ATC200604: Report of the Portfolio Committee on Small Business Development on Budget Vote 36 of the Department of Small Business Development for Financial Year 2020/21, Dated 29 May 2020

Small Business Development

Report of the Portfolio Committee on Small Business Development on Budget Vote 36 of the Department of Small Business Development for Financial Year 2020/21, Dated 29 May 2020

 

1.         INTRODUCTION

 

The Portfolio Committee on Small Business Development (“the Portfolio Committee”) having considered Annual Performance Plans and Budget allocations of the Department of Small Business Development (“the Department”), alternatively, (“DSBD”) and its entity, Small Enterprise Finance Agency (“sefa”) reports as follows: -

 

1.1        Background

The Constitution of South Africa (Act No. 108 of 1996) recognises that the legislative authority has an important role to play in overseeing both the financial and non-financial performance of government departments and public entities. Section 27 of the Public Finance Management Act (No. 1 of 1999) makes provision for Ministers to table the annual budget for a particular financial year in the National Assembly before the start of that financial year. Whereas section 10(1)(c) of the Money Bills Amendment Procedures and Related Matters Act (No. 9 of 2009) makes provision for Ministers to table Strategic Plans and Annual Performance Plans for (APPs) their respective Departments, public entities or institutions, which must be referred to the relevant Portfolio Committees for consideration and adoption.

 

It is important for the strategic plans to be tabled within the stipulated period because the plans provide information for the budget appraisal process of the relevant Portfolio Committee. Strategic Plans identify strategically important outcome orientated goals and objectives against which public institutions medium-term results can be measured and evaluated by Parliament. Annual performance plans identify the performance indicators and targets that the institution endeavours to accomplish in the upcoming budget year. The annual performance plan shows funded service-delivery targets or projections. The annual budget sets out what funds an institution is allocated to deliver services and most importantly, indicates the resource envelope for the year ahead, and sets indicative future budgets over the Medium Term Expenditure Framework (MTEF). The budget covers the current financial year and the following two years.

At the beginning of each year following the State of the Nation Address (SONA) by the President, the Minister of Finance tables before Parliament a detailed outline of the State's Budget: how much money will be or ought to be spent, on what, in that financial year. The Minister of Finance delivered his budget speech on 26 February 2020. Accordingly, his speech preceded the tabling of the Annual Performance Plans and Strategic Plans. The Department has complied with this responsibility. It has presented its budget vote before Parliament, which, amongst others, postulated how the Department aim to reconcile its resources with the service delivery imperatives as outlined by the President of the Republic of South Africa in the State of the Nation Address particularly in light of the Covid-19 pandemic. One of the foremost statutory functions of the Parliament is to therefore discuss, pass and oversee the Department’s Budget. The Department of Small Business Development Budget (Vote No. 36) was referred to the Portfolio Committee for consideration and reporting.

 

1.2        Purpose of the Budget Vote

The budget is a political and financial instrument that the government uses to ensure that its policy programmes are operationalised through the allocation of financial resources to the different spheres of government, specifically to programmes and projects. It reflects an outcomes centred public spending approach. It is further described as a tool that the government uses to evaluate the financing of its key policy objectives. It also used to evaluate whether the macro-economic perspectives of the Budget and the respective Budget Votes meet the requirements of government policies and give substance to the government’s five-year plan. Therefore, the purpose of Vote 36 for the Department is to promote the development of survivalist, small, micro, medium and co-operative enterprises that contribute to inclusive growth and job creation.

 

1.3        Objectives of the Report

The objectives of the report are as follows: -

1. To describe and analyse the budget of the Department of Small Business Development, vote 36, over the 2019/20 financial year;
2. To consider, soon to be phased out due to the recent reconfiguration of state departments, vote 39 as sefa, is now an agency of the Department of Trade, Industry and Competition (DTIC) through Industrial Development Corporation (IDC);
3. To report on the deliberations and consideration, which are essentially the unpacking and examining of the Department annual performance plan and its associated budget vote in relation to the strategic plan;
4. To make recommendations concerning the endorsement, adjustment or rejection of budget vote 36 and any other recommendations regarding the implementation of the Department strategic plan;
5. To record general and specific observations and make appropriate recommendations.

 

1.4        The Portfolio Committee Process

Owing to the country’s ongoing lockdown due to Covid-19 epidemic, this year’s budget vote process is being held under very challenging conditions. The Portfolio Committees are meeting via online mechanism to pore over the Department and entities strategic and annual performance plans, budgets and performance targets. Furthermore, it is worth noting that this year’s budget vote report will not be debated in the House, as is usually the norm, and excluded one of the DSBD entity, Seda.  In compliance with the referral by the National Assembly, the Portfolio Committee on Small Business Development held its briefing with the Department of Small Business Development on 13 May 2020 and Small Enterprise Finance Agency on 20 May 2020 to consider their annual performance plans and the Department budget vote.

