Small Enterprise Finance Agency and Small Enterprise Development Agency on their Strategies & Annual Performance Reports

Meeting report

Small Enterprise Finance Agency (sefa) Annual Performance 2014/15 briefing

Dr Sizeka Magwentshu-Rensburg, Chairman of the sefa Board, provided an introduction and a brief presentation on what sefa had been doing in the last financial year. In the three years that sefa had been in existence it had grown significantly and continued to grow, with a 48% growth in the services that the organisation provided to the small businesses and enterprises as well as cooperatives. Money invested in the economy in terms of disbursements to small businesses grew about 40 %, and sefa continued to reach out to more small businesses and enterprises. She noted a few challenges which included the fact that the level of disbursements was not satisfactory, and the rapid growth needed to be balanced to achieve sustainability of the organisation. Other factors were the impairment, although lower than the budget, and the market norm, which still needed to be controlled.

Turn around times had improved, but there were still a number of small businesses that were experiencing long turn around times from sefa. The organisation had not reached out to small businesses with disabilities, but was working hard to ensure the organisation changed that. She pointed out that the organisation had not achieved what it set out to achieve, but a corporate strategy had been set in place for the following year, which would, in due course, be shared with the Committee. It would focus strongly on the disability market and accessibility.

The network of sefa had grown so that people in the rural areas could be able to reach the organisation. This showed improvement and there were plans to extend to those regions. She noted that one of the challenges from the previous year was the cost of finance to small and survivalist businesses, and sefa was working with partners to provide a middle road. Its partners were much closer to the small businesses but they operated with limited infrastructure and the cost of service delivery was very high. This year, sefa had been working with Minister of Small Business Development, Lindiwe Zulu and had aligned its programmes with the Department of Small Business Development (DSBD) objectives.

Mr Thakhani Makhuvha, Chief Executive Officer, sefa, Mr Makhuvha took over to present in detail the annual results for the 2014/15 year.

He highlighted funding activities that were approved in the year under review, and said that sefa had approved R1 billion, and disbursed over R1.3 billion to small and medium enterprises (SMEs). Sefa had assisted over 68 000 SMEs, and about 60 000 jobs would be created. 74% of disbursements went into businesses that were managed and owned by black people; 50% went into priority provinces. Sefa had disbursed R484 million in the current year to businesses that were owned and managed by women. 68% of funding was disbursed to businesses that were owned and managed by young people. It had acquired major funding, mainly from the government and the Industrial Development Corporation (IDC). It currently employed 222 employees.

Sefa had been awarded an unqualified audit opinion from the Auditor-General (AG), but lamented that its performance targets were not achieved too well, with 70% of targets met. Market conditions that still persisted had not been conducive but the organisation had maintained its approvals. In October 2014, sefa launched a fund in collaboration with the National Youth Development Agency (NYDA) and the Industrial Development Corporation (IDC). IDC contributed R1 billion into the fund and R1.7 billion would be allocated to businesses that were owned and managed by young people. Since the launch the fund had set in place over R450 million for those businesses, and already in the current financial year R290 million had been disbursed. He emphasised that there was a need to provide concerted effort for businesses that were owned by people with disabilities, as well as women and young people. Not enough was yet being done to empower those categories although funds had been disbursed and money allocated.

Challenges

Mr Makhuvha mentioned only a few challenges, saying that these had been identified as the most important ones that required immediate attention and resolution. The first was cession – and he noted that the Committee and sefa had discussed this at an earlier meeting. When sefa provided funding to SMEs and cooperatives it would expect the funding to be repaid, and cession would ease its way to get money repaid after contracts had been concluded and payment made, because sefa would receive payments on behalf of the enterprises and then pay over to them. In many cases, sefa had not been able to get cession agreements in place in advance of payments being made. The next challenge was the issue of accessibility, for sefa was not conveniently accessible to the most remote areas nor had a presence in rural areas. To try to achieve this would add considerable financial constraints on the organisation, and the best way to improve accessibility would be to partner with other entities that were more accessible, such as the Post Office. The challenges mentioned earlier in increasing assistance to the disabled needed to be actively looked into. Credit indemnity was another challenge, because the uptake had been sluggish so the product needed to be revived and the level of access to credit increased.

Financial statements

Ms Reshoketswe Ralebepa, Chief Financial Officer, sefa, took the Committee through the financial performance of the organisation. She noted a few key points. Interest n the financial year grew by 104%, largely due to the large disbursements that occurred during the current financial year. Impairments were at 22% of total loans and this continued to be a problem. The cost to income ratio was 122%, meaning for every R1 the organisation receives, it spends R1.22, which was already high and if this continued to increase it would become a problem. The debt/equity ratio increased from 40 to 42% and this was due to the fact that IDC converted its loan to sefa, of over R1 billion, to equity in the current year. She took the Committee through the balance sheet and the statement of comprehensive income, outlining the numbers (see attached presentation).

Discussion

Ms NT November (ANC) sought clarity on sefa’s lending conditions, and asked whether, when sefa lent money, there was any training provided to the borrowers? Most people, when obtaining finance, focused on the amount and lost sight of all the other things that they need to do with the money to sustain their businesses.

