Department of Small Businesses Development on support to distressed businesses affected by unrest in KwaZulu-Natal & Gauteng; with Minister

NCOP Trade & Industry, Economic Development, Small Business, Tourism, Employment & Labour

31 August 2021
Chairperson: Mr M Rayi (ANC, Eastern Cape)
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Meeting Summary

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The Select Committee on Trade and Industry, Economic Development, Small Business, Tourism, Employment and Labour was briefed by the Department of Small Business Development (DSBD) on the support offered to distressed businesses following the unrest and violence in KwaZulu-Natal and Gauteng Provinces.

The DSBD said it intended to assist uninsured formal businesses throughout the country, with specific focus on those affected by violence and looting in KwaZulu-Natal and Gauteng Provinces. According to StatsSA and the South African Property Owners’ Association, R1.5 billion was lost in terms of stock, R15 billion in property damage, 800 retail stores were looted and over 100 were burnt. 50 000 informal businesses and 40 000 formal businesses were affected. It was estimated that about 150 000 jobs would be affected. There was an urgent need to assist the affected businesses.

Funding of R300 million to assist the businesses resulted from the reprioritisation of certain programmes in the DSBD. The fund aimed to assist about 150 businesses. The DSBD offered a blended financial instrument comprising a 60 percent grant component and a 40 percent loan component, with interest of five percent.  So far only 30 out 192 funding applications from KwaZulu-Natal and Gauteng were being processed, with 11 having been approved. The disparity was because most applications were incomplete and some applicants were guilty of double dipping.

Members were told that the DSBD had mechanisms to assist applicants with the application process. Funding was generally capped at R2 million for each applicant. Preference was given to women, youths and persons with disabilities. Applicants could approach other funding agencies, especially the Department of Trade Industry and Competition (DTIC) to augment funds from the DSBD. The DTIC was responsible for assisting businesses whose infrastructure had been damaged. It also assisted businesses owned by foreign nationals, provided those businesses fulfilled specific criteria. The DSBD worked closely with provinces, municipalities and the private sector to positively improve the economic climate of the country. It had workers on the ground to sensitise local businesses to the various interventions.

Members expressed concern about the huge disparity between the number of applications received and those approved. The DSBD should educate applicants on how to successfully harness the intervention. Unnecessary red tape should be removed. The DSBD should channel its scarce resources to businesses with prospects to thrive as this ensured increased employment and improved GDP. The DSBD should also target its intervention in other parts of the country affected by violence and looting. Foreign-owned businesses needed to be assisted as most of them played a vital role in employing South Africans. It was important that the DSBD collaborate with the private sector and other role-players to accelerate economic recovery in the country.

The DSBD promised to consider Members’ concerns. It would continue to work with other stakeholders to assist businesses under its mandate.

Meeting report

The Chairperson welcomed Members and officials from the Department of Small Business Development (DSBD). He apologised for starting the meeting late. The reason was that it ran concurrently with other parliamentary meetings. He hoped to escalate the matter to the Chairpersons of the various Portfolio and Joint Committees to address the matter going forward. He expressed condolences to the family and friends of Mr Kebby Maphatsoe (ANC), who died on August 31, 2021. He had been a Member of the Parliament and served as Deputy Minister of Defence and Military Veterans between 2014 and 2019. The Chairperson also expressed condolences to Mr E Landsman (ANC, North West), who had lost a dear family member. He also sent greetings to staff of Parliament who had tested positive for COVID-19 and were currently recovering.

Presentation by the DSBD

Mr Lindokuhle Mkhumane, Director-General, DSBD,  said the purpose of the presentation was to brief the Committee on the impact of the recent looting and unrest, as well as initiatives developed by the DSBD and its entities, the Small Enterprise Development Agency (SEDA) and Small Enterprise Finance Agency (SEFA). The recent riots and looting had affected Small, Medium and Micro Enterprises (SMMEs), both in the formal and informal sectors, in various parts of the country, especially in KZN and Gauteng. The DSBD decided to offer interventions to assist the recovery of the affected businesses. Most SMMEs lost goods, equipment and machinery, as well as infrastructure in some cases. The Department of Trade, Industry and Commerce (DTIC) aimed to give infrastructural support to businesses that had suffered the destruction of infrastructure. The DSBD only supported businesses with stock, machinery and equipment.

Disruption to the supply chain had affected the delivery of stock to various businesses. For example, the disruption on the N3 road cut businesses off from stock. This increased poverty and unemployment and decreased the gross domestic product (GDP). The country had started to experience a low economic growth rate even before the COVID-19 pandemic. The hard lockdown made matters worse. Most businesses were restricted, especially those in the tourism sector due to limits on the number of people that were allowed within closed spaces.

