The Portfolio Committee on Small Business Development met virtually to be briefed by the Department of Small Business Development on its 2019/20 Annual Report, as well as that of the Small Enterprise Development Agency (SEDA) and Small Enterprise Finance Agency (SEFA).
The Department had set out to achieve 27 annual performance indicators and targets over the reporting period; 18 (or 67%) of the targets were achieved and nine (33%) were not achieved. The Department had a 1.8% expenditure variance on the annual budget – expenditure of R2.229 billion out of the allocated R2.269 billion, which translates to a variance of R39.8 million. Additionally, the Department achieved a 55.9% representation of women in its senior management services (SMS), above the public service standard of 50%. The Department also has 2.4% persons with disabilities as of 31 March 2020. However, the Department's vacancy rate steadily increased and ended the reporting period with 26 vacancies, which translate into a vacancy rate of 12.4%.
The Department received an unqualified audit outcome with material findings on performance information and compliance with legislation.
SEFA reported that it has been appointed as the implementing agency for the R2.7 billion Small Business and Innovation Fund commencing in FY2019/20. Achievements for the year under review included approvals standing at R570 million; disbursements at R588 million; 474 SMMEs financed; and 7 849 jobs facilitated.
The Agency’s highlights of its financial performance as of 31 March 2020 included receiving an unqualified clean audit opinion since its inception on 01 April 2012. The Agency also maintained costs and achieved cost-to-income ratio of 79% against a budget of 83%. The total loan book portfolio was R1.9bn as of 31 March 2020 and is comprised of R1.2 billion wholesale lending book and R645 million in respect of direct lending book.
SEDA’s performance information is structured in line with its approved annual performance plan for 2019/20. In the year under review, the Agency measured its performance on 32 targeted indicators at the output level. The organisation achieved and exceeded the set targets on 28 indicators and did not achieve the set performance on four indicators. This performance reflects the achievement of 88% on set indicators.
In the 2020/21 financial year, the organisation is focusing on offering support to spaza shops, automotive, artisans, hairdressers, tshisanyamas, fruit & veg vendors as well as clothing and textile; build a strong South African Incubation and accelerator entrepreneurship ecosystem, focusing on townships and rural areas – including rolling out incubators in these areas
Members commended the Department and entities for their presentations. They said that achieving 18/27 performance indicators is not that good even if the Director-General had provided the rationale for that; “66% is not where we want to be so we need to pull up our socks because what we say in our annual reports and what we plan they must be congruent”
A Member pointed that the Department will not perform well as long as it does not represent people more, specifically the street vendors and the spaza shops owners in rural areas. “We need the Department to represent more of these people because they are the ones that are feeding their families and sending children to schools”.
Members said that vacancies and acting positions were a perennial problem. 12% is not a good thing, so the Committee needs to hear from the executives about when the implementation will take place
Opening Remarks by the Chairperson
The Chairperson opened the virtual meeting, welcoming the Members, the Minister of Small Business Development, delegation from the Department of Small Business Development (DSBD) as well as its entities, and everyone else in attendance.
She introduced the meeting agenda and handed over to the Minister for her to give her opening remarks.
Minister’s Opening Remarks
Minister Khumbudzo Ntshavheni greeted the Committee, delegates and all those in attendance. She indicated that she could only be present for a few minutes and requested that she be excused as she was supposed to join the Deputy President on the signing of the Memorandum of Understanding (MoU) with the military veterans who want to know what the ministry will support them within their enterprises.
The Minister advised the Committee that the Deputy Minister could not also attend as she had pertinent ministry commitments to attend. She advised the Committee that the Director-General, Mr Lindokuhle Mkhumane, was going to lead the delegation of the Small Enterprise Finance Agency (SEFA) and Small Enterprise Development Agency (SEDA) in the meeting.
Department of Small Business Development (DSBD) 2019/20 Annual Report
The Director-General (DG) gave the report. He reported that on its strategic overview, the Department managed to:
- Reduce regulatory burdens and established a conducive legislative and policy environment for small, medium and micro enterprises (SMMEs) and co-operatives.
- Provide credible information on the status of the co-operatives, village, and township economies.
- Scale-up and coordinated support for SMMEs, co-operatives, village, and township economies.