Mr R Chance (DA) commented that when looking at sefa from the perspective of the shareholder (IDC), the taxpayer and the country at large, it seemed that there was a downturn, because the financial results showed a deterioration in the sense that the impairments were going up every year, and the balance was restructured to turn a loan into equity. That was a concern and the organisation needed to interrogate the reasons why impairment had increased, understand why this was happening, and what could be done to improve the situation. He added that the IDC had mentioned in a workshop that the Corporate Social Investment (CSI) contributed 5% to the Gross Domestic Product (GDP) whilst in Germany it contributed 25%. He thought that this would never be achieved if sefa continued to be bailed out with taxpayer money. The cost to income ratio compared to the commercial banking sector, which was roughly 60% and sefa should think how it intended to bring this down. He asked what sorts of outputs sefa needed to be looking at – whether employment, taxes paid by the beneficiaries, or the sustainability of those beneficiaries over time. At the moment it seemed to be focusing on inputs, and that was costing the organisation more. He wondered what was the actual impact made by sefa to the beneficiaries, and whether they looked into the size of the business, whether it showed growth, and the long term impact on the beneficiaries. The latter was what Members of this Committee wanted to see.

He asked what partnerships sefa was referring to, and with whom it was in further discussion. Finally, he asked what its greatest growth constraints were. An earlier meeting had discussed issues of scaleability and replicability of impact. He asked how the balance sheet would grow to R5 billion, and how long this would take.

Mr X Mabasa (ANC) said that it seemed that sefa seemed to serve everyone except for the poorest and the most informal traders or businesses and nothing had been said about either in the presentation. He too was interested in hearing more on the partnerships, particularly those entered into in this financial year and whether a formula for them was set out. Failing this, he feared that sefa could be taken for a ride. He lamented the Walk-In 25 partnership with sefa, asking how Walk-In 25 benefitted the township and the rural economy, and said that his question to the political heads had not been answered satisfactorily. His concern was that the focus of an organisation like sefa should not neglect the empowerment of black people in townships, especially those with extreme poverty and survivalist businesses such as selling things at taxi ranks and train stations. They should be the core focus, and he did not see that partnering with Walk-In 25 was doing anything to empower the poor people in townships. The impression was created that black people were not trusted with big money, although there were young people in townships that were more than capable of doing this and they did not need to be exploited.

Mr Mabasa congratulated sefa on the unqualified audit opinion. Referring to page 7, he asked about the interest rates charged to each of the categories of loans. He also asked sefa to expand on the 3% rate for wholesale cooperatives, mentioned on page 11, and what “wholesale” meant. Page 13 set out disbursements to SMEs, which had  58%, and he asked whether this was proportionate, and for any disjunct to be explained. If sefa did not help cooperatives, then there would be a problem in empowering the poorest people he spoke about. He said sefa needed to take that step and engage with those people on a one on one basis, so that they appreciated what sefa sought to accomplish. He asked if sefa would go out to the most remote areas, such as the Northern Cape, to try to empower people. He asked for the acronym of CBDA to be explained. He noted that on page 16, there was no category for people with disabilities, and asked for explanation. He congratulated sefa on the unqualified audit report.

Reverend K Meshoe (ACDP) noted that there had been a decline in approvals this year, compared to the last, and asked for this to be explained. He asked for examples of the help provided during Walk-in 25 to the local township spaza shops. At least 50 mobile bakeries would be established shortly, but he wanted timeframes. He noted the need to co-locate with sister organisations, and again wanted time frames. 

Mr S Mncwabe (NFP) asked for further comment on what had been done to empower and assist those with disabilities and those in rural areas, saying that often no practical steps were offered to these two groups. He was impressed by the organisation engaging with cooperatives within the basic education sector, to empower them and provide the nutrition programmes, because in the past these services had been provided by non-locals coming in from outside these areas.

Mr T Khoza (ANC) asked how the youth-owned and women-owned businesses were clustered or separated. He asked about cooperatives participating in the school nutrition programmes, and where this was happening, and whether it could be replicated in provinces lagging behind.

The Chairperson endorsed the comments on the need to empower businesses owned by people with disabilities, and asked whether they had so far just been identified or if any actual work had been directed to this, and asked for details of where these were, and what types of business they were running. She also wanted to hear more on the school nutrition programmes.

Mr Makhuvha firstly dealt with the comments on training, and agreed that giving funding alone, without providing support, was not ideal since most of the entrepreneurs would not be able to sustain their enterprises. For this reason, sefa offered business support through post-event monitoring. In most cases, as part of the approval process, a client would be provided with a mentor to guide the client, who would identify shortcomings of the client and draft a condition that  this client would only be entitled to use the money received if adhering to the mentorship programme. He cited the example where a client might produce a business plan but sefa may not consider that to be tight enough to secure funding. It would refer the client to a sister organisation to help to enhance the business plan.

In relation to the conversion of the loan into equity, he explained that when sefa received its grant from government, it came via the IDC, as a shareholder loan. Sefa had discussed with IDC whether receiving this as equity rather than a loan would enhance its financial position; that was a critical point.

Mr Makhuvha acknowledged that cost to income was a high ratio, but hopefully as sefa approved more loans and disbursed more, that would drop. The growth in the debt book had been significant, and the collection success had played a significant role in its financial position. Sefa planned to strengthen post-event monitoring, and had introduced monthly meetings of an investment monitoring committee. The Chief Risk Officer would go through each loan to establish issues and challenges, even if they were not already deteriorating, then analyse the reasons why some of the clients were not paying back the loans. Sefa had collaborated with some organisations that assisted clients, in order to interrogate the reasons why some of the clients were not defaulting on payment, or to engage with partners providing services or contracts, in order to find out what was happening when there was default. This should help to identify and give early warnings of potential defaults on loans and arrest the level of impairment commented upon by the Committee. The more sefa was able to collect, in terms of capital and interest, the more it would be able to contain its costs, and this would largely be done through collection procedures.

