Annual Incentive Report 2020/21: DTIC briefing

Meeting report

Opening Remarks
The Chairperson stated that the Incentives Schemes Report was critical to the Portfolio Committee’s mandate as it received over 50%  of the Department’s budget and so was one of the key tools, fundamental to the operation of the Department to create growth and integration.

Mr F Mulder (FF+) requested that documents from presenters be provided earlier than the night before a meeting.

The Chairperson agreed to discuss with the Department the timing of the submission of documents for presentation to the Committee as it was necessary to study the documents, if the Committee were to provide credible oversight.

Presentation of the 2020/21 Annual Incentive Report
Ms Susan Mangole, Acting Deputy Director-General of Industrial Financing, dtic, stated that she was accompanied by several senior colleagues from the Department, including the Acting COO, Ms Nontombi Matomela and the CFO, Mr Shabeer Khan.

Ms Mangole reminded the Committee that the previous Annual Incentive Report was presented prior to COVID and Members would see the impact of COVID on the Industrial Financing. The pandemic had, inter alia, created liquidity constraints, disrupted supplier capacities and supply chains, created delays in film productions, reduced Investor confidence and caused a slow-down in project implementation. The Industrial Financing Division had to adapt its modus operandi to address the challenges.
 
The Annual Incentive Report provided a record of the efforts of the Department to grow sustainable, competitive enterprises which support national priorities through accessible industrial finance. The Report provided details on five investment clusters supported via the Industrial Financing, covering manufacturing, innovation, services, infrastructure and support for potential export goods. 216 projects were supported at a cost of R8.8 billion, provided as loans, grants and tax allowances. 18 000 new jobs were to be created and 22 000 jobs retained. The report contained specific details of where the money had been spent and the type of project.

Ms Mangole stated that the fund was administered in conjunction with the Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF), specifically the Women Empowerment Fund and The Black Business Manufacturers Fund.

Ms Mangole pointed out that the dtic and its partners had been unable to find suitable projects in the Northern Cape. Despite a specific focus on rural provinces, loans were dominated by organisations in Gauteng, KwaZulu-Natal and the Western Cape. The approach for the following financial year was to focus on ensuring that there the incentive programme was supporting at least one business in each district. The Industrial Parks ought to be facilitating the growth of small businesses that would be able to apply for participation in the incentive programme. 88% of the approvals had gone to companies that had been certified  B-BBEE levels 1 to 4, which indicated the support given to transformed enterprises.

Ms Mangole informed the Committee that the Industrial Financing Branch had continued to operate throughout the pandemic, but it had to change the way in which it functioned as it had to support enterprises impacted by Covid-19.

(See Presentation)

The Chairperson thanked the Acting DG and invited comments and questions.

Discussion
Mr W Thring (ACDP) noted that SA had a long way to go to realise the key goal of industrialisation in the country. Despite the investment of R3 billion with regards to industrialisation and the return of investment of R16 billion, the creation of just under 2 300 jobs was insignificant in comparison with the current unemployment rate of 39.4%, of whom over 70% were youth. Creating just over 2 300 jobs paled into comparison with what was needed to reduce unemployment and to move from a consumerist nation to a producing nation. What would be done to ramp up the projects to ensure that SA achieved its goal of being an industrialised nation? The amounts invested in the different sectors showed that a key policy of government, i.e. beneficiation was not being realised although the only way to make a turnaround was not to export the bulk of the country’s raw materials. Improved commodity prices just encouraged the export of more raw materials. Not enough money was set aside for beneficiation.

He stated that it could not be that the strongest province, Gauteng, got the lion’s share of the budget, R4.1 billion and KwaZulu-Natal received R3.1 billion while the weakest province, the Northern Cape, received nothing. The Northern Cape was rich in minerals, such as diamonds, so how was it possible not to find a single beneficiation project in the Northern Cape? It pointed to a lack of will because it could not be that the weakest province got zero. Something had to be done in that regard.

