Small Enterprise Finance Agency 2022/23 Annual Performance Plan

Meeting report

The Chairperson said that the Committee would be briefed by the Small Enterprise Finance Agency (SEFA) officials on its Corporate Annual Performance Plan (APP) 2022/23.

Mr H Kruger (DA) questioned whether the entity should table its APP prior to the Department.

The Chairperson asked the content advisor to assist on this matter.

The Content Advisor clarified that the order of presentations did not matter. 

The Committee Secretary indicated that the Chairperson received a letter from the Department requesting a postponement for the presentation, as it has to add information on its strategic APP. As the budget vote is scheduled for 10 May, the Committee stressed that all presentations should be done before then, including the Department’s. He added that the order of presentations did not matter.

Mr Kruger disagreed that SEFA should present its APP first and indicated that the Department’s strategy should coordinate and lead the entity’s.

The Chairperson said that the Department had worked with the entity on preparing its strategic APP. As such, there would be no confusion in the presentation. She added that the Committee would inform the Department that it must present its plans before the Budget Vote.

The Committee Secretary then took the Committee through its agenda for the meeting.

The Chairperson requested a mover for the adoption of the agenda.

Mr H April (ANC) moved for the adoption of the agenda.

Mr E Myeni (ANC) seconded the adoption of the agenda.

Briefing on SEFA’s Corporate APP 2022/23
The Chairperson of SEFA, Mr Martin Mahosi, and the Chief Executive Officer of SEFA, Mr Mxolisi Matshamba, briefed the Committee on SEFA’s Corporate APP for the 2022/23 financial year.

Performance
Mr Mahosi indicated that from 1 April 2019 to 31 December 2021, SEFA achieved 44.7% performance regarding the approval of loans. He further added that the total number of loans approved decreased from R1.9 billion (against a target of R2.8 billion) in the 2020/2021 financial year to R1.5 billion (against a target of R2.1 billion) in 2021/2022. SEFA has targeted approving loans amounting to R2.4 billion during this financial year.

He highlighted that from 1 April 2019 to 31 December 2021, SEFA achieved 48.1% performance in disbursements. Unlike the performance in approvals, the total disbursements across the two previous financial years remained the same at R1.6 billion. However, performance in 2021/2022 was against a target of R2.7 billion, whereas the target in 2020/2021 was R2 billion. Thus, the entity achieved a lower performance for the 2021/2022 financial year. For this financial year, SEFA has set a target of R2.7 billion in disbursements.

He underlined the threats currently facing SEFA, which include:
- The high impairment rate and debt write-offs, are leading to capital erosion
- Rental boycotts in SEFA properties which obstruct the collections target
- Low staff morale and engagement, which has affected performance

Strategic priorities for the 2022/2023 financial year
Mr Matshamba highlighted that SEFA has five main priorities for this financial year; they are:

1. Building a sustainable loan book
2. Improving performance on key development indicators
3. Improving the cost structure
4. Enhancing organisational capabilities across its value chain
5. Building the SEFA brand and increasing SEFA visibility

2023 Budget Summary
Mr Matshamba indicated that SEFA’s budgeted net value is expected to increase from R927 million on 31 March 2022 to R2 billion by 2025.

In its budget statement, SEFA has forecasted that its expenses would increase from R601 million in the previous financial year to R868 million in 2022/2023. The majority of this expenditure will be dedicated to the movement on impairments and bad debt provisions, which will amount to R404 million. In addition, SEFA has forecasted a loss of R247 million for this financial year, which will improve the R351 million loss incurred in the previous financial year.

He said that the entity’s income is projected to increase from R520 million in 2020/2021 to R818 million this financial year. The bulk of this income is projected to come from three areas: the Medium Term Expenditure Framework allocation (R252 million), grant income (R296 million) and interest earned on loans and advances (R121 million).

See attached presentation for further details.

Discussion
Mr April asked the officials to provide a report on the number of companies assisted by the Small Enterprise Development Agency (SEDA) and SEFA in the past financial year.

Ms B Mathulelwa (EFF) mentioned that the Committee had previously requested that SEFA present a detailed report which included supporting evidence. 

