ATC200717: Report of the Portfolio Committee on Small Business Development on Adjustment Budget Vote 36 of the Department of Small Business Development for the Financial Year 2020/21, Dated 16 July 2020

Small Business Development

REPORT OF THE PORTFOLIO COMMITTEE ON SMALL BUSINESS DEVELOPMENT ON ADJUSTMENT BUDGET VOTE 36 OF THE DEPARTMENT OF SMALL BUSINESS DEVELOPMENT FOR THE FINANCIAL YEAR 2020/21, DATED 16 July 2020

 

1.         INTRODUCTION

 

The Portfolio Committee on Small Business Development (“the Portfolio Committee”) having considered the amended Strategic, Corporate and Annual Performance Plans and Budgets of the Department of Small Business Development (“the Department”) and entities, Small Enterprise Finance Agency (“sefa”) and Small Enterprise Development Agency (“Seda”) reports as follows: -

 

1.1        Background

On 15 March 2020, President Cyril Ramaphosa declared a national state of disaster in South Africa in line with the Disaster Management Act, 2002, following the outbreak of the novel corona virus and subsequent declaration of the pandemic by the World Health Organisation. Government had to act promptlyin order to moderate economic and social impacts of the pandemic. Some of these measures implied(re)direction of resources to higher priority government needs notably health services. On 21 April 2020, the President announced a R500 billion fiscal support package that included spending towards Covid-19 priorities. On 30 April 2020 the National Treasury published the “Economic Measures for Covid-19”, outlining an R500 billion response, as well as identifying the funding sources for the package, which included reprioritisation from the 2020/21 financial year budget.Accordingly, state Departments and entities tabled provisional plans and budgets pending supplementary budget by the Minister of Finance.

 

1.2        Tabling of the Supplementary Budget and Link to the MTBPS

The Public Finance Management Act, read jointly with Money Bills Amendment Procedure and Related Matters Act, empowers the Minister of Finance to table the revised budget as and when necessary. The supplementary budget was duly tabled in Parliament on 24 June 2020 in accordance with the two statutes. It sets out a roadmap to, amongst others, stabilise debt by improving the country’s spending patterns, creates a foundation for economic revival and act as a conduit to the second adjustment budget scheduled for Octoberwhich will be tabled together with the Medium Term Budget Policy Statement (“MTBPS”).  Accordingly, it is anticipated that the 2020 MTBPS would provide further clarity on whether the government is achieving these objectives. 

 

1.3        Implications of the Covid-19 on the Mandate of the Department and Entities

The pandemic has had a weighty impact on the South African economy. There is no doubt that it would hurt service delivery due to a variety of austerity measuresbeing implemented to contain spending while guaranteeing productive utilisation of limited financial resources. The outbreak of the Covid-19 epidemic has forced the Departments to redirect funds and reduce expenditure initially planned for the current and successive financial years.It has consequently become imperative that innovative working arrangements are developed with a view to minimising the adverse impacts these budget cuts have on performance and service delivery.For that reason, strategic and corporate plans, annual performance plans, performance targets and budgets have been revised downwards. For the South African small business sector, already having to grapple with a contracting economy, supplementary shocks from Covid-19 are putting serious strain on their operations.

 

2.         DSBD BUDGET VOTE 36: 2020/21 FINANCIAL YEAR

 

The purpose of Budget 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. In terms of the budget estimates tabled prior the outbreak of the corona virus pandemicin February 2020 as illustrated in table 1 below, 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.

 

The bulk of the Department spending over the medium term was on transfers to 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. As this report indicates, some of these programmes have been discontinued while others, such as Township Entrepreneurship Fund have been postponed and funds reprioritised to support small enterprises affected by Covid-19 catastrophe.

 

 

 

Table 1: 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 (2020)

 

3.         ANALYSIS OF THE REVISED BUDGET

 

Section 30(2) of the Public Finance Management Act (“PFMA”)specifies the type of spending that the adjustments budget may provide for. This special adjustments appropriation makes provision for -:

• Virements and shifts within the vote: a virement is the use of unspent funds from amounts appropriated under one main division (programme) to defray excess expenditure under another main division (programme) within the same vote. Section 43 of the PFMA, read together with Treasury regulation 6.3 and section 5 of the Appropriation Act (2020), sets out the parameters within which virements may take place. The virements included in this adjustments budget are mainly those intended to respond to Covid-19;
• Adjustments due to significant and unforeseeable economic and financial events:these adjustments are required due to a significant reduction in government revenues and changes in spending priorities in response to the Covid-19 pandemic;

 

3.1        Virement and Suspension of Funds

Overall, the DSBD budget contracted slightly from R2.4 billion in February 2020 to R2.3 billion during the adjustment period. In order to cushion the blow andminimize undesirable impacts of Covid-19 pandemic on small business sector, the Department and entities collaboratively established a financial stabilizationmechanism, Covid-19 Emergency Fund, tofund small enterprises affected by Covid-19. In terms of table 2 below, a total of R1.154 billion was realised for emergency fund from programme three (R13.5 million) plus reprioritised funds from programme four (R1.141 billion). National Treasury approved a virement request worth R413.5 million in April 2020 and a further reprioritization amounting to R741 million in June 2020, contributing and making a total of R1.154 billion available to support struggling small enterprises. The fund was placed under the administration of Small Enterprise Finance Agency.