Mr C Malematja (ANC) asked why the Department was ensuring that support was being given to black industrialists, but other black businesses were not supported. The presentation gave the number of jobs created in 2020/21, but how many jobs were temporary and how many were sustainable? He acknowledged the shift between grants and loans in the past two financial years during COVID but the amount of grants had dropped and tax had increased. How could the Department explain that?

He pointed to the time lag between the approval of a project and the disbursement of funds. How long was that time lag and what were the factors that contributed to it?

Mr Z Burns-Ncamashe (ANC) stated that the report provided a synoptic view of the period under analysis. He appreciated the work done to deliberately support the black industrialist scheme which was part of ensuring that black people participated meaningfully in the mainstream economy of SA. It was part of the Black Empowerment policy which had to characterise the functionality of government. Regarding the Black Industrialist scheme, he had observed that 27 projects worth R600 million had been cancelled. Why were they cancelled? It was paradoxical to support Black Industrialists and then to cancel so many projects. What had led to that? What measures were in place to avoid future cancellations? Cancellations had to be reduced to zero. What was the plan?

He observed that Covid-19 had rained havoc in a number of areas. Did the Industrial Finance Division provide post-funding support to Black Industrialists and SMMEs to ensure the sustainability of the businesses? It was important to be deliberate in dealing with the matter. How much was disbursed by the NEF and the Industrial Development Corporation (IDC) by 1 March 2021 and how much had been disbursed by Feb 2022? He raised the issue of the automotive development scheme, including aqua-culture development, which had to be strong in the Northern Cape as it was a coastal province alongside the Atlantic Ocean. What was the actual investment? He had observed that the actual investment was significantly higher than the projected investment. That had to be commended as it showed that something right had been done. He asked the Department to elaborate on the matter. If the country had such models of success, how did one ensure the multiplier effect?

Ms Y Yako (EFF) stated that the dtic was supposed to bolster, assist and help the economy of the country grow in terms of investment, creating job opportunities and developing industry, but she was uncomfortable about how dtic had been doing the disbursements, especially when it came to investments as she had recently noted quite a few scandals where funds had been invested in certain companies that had not generated any revenue. She referred to a company that was making specific cell phones, but could not remember the exact name of the company. The dtic had been sponsoring that company but no one had ever seen the phones. Why was the dtic investing in such companies?

She noted that in the Coega Economic Development Zone (EDZ) 6 000 jobs had been created. How many of those jobs were created locally? How much did the EDZs support communities? There was a lot of unemployment in Nelson Mandela Bay and she was concerned that the Department was spitting numbers and the presentation looked like a great picture, but the reality was very different. The Committee only did oversight via black and white on paper which did not give the full picture of what was happening in reality.

Ms N Motaung (ANC) asked how many jobs were created via the Black Industrialist scheme in the past three years. It had been expected that hundreds of jobs would be created, but how many were actually created and how many were sustainable jobs? How many industrialisation programmes supporting black people and businesses directly had had an impact on the township economy, at least in the developed areas. Support given to the Black Industrialist programme within the automotive sector, what proportion was given to the automotive after-sector and how many entrepreneurs had been supported thus far?

Mr S Mbuyane (ANC) pointed to the R353 million spent in the chemical industry. Did that include gas and oxygen industry where black people were involved? Into which categories did non-profit and non-governmental organisations fall and how were they approved for funding and support? Did the R2.2 billion expended in the film industry, did that include black film makers? Did the dtic have any collaboration with the Department of Arts and Culture? He asked because it was well known that there was a high level of fronting in that sector. Did dtic collaborate with the film sector?

The Chairperson agreed with  Mr Thring who had asked about the high concentration of support in Gauteng. Should the dtic not look at the criteria for disbursement of funds so that disbursement was not skewed towards certain provinces. At the State of the Nation Address (SONA), the President had spoken of leaving no one behind but here a whole province was being left behind. The District Development Model should provide a way of working in rural provinces. The dtic had to come back and give its plan for supporting the Northern Cape.