Mr F Jacobs (ANC) indicated that the Chairperson of SEFA had previously said that the entity anticipates approving loans of R1.9 million and disbursements amounting to R1.5 billion during this financial year, which aim to benefit more than 69 000 SMMEs and cooperatives and maintain 80 000 jobs over this period. However, these figures did not correspond with SEFA’s planned targets. He asked for clarification on this. Further, he asked why SEFA had lowered its disbursement target this financial year and what measures were implemented to ensure the current target was achieved.

He urged SEFA officials to be present in all of the country’s district municipalities to assist small business owners with the applications for the available funds at the entity.

Regarding the discounted risk rate price model (DRRPM), he asked how the model would be designed and how it would apply to products sold from businesses in rural areas. Additionally, he asked how the entity would ensure better implementation of the DRRPM.

He asked when SEFA would set up microfinance institutions (MFI) in the Western Cape (WC), as most are based in the Northern provinces. Additionally, he asked what SEFA’s plan is to assist micro and informal businesses that require loans to remain sustainable.

He also asked for SEFA to elaborate on what it meant regarding the lack of stability in policymaking and how it thought the Committee could assist it with this. This, he said, speaks to the lack of small and township business framework.

The Chairperson indicated that the Department should look to unlock the current bottlenecks in the legislation. She also called for SEFA to conduct visibility campaigns as SEDA has done to make SMMEs aware of its services.

She highlighted that there were several issues surrounding the Youth Challenge Fund (YCF).

Mr Kruger mentioned that SEFA used micro-lenders to provide SMMEs with finance in the past. However, this proved to be expensive. Small businesses, he believes, should be accommodated through direct lending, as many of them only require small funds to function. He recommended that SEFA refrain from using micro-lenders (as they have high-interest rates) and rather look to have a presence with SEDA in the district municipalities. 

He highlighted that there is too much red tape in the Department. For instance, filling out the application form is complicated for the average person. He recommended that SEFA put aside funds to redesign the application forms to make it easier for people on the street to fill out the forms. 

SEFA response

Mr Mahosi, on the number of companies assisted, said that he did not have the information on hand and the entity would provide the details in its next quarterly report (where it details its performance).

Regarding the approved loans, he mentioned that SEFA did provide a report in the previous quarter on the applications received, approved and declined.

He clarified that the correct target for approved disbursement is R2.2 billion, while the R1.9 billion in the presentation relates to the target for the previous financial year.

Touching on the disbursement targets, he indicated that while SEFA did miss its targets in the previous financial year, the performance of the recipient SMME is linked to that of the entity.

He agreed that there is a need to capacitate SMMEs and simplify the application processes for the owners. The entity has struggled with striking a balance between maintaining profitability and providing adequate funding to SMMEs. As a solution to this, SEFA has embarked on establishing a funding model, which will assist with understanding its cost structure and its ability to generate revenue. Although SEFA needed to ensure it does not overstretch itself in its attempt to provide services to its (and SEDA) clients.

He informed Members that SEFA is moving towards automating its application process and has been training its frontline workers on how to process applications and provide clients with SEFA’s products.

On the MFI, he indicated that in the previous financial year, SEFA increased the number of available MFIs, particularly in KwaZulu-Natal. Presently, it is looking into bringing further intermediaries to assist with financing SMMEs. He added that SEFA is aware that it needs to develop MFIs in other provinces, such as the WC.

He explained the difference between the micro-lenders and intermediaries used by SEFA. When working with its intermediaries, SEFA agrees upfront on the cost it should shoulder after approving a loan to a client. Then the total amount provided is capped to limit the expense for the service user. SEFA uses intermediaries because the cost of loaning small amounts to SMMEs is more expensive and risks its sustainability. In addition, it also gives them better leverage with developmental indicators. SEFA, he added, has to mitigate against all risks to its profitability and sustainability.

He agreed that many clients find difficulty in completing the application forms. SEFA is looking to make the forms easier to fill out, but in doing so, it has to ensure that it can maintain thorough processing.

Regarding the YCF, he indicated that the issue did not relate to the complication of the forms but rather the applicants' compliance.

Mr Matshamba, on the entities passed on by SEFA to SEDA for finance, said that this information would be provided when SEFA tables its next report to the Committee. Some clients who have applied for direct lending are referred to SEDA when SEFA notes serious gaps in the application. Other applicants borrow through their own line application, whilst others do so through commercial banks via the KCG Credit Guarantee system. SEFA, he added, is looking to find a balance.

