ATC200610: Report of the Select Committee on Trade and Industry, Economic Development, Small Business Development, Tourism, Employment and Labour on Budget Vote 36:Small Business Development, the Strategic Plan and the 2020/21 Annual Performance Plan of the Department of Small Business Development, Dated 9 June 2020
REPORT OF THE SELECT COMMITTEE ON TRADE AND INDUSTRY, ECONOMIC DEVELOPMENT, SMALL BUSINESS DEVELOPMENT, TOURISM, EMPLOYMENT AND LABOUR ON BUDGET VOTE 36:SMALL BUSINESS DEVELOPMENT, THE STRATEGIC PLAN AND THE 2020/21 ANNUAL PERFORMANCE PLAN OF THE DEPARTMENT OF SMALL BUSINESS DEVELOPMENT, DATED9 JUNE 2020
The Select Committee on Trade and Industry, Economic Development, Small Business Development, Tourism and Employment and Labour (the Committee), having considered Budget Vote 36: Small Business Development,the Strategic Plan andthe 2020/21 Annual Performance Plan of the Department of Small Business Development (the Department) tabled by the Minister of Small Business Development (the Minister), and in terms of the Public Finance Management Act of 1999 (PFMA), as well as the Money Bills Amendment Procedure and Related Matters Act, 2009, reports as follows:
The Committee considered the 2020/21-2024/25 Strategic Plan, and the 2020/21 Annual Performance Plan of the Department of Small Business Development (DSBD) on the 13 May 2020. The Select Committee has also further considered the adequacy of financial resources for the implementation of these plans and interrogated the allocation received by the Department. The Department submitted that the current strategic plan, and annual performance plan are aligned to the Medium Term Strategic Framework (MTSF).
It should be noted that due to the COVID-19 pandemic and its resultant negative impact on the economy, the Minister for Small Business Development, Ms K Ntshavheni indicated that the Department is expected to align its planning and reporting processes to respond to the COVID-19 pandemic, as such the tabled Strategic Plan and Annually Performance Plan would be revised to accommodate COVID-19 policy responses. The Minister further noted that the Department would reprioritise some of its budget priorities in response to COVID-19 interventions, and the process would be guided by the Public Finance Management and Disaster Management Acts. The Department submitted that it has commenced the review of the tabled Strategic Plan and APP’s, and the revised strategic plans would be tabled after the Minister of Finance has the tabled in Parliament the Adjustment Budget.
Further, the Committee noted that the South Africa economic growth is anticipated to decline between 6 and 7 per cent in 2020, and the significant decline of the national economy is supported by the International Monetary Fund, Reserve Bank and the Organisation for Economic Cooperation and Development. COVID-19 pandemic would have significant implications for business with people being displaced, the movement of goods restricted or suspended, and supply chains disrupted.
The Committee further noted that many small enterprises were in a weak position, and faced with long standing challenges such as lack access to finance, managerial skills, inadequate infrastructure support, and regulatory burden, before the pandemic outbreak. Covid-19 has weakened the SMMEs further, and it is critical to save existing productive and commercial capabilities, including the saving of jobs.
The Committee recognised the depth of the crisis presented by the COVID-19 pandemic in relation to the operations of SMMEs, and the deeper problem of the unemployment that would have to be tackled. The Committee emphasised that preservation of jobs, and support to many businesses should be at the centre of government agenda. Partnerships amongst social partners should be enhanced to accelerate economic recovering.
- Overview of the Legislative and Policy Mandate of the Department
The Estimates of National Expenditure articulates the aim of the Department is to promote the development of small business that contributes towards an all-inclusive economic development and growth. Further it is stated that the Department is tasked with the responsibility of leading an integrated approach to the promotion and development of small business and cooperatives by focussing on economic and legislative drivers that stimulate entrepreneurship to contribute towards radical economic transformation. It expected that the realisation of this mandate will lead to increased employment, poverty reduction and reduce inequality.
The legislation which underpins the work of the Department are the following:
- National Small Business Act (1996)
- National Small Business Amendment Act (2004)
- Small Business Development Act (1981)
- The Cooperatives Act (2005)
- The Cooperatives Amendment Act (2013).
The Department expressed that the National Development Plan (NDP) envisages that by 2030,90 per cent of the 11 million jobs will be created through small to medium enterprises. Further stressed that government itself does not create jobs, but creates the enabling environment. The jobs creation initiative would requirea collective effort from the private, civil and the public sectors.
