Impact of government’s support interventions to businesses: PBO & DSBD briefings; with Minister

Standing Committee on Appropriations

16 September 2022
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary

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The Standing Committee for Appropriations met virtually to consider briefings by two entities on the support they provide to the business community in South Africa. The first briefing was by representatives of the Department of Small Business Development (DBSD) on the programmes of the Small Enterprise Finance Agency and the Small Enterprise Development Agency. The second briefing was by the Parliamentary Budget Office (PBO) on government support interventions.

PBO said the COVID-19 Loan Guarantee Scheme worth R200 billion had been a failure. First, there was a minimal take-up by small, medium and micro enterprises (SMMEs) that amounted to a mere R13.5 billion. There had been an intervention by the National Treasury in July 2020, with minimal changes, and a similar lack of acceptance. A "Bounce-Back" support scheme has since been launched in April 2022 to help small businesses recover from COVID-19, the violent unrest in July last year, and the KZN floods.

The Committee asked the Department how they planned to incorporate product localisation into the country’s value chain. How many SMMEs were owned by South Africans, and how many by Africans who were non-South Africans? There was a need to reform legislation and remove the constraints imposed by commercial banks on small businesses.

The Members also asked how the Department planned to prioritise and incorporate previously disadvantaged groups -- women, youth and those with disabilities -- into their programmes. They wanted details of the successes and failures of SMMEs. They questioned the DSBD's effectiveness in ensuring government departments and big businesses used their purchasing power to support SMMEs, especially those that could create job opportunities in rural communities. The Committee undertook to support the Department's quest for a larger budget allocation, recognising the performance constraints imposed by its current financial limitations.

Meeting report

The Chairperson said the Department of Small Business Development (DSBD) played a critical role in reigniting the economy through Economic Reconstruction and Recovery Plan (ERRP). The DSBD also assisted previously disadvantaged people to be involved and participate in the economy, and create jobs.

DSBD support to small business

Ms Stella Ndabeni-Abrahams, Minister of Small Business Development, said the Department would be reporting on the support provided by its two entities, the Small Enterprise Finance Agency (SEFA) and the Small Enterprise Development Agency (SEDA). Their programmes offer opportunities current and future beneficiaries. They urged those needing support to read their information material to understand the products they offer. The Department had tried to relax the requirements for providing business and development support via the SEDA.

Mr Lindokuhle Mkhumane, Director-General (DG), DSBD, said the (SEFA) offered support to small, medium and micro enterprises (SMMEs) through loans and grants. There were two programmes:

Township & Rural Entrepreneurship Programme (TREP)

The TREP assisted informal, micro and small businesses to grow their business ventures in rural areas and townships. The maximum value for the package was R1 million. The maximum repayment of the loan was 60 months, which was dependent on cash flows. The fixed interest rate was 5 %.

Small Enterprise Manufacturing Support Programme (SEMSP)

The SEMSP aimed at resuscitating and growing townships, rural towns, and village economies by providing financial and non-financial support to area-based small-scale manufacturers. Challenges and solutions experienced by SEFA in executing its mandate were highlighted from Slide 16 to slide 23 in the presentation.

Small Enterprise Development Agency (SEDA)

The SEDA provided non-financial support to SMMEs. The Department had introduced an accessibility model through the assistance of the South African National Space Agency, which would enable SEDA to be an ecosystem facilitator of business development services (BDS) through private sector stakeholders and BDS providers. There would be 180 additional touch points throughout the country. 80 of which would be rolled out in this current financial year at a cost of R24 million.

(See presentation for impact of SEDA on business development support.)

PBO: Government interventions to support business

Dr Dumisani Jantjies, Director, Parliamentary Budget Office (PBO), provided an update on the impact of government’s support interventions to businesses following the COVID-19 pandemic.

