Audit Outcomes: AGSA, DPME & FFC input

Meeting report

Briefing by the Auditor-General South Africa (AGSA) on the 2018/19 audit outcomes of the Department of Small Business Development (DSBD) and its entities

Audit outcomes of portfolio over three years        

The representative from the AGSA explained that the quality of the financial statements has been maintained and no material adjustments had been identified through the audit process at both auditees (DSBD & Small Enterprise Development Agency). This was as a result of timely reviews by competent staff and oversight structures prior to submission for audit. Material non-compliance relating to the incentives awarded was identified in the current and prior audit periods at the DSBD and remains the greatest stumbling block to achieving clean audit outcomes. Preparation of annual performance reports remained a concern, as material adjustments had to be made to the reports submitted for auditing at both auditees. The review processes applied over the financial reporting processes must be extended to the performance reporting environment.

Credible financial reporting

The quality of the financial statements has been maintained and no material adjustments have been identified through the audit process. Detailed and timely reviews of the financial statements by competent staff and other role players including the audit committees has ensured that potential misstatements are identified and addressed prior to submission for audit.

Credible performance reporting

Reviews by the adjudication committees to ensure that applicants met the requirements/provided the required documentation as per the BBSDP and CIS guidelines were not effective. Appropriate measures were not maintained to identify employees of the state who applied for incentive grants for both the Black Business Supplier Development Programme (BBSDP) and Cooperative Incentive Scheme (CIS). Nineteen instances were noted where such applications were approved. Some BBSDP files did not contain evidence of site verifications performed prior to approval of the applications. Post approval site visits for grants paid to applicants as required by BBSDP guidelines were not always performed. In some instances, AGSA could not verify the assets purchased with the Department’s funding. Instances were noted where the beneficiary and the preferred supplier shared common directorship. Some beneficiaries submitted more than one application under various small businesses that were approved.

Financial health and financial management

No material uncertainty exists as the Department can continue to operate in the foreseeable future. The Department is in a net current liability position as well as a net liability position, and should monitor the financial viability to successfully execute its mandate.

Fruitless and wasteful expenditure decreases over two years

Cases of fruitless and wasteful expenditure during the period under review were as follows: Clients colluded with a service provider to utilise funds allocated for other purposes R0.3 million (SEDA). The entity paid for clients to travel overseas to exhibit goods, some clients did not attend (R0.25 million).

The remainder of the fruitless expenditure relates to missed flights and interest paid R0.7 million (DSBD and SEDA)

Supply chain management (SCM) findings were as follows:

• Terms of reference not stipulating threshold for local content (DSBD).
• Using the month to month clause on the travel management contract without the accounting officer’s approval (DSBD).
• Winning supplier’s details on the quotation are the same as those of the losing supplier (DSBD).
• Operating leases paid after expiry of the lease contracts (Seda).

The following significant areas had come to AGSA’s attention and little progress has been made to address them:

• The control measures designed to ensure that transfers relating to the Black Business Supplier Development Programme (BBSDP) and Cooperative Incentive Scheme (CIS) were only made to valid and eligible beneficiaries hence not always effective.
• Management did not timeously respond to findings noted in the 2015/16, 2016/17 and 2017/18 audits and as a result a number of repeat findings were repeated.
• An increased level of oversight was required over performance reporting against pre-determined objectives to ensure that the achievements and reasons for variances are supported by appropriate evidence and are valid.

On way forward, the AGSA will continue with proactive and continuous engagement to enable safeguarding against vulnerable risk areas. The Department must ensure that the guidelines for the different incentive schemes are revised to ensure that they are aligned to the objectives of the scheme and are not susceptible to abuse. Management should ensure strict adherence to the guidelines and standard operating procedures of the BBSDP and CIS incentive scheme. The responsibility for ensuring compliance with BBSDP guidelines should be clearly allocated and the responsible officials should be held accountable for any non- compliance. Management should undertake site visits to verify that the goods and services were actually delivered/received through pre and post site visits. Suspected misrepresentations by beneficiaries, suppliers and network facilitators must be investigated and the necessary action taken. The Department should perform an independent assessment on the reasonability of the quotations received from the beneficiaries to identify instances of abuse and ensure that value for money is received. The Department should consider enhancing the role of SEDA in the adjudication, allocation and monitoring processes of the incentive schemes, as the entity has shown sound controls over these processes and has a wider geographical presence.

The Committee should periodically review and track progress made by management against the action plan to address internal and external audit findings to prevent reoccurrence thereof. The Committee should also track the commitments made by management in response to the findings identified in the investigation report on the BBSDP and CIS incentive schemes

[PMG was not present during the Discussion part]

Briefing by the Financial & Fiscal Commission (FFC) on the Department and its entities

Mr Chen Tseng, Specialist, FFC, highlighted that South Africa had one of the lowest creation rates of successful SMMEs. Around 70 to 80 percent of SMMEs fail in the first year and only about half of the survivors last for the next five years (DSBD 2016). SMMEs have only a 37 % chance of surviving the first four years and only a 9 % chance of surviving the first ten. Compared to its BRICS peers, data suggests that South Africa has quite a motivated, fearless, optimistic entrepreneurial spirit for small business development. However, actual outcomes of business ownership and employee involvement in entrepreneurial activity are amongst the lowest, and mediocre in innovation.

