DBSD, SEFA & SEDA: Q3 2022/23 performance; with Minister and Deputy Minister
Small Business Development
22 March 2023
Chairperson: Ms V Siwela (ANC)
In this meeting attended by the Minister and Deputy Minister, the Committee received the quarterly performance reports of the Department of Small Business Development, the Small Enterprise Finance Agency (SEFA), and the Small Enterprise Development Agency (SEDA) for the third quarter of the 2022/23 financial year.
During the third quarter, the Department supported 5 540 township and rural enterprises, 3 336 start-up youth businesses, and 11 772 competitive small enterprises and cooperatives. However, it had achieved only 11 of its 23 performance targets (47.8%). Among other things, it continued to underachieve on human-resources indicators, maintaining a vacancy rate of 14.6% and failing to reach its targets for the representation of women and people with disabilities in the senior management service. The Department’s quarterly expenditure was R705.3 million, reflecting over-expenditure of R8.9 million (1.3%) against projections.
SEFA had fully achieved 11 (41%) of its 27 performance targets and had under-achieved on a further nine (33%). During the third quarter, it had approved R249 million in loans (37% of its target) and had disbursed R550 million in loans (99% of its target). It had collected R195.8 million in loan repayments, with a particularly sharp decline in on-time loan repayments among direct-lending clients. SEFA attributed the decline in collections to the general economic climate, especially loadshedding. In response to lower collections, it had shifted its loan book approvals away from direct lending and towards the Township and Rural Enterprises Programme, but the latter consisted of lower-value loans and the overall value of approvals was therefore limited. The current balance of SEFA’s loan book was R4.1 billion.
SEDA had achieved 17 (89%) of its 19 performance targets. However, it failed to establish any new incubation centres and, due to a budgetary shortfall, failed to assist any enterprises through the Technology Transfer Assistance Programme. It had incurred minor under-expenditure of R3.71 million (1.56%) against the projected R237.47 million. It had approved 5 983 (41%) of 14 595 applications received in the third quarter and had supported 34 410 enterprises accounting for 4 219 jobs.
The Minister acknowledged upfront that the Department and its agencies had not performed optimally, and the Committee shared the Minister’s concerns. Members reminded the entities of the scale and significance of the transformative agenda they were tasked with. They asked for further detail about the concrete impact of the Department’s programmes. They sought reassurance that the entities were not over-spending on overhead expenses to the detriment of programme expenditure. The Committee raised particular concern about the low value of SEFA’s loan approvals in the third quarter, asking what the root cause of the problem was and how SEFA intended to address it. Members also asked about the Department’s plans for filling key vacancies, the agencies’ organisational presence and capacity in township and rural areas, and SEFA’s Operation Bhatala initiative.
The Committee noted an apology from Mr H Kruger (DA).
Opening remarks by the Minister
Ms Stella Ndabeni-Abrahams, Minister of Small Business Development, said that she wanted to be upfront and acknowledge that the Department of Small Business Development (DBSD) had not delivered on its commitments, as it had achieved only 47% of its performance targets.
She highlighted some of the areas in which the Department had not fully delivered, including linking small businesses to market opportunities; refurbishing or building infrastructure for small, medium and micro-enterprises (SMMEs) and cooperatives; supporting cooperatives either financially and non-financially; and assisting five municipalities to roll-out the Red Tape Reduction Awareness Programme. The Department and its Director-General were responsible for implementing all this work and would brief the Committee on the details of what had happened and how they planned to move forward.
Similarly, although the Small Enterprise Development Agency (SEDA) had made great improvements from the previous quarter, it had under-delivered in some areas due to budget constraints. The Small Enterprise Finance Agency (SEFA) had not done well overall – although some programmes had performed very well, others had not. Both agencies would elaborate further in this respect and outline the measures they had put in place to improve their performance.
Briefing: DSBD Q3 2022/23 performance
Mr Lindokuhle Mkhumane, Director-General, DBSD, briefed the Committee on the Department’s third-quarter performance. The Department had achieved 11 (47.8%) of its 23 performance targets during the third quarter. Performance highlights included that the Department had:
• Paid 100% of valid creditors within 30 days;
• Exceeded its expenditure target, spending R705.3 million against a projected R696.3 million; and
• Supported a total of 5 540 township and rural enterprises, 3 336 start-up youth businesses, and 11 772 competitive SMMEs and cooperatives.
