Briefing on the budget and strategic plans: Export Credit Insurance Corporation (ECIC) and the National Credit Regulator (NCR)

Meeting report

Export Credit Insurance Corporation Briefing
Dr Patrick C Kohlo (CEO) informed Members that the Export Credit Insurance Corporation (ECIC) was established as a self sustained national export credit agency, which meant that they did not receive any funding from Government and had to generate their own income. The ECIC was a registered insurer subject to supervision by the Financial Services Board (FSB). Their mandate was to provide insurance on behalf of the Government for contracts involving export transactions, foreign investments and loans or similar facilities. In essence, the ECIC was the insurer of last resort.

ECIC functions consisted of formulating an underwriting policy, evaluating export projects, assessing credit risks, structuring securities to mitigate risks, managing insurance portfolios and diversifying portfolios. The strategic goals were to focus on customers, enhance performance, engage in strategic alliances, foster risk orientation and provide effective stewardship.

The ECIC achieved sustained growth in insurance portfolios, successful reduction of reinsurance portfolios, efficiently managed claims and salvages as well as growth in investments to facilitate insurance capacity.

Mr Emile Matthee (General Manager) informed the Committee that growth increased from R5.6 billion in 2006 to R9.9 billion at the end of 2007. With country exposure, the spread was improving. The ECIC now had exposure to countries such as Nigeria, Sudan, Zimbabwe, Mozambique, Iran, the Democratic Republic of Congo (DRC), Turkey, Zambia, Ghana and Kazakhstan. The ECIC was well placed to accommodate future transactions, as their total capacity was calculated at R30 billion. In terms of the budget, the growth premium was estimated to decline in the year ahead.

There were seven key priority initiatives for 2008/09. The first initiative looked at a more consumer friendly policy certified as Basel II compliant by the Reserve Bank. Initiative two looked at the Economic Impact Assessment Model built in collaboration with the Department of Trade and Industry (dti) and the National Treasury. Costs for initiative one and two would be absorbed in salary expenses. Initiative three focused on documentation training, which was the training of staff on intricate finance documentation. Initiative four addressed the Portfolio Management System (PMS) to enhance effectiveness, efficiency and accuracy of the ECIC portfolio administration. The fifth initiative involved comprehensive and up to date industry and research reports. Initiative six focused on the International Credit Risk Insurance Forums while initiative seven looked at increased deal flow in to Africa.

Mr Mandisi Nkuhlu (Senior General Manager) noted that the ECIC assisted Small and Medium Enterprises (SMEs) in the form of Performance Bond Insurance, developed in partnership with the Industrial Development Corporation (IDC). It focused on SMEs with financing capacity hindrances and enabled them to participate in export of capital goods and services. 

Regarding Apex priorities, the ECIC would provide assistance to SMEs, focus on the resolution of challenges facing Zimbabwe, look at reconstruction in the DRC and intensify economic diplomacy. Economic cluster objectives included an increase in economic efficiencies, promoting dynamic sectors and integrated support for SMEs.

National Credit Regulator briefing
Adv Pansy Tlakula (Board Chairperson) of the National Credit Regulator (NCR) discussed the institution’s mandate. Relevant sections of the Act stated that the NCR should promote and support the development of a transparent, fair, efficient and accessible credit market. It should ensure the registration of all credit providers, credit bureaus and debt counsellors. It was responsible for enforcing the Act through research, audits, monitoring and information dissemination as well as increased knowledge of the consumer credit market.

Major achievements were the effective action taken against Rudco Finance, publication of the first credit bureau statistics and progress in registration of credit providers. Challenges included debt counselling, capacity and funding constraints.

Ms Nomsa Motshegare (COO) stated that more than half the credit providers, debt counsellors and credit bureaus applicants were registered. Four hundred and twenty credit provider applications were rejected. The NCR dealt with 111 300 calls and 1415 complaints in the past 11 months. There had been 213 investigations since June 2006 and enforcement actions were undertaken. The NCR published the first statistics from the credit bureau reports in September 2007, which showed that six million consumers benefited from data cleansing.

Mr Gabriel Davel (CEO) stated that the NCR wanted to increase consumer awareness by improving education and communication, by making call centres more effective through offering quality advice to consumers, by allowing access to redress through effective complaints resolution and by supporting the establishment of a national network of effective debt counsellors. Registration, compliance and enforcement would be improved through the registration of credit providers, credit bureaus and debt counsellors, the implementation of a compliance monitoring system and through visible enforcement.

The CEO addressed the budget. He warned Members that the NCR was still in the establishment phase and thus was not able to spend at budgeted levels. Expenditure was incurred for personnel, debt counselling and the creation of sufficient capacity, as well as professional fees. Debt counselling support was the biggest item in the operational expenditure per department. The NCR, over the next two years, would make every attempt to secure further funding in order to prevent a reduction in funding in critical areas. 