On departmental performance, the value of funding disbursed to cooperatives through incentive scheme during the period under review amounted to approximately R85 million per year. The number of cooperatives supported per year amounted to 350 but was declining. 700 to 800 black-owned small, medium and micro enterprises were being assisted per year, six to 15 informal business infrastructure were funded and upward of 2 000 beneficiaries received financial assistance. However, FFC was concerned about the poor viability and sustainability of the supported cooperatives. There was need to focus on impacts and efficiencies of economic growth and employment creation.

Small Enterprise Finance Agency (SEFA)

On disbursements by SEFA during the period under review, loan approvals under-performed (R446 million out of the R770 million target), meaning that most of the beneficiaries are on the old books. Notable concerns as follows: revolving financing requirements by existing beneficiaries increased, meaning that businesses are struggling to maintain operations; performance indicators open to spurious interpretations; and funding via financial intermediaries, creating an elongated funding-to-business channel to impact on small business development.

The FFC recommended that the Department’s enabling systems and services for small business enterprises be strengthened. A business friendly system of affordable, sustainable line of credit also needs to be enabled since small businesses buy most inputs on credit. It was further recommended that consideration be given to a three-tiered platform of support towards small business development:

• Aggregator platform: to provide integrated solutions to two or more key needs of the client i.e. inputs, knowledge, finance, upstream and downstream buyers. This platform will improve the smallholder farmer’ access to and integration with the market.
• Digital Platform: to provide digital solutions for clients’ informational needs. This platform will enhance supply chain visibility and efficiency for agribusinesses

-     Innovative Financial services: Innovative payment, credit and insurance solutions (e.g. blended finance).

Improving intergovernmental objectives

There is a growing emphasis and recognition that sub-national authorities have to play a more significant role in local, small business development and job creation. Focus should be on promoting a fair and competitive environment for small business development to thrive in the local markets of public goods and services. (e.g. cleaning and security). There is a need to have synergy across three spheres of government in promoting small business development. A portion of the provincial and local funding should be dedicated towards actual, productive, sustainable local business development. Enhancing integrity in the procurement processes is crucial together with consolidating and monitoring small business development initiatives and financing through contract management, disclosure of interests, performance management and evaluations of employment and production outcomes.

In conclusion, the Committee together with the Portfolio Committees on Trade and Industry, Employment and Labour ought to jointly contemplate the recently published National Treasury economic strategy from a value-chain-of-an-industry perspective to ensure a driven, inclusive economic growth path. There was need to consider the potential of the Fourth Industrial Revolution (e.g. technology and information sharing) for small business development and to address and focus investments on public infrastructure, install consequence management in the legislation to eliminate inefficiencies, project delays and inadequate maintenance.

Discussion

The Chairperson appreciated the presentation by the FFC and invited clarity-seeking questions from Members. People on the ground needed to proactively liaise with communities to unlock further opportunities. The Department will be encouraged to address challenges around its organogram in consultation with the Department of Public Service and Administration. Public funds must be safeguarded and spent judiciously.

Mr F Jacobs (ANC) appreciated the FFC input as it informed the Committee’s approach to its oversight work. There is a lot of homework to be done by Members. There is need for returns on investment and impact maximisation across government departments and entities. The value-add of independent financial contractors as intermediaries had to be explored and reviewed. The Department should also take up the FFC recommendations as presented. A robust plan to get small and medium enterprise growing had to be devised as it would go a long way in catalysing job creation.

Mr H April (ANC) said it had to be made clear that politicians were no longer on campaign mode but now in the business of governing to take the country forward. He wanted to know if the FFC was in a position to give advice to departments directly.

Prof Daniel Plaatjies, Chairperson, FFC, said comments from Members were spot-on. As a constitutional structure, the FFC reports to and advises Parliament. It is Parliament that must decide whether it agrees with the advice in line with the overall strategic thrust and how said advice fits into the Committee’s programme relative to its accountability and oversight mandate. There is policy advice that was raised years ago by the FFC around infrastructure-led growth as the basis of economic growth. The FFC was not lamenting the Department but saying this is the story as is and pointing out what needed to be looked into. The Department should probably be given the opportunity to explain some of the findings. It is about the catalytic potential of the Department and what could ignite and grow small businesses further. There is also needed for baseline research to be carried out to determine the state of small business in SA as part of a diagnostic exercise.

Briefing by the Department of Planning, Monitoring and Evaluation (DPME) on performance and expenditure for DSBD, SEDA, SEFA

Mr Henk Serfontein, Chief Director: Public Service Monitoring, DPME, took the Committee through a presentation on the performance and expenditure of the DSBD and its entities. The highlights of the Department’s strengths as reflected by the Management Performance Assessment Tool were as follows: stable senior management service (SMS) with a zero turnover rate in 2018/19; vacancy rate at 7.7%, less than public service threshold of 10%; percentage of females in SMS at 52.6%, above 50% target; employees with disabilities at 3.1 %; and 100% invoices paid within 30 days. However, the Department still needed to address challenges within the strategic management environment – Annual Performance Plans, and the monitoring of organisational performance and institutionalisation of evaluations. Also, management of financial disclosures within the required timeframes must be attended to as non-adherence to prescripts in this area could pose serious risks for the department in terms of potential conflict of interest or its SMS doing business with the state.