Economic Reconstruction and Recovery Plan (ERRP)

He said one of the main objectives of the ERRP was to re-industrialise the economy, focusing on growing small businesses. More than 2.6 million SMMEs were counted during the first quarter of 2020. 66.9 % were classified as informal, and 28.9 % were classified as formal. 74.8 % of the formal SMMEs were black-owned. Small businesses contributed R2.3 trillion (22 %) of the R10.5 trillion total turnover for industries in the South African formal business sector.

The interventions introduced in the ERPP were linked to the vision of the country set out in the National Development Plan (NDP).

COVID-19 Loan Guarantee Scheme (CLGS) – 2020

R200 billion had been launched as part of government’s proposed R500 billion economic relief package. The South African Reserve Bank (SARB) had partnered with commercial banks to provide emergency and distress relief loans to struggling businesses because of COVID-19. The scheme had failed, with a minimal take-up, and only R13.4 billion of the available funds had been disbursed to businesses.

Changes to the scheme had been made by National Treasury (NT), the SARB and the Banking Association of South Africa (BASA) to make funds more available to businesses on 26 July 2020. There was still no significant uptake of the loans -- only R18.2 billion of the R200 billion was disbursed.

A "Bounce Back" support scheme was launched on 25 April this year to remedy the failure of the two previous interventions. This scheme aimed to assist eligible recovering businesses to access finance due to constraints related to COVID-19, the civil unrest during July 2021 and the KwaZulu-Natal floods. The Bounce Back support scheme was comprised of a loan guarantee mechanism of R15 billion, and R5 billion in the form of an equity-linked scheme.

(Please consult the presentation for further details.)

Discussion

Mr A Sarupen (DA) asked if the Department was doing substantive work in the value chain to ensure vertical integration. Were they engaging with bigger manufacturers and businesses and asking what kind of business could be procured locally? What kind of businesses should the DSBD be incubating for them, and how successful could it be?

Mr X Qayiso (ANC) said that the information presented would assist the Committee in assessing the level at which they could intervene. He asked what the percentage of the SMMEs owned by non-South Africans from Africa was. Were they being catered for if they had permits? What percentage of women, youth and people living with disabilities, own SMMEs? Women were sidelined economically, and did not have the same access to economic activities and opportunities as men.

He said that the financial institutions had offered little support to SMMEs, which strengthened the need for a state bank to facilitate financing these small enterprises with lower interest rates. The current dominant commercial banks focused on investing large amounts of capital into big corporations. The state had to come in and use institutions of its own to assist the SMMEs. A number of developing countries after World War 2 stimulated their economies by focusing on SMMEs, leading to economic growth and stability in countries such as Germany.

There was also a need for legislative reform and flexibility in the Municipal Financial Management Act (MFMA) and the Public Finance Management Act (PFMA) to remove the constraints imposed by commercial banks on SMMEs. The SMMEs needed to thrive at the local level.

Mr Qayiso asked what had happened to the budget that had been given to the DSBD, and why it was insufficient.

Ms D Peters (ANC) asked what kind of support home industries (e.g. confectionery) and street economy (e.g. kitchens, backyard markets) entrepreneurs get. What was the DSBD's view on the big companies, like Shoprite, Checkers and SPAR, taking over the local economies’ business ideas -- they were even selling fat cakes, flour, yeast and oil. Why did they compete with their customers who sustained their big businesses?

She said that a township initiative had been launched by the Premier and Member of the Executive Council (MEC) for Economic Development in Soweto. What was the relationship between the DSBD and the Gauteng province? Was it offering any support to this initiative in any other provinces? Was the DSBD working with the Department of Trade, Industries and Competition (DTIC) to put supplier development initiatives in place to allow big industries to procure from emerging local suppliers? What were the big commercial enterprises doing for the development of SMMEs? Was there a conscious effort to open a market for locally produced goods, especially for SMMEs?

She asked how many innovation hubs there were in the country. Were there enough to support the emerging local suppliers? How much was the funding for women, youth and people living with disabilities spread across provinces, districts and municipalities? Was there an intention by the "champions" of the district development model (DDM) to include SMMEs as one of the focus areas? What was the DSBD doing to make sure that the Ministers and their deputies in the DTIC were enhancing the focus? Why were the targets not measured ?