- Expand access to financial SMMEs through partnerships and innovative service offerings.
- Ensure compliance and good governance.
- Realise efficient, integrated and streamlined business processes and systems.
- Coordinate development of the skills pool across the sector.
- Strengthened human resource capability and a high-performing organisation.
On the organisational structure, a proposed structure was submitted to the Minister of Public Service and Administration during the latter part of 2018 for consultation and all submissions in this regard were withdrawn with the entry of the sixth Administration. The sixth Administration was clear in its intention that the focus will be on implementation with the resolve to address challenges of poverty, inequality and unemployment. The Department embarked on a review of the structure to ensure alignment between the new strategy and delivery. The Department acknowledged that to keep up to date with the fast-changing business landscape, the structure must be agile and eliminate duplication of functions within the Portfolio.
The Department had set out to achieve 27 annual performance indicators and targets over the reporting period; 18 (or 67%) of the targets were achieved and nine (33%) were not achieved. The Department had a 1.8% expenditure variance on the annual budget – expenditure of R2.229 billion out of the allocated R2.269 billion, which translates to a variance of R39.8 million. The Department managed to process 100% payments to eligible creditors 11 467 invoices to eligible creditors, amounting to R65 347 730.48 paid on average of 13 days; there were 47 versus 30 planned facilitated interactions that delivered meaningful engagements with communities and the public; this was due to several events that are associated with the launch of the district-based implementation model by the President. The Department achieved a 55.9% representation of women in its senior management services (SMS), above the public service standard of 50%. The Department also has 2.4% persons with disabilities as of 31 March 2020.
The DG also indicated that on sector policy and research, 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 33 municipalities. Proposed amendments of the National Small Business Act were finalised, paving a critical path to the establishment of the Ombud Service. This further allowed the Executive Authority to prepare the Draft Bill for tabling at Cabinet. The measurement framework on the National SMMEs Index was developed in February 2020. The SMME Index seeks to address the current challenge regarding the lack of credible, timely, reliable and consistent information within the small business eco-system. The co-operatives registration process was reviewed – the purpose of the review was to ascertain areas of development for co-operatives and identify areas that may be negatively affecting them. The review was also conducted to come up with proposals for improvements that can be affected to ensure that co-operatives are seamlessly and purposefully formed and registered to improve their sustainability.
The Committee was advised that on integrated cooperatives development, four (4) product markets roll out plans for SMMEs and cooperatives were approved by Acting Deputy Director-General in the four provinces:
- North West (Home industries and fashion)
- Mpumalanga (Steel)
- Limpopo (Agricultural)
- Eastern Cape (Clothing)
20 SMMEs and co-operatives were supported, whose product quality has been tested and improved. The Department was involved in strategic engagements with key players within the public, private sector as well as the international players. These engagements included, amongst others, partnerships with Proudly SA as well as the South African Electro-Technical Export Council (SAEEC).
Presenting on Entrepreneurship Development and Enterprise Development, the DG said that a total of 3 524 informal businesses against the annual target of 1 000 were supported through the Informal Micro-Enterprise Development Programme (IMEDP); 2 535 crafters were also supported through the Craft Customised Sector Programme. Through the Enterprise and Incubation Programme, six digital hubs were established in rural and township areas with the focus on developing and intensifying support, and sustaining existing SMMEs and co-operatives:
- SBTI Botshabelo Digital Hub,
- Limpopo Digital Hub,
- 4th Industrial Revolution,
- KwaMashu Digital Hub,
- Alexandra Digital Hub and
- Mafikeng Digital Hub.
The Department received an unqualified audit outcome with material findings on performance information and compliance with legislation. The Department was not able to achieve the target of below 10% in respect of vacancy rate and ended the financial year with a vacancy rate of 12.4%; this was due to moratorium on filling vacancies pending finalisation of the National Macro Organisation of Government (NMOG) process. Co-operatives supported to the value of the R85.7 million (budget: R87.9 million). This was due to due to NYDA (National Youth Development Agency) underperformance and claims that did not meet the CIS compliance requirements. SMMEs and co-operatives supported through blended finance to the value of R80 million (budget: R100 million) was transferred to SEFA for implementation. R20 million was transferred to Covid-19 interventions. The Department is in the process of developing the Strategic Planning, Monitoring and Reporting Framework and Standard Operating Procedure (SOP) that will address the material findings on performance information and compliance with legislation. Vacant funded posts will be filled upon approval of the reviewed structure. Going forward, the Blended Finance programme will be implemented through SEFA. The Department has developed and introduced a new business delivery model and as such, the Black Business Supplier Development Programme (BBSDP) is being phased out. During the 2020/21 financial year, the Department will prioritise and focus on Products Markets.