However, the Department had not met 12 of its performance targets, including:
• Achieve 10% vacancy rate in funded permanent posts (14.6% achieved);
• Implement phases four and five of the SMME Database (not completed);
• Link 100 SMMEs to global market opportunities (32 achieved);
• Build or refurbish business infrastructure for two SMMEs or cooperatives (none achieved);
• Support 50 cooperatives financially and/or non-financially (28 achieved);
• Support 450 crafters through the Craft Customised Sector Programme (309 achieved);
• Assist five municipalities to roll out the Red-Tape Reduction Awareness Programme (none achieved); and
• Consolidate research on priority regulatory reforms affecting small enterprises (not completed).
Mr Mkhumane also outlined the corrective measures that the Department intended to implement to improve its performance towards each target.
Ms Semphete Oosterwyk, Chief Financial Officer, DBSD, briefed the Committee on the Department’s financial, audit, and human-resources outcomes. During the third quarter, the Department had spent R705.3 million against a projected R696.3 million, resulting in over-expenditure of R8.9 million (1.3%). While there had been under-expenditure of R32.8 million in the Enterprise Development programme, the Development Finance programme had exceeded its projected expenditure by R27 million and the Sector and Market Development programme had exceeded its projected expenditure by R17.2 million.
In human resources, the Department currently had vacancies in 31 (14.6%) of its 212 permanent funded positions. The vacancy rate increased during the third quarter because three permanent staff had terminated their contracts.
Ms Oosterwyk also updated the Committee on the progress made by the Department towards addressing internal control deficiencies identified in its last audit report.
Briefing: SEFA Q3 2022/23 performance
Mr Mxolisi Matshamba, Chief Executive Officer, SEFA, said that SEFA had achieved 11 (41%) of its 27 quarterly targets. A further nine targets (33%) had been under-achieved but achieved to at least 75% of the target. In the third quarter, SEFA had:
• Approved R249 million in loans (37% of target);
• Disbursed R550 million in loans (91% of target);
• Collected R195.8 million in loan repayments (78.9% of instalments raised, against a target of 87%).
In loan book approvals, the Khula Credit Guarantee programme had performed particularly poorly, approving R1.3 million in loans and therefore meeting only 2% of its quarterly target. This was due to long turnaround times by financial institutions and the unwillingness of partner institutions to apply for licenses from the National Credit Regulator.
In disbursements, under-performance was concentrated in direct lending, which had disbursed R215 million or 72% of its quarterly target. In collections, the on-time collections rate for direct lending was poor at 35.1%, reflecting the difficulties that SMMEs currently face in meeting their monthly loan obligations.
Through these approvals and disbursements, SEFA had financed 23 842 SMMEs and cooperatives (94% of target) and had facilitated and sustained 28 153 jobs (89% of target). Of the SMMEs assisted, 23 358 (97.9%) were in the micro-finance sector. Although SEFA had over-performed on its target for providing finance to black-owned enterprises, it had under-performed in reaching other targeted groups, especially enterprises owned by people with disabilities.
SEFA’s current loans portfolio stood at a balance of R4.1 billion, with R1.4 billion (36%) in wholesale lending and R2.7 billion (64%) in direct lending. Mr Matshamba provided further detail on the composition of the portfolio and on SEFA’s financial and human resources performance. He also provided a list of each of the applications SEFA had received, the outcomes of the applications, and SEFA’s reasons for its decision in each case.
Briefing: SEDA Q3 2022/23 performance
Mr Nkosikhona Mbatha, acting Chief Executive Officer, SEDA, said that SEDA had achieved 17 (89%) of its 19 quarterly performance targets. During the third quarter, SEDA supported 34 410 SMMEs and cooperatives, thereby creating and/or sustaining 4 219 jobs. 14 595 applications had been received during the third quarter and 5 983 had been approved for implementation.
However, two performance targets had not been met. First, in the Township, Rural and Informal Business programme, SEDA had not established any new Incubation Centres, contrary to its quarterly target to establish four such centres. However, new centres are currently in the adjudication and recommendation stage and should be approved in the fourth quarter. Second, in the Business Competitiveness and Viability Programme, SEDA had not assisted any SMMEs and cooperatives through the Technology Transfer Assistance Programme, primarily because its budget for such assistance had been spent in the first quarter. SEDA was working tirelessly to raise and prioritise funds to cover the shortfall.
In the third quarter, SEDA had spent R233.76 million against the projected R237.47 million, resulting in under-expenditure of R3.71 million (1.56%). There was significant under-spending on capital goods, because certain items – a vehicle and information technology products – had been purchased but would only be paid for and delivered in the fourth quarter. SEDA was confident that it would resolve the under-spending in the fourth quarter.
