Department of Small Business Development (DSBD)

1. Department of Small Business Development (DSBD) Briefing to the Portfolio Committee On incubators supported by the department, gazelles, network facilitators (NFs) and service providers working with the department in support of enterprises and cooperatives and their developmental status and impact on job creation Date: 13 June 2018

2. ENTERPRISE INCUBATION PROGRAMME (EIP) • Programme Outline • What is an incubator • What makes an incubator • Programme Description • Monitoring and Evaluation • MTEF Budget and Target Plans • 2016/17 Approved • 2017/18 Approved • Envisaged EIP impact and job creation • Non-Performing Incubators • EIP Challenges • BBSDP and NETWORK FACILITATORS (NFs) • Programme description • Background on the Network Facilitators • Rationale of Utilising Network Facilitators • Role of Network Facilitators • Payment of Network Facilitators • Well performing beneficiaries • Challenges • Way Forward: Use of Network Facilitators

3. 3 CIS and SERVICE PROVIDERS • Programme Description • Reasons for CIS Pre-payments • Measures to minimise risks • Performance outcome and risk mitigation • Payments to Service Providers 2017/18 • Well-performing beneficiaries • 4 GAZELLES • Programme Description • Programme Approach • Selection Criteria • Portfolio of Interventions • Gazelles Growth Results as at end of March 2018 • Profit Growth • Full Time Jobs Growth • Part Time Jobs Growth • Performance improvement • Plan for future • Annual Financial Planning • Planning for Insourced Programme –Cohort 1&2 • Estimated Budget for Insourced Programme • Risk Areas • Key lessons learnt

4. Enterprise Incubation Programme (EIP)

5. The Department of Small Business Development (DSBD) piloted an Enterprise Incubation Programme (EIP) for small businesses and cooperatives in the 2016/17 financial year. The programme is market driven and provides direction to the incubator’s work of preparing entities to supply to local markets. • Currently there are 129 private and public funded incubators in the country. Of this network, DSBD and Seda supports 80 incubators which have benefitted 3690 clients and created 2592 new jobs in the past financial year. • The EIP programme has considered the existing incubator gaps in the conceptualisation of the programme. A programme has been designed with distinct elements to best respond to the business development needs of early stage enterprises and cooperatives and is distinct from operational incubation programmes in the public sector. • The programme is centred on the securement of a market/s, by the applicant (Incubator) and transferring of skills to small businesses and cooperatives (incubatees), with an effort of attaining the expectant quality standards and specifications of firms. This is acknowledging that without market access, entities will have no means of generating revenue and therefore it will be difficult for them to survive.r.

6. Although literature is plagued by definitional ambiguity as far as the term “business incubator” is concerned, number of definitions and the form of business incubators have evolved through time according to the need of the business enterprises and the economic climate. • The following are two definitions out of numerous definitions: • A business organisation that facilitates and provides a protected environment to new, early stage and existing businesses by offering a comprehensive range of shared and enterprise development assistance options. These may include businesses in a clustered set up and including co-operatives. • A business cluster: An area with a sustained competitive advantage in an industry based on factors such as local knowledge, reputation, institutions, infrastructure, creative climate, culture and quality of life and economies of scale. • International Cooperative Alliance definition. A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. • Incubators are in a particular sector such as Manufacturing, ICT, Agriculture, etc. • .

8. Programme Elements: • Market Access: EIP will be centred around the securement of a market by the applicant (legally binding agreement) with a firm. • Funding: 100% funding by Government for the pilot year. Thereafter cost-sharing will ensue. • Business Development Support: Transferring of technical skills and mentorship in preparing incubatees to meet the mandatory specifications and quality standards required by firms. • Exit and graduation: Once incubated, enterprises will be empowered with the technical know-how of responding to the supply chain requirements of firms and will be encouraged to approach additional markets and financiers. • Funding: • In terms of the EIP guidelines approval is capped at a minimum of five million rand (R5 million) to maximum of ten million rand (R10 million) VAT inclusive per financial year for 3 years and subject to the availability of funds.