Over the medium term, the Department indicated it will also focus of the following priorities:
- Finalisation and implementation of the Township Entrepreneurship Fund;
- Establishment of Fund 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, which seeks establishSMME Ombud Office, ensure regulations/licensing of businesses owned by foreign nationals and regulate unfair business practices;
- Implement National Incubation Policyand Incubation Standards; and
- Accelerate establishment of incubators and digital hubs in the townships and rural areas.
As the policy response to Covid-19, the Department designed interventions to help SMMEs to insulate the effects of the pandemic to the business operations. In response to Covid-19, the Department reported that it has established the SMME Debt Relief Fund, Business Growth and Resilience Facilityto support SMMEs to navigate the current uncertain situation, and Small Enterprise Finance Agency (SEFA) has also offered payment holidays to the clients.The main purpose of these interventions is too keep businesses afloat during the lockdown as they are not able to generating any income to sustain themselves and protect jobs. The interventions also cover township and rural enterprises. The Department submitted that it is working on post-lockdown interventions to ensure that businesses are assisted to upgrade their business processes and get appropriate financial support to operate in a ‘new normal operating environment’.
The Committee noted the effect of the COVID-19 to the Medium-Term Strategic Framework including the National Development Plan 2030. The COVID-19 pandemic will affect the economy, and has the direct negative impact to SMMEs and employment. Since the duration of the pandemic remains unknown, it has been accepted that the impact of the pandemic would ravage the economy, and affect jobs and cause strain to households and many companies.
- Budget Policy Area
The Department submitted that over the medium term in response to the MTSF priority 2:Economic Transformation and Job creationwill ensure that the following outcomes are attained:
- Grow small business contribution to GDP from 35 per cent to 50 per cent by 2024. In order to achieve the target, the Department intends to upscale support to SMMEsand Co-operatives through the provision of blended finance instruments, theestablishment of the Incubation centres and Digital Hubs;
- Increaseparticipation of SMMEs and Co-operatives in domestic and international markets;
- Boost the contribution of the Creative Industries Sector to GDP,
- Scaled-Up and improve coordination of support for SMMEs, Co-operatives, Village and Township economies;
- Implement responsive targeted financial and non-support programmes to new and existing;
- Further, expanded access to finance for SMMEs and Co-operatives through innovative service offerings.
- Further, the Department intends to increase the percentage share on government spending to the benefit of local firms. Thus it will intensify coordination and monitoring of the implementation of government policy in relation to the 30 per cent public procurement programme for small businesses;
- In partnership with the departments such as the Department of Trade Industry including the Competition Commission, the Department will facilitate broader participation in the economy to ensure that the current concentrated South African product market open up for new entry (including black owned SMME);
- The Department recognise the crucial role that women, young people, and people with disabilities can play in the economy. Over the medium term the Department will design and implement development programmes that seek to increase representation of the women, young people, and people with disabilitiesin the mainstream economic activities.
Over the medium term, the Department submitted it will continue to implement the National Development Plan 2030. The Committee noted the critical policy strategy plans that informed the formulation of the current strategic plans, and other spending plans. As indicated in this report the Committee emphasised that the COVID-19 pandemic would have an impact to the Medium-Term Strategic Framework including the NationalDevelopment Plan 2030.Further the Committee recognised that the national budget is strained, and that would have an effect to the departmental spending priorities. As a result, other policy priorities might be scaled-back. Additional funding may be required to assist the Department to carry tasks in response to COVID-19 pandemic, and also implement standing priorities, which are pivotal.
- Overview of Departmental Spending
The Department is expecting to increase spending at an average annual rate of 6.8 per cent from R2.3 billion in 2019/20 to approximately R2.8 billion by 2022/23. The bulk of the Department’s spending over the medium term is on transfers to the Small Enterprise Development Agency (SEDA) amounting R2.8 billion, and the Small Enterprise Finance Agency (SEFA) for the implementation of the Township Entrepreneurial Fund, amounting to R2.8 billion. Further the Department is anticipated to internally administered incentives amounting to R1.5 billion to support SMMEs and Cooperatives. Thusover the medium term, the Department indicated it will establish a one stop SMME platform for business to access financial and non-financial support; and improving access to finance by providing the blended finance model in the Township Entrepreneurial Fund, and extending the finance of SMME’s and cooperatives.
