Department of Small Business Development and entities Q2 2022/23 Performance; with Ministry

Meeting report

Minister's opening remarks

Ms Stella Ndabeni-Abrahams, Minister of Small Business Development, said the presentation sought to highlight the progress made by the Department and its entities in its work in the second quarter. Although
some of the targets had been achieved, there were others where performance had been poor, and these were being attended to. They needed to consider whether the Small Enterprise Development Agency (SEDA) should be responsible for business development support to ensure the Department could produce quality incubatees who could access opportunities once they graduated from the programmes. Admittedly, the Department failed to perform well on the cooperatives, and this was being looked into. The Director-General would provide more information in this regard.

DSBD second quarter performance report

Mr Lindokuhle Mkhumane, Director General, Department of Small Business Development (DSBD), said performance in the second quarter of 2022/23 had shown improvement compared to the first quarter. The overall performance had been 78% against target, compared to 22% in the previous quarter.

The performance highlights included:
An unqualified audit outcome, without any findings and adjustments on both the non-financial performance information and annual financial statements for the 2021/ 22 financial year.
A 50% representation of women in small and medium enterprises.
Creditors were paid on time. The process, on average, currently takes place in seven days.
A total of 239 cooperatives were supported financially and/or non-financially.
A total of 3 016 start-up youth businesses were supported financially and/or non-financially, and a total of 6 446 township and rural enterprises were supported.

However, the Department underachieved in:

Filling of vacant posts, which was slow in the Department.
Ensuring a fully functional database base was a key element in reducing red tape for small, micro and medium enterprises (SMMEs).
Linking SMMEs to global opportunities, as there were only a limited number of pavilions and trade shows to expose SMMEs and cooperatives.

Ms Semphete Oosterwyk, Chief Financial Officer (CFO), DSBD, presented the financial report.
The DSBD had projected to spend R712.9 million for quarter two, and only R707.7 million was spent. The performance per programme was riddled with underperformance in:

(i) Administration – due to the current vacancies and cash flow alignment in goods and services;
(ii) Sector and market development – due to the misalignment of the structure; and
(iii) Enterprise development – due to a correction of incorrectly posted expenditure in quarter one.

The Development Finance programme experienced overspending due to the alignment of cash flow and a payment that was projected in quarter one, but was processed only in quarter two.

Similarly, there was underspending across all sectors as per their economic classification:

(i) Compensation of employees was largely due to unfilled vacancies;
(ii) Goods and services was largely due to payments of utility services for 15 months received and processed in quarter two, as well as more informal and micro-enterprise development programme claims being processed than anticipated;
(iii) Transfers and subsidies – the net effect was due to late payment and delayed site inspections in product markets; and
(iv) Capital assets.

The Audit action plan was currently being monitored and lessons learnt from current programmes were being implemented. All of this was done to ensure there was no recurrence of audit findings.

Mr Mkhumane said that overall, the performance in human resource (HR) management had not met the set targets. Firstly, the high vacancy rate prevailed due to resignations and the expanding nature of the establishment, which hindered the Department's ability to achieve a low vacancy rate. There was also the unmet Departmental target of appointing women to senior positions -- the Department was committed to having more women represented in senior positions. Lastly, it experienced a slight decrease in the appointment of people living with disabilities due to an increase in the headcount during quarter two. The Department was committed to improving its performance in these areas.

Small Enterprise Finance Agency (SEFA) Q2 performance

Mr Mxolisi Matshamba, Chief Executive Officer, SEFA, said that SEFA's loan book was sitting at R3.9 million at the end of quarter two. This was money deployed into the economy. The approval was 65% of the target, translating to R436 million. However, the total disbursements in this period were sitting at 101%, which translated to R605 million. The loan book in this period grew by 8% on a quarter-to-quarter basis. This resulted in 15 177 jobs being facilitated.

A total of R518 million was disbursed to black-owned businesses, R122 million to township-based businesses, R201 million to women-owned enterprises, and R156 million to youth-owned businesses.

The organisational scorecard had challenges, with unmet targets from a financial perspective. This was largely due to misaligned planning within the organisation. The effects of load-shedding were also proving challenging for some businesses to which SEFA provided funding. This was more prevalent in the manufacturing sector. For instance, the machinery often needed to be warmed up for two hours before production could take place, and by the time operation resumed, the power was out again. This was hard-hitting for the SEFA clients, who had been trying to emerge from the effects of the Covid-19 pandemic.