Mr Mbatha also provided an update on SEDA’s response to historical audit findings. Among other things, SEDA implemented a standardised performance reporting system in the third quarter to improve data integrity and performance reporting.
Ms M Lubengo (ANC) noted that, according to the Department’s presentation, a payment to Microsoft had been reversed because it had to be paid in dollars. What was the root cause of the reversal and repayment?
Mr J De Villiers (DA) said it was a difficult report with many disappointments. He was concerned that SEFA had only met 37% of its target for loan approvals. Access to finance was one of the biggest challenges for small businesses and SEFA was one of the best ways to access capital at low interest rates. SEFA had more favourable interest rates than most other lenders and was thus an incredibly important tool for small businesses. Thus it was tragic that SEFA was sitting with this capital and not achieving its targets. What explained this failure? Was it a failure of the market to take up the product – in other words, a failure by SEFA to adequately advertise its services? Was it because SEFA was declining a large number of applications? Was it because it was difficult to access finance? He wanted SEFA to clarify how it would improve its performance in loan approvals.
The Chairperson said that if small businesses were not funded, nothing would happen on the ground and they would simply die. She thought the Red Tape Reduction programme would assist small businesses. She also wanted to hear more about Operation Bhatala.
Mr F Jacobs (ANC) said that the Committee had to acknowledge the Minister’s admission that she was unhappy with the Department’s performance. It also had to express its own disappointment that many performance targets had not been met. The Committee saw a lot of money being spent but many performance targets were not being met. Members were not happy – they had expected an improvement in performance and they had expected the entities’ managers and political leadership to provide solutions to the entities’ challenges rather than make excuses for underperformance. The Committee wanted to foster an entrepreneurial culture where communities required hand-ups rather than hand-outs. Did the Department have the technical and administrative capacity to advance that agenda?
The Department was not meeting its targets for reaching historically disadvantaged communities, people with disabilities, and women. The Committee had raised this issue consistently with the Department throughout the current parliamentary administration. Capacity and staffing issues also came up regularly. Did the Department have what it took to do the work it needed to do? Its flagship programme was its work with township and rural enterprises. Did the Department have an organisational presence and capacity in all the country’s townships and rural areas to ensure opportunities were open to historically marginalised communities?
He appreciated SEFA’s innovation in tracking, tracing, and maintaining its loan book, providing more accountability. Could the Department provide more information on the ownership profiles and products of the SMMEs it worked with? For example, he wanted to hear more about the initiative under which the Department had linked certain SMMEs and cooperatives to Edenvinne, a new retailer in Menlyn Mall. What were the names of the SMMEs and cooperatives involved in that initiative, and what benefits and challenges had those cooperatives faced as a result? It made sense that small businesses should establish a presence in malls, where people spend a lot of time. He also wanted more detail about the performance of the townships and rural enterprises that had received support.
In general, the Committee needed to gain a better and more specific understanding of the Department’s achievements. It should provide information about each category of support, both financial and non-financial, that it had provided to small enterprises. Which enterprises had been assisted and what type of non-financial support had they received? What was the average disbursement to each enterprise? Members had seen a breakdown of disbursements per province, but it would be useful to see a more detailed geographical breakdown in other areas. For example, what was the regional distribution,urban–rural distribution, and demographic distribution of the various programmes?
The Department and its entities had to ensure that application procedures were reviewed and simplified so that nobody got left behind. Mr Matshamba had explained SEFA’s rationale for rejecting certain applications, and the rationale made sense. But was the application process automated and transparent?
He noted that the Department’s executive had approved a report on 11 772 competitive SMMEs and cooperatives that had received support. Could the Department provide more information about this report?
Did the Department have a plan to fill its outstanding vacancies? Perhaps the Committee should receive monthly updates on the Department’s progress in filling vacancies and building capacity, since this was a perennial problem.
The Department had not achieved its target of assisting five municipalities with rolling out the Red-Tape Reduction Awareness Programme. Where were those municipalities and why had the target not been achieved?
Could the Department provide further information about its initiative to link SMMEs and cooperatives to global market opportunities? What was the bottom line of this initiative for beneficiary enterprises – could the Department provide examples of its impact? What did those global links entail? During the third quarter, the Department had linked 32 SMMEs and cooperatives to global opportunities – how many of those 32 were cooperatives? Moreover, its quarterly target had been to facilitate such links for 100 SMMEs and cooperatives. Could it explain its plans in that regard? Mr Mkhumane noted that the target had not been achieved because of a “lack of suitable global events to link SMMEs and cooperatives to”. But the COVID-19 pandemic had abated, so why was it difficult to find suitable events?
