Implementation of Business Recovery Support Package; Merger of Seda, Sefa and CBDA; with Deputy Minister

Meeting report

The Chairperson said the purpose of the meeting was for the Committee to receive briefings from the Department of Small Business Development (DSBD) on the Implementation of the Business Recovery Support Package and expenditure of the R2.3 billion that had been allocated to mitigate the disruptions due to COVID and the unrest in July. The Department would also brief the Committee on the progress of the merger of the Small Enterprise Development Agency (SEDA), the Small Enterprise Finance Agency (SEFA) and the Co-operative Banks Development Agency (CBDA.)
 
The Deputy Minister of the DSBD, Mr Sidumo Dlamini, said he appreciated the opportunity given to the Department to make a presentation to the Committee. He handed over to the Director-General of the Department to make opening remarks.

Mr Lindokuhle Mkhuname, Director-General (DG), DSBD, said he did not want to waste time and would hand over to the Chairperson and the CEO of the SEFA to lead the presentation.

Mr Martin Mahosi, Chairperson, SEFA, said he would speak when the need arose for SEFA to give clarity on the presentation, but the presentation would be led by the CEO.

SEFA Business Recovery Programme

Mr Mxolisi Matshamba, CEO, SEFA, outlined the costs of the recent violent protests in KwaZulu-Natal and Gauteng. He said R1.5 billion in stock was lost. Damage to property and equipment amounted to R15 billion. More than 800 retail stores were looted and 100 were completely burnt. The looting impacted negatively on about 50 000 informal traders and 40 000 formal businesses. To date, 150 000 jobs had been reported to be at risk.

The Business Recovery Support Programme (BRP) had focused on uninsured small enterprises impacted negatively by the unrest and on the small enterprises which required funding for working capital (including stock), equipment (including delivery vehicles) and furniture as well as fittings. Small enterprises that had existing funding from other lenders were also considered.

The programme offered financial support in the form of blended finance which was a combination of a grant (60 percent) and a loan (40 percent). The interest rate on the loan component was limited to five percent, with a maximum repayment period of 60 months. The small enterprises had been assisted by SEDA in packaging their funding applications.

The total budget requirement was R300 million which was secured through the Business Viability Scheme budgets of the 2020/21 and 2021/22 financial years. The remaining budget of the Business Viability Scheme would be used to process the existing pipeline of applications to that scheme.

Mr Matshamba said incomplete applications by intended beneficiaries had been a big challenge in ensuring speedy implementation of the BRP intervention. Incomplete applications were referred to SEDA for assistance. SEFA had received a total of 785 applications for the BRP, of which 447 were incomplete, 192 passed the initial screening and 75 did not qualify for the support package. A total amount of R172 632 078 had been disbursed to successful applicants in Gauteng (41.62 percent) and KwaZulu-Natal (58.38 percent). Of all the small enterprises that received financial support from the programme, 36.42 percent were owned by females.

The scheme had budgeted to support 13 333 Informal Traders with R3 000 each as a once-off grant to a cumulative amount of R40 million, but had received only 7 410 applications to date and disbursed R10.07 million to the 3 356 informal traders whose applications had been successful.

(Refer to the PowerPoint presentation for further details.)

Discussion

The Chairperson invited the Members to deliberate on the presentation.

Ms M Lubengo (ANC) noted that the approved deals favoured more males than females and asked what criteria had been used to achieve that outcome.

Mr F Jacobs (ANC), commended SEFA and the Department on the work done from the time of the unrest to date which, he said, indicated that the Government was responsive. He asked about the ‘specifics of no new money’, that led SEFA to re-prioritise its budget when the President made pronouncements about the recovery package. How was SEFA going to deal with the unsuccessful applicants and what was the situation for accessing more funding?

Mr H April (ANC), said the presentation had been conscientious and gave the Committee hope that work was being done on the ground. 

Mr D Mthenjane (EFF) asked if the Department could submit evidence to the Committee of the monies that had been disbursed. Some businesses had reported to the Committee that they had applied for the funding but had not received the money. Some applicants had been rejected due to non-compliance and were said to have received help from SEDA so that they could comply; had those who received help from SEDA, come back to SEFA to re-apply?