Mr Makhuvha noted that he did not have the figures with him now on the number of businesses that had been funded by sefa, how they were performing financially and their sustainability, but it would be obtained and forwarded to the Committee.

He noted that the post investment monitoring team did go out to visit clients from time to time, including those who were performing well, to ascertain what challenges they had. Information would be gathered on the clients' management accounts, aging analysis, and client growth, and again that could be furnished. In relation to input of venture capital funding, this was something that sefa would look at as it progressed, and it would also consider how to come up with innovative products and up-scale its funding activities.

Sefa had been collaborating with the Small Enterprise Development Agency (seda) on the Gazelles Programme, as it was recognised that they should work together.

In regard to the growth potential, he noted that sefa was still a young organisation that had the potential to do more, and it would continue to grow its capabilities in order to improve the loan book. As a young organisation, it was also important to improve scale internally first.

The Chairperson reiterated Mr Chance's question on how the organisation intended to grow and increase its statement of financial position from R1 billion to R5 billion. Mr Makhuvha had given a general response, but she wanted to know what its growth path was, and whether it did envisage growth.

Mr Makhuvha responded that, earlier in the year during the presentation of the corporate plan, sefa had mentioned that in the coming year it foresaw a growth of R1.3 billion, in terms of the funding and disbursement activities, and based on the allocation of funding. In the next three years it anticipated that it would grow by R5 billion, and in the following five years by R8 billion. One of the critical areas for the growth of the book was the opportunity presented by government with regards to the 30% set asides. Its contract financing was expected to grow significantly and sefa would be able to assist those who require contract financing. Sefa had also looked at the need to provide extensive financing for cooperatives; in this year there had been funding of R40 million but it was hoping for a significant increase. The Khula Guarantee Programme run for a few years had been sluggish, so there it anticipated only modest growth, particularly looking at supply credit activities in which it was engaging with commercial banks and non-banks in order to take up the products. Sefa had received various applications from various sectors in the economy and these needed to be converted into transactions. It had identified 37 access points across the country and more access points were identified, and once internal scale had been improved, it should be able to grow significantly.

The Chairperson pointed that she expected Mr Makhuvha to think of the policy pronouncements that had been made by government. One related to local procurement which would have an impact in growing the loan book; former imported goods would now be produced locally. Secondly, there was a policy pronouncement on 30% procurement from local SMEs and cooperatives, and this would create more sustainable markets in the public and private sectors, who would now be compelled to spend 30% purchasing from the very businesses that were sefa's client base. There was also work done in the Department of Planning, Monitoring and Evaluation to ensure that government departments and state owned companies adhered to the 30-day payment of supplier invoices rule. All these policies would enhance sefa's book. However, there was also a need to be specific and to understand what would be the target and market of the organisation, and how this linked to those pronouncements – for instance, in terms of school nutrition programmes and school furniture being handled by cooperatives. If the retail sector noted that it was, for instance, providing R77 billion of fresh produce, then 30% of that translated to R23 billion being sourced from cooperatives and SMEs. Sefa must then focus on funding more of fresh produce agricultural cooperatives, because here was a sustainable market; at the moment supply was lower than demand but sefa had the opportunity to balance that, within the sustainable market. As sefa received applications, it should prioritise those within the sustainable markets and where there was a government policy, as this would indicate where the most lucrative markets were for funding. She urged sefa not to think of itself as a stand alone entity but rather as part of a South Africa that must use policies to assist the organisation to grow.

She noted that questions had been asked about the distinct role of the Department of Small Business Development, and that of sefa. She suggested that growing the book should be done through the fiscus and priority programmes. The Committee and sefa should work together to determine what were those new growth sectors and new opportunities. One significant one had been mentioned earlier – the oceans economy. She reminded the Committee about the visit a year ago to Operation Phakisa, which had four laboratories. One focused on aqua-culture, a relatively new sector. The oceans economy had a three thousand kilometre coast line that was generating an income of about R56 million and it was anticipated that by 2033 that figure could be increased to R177 million. The research showed turn around times of 1080 days from the first decision to venture into aqua-culture to starting the seeds of the business, because of the applications for land use and land clearance. For this reason it was decided to try to put together an inter-departmental authorisation committee in order to reduce the turn around times to 234 days. That was still quite long, but at least represented a significant decrease. There was another decision around an inter-departmental fund because the Department of Trade and Industry (dti) had an aqua-culture enhancement fund already. That would be placed in agencies, and perhaps redirected from Land Bank to seda. There was still a need to decide on target areas and focus on some. She suggested that it would be important to reposition, or at least encourage some SMEs to embark upon the area of renewable energy, taking on small projects to improve the national renewable energy programme. 

The Chairperson wondered if the Committee should take a different view in relation to the high cost-to-income ratio. Sefa was surely a wealth creation or redistributive agency. She wondered how it should be measured; whether as it was, or on the basis of the impact it made because it was engaging in activities, with an attached cost, that the commercial banks did not cover. There was always a cost to assisting the SMEs to get  on to the path where their businesses were sustainable. There was a need to ask what value it would bring in before saying that the costs were too high.

