DTI Budget & Strategic Plan 2009/12: input by Minister; IDC & Khula Budget Strategic Plans 2009/10

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Trade, Industry and Competition

16 June 2009
Chairperson: Ms J L Fubbs (ANC)
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Meeting Summary

With both the Minister and the two Deputy Ministers in attendance, the Committee was briefed by Khula, the Industrial Development Corporation (IDC) and the Department of Trade and Industry (DTI) on their strategic plans. Khula focused on the necessity for its move away from its old mandate of the wholesale model towards KhulaDirect, believing this was necessary especially at a time when SMEs were suffering because they were unable to access funding from risk-averse commercial banks.

The IDC presented its strategic plans in light of the current economic crisis. With its primary objectives focussed on supporting industrial capital development and promoting entrepreneurship, it outlined its large projects and intended schemes in order to create employment opportunities.

The dti’s Director General proposed its strategic framework for the next three years, focusing on what its role should be, given the current state of the economy, and highlighting the ‘Framework for SA’s response to the international crisis’ document. It presented a thorough understanding of the tasks and challenges that were laid out before them, and sought to ensure collaboration with other organs of the state.

The Members discussed the Institutions roles both in a broad sense, and in terms of how they made an impact at ground level. Questions were raised about funding and how this was being allocated to various programmes, and proposed projects were scrutinised. The Minister of Trade and Industry also addressed the Committee about dti’s role in the near future and what projects were being undertaken.

Meeting report

Khula presentation
Mr Setlakalane Molepo, CEO: Khula, delivered a presentation to the Committee on Khula’s achievements of the past year, the challenges it faced in terms of giving financial aid through commercial banks to small and medium enterprises (SMEs), and what it aimed to achieve through KhulaDirect.

The institution had always aimed to provide assistance to SMEs, and over the last four years annual disbursements, its total loan book, and income from its core operations had doubled. Added to this, it had built a network of partner organisations with 290 branches reaching over the nine provinces. All of this being achieved without any major capital investment from the State.

The main challenge that Khula currently faced was that there was a growing perception among commercial banks that financing SMEs was extremely risky. These SMEs were in a position where they need more support than usual, but were unable to get it from commercial institutions. The presentation highlighted the constraints that Khula experienced in dealing with this situation, including the lack of control it had experienced in driving development, the inherent over-reliance on cooperation from commercial partners, the complexity of the model which was hard to explain to their target market, and the fact that state support for SMEs was concealed which led to distorted market perceptions.

In adopting the KhulaDirect model, these constraints were removed, giving the institution more control over financing the lower end of the SME market, and sending a clear message that the State supported SMEs. KhulaDirect would be implemented through, among other things, the acquisition of selected retail financing institutions (RFIs), partnerships with private and state owned enterprises, complementary mentorship support, and the development of the direct lending model.

Mr Molepo reiterated a point made the previous year by using the example of the results that KhulaDirect would achieve if given R3bn in recapitalisation, and concluded by saying that KhulaDirect would empower Khula to meet its goals and breach the SME financial gap.

Discussion

Mr S Marais (DA) asked for more information about the sources of funding. Given that Khula talked about a responsibility to SMEs, he asked for more information be provided on the SMEs.

Mr M Oriani-Ambrosini (IFP) thanked Mr Molepo for his clear presentation, but asked why this plan should not be finalised, and why the state should have to compete with its own citizens in the form of commercial banks.

Mr Z Ntuli (ANC) pointed out that Khula had not been permitted to lend directly to SMEs that did not have permits, and asked whether disbursements were in the form of cash or collateral.

Mr Molepo replied that Khula was funded and that it depended wholly on the government for re-capitalisation, with the understanding that money would be made available. It was also important to establish relations with both the private and public sectors. In terms of support, he pointed out that mentors were supposed to help pre and post entrepreneurs, and that Khula could liaise with them to ensure an appropriate business plan. The issue was to ensure that people had the capacity to fulfil their task.

Mr Des de Jager, Khula: General Manager: Risk Compliance, pointed to the problems with identifying capable monitors out of the thousands willing to supply services. However, during the past year Khula had been working closely with the Institute of Business Advisors (IBA) who trained mentors, and Khula then interviews these mentors to ensure that they were capable of fulfilling their tasks. The mentorship supplied was generally post-funding in order to identify problems that specific businesses encounter. This programme was well advanced.