Mr G Hendricks (Al-Jama-ah) said it had not been the responsibility of National Treasury to pay out the claims, but that of the insurance companies. SEDA had shown that it was improving as it had helped the applicants to get the documentation that was required to qualify for assistance. The Committee had to consider another round of inspections next year to visit the sites that it had not visited in the current year.

The Chairperson asked SEFA for the number of applications that were not complete. What were the issues with those applications? The President had requested that the applicants who had no permits be given free permits so that they could receive the necessary assistance. Were the applicants able to receive those permits?

Responses

On the issue of re-prioritised SEFA funds, the DG, Mr Mkhumane, said that most of the recovery package money that the Treasury had allocated went to the Department of Trade, Industry and Competition (DTIC). The package had been announced as R2.3 billion; R2 billion went to the DTIC and only R300 million was allocated to the DSBD. 

The SEFA Chairperson, Mr Mahosi, answered the question on gender specifics. He said the criteria had been the same for applicants and had not favoured any one particular gender. The reality had been that the gender domination in terms of operation of small businesses had been more male than female. SEFA had no control over the gender domination of the applicants.

SEFA would submit the details of applicants who had been helped by the BRP and those details would also come up in the next quarterly report.

On the unsuccessful applications, Mr Matshamba said some applicants had no police case number and when requested to obtain an affidavit instead, they did not submit any affidavit. This had reflected that those applicants had been ‘chance takers’ because obtaining an affidavit was a relatively easy process. SEFA had presented the most basic requirements for the applications. Informal traders were not asked for tax registration, they just needed to submit a permit from their municipality indicating that they were operating in the area. SEFA had been working with SEDA to assist the applicants with obtaining the relevant documentation.

On the request for details of the applicants who had been assisted, he said SEFA would provide that information within the context of the Protection of Personal Information ACt (POPIA). SEFA was forced to comply with POPIA so that it would not find itself on the wrong side of the law.

On insurance companies covering the damage, he said SEFA had focussed on assisting those entities that had not been insured. If a successful applicant was found to be insured and had received money from the insurer, SEFA would convert the applicant’s grant portion to a loan.

Dr Joy Ndlovu, Chairperson, SEDA, said SEDA had been able to help 177 of all the applicants who had been referred to it. Eighty percent of the assistance SEDA provided had been around financial issues, mainly cash-flow projections and annual financial statements.

Mr Nkosikhona Mbatha, acting CEO, SEDA, said the applicants received help with financial statements and obtaining quotations. The applicants had to provide their own three-month bank statements and their lease agreements where applicable. The applicants had to submit their copies of their ID documents. Seventy percent had not done so.
 
SEDA had been calling applicants over the past weeks and 134 applicants who had been asked to obtain affidavits were no longer responding when contacted, indicating that they were taking chances. SEDA had helped 177 applicants and was dealing with a further 65.

Mr Mkhumane, answering on free permits, said some municipalities had been reluctant to suspend fees for the permits. Those municipalities thought that by suspending the fees of the permit, they would be virtually suspending the need for the permits. The Department had been engaging with the municipalities to clarify that the permits were not to be suspended, only the fees for acquiring them. 

On the issue of businesses taking insurance, he said the clients who were supported by SEFA had already taken out insurance for their businesses and did not have to apply for the BRP assistance. It was important for the Department to encourage small businesses to take insurance.

Further discussion

The Chairperson said she was happy that the issues regarding pending applications had been spoken to and that the Department was being protected from people who were taking chances. The Department should continue to encourage businesses to take out insurance and to ensure their employees were registered with the Unemployment Insurance Fund (UIF). The Department had to write a letter to the municipalities, and share it with the Committee, regarding the issue of free permits so that the people could receive help. Informal trading was a part of job creation.

Mr Hendricks said that some people who were affected by the looting had qualified for insurance, meaning that the looting had been an insurable event. Taxpayers’ money was being used to help businesses recover and that gave an unfair advantage to insurance companies. The Committee needed to ask itself why some people could not qualify for insurance whilst others could qualify. Government had slipped up and paid out tax-payers’ money while that load could have been shared among insurance companies. The Committee needed to ensure that tax-payers’ money was not ‘thrown away’ just like that.