 Discussion
Mr S Rasmeni (ANC) noted that the NCR and ECIC were making some headway on the mandates given by the Government. He asked that the ECIC provide information on the challenges that were experienced. He told the Committee that the two institutions needed support if they were to ensure local and regional economic development. The Committee would have to look at what the institutions were doing at board level to ensure “Business Unusual”. With the ECIC, there was a direct impact on Apex priorities. He asked if they had focused on the priorities already or if they preparing to do so since the priorities were only identified a month ago. He also asked the ECIC how the work that they were in engaged in supported Broad-Based Black Economic Empowerment (B-BBEE).

On the issue of B-BBEE, Mr Nkuhlu stated that the ECIC implemented a broad-based scorecard that was in line with that of the Department of Trade and Industry. The main exporters would have to meet the criteria set out in the scorecard to benefit from the ECIC’s support. 

Mr Tladi Ditshego (Board Chairman: ECIC) stated that there were many challenges that were monitored on a daily basis. The current challenge was the situation in Zimbabwe. The new Mining Licence Review was also being monitored. The ECIC worked with other organisations like the IDC, the Development Bank of South Africa and MTN.

Mr Nkuhlu told Members that there were a number of the Apex priorities that they were already engaged in which were improving business practices so that they were in line with international best practices. There were lessons from OECD reports that were incorporated in the ECIC’s business practices. The ECIC saw “Business Unusual” as accelerating activities and increasing growth in terms of more interventions.

Mr Rasmeni asked the NCR for clarity on the training workshops being done for the judiciary. He asked what the major reasons were for the 420 application rejections and the compliance notices for credit bureaus. Newspapers reported that there were problems with debt counsellors and fees.

Mr Gabriel explained that the training was held in conjunction with the Justice College. Consumer education was quite a process but the NCR was working closely with trade unions, non-government organisations (NGOs) and other community-based projects. The NCR was working on road shows and having workshops. There were challenges but improvements were being made. 

Ms Motshegare from the NCR stated that there were criteria that credit providers had to meet before they could work under the Act. They could not be identified as credit providers if they were convicted of fraud, theft or violence within the past ten years. There was a lot of documentation to be completed and submitted to the institution before one could be registered as a credit provider. Most applications were sitting in a category where the NCR was waiting for people to sign for registration. Also, many people had still to submit certain information.   

Dr P Rabie (DA) addressed the ECIC saying that their presentation was very informative but there was an issue with one of the Apex priorities. He wondered how it was possible for the ECIC to provide cover in a country like Zimbabwe that had so much political risk and the highest inflation in the world.

Mr Nkuhlu said that the ECIC contacted the Department of Trade and Industry (Dti) because it was the lead player in negotiations with Zimbabwean counterparts on investment. The ECIC wanted to indicate that it was ready to support the reconstruction of the Zimbabwean economy.

Ms F Mahomed (ANC) said that the ECIC portfolio was directly linked to economic growth and that these were challenging times. She asked for a few examples of their net operating expenses. In terms of their assistance to SMEs, more information was needed.

According to Mr Matthee, the Net Operating Expenses comprised of R1.3 million for audit fees and R1.1 million for the assessment of projects in other countries. Fees for international membership, salaries, legal reviews, financial analysis and international research drove their net operating expenses. 

Mr Nkuhlu stated that the support of SMEs was an initiative started long before the State of the Nation Address. The ECIC was pursuing funding from the Government. The project would be implemented on a pilot basis. Companies would benefit from the ECIC’s support if they met the SME criteria. There was no need for a link between B-BBEE and SMME. There were a number of players that the ECIC supported and many SMEs were subcontractors. They might have technical expertise but financially, they struggled to raise working capital. Sometimes, banks rejected SMEs because they could not raise bank guarantees. The ECIC, in partnership with the IDC, had developed a new product that essentially covered the IDC should the IDC’s beneficiaries default on payments. 

Ms Mahomed wondered how well the NCR functioned when compared with international standards. Also, with the six million consumers that had benefited from data cleansing, she wondered how the NCR assessed that they had actually benefited. She was also concerned as professional fees expenditure was too high.

Adv Tlakula said that the NCR was mindful of professional fees at the operational level. As a new organisation, the NCR was reliant on consultants and others to assist them in their mandate. The NCR relied on the board to check if internal capacity was to be created or if help was needed from outside service providers.

Mr Gabriel stated that certain cases were highly technical and the NCR hired forensic investigators and chartered accountants to perform the investigations. The hiring of law firms to present the investigations and evidence also contributed to high professional fees.  

Mr J Maake (ANC) asked the ECIC about their compliance policy and what the process was. With promotion of dynamic sectors, how did the ECIC cover foreign exchange?

Mr Nkuhlu stated that in developing countries, the level of risk was generally higher. The ECIC provided total risk cover, thus providing the incentive for other companies to provide businesses with finances. An insurance policy was provided. The quality of the insurance policy impacted on the bank so the policy had to be Basel II compliant. Basel II encouraged banks, through schemes, to support projects and also allowed for stricter requirements.