9. A strong Monitoring and Evaluation system forms an integral part of both the EIP pilot phase and actual programme rollout. • The system comprises of : • Specific performance indicators that will determine incubator performance against intentions; • Quarterly reporting from the incubator (approved applicant) that contains both quantitative and qualitative assessments of performance. • Periodic/Quarterly site visits by DSBD; • Inclusive feedback mechanisms to monitor feedback from incubator and incubated enterprises and cooperatives to assess their expectations against actual performance; and • System to monitor and track the performance of enterprises and cooperatives once incubation ends (aftercare).

10. The entire budget could not be allocated in the inception year, due to delays in making the first disbursements. These delays were both as a result of time taken by the department to develop its own Programme Guidelines and applicants not responding to the Programme criteria, and having to resubmit. As a result R26 million was rolled over at the end of 2016/7 and the this was to fund the previously approved incubators’ second and third tranches.

13. As per the EIP guidelines the duration for the incubatees readiness to exit the programme is maximum three years. • This will ensure their state of readiness to operate a sustainable business after exit and therefore proper impact on jobs can be adequately measured after exit • The programme was piloted in the 2016/17 financial year, therefore all the beneficiaries are still on the first phase of the incubation stages. • For a successful incubation model, the beneficiary should go through the three incubation stages i.e. Pre – incubation, Actual Incubation and exit stage. • In total, the programme is supporting more than 220 SMME’s/Co-operatives • It is envisaged that the supported beneficiaries will create in excess of 454 jobs, (creating a minimum of one employment opportunity per SMME/Co-operative) • This will impact the communities in alleviating poverty and unemployment for HDI especially in the rural, township and urban areas • Ninety percent of the beneficiaries are based in the rural and township areas

15. Non-Compliance (e.g. CSD, SARS); • Non-adherence to Project Implementation Plan; • Lack of early warning systems to detect non-performing areas including compliance in rolling out the implementation plan. • Lack of internal capacity within DSBD.

16. Bbsdp & network facilitators

17. BBSDP is a cost-sharing grant offered to black-owned SMEs to assist them to improve their competitiveness and sustainability • A single enterprise can apply for a maximum amount of R1 million of which a maximum of R800 000 should go to tools, machinery and equipment. A maximum of R200 000 is available for business development services which include, governance training, marketing , productivity, management and use of modern technology • For an enterprise to qualify it must be 51% black owned and have a predominantly black management team • To qualify the enterprise must be in operation for a period of one year and have a turnover of between R250 000 and R35 million

18. Network Facilitators are individuals or legal entities who assist Enterprises in compiling BBSDP proposals and/or ensure the delivery of projects that have been approved under BBSDP • The Network Facilitator (NF) is classified as an Independent Contractor in terms of exclusionary sub-paragraph (ii) of the definition of “remuneration” in the Fourth Schedule to the Income Tax ,1962 • NFs are honest brokers between the department and the enterprise applying for funding under the BBSDP Programme • NFs are rewarded for certain services rendered but there is no relationship of employment, agency or representation established between the department and the NF

19. At the time (2010) there were a number of organisations that were presenting themselves as facilitators of the incentives • These organisations were operating on an informal basis and were not accountable to anyone • The department (the dti) at the time decided to formalise these facilitators by professionalising them and ensuring that they are vetted and accredited • A formal application process which included a clear recruitment and selection criteria and process was introduced • The recruitment was opened nationally and the selection processes targeted black-owned enterprises • This intervention was also seen at the time as an attempt to reduce the time and costs that the entity spends in accessing finance

