Integrated Small Enterprise Development Strategy

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
30 May 2007
INTEGRATED SMALL ENTERPRISE DEVELOPMENT STRATEGY: DEPARTMENT BRIEFING
 

Chairperson: Mr B Martins (ANC)

Documents handed out:

Integrated Small Enterprise Development Strategy Powerpoint presentation

 

SUMMARY
The Department of Trade and Industry briefed the Committee on the Integrated Small Enterprise Development Strategy and gave an update on its performance. The new integrated strategy was based on three main principles. Government would roll out a network of services to provide financial and non-financial support, would create access to markets and take steps to simplify the regulatory environment. The Department outlined the background to the Small Enterprise Development Agency (SEDA), Khula Finance, South African Micro-Finance Apex Fund and the National Empowerment Fund, both of which assisted in funding. It was pointed out that Khula was not able to provide retail services or make its own loans as yet, although this was under discussion with National Treasury. The support given to cooperatives was noted, and it was indicated that at present insufficient use was made of this model. To address the market demand it was agreed that ten product categories would be set aside exclusively for small businesses. SEDA was assisting small businesses in the start up phases, and provided access to technology and capital, and mentorship programmes. It was important to try to achieve integration and a broad spread of offices. The performance of the institutions was set out. There was a need to expand access in the smaller provinces, and to reconsider the mandate of Khula, and to address insufficient funding. Some other institutions were also assisting with small businesses.

Members asked questions on how the services were integrated, the level of cross-pollination between the institutions, the need for faster and more targeted work on cooperatives, the need to create better incentives and bulk-buying opportunities for small businesses, and the progress on the Khula structure. Several members raised concerns that the new township developments were forcing out existing small businesses, questioned the technical support being provided, commented that SEDA was not assisting enough as some of the business plans it drew were being rejected by other institutions, and questioned the coordination of agencies and structures. Further questions related to the ten dedicated product lines, the training being offered, the large proportion of financing to the retail and wholesale sector, what had been done about the inadequate funding, and the branding and image of the Department. A Member urged strongly that this Committee should question why the Minister of Finance should be the ultimate decision maker on the budget, as he believed this was a collective Cabinet responsibility, and also urged that the Committee must take a firm stance on the blatant disregard of this Committee’s recommendations that adequate funding be given to cooperatives. Further proposals by another Member relating to studies to be undertaken, joint initiatives with other departments, a review of the role of local government, and a review of the activities of the economic cluster would be considered by the Committee at a later stage. Finally the Committee adopted the annual report, strategic plan and budget of the Department that had been presented at a previous meeting.

MINUTES
Mr Lionel October, Deputy Director General: Department of Trade and Industry (dti), indicated that, at the prompting of this Committee, dti had come up with a new approach for the Small Business Strategy. Government had previously taken a first economy approach to trying to deal with small businesses. When access to finance was identified as a key problem, Khula was set to act as intermediary, with the four main commercial banks lending money to small enterprises and the State mitigating the risk by standing as guarantor.

The new approach relied on three main principles. Government would roll out a network of services to provide financial and non-financial support. It recognised that training and building capacity alone were not sufficient and that access to markets and demand must be created. Small businesses currently faced serious regulatory obstacles in regard to tax and labour laws, so the regulatory environment must be simplified. The strategy was then divided into key programmes.

The Small Enterprise Development Agency (SEDA) was created from a merger of two institutions. SEDA had successfully established 47 offices and 102 enterprise information centres across eight provinces and provided small businesses with the facility of a one-stop shop for advice and opportunities. Its products included tender advice, mentorship, and business development support.

When it became clear that not enough financial support was being given to micro-enterprises, the South African Micro Finance Apex Fund (SAMAF) was set up to provide loans of below R10 000. It had a presence in all provinces.

Khula still existed, but there were some challenges as it was not a lending or retail institution, but lent through intermediaries. Dti had proposed that it should follow the route of other countries, and set up Khula as a small business agency to create its own network and roll out its own loans. Although this had not yet been approved by Government, Khula had developed a business plan and could do so if approved.

