ATC191022: Budgetary Review and Recommendation Report of the Portfolio Committee on Small Business Development, dated 22 October 2019

Small Business Development

THE BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE PORTFOLIO COMMITTEE ON SMALL BUSINESS DEVELOPMENT, DATED 22 OCTOBER 2019
 

The Portfolio Committee on Small Business Development (“the Committee”), having considered the performance of the Department of Small Business Development and its entities for the financial year 2018/19 reports as follows:

 

  1. INTRODUCTION

 

The Department and its entities, Small Enterprise Development Agency (“Seda”) and Small Enterprise Finance Agency (“sefa”), tabled and presented to the Portfolio Committee their 2018/19 annual reports, together with annual audited financial and non-financial performance results for consideration by Parliament on 10 October 2019. The current Budgetary Review Recommendation Report (“BRRR”) process takes place at a time when the global economy is going through the most indeterminate period precipitated, amongst others, by BREXIT, tension between Iran and Saudi Arabia, with harmful implications on the oil prices, and trade standoff between China and the United States. South African economy in particular continues to tussle with serious economic headwinds from sluggish economic growth, rising government debt to rising unemployment. According to Statistics South Africa (“STATSSA”), the country’s economy grew by 0.8% in 2018, and only expected to grow by 1.9% in 2019.

 

During the first quarter, ending June 2019, South Africa’s gross domestic product (“GDP”) weakened by 3.2%, the biggest quarterly drop in GDP in 10 years, main contributors to the collapse being the manufacturing (-8.8%), mining (-10.8%) and agriculture (-13.2%) sectors. It nevertheless recovered slightly to 3.2% during Q2 of 2019. The government debt is fast approaching 60% mark while during quarter two (2), the Quarterly Labour Force Survey recorded a substantial increase in the level of unemployment of 1.4 percentage points from 27.6% in the first quarter of 2019 to a record 16-year high of 29% in the second quarter of 2019. All these developments are weighing heavily on the government and the Department in particular to fulfilling its constitutional obligation.

 

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 BRRR therefore 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 mandatory for Parliament to consider the Department’s budgetary needs and shortfalls vis-à-vis the Department’s operational efficiency and performance. 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.

 

1.2        Methodology used in the formulation of this BRRR

The Committee interrogated all presentations and 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 2018/19 financial year as outlined in the Annual Performance Plan (“APP”) of the Department against the set of targets as presented in the tabled annual performance plan in 2018. Furthermore, the Portfolio Committee engaged a number of different stakeholders and various organs of state that play a role in assessing the financial and non-financial performance of the Department, including the briefing by the Auditor-General of South Africa (“AGSA”), alternatively, (“AG”), Department of Planning, Monitoring and Evaluation (“DPME”) and Financial and Fiscal Commission (“FFC”) concerning the audit outcomes of the Department and its entities. The Department of Public Service Administration (“DPSA”) had also been invited but tendered its apology after it emerged that the Department of Small Business Development is going to embark on a strategic planning process that is most likely result in the organisational structure being reconfigured.  

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”). 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.

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 first generation Medium Term Strategic Framework (“MTSF”), namely, Outcome 4: Decent employment through inclusive growth, and Outcome 7: Rural development. The current annual report being assessed marks the conclusion of the first generation MTSF that started in 2014.

 

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 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. 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”.

 

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 to 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 2017/18 BRRR recommendations to ascertain if any of these have at all been implemented.

 

Section four (4) considers the Department’s financial performance against its allocation for the financial year 2018/19. It briefly examines the 2019/20 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 evaluated.

 

Section seven (7) of the report discusses the Committee’s observations and perspectives 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 sums up all issues of interests and concerns to the Committee that could have been handled differently and issues that require DSBD attention going forward.

 

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. Ordinarily, these recommendations are categorised into two: Funding recommendations and Governance related recommendations. However owing to the continuous underspending by the Department, throughout the fifth Parliament, the Portfolio Committee has had no reasons to direct its recommendations to the National Treasury.

 

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 explored a number of micro and macroeconomic policy measures that yielded inconsequential results.

 

The adoption of the National Development Plan not only placed an 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, and Medium Term Strategic Framework 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.

 

2.1        Relationship with National Development Plan (NDP)

The implementation of the National Development Plan (NDP) is one of the key government imperatives under the current administration and is aligned with the Africa Agenda and the global Sustainable Development Goals (“SDGs”). The NDP focuses us on the overall objectives, supported by South Africans, to eradicate poverty and substantially reduce inequality by 2030 through the creation of jobs and accelerating inclusive economic growth. The Department is directed to implement chapters three (3) and six (6) of the NDP 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.

 

2.2        Relationship with the New Growth Path

In terms of the New Growth Path (“NGP”), the Department is mandated to implement various policy propositions for growth, decent employment and equity. Its foremost objective is to push for the creation of 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”.

2.3        Relationship with the Medium Term Strategic Framework

The current period marks the end of the first Medium Term Strategic Framework following the adoption of the NDP. The Cabinet had decided back in 2013 that the 2014 - 2019 MTSF would form the first five-year implementation phase of the NDP and mandated work to begin on aligning the plans of the state organs with the NDP vision and goals. Thus, for the past five years the MTSF has made some priorities aimed at achieving radical socio-economic transformation through decent employment and inclusive growth. The Department of Small Business Development had been assigned to champion some of the priorities, namely, outcome four (4): Decent employment through inclusive growth, outcome five (5): A skilled and capable workforce to support an inclusive growth path and outcome seven (7): Rural development. The 2019 - 2024 MTSF, to inform the new strategic plan of the Department and entities, is still being finalised.

 

2.4        State of the Nation Address

Owing to the national general elections held on 8 May 2019, South Africa has had two State of the Nation Address, February and June 2019. In both SONAs, the President emphasised government commitment towards increasing local demand through, among other things, increasing the proportion of local goods and services procured by both government and the private sector, import replacement measures and stressed the importance of small business incubation programmes. Also in terms of market access opportunities for small enterprises infrastructure has been given a special priority with R100 billion set aside to seed the Infrastructure Fund. Labour intensive sectors particularly agriculture and agro-processing have consistently received special attention with R3.9 billion allocated to the Land Bank to support black commercial and emerging farmers. Business premises and access to affordable infrastructure for small enterprises remains one of the notable bottlenecks, the President stressed the significance of revamping industrial parks in townships and rural areas that have been lying idle for years.

 

2.5        Strategic Plan of the Department: 2015-2019 (Revised in 2017)

During 2017, the Department embarked on a process of reviewing its strategic plan which was ultimately approved by the Minister. The revised strategic plan, informing the 2018/19 annual performance plan and budget were accordingly considered by the Portfolio Committee during May 2018. The strategic plan review process was complemented by restructuring of the organisational structure to ensure alignment with the budget structure for 2018/19. The current performance and financial reporting is therefore centred on the four programmes as contained in this strategic plan. As alluded to hereinabove the Department has indicated that this strategic plan will be overhauled in order to conform to the new government priorities.

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 developed its Strategic Plan and 30 Strategic Objectives. 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 fourth Parliament, most of them under the stewardship of the Department(s) of Trade and Industry (the dti) as well as Economic Development (“EDD”), were integrated into the new plans of the fifth Parliamentary plans, specifically the plans of the DSBD, and with extension, the Portfolio Committee on Small Business Development. Following the general elections and reorganisation of the state departments EDD has been absorbed by the the dti. However, it is expected that some of the functions, budget and personnel e.g. rural and township economy, informal and social economy and others will be transferred to DSBD.

 

3.         SUMMARY OF PREVIOUS KEY COMMITTEE RECOMMENDATIONS

 

During the 2018 Budgetary Review and Recommendation Report, the Portfolio Committee made the following recommendations:

 

 Table 1: 2018 BRR Recommendations

 

Recommendations

Response from the Department

1.

