DSBD 2019/20 Quarter 3 performance; Blended Funding Model and plans for SA SME CEO FUND; with Minister

Meeting report

Briefing on 2019/20 Quarter Three Performance Report by the Department of Small Business Development Opening remarks by the Minister

Ms Khumbudzo Ntshavheni, Minister of Small Business Development, appreciated the Portfolio Committee for the continued support her Ministry gets from it. She feels the support and will keep working to improve the challenge of her availability given time constraints.

The Committee previously raised the matter that in law the Acting Director-General (ADG) is not allowed to act for more than 12 months. This is so, but from the time she came on as Minister, the ADG has not acted for more than 12 months. If the ADG acts for more than 12 months her Ministry takes full responsibility for the Department. She assured the Committee the position of the Director General (DG) is the responsibility of the President. The Ministry and Department acts with the President’s permission and direction. From next week the advertisement of the DG will go out to start the process of appointing. The Ministry will keep the Committee up to date with the appointment of the DG because if they are not able to appoint the DG it means the position will remain a problem. The Ministry and Department are working on that one.

The Ministry takes the responsibility assigned to it of ensuring South Africans can create jobs. It is not about creating jobs for others but about self-employment for people and creating a generation of job creators. The commitment to this is serious and the Ministry works with their colleagues on the inside cluster to achieve its goals, to guide those found wanting. If it needs to improve it will improve. There will be improvements with work and with the targets at hand. It will continue to affirm and assure the Committee it will work with the Committee.

South Africa Small Medium Enterprise Fund’s Chief Executive Officer (SA SME Fund’s CEO), Ketso Gordhan, said it and National Treasury could not find each regarding targets required and the SMME’s (Small Medium and Micro Enterprise’s) which had to be funded. That is why Treasury withheld the money it was supposed to give. Treasury was also supposed to co-operate with the Jobs Fund, where the money was supposed to come from.

The Department was interacting with the SA SME Fund about targets and the work it was doing to synchronise and build a stronger relationship. In the last meeting held between them in November 2019, it announced it was going to support 10 000 informal businesses over the next 5 years.

So, the Department told them the target is to support a million informal businesses over the next 5 years, and asked why they cannot increase the target amount to 200 000 to make it 10% of what the Department is targeting. The Fund indicated it has constraints and cannot go further. This is where the parties are now. . The SA SME CEO Fund and National Treasury and the Department must work together closely.

Briefing: 2019/20 Quarter Three Performance Report

Mr Lindokuhle Mkhumane, Acting Director-General, Department of Small Business Development, said the presentation outline will focus on the following:

• Background and purpose
• Governance and compliance
• Performance summary
• Overall performance report by programme
• Quarter Three financial performance report
• Reasons for variance
• Planned actions to mitigate challenges
• Audit findings

The report represents an overview of the activities of the Department in line with the Public Finance Management Act 1 of 1999 (PFMA), Treasury Regulations 5.3 and 30.3 and the Framework for Strategic Plans and Annual Performance Plans.

Mr Mkhumane said, regarding governance and compliance the Department complied with all the relevant provisions and rules of the National Assembly, the National Council of provinces, the Public Finance Management Act (PFMA), 1999 (No. 1 of 1999), Treasury Regulations and the National Treasury Framework for Annual Performance Reporting, Treasury Regulations.

In terms of the Quarter 3, 2019/20 performance executive summary the Department has 24 performance indicators, 24 annual targets in the revised 2019/20 APP and is reporting against 23 quarterly targets.

Overall performance

Programme 1: There was an over-achievement, due to a number of events associated with the launch of the District Development Model by the President. There was a moratorium on filling vacant funded posts until the finalisation of the strategic plan and structure. The vacancy rate steadily increased over the Third Quarter and will continue to do so (8.7% -9.6% - 10.6%).

