ATC141030: The Budgetary Review and Recommendations Report of the Portfolio Committee on Small Business Development, dated 29 October 2014

The Budgetary Review and Recommendations Report of the Portfolio Committee on Small Business Development, dated 29 October 2014

The Portfolio Committee on Small Business Development, having considered the performance and submission to the National Treasury for the medium term period of the Department of Small Business Development, reports as follows:

1. Introduction

For some years even before 1994, the end of the apartheid, the lives of the majority of ordinary South Africans especially Blacks have relied on the Small Medium Micro Enterprises (SMMEs) sector particularlyin the informal sector. Their incomes and work have been secured in this sector. This sector shows the potential to reduce unemployment and poverty rates and create a fairer distribution of income. Hence this sector has become a focal point for South Africa because of the critical and important role it is perceived to play for economic and social development.

Currently, South Africa is characterised by two economies, that is, the first and second economies. Bulk of the informal sector falls under the second economy. The two economies are totally distinct from each other. The first economy is modern, integrated with the global economy and possesses much of the country’s wealth. Whilst the second economy is underdeveloped, isolatedfrom the first and global economies and contributes little compared to its potential to the country’s wealth. Meanwhile, the majority of poor South Africans are concentrated in second economy in order to generate their incomes. In addition, the Survey of Employers and Self Employed conducted by Statistics South Africa in 2013 revealed that about 69.2 percent of the participants in this sector participated because of unemployment. This means that the majorityof thenational labour force rely on the informal sector to earn their living. Therefore, the informal sector is an important source of jobs for many groups.

Importantly, aside from creating jobs, there are other benefits accrued in expanding this sector through broadening the base of new and existing businesses, these includebenefits such as the reduction of economic concentration, higher levels of competition, and increased opportunities for Broad Base Black Economic Empowerment. There are real obstacles ( as identified in National Development Plan) to creating an environment that can lead to the realisation of the afore-said benefits, these include amongst others, policy environment that traditionally favours concentration and large corporations, and distortions created by apartheid in ownership and access to land, capital and skills for the majority of population. Thus, SMMEs and Cooperatives can also play a pivotal role in changing apartheid legacy patterns of business ownership.

It is against this background that the current government deems the development of SMMEs and Cooperatives as the panaceafor employment, poverty reduction and fairer distribution of income, and to radically transform the economy as far as business ownership patterns are concerned. To crystallise its commitment in the development of Small Business and Cooperative as a tool for radical economic transformation, the current government administration has established a dedicated department that will pursue such in July 2014 after the President signed the Proclamation which establishedthe Department of Small Business Development.

1.1 Mandate of the Committee

The mandate of the Portfolio Committee on Small Business Development (the Committee) as derived from the Constitution is to maintain oversight over the Department of Small Business Development. The committee executes its mandate by doing the following:

· to monitor the financial and non-financial performance of the Department and its entities to ensure that national objectives are met;

· to process and pass legislations; and

· to facilitate public participation relating to issues of oversight and legislation.

As an integral part of Committee oversight role, Section 5 of the Money Bills Amendment Procedure and Related Matters Act, requires the National Assembly, through its committees, to annually assess the performance of each national department. A committee must submit a report of this assessment known as a Budgetary Review and Recommendation Report (BRRR).

1.2. Mandate of the Department

The mandate of the Department of Small Business Development (the Department) is informed by the Resolution of the 53 ^rd Congress of ANC and the 2014 ANC Election Manifesto. Furthermore, the mandate isderived from the different pieces of legislations and policies such as the White Paper on National Strategy for the Development and Promotion of Small Business, National Small Business Act, the Co-operatives Act, theNational Development Plan (NDP), the New Growth Path and the Industrial Policy Action Plan. Flowing from above, the Department is mandated to lead an integrated approach to the promotion and development of small business and cooperatives through a focus on the economic and legislative drivers that stimulate entrepreneurship to contribute to radical economic transformation.

1.3 .Purpose of the Budget Review and Recommendation Report

The primary purpose of the BRRR is to annually assess the performance of the Department with reference to:

1. the medium term estimates of expenditure of the department,

2. its strategic priorities and measurable objectives, as tabled with the national assembly with national budget,

3. the expenditure report relating to the Department, in this case Quarter 1 and 2 expenditure reports, and

4. financial statements and annual report of the Department.

Subsequently, the committee is 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. This gives effect to Parliament’s constitutional powers to amend the budget in line with the fiscal framework.

It is worth highlighting upfront that this Department will not have all pertinent documentation highlighted above which are necessary for constructing the BRRR, such as annual financial statements, annual report and medium term estimates expenditure tabled with the national budget since the Department was only established in July 2014. However, the draft strategic plan and proposed Medium Term Estimates and half yearly expenditure will be used as the basis to construct the BRRR and inform efficient and effective forward use of resources. Furthermore, the previous performance of the Department will be extracted from the annual report of the Department of Trade and Industry since the programme that migrated from the DTI to form the Department was budgeted for inthe DTI in the previous financial years.