20. Assist Enterprises in completing BBSDP application; • Compile company profile for the Industrialist / Enterprise and undertake rapid assessment and/or Company diagnostic before submitting an application; • Ensure that the applicant complies with mandatory requirements of BBSDP; • Ensure quality delivery of BBSDP projects; • Assist and co-operate in the event of any investigation on which the NF may have information; • Immediately inform DSBD of any corruption or fraud which comes to its knowledge, whether in connection within the NF, within DSBD, with the Enterprise, or in connection with any other network facilitator Enterprise. • Identify and recommend Service Providers together with the Enterprise that will assist in implementing agreed approved interventions. • Ensure that the three quoting Service Providers are of same level in terms of quality services to be rendered

21. For projects less than R75 000, a facilitation fee of 10% of the cost of the project will be paid • A facilitation fee of R10 000 will be payable for all applications equal and exceeding R75 000 but less than or equal to R130 000 plus 20% of the difference between R130 000 and R75 000 on condition that a company diagnostic tool has been performed. The maximum payment in this regard is R 21 100. • The payment of Network Facilitators will form part of the incentive amount, meaning that the incentive will be reduced by up to R21 100 payable for facilitation of services rendered by Network Facilitators to various enterprises. • Network Facilitators are only paid half of the facilitation fee on approval of the project • The second and final fee is paid once the enterprise has performed and the service or equipment has been delivered to the enterprise

23. Payments to Network Facilitators 2017/18

24. Success Rate/Well-Performing Beneficiaries • The department is in the process of assessing all the projects that were funded in the 2015/16 and 2016/17 financial years • The same tool that was utilised for assessing the developmental status for CIS funded cooperatives is being utilised • Site visits for 2015/16 of the funded BBSDP projects will be finalised by the end of June 2018 • The assessment of the 2016/17 financial year will commence immediately thereafter • The following slide talks to some examples of the beneficiaries funded through the BBSDP that are thriving • All successful beneficiaries pointed out that the BBSDP intervention resulted in increase in efficiency, costs reduction, turnaround times resulting in increase in turnover and jobs

25. Well-Performing Beneficiaries NAME OF BUSINESS: Ditshimega Projects and Training TYPE: Civil engineering EQUITY: 60% male & 40 % Female Owned INTERVENTION: Komatsu WB93R-5EO Rigid Backloader TLB, Excavator and 3D software Amount Paid: R 650 000 in 2016 IMPACT OF THE INTERVENTION: Turnover grew to R150 million and increased jobs from 7 to 35.

26. Well-Performing Beneficiaries NAME OF BUSINESS: Patrick Mofokeng Trading CC TYPE: Petro Chemical Industries EQUITY: 100% male owned INTERVENTION: Equipment that is used to process used oil for selling to construction and motor vehicle Amount Paid: R 800 000 IMPACT OF THE INTERVENTION: This is the only black-owned enterprise operating such type of a business in the Free State. Created 3 new jobs. Turnover increased from R250 000 per month to R432 000

27. Well-Performing Beneficiaries NAME OF BUSINESS: Chemsol Adhesives CC TYPE: ChemicalsManufacturing EQUITY: Female owned INTERVENTION: HY4002B Flexographic high speed level printing machine, ALC-18HB Belt system, Ultrasonic label cutting machine Amount Paid: R 222 158 (2016) IMPACT OF THE INTERVENTION: Their turnover was R4.8million at application stage and after intervention it increased by 40%. Permanent jobs increased from 8 to 21

28. Well-Performing Beneficiaries NAME OF BUSINESS: Ash Freight Container Depot TYPE: Logistics EQUITY: Male and female owned INTERVENTION: Weighbridge and software Amount Paid: R 352 472 IMPACT OF THE INTERVENTION:An additional R 80 000 income is now received weekly resulting in approximately R 320 000 per month in additional income. The company currently employs 11 people directly.