Mr Jacobs concluded that the Committee had to highlight the entities’ lack of improvement and continued failure to meet all their targets. It was worrisome and the Committee had to demand a strong and serious management plan to ensure that the necessary improvements were made.
Mr H April (ANC) said that he admired the honesty displayed in the presentations, but he wanted to join the Minister in expressing disappointment in the Department’s performance. He highlighted the Department’s financial performance during the third quarter (see slide 20). Programme One, Administration, had underspent by R2.5 million (9%), mainly due to vacancies and some under-spending on machinery and equipment. Yet there had been over-spending on goods and services – by R203 000 – due to higher payments than expected for communications and travel. He was worried about this over-expenditure on goods and services.
In Programme Two, Sector Market and Development, there was over-expenditure of R17.2 million (119%). In other words, the programme had spent more than twice its budget. The reason given for this over-expenditure was that there had been over-spending of R19.7 million in transfers and subsidies, because claims projected for the second and third quarters had been processed in the third quarter instead. Meanwhile, there was under-spending of R931 000 in employee compensation due to vacancies and under-spending of R2.6 million in goods and services due to the reversal of the Microsoft payment and outstanding claims from SEDA. Programme Three, Development Finance, had exceeded its budget by R27 million (7%), mainly due to a misalignment in cash flow leading to an over-expenditure of R25.8 million on transfers and subsidies – according to the Department, this was caused by an incorrect transfer of R29.8 million under the Blended Finance programme.
He said he would like to send further questions to the Department for written responses. His main point was that, though the Committee understood the effects of the current global economic climate, the Department and its agencies had to do much more to provide better service to South Africa’s residents. It was not acceptable for the entities to under-spend in crucial areas or over-spend on non-essential items like travel and phone bills – not when people were struggling and begging for assistance with the finance they needed to make their businesses work.
Responses from DBSD
On the Microsoft payment, Ms Oosterwyk said that the Department had paid the invoice as usual but Microsoft had changed their processes. The Department usually paid in South African rand but Microsoft had stipulated that the money had to be transferred to an overseas account. Microsoft had therefore refunded the Department so that the Department could pay the equivalent amount in dollars instead.
On the over-expenditure highlighted by Mr April, she said that the Department had not overspent on its budget. The Department compiled cash-flow projections, estimating its expected spending based on its procurement plan and orders issued. She thought the Committee would understand that actual expenditure did not always conform to these projections. The Department drew down funds from National Treasury every month but not all payments planned for a given quarter actually went through in that quarter, for example, because invoices were not always received when expected.
The third-quarter figures were especially likely to deviate from projections because the third quarter coincided with the Adjusted Estimates of National Expenditure process. Until that process had been finalised by the Minister of Finance and the President, the Department was unable to align its cash-flow and cash-flow projections. Misalignments were inevitable and the Department did its best to adjust on a quarterly basis, but that was not always possible. Nonetheless, it was important to clarify that the Department had not exceeded its budget – it was not running an overdraft. It had spent more than projected, but it had not spent more than it had to spend – Treasury would have flagged the situation if so.
Responses from SEDA
Mr Mbatha said that vacancies presented quite a challenge but SEDA’s vacancy rate nonetheless remained under 10%. It was inevitable that employees would leave and SEDA simply had to work hard to ensure that it could replace those individuals. It also offered training to employees. SEDA was working around the clock to recruit and replace employees. Despite these challenges, SEDA had achieved 89% of its performance targets in the third quarter and its performance rate had been over 70% in the previous quarter too.
On access points, SEDA was working, together with SEFA, to ensure that it offered a similar menu of services in locations across the country, including to clients in townships and rural areas.
Responses from SEFA
On SEFA’s quarterly loan approvals, Mr Matshamba said that any lender had to ensure he did not lend out more money than came in. SEFA’s collections rate for direct lending clients had dropped dramatically from 75% to 35%. As a result, SEFA had no option but to slow down its approvals in direct lending and increase approvals in the Township and Rural Enterprises Programme (TREP), where ring-fenced funds were available. SEFA’s quarterly report reflected that disbursements had increased in TREP. There were many applications for TREP financing – in one month, SEFA had received about 2 000 TREP applications – so SEFA could process many TREP loans. But TREP loans were generally much smaller than the loans made under the direct lending programme – direct lending business involved multi-million-rand loans. Because SEFA approved smaller loans, the total value of loan approvals declined.