1.4. Previous BRRR (recommendation and responses by the Ministers)

It should be noted that the Committee has been newly established in this current financial year, therefore it does not have the previous BRRR. However, since the function of the Department was a programme in the DTI, the DTI’s previous BRRR will be used as the basis for this BRRR. The previous DTI’s BRRR recommendedto the National Assembly to request the Minister of Finance and Minister of DTI to ensure that the Co-operative Development Agency , the Broad-Based Black Economic Empowerment Commission , the Co-operative Tribunal ,the National Trust Fund on Indigenous Knowledge, and the National Council on Indigenous Knowledge are adequately funded for the 2014/15 financial years and over the MTEF period to ensure that these bodies are able to fulfil their mandates. It is worth noting that this recommendation is not only a recommendation from the previous DTI’s BRRR but is the only recommendation found relevant to the Department of Small Business Development.

1.5. Process or steps followed in developing the Report (Methodology)

Ideally, this report is a culmination of interaction with different stakeholders that play a role in assessing the financial and non-financial performance of the Department such as the briefing by the Auditor-General on his opinion with regard to audit outcomes of the Department, as well as by the Department of Performance Monitoring and Evaluation. In addition, lessons from oversight visits and hearing from stakeholders are used to argue for reduction or addition or reconfiguration of resources and departmental programmes.

Notwithstanding the above, this report has taken into consideration the best lessons learnt from the Committee’s interaction with institutions that provide support to SMMEs and Cooperatives since it was constituted after the May 2014 general elections. These interactions enabled the Committee to assess theimpact of both financial services and non-financial services to SMMEs and Cooperatives as well as the effectiveness of programmes which were designed by the DTItodevelop SMMEs and Cooperatives. The Committee engaged with organisations that represent and provide support services to SMMEs and Cooperatives. The purpose of this exercise was to understand the state of SMMEs and Cooperatives in South Africa and to allow the affected groups to speak for themselves so that recommendations of the Committee on the BRRR could also take into consideration issues raised by SMMEs and Cooperatives from a felt need perspective.

Moreover, the Committee invited a student that had conducted research for her Master’s Degree on the mortality rate of Cooperatives in Limpopo. Entities and organisations with an interest in the development of SMMEs and Cooperatives were also invited to share their experiences with the Committee.These include Statistics South Africa, Pick ‘n Pay, AHI and Ithala Development Bank. TheCommitteeadoptedthis approach in order to get different views about the situation of SMMEs and Cooperatives including support services as well possible solutions. Emanating from those interactions, the following challenges were identified as obstacles in the growth and development of SMMEs and Cooperatives:

i. Access to finance

ii. Access to market;

iii. Lack of adequate infrastructure to enable smooth operations especially in townships, informal settlements and rural areas;

iv. Fragmented services offered by different services providers;

v. High interests charged by intermediaries;

vi. Financial services of the DFI’s that are not addressing the developmental conditions of SMMEs and Cooperatives;

vii. Inadequate training;

viii. Red tape;

ix. Non-paymentand late payment of invoices by government departments and the private sector;

x. Cumbersome and complicated processes of establishing businesses;

xi. Lack of focus of services to informal traders and street vendors and by-laws of municipalities affecting informal traders;

xii. Mushrooming of Township Malls and Rural Malls and vigorous entry of foreign nationals in the space of spaza shops that result with marginalisation of local people;

xiii. Government policies that prevent access to market and retard growth to SMMEs and Cooperatives;

xiv. Lack of adequate incentives to attract investment in under-developed areas;

xv. Lack of a database of the informal sector SMMEs;

xvi. Lack of technology use by SMMEs and Cooperatives;

xvii. Lack of entrepreneurial culture;

xviii. Supply chains are closed to small businesses; and

xix. Lack of a working relationship between the South African Bureau of Standards (SABS) and SMMEs and Cooperatives.

This was an important exercise in assisting the Committee to get a better understanding of the nature of challenges experienced by SMMEs and Cooperatives so as to make recommendations in the Budget Review Recommendations Report that would enable the Department to respond to the felt needs.

Furthermore, the Committee held a strategic workshop with the Department in preparation for this report which subsequently led to the Department completing and presenting its Draft Strategic Plan and Annual Performance Plans to the Committee, and proposed Medium Estimated Expenditure for 2015/16.

Lastly, a delegation of four members representing the Committee attended the SMMEs National Policy Colloquium organised by the Small Business Development Institute in partnership with the Department. The colloquium was attended by SMMEs and Cooperatives, organisations representing different sectors in small business, including research institutions, financial and professional services as well as Development Finance Institutions.

The limitation of this report is that it has not been able to look backwards as it was supposed to due to lack of available information as alluded in the previous paragraphs, unlike other departments who have been in operation over a longer period.