Mr S Emam (NFP) asked the DSBD how many businesses were able to pay back the loans. What was the success and failure rate? Were they engaging local governments to produce small business hub premises for more SMMEs to thrive? What other initiatives were they putting in place? He suggested that if the foreigners left South Africa, one would not be able to have a haircut, so was the Department considering introducing initiatives in personal care, where local people could be trained to become hairdressers and barbers? He had trained 33 girls, funded by himself, to do a beauty course, and they would like to be their own entrepreneurs. What kind of assistance could the DSBD give them once they were qualified and had experience to start their business? After giving them money, what assistance were they giving the SMMEs to provide financial management and human resource skills on ongoing progress?

Ms E Ntlangwini (EFF) asked the DSBD what they were doing to curb the rate of unemployment in the rural towns. How did it ensure that businesses were sustainable and created job opportunities in these communities? Why not build new industries for these communities? She said that some SMMEs were unaware of the business support packages offered by the Department around Matatiele. What was the Department doing to ensure that all SMMEs were cared for, and that all relief packages were spread equally amongst businesses? She asked the Department to provide a breakdown of the businesses that youth, women and black people owned within this financial year.

The Chairperson said the success of the DSBD was dependent on the efficiency and the progress of the economy, investment and job creation. The Department had not presented its budget and its adequacy. How big was their budget? How much of their budget did they spend in the last financial year? What were their collaborations with other departments regarding SMMEs and women-owned companies? What was the rationale behind not funding property development? What was their other role, besides providing funding for the SMMEs?

He said government and its agencies, including state-owned enterprises (SOEs) normally did not pay SMMEs on time. Government had come up with a policy of 30 days, but this did not happen in most cases. Most businesses cite government as the biggest contributor when they have to close. What was the DSBD's role in addressing this issue, and how did they think it would impact these businesses?

What role does the Department play in agriculture, especially in new business ventures related to cannabis, in terms of increasing the licences and increasing the number of SMMEs in the new sector? What was the impact of load shedding on small businesses? Were government departments, such as prisons and schools, procuring from localised small businesses as part of local development? What role did the Department play in ensuring that obtaining a business licence was not complicated? Did they consider establishing new law, accounting and engineering firms as potential targets for SMMEs? The medium term expenditure framework (MTEF) budget worth R2 trillion was aimed at transforming the economy by helping small, black-owned businesses, focusing on women. Had the DSBD looked at this and assessed if it served the interest of their constituency?

DSBD's response

Mr Mkhumane referred to localisation in the value chain, and said the Department advised on two parallel processes. The first involved a bigger process, where the government and big businesses identify specific products that could be produced locally by SMMEs through the National Economic Development and Labour Council (NEDLAC). There were 40 identified products. They were currently involved in an import replacement initiative, where retailers tell them what foreign products had space in their market. The Department then uses the SEMSP to ensure that these small companies get proper machinery, equipment and technology, as well as business development support. The Department had a component through the Economic Recovery Programme (ERP) that relates to the SMMEs' forecast localisation programme, and also approaches different retailers such as Clicks and Pick n Pay to offer space for products produced by small businesses. The DSBD would then help the SMMEs to list their products with the big retailers. It was important for the Department to come up with these interventions to ensure that the SMMEs did their packaging and pricing of products properly, informed by the inputs that were put into the production.

He said that the Department had specific figures on the statistics of the businesses owned by women, and would make them available.

There was legislative reform, and the Department was currently reviewing two pieces of legislation. The National Small Enterprise Act, last reviewed in 2004, was being reviewed because there was a need to set up an ombuds office to offer alternative routes to solve disputes and advocate for the issues raised by the SMMEs. The Act was supposed to go to Parliament in February 2023.

