smallBRRR

6. THE BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE PORTFOLIO COMMITTEE ON SMALL BUSINESS DEVELOPMENT

The Portfolio Committee on Small Business Development (“the Committee”), having considered the performance of the Department of Small Business Development (“the Department”), alternatively, (“DSBD”) and its entities for the financial year 2016/17 (on 04 -05 October 2017), dated 18 October 2017 reports as follows:

1. INTRODUCTION

1.1       Purpose of the Budget Review and Recommendation Report

The Constitution of the Republic of South Africa, 1996 (“the Constitution”), specifically Section 77 (3), stipulates that an Act of Parliament must provide for a procedure to amend money bills before Parliament. It is this constitutional provision that gave birth to the Money Bills Amendment Procedure and Related Matters Act  No. 9 of 2009 (“the Act”). The Act sets out the practice that allows Parliament to make recommendations to the Minister of Finance to amend the budget of a national department. Section five (5) of the Act, posits that the National Assembly, through its Committees, must annually evaluate the performance of each national department with reference to the following:-

• The medium term estimates of expenditure of each national department, its strategic priorities and measurable objectives, as tabled in the National Assembly with the national budget;
• Prevailing strategic plans;
• The expenditure report relating to such Department published by the National Treasury in terms of Section 32 reports of the Public Finance Management Act, No 1 of 1999 (“PFMA”), as amended in 2009;
• The financial statements and annual reports of such Departments;
• The report of the Committee on Public Accounts relating to the Department; and
• Any other information requested by or presented to a House or Parliament.

Accordingly, Committees must submit the Budgetary Review and Recommendation Report (“BRRR”) annually to the National Assembly. The BRRR assesses the effectiveness and efficiency of a Department’s use and forward allocation of available resources and may include recommendation on the use of resources in the medium term. Committees are to submit the BRRR after the adoption of the budget and before the adoption of the reports on the Medium Term Budget Policy Statement (“MTBPS”) by the respective Houses in November of each year. The Act therefore makes it obligatory for Parliament to consider the Department’s budgetary needs and shortfalls vis-à-vis the Department’s operational efficiency and performance. In the case of DSBD, this is done taking into consideration the fact that the Department has oversight responsibilities over the two entities, that is, Small Enterprise Finance Agency (“sefa”) and Small Enterprise Development Agency (“Seda”). The Committee is accordingly required to make recommendations on the forward use of resources to address the implementation of policy priorities and services as these may require additional, reduction or re-configuration of resources for the Department. Those recommendations have to be submitted to the Minister of Finance and the Minister of the Department of Small Business Development for execution. This gives effect to Parliament’s constitutional powers to amend the budget in line with the fiscal framework.

1.2       Methodology used in the formulation of this BRRR

The Committee interrogated all presented documents as outlined in clause 5 of the Money Bills Amendment Procedure and Related Matters Act. It also assessed the performance of the Department for the 2016/17 financial year as outlined in the Annual Performance Plan (“APP”) of the Department. It nonetheless, did not evaluate performance of the first quarter of 2017/18 financial year, as this has not been presented to the Committee. It furthermore, interacted with different stakeholders and various organs of state that play a role in appraising the financial and non-financial performance of the Department, including the briefing by the Auditor-General of South Africa (“AGSA”), alternatively, (“AG”), regarding the audit outcomes of the Department and its entities.

In carrying out such exercise, the Committee utilised a number of source documents, including the 2015-2019 Strategic Plan of the Department, APP’s, Annual Reports, 2016/17 Financial Statements, Estimates of the National Expenditure (“ENE”), numerous briefings by the Department and its entities during the course of the year, as well as the State of the Nation Address (“SONA”). The Committee also used the Constitution as its basis. The office of the Auditor General, Department of Planning, Monitoring and Evaluation (“DPME”) and Department of Public Service Administration (“DPSA”) gave inputs during the BRRR process. In addition, this report has taken into consideration the best lessons learnt from the Committee interactions with institutions that provide support to survivalist, small, micro, medium and co-operative enterprises since it was constituted in July 2014, lessons learnt from various oversight visits, conferences and engagements with numerous stakeholders. Information gathered from the above-mentioned activities is then utilised to argue for the reduction or addition and/or reconfiguration of resources and Departmental programmes.

1.3       Mandate of the Committee

In terms of the Constitution of the Republic of South Africa, Portfolio Committees have authority to legislate, conduct oversight over the Executive and facilitate public participation. Parliament’s mission and vision statements, the rules of Parliament and its Constitutional obligations govern the Portfolio Committee on Small Business Development mandate. The mandate of the Portfolio Committee is to contribute to the realisation of a developmental state and to ensure effective service delivery through discharging its responsibility as a Portfolio Committee of Parliament. Its vision includes enhancing and developing the capacity of Committee Members in the exercise of effective oversight over the Executive Authority (“EA”).

One of the Committee’s core objectives is to oversee, scrutinise and influence the action of the Executive and its agencies. This implies holding the Executive and related entities accountable through oversight of its programmes, scrutinising its budget and expenditure (‘annually’), and recommending through Parliamentary processes, actions it should take in order to attain its strategic goals and contribute to service delivery. As an integral part of Committee oversight role, Section 5 of the Money Bills Amendment Procedure and Related Matters Act directs the National Assembly, through its committees, to periodically evaluate the performance of each national department. This process leads to a committee having to submit a report of this assessment known as a Budgetary Review and Recommendation Report, which is then tabled to the National Assembly.

1.4       Mandate of the Department

The Department of Small Business Development plays a major role in effecting Chapter three (3) and six (6) of the National Development Plan (“NDP”). Both chapters deal with the economy and employment as well as rural inclusive growth. The NDP builds on the government’s New Growth Path (“NGP”) which aims to create five (5) million jobs by 2020 and bring about a new, more inclusive, labour-intensive and efficient economy. Additionally, the Department has a responsibility to contribute to the two outcome(s) of the Medium Term Strategic Framework (“MTSF”), namely, Outcome 4: Decent employment through inclusive growth, and Outcome 7: Rural development. In the midst of executing its directive the Department further carries an obligation to observe, adhere and implement policy articulations as contained in the successive State of the Nation Addresses i.e. Nine Point Plan (“NPP”), 30 percent Procurement Policy, sector transformation charters, to keep tabs on the policies and acts that fall outside its ambit but that may potentially and adversely affect the small business sector i.e. Preferential Procurement Policy Framework Act (“PPPFA”), Broad-Based Black Economic Empowerment Act (“BBBEE”) and BBEEE Transformation Charters, Industrial Policy Action Plan (“IPAP”), Companies Act as well as its five year Strategic Plan to name the few.

1.4.1    Small Enterprise Development Agency

Small Enterprise Development Agency is an entity of the Department whose mandate include, inter alia, developing, nurturing, supporting and promoting small business ventures throughout the country, whilst ensuring their growth and sustainability in a harmonised fashion with various stakeholders. The Minister of Small Business Development is the executive authority of the agency and as such exercise oversight role over the entity as prescribed by the Public Finance Management Act.

Seda was conceptualised in 2004, through amendment of the National Small Business Act, amendment Act 29 of 2004, which made provision for the incorporation of the Ntsika Enterprise Promotion Agency, the National Manufacturing Advisory Centre and any other designated institutions into a single Small Enterprise Development Agency under the Department of Trade and Industry (the dti). It is a schedule 3A national public entity in terms of the Public Finance Management Act (“PFMA”), Act 1 of 1999, as amended. Seda mandate stems from the National Development Plan, Medium Term Strategic Framework 2014-2019, Strategic Plan and Annual Performance Plan (APP) of the Department, its five-year Strategic Plan and APP that are compatibly aligned to its executive authority.

1.4.2    Small Enterprise Finance Agency

The Small Enterprise Finance Agency was established in April 2012 through the amalgamation of South African Micro-Finance Apex Fund (SAMAF), Khula Enterprise Finance and Industrial Development Corporation’s small business activities. On 1 April 2015, sefa was officially handed over to DSBD. It is a registered entity in terms of the Companies Act of 2008 and incorporated in terms of Section 3(d) of the Industrial Development Corporation (“IDC”) Act, 1940, and thus a wholly owned subsidiary of the IDC. Section 3(d) of the IDC Act seeks “to foster the development of small and medium enterprises and co-operatives”.

The agency has six (6) subsidiaries that report to it, two (2) associate partners, three (3) joint ventures and one joint operation. Its mandate is to be “the leading catalyst for the development of sustainable survivalist, small, micro, medium and co-operative enterprises through the provision of finance. Likewise, its sister entity SEDA, the agency’s directive find expression in the National Development Plan, Medium Term Strategic Framework 2014-2019, Strategic Plan and Annual Performance Plan (APP) of the Department, as well as its five-year Corporate Plan and APP.

1.5       Outline of the Report

This BRRR consists of seven sections. Section one (1) briefly outlined the mandate of the Committee and the Department, the purpose of this report and the methodology followed in preparing the report.

Section two (2) sets out the key policy focus areas for the Department. This includes an overview of the relevant national priorities as outlined in the government policies and plans such as the National Development Plan, New Growth Path, the Medium Term Strategic Framework and the State of Nation Address that the Department has to contribute in achieving them. Thereafter, an overview of the strategic plans of the Department and its entities are highlighted with the view of assessing whether or not they address the broader government priorities and plans originating from the afore-said policies and plans.

