Department of Small Business Development on its Quarter 3 performance

Meeting report

The Chairperson welcomed the delegations from DSBD, the Small Enterprise Development Agency (SEDA) and the Small Enterprise Finance Agency (SEFA).

Briefing by DSBD on its Third Quarter performance
Ms Edith Vries, Director-General, DSBD, took the members through the report which reflects the progress made on the implementation of performance indicators and targets set in respect of quarter in the 2016/17 annual performance plan; variances and reasons for variance; key challenges faced by the Department in implementing the mandate; planned actions to mitigate implementation challenges and recommendations.

She noted that the Department was mandated to lead an integrated approach to the promotion and development of small businesses and cooperatives through a focus on economic and legislative drivers that stimulate entrepreneurship to contribute to radical economic transformation. On performance information, in the third quarter, programme 1, which comprised mainly of administration and executive support functions performed well, achieving 78.6% or 11 of its 14 planned quarterly targets; and has spent 59.9% of its budget by 31 December 2016.

With regards to programme 2, it achieved 90% of its 10 quarterly targets. The policy and research branch was by far the best performing branch in the Department to date and has spent 36.2% of its R25.6 million allocated budget to date. Programme 3 performed dismally achieving 57.1% or 7 of its 14 quarterly milestones, and spent 72.5% of its R854.7 million allocated budget to date.

For the first time since the establishment of the Department it recorded a vacancy rate of 9.5%. The Department corrected and aligned the anomalies between PERSAL and human resource (HR) systems by abolishing certain and creating other posts. Once approved, it will immediately reduce the vacancy rate. The Department was confident that the 10% target will be achieved by year end. 53.5% of women and 2.5% of people with disabilities were employed at senior management level.

The Cooperative Incentive Scheme (CIS) supported 38 as opposed to the 125 targeted cooperatives due to the challenges with the Department of Trade and Industry’s (DTI’s) transfer system, but this was resolved in quarter four. The Department supported 175 as opposed to the targeted 200 SMMEs as a result of few cancelled projects due to non-performance. With regards to the Informal and Micro Enterprise Development Programme (IMEDP), it trained 1 120 as opposed to the 2 500 targeted informal business or beneficiaries. This was because the IMEDP team (5) was thinly spread and have to straddle across multiple functions (counting of forms, capturing of data, clustering of related equipment, organising of workshop sessions and related arrangements, and attendance of workshop sessions). It was worth noting that the solutions were implemented and 75% of annual target will be met.

With regards to the organisational structure, the interim structure will continue, but the permanent proposed structure was in the approval phase with the Department of Public Service and Administration (DPSA). As it is, the Department has two vacant Deputy Director-General positions with two senior management members acting in those positions. All the branches within the Department have indicated the under-resourced environment in which they function. To mitigate this, the remedial measures included employing contract workers and interns in order to relieve the under-capacity that currently existed and that could negatively impact on the Department’s achievement of the set deliverables. The Department’s priority was to finalise the approval of the permanent structure and to prioritise the implementation of the HR plan.

With regards to the financial performance in quarter 3, the Department spent R314.5 million of the estimated R335.6 million which translates into 93.7%. Reasons for variance included the compensation of employees which have contributed to the under spending in salaries in the amount of R4.8 million. There are currently 22 vacant posts, and some of the vacancies are in the various stages of being filled whilst others cannot be filled until the structure has been finalised. Another variance stems from goods and services which under performed by R10.4 million largely on computer services due to delays of the finalisation of deliverables between the department and State Information Technology Agency (SITA) in the amount of R3.5 million; and consultants (R3.1 million) and travel (R1.7 million) due to outstanding invoices. In addition there was under spending totalling R4.4 million due to non-processing of transfers; R23.9 million for the National Informal Business Upliftment Strategy (NIBUS), R15 million for Incubation and R3.7 million for CIS.. Lastly, capital expenditure also contributed to the under spending by R1.5 million due to outstanding payment for computers and laptops delivered during November and December.