Despite the challenges, the Portfolio Committee is of the view that the Department has taken necessary steps in addressing some of these challenges. The Portfolio Committee would like to see some of the remaining issues i.e. finalisation of the organisational structure and the protracted question of a strategic plan addressed by 31 October 2018;

Due to the transition process, the National Government is in the process of finalising the Medium Term Strategic Framework for the next five years. It is projected that cabinet will approve this by the end of October 2019. The MTSF will then assist the Department to finalise its strategic framework which is linked to the MTSF. Then the strategy will inform the development of the structure of the organisation because the structure follows the strategy. The department is eager to finalise the structure and get concurrence from the Minister of Public Service and Administration so that it can start with the process of filling positions.

2.

In line with the Auditor General recommendations, the Department should report  quarterly to the Portfolio 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;

The department will be providing the report on findings of the Auditor General to the PC and submit it as part of its quarterly reports.

 

3.

The Department and Seda have to provide the Portfolio Committee with a detailed plan of action on how it plans to recover monies erroneously paid to the former sefa CEO before 31 October 2018;

Provisions from the regulatory and legislative from Treasury Regulations (TR 20.2. 1) ensure that one cannot be remunerated twice from the same source of income/revenue.

 

The exception to Treasury Regulation Section 20.2.1 as stated in Treasury Regulation Section 20.2.3 is that a person employed by an organ of state/in public service/in service of the state who serves on a Board as a non-executive member may receive remuneration for work outside his/her official duties if approval is obtained from the Executive Authority to take up remunerative work outside his/her official duties. In such an instance, the person will be paid sitting time, preparation time, travelling time in fact all regular expenses; Interpretation of this exception and letter of appointment from the Executive Authority were the root –cause for payments made.

 

As per guidance from the National Treasury and provisions of TR 20.2.1, the Board Member   has to forfeit payment or forfeit annual leave.  The Board member has to take 1 day's leave from his/her employer for each day of Board meeting. Discussions in this regard have been concluded with the former sefa CEO and confirmation/ verification of leave days forfeited from the employing organ of State has been received. The final verification is underway for finalisation before 31 October 2019.

4.

The Department and Seda should furnish the Portfolio Committee with a detailed plan of action in addressing National Treasury and Auditor General concerns regarding irregular expenditure incurred in the implementation of national gazelles by 31 October 2018;

Seda Management made a submission to National Treasury to condone the amount of the irregular expenditure. Additional information that was requested by National Treasury on corrective actions taken to prevent circumstances that led to this irregular expenditure was submitted to them.  Seda also took disciplinary actions against Management Officials that are currently in its employment that were key in the processes for preparation and finalisation of the contract, while other managers are no longer employed by Seda.  With all this information already furnished to the National Treasury, Seda is awaiting feedback from National Treasury to confirm that all its concerns and expectations have been fully addressed.

5.

The Department must expeditiously deal with issues of underperformance. In its own admission, strategic posts have remained vacant for far too long. The Portfolio Committee is concerned that absence of a permanent Director General may handicap the Department in fulfilling its constitutional and legislative obligations. 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 2018/19 financial year;

The filling of posts will be dependent on the finalisation of the structure. Cabinet also decided that Departments should delay the filling of DDG posts until the National Micro Organisation of Government process is finalised.

 

6.

With out-of-date National Small Enterprise Act, the Department is in some way operating in a vacuum. The finalisation of the Act must be accelerated. The Portfolio Committee notes that the schedule was gazetted. The draft bill must be submitted to Parliament before 31 March 2019;

The Department is not operating in a vacuum as the existing act has not been repealed. Due to the urgency of certain matters the Department with the support of the Office of the Chief State Law Adviser has prioritised the amendment on three critical areas; (1) Additional clause to allow for the establishment of the Office of the Ombudsman, (2) Additional clause to enable the Minister to issue regulations on matters pertaining to small businesses, and (3) Additional clause to enable the Minister to deal with licencing of small businesses. The bill with these amendments will be presented to parliament within this current financial year. The comprehensive bill that talks to all other issues will be submitted next year.

7.

The high failure rate of co-operative enterprises remains a constant reminder that CIS intervention without providing rudimentary support to co-operatives i.e. infrastructure, capital and market access, skills development and systematic elimination of inefficiency costs, have failed and therefore necessitate appraisal. In its current arrangement, CIS is essentially about distributing money to co-operatives with no monitoring and evaluation. The Committee is thus reiterating and stressing the urgency by the Department to finalise the review of the Co-operative Incentive Scheme before 31 March 2018;

As pronounced by the President during the State of the Nation Address the Department is moving towards the blended finance model and co-operatives will be funded through that model, therefore CIS will cease to exist in its current form. Blended Financing will also have mechanisms in place that will ensure that entities funded receive post-funding support, which will ensure that they become successful.

 

8.

The Department must further speed up the creation of Co-operative Development Agency in order to champion and fast-track the creation of Co-operative Financial Institutions (“CFI”) and Co-operative Banks, promotion of community stokvels with a view to converting or formalising them into CFI’s and Co-operative Banks and mainstream economy. 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;

The department has decided to take a more strategic approach with regards to the issue of access to finance for SMMEs and Co-operatives. Currently the department is working with the National Treasury to develop a Small Business Finance policy which will also cover this matter.

 

9.

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 of the functions and units are being transferred from National Treasury to Prudential Authority (“PA”), an agency of the South African Reserve Bank (“SARB”). Notwithstanding that CBDA is currently under the chairpersonship of an official from the Department of Small Business Development, there appears to be no consultation or strategic engagement between CBDA and DSBD. The Department seem out of touch with the recent developments at CBDA and Prudential Authority, in particular the opportunity this development provides in developing financial co-operatives. The Department has a duty to engage both entities with a view to crafting a strategy to develop and support financial co-operatives;

Recent regulation and supervision roles of cooperative financial institutions is transferred to the SARB, being the Prudential Authority, thereby reshaping the role of CBDA. CBDA is now solely mandated to support, promote and develop a sustainable and responsible cooperative financial sector. For the 2019/20 financial year, CBDA and National Treasury in partnership with Department of Small Business Development (DSBD) are working on the development of a well-funded, supported and defensible Co-operative Banking Strategy for South Africa. World Bank supports the formulation of a comprehensive reform plan for the cooperative banking sector in order to make it viable, efficient and effective and to help CBDA optimise its delivery of support to the sector. In this regard, Rabo Bank Partnerships and EBS Advisory are engaged by World Bank to provide input in the formulation of this strategy and options for reform of the South African cooperative financial institutions sector.

 

The (potential) role of cooperative financial institutions as agents for inclusive growth and financial inclusion are addressed at parliament level and the Ministry of Finance has reaffirmed its commitment to develop a robust and sustainable cooperative sector including financial cooperatives. Strengthening (or the creation) of a cooperative financial sector is envisaged as an important step forwards contributing to the advancement of social and economic welfare of all South Africans. To support the government in its efforts to advance financial inclusion in the country the current project, aims to seek ways to revitalize the cooperative financial sector in South Africa.

 

In addition, DSBD through SEFA funding to the tune of R6m has supported the development of the National Banking Platform for the Cooperatives Financial Institutions (CFI). Cooperatives Banks and Financial Institutions currently controlled assets to the tune of R 279 million. This is very low when compared to elsewhere in Africa and globally. It is however, envisioned that they rollout of the new national strategy will inject a huge dose of growth and development of the sector by upscaling the support accordingly.

 

CBDA and DSBD have made serious inputs into the process driven by National Treasury to review the regulatory and legislative framework particularly on the R30 million deposit limit set for cooperatives, the limit on 15% external credit, the limited investment vehicles, the exclusion of CFIs from financial support, and the capitalisation of CFIs. CBDA and DSBD, in order to protect consumers of CFIs services, is proposing for the creation of a deposit insurance fund because members are 100% exposed should the institutions lose funds, especially as they are predominantly from the most vulnerable strata of society. The proposed national banking strategy is reviewing the cooperative banking model. The dependence on member contributions for capitalisation delays economic growth. It posits that there should be more emphasis on enterprise lending to support to promote CFIs as intermediaries at local level. There must also be minimum skills and competency requirements for Boards, managers and personnel of CFIs.