Programme 2: The target for the Quarter was exceeded by 14 municipalities, as the unit has adopted a systemic approach to Awareness Workshops, enabling multiple municipality events arranged in partnership with Provincial Economic Development (PED), Co-operative Governance and Traditional Affairs (COGTA), South African Local Government Association (SALGA), Treasury and the Office of the Premier. To date achievements include:

• The Small Enterprise Ombuds Service Bill was drafted and incorporated into the National Small Enterprise Amendment Act, 2019. 
• During the month of October 2019, it conducted a benchmark exercise of the different Indexes (internationally and locally). This is one of the key inputs to the development of the measurement framework. 
• A draft report was prepared with recommendations for consultations along internal approval lines / structures for inputs and approval.
• Produced quarterly report on the implementation of Business Turnaround and Retention

Programme 3: There was a high volume of non-compliance of applications resulting in delayed processing of payments.

Programme 4: National Treasury’s approval for the transfer of funds to the Small Enterprise Finance Agency Soc Ltd (SEFA) was only confirmed in October 2019. This resulted in the funding adjudication processes starting late in November 2019. Legal advice received in the quarter is under review, granting permission to proceed with payments for claims on hand.

Mr Mkhumane said in quarter 3 expenditure came to R954 654 million (92%) against projection of R1 037 846 billion, resulting in an under performance of R83.192 million (8.0%). The year-to-date expenditure is R1 861 235 billion (72.5%).

Discussion

The Chairperson said Members must engage on the report, the DG made it easy for them because their role is to check the performance of the Department and ask for the turnaround strategy on those matters.

Ms K Tlhomelang (ANC) referred to Programme 1: administration, and asked what the financial implications are of employing 102 instead of employing 99, if the Department is happy with that situation, and if so, if it can give the readings?

On Programme 3: Integrated and Corporative Development, she asked what the impact is of setting the target and if there are any challenges to take it forward and come up with a proper proposal.

Mr F Jacobs (ANC) welcomed the presentation made by the Acting Director-General saying he was always not impressed with this Hollywood Department which is full of actors, and he hoped the ADG applies for this position when it is advertised.

Mr M Hendricks (Al Jamah – ah) said they are very impressed with the 30 days payment the Department does. It shows indeed there is commitment from the Department that SMMEs get the necessary support because SMMEs biggest challenge is they are not paid on time.

He also praised the Department because in this report he could see there was some work done in the Northern Cape. It is inspiring to see the Department taking Members seriously.

The Members listened to the high level presentation made by the Minister, and before that many of the Members received a report on the impact of the President’s proposals. Today the Committee received a report by the ADG. Mr Hendricks endorsed the sentiments of the previous speaker that the ADG should apply for the position and be successful in that position because it is only getting better.

Mr E Myeni (ANC) asked about the pitch for funding, and in which category this fell.

Mr H April (ANC) said what was useful in the presentation was that the ADG outlined the variances on page 32 and also spoke to the mitigation and planned actions. As a Portfolio Committee they must complement the ADG on that.

The Chairperson said the Members are fairly satisfied with the report from the ADG, but he can just respond to some of the questions since others were just comments.

Mr Mkhumane replied that the pitch for funding is done in collaboration with Small Enterprise Development Agency (SEDA) and Small Enterprise Finance Agency Soc Ltd (SEFA), it fell in the budget which is called Small Business Innovation Fund. It is targeting the start-ups and those that have ideas they want to implement.

On the topic of over achievement connected to Programme 3, he said it was when the President was going around launching the District People Development Model, for example, in Waterberg there were four engagements. What the Department did using the pitch for the Funding Model, was call people to prepare those people on how to pitch for funding. The Department also had those people pitch for funding activities and in this way jumped on the wagon and was able to achieve what it budgeted for and what it targeted for, as it had to do a number of built-up programs leading to the launches by the President, as well as eThekweni, and they had to go to uMlazi to listen to the SMMEs.

The Department also had engagements at KwaMashu, these were activities happening around eThekwini as a build-up to the plan hosted by the President. That was why they were able to do more than they targeted for. SMMEs are given an opportunity to understand the programs and make it easier for them to access the business activities that are afforded by the Department and its entities.