The Board Chairperson highlighted that Mr Makhuvha had focused more on internal perspectives, whilst the Committee members submitted external perspectives. Internally, one of the greatest constraints to growth was lack of capacity within the organisation. Due diligence was falling short, and this affected the impairment, so due diligence would have to be improved. SMEs with potential needed to be identified and those that lacked extensive potential should be provided with development strategies. As sefa continued to lend to small businesses, there had to be development, and it should not sit back and wait for payments from businesses. As a development organisation it could be expected that the cost to income ratio would be higher than commercial banks, as the Committee Chairperson had set out, but that ratio needed to be monitored carefully otherwise the organisation would easily fall into inefficiency. In addition, she answered Mr Chance by saying that sefa did fund Funds. The partnership between Transnet, Anglo American and sefa was financing a Fund that managed small businesses. One of the biggest funding challenges lay in providing funding for start-ups, and whilst it did do this, it had to bear equity in mind.

Mr Chance said this was an important discussion. If cession was solved, he asked if this would impact impairments and what proportion of the organisation would be improved by getting the cession of the debtor’s books.  Secondly, he asked if the impairments were mostly felt in the direct or indirect lending, and he said that if they were found in direct lending then sefa had to focus more on the due diligence and post investment monitoring. If it was in wholesale lending then the wholesalers would have to do that work. In relation to financing Funds, he said that if sefa spoke to other financial institutions, it would find that they were doing work, but on  a small scale. He thought there was a need to talk to government about how this institutional mechanism could be broadened. He cited the example of an innovative financial product which was developed by Atlantic Asset Management, who had entered into a deal with the Jobs Fund, using R75 million from that Fund to increase it ten-fold in the private sector. It was half way through raising that money. The Jobs Fund would regard this as “first loss” and would pick the beneficiaries, mainly through the wholesalers. For example there were now micro finance organisations in the Tzaneen area who were the closest equivalent to the banks who were successfully lending money and actually getting it back. Sefa had a workshop earlier in the year yet some of these institutions were not invited. He urged the Committee to urgently convene a meeting and engage with those stakeholders. A survey that was conducted by the Enterprise Development practitioners reported that 86% of businesses did not believe that enterprise development funding was properly spent and that was a huge amount of money that was going to waste. The organisation needed to start asking the right questions to other key role players within the financial sector.

Mr Mabasa also spoke to financing a Fund, urging that sefa should not take the same role as intermediaries, and asked to what extent sefa would still finance intermediaries.

Mr Makhuvha answered questions on the cession of contracts issues,s and clarified that most of the impairments were seen in relation to the direct lending, not the wholesale lending activities. He said that sefa would be paying significant attention to contract funding as it hoped that in doing this, it would be able to arrest some of the challenges of cessions, which should improve the situation. Those cessions that it did have in place would help to cushion the level of risk.

Mr Makhuvha spoke to the issue of the poorest of the poor, as raised by Mr Mabasa. Sefa had assisted 68 000 SMEs and 90% were micro enterprises, so the developmental numbers that the organisation reflected were largely driven by the micro enterprises. Most of these were based in the informal settlements.

In relation to intermediaries he said that micro financed enterprises were reached through partners, and one of those institutions was based in Tzaneen, as mentioned earlier by Mr Chance. This did consume a significant amount of sefa's funding, and so the impact was also significant.

Mr Mabasa asked whether in saying that 90% was going into the informal sector, at least half of that was being paid to the kind of businesses that were selling from the side of the road or at taxi ranks. When the Committee undertook oversight visits, it had seen that some people, including a disabled person, had moved out of the premises provided to the taxi ranks and he wondered why; were they not receiving funding? If this money was indeed being paid as suggested it would seem to imply that poverty was being addressed. When the Committee did oversight visits again,  it would want to check. He wanted a deliberate distinction between the “middle layer” and the poorest.

The Chairperson paraphrased Mr Mabasa's point and asked sefa to “think outside of the box” and appreciate that MPs here represented communities. She noted that the Committee visited KwaZulu Natal (KZN), Eastern Cape and Tauten. In KZN the objective of that oversight was to see and hear from the people whom the Committee thought were target groups for the DSBD and entities. It had interacted with street vendors and spaza shops. One of the main reasons was also because at this time the country was seeing what were described as xenophobic attacks, although it was in fact highly unlikely that a South African would attack another person merely because he spoke another language. Instead, the attacks were happening in the space of small businesses. In one place, the Committee had found foreign nationals operating from shops, being able to pay R12 000 rental, yet South Africans were forced to operate from crates as tables, by the road-side, often having to take their toddlers with them for the day of trading. Mr Mabasa was speaking of those people who were trying to trade under the most adverse physical and weather conditions. There was clearly a distinction between these two types of businesses, and sefa should recognise that and the Committee had to make sure that the street traders needs were addressed.

Mr Makhuvha clarified that page 46 set out the actual impact in relation to the funding, not necessarily the total amount provided for funding R3 billion. He pointed to the column reflecting micro enterprises, showing that 66 000 were enterprises that sefa funded on behalf of intermediaries.

The Chairperson said that sefa and the Committee were thinking differently. Sefa was looking at what it gave to the intermediaries, and what was lent out by the intermediaries, but was not looking at whether the businesses actually grew. The Committee's experience was that the businesses did not grow but the intermediaries did.  Even the loan that was given to them had very high interest rates, and the training was inadequate, for the Committee had found that many of the trainees were still unable to distinguish between what belonged to the business and what belonged to the owner and were thus unable to recognise costs to the business. Sefa's target group should not be intermediaries but the  people who approached the intermediary requesting assistance.