The second purpose of the Act was to cater for the incorporation of SEFA and the cooperative bank development agency into SEDA. The SMMEs had complained that their business plans were being approved by SEDA but declined by SEFA. The two entities would be integrated as requested by Cabinet, to reduce the administration for the SMMEs. The new entity would spread to a district level through the DDM to reach businesses based in townships and rural areas. The TREP addressed the businesses operating in the townships, including the home industries through special intervention. SEDA further formalises these businesses and gives them workshops on how to apply for funding. SEDA assists by interacting with the municipalities to solve licensing, compliance and registration issues. It also provides post-investment support to ensure that these businesses achieve their goals.

Mr Mkhumane said there was a relationship between the Department and the provinces. The Business Act was being amended, discussing shifting the permit and licensing responsibility to the provinces. The Business Act was being reviewed because they discovered inconsistencies in the prices of licences between various municipalities. Municipalities should not consider issuing permits and licences as an income stream -- the money paid should be only for administrative purposes.

The DSBD was working together with the DTIC to package the SEMSP. The DTIC had contributed R200 million during the inception of the SEMSP. The Department worked closely with other entities like "Proudly South Africa," to manufacture and raise a demand for local goods. There was a bias on the part of consumers to buy products with which they were familiar, so the partnership with Proudly South Africa helped to market and raise awareness about locally produced goods. However, they still needed to increase the budget to assist with marketing these products.

He said that there were a number of incubators, digital hubs and entrepreneurship centres working closely with the technical and vocational education and training (TVET) colleges. The Department was working with the district "Champions" through the DDM to collaborate with the municipalities in raising awareness of its events and projects. The Department of Employment and Labour had given the DSBD a database of the people trained to be artisans but required support in terms of business development.

The Department was assisting the municipalities with their local economic development strategies and infrastructure for township and rural areas through a co-shared economic infrastructure facility. There was a scheme called the Informal and Micro-Enterprise Development Programme to support informal settlements with equipment to run and improve their operations. The Department worked closely with the municipalities to identify the informal businesses that were not known. The municipality would have to help the Department by monitoring the equipment used by the informal businesses and the impact of the interventions by the DSBD.

He said that the Department had not mentioned the budget because the Committee's letter had not mentioned it as a deliverable for this presentation, but in future, he would ensure that the budget was always included. The budget was not sufficient, but the Department was building capacity to make do with what it had. It was always wrong to send money back to National Treasury, but they pushed and made sure they spent as much money as possible. For example, the budget for 2021/22 was R2,27 billion, and R2.24 billion had been spent. The under-spending was mostly on the cost of employees (COE), because the Department had to delay certain appointments to finalise the structure. They were now in the process of filling all critical positions. There was a significant need to upscale the budget, because the work on incubations needed to be extended.

Mr Mkhumane said the Department was improving its advocacy role to ensure that SMMEs were paid on time by the government and the private sector. It had been advised by National Treasury that the sector that did not pay people on time needed to be held accountable through consequence management.

The DSBD had been working with the Department of Agriculture, Land Reform and Rural Development on their master plan that was finalised recently. The DSBD had a special interest in the cannabis sector, and was piloting certain initiatives. They had been warned of the red tape that had been identified in the cannabis space pertaining to licensing, and were addressing these issues with the Presidency. One of the incubators in the Eastern Cape could help the DSBS to drive the initiative in the cannabis sector. He said that the Department had identified 1 000 products on which to spend funds. They would prioritise high value areas where a lot of money was spent, especially in hospitals, prisons, and the manufacturing of linen.

Mr Nkosikhona Mbatha, Acting CEO, SEDA, said that the Department was working with various wholesalers and different entities in the private sector, such as Pick ’n Pay, to ensure that local products were included in their value chains. Incubations and normal SEDA models were used to ensure that the small businesses and street economy supply quality goods. There were 20 digital hubs across the country where entrepreneurs were housed, where they prepare their concepts ready for the market. Most of these incubators were located in townships.

The Department was working with different TVETS and universities to ensure that students who wanted to be entrepreneurs were offered an opportunity at an early stage. There were also normal incubators to assist SMMEs in the food sector in dealing with issues involving compliance and the certificates required for their products to be ready for consumption. SEDA always strived to spend above 70% of its budget in the provinces.