1.6 Outline of the report

This BRRR consists of five sections.

Section 1 briefly overviews the mandate of the Committee and the Department, the purpose of this report and the methodology followed in preparing this report, as well as the limitations of the report.

Section 2 sets out the key policy focus areas for the Department. This includes an overview of the relevant national prioritiesemanating from government policies and plans such as National Development Plan, the Medium Term Strategic Framework and State of Nation Address which the Department has to contribute towards achievement of. Thereafter, an overview ofthe Draft Strategic Plan will be highlighted with the aim of assessing whether or not it addresses the broader government priorities and plans emanating from the afore-said policies and plans.

Section 3 assesses the Department’sfinancial performance against its allocation (budget allocation from the DTI’s Broadened Participation Programme which the Department migrated with). The report comparesthe Department’s budgeted and actual expenditure as at 31 September 2014 which will be assessed and considers the 2015/16 MTEF programme allocation, in terms of the economic classification and per sub-programme.

Section 4 discusses the Committee’s perspective with regard to draft strategic plans presented by the Department during this BRRR process in terms of their mandates, strategic objectives and core issues previously identified by the Committee. In addition, the financial and non-financial performance and their additional forward-looking budgetary and/or performance requirements are assessed. This section is divided into governance and funding.

Section 5, draws recommendations based on the deliberations informed by the assessment of the Department in each of the sections as discussed above. These recommendations are categorised into two: Funding recommendations and Governance related recommendations.

2 Overview of the Strategic and Operational environment

The plans and objectives of the Department are determined largely by the environment in which it operates. The environment in which the Department has to operate has been enabledby active policies and plans that the current government has adopted since taking office in May 2014. The National Development Plan has been adopted as the guiding and living policy document concerning the current government planning, hence government plans and strategies have to be aligned with the NDP. Thus, all strategic plans and annual performance plans of the organs of the state have to be streamlined to align with the broader government plans (NDP and MTSF).These plans and strategies are annually reviewed during the State of Nation Address, after which the Department and its entities are expected to align their annual performance plans. Flowing from this, the next paragraphs will focus on policy areas from the NDP that are relevant to the Department.

2.1 National Development Plan

In its 53 ^rd National Conference, the ANC resolved to take the lead in mobilising and uniting all South Africans around a common vision of economic transformation that puts South Africa first. Since, the National Development Plan is a living and dynamic document and articulates a vision which is broadly in line with that of the ANC objective to create a national democratic society, the 53 ^rd National Conference resolved to use the NDP as a common basis for this mobilisation.

The NDP has highlighted a number of key issues that are related to the Mandate of the Department, and there are interalia:

Economic transformation: This means the broadening of opportunities for all South Africans, particularly for previous historically disadvantaged people. In order to realise this, there is a need for creating more employment, reducing poverty and inequality, and raising the standards of living and education through broadening ownership and control of capital accumulation; as well as equity in ownership of assets, income distribution and access to management, professions and skilled jobs.

Amongst other possible solutions proposed in the NDP to transform ownership of the economy is the creation of an enabling environment for small micro and medium enterprises (SMMEs) and entrepreneurs to thrive. This includes inculcating the spirit of entrepreneurship in schools, lowering the cost of doing business in the economy, and reducing barriers to entry in various value chains.

Small businesses support job creation and redress skewed ownership: It is postulated that small businesses will play an essential role in employment creation. This is due to their buoyancy in job creation in the period between September 2002 and September 2005 compared to large businesses in the formal sector excluding agriculture (Mgxaji, 2008). The NDP estimates that about 90% of jobs will be created by SMMEs by 2030. Other than creating employment and contributing to economic growth, SMMEs will play a key role in redressing the distortions created by apartheid in ownership, access to land, capital and skills for the majority of the South Africans.

The above explanation clearly shows the important role that can be played by small businesses in tackling the triple challenges of employment, poverty and inequality in our country. It is therefore in that spirit that the NDP proposed key support measures to small business development which are;

Public and private procurement : It is proposed that the government must make government procurement opportunities more accessible to small businesses, streamline tender processes so as to improve transparency and get rid of corruption which has to be accompanied by the commitment to 30 day payment to smaller suppliers. Moreover, there is a need to leveragethe Local Procurement Accord to promote stronger buyer-supplier relations and deeper localisation.

Regulatory environment: a comprehensive regulatory review for small businesses to assess whether special conditions are required. This includes regulations in relation to business registration, tax, labour and local government.

Access to debt and equity finance: This has to do withexamining the role of the state in easing access to finance by start-ups and emerging businesses. A risk-sharing agreement between the lender and the borrower should be created as start-ups are particularly in need of financial support and are least able to access it. Moreover, there is an urgent need to consider reformingthe mandates and operations of the DFIs in line with initiatives already undertaken, and upgrade the skills of those providing business advice and services. Further work needs to be done in finding the right blend of grant and loan finance and what repayment terms and interest rates are most likely to lead to new business formation and success. There is also an urgent need to explore the role of venture capital in stimulating new venture creation.