During its recent roadshows, SEFA officials have interacted with a number of small business owners, who have requested that government should apply different interventions depending on the needs of the business.

Also, during its roadshows, the entity had learned that rural business owners struggle to access its offices. Hence it has been suggested that it build relationships with the provincial development financial institutions (DFI), which have a better footprint in the provinces. Two, management has suggested that SEFA should build relationships with LED offices in the municipalities. SEDA and SEFA will train the LED officials on SEFA’s basic product knowledge and what services it offers. This would ensure that SMMEs are assisted with electronically uploading some of the documentation required.

On SEFA having a presence in the districts, he stated that the option of rebuilding its offices in the municipalities was not financially viable at this current moment. SEFA, he argued, should rather look to building relationships with officials in the municipalities.

On the question of policy, he clarified that SEFA was referring to the regulations established by municipalities, such as the permits provided to SMMEs, which impact the cost of doing business. Other factors such as the administered pricing, the cost of electricity, and loadshedding also directly impact the cost of doing business for SMMEs.

Clarifying the disbursements, he said that the numbers and targets on the report were extracted from old documents and the approvals planned for this current year are R2.2 billion. In contrast, the disbursements amount to R2 billion.

Regarding the DRRPM, he mentioned that SEFA believes that the model is now working after seeing an improvement in the last quarter. During this period, SEFA saw an improvement in the disbursements under the Township and Rural Entrepreneurship Programme (TREP), totalling R715 million by the end of March 2022. Both the DRRPM and the TREP programmes have blended finance, including grant funding. This, he believes, is more attractive to SMMEs. To improve the uptake of TREP funding, SEFA has increased the maximum funding that can be offered to an SMME from R350 000 to R1 million. He assured Members that SEFA would provide further details on this to the Committee in a future meeting.

He informed Members that SEFA would be rolling out the full automation of the application process. Additionally, it will be working with SEDA to ensure that training and development are improved, as there is an increased need for the training of young business owners. Programme management will ensure that the entity fulfils its APPs and delivers on immediate interventions, such as those for businesses under distress from Covid-19, the July riots, and the recent floods in KwaZulu-Natal.

One of the key deliverables SEFA wants to drive this year is the introduction of more black-owned intermediaries in the micro-financing space. SEFA, he said, had begun building the capacity of the micro-finance division within SEFA after not having done so in the past two financial years. Thus far, the entity has improved the number of intermediaries funding SMMEs.

To mitigate against the high costs of micro-lenders, SEFA has to either provide the lenders' subsidies to finance their operations or increase the raising of funds from donors to cover their basic costs.

On SEFA’s performance, he said that it would include these details when it tables its fourth quarter report. The budget for this financial year is lower as the entity has not budgeted for supporting SMMEs affected by the July Riots, the lockdown and the recent floods. Instead, the entity is looking into how it can finance short-term interventions.

The Director-General of the DSBD, Mr Lindokuhle Mkhumane, said that Cabinet approved TREP in March 2020, a month before the initial lockdown. Due to the lockdown effect on SMMEs, the Department had to use the funds to support them. Thus far, SEFA has supported over 8 000 businesses, while SEDA has supported 26 972 SMMEs through this intervention. The Department, he said, believes that the policy has had a positive impact.

He indicated that the NT must address how to capitalise on DFIs and outline whether they should have developmental or financial targets. The NT should provide the new DFI with adequate funding to assist SMMEs struggling to access finance from the banks. He added that SEFA had not received sufficient money from the NT, as it only received R300 million to cover operational costs. SEFA does receive a shareholder loan from the Industrial Development Corporation (IDC). However, the money it obtained from TREP has made a difference to its balance sheet.

The Chairperson thanked the officials from the entity and the Department for their engagement. She agreed that the entity’s lack of resources was a concern. To assist, the Committee will request that NT provide SEFA with a sufficient budget to assist SMMEs.

She asked the Department to urgently provide a date for when it will table its strategic plan and APP.

She then requested a mover for the approval of SEFA’s strategic APP.

Mr Jacobs moved for the approval of the entity’s strategic APP.

Ms M Lubengo (ANC) seconded the approval.

Mr Kruger said that the Committee should note the absence of both the Minister and Deputy Minister from the meeting.

The Chairperson stated that the Committee did not have to do so.

Consideration and adoption of minutes: 1 April 2022
The minutes were considered and adopted.

The meeting was adjourned.