It would not be sensible for SEFA to respond to the low collections rate by foreclosing on clients who were behind on their repayments, because SEFA would then end up writing off the balance of those loans. For example, SEFA lent one client R14 million to build accommodation for doctors and nurses. Due to various challenges, such as bad weather, construction had been delayed and the client was now five months behind on his repayments. SEFA had two options in this case: it could close the loan, repossess the incomplete building, and look for somebody else to complete construction at additional cost; or it could wait for the client to finish the building, at which point he would begin taking on tenants and generating income with which to repay his loan.
In summary, therefore, SEFA could not trade recklessly by lending more than it had available, but the volume of its collections depended on the general economic climate. If SEFA’s clients could operate for eight hours a day without interruption due to loadshedding, they could return to full production and generate enough revenue to service their loans. When that happened, SEFA would see its collections rate increase from 35% to above 70% or 80%. SEFA also hoped that collections through Operation Bhatala would boost the collections rate to above 70% before the end of the financial year.
Operation Bhatala was proceeding, but it required a balancing act. SEFA evaluated the circumstances of each client and worked out its expectations and a repayment plan. As he had mentioned, it would be reckless to pursue loan repayment at the cost of destroying small enterprises. The client-facing construction delays should be given a grace period, because SEFA would recuperate its capital as soon as construction was completed and the client began generating income. However, other clients had never made an attempt to repay their loans even though they were living lavish lifestyles and were clearly able to make payments. Sometimes, the clients asked to negotiate only after SEFA successfully took them to court. Some of those clients had evidently decided they simply did not need to repay their loans because it was government money. Those clients were SEFA’s primary targets.
In other cases, however, SEFA did not apply as much pressure regarding collections, because it was obvious that some clients were struggling with trading, especially due to loadshedding. SEFA wanted to start providing its clients with alternative or backup power sources to continue producing for eight hours a day, even during loadshedding. That was another intervention that would improve SEFA’s collections rate.
Mr Mbatha had responded to Mr Jacob’s question about township and rural access points, and SEFA was using SEDA access points where possible, because that was cheaper and more efficient for the government as a whole. SEFA was already beginning to see results regarding the flow of applications. Moreover, at those access points, SEFA planned to train the employees to assist clients with SEFA processes and applications. Usually, bigger clients were able to complete business plans and application forms, but TREP clients often had difficulty, and SEFA envisaged TREP clients working with SEDA at those access points. That would help improve the quality of applications.
In addition, SEFA was at an advanced stage of negotiating partnerships with private companies who routinely made small loans, such as African Bank and Yoco. SEFA proposed that these private companies could provide finance to clients who were in good standing, in order to reduce “congestion” at SEFA. When you were buying milk at a store, you did not want to queue behind the guy playing the lotto – you wanted to buy milk and get out quickly. Analogously, some of SEFA’s clients were in good standing and could be granted loans quickly from private companies. That would leave SEFA with more capacity to work with clients struggling with financial records, tax, or other issues.
Finally, capacity was a major issue for SEFA. What mattered was not just “warm bodies” but skills. SEFA needed people who understood the lending business, which required training – even qualified lawyers needed to be trained before they were equipped to perform SEFA’s work. Indeed, many private banks recruited from SEFA’s legal department precisely because SEFA trained them well. It was likely that it would be necessary to continue signing 24-month contracts with employees until SEFA and SEDA completed their merger. It would be ideal to grant longer-term contracts – in particular, that would support employee retention, because employees were less likely to leave long-term or permanent contracts. But compromise would be necessary until the merger was complete.
The Chairperson said that the Committee understood the difficulties that the Department and its agencies faced, especially due to loadshedding. However, the entities had to push harder in the fourth quarter. The Committee wanted to see the Department and its agencies fulfilling all the promises they had made.
The Committee adopted the entities’ reports.
Mr April added that he was concerned that members of racial minorities were being excluded both from beneficiation and from employment at the entities. In the last quarter, only 1% of SEDA beneficiaries were Indian and only 11 Coloured people were employed in the Department.
Mr King Kunene, Committee Secretary, reminded Members that the Committee was preparing for its oversight visit to the North West.
Ms Dipuo Peters, Deputy Minister of Small Business Development, said that the Ministry had been invited to join the Committee on its oversight visit. The Ministry was awaiting the details to make proper preparations, but it intended to join the Committee on its first day in the North West.
The meeting was adjourned.
Siwela, Ms VS
April, Mr HG
De Villiers, Mr JN
Hendricks, Mr MGE
Jacobs, Mr F
Lubengo, Ms ML
Mabika, Mr M
Mathulelwa, Ms B
Myeni, Mr ET
Ndabeni-Abrahams, Ms ST
Peters, Ms ED
Tlhomelang, Ms KB
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