The unrest mostly affected uninsured businesses as they did not have the means to replace damaged or looted items. This necessitated more need for social security payments, which put more pressure on an already strained fiscus and worsened health conditions in the country. Other factors of concern included disruptions in vaccine rollout and the slow economic recovery. The recent destruction had really reversed the economic gains the country made in recent times. According to the South African Property Owners’ Association and other business organisations, the nation experienced R1.5 billion in stock losses and damage to property and equipment to the tune of R15 billion. More than 800 retail stores were looted and 100 malls were set alight. About 50 000 informal businesses and 40 000 formal businesses were affected. To date, about 150 000 were at risk.

It became necessary for the DSBD to introduce various instruments to assist both formal and informal businesses to accelerate business and economic recovery. One of the programmes aimed to support formal businesses, particularly those in KZN and Gauteng. The DSBD did not close its eyes to other Provinces, especially Mpumalanga, where interventions were also needed. The DSBD was mainly supporting uninsured businesses with working capital, stock, equipment and machinery as well as furniture and fittings. It also accommodated businesses with existing funding facilities from other lenders. This intervention enabled the businesses to pay their creditors at the right time.

The DSBD offered blended finance, which combined a 60 percent grant and 40 percent loan. Interest on the loan component was only five percent. This meant that a trader who borrowed R2 million would need to return only R840 000. This option was cheaper than those available from other funding entities. The DSBD had put measures in place to ensure accountability and transparency in the whole disbursement process. It was important to balance the management of the crisis and the culture of returning government funds to the right quarters; thus the introduction of the 40 percent loan component. The repayment period was a maximum of 60 months, with an initial payment moratorium of up to 12 months, to allow businesses ample time to recover and to make repayments with convenience.

In terms of non-financial support, the DSBD offered both pre-investment and post-investment support to assist small businesses. The pre-investment support dealt mainly with packaging of applications to ease the whole process, while the post-investment support involved monitoring the growth of the small businesses to ensure that money advanced to them made positive impacts. Though the DSBD had lowered the bar in terms of qualification criteria, it ensured the applicants complied with certain requirements. These included  a SA Police Service (SAPS) case number to ascertain the business was affected by the unrest; full registration with the Companies and Intellectual Property Commission (CIPC); 100 percent South African ownership; that the business had been in operation as of 30 June 2021; and that it was registered with the SA Revenue Service (SARS). It was important to register all SMMEs in South Africa on a credible database as this allowed the DSBD to know the locations of businesses, the type of business being conducted, and the performance of the business. The DSBD also ensured that businesses submitted affidavits to prevent double dipping. It would not be fair for the DSBD to fund businesses that were already insured.

Informal businesses were excluded from this intervention as there was an entirely different package that catered for them.

Other required documents included ID, financial statements, cash flow projections, facility statements regarding other funders, and specific quotations. Applications were submitted online at BRP@sefa.org.za. The DSBD had about 20 agents that supported SMMEs and provided clarity where necessary. The DSBD reviewed applications, did due diligence and then forwarded the applications to SEFA for approval. SEDA, through its various offices, facilitated the completion of applications and offered additional non-financial assistance whenever necessary.

The DSBD had a budget of R300 million to assist about 150 formal businesses, especially those in KZN and Gauteng Provinces.

The DSBD did not leave informal businesses out of its interventions, as they must be assisted to grow. Informal businesses could help provide employment and tackle some of the challenges the country faced. Informal businesses were not expected to be registered with CIPC and SARS due to their small operating sizes. The businesses must link to the Department's business support initiative in order to optimise the resources from the government. The DSBD offered a grant of R3 000 to owners of informal businesses to ensure they restocked appropriately. To be supported, the owner of the informal business must be South African, produce valid ID and have a bank account. The DSBD helped those without bank accounts to open one. All financial transactions must be done through the bank to prevent money laundering. The DSBD did not require any minimum turnover from the vendors. It would give preference to women, youths and persons with disabilities. The DSBD worked closely with the banking sector in various parts of the country, especially Nedbank, which had been very helpful. The bank did not charge for the support they provided and this enabled the DSBD to reach the beneficiaries more effectively.

