one:

• The Department for the past three years achieved unqualified audit reports from the Auditor-General and the year under review was no exception
• The Department managed to process 12 401 invoices to eligible creditors amounting to R75 390 787.71 and 1 496 incentives payments amounting to R357 418 146.97 at an average of 10 days of receipt. None were paid after 30 days of receipt
• Achieving a representation of 53.8% of the women in its Senior Management Services (SMS), above the public service standard of 50%
• The Department has 3.1% people with disabilities as at 31 March 2019, two of whom are SMS members
• The Department also kept the vacancy rate at 7.7% which is way below the acceptable 10% vacancy rate in government

Highlights for programme two:

• The work on reducing regulatory burdens and a conducive legislative and policy environment for SMMEs and co-operatives entailed continuing to assist municipalities to roll out the Red Tape Reduction Programme (RTRP) in 30 municipalities
• A key new assignment which the Department undertook in the period under review was the revision of the Schedule 1 (focused on the definition) of the National Small Business Act which was gazetted.
• The National Development Plan, Vision 2030 (NDP) stipulates that the fragmented nature of the small business environment (ecosystem), with different institutions providing independent support ultimately compromises the impact. To respond to this observation, the Department initiated a process to develop National Accord to drive small business mandate, and in the period under review, consultations were held with both public and private sector. The outcome of the engagements culminated in parties agreeing on priority areas for collaboration as follows:
  • Procurement and compliance to 30-day payment;
  • Finance and cost of doing business;
  • Affordable business premises and data availability;
  • Skills Development; and
  • South Africa Day of Buying from Small Businesses

Highlights programme three:

• One of the strategic objectives assigned to the Integrated Co-operatives Development programme was to ensure an integrated approach to planning, monitoring and evaluation of the co-operatives sector to inform policy decision making and to that end, the Department convened co-operatives forums to ensure a shared and common vision and prioritise across the co-operatives sector
  • The Department supported municipalities to integrate co-operatives development into their Integrated Development Plans (IDPs) as they have a bigger impact in the economic development of a broader community
• One of the projects supported through this programme (New Generation Co-operative) produced 887 tons of tomato during 2018 harvested and delivered all this produce to Alljoy. During this harvest all members of the co-operatives made a total turnover of over R1.5 million, creating 112 jobs.

Highlights programme four:

• A total of 1 922 informal business against the annual target of 1 000 were supported through the Informal Micro Enterprise Development Programme (IMEDP). The sterling performance is attributed to the partnerships with Business Chambers and Associations
• R18 million aimed at supporting SMMEs was leveraged against the annual target of R5 million
• DSBD is a national state function, which has no concurrent jurisdiction with any multi-level jurisdiction, thus to drive the enterprise development, the Department needed to establish Inter-Governmental Relations (IGR) Forums to promote policy coherence in the SMMEs sector. As at the end of the reporting year, four IGR forums were conducted. This has resulted in better policy coordination and collaboration between the department and provinces

Areas of underperformance:

• The two ICT system projects defined in the DSBD ICT plan was not implemented, were discontinued and deferred to the new financial year for implementation
  • The remaining two ICT system projects will be carried over into the new financial year, as the Department was not affected by the reorganisation of the state
• The Department’s compliance with MPAT standards were not yet determined, the Department will strive to comply with the DPME MPAT standards
• The amendment of the National Small Business Act through legislative process was not completed, stakeholder engagements and the development of policy positions which will inform the amendment to the Act (such as Alternative Dispute Resolution and the Institutional arrangements) is underway. These additional areas will inform the amendments of the Bill
• From five research reports on SMMEs and co-operatives key areas of support approved, only two research topics were not approved during 2019/20 financial year
• Multi-year Strategy on International Relations, to advance SA trade positions and mandates that will promote investments and growth of SMMEs and co-operatives, was not finalised and approved
• Bi-annual analysis of government-wide procurement trend was conducted for six months and two months respectively - the trend analysis for December 2018 to March 2019 was not conducted
• Lack of data given that the service provider contracted to National Treasury ended in November 2018
• The Department planned to support two provinces either Free State, North West or Mpumalanga out of the six provinces that were identified as not having approved and aligned Provincial Co-operatives Strategies. Unfortunately only Northern Cape and Mpumalanga indicated and agreed to host the strategy alignment workshops
• 231 Co-operatives and SMMEs were linked to market and procurement opportunities in the public sector, state-owned entities and private sector, without issuing the certificates as stipulated in the Technical Indicator Descriptions
• Annual assessment on the development impact of cooperatives funded through co-operatives supported, however the remedial actions were not implemented
• Co-operatives supported financially through the CIS: the Department planned to support 122 Co-operatives financial. However, one co-operative was not supported financially through CIS
• There were delays in the finalisation of claims since claims had to be done manually – the CIS IT system had a technical error [(the system could not calculate the 15% Value Added Tax (VAT)
• 12. Black Business Supplier Development Programme (BBSDP): the Department planned to support 677 Black SMMEs through BBSDP, only 505 black SMMEs were supported through BBSDP, the target was not met due to a high number of non-compliant claims
• The Department did not manage to develop a Draft framework of standards for professionalisation of business advisory services
• Stakeholders agreed that there is a need to generate a Discussion Paper to document the status quo, options, processes and roleplayers and to justify a need for Business Advisory Services, identify legislations relevant to the Business Advisory Services,  Services Standards Framework for South Africa