Over the 2020 medium term period, approximately R516 million is expected to be spent on Compensation of Employees spending item. Whilst, approximately R281 million is anticipated to be spent on Goods and Services spending item. As already indicated in this report, the bulk of the Department spending is deployed to the Transfers and Subsidies spending item, which covers transfers to SEDA and SEFA. Over the medium term the Department is expected to spend approximately R7 billion as covering spending to SEFA, SEDA, Black Business SupplierDevelopment Programme and National Informal Business Upliftment Scheme.
In terms of the Black Business Supplier Development Programme, the Department indicated that it will over the medium term spend approximately R894 million. Further, approximately R251 million is expected to be deployed to accelerate the implementation of the National Informal Business Upliftment Scheme. The Department further reported that approximately R275 million would be spent to spur growth and expansion of the Cooperatives through the implementation of the Cooperatives Incentive Scheme.
Table 1 shows how the Department is expected to spend over the 2020 medium term. However it should be noted that in response to the COVID-19 pandemic, allocated resources as well as programme priorities will be reprioritised by the Department.It is anticipated that the Minister of Finance when tabling the special adjustment budget the changes will be reflected in the Special Adjustment Budget.The Department has organised its expenditure into four functional policy programmes, which comprise of Programme 1:Administration; Programme 2: Sector Policy and Research; Programme 3: Integrated Cooperative Development and Programme 4: Enterprise Development and Entrepreneurship.
In relation to Programme 4: Enterprise Development and Entrepreneurship, the Department submitted that over the medium term it will develop the Small Enterprise Development Masterplan, support 100 000 start-up companies owned the youth and further support 33 332 youth entrepreneurs. The Small Enterprise Development Masterplan is envisaged to ensure the delivery of an integrated, targeted and effectedsupport interventions aimed at promoting entrepreneurship as well as providing financial and non‐financialsupport to qualifying small enterprises. Further, the Enterprise Development and Entrepreneurshipis expected to conduct impactassessmentreport on theperformanceof incubationcentres anddigital hubsprioritising thosein Townships andRural areas.The Department submitted that it will table in Parliament the National SmallEnterprise Amendment Bill. The Enterprise Development and Entrepreneurship is anticipated to spend approximately R6,9 billion, over the medium term period.As indicated in this report, the bulk of the spending covers spending directed to SEFA, SEDA, Black Business Supplier Development Programme and National Informal Business Upliftment Scheme.
However, the Committee noted that various reports state that public business support programmes are relatively fragmented, and do not appear to have a significant impact on creating new small businesses including Cooperatives. This is the issue that the Department needs to tackle. Further, in the recent past report of the Financial and Fiscal Commission flagged the utilisation of financial intermediaries (wholesale lending) as one of the cost drivers that increasing the cost of capital for struggling small enterprises. The Committee advanced that that the challenges faced by SMMEs need to be significantly improved.
In terms of Programme 3; Integrated Cooperative Development, the Department is expected to spend over the medium term period, approximately R440 million. Of which approximately R275 million will be directed to the Cooperatives Incentive Scheme. Over the medium term, the Department has planned to support 1000Co-operatives through Financial andnon-financial
With regard to Programme 2: Sector Policy and Research, the Department has indicated that over the medium term period is expecting to spend R89 million. Of which approximately R57 million will be directed to the Compensation of Employees spending item, and R32 million would be deployed to cover Goods and Services spending item.
Over the medium term period, spending for Programme 1: Administration is anticipated to be approximately R409 million. The Department indicated that over the medium-term period it will undertake various initiatives to strengthen governance, and enhance organisational capacity and capability. Going forward, the Committee indicated that it will pay particular attention to monitor the Department’s organisational health and capability in order to meet government policy outcomes.
Table 1: Summary of the Departmental Spending for the 2020 Medium Term Expenditure Framework
Source: Estimates of National Expenditure, National Treasury
It should be stated that the departmental estimates of the expenditure for the 2020 medium term is not aligned to the department’s policy and planning strategic documents. The Committee emphasised that it is pivotal that the budget is aligned to the planning strategic documents. The mis-aligment of the policy and planning strategy shows that the Department did not adequately connect the planning and budgeting process.The Committee emphasised that the planning and budget documents are very critical to determine the stability and growth of the Department.