29. Well-Performing Beneficiaries NAME OF BUSINESS: Thapiwe logistics Pty Ltd TYPE: Industrial Cleaning Services EQUITY: Female owned INTERVENTION: 12500 litre Vacuum unit Amount Paid: R 698 200 IMPACT OF THE INTERVENTION:It has yielded in the company turnover of a solid R270,000 per month. The company currently directly employs in total 21 direct staff to work on the project

30. challenges • There is lack of adequate capacity to monitor and evaluate the impact of the intervention by the department on BBSDP projects • The department ends up utilising the same officials who are involved in the application and adjudication of projects to conduct post-investment monitoring site visit which compromises independency in the verification and monitoring of the intervention • The department could not open for new applications in this current financial as it is trying to address the huge pipeline of approximately 1200 applications that are being processed in the current financial year 2018/19 • Some companies have closed down due to sector specific challenges e.g. in construction • There have been some allegations of possible collusion between some of the officials as well as the Network Facilitators resulting in inflated quotations being paid out • Three NF’s have been removed from the programme as a result of Audit Findings for irregular conduct in the previous financial year. The irregular conduct include fraudulent quotations and sharing of passwords by the blacklisted NFs • The Auditor General has been contracted by the department to conduct an investigation on the programme and this investigation should be finalised in the next three to four months

31. Way Forward: Use of Network facilitators • The pending review of the current BBSDP Programme will assist the Department to make a determination to continue with the programme as is making use of NF’s or making further changes that might remove the reliance or usage of NF either way. • As part of the Portfolio Approach the departments believes that we can utilise the infrastructure of Seda and make accessibility of incentives easier for SMMEs

32. Cooperative incentive Scheme (CIS)

33. CIS PROGRAMME DESCRIPTION • CIS is a 100% grant offered to registered and qualifying cooperatives. It is an incentive that focuses on supporting broadening economic participation by historically disadvantaged communities to enter the mainstream economy. • The scheme has been revised and approved in February 2018 to fund Individual Primary Cooperatives, Cluster/Secondary Cooperatives. (Revised Guidelines to be implemented in July 2018) • Individual Primary Cooperatives: Primary Cooperative is defined as a form of a cooperative made up of a group of five or more members whose purpose is to provide service and/or employment for one another. • A minimum of R 400 000 and a maximum grant of R 1 500 000 can be offered to one cooperative entity. • Cluster Cooperative: Is where two or more primary cooperatives have agglomerated (i.e. come together) to meet the economic needs of each member primary cooperative within the cluster. The aim is to achieve economies of scale and scope as effective mechanism of growing primary cooperatives. • A minimum of R 3 million and a maximum of R 11 million grand funding is available to one cooperative cluster

34. CIS PROGRAMME DESCRIPTION • Eligible Activities for Individual Cooperatives are infrastructure, machinery, equipment, commercial vehicles (excluding luxury vehicles and taxis), technological improvements and tools for both start-ups and existing cooperatives (capped at 70% of the total allowable grant amount). • Other activities that Individual Cooperatives can be funded for include working capital for both start-ups and existing cooperatives (capped at 30% of the maximum allowable grant amount); incentive of Cooperative Management capped at a maximum of R 120k for a maximum period of 12 months; start-up stock; rent, electricity payment and water as well as stipends for cooperative members for a maximum period of 12 months capped at maximum of R 18k per member of the primary cooperative. • Eligible activities for Cluster Cooperatives: 70% of the cluster funding may be used for infrastructure (warehouse, silos etc); machinery and equipment, commercial vehicles, technological improvements and tools. • For cluster funding, 30% of the funds may be used for working capital, bulk buying of stock; shared services; marketing and logistical services; rent, electricity and water payments as well as stipends for members of the primary cooperatives.

35. Reasons for CIS Pre-Payments • During 2005/06 – 2006/07, the CIS Guidelines prescribed that payments must be made directly to Co-operatives. • During the transfer of the Co-operative Incentive Scheme (CIS in 2007 from EIDD to TEO, an audit indicated that paying co-operatives directly was too high a risk because it was found that the Co-operatives often did not utilize the CIS funding for the intended purpose. For example • A forensic report compiled by Price Waterhouse Coopers and Gcabashe Forensic Services for the dti dated 10 May 2007 indicated that an amount of R 2 000 000 (R 2 million) out of R 4 000 000 (R four million) funding for the African Co-operative for Hawkers and Informal Business (ACHIB) was not used according to the budget and the business plan submitted by ACHIB to the dti. • It was also mentioned that National Pavilions, the Critical Infrastructure Programme (CIP) and the Support Programme for Industrial Innovation (SPII) also effect upfront payments.