The presentation then discussed governance matters and human resources.

Ms Semphete Oosterwyk, CFO, DSBD, took the Committee through the financial information. Looking at the overall reasons for varinance:

• Transfer payments - Expenditure was R1.206 billion (95.6%) of the overall budget of R1.262 billion, which constitutes an under spending of R55.9 million (4.4%)
  • CIS:  The budget was R83.3 million whilst the expenditure was R41.2 million (49.5%) which resulted in under expenditure of R42.1 million (50.5%)
  • BBSDP: The budget was R270.9 million whilst the expenditure was R257.7 million (95.1%) which resulted in under expenditure of R13.2 million (4.9%). The variance is due to non-compliance issues on three fully compliant quotations which must be attached to the file by the Incentives officials
• Goods and services:  The under expenditure occurred mainly on consultants (R2.2 million) as some research projects were delayed, travel (R1.8 million) as the Department applied cost containment measures on travel in line with National Treasury directive, outstanding vouchers (R408 000) from the Department of International Relations and Cooperation (DIRCO) for international travel undertaken in quarter four, as well as the travel account for domestic travel which stood at R685 000 at the end March 2019
• Compensation of Employees:  under expenditure of R7.6 million (5.4%) mainly due to vacancy rate of 7.7% as at 31 March 2019

With the 2018/29 audit outcome, the Department achieved an unqualified audit opinion with no material misstatements on the Annual Financial Statements (AFS). Areas of concern:

• Strengthen fraud prevention interventions (incentives)
• Ethical conduct (awareness and monitoring)
• Material misstatement on performance information (inadequate evidence-based reporting)
• Prevent irregular expenditure- local content and state attorney procurement
• The 2018/19 audit resulted in 26 findings whilst the 2017/18 Audit had 32 findings with three repeat findings

Corrective measures

• Incentives guidelines and internal controls are being strengthened and implemented
• SMART setting of APP targets as well as the Technical Indicator Descriptor
• Implement the local content procurement requirements
• Audit Matrix for the Department compiled and monitored on a quarterly basis

The Chairperson noted the unqualified audit was a big step in the right direction considering that the Department did not have an organogram during the year under review. The Committee recommends the Department pays attention to areas of concern as raised by the Auditor-General in order to achieve a clean audit.

Discussion

Mr V Zungula (ATM) asked if there is any other way to evaluate government’s attitude towards SMMEs. He was concerned about the bullying experienced by SMMEs by big companies. He asked what happened to SMMEs which were not supported. He did not understand why internal control failed to pick up challenges and avoid them beforehand.

He also sought clarity regarding claims against the Department. He then asked about vacant posts including that of the DG. Why was the Department failing to reach its target of spending 95% of its budget only reaching 62%?

Ms M Lubengo (ANC) referred to slide 38 where it speaks of an overall decline in spending of 3.5% and asked the Department if there was any other way to avoid transfer payments.

A Member applauded the Department on its tremendous job regarding the ten days of receipts. He asked if the Department has considered removing the impediment for those that wish to enter the porgramme but could not afford to do so.

Department response

Mr Mkhumane responded that in the new strategy, going forward, SEFA has a set and separated dedicated project and market access since government does not utilise these areas. The expenditure is being monitored and these matters would be bough to the attention of the Minister for some of the recommendations to also be brought to the attention of Cabinet. There is a Public Procurement Bill which is taking a long time to be introduced. The Bill speaks to specific thresholds for SMMEs and their contracts. There is audit matrix that is being implemented by the AG. The Department has been in conversation with the office of the State Attorney to resolve matters relating to tax clearance certificates. Turning to internal control, this is encompassed of people outside the Department as they are more willing to be vigilant in terms of tracing.

The meeting was adjourned.