Box 1: Shows mis-alignment of the Budget Structure with Planning Structure
Programme 2: Sector and Market development
Programme 2:Sector Policy and Research
However, resources are allocated based on Subprogrammes: Co-operatives Development, Co-operatives Programme Design and Support and Supplier Development and Market Access Support. Budget not aligned to the policy planning documents.
Programme 3: Enterprise Development
Programme 3: Integrated Cooperative Development
However, resources are allocated based on Small Enterprise Development Agency, Research, Policy and Legislation, Policy and Legislation, International Relations and Monitoring and Evaluation.
Programme 4: Development Finance
Programme 4: Enterprise Development and Entrepreneurship
However, resources are allocated according to Subprogrammes; Township Entrepreneurship Fund, Co-operative Incentive Scheme, Black Business Supplier Development Programme, Craft Customised Sector Programme, National Informal Business Upliftment Instrument and Entrepreneurship.
The Department would need to firm the alignment of the budget with the strategic plan. This would help the Department to allocate resources in an effective and efficient manner. Further, The Committee stressed that the Department would need to accelerate the development of the macro-organisational structure. The Department submitted that it will fast track the development of the macro-organisational structure, and also made an undertaking to align the budget structure with the strategic plan.
5. Issues Arising from Engagement
- The Committee emphasised that preservation of jobs and business capacity should be at the centre of economic and social policies in a post COVID-19 phase. Partnerships amongst social partners should be enhanced.
- Further, the Committeenoted that government prior to the COVID-19 outbreak, government tax revenue was low, as a result of low economic growth, and debt to GDP was increasing, big state owned enterprises were experiencing weak balance sheet and put pressure to the already contained fiscus.
- The Committee urged theDepartment to balance these challenges whilst ensuring that assistance to small business is not compromised. The Department would have to reprioritised programmes. In some instances, it will have to scale back other priorities.
- The Department reported that in response to the COVID-19 pandemic, it has established SMME Debt Relief Fund, Business Growth and Resilience Facility including the Spaza Shops Support Programme. For the COVID-19 relief efforts, the Department has set aside R530 million to support companies in distress.
- In terms of the SMME Debt Relief Fund, the fund objectives aim at ensuring businesssurvival, provide working capital, job protection and income protection.
- In addition, the Department indicated that SEFAwill be providing a payment holiday to clients.There are currently 219 clients in the Direct Lendingactive book who will be eligible for a blanket payment holiday.These clients have total outstanding loanbalance of R335 million. There are also opportunities for SMME’s to restructure existing loans with SEFA.
- Further, the duration of the pandemic remains unknown, and the depth of the damaged to the economy, and livelihoods not yet clearly quantified. The Committee agreed that that the impact of the pandemic would affect jobs and cause strain to households and many companies.
- The Department indicated that in the post COVID-19 environment, it will focus on applying resilient interventions to ensure that small businesses are able to operate in ‘new normal economic, financial and business environment’. ICT infrastructure support, and productivity strategies will be prioritised.
- Further, the Committee emphasise that the Department should form partnership with the Productivity of South Africa to improve and enhance support to small business, which are under distress as part of the recovering and sustainability planned interventions.
- The Department submitted that the current strategic plan, annual performance plan and the budget were developed in a different policy context, which did not take into account the Covid-19 pandemic. The Committee agreed that the current budget policy context will necessitate the Department to revise the spending plans to accommodate policy responses to the Covid-19 pandemic.
- Further, the Committee expressed concern about the mis-alignment of the budget with the broader strategic plan (misalignment of the planning structure and budget structure) of the Department. The Department indicated that during the current financial year it will submit the final macro-organisational structure to the Department of Public Service and Administration. The envisaged macro-organisational structure would enable the Department to develop a new budget structure that will be aligned to the strategic planning structure.
- Members urged the Department to sufficiently focus on providing both non-financial and financial support to SMMEs including Cooperatives to be able to navigate the prevailing negative economic conditions. Members noted that South Africa has experienced low business confidence and lower than expected investments before the COVID-19 pandemic outbreak. Further, Members indicated that many small businesses have expressed that programmes offered by the Department do not adequately addressed their challenges.
- The Committee indicated that reports by various institutions advance that public business support programmes are relatively fragmented, and do not appear to have a significant impact on creating new small businesses including Cooperatives.
- Further, The Committee urged the Department to ensure that the business development support programmes it offers, including funding and financing support initiatives should reach rural and township enterprises.
