Sefa & Seda 2019/20 Quarter 4 Report

Small Business Development

24 June 2020
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

Video: Portfolio Committee on Small Business Development, 24 June 2020
Audio: Sefa & Seda 2019/20 Quarter 4 Report 

The Small Enterprise Development Agency (SEDA) and the Small Enterprise Finance Agency (SEFA) reported on their fourth quarter performance.

SEDA advised the Committee that although there had been an improvement in its overall performance against its annual targets, it could not maximise its full potential because of the outbreak of COVID-19. It had ensured consistent service delivery through co-locations at 87 municipalities and partners, with 23 co-locations at SEDA branches, and 11 mobile units. It had trained 46 local economic development (LED) officers on SEDA basic diagnostic tools in three provinces, and a further 34 on the New Venture Creation, in partnership with the Services SETA, from six municipalities. It had been a challenging exercise to secure finance for newly established cooperatives owing to the major banks’ strict lending criteria. The entity would improve through the SEDA/SEFA merger, which would result in streamlining their operations.

SEFA said its amortised total loan book as of 31 March 2020 stood at R1.5 billion -- R902 million in wholesale lending facilities, and R645 million in direct lending facilities. Total disbursements for the quarter were R295 million, representing 186% of the quarterly target, and 142% of the annual target. In the fourth quarter, a total of 12 385 small, medium and micro enterprises (SMMEs) had received financial support via the SEFA loan programmes, resulting in the creation and maintenance of 18 637 jobs. R182 million had been disbursed to black-owned SMMEs, R24 million to township-based SMMEs, R71 million to women-owned SMMEs, and R40 million to youth-owned enterprises.

Of concern to the Members was the issue of stability, whether the entities had footprints in areas where their services were most needed, and the district ecosystem models. The Chairperson commented that it seemed as if SEDA and SEFA were not talking to each other, but the two entities insisted they were stable and were working well together while waiting for the merger to be finalised.

Meeting report

SEDA: Fourth Quarter performance report

The Small Enterprise Development Agency (SEDA) reported that its Board had attended to governance and compliance priorities during the quarter which included its Strategy Plan 2020/23,  Annual Performance Plan 2020/24, information communication technology (ICT) governance framework and strategic plan, and its quarterly performance and compliance reviews.

On performance against annual performance targets, 32 strategic indicators were measured in the quarter, and the entity had achieved 28 (87.5%). However, it had not performed well in the following areas:

  • Number of cooperatives assisted with access to finance;
  • Number of clients supported through the National Gazelles programme;
  • Number of small, medium and micro enterprise (SMME) entrepreneurs graduated;
  • Several diagnostic assessments conducted on the client's business.  Some of the clients could not sign-off on the assessments due to the lockdown in the last week of March.

The reasons for non-achievement of these indicators were:

  • The variance attributed to business analyst (BA) vacancies, and the negative impact of COVID-19 restrictions that started during the month of March.  Some of the clients could not be reached to sign-off their assessments, and that information could not be captured.
  • It had been a challenging exercise to secure finance for newly established cooperatives. The entity would improve through the SEDA/SEFA alignment with regard to streamlining the requirements.
  • A third cohort was not activated, as the programme would not be continuing this year.
  • Some of the entrepreneurs who were due to graduate by the end of March could not finalise their processes due to the Covid-19 lockdown.  There would be further delays, as these entrepreneurs would now be requiring more support to survive. Incubators would assess the impact and develop initiatives to assist.

SEDA said there had been an increase in performance overall against its annual performance plan targets, but it could not maximise its full potential because of the outbreak of COVID-19.

SEDA had ensured consistent service delivery through co-locations at 87 municipalities and partners, with 23 co-locations at SEDA branches, and 11 mobile units. Five new co-locations were established in Middelburg and Cradock (Eastern Cape), Setsoto Local Municipality (Free State), Gauteng Enterprise Propeller and Mardan Enterprises (Northern Cape)

It had trained 46 local economic development (LED) officers on SEDA basic diagnostic tools in the Eastern Cape (eight), Limpopo (33) and North West (5). A further 34 LED officers were trained on the New Venture Creation, in partnership with the Services SETA, from the municipalities of the City of Tswane (two), Nkangala (one), Dihlabeng (eight), Maluti-a-Phofung (10), Nkomazi (nine) and Mbombela (four).