 

1.5        Special Adjustment Budget

On 15 March 2020 the President declared a national state of disaster in South Africa in terms of the Disaster Management Act, 2002, following the declaration of the global COVID-19 pandemic by the World Health Organisation. Government had to act swiftly to minimise the economic impact of the pandemic, this implies a redirection of resources. On 21 April 2020, the President announced a R500 billion fiscal support package that includes spending towards COVID-19 priorities. On 30 April 2020 the National Treasury published on the “Economic Measures for COVID-19”, outlining an R500bn response, as well as identifying the funding sources for the package. Part of the funding sources for this package is a R130 billion baseline reprioritisation in the 2020/21 financial year. The Minister of Finance will accordingly be tabling a revised budget during June 2020 and this will require the Departments and entities to revise their own strategic plans, annual performance plans, performance targets and budgets for tabling and consideration by Parliament.

2.         OVERVIEW OF THE DEPARTMENT OF SMALL BUSINESS      DEVELOPMENT

 

2.1        Aim and Purpose of the Department

To lead and coordinate an integrated approach to the promotion and development of entrepreneurship, Small, Micro and Medium Enterprises (SMMEs) and Co-operatives, and to ensure an enabling legislative and policy environment to support their growth and sustainability.

 

2.2        Mandate of the Department

To lead and coordinate an integrated approach to the promotion and development of entrepreneurship, small businesses and co-operatives, and ensure an enabling legislative and policy environment to support their growth and sustainability.

 

2.3        Vision of the Department 

A transformed and inclusive economy driven by sustainable, innovative SMMEs and Co-operatives.

 

2.4        Mission of the Department

The coordination, integration and mobilization of efforts and resources towards the creation of an enabling environment for the growth and sustainability of SMMEs and Co-operatives.

 

2.5        Values

The values and principles that underpin the DSBDs pursuit of its vision and mission are shared across the three entities, and are predicated on the principles of Batho-Pele as follows: -

• Innovation;
• Integrity;
• Professionalism;
• Customer-centric;
• Commitment and;
• Caring organization.

 

 

2.6        Legislative and Policy Mandates

The directive of the Department is primarily premised on diverse sections of legislations and policies such as the Constitution (1996), Public Finance Management Act (1999), Public Service Act (2007), White Paper on National Strategy for the Development and Promotion of Small Business (1995), Small Business Development Act (1980), National Small Enterprise Act (1996), as amended in 2003 and 2004, Companies Act (2008), Close Corporation Act (1984), Co-operatives Act (2005), Co-operatives Amendment Act (2013), Co-operative Banks Act (2007), Industrial Development Corporation Act (1940), Business Act (1991), Broad Black Business Economic Empowerment Act (2003), National Empowerment Fund Act (1998), Preferential Procurement Policy Framework Act (2011), Intergovernmental Relations Framework Act (2005), Local Government Bylaws, Youth Enterprise Development Strategy, Innovation and Technology Strategy, National Development Plan (NDP), New Growth Path (NGP), the Industrial Policy Action Plan (IPAP), Agricultural Policy Action Plan (APAP) and 2014-2019 Medium Term Strategic Framework (MTSF).

 

2.7        Programme Structure (2020/21)

 

Table 1: Programme Structure

Programme NO.	Programme Name	Sub-Programmes
Programme 1	Administration	Ministry; Departmental Management (Office of the DG); Corporate Management; Financial Management; Communications and Marketing.
Programme 2	Sector and Market Development	Research; Business Information and Knowledge Management; Ease of Doing Business; Access to Market Support; Sector Specific Support.
Programme 3	Enterprise Development	Enterprise and Supplier Development; Entities Performance; SMME Competiveness; Entrepreneurship; Policy and Legislation Support (IGR and Coordination).
Programme 4	Development Finance	Programme Policy; SMMEs Design and Support; Risk Cover & Business Rescue; Co-operative Support; Monitor and Report on entity transfers.

Source: DSBD 2020/21 Annual Performance Plan

 

3.         POLICY PRIORITIES FOR 2020/21

 

3.1        National Development Plan

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.

 

3.2        The Medium Term Strategic Framework

The current period marks the beginning of the second generation Medium Term Strategic Framework (MTSF) 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 government has thus approved 2019 – 2024 MTSF for implementation by government departments. The MTSF 2019 - 2024 aims to address the challenges of unemployment, inequality and poverty through three pillars -:

• Driving a strong and inclusive economy;
• Building and strengthening the capabilities of South Africans;
• Achieving a more capable state.

These three pillars underpin seven priorities of the MTSF and they are as follows -:

Priority 1: A capable, ethical and developmental state

Priority 2: Economic transformation and job creation

Priority 3: Education, skills and health

Priority 4: Consolidating the social wage through reliable and quality basic services

Priority 5: Spatial integration, human settlements and local government

Priority 6: Social cohesion and safe communities

Priority 7: A better Africa and world

Owing to its mandate the Department of Small Business Development has therefore been consigned the responsibility to champion Priority 2: Economic Transformation and Job Creation. Some of the key functional areas of the Department would as a result include but not limitedto -

• Upscaling and expanding support to small businesses;
• Creating more jobs;
• Drive inclusive economic growth;
• Champion re-industrialisation of the economy and emergence of globally competitivesectors;
• Increasing access to and uptake of information and technology (ICT);
• Ensuring competitive and accessible markets through reduced share of dominant firms in priority sectors as well as;
• Mainstreaming of youth, women, and Disabilities with minimum 40 percent target for Women, 30 percent for youth and 7 percent for Persons with disabilities in the SMMEs and Co-operatives Sector.