10.

The Department has a responsibility, in conjunction with sefa, to rapidly finalise the development of the rescue strategy for struggling small enterprises before 31 March 2019. 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;

The business rescue strategy was finalised over a year ago and is being implemented.

 

11.

As previously recommended, Section 2 of the National Small Business Amendment Act No 26 of 2003 requires the Minister to appoint members of the Advisory Board. The Department has so far not supplied the Portfolio Committee with plausible or compelling reasons why after 24 months of having started the process, the Advisory Body is not up and running;

The process of appointing the Board is underway and will be finalised in November 2019.

 

12.

Furthermore, the Portfolio Committee had in the past recommended to the Department needs to engage National Treasury in order to ascertain how much it would cost to establish necessary institutional support structures i.e. Co-operatives Development Agency, Co-operatives Advisory Council, Co-operative Development Fund and Co-operatives Tribunal, including discussions with the Department of Higher Education concerning the Co-operatives Training Academy. In light of the present co-operatives mortality rate such institutional support structures are indispensable;

There are two main reasons why we will not proceed with the setting up of these entities. Firstly, the priorities of the sixth administration are clear we are expected to upscale support to small enterprises and co-operatives to enable this sector to contribute more, moving their contribution to GDP from 35% to 50%. This therefore means we have to treat co-operatives enterprises as serious business enterprise and setting up separating structures apart from SMEs will not help that course. Co-operatives will be treated as business enterprises and SME Ombudsman that we are working on setting up will assist co-operatives as well. The establishment of academies is the mandate of the Department of Higher Education and they are the ones who can set up the Academy, which is doubtful given the fact that there are limited resources in government and it will make more sense to have curriculum dedicated to co-operatives in the existing institutions like TVET Colleges and Universities. Secondly, these agencies were proposed as far back as 2012 when the government was doing well and had financial resources to establish institutions. The fiscus is under strain and cannot afford establishment of institutions.

13.

In keeping with the principle of the Portfolio Strategic Framework approach, Seda Accounting Officer ought to be appointed as a Non-Executive Director to the sefa Board of Directors before the end of Q3 2018/19 financial year;

The sefa memorandum of incorporation does not make provision for the appointment of Non-Executive Directors.

 

14.

Treasury Regulation 8.2.3 provides that “Unless determined otherwise in a contract or other agreement, all payments due to creditors must be settled within 30 days from receipt of an invoice or, in the case of civil claims, from the date of settlement or court judgement”. The prescribed period referred to in section 38(1)(f) of the Public Finance Management Act (“PFMA”) is 30 days from receipt of an invoice or, in the case of civil claims, from the date of settlement or court judgement, as provided in Treasury Regulation 8.2.3. Timeous payment of services rendered to some government departments and state owned entities continue to kill small enterprises and co-operatives. The Portfolio Committee is of the strong view that the Minister of Small Business Development must write to the Ministers of Public Service Administration (“DPSA”) and Planning, Monitoring and Evaluation (“DPME”), with a view to constituting a core team that will ensure that the accounting officer’s responsibility [in terms of section 38(1)(f)] to settle all contractual obligations and to pay all money owing, including intergovernmental claims, is adhered to within the prescribed (30 days) or agreed period.

The department has a more practical approach that it is pursuing which is to push for the amendment of the act to enable the charge of automatic interest on more than 30 days outstanding payments for SMMEs. Then this money will be deemed as irregular expenditure by Auditor General and the officials responsible for this expenditure will be expected to reimburse the State for the interest payment.

 

Source: 2018 BRRR report

4.         OVERVIEW AND ASSESSMENT OF FINANCIAL PERFORMANCE

 

Of the R1.488 appropriated to the Department of Small Business Development during the previous financial year, the Department successfully disbursed R1.420 billion or 95% of the adjusted budget. The Department thus incurred an underspending of R69 million or 4.6% of the budget. Compared to the previous financial year 2017/19 it registered a negligible decline of 3.5% from an impressive 98.9%. The Department received unqualified audit opinion with findings. The Auditor General cautioned the Department that the instability and prolonged vacancies in key positions could cause a competency gap and affect the rate of improvement in audit outcomes. Accordingly, expenditure performance decline has largely been attributed to high vacancy rate in the senior management level. Table 2 below provides a summary or synthesis of what had been allocated to the Department, allocation for four branches or programmes, actual expenditure by each branch, variances as well as branch and DSBD expenditure in percentage terms. Administration programme continue to receive the largest chunk of the budget, R127 million, compared to other three (3) core programmes of the Department.

 

Table 2: Financial Performance Overview

Programme

Adjusted Appropriation

Final Appropriation

Actual Expenditure

Variance

Expenditure as a % of Final Appropriation

R’000

R’000

R’000

R’000

R’000

Administration

127 121

127 940

126 461

2 489

98.1%

Sector Policy and Research

22 447

21 012

17 023

3 989

81.0%

Integrated Co-operatives Development

116 017

121 776

76 278

46 497

61.8%

Enterprise Development and Entrepreneurship

1 223 868

1 217 726

1 201 766

15 960

98.7%

Total

1 488 453

1 488 453

1 419 518

68 935

95.4%

Source: 2018/19 DSBD Annual Report

 

In terms of economic classification as illustrated in table 3 below expenditure on the compensation of employees was R133 million (95.4%) against the overall budget of R140.6 million. There was therefore an underspending of R7.6 million (5.4%). Spending on goods and services was R73.6 million (93.3%) against the overall budget of R78.9 million which constitutes an under-spending of R5.3 million (6.7%). While outlay on capital assets was R6.5 million (98.5%) against the overall budget of R6.6 million which constitutes an underspending of R98 thousand (1.5%). Expenditure on transfer and subsidies was R1.206 billion (95.6%) against the overall budget of R1.262 billion, which constitutes an underspending of R55.9 million (4.4%).

 

Table 3: Economic Classification

Economic Classification

Final

Appropriation

Actual Expenditure

(Over)/Under Expenditure

Variance as a % of Final Appropriation

(R’000)

(R’000) (%)

(R’000)

 

Compensation of Employees

140 632

133 036

7 596

5.4%

Goods and services

78 860

73 551

5 309

6.7%

Capital asset

5 126

5 030

96

1.9%

Transfers and Subsidies

1 262 380

1 206 447

55 933

4.4%

Total

1 488 453

1 419 518

68 935

4.6%

Source: DSBD Annual Report (2018/19)

 

Major costs drivers were transfers to Seda (R840.089 million) and internally implemented grants (R355.703 million), operating leases for office space and pool cars (R20.4 million), travel and accommodation for official trips undertaken (R20.8 million), regulatory and forensic audits by the Auditor-General (R5.3 million), computer services for State Information Technology Agency (“SITA”). The substantial underspending of R55.9 million which occurred on transfers and subsidies were as a consequent of flailing Co-operative Incentive Scheme (“CIS”) grants that underspent by R42.1 million (50.5%), the Black Business Supplier Development Programme (“BBSDP”) underspending of R13.2 million (4.9%) and National Informal Business Upliftment Strategy (“NIBUS”) underspent by R496 thousand (0.9%). On the issue of transfers and subsidies, the Portfolio Committee and AGSA, have in the past raised the amounts beings transferred (90% of the budget) as untenable.  In its presentation to the Portfolio Committee the Financial and Fiscal Commission (“FFC”) raised similar concerns for the Committee to note when approving DSBD budget.