The Chairperson thanked Mr Mkhumane for responding and invited the Department again to brief the Committee on the Blended Funding Model. She said on the plans for the SA SME CEO Fund, the Minister has already outlined what is happening and it will be upon them as a Committee if they will like to engage with that particular entity, and the Committee will take that decision. The Department must not waste time on this issue because the Committee is quite aware that the Department is no longer working with that particular entity. The Department must only brief the Committee on the Blended Funding Model.

Briefing on the Blended Funding Model

Mr Mzoxolo Maki, Acting Deputy Director-General (ADDG): Enterprise Development and Entrepreneurship, Department of Small Business Development (DSBD), said, at the end of the fifth Administration, it looked at the challenges the Department and its agencies faced in providing financial support to SMMEs. The Department and its agencies, Small Enterprise Development Agency (SEDA) and Small Enterprise Finance Agency (SEFA) provide financial and non-financial support to qualifying small enterprises.

The financial and non-financial support is aimed at building the small enterprises viability, sustainability and competitiveness as well as increasing it’s profitability and asset base through the Programme. Blended Finance Program (BFP) is one of the financial instruments that the Department uses to target SMMEs that cannot be funded by the available support instruments for factors related, but not limited to risk, amount, viability, inadequate management and technical expertise amongst others.

The objective of the programme is to provide financial support to township or rural based enterprises, with emphasis on enterprises owned and managed by designated groups (women, youth and/or people with disabilities), to increase their capacity to access economic opportunities and enhance their competitiveness. The aim is to provide financial support to qualifying small enterprises to help them acquire business equipment, tools and machinery as well as business development services.

The Programme offers a maximum loan amount of up to R5m with a potential maximum grant allocation of 50% which equates to R2.5m to qualifying applicants. The minimum amount an applicant can apply for is R50 000.

Mr Maki said, the qualifying criteria for an entity is majority black ownership, with preference to youth and women and people with disabilities. The business operations must be conducted within the borders of South Africa, and the controlling interest (50% plus 1) held by a South African with valid South African identity document (ID) or permanent residents who hold a valid South African ID.

Business must demonstrate capacity to create a minimum of 10 sustainable jobs (sustainable jobs means people employed for a minimum of 12 months), have business activities based in a Township/Rural or Semi-Rural area, be an enterprise participating in government economic priority sectors, for example manufacturing, and agro processing, be an existing business or start-up, be registered with South African Revenue Services (SARS), and provide a certificate of good standing for its tax obligations. It must also demonstrate an existing market to be serviced, for example, a signed contract to be serviced, letters of intent, trading history, trading references, to name a few, and must be registered on the Central Supplier Database (CSD), be compliant, and have a business bank account.

Sectors funded to date comprises of a combination of Trucking and Logistics, Tourism, Petroleum, Manufacturing, Forestry, Retail & Services, and Telecommunications.

Discussion

Mr Z Mbhele (DA) said he was looking at the list of sectors funded to date, and would like some assistance to get a clearer picture in his head of what assistance was given through the Blended Funding Model to the SMME’s, for example, if it was attracting logistics in tourism. That is straight forward because SMMEs will apply for finance to procure vehicles so as to ferry around their clients. But when it comes to petroleum it is bit blank because they see this industry as maintained by these big refineries, which is more of a corporate space than SMMEs.

Next he asked for an update on manufacturing, because manufacturing is perceived as big manufacturing plants, usually operating in urban areas as opposed to rural; and whether the Department is familiar with the incubator programme and what the challenges are in the incubator business development space, because often the assistance is well meaning but is not aligned to the needs either of the businesses or to the needs of the market.

Ms Tlhomelang welcomed the presentation and said this Blended Funding Model programme is an instrument the Department is going to use to target SMMEs regarding available support referred to on slide 3 of the report.