He highlighted that the budget of SEDA had not been growing over the years, and the Department was dealing with around R800 million annually. There was a need to make sure that SEDA was able to support the businesses that were affected by COVID-19, civil unrest and floods in KZN, so they could remain sustainable. SEDA would continue providing training to ensure that these businesses were profitable and also contributed to creating employment. For the first time in five years, they had been able to spend 99.6% of their budget on providing services to SMMEs in the current financial year. They had had a surplus of R294 million from last year, but did not want to underspend in future.

The budget was monitored quarterly, and they continued to allocate money to the provinces that were in need. The incubation of cannabis would require a lot of money, and work had already been done. The industry was new and the money for getting a licence needed to be accounted for so that black-owned SMMEs were roped in. SEDA was participating in a project with Canada to ensure that their Department got SMMEs a rating. However, it was going to cost a lot of money to get the ratings. SEDA and a team from the Eastern Cape were working on the cannabis projects.

Mr Mbatha said he was working with many departments, and there was money they had from the National Skills Fund to employ graduates and further provide training at 2 500 businesses for the next two years. Tshwane municipality had offered them an office to accommodate SEDA employees. The Department had received a further R3 million from the Department of Economic Development in KZN to train and mentor employees.

He said load shedding had a big impact on the SMMEs. SEDA offered generators to some of their clients, and it worked well when the cost of diesel was still very low. Due to the increasing fuel costs, it had become a challenge to run a profitable SMME. The generators were no longer a solution, so alternatives such as solar power were required, which would put the SMMEs in more debt. The businesses inside malls were thriving, but the production of those outside the mall had been affected.

He said that the businesses mentioned by Mr Emam could access funding from the TREP.

Mr Mxolisi Matshamba, CEO, SEFA, said that before COVID-19, the number of jobs created had been around 70 000 to 80 000. Due to COVID-19 interventions by the Department through SEDA and SEFA, the number had jumped to 200 000. However, the numbers returned to pre-COVID levels as the Department returned to normalcy.

He said SEFA did not fund non-South Africans, only 100% local citizens. He gave an example of a bad experience involving a Zimbabwean and a R12 million loan. He said they had strict conditions, and greater security was required to secure funding.

The financial support provided to women-owned SMMEs had been R342 million, youth-owned enterprises received R263 million, the disabled R4.4 million, and rural SMMEs R281 million. The Department had funded 776 129 SMMEs, which had resulted in about 96 589 new jobs. He added that the Department had supported the businesses affected by the violence in KZN. They had received about 7 000 applications from the informal sector, and would use the programme used in KZN to provide financial support to the informal businesses, and then engage with the municipalities and associations of these informal businesses to see how they could formalise them.

He said there was annual funding in the budgets allocated for each province and district. However, the uptake of loans in the Western Cape and urban KZN was high, while the uptake was lower for the poor and rural provinces. SEDA provided post-investment support to the businesses that had taken out loans to ensure that their businesses were sustainable.

He said that property developments were backed by contracts in commercial businesses, and they did not fund speculative property development. SEDA funded a couple of businesses that provided residential accommodation in the township, and also funded retail developments for businesses.

He said that in Khula Credit Guarantee (KCG), SEDA had the oldest credit guarantee agency with good performance, and through the use of KCG they could unblock the balance sheets of the banks, given the fiscal challenges faced by the country. Credit guarantees were extended to the commercial banks in March 2012 amounting to about R201 million. The commercial banks had extended funding to SMMEs of about R1.3 billion, offering the Department a multiplier effect of 6.25. He said that the credit guarantee offered by SEDA was slightly different from that of the National Treasury. There were strict conditions, and one had to prioritise SMMEs that were black-owned.

They were not engaging much with National Treasury, but still needed to do so on how they could participate, because the current structure was not working for them. They could not borrow money from the banks, and in return, they guarantee banks -- it did not make financial sense.