 

4.1        Funding Proposal for 2019 MTEF

For the 2018/19 financial year and three (3) outer years the Department’s budget is distributed across the following four programmes: -

  • Programme 1: Administration;
  • Programme 2: Sector Policy and Research;
  • Programme 3: Integrated Co-operatives Development and;
  • Programme 4: Enterprise Development and Entrepreneurship.

 

Table 4: Overview of 2019/2020 Budget and MTEF Estimates

PROGRAMME

MAIN APPROPRIATION

MTEF

 

2018/19

 R’000

2019/20

 R’000

2020/21

R’000

2021/22

R’000   

TOTAL OVER MTEF

R’000   

Administration

127,121

124,388

          131,496

       139,630

    395,514

Sector Policy and Research

 

22,447

            35,615

            39,416

            42,310

      117,341

Integrated Co-operatives Development

 

 

115,017

     127,628

          135,080

          142,269

      404,977

Enterprise Development

and Entrepreneurship

 

 

1,223,868

2,280 921

       2,407 271

       2,539 124

    7,227,316

TOTAL

1,488,453

       2,568,552

2,713,263

            2,863,333

            8,145,148

Source: DSBD Annual Performance Plan 2019/20

 

4.1.1     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.  The programme is responsible, among others, for making certain that sound governance is in place, enhanced contribution to socioeconomic development outcomes, professional and capacitated small business development sector as well as guaranteeing that limited resources are utilised optimally. Programme 1 has been allocated R395 million over the MTEF period disaggregated amongst the following sub-programmes: Ministry (R85 million), Departmental Management (R57 million), Corporate Services (R172 million), Financial Management (R63 million) and Communications (R16 million).

 

Table 5: Expenditure Estimates - Programme 1

Programme 1: Administration

2019/20

2020/21

2021/22

 

Sub-programmes 

Revised
Baseline

R'000

Revised
Baseline

R'000

Revised
Baseline

R'000

Total

R'000

Ministry

          26,472

29,012

30,068

85,552

Departmental Management

         18,500

            18,615

20,733

57,848

Corporate Services

         54,128

            57,490

60,492

172,110

Financial Management

          20,324

            21,038

22,625

63,987

Communications

            4,964

              5,341

5,712

16,017

Total

        124,388

          131,496

139,630

395,514

Source: DSBD Annual Performance Plan 2019/20

 

4.1.2     Programme 2: Sector Policy and Research

The purpose of Programme 2 is to create an enabling environment for the development and growth of sustainable small businesses and co-operatives through, among others, commissioning of research, development and review of policies and legislation(s), coordination and promotion of sound intergovernmental relationships, promoting the sector interests in the regional and global arena, as well as effective monitoring and evaluation of programmes to ensure the desired impact is achieved in contributing toward the creation of employment and economic growth. The budget allotted to this programme over the MTEF period is R117 million, revised upward from R70.9 million during 2018/19 budget consideration process. It has four (4) sub-programmes, namely, Research (R54 million), Policy and Legislation (R21 million), International Relations and Trade (R19 million), as well as Monitoring and Evaluation (R21 million). For the current financial year, the programme allocation increased from R22 to R35 million. Table 6 below is a brief indicative what each sub-program will receive.

 

Table 6: Expenditure Estimates - Programme 2

Programme 2:

2019/20

2020/21

2021/22

 

Sub-programmes 

Revised
Baseline

R'000

Revised
Baseline

R'000

Revised
Baseline

R'000

Total

R'000

Research

17,330

18,169

19,091

54,590

Policy and Legislation

5,706

7,848

              8,277

21,831

International Relations

6,026

6,380

              6,745

19,151

Monitoring and Evaluation

6,553

7,019

              8,197

21,769

Total

35,615

39,416

            42,310

117,341

Source: DSBD Annual Performance Plan 2019/20

 

4.1.3     Programme 3: Integrated Co-operatives Development

The Programme is accountable for creation of a conducive environment that facilitates the establishment, growth and development of co-operative enterprises through the development and review of legislation and policy, design, piloting and monitoring the impacts of support services and instruments, championing of functional partnerships and co-operation agreements, and the advocacy and thought leadership in advancing economic growth, job creation and social cohesion. The Programme has three subprograms, namely, Co-operatives Development (R28 million), Co-operatives Programme Design and Support (R334 million), as well as Supplier Development and Market Access Support (R41 million). During the MTEF period the Programme is allocated R405 million, of which R127 million has been earmarked for the current financial year.

 

 

Table 7: Expenditure Estimates – Programme 3

 Programme 3:

2019/20

2020/21

2021/22

 

Sub-programmes

Revised
Baseline

R'000

Revised
Baseline

R'000

Revised
Baseline

R'000

Total

R'000

Co-operatives Development

9,038

9,672

10,268

28,978

Co-operatives Programme Design and Support

105,511

111,722

117,515

334,748

Supplier Development and Market Access Support

13,079

13,686

14,486

41,251

Total

127,628

135,080

142,269

404,977

Source: DSBD Annual Performance Plan 2019/20

 

 

4.1.4     Programme 4: Enterprise Development and Entrepreneurship

Programme 4 has been allocated R7.2 billion over the MTEF with a sizeable portion of this amount going to Seda. The spending focus for the Enterprise Development and Entrepreneurship Programme over the medium term will be on the four (4) subprogrammes constituting the Programme, namely, Enterprises and Supplier Development Programme, SMME Programme Design and Support, SMME Competitiveness and Entrepreneurship. For the current financial year 2018/19 the Programme has been allocated R2.6 billion which as indicated consist of Seda allocation of R868 million and sefa provision of R1 billion.

 

4.2        Expenditure Trends for the first 3 months of the 2019/20 financial year

Expenditure during the first quarter was R386.8 million or 15.1 per cent of the appropriated budget of R2.6 billion. This resulted in the underspending of R93.2 million that was mainly on transfers and subsidies for incentive schemes.

 

Programme 1: Administration:

Spending was lower than projection by R1.1 million or 4 per cent mainly on goods and services due to overstatement of audit cost and outstanding invoice for travel and subsistence.

 

Programme 2: Sector Policy and Research:

Spending was lower than projection by R2.3 million or 35.7 per cent mainly on compensation of employees as a result of vacancies and goods and services because of delayed research projects.

 

Programme 3: Integrated Cooperative Development:

Spending was lower than projection by R11.5 million or 44.3 per cent. This was mainly due to slow disbursement of funds under the cooperative incentive scheme where underspending was R10.6 million or 61.2 per cent of the projection, attributed to claims not complying with the guidelines.

 

Programme 4: Enterprise Development and Entrepreneurship:

Spending was lower than projection by R78.2 million or 18.7 per cent mainly on transfers and subsidies particularly incentive schemes. Disbursements to some of the beneficiaries of the black business supplier development programme was withheld due to non-compliance with the guidelines and as a result the programme underspent by R50 million or 89.5 per cent. The department explained that lack of capacity has contributed to slow processing of applications on the national informal business upliftment scheme, hence the slow spending on the scheme. Payment of the first tranche to beneficiaries of the craft customised sector programme is expected to be effected in July 2019.

 

 

 

Table 8: Budget and Expenditure Summary (Q1)

Programme

Main Appropriation

Available Budget

Q1 Actual Expenditure

Expenditure as a % of Available  Appropriation

Q1 Projected Expenditure

R’000

R’000

R’000

%

R’000

Administration

124.4

124.4

27.7

22.2%

28.7

Sector Policy and Research

35.6

35.6

4.2

11.7%

6.5

Integrated Co-operatives Development

127.6

127.6

14.5

11.4%

26.0

Enterprise Development and Entrepreneurship

2 280.0

2 280.9

340.5

14.9%

418..0

Total

2 568.6

2 568.6

386.8

15.1%

480.0

Source: National Treasury (2019)

 

4.3        Issues for the committee to note [National Treasury]

The trend of slow spending on incentive schemes persists. This was the case in previous financial years. The department was advised to develop plans to improve execution of the programmes and spending thereof. Close attention needs to be focused on the black business supplier development programme and the co-operative incentive scheme where spending was 89.5 per cent and 61.2 per cent, lower than planned, respectively. Roll out of the small business and innovation fund should be expedited and further delays are concerning.