The remedies to under spending included finalising and filling up posts once the Minister approved the revised structure. For goods and services, managers were encouraged to trigger the projected expenditure in line with their projections and the demand plan. With regards to transfers, for NIBUS, 2 597 informal businesses have been trained but the concern is that zero funds have been disbursed and it was highly unlikely that the money will be spent by end of the financial year. As for CIS, the current approvals are currently standing at R30 million and the unit was making follow-ups with the successful applicants. Three adjudication meetings have been held to date resulting in approvals for R23 million. The risk still remained that the programme will not be able to disburse the R46 million allocated by National Treasury by the end of the financial year. Lastly, capital expenditure anticipated that the outstanding invoices will be submitted and paid by the end of February this year - an amount of R1.5 million.

Briefing by SEDA on its Third Quarter performance
Mr Lusapho Njenge, Acting CEO, SEDA, took the Committee through the presentation stating that SEDA’s performance information is structured in line with the entity’s approved 2016/17 – 2018/19 Annual Performance Plan (APP). Out of a total of 20 strategic indicators 14 quarterly targets were achieved, which was a 70% achievement rate. Year to date targets achieved showed 16 of the targets, which was an 80% achievement.

The highlights in terms of performance include the following:
-118 clients supported through the supplier development programme
-279 clients supported through the trade facilitation
-111 primary cooperatives established
-1 819 clients supported through       Basic Entrepreneurial Skills Development Programme
-60 partnerships sourced for small business development
-41 clients supported with systems implementation
-98% indicated that they are satisfied with the quality of SEDA services
-78% of surveyed clients showed an increase in their turnover
-55% of those surveyed reflected an increase in the number of people employed
- 1 794 jobs created to date through the SEDA Technology Programme

SEDA performed below expectations on the following indicators:

On Enterprise Development
-number of diagnostic assessments conducted on client businesses
       -number of clients supported through the National Gazelles programme
       -development of branch resourcing framework
       -value of service delivery costs covered by partners

On SEDA Technology Programme
       -number of clients supported through technology transfer

More SMMEs were created in the agricultural sector (81), followed by manufacturing (71) and the lowest were mixed high tech. There were also more clients supported in the agriculture and agro-processing sector (543), followed by the construction sector (304). More jobs were created in the construction sector (772) through the incubation programme.

The total revised revenue budget for SEDA for the 2016/17 financial year amounted to R768.14 million. The actual expenditure for the period 1 April to 31 December 2016 amounted to R550.16 million resulting in a pro rata under spending of R2.09 million (0.38%) against the pro rata budget of R552.25 million.

Briefing by SEFA on its Third Quarter performance
Mr Thakani Makhuva, CEO, SEFA, said the total loan book approvals and disbursement for the financial year represented 52% and 101% of the respective annual targets. The overall macro-economic environment was negatively impacting on the business performance of the SMME and cooperative enterprise sector. The internal controls of the organisation remained stable, and a new board of director has been appointed as at the end of November 2016.

With regards to the loan book approvals, loan approvals as at the end of the 3rd quarter was R460 million. This represented 52% of the annual budget. The direct lending under-achievement on disbursements was mainly due to the tightening of credit (tighter loan covenants to manage loan impairments).

With regards to post investment and restructuring, the total loan portfolio at the end of December 2016 was R1.4 billion comprising of R747 million direct lending loans and R700 million wholesale loan facilities to financial intermediaries. The total loan portfolio at risk was 48% (R678 million) – 77% direct lending and 14% wholesale lending. Portfolio at risk is influenced by the performance of Direct Lending Book, and the Book is influenced by low levels of collection which can partly be attributed to the type of client SEFA funded and the overall tough SMME economic operating conditions. Management was implementing an aggressive turnaround strategy to turnaround the high level of direct lending impairments. These included a monthly investment monitoring committee where each investment was reported and discussed, as well as aggressive collection programmes which included soft and hard collections.

The summary report of the financial performance recorded that the main contributor for movement in revenue came from interest from bank and cash. Interest revenue from loans and advances of R87 million (excluding fees) was at par with budget with a marginal variance of R295 000. Interest from cash of R24.3 million was R9.5 million above. In addition the bank balance during the period remained higher than budgeted due to lower disbursements. The accumulated impairment as a percentage of total loan books at cost sat at 55%.