Mr Nkuhlu addressed the foreign exchange question in terms of call centre operations. The ECIC was trying to tap in to the services sector because of the high potential for growth. Call centres was also seen as a sector with potential growth. However, some call centres in South Africa serviced international companies and consumers outside of the country and therefore dealt with foreign currencies. If the Rand strengthened, the contracts were seen as less competitive. The ECIC suggested that the exchange rate be “locked in”. This would enable the ECIC to anticipate the revenue stream and effect on the currency.    

Mr Maake asked the NCR for clarification about the lack of certainty on fees and court processes. He stated that he had an issue with effective, visible enforcement in registration and compliance.

Mr Gabriel stated that there was a lot of confusion between the term ‘debt counselling’ and ‘debt cancelling’, so people stopped payments. However, this was often done maliciously by middle to high-income consumers who took their chances. If some payment were made, the bank would hold off on taking legal action. The inability of magistrates to deal with these issues due to capacity constraints has become a major concern.    

Regarding enforcement, Mr Gabriel answered that warnings were given. If warnings were not heeded then compliance notices were distributed. If the compliance notices were ignored, then cases were taken to the tribunal. Non-compliance was a criminal offence and resulted in court action. The Credit Bureau records have reports that assess how people’s credit records change over time as well as their credit worthiness.

Mr L Labuschagne (DA) asked the ECIC about short-term transactions, wanting to know if they were classified in terms of value or time. He wondered if research into South African industry assisted the ECIC in deciding whom to support with exports or supplying credit. He noted that most of the institution’s applications were in developing and lesser-developed countries.

Mr Matthee replied that short-term was defined as less than two years. Applications were mostly in developing countries, specifically in Africa.

Mr Labuschagne asked the NCR if they participated in the banks enquiries into bank charges. He wanted to know if the debt counsellor’s fees were prescribed by the NCR. The newspaper showed that debt counselling was misunderstood. It seemed as though there was confusion amongst debt counsellors as well as the public. He asked why the NCR referred cases to the Scorpions and not the police. Before, the wealthy had more access to credit than the poor did and the poor were paying exceptionally high interest rates. The NCR’s report showed that credit for most of the middle income consumers was decreasing and the poor were getting too much credit. He wanted to know about the credit given by municipalities on rates. He asked if there had been an impact assessment of the new Act on the economy, what the unintended consequences were, and how the enforcement process worked.

Ms Motshegare stated that once a complaint was lodged with the NCR about bank issues, consumers were encouraged to approach the bank. If the complaint was not resolved, banking services were approached. If the problem persisted, then the NCR would take immediate action.

Mr Gabriel said that fees for debt counselling cases could go up to R3000 per case. Debt counsellors had to be remunerated for the work that they did as each person had an average of nine credit agreements to sort through. Once debt counselling was completed, the first payment made would go to the debt counsellor.

The NCR had started a relationship with the Scorpions when the Organisation first came about and had many prosecutions. The NCR still worked with the police in many other ways. With enforcement, the NCR would use other enforcement tools before they sent people to the Tribunal. Normally, a compliance letter was sent and if the person did not comply, he/she would be sent to the Tribunal. 

Mr Gabriel stated that the middle-income group was most affected by the interest rates. Low- income consumers tended to be less interest-sensitive and interest changes did not affect them as directly as the cost of living expenses.

Credit from municipalities would only become part of the Act once municipalities started charging interest from the point of arrears. If municipalities charged interest in terms of legislation, then this was not interest by agreement and still would not fall under the Act.

Adv Tlakula answered that the organisation was new and that the mandate had only come in to existence less than a year ago. The unintended consequences would become clear once the mandate was fully implemented, in about two years time. She stated that it was difficult to monitor credit that was given, but that the NCR was mindful of that problem. The NCR had to create a credit conscious society and would educate people at an early stage by working on certain programmes with the Department of Education.  

Mr M Bhengu (IFP) noted that there were no comments about audit reports from either institution. He commented that it was worrying that lack of funding was placing constraints on NCR capacity.

Mr Matthee stated that there were no outstanding issues on the ECIC’s audited financials.  

Mr Gabriel stated that the NCR’s audited financial statements were presented in its annual report to the Committee wards the end of 2007. The budget constraints were under control. Donor funding would not be used for operational expenses but rather for research and debt counselling.
 
Mr Labuschagne thought that the intention of the Act was not to have a register of credit agreements. He wondered if it was more practical to register every debt counselling agreement and fee with the NCR.

Mr Gabriel replied that the NCR would record all credit agreements once the NCR was fully implemented. Debt counselling would be recorded as well. There was a web-based system where people were registered. 

Mr Rabie commented that he was in favour of the Consumer Act but that he had heard conflicting stories from the private sector. He asked the NCR if there were any shortcomings in the Act that they wanted to amend.  

Mr Gabriel stated that the impact of the Act was being monitored closely. Some credit providers were struggling, while others were performing better. It was easy to blame problems on the Act rather than incompetent management. The NCR was looking at debt counselling amendments, specifically in terms of fees.

The meeting was adjourned.