 

3.3        State of the Nation Address

During 13 February 2020, the State President Honourable Matamela Ramaphosa delivered his third state of the nation address (SONA)wherein a number of policy issues of interest to the Department of Small Business Development were announced. He, among others, underlined “the state of our economy that was not growing at any meaningful rate for over a decade whilst the rate of unemployment is deepening”. The President specifically made mention, as part of alleviating youth unemployment, the partnership between the National Youth Development Agency (NYDA) and the Department of Small Business Development to provide grant funding and business support to 1000 young entrepreneurs in the next 100 days. Whereas SheTradesZA platform to assist women-owned businesses to participate in global value chains and markets was also announced as one of the most innovative initiative. He furthermore announced plans to reinforce procurement opportunities for small enterprises by designating more than 1000 locally produced products to be be procured from Small, Medium and Micro Enterprises.

 

3.4        Planned Policy Initiatives

As reported in the past most of the planned policy initiatives as contained in table two (2) below had been earmarked for implementation during 2015/16, 2016/17, 2017/18 and 2018/19. During the budget vote process the Department informed the Portfolio Committee that it has experienced delays in the finalisation of key policies, most significantly, the amendment of the National Small Enterprise Act. The Department did acknowledge that it was supposed to have finalised the legislative process during the 2018/19 financial year. However, the stakeholder engagements and the development of policy positions which will inform the amendment to the Act (such as Alternative Dispute Resolution and the Institutional arrangements) were well underway. According to the Department, these additional areas will inform the amendments of the Bill.

 

During the MTSF period, the Department plans to undertake comprehensive amendments to the Act, implement, and monitor the National Small Enterprise Act. Key areas that will be covered in the amendment bill will, amongst others, include the establishment of the Ombud Office and Unfair business-to-business practices.It is important to note that, over and above these, the Portfolio Committee has implored the Department to look into Franchising regulations, Business Act, and other key policy measures falling outside DSBD purview such as the current Public Procurement Bill to name the few.

 

Table 2: Planned Policy Initiatives

Policy	Intent
National Small Enterprise Act (No. 102 of 1996) as amended in 2003 and 2004	The Department is in the process of amending of the National Small Business Act (No. 102 of 1996) and anticipate submitting a bill to the Executive Authority during the course of 2019 / 20 financial year. To date amendments to Schedule 1 of the National Small Enterprises Act has been gazetted;
Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises	The DSBD is reviewing the Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises, in order for the strategy to remain relevant and to accommodate recent economic activities and business cycles;
Midterm Review of the Co-operatives Strategy (2012-20220:	The DSBD will evaluate the Co-operatives Strategy (2012-2022) and improve on the implementation plan and will inform the development of an integrated approach to co-operatives development.

Source: DSBD 2020/21 Annual Performance Plan

 

3.5        Summary of the Key Priorities Informing the 2020-25 Strategic Plan and 2020/21         Annual Performance Plan

The key priority / focus areas informing the balanced strategy framework of the DSBD have been identified and incorporated into the plan. These include -:

• Finalisation and implementation of the Township Entrepreneurship Fund;
• Establishment of Funds in partnership with the private sector;
• Review and implement Credit Guarantee Scheme;
• Finalise and implement the SMME Funding Policy;
• Finalise amendments to the National Small Enterprise Act to deal mainly with the establishment of the SMME Ombud Office, regulations/licensing of businesses owned by foreign nationals and unfair business to business practices;
• Implement National Incubation Policy and Incubation Standards; and
• Accelerate establishment of incubators and digital hubs in the townships and rural areas.

 

4.         BUDGET ANALYSIS

 

4.1        Estimates of National Expenditure

It is perhaps worth noting that this budget vote report purposelyomitted analysis of the estimates of national expenditure (ENE) because the data and information that the Department of Small Business Development submitted to National Treasury in 2019 has somehow been reviewed. For instance, the published ENE report still makes mention of the four programmes as follows -:

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

 

While the strategic plan and annual performance plan, the Departmental programmes have slightly been amended as follows -:

 

• Administration;
• Sector and Market Development;
• Enterprise Development and;
• Development Finance.

However, for ease of referencing table 3 below provides budget summary for vote 36 as approved and recorded by the National Treasury during the previous year with four programmes i.e. administration, sector policy and research, integrated co-operatives as well as enterprise development and entrepreneurship.

 

Table 3: Estimates of National Expenditure

	2020/21				2021/22	2022/23
R million	Total	Current Payments	Transfers and Subsidies	Payments for Capital assets	Total	Total
MTEF Allocation
Administration	129.1	125.5	-	3.5	136.8	143.5
Sector Policy and Research	28.0	27.9	-	0.1	28.7	31.8
Integrated Co-operatives Development	140.0	52.4	87.3	0.3	147.1	152.9
Enterprise Development and Entrepreneurship	2 109.7	45.5	2 063.8	0.3	2 383.6	2 432.5
Total Expenditure Estimate	2 406.8	251.4	2 151.1	4.3	2 696.1	2 760.7

Source: National Treasury (2019)

 

According to National Treasury, before the outbreak of the corona virus pandemic, expenditure was expected to increase at an average annual rate of 6.8 per cent, from R2.3 billion in 2019/20 to R2.8 billion by 2022/23. As usual, the bulk of the Department’s spending over the medium term is on transfers to the Small Enterprise Development Agency, amounting to R2.8 billion, and to Small Enterprise Finance Agency for implementation of the Township Entrepreneurship Fund, amounting to R2.8 billion, as well as for internally administered incentives amounting to R1.5 billion. The new and revised budget will be tabled to Parliament once the Minister of Finance has delivered his emergency budget to the House during June 2020.