Dti was giving further support was given to cooperatives, had changed the legislation, formulated a strategy and set up support programmes. Incentives were still not targeting enough small and black businesses. The Small and Medium Enterprise Development Programme, relating to tourism, was mainly focused on the larger areas and larger enterprises.

In order to create demand for small business products it was agreed that dti would set aside ten product categories for small business exclusively. The research had been completed and a memorandum to Cabinet memo had been prepared for submission in mid-June. It was hoped that there would be full public sector buy-in. The private sector was also being encouraged to buy these products from small businesses through two sections of the BEE Codes. One part provided that 70% must go to black business, and another provided for proportions to small businesses. Several companies had taken up the challenge to assist small businesses, and Woolworths, which was committed to achieving Level 4 status, had directed a portion of its buying to small and black businesses.

The regulatory environment had been improved through a review of all laws, and the departments had been advised what aspects were restricting small businesses. The tax regime had already been simplified.

Dti also had an approach to assist small businesses in start up phases, and SEDA therefore provided access to technology and capital. Dti had set up incubators at 18 centres across the country, and the technology assistance programme could give advice on machinery and assist in procurement.

Mr October noted that integrated service delivery was a key element. There were 102 information centres, 47 SEDA offices, 13 Khula mentorship offices, 8 SAMAF offices, other intermediaries and 38 partnership organisations and incubators.

In regard to the performance of SEDA, Mr October noted that last year on average 10 000 small enterprises per province had sought assistance. SEDA had assisted an average of 4 000 companies per province to register. It had provided specialist systems development and manufacturing support to a range of companies. The technical fund had provided assistance with over R2 million worth of funding. Although SEDA rolled out the bulk of services itself it also worked through other institutions and private sector support. Although SEDA did not provide financial support it could refer people to the appropriate financial institution. The products that SEDA offered were tabled.

Mr October said that Khula still was limited by its mandate, but was expanding its reach to small business, achieving a dramatic increase in the amount of money targeted to small businesses, and improving access through partnerships. Most assistance was being given in the larger provinces of Kwazulu Natal, Gauteng and Western Cape but it aimed to increase its spread. Khula had partnerships for the roll out of products. It had a joint fund with Department of Agriculture (DOA) for emerging farmers, and wished to expand also to the Expanded Public Works Programme (EPWP). Previously Khula had not set performance targets for banks, but in its new contracts clear targets were set both as to amounts to be lent and the areas to be covered. Through its property portfolio it would rent out industrial areas to small businesses.

SAMAF worked in areas of micro credit through partner organisations and group savings schemes. It was also reviving and building capacity of the old village banks, in an effort to create a network.

Mr October stressed that a further range of government institutions also provided support to small businesses, and had been asked to focus on the smaller provinces. They were asked to focus outside Gauteng and on small businesses. The Industrial Development Corporation (IDC) had created a special fund which was dedicated to providing loans at 2% below prime, and over R1 billion had been launched through this to the small business. A capital facility through United Nations (UN) provided around R450 million over the next three years, and aimed to provide 86 companies with funding and create 7 200 new jobs.

The National Empowerment Fund (NEF) had been asked to generate products suitable for small business and was a key tool in black economic empowerment.

Mr Jeffrey Ndumo, Chief Director, Cooperatives, dti, noted that cooperatives were not yet appreciated fully in the public or private sectors. Dti was undertaking training and workshops to promote this business model. Training had been done in nine provinces, and was directed to local economic development and community workers, and multi purpose community centre employees. of business. There had been increased growth in registration of cooperatives. A critical challenge was lack of finance and a cooperative incentive scheme under which 16 cooperatives benefited. The amount spent was R4 million. dti anticipated being able to assist a further 25 cooperatives and anticipated that this could be increased. R50 million had been provided as a budget for dispensing to cooperatives. Up till now donor funding had been used as there was no direct budget.