During the period under review, 2 290 entrepreneurs had attended Pitch for Funding master classes and sessions in the Vhembe District, in collaboration with the Department of Small Business Development (DSBD).  Further sessions took place covering nine district municipalities in Kwazulu-Natal (KZN), and reached 2 442 entrepreneurs, making a combined total for the year to 4 732 prepared for funding.

Feasibility studies and business plans for four product markets in Umthatha, Mahikeng, Emalahleni, and Musina, had been completed and submitted to the DSBD for implementation under the economic infrastructure programme. The business development standard (BDS) process was taking place in partnership with the South African Bureau of Standards (SABS), and 50% of the processes had been achieved by the end of March. The standards technical committee was reviewing the documents for approval. The SABS had also set up a technical committee for the BDS standards.

SEDA and SEFA continued to work together, assisting with the DSBD Covid-19 hotline on the Debt Relief Scheme. Both Agencies had been serving on the various DSBD work streams that had been developing the various programmes, and would be the main drivers of the implementation and development of a database for service providers that would offer post-funding support to SEFA-funded clients, and on the digitisation of the SEDA/SEFA referral process.

Other business support initiatives through partnerships with SEDA were:

  • Cape Bourne Studio Entertainment, which specialises in internet and printing services, was awarded a mentorship programme to the value of R10 000 from Business Partners.
  • IKAMVA Youth Entrepreneurship Development Co-Operative received support from the Grandwest on their ESDP programme, to the value of R568 000. This had enabled the organisation to grow by increasing its staff from five to 25.
  • 30 Bonsmara bulls with an estimated value of R600 000 had been donated to eight farms in the Heuningvlei area in the Northern Cape. Bull management training amounting to R150 000 was provided to the 140 farmers on these farms.

SEDA had 677 staff at the end of the quarter, of whom 185 were business advisors. Although the staff vacancy rate was 5%, the vacancy rate for business advisors was 8%. A significant proportion of the national office was in the Enterprise Development Division and the SEDA technology programme, which were part of the core services.

The total revenue budget for SEDA for the 2018/19 financial year was R862.43 million, and the actual expenditure for the period 1 April to 31 December 2018 had amounted to R566,84 million resulting in a pro-rata under-spending of R75.13 million (11.7%), against the pro-rata budget of R641.97 million. Commitments at the end of December 2018 were about R23.68 million.

SEFA: Fourth Quarter performance report Financial Year 2019/20

An overview of the Small Enterprise Finance Agency’s (SEFA’s) fourth quarter performance against the approved corporate plan for the financial year 2019/20 was presented to the Committee.

The Committee was advised that SEFA’s amortised total loan book as of 31 March 2020 stood at R1.5 billion -- R902 million in wholesale lending (WL) facilities, and R645 million in direct lending (DL) facilities. A total of R637 million loan facilities had been approved, representing 342% of the quarterly target and 152% of the annual target. Total disbursements for the quarter were R295 million, representing 186% of the quarterly target, and 142% of the annual target.

In the fourth quarter, a total of 12 385 SMMEs had received financial support via the SEFA loan programmes, resulting in the creation and maintenance of 18 637 jobs. R182 million had been disbursed to black-owned SMMEs, R24 million to township-based SMMEs, R71 million to women-owned SMMEs, and R40 million to youth-owned enterprises. Overall, organisational collections amounted to R75 million. DL loan collections were R27.4 million, while WL collections were R47.7 million. The loan book portfolio at risk stood at 49% as at 31 March. 

On loan book performance, the total approvals for the quarter were R636.8 million included R199 million for direct lending, R188 million wholesale lending to small and medium enterprises (SMEs), and R250 million to Khula Credit Guarantee (KCG). The over-achievement was due to the implementation of the Small Business Innovation Fund (SBIF), and the year to date approvals achieved stood at R1.4 billion.

Loan book disbursements amounted to R295 million against the target of R159 million, and represented 186% of the quarterly target. DL disbursements were R45 million, the WL loan programme disbursed R250 million, WL SME disbursed R129 million, microfinance disbursed R28 million, KCG disbursed R93 million, and the year to date disbursements stood at R1.1 billion.