The SEMSP was one of the most popular products in its portfolio, with a lot of growth that amounted to R657 million, which provided guarantees for 68 SMMEs, with 3 156 jobs.

PBO's response

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, repeated that there was no historic information on indicators and budgets, and that they had developed new indicators and targets for the annual performance plan (APP).

Minister response
Minister Ndabeni-Abrahams said the Department was moving from a departmental to an ecosystem approach to enhance the localisation of small businesses in the value chain. They had recognised what was within their capabilities and what their partners could offer. They had established an Enterprise and Supplier Development (ESD) platform that included the public and private sectors. The 3% expected to be contributed from broad-based black economic empowerment (BBBEE) companies was supposed to come from the ESD. They had identified that the money was being spent in the urban areas on particular training. They then needed to leverage the existing instruments, engage with the industries involved, and propose to Cabinet that 30% needed to be put aside specifically for township and rural business. There was R18 billion worth of contributions by ESD, but for them to leverage the 30%, they needed to match whatever they were bringing. They had submitted a request for R10 billion to National Treasury for SEFA to recapitalise the KGG, the credit component of SEFA. The SMMEs had to have access to funding to enable them to participate in the ERRP.

The Minister said that the Department was looking into merging SEDA and SEFA to provide a one-stop centre for SMMEs. It had also looked into bringing some of the products back to enhance the localisation the DG had talked about, which included light manufacturing and other sectors. SEDA would spearhead this, and bring capacity with qualified skills to attract investments from the private sector.

 She said that the District Champions were directors with their own responsibility in the Department. It was evident through the road shows that they were not hands-on or provided the necessary information. The Department had temporarily appointed district development coordinators to augment the District Champions' work. Progress in transforming the economy had been weakened by the lack of alignment and integration of plans from national to provincial and local governments. The district coordinator would be able to relay the information from the local economic development units to the provincial level. The alignment of all spheres of government would allow the Department to bring together all the products that were representative of every district. The roadshows also highlighted the lack of capacity of the LED officers.

The Department was collaborating with the Department of Basic Education (DBE) on school infrastructure projects worth R4 billion that had to be given to SMMEs should the National Treasury agree. The interventions from the DSBD would focus on enhancing the business development support to ensure that their SMMEs were market-ready, bankable, and ready to access finances to provide quality services. The Department was also working with the Department of Higher Education and Training to give preference to the SMMEs in building residences at educational institutions.

She said that the DSBD was engaging with the South African Local Government Association (SALGA) to engage all the political principals to see how they could follow the process of the legislative amendments. She urged Members to use their constituency offices to enhance collaboration to sort out the licensing and compliance issues for SMMEs. The Department of Police had committed to a meeting where they would speak about the products that could be in-sourced into the SA Police Service (SAPS).

She added that the Department was engaging big corporations like Tiger Brands to ask how best they could work together to give African township businesses an opportunity. It was unfortunate that Matatiele could not access some information they make available at places where it is accessible, such as social media, the SEDA and LED offices, but not the website. Yesterday they delivered to 31 beneficiaries in Matatiele, while previously they had 135. R10.5 million had been committed in KZN during the floods, and R6 million for Matatiele.

She stressed that the DSBD needed support with its budgeting. Government allocated only 1% of its budget to SMMEs. She asked the Committee to intervene.

The Chairperson thanked the Minister and the other participants for the engagement. He said that the information could also be shared through community radio stations. He agreed that there was a need for vertical and horizontal integration of funds to maximise their impact. Government must walk the talk and stress the impact of SMMEs on transforming the economy. The under-spending and underfunding of this sector were disappointing, because it drives the economy. There was a political responsibility to ensure that the government made funds available for SMMEs. SMMEs had a higher propensity to create profit in the country’s economy. There was a need to deal with the monopolies of capital, and this could not be done without money.

Adoption of minutes

The Committee's minutes of 9 and 13 September were considered and adopted.

The meeting was adjourned.

 

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