 

4.2        Revised Programmes and Budget Allocation[Based on 2020 – 2025 Strategic Plan]

 

4.2.1     Programme 1: Administration

The purpose of programme one is to provide strategic leadership, management and support services to the Department. The programme is allocated R409 million over the MTEF period with Corporate Services taking a large chunk of the budget. 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 one has five sub-programme and Sub-Purpose:

• Ministry - to provide for administrative and logistical support to the Minister and Deputy Minister, as well as support staff and make provision for their salaries;
• Departmental Management (Office of the DG) - to provide strategic leadership, management and support services to the Director General and the Department;
• Corporate Services - to provide enterprise-wide support services comprising of human resources, legal services, learning and development and transformation policy and coordination;
• Financial Management - To provide strategic leadership and advice on supply chain, financial and asset management related services to the department; and
• Communications and Marketing - to provide coherent, communications, marketing and stakeholder management support to the Department and its agencies.

 

 

Table 4: Expenditure Estimates - Programme 1

Sub-programme (R’000)		Projections
		MTEF
	Total MTEF	2021/22	2021/22	2022/23
Ministry.	81 875	25 802	27 329	28 744
ODG.	56 680	17 852	18 878	19 950
Corporate Services.	185 219	58 199	62 029	64 991
Financial Management.	62 587	19 907	20 887	21 793
Communication and Marketing.	23 013	7 306	7 674	8 033
Total	409 374	129 066	136 797	143 511

Source: DSBD Annual Performance Plan2020/21

 

 

4.2.2     Programme 2: Sector and Market Development

The purpose of programme two is to facilitate and increase access to markets for SMMEs through business information, product development support and value chain integration. Programme two has the following sub-Programme and Sub-Purpose:

• Business Information and Knowledge Management - To provide evidence based (economic analysis, econometrics, research) business information to direct sector thought leadership;
• Ease of Doing Business - To reduce the administrative and regulatory burden of document business for SMMEs;
• Access to Market Support - To provide domestic and international market support services to SMMEs;
• Sector Specific Support - To support the entry and growth of SMMEs in prioritised and designated sectors of the economy.

 

Table 5: Expenditure Estimates - Programme 2

Sub-programme (R’000)		Projections
		MTEF
	Total MTEF	2021/22	2021/22	2022/23
Co-operatives Development.	40 707	12 569	13 794	14 344
Co-operatives Programme Design and Support.	63 038	20 874	20 766	21 818
Supplier Development and Market Access Support.	61 393	19 303	20 450	21 640
Total	165 138	52 746	55 010	57 802

Source: DSBD Annual Performance Plan 2020/21

 

According to DSBD the sub-programme budget has not changed but still in line with old budget structure under Integrated Co-operatives Development. The budget allotted to this programme over the MTEF period is up from R117 million to R165 million. Over the MTEF Co-operatives Development is apportioned R40 million, Co-operatives Programme Design and Support R63 million while Supplier Development and Market Access Support receives R61 million.

 

4.2.3     Programme 3: Enterprise Development

The purpose of programme three (3) is to oversee the promotion of an ecosystem that enhances entrepreneurship and the establishment, growth and sustainability of small businesses and cooperatives as well as coordinating business development support interventions across various spheres of government.  For the MTEF programme three is allocated R2.8 billion largely due to transfers to Seda. For the current financial year, the programme had been allocated R917 million which as indicated earlier will likely be affected by the ongoing budget reprioritisation. The Enterprise Development Programme comprises of the following sub-programmes:

• Enterprise and Supplier Development - To drive the transformation of the economy through the formulation of policy instruments and advocacy work aimed at the inclusion of SMMEs in the mainstream economy;
• Entities Performance - To exercise oversight including overseeing the execution of programmes by the implementing agencies that report to the Department of Small Business Development, namely Seda and Sefa;
• SMME Competiveness - To work with Municipalities through their integrated Development Plans to develop, enhance and implement enterprise development programmes toward improved Local Economic Development (LED);
• Entrepreneurship - To coordinate the provision of an entrepreneurship development and support service infrastructure by government in general and the DSBD in particular. Drive implementation of youth focused entrepreneurship interventions in partnership with various stakeholders;
• Policy and Legislation Support (IGR and Coordination) - To develop and review policies and legislation to create and promote sustainable growth opportunities for small businesses and co-operatives and to advance coordination and cooperation amongst the different spheres of government.