She asked how an individual sole proprietor who is currently running a small business and struggling to get finance and support will be assisted with this current model.

Mr Hendricks said he would like the Department to consider:

• To give some indicators of what will sell, what the market wants, and if it is part of their business plan it must give them some extra points.
• It is very important to look at the President’s idea of 1000 compulsory products to be sourced from small businesses, to look at those 1000 products and make sure some of it is included in those business plans. They must give more points for this, because if they manufacture these products or source products to sell, the corporate sector is forced to buy them from no one else but buy them from small businesses.
• It is very important that when talking about township and rural economies that there be a business hub for them. This means the development of a business hub in township and rural areas. The Department must ensure it provides security, ensure it is safe, it is environmentally friendly, and it looks attractive. It is not only to provide funding, but it must make sure the business is attractive and successful. The ADDG indicated R5m is available. There must be franchises for townships and rural economies that speak to what people will buy in those townships and rural economies. There must be a ten key operation. This means the franchise must have ten jobs it will create.

Prof C Msimang (IFP) said the ADG was telling them about certain delays that there were a number of variances between the plans for first third care-up up to the third quarter. The ADDG has also touch on this point. The reasons are quite valid and therefore he not much worried on how they started in the current year, but is concerned about how they will finish. It is said in the paper that they will reached their targets in the fourth quarter. He will be happy if the ADG and the ADDG can give them a guarantee on this or an assurance that they will not be losing the funds. There is a possibility to roll-over the funds because they’ve reached a stage where the competition for funds is quite great.

He is very excited that focus is on townships and rural areas because they are going in areas where the need is very serious. It would be nice to see their people in rural areas and townships getting busy because lot of them come into the cities and waste their time living in squatter camps. It would be nice to temper the traffic to the cities and give them something to keep them busy and put bread on the table for their families.

However, the biggest challenge if one is in business in rural areas and townships is the IT. He is not sure whether the idea of referring these people for a start to SEDA as far as the IT is concerned because this department can be seen to be operating in a very sophisticated level. Even when filling the forms when applying to SEDA or SEFA, they expect one to do that online because in the rural areas and townships they still lacking behind.

Prof Msimang asked what SEDA and SEFA expect as a security for securing a loan because this is a challenge in rural areas and township.

Mr Jacobs said the challenge now is capacity and there must be a review of intended outcomes for this model. As a Committee, it is not what intention there is, but how the relevant parties will develop the implementation capacity. People are desperate and need a helping hand, not South African Social Security Agency (SASSA) grants, but assistance in terms of funding. The intention of making it easier and accessible is commendable, but the devil is in the detail of how.

He asked the Department if it has an online application and if there are criteria of dates, if there are any business advisers helping small businesses, if parties are going to be responsive to the micro-lender, and lead this and not to have a bureaucratic response, and if there is an existing capacity?

Mr Mkhumane said in terms of the 1000 products as a Department they are working on that. There were engagements with SARS, and what is intended is to look at those products that are important and which can be manufactured locally.  

They are also working with National Treasury to look at those products mostly procured by government departments. There is a figure of 15 000 to be procured out of government departments from SMMEs, which it believes is a good start to force all government departments to buy from SMMEs.

Mr Mkhumane said there was a comment on business hubs in townships and rural areas and to make sure the entity gets secure premises for their SMMEs. Yes they agree on that one, it is something it is working on and it must be remembered, the entity just moved from the shared economic infrastructure facility to product markets to accommodate more SMMEs and use the product market, where their SMMEs can sell their products in an open market.

The SMMEs are working and hopefully will get more resources, so they can have these business hubs in as many townships and rural areas as possible. But they are also working with the Department of Trade and Industry, it must be remembered that Trade and Industry has the Industrial Parks Programme. What they normally do there is more on the infrastructure side, and the Department is saying the people who occupy those industrial parks are SMMEs and should bring development support from its own side, because once there is infrastructure, the Department will come with the business support. This is why it will be locating its extension offices, to have the SEDAs and SEFAs located in these industrial parks to offer services closer to the SMMEs, as well as the surrounding communities, because most of the industrial parks are located closer to the townships.