Section three (3) revisits the previous recommendations and responses for the past two financial years to ascertain if any of these were at all implemented.

Section four (4) considers the Department’s financial performance against its allocation for the financial year 2016/17. It briefly examines the 2017/18 MTEF programme allocation in terms of the economic classification and per sub-programme.

Section five (5) deals with overview of the service delivery performance including programme performance and key performance indicators.

Section six (6) interrogates the Departmental entities, the financial and non-financial performance; forward-looking budgetary and/or performance requirements are assessed.

Section seven (7) of the report discusses the Committee’s perspective with regard to the strategic plan of the Department concerning its mandates, strategic objectives and core issues previously and currently identified by the Committee. In addition, this section argues that the mandate of the Department ought to be understood within the context of the NDP targets, number of jobs anticipated by 2030, poverty reduction and shifting government expenditure from consumption to production.

Lastly, section eight (8) is a synthesis of recommendations, past and present, based on the deliberations informed by the assessment of the Department in each of the sections discussed above. These recommendations are categorised into two: Funding recommendations and Governance related recommendations.

2.         OVERVIEW OF THE STRATEGIC AND OPERATIONAL ENVIRONMENT

The strategic plans and objectives of the Department and its entities are determined largely by the ecosystem in which they operate. Prior the adoption of the National Development Plan as a guiding blueprint for the country’s socioeconomic development, there was a level of policy uncertainty, fragmentation and disintegration within and outside the public sphere, which did not auger well and at best contradicted the government’s efforts of accelerating growth, reducing unemployment and inequality as well as complete eradication of poverty. The National Development Plan brought much needed stability and confidence in the governance system. In the past, the government had certainly explored a number of micro and macroeconomic policy measures that yielded inconsequential results.

The adoption of the NDP not only placed an onerous obligation on the state to align its machinery in particular its planning processes but also enjoined the civil society, labour and business to fast-track vision 2030. Thus, all strategic plans and annual performance plans of the organs of state must find expression in the plan, NGP, SONA and MTSF, considered a building block to vision 2030. These plans and strategies are annually reviewed during the State of the Nation Address, whereby the Departments and their entities are expected to align their annual performance plans in accordance to the priorities and primacies contained in each State of the Nation Address.

2.1       Relationship with the National Development Plan

The Department of Small Business Development was established in 2014 with an inclusive mandate of developing survivalist, small, micro, medium and co-operative enterprises (“Small Business”) as defined in the National Small Business Act, 1996. It plays a vital role towards the implementation of chapters three (3) and six (6) of the National Development Plan that deal with the economy and employment as well as rural inclusive growth. The NDP is the country’s vision, with a target of creating 9.9 million new jobs from small businesses by 2030. The NDP identifies the important role that small business enterprises play in inclusive economic growth and employment. The plan articulates the benefits of increased coordination and support, incubation, and reduced costs of regulatory compliance for small enterprises to achieving a transformed and inclusive economy.

Therefore, chapter three give DSBD marching orders to put in place mechanisms that seeks to reduce the cost of doing business through microeconomic reforms, to develop proposals for an acceptable minimum standard of living and proposals on how to achieve this over time to remove the most pressing constraints on growth, investment and job creation, including energy generation and distribution, urban planning etc., as well as to position South Africa to attract offshore business services, and build on the advantage provided by its telecommunications, banking and retail firms operating in other countries.

While chapter six emphasises the role of infrastructure in bringing about economic development particularly in rural areas. The plan postulates that rural economies will be activated through improved infrastructure and service delivery. It instructs the state sector to conduct a review of land tenure, to analyse the nature of services and support offered to small and micro farmers, a review of mining industry commitments to social investment, and tourism investments. It further mandates the government to substantially increase investment in irrigation infrastructure, to create tenure security for communal farmers, especially women, investigate different forms of financing and vesting of private property rights to land reform beneficiaries that does not hamper beneficiaries with a high debt burden.

2.2       New Growth Path and National Development Plan

The Department has a responsibility to implement various policy propositions for growth, decent employment and equity as captured in the New Growth Path. The NGP aims to create five (5) million jobs by 2020, and also forge a new and more inclusive, as well as labour intensive and efficient economy. According to the NDP (2011: 117), “the NGP is the government’s key programme to take the country onto a higher growth trajectory”. Of specific interest to the Department are three microeconomic policy propositions advocated in the programme, namely: -

2.2.1    Rural Development Policy

• emphasis on rural development and agricultural value chains;
  1. Enterprise development in particular the promotion of entrepreneurship

• creation of one stop shop and single funding agency;
• strict adherence to a 30-day payment period or fiscal penalties for non-compliance;
• elimination of red-tape and;
• address exorbitant cost of space in shopping Malls;
  1. Developmental Trade Policies

• Lobbying for a trade policy that endeavours to promote exports while addressing unfair competition against domestic producers;

2.3       Medium Term Strategic Framework and National Development Plan

The Department is directed to contribute to service delivery outcome 4 (‘decent employment through inclusive growth’) and service delivery outcome 7 (‘rural development’) of the 2014-2019 Medium Term Strategic Framework. It is tasked to create a favourable legislative and policy environment for survivalist, small, micro, medium and co-operative enterprises, develop and grow small business sector in township and rural areas, and establish public and private partnerships aimed at maximising support for small businesses.

Over the medium term and, in line with the NDP, the Department plans to focus on increasing the number of small enterprises that it supports in all nine provinces, review the strategy for SMME Development and Entrepreneurship, reinforce support for co-operative enterprises, develop and intensify market access opportunities for small enterprises, support incubators for small enterprises, and strengthen Departmental operational capacity. The Department is further tasked with an assignment of moderating redundant regulatory bottlenecks, which it plans to do through its red tape reduction programme for the operations of small enterprises in municipalities.

2.4       State of the Nation Addresses [2014-2017]

2.4.1    SONA 2014

During the 2014 State of the Nation Address (SONA), first State of the Nation Address of the fifth democratic administration, the President announced the creation of the Small Business Ministry as a National Department in accordance with the re-organisation of some national departments. The Ministry was assigned a mandate to lead an integrated approach to the promotion and development of small businesses and cooperatives through a focus on economic and legislative drivers that stimulate entrepreneurship to contribute to radical socioeconomic transformation as advocated in the Mangaung Resolutions of the ANC Conference in 2012. During the announcement, the President further put forward key policy objectives and deliverables for pursuance by this new Department as follows: -

• To increase tourism contribution to the country’s revenue to more than 125 billion rand by 2017;
• Prioritisation of support to small business, as well as township and informal sector businesses in particular using the SMME development programme to boost broad-based black economic empowerment;
• Sharpen the implementation of the amended Broad-based Black Economic Empowerment Act and the Employment Equity Act, in order to transform the ownership, management and control of the economy;
• Promotion of employee and community share ownership schemes and boost the participation of black entrepreneurs in the re-industrialisation of the economy;
• To reposition Development Finance Institutions  (“DFI”) in the next five years to become real engines of socio-economic development and;
• To support Postbank so that it can play a leading role in the expansion of banking services to the poor and the working class.

2.4.2    SONA 2015

During this SONA, the Department was given an additional mandate to strengthen efforts designed to solidify the small business sector. It then took a step to strike a decisive and expressive intervention to the development of small business sector through its involvement towards the attainment of the NPP plan specifically to “unlock the economic potential of survivalists, small, micro, medium and co-operatives, particularly township and rural enterprises” as pronounced by the President during the 2015 State of the Nation Address. Other key policy objectives and deliverables for the year ahead were proposed as follows: -

• Resolving the energy challenge;
• Revitalising agriculture and the agro-processing value chain;
• Advancing beneficiation or adding value to our mineral wealth;
• More effective implementation of a higher impact Industrial Policy Action Plan;
• Encouraging private sector investment;
• Moderating workplace conflict;
• Unlocking the potential of SMMEs, cooperatives, township and rural enterprises and;
• To reform State sector and boosting the role of state owned companies, ICT infrastructure or broadband roll out, water, sanitation and transport infrastructure and;
• Operation Phakisa, which is aimed at growing the oceans economy.

2.4.3    SONA 2016

The 2016 State of the Nation of Address emphasised the state of world economy, in particular the economies of two of our partners in BRICS, Brazil and Russia that were anticipated to contract further, with ramifications on the small business sector. The third strategic partner, China, was also predicted to achieve below 6 percent economic growth owing to the hostile global economic conditions. Additional areas of importance for the Department were identified as follows: -

• Government started the process of creating One Stop Shop/Invest SA initiatives to signal that South Africa was truly open for business. State departments were directed to fast-track the implementation of this service, in partnership with the private sector. It is hoped that through such initiatives, legislative and regulatory obstacles that frequently impedes offshore investment will ultimately be eliminated;
• It was announced that SA Tourism will inject R100 million a year in the economy to promote domestic tourism, and to encourage South Africans to tour their country;
• The President further underscored the need to empower survivalists, small, micro, medium and co-operative enterprises to accelerate their growth, access to high-quality, innovative business support that can dramatically improve the success rate of the new ventures and;
• Big business was urged to partner with new and small businesses particularly those that are owned by women, youth and people with disabilities, as part of broadening the ownership and control of the economy and lastly;
• The establishment of the SMME fund, a partnership between government and private sector, was announced.

