Incubators, Network Facilitators, Service Providers, Gazelles impact on beneficiaries & jobs creation: DSBD briefing

Meeting report

Department briefing
Mr Lindokuhle Mkhumane, Deputy Director General, took the Committee through the presentation. He stated that the Department appeared before the Committee to brief it on incubators supported by the Department, Network Facilitators (NFs), Service Providers & Gazelles working with the Department in support of enterprises & cooperatives, the developmental status of beneficiaries and impact on job creation. The presentation would focus on the Enterprise Incubator Programme (EIP), the Black Business Supplier Development Programme (BBSDP) and NFs, CIS and service providers, and Gazelles.

Mr Mkhumane provided the Committee with the EIP outline. The Department piloted EIP for small businesses and cooperatives in the 2016/17 financial year. The EIP was market driven and provided a direction to the incubator’s work of preparing entities to supply to local markets. There were 129 private and public funded incubators in the country. Of this network, the Department and the Small Enterprises Development Agency (SEDA) supported 80 incubators which had benefited 3690 clients and created 2592 new jobs in the past financial year. The EIP had considered the existing incubator gaps in the conceptualisation of the programme. A programme had been designed with distinct elements to best respond to the business development needs of early stage enterprises and cooperatives and was distinct from operational incubator programme in the public sector. The EIP was centred on the securement of markets, by the applicant (incubator) and transferring of skills to small businesses and cooperatives (incubatees), with an effort of attaining the expectant quality standards and specifications of firms. Without market access, entities would have no means of generating revenue and therefore it would be difficult for them to survive.

The Medium-Term Expenditure Framework (MTEF) budget was R46 274 000, R49 665 000 and R54 737 000 for 2016/17, 2017/18 and 2018/19 financial year, respectively. It was however stated that the entire budget could not be allocated in the inception year due to delays in making the first disbursements. The EIP was challenged by non-compliance, non-adherence to the Project Implementation Plan, lack of early warning systems to detect non-performing areas including compliance in rolling out the implementation plan and lack of internal capacity with the Department.

Mr Mkhumane further reported on the Black Business Supplier Development Programme (BBSDP) and Network Facilitators (NFs). The BBSDP was a cost-sharing grant offered to black owned SMMEs to assist them to improve competitiveness and stability. A single enterprise could apply for a maximum amount of R1 million, of which a maximum of R800 000 should go to tools, machinery and equipment. A maximum of R200 000 was available for business development services which included, governance training, marketing, productivity, management and use of modern technology. For an enterprise to qualify it ought to be 51% black owned and have a predominantly black management team. It ought to be operational for a period of one year and have a turnover of between R250 000 and R35 million. On the other hand, NFs were individuals or legal entities who assisted enterprises in compiling BBSDP proposals and/or ensure the delivery of projects that had been approved under BBSDP. The NFs were classified as independent contractors and were honest brokers between the Department and the enterprise applying for funding under the BBSDP programme. They were rewarded for certain services rendered but there was no relationship of employment, agency or representation established between the department and the NFs.

With regard to payment of the NFs, for projects less than R75 000, a facilitator fee of 10% of the cost of the project would be paid. A facilitator fee of R10 000 would be payable for all applications equal and exceeding R75 000 but less than or equal to R130 000 plus 20% of the difference between R130 000 and R75 000 on condition that a company diagnostic tool had been performed. The maximum payment in this regard is R21 100.

On the success rate or well-performing beneficiaries, the Department was in the process of assessing all projects that were funded in the 2015/16 and 2016/17 financial years. The same tool that was utilised for assessing the developmental status for CIS funded cooperatives was being utilised. Site visits for 2015/16 of the funded BBSDP projects would be finalised by the end of June 2018. Well-performing beneficiaries included Ditshimega Projects and Training, Patrick Mofokeng Trading CC, Chemsol Adhesives cc, Ash Freight Container Depot, and Thapiwe Logistics Pty Ltd.  The following was noted as challenges: There was lack of adequate capacity to monitor and evaluate the impact of the intervention by the Department on BBSDP projects. The Department could not open for new applications in the current financial year as it was trying to address the huge pipeline of approximately 1200 applications that were being processed in the current financial years 2018/19. Some companies had closed down due to sector specific challenges. There had been some allegations of possible collusion between some officials as well as NFs resulting in inflated quotations being paid out. The Office of the Auditor General (AG) had been contracted by the Department to conduct an investigation on the programme and this investigation should be finalised in the next three to four months.