 

5.         OVERVIEW AND ASSESSMENT OF SERVICE DELIVERY PERFOMANCE

  1.  

The Auditor General of South Africa representatives appeared before the Portfolio Committee on 08 October 2019 to present the audit findings. The Department and entities did well during the previous financial. The Department obtained unqualified audit opinion with findings while Seda and sefa obtained clean audits. However, there were key findings relating to incentives and supply chain management as follows:-

  • Reviews by the adjudication committees to ensure that applicants met the requirements/ provided the required documentation as per the BBSDP and CIS guidelines were not effective;
  • Appropriate measures were not maintained to identify employees of the state who applied for incentive grants for both BBSDP and CIS. Nineteen instances were noted where such applications were approved;
  • Some BBSDP files did not contain evidence of site verifications performed prior to approval of the applications. Post-approval site visits for grants paid to applicants as required by BBSDP guidelines were not always performed;
  • In some instances, we could not verify the assets purchased with the department’s funding;
  • Instances were noted where the beneficiary and the preferred supplier shared common directorship;
  • Some beneficiaries submitted more than one application under various small businesses that were approved;
  • Terms of reference not stipulating threshold for local content;
  • Using the month-to-month clause on the travel management contract without the accounting officer’s approval;
  • Winning supplier’s details on the quotation are the same as those of the losing supplier;
  • A fruitless expenditure incurred that relates to missed flights and interest paid –R0,7 million.

 

5.2        Programme Performance

The Department had set out to achieve 34 annual targets over the reporting period. The Department achieved 21 (62%) of the targets while13 (38%) were not realised. As reported elsewhere the Department achieved unqualified audit opinion with findings, paid 100% of its invoices within 30 days and rolled out a number of incubators. Areas that require attention according to the Department of Planning, Monitoring and Evaluation (“DPME”) are MPAT where score was below acceptable standard level at 2.9, inconsistency between 95% budget expenditure as opposed to only 62% of the targets achieved, under achievement in core programmes three (3) and four (4) at 43% and 71%, respectively, leading to underspending and allegations of fraud, misrepresentation and non-compliance of Departmental Guidelines on the part of officials responsible for the administration of the schemes as well as allegations of collusion and fraud in respect of applicants, as reported by the Auditor General.

 

Table 9: Overall Performance per Programme

PROGRAMME

NO. OF PERFORMANCE INDICATORS

ACHIEVED (VALUE & %)

NOT ACHIEVED (VALUE & %)

2018/19

2017/18

Final Approp-

Actual Expend-

(Over)/Under Expend-

Final Approp-

Actual Expend-

(R’000)

(R’000) (%)

(R’000)

(R’000)

(R’000)

1. Administration

9

7 (78%)

2 (22%)

127 940

125 451 (98%)

2 489

119 711

116 999

2. Sector Policy and Research

11

6(55%)

5(45%)

21 012

17 023 (81%)

3 989

17 324

16 748

3. Integrated Co-operatives Development

7

3(43)

4(57%)

121 775

75 278 (62%)

46 497

99 296

99 204

4. Enterprise Development and Entrepreneurship

7

5(71%)

2(29%)

1 217 726

1 201 766 (99%)

15 960

1 239 339

1 226 533

TOTAL

34

22(62%)

12(38%)

1 488 453

1 419 518 (95%)

68 935

1 475 670

1 459 484

Source: DSBD Annual Report (2018/19)

 

4.1        Programme One: Administration

The programme is responsible for the provision of strategic leadership, management and support services to the Minister, Director-General, the Department and its entities. The programme has nine (9) indicators, seven (7) of those were achieved while two (2) were not achieved. Table 10 provides an indication how funds were disbursed under this programme in relation to the targets during the course of the previous financial year.

 

Table 10: Linking Programme with Budget - Programme 1

Programme 1: Administration

2018/2019

Sub-programmes 

Final Appropriation

R'000

Actual Expenditure

R'000

Over/Under Expenditure

R'000

Ministry

32 753

32 713

40

Departmental Management

17 981

16 314

1 667

Corporate Services

51 200

50 604

596

Financial Management

19 532

19 358

174

Communications

6 474

6 461

13

Total

127 940

125 451

2 489

Source: DSBD Annual Report (2018/19)

 

 

4.2        Programme Two: Sector Policy and Research

The programme has the following sub-programmes: Research, Policy and Legislation, International Relations and Trade Promotion; and Monitoring and Evaluation. The programme has 11 performance indicators, six (6) targets were achieved while five (5) were not. Table below provides a summation of how funds were utilised under this programme in relation to the targets.

 

Table 11: Linking Programme with Budget - Programme 2

Programme 2:

2018/2019

Sub-programmes 

Final Appropriation

R'000

Actual Expenditure

R'000

Over/Under Expenditure

R'000

Research

8 335

6 722

1 613

Policy and Legislation

5 678

4 806

872

International Relations

4 244

3 255

989

Monitoring and Evaluation

2 756

2 240

615

Total

21 012

17 023

3 989

Source: DSBD Report (2018/19)

 

4.3        Programme Three: Integrated Co-operatives Development

The programme is responsible to create an enabling environment that facilitates the establishment, growth and development of Co-operatives through the development and review of legislation and policy, the design, piloting and monitoring of the impact of support services and instruments; the championing of functional partnerships and cooperation agreements; and the advocacy and thought leadership in advancing economic growth, job creation and social cohesion. The Integrated Co-operatives Development Programme covers the work of the following sub-programmes, Co-operatives Development, Co-operatives Programme Design and Support; and Supplier Development and Market Access Support. The programme has seven performance indicators, only three (3) of the seven were achieved resulting to the programme performing badly.

 

 

 

 

Table 12: Linking Programme with Budget – Programme 3

 Programme 3:

2018/2019

Sub-programmes

Final Appropriation

R'000

Actual Expenditure

R'000

Over/Under Expenditure

R'000

Co-operatives Development

7 555

6 119

1 436

Co-operatives Programme Design and Support

98 915

54 208

44 707

Supplier Development and Market Access Support

15 305

14 951

364

Total

121 775

75 278

46 497

Source: DSBD Annual Report (2018/19)

 

 

4.4        Programme Four: Enterprise Development and Entrepreneurship

The Enterprise Development and Entrepreneurship Programme covers the work of the following sub-programmes: Enterprise and Suppler Development, SMME Programme Design and Support SMME Competitiveness Entrepreneurship. The programme has seven (7) indicators and five (5) of these were achieved and two (2) were not achieved.

 

Table 13: Linking Programmes with Budget – Programme 4

 Programme 4:

2018/2019

Sub-programmes

Final Appropriation

R'000

Actual Expenditure

R'000

Over/Under Expenditure

R'000

Enterprise and Supplier Development

861 394

861 083

311

SMME Programme Design and Support

296 053

281 372

14 681

SMME Competitiveness

57 238

56 742

496

Entrepreneurship

3 041

2 570

471

Total

1 217 726

1 201 766

15 960

Source: DSBD Annual Report (2018/19)

 

6.         REVIEW OF THE DEPARTMENTAL ENTITIES

 

6.1        Small Enterprise Development Agency

 

6.1.1     Financial Performance

Seda’s performance, both financial and nonfinancial, has been consistent throughout the fifth Parliament. This good record of accomplishment was maintained during the previous financial year. The entity achieved unqualified clean audit during 2018/19 financial year.  Overall, Seda achieved and exceeded performance targets on twenty-seven (93%) out of twenty-nine strategic indicators. Seda Technology Programme (“STP”) in particular achieved and exceeded its performance on all six (6) strategic indicators. The total revenue budget for Seda for the 2018/19 financial year amounted to R873, 15 million with total expenditure amounting to R839, 16 million (about 96% of the budget).