2.4.4    SONA 2017

In the 2017 SONA, President Jacob Zuma impressed on a number of fundamental policy proposals to invigorate the small business sector as follows: -

• Government’s commitment to support black smallholder farmers in particular the implementation of a commercialisation programme for 450 black smallholder farmers;
• The State to utilise the strategic levers that are available such as legislation, regulations, licensing, budget and procurement as well as Broad-based Black Economic Empowerment charters to influence the behaviour of the private sector and drive transformation;
• And through such regulations and programmes, government will be able to use the State buying power to empower small enterprises, rural and township enterprises, designated groups and to promote local industrial development;
• To use the State expenditure of R500 billion a year buying goods and services to achieve economic transformation;
• To implement the new regulations making it compulsory for big contractors to subcontract 30 percent of business to black-owned enterprises by the 1st of April 2017;
• To focus on a few key areas packaged as the Nine-Point Plan to reignite growth so that the economy can create the much-needed jobs and;
• To focus on areas such as industrialisation, mining and beneficiation, agriculture and agro-processing and energy in an endeavour to benefit small business sector;

2.5       Strategic Plan(s) of the Department

The Department of Small Business Development was established in May and proclaimed on July 2014. The Broadening Participation, a division within the dti, was shifted to the Department, with financial and human resources. During 2014/15, the Department operated as part of the dti Budget Vote 36 until the end of that financial year. In 2015/16, Budget Vote 31 on Small Business Development became effective, but was still implementing programmes that were transferred or inherited from the dti. Hence, governance and corporate services functions operated under the auspices of, or, through a Cooperation Agreement with the dti.

2.5.1    Strategic Plan: 2014 - 2019

During the 2014 BRRR process, the Department presented its first draft Strategic Plan for 2014-2019. The draft Strategic Plan highlighted strategic objectives of the Department for the period concerned and targets for each year going forward. The Portfolio Committee was content with the quality of the draft Strategic Plan. The strategic objectives proposed in the draft Strategic Plan were aligned to the mandate, vision and mission statement of the Department. In addition, the targets and outcomes set to achieve the policy focus areas were relevant to the Department. However, while the proposed resources to fund the execution of strategic plans were aligned to the set targets, there were still some gaps with regard to understanding the needs of the target market in order to determine the relevant support provision.

Consequently, in May 2015, during the Budget Vote Report process, the Department submitted a final draft Strategic Plan that incorporated concerns raised by the Committee during the previous year, October 2014. As such, the final draft Strategic Plan was adopted by the Committee pending Department of Public Service Administration approvals. The adopted Strategic Plan highlighted the strategic objectives of the Department for the 2014-2019 period and targets for each year going forward. The strategic objectives were informed by the government strategic sector or cluster priorities as derived from the MTSF, focus sector policy areas emanating from policy documents such as NDP and situational analysis of the sector.

Procedurally and as required by National Treasury and DPME, strategic objectives should state clearly what the government institution/department intends doing (or producing) to achieve its strategic outcomes oriented goals, these must be in accordance with the vision, mission and mandate of the Department. The objectives should generally be stated in the form of an output statement, although in exceptional circumstances government institutions might specify them in relation to inputs and activities or outcomes. Each objective should be written as a performance statement that is specific, measurable, achievable, relevant and time-oriented often referred to as SMART, and must set a performance target the institution can achieve by the end of the period (‘five years’) of the Strategic Plan. The Department had originally identified the following five programmes, viz.: -

• Programme 1: Administration - This programme, has remained intact throughout DSBD evolution, consist of support services to the Department such as a Chief Information Office, Human Resources, Legal Services, Corporate Governance and Ethics, Auxiliary Services and a unit to execute the marketing and communications of the department;
• Programme 2: Customised Intervention Programmes - The key focus for Programme two was on improving the quality of financial and non-financial support services to small enterprises;
• Programme 3: Co-operatives - The Department had undertaken to implement a new support model for co-operatives, including implementation of the Co-operatives Act directive to establish, among others, Co-operatives Development Agency (“CDA”), Co-operatives Training Academy (“CTA”) and Co-operatives Tribunal (“CT”), including developing and providing financial and non-financial support services;
• Programme 4: Research, Policy and Intergovernmental – Programme four was dedicated to assessing existing policies enshrined in legislation affecting Small Business, Co-operatives, Youth Enterprise Development, Women Empowerment and National Informal Strategies with a view to enhancing policies in line with the mandate of the Department. The conclusion of transversal agreements with other Government Departments, State Owned Entities and private sector to enhance implementation of Departmental strategies were to be achieved under this programme;
• Programme 5: Enterprise Development and Entrepreneurship – This Programme was introduced to ensure increased access to employment and entrepreneurship for high-impact businesses as well as marginalised groups, focusing on skills development, franchising, technology transfer and incubation, advancing support for the emerging and smaller enterprises.

Following DPSA approving a start-up structure comprising of only three (3) divisions/programmes, the Department was therefore obligated to reconfigure the structure. Hence, the Portfolio Committee would subsequently adopt the strategic plan of the Department with only three (3) programmes as per DPSA directive and these were -

• Programme 1: Administration – As above, this programme has remained intact during the course of DSBD progression, its purpose is to provide strategic leadership to the Department and its entities, ensure successful implementation of the Department’s mandate through sustainable and integrated resource solutions and services that are customer-driven. The programme encompasses support services to the Department which include, the Ministry, Office of the Director-General, Cluster Oversight and Strategic Planning, Corporate Services, Financial Management and Communication and Marketing;
• Programme 2: Co-operatives Support and Development - The key focus of this programme was to create an enabling environment that will facilitate the establishment, growth and development of Co-operatives through the development and review of policy and legislation and provision of enhanced financial and non-financial support services utilising improved institutional arrangements. This programme constituted sub-programmes, namely, Primary Co-operative Development, Incubation Support Programme, Co-operatives Supplier Development Programme, Intergovernmental relations, market development, Research, planning, monitoring and evaluation;
• Programme 3: Enterprise Development and Entrepreneurship - The purpose of Programme 3 was to create an enabling environment and growth of sustainable small businesses so that they contribute to the creation of employment and economic growth. The programme comprised, inter alia, Enterprise Development, Entrepreneurship and Franchising, Incentive, grants and soft loans, regional industrial and special projects, Gender, youth and people with disabilities and National Informal Business Upliftment Strategy Sub-programmes.

2.5.2Strategic Plan: 2015 -2019

Subsequent to Budget Vote 31 becoming effective, the Department began establishing its own policy regime, Audit Committee, Internal Audit function, Risk Committee and risk management function. From this time, it organised itself into functions as an autonomous and effective administration with effect from 1 April 2016. The challenge on the other hand has always been that the Department inherited programmes conceptualised at different times by the dti. It did not take over a ready-made and full solution to deliver the small business development and co-ordinating mandate of a Department. It thereafter commissioned a Programme Review in July 2015, the aim being to determine the relevance and impact of the existing programmes as opposed to the mandate of the Department. The key findings and recommendations of the Review, presented to the Portfolio Committee in November 2015, were that the Department must, rationalise and refocus programme activity on areas of highest impact; create a clear delineation of responsibility between the Department and its agencies; invest in a comprehensive policy, research, monitoring and evaluation capability; package DSBD, sefa and Seda offerings to present a single point of entry for survivalist, small, micro, medium and co-operative enterprises; strengthen points of interactions between other areas of government and with the private sector; consolidate the mandate for co-operatives to improve focus, and most importantly and conduct proper change management.

The Review further suggested an adoption of a value-chain based product and services architecture, to enable the Department to tackle sector deficiencies and to position the Department as the guardian of overall small business sector performance. DSBD adopted most of the findings and recommendations that emanated from the review, which informed the Department’s strategy moving forward, value-chain service delivery model and programme structure. As a result, the 2014 - 2019 Strategic Plan was slightly altered to accommodate the new business model that the Department had adopted, which to a great extent, informed the Department’s 2016/17 APP. However, National Treasury and DPME did not approve the APP. The Department has three programmes as follows: -

• Programme 1: Administration – As indicated earlier, the purpose of Programme one is to provide strategic leadership, management and support services to the Department;
• Programme 2: Small, Medium and Micro Enterprises and Co-operatives Policy and Research - The purpose of Programme 2 is to formulate policies and conduct research for the development and growth of suitable small businesses and co-operatives that contribute to the creation of employment and economic growth;
• Programme 3: Small Medium Micro Enterprises and Co-operatives Programme Design and Support - The purpose of this Programme is to support the development and growth of small businesses through designing financial and non-financial business development support programmes and interventions i.e. National Informal Business Upliftment Strategy (“NIBUS”).

2.5.3Strategic Plan (Proposed): 2017-2019

In respect of the functional and organisational structure of the Department, the service delivery model has been finalised.  The Department is in the process of redesigning its organisational structure, which is aligned to its strategic plan and service delivery model. The business case outlining the rationale for the proposed changes has been developed albeit not presented nor approved by the Portfolio Committee. The business case is evolving to reflect the nature of operational requirements. Bar Administration branch/programme, which will remain unaffected, the latest review suggests the conception of the following branches:-

Branch 2: Sector Policy and Research - To create an enabling environment for the development and growth of sustainable small businesses and co-operatives and to ensure the desired impact is achieved in contributing toward the creation of employment and economic growth by SMMEs and Co-operatives

Branch 3: Integrated Co-operatives Development - To promote an ecosystem that enhances the establishment, growth and sustainability of co-operatives through the design, piloting and monitoring of the impact of support services and instruments; championing of functional partnerships agreements; the advocacy and thought leadership in advancing economic growth and job creation by Co-operatives; and the establishment and governance of the institutional arrangements provided for in the Co-operatives Act.