Summary of Financial Performance 2018/19

Mr Nyiko Mabunda, Director: Sector Monitoring, DPME, highlighted that the Department’s significant costs drivers during the period under review were transfers to the Small Enterprise Development Agency (SEDA) (R840.1 million) and internally implemented grants (R355.7 million), operating leases for office space and pool cars (R20.4 million), travel and accommodation for official trips undertaken (R20.8 million), regulatory and forensic audits by the Auditor-General (R5.3 million), computer services for SITA Desktop support services and Microsoft licencing (R7 million) and consultancy services (R5.5 million).

Significant underspending at a monetary level occurred on Transfers and Subsidies (R55.9 million). The underperforming grants were CIS that underspent by R42.1 million (50.5%), BBSDP that underspent by R13.2 million (4.9%) and the National Informal Business Upliftment Strategy (NIBUS) that underspent by R496 thousand (0.9%), the underlying reasons being the non-compliance to the incentives guidelines and challenges with the IT system. Goods and services contributed to underspending mainly as a result of delays in finalising the research projects (R2.2 million) as well as outstanding travel and subsistence vouchers.

Small Enterprise Development Agency (SEDA)

Overall, SEDA achieved and exceeded performance targets on twenty seven (93%) out of twenty nine strategic indicators. SEDA Technology Programme achieved and exceeded its performance on all strategic indicators. The total revenue budget for SEDA for the 2018/19 financial year amounts to R873, 15 million with total expenditure amounting to R839, 16 million (about 96% of the budget). The agency’s performance highlights were as follows: 2,860 clients were supported through incubation; 465 clients supported through innovation; 6,957 new jobs were created by supported clients; 19,064 jobs sustained by supported clients; and a total of R1.75 billion turnover increase on supported clients. Notable areas of concern were as follows: twenty-three cases of alleged fraud and other irregularities which were investigated- findings and recommendations for corrective and remedial actions were issued to management; failure to meet targets on the “Number of clients supported through Enterprise coaching” due to drop outs by participating enterprises; and actual achievements that are way higher than targets in most indicators, which calls into question the robustness of target setting.

Small Enterprise Finance Agency (SEFA)

Performance highlights for SEFA were as follows:

• Facilitation of 88 590 jobs
• 72 894 entrepreneurs funded through its various loan programmes
• Disbursed R1.2 billion into the South African economy
• R549 million disbursed to 67 253 enterprises operating in priority rural provinces, against the annual target of R333 million.
• R482 million disbursed to 72 238 women-owned businesses compared to R333 million targeted for the year; and
• R897 million disbursed to 72 795 black-owned enterprises relative to R518 million planned for the year.

In conclusion, the role of small business in sustaining economic growth, creating jobs and reducing poverty is becoming increasingly vital. The contribution of small business to 50% of GDP is still a target that government aspires to in line with the National Development Plan. Interventions must be implemented relentlessly during 2019-2024 MTSF period and resources must be utilised prudently and possibility of fraud greatly reduced. As the Management Performance Assessment Tool found, it is strongly recommended that the Department ensure that all the plans are aligned to the national priorities to enable effective monitoring and that the department also attempts to conduct evaluations and make use of the outcomes thereof to improve and shape future programmes. The Department should leverage on its close proximity to the small business sector and play a more active by facilitating the resolution of cases of non-payment and implementation of measures to achieve sustained improvement trajectory.

Discussion

The Chairperson said DPME was encouraged to discharge its duties without fear or favour. The observations made by the presenters should be shelved for the following day when the Department appears before Committee. 

Mr T Langa (EFF) asked about the role of DPME. How and when does DPME intervene as a monitoring department? He expressed concern about the recurrence of concerns and negative findings across government departments and entities.

Ms K Tlhomelang (ANC) wanted to know whether there was any punitive or remedial action if departments and entities do not implement recommendations flowing from observations made by the DPME.

Mr G Hendricks (Al Jamah-ah) noted the job creation benchmarks set by government and asked if they were achievable under the prevailing circumstances.

Mr Serfontein said part of DPME’s mandate was to identify blockages across departments in line with the performance agreements agreed upon between the President and Ministers. DPME was continually monitoring performance progress and considered itself as a partner to the Committee. On the achievability of job creation targets, 90% of the job opportunities were expected to come from small businesses. Therefore, the Department was of critical importance on that front.

The Chairperson said the Department, expected to appear before Committee the following day, will be in a position to respond to most of the questions from Members. The Committee could not make any judgement calls at this stage. The reality is that there is need to join hands in dealing with the challenges at hand. She thanked everyone for the engagements.

The meeting was adjourned.