The DSBD worked closely with the Informal Traders’ Association as they had offices in most parts of the country. The Association was able to assist their members to package applications for funding. As a relief measure, the DSBD had implemented a moratorium on business permits and licences for informal businesses. The DSBD did not permanently terminate the fees, but only suspended the fees until December 31, 2022. This helped to reduce the cost of doing business for the period covered by the moratorium. The country had recently seen more people move from formal employment to informal businesses. The money that could otherwise go to fees, which could be high in some municipalities, could be used to acquire stock for businesses. This removed the red tape, especially for new entrants into the informal sector. It was important that informal businesses comply with the Business Act. This further reduced the cost of doing business with SMMEs and cooperatives. The DSBD aimed to increase the grant component of its intervention so that businesses could better access the funding.

 SEFA Update on Business Recovery Support

Mr Mxolisi Matshamba, CEO, SEFA, said that the entity funded four retail stores and two fuel stations in Gauteng. In KZN, it funded one eye-care company and four restaurants. The total SEFA exposure to the six businesses in Gauteng was R12.8 million, while the exposure to the five businesses in KZN was R2 million. SEFA had given the businesses a six-month moratorium on repayments and this helped to ease pressure and allow them to continue operating while their insurance claims were being finalised. Pick n Pay had offered some of its franchisees loans to enable them to restock and continue to trade until they concluded their insurance claims.

The DSBD had received 94 applications from KZN, 44 applications from South Gauteng, which included the East Rand, and 54 from North Gauteng, which included Pretoria. The applications from KZN were valued at R71 million, Gauteng South R42 million and Gauteng North R55 million. In brief, the 192 applications from the two Provinces were valued at R168 million. Fifteen applications from KZN were being processed, seven from Gauteng South and eight from Gauteng North. In summary, 30 out of 192 applications were being processed. Those from KZN were valued at R67 million, those from Gauteng South at R6.8 million and those from Gauteng North at R7.4 million, totalling R82 million. The projected approval date was 3 September 2021. A total of seven applications from KZN had been approved as well as two from Gauteng South and one from Gauteng North, totalling 10 approved applications for the two provinces.

Most of the applications were incomplete, hence the huge gap between the number of applications received, applications processed and applications approved. SEFA helped with the completion of applications. In certain cases, applicants were referred to SEDA for further non-financial assistance. SEFA had initially accepted some incomplete applications for the purpose of registering them on the system and meeting the application deadline. The number of processed and approved applications would likely increase going forward as the number of completed applications increased. The Minister had extended the application deadline to the end of September 2021 to give applicants sufficient time to complete their applications.

Mr Matshamba noted that 120 doctors and pharmacists had approached the DSBD for assistance regarding applications. The DSBD urged all applicants to respect the requirements of the funding and ensure honesty during the application process.

The Chairperson urged the DSBD to provide the Committee with a soft copy of the presentation so Members could have additional information.

Minister’s comments

The Minister of Small Business Development, Ms Stella Ndabeni-Abrahams, thanked the Committee for the opportunity to make the presentation and urged the Committee to help create further awareness about the programmes of the DSBD. The delay in the disbursement of the funds was mainly due to the reluctance of the prospective beneficiaries to pick up the funds. The DSBD implemented a blended finance intervention, comprising a 60 percent grant and 40 percent loan, which was more favorable than the facilities from other credit providers. However, most applicants complained about red tape and were reluctant to fill in the relevant forms. It was important that applicants comply with the requirements as this empowered the DSBD to become more accountable. The funds came from government sources and must be fully accounted for. The DSBD targeted all provinces but prioritised KZN and Gauteng at the moment as they were the most hit by the recent riots and looting.

Discussion

Mr J Londt (DA, Western Cape) agreed with the Minister that the DSBD should implement the interventions responsibly because the funds came from taxpayers. He sought to know if there were additional funding mechanisms to augment the shortfall in funding from the DSBD, which had limited financial resources at its disposal. He expressed concern that application processing was often prolonged and might negatively affect the ability of business to operate optimally. Some businesses were currently out of cash and business owners as well as employees might find it difficult to cater for their families. Were there people who could be held accountable for the processing of applications? He lamented the low percentage of approved applications. Could the DSBD give the Committee an indication of what the problem was? He expressed concern that information on the pay-out date was not available. Did the DSBD have any plans to remove the red tape in the application process? He cautioned the DSBD to carefully manage its funds. It was more appropriate that the DSBD funded thriving businesses as these had the capability to employ people and contribute to GDP. The DSBD should not prioritise bad businesses because this was as good as throwing money down the drain. The DSBD’s finite resources should be targeted for maximum impact in order to address the broader problem of unemployment in the country.