The Chairperson said the Committee would deal with the point raised by Mr Hendricks, in order to protect society. She invited the Department to make the next presentation.

Incorporation of SEFA and CBDA into SEDA

Mr Mkhumane said that in 2021, Cabinet approved the consolidation of the agencies reporting to the Minister of Small Business Development, to form a new entity that would be responsible for the provision of both financial and non-financial support to small enterprises throughout the entire business development life cycle. The DSBD embarked on the process of developing a Business Case that would serve as a roadmap to guide the DSBD in the establishment of a new entity. 

The proposed options outlined in the business case were:

--Option 1: Establish an entirely new entity;
--Option 2: Merge SEDA and SEFA into a new entity;
--Option 3: SEDA acquires SEFA;
--Option 4: SEFA acquires SEDA.

He said the proposed option that had been submitted to the Cabinet was Option 3, that SEDA should acquire SEFA. It was based on a legal opinion sought from the Office of the Chief State Law Adviser. The proposed option had been approved by the Cabinet on 04 August 2021. The merger of the entities would enable integrated government support for small enterprises with effect from 01 April 2022. The proposed option would also allow for the entity to acquire the CBDA and the Cooperatives Development Agency (CDA).

He said the Minister of the DSBD had established a Joint Oversight Forum, made up of the chairpersons and executives of the three entities. The Minister had consulted with the Minister of Trade, Industry and Competition and the Minister of Finance.

He said the process of appointing the Board of Directors for the merged entity had been initiated and the advertisement would appear in newspapers on 12 December 2021 with a closing date of 24 December 2021. An independent contractor would be appointed to oversee the transition into the merged entity.

(Refer to the PowerPoint presentation for further details.)

Discussion

The Chairperson invited the Members to deliberate on the presentation by the Department.

Ms Lubengo said one of the challenges in the merger was change management and its impact on the staff members. She asked what the Department’s strategy was for change management and how issues of duplications and redundancy were going to be addressed. Was there any guarantee that people were not going to lose their jobs? How was the staff’s morale in all the entities that were affected and what message had been conveyed to the staff about the merger?

Mr H Kruger (DA) said there were two problems when talking about government’s intervention in small business development. One was related to how assistance could be provided to small businesses by SEDA and SEFA. The other was that small business matters were scattered over many departments. The problem was that small businesses tended to “double-dip” into different departments. How was the issue of small businesses being scattered over many departments going to be solved, seeing that most of those departments did not want to let go of the small businesses they supported?  

Mr Jacobs said the Committee encouraged a smooth, stable transition and knew that the transition period would not be an easy one because “while we change the wheels of the bus, the bus must still be moving.” People had to still get the services. The Committee wanted to have a direct and “hands-on” involvement in the implementation of the merger. He asked how the assets of the entities were going to be integrated and if there were going to be any staff retrenchments. How were the boards going to be integrated into one, as currently there were three boards?

Mr Mthenjane asked why the Portfolio Committee had not been consulted before the merger was undertaken, suggesting that it would have been better if the three entities had been taken back into the DTIC. He wondered if the merger was a good idea.

Mr April commented that Mr Mthenjane might have arrived late in the Committee, as the Committee had agreed that the merger would be a good idea in terms of improving efficiency. He asked to what extent the Department had engaged with the unions about the merger. How was the merger going to address the issue of fragmentation and poor coordination of SMMEs at local and provincial levels? What were the expected financial implications of appointing an independent contractor to oversee the implementation of the merger? Was it practically possible for the merger to be completed before the next financial year? 
 
Ms B Mathulelwa (EFF) asked if SEDA and SEFA could provide a practical idea of how the business development model would look after the merger, in comparison to the current model.

Responses

Ms Dominique Vincent, Acting Deputy Director-General: Enterprise Development, DSBD, said the business case clearly articulated the need to incorporate a change management process in order to obtain the desired outcomes. A technical committee had been incorporated to deal with the change management process and the placement of staff across the three entities. The business case had not yet been finalised, and it would provide information as to whether there would be any redundancies or duplications.