Branch 4: Enterprise Development and Entrepreneurship - To promote an ecosystem that enhances entrepreneurship and the establishment of growth and sustainability of small businesses through the designing, piloting and monitoring of the impact of support services and instruments; the promotion of targeted local enterprise development; championing functional partnerships; advocacy and thought leadership in advancing economic growth and job creation by SMMEs and entrepreneurs.

2.6       Strategic Plan of the Committee and Parliament

In line with the Parliaments Strategic Plan, and in order to be able to perform its constitutional mandate, the Portfolio Committee on Small Business Development held its first strategic session in February 2016 wherein, a full-fledge Strategic Plan and 30 Strategic Objectives were developed. Each Strategic Objective developed is in line with the Strategic Objective(s) and Outcome(s) of the fifth Parliament. Areas of spill-over from the 4th Parliament, most of them under the stewardship of the Department(s) of Trade and Industry (“the dti”) as well as Economic Development (“EDD”), are also integrated into the new plans of the 5th Parliamentary plans, specifically the plans of the DSBD, and with extension, the Portfolio Committee on Small Business Development. Additionally, the Strategic Objectives of the Committee are further informed by the Department’s and its agencies priorities, including but not limited to, the implementation of the New Growth Path strategy in support of the National Development Plan, promotion of rural, township, women, youth based enterprises and co-operatives.

In conclusion, an analysis of whether the strategic objectives address sector priorities, sector policy focus areas and sector situational analysis, and whether in overall, the strategic plan is aligned to the Departmental vision, mission and mandate will be dealt with on the section which deals with Committee Observations (‘Section 7’). Furthermore, a review of the Departmental performance based on the performance reported in the Annual Report and other documents will be expounded in the same section. Also, areas that the Committee feel are omitted or unnecessary, duplicated, irrelevant will be highlighted with the aim of drawing recommendations.

3.         SUMMARY OF PREVIOUS KEY COMMITTEE RECOMMENDATIONS

3.1       2016 BRRR Recommendations and Responses by the Ministers

Table 1: 2016 Recommendations

3.2       2015 BRRR Recommendations and Responses by the Ministers

The Committee made the following recommendations to the Department in the 2015 Budgetary Review and Recommendation Report:

 Table 2: 2015 Recommendations

4.         OVERVIEW AND ASSESSMENT OF FINANCIAL PERFORMANCE

4.1Summary of Programmes and Budget Allocation

4.1.1    Programme 1: Administration

The purpose of the Administration programme is to provide strategic leadership to the Department and to ensure that the Department fulfils its mandate through sustainable and integrated resource solutions and customised services. During the 2016/17 financial year the programme was allocated R118 million. The spending focus or sub-programmes were Management, Corporate Services, Financial Management, and Communications. The bulk of the budget (61.8%) was allocated for the Corporate Services, Financial Management and Communications. Under economic classification, compensation of employees and goods and services made up the most of the budget with 55 and 44 percent respectively.

1. Programme 2: SMME and Co-operatives Policy and Research

The purpose of programme 2 is to formulate policy and conduct research for the development and growth of sustainable small businesses and co-operatives that contributes to the creation of employment and economic growth. During the financial year under evaluation, it was allocated R26.1 million. The Policy, Research and Legislation sub-programme was 71 percent or R18.5 million of the budget, Monitoring and Evaluation allocated the rest of the budget R7.6 million. The spending focus over the medium term for Programme 2 was to Review the Strategy for SMME Development and Entrepreneurship, Research on inhibitive legislative and regulatory protocols, Collaborative and integrated planning with provinces and local governments, Develop and implement a robust research agenda as well as Develop the International Relations Strategy.

4.1.3    Programme 3: SMME and Co-operatives Programme Design and Support

The purpose of programme 3 is to support the development and growth of small businesses by designing financial and non-financial business development support programmes and interventions. The programme was allocated R1.181 billion for the 2016/17 financial year.  The greater part of the estimated expenditure, 94 percent or R1.105 billion, had been earmarked for transfers and subsidies to the Department’s entities that provide financial and non-financial small business support services. Small Enterprise Development Agency is funded under the Enterprise Development subprogramme. While Black Business Supplier Development Programme (“BBSDP”) and Co-operatives Incentive Scheme (“CIS”) are funded under the SMME Development Finance sub-programme and compensation of employees constituted R57.7 million or 5 percent.

Table 3: Overview of Vote Allocation and Expenditure per Programme for the period 2016/17

Source: National Treasury

4.2Performance on Financial Expenditure

The audited financial statements for 2016/17 were tabled in Parliament together with the Annual Report of the Department and its entities from 3 - 5 October 2017. The Department had received an allocated amount of R1.325 billion for the 2016/17 financial year. During the adjustment period in October 2016 this amount was adjusted downwards by R7 million to R1.318, with National Treasury forecasting an overall expenditure of R1.207 billion by the financial year end, probable due to persistent underspending during the 2015/16 financial year, and in Quarter one and two of the 2016/17 financial year. Nevertheless, as table 4 and 5 illustrates, underspending went even further than what National Treasury had predicted and stabilised at R1.197 billion. Subsequently, the Department recorded an under-expenditure of R122 million owing to meagre performance in the compensation of employees as well as associated goods and services, slow uptake of Co-operative Incentive Scheme, National Informal Upliftment Business Strategy and Enterprise Incubation Programme.

 Table 4: Financial Performance Overview 2016/17

 Source: DBSD 2016/17 Annual Report

During the 2015/16 financial year, the Department successfully expended 97.5 percent of its budget, and only underspent by 2.5 percent. However, its financial performance for 2016/17 financial year regressed with a total R122 million or 9.2 percent of the allocated budget not disbursed compared to R28 million during 2015/16 financial year. The underspending of R15.7 million was due to protracted vacancy rate in the Department totalling 35 posts as of 31 March 2017, while R64 million of the projected budget of R78 million accrued because of goods and services attached to the vacancies that could not be filled because of structure review programme.  As indicated earlier, the DPSA informed the Committee that the Department has finalised its service delivery model and is in the process of redesigning its organisational structure that is aligned to its strategic plan and service delivery model. The Job Evaluation process for all posts is underway which will hopefully remedy what appears to be a chronic underspending owing to an unending programme review.

For the current financial year 2017/18, the Department is budgeted an amount of R1.449 billion, which represents an increase of 124 million or 7.8 compared to R1.325 allocated during the previous financial year 2016/17. For the outer years of the 2018 Medium Term Expenditure Framework (“MTEF”), the Department has been allocated an amount of R1.529 billion and R1.618 billion respectively. This represents an average growth rate of 7.7 percent over the 2017/18 MTEF. The Department’s total budget allocation, which includes transfers to the Small Enterprise Development Agency, is expected to increase at an annual rate of 7.1 percent, from R1.2 billion in 2016/17 to R1.6 billion by 2019/20. The allocated budget of R1.4 billion for the current financial year 2017/18 is budgeted to finance current payments which include compensation of employees, goods and services, payments for capital assets, transfers and subsidies. The significant amount of R736 million will be transferred to a Departmental entity, namely , Small Enterprise Development Agency and various private institutions through Black Business Supplier Development Programme, Co-operative Incentive Scheme, National Informal Business Upliftment Scheme and Enterprise Incubation Programme.

1. Funding Proposal for 2018 MTEF

The budget and MTEF allocations below support and contribute to the three Strategic Goals as captured in the Department Strategic Plan, and it is being carried forward in the Department 2017/18 APP. Table 5 below breaks down the budget allocation per programme for 2017/18 compared to allocations per programme in 2015/16. The Department’s total budget allocation, which includes transfers to the Small Enterprise Development Agency, is expected to increase at an annual rate of 7.1 percent, from R1.2 billion in 2016/17 to R1.6 billion by 2019/20. The Department’s budget is distributed across the following three programmes: -

• Programme 1: Administration;
• Programme 2: Small, Micro, Medium and Co-operatives Policy and Research and;
• Programme 3: Small Medium Micro Enterprises and Co-operatives Programme Design and support

Table 5: Consolidated Budget Summary 2017/18 & Outer Years

Source: DSBD Annual Performance Plan

As in previous years, the bulk of the allocation, R4.1 billion over the MTEF and R1.3 billion for the current financial year, goes towards Programme 3, ‘Small Medium Micro Enterprises and Co-operatives Programme Design and support’. The main cost driver for the Programme however is transfers to public entities amounting to R3.9 billion (95%) over the MTEF and R1.2 billion during 2017/18 financial year. Programme 2, ‘Small, Micro, Medium and Co-operatives Policy and Research’, has not only received the lowest allocation but it has also been slashed by R4 million, which when combined only amount to less than 2 percent of the total Departmental budget – 0.8 per cent less than in 2016/17. As in the previous year, Programme 1, ‘Administration’ will increase by 12.3 percent from R113 million in 2016/17 to R127 million in 2017/18. This trend will continue over the medium-term, as is illustrated in Table 5 above.