During 2005/06 to 2006/7 financial years, the CIS Guidelines prescribed that payments ought to be made directly to cooperatives. During the transfer of the CIS from Enterprise and Industry Development Division (EIDD) to The Enterprise Organisation (TEO), an audit indicated that paying cooperatives directly was too high a risk because it was found that cooperatives often did not utilise the CIS funding for the intended purpose. It was also mentioned that National Pavilions, the Critical Infrastructure Programme (CIP) and Support Programme for Industrial Innovation (SPII) also effected upfront payments.

In 2009/10 financial year, out of the more than 200 payments for cooperatives that were finalised, only two of these payments to service providers were found to be problematic because although the service providers received payment, they did not deliver the goods. After several follow-ups, the two cases were then handed over to the Department of Trade and Industry (DTI) legal unit for legal action against service providers. Between 2014/15 and 2017/18 financial years, a total of 922 cooperatives were supported to the value of R274.2 million. During the period, 12 service providers did not deliver and their cases were transferred to the Department’s legal unit for legal action to be taken against them. Due to the risk measures that were put in place, the failure by service providers to fulfil contractual obligation had been minimum at best. They were all forwarded to the legal unit for resolution. Practically, only one case was resolved and remaining 11 cases were in process.

Regarding payments to service providers in 2017/19 financial year, the CIS did not make use of NFs. It purchased machinery and equipment and stock directly from suppliers. It did not pay commission, management fees, etc. All its investment to cooperatives was spent directly to supporting cooperatives. From 2014 to 2017, the whole amount of R274.2 million was spent to 922 cooperatives. The assessment that was carried out on the 400 CIS cooperatives revealed that 71% of the funded cooperatives were operational. Only 29% was non-operational. Well-performing cooperatives were Zoowide Printing Primary Cooperative and Flava Primary Cooperative.

The National Gazelle Programme identified high performance small businesses to take them to new levels through appropriate and focused interventions. The programme was home grown and fitted well with the current narrative of radical economic transformation. It was at pilot phase, some elements could be improved to speed up development of participants. Strategically, it fitted with the National Development (NDP), Industrial Policy Action Plan (IPAP) and could enhance performance of other governmental programmes (i.e. infrastructure roll out programme, etc). Investors paid a premium for a growing business (i.e. Generate Economic Value Add) which was a positive difference between Return on Capital (RoC) and Cost of Capital (CoC). Gazelle interventions were not offered by SEDA. Rather, the role of SEDA included monitoring, site visits, and market access. The biggest impact of the programme could be seen in the overall value and score improvement. It had succeeded in acceleration of 68% of the businesses on the National Gazelle Programme. There were 27 businesses making up the 68%.

The CIS offered a 100% grant to registered and qualified cooperatives. It was an incentive that focused on supporting broadening economic participation by historically disadvantaged communities to enter the mainstream economy. The CIS had been revised and approved in February 2018 to fund Individual Primary Cooperatives, Cluster/Secondary cooperatives. The Revised Guidelines would be implemented in July 2018. The Individual Primary Cooperatives was defined as a form of a cooperative made up of a group of five or more members whose purpose was to provide service and/or employment for one another. A minimum of R4000 000 and a maximum grant of R1.5 million could be offered to one cooperative entity. Cluster Cooperative was defined as where two or more primary cooperatives had agglomerated (i.e. come together) to meet the economic needs of each member primary cooperative within the cluster. The aim was to achieve economies of scale and scope as effective mechanism of growing primary cooperatives. A minimum of R3 million and a maximum grant of R11 million was available to one cooperative cluster.

Discussion
Mr R Chance (DA) welcomed the presentation. He referred to the previous meeting in which there was a discussion on starting a business up and asked how this could be linked to the incubator programme that aimed at growing a business. He asked how all these programmes were linked to or differed from architecture programme? He remarked that at the bottom there was a start-up programme and it was expected that these small businesses should grow up into big or large companies. How did the Department move a new business from one programme to another?  What happened to interventions provided by the DTI?
He remarked that there should be a clear difference between a grant which was offered to a recipient or beneficiary and an incentive which was offered to a beneficiary to do something else. Why was much money being spent on incentive types of programmes? Much money was also spent by the private sector.
He asked how the role of the Department differed from the services provided by private sector?