The approvals had underperformed due to programmes not achieving their quarterly targets. The underperformance was partly due to the quality of transactions received, which inter alia, included the commercial viability and non-alignment to SEFA's mandate.

SEFA did not achieve its targeted developmental impact in the following areas:

the number of SMMEs funded;
jobs facilitated;
facilities disbursed to women;
youth;
people with disabilities; and
township-based businesses.

The underperformance in these targets could be attributed to a low level of uptake of funds by the microfinance intermediaries (MFIs). SEFA's developmental scorecard was highly dependent on the performance of the MFIs. For the remaining two quarters, it was projected that SEFA would disburse R350 million to support 77 745 informal and micro enterprises. In the disability development indicator, there was a pipeline of R65 million to be processed in quarter three.

In the spatial distribution of loan disbursements, the geographic leader was Gauteng (35%), followed by Mpumalanga (13%) and the Western Cape (11%). The main driver in Mpumalanga and Limpopo was the active rate of microfinance lending.

Regarding post-investment monitoring, the portfolio at risk was a technical measure accounting for exposures that were 60+1 days in arrears. The overall portfolio had remained constant at 41% against a 43% target. 74% of SMME relief was at risk as of the end of September 2022, against 66% from quarter one.
The overall collection rate was below target, currently sitting at 47.4% against a target of 87%. This was further exacerbated by load-shedding, the hike in interest rates, and the overall poor performance of the economy.

Mr Matshamba said there was a need to ensure human capital management initiatives had been undertaken to ensure effective employee engagement, and performance management practices. These included a study assistance programme, a culture improvement project, employee rewards and recognition plan, performance appraisals, and mid-term performance evaluations that were underway, which would inform the development of performance improvement plans.

In an attempt to address the underperforming areas and programmes, SEFA was of the view that by the time the 2022/23 financial year ended, the entity would be able to achieve the targets in the underperforming areas. The upcoming high-demand seasonal periods, such as the festive and Easter seasons, were set to bridge some of these gaps. By the end of March 2023, the value of approvals and disbursements would exceed the target by 13% each, and the number of SMMEs would also exceed the targets by 10%, with the number of jobs being projected at more than 12% beyond the target. Every effort was being made to ensure that all deals at the approval level were handled, and that disbursements were conducted.

Small Enterprise Development Agency (SEDA) Q2 performance

Mr Nkosikhona Mbatha, Acting Chief Executive Officer (CEO), SEDA, said the organisation measured its quarter two performance using 17 indicators. As it stood, it achieved 100% or more on 13 indicators and under-performed on four. The number of SMMEs and cooperatives supported in the priority sectors (Scale-Up/High Growth Potential) was under-achieved at a performance rate of 80 to 99 percent, whilst three indicators were sitting below 50% -- the number of new SEDA access points, the number of new incubation centres established, and the number of SMMEs and cooperatives assisted through the technology transfer assistance Programme.

SEDA supported a total of 42 319 SMMEs and cooperatives. As of 30 September 2020, the portfolio had a total balance of R3.9 billion. A total of 5 511 jobs were created and sustained, and during the quarter in question, R253 million was spent, which was over the projected amount. From an access point, there were 54 SEFA branches, 122 incubation centres, four new SEDA access points, and 57 SEDA co-location points. The demographic comprised 89% of services being rendered to black-owned businesses, 9% to coloureds, and 1% respectively to Indian and white-owned businesses.

The Agency was deliberate in assisting SMMEs with high growth potential to ensure they moved to the next level. As it stood, this quarter’s targets had been achieved. This assistance varied in form and included mentorship and training to assist the businesses to be able to stand challenging economic conditions.

Financially, the Agency's total expenditure budget amounted to R947.46 million (including capital). This total included R60 million for the special flood relief project. The target had been to spend 75% on core activities and 25% on support, but on the ground, 91% was spent on core and 9% on support activities. This was a good indicator that spending was more focused on programmes going to SMMEs, rather than just supporting programmes. SEDA did not return any money to National Treasury for the first time in over five years. This was commendable and the Agency was committed to maintaining this status quo.