4.3.1    Programme 1: Administration

The purpose of Programme 1 is to provide strategic leadership, management and support services to the Minister, Director-General, the Department and its entities.  Programme 1 allocation is up by R13 million from R113 million in 2016/17 to R127 million in 2017/18. During 2016/17 financial year this Programme had originally been apportioned R118 million which was later adjusted downward to R113 million as a result of lower than anticipated expenditure owing to vacancies, and associated goods and services.

Table 6: Expenditure Estimates – Programme 1

Source: DSBD Annual Performance Plan

The amount of R127 million allocated to the Programme during the current financial year is set to be appropriated among its sub-programmes which include, Ministry, Departmental Management, Corporate Services, Financial Management and Services. Of this R70 million will be allocated to human capital, R57 million to operational requirements, R13 million for travel and subsistence and R6 million for stabilisation of information and communications technology support in the Department.

4.3.2    Programme 2: Small, Micro, Medium and Co-operatives Policy and Research

The purpose of Programme 2 is to formulate policies and conduct research for the development and growth of suitable small businesses and co-operatives that contribute to the creation of employment and economic growth. The budget allotted to this programme has been reviewed downward by R4 million to R22 million from R26 million in 2016/17.

Table 7: Expenditure Estimates – Programme 2

Source: DSBD Annual Performance Plan

This programme has three (3) sub-programmes, namely, Policy, Research and Legislation - which aims to generate reliable information for policy formulation on survivalist, small, micro, medium and co-operative enterprises, Monitoring and Evaluation - aims to provide quantifiable analysis and information on small business sector in South Africa as well as International Relations. Of the, R11 million will go to human capital, R11 million to operational requirements and R3.5 million on travel and subsistence. The programme has been allocated R72 million over the MTEF period.

4.3.3    Programme 3: SMME and Co-operative Enterprises Programme Design Support

The programme is responsible for supporting the development and growth of survivalist, small, micro, medium and co-operative enterprises through designing and implementing financial and non-financial business development support programmes and interventions. The largest portion of the Department budget goes to this programme. During the 2017/18 financial year, it received R1.2 billion up from R1.1 billion in 2016/17. More than half of the allocated budget (R730 million) for this programme is set to be transferred to Departmental agencies and accounts for public corporations.

Table 8: Expenditure Estimates – Programme 3

Source: DSBD Annual Performance Plan

The Programme comprise of five sub-programmes, which include Competitiveness Support, Enterprise Development, Co-operatives Development, Market Development and Small, Micro and Medium Enterprises Development Finance. Funds allocated to human capital accounts for R57 million and R13 million to operational requirements. The focus for the current financial year will be on provision of financial and non-financial business support by the Department and its entities.

5.         OVERVIEW AND ASSESSMENT OF SERVICE DELIVERY PERFOMANCE

5.1       Report of the Auditor General

During 2015/16, the Department obtained unqualified audit opinion with findings. The Auditor General had, in 2015/16 financial year, flagged one non-compliance matter worth R1.8 million, an area that the Department was counselled to pay attention to. The quality of financial statements had also been flagged for consideration as these had initially been found to contain material misstatements, which were later corrected. According to the Department, this was due to critical vacancies (i.e. no Chief Financial Officer for most of previous financial year) and no established processes to ensure complete and accurate financial and performance reports.

During the current financial year, however, the Department remained where it was the previous financial year by obtaining unqualified audit with material findings. The material non-compliance was with respect to transfers, specifically Co-operatives Incentive Scheme and Black Business Supplier Development Programme (“BBSDP”) which were found not be adequately monitored and approval processes were not in compliance with Treasury Regulations 8.4.1. The AG report indicated that the Department must enhance its oversight and monitoring responsibilities to strengthen the control environments. Furthermore, the AG directed the Department to amend incentive scheme guidelines in order to ensure that there is extensive monitoring and evaluation of these transfers to prevent the possibility of fraudulent activities. Based on the findings of the Auditor General during the 2016/17 financial year, the Department has requested an investigation on the incentive scheme. This request for investigation is awaiting approval from the Auditor General.

5.2       Overview of Programme Performance

The Department is mandated to lead an integrated approach to the promotion and development of small businesses and co-operatives through a focus on the economic and legislative drivers that stimulate entrepreneurship to contribute to radical economic transformation. It has three programmes, that is, Administration, Policy and Research, Programme Design and Support.

Table 9: DSBD Strategic Objectives

            Source: DSBD 2016/17 APP

5.2.1    Summary of Programme 1 Performance

The Department had set itself a target of fourteen (14) Key Performance Indicators (KPIs) for the 2016/17. It successfully achieved twelve of the 14 targets, contained among these were, vacancy rate below 10 percent even though all senior managers are acting , timeous payment of invoices within 30 days, percentage of women and people with disability met, quarterly reports, APP and DSBD annual report tabled. Strategic planning, however, is proving to be DSBD achilles heels. Procedurally, departments are required to submit first and second of the draft APP’s to DPME every year by 31 August and 30 November, respectively. During the Department interaction with National Treasury and DPME in November 2016, DSBD 2017/18 APP was not ratified but instead a change to the DSBDs strategic approach to its mandate, which necessitates a structure focusing on leading the growth and sustainable survivalist, small, micro, medium and co-operative enterprises was proposed. This might certainly have future budgetary implications to the Department. As a result, DSBD does not have an approved APP.

Table 10: Summary of Programme 1

Source: DBSD 2016/17 Annual Report

5.2.2    Summary of Programme 2 Performance

The purpose of programme 2 is to formulate policy and conduct research for the development and growth of sustainable small businesses and co-operatives that contributes to the creation of employment and economic growth. The programme consist of three sub-programmes, namely, policy and research, monitoring and evaluation as well as international relations. For Programme 2 there were eleven targets in total, including most importantly, consultations on the proposed amendment of the National Small Business Act. This programme performed very poorly, only six (6) targets were achieved and overall spending of 54 percent or R13.8 million. During the previous financial year, the Department had planned to table the draft bill before the Parliament. However, this was not achieved, and it is not likely to be achieved during 2017/18 financial year. 

Table 11: Summary of Programme 2

Source: DBSD 2016/17 Annual Report

5.2.3    Summary of Programme 3 Performance

The purpose of programme 3 is to support the development and growth of small businesses by designing financial and non-financial business development support programmes and interventions. The programme consist of five sub-programmes, i.e. co-operatives development support, competitiveness support, enterprise development, development finance, market development and stakeholder relations. Strategic objectives are-

• Design and implement targeted programmes to support new and existing small and medium enterprises in townships and rural areas;
• Increase participation of SMME’s and Co-operatives in the mainstream economy;
• Coordinate and maximise support for SMME’s and Co-operatives through public and private partnerships;
• Drive an integrated planning and monitoring for SMME’s and Co-operatives development in townships and rural areas.

The Department had set itself a target of 13 KPIs but could only attain nine (9), an achievement of 69 percent. The Informal and Micro Enterprise Development Programme (“IMEDP”) exceeded the planned target of 7000 by 848, EIP and SEIF became effective and integrated planning with various local municipalities was pursued. There were areas, however, where the programme performed below par i.e. creation of the Co-operative Development Agency (CDA) remains unattainable, underspending on DSBD flagship projects such as, NIBUS (R54 million), CIS (R11 million) and EIP (R26 million), is a cause for concern considering that all three performed poorly during the previous financial year.

Table 12: Summary of Programme 3

Source: DBSD 2016/17 Annual Report

5.3       Interaction between the Committee and Small Businesses and Co-operatives

In an effort to deepening understanding of small business ecosystem the Portfolio Committee embarked on two oversight visits to KwaZulu Natal and Mpumalanga provinces, where it engaged a substantial number of small enterprises, municipalities, traditional leadership and small business representatives. The oversight visits were in accordance with the mandate of the Committee as outlined in the Constitution of the Republic of South Africa, which is to legislate, conduct oversight over the executive and facilitate public participation. The visits were also in furtherance and to accomplish the Committee’s own strategic objectives that are rooted on the strategic objective(s) and outcome(s) of the fifth Parliament. These (strategic objectives of the Committee) further recognises the Department and its agencies’ priorities as captured in their respective five-year Strategic Plans and Annual Performance Plans.

During 14 - 15 September 2016, the Committee visited KwaZulu Natal province. The Committee had targeted to visit the Free State Province. However, in light of the fact that the Department of Small Business Development had already begun disbursing funds in KZN projects under the Co-operatives Incentive Scheme to support 12 primary agricultural co-operatives, commonly referred to as “The 12 Balimi KZN Co-operatives”, the Committee felt it was prudent to instead visit the province in an effort to taking stock of what was being done there. Five municipalities, namely, eThekwini Metro, uGu, iLembe, Harry Gwala and uMgungundlovu District Municipalities were visited.

The Committee also visited Mpumalanga Province during from 27 – 31 March 2017 also to projects sponsored by the Department under the same scheme/grant, Co-operative Incentive Scheme. However, the visit involved a stopover at Mzanzi Agricultural Co-operative Limited project in Mokgwaneng, one of the four co-operatives funded indirectly by the Small Enterprise Finance Agency in a broiler production project overseen by Super Grand Agricultural Feed Primary Co-operative Limited. The Committee visited a total of thirteen (13) projects situated across six (6) local municipalities, namely, Dr JS Moroka, Ephraim Mogale (Limpopo Province), Victor Khanye, Bushbuckridge, Nkomazi and Chief Albert Luthuli. To date, the findings of the Committee on these projects have instigated the Committee to call for a full forensic investigation by the Auditor General. This request has been sanctioned but awaiting funds allocation from the office of the House Chair. For the purpose of the BRRR report, a synthesis of key observations and recommendations of the Committee oversight visits, ordinary meetings and stakeholder engagements will be summarised on section seven and eight respectively.