36. Reasons for CIS Pre-Payments (Cont.) • Co-operatives were made to sign cession forms to allow the dti to pay service providers directly for Goods and Services supplied. It became clear that most service providers demanded upfront payments before releasing goods especially in cases where bakkies and tractors were purchased. • Meetings were held with the Finance division (e.g. in October 2009) who explained that the PFMA does not specifically prohibit upfront payments but that it requires that measures be put in place to minimise risk. Finance did not stipulate the measures but agreed with the measures introduced by the CIS unit; • DSBD continued to utilise the approach of upfront prepayment and the following risk measures were put in place the mitigate the risk as required by the PFMA.

37. Measures To Minimise Risk • DSBD put in place the following risk mitigating measures to ensure risks are mitigated: • The approved co-operative sign a Cession letter to allow payments directly to the Service provider; • Declare in writing that it is not connected to the service Provider; • Declare in writing that activities have been completed to their (Co-operatives ) satisfaction; • The approved service provider must provide an invoice in its own trading name; • An original Credit Oder Instruction Form certified by the bank of the Service Provider; • Original and Valid Tax Clearance certificate; • Written confirmation of the delivery date as soon as possible after payment has been received; • Established a post-disbursement monitoring system (post disbursement inspection) to determine whether goods and services of the correct quality and quantity have been delivered and whether the Goods and Services are used for their intended purpose as well as the progress of the Co-operative in general.

38. Performance Outcome and Risk Mitigation • In the 2009/10 financial year, out of the more than 200 payments for Co-operatives that were finalized only 2 of these payments (approx. 1.7%) to service providers were found to be problematic because although the service providers received payment, they did not deliver the goods. After several follow-ups, the 2 cases were then handed over to the dti legal unit for legal action against the Service Providers. • Between 2014/15 and 2017/18 financial years, a total of 922 co-operatives were supported to the value of R274.2 million.  During the period, 12 service providers (approx. 1.3%) did not deliver and their cases were transferred to the Department’s legal unit for legal action to be taken against them. • Due to the risk measures that were put in place, the failure by Service Providers to fulfil contractual obligation has been minimum at best. They were all forwarded to legal unit for resolution. Practically, only one case was resolved and the remaining 11 cases are in process.

39. Payments to service providers 2017/18

40. Payments to service providers 2017/18 • CIS does not make use of Network Facilitators. It purchases directly machinery and equipment and stock directly from suppliers. It does not pay commission, management fees, etc. All its investment to cooperatives is spend directly to supporting cooperatives. • Although the slide above provided funding expenditure to co-operatives covering only 2017/18 financial year, however, the whole amount of R274.2 million was spend to 922 co-operatives as from 2014/15 to 2017/18 financial years. • The assessment that was carried out on the 400 CIS cooperatives revealed that 71% of the funded cooperatives are operational and only 29% were found to be non-operational. • There is a serious challenge with CIS IT system – the system inherited from the dti is obsolete and some functions are not working due to the fact that the system has not been maintained since 2014/15 financial year. State Information Technology Agency (SITA) is assisting DSBD to develop an online application IT system that will address the identified challenge • There is lack of capacity to continuously monitor and evaluate the impact of CIS interventions. This will now be done in partnership with relevant stakeholders such as Provincial Departments of Economic Development and LED officials at local level.