 

Table 14: Overall Performance per Programme

PROGRAMME

NO. OF PERFORMANCE INDICATORS

ACHIEVED (VALUE & %)

NOT ACHIEVED (VALUE & %)

2018/19

2017/18

Final Approp-

Actual Expend-

(Over)/Under Expend-

Final Approp-

Actual Expend-

(R’000)

(R’000) (%)

(R’000)

(R’000)

(R’000)

1. ENTERPRISE DEVELOPMENT

13

12 (92%)

1 (8%)

471 656

447 018 (95%)

24 638

438 608

431 295

2. SEDA TECHNOLOGY PROGRAMME

6

6 (100%)

-

229 928

227 672 (99%)

2 256

190 061

187 980

3.  ADMINISTRATION   

10

9 (90%)

1 (10%)

171 570

164 478 (96%)

7 092

169 826

146 023

TOTAL

29

27 (93%)

2 (7%)

873 154

839 168 (96%)

33 986

798 497

765 298

Source: Seda Annual Report (2018/19)

 

6.1.2     Non- Financial Performance

With respect to non-financial indicators the organisation performed exceptionally well, 2 860 clients were supported through incubation programme, 465 clients were supported through innovation, 6 957 New jobs created by supported clients, 19 064 jobs sustained by supported clients and a total of R1.75 billion turnover increased on supported clients. There were nonetheless areas of concern that require immediate attention by the management. Seda recorded twenty-three cases of alleged fraud and other irregularities that were investigated. Findings and recommendations for corrective and remedial actions were issued to management. Furthermore, the entity could not meet targets on the “Number of clients Supported through Enterprise coaching” due to dropouts by participating enterprises. The reasons for dropouts require further analysis in order to prevent the trend from continuing. There is also a noticeable inconsistency where actual achievements are much higher than targets in most indicators, inferring therefore that target setting require more investigation or examination.

 

6.1.3     Seda Programme Summary and Budget Allocation (MTEF)

 

6.1.3.1  Administration

The purpose of administration programme is to provide strategic leadership and support to core delivery to ensure successful implementation of the organisations strategy. This includes monitoring organisations performance, strategic alignment with the shareholder’s expectations and capacitating the organisation to achieve its set objectives. This programme is intended to support the achievement of all the perspectives of the balanced scorecard i.e. organisational capacity, internal processes, finance and customer and stakeholder perspectives. An estimated R177 million has been budgeted for this programme, while this is expected to increase steadily over the MTEF period to R198 million.

 

6.1.3.2  Enterprise Development

The purpose of the programme is to support small businesses and co-operatives by providing them with needs based and growth oriented non-financial business development support, to ensure that their businesses are sustainable and contribute to the countries developmental goals of decreasing unemployment and increasing economic contribution to GDP. These services aimed at providing solutions related to various business functions from production to human resources, finance, marketing, quality improvement and export development. Rural and township enterprises including cooperatives are prioritised by ensuring that must of the support offered is directed towards them. For the current financial year, the programme is allocated R534 million.

 

6.1.3.3  Seda Technology Programme

To provide technology and innovation oriented interventions, including quality and product improvement support to small enterprises and co-operatives. For the current financial year the programme is budgeted R225 million. During the budget vote process, Seda Accounting Officer informed the Portfolio Committee that the agency is anticipating a major reduction in its budget over the MTEF by approximately R123 million which is 5% from 2018/19 to 2020/21. This results in the budget available for programmes and projects being reduced accordingly as the total budget amount is limited. As a consequence, Seda is expecting a number of strategic initiatives had to be scaled down or postponed in previous financial years such as incubation expansion, the one municipality one product programme (OMOP), and promotion of Seda’s interventions in the key growth sectors where technical interventions are needed.

Table 15: Expenditure Estimates

Programmes

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

2023/24

 

Audited outcome
R'000

Approved budget
R'000

Estimated budgets
R'000

Administration

                            155,650

                        181,556

                        177,362

                        188,832

                        198,117

                        210,004

                        222,604

Enterprise Development

                            426,229

                        471,656

                        535,949

                        534,094

                        566,230

                        564,646

                        597,265

Seda Technology Programme

                            187,980

                        229,928

                        225,489

                        237,495

                        247,169

                        261,999

                        277,719

Total expenditure

                            769,859

                        883,140

                        938,800

                        960,421

                     1,011,516

                     1,036,650

                     1,097,589

Source: Seda Annual Performance Plan 2019/20

 

6.2        Small Enterprise Finance Agency

 

6.2.1     Financial Performance

For five (5) consecutive years, sefa has achieved unqualified clean audit opinions. For the previous financial year the direct lending attracted lower impairments on new disbursements  (28% of loans disbursed in 2019) compared to the previous years. However, this may very well be as a result that sefa has opted to intensify utilisation of wholesale lending model as opposed to direct lending. Operating expenses were restricted at approximately R79 million over the past 5 years. In addition, sefa incurred a R7 million cost saving from 2018 financial year. There was 35 million euros raised from the European Union facility and R3 billion Small Busines Innovation Fund (“SBIF”) facility. There were nevertheless few operational hiccups here and there and some of these are:-

  • The low growth macroeconomic environment is adversely impacting on the performance of sefa funded clients, resulting in the impairment coverage ratio of 47% and negative loan book growth (29% decline in Loans and Advances, year on year);
  • Cost to income ratio remains high (105% per BSC);
  • Reduction in interest income generated by sefa over 5 years;
  • The fiscal constraints and reprioritisation of government expenditure resulted in lower MTEF allocation than in previous years (i.e. below inflation increases)

 

During the previous financial year the largest portion of the funding activities were conducted through the Wholesale SME funding followed by the Informal Sector. According to sefa annual report this helped improve the financial inclusion of most enterprises that are not ordinarily served by the conventional lenders. The minimal activity in the support to co-operatives is in line with the organisational move to focus more on resuscitating existing projects instead of taking more new ones given the challenges that this target group is facing.

 

6.2.1.1  Direct Lending Performance

Among some of the key achievements under direct lending were -

  • Direct Lending achieved 39% increase in approvals year on year at R272mil and 33% increase in disbursements year on year at R158mil. Reversing the declining trend of Direct Lending Approvals and Disbursements that had been in place for 3 years;
  • Introduced & implemented a strategic partnership with Pick n Pay that resulted in a R60mil facility for investment in the townships -a key targeted development focus for sefa. During the financial year R30mil worth of individual stores were approved to be disbursed in Q2 FY19/20. This partnership not only ensured achievement of Direct Lending approval targets for the year but also ensured traction in a key targeted development economic area for sefa;
  • Developed and implemented a new strategy for Direct Lending embedded in a sector driven investment strategy that will lead to ensuring portfolio diversification, technical skills specialization and sustainable portfolio construction. The sector investment strategy also seeks to ensure that sector concentration is mitigated and income for Direct Lending is generated through a bias towards medium term investments that yield longer interest income and sustainable jobs.