6.         REVIEW OF THE DEPARTMENTAL ENTITIES

6.1       SEDA Budget Allocation 

Table 13: Seda Revenue and Expenditure

 Source: SEDA 2016/17 Annual Report

Seda Parliamentary grant declined from R624 million in 2014/15 to R610 million in 2015/2016 before recovering slightly to just over R620 million during the previous financial year. A huge portion of Seda funding (93%) was through Parliamentary grant, Provincial and local governments contributed 1.1 percent of Seda revenue while 1.2 percent was generated through interest earned. The remaining 4.7 percent came from sundry income and other specific projects. Of the total revenue of R754 million, total expenditure increased by R30 million to R772 million from R742 million. However, the deficit went down from R46 million during the 2015/16 financial year to just over R17 million in 2016/17. Costs drivers include administration, depreciation, personnel, programme and project costs. The agency’s total budget for 2017/18 is R735.7 million.

6.1.1    Financial Performance

Similar to the previous financial year, Seda received unqualified audit with findings from the Auditor General. Significant audit findings relates to irregular expenditure where a transaction above R500 000 was procured without following due process as required by Treasury regulation. Furthermore, the AG flagged an issue which the Portfolio Committee had raised during the 2016 BRRR, a violation section of 13 (2) of the National Small Business Act which postulates that “members referred to in subsection (1) who are in the service of the State may not receive additional remuneration or allowances for serving on the Board, but may be reimbursed for expenses incurred in the performance of their functions in terms of this Act”. Other audit findings include fixed assets concerns where residual values were under-stated as well as misalignment between Estimate of National Expenditure – four programmes and Annual Performance Plan – three programmes. Fruitless and wasteful expenditure for R92 000 was incurred during the year under review in respect of misconduct by staff not complying with Seda procedures. Nevertheless, this is a significant reduction compared to the reported amount of R680 000 in 2015/16.

1. Non- Financial Performance

Seda performance information is structured in line with the entity’s approved Annual Performance Plan 2016/17 – 2018/19, key offerings being, Business information and advice, Business Management, Training and Mentoring and SEDA Technology Programme (“STP”). As table 14 below demonstrates, the agency achieved and exceeded performance targets on 17 out of 20 strategic indicators, which is 85 percent achievement. The organisation performed exceptionally well on the following indicators: On Enterprise Development SEDA supported 167 clients through the supplier development programme, supported 353 clients through trade facilitation, 115 Primary co-operatives established, 1747 clients supported through Basic Entrepreneurial Skills Development (BESD) programme, while through STP, 2,582 jobs were created to date. There were areas, nonetheless, where the performance was substandard. Underperformance (with corrective actions) on the following:-

• National Gazalles - Number of clients supported through the National Gazelles programme was way below the target of 200. The process of selecting the second cohort is nearing completion. Going forward, the programme will focus on the top 40 qualifying small enterprises that were successful during the pilot phase;
• Number of clients assisted through technology transfer – Owing to budgetary constraints, this target was not met. Going forward, a window for application will be opened to manage the requests for support and also give the programme a sense of additional funding that might be required.

 Table 14: Performance against Strategic Outcome Oriented Goals

Source: SEDA 2016/17 Annual Report

6.2       sefa Budget Allocation

sefa was established on 1 April 2012 because of the merger of South African Micro Apex Fund, Khula Enterprise Finance Ltd and the small business activities of Industrial Development Corporation (“IDC”). Its mandate is to foster the establishment and growth of survivalist, small, micro, medium and co-operative enterprises, contribute towards poverty alleviation and job creation in line with the objectives of the NDP, NGP, MTSF and strategic plan of the Department. The agency’s operations are funded from revenue largely derived from the allocation it receives from the Budget Vote 25 of the Economic Development Department, reflecting R671 million, or 54 percent of revenue, over the medium term and 46 percent is revenue derived from interest and fee income, and income from property and rentals. sefa received less support from the State in 2016/17 with government allocation being reduced by 48 percent to R213 from R406 million in 2016. Since inception sefa has disbursed R4.3 billion into the economy to 241 537 small businesses. The agency’s budget objectives are to: -

• Work within current funding available and maintain positive cash balance over the MTEF period;
• Reduce losses over 5-year period and break-even by 2020/21;
• Decrease impairments, especially in the direct lending operations to 22 percent by 2021/22 financial year;
• Downscale Direct Lending operations in the short-term to enable collection strategies to be put in place;
• Head count freezes over 5-year period with an allowance for annual cost of living adjustments; and
• Properties to break-even by 2021.

6.2.1Overview of the Service Delivery Performance: Non- Financial Performance

The agency offers four main products, namely, Direct Loans (asset finance, Term Loans, Revolving loans and Bridging loans, Purchase Order Product and Amavulandlela Scheme for entrepreneurs with disabilities), Wholesale Loans and Equity (on-lending facilities, Funds and joint ventures, Micro-finance, Structured Finance Solutions), Business Support (Institutional strengthening, technical support and mentorship), Credit Guarantees (Credit Indemnity guarantees and Supplier guarantees) as well as Rental Property. SEFA has taken on the challenge of job creation, facilitation and support in the small enterprises space and make remarkable inroads, albeit few hiccups which threatens its existence emanating from ballooning impairments and losses in the property portfolio. sefa performance over the five-year period since inception is shown below on table

Table 15: sefa Financial Performance over five-yea

Source: SEFA 2016/17 Annual Report

During 2016/17 financial year sefa had targeted to approve loans to the tune of R885 million but could only approve R827 million. This target was not met owing to lack of viable applications from Co-operative Financial Institutions (“CFI”) and indemnities issued under Khula Credit Guarantee Scheme (“KCGS”) not meeting approval targets. In addition, number of small businesses that received finance and number of jobs facilitated were fewer than what the agency had set itself to achieve. The agency did well however, on other indicators such as disbursements to small businesses, women and youth-owned businesses, enterprises in priority rural provinces as well as facilities less than R500 000. A total of R1 billion was disbursed to small businesses, of that, R366 million went to rural owned enterprises.

6.2.2    Financial Performance

For the 2016/17 financial year, sefa received an unqualified audit (clean audit) report. No expenditure was classified as unauthorised, fruitless and wasteful expenditure amounted to nil. The accounting authority condoned irregular expenditure sustained during the year under review. For financial year 2016/17, sefa continues to wrestle with obstinate accumulative impairment levels that are above the entity’s target of 29 percent and currently at sitting at 47. In the current year an impairment charge of R67 million from R355 in 2015/16 was recognised. Loan collections is proving to be a major factor contributing to this. As part of the mitigating strategy Post Investment Monitoring (“PMI”), division was established to explore various post investment strategies to improve collections. The main objective of the division is to maintain impairments and manage collections. During the period under review, PMI collected R322 million from loans and advances. This represent 81 percent of the expected collection.

7.         OBSERVATIONS OF THE COMMITTEE

During the course of the financial year 2016/17, the Committee had frequent interactions with the Department, stakeholders across civil society, labour and business, all three spheres of government, individuals and education sector with a view to perfecting its technical knowhow around the small business sector. Technical oversights to Mpumalanga and KwaZulu Natal were undertaken essentially to provide communities, particularly in the far-flung areas, an opportunity to interact with Members of Parliament.  Throughout the formation of this BRRR report the Committee, Department and its entities engaged in a very robust and consultative process that enabled both the Department and Committee, to construct a progressive BRRR report. Critical issues raised and deliberated upon are incorporated into this report with the aim of helping the Department to successfully achieve its ultimate objective of creating sustainable small enterprises.

Moreover, some of the observations and recommendations raised below stem from the Committee engagements with other relevant stakeholders, thus, as highlighted in the methodology of this report, all relevant reports of the Committee, research, minutes from those engagements are used as the basis for arguing and deliberating some issues for the purpose of advocating for additional/reduction of funds, and in some instances, changes in policies governing the Department. Issues raised in those engagements were mostly centred around governance, administration and funding.  Having reflected on the Department, sefa and Seda annual performance plans and budgets for 2017/18 the Portfolio Committee hereby wish to register the following observations and recommendations for consideration by the Department: -

7.1       In the course of the Budget Vote process at the start of 2017, the Portfolio Committee was briefed that, during the DSBD interaction with DPME and National Treasury in            November 2016 as regards its APP, the Department was subsequently encouraged to      review its 2018/19 APP to strengthen its oversight role over the entities in order to            reduce duplication of functions, and to reflect its contribution towards the priorities of     the economic sector as reflected in 2014 - 2019 MTSF and the NDP. The Committee  notes that the APP has since been reworked although not presented to it yet;

7.2       The Committee wishes to reiterate its support of the DPME and Treasury          recommendation for the Department to prioritise strengthening of working relationships          with the municipalities and provinces. The Committee is on record having registered           its dissatisfaction that the duplication of functions and programmes tailored for small       businesses is prevalent across the entire government and there is no strategy from       DSBD to coordinate these functions and eliminate wasteful duplication of functions and      resources;