 

Table 6: Expenditure Estimates – Programme 3

Sub-programme		Projections
		MTEF
	Total MTEF	2021/22	2021/22	2022/23
Small Enterprise Development Agency	2 798 983	889 140	937 368	972 475
Research	61 163	19 817	19 413	21 933
Policy and Legislation	14 102	4 211	4 801	5 090
International Relations	0	0	0	0
Monitoring and Evaluation	13 249	4 016	4 448	4 785
Total	2 887 497	917 184	966 030	1 004 283

Source: DSBD Annual Performance Plan 2020/21

 

 

4.2.4     Programme 4: Development Finance

The purpose of programme four (4) is to develop and review SMME Funding policy to ensure broadened access to finance for SMMEs and Co-operatives. The programme will also design, review and implement instruments that are aligned to the broader participation in the mainstream economy by small businesses and co-operatives owned by individuals from with preference to historically disadvantaged communities.For the current financial year programme is allocated R1.2 billion while R4.2 billion is budgeted over the MTEF period. Programme four has the following sub-programmes -:

• Programme Policy - To develop and review policies to create and promote financial support interventions aimed at supporting small businesses and co-operatives and advance coordination and cooperation amongst the different sphere of government;
• SMMEs Design and Support - To design programmes, models and mechanisms to support businesses throughout their lifecycles. The Sub-programme also review existing programmes, models and mechanisms as well as designing and pilot new and improved programmes;
• Risk Cover & Business Rescue - To provide for interventions that are aimed at supporting those enterprises that can still recover;
• Co-operative Support - To review existing programmes and design new one based on the review outcomes and changes in the co-operatives development landscape and economic conditions;
• Monitor and Report on entity transfers - To guide development of programmes sitting with the entities and report on the impact of the interventions.

 

Table 7: Expenditure Estimates – Programme 4

Sub-programme		Projections
		MTEF
	Total MTEF	2021/22	2021/22	2022/23
Township Entrepreneurship Fund	2 800 000	800 000	1 000 000	1 000 000
Black Business Supplier Development Programme	893 594	283 751	299 357	310 486
Co-operative Incentive Scheme	274 799	87 254	92 052	95 473
Craft Customised Sector Programme	35 086	11 141	11 754	12 191
National Informal Business Upliftment Instrument4	251 340	79 810	84 200	87 330
Entrepreneurship	20 684	6 727	7 118	6 839
Total	4 275 503	1 268 683	1 494 481	1 512 319

Source: DSBD Annual Performance Plan 2020/21

 

 

 

 

 

 

 

SMALL ENTERPRISE FINANCE AGENCY

 

5.         MANDATE

The Small Enterprise Finance Agency (sefa) 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 corporatised as an entity in terms of the Companies Act of 2008 and 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”. Unlike its sister entity Seda which is a schedule 3A entity, sefa is oddly a schedule 2 entity (in line with the parent entity IDC).  There Public Finance Management Act has no provision that deals with subsidiaries as a corporate form and/or separate from their parent entities. In terms of the PFMA, the Minister of Small Business Development is legally not the Executive Authority and therefore her ability to exercise oversight responsibility over the agency as prescribed in the Public Finance Management Act is still impaired.

 

6.         LEGISLATIVE AND POLICY MANDATE

 

sefa’s operations are governed and guided by a wide range of legislative requirements and government policies. The table below outlines the most prominent policies and Acts that guide

and influence sefa’s operations.

 

Table 8: Guiding Legislations

Policies and legislation that guides sefa Operations
Foundational Policies	Sector-Based Policies	Legislation
The National Strategy on the Development and Promotion of Small Business in South Africa (1995)	Co-operatives Development Policy (2004)	National Small Business Act (1996; revised 2004)
Integrated Small Business Development Strategy (2004 – 2014)	Integrated Strategy on the Development and Promotion of Cooperatives (2012)	National Credit Act
The Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises (2005)	National Informal Business Upliftment Strategy (2013)	Industrial Development Act
	Youth Enterprise Development Strategy 2013-2023 (2014)	Financial Intelligence Centre Act (FICA)
		Consumer Protection Act, 2008
		Companies Act of 2011
		Co-operatives Act (No. 14 of 2005)
		Short Term Insurance Act
		Promotion of Access to Information Act, 2000
		Public Finance Management Act (1999 as amended)

Source: sefa Corporate Plan 2021/2025

 

 

7.         SEFA STRATEGIC PILLARS

 

Vision

To be the leading catalyst for the development of sustainable small, micro, medium and co-operative enterprises through the provision of finance.

 

Mission

To provide simple access to finance in an efficient and sustainable manner to small, micro, medium and co-operative enterprises throughout South Africa by: -

• Providing loan and credit facilities to SMMEs and co-operative enterprises;
• Providing credit guarantees to SMMEs and co-operatives;
• Creating strategic partnerships with a range of institutions for sustainable SMMEs and co-operative enterprise development and support;
• Developing, through partnerships, innovative finance products, tools and channels to catalyse increased market participation in the provision of affordable finance.

 

Values

SEFAs values and guiding principles to deepen institutional culture and organisational cohesion are: -

• Kuyasheshwa: We act with speed and urgency;
• Passion for development: Solution-driven attitude, commitment to serve;
• Integrity: Dealing with clients and stakeholders in an honest and ethical manner;
• Transparency: Ensuring compliance with the best practice on the dissemination and sharing of information with all stakeholders;
• Innovation: Continuously looking for better ways to serve our customers.

 

Objectives

• Ensure sefa is a high impact, high-performance Development Finance Institution (DFI) that is responsive to the government’s microeconomic policies and specifically the DSBD MTEF plan;
• Align sefa’s organisational structure, culture and innovative delivery model to be responsive to its mandate and strategy;
• Develop the sefa brand value-proposition for our target markets, improve distribution reach, and establish winning collaborative models;
• Improve sefa’s sustainability, operational effectiveness, efficiency and service delivery by streamlining business processes and deploying technology solutions.