She said the Department was in the process of appointing an independent contractor to deal with the change management processes and come up with an implementation plan that would engage with the staff to ensure that they were included and informed about the process. The staff would be able to contribute and remain motivated throughout the process. The Department could not commit that there would not be any job losses.

She said the business case indicated that the merged entity would give financial and non-financial support to small businesses. A function called the National Small Business Development Ecosystem had been incorporated into the business case and had the purpose of creating a small business platform, wherein all the details of the businesses that were to be supported would be captured. The Ecosystem would also capacitate support to intermediaries so that they would be part of the transition process.

Answering on engagements with various unions, she said the Department had identified that most of the SEDA and SEFA staff were affiliated with the Public Servants' Association and NEHAWU. The Department had had engagements with the labour representatives and the organisations were keen to be part of the process.

Mr Mkhumane, answering on the integration of the boards, said that the terms of the boards for SEFA and SEDA were already aligned and the Department had engaged with the Minister to extend the term of the CBDA board to the end of March 2022 so that it also fell within the alignment. A single board would start operating on 1 April 2022.

Answering on the practicality of finalising the merger by the end of the financial year, he said the Cabinet had given the Department a deadline of 31 March 2022 to finalise the merger. However, the Department was aware that issues might be experienced well into the next financial year. That was the reason behind appointing an independent contractor to assist the Department for a period of at least one year.

Mr Mahosi, speaking on the integration of SEFA into the merged entity, said the current board of SEFA had been appointed in 2019 and had had a plan for the entity to reach profitability level by year four. However the entity was affected by the COVID pandemic. The entity aimed to carry that plan into the merger. SEFA had a project underway to look at what would be a viable funding model for the entity and the work done in that project would be carried into the merger. SEFA had not had a coherent policy over the years and it was working on finalising a credit policy that would be informed by the funding model. In order to improve efficiency, the entity had been moving towards more automation of the application processes and increasing visibility through marketing.

He said the main issue that SEFA faced was that of the historical loan book. There were businesses that had gone “under water” and were still reflected in the loan book for money that was still collectable, even when there was clear proof that those enterprises would not be able to repay SEFA. SEFA was working on a policy on how to address such issues in a decisive and robust manner.

He said the other issue was that SEFA’s property portfolio was a big burden on its balance sheet due to a history of negligence. The property portfolio had been outsourced to a third party who performed horribly in managing the portfolio. The previous SEFA board ended up cancelling the contract with the third party. In the past year, SEFA had been working on improving the management of the portfolio by recruiting capable staff and improving the condition of some of the properties. Improving their condition ensured that SEFA could collect rent more effectively, because a number of the tenants had once boycotted rent payments due to the condition of the buildings. SEFA was working on strengthening the governance of its property portfolio.

Further discussion
 
The Chairperson invited follow up questions. 

Mr J De Villiers (DA) requested clarity on why SEFA had a property portfolio in the first place. Why were such assets not sold so that the money could be invested in markets?

Mr Mahosi answered that the portfolio was a product of what had happened in the 80s when the Small Business Development Council (SBDC) was established and the Government went into business with the private sector. The Government invested 50 percent of the capital to fund the new agency. With the advent of democracy, the Government wanted to fund its initiatives on the SMME development side and it diluted its stake to 32 percent. Later, the SBDC was renamed Business Partners. Business Partners was more of a property business than a lending business and it depended on its property portfolio to fund its business.  The properties that SEFA had were from the then SBDC. They were not new property that SEFA had bought.

The Deputy Minister said the Department was committed to working with the Committee. The Department would take notes and work on implementing the suggestions and comments of the Committee.

The Chairperson said the intention of the meeting was to get information on the progress and the challenges as outlined. A merger came with advantages and disadvantages. Some staff members might lose jobs. The Committee welcomed the initiatives of the Ministry in consulting with the staff members. The unions had to be taken on board because they existed for the welfare of the workers. The Committee appreciated the commitment and the work that had been done by the agencies.

The Chairperson, invited all the Members of the Committee to give their farewell messages going into the holiday season, and the meeting was then adjourned.