7.3       The Committee has, over time, observed that mandate overlaps, territorial protection,    duplication of functions and silo mentality within the Departments, from national to local        government level, is a huge problem and contradicts fiscal consolidation initiatives currently being pursued by government. A number of state Departments still carryout     functions and provide products and services tailored for small business, which every         so often, leads to ‘triple dipping’ in the fiscus. The Committee had in the past requested            DSBD to involve Treasury and DPME on these and other matters. The Committee notes that little progress has been attained in this regard;

7.4       Equally, the issue of sefa ownership and reporting remains a major concern for the        Committee as all of its budget allocation is still handled by EDD and therefore sits         on       vote 25. This is an untenable situation and frequently causes needless confusion         and       duplication of functions as EDD itself has strategic objectives exactly similar to            DSBD i.e. development of township economies;

7.5       sefa incorporation obfuscates DSBD mandate of exercising oversight responsibility.      In terms of the Public Finance Management Act, unlike SEDA, sefa is not      a schedule        3 entity but a schedule 2, taking a cue from its parent company IDC. The PFMA states           that subsidiaries of all the public entities/SOEs listed therein (‘schedules’) are            automatically also categorised under the same schedule as their parent entities,   irrespective of the corporate form or type of that subsidiary relative to that of its parent          entity, a case in point with sefa and IDC. Furthermore, sefa has six (6) subsidiaries accountable to it, including non-profit    entity [a company without a share capital] and  in terms of the PFMA, there is also no provision for the Department to exercise           oversight responsibility over these subsidiaries yet there are public resources that get         disposed to these entities on a yearly basis;

7.6       There is still a general discordance in what the Department considers to be its mandate and key deliverables vis-à-vis its actual directive as proclaimed by the State President during its proclamation and inception in 2014 which, among others, is to champion the development of small businesses, coordinate various government departments horizontally and vertically, and sign transversal agreements that generates market access opportunities, ease access to finance, amplify skills development and eliminate bureaucratic red tape;

7.7       The Committee further notes DSBD’s general inability to convert policy priorities i.e. NDP, NGP, MTSF and SONA into programmes, strategic objectives and key performance indicators for implementation. For instance, there is no clear strategy on how to leverage 30 percent procurement policy from small businesses as announced by the President during the 2015 SONA, or, strategy to “utilise strategic levers that are available such as legislation, regulations, licensing, budget and procurement as well as Broad-based Black Economic Empowerment charters” to influence the behaviour of the private sector and drive transformation as announced by the State President during 2017 SONA. This is despite the Portfolio Committee having recommended to the Department during 2016 BRRR to conceptualise the Retail and Wholesale Charter which in terms of the Committee timelines, was due for completion during Quarter 1 of 2017/18 financial year;

7.8       For instance, a Committee visit to KwaZulu, the Department was once again reminded  a simple fact by an official from KZN Department of Agriculture and Rural            Development (“DARD”) that, in terms of roles and responsibilities in relation to         coordination, KZN DARD responsibility in agricultural projects is to advise beneficiaries            “where to plant, when to plant, how to plant, land preparation, planning, matching crops    and types of soil, Bio Resource Unit            (BRU) and monitor the crop”, but not the          commercialisation aspect which is a responsibility of Small Business Development;

7.9       The visit referred to in 7.8 above, was prior the 2017 SONA, where the State President            underscored the “Government’s commitment to support black smallholder          farmers in         particular the implementation of a commercialisation programme for black smallholder farmers”. The absolute failure of the 12 Abalimi Agricultural Co-operatives         Pilot project in KwaZulu Natal substantiates once more that DSBD is simple impotent   in translating government commitments into programme of action;

7.10     For three consecutive financial years budget allocation for Programme 2, a core unit       in the Department has been miniscule. During the 2017/18 financial year, it did not   only receive the lowest allocation but, it has also been slashed by R4 million, from R26          million to R22   million, which when combined only amount to less than 2 percent of the total Departmental budget – 0.8 per cent less than in 2016/17. While Programme 1, a           mere support unit, will increase by 12.3 percent from R114 million in 2016/17 to R127      million   in 2017/18;

7.11     The Department was founded in line with the National Small Business Act, 1996 as       amended, based on the assumption that, once it was up and running, this Act will be       speedily brought in line with the NDP, NGP, MTSF and numerous other policy   prescripts and instruments that governs small businesses. However, for two        consecutive financial years,   the Department has failed to finalise the review of the     National Small Business Act,     1996 as amended. Instead, it has been deferred for completion during the 2018/19 financial year;

7.12     The Committee observes that most of the senior management staff in the Department     have been on acting capacity, albeit on a rotational basis, for more than three years.  The Portfolio Committee has, on numerous occasions, identified this as an        area that has impaired the proficiency of the Department. The Committee further notes   that this is worsened by interminable or perpetual programme review, which at the time      of finalising this BRRR for instance, was still being deliberated;

7.13     In its successive BRRR recommendations, the Committee has been consistent in            its call for the creation of institutional support structures as provided for in the Co-           operatives Act i.e. Co-operatives Development Agency, Co-operatives Training Academy, Co-operatives Tribunal and National Small Business Act i.e. National Small  Business Council;

7.14     As introduced to earlier, the Committee visited Mpumalanga province at the beginning   of 2017 to beneficiaries of the CIS grant. The majority of the co-operatives funded by        the Department and ultimately visited by the Portfolio Committee in the Province of    Mpumalanga are broiler production projects. However, the Committee noted that all            projects have neither been introduced nor known by the local and provincial      governments and therefore incapable of attracting auxiliary infrastructural support    largely as a consequent that they do not appear on the integrated development plans        (“IDP”) of the local governments. Furthermore, there was no effort from the      Department to cluster broiler production co-operatives together in order to realise        economies of scale;

7.15     The Committee noted that, not only in Mpumalanga but nationally, the demand for         broiler production with almost identical specifications, such as, broiler house, concrete   floor, water tank, manifold system, full package curtain system, automatic bell drinkers, chick trays, founts, foot bath, thermometer, tube feeders, day old chicks and bio            sprayers to mention just the few is enormous. Regrettably, however, the Department      has consistently failed to proactively embark on a process of bulk buying and      negotiate favourable terms of trade not just with the Service Providers but also with  the chain stores. Consequently, price discrepancy sometimes within the same     province and sometimes from the same Service Providers, is alarming;

7.16     Most of the projects the Committee visited in both provinces, Mpumalanga and KwaZulu Natal, were not subjected to feasibility studies. There is also no evidence that         when projects are funded, the Department and its beneficiaries bother to go through     spatial development plans of the local municipalities to ascertain if the site           selections are in accordance to the local governments framework. It is not surprising       therefore, that most of these projects visited are juxtaposed alongside residential homesteads;

7.17     Pursuant to 7.7 above, in relation to DSBD’s incapability to cascade policy       articulations into tangible deliverables that benefits small enterprises, operating      premises or sites availability just for any projects, tend to throw small enterprises into     a state of frenzy and despondency. This is one of the areas cautiously identified for         reflection by the government in the New Growth Path. The challenge of dealing with  unscrupulous property owners can be strenuous for small businesses, the exploitation           that some of the small enterprises are subjected to is terrifying and in fact demand that       the Department, in collaboration with Corporative Governance and Traditional Affairs    (“COGTA”), provincial and local government, develop a carefully crafted strategy to            deal with this issue. Premises for small enterprises are proving to be a break or make  issue that must be attended to immediately;

7.18     Oversight visits, particularly the Mpumalanga leg, afforded the Committee an     opportunity not just to associate with CIS beneficiaries but also to establish how public   resources are disbursed. Irregularity on how CIS applications are handled and      processed is the basis for concern and now a matter for forensic investigation by the      Auditor General. Elimination of co-operative(s) applications, including quotations without concrete motives is worrying. So is the appointment of Service Providers     without co-operatives consent, or pressuring co-operatives into accepting Service          Providers of the Department’s choice without following due process. This practice    subjugates the CIS intents and purpose and flies in the face of what this Department           was created to  accomplish;

7.19     The Committee notes with frustration that in spite of overwhelming evidence of   corruption and  collusion by some of the officials within the Department, not one of them        has been brought to book. The Committee records and wishes to applaud sefa for           conducting a     swift forensic investigation when the Committee pointed out       irregularities it discovered in Mpumalanga, which will expectantly lead to criminal         prosecution;

7.20     During the 2016/17 planning cycle the Department, Seda and sefa embarked on a joint planning process that culminated in the development of a Portfolio Strategic    Framework 2015/16 - 2019/20, which will feed into an overall Strategic Framework for           the entire Small Business Development Portfolio. The Committee noted, however,         the level of contradiction between the two entities on a number of key issues during the annual reports presentation. For instance, sefa is pushing ahead with its  policy of curtailing ‘direct lending’ to small enterprises and instead prioritise ‘wholesale        lending’, in other words, financial intermediaries. While Seda, in its presentation, was     very critical of using intermediaries, as their interest rates are usual very high. The      Committee has persistently raised its objection to the use of intermediaries by sefa,  which reportedly charge an interest of between 40 percent and 110 percent. The           Department has consistently failed to provide leadership over these matters.