Discussion

The Chairperson said that the responsibility of the Committee was to hold the Department accountable. On the gaps identified the Committee then makes a recommendation and it is then incumbent on the Department to set a time frame on which the recommendation will be implemented to improve the situation.  If the recommendations are not implemented, the Department will need to indicate to the Committee why the recommendations were not implemented and the Committee will be in a position to assist the Department to come up with the instruments required to achieve or implement the recommendations.

Mr T Chance (DA) said the Department was not clear about what its mandate was, and this was clearly indicated by what the DG stated about the fact that they were still in discussion with DPME about the mandate and the strategy which was holding back the conclusion of the Department’s structure and the filling of the vacancies. This was a matter of concern particularly for a department that has now been in operation for three years. The other concern was that DPME has commissioned a piece of research, a strategic view of the Department which was only due to report in December which meant there will be another nine months of limbo, where the Department was essentially directionless, following an APP that was well outdated. The Department was still focusing on activities not outcomes and the number of SMMEs to be supported to be increased and it did not actually get down to the real issue which was the impact of the Department. DSBD was running programmes that overlapped with its entities. He was in agreement with DPME and Treasury that the Department should be focusing more on policy; monitoring and evaluation not only because it did not have capacity but it will never have the capacity to focus on implementation. The Department will need to increase its budget tenfold in order to have the impact it will need to have. He asked why was it taking so long for the Department to come to grips with its real core mandate – to be a driver of a coordinated approach to SMMEs and cooperatives development and support to all departments across all spheres of government; and to play a similar role in matching the resources of the private sector and the NGO sector. Without those three cooperating and running in full steam the Department will continue under performing. He asked why there was not anything being done about this and how long it was going to take.

He asked what the total expected under spending would be at year end and why it was necessary to consult with the Footwear Association to discuss the Department’s international strategy. There was no mention on the progress of the National Small Business Advisory Council on the report.

In terms of SEDA, he said he failed to understand why getting a voyager gold card should be something that should become part of the programme to support SMMEs. It seemed like something nice to have but not a must-have. What is happening with the top tier, the top 40 businesses supported under the Gazelles programme? Was there actual actually progress? He asked when the Department will be coming back to the Committee with a report on the progress and what was the uptake for the 2017/18 financial year.

Referring to SEFA, he said it was terrifying statistics relating to the impairments. Last year it was mentioned that a turnaround strategy was being implemented, but it seemed to have no impact and why working through intermediaries was such a problem if the intermediaries have such a good record in collecting the debt than the direct loan book does. At what point do you forecast SEFA running out of money because if impairments continued in the current pace, you are going to run out of money? Does recapitalisation of SEFA actually made sense if 70% of the money lent out goes directly down the drain in the direct loans? Is it actually financially responsible to loan money to businesses that you know are not going to pay the money back and why not call it a grant rather than a loan? Why was the wholesale loan book performing better than the direct loan book? With regards to the property portfolio, why are the negotiations with the industrial parks stalling? What was the problem and if a discussion has been held with the City of Johannesburg, as well as the Johannesburg Property Company to help with the industrial parks?. There was no distinction between SEFA SMMEs and cooperatives statistics in terms of funding and he asked what the statistics cooperative are funding in terms of performance indicators.

Mr X Mabasa (ANC) asked about what was going to be done about the threat of under spending and asking more funds from Treasury, because Treasury will argue that the Department cannot ask for more funds if its budget was not fully utilised. He asked why it so difficult closing the vacancy rate gap considering that unemployment and poverty in the country were so high. There was not a good sense of the working between the Department and the other two spheres of government and it was worrisome that the figures were not exactly reflective of that. CIS supported 38 out of 125 cooperatives and he wanted more motivation on the discrepancy.