Mr Mkhumane said the entity is working hard to make sure money does not go back to Treasury because enterprises are not fully compliant. National Treasury says these people are approved, this money is committed to this particular entity and sort out that entity’s compliance issues later. But then the money must not move anywhere because there are people who have applied for this funding and it was committed to support them. The entity is moving forward in ensuring all the money does not go back.

Mr Mkhumane said they reach rural areas and townships through the Medium Term Strategic Framework (MTSF), the entity targeted to establish 270 incubators and digital hubs. All the new incubators and digital hubs must either be in a township area or rural area. It is difficult because it is easy to get proper infrastructure in a central business district (CBD) than in a rural area. It is working with the Department of Public Works, municipalities and provinces to ask them to give it the infrastructure they are not utilising so they get a cut down on the renovations of the building, because they do not build new infrastructure, but want to use existing buildings. The municipalities and provinces are coming on board and are working through the District Development Model to encourage them to avail facilities.

The Chairperson said she supported her colleagues in the Committee, they did not want to see money going back to National Treasury. The Department must try its level best and they appreciate that.

Mr Maki said, on the petroleum industry and the type of support it provides, the deal it concluded is the opening of a filling station in the Western Cape. It is a franchise and the attitude of the Department to the deal was, it wants to see transformation and wants to break down monopolies in the industry, as it is taking its cue from the sixth Administration. If the deal is a franchise, it says, can the franchisee at least own the land so that it knows the money coming in will not be used for payment of rent. It gives the money for the franchisee to buy stock and all the necessary machinery and equipment to start the business.

It has taken a view that it wants to ensure it involves historically disadvantaged individuals in the upstream and downstream segments of the petroleum industry. If it wants these people to be right there at the top but it is not so keen to support them midstream, then it will never break down the monopolies in the petroleum industry. That is why it took a strategic decision to ensure that in conditions in the loan it must make sure the land issue is covered, so that whatever money is coming in it is used for further development of the business.

Mr Maki said on manufacturing, they have an interesting business in Gauteng. The business is 51% Black African Female owned and they are working on cosmetic products development and want to expand the business. The requirement to expand the business is that their product portfolio has to increase as well. So, part of the support the Department is providing for purchase of the requisite equipment as well as the inputs for the production and manufacturing of new product line they want to manufacture.

In her opening the Minister talked about informal business support and there are programmes for that. Mr Maki said there is one programme for instance, called the Black Business Supplier Development Programme, which will be utilised where a sole proprietor would want to acquire machinery, equipment and tools in aid of the business operations. This programme was devised to address the big issue of job creation via SMMEs. It has put a very high premium on this programme to take up businesses that will help them to create jobs.

It must ensure SMMEs produce products and services that their respective markets meet. As part of getting businesses ready one of the things the Department and its entities do is to take businesses through a process of ensuring they meet the requirements. SEDA, for instance, will take them through their Business Development Services (BDS) process to develop a proper business plan and without a proper business plan for the market that business will fail. It makes sure it works together with its SMMEs to point them in the right direction, so when it produces the business plans it knows these are viable and feasible businesses. There are plenty opportunities up there and chief amongst them are the 23 products designated by the Department of Trade, Industry, and Competition (DTIC). There are also opportunities that are coming in the master plans, that support the implementation of the Re-imagined Industrial Strategy. In those, there is very critical work that must happen in terms of doing value chain analysis so that SMMEs can identify profitable business opportunities in the respective value chains, for instance, the 23 designated products or the seven national priority sectors as identified in the Re-imagined Industrial Strategy. As a Department and its entities it is its duty to point its SMMEs in the right direction.

The Chairperson thanked the Minister and her delegation from the Department of Small Business Development for presentations and responses to the questions posed by Members. She also thanked Members of the Committee for their inputs and comments.    

Meeting adjourned.