Mr October said that the key challenge was still the funding of the programmes. SEDA’s budget was R253 million, from which run provincial and branch offices must be run. There was no uniformity and the provinces were not compelled to support or finance SEDA offices. A further challenge was that the State on its own could not solve the problem. There were 2 million small enterprises, growing at 7% per annum and there was a need to leverage the private sector to assist. Khula faced policy challenges because it could not lend directly to small business, and this was an area still under discussion. Capitalisation was needed for all the institutions. IDC had a balance sheet of R30 billion, and 600 professional staff, and had capacity to roll out large amounts. NEF and Khula were simply unable to establish such systems, capacity and infrastructure; Khula had a budget of only R70 million. SAMAF similarly had a budget of R83 million and could clearly not solve the problem of one million micro-enterprises. The perception that small enterprises would not repay loans was incorrect as the payment record was good and it was possible to run these enterprises in a sustainable way.

Discussion
Mr S Rasmeni (ANC) asked why the expression "integrated small enterprise development strategy" had been used, since it seemed that no other departments had any buy-in in terms of practical work into the sector. He asked for clarity on coordination, and said it would be useful to hear of other departmental programmes.

Ms Mandisa Manjezi, Chief Director: Enterprise Industry Development, dti, said that this term was reflective of a efforts to set up a platform of agencies that focused on financial, non financial and technical support. It also spoke to integrated operational systems, integrated information networks, integrated information about the enterprises using the institutions, and level of coordination of programmes. The three tiers of government were also coming up with strategies to deal with local needs. In addition to this, the Micro Agricultural Finance Schemes (MAFISA) and Khula had a joint agreement aimed at upscaling collateral security for release of land to small scale farmers. A further agreement between Mafisa and SAMAF used a common network for outreach, although admittedly this had sectoral limitations. Plans were being made around local business support centres, and there were attempts to increase knowledge and capacity as well as cross-pollination of know-how. The relationships between NEF, SEDA, and IDC were important.

Mr Rasmeni did not believe that the work on cooperatives was fast enough, and noted that only 16 had been supported although there were many in existence. Even North West's Department of Economic Affairs, which convened summits for cooperatives every year, did not know of all the cooperatives in the province. It was unsure whether cooperatives were simply lumped in with black economic empowerment initiatives. Apparently there was substantial donor funding available.

Ms D Ramodibe (ANC) agreed that not enough was being done. She noted that many women were working in cooperatives and asked whether anything was being done to target them, and what types of working relationships existed with present cooperatives. She asked how many women had been trained by dti and where they were situated.

Mr Ndumo replied that although only 16 cooperatives had been helped under the incentive schemes, there were a number of other supporting strategies by IDC, Khula, SEDA and SAMAF. Information had not been collated yet, so a detailed picture was not available. The Intergovernmental Coordinating Committee, consisting of all departments, including National Treasury, was engaging on joint programmes in supporting cooperatives. Dti was getting information from provincial agencies, departments, municipalities and districts about different types of support. Although cooperatives differed in form, they should be able to enjoy the same support given to other business, from incentives through finance to non financial support. The information would also be integrated into a strategy on cooperatives. About 30 000 cooperatives were registered and dti sought to increase this number.

Mr Ndumo added that R20 million was now given to financing cooperatives. There had been some challenges in tightening up delivery mechanisms, particularly the special project fund. It was working with a sub-agency of SEDA to roll out the special cooperative project fund. Bulk purchases would drive down purchase costs, and could influence commodity pricing and distribution of the marketing. Unfortunately there was presently no culture in South Africa was that small businesses would use cooperatives to drive their development so that they could buy in bulk as conglomerates. Dti was engaging with this process, and trying to persuade small businesses to take advantage of the opportunities and promote their marketing. It was also looking specifically into who were the members of cooperatives and where they were distributed.

Mr J Maake (ANC) and Ms F Mahomed (ANC) asked why dti did not already have a register of cooperatives. Mr Maake asked how the integrated strategy was specifically addressing the cooperatives and whether there would be extra staff and finance required.

Mr October noted that the information had been manually recorded and as it was being computerised further statistical information was being gained.

Mr Rasmeni noted that the first line of information was surely the Companies and Intellectual Property Registration Office (CIPRO) and that dti should approach them to assist in collating information.

Ms Ntuli noted that no incentives were given for SMMEs that were generally struggling. None of the presentations had addressed the issue of availability of raw material, bulk buying, resources, special discounts and quality of materials. She asked if dti was enabling small businesses to buy directly from factories.