Mr T Khoza (ANC) asked the Department, when it met in the Minesco, if there was pause and reflection on their performance and if they were convinced that the Department was giving the best in terms of supporting the cooperatives. It was worrisome that there was incorrect information on slide 17 and he wanted to know the Department gave incorrect information. With regards to the rural areas that were not reached, the needy people are coming from those areas and if those people are not reached, he asked how the Department intend to address the issues of poverty and inequality. Can the Department indicate that in the future it will have an allocation in its budget for the Cooperative Development Agency (CDA)? There was an indication that the policy and research unit was performing and he wanted to know if the Committee could get information from the Department to assess the impact the Department has had on cooperatives. With the stakeholder consultation, does the Department dothe consultation itself or rely on external consultants? He asked if the Committee can be assured when the interim structure was going to be dealt with because it affected the performance of the Department. He asked if there was any guarantee that the action plan will yield results in terms of addressing the shortcomings of the Department

Mr Makhuvha replied that one of the mechanisms put in place on the SEFA collections, there was a dedicated team that deals with collections only. In the past, SEFA did not list clients in the credit bureau, but now it does and so clients start coming forward to arrange payments and restructure their outstanding arrears. If there is no recovery from clients that have been in arrears for over 180 days, that falls on the write off policy but after the team has made efforts to recover and pursued the sureties. In the past SEFA used to provide funding for those that got contracts from the States and did not have session of contracts. If there was no session of contract the application will be processed but SEFA will negotiate the session of contract, and until that has been done SEFA will not disburse any funds. So going forward, SEFA was beginning to build a quality loan book but it was currently sitting with the legacy of the old loan book.

SEFA has to ensure that it lived within its means and budgets and has done a focus over a period of five years. It has a R921 million facility from the Industrial Development Corporation (IDC) which SEFA has not tapped into, and cash in the bank of slightly over R500 million. As SEFA does its focus going forward, it needs to ensure that the money continued to be disbursed, is collected and learn to live within its means. The cost-income ratio, was sitting at about 140% and SEFA was not budgeting for any cost-income ratio over 100%. SEFA will still be lending in the next five years based on what is in place currently. If there was additional funding available, SEFA will be in a position to provide discounts on the price and lend out more money to its clients.

With regards to the properties, this has been very challenging and it has been ongoing for a long time. SEFA has been engaging with the associations and the board has given the team a mandate to sell the properties at market value, but the association that SEFA has been engaging with wants the transfer of the property to be done with no consideration. However, the board will have a sit down and issue a new mandate on this. There has been engagement with the Gauteng Department of Economic Development together with DTI where they have money for the revitalisation of the townships in terms of helping refurbishing some of the properties, but there has been no engagement with the City of Johannesburg with regard to the properties. On the delay of the disbursement of funds, all loans are approved with certain terms and conditions that need to be fulfilled. For example, R8.8 million had been approved for entrepreneurs with disabilities and one of the conditions involved one client to allow to enter into a joint banking account in order to mitigate the risks, the account will always be in the name of the client but there needs to be an external signatory in order to mitigate the risks that might arise, but the client was not willing to enter into a joint bank account. Ordinarily on the direct lending side it did not take long from approval to disbursement, but due to the risks that are associated with the loans, it should be ensured that the loan will be paid off and this will expand the degree of the delay.

In the 2015/16 financial year the portfolio has been growing from about R2 million approvals to around R40 million approvals and that was around the developmental projects with huge infrastructure investments and out of that R43 million  has already been disbursed about to cooperatives for setting up their infrastructure for poultry and tunnel farming and waste recycling.  There will be a report on the actual development statistics in the next quarter when the cooperatives have implemented their projects and SEFA was able to assess the impact around job creation and turnover.

Mr Njenge replied that the voyager card was core things and they have discussed with SAA on opportunities on the Gazelles. The voyager card was provided by SAA to say that they can provide the Gazelles at no cost. It was more of a market opportunity. A more detailed report on the Gazelles can be provided to the committee in due time because the team did not have the full information currently available at the moment.

There had been a steering committee the week before on the Gazelles. It was inspirational to hear some of the stories and this will be provided to the Committee in due time as well. Through the way in which the Gazelles are being monitored, there was constant interaction and that report was readily available. The support provided to the Gazelles has sparked more confidence in the investors. The Gazelles are now going to be a pipeline in the Black Industrialist Programme so the Department was keeping track.

Mr Njenge stated that on the current intake there were 331 applications, but towards the end of April the process should be finalised and that information can be reported to the Committee as soon as the process is done.