With regard to a conference held last year, there was an agreement of creating professional business support and he wanted to know what the Department was doing in that respect. The Department should spend much time on the provision of interventions. SEFA should fill the gaps where small businesses were failing.
Was the Department making an impact on the economic growth through supporting small businesses? How much money was transferred to the incubator programme from other programmes?
He further remarked that the role NFs should be done by business advisors. He asked that the Committee should be provided with figures of people who were employed by cooperatives and small businesses along with the turnover or their benefits.
With regard to the Gazelle programme, he asked who the investors were and an estimation of the amount spent on the National Gazelle Programme.

Mr H Kruger (DA) thanked the Department for an informative presentation. Referring to pages 11 and 12, he asked whether it was possible to provide the Committee with physical addresses of incubators and wanted to know why Mpumalanga was not included in the provinces. Was there no incubator in that province? He commented that Mpumalanga was the second rural province after Eastern Cape and asked why there was no incubator programme undertaken in that province.
Referring to page 34, in particular, CIS programme, he asked why eligible activities did not include training. He remarked that the grant was increased and asked why the CIS focused on starting up a new business and why they should not think of buying an operating successful business. He felt that cooperatives could buy successful businesses and take it from there.

Rev K Meshoe (ACDP) welcomed the presentation. He asked what the average time for incubatees was to graduate or to attain the expectant quality standards and specifications of firms. Referring on page 11, he asked how the incubators’ amount was approved.
He remarked that 14 cooperatives in Limpopo were granted R5 million whereas 10 cooperatives in Eastern Cape were granted R8 million and asked how the grant was determined.
He remarked that the Committee had been hearing that there was lack of internal capacity in the Department and asked what the Department was doing about that.
Referring to mechanism of growing primary cooperatives individually, he asked whether the clusters were doing the same projects and if yes how did the Department quantify or measure that these cooperatives were growing individually.
He noted that the Department stated that direct payment to cooperatives was too high risk and thus preferred payment through service providers. These service providers were also requiring consultation fees. Was a consultation free or was there a percentage fee paid on the projects managed by service providers? He further noted that financial reporting was a major challenge and that there was reluctance to share accurate information. This was serious; he asked what measures the Department had taken to deal with the situation.

Mr N Xaba (ANC) welcomed the presentation, it outlined the successfulness of projects at provincial level. That was commendable. Referring to page five, he noticed that SEDA technology programme was not included in the presentation even thought it was touched on in the briefing. He also asked the Department to elaborate on factors to be taken into account to determine an incubator. He noticed that the Department had developed its own model of incubator.
He further said that the Department was hiding behind the term historically disadvantaged communities without elaborating on who assisted in these communities. The question was what shining cooperatives and SMMEs were could be delivered on during the first 100 days of President Ramaphosa. Could those cooperatives and SMMEs be proudly identified for site visit by the President?
Referring to independent contractors, it was stressed that there were no strings attached to independent contractors and that a good relationship was created. On the page 18, the Department agreed that it would deal with minor problems. However, there was no relationship of employment, agency or representation. He asked the Department to elaborate on relationship.
He further remarked that corruption in the country was increasing and that the Department should be hard on cases of corruption. He asked whether there were case numbers of cases of corruption referred to in the presentation.

Mr B Bongo (ANC) welcomed the presentation, it was a well-prepared report. Referring to page 11, he was interested in the breakdown of R5 million allocated to 14 cooperatives and asked how much was granted to each cooperative. Why there was no incubator supported in Mpumalanga?
Referring to payments to NFs, he noted that only one NF in Free State received R42 200 whereas the three NFs based in Mpumalanga received R505 067 and asked how amounts were allocated to NFs.
He was concerned that provinces with large rural areas were not getting enough support. People in rural areas were crying because they were not being supported. There was a tendency of removing names on the proposal submitted by people from rural areas and asked whether measures were taken to support rural people’s intellectual property. The people, who were getting the funding, were not those who put a project together. However, the Department was talking about successes.