The finance team was doing commendable work, as 99.8% of invoices were paid within 30 days.

Discussion

Mr G Hendricks (Al Jama-ah) was happy to note the progress made by the DSBD, whilst noting the progress was a reminder that this Portfolio Committee had 18 months left, and its success was important. The work of the Committee would be assessed against the President's State of the Nation Address (SONA) which was set to create ten million jobs by 2030, and the Department had to create a meaningful contribution towards realising this goal. The President had further set goals for the localisation of products, as there was a need to see more local products than international products on South African shelves. The Ministry must ensure these goals are realised.

He requested a special report from the Department proving that it was not merely a microlending department in government. The DSBD was a tool to get families out of poverty.

He urged the Deputy Minister to exercise wisdom in determining how easily certificates could be issued to enable people to participate in roadside trading, as the festive season was a high-demand season. The Gauteng Province was an example of how small traders could be supported, whilst the City of Cape Town did the opposite by having lengthy processes that stifled the progress and prospects of small business traders. Perhaps a leaf could be taken from these examples by both the Department and the Committee to assist in achieving the goals set by the President for small businesses.

The Chairperson echoed her sentiments for ensuring the attainment of ten million jobs, saying this largely rested on the Committee and Department’s leadership and commitment.

Ms M Lubengo (ANC) asked the Department to elaborate on the 60% underspending in programme two. She raised questions regarding:

The misalignment of payment of officials -- what was the Department’s plan of action to avoid underspending by such a large margin going forward?
How was the Department planning to avoid the high posting of the Informal and Micro Enterprise Development Programme expenditure going forward?
What progress has been made in merging the SEFA, SEDA and the Cooperatives Bank Development Agency?
What was the Department's plan to counter the under-spending in support given to the 6 446 township and rural enterprises in quarter two?

Mr E Myeni (ANC) asked the Department to provide more details on their consultative process with key stakeholders regarding the regulatory impediments impacting small enterprises. Who were the key stakeholders and what were the outcomes?

It was commendable that the DSBD could pay suppliers on time. The provincial government was lagging, however, according to the National Treasury. In the Department’s view, what could be done to ensure provincial departments paid on time, and what role could it play in ensuring this was adopted by the provincial departments to pay small enterprises on time?

In the Department's report on refurbishing the One Business Infrastructure for SMMEs and Cooperatives against the target of two, the Department had added that the Kgosi Maubane infrastructure was partially completed and equipment would be installed once the security infrastructure had been resolved. Why was the second business infrastructure not refurbished or built, and what was the security infrastructure at the Kgosi Mmaubane project?

The Department needed to engage some stakeholders, as they were not visible. For instance, from his experience, the sale of dagga was made by black people, yet licences for cannabis sale were being issued only to non-black entrepreneurs.

Mr D Mthenjane (EFF) asked if any team within the Department was doing follow-up work on the entities? For instance, SEFA was not convincing, as there were a lot of questions and complaints from small businesses. If one went to the different regions, there were complaints all over. Why was this the case, as SEFA was presenting a different reflection?

The entities tended to ignore entities and apply cumbersome application processes. SEFA needed to do more. SEDA was somewhat better, as there had been positive feedback from the entities.

Ms B Mathulelwa (EFF) asserted that the DSBD failed in all aspects. The Committee had requested a programme of action from the Department, and to date, nothing had been received. The red tape in the agencies was stifling the growth of small businesses. The Department did not even involve or advise the Committee when they were going to the public. The public raised concerns to the Department, and they never heeded their requests. There had been numerous complaints from small business owners that they never knew what initiatives were taking place in their respective communities. The Department needed an office or table in local municipalities, to enable entrepreneurs to register their businesses.

She added that as it stood, nothing had been done for the victims of the floods in the Eastern Cape. The efforts of the Ministry of Small Business Development remained confusing and unseen.

Mr H April (ANC) expressed concern over how difficult it was for businesses to receive assistance from the Department and its agencies. Looking at the loan and debt book, it was quite baffling that the Department and the agencies were having challenges recovering repayment of loans, considering the amount of red tape involved when applying for loans.

SEDA was commended for ensuring no money was returned to the National Treasury.