 

8.         SEFA PROGRAMME OVERVIEW

 

In order to ensure effective implementation of the Corporate Plan, sefa will continue to implement the following programmes:-

 

Table 9: Strategic Programmes

Programme	Strategic Programmes	Strategic Initiatives
Access to finance for SMMEs and Co-operatives;	Informal Sector and Micro-Enterprise Finance;	Roll out Fresh Produce Market Project to two additional geographical areas; Consolidate and strengthen strategic partnerships in under-served provinces & roll out approved projects; Support MFI growth and development, new product development and new partnerships; Partner with private and public institutions to offer crucial business development services needed by informal business that sefa cannot provide directly; Raise funds from external sources (Corporates and International Donors) and use those funds as equity/quasi equity in niche intermediaries with mandates closely aligned to sefa and donor funding partners to improve the sustainability of end users;
	Direct Lending	Increased Development Impact; Improved Financial Sustainability; Client-Centricity Towards Client-Sustainability; Enhancing Operational Efficiencies and Effectiveness Automation of front-end processes.
	Wholesale SME Lending	Improve the sustainability of end users through the use of equity/quasi equity to fund niche intermediaries with mandates closely aligned to sefa and donor funding partners; Expand the Structured Finance Solution (SFS) offering, in partnership with Direct Lending; Build value adding partnerships to expand outreach to under-served Provinces; Increase revenues through leveraging government, DFI, Donor, and ESD Resources; Managing costs by maintaining a lean Wholesale Lending structure; Preserve capital in Wholesale Lending business.
	Co-operatives Lending	Leverage financial and non-financial resources of other role players into a holistic framework; Develop a “Co-operative Growth Eco-system Plan”;
	Khula Credit Guarantee	Extend coverage to include a wider range of financial institutions and commercial suppliers of inputs to SMEs; Introduce flexibility of terms and conditions to increase attractiveness of products and services to targeted SME financiers. The aim is to re-engineer the scheme to facilitate the attractiveness and ease of use by participating institutions (new agreements, enhanced business processes and systems); Develop, pilot and market new products and services to facilitate increased uptake of the indemnity facility. The following products and services will be developed and implemented; Introduce risk-based pricing – develop and use a risk based premium pricing model.
Post Investment/ Workout and Restructuring Management;	The primary objectives of the unit are to manage the loan portfolio by reducing the current high levels of impairments from 45% in 2017/2018 to 36% in the 2018/2019 financial year and reduce it further by 100 basis points over the MTEF period.	Implement a pro-active monitoring approach in the identification of early warning signals for portfolio investments; Workout and Restructuring; Mentorship and business support programme to develop client sustainability; Collections; Delinquent Loan accounts.
Build an efficient and effective sefa that is performance driven and sustainable.	Financial Management, Supply chain and Compliance.	Cost Management; Cash Preservation & Cash Management; Raise Additional Funding Through External Donors; Improved Financial Integrity and Automation
	Human Resource Management.	Impact; Sustainability; Productivity; Effectiveness.
	Information and communication technology (ICT).	Improved ICT governance; Network/Infrastructure management; Application development.
	Corporate Strategy and Reporting.	Corporate planning and reporting; Research Management and Information Dissemination; Project Management Office (PMO); New Product Development.
Build a strong and effective sefa brand emphasising accessibility to SMMEs.	The role of Marketing and Communication is to position and market sefa, its products and services to SMMEs and Co-operatives and to facilitate strategic engagements with key stakeholders.	Enhance the sefa brand emphasizing accessibility of its products and service to SMMEs and Co-operation Enterprises; Customer Relationship Management; Stakeholder Engagement; Build an effective Internal Communication Platform.
Compliance, Governance, Enterprise Risk Management and Internal Audit.	Operational Risks.	Promote sustainability of sefa operations; Continued compliance with new regulations and legislation; Effective Reporting.
	Credit Risk Management.	Credit risk Appetite; Greater Alignment between credit and business; Optimise credit portfolio reporting; Better segmentation or diversification of portfolio; Revise Pricing Framework for Direct and Wholesale Lending; Risk Quantification Develop and maintain credit risk models.
	Internal Audit	Assurance on core sefa business processes; Create a sound Control Environment and assist Management to achieve organisational goals; Improve Internal Audit Productivity/Effectiveness; Improve Risk Management and Governance processes;
	Company Secretariat and DRM.	Enhanced governance practices; Enhanced guidance and secretarial support to Board and Committees; Compliance with applicable laws, policies and procedures; Automation; Strengthen DRM to effectively support business decisions.
	Legal Services	Contracting – Facilitate the drafting of loan agreement and amendments based on committee decisions; Represent and facilitate the resolution of all sefa legal disputes; Institute and facilitate the process of legal collection where funded clients has reneged on the contract agreements.
Property Management.	Properties management programme.	Sale and transfer of Properties; Effective and efficient administration of the property portfolio; Ensure that the sefa property portfolio is preserved.