The Acting Chairperson asked whether the Department felt convinced that it was serving the targeted groups or was the Department funding the middle person? Was the Department where it was supposed to be? Was it doing a real impact on the lives of targeted groups?
With respect to incubators, he asked whether there were lessons learnt from African countries or from somewhere else and what could be experiences in the so called First Countries? Did the Department feel that the money channelled through Gazelle programme reached the targeted group? What were criteria of being a beneficiary of the incubator programme? What were the physical addresses of incubatees and incubators? Was an incubation programme related to mining? Did the Department have to take the route of the NFs when the SEDA was there? Middle persons should be reduced in order to ensure that funds get to poor people. Was there a good relationship with the Department of Labour?
He expressed his debt of gratitude to the department for the input it had made.

Ms Edith Vries, Director General, said that questions would be responded by different officials.

Ms Mandisa Tshikwatamba, CEO: SEDA responded that, with respect to Gazelle programme, the payment of service providers was worked on the basis of percentage figure of 15% of the tranche.

The Acting Chairperson said they should also talk about women-owned SMMEs and cooperatives, particularly, whether they were succeeding.

Ms Vries responded that women were part of various programmes offered by the Department. All these programmes targeted informal settlements and rural areas.

Mr Andrew Bam, Programme Analysis Development and Learning, responding to questions asked on Gazelle Programme, said the Department had a grading methodology which was used to measure the success of the business from a start-up stage and through other interventions. The grading was done on the basis of differentiation. That was whether the business or enterprise was urban or rural based, or whether opportunist or survival enterprise or which industry or sector they were operating. All these considerations would determine what intervention an enterprise needed. There were other factors to take into account.

On the question of investors, it was anyone who could purchase that business at some point in future. Investor programme was viewed as an intervention and the Department would elaborate on it in the next engagements. All these interventions were aimed at increasing turnover and minimising risks.

Ms Tshikwatamba said the growth of most enterprises was above 75%. However, some enterprises were dropping in their performances. They could adapt when they offered interventions. The model of interventions utilised enjoyed an international accreditation. The business doctors were called to present on the model used in the Gazelle programme in California, United States, because of its success. This example was an indication that the Department was applying a good model. The Department was making sure that the interventions were value for money. The Gazelle Programme was designed to support those enterprises that were performing well and to ensure that these well-performing enterprises expanded on the creation of jobs. The Department was focusing on performance. The Gazelle programme was cutting across programmes, industries and sectors hence it was based on the performance.

The Acting Chairperson asked who was fitting in the Gazelle model and asked whether this model assisted the poorest of the poor or those who were down there because the rationale behind programmes and interventions were to alleviate poverty.

Mr Bam stated that these interventions and programmes used a graduation approach. However, there were some challenges. Some enterprises did not have access to communication technology. Enterprises were empowered to such a degree they could join the Gazelle programme.

Ms Tshikwatamba responded that when the Department came to brief the Committee, it did not come with all details of enterprises that received interventions and which were part of the Gazelle programme. They needed to utilise the clientele data base in order to establish who these enterprises were per province. Some enterprises in Townships did not have the gazelle calibre. She asked that the Department should be given time to report on this.

Ms Vries responded that the Gazelle programme was not designed to serve the informal sector.

The Acting Chairperson disagreed. He was happy to correct the DG on her response; she should note that there was no way that the Department could justify why businesses in the informal sector could be excluded.

Ms Vries said she would like to withdraw her comments. Specialisation was a provision made under the National Small Business Development Bill.

Mr Mkhumane said the Department had set its targets which addressed issues related to architecture as it was addressed to the Committee. By the end of the year, they would be able to indicate the achievements. The Department had introduced a programme which focused on those who were not meeting requirements. The Department would report on a lifecycle of a business. There were interventions made by the DTI in the context of the Broad Based Economic Empowerment and the same department was conducting a study on the small business investment.

Ms Vries said the Department’s budget could not allow it to do much other than creating an environment in which business could start and grow.

Mr Mkhumane said physical addresses had been shared with the Chairperson of the Committee through the Secretary of the Committee.  
On the relationship with the NFs, he responded that they were independent contractors and that there was no contractual relationship with the Department. They could not come and ask payment, they were paid on the basis of performance.

The Chairperson thanked the DG and her team for their presentation and engagements and remarked that the Committee was happy with its work and stressed that the Department should not stop from serving the poorest of the poor.

The meeting was adjourned.