He asked if the Department could provide an update on the following issue, as noted in the Budgetary Review and Recommendations Report (BRRR) -- the progress on the Business Amendment Bill and National Small Enterprise Bill, as they may be referred to Parliament only in 2023.

He suggested that the Department develop a turnaround plan for cooperatives which should be incorporated into the third quarterly report.

Since the amendment of the Department’s organisational structure was approved in August, what progress has been made in implementing it to reduce the high vacancy rate? Given the state of unemployment in South Africa, these high vacancy rates were unacceptable.

The Department had missed its target for the support of cooperatives. What had been done in the second quarter, and what kind of financial and non-financial support was given to the 239 cooperatives? What was the sector, race, gender, age, and gender breakdown of these cooperatives?

Ms K Tlhomelang (ANC) raised issues around red tape reduction, saying the Department had undertaken this strategy since 2015. What was its strategy for assessing the impact thereof? Could it provide evidence of the impact of the red tape reduction? The President had written letters to the Premiers of each province for their engagement and encouragement with the red tape reduction initiative, whilst the Department was working with municipalities in this regard. How did it ensure that the Department's and Presidency's initiatives were not duplicating activities and ensure that there was synergy and coherence with these initiatives?

Mr F Jacobs (ANC) acknowledged the efforts of the Department and its agencies to achieve some targets.
On matters of disabled people, could the Department not work with Disabled People South Africa as a member-based organisation, to help increase the participation of people living with disabilities that were running SMMEs?

He asked if the Department of Trade, Industry and Competition (DTIC) and the Department of International Relations and Cooperation (DIRCO) could be approached to assist entrepreneurs in reaching international markets. China and the European Union (EU) were cited as areas that did this well.

There needed to be an improvement in the Department's ability to leverage one rand for every six rands the banks paid.

He advised the Department and the Presidency to get the South African Local Government Association (SALGA) to develop one by-law that made it easier for people to trade in municipalities.

How was the DSBD interfacing with the National Empowerment Fund's platform?

Mr H Kruger (DA) said that departments that did not make payments to suppliers and businesses within 30 days should be named and shamed.

He said the SEDA in Emalahleni was not visible. There was no signage, and it was about 15 to 20 kilometres away from the people that needed it the most. Its positioning was in an affluent area, and was not near where it was needed. Emalahleni needed to be fixed -- the small businesses needed the DSBD's services.

Responses

SEFA

Mr Matshamba said the names of those supported would be forwarded to the Committee. However, it would not be practical to have all the beneficiaries present at Parliament, as there were over 70 000 beneficiaries, but they could come to the Committee upon nomination.

Regarding the comment that SEFA should not become a microfinancing entity, he responded that the majority of the microlending beneficiaries were rural women in the survivalist stage. If access to finance to them were stopped, it would mean that more than 70 000 women would have no access to finance. This was not wise, and may have catastrophic effects.

SEFA numbers were audited, so the matter of Mpumalanga residents complaining about the lack of support could be verified by following up on the submitted documents to prove the existence of these businesses and the said funding.

SEDA

Mr Mbatha confirmed that signage was currently being done at the eMalahleni SEDA office.

Efforts were being made in Mpumalanga to bring the work of SEDA to the people so that the services were available to those who needed them.

DSBD

Ms Oosterwyk said the underperformance of programme two was mainly due to transfers and subsidies that could not be transferred due to the Kgosi Maubane project.

Currently, there is a budget infrastructure and interim budget as approved by National Treasury. This could not be immediately changed due to National Treasury processes. Unfortunately, the same challenge would be experienced in the 2023/24 financial year.

To ensure the misalignments were dealt with, the Department did post journals, and the capturing and allocations would be undertaken more carefully. Although planning for cash flow was done, reality sometimes dictated that the funds were dispersed once all the documentary and other requirements had been complied with. Fortunately, National Treasury provided for adjustments to be done to ensure realignment was done throughout the year, subject to its approval.

Ms Brigette Petersen, Chief Director: Corporate Services, DSBD, responded to the progress made in implementing the new organisational structure to reduce the vacancy rate. She said the Department had initiated the planning and implementation strategy; the placement of all directors, deputy directors and assistant directors was under way; 28 posts had been advertised to date, and 32 by the end of 2022; six appointments had been made, and an additional five would be made by the end of January 2023.