Small business support services: There is a need toconsolidate , strengthen and streamline these support services. The size of the business, its geographical location and the sector in which it operates will determine the kind of assistance ,needs and support interventions required. Thus, support interventions should be sub - divided, based on whether small firms are start-ups or multiple start-ups; survivalist businesses, high growth businesses, very high potential or high impact businesses; and new industries or new technology businesses.

Enterprises with the highest potential are those owned or led by entrepreneurs who have previously started businesses successfully.The state will have to create an environment with strong markets for these businesses to buy and sell, thus making it simple to start more of those businesses. This group of entrepreneurs is an important identified target market for an incentive system. In addition, another focus is on those entrepreneurs who have failed before. This is due to the fact that they will potentially find it difficult to start businesses again as credit access and so on becomes challenging. Thus, this clearly shows that the government must change its one- size fits-all support programmes.

Further, public-private partnershipsneed to be considered, where the private sector is incentivised to provide small businesses with support, with increased payment contingent on successful incubation of small businesses.

Address the skills gap: by providing training for school leavers and unemployed youth with a focus on skills development; develop skills for students currently in school with focus on grooming an entrepreneurship attitude; and promote skills development for new sectors with a focus on high-technology skills advancement.

2.2 Medium Term Strategic Framework (MTSF)

Following the adoption of the NDP, Cabinet decided in 2013 that the 2014-2019 MTSF should form the first five-year implementation phase of the NDP and mandated work to begin on aligning the plans of state organs with the NDP vision and goals. Since the May 2014 elections, the MTSF has been aligned to the national governing party’s election manifesto. The MTSF is the result of an intensive planning process involving all three spheres of government.

It provides a framework for prioritising and sequencing government programmes and development initiatives for the next five years.

Importantly, the NDP provides the framework for achieving the radical socio-economic agenda set out in the governing party’s election manifesto. It recognises the need for a capable and developmental state, a thriving business sector and strong civil society institutions with shared and complementary responsibilities. It identifies decent work, education and the capacity of the state as particularly important priorities. It also highlights the need to improve the quality of administration of many government activities.

Thus, for the next five years the MTSF has prioritised achieving radical socio economic transformation through decent employment through inclusive growth. These focus areas will be an integral part in achieving set targets aiming ata radically socio-economic transformation. The Department of Small Business Development has been assigned to champion some of the priorities. The following are the focus areas and priorities that are relevant to the Department of Small Business Development:

Expanded opportunities for historically excluded and vulnerable groups, smallbusinesses and cooperatives

The government needs to ensure that the historically excluded and vulnerable groups, in particular the youth, black women and people with disabilities, have increased access to economic opportunities. The government will continue to broaden the base of black economic empowerment, for example through promoting more employee and community share ownership, with a particular emphasis on empowering youth, women and people with disabilities. There will be an emphasis on promoting black industrialists and enterprises in the productive economy.

The Department whichis responsible for small business development will identify the institutional and regulatory changes required to accelerate the growth of the small business sector and raise its contribution to job creation. The Governmentwill also strengthen support for cooperatives, particularly in marketing and supply activities, to enable small scale producers to enter formal value chains and take advantage of economies of scale (Medium Term Strategic Framework, 2014)

Local business incubators, industrial and retail sites, marketing agencies, cooperative support programmes and access to finance are amongst the key measures required to promote small enterprise growth, reduce market concentration and expand decent work opportunities.

Key targets for the MTSF include:

An increase in the GDP growth rate from 2.5% in 2012 to 5% in 2019

An increase in the rate of investment to 25% of GDP in 2019

The share in household income of the poorest 60% of households rising from 5.6% in

2011/12 to 10% in 2019

A decrease in the official unemployment rate from 25% in the first quarter of 2013 to

14% in 2020

2.3 Draft Strategic Plan of the Department

During the BRRR process, the Department presented its Draft Strategic Plan for 2014-2019. The Draft Strategic Plan highlighted the strategic objectives of the Department for the period concernedand targets for each year. Ideally, the strategic objectives are informed by the government strategic sector or cluster priorities as derived from MTSF, focus sector policy areas emanating from policy documents such as the NDP and a situational analysis of the sector. Strategic objectives should state clearly what the government institution/department intends doing (or producing) to achieve its strategic outcomes oriented goals which are aligned to 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 SMART (Specific, Measurable, Attainable, Realistic & Time-bound) and must set a performance target that the institution can achieve by the end of the period (five years) of the Strategic Plan. Nonetheless, the Department has flagged the following as its strategic objectives:

• To facilitate the development and growth of small businesses and co-operatives to contribute to inclusive and shared economic growth and job creation through public and private sector procurement;

• To facilitate radical economic transformation through increased participation of small businesses and cooperatives in the mainstream economy;

• To advocate for a conducive regulatory environment for small businesses and co-operatives to enable access to finance, investment, trade and market access in an equitable and sustainable manner;

• To facilitate partnerships with all spheres of government as well as the private sector to ensure mutual cooperation that will benefit small businesses and co-operatives ; and

• To facilitate access to adequate infrastructure and incentives that are designed to attract investment to underdeveloped communities and reduce costs of doing business by small businesses and cooperatives.