SEFA’s development impact included achieving 101% of the target for jobs facilitated, the majority of which were contributed by the micro enterprise sector. The jobs facilitated year to date represented 91% of the annual target. The percentage of SMMEs financed had been 69% of the target. The number of SMMEs financed year to date represented 80% of the annual target, and the majority of SMMEs facilitated were contributed by the micro enterprise sector.

Enterprises based in the priority rural provinces had received R49 million in the fourth quarter, while those in the townships received R24 million, women-owned businesses received R71 million, and black-owned businesses received R182 million.  A total of 12 319 small loans (less than R500 000) were issued, and disbursements to people with disabilities were R68 000. In value terms, the majority of SEFA’s disbursements were done in Gauteng, followed by KZN, as these two provinces had higher densities of SMMEs registered in South Africa.

Reporting on its financial performance, SEFA said its cost to income ratio was in line with the target, and 79% had been achieved. Accumulated impairments had been higher than targeted. Favourable income was mainly due to positive expenditure variances in operating, property investment and personnel expenses.

Discussion

The Chairperson asked the two departments SEDA and SEFA to convince the Committee on the turnaround strategy, because the issue of Covid19 would stay with them for some time. She asked what they were planning, because their annual performance plans and targets had been disrupted. Even if the country was not in a normal situation, how would they be able to assist?

Dr Joy Ndlovu, Acting Chairperson: SEDA said they had reviewed their business strategy and had encouraged executives to continue to review the business plan and see if they were any opportunities they could tap into, and how best they could do things differently. They had been reviewing their workforce location and how work could continue under lockdown. The information technology (IT) department had been under a lot of pressure, as most work was now being done remotely and digitally. SEDA had also revisited its crisis and continuity plan to put mitigation plans in place.

SEDA had also looked at its entrepreneurs and was devising ways to make them also use their digital platforms, as most of them had not been making use of the digital space before Covid19. They were also using a combination of schedules and appointments for those clients who would require face to face interaction in line with the Covid19 regulations. The Department was using online platforms for training, briefing sessions and webinars, and was also developing an e-learning platform that would be used by the Department’s business advisors and service providers to offer mentorship.

Dr Ndlovu added that they had developed a concept paper which they would be happy to present to the Committee. They were using social media a lot to share information and keep track on the number of people that attended their online platforms so that they could go back and make follow-ups.

SEFA responded by saying they could not allow mediocrity, but the key thing was that the shortfalls the Department were facing were in the common areas it had been struggling with over time, which were township and disability centres. That was where the turnaround strategy SEFA was being focused on.

Ms M Lubengo (ANC) asked SEDA what progress had been made in areas such as cooperatives being assisted with access to finance, exhibitions and training, which had been listed as under-achievements in the first quarter.

SEDA responded that all those indicators had been achieved by the end of the financial year in the fourth quarter, except for cooperatives that accessed finance from banks. The challenge with these cooperatives was that they were not able to produce requirements, such as collateral which was required by the banks. In most instances, SEDA assisted cooperatives to access finance from government departments and agencies.

Mr H Kruger (DA) asked SEDA about their rural footprint. He argued that most of their offices were very far away from clients, and asked what they were doing to get these offices closer to those clients who needed help. Were there any existing plans for helping small businesses and if so, what was the strategy for visiting all those which they had assisted since 2014? He asked for information about these small businesses. He wanted to know if the budget for 2021 was still around R1 billion, or if it was going to increase or decrease. He also requested SEDA to come to the Committee and present on the district ecosystem model which they were working on.

Mr Kruger asked SEFA about its post-COVID financial assistance plans for new businesses in 2021, and sought an explanation of its role in the Treasury guarantee scheme for small businesses. He commented that the guarantee scheme that the Treasury announced was R200 billion, and it was working with the banks, but he had been getting messages from small businesses that the banks were not helping, although the government guaranteed 80% of the funds. Was SEFA going to play a role in this matter, as small businesses needed the banks to get on board?

SEDA responded to the question about its footprint, and said their footprint was a critical priority for the entity. They had implemented new programmes that addressed issues in townships and rural areas. They were happy that the Committee had asked SEDA to come and talk about the district ecosystem model, as they could explain how it would work and the enlargement of SEDA’s footprint in these areas where they currently did not have much of a presence. The Committee would see in future meetings that SEDA’s reporting would change – it would speak about districts where it had its presence, and districts where it was planning to do more.

