Report of the Auditor-General on the Support of Micro, Small
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VALUE FOR MONEY AUDIT REPORT of the AUDITOR-GENERAL on the SUPPORT OF MICRO, SMALL AND MEDIUM ENTERPRISES by SMALL AND MEDIUM ENTERPRISES DEVELOPMENT CORPORATION under the MINISTRY OF WOMEN AFFAIRS, COMMUNITY, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT Presented to Parliament of Zimbabwe 2019 V.F.M: 2019: 04 i DISTRIBUTED BY VERITAS e-mail: [email protected]; website: www.veritaszim.net Veritas makes every effort to ensure the provision of reliable information, but cannot take legal responsibility for information supplied. OAG VISION To be the Centre of Excellence in the provision of Auditing Services. OAG MISSION T o examine, audit and report to Parliament on the management of public resources of Zimbabwe through committed and motivated staff with the aim of improving accountability and good corporate governance. OAG VALUES ii 1/69/1696 VFM The Hon. Doctor Sithembiso G.G. Nyoni Ministry of Women Affairs, Community, Small and Medium Enterprises Development 8th floor Kaguvi Building Central Avenue Harare. Dear Madam I hereby submit my Value for Money Audit Report, on the Support of Micro, Small and Medium Enterprises by Small and Medium Enterprises Development Corporation (SMEDCO) in terms of Section 11 of the Audit Office Act [Chapter 22:18]. Yours faithfully, M. Chiri (Mrs) AUDITOR-GENERAL Harare June 11, 2019 iii TABLE OF CONTENTS Page v LIST OF ANNEXURES ... .. vii LIST OF ABBREVIATIONS .. ...viii ... x 1. INTRODUCTION 1.1 Backgrou ... 1 1.2 ... 1 1.3 ... 2 1.4 Organizational ... ...2 1.5 ..2 1.6 ... 3 1.7 ... 6 2. SYSTEMS DESCRIPTION 2.1 ... ... 7 2.2 ... ........7 3. FINDINGS 3.1 Provision of support .. ........10 3.2 Compliances with established principles . 6 3.3 Monitoring of financed MSMEs .....30 4. CONCLUSIONS . .33 5. RECOMMENDATIONS 4 ANNEXURES .. ....35 iv LIST OF TABLES, PICTURES AND GRAPHS Tables Page Table 3: Number of Table 4: Number Table 7: MSME Table 8: Written- Table 10: Fin Table 11: Proportion of revenue generated from factory shells and training fees against T Table 16: Pre- .........31 Table 17: Post- . Table 18: Questionn . Pictures Pic v -17 Graphs Graph 2: Losses incurred on a yearly vi LIST OF ANNEXURES Annexure Page Annexure A: Organogram..............................................................................................................35 Annexure D: Documents reviewed................................................................................................38 vii LIST OF ABBREVIATIONS CEO: Chief Executive Officer CGF: Corporate Governance Framework GDP: Gross Domestic Product MSMEs: Micro, Small and Medium Enterprises SMEs: Small to Medium Enterprises SMEDCO: Small to Medium Enterprises Development Corporation viii EXECUTIVE SUMMARY Small and Medium Enterprises Development Corporation (SMEDCO) is a parastatal under the Ministry of Women Affairs, Community, Small and Medium Enterprises Development. SMEDCO was established by Section 3 of the SME Act [Chapter 24:12]. The parastatal is a development finance institution mandated by the SME Act, [Chapter 24:12] to promote and develop Micro, Small and Medium Enterprises (MSMEs) in Zimbabwe, whether operating in the formal or informal sector of the national economy, for sustainable development. SMEDCO achieves the mandate through encouraging and assisting in the establishment of Micro, Small and Medium Enterprises (MSMEs), providing financial assistance, management counselling, training, information and advice to these MSMEs. In addition, SMEDCO facilitates the establishment or sets aside premises or areas for the establishment and development of particular classes of MSMEs. Apart from the SME Act [Chapter 24:12], the Corporation is also governed by the provisions of the Corporate Governance Framework (CGF) for State Enterprises and Parastatal of November 2010. The Corporate Governance Framework provides for transparency in corporate structures, operations, as well as reducing opportunities for role conflict among key stakeholders namely the Shareholders, Board and Management. My audit was motivated by that in Zimbabwe, the MSMEs sector is considered to be a major player in the economy contributing an estimated 60% of GDP and an estimated 50% of total ars, assumed greater prominence as a source of livelihoods through the absorption of retrenchees from closing companies, school leavers, youths, women and those with disabilities. Potential benefits include employment creation, poverty reduction and a source of livelihoods, value addition and beneficiation of local natural resources utilizing available expertise. During my pre-study audit it emerged that SMEDCO had not been fully implementing its strategic plans and was making perennial losses since 2010. In addition, SMEDCO was not supporting MSMEs with fixed capital loans but was only issuing working capital loans. The purpose of my audit was to assess whether SMEDCO was fulfilling its mandate of supporting MSMES. ix Summary of findings. My audit revealed weaknesses in the support of MSMEs by SMEDCO as detailed in chapter 3. The weaknesses were on: Provision of support services. Compliance with established principles. Monitoring of financed MSMEs. 