Dr Magwentshu-Rensburg responded to Mr Mabasa. Sefa had told the Committee previously that it was  working through the intermediaries and the poorest target group that they would lend to. She acknowledged the concerns around intermediaries. Slide 23 dealt with the Durban Mangaung Fresh Produce market. Sefa was saying that it should have a product that supported that target group. However, it was running a pilot at the moment, to test it, and was trying to do so with the support of  other institutions and also trying to deal with the issue of the intermediaries. When the pilot was concluded, the results would be conveyed to the Committee.

Mr Mabasa lamented that this was a very painful discussion. He reiterated that if sefa was not interacting directly with the poorest people, it would not be making any substantial difference to their lives. Many of the intermediaries were white owned and managed, but his main concern was the way they performed; for they exhausted the money from sefa without channelling it properly to empower the poorest. Sefa, meanwhile, was also not interacting with those poorest people. The only ones benefitting were the intermediaries.

Mr Chance stated that Mr Mabasa's comments need to be understood and unpacked appropriately. Firstly, he highlighted the reference to white intermediaries. In fact, the regulations under the Financial Services Board (FSB) had resulted in over 20 000 black owned intermediary providers of finance having to close down, because of unfortunate unintended consequences. He thought Mr Mabasa, instead of criticising sefa on this, must ask National Treasury how this occurred. These regulations had tightened up the capital adequacy ratio for intermediaries so far that it forced many into redundancy and closure. Secondly he pointed out that it would be physically impossible for sefa itself to go out and provide loans of R500 because it simply did not have the footprint to do this, and that was why it appointed intermediaries. Thirdly, it may be true that some of the intermediaries were over charging interest, but they should be identified and weeded out individually, whilst recognising that the law set interest rates too. Fourthly, sefa had already made it clear to the Committee that the impairment ratio was greater through the direct lending than through the indirect lending, and the direct lending was certainly done through the intermediaries. He believed that these four points directly countered Mr Mabasa's arguments. He urged that the Committee should understand sefa’s position. He was not suggesting it was perfect, but the Committee could not simply dismiss the role of the intermediaries, and must recognise the vital role played in providing financing to all clients, including the poorest. In fact, the poorest of the poor were not tending to set up businesses, but were merely providing subsistence income for themselves. He wondered if sefa should be involved in this space, or whether that  was linked to the role of the Department of Social Development that was handing out grants to people who were not growing businesses. The DSBD should be involved in funding businesses to grow, not handing out grants. He urged that the role of sefa and whether it was in the business of wealth creation or redistribution would need to be addressed.

Mr S Bekwa (ANC) said that Mr Chance should not have referred Mr Mabasa to National Treasury when he had been interrogating a sefa report.

Dr Magwentshu-Rensburg agreed that it was important for sefa and the Committee to unpack the issues and establish the key roles of various entities and their impact. She noted that sefa, as an entity, had moved from the Department of Economic Development to the Department of Small Business Development, and it was now working in a different context. It was not correct to suggest that sefa should not help the poorest; it should provide even the smallest loans because it was aimed at empowering the poor in the country. There was a focused department in sefa to ensure that those to whom Mr Mabasa referred were not neglected.

The Chairperson commented further, saying, in regard to the suggestion that the Department of Social Development should play a part, that it was already over-burdened and did a lot. The Department of Trade and Industry concentrated upon those who were already “able to fly” and wanted to develop further. However, it had been tasked with small and big businesses, but the small businesses suffered. That was the reason for the establishment of the DSBD, to focus on small business only. Sefa was an entity of that department, and thus also had the mandate to assist and empower small businesses and cooperatives. The “development” of small businesses was not the same as “wealth” for some of the people it was helping could not even afford three meals a day or school uniforms for their family. Stokvels had played a significant role in poor communities, providing people with the opportunities to lend and borrow money to attend to their needs, and she wondered why the DSBD was not partnering with more of these kinds of entities that understood the culture and dynamics within their communities, instead of employing intermediaries. She felt it was not correct to continue to give money to intermediaries whose structure and impact did not stretch out to the poor, when other institutions could do so better.

Mr Mabasa said that the ANC represented the poorest of the poor, and said that if opposition parties did not object to something, the proposing parties should be worried.

Mr Chance objected to this, pointing out that it was utterly irresponsible.

The Chairperson said that she wanted the Committee to note that the DSBD was a starting point, and should focus on those people who were denied access to the mainstream economy. This organisation was not mandated to enrich the wealthy people; the challenges that had been identified in the NDP included poverty and unemployment.

Mr Makhuvha continued to give responses. Sefa was mindful of what it had to do going forward. The average interest rate for anything from R500 to R5 million in direct lending, in the direct lending, was 13.9%, which was very high. In regard to “wholesale” he noted that the wholesale was just a division but there were competencies around looking at how cooperatives' activities sit within the wholesale division. There were also cooperative enterprises, which were grouped together, which got funding from the organisation. In response to the question as to why those with disabilities were not included in the categories he said that sefa did not fund businesses owned by people with disabilities and had thus not reached that target.

The Chairperson asked whether the DSBD, when it went out on oversight visits, shared the information it gleaned with sefa, and what value was added by those visits. She asked if there was any opportunity for discussion on experiences encountered.

Mr Makhuvha responded that sefa would interact with the Department from time to time and there had been a workshop hosted by the DSBD.

The Chairperson referred to a project started by a Mr Friday Mavuso, involving people with disabilities. Someone had seen an opportunity, ensured that materials were brought in, enabled production and sales to government stakeholders. Here, the people had been so poor that they could not pay electricity bills, and they lived in sub-standard conditions. She was telling this to highlight the importance of actually going to the communities to experience what they experienced, and it also highlighted the need for interaction with the DSBD. 
 