Mr Burns-Ncamashe stated, referring to the problems experienced by  the Industrial Parks and the industries in rural towns, that  one of the biggest challenges was the fact that roads were classified as social infrastructure, yet they had a direct bearing on the economy. Roads linked to industrial enterprises and Industrial Parks should be classified as economic infrastructure. What appetite did the dtic have for ensuring that those roads were built, and perhaps through a cooperative agreement between spheres of government.
What role did the dtic play in seeing that roads were constructed and maintained by local or provincial government? The producers produced high quality products but by the time they got to distribution the goods were compromised due to poor infrastructure. He presented an example of a saw mill in the Eastern Cape where the delivery of logs could not happen in the rainy period and hence the logs had become unexportable, which held export back from the heights it could achieve.

He asked what was being done to revitalises Industrial Parks, in places like Butterworth in the Eastern Cape. What was being done to revitalise Industrial Parks? They required a reliable supply of water and energy.

Ms Mangole, began by responding to the question of social infrastructure versus economic infrastructure. The dtic supported the critical infrastructure programme which provided roads, water, etc. to unlock economic activities. The dtic partnered with a municipality that applied for the funds to repair infrastructure. She explained that in one of the recent programmes, Giyani had applied for infrastructure funds as it wished to build a shopping centre in the area. The local municipality had a programme that targeted the supply of roads, electricity and fibre. Municipalities that became involved in the programme would receive 100% support and funding from the critical infrastructure fund. However, the municipality had to give an undertaking to maintain the infrastructure once it had been built. That was how the dtic had adapted the programme to include the District Development Model. In almost all municipalities, some economic reality was taking place, even if it was a shopping centre that was being built.

Ms Mangole agreed that the beneficiation aspect was particularly not well-supported. However, the dtic was working on amending its guidelines to encourage support of localisation and beneficiation. In 2020/21, it was a challenge to get applications as the programme was based on a co-sharing system of funding. A business applied to the dtic for funding, but it had to also obtain funding from a bank or development institute. Many of the cancellations were because the business could not obtain additional funding. The dtic carried the full risk for the period that the company took to raise its share of the money. The dtic was keen to fund machinery and equipment, but if the machinery had to be procured outside of the country, it took some time for it to be delivered and that was one of the time gaps that raised questions.

She took the point regarding the Northern Cape but informed the Committee that dtic was working with the provincial Economic Development Department. There were some projects in the pipeline and that included beneficiation projects and a major one that was part of the green economy. The dtic was working with the NEF and the IDC to identify the SMMEs that required support. The dtic did receive applications but it needed to work very hard to get people to accept the need to be fully compliant with relevant regulations.

Regarding fronting, Ms Mangole explained that a company had to have a certain level of B-BBEE certification when it applied. Normally the companies were given two years to provide the proof needed. A lot of companies applied to dtic for funding but by the time they were ready to claim the funding, their B-BBEE status had changed and often it was because they had dropped to below 50% black ownership, and hence no longer complied as a Black Industrialist. The company had to remain on the same level during the period of verification, and  verification auditors verified the B-BBEE level so that there was no fronting.

She stated that there had been a shift from grants to loans in order to avoid fraud. The client had to go to a bank and be verified by the bank as well in order to be able to claim the money. The dtic also worked closely with the direct finance institutes and banks to support each other and the clients. The incentive had to be blended with the loan. She added that the dtic was charging only 2% interest which benefitted the client but allowed the dtic to eventually support another client.

Concerning the period between approval and pay-out, she said that an application had to be fully compliant. If all documents are submitted and the client is fully compliant, the loan can be processed within 60 days. COVID-19 had challenged the turnaround time, but it was more frequently a case of the client not being compliant or not submitting the required documents.  Claims were paid out within 30 days if the claims form was properly completed, all documents were provided, the client was compliant and the claims inspector or verification inspector agreed with the claim.

