Small Enterprise Development Agency (Seda) & Khula: Budget Strategic Plans 2007/08

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
9 March 2007
SMALL ENTERPRISE DEVELOPMENT AGENCY (SEDA) & KHULA: BUDGET STRATEGIC PLANS 2007/08

Chairperson: Dr B Martins (ANC)

Documents handed out
Khula Enterprise Finance Ltd Presentation
The Small Enterprise Development Agency Presentation

www.seda.org.za
www.khula.org.za

SUMMARY
Khula said that some of their operational achievements were that business loan approvals and disbursements had on average grown by more than 50% from 2002 without additional funding and three new funds were launched and capitalised at about R300 million. Some of the binding constraints were that the Credit Indemnity Scheme was suited to more established businesses and they had a limited influence on the credit decision. The Khula direct business model had the objective to address the financing gap in the R10 000 - R250 000 range.

The proposed business model would be driven by synergistic partnerships where Khula would partner with institutions that had an existing infrastructure, and they would use their facilities. The restructure of Khula's existing regional offices would provide additional functions.

The Small Enterprise Development Agency (SEDA) said that small enterprises comprised 95% of all enterprises and there were currently between 2.5 million to 3 million of them in existence. They contributed 45% to the Gross Domestic Project and absorbed 60% of formally employed labour. SEDA said that they would move from being a centrally controlled organisation to a decentralized one, which was flexible and customer-oriented. They were also going to move from reliance on a mono-funded approach to having a sustainable multi-sourcing of funds. This was necessary because the current funding from the Department of Trade and Industry was not enough for the mandate and there were uncertainties related to the future level of the funding. What mattered most, was that the entrepreneurs wanted solutions to their problems. They wanted quick ‘turn-around times’, simple language and simple processes.

MINUTES
Khula Presentation
Mr Xolani Sithole, Managing Director, said that their target market were the underserved segments of the small-to-medium enterprise (SME) market, primarily black-owned owner-managed formal SMEs and start-up and developmental capital expansion programmes. There was a bias towards underserved provinces and rural areas. The loans were in the range of R10 000 - R3 million, with particular emphasis on facilities less than R1 million in value, especially less than R250 000.

Some of their operational achievements were that business loan approvals and disbursements had on average grown by more than 50% from 2002 without additional funding and three new funds were launched and capitalised at about R300 million. The value and number of business plans approved through their mentorship programme had also increased by more than 400% between 2002 and 2006.

They had managed to provide development properties to 1245 SMEs in underdeveloped areas and they facilitated the creation of 6308 employment opportunities in Khula premises. Business loan advances to Retail Financial Intermediaries (RFls) had increased from R34 million in 2002, to R137 million in 2006. Operating losses were maintained at constant levels with marginal increases in operating costs and bad debt provision declined significantly from 38% in 2002 to 2% in 2006. Claims provisions were also maintained at constant levels.

Some of the binding constraints were that the Credit Indemnity Scheme was suited to more established businesses and they had a limited influence on the credit decision. The RFI network had successes and failures, especially with economies of scale. The wholesale model had also distorted market perceptions of Khula. There were large distances from the end-users and the amount of funds available for disbursements were limited.

Some of their strategic plans were to grow the value of approvals and disbursements to SME financing partners by introducing new products and channels and growing the level of business within existing sustainable partnerships. They were also going to ensure that the funds provided were distributed to as wide a group of entrepreneurs as possible by choosing partners with the infrastructure to reach SMEs located in various parts of the country.

They planned to grow and diversify the property portfolio to increase the yield support to SME tenants to acquire some of the properties to build their capital base. They also wanted to ensure that the portfolio of investments grew steadily and was sustainable through selecting the right commercially-oriented development-focused partners and ensuring that the appropriate lending/investment criteria and risk management practices were in place and adhered to by the partners. They were putting in place firm targets for investment by the partners that were aligned to Khula's corporate objectives of providing effective pre and post-financing business support services to SMEs.

Their strategic objectives were to grow Khula's outreach and impact and build an effective institution that achieved its SME development mandate in a financially sustainable manner. They wanted to invest in the development of their staff to create and retain high performance teams. In was also important to increase the awareness of Khula and its products within its target market, and achieve high client satisfaction levels.

The khula direct business model had the objective to address the financing gap in the R10 000 - R250 000 range. The proposed business model would be driven by synergistic partnerships where Khula would partner with institutions that had an existing infrastructure, and they would use their facilities. The restructure of Khula's existing regional offices would provide additional functions. Khula was also going to acquire equity in targeted RFls and enhance and realign the mentorship programme.

Other key objectives were to improve operational efficiency and effectiveness, maintaining financial sustainability and improving process efficiencies while growing. They had to improve risk management and their Human Capital Strategy.

Discussion
Mr S Rasmeni (ANC) said that it seemed as though government had ignored micro-businesses, which was sad, as South Africa was a developmental state. What criteria did people have to meet to get loans, and what did they do to support and advise micro-businesses?

Mr Sithole replied that the issue of micro-businesses all had to do with emphasis. The Apex Fund was the agency dedicated to micro-businesses, but the door was not closed to them at Khula (as long as the loan was R10 000 and over). Khula was a wholesale financer, so for businesses to get the service they required, Khula had to get the best partners who understood their role and function. Khula was trying to get to a position where they had more control over the RFIs than the large banks. This would therefore make it easier to control the process of rejecting and approving loans. Khula also had an obligation to inform applicants why their applications had been rejected.