 

Table 2: Revised Programme Allocations

		Downward Revisions		Reallocations
R’000 (Programmes)	2020/21 Main budget	Suspension of funds (COVID-19 purposes)	Virements from (COVID-19 purposes)	Virements to (COVID-19 purposes)	2020/21 Total net Change proposed	2020/21 Total allocation proposed
Administration	129 066	-6 400	-	-	-6 400	122 666
Sector Policy and Research	28 044	-8 100	-	-	-8 100	19 944
Integrated Co-operatives Development	140 000	-16 500	-13 500	-	-30 000	110 000
Enterprise Development and Entrepreneurship	2 109 673	-36 000	-1 141 000	1 154 500	-22 500	2 087 173
Total	2 406 783	-67 000	-1 154 500	1 154 500	-67 000	2 339 783

Source: National Treasury (Adjustments Appropriation Bill, 2020)

 

3.2        Revised Allocation Per Programme

The 2020/21 baseline was reduced by R67 million and this is made up of reductions from all four programs as follows -:

• Programme 1: Administration was allocated R129 million in the February budget allocation. The net effect is a reduction of this programme’s budget by R6.4 million to R122 million;
• Programme 2: Sector Policy and Research (now called Sector and Market Development), in February, programme two had been allocated R28, it was reduced by R8 million to R19 million;
• Programme 3: Integrated Co-operatives Development (now called Enterprise Development) allocation of R140 million was reduced by R30 million (suspension of R16.5 million and virement of R13.5 million) to R110 million
• Programme 4: Enterprise Development and Entrepreneurship (now called Development Finance) a portion of R1.141 billion was reprioritised for Covid-19 interventions.

Other programmes of the Department and entities affected by reprioritization or outright suspension are captured in table 3 below. They entail funds from suspensions and virementsfrom the DSBD programmes and entities, Seda and sefa. For instance, Small Enterprise Development Agency lost R30 million initially earmarked for the National Gazelles programme which has since been discontinued, the Black Business Supplier Development Programme (“BBSDP”) lost R270 million, National Informal Upliftment Business Strategy (“NIBUS”) suffered a loss of R70 million, Co-operative Incentive Scheme (“CIS”) lost R23.5 million, while implementation of the Small Enterprise Finance Agency Township Entrepreneurship Fund has been deferred for future implementation and funds reprioritised for Covid-19 interventions.

 

Additional sources of funds were because of suspension of allocations to general operational spending items such as travel and subsistence, communications, inventory and consumables, and venues and training facilities. Altogether, the Department’s budget decreased by R67 million from R2.406 to R2.339 billion whilst total funds reprioritised for Covid-19 Emergency Fund equates to R1.154 billion.

 

Table 3: 2020/21 Budget Reprioritisation

Description	Original Budget R’000	Reprioritization R’000	Budget reduction R’000	Adjusted budget R’000
Compensation of Employees	162 317	0	0	162 317
Goods and Services	89 095	0	-28 000	61 095
Machinery and equipment	4 275	0	0	4 275
Transfers and subsidies	2 151 096	0	-39 000	2 112 096
Seda	889 140	-30 000	0	859 140
BBSDP	283 751	-270 000	0	13 751
NIBUS	79 810	-70 000	0	9 810
Craft CSP	11 141	0	0	11 141
Sefa: TEF	800 000	-771 000	-29 000	0
CIS	87 254	-13 500	-10 000	63 754
sefa: COVID-19 Emergency Fund	0	1 154 500	0	1 154 500
TOTAL	2 406 783	0	-67 000	2 339 783

Source: Revised 2020/21 Annual Performance Plan

 

 

4.         COMMITTEE OBSERVATIONS AND FINDINGS

 

Having deliberated and considered all the submissions made by the Department and entities, this section summarizes the Portfolio Committee’s observationsand findings -:

 

4.1        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 and entities, as well asdetrimental     consequences to the small business sector in general;

4.2        The Committee notes that many small enterprises are struggling to stay   afloat because they cannot operate under the Covid-19 lockdown. It further            notes the government response and leadership demonstrated by the Department             and entities thus far;

4.3        The role of the private sector has been very critical in curbing the immediate and             longer-term effects of the Covid-19 pandemic on business and industry. The          Committee is of the view that the Department must remain focus, strengthen         partnerships with the private sector and do what is within its control to assist       small enterprises financially or otherwise including mitigating supply chain     disruptions;

4.4        The Committee notes that prior the outbreak of the Covid-19 pandemic, government        tax revenues were declining owing to low economic growth, sovereign debt was        increasing, state owned enterprises were experiencing weak balance sheet and put    pressure to the already constrained fiscus. The Committee is calling on the Department   to balance these challenges whilst ensuring that assistance to small business is not          compromised;