 

Table 16: Direct Lending Performance

Indicator

Target

Achieved

Approvals

 

 

R242m

R272m

Disbursements

 

R231m

R158m

Productive Sectors

R128m

R109m

Black Entrepreneurs

R162m

R250m

Female Entrepreneurs

R103m

R36m

Number of Enterprises

190

190

Jobs

1072

3124

Youth Entrepreneurs

R69m

R39m

Source: sefa Annual Report (2018/19)

 

6.2.1.2  Informal Sector & Micro-Enterprises performance

The Informal and Micro sector programme is geared at building financial inclusivity and facilitating entry of previously disadvantaged individuals particularly women, residing in the rural areas and township communities. Some of the highlights include -

  • 68 032 number of enterprises (or 99.8%) supported were women-owned based in rural areas to the value of R240 million;
  • A 32% growth in the amount disbursed to micro-enterprises compared to the previous year;
  • The Micro Finance and Informal Sector lending programme is channelled through micro financing institutions and partnerships with corporates who implement enterprise and supplier development programmes;
  • A value-adding partnership with the Wholesale and Retail (W&R) seta was established, resulting in the training of some sefa supported microenterprises at the Mangaung Fresh Produce Market;

 

Table 17: Informal Sector & Micro-Enterprises performance

Indicator

Target

Achieved

Approvals

 

 

R96m

R48m

Disbursements

to end users

 

R200m

R314m

Number of Enterprises

71 500

72 183

Jobs Facilitated

71 500

80 594

Female Entrepreneurs

R90m

R310m

Black Entrepreneurs

R14om

R313m

Youth Entrepreneurs

R60m

R49m

Source: sefa Annual Report (2018/19)

 

6.2.1.3  Wholesale SME Lending Performance

The SME Wholesale Lending provides funding to intermediaries and specialised funds that share sefa’s objective of increasing access to finance to SME’s. sefa also enters into joint ventures and strategic partnerships to crowd-in financial and business support as well as technical resources from the public and private sectors. Highlights include -

  • Sefa has developed an in-house fund management capacity to deliver third-party funds. The management of third-party funds is intended to leverage existing financial and non-financial resources in order to improve access to funding for SMEs;
  • The European Union Commission has allocated budget support of €30m of the Employment Promotion through SMME support Programme (“EPSSP”) to sefa, 10 million euros for Enterprise and Supplier Development (“ESD”) projects and 20 million euros earmarked Innovation projects in the outer years.  This funding affords sefa to increase access to finance, crowd-in private sector investment and scale up support to SMMEs;
  • Small Business and Innovation Fund: sefa has been appointed as the implementing agency for an R3.2bn Small Business and Innovation Fund commencing in 2019/20 FY.

 

 

 

Table 18: Wholesale SME Lending Performance

Indicator

Target

Achieved

Approvals

 

 

R255m

R172m

Disbursements

 

 

R305m

R613m

Number of Enterprises

271

487

Jobs Facilitated

1 357

3 832

Female Entrepreneurs

R137m

R106m

Black Entrepreneurs

R214m

R332m

Youth Entrepreneurs

R92m

R98m

Source: sefa Annual Report (2018/19)

 

6.2.1.4  Khula Credit Guarantee

Khula Credit Guarantee programme is designed to facilitate lending from commercial banks and other non-banking institutions to indemnify them from potential default by the SMMEs.  The South African financial system contains a highly developed and well-capitalized banking sector, which caters mainly for the advanced segments of the economy.  The financial sector is highly concentrated and dominated by four large banks, which cater to the higher-end segments of the economy, leaving the middle segment underserved.  KCG was established to address this gap. Highlights include -

  • The portfolio guarantee facilities approved in 2018/19 amounted to R210m against a target of R182m. These facilities were granted to financial institutions in the Agribusiness and SME sectors;
  • Indemnities taken up amounted to R135 million, with supplier credit guarantees accounting for 67%, Corporates 14%, Commercial Banks 10% and Non-Bank Financial Institutions 9%.

 

Table 19: Khula Credit Guarantee

Indicator

Target

Achieved

Approvals

 

 

R182m

R210m

Supplier Credit

 

 

R34m

R91m

Portfolio Guarantees

R52m

R46m

Number of Enterprises

134

204

Jobs Facilitated

575

2 401

Female Entrepreneurs

R38m

R29m

Youth Entrepreneurs

R26m

R11m

Source: sefa Annual Report (2018/19)

 

 

 

7.         OBSERVATIONS

 

Having reflected on the Department, sefa and Seda annual reports and financial statements for 2018/19 financial year, the Portfolio Committee hereby register the following observations and recommendations for consideration by the Department: -

 

7.1        This being the last BRRR and annual reporting centred on the fifth Administration and      Parliament, the Portfolio Committee wishes to thank the outgoing Minister Lindiwe Zulu     for having initiated the daunting and complex process of establishing a new         Department. Under her leadership, a very good foundation was laid. Similarly, the           Portfolio Committee welcomes the new Minister Khumbudzo Ntshavheni and applaud        her for having ensured that she hit the ground running from day one. She is taking        over a critical portfolio at a time when the country’s economic growth prospects keep             waning and unemployment, youth and women in particular, is on the rise. As alluded        to earlier, economic growth is expected to reach 1.5 per cent in 2019, rising to 2.1 per        cent by 2021. However, small businesses can be that next frontier necessary in turning      the sustainable job creation curve up;

7.2        The Portfolio Committee is pleased with the overall performance of the portfolio during   2018/19 financial year, two (2) unqualified clean audits from the entities and unqualified        audit from the Department are indeed cause for celebration. If the AG report is anything        to go by it means there is still a room for improvement;

7.3        The Auditor General report also painted a picture of a Department and entities that are     trying their utmost despite limited resources and the poor state of the country’s      economic activity. According to the AG, the quality of the financial statements has been     maintained and no material adjustments have been identified through the audit    process at both auditees (DSBD and Seda);

7.4        The Committee notes however areas of discontent from the AG involving “material           non-compliance relating to the incentives awarded was identified in the current and prior audit periods at the DSBD and remains the greatest stumbling block to achieving         clean audit outcomes”, as well as “preparation of annual performance reports remains      a concern, as material adjustments had to be made to the reports submitted for       auditing at both auditees. The review processes applied over the financial reporting         processes must be extended to the performance reporting environment”;

7.5        Some of the Auditor General observations relating to incentives were as follows:-

7.5.1     Reviews by the adjudication committees to ensure that applicants met the                       requirements/ provided the required documentation as per the BBSDP and CIS                        guidelines were not effective;

7.5.2     Appropriate measures were not maintained to identify employees of the state who applied for incentive grants for both BBSDP and CIS. Nineteen instances were noted where such applications were approved;

7.5.3     Some BBSDP files did not contain evidence of site verifications performed prior to approval of the applications. Post-approval site visits for grants paid to applicants as required by BBSDP guidelines were not always performed;

7.5.4     In some instances, “we could not verify the assets purchased with the department’s funding”;

7.5.5     Instances were noted where the beneficiary and the preferred supplier shared common directorship;

7.5.6     Some beneficiaries submitted more than one application under various small businesses that were approved;

7.5.7     The “following significant areas had come to our attention and little progress has been made to address them”:

  • The control measures designed  to ensure that transfers relating to the BBSDP and CIS were only made to valid and eligible beneficiaries were not always effective;
  • Management did not timeously respond to findings noted in the 2015/16,2016/17 and 2017/18 audits  and as a result a number of repeat findings were registered;
  • An increased level of oversight was required over performance reporting against pre-determined objectives to ensure that the achievements and reasons for variances are supported by appropriate evidence;
  • Management (accounting officer and senior management) does not respond with the required urgency to the AG messages about addressing risks and improving internal controls. Inadequate implementation and monitoring of action plans by these role players to address key audit matters have been identified as a root cause for the repeat findings;
  • The instability and prolonged vacancies in key positions can cause a competency gap and affect the rate of improvement in audit outcomes;
  • Capacity to undertake the necessary oversight through pre-and post-site visits was not adequate.