Mr Makhuvha said that street vendors were covered by the intermediaries, but sefa may need to intensify that aspect internally, despite the fact that it did customer satisfaction surveys. 
 

Mr Mabasa said that the Committee would like to see sefa move away from over-reliance on intermediaries.

Mr Makhuvha said that sefa had a Northern Cape office, but it continued to recognise the need to co-locate there.

The CBDA was the Cooperative Bank Development Agency, which solely developed cooperatives.

He repeated that there had not been a specific focus on people with disabilities, but funding had been allocated of about R5 million to entities, all in the construction sector.

Mr Mabasa emphasised his comment on Walk-In 25, which was supposed to assist township people; but pointed out that it was a group of three young white people who held various qualifications. He asked if this suggested that sefa did not trust black people with such activities or large sums of money, and what had persuaded sefa that this was the right vehicle to channel growth in the townships,

A member of sefa responded that sefa had interacted with all the partners that were involved, including the stakeholders, and this had included the dti, who had been involved through a previous contribution on Walk In 25. There were also private sector players, a traditional authority and the shop owners, who were asked what they wanted to change. Three people would help to deliver the services, and through this particular model, sefa felt that members of the cooperatives were now empowered to participate in the administration and the functioning. If these people wanted to establish their own secondary cooperative they should, in the next two or three years, be able to understand the business and the local environment better than Walk-In 25. Here, the cooperatives were assisted by Walk-In 25, but sefa was funding the cooperatives directly and there was a structured finance solution to help sefa know exactly where the benefits were going, and whether the technical partners were delivering as expected.  Sefa would also talk to other partners to continue with their support, and to assess if the model of bulk buying worked. There had been intense discussion. It was agreed that there had to be transformation in terms of those running the shops. The structured finance solution was now being used in order to help establish the needs of the entrepreneurs, and to empower the poorest.

Mr Mabasa again asked what sefa understood the formula used by Walk-In 25 to be, and whether it was wise to have gone on with it. He pointed out that sefa had to protect those it was representing. The intellectual property appeared to belong to Walk-In 25. He wondered again if sefa was not able to find young graduates who actually fully understood the dynamics of the people in the townships. He asked how much Walk-In 25 received from sefa.

The sefa Executive: Wholesale Cooperatives said that sefa did not have the figures to hand.

Mr Mabasa insisted that this be furnished to the Committee, whether in ratio or percentage form. He also made the point that the leadership should have all these figures available readily.

The official noted that sefa had changed the way it worked with Walk-In 25, with restructuring of the transaction.

The Chairperson asked if sefa was rolling out or piloting the model.

Sefa responded that it was being piloted, in Aganang, Limpopo.

Mr Mabasa said that the same had been said of the project in Orlando, some four or five years ago, and wondered why now there was another pilot in Limpopo, and what the feedback was from Orlando?

The Sefa official said that sefa got feedback from four institutions, including the dti, Masisizane and the National Empowerment Fund (NEF) and had abstracted from that where there had been non-delivery.

The Chairperson asked why then, having identified shortcomings, it repeated the project in Limpopo.

It was clarified that although the project had been based around the concept of bulk-buying, in practice significant discounts were not received. Sefa had a discussion with the dti, in which it was concluded that the facility provided was too expensive for the cash flow of the business to handle.

The Chairperson thought sefa should present the Walk-In 25 model and should include the lessons learned from the piloting in Soweto, and explain how they would be mitigated in the next pilot, as also how to benchmark the model. She asked that DSBD and sefa should present on Walk-In 25 and include the expectations of that.

Mr Mabasa asked the presenters also to specify the amounts paid to the three promoters of Walk-In 25, in a way that the Committee would be able to track, reflecting proper accounting procedures.

Ms Phumla Ncapanyi, Acting Director General, DSBD, said that it was clear that the Department had to do its work and support the Ministry in achieving the set goals and objectives. The legislative framework that governed IDC was the same as that governing sefa, but both of these organisations had different target markets, and so this was the kind of matter that needed to be looked into, as well as coordination of leadership and determination of cooperative roles. Sefa had to be assisted to target the right markets. The model that sefa was being criticised for was the model that had been in operation in other bigger and well-established government entities, like the Land Bank, but that had catered mostly to commercial farmers and neglected the small farmers, and the same was true of the IDC that had been focusing more on funding bigger projects. Sefa received government funding and did skim off a management fee, and the money given to intermediaries also was skimmed of a management fee, so that the money actually available to beneficiaries had significantly reduced by the time it reached ground level.

The Chairperson noted that this had been identified by the Committee already.

Ms Ncapanyi noted that the Department had to be very clear on targets. Yesterday, in the presentation, some were given around co-location, but Members' questions on where those points were had not been answered.

The Chairperson said that on slide 5, sefa said that it implemented most of the programmes through its associates, joint ventures and parent entities. In the presentation no mention was made of organisations in townships that could assist in reaching out to many more people. She reiterated that by using a Stokvel, a municipality or a ward, sefa could reach out to other entities. Slide 38 spoke to challenges, and some were associated with the social economy, such as cooperatives. She asked that sefa should elaborate what these challenges were and how it planned to address them. Lastly, in order that the Committee could understand any hindrances, she asked if sefa had made any recommendations to the DSBD, particularly around the regulations. She had also not heard what systems had put in place in sefa and the Department to assess the financial impact or support given to the SMEs and cooperatives.