SEDA said they did have the information on small businesses assisted since 2014, and had sent it to its branches for them to confirm all those that were still operational. SEDA would send it to the Committee by early next week.

It had divided its plans to assist existing clients into three streams. These were emergency plans for businesses that were in a dire situation; those for businesses which were less affected; and those that were minimally affected. It had done critical planning for the three streams to come up with specific interventions for all of them in order to devise a turnaround plan, and prioritise access to finance where it was possible. SEDA would be linking their strategy to the business viability support programme that the DSBD was working on for existing business.

Regarding the budget, SEDA said in December 2018, the expenditure had been reduced by an amount of R19 million over a period of three years. However, due to economic constraints in December 2019, the National Treasury had reduced SEDA’s budget by R61 million. The reason they had R1 billion in the 2019/20 financial year was because of approval from the Treasury to use the surplus from the 2018/2019 budget.

SEFA said they did not play a role in the National Guarantee Scheme, which had been designed directly between the banks, the National Treasury and the Reserve Bank. However, they were aware of the challenges that were facing the small businesses which were battling to access the funding because they did not have collateral, which was one of the old risk assessment criteria which most banks were stuck on. They were engaging relevant authorities to see how best they could address the challenges their clients were facing as a result of this scheme.

Mr H April (ANC) asked SEFA why it had overspent on black-owned businesses and under-spent on the rest of the targets, especially on women and people living with disabilities. Was this due to a capacity problem?  The mortality rate was high among the over 12 000 small businesses supported through SEFA. He asked if SEFA could give the Committee more detail on the survival rate in terms of how many small businesses had been in business for less than five years, three years and two years. He also asked why SEFA was reporting that it had achieved and exceeded its jobs target for the fourth quarter, but on the annual target the graph showed it had missed its target.

In response, SEFA acknowledged that they had overachieved on black-owned businesses and under-spent in the areas mentioned. The under-performance had been as a result of financial institutions who lent money to rural areas that had failed to give them money, due to their risk assessment criteria.

Responding on jobs, SEFA said they had achieved their target in the fourth quarter, but in the first quarter, the cumulative number for the year had fallen short from achieving 100% by the small margin of 9%.

Regarding the mortality rate of small businesses, SEFA argued that their role was to address market failures, and many of the small businesses they were funding were in a position of attracting credit from banks. Once a business had gained confidence and was in a position to have a balance sheet, it became very easy for it to go to a commercial bank and get credit. The characteristics of a business were contained in its business management and cash flow management capabilities. The lack of sound cash flow capabilities contributed towards the high mortality rate, but SEFA as an institution ensured it increased longevity through offering mentorship programs on cash flow management and business management to these small businesses.

Mr Z Mbhele (DA) asked SEDA about the business advisors (BAs) which were at the core of the implementation of SEDA’s mandate. He commented that if one wanted to paint a picture of the ideal scenario when it came to SEDA assisting emerging enterprises, it would show small businesses approaching SEDA to say they were struggling to manage their cash flow and finances, and SEDA then did the analysis and helped them to identify the gaps and would intervene by training and offering other technical assistance. It had been raised before in the Committee that there was a challenge around capacity in terms of BA vacancies, as well as their calibre. Against this background, had SEDA been in consultation with any other entities that were working in that space to improve performance?

The presentation had indicated that the majority of the jobs that were facilitated in terms of development impact, were happening in the micro-enterprise sector, and that pointed to the importance of micro-finance as an intervention to assist. He reiterated that all big donors were very reluctant to get into the community level micro-grant space because of the weak systems, and also because the administration of their finances made it very unattractive.

He asked SEFA if they could give a clear picture of what steps they were taking to expand in the microfinance space. He also asked about the implementation of the Small Business Innovation Fund.

SEFA said they had developed a career pathway model for its BAs which indicated the critical competencies and skills which it needed to develop. At the previous meeting, it had presented its practical business coaching mentorship programme for its BAs. These training workshops would crystalise the practical side of work which was lacking in its BAs. When they were working on the discussion paper, they had had road shows throughout the country, but they had also had a very small close group of stakeholders that had also helped them to facilitate this discussion paper on the training of BAs. They were part of a community of practice on business advising, and this was where it had found as much input as possible to put into its programme. Among those consulted for input were the Institute of Management, universities, and independent service providers. They were benchmarking this with two international standards that were already recognised by the South Africa Bureau of Standards.