 

Ms B Mathevula (EFF, Limpopo) sought to know if the DSBD had a mechanism to track uninsured businesses affected by the violence and looting in KZN and Gauteng. Did the DSBD make any efforts to assist those who had lost income as a result of the violence, especially those affected at the Pan Africa Mall in Alexandra?

 

Ms S Boshoff (DA, Mphumalanga) congratulated the Minister on her recent appointment and hoped to have an amicable and working relationship with her. She sought clarity on the number of businesses that were affected by the recent violence and the consequent number of jobs that would be lost. What was the DSBD doing about businesses that were not fully owned by South Africans? There were many businesses in South Africa owned by foreign nationals who employed mostly South Africans. These businesses could not be left to their own devices as this would hit the employees the most. Both employers and employees had families to cater for.

 

Mr M Mmoiemang (ANC, Northern Cape) congratulated the Minister on her appointment and looked forward to a fruitful working relationship with her Department. He noted that the report on the Committee’s oversight visit to the affected areas must be assessed at both Committee and House levels. He lauded the participation of representatives of the Committee and the DSBD during the visit. The Committee and the DSBD must act on the lessons learnt during the visit and take timeous and appropriate action in order to instil confidence in the public in relation to the work of the Committee. He sought clarity on what the DSBD was doing to protect businesses owned by foreign nationals. It was also important to ensure that foreign business operators had the required papers. He asked if the DSBD had plans to accommodate small businesses that might need assistance in excess of the threshold of R2 million. Did the DSBD have any collaboration with South African Special Risk Insurance Association (SASRIA) and insurance companies? The Committee understood that the DSBD focussed on uninsured businesses in its interventions. It was, however, necessary to work alongside relevant role-players.

 

The Chairperson asked if the DSBD had official data on uninsured SMMEs. It was important to have an estimate of all SMMEs, especially in the affected areas, and this should not be limited to only KZN and Gauteng. He noted that the R300 million earmarked for the intervention resulted from the reprioritization of certain programmes in the Department. Which programmes were affected by the reprioritization? The recent incident had affected more than 800 SMMEs, over 100 properties were burnt and about 50 000 informal jobs were affected, yet 150 SMMEs were targeted for intervention with a meagre R300 million. How did the DSBD aim to assist most of the affected businesses, given its limited resources? He urged the DSBD to clarify the R1.3 billion intervention announced by the former Finance Minister. He expressed concern about the decision of the DSBD to convert the 60 percent grant component of the funding to a loan at a later stage if the funded businesses eventually got their insurance claims. This would significantly increase the final amount that the businesses returned to the DSBD.

He agreed with Ms Boshoff and Mr Mmoiemang that businesses owned by foreign nationals also needed assistance as this was in the best interest of the nation. He lauded the willingness of the DTIC to assist such businesses that were registered with the CIPC and the SARS. There should be a synergistic approach between the DTIC and the DSBD in this regard.

The DSBD also needed to collaborate with the private sector to improve the employment situation in the nation. It was important that the DSBD ensured that all businesses operating in all municipalities had relevant permits and licences. The DSBD must develop standard monitoring procedures that applied to all SMMEs and informal businesses in the country. In view of the limited resources of the DSBD of R300 million, did the DSBD envisage other funding sources, particularly the R500 billion announced by the President.

He noted that the current number of approved applications was low compared to the number of businesses affected in the worst hit Provinces. Was there a possibility that additional businesses could apply for the intervention at a later stage? The DSBD’s decision to allow ample time for repayment of the loan was laudable. However, did the DSBD have plans to facilitate healthy cash flow pending the time insurance claims were finalised? Businesses must be able to pay their creditors to avoid paying more interest. There should be effective communication between the DSBD and businesses so that the businesses could become aware of the various interventions.

Response by the DSBD

Minister Ndabeni-Abrahams said the R300 million came from the unspent funds allocated to the Business Viability Programme run by the DSBD through SEFA and SEDA. The DSBD had decided to use the unspent funds to assist affected businesses instead of returning them to National Treasury. The DSBD had developed mechanisms to reach businesses in the affected communities. The staff were on ground to assist businesses. The DSBD mainly focused on uninsured businesses. The DTIC had interventions to assist businesses owned by foreign nationals. It was also assisting businesses whose properties were damaged. The DSBD actively collaborated with the Department of Labour and Employment and was working to facilitate businesses’ growth through appropriate intervention and the removal of red tape. However, businesses needed to fulfil basic criteria like having a bank account. Money laundering was a serious offence that the DSBD tried to avoid at all costs. The DSBD must know exactly where the funding went. This was important for accountability and transparency.