Ms Manjezi responded said that this was the basis of the supplier programme through the ten products. Dti was not merely setting aside procurement, but would also be able to find out what types of resources were used, to allow research on suppliers, collection of statistics, and quality.

Mr S Njikelana (ANC) noted that SEDA would be setting up a cooperative development agency. He cautioned against setting up too many small structures and urged that all the different agencies must work together.

Mr M Ntuli (ANC) asked if Khula were already lending directly. If not, she enquired what was the time frame to complete.

Mr October replied that this issue had been ongoing over several years. National Treasury was still not persuaded that Khula should move to retail or that Government should be in the business of small business lending. Dti believed it would not get the private sector to lend to the small enterprises needing loans around R250 000, and that many banks were refusing to lend under R1 million and refusing to lend for start up costs not backed by any track record. In India the large banks now did offer micro-credit, but only after dedicated NGOs and the State had begun the process several years ago, and something similar would need to happen in South Africa.
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Ms Ntuli asked about rural development and the relationship between Khula and the Land Bank. In many cases the defaulters would have their land attached and she believed that this was not correct.

Ms Ntuli asked who was funding the service providers being used for training.

Ms Manjezi noted that some of the business training and development was needing to be outsourced as many technical specialists would not work full-time for SEDA. There must be a mix between full time mentorship staff and part-time professionals with experience in another industry.

Ms Ramodibe noted that the real issues were now being addressed in the second economy. She noted that the Committee had spoken the previous day of "township economy". Many enterprises were being forced into closure because of new shopping mall development in townships and she asked if dti had done anything to assist them, or if there was any cooperation with local government in addressing the issues.

Prof Turok noted that the question of townships and malls had been raised with Mr Brian Molefe of the Public Investment Corporation. The intention was that the shopping malls in townships must include places for the smaller entrepreneurs, and the Committee should ensure that this was happening. He also noted with concern that in his constituency a poor township contained many spaza shops, but the owners would not get together in cooperatives. SEDA needed to do more work to persuade people that they could be helped if they did so.

Ms Ntuli agreed that long-established small businesses needed to be helped, perhaps even by assisting them to purchase shares in the new shopping malls.

Ms F Mahomed (ANC) agreed that the malls did not have places for SMMEs, rentals were exorbitant, the stands were too large, or were not visible enough.

Mr October agreed that some traditional small businesses were being driven out. Dti generally supported the movement of development into townships but there were challenges. Dti had in the past financed a cooperative to be able to buy into a retail mall but there was not yet a national programme and this would be taken up with SEDA and at MinMEC.

Mr Ndumo added that some businesses were using cooperatives to achieve economy of scale, but that more work needed to be done to ensure that this was a focus area. Many township enterprises could benefit hugely and be revived if they would come together and be able to use bulk purchasing power.

Ms Ramodibe asked for clarity on the technical support through SEDA.

Ms Manjezi noted that an example would be an incubator buying raw materials in bulk on behalf of small business – such as wood – and then providing machinery and workshops at a central "hive", which was a world wide concept. SEDA could cover enterprises with overhead costs in the first year, by providing rent-free premises, on the understanding that after the incubation period, when the enterprise was up and running, the premises would be vacated, leaving them free for the next incubating enterprise. Technical assistance was used to help identify how a business could improve its product or processes with new machinery, and then to source where it could be purchased.

Mr S Rasmeni (ANC) noted when the Committee visited SEDA it was impressed with the work being done but challenges remained in the use of service providers, some of whom might lack capacity. He asked how dti was addressing these issues, and how many people were being assisted. He further commented that NEF had stated that many of the business plans submitted were clearly not up to standard, and therefore NEF had instituted a unit to assist in drawing business plans and verifying the information. He believed that NEF should work with SEDA to ensure that all business plans forwarded for any level of funding were up to standard. He wondered if the business plans were perhaps being rejected because they were assessed on "first economy" standards.