The Department does not have an internal control unit as it is unfunded. The responsibility for internal controls lies primarily with management. Monitoring of controls forms an integral part of the risk management system, and the adequacy of internal controls is also reviewed through internal and external audits. The Internal Audit Unit is in place and reports functionally to the Audit and Risk Committee (ARC) and administratively to the ADG. A risk-based audit plan was approved by the ARC for execution in the 2019/20 financial year and reports were issued quarterly. The Unit recorded a slight improvement in capacity with the appointment of the Assistant Internal Auditor and two audit interns. Project Management capacity remains inadequate compared to the scope and the number of programmes to be covered each year. The ARC was in place and provided oversight over internal control, risk management, and governance matters in the Department. The Committee operated in terms of an approved ARC Charter and accordance with the requirements of the Public Finance Management Act (PFMA) and Treasury Regulations and was operational from April 2019 until the end of their term in December 2019. The Committee held six meetings during their term of office and no meetings were held after December 2019.
The Department's vacancy rate steadily increased and ended the reporting period with 26 vacancies, which translate into a vacancy rate of 12.4%. The Department did well in exceeding the Cabinet target of 50% women in senior management positions, ending the year with 55.9%. Department did well also in exceeding the Cabinet target of 2% employment of people with disabilities, maintaining a representation of 2.4%. Expenditure is R2.026 billion (99%) of the adjusted budget of R2.046 billion, which constituted an underspending of R20 million (1%). Cooperative Incentive Scheme (CIS) underperformed by R2.3 million (2.6%) due to the non-submission of supporting documents worth R1.8 million by the NYDA and technical issues with banking details. BBSDP underperformed by R14.6 million (11.5%) due to non-compliant claims and partial submission of supporting documents by the NYDA. NIBUS underperformed by R3.2 (5.3%) million due to technical issues with banking details.
SEFA 2019/20 Annual Report
The Chairperson of SEFA, Mr Andrew Martin-Robert Mahosi, presented. He reported that on the funding activities (2019/20) strengthening of wholesale SMME partnerships as well as the implementation of Small Business and Innovation Fund (SBIF) resulted in both SME wholesale and directing lending recording significant amounts of approvals during the period under review. Khula KCG Holdings’ approvals of R310 million surpassed the annual target of R227 million, thanks to the increased appetite of the portfolio guarantee facilities. The implementation of SBIF resulted in both SME wholesale and directing lending recording significant amounts of disbursements during the period under review. KCG take ups or disbursements outperformed the target substantially, following an increased interest in the portfolio guarantee facilities. Disbursements by the informal sector fell short of target due to unfavorable economic conditions that resulted in MFI partners underusing the revolving facility with SEFA.
On development impact, SEFA said disbursements in metros, namely Gauteng, KZN, and Western Cape remain high due to a relatively higher level of economic activity in these provinces. The performance of Limpopo and Mpumalanga also steadily grew largely on the back of the microfinance programme in these provinces. Northern Cape, North West and Free State disbursements are lower due to the absence of microfinance institutions which are having a significant developmental impact in other provinces. The highlights of wholesale lending were:
- R1.07 billion was disbursed to 74 331 small businesses;
- R234 million was disbursed as loans that were less than R500 000;
- R692 million was disbursed to black-owned businesses;
- R361 million was disbursed to women-owned businesses; and
- R141 million was disbursed to youth-owned businesses
SEFA supports informal and microenterprise finance through specialised Micro Finance Intermediaries (MFIs) – most of which are non-profit organisations. Over the past eight years, SEFA has maintained a solid relationship with two large MFIs and fewer smaller ones. Actual approvals for the year under review were lower than anticipated largely as a result of the closure of some of SEFA’S schemes that, in their pilot stage, did not yield expected developmental returns, hence could not be rolled out. Also, there was lower uptake from some key micro finance institutions in respect of the revolving loan facilities.