7.6        The Portfolio Committee notes that following the state reconfiguration and pending         finalisation of the 2019 - 2024 MTSF, DSBD has already indicated its intent for a strategic review process that most probably will also affect the current organisational    structure of the Department. The Committee is hopeful that the issue of vacancies at       a senior management level would as a consequent be laid to rest;

7.7        During the course of the fifth Parliament the Portfolio Committee cautioned the   Department concerning the distribution of personnel and budget in favour of            administration, a support programme, at the expense of the core programmes of the        Department. During the previous financial year the staff compliment under          programme one (1) was 88 number of filled posts out of 99 approved establishment,            programme two (2) 19 out of 22, programme three (3) 38 out of 40, and programme     four (4) 47 out of 47. The budget for programme one was therefore correspondingly             higher than the budget for other three programmes. This is one particular area that           requires special focus as the structure was not approved by DPSA;

7.8        Furthermore, the Committee has in the past raised the issue of staff compliment vis-       à-vis the DSBD budget where 90% of the allocation are transfers and subsidies, an        area flagged by the FFC for the Portfolio Committee to pay special attention to;

7.9        On the policy and legislative front, all initiatives planned for 2015/16, 2016/17, 2017/18     and 2018/19 financial year(s) have been deferred for 2019/20 financial year e.g.          finalisation of the review of the National Small Business Act, revision of the Integrated            Strategy on the Promotion of Entrepreneurship and Small Enterprises and review of        the Integrated Strategy on the Development and Promotion of Co-operatives (2012 -             2022). The Committee notes DSBD introspection (25: 2018/19 Annual Report) that    “significant underperformance was noted in terms of the finalisation of the amendment       of the National Small Business Act. The Department’s inability to complete the    task was due legislative drafting incapacity that exists, thus resulting in over reliance       on external assistance and counsel in driving this unit of work. Given the skills/    competency shortage, the Department has considered it vital to explore the option of     secondment of officials from other Government departments with legislative acumen and experience to augment the existing gap” and lastly;

7.10      The Committee welcomes the replacement of Klynveld Peat Marwick Goerdeler   (“KPMG”) by SizweNtsalubaGobodo (“SNG”). However, considering the nature of       business sefa does on behalf of the government and people of South Africa and the             amount of money that is apportioned to the agency on an annual basis, the Committee   is of the view that sefa books should better be handled by the supreme audit institution      of South Africa, Auditor General. Likewise, the Committee observes the uncertainty at   the institution’s Board of Directors and executive management level.      

 

 

 

 

 

 8.        RECOMMENDATIONS

 

8.1        It is envisaged that the 2019 - 2024 Medium Term Strategic Framework shall have            been completed before the end of Quarter 3. The Portfolio Committee is urging the Department to immediately resume crafting the strategic plan that complies with all            the government prescripts pertaining to the strategic plans and organisational structure    e.g. Public Finance Management Act (1999) and Public Service Act (1994) before the            end of Q3 of the 2019/20 financial year;

8.2        As MPAT found, the Portfolio Committee recommends that the Department        ensure that all the plans are aligned to the national priorities to enable effective         monitoring, and that the Department attempts to conduct evaluations and make use of      the outcomes thereof to improve future programmes and to report progress to the          Portfolio Committee on a quarterly basis;

8.3        In line with 8.2 above, the Department needs to address the challenges noted within        the Strategic Management environment – Annual Performance Plans, and the          monitoring of organisational performance and institutionalisation of evaluations to   reflect on quarterly performance reports to Parliament;

8.4        Management of financial disclosures within the required timeframes must be attended     to as non-adherence to prescripts in this area could pose serious risks for the    Department in terms of potential conflict of interest or its SMS doing business with the           state;

8.5        Considering that other state departments i.e. Economic Development Department           have been collapsed or reconfigured, this provides DSBD an opportunity to consolidate             all small enterprise functions e.g. rural and township economy, and budgets scattered           in various other state Departments. The Department must guide the Portfolio             Committee which of the functions, budget and personnel will be relocated or       transferred to the DSBD, so that if required, the Portfolio Committee can start the   process of interacting    with other Portfolio Committees of Parliament before the        finalisation of the strategic planning processes for both the Department and the Portfolio Committee;

8.6        The strategic plan of the Department must also pronounce on the institutional      realignment of entities e.g. standing Committee recommendation to transfer sefa to   DSBD and/or amalgamate Seda and sefa into a single entity;

8.7        The utilisation of financial intermediaries (wholesale lending) by sefa was raised   sharply by the Committee members during the BRRR process and flagged by the FFC          as increasing the cost of capital for struggling small enterprises. The standing           recommendation of the Portfolio Committee is that sefa should consider insourcing        wholesale lending facility, or, consider alternative approaches of lending money to its         clients e.g. only financial institutions regulated by the South African Reserve Bank.     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       Co-operative Financial Institutions (“CFI”) 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. Officials from the Department were part             of the team that travelled with the Portfolio Committee to visit Mondragon Co-operative   in Spain. The Department has a responsibility to implement resolutions emanating from its travel report;

8.8        The Department must prioritise the stabilisation of sefa through appointments of             permanent accounting authority and accounting officer before this undermines the        agency’s operations and stability. The Portfolio Committee is hereby recommending   these appointments be concluded before the end of the current financial year;

8.9        One of the topical and delivery area for the Department is the issue of market access.     Without strong private sector partnerships, the Department is not likely to go further in            terms of realising this objective hence the Portfolio Committee call to the Department          to spearhead a mix of strategic interventions e.g. Wholesale and Retail charter, a             comprehensive Market Access Strategy with clear plans to leverage private and public    procurement opportunities, as well as the role of informal trading, rural and township            economy enterprises;

8.10      In line with the recent launch of the District-based Service delivery model, the Portfolio    Committee standing recommendation is that the Department must work hand in gloves           with all spheres of government and ensure that it upscale the involvement of Local           Economic Development (“LED”) structures by active participation in Integrated             Developmental Plan (“IDP”) sessions, including the introduction of a more robust            mechanism in ensuring that there is better co-ordination between activities of the      respective Provincial Governments and the DSBD, and various other initiatives and    mechanisms that bring to life DSBD mandate e.g. Intergovernmental Relations    Framework Act (“IRFA”), National Spatial Development Perspective(“NSDP”),       Presidential Poverty Nodal Points (“PPNP”) and Transversal Agreements to mention the few;

8.11      The Department must ensure that the guidelines for the different incentive schemes         are revised to ensure that they are aligned to the objectives of the scheme and are not       susceptible to abuse before the finalisation of the blending finance model currently being crafted;

8.12      The management, and/or, Bid Adjudication Committee should ensure strict adherence      to the guidelines and standard operating procedures of the BBSDP and CIS incentive             scheme. The responsibility for ensuring compliance with BBSDP guidelines should be          clearly allocated and the responsible officials should be held accountable for any non-      compliance. The Portfolio Committee should be informed quarterly concerning the          progress attained;

8.13      Management or responsible officials have an obligation to conduct site visits to verify    that the goods and services were actually delivered/received through pre-and post-site           visits. As recommended in 8.16 below, owing to its geographic footprint, Seda could           be utilised for this purpose;

8.14      Suspected misrepresentations by beneficiaries, suppliers and network facilitators must   be investigated and the necessary action be taken before the end of the current financial year;

8.15      The Department should, on an ongoing basis, perform an independent assessment on    the reasonability of the quotations received from the beneficiaries to identify instances   of abuse and ensure that value for money is received;

8.16      The Portfolio Committee standing recommendation, which has also been affirmed by      the AG is for the Department             to consider enhancing the role of Seda in the     adjudication, allocation and monitoring processes of the incentive schemes, as the            entity has shown sound controls over these processes and has a wider geographical       presence;

8.17      The review of the National Small Enterprise Act (1996) must be accelerated and tabled     to the Portfolio Committee in line with the DSBD annual performance plan (2019/20),   wherein the Department undertook to submit the bill to Parliament before the end of          the current financial year;

8.18      In addition, DSBD position with respect to the review of the Co-operatives Act (as           amended) must be clarified to the Portfolio Committee as these have implications on            the programme and budget of the Committee. So are reviews of the Integrated            Strategy on the Promotion of Entrepreneurship and Small Enterprises and review of        the Integrated Strategy on the Development and Promotion of Co-operatives (2012 -             2022).

 

Report to be considered.

 

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