Mr D Oliphant (ANC) was unhappy with the figures presented and asked if there had been proper coordination of agencies and structures dealing with small businesses issues. He asked how much money was dedicated to staff and administration. He, like Mr Rasmeni, was concerned that SEDA would assist people in drafting a business plan, only to have it rejected at another structure of dti. People had dreams of starting a business and were being frustrated, and feeling that they were not getting anything from the structures that were supposed to give support. This was a serious problem in the rural areas.

Mr October agreed that there were quality issues, and many of these were related to insufficient funding. IDC had highly skilled staff who were earning salaries comparable to the private sector. Khula and SEDA could not attract the best staff because of lack of funding. Dti agreed that more investment was needed into these institutions but was experiencing difficulty because dti would have to make out a business case before approaching National Treasury. This was the opposite of what should happen; for instance EU had put aside a defined sum of R300 million for small rural SMMEs even before getting the applications. He agreed that the quality of business plans must improve. IDC had already formed a business support unit to assist in improving the drafting of applications and NEF also were creating that facility. Dti was further trying to bring more high quality professionals into SEDA rather than merely using consultants. Rejections could occur if the institutions were not convinced that there was a good risk. The main criterion was viability, but in the past it had sometimes been difficult to get a proper assessment because of the poor information on the applications. NEF had a higher rejection rate because the loan book was smaller. IDC had more funding, and dti would be able to provide reasons why applications were rejected. He pointed out that in many cases the collateral required had been dropped to very low levels, sometimes even to zero.

Mr S Njikelana (ANC) said that there was a further dilemma that even if people were given advice where to go they lacked a sense of empowerment and sufficient confidence to actually make the application. Although technical assistance was being given, people were in reality still not accessing the institutions and he believed that the access needed to be maximised further to give meaning to dti’s efforts.

Mr Njikelana believed that all marginalised groups, not simply women, should be strengthened, including the disabled, victims of domestic abuse, and migrants from neighbouring countries who had not managed to gain permanent residence despite having been in South Africa for years.

Mr Njikelana asked how the ten products to be supported had been decided upon.

Mr October said that dti had looked to products where government was a large procurer, that could also easily be produced by small enterprises. Products such as aircraft were obviously out of the question, but clothing and textiles, particularly for uniforms, were a target market. Government was also the biggest procurer of IT equipment in the country.

Mr Njikelana noted that the training needed to be monitored, and asked if management was supporting the training. He said that the reaction by the public was not always good.

Mr Njikelana noted that 62% of Khula financing related to retail and wholesale. He asked if this was a general trend, and wondered if there should not be a better balance, particularly a larger percentage going to agriculture, which was only at 8%.

Mr October agreed that the bulk of the portfolio was going to the services sector, but Khula’s loan book reflected what was happening in the economy, as most small enterprises were in the services sector at present. Those businesses were cyclical, determined by the consumption boom, and therefore Khula and dti encouraged creation of sustainable long term businesses in supply chains, in manufacture or agriculture. There was currently insufficient linking, unlike Japan, between small and big businesses. The Khula portfolio reflected the current status but did aim to broaden into a better spread.

Mr Njikelana asked if National Treasury had already been approached about the inadequate funds, and what their response had been. Dti had been under pressure from the Committee for some time and he noted with pleasure that Khula had managed to make a difference and a turn around, but it was clear that adequate funding must be made available. He noted that dti had had a surplus in the last year. He asked what the stumbling block was in not getting adequate funding for institutions that had displayed progress.

Ms Mahomed noted her concern at the decline in funding for Khula in particular over the years.

Prof B Turok (ANC)did not understand why budget surpluses should be used to pay off foreign or local debt rather than addressing the second economy. The Cabinet should be making an allocation, via National Treasury, to dti, who should be responsible for using the funds. He was shocked that NEF had to submit a strategic plan to Treasury to get the R400 million. Treasury was merely the disburser of the budget, and did not own it. He did not understand why the Minister of Finance should be the final decider as Cabinet held collective responsibility.

Prof Turok believed that the lack of funding for cooperatives was a blatant disregard of this Committee. Dependence on donor funding was ridiculous, as this should be funded by the budget. He urged this Committee to make a very strong statement to this effect.