Small Enterprise Development Agency (Seda) Performance Report 2014/2015 briefing
Mr Lusapho Njenge, Acting Chief Executive Officer, Seda, said that Seda received an unqualified audit opinion on the annual financial statements, and this was now a sustained performance over the last seven years. There were no material findings on the Annual Performance Report concerning the usefulness and reliability of information. There were no matters of non-compliance and no matters to report under Corporate Governance. The financial health of Seda was found to be exceptionally healthy. The Seda Delivery Network at 31 March 2015 recorded that Mpumalanga had 14 information desks, the Eastern Cape had nine supported Seda incubators and the Western Cape had 12 satellite officers. The total number of information desks was 53, the total number of Seda branches was 43 and a total of 19 mobile units were recorded. Seda comprised a national office and provincial offices. The national office had 131 staff members with four of the employees on contract. The total percentage of the national offices’ vacancy rate was 22.86%. The provincial offices employed 409 members with 18 employees employed on contract. The vacancy rate for the provincial office was 12.86%.

The performance highlights of the service delivery for the year were  outlined. The Seda Technology Programme supported 3 016 clients, against the target of 1 710. The target for directly creating jobs was 1  650 for the year but Seda managed to exceed the target with creating 1  963 jobs. The target for supporting small businesses through conformity assessments was 127 but Seda surpassed this target by supporting 173 small businesses. In addition to these achievements, R6.8 million was leveraged and utilised from delivery partners during the financial year, with additional in-kind contributions.

Seda targeted to have 93% of its clients satisfied with its services. The target was exceeded and actual performance was 99%; this high performance was attributed to the efforts and quality of business development service providers and to the improved project management. Seda surveyed Small, Medium, Micro Enterprises (SMMEs) with an increased turnover and increased employees to improve the client business performance. The targets for the objectives were 52% and 33%. Both targets were exceeded and Seda attributed this to an increased market access which enabled the clients to increase their turnover and the agriculture and service industry contributed to employment creation by SMMEs. Seda wanted to increase the number of rural enterprise developments; the target was 27 developed enterprises and it had exceeded this target by developing 35 enterprises. Seda attributed this achievement to the continued support of secondary cooperatives from the previous year.

The annual target for maintaining the cost sharing with delivery partners was R10 million. The actual performance was R6.8 million; this was due to the fact that partners that had contributed towards Seda’s delivery costs in the past had to reduce contributions as a result of financial constraints. The cost of efficiency was targeted to be improved by 71 % and 5%. The targets were exceeded. The vacancy rate for Seda was due to decrease by 14% and that achievement was 15.49 %. This achievement was due to higher than targeted percentage due to a  re-alignment project the organisation embarked on. The number of incubators targeted was 48, and the annual performance was 48. The number of jobs created through the programmes was targeted at 1 650 and the actual performance was 1 963. The achievement was attributed to the manufacturing, construction and agriculture sectors, and business cycle contributed to high performance overall.

The number of supported and assisted clients was targeted to be 1 710 (supported) and 63 (assisted). The target of the supported clients was exceeded with an actual performance of 3 016; this achievement was attributed to an increase in the number of incubators and intake of new clients at established incubators contributed to the over performance. The target for the assisted clients was not achieved due to insufficient funds available to assist qualifying clients.

The 2014/2015 revenue was R713.352 million, which was an increase from the previous financial year. The revenue consists of the governmental grants, external earnings, sales of assets and the interests.  Seda’s expenses totalled R645.243 million, which was an increase from the previous financial year. The expenses include; administrative, personnel and programme and projects costs. The administrative costs were R147.683 million, personnel costs were R230.924 million and the programme and projects costs were R266.456 million. The grant allocation for Seda was R318.50 million and it managed to spend in full. External earnings amounted to R45.36 million and only R23.97 million of the budget was spent. The target for interests was R4.17 million and the budget was over-spent, totalling R4.91 million. The total revenue budget for the year was R693.09 million and total projected expenditure for the year was R692.58 million. The under expenditure was due to the annual salary increase from 1 April 2015 which was not effected yet, assets of 2015/16 not acquired yet, as well as the timing difference from commitments of programme and project related costs and actual payments.

He concluded by saying that the focus areas for the 2015/2016 financial year were to focus on outcomes, such as job creation, increase in turnover and sustainability. Seda also intended to review programmes which were in line with DSBD mandate and government priority areas, attend to roll out of small business incubation, focus attention on cooperative support, including collectively owned large scale projects, implement the Gazelles programme to identify and profile high performing entrepreneurs and reposition support functions from a reactive role to a proactive, strategic support role, especially in areas such as Information and Communication Technology (ICT), advocacy and lobbying, and human capital.

Discussion
Mr Chance asked if Seda had done a survey of business to find out what percentage of clients were supported by sefa, or any other business development organisation, and if there were results. He asked if Seda had come across a company called Catalyst for Growth, which was financed by the JP Morgan Foundation. The objective of the company was to conduct a survey with some business. This was a  non-profit organisation (NPO). He suggested that Seda should consider working with the NPO to help with conducting surveys of businesses and clients. Regarding the Gazelles programme, he wondered why the Department took a decision to aid rather than award winners.

Rev Meshoe said that Seda had achieved a number of partnerships, asked who were the largest, and what criteria were used when looking for partnerships.

Ms Mahambehlala noted the comments on the financial statements, such as the fact that Seda's accounting authority had not conducted proper oversight, and asked that this must be improved.

Mr Mncwabe also was interested in hearing more about the partnerships.