The Department was scheduling the posting of the 26 posts for this financial year, which was set to be done by quarter four.

The vacancy rate had improved by 1.4%, which was expected to improve further as the rate of appointments surpassed the rate of terminations.

Mr Mojalefa Mohoto, Chief Director: Enterprise Development, DSBD, said the value of the investment in enterprises supported was currently over R63 million. This programme was a mixture of funding and a non-financial component.

The security of the Kgosi Maubane infrastructure had been identified as a threat to the completion of the programme.

Some strategic partnerships had been formed that could be used to ensure some cooperatives were assisted when the need arose.

The reduction of red tape has made strides since 2014, particularly in the seven areas identified by the guidelines when the programme was established. In the main, there was a sectoral focus on implementing this programme, such as tourism support transport licensing. The Department was working harmoniously on the red tape reduction initiative, and there had been collaboration in this regard.

Regarding the 30-day payment requirement, work was being done by the Department, in collaboration with the National Treasury, to look at the regulations and non-compliant partners. Going forward, it would play more of an advocacy role to strengthen policy initiatives, and to ensure the DSBD paid a critical oversight role.

Mr Jeffrey Ndumo, Acting Deputy Director-General, DSBD, said the Department had put together a plan around the Business Act. The Bill was expected to be tabled in Parliament around April 2023, and every effort was going to be made to ensure this was introduced to Parliament at this time.

There was a list of products and services for small businesses linked to the market, which would be provided to the Committee as required.

Similarly, there had been budgetary allocation delays regarding the target to link local enterprises to international markets. The Department expected a recovery in this regard, and would ensure the targets were met.

Minister's comments

Minister Ndabeni-Abrahams said the process of applications for the Informal Micro Enterprises Development Programme (IMEDP) took place at the local government level, working with the Local Economic Development (LED) units. This was where beneficiaries and applicants would go for support, or would go to SEDA. LED offices were found in every municipality. This was done in an effort to ensure there was a footprint on the ground, and that municipalities would take responsibility for the people being processed, as they were better placed to know who had or did not have a permit. This was then extended to the Department for processing.

Regarding non-communication with community members, this would be done when the Minister was going to visit. Even when other officials were involved, the Department always sent out a communique.

Information on the support provided to entrepreneurs would be provided to the Committee,

There was collaboration with the municipalities in dealing with the red tape, and SALGA identified a few areas. Throughout the country, the Department had worked with the Members of Executive Councils (MECs) and Mayors to ensure all those involved understood the implications of the by-laws.

The President mentioned that the National Development Plan indicated the need for small businesses to create nine million of the 11 million required jobs. This had been revised to 13 million jobs by the National Planning Commission, due to the Covid-19 pandemic. This resulted in an additional responsibility to the SMMEs and cooperatives, as the number for small businesses had now increased to 11 million jobs.

At the centre of the Economic Reconstruction and Recovery Plan (ERRP) was the issue of industrialisation. Where localisation was highlighted, the DSBD was trying to leverage the existing funds through the Enterprise and Supplier Development (ESD) programme, which dictates that 3% of the annual turnover be allocated towards enterprise supplier development. The Department was trying to get those forecasts and have at least 10% go to township businesses, and 15% to rural businesses. Of the entire package, 33% ought to be towards capacity building, and 67% should be distributed across technology and infrastructure capital. The Department would like to exercise oversight to liberate interventions in different sectors if this is successful.

There were now about 3.5 million SMMEs which created just under ten million jobs. If the target was reached by 2030, there was a need to ensure the creation of four million SMMEs. This required intensified  coordinated efforts and increased budgeting, as this was where SMMEs and cooperatives were lagging – more investment was needed to create these entities. If this was done, and Parliament approved the call through National Treasury, the DSDB and its entities must be given R200 million to establish more incubation centres. The Department reviewed the incubation model to ensure it addressed the job requirements and gave businesses opportunities for industrialisation.

There had been engagements with provincial departments, and efforts had been made to write to Premiers about the delay in paying suppliers. Admittedly, the DSBD had to champion the interests of small businesses therefore, strategies must be devised, even if the law placed the prerogative on the National Treasury.

The meeting was adjourned.