Mr Rasmeni agreed that the unfunded mandate for cooperatives was serious, as cooperatives were the prime focus for Broad Based Black Economic Empowerment.

Professor B Turok requested a note in writing about the changes in policy, and said that it seemed that some of the weaknesses of the past may have resulted from incorrect policies. He noted, however, that the process seemed to be very slow, albeit that this might not be entirely the fault of dti, and that the Portfolio Committee was duty bound to record its concern on the pace.

Prof Turok believed that training must be done in situ at their workplace and 'on the job". Entrepreneurs could not be trained in the abstract, but he did not believe the current training courses were helpful.

Ms F Mahomed (ANC) asked what dti was doing to build its image and brand. She noted that dti had tried to respond positively, but it should perhaps consider outsourcing its marketing to marketing companies as it was very difficult to "sell" dti to constituents. Many people had a lukewarm idea of SEDA and Khula and so forth and these would need to be re-built and customer support re-established. She suggested an aggressive media campaign including internet, and an evaluation form. Dti’s policies were good, but the advocacy remained a challenge

Mr October agreed that this would be important for dti as a whole. However, he pointed out that the problem the enterprise and industry division faced was not lack of demand for the products, as all incentive schemes were oversubscribed, but rather insufficient resources to meet the supply. He agreed that dti would need to attend to this as an institution, but stressed also that it needed to improve the budget allocations.

Mr Rasmeni proposed that dti should broaden its net and perhaps other funding institutions should be approached, such as the Development Bank of South Africa (DBSA) which was funding at the level of local government infrastructure.

Mr I Harding (ID) noted that many small businesses needed contracts to stay alive but were having difficulty in accessing them from State Owned Agencies and similar institutions. He asked if this problem would be addressed through the integrated strategy. He also wondered if this Committee should not raise the matter with other portfolio committees who dealt with SOEs, such as those on communications and public enterprises. He cited some examples of small contractors who had found themselves out of business after having had a contract with Telkom not renewed.

Mr October agreed that there had been a problem of demand. Entrepreneurs needed to sell into a particular market and that was why ten product categories were being set aside for small and black businesses. SEDA would also have to further its work on tenders and networking. So far it had only achieved success with the Department of Public Works (DPW).

Prof E Chang (IFP) noted that South Africa needed to take advantage of opportunities as they occurred and pointed out that in Taiwan very successful enterprises had been assisted by State owned enterprises procuring and providing raw materials. She was concerned that the costs of doing business were still too high and that even Khula was charging too much through the intermediaries. She believed that caps needed to be put on the interest being charged, under specific contracts with government. She agreed with Professor Turok that the speed of change was too slow and that small businesses would lose out unless this could be addressed.

Mr October responded that both access and cost were being dealt with. SAMAF had capped the interest rates, and Khula was also doing so in its new contracts. IDC had made products available at below commercial rates. However, it must be remembered that the institutions must be allowed to be financially sustainable in the long run, so that their charges must allow them to cover the risk and the administration costs and make profits to grow. All agencies were working on pricing issues.

Mr Njikelana proposed that dti should develop an integrated and long term strategy for small business development. He proposed that the Committee Members should conduct oversight visits in their own constituencies or selected areas, to SAMAF and SEDA, to get a sense of how they were working on the ground. He further proposed that dti should undertake an international small business support comparative study. He believed that dti should engage in a joint workshop with the Departments of Finance, Agriculture and Foreign Affairs to address promotion of small business involvement in global trade and to address improvement of global trade competitiveness, and to assess the adequacy of resource mobilisation. He proposed that the - role and contribution of other levels of government be reviewed, as it was unclear what coordination was being achieved and what they should be doing. Finally he proposed that the activities of the economic cluster be examined and evaluated in detail, as he felt that a cluster approach was needed.

The Chairperson noted that some of these proposals were new and that the Committee would look at them in further detail.

Adoption of Annual Report and Strategic Plan and Budget of DTI
The Chairperson indicated that the Committee had interacted with dti on its budget and strategic plan previously, but that the report now needed to be adopted.

It was resolved to approve the report..

The meeting was adjourned.