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 to improve access to funding for SMMEs. SEFA has been appointed as the implementing agency for the R2.7bn SBIF commencing in FY2019/20. Achievements for the year under review are as follows:
- Approvals stood at R570 million;
- Disbursements at R588 million;
- 474 SMMEs financed; and
- 7 849 jobs facilitated
The director also said that the ‘Post Investment Monitoring and Workout Division’ manages SEFA’s investments through a proactive portfolio management approach. The division also executes debtors' management, turnaround, workout and restructuring of accounts as well as business support. The total loan book portfolio was R1.9bn as of 31 March 2020 and is comprised of r1.2 billion wholesale lending book and r645 million in respect of direct lending book. The overall portfolio remained unchanged from the previous year following the contraction of the DL portfolio, which was in turn offset by the increase in the WL portfolio. In terms of numbers, WL has 45 partners, while DL has 489 clients. The loan book portfolio at risk as of 31 March 2020 was 49%, compared to 58.46% in 2019.
The highlights of SEFA’s financial performance as of 31 March 2020 were as follows:
- Unqualified clean audit opinions since SEFA’s inception on 01 April 2012
- SEFA introduced new products in the form of blended finance and SBIF to its portfolio of loans and advances
- Successfully raised external funding and internal funding and signed all Memoranda of Incorporation (MOIs)
- COVID-19 relief funds (R1.83 billion); SBIF/TEF; European Union (EU) Fund of R150m; Industrial Development Corporation (IDC) loan of R640m
- Successful second-year application of IFRS nine since adoption and implementation
- The credit risk department validated and calibrated the Expected Loss Model, which was found to be reliable and robust in line with IFRS nine standards as independently verified by the external auditors.
- Successful IFRS 16 implementation without the use of external consultants
- Maintained costs - achieved cost-to-income ratio of 79% against a budget of 83%.
The Chairperson then handed over to the Small Enterprise Development Agency (SEDA) for its presentation.
SEDA Annual Report 2019/20
The Chairperson of SEDA, Dr M Ndlovu, gave the presentation and reported that the entity managed to achieve this performance despite the encountered challenges which include a 10% vacancy rate on business advisors and limited financial resources. The organisation received an unqualified audit opinion with no material findings. SEDA needs to improve its information and reporting system. In the 2020/21 financial year, the organisation is focusing on offering support to spaza shops, automotive, artisans, hairdressers, tshisanyamas, fruit & veg vendors as well as clothing and textile; build a strong South African Incubation and accelerator entrepreneurship ecosystem, focusing on townships and rural areas – including rolling out incubators in these areas; offer support services more aligned to township- and rural-based small enterprises; identify and implement impactful programmes in partnership with ecosystem partners; decentralise some of the client support functions conducted by SEDA to be implemented by ecosystem partners; focus identify complementary interventions that will be mutually beneficial for the targeted partners in the ecosystem; expand the incubation period and encourage incubators to be self-sustainable.
SEDA’s performance information is structured in line with its approved annual performance plan for 2019/20. In the year under review, SEDA measured its performance on 32 targeted indicators at the output level. The organisation achieved and exceeded the set targets on 28 indicators and did not achieve the set performance on four indicators. This performance reflects the achievement of 88% on set indicators. The Agency’s programmes are implemented to achieve the following objectives:
- Increase entrepreneurship awareness among South Africans
- Improve capacity building and training on supported SMMEs and cooperatives
- Improve access to market among supported SMMEs and cooperatives
- Increase access to finance on supported SMMEs and cooperatives
- Improve product quality and production capacity on supported SMMEs and cooperatives
Apart from the mentioned objectives, greater focus is placed on ensuring that supported enterprises improve their turnover and increase the number of people they employ. The organisation has increased the support offered to rural- and township-based small enterprises; whilst the implemented initiatives are yielding results it is acknowledged that more can be done to improve on the support offered. Small enterprises owned by women, youth and disabled persons have also been prioritised; there are continuous engagements with various bodies representing disabled persons to increase the number of support offered to more businesses owned by disabled persons. In the next financial year, more efforts will be invested to ensure that the reported numbers reflect this change.