- The Department indicated that over the medium term it has planned to Scaled-Up and improve coordinated support for SMME’s, Cooperatives,Villages and Township enterprises in order to accelerate economic growth, and further improve rural and township economies.
- Further, the Department submitted that over the medium term service delivery will be aligned with the district based model, and the envisaged Small Enterprise Master Planwould enable small enterprises to realise their full potential.
- The Committee urged the Department to accelerate the development and finalisation of the National Small Enterprise Amendment Bill.
- Over the medium term period, the Department submitted that it will embark on a merger process that would see SEFA, SEDA and the National Empowerment Fund (NEF) to form a single entity that will offer support to SMMEs and Cooperatives. The Committee supported the initiative, and stated that it has been a policy view that the Committee has advocated for.
- The Committee noted the establishment of the Rural Township Entrepreneurial Fund including other access to finance initiatives planned by the Department. However, it has emphasised that the Department to ensure that the programmes reach the intended beneficiaries including businesses residing in rural and township areas.
- Further, the Committee urged the Department to leverage private sector finance to improve the impact of the business development support programme to ensure that small businesses contribute towards the economy, and job creation. The Committee called for stronger measuring tools to evaluate performance of SMMEs.
- The Department also submitted that it is working close with local government, and provinces to spread the reach of the support offered to small businesses. The Committee urged the Department to improve its working relations with local and provincial governments. Many small business, particularly in rural areas were not able to acquire permits to operate as essential services during the first phase of the lockdown period.
- The Department acknowledged that in some instances communication could have been improved. However, the challenge experienced with many small businesses particular in rural towns was exacerbated by the fact that some municipal offices were closed during the lockdown period. The Department is working closely with the South African Local Government Association (SALGA) to ensure that the Local Economic Development (LED) units in municipalities to remain operational in order to assist small businesses.
- Partnerships with other departments, and the private sector including civil remains a critical priority. Over the medium term, the Department indicated that it will work close with the Department of Trade, Industry and Competition in areas such access to finance, market access and non-financial support geared to improve performance of SMMEs. Further, better coordinated approach in serving rural communities would be enabled with greater participation of local and provincial governments including taping to the wide network of civil society and private sector.
- Multi governance forum such as the Ministers and Executives of Executive Council meetings would play a critical role to improve coordinationto eliminate duplication in implementing development programmes.
- The Department also submitted that in response to the Presidential Announcement of the creation of 1000 jobs to youth within 100 days, it is working partnership with the National Youth Development Agency to support youth owned enterprises. Further, it has established a women’s development programme to support women ownedbusinesses.
- Over the medium term, the Department indicated that is in the process of developing a Small Business Index which is intended to measure the health of SMME’s and measure the impact of deliverables of the Department.
- Further, The Department submitted that it will extend the Credit Guarantee Scheme to support business, which under normal commercial banking practices would not qualify to get a credit. The payment guarantee for loans to commercial banks will be provided by SEFA.
Following the engagements with the Department, the Committee proposed the following recommendations to the Minister:
- The COVID-19 pandemic would certainly put pressure on the current departmental budget. The demands of businesses would require policy responses to mitigate the damage that would be caused by the COVID-19 pandemic. National Treasury taking into cognisance available resources should consider to allocate additional resources to the Department to scale-up policy response necessitated by the COVID-19 pandemic.
- The Department by the end of the current financial year should finalise the Small Enterprise Master Plan including the Small Enterprise Amendment Bill.
- In preparation for the 2021 medium term, the Department must finalise the macro-organisational structure, and formulate the budget structure that is aligned with the strategic plan. The Department of Public Service and Administration, National Treasury, and the Department of Monitoring and Evaluation should provide support to the Department to develop the macro-organisational structure including the strategic plan in accordance with their legislative and policy mandates.
- Organisational health and capability should be one of the key priorities that the Department should prioritise. In preparation of the 2021 medium term period, the Department would need to fill critical posts to realise the government, and departmental policy outcomes. This should form part of the broader re-engineering of the Department, and to repurpose the Department to meet the needs of the small enterprise industry.
- Further, in preparation for the 2021 medium term, the Department must fast track the process of merging SEFA, SEDA and NEF to form a focused, single and coherent SMME Development Agency. The merger process of SEDA, SEFA and NEF should be prioritised. The Presidency and National Treasury should provide necessary resources to support the merger of the mentioned development entities.
Report to be considered.
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