1. Provision of support services. My audit revealed that SMEDCO was not fully providing all the support services required for the growth of the MSMEs sector. From 3 583 loans amounting to $10 924 673 disbursed by SMEDCO at all its branches during the period 2010 to August 31, 2018, only 9 were loaned for fixed capital purposes. The rest were working capital loans. From 94 questionnaires administered that they were in need of fixed capital loans. Their appeal to SMEDCO was that if they could access fixed capital loans to buy machinery, equipment, fixtures and fittings, their businesses would grow sustainably. I also noted that the number of MSMEs who were financially supported declined from 1 620 in 2010 to 82 in 2014. In 2015 and 2016 only 1 and 12 MSMEs were supported financially by SMEDCO. However, the number started to increase in 2017 to 233 after SMEDCO secured Treasury Bills to source funding from the market. For the period 2012 to August 31, 2018, SMEDCO trained 2 451 MSMEs against a target of 8150. Thus 5 699 (70%) targeted MSMEs were not trained. However, a comparison between actual trained MSMEs and targeted MSMEs trainings could not be made for the years 2010 and 2011 since there were no set training targets in those years. Some of the trained MSMEs had not been financially assisted by SMEDCO to capacitate them to run their businesses. Furthermore, there was no evidence that there were new MSMEs which SMEDCO encouraged or assisted to be established during the period 2010 to August 2018. However, it conducted trainings to encourage students and retiring employees to venture into business. SMEDCO did not construct any infrastructure (factory shells) which could provide MSMEs with operating space in the 6 branches for the period 2010 to August 2018. This was despite that in the strategic plans for 2012 to 2018 SMEDCO planned to increase the number of factory shells built to 2 per annum or on lease to 1 per province and increase the number of value addition projects completed to at least 3 per annum for selected MSMEs. Inadequate provision of support services to the MSMEs by SMEDCO was attributed to poor financial performance due to the following: Disproportional matching of operational expenditure to revenue generated leading to losses. Inadequate financial controls leading to fraud. Weak debt recovery and rental collection mechanisms. Weak resource mobilization strategies. x Disproportional matching of operational expenditure to revenue generated leading to losses. My review of audited financial statements revealed that from 2010 to 2017, SMEDCO did not total revenue generated throughout the period under review. For more details, refer to Table below. Analysis of operating expenses to total revenue generated. YEAR 2010 2011 2012 2013 2014 2015 2016 2017 Total revenue $790 272 $2 081 $1 807 036 $2 064 321 $1 381 457 $648 099 $303 351 $604 143 generated 692 Total operating $1 014 765 $3 517 $2 134 867 $3 971 837 $3 789 524 $2 219 843 $787 327 $1 474 143 costs 591 Total 128% 169% 118% 192% 274% 343% 260% 244% operating costs as a percentage of total revenue generated Source: Audited financial statements. Audited financial accounts for the years 2010 to 2017 revealed that SMEDCO made cumulative losses amounting to $ 8 490 922. This hampered the capacity of SMEDCO to support more MSMEs from internally generated funds. Inadequate financial controls leading to fraud. SMEDCO lost $1 137 573 through misappropriation of funds by staff during 2011, 2012, 2013 and 2015. This amount could have gone a long way in sustaining the operations of SMEDCO. Weak debt recovery and rental collection mechanisms. SMEDCO failed to recover loans amounting to $2 132 168 issued during the period 2010 to 2012. The unrecovered loans were subsequently written off in 2013 ($1 765 225) and in 2014 ($366 943). As at August 31, 2018 there were 129 out of 166 financed MSMEs who were failing to repay their loans on time. This was an indication that SMEDCO was struggling to collect some of the outstanding loans on a monthly basis. SMEDCO owns factory shells which it rents out to MSMEs at an average rental of $50 per shell per month. There were uncollected rentals amounting to $ 333 312 during the period January 2010 to August 31, 2018. If this amount had been collected for on-lending to MSMEs at an average of $5000 each it could have benefited 67 MSMEs. Weak resource mobilization strategies. SMEDCO had planned to mobilize financial resources from the private sector and quasi- government organizations. Furthermore, SMEDCO planned to generate 5% revenue from renting out infrastructure such as factory shells and another 5% revenue from fees charged on training of MSMEs. SMEDCO could not mobilise financial resources required for its operations during the xi period 2012 to August 31, 2018. A total of $6 558 569 was mobilised from the private sector and quasi-government organizations against a target of $41 350 000 resulting in a deficit of $34 791 431(84%).