41. Well-Performing Beneficiaries NAME OF BUSINESS: Zoowide Printing Primary Cooperative SECTOR: Service CIS INTERVENTION The entity applied for CIS intervention in 2017 and was approved for printing, digital printing, tools and working materials to the value of R282 830.00. IMPACT OF THE INTERVENTION. The equipment has assisted the co-operative to reduce the business operational costs. The procurement of the equipment has also contributed in ensuring that the Co-operative delivers its service to its customers in an efficiently and effectively manner. Staff complement has also improved. The approval by CIS assisted the co-operative in creating 3 new jobs. Turnover increased from R20000 per month to R60 000

42. Well-Performing Beneficiaries NAME OF BUSINESS: Flava Primary Co-operative SECTOR: Manufacturing CIS INTERVENTION The entity applied for CIS intervention in 2017 and was approved for bicycle kits, welding equipment, and a spray set to the value of R336 789. IMPACT OF THE INTERVENTION. The co-operative has since signed a memorandum of understanding with the Gauteng Province to supply petrol propelled bicycles. They are also working on an export process which if successful will afford them an opportunity to export their product to India. The approval by CIS assisted the entity to reduce the cost of acquiring capital expenditure by R336 789 and this has enabled the business to maintain a good financial health and also redirect their funds to other development initiatives.

43. National gazelles programme

44. Programme description • It identifies high performance small businesses to take them to newer levels through appropriate and focused interventions. • Programme is home grown (fusion of international best practice with local dynamics). • Fits well within the current narrative of radical economic transformation. Programme is at pilot phase, some elements can be improved to speed up development of participants. • Programme is a strategic fit with NDP, IPAP and can enhance performance of other Govt programmes e.g infrastructure roll out programme, etc.

45. Programme approach • Investors pay a premium for a growing business i.e Generate Economic Value Add – positive difference between Return on Capital (ROC)and Cost of Capital (COC) • Each business’s intention should always be: • Increase ROC (improve margins, not sales!), • Reduce COC (earn same profit with less capital) • Build Economic MOAT/competitive advantage (defer saturation by finding new opportunities and building competitive advantage). • Value is built by increasing the predictability of the business (diversify cash flows, switch to more stable business model and improve quality of reporting)

46. Selection criteria Creativity and Innovation • Use of technology • Thinking out of the box • New approach in doing things or new product • Growth potential Governance and Administration • Overall management • Strategic management • Financial reporting and financial management Human Resources Management: • Conditions of employment • People development and industrial relations • Staff growth and retention Regulatory and Compliance • Compliance with SARS • Compliance with broad based BEE • Environment friendliness • Local procurement

47. Portfolio of interventions Gazelles Interventions not offered by Seda Network • Webinars • Value- Builder System (Monitoring performance of the business according to the elements of the Value Builder) • Master-classes • Facilitate Incentive application • Tenders to secure (Online resource for Tender opportunities and Supplier Development Programme Kinkages ) • Assistance with Quotations (for contracts) • Gazelle financial support service • Role of Seda Network • Monitor implementation of the programme • Site visits to Gazelles businesses • Market access through local and international pavilions (Exhibitions)

48. Gazelles growth results-end march 2018-cohort 1 Based on the benchmark result the following high-level summary indicates the impact of the National Gazelles Program • The biggest impact can be seen in the overall value and score improvement. • The program has succeeded in accelerated development of 68% (27) of the businesses on the National Gazelles Program • 68% (26) of businesses on the program increased their business performance by 17% resulting in a R30 million increasein business value, from R92 million to R122 million. 29% (11) of these Businesses increased their business value by more than 25% • 71% (27) of Businesses on the program increased their Growth Potential by 17% • 37% (14) of Businesses on the program de-risked their business making them less dependent on any one single point of failure • 45% (17) of Business owners now experience more management freedom by working on their business and not in it • 45% (17) of Businesses on the program now have 10% more cash flow • Decrease in jobs created from 1112 (2015) to 1068 (2017).

49. Profit growth Percentage of Companies that Grew, decreased or remained stagnant with regards to Net Profit.

50. Full Time Jobs Growth Percentage of Companies that Grew, decreased or remained stagnant with regards to Full time Jobs.