Mr H Kruger (DA) thanked the Department, SEFA, and SEDA for their presentations. To the Department, he asked how far they are signing agreements with provinces and municipalities because it seems like every province, department, and municipalities are doing their own thing.
He also asked on red tape. He asked if the Department was happy about their achievement on the red tape reduction programme. He noted that they have 33 municipalities doing their work, yet the country has over 200 plus municipalities in South Africa, which translate to a 12% success rate. He reiterated that there was nothing to be happy about as small businesses are suffering because of red tape.
Mr Kruger talked about the product market in Mpumalanga and asked where exactly it is as he wanted to visit it. He also cautioned the Department, saying that they are talking the whole time about COVID-19 and that the Committee must remember that this report is for the year 2019/2020 so in the whole report only 15 days of the report had a problem with COVID-19. So, he cautioned the Department to be very careful in giving COVID-19 as an excuse because they will run out of excuses in the following year.
Mr Kruger also pointed out to SEFA that on slide 53 of their presentation, where they talk about an impairment rate of 44% and also mention the fact that they think it will not go down this financial year. He had a problem with that and wanted to know about SEFA’s expectations of the impact of COVID-19 on the impairment rate.
Mr Kruger said that yesterday the Department of Tourism made a presentation in the Committee about the District Development Model and tourism is also a big part of small business. He proposed that the Committee should invite the Department of Tourism before the end of the year to give that same presentation to the Committee.
Mr Z Mbhele (DA) thanked the Department and the entities for giving comprehensive presentations, which he said covered a lot of ground and scope. To the Department, he asked about the finalisation of the departmental structure and the progress report. He indicated that a new piece of information was to mention that there is a dependency on the finalisation of the National Macro Organisation of government process. He said that he does not recall that being mentioned before.
He also asked the DSBD if its structure finalisation is the main factor that it is dependent on or if there are other issues in the pipeline which are also a hindrance. He noted that at some point late last year the Department was about waiting for feedback or movements from the Department of Public Service and Administration (DPSA) hence he needed clarity to connect the dots and get a coherent picture as to which factors are causing the delay. The reason why he asks about the finalisation issue is part of the reasons why vacancies cannot be filled. He also asked if the Department’s budget has to pay employees who will fill those posts because of the R14million underspent on the compensation of employees is a direct correlation to the 12% vacancy rate.
He also directed a comment to SEFA, pointing out that on two incidences there was the mention of underperformance of some of the targets being due to high economic conditions that dampened demand as well as a broader SMME environment that was unfavorable. Some of the performance indicators for Kula credit guarantee both in terms of approvals and beneficiaries were exceeded so there is a bit of discrepancy there.
Ms B Mathulelwa (EFF) pointed that the Department will not perform well as long as it does not represent people more, specifically the street vendors and the spaza shops owners in rural areas. “We need the Department to represent more of these people because they are the ones that are feeding their families and sending children to schools”.
She noted that SEFA are saying that they got a clean audit but she does not agree with them on that because on the relief fund SEFA did not indicated who benefited from the money from SEFA; the Agency also rejected the people who needed funding during COVID-19 hard lockdown without proper follow up and helping them be able to qualify for these loans. She asked who SEFA’s auditor is who found them to have been clean when such loopholes are evident.
Mr F Jacobs (ANC) commended the Department and the entities for their presentations. He said that achieving 18/27 performance indicators is not that good even if the DG has given us the rationale for that; “66% is not where we want to be so we need to pull up our socks because what we say in our annual reports and what we plan they must be congruent”. Mr Jacobs said the DG had noted that he was going to explain the budget expense being 98%, with only 67% of the target met. He argued that this is a key issue in the budget that they have to deal with. He also noted that 47% out of 30% plan facilitation is a clear sign that the Department is also doing well and needs to be commended.
He argued that because the Department came to some of the areas in Western Cape, the Department officials are just doing a lot of advocacy presentations, but its impact is not measured. He said that they need to move away from advocacy to actual throughput.