4.5        The Committee welcomes numerousinterventions aimed at ameliorating the small             enterprise sector such as the creation of the Covid-19 Emergency Fund, SMME Debt Relief Fund, Business Growth and Resilience Facility including theSpaza Shops            Support Programme;

4.6        Once more, the role of the private sector players has been very pivotal during this           difficult period. A number of initiatives were piloted and the support extended to small           enterprises is highly treasured. These initiatives ought to be encouraged and given   impetus through, inter alia, considering tax breaks to those companies actively   participating on the Covid-19 interventions;

4.7        The country’s ranking in the ease of doing business index continues to slide. From          a high of 28 in 2006, South Africa is now ranked number 84 behind Mauritius, Kenya             and Rwanda to name the few. The Committee notes that for the country to improve   prospects of attracting foreign direct investments that bring much needed capital,           growth, new technology and increasein national income, efforts to improve this and   other indices must be strengthened;

4.8        The Department’s budget reduction, albeit marginally compared with other           Departments, is still an area and source of concern for the Committee. During the            adjustment process, the Department did not receive any new money. This is despite the         onerous responsibility entrusted to the Department of creating in excess of 11 million      jobs by 2030 and ignite economic activity;

4.9        A supportive and well-oiled financial infrastructure is essential in the medium to   long-term to encourage sustainable, viable, and significant improvements in access to SMME and co-operatives finance. In that context, the Committee             notes and welcomes the drafting of the SMME and Co-operatives funding policy;

4.10      As observed by the Committee in February, National Treasury expenditure           estimates and programmes, as well as estimates on the Adjustments Appropriation Bill are not aligned to the policy and planning strategic documents of the             Department. Strategic alignment of the plans and budget would help the             department allocate resources not only efficiently but also in an effective manner.   Also in February, the     Department indicated that during the current financial year it   would 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;

4.11      Lastly, in its several oversight activities the Committee noted with concern thatalmost      all of the rescue funding schemes that have been made available required some   business compliance, proof of business operations and income generation. As   such, many of these businesses do not make the cut.

 

5.         RECOMMENDATIONS

 

5.1        South African economy needs a serious growth injection. The small business      sector is being earmarked as one of the vital segment that requires concrete support             from the state and big corporates. Budget reductions are not an option. In          preparation for another budget review in October to be tabled together with the   Medium Term Budget Policy Statement, the Department needs a candid         engagement with the Ministry of Finance with a view to petitioningNational             Treasury for      an additional financial resources in order to confront numerous   challenges posed by     Covid-19 pandemic and beyond;

5.2        The Department is encouraged to look at efficient spending of its baseline funds            and promptly identify idling reserves in order to avoid future and undesirable            virements and suspensions.Poor spending on programmes as well as goods and   services which are usually a manifestation of vacant posts, are typically the basic           triggers and motivation behind such virements;

5.3        The Department is encouraged to intensify strategic partnerships with the private             sector and actively pursue external funding opportunities for small businesses        through creating an enabling environment where possible. The Department and            sefa do not have capacity nor financial resources to support millions of small     enterprises.It is only through strategic partnerships that a serious impact on   expanding funding opportunities can be accomplished;

5.4        To reduce the burden of compliance for small businesses the Department           must formulate an action plan of improving the ease of doing business and present         this to the Committee before the end Q 3 during the current financial year;

5.5        The national fiscus is dwindling owing to reduced tax base as large number of    companies shut down operations. Interventions such as credit guarantee scheme    are some of the arsenals that DSBD and/or government still have at its disposal.          In countries such as Germany, it is estimated that the loan-guarantee provision is             of the order of 30% of the country’s Gross Domestic Product (“GDP”);

5.6        The Portfolio Committee on Small Business Development must urgently convene            a session with the Banking Association of South Africa, South African Reserve        Bank and National Treasury in order to receive feedback on the implementation of the Covid-19 Loan Guarantee Scheme announced by President Cyril   Ramaphosa in April 2020;

5.7        The SMME and Co-operatives funding policy must be expedited and presented to          the Portfolio Committee once endorsed by Cabinet before the completion of the             current financial year. Other intermediaries benefiting from sefa wholesale funding must come and account to the Portfolio Committee concerning how they            are assisting small enterprises during this difficult period;

5.8        The Portfolio     Committee is mindful of the significant disruption 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 covered towards developing a Small Enterprise Amendment Bill. The      bill must be referred to Parliament before the end of quarter three of the 2020/21       financial year;

5.9        Another critical policy issue that needs to be taken into account by the Department         as it constantly 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 organisational structure has direct implication on the costs structure and budget of the Department;

5.10      As per point 5.2 above, strategic posts in the Department are still vacant. The     absence of a permanent Accounting Officer 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;

5.11      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);

 

6.         CONCLUSION

The Portfolio Committee notes the budgetary constraints in relation to a comprehensive response to the Covid-19 pandemic.The Committee will continue to monitor closely the implementation of projects and programmes as captured in the strategic, corporate and annual performance plans of the Department and entities.

The Portfolio Committee accepts the proposed adjustments. The Economic Freedom Fighters (“EFF”) rejects the report while the Democratic Alliance (“DA”) reserves its position on the report.

 

Report to be considered