In order to achieve the afore-said strategic objectives, the Department has set to its priorities for both 2014/15 MTEF and MTSF. These strategic priorities are formulated after considering broad government priorities, cluster priorities and sector priorities emanating from different government policy documents which were mentioned earlier. The following are the Departmental priories.

Short term priorities (2014/15 MTEF)

• Skills, training and capacity building (LED, business development support, technology transfer, innovation and entrepreneurship);

• Finalise incentives and access to finance;

• Public sector procurement (set-asides programme);

• Private sector procurement opportunities (supplier development programme, revitalization of mining towns); and

• Develop new policies, review existing policies ;and introduce strategies, i.e. roll-out of key interventions.

Long term Priorities (MTSF)

• National survey (periodic and reliable statistics);

• Design training programmes to address skills gaps including sector specific interventions;

• Develop key domestic and international markets;

• Decentralize business development services to include economic profiling and market access; and

• Develop and review the regulatory environment.

In pursuing the above-mentioned strategic objectives, its goal is to achieve the following ultimate outcomes aiming to better the lives of the poor South Africans:

• Incentive programmes aimed at creating new businesses, which will increase the potential for new jobs;

• Public and private sector procurement geared towards improving market access (including growth and development) for black small enterprises and co-operatives (e.g. fixing of potholes);

• Increased culture of entrepreneurship aimed at increasing the number of new innovate and sustainable business ventures that will contribute to job creation;

• Creating a simplified policy and regulatory environment for SMMEs and Co-operatives development to eradicate poverty, inequality and unemployment;

• Through the Export Development Programme companies will improve their ability to export and reduce the costs and risks involved in penetrating foreign markets;

• The provision of technical and business development services to the targeted groups (youth, women and people with disabilities) will result in upgraded skills, improved quality of products, access to local and international markets, enhanced and sustainable enterprises as well as increased employment; and

• Enhanced support to informal businesses, rural and township enterprises will increase their competitiveness, resulting in sustainable enterprises and retention of existing jobs.

The Department has organised itself into five programmes which are interalia:

· Programme 1: Administration - This programme will comprise 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: Customise Intervention Programmes : The key focus will be striving to improve the quality of financial and non-financial support services to SMMEs and cooperatives. Specific programmes will include the support of informal activities through the implementation of the National Informal Business Upliftment Strategy (NIBUS), which will provide subsistence for people who are economically marginalised. In addition to this, the depth on supporting market access initiatives.

· Programme 3: Cooperatives : The department will be implementing a new support model for cooperatives, including implementation of the Co-operatives Act and the establishment of a Cooperatives Development Agency and Tribunal, and developing and providing financial incentives.

· Programme 4:Research, Policy and Intergovernmental: Evaluation of existing policies enshrined in legislation affecting National Small Business, Cooperatives, Youth Enterprise Development, Women Empowerment and National Informal Strategies with a view to enhance policies in line with the mandate of the Department. The conclusion of transversal agreements with other Government Departments to enhance implementation of Departmental strategies will need to be effected. Part of the research to be conducted and policy adjustments to be made will focus on Red Tape reduction.

· Programme 5: Enterprise Development and Entrepreneurship : Programmes will be 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, aimed at advancing support for the emerging and smaller enterprises.

Flowing from the above, an analysis of whether the strategic objectives addressed 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 on the section which deals with Committee Observation (Section 4). Subsequently, areas which the Committee felt were omitted or unnecessary, duplicated and irrelevant will be highlightedwith the aim of drawing recommendations

3. Financial Performance Assessment

As alluded in the introduction that the Department was officially established in July 2014 following the signing of Proclamation by the President. Immediately after its establishment, the Broadening Participation Programme of the DTI has migrated to the new Department to pursue its planned programmes. Importantly, not all the sub-subprogrammes of sub-programmes whichconstitutethe Broadening Participation Programme migrated to form the Department, other sub-sub programmes such as Broad- Base Black Economic Empowerment (BBBEE), Support Programme for Industrial Innovation(SPII), Incubation and Technology and Human Resources for Industry Programme (THRIP) have remained with the DTI. Only the Enterprise Development sub-programme moved to the Department in its entirety. Thus, the budget for 2014/15 is extracted from the R1 billion appropriated for Broadening Participation Programme of DTI tabled during the National Budget.