Mr D Oliphant (ANC) said that the Committee was worried that there were a large number of agencies but this was not proportionate to the level of help that small businesses were receiving. Many were struggling.

Mr Sithole said that was really limiting them was the fact that they were wholesalers, and so could not have offices everywhere in the country.

Mr J Maake (ANC) asked for examples of RFIs. How did they operate and what was going to be the effect of Khula Direct on the RFIs as they were going to be operating in the same market?

Mr Sithole replied that RFIs were non-banking financial institutions such as Itala. Khula used such entities as they had a ‘footprint’ in specific areas. For example, Itala had a presence in Kwa-Zulu Natal. How the process worked was that the RFIs would make applications for loans and Khula would then make provision for this and charge interest (market related lending). The RFIs would receive the money in chunks after meeting certain requirements and they would have the freedom to make the investment decisions. There were risks so it was important to find the right partners and Khula monitored the process on a monthly basis and made evaluations when the RFIs came back for more money.

Khula also used a mixed delivery system. They had to penetrate smaller areas and venture out of Johannesburg, Cape Town and Durban to get fresh markets. They had built up capacity in these smaller areas and were moving in that direction. They were not going to compete with the RFIs, but were actually going to be working together.

Mr S Njikelana (ANC) asked what the cost of delivery was to Khula.

Mr Sithole said that one reason why the private sector was not involved in small business funding was the high cost of delivery. Therefore, it was important to be as efficient as possible at the least cost. That is why Khula were not going to open offices everywhere and were not going to create a huge bureaucratic organisation. Instead, they preferred to make partnerships to limit their costs.

Small Enterprise Development Agency (SEDA) Presentation
Ms Wawa Damane, CEO, said that small enterprises comprised 95% of all enterprises and there were currently between 2.5 million to 3 million of them in existence. They contributed 45% to the Gross Domestic Project and absorbed 60% of formally employed labour. There was a year on year increase of 45% of close corporation registrations, a 32% growth in company registration, and a massive increase in the registration of cooperatives. The participation of small businesses in export trade was now 33% (and rising steadily). However, only 16%of entrepreneurs belonged to business associations.

Between 2007 and 2009 SEDA would move away from expanding the network to effective service delivery through the existing network due to financial constraints. The delivery model was being reviewed as existing centres were not fully equipped and the existing delivery staff was not fully capacitated.

SEDA would also move from being a centrally controlled organisation to a decentralised, which was flexible and customer-oriented. They were also going to move from having reliance on a mono-funded approach to having a sustainable multi-sourcing of funds. This was necessary because the current funding from the Department of Trade and Industry (DTI) was not enough for the mandate and there were uncertainties related to future level of the DTI funding. Thankfully, other government departments were willing to participate and clients were willing to pay for the services.

At present there were 103 Enterprise Centres and 12 960 clients had been assisted through the SEDA website. 285 716 clients in total visited the website, 219 radio programmes had been broadcast, 20 print media programmes were implemented and four television programmes had been flighted.

In terms of manufacturing support, a project to support small manufacturers to supply big retailers such as Massmart, that would result in the income generation of R70 million and a creation of 188 new jobs in the initial stage. The Shintsa furniture-making programme targeted at young people in partnership with five FET colleges (40 learners per college) was also under way. Support would be given in SEDA branches where FET colleges were found in Port Elizabeth, Motheo in the Northern Cape and Umgungundlovu in Pietermaritzburg.

In terms of the financial management, SEDA had received an unqualified audit report in its first year of operation. The internal control environment had been strengthened through having additional capacity in the finance department. They had the capacity to spend all of their allocated funds and in fact a moratorium was placed on new funding commitments because of inadequate funds. Some human resource issues were that all staff from merged institutions had successfully been placed in SEDA and there were only three outstanding CMMA cases from the merge.

Some of the targets for the 2007/08 year were that 300 000 clients would be assisted; 4000 new businesses would be started and would be operational; 6000 new jobs would be facilitated and there would be a 10% growth turnover in the assisted SMEs.

Some of the lessons learned so far were that government funding was located in different pockets with different decision-making processes. The challenges were compounded by legislation that impeded the transfer of funds from lower tiers of government to higher ones. Role clarification was critical in this area and there were slow approval processes even in areas where buy-in existed. There was also a negative perception regarding the delivery track record of national entities.

South Africa also had expansive geographic space and scale that had to be covered. This required large investments, but sometimes there were unrealistic expectations. There was a need to balance the political expectations with what entrepreneurs needed. Other issues were the different levels of capacity in their partners. What mattered most, was that the entrepreneurs wanted solutions to their problems. They wanted quick ‘turn-around times’ simple language and simple processes.

Discussion
Mr Rasmeni asked what costs they wanted to recover when they intervened and what kind of intervention was this? Which organisations did they use for training and mentoring, and how did they measure their capacity to train?

Ms Damane replied that they paid for the actual work they did such as helping the business get ISO accreditation for instance, which could be a complex process. SEDA only got 10% of their costs back. SEDA also made sure that they used only accredited trainers. The business trainers were also trained and the EICs were trained to give the proper information on SEDA functions and its products.

Mr Maake asked in what form the funding provisions came. Was it in legislation and did they have to give a certain amount?

Ms Damane replied that the funding was governed by the Public Finance Management Act (PFMA), the Municipal Finance Management Act (MFMA) and their enabling Act, the National Small Business Amendment Act. The amount of funding given was determined by pragmatism, depending on what the business needed. 

Meeting adjourned.