On the vacancies and acting positions, Mr Jacobs said that this was a perennial problem. Twelve percent (12%) is not a good thing, so the Committee needs to hear from the executives about when the implementation will take place. He also reiterated that issues of underperformance such as finance are there when the Department allocates money to other agencies; “you can delegate responsibility but never accountability, hence it remains that the Department’s accountability to ensure money was spent responsibly”.
The Chairperson said that there was a good improvement in the Department but she was worried that the distribution in terms of the geographical spread, where Gauteng is leading and those that are rural are not benefiting much. She hoped that the District Distribution Model (DDM) is going to produce more.
The Chairperson also appreciated the clean audit and welcomed the new CEO. She emphasised to the CEO that the mission of the Committee is to improve rural communities and that they need to see people with disabilities also on SEFA. She encouraged the DG to continue doing a good job because COVID-19 has disrupted a lot and there is a need to alleviate poverty, inequality and create jobs.
The first to respond was SEFA. The SEFA Chairperson responded and said he agrees with the Committee Chairperson that they have to improve on performance uptake of products with people with disabilities; this is a work in progress. He recounted that they had a session two weeks ago with the Select Committee on Trade and Industry which was led by the government. SEFA said they had an exchange on the support given to people with disabilities and they also got good information in terms of interventions on how they could reach out to such a community of the disabled.
On geographical spread, SEFA agree that it is a work in progress, and one setback to pursuing this was disrupted by COVID-19, especially the pitch for fund programme which seeks to fund business, but the entity could not do it. He reiterated that anybody who approaches SEFA for funding must have certain documents that enable SEFA to scrutinise the application and then see if they qualify. SEFA is a lending institution and manages and mitigates the risk through this scrutinising. He said so it is not correct that SEFA has not been helping out people and going out. The Chairperson said they have programmes; they launched township programmes that included these micro-enterprises. As SEFA they acknowledge that it is not everybody that knows about them and thus have core locations and work with municipalities.
On the auditors, he said it is not SEFA that grants itself a clean audit but it is done by SEFA’s auditors who conduct a rigorous audit process. SEFA also said, on COVID-19, that the audit was done by the AG and many departments failed to pass that test. The Committee was advised that from a SEFA point of view they are doing a few things to make sure distressed companies continue to trade even at low levels. He indicated that they have done assessments to check if some are working full capacity, received payment holidays so that SEFA can adjust their loan interest as you cannot say a company is defaulting when they are no operating in the current economic environment.
The second to respond was SEDA and on the geographical spacing, it said that the Department has been to all the districts throughout the country to create avenues of this support scheme and this was prompted by very low intake of the scheme. SEDA said they hoped that in the coming month before year-end they are going to see the results of this robust outreach throughout the country.
The entity explained that the District Ecosystem Facilitation Model from SEFA is to improve our outreach, especially where there is a market to ensure the services do reach out. On involving people with disabilities, SEDA said they are in partnership with an organisation that has individuals in that space, e.g. DPSA and others, to improve SEDA performance in that area.
The DG said that they will provide the information on agreements with municipalities in writing but indicated that the process is ongoing; negotiations and MoUs of cooperation are still being signed so that cooperation is broadened.
On the red tape, the DG clarified that the target 16 was for the financial year 2019/2020; out of the municipalities in the country, the Department is working with 136 of them, which is close to 50%. The Department hopes that in the next two to three years they would have covered the whole country.
On the issue of Covid-19, the DG said that the Department was not able to achieve the three targets that were indicated because COVID-19 are targets but the problem is that the executive committee (EXCO) had approved them; so the leadership had to shift and not have that with EXCO.
On vacancies, the DG said that they are prioritising the issue this year. He argued that they already have a permanent chief director. He agrees that the 67% achievement rate is not okay and they have to push that it does not happen again. He argued that 2019/2020 was a difficult year for the Department as they had to change their annual performance plan three times. The DG also said, on the correlation between budget and target, the issue is they did not meet the target; the target that was not met had no financial implication.
On measuring the impact, DSBD said that this year they will be able to measure the impact since they can collect that information. He also said they have already advertised the 16 positions and do have a budget and these have accepted the job offer and are ready to start in December. The DG reiterated that they need to put systems in place so that they stop repeat findings and also change how the Department crafts its annual performance plan so that such issues can be mitigated.
The Chairperson thanked everyone for attending.
The meeting was adjourned.
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