Instead of dwelling on reviewing the financial performance of the Department, the bulk of the time will be spent on unpacking the funding proposal for the Department. The financial performance assessment will only focus on the first two quarters of this financial year, whereby the Department has started to use funds which were moved from the DTI. Thus, the following table will unpack the Department’s financial performance for first two quarters of 2014/15 financial year and consider the funding proposal for 2015/16 MTF.

3.1. Quarterly Financial Performance

Table 1: Overview of 2014/15 Expenditure and 2015/16 Medium Term Estimates
Programme	2011/12	2012/13	2013/14	2014/15			2015/16	2016/17	2017/18
	Outcomes	Outcomes	Outcomes	Main	Adjusted	Outcomes	Medium Term Estimates
Administration							161	177	195
Customise Intervention Programmes							112	123	136
Cooperatives							111	122	134
Research Policy and intergovernmental Relations							26	29	32
Enterprise Development and Entrepreneurship							1148	1263	1389
Total							1558	1714	1886
Broadening Participation	887.5	929.7	1010.3	710	33	743

The above table reveals that when the Department was established following the Proclamation by the President, it had an allocation of R710 million which was initially allocated for the Broadening Participation programme of the DTI. An additional amount of R33 million was allocated to the Department by National Treasury, which then increased the Departmental budget to R743 million.From the total allocation of R743 million, the Department has spent R420 million of which mostwas in the form of transfer payments (R402 million) and for the Compensation of Employees (R14 million). The actual achievements that the Department has recorded following the spending of more than half of its budget include amongst others, an increased number of SMMEs created through SEDA Technology Programme (STP) to 83 compared to the 75 that was initially targeted, establishing about 43 incubators supported through STP, and a significant increase in the number of SMMEs approved for assistance by SEDA through STP exceeding the target of 240 by more than 500 percent to 1576. Importantly, deducing from the above spending trends, this means that if the Department continues spending on the current rate, it will overspend by about R11.8 million at the end of the 2014/15financial year. Items that will significantly contribute to the projected overspending include Compensation of Employees and Goods and Services by about R8.9 million and R2.9 million respectively.

3.2 Funding Proposal for 2015/16 MTEF

The Department has proposed an allocation of R5 158 billion over the MTEF which is due toa proposed allocation of R1 558 billion (2015/16), R1 714 billion (2016/17) and R1 886 billion (2017/18). About 75.9 percent of the proposed budget of R5 158 billion will be transferred to departmental entities and the remainder( about 15 percent) used to pay salaries. Programmes that are expected to share a significant amount of the proposed budget over the MTEF include Enterprise Development and Entrepreneurship as well as Administration, and they are estimated to consume a budget of about 74 percent and 10 percent of the budget allocation respectively over the MTEF. The least budgeted programmes include, Cooperatives and Research Policy and Intergovernmental Relations with an estimated share of allocation of about 2 percent and 7 percent respectively over the MTEF.

In a nutshell, it is clear from the above explanation that the majority of proposed budget will be channelled to the departmental entities which render services on behalf of the Department in order to achieve its mandate.

Flowing from the above, the next step is to get an understanding of how the budget is proposed to be allocated in the departmental programmes and what are those items that contribute a significant share of the programme budgets.

3.2.1 Allocation per programme level

Table 1 shows that Programme 1 Administration will receive an amount of R534 million over the MTEF. Over the financial years of MTEF, the programme is budgeted to receive an amount of R161 million (2015/16), R177 million (2016/15) and R196 million (2017/18). About R 267 million (50 percent) of the proposed allocation to this programme will be used to fund compensation of employees, while R256 million (48 percent) will be used to buy goods and services for this programme. The fact that Compensation of Employees has a significant share of proposed budget for this programme, comes without a surprise since this programme is more labour intensive, ranging from all personnel of the Ministry, Office of the Director –General up to Corporate Services. However, the share of compensation of employees for this programme should not be significant when it is compared to the total budget for Compensation of Employees for the Department because this programme is not a core-function of the Department instead it is just a supporting function.

Programme 2: Customise Intervention Programmes is budgeted an amount of R371 million over the three years of MTEF. For the financial years of MTEF this programme is budgeted an amount R112 million (2015/16), R 123 million (2016/17) and R135 million (2017/18). The significant amount of budget will be spent on Compensation of Employees, amounting to R198 million (50 percent) over the MTEF. Of which an amount of R95 million (26 percent) and R77 million (21 percent) has been budgeted for Transfer Payments and Goods and Services.

Programme 3 : Cooperatives is set to receive an amount of R366 million over the MTEF. For the financial years of MTEF, this programme has been budgeted to receive an amount of R110 million, R121 million and R133 million for 2015/16. 2016/17 and 2017/18 respectively. About 54 percent (R199 million) will be transferred to Departmental Entities, particularly, Cooperative Development Agency and Cooperatives; of which R114 million (31 percent) will compensate employees. Importantly, there are two matters of concern to the allocation proposed for this programme, firstly, its total share to the proposed budget of R 5188 billion over the MTEF and secondly, the significant spending budgeted for Compensation of Employees and Transfers.