Source: SEFA Annual Corporate Plan 2021/25

 

 

9.         FINANCIAL CONSIDERATIONS

 

The Small Enterprise Finance Agency initial capitalisation was derived from the three main sources -:

a)         The balance sheet of the merged institutions (Khula and South African Micro-                  Finance Apex Fund [samaf]);

b)         Annual transfers from the fiscus (MTEF allocation), and

c)         The long-term interest-free loan from the IDC

 

On an annual basis the agency has been receiving its MTEF allocation through the Economic Development Department (EDD) via the agency’s shareholder, the IDC, and accounted for by sefa as a shareholder loan in terms of the signed IDC Annual Grant Through Shareholder Loan Agreement. Following the reconfiguration of the state departments in 2019 the Department of Trade, Industry and Competition will soon take over this responsibility.

 

For the MTEF period, sefa recorded R777.6 million MTEF allocation, which is a reduction of R24.5 million (an equivalent of R8 million annually). The MTEF allocation is utilised to subsidise the interest rate, funding of support services to clients, the Khula Credit Guarantee Fund and shortfalls incurred in operations of sefa. A projected inflationary increase was calculated for the remaining 2 years of the 5-year planning period. sefa strives to raise funds through donor funding and thus maximising on job creation and developmental impact. R450 million has been raised in the last 2 years with the European Union, and R300 000 of that amount will be utilised in the financial year 2021.

 

A further R2,8 billion Township Entrepreneurship Fund (TEF) has been allocated to sefa, over the MTEF period, with additional R1 billion budgeted for 2024 and 2025 Financial Years (FY) respectively, adding to a total of R4.8 billion over 5 years. This fund will be used for end user loans under Micro, Direct and Wholesale Portfolios at discretionary rates and provision of infrastructure and facilities to SMME’s, and will allow sefa to create a job multiplier of 981 148 jobs, approvals of R10.8 billion and disbursements of R10.5 billion with roll over effect over 5 years. In addition, sefa has been allocated R200 million in 2021 for use of Blended Finance and R50 million to distressed funds.

 

Table 10: Strategic Programmes

	2020/21	2021/22	2022/23	2023/24	2024/25	Total over MTEF
MTEF Allocation (R’000s)	246 908	260 541	270 164	283 672	297 855	777 613
TEF Allocation	800 000	1 000 000	1 000 000	1 000 000	1 000 000	4 800 000

Source: SEFA Annual Corporate Plan 2021/25

 

sefa currently has a signed facility letter with IDC for an interest-free loan and 5-year capitalmoratorium of R921 million. During the 2019 financial year, sefa signed an R640 million loan agreement with IDC and an R150 million loan drawdown was made in 2019 financial year. The budget assumptions for the drawdowns are as follows -

 

Table 11: Strategic Programmes

	2018/19 (the amount is already drawn)	2020/21	2021/22	2022/23	2023/24	2024/25	Total
Drawdowns (R’000s)	150 000	290 000	200 000	0	0	0	640 000

Source: SEFA Annual Corporate Plan 2021/25

 

Since inception, sefa’s financial performance has been under pressure due to low growth economic environment which had a negative impact on the performance of sefa funded clients and the related effect of sefa loan book performance. Negative revenue growth as a result of the erosion of capital and the declining loan book emanating from high impairments, non-profitable properties, high staff cost structure and the direct lending expensive operating model, which had an adverse effect on sefacost to income ratio, cash reserves and overall sefa’s financial sustainability. The MTEF reductions will have a significant impact on sefa’s financial sustainability, business performance (loan book outcomes), cash balances and reserves. To achieve some positive financial outcomes, sefa will introduce financial measures and initiatives to counter the reduction in the allocation from fiscus and funding deficit. The budget assumes that the IDC interest-free loan will be fully drawn down by the end of year five at R640 million.

 

10.        OBSERVATIONS

 

Having reflected on the Department andsefaannual performance plans and budgets for 2020/21,the Portfolio Committee hereby register the following observations and recommendations for consideration by the Department: -

 

10.1      The Portfolio Committee notes that this year’s budget vote process takes place right       in the middle of the Covid-19 pandemic that coincidentally came at a time when the     South African economy was already under severe strain, posing not just a health risk to        the people, but threatening livelihoods as well. The road to economic recovery will           certainly be a challenging and daunting task. The Committee cautiously welcomes the            government risk-adjusted approach to reopening the economy;

10.2      The Covid-19 endemic compelled the government to relook at the budget that had           earlier been announced by the Minister of Finance in February 2020, leading among             others, to the Special Adjustment to the Budget in order to modify the 2020/21 budget        to utilise current baseline allocations to provide for the rapidly changing economic             conditions and enable spending on the COVID-19 response;

10.3      The Portfolio Committee furthermore notes that the Minister of Finance will also   present a revised fiscal framework to the House in June 2020 to account for revenue   losses emanating from the economic shock of the pandemic and subsequent lockdown;

10.4      The Committee observes that prior the outburst of the Covid-19 pandemic the     government had already approved the 2019 – 2024 Medium Term Strategic Framework        which basically paved the way for all the government departments including DSBD to        conclude their strategic plans and accompanying annual performance plans for   2020/21. While the Portfolio Committee is mindful that these strategic plans, APPs,             performance targets and budget will be reviewed once the Minister of Finance tables a     revised budget in June 2020, there are nevertheless few legacy areas that require             specific and urgent attention by the Department;