According to StatSA and the South African Property Owners Association, about 150 000 jobs, R1.5 billion worth of stock and R15 billion worth of property were affected, 800 retail stores were looted and 100 were burnt. About 50 000 informal traders and 40 000 businesses were affected. These were huge figures in light of the DSBD's limited resources. The DSBD continued to solicit additional funds from government in order to assist struggling businesses.

It was important that prospective beneficiaries become aware of the various government interventions. The DSBD offered a blended finance intervention comprising a 60 percent grant and 40 percent loan. It was important for the DSBD to harmonise communication with the DTIC to avoid sending confusing signals to the beneficiaries. There should be clarity regarding the terms and conditions of the various financial packages. Beneficiaries of the DSBD interventions, for example, were expected to return only R840 000 if they borrowed R2 million.

In response to Mr Londt’s concern, Mr Matshamba said that the huge gap between the number of submitted applications, processed applications and approved applications resulted from the failure of the applicants to comply with relevant terms and conditions. Some applicants, for example, requested funds that far exceeded those reflected in the pro forma invoices and quotations. Some could not provide appropriate financial statements or SARS clearance, among others. There was a war room, comprising the DTIC, SETA and SEFA, which helped to verify the status of applicants. Some applicants were guilty of double dipping because they applied for intervention from more than one source. The war room helped to unveil unscrupulous individuals. To deter double dipping, the DSBD had decided to convert the 60 percent grant to loan if an individual was found to have been fraudulent in obtaining the grant.

The DSBD had staff on ground and actively collaborated with provinces and local communities to create awareness about its programmes. Awareness was also created through radio programmes. The DTIC, through its Critical Infrastructure Programme, intervened in businesses that had suffered infrastructure damage. The DSBD also communicated through webinars. The DSBD encouraged business owners to apply for bridging finance to ensure effective cash flow. The DSBD was willing to uncap the R2 million threshold for businesses that truly needed more. Those businesses could also approach other entities, especially the DTIC, to augment the funding. The DSBD also assisted those with pending insurance claims but these businesses must refund government money the moment they finalised their insurance claims. There was a cordial relationship and effective communication between the DSBD and those it funded. It ensured the beneficiaries received timeous intervention in order to stay afloat.

In response to Ms Boshoff’s question on the number of businesses affected in Mpumalanga and the corresponding pay-outs, Mr Matshamba said that the DSBD did not limit its focus only to KZN and Gauteng. The DSBD cast its net nationally but had to prioritise the two provinces that were hit the most. The DSBD had a database of uninsured businesses. The DSBD actively collaborated with provincial entities to assist businesses. There was a difference in the funding capabilities of the individual provinces. The provinces referred financial assistance in excess of R1 million to the DSBD. The DSBD also considered tapping into the national credit scheme, especially after the announcement of the R500 billion economic stimulus package. One of the difficulties in the intervention resulted from commercial banks being the main facilitators. Most of the banks would stick with their conventional terms and conditions, which further made it difficult for prospective beneficiaries to apply. The DSBD, through SEFA, facilitated the Kula Guarantee Scheme which was really favourable for SMMEs in the country.

Various municipalities had differing policies regarding the issuance of business permits and licences. Some municipalities charged as high as R4 500 for new informal businesses, which represented a huge barrier in certain cases. The DSBD, therefore, had recommended the suspension of fee payments in order to facilitate the success of SMMEs. This did not mean the suspension of permits and licenses. The DSBD was actively working on the Business Act, which holistically dealt with the issuance of Permits and licences. The President had transferred the mandate to the DSBD in October 2020. The DSBD aimed to standardise the issuance of permits and licences throughout the country and the South African Local Government Association (SALGA) was very instrumental in the process. The DSBD also aimed to effectively monitor businesses in various parts of the country to ensure government funds went to the intended targets and were effectively utilised.

Further discussion

The Chairperson sought clarity on the credit scheme budget. What role did the private sector play in partnership with the DSBD?

Mr M Dangor (ANC, Gauteng) noted that there was a lot of confusion about the R500 billion. About 40 percent of the fund was allegedly lost through the guarantee scheme. He urged the DSBD to give clarity on the matter.

Mr Nkosikhona Mbatha, Acting CEO, SEDA, said that the entity entered into partnerships with role-players in the private sector to improve the economic situation in the country.

The Minister promised to work hard to ensure the DSBD considered Members’ concerns and inputs in turning around the economic condition of the country.

After adoption of minutes, the meeting was adjourned.

 

 

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