On financing and funding, SEFA said they had partnered with about four different SEDA-supported incubators to ensure that they had a coordinated approach, and these were approved to fund small businesses. The fund was in the form of a grant, and not of a loan, of R70 million. They had also partnered with 10 different intermediaries who had played a role in the early stages with some in the funding activities. A total of R410 million had been used, and the balance had been redirected to assist in the fight against Covid19.

Ms K Tlhomelang (ANC) asked SEDA if they could report on the number of cooperatives they had assisted to become companies. Were there any that could be turned into big companies and if so, how many? She also asked whether the entrepreneurs who graduated were now able to stand on their own, and able to create jobs. If they had a problem after they graduated, were they able to get assistance again from SEDA?

SEDA responded that they defined the cooperatives in terms of the socio-economic impact that they were likely to make within the community within which they were operating, the number of jobs they were likely to create, or the turnover that was likely to occur. They had a lot of other co-operatives in addition to the businesses which they assisted.

On graduation, SEDA said the companies that graduated were incubated for a period of one to five years, and they had a series of milestones they had to achieve because of the business model. Once they had achieved that, they could then graduate. The reason they had to follow the structured programme was that SEDA did not allow them to be overly dependent on the incubator. They had to graduate within the ecosystem, and they had to supply within SEDA’s market. Once they graduated, SEDA linked them to different market opportunities and venture funds that SEDA supports.

Mr T Langa (EFF) said that before COVID19, both SEDA and SEFA seemed to be improving in terms of performance. With the advent of Covid19’s impact and the instability in the DSBD in terms of high volumes of people acting in senior positions, he asked how this had affected their performance and how were they planning to bring stability.

SEFA responded on the issue of stability, and said they were pleased to report that they were trying to get finality on the CEO matter, although that finality would be an interim measure until the integration process was completed. They expected to get a much more indicative position within a month or so as far as the position was concerned. At the executive level, the only vacancy that existed was currently being handled by the head of lending, but they had decided not to fill that position but rather continue with that arrangement, as the incumbent could deal with the portfolio. The rest of the positions were quite stable, except for where there would be shortfalls in the property portfolio as they tried to strengthen their management capacity. Overall, SEFA could not say they were in a crisis.

SEDA also responded to the question by saying all its executives were cross-learning into various departments so that any of its executives would ready to take any position where a vacancy might need to be filled. Their CEO was on suspension, but they have an acting executive officer who was fully aware of the organisation and had been trained to do some of the work of the CEO. The entity was not in a position where it would have to start from scratch. It already had the people who were up to date with what the issues and challenges were, and they had been trained to deal with them. This did not mean that they would take forever to replace people should the positions become vacant, as they were thinking ahead on how to do it, and had partners who would help ensure the process was fast-tracked and the entity had people in these places. Their major challenge now was the delay of the merger, as SEDA did not know the impact it would have on the positions, and it could not hurry to fill the vacancies because the merger might not need these positions.

Mr F Jacobs (ANC) asked SEDA why it was not making use of ICT to carry on with their programmes during this lockdown. He also asked SEFA to explain the European Union (EU) funding -- how big it was, what its impact was, and whether it was an annual contribution, or a once-off. He also asked SEDA to come to the Committee to explain their distribution model in detail.

On the issue of ICT, SEDA said that they had done extensive work and had made submission to the President’s Council on the fourth industrial revo.lution for the zero-rating of educational and business development platforms. The Committee learned that SEDA had a provision of free data of 5 Gigabytes to all SMEs and entrepreneurs so that they had access to data to do some of their work. Township hubs and digital hubs were being expanded. There was a lot of work, as this would promote the democratisation of digital platforms.

Mr Lindokuhle Mkhumane, Acting Director-General: DSBD, said the EU funding was a joint government/EU programme which was led by SEFA. It had several projects, but the key project was agriculture. SEFA was assisting the officials to deliver, and the EU offered technical support. The programme had two years remaining.

The Chairperson said the Committee was worried that SEDA and SEFA did not speak to one another. She assured the entities that the Committee appreciated the work being done by the entities so far.

The meeting was adjourned

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