8.         RECOMMENDATIONS

8.1       The Committee is in agreement with National Treasury and DPME that the Department             must refocus its attention to Programme 3, which include Agency Oversight, Monitoring and Evaluation and intensify initiatives directed at supporting Intergovernmental    Relations, Provinces and Municipalities as previously argued by the Committee;

8.2       In line with the Auditor General recommendations, the Department must report  quarterly to the Committee on the implementation, progress and action plans to      address poor audit outcomes, to provide feedback on status of key controls,             especially the monitoring of incentives scheme and to provide to the Committee a           list of action taken against transgressors; 

8.3       The Department must further explore other strategic partnerships and use other  structures such as President’s Coordinating Council (“PCC”) in order to expedite the  signing of Transversal agreements and relocation of other functions that still exist in  other departments to DSBD. This could unlock more funding for the      Department, as the Minister of Finance also sits on the Council;

8.4       Strategic posts have remained vacant for far too long. The Department must furnish        the Committee with an Action Plan on the filling of vacant positions that exist in the        Executive of the Department, which are Deputy Director-Generals and Chief Directors    before the end of Q3 of the 2017/18 financial year;

8.5       With the National Small Business Act so outdated, the Department is in some way         operating in a vacuum. The finalisation of the Act must be accelerated. The draft bill must be submitted to Parliament before 31 March 2018;

8.6       Furthermore, the Department must        submit to the Committee a list of all other           regulatory and legislative measures it plans           to formulate or amend (acts, bills,          strategies, plans, policies etc.) before the end of the fourth quarter of 2017/18 financial      year;

8.7       Pursuant to 8.5 and 8.6, small business sector often complain that they spend much        time and devote significant resources to activities such as filling out forms, applying for        permits and licences, reporting business information, notifying changes, etc. This is     particularly onerous for smaller enterprises and may even discourage people from            starting up new business. The Department has a responsibility to develop a red tape       reduction strategy before the end of 2018/19 financial year;

8.8       There is a need to revisit Co-operatives act, 2005 as amended, on the subject of the      creation of secondary co-operatives. In its current format, there are conditions      precedent that impede or depress the creation of secondary co-operatives, when in       reality, secondary co-operatives should provide services to primary co-operatives;

8.9       On market access intervention, the Department needs to provide adequate support to    projects, both financial and non-financial, lead an integrated process of nurturing      co-       operatives from inception phase to spearheading market access intervention        programmes. The Portfolio Committee would like to recommend that a Market Access Unit within the        Department urgently develop a detailed and realistic Market Access      Strategy on or   before 31 March 2018, contents of which will include plans to scale up  support to all projects previously visited by the Portfolio Committee in Eastern Cape,   Limpopo, KwaZulu Natal, Mpumalanga, Gauteng and Free State;

8.10     The proposed strategy referred to on 8.9 must include the implementation plan of the     Cabinet Resolution of 2007 which sanctioned that 85 percent of expenditure on ten  (10) designated products and    services be procured from survivalist, small, micro, medium and co-operative enterprises;

8.11     Furthermore, policy priorities outlined by the State President during each SONA,          become the program(s) of government to implement. The proposed strategy must  incorporate a plan for operationalisation of 30 percent procurement of goods and    services from government and state owned entities from small enterprises, as      announced by the President during 2015 State of the Nation Address;

8.12     That strategy or policy must be expanded to take account of the private sector in line     with the 2017 State of the Nation Address call for the government to utilise            “strategic levers that are available such as legislation, regulations, licensing, budget           and procurement as well as Broad-based Black Economic Empowerment charters to    influence the behaviour of the private sector and drive transformation”. The    Department must accordingly, also in fulfilment of the 2016 BRRR recommendation,           finalise and present the first draft to the Portfolio Committee of the proposed Retail and            Wholesale Charter during the fourth quarter of 2017/18 financial year;

8.13     The Department must urgently engage National Treasury to ascertain how much it would cost to establish support entities, such as, National Small Business Council, Co-operatives Development Agency, Co-operatives Training Academy and Co-operatives Tribunal. Such engagement to include discussions on:-

a)         Practice Note or Regulation on the implementation of the proposed cession of               contracts as requested by sefa. Some of the small enterprises currently being                        liquidated are owed monies by other government departments and SOE’s;

b)         Implementation of 30 percent set aside policy and;

c)         The possibility of relocating small, micro, medium and co-operative enterprises              functions/directorates/budget currently residing in other Departments;

In the event that the Department encounter challenges in either retrieving small enterprises programmes left in various departments or in creating intervention strategies, the Department must inform the Portfolio Committee so that the Committee can initiate the process of engaging other relevant Committees and National Treasury;

8.14     The Committee is still looking forward to the Department bidding proposal to the           National Treasury, encompassing a clear value proposition and social rate of return for        the government through utilising, among others, computable general equilibrium  (CGE), applied general equilibrium (AGE) or econometrics       model(s). The Committee            is reasonably conscious of the reality that National Treasury is a contested terrain, it is    not likely to increase DSBD budget to accommodate for the creation of the proposed           institutions without a well-articulated and clear business case;

8.15     The Committee notes that sefa has struggled to lend money to small enterprises through Co-operative Financial Institutions (“CFI”). It is also not persuaded of sefa’s    approach where intermediaries are made use of to advance loans to small enterprises.          This is   tantamount to abdication or renunciation of its responsibility. The Committee      has in    the past, indicted Department and sefa to have a strategic discussion on the            matter   and report back to the Committee but this has not happened. There is a need         to consider a model that will be cost-effective and sympathetic to circumstances of           small enterprises, and most importantly, it must accelerate the use CFI’s and Co-           operative Banks as part of a broader government strategy to streamline access to finance  particularly for  survivalist, small, micro, medium and co-operative enterprises.   The Committee would be pleased to receive feedback from both DSBD and sefa on        the matter before 31 March 2018;

8.16     Pursuant to 8.15 above, the Department must explore alternative and affordable financing for small enterprises in an effort to curbing exploitation by financial intermediaries, including to champion the review or amendment of the Usury Act, and/or any other acts or policies that suffocate small enterprises;

8.17     The Department must further speed up the creation of Co-operative Development Agency in order to champion and fast-track the creation of CFI’s and Co-operative Banks, promotion of community stokvels with a view to converting or formalising them into CFI’s and Co-operative Banks. The existing financial instruments have proved futile for small businesses. The Department and sefa must explore other means of helping small enterprises in a manner that is self-reliant using the Gramin Bank of Bangladesh model and/or Limpopo based Small Enterprise Foundation;

8.18     There is an existing Co-operative Bank Development Agency (“CBDA”), created in terms of the Co-operative Banks Act 40 of 2007, (“Co-op Banks Act”),  but it is currently being reconfigured, where some functions and units are being transferred from National Treasury to Financial Services Board (“FSB”) and South African Reserve Bank (“SARB”). However, there is no consultation or strategic engagement with the Department. The Department must urgently engage the agency, while on one hand, the Committee needs to invite the agency leadership for a briefing;

8.19     The Department has a duty, in conjunction with sefa, to rapidly finalise the development of the rescue strategy for struggling small enterprises before 31 March 2018. The concept of business rescue finds its foundation in one of the stated purposes of the Companies Act, which is to "provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders”. In its correspondence to sefa Board of Directors, the Committee strongly advocated for the agency to adhere to these provisions before progressing to section 129 of the National Credit Act;

8.20     sefa Board of Directors, in its capacity as the Accounting Authority, must exercise its oversight responsibility by ascertaining if in the case of Super Grand Agricultural Feed        Primary Co-operative Limited and four other co-operatives, the Chief Executive Officer, in his capacity as the Accounting Officer, performed his duties diligently and       meticulously without contravening Section 38 (a) (i) (b) (c) (ii) and (h) (i) (ii) (iii) of the          PFMA, findings of which must be reported to the Committee for record before the  end of the third quarter of the 2017/18 financial year;

8.21     The Department must develop growth strategy to position co-operative enterprises as    a tool for community socio-economic development in order to shift resources from  consumptive to productive budget. This is likely to reduce dependency of poor families’ on government handouts, which costs the state billions annually.

8.22     The 88 percent failure rate of co-operative enterprises is a clear demonstration that interventions such as CIS are failing and therefore necessitate appraisal. The Committee is thus reiterating and stressing the urgency by the Department to finalise   the review of the CIS grant before 31 March     2018;

8.23     It must speed up the development of a Master Plan and national strategy for co-operatives and SMME’s development, with a specific focus on township and rural economy, to include informal traders, street vendors  and whackers before the end of  the 2018/19 financial year;

8.24     The Department has a responsibility to broaden its understanding of all the projects  under its support, identify gaps that require intervention in the form of additional    funding, infrastructure, technical assistance, skill development, training and those that   require signing of transversal agreements in an effort to leveraging soft and hard  infrastructure extremely needed by the co-operatives;

8.25     In its existence, the Committee has a received a number of complaints from small  enterprises with issues such as non-payment of services and unfair competition from big business. The Department needs to spearhead conceptualisation and creation of the Small Business Ombudsman.

9.         APPRECIATION

The time lines for the assembly of the BRRR are very tight. The Committee would like to express its appreciation to the Minister, Deputy Minister and the Director General, the Auditor- General and entities who all participated in the 2017 BRRR process. The Committee also extends its unreserved gratitude to the Committee staff that has willingly and voluntarily ensured that work is done even beyond normal working hours, setting a good example for all public servants. Lastly, the words of appreciation go to Committee members for their constructive contribution towards the success of the Committee. 

Report to be considered.