10.5      During the previous budget vote report the Portfolio Committee noted that due to the      interconnectedness between the organisational structure and the strategy, the long     outstanding issue of the organisational structure will only be attended to once the       Department initiates its strategic planning activities. The Portfolio Committee had            further recorded and concurred with the Department of Public Administration (DPSA) guidance to the DSBD in 2018 to the effect “the changes to organisational structure of the Department of Small Business Development should be held in abeyance until the sixth administration is in place given the anticipated changes expected to the Machinery          of Government. This will also afford the new Executive Authority an opportunity to     apply his/her mind on the configuration of the Department”;

10.6      As mentioned hereinabove, the estimates of the national expenditure (department            budget) is not aligned to the policy and planning strategic documents. The new          planning structure has 14 subprogrammes, recording an increase from 11             subprogrammes. Strategic alignment of the plans and budget would help the      department allocate resources not only efficiently but also in an effective manner;

10.7      The Portfolio Committee further records that sefa ownership by Economic           Development Department/DTIC via Industrial Development Corporation has been on            the agenda for quite some-time. This include the appointment of a permanent Bard and      the Chief Executive Officer, as well as the issue of pending amalgamation between         sefa and Seda;

10.8      Sefa annual reports have consistently demonstrated that most MFIs and RFIs that           benefits from sefa wholesale funding are predominantly white owned. Also, the rate of            interest charged by MFIs and RFIs is not being monitored by sefa, consequently, there           has been instances where small enterprises are charged double the rate of what is             permissible in terms of the National Credit Act;

10.9      The Committee observes that some of the previous Portfolio Committee             recommendation does not find expression in the sefa corporate plan, some of these were          “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, SEF impairments are next to nothing”;

10.10    During the previous financial year, sefa was forced to tap into IDC reserves (R921           million). According to the agency, “the IDC loan draw down was necessitated by the          worsening cash status of sefa with the depletion of cash resources over the five (5) year period as a result of high staff costs, high impairments rates and a worsened property            portfolio”. It seems, sefa financial position is deteriorating. As noted earlier “the MTEF     reductions will have a significant impact on sefa’s financial sustainability, business      performance (loan book outcomes), cash balances and reserves”.

 

11.        RECOMMENDATIONS

 

11.1      The coronavirus pandemic is affecting small businesses in a variety of ways. The            Portfolio Committee is conscious of the disruption that the pandemic has caused on the            targets and budgets of the Departments in general and DSBD in particular. Many small       businesses are struggling to stay afloat because they cannot operate under the COVID- 19 lockdown.    However, the Committee is pleased with the response and leadership      demonstrated thus far by the National Command Council (NCC), South African            government and various private sector players that have implemented interim measures   to curb the immediate    and longer-term effects of the Covid-19 pandemic on business   and industry. The Department of Small Business Development must remain focus and           do what is within its control to assist small enterprises financially or otherwise including          mitigating supply chain disruptions;

11.2      During its strategic plan annual performance presentation the Department informed the    Portfolio Committee that it has experienced delays in the finalisation of key policies,           most significantly, the amendment of the National Small Enterprise Act. The Portfolio      Committee is mindful of the significant disruption that is being caused by the Covid-       19 pandemic and aware that many Departments will have difficulty in meeting the     timelines. However, the new normal requires a new mind-set. The Portfolio Committee            has been consistently informed that lot of groundwork had already been achieved. The    introduction of the bill to Parliament must be effected before the end of the 2020/21        financial year;

11.3      It is envisaged that the current strategic plan, annual performance plan, performance       targets and budget will be reviewed as soon as the Minister of Financedelivers his amended budget in Parliament in June 2020. This is an opportunity for the Department        to rectify the misalignment of the policy and planning strategy which as indicated above reveals that the budget of the Department was tabled without taking into consideration          the broader strategic focus of the Department;

11.4      Another critical policy issue that needs to be taken into account by the Department as     it reviews its strategic plan is the macro-organisational structure that is aligned to the   broader policy objectives of the government. The Department is currently operating on    a start-up structure. The Department of Public Service Administration has in the past       reiterated its commitment to assisting the Department finalise organisational structure.            The organisational structure has direct implication on the costs structure and budget of             the Department;

11.5      The Department, in its own admission, has noted strategic posts have remained vacant   for too long. The Portfolio Committee is concerned that absence of a permanent     Director General may handicap the Department in fulfilling its mandate. 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 Q2 of the 2020/21 financial year;

11.6      The process of amalgamating sefa and Seda must be speeded and the strategic plan of             the Department must pronounce on the institutional realignment of these two and        possibly other entities e.g. National Empowerment Fund (NEF). Sefa need to be stabilised as a matter of urgency in order to assist the Department fulfil its mandate of    improving access to finance for all South Africans;

11.7      Sefa financial stability requires greater scrutiny and focus from the Portfolio        Committee. The agency, since inception, has struggled to collect outstanding loans      resulting in impairments and debt write offs amounting to millions. The situation is likely to get worse with the current and ongoing pandemic, MTEF allocation(s) being        reduced or reprioritised and interest free loan from IDCbeing fully exhausted. The     Portfolio Committee needs a detailed appraisal report and turnaround strategy fromsefa before the end of Q1 2020/21.

 

 

Report to be considered.