Ms Nomonde Mapetla, Chairperson: Khula, noted that their original mandate prohibited Khula from direct lending, but over time this was not successful as banks tended to utilise the guarantees that Khula provided to riskier businesses, as they did not want to take the risk themselves. Khula had entered into contracts to provide financial assistance to SMEs with the four major banks, and it was discovered that ABSA was the most helpful. However, monitoring was difficult without completing the assessment, so the direct lending model would be useful. It was not Khula’s intention to privatise, but to take over RFIs that were progressive and self-sustainable. It was stressed that the intention was not to compete with the citizens engaged in banking services, but rather to provide financial access to previously disadvantaged people, and those who would not be able to get loans from commercial banks. Khula was working with the Sector Education and Training Authority (SETA) to train businesses that had started up, but were not directly involved in this, with SETA outsourcing training they could not provide. In essence Khula wishes to intervene, insuring that SMEs get financial assistance that would not otherwise be available from commercial banks.

Mr Mthembeni Mkhize, Deputy Chairperson: Khula added that in the last few years the banks had generally not been active, even when collateral was in place. Many entrepreneurs did not have the means for putting this collateral in place, and there was nothing stopping the taxpayers, in the form of the private banking institutions, from ensuring entrepreneurs get access to funds. He reiterated that the mandate stipulated that Khula was not allowed to lend directly, and could only act through banks or RFIs. Khula had approximately 400 mentorship service providers, and there had been a continual improvement in making funds available to SMEs. This was a continuation of its previous strategy, and direct funding was a continuation of that.

Mr Molepo added that the disbursements were given to end-users through RFIs, and out of this approximately R100 million was issued through indemnity credit with Khula’s guarantee, but this would only be called upon once there was an act of default.

Mr E Gcwabaza (ANC) requested a geographical breakdown to ascertain the achievements Khula had made in spreading out to SMEs across the country. He asked for clarification on Khula’s relationship with Umsobomvu. He asked how much impact Khula had had in creating jobs over the previous five years and what mechanisms were in place to monitor the growth and sustainability of the SMEs that Khula financed.

Mr S Njikelana (ANC) queried Khula’s function within the rural economy. He asked if the 290 branches referred to in the presentation were linked to RFIs or were themselves RFIs. It would be more appropriate to speak in terms of a developmental state and refrain from talk of ‘profits‘. Rather the term ‘surplus’ would be more appropriate as Khula was a government institution. The Committee would benefit from having access to documents pertaining to loans given out in the previous financial year. The presentation was silent on any legislative changes. In the Public Finance Management Act, Khula was a Schedule 2(b) entity and was thus not able to borrow money directly. He wondered if this should not be changed. He suggested that the Committee might benefit from a more in-depth briefing on Khula.

Ms C Kotsi (COPE) asked for clarification on what RFIs were, and asked how much the re-capitalisation of Khula would be. Further concerns were raised about the accessibility of aid from Khula in both urban and rural areas. He asked for clarification as to how Khula would give assistance to those stranded in rural areas in particular.

Mr Ntuli asked what challenges Khula faced in persuading banks to give loans to poor people living in townships.

Mr Marais asked Khula to give an indication of why the three provinces were targeted and what the division between them was. He asked for clarification as to what jobs would be created over the next four years, and how Khula intended to monitor and report on this. He asked for quantitative explanations in terms of volumes of business, budgets and what Khula intended to receive as a return on investment.

Ms Fubbs pointed out that Khula had referred to a developmental approach, but asked that Khula indicate to the Committee its understanding of its own role in a developmental state. She asked what Khula meant by ‘enhancing service delivery’ and ‘creating a new model’ as these were vague terms.

Mr Molepo responded first to the issue of geographical spread, arguing that the three provinces - Gauteng, Western Cape and KwaZulu Natal - were the most economically developed and they would receive 60% of the budget. Facilities disbursed to end users in the priority provinces (the other six provinces) could receive 40% of the budget. Any business which Khula undertook needed to be done in the context of spreading its reach to those six under-developed provinces. With regards to the relationship with Umsobomvu, he said that when Khula’s transactions were seen to meet with the Umsobomvu mandate, they ensured that they were referred to Umsobomvu. With regards to the 290 branches, this was measured through the RFIs used by Khula which were present in the nine provinces. He accepted that there was need to talk of ‘surplus’ rather than ‘profit’. He explained that RFIs were non-traditional commercial banks that had established niche markets and had the ability to reach SMEs throughout the country. Khula’s role was to partner with these in order to ensure that it would have as great an impact as possible through them. He pointed again to the limitations of commercial banks, saying that they were risk-averse and therefore unwilling to aid people who did not have collateral. Khula strives to get closer to the cash-flow in order to ensure that promising businesses with available markets could be analysed and supported by Khula. It was Khula’s wish to support these underserved ventures that would otherwise be unable to get financial aid from banks.

Deputy Minister, Ms Maria Ntuli, said that as a wholesale model, Khula was not able to do what was envisioned. People were still paying high rates attached to commercial banks. However, KhulaDirect was beginning to answer that particular aspect. She commended KhulaDirect on trying to address the issue of financing small business ventures in rural areas, and for its attempts to ensure collaboration between various sectors. A national plan would not work as each province had varying and unique requirements. It would be necessary to work with each