Ms Elize Koekemoer, Acting Deputy Director-General, DSBD, said the Department had consultations with other departments and the DTI on international trade relations. DSBD had been advised by DTI to have negotiations with some of the export councils that they have recommended. The Department had two very important forums that met on a regular basis with other spheres of government, such municipalities, but there was a lack of standardised indicators in terms of being able to influence the planning and the reporting to ensure that are reporting on the same things. In this regard there has been a very slow process and it has been elevated to a technical Minmec meeting to work towards a standardisation of reporting between the provinces and it must be done by the end of July before the APPs. Currently the Department was working on an integrated framework and reporting and it was a work in progress. It was clear based on the attendance of the meetings that something that will eventually come to the fore.

Mr Mzoxolo Maki, Acting Deputy Director-General, DSBD, stated that in engaging the provincial government sphere, the Department has engaged a lot with the local municipalities and provincial departments to share information about the financial and non-financial support that the Department provides through its programmes and the Department gets invited by COGTA (Cooperative Governance and Traditional Affairs) in some of the local and provincial level forums and workshops. So the Department is moving closer towards working with the local government.

With regards to the under-performance of CIS, unfortunately when the Department created the system, it remained with DTI. DSBD was working closely with DTI to address that and was now in the process of reconfiguring the system to an operating environment and installing the system in the Department’s own IT environment. The Department officials are currently processing the applications and with the processing of the applications the Department will be able to reduce the amount that would be projected as under-spending for this programme.

In terms of the action plan for IMEDP, DSBD was lacking in terms of traders for informal traders, but partnerships with other stakeholders will speed up the process to provide training to informal traders. The Department has not been successful in making provision for the equipment and infrastructure and a plan has been devised where the Department was trying to get people on board and enlisted services in the Department of Labour to get graduates to come on board to assist with the administration. There are now, better ways of delivering the infrastructure, and in the next financial year the infrastructure will be provided.

The new structure should be effective in the first quarter of the next financial year and the two Deputy Director-General posts will then be advertised. There are very tight timelines but the Department was working hard the timelines.

The vacancy rate was sitting on 9.5%, which was below the government target, but the key posts needed to be filled.

Policy and research was a core function which is why the Department has introduced policy and research functions this year. The issue was how the Department changed the structure, because it was a highly prescribed process in the public service. The Department was happy about the feedback received from DPME. Some of the personnel at the DTI will be moved to the Department but it was not a process that can be done in a short space of time.  

The Department will be hearing from the potential beneficiaries before the end of the week. If they are responsive, under spending will be at R95 million and R19 million will be absorbed by compensation of employees and the remainder in the transfers for NIBUS and the incubation programme, which will be the main contributors. If the potential beneficiaries do not respond as requested, the Department will be looking at over R100 million under spending.

The Department has tried to explain in a number of ways that it had been given a widespread mandate but yet the funding was limited. The Department did reflect on its performance in the Minesco meeting. With regards to the rural areas and development there, the target of 30% support was allocated to the rural areas but the Department only achieved 29.4%. This was the only quarter the Department under-achieved in reaching out to the rural areas. This is something that the Department will deliberate with its entities. In terms of the number of cooperatives supported, there are very few takers in those provinces but DSBD had reached out to the DGs and the local municipalities for economic development to assist in bringing forward potential beneficiaries.

With regards to the CDA not having an allocation, there was no confirmation at this stage whether there will be allocation for CDA. In line with this was the issue of under spending. A task team had been established with National Treasury to identify what needed to be done in order to address the under spending. The funds available for the support of SMMEs are spread out in various departments, so Treasury will assist the Department to monitor those funds.

As for the National Small Business Advisory Council, the Department was definitely on track. A list of proposed candidates has been completed. They have gone through the vetting stage and within 10 days the list will be provided to the Minister and by May, the candidates’ process should have been finalised.

The Chairperson said that it seemed that both the Department and the Committee do not seem to have an understanding about the mandate of the Department. Furthermore, the mandate was not on research and policy, but on actually developing the SMMEs and cooperatives in the country. Perhaps the Department and DPME should come forth and discuss with the Committee exactly what the mandate of the Department was so that the Department and the Committee can organically move forward and clear on what the Department was actually established to achieve in the South African economy.

The meeting was adjourned.