Firstly, the total share of this programme to the total budget requested over the MTEF amounts to R367 million (7 percent) of R5 188 billion which is lower than the proposed budget for Programme 1: Administration, which renders a support function to the Department. The development of Cooperatives is one of the core-functions of the Department as alluded in the previous paragraphs. It was previously mentioned that the Resolution of 53 ^rd National Conference of the ANC, National Development Plan, the ANC 2014 Manifesto and the MTSF have prioritised the development of Cooperatives as one of the tools for economic transformation. Therefore, this has to share a significant amount of the proposed budget in order to achieve its objectives.

Secondly, the fact that both Transfer Payments and Compensation of Employees share a significant amount of the budget proposed to be allocated for this programme is confusing. This is due to the fact that once an Agency/Entity is created, it means that much of the planned work /programmes that could have been performed by the Department is executed by that particular Agency or Entity. So, the Department just monitors the implementation of such planned work/programmes. This analogy has to be translated into the budget in the sense that, when the budget set to be transferred to entities increases, the budget for compensation of employees in the Department should decrease.

Programme 4: Research, Policy and Intergovernmental Relations is budgeted an amount of R87 million over the MTEF. Over the financial years of the MTEF, this programme is budgeted an amount of R26 million (2015/16), R29 million (206/17) and R32 million (2017/18). Of the budgeted amount of R87 million, a significant budget will be spent on Compensation of employees amounting to R72 million (84 percent) over the MTEF. This is in tandem with the functions of this programme since it is labour intensive. In order to achieve the set targets of this programme, professional personnel will have to be hired, who are experts in research to different fields of study. Taking into consideration the scarcity of skills in South Africa, personnel that will be employed in this programme will not come cheap. The Department will have to hire them with special notches following the guidelines from Department of Public Administration of remuneration of scarce skills.

Programme 5: Enterprise Development and Entrepreneurship is budgeted an amount of R3.8 billion over the MTEF. Of the proposed budgeted amount of R3.8 billion, R1.1 billion, R1.3 billion and R1.4 billion will be spent in 2015/16, 2016/17 and 2017/18 financial years respectively. A significant share of this proposed budget, R3 .7 billion( 94.5 percent) will be transferred to departmental entities in particular the Small Enterprise Development Agency (SEDA). Interestingly, the Compensation of Employees share an insignificant amount of R119 million (3.1 percent) over the MTEF. This programme is one of the core-function programmes as per the mandate of the Department. Thus, this means that its core function will be delivered by the agency and not by the Department.

4. Observation of the Committee

The Committee welcomed and commended the strategic plan of the Department. The Strategic objectives proposed in the Departmental Strategic Plan have been found to align with the mandate, vision and mission statement of the Department. In addition, strategic objectives are set to achieve the focus policy areas relevant to the Department. Furthermore, the strategic plans in the form of set targets and outcomes were found to align with the strategic objectives of the Department. Lastly, the proposed resources to fund the execution of strategic plans are alignedwith the set targets.

It is however clear that there are still some gaps with regard to understanding the needs of the target market in order to determine the relevant support provision leading to the need to conduct research to increase this understanding. In addition, taking into consideration that informal traders and street vendors are still subjected to inhumane conditions, the Department should have included Human Dignity as one of its values to demonstrate its understanding of its target groups (poor people). Lastly, The Department has not included People Centred and People Driven development approach as a guiding value in responding to the felt needs of South Africans.It is also not in line in terms of keepingwith the principles of community development that requires development processes to allow peoples’ experiences to influence interventions needed, rather than imposing on people interventions that are based on the perceived needs.

4.1 Governance

In his Medium Budget Policy Statement, the Minister of Finance put an emphasis on savings and reprioritisation of expenditure. This is due to the limited budget that the country operates upon, which has to fund productive investment expenditure, service delivery and service the country’s debt. In line with that he encouraged the government departments to reconsider transferring funds to entities and instead build the internal capacity.

Flowing from that thereis a need to consider the current funds budgeted to be transferred to departmental entities. This is due to the fact that there is quite a substantial amount of money that is lost in this value chain before it reaches the target. The costs of running these entities are quite significant although their impact is not clearly felt. Thus, it is suggested that a scientific study be conducted to evaluate their impact, relevance and contribution to the Departmental Mandate, Vision and Mission as well as the possibility of locating these services under one roof or in the LEDs of Municipalities so as to reduce costs and also make them more accessible.

The Committee raised some concerns in the slow progress in the migration of programs from both DTI and the Department of Economic Development (EDD). This slow progress of migration creates challenges of fast - tracking the development of effective programmes which is directly linked to solutions to socio-economic challenges. Moreover, this delays the scientific research that needs to be undertaken to determine their effectiveness and alignment to the Departmental mandate. Programmes such as Incubation Support Programmes (ISP) and Small Enterprise Finance Agency (SEFA) are aligned to the departmental strategic objective and they can be used to achieve those strategic objectives. Furthermore, the NDP which is a springboard for the establishment of the department, has highlighted debt equity and finance, and the public-private partnership whereby the private sector is incentivised to provide small businesses with support, with increased payment contingent on success (incubation).