Mr Njenge replied that there were times when Seda received support from other institutions to support businesses. There were two methods which it used to identify the businesses which would be supported by Seda, and another way to establish which businesses would be supported by other organisations. When Seda was approached by companies, it would usually refer them to the South African Bureau of Standards (SABS), and when this was done the information was recorded so that Seda could keep track of the businesses and whether they had become successful. Seda had not heard of Catalyst for Growth. The types of surveys which it conducted were limited to programme efficiency. This was also due to departmental policies which did not allow it to conduct such surveys. Most of the services which Seda provided were the ‘push approach’ type of services as it tried to get as many people as possible to come and make use of its services and all its branch networks were structured around this approach. The intention of the Gazelle programme was to try and help at least 200 businesses and when there were enough success stories the number of businesses could grow to 2000.

The approach to partnerships was derived from the three strategic goals. The first one was to make businesses more cooperative and goal oriented, the second was to ensure that the business did not struggle with getting into contact with Seda for financial support, and the third was to ensure that its business support division would grow. Seda continually evaluated these three goals to see in which division it might be lacking. For instance, it may not have access to technology and would then form partnerships with businesses which were technologically advanced.

Mr Norman Mzizi, Chief Strategy and Information Officer, Seda, drew attention to note 17 to the financial statements, which referred to the partnerships.  The Auditor-General stated that the information reflected in that note relating to partnerships should be disclosed retrospectively, to reflect it. In note 19, it was said that the Department of Higher Education and Training was a related party to Seda, on the basis that funding was received from it – the Auditor-General also thought that this information should have been disclosed retrospectively and noted that this was a prior year error. This had now been disclosed properly.

Mr Mabasa accepted that Seda may not have sufficient professionals to assist SMEs and cooperatives, but asked if the the strategy it had adopted to offer those services was sustainable. He noted that Seda could link graduates specialising in a particular field, and perhaps a professional, to ensure that clients did get the right type of services. This would equip and empower the graduates and ensure linkage with a professional. He noted that Seda had said there were insufficient funds available to assist clients on the technology transfer programme, where the target of 63 was not met, with the assisted clients numbering only 42. He asked if there had been effective communication to the DSBD, whether processes were in place to help where there were insufficient resources, were Treasury rules implemented? 

Mr Njenge replied that the strategy on that linkage programme was currently done generically, but there was a programme on which it partnered, for basic entrepreneurial skills development. This identified 200 graduates and trained them in small businesses skills, then assigned them to small businesses. This had been generic, but Seda was now planning to focus on a specific field or specialised graduates and link them up to small businesses that required their specialised skills. For technology transfer, there was always over-subscription, because of the impact that it generated, but Seda was working to obtain more resources, to ensure that it kept flowing.

Mr Mzizi added that the funds for STP were ring-fenced, and these were  used for the incubations, but it could also look into other areas where there had been an under-relocation of funds.

Mr Mabasa asked if, in relation to the graduates, there was any attempt to link to provinces and regions, as he thought it was important to do this so that graduates were allocated to regions where they would not struggle to adjust. 
 

Mr Njenge replied that this was exactly the manner in which the programme was carried out, but there were insufficient funds available to carry the programme in its entirety so that Seda had asked the Department of Higher Education and Training to assist in funding.

Mr Mabasa congratulated Seda on the unqualified audit opinion especially under the circumstances in which it had been functioning.

The Chairperson hoped that the “client business performance improved” meant that the SMEs and cooperatives had improved. She asked for more detail on that.

Mr Njenge replied that Seda measured client business performance improvements as a result of Seda’s interventions – whether those were by incubations or client support. Firstly, at intermediate level, it hoped to see improved skills of the business owner, employment rate and increased revenue. Seda focused narrowly on the interventions that it provided. Recently it held a management workshop to explore what problems Seda was put into existence to solve and it was agreed that the problem was a small enterprise sector with low sustaining levels and growth. Some of those problems were now under control; for there was access to finance, and infrastructure. Seda submitted an Annual Performance Plan (APP) document to the DSBD and this mapped out problems internally and externally and set out which were within the mandate of Seda to solve. Some were outside its mandate or its control, but it still tried to address them where possible. Seda’s impact was minimised by the fact that the infrastructure was not enabling, with energy cuts and the like. On these, the DSBD would rather be involved.

The Chairperson asked the Department if the business performance improvements were negatively affected by infrastructure shortcomings that had nothing to do with Seda. Infrastructure would be needed to support businesses in the rural areas. She asked if the DSBD recognised that interventions were also needed by other departments, and did it take into account what infrastructure was needed to maximise the improvement, in the context of developing the small businesses.

Mr Mojaleja Moholo, Deputy Director General, DSBD, replied that the Department did approach other departments in relation to improving the context in which small businesses operated – such as the departments dealing with transport and road works, and it was developing programmes. The Department of Trade and Industry had also pointed out that there was a need for better infrastructure to assist development.
The Chairperson in response pointed out that it would be more beneficial if each department focused more on the integrated plan that combined them in achieving community development, instead of each department carrying out work just to achieve its mandate. She asked if there was a focus on integrated or singular work.

Mr Moholo replied that discussions were at provincial and local level to find out what infrastructure was most needed to develop small businesses and cooperatives.

The Chairperson lamented that it seemed to be that black people’s contributions and concepts were overlooked, but when a white person came up with the very same concept that was given priority. There was a “three legged” economy, but the legs were not even. She thought that first preference had to be given to state owned companies and community development should be prioritised through government procurement.

The meeting was adjourned.