The cancellation of the Black Industrialist  projects occurred mostly because the client could not obtain financial closure. Most companies still had to raise 50%. Sometimes an application was temporarily closed until the client had obtained his necessary share of the funding. In other cases, it was where the company had changed ownership and when the company came back, the ownership was below 50% black ownership. The third element was the fact that obtaining equipment and machines during the COVID pandemic was extremely slow as transportation routes were blocked and some companies closed on and off. The dtic offered support post-funding to assist clients to manage their business.

She pointed out that the Covid funding had been different as it was for a different purpose. The COVID Fund was a loan facility for items required to stop the spread of COVID. Revolving credit was made available. The fund was fully subscribed at R138 million.

Ms Mangole promised that she would make enquiries as to exactly how many of the jobs at the Coega EDZ were local jobs for people within the region and inform Ms Yako via the Committee Secretary. However, the dtic was encouraging companies to localise sub-contracting jobs and even setting targets for companies. Companies were encouraged to appoint a community liaison officer who would then work with the community structures and inform them of jobs as they became available. The community also provided a list of people and their skills. The dtic required the big companies to employ people from the local community.

She said that under the critical infrastructure programme, the dtic was supporting companies in the rural areas. The Annual Performance Plans also encouraged working in rural and township areas. The dtic was working with the provincial economic departments to be able to assist people living in the townships.
The Industrial Financing Division would be reviewing the incentive guidelines to weight them more in favour of the rural provinces and townships.

Mr Mbuyane asked about collaboration with the Department of Arts and Culture because there a lot of fronting in the film industry. He knew that DFIs were linking with the Department but how did they deal with the film industry? Were people double-dipping in industrial funding? Was the Department aware of double dipping by those participating in the Enterprise Development Programme? Those companies were accessing more than one set of funds from the government.

Mr Burns-Ncamashe asked about the revitalisation of the Dimbaza and Mbatha Industrial Parks.

Mr Malematja asked about sub-contractors and asked if the same sub-contractor was utilised in each and every project, thereby blocking out all other sub-contractors. His concern was aggravated by fronting in the form of utilisation of one sub-contractor. How did the dtic ensure that all sub-contractors got the opportunity to work?

Ms Mangole said that the dtic was working closely with the Department of Arts and Culture, which was the dtic’s key stakeholder when dealing with the issue of transformation. The dtic was contributing to the Creative Arts Master Plan and was trying to build a database of emerging black filmmakers so that there could not be fronting. The dtic was working with the SA Revenue Service as well.

The dtic was alert to double-dipping and always checked where other funding had come from. If a company received one grant from government, the dtic did not make a grant to that company. The Department checked with other departments and the DFIs to ensure that a company did not enjoy two sources of government funding. Dimbaza and Butterworth Industrial Parks had been revitalised but the infrastructure was still being re-vitalised. The ongoing problem was that each year, infrastructure had to be repaired because it had been vandalised. Ms Mangole promised to provide details of how much had been spent on the two Industrial Parks.

The dtic encouraged big companies to support SMMEs and sub-contract to them. She would ask about what support they offered the sub-contractors and how they ensured that there was not a monopoly. The dtic would monitor that.

She added that, in the current financial year, the Northern Cape was enjoying R639 million in projects and Industrial Parks. The information would be provided to the Committee when she reported on the 2021/22 Annual Incentive Report.

Closing Remarks
The Chairperson was encouraged to hear that the Northern Cape had not been left behind. She requested that the Department respond to the Committee in writing about the items where it had been unable to provide a complete response. She hoped that the Industrial Financing programme would be improved before the report on the current financial year.
                                                       
The Committee Secretary informed Members that the following meeting would be on Wednesday 2 March 2022: The Special Investigating Unit would provide a status report on maladministration and corruption in the National Lotteries Commission.

The meeting was adjourned.