The signing of transversal agreements serves as the integral part of the Departmental strategy to execute some of its tasks in order to achieve its overarching ultimate goals of job creation, poverty reduction and fairer distribution of income. With regards to the signing of transversal agreements, the Committee raised concerns that agreements signed should reflect the understanding of both parties entered into such agreements, to ensure that it is of mutual benefit to both parties. For example a transversal agreement between a departmental and municipality should reflect both department and municipal priorities. The motive behind is to have a mutual understanding of how to execute the planned activities and to safeguard that no priorities take precedence over others.

The Committee also raised concerns with regard to the migrating of functions that were not performing well in the DTI to the Department. This came as a challenge for the Department because it has to be embedded with those non-performing functionswhich were inherited from the DTI.

The Committee observed that the performance indicators of the Department are focusing more on the number of SMMEs and Cooperatives that would have been assisted as a tool of measurement without looking at the impact of SMMEs and Cooperatives on job creation and poverty reduction. The Department also tends to generalise on youth unemployment and fails to specifically identify the youth that is mostly affected by unemployment and poverty. This would be vital in bringing services closer to thehighest levels of unemployment. The Departmentalso needs to relate the process of SMMEs and Cooperatives development to skills training that focuses on skills that are needed to provide services.

Key to the success is the ability to research the market and develop a marketing mix at business level with an active role played by the government to address the uncontrollable factors of marketing. The Department of Small Business Development has not included the establishment of a marketing unit within itsstructure to navigate the public procurement and lead the process of opening that market for SMMEs and Cooperatives.This is a blind spot to thatpart of the Department. The functions of that unit would also include facilitating training that relates to identified markets so as to absorb the unemployable youth due to lack of skills required to tap into existing market opportunities. That should also be done taking into consideration that a relationship needs to be facilitated between government departments, State Owned Enterprises, big businesses ,SMMEs and Cooperatives.

4.2. Funding

Emanating from Section 3, it is clear that there is an urgent need to consider the transfer payments to the Departmental Entities. The majority of the budget is transferred to these entities but there is little oversight conducted on these entities. In most cases, the oversight is conducted in the Department rather than them. This calls for an in- depth analysis and deliberations that will lead to a better approach to monitor the prudent use of public fundsby those entities. If it is better and more convenient to monitor the prudent use of public funds at a Departmental level, whichwill then mean that the Department will have to consider performing those functions that are relegated to entities.

Furthermore, it is concerning that in most cases, both compensation of employees and transfer payments share a significant budget in some programmes, for example Cooperative in this case. This is a sign of duplication of resources that could have better been used elsewhere for the betterment of the lives of the South African citizens.

Moreover, the least share of the budget by the programmes which are directly linked to the mandate of the Department is a matter of concern. Substantial resources have to be allocated in programmes that are the core-functions of the Department not to support function programmes. In this case an example is given in Section 3 under Programme 3 Cooperatives.

5. Recommendations

The Portfolio Committee on Small Business Development recommends the following:

5.1. Funding Recommendations

The Department should:

1. Be allocated the proposed funds;

2. Consider reviewing its transfer payments to identify savings going forward;

3. Allocate more resources to core-functional programmes (Cooperatives, and Enterprise Development and Entrepreneurship); and

4. Develop a guiding document on how will it administer loans and grants to finance SMMEs and Cooperatives.

5.2. Governance recommendation

The Department should:

1. Ensure that all necessary functions which are aligned with the mandate of the Department which are still located in other Departments are migrated to the Department;

2. Conduct research on needs analysis of the target market (poor communities) in order to tailor-make and streamline the relevant support provisions that will respond positively in tackling the triple challenges of unemployment, poverty and inequality;

3. Conduct a scientific study to assess the effectiveness and efficiency of the departmental entities and programmes which migrated from the DTI in order to align them with the mandate of the Department;

4. Reconfigure Programme 4 in order to accommodate the Market Research Unitso as to conduct market research for SMMES and Cooperatives, especially those that are at an initial stage of development. To also identify the market and assist SMMEs and Cooperatives to access the public procurement market and sort out the uncontrollable factors that affect SMMEs and Cooperative as part of creating an enabling environment for the development and growth of SMMEs and Cooperatives;

5. Submit a more detailed organogram stipulating roles and skills needed for each role and also explain how the budgeted amount for compensation of employees relates to the organogram of the Department;

6. Ensure all Transversal Agreements are presented to the Committee prior to and after signing by the Department for monitoring purposes; and

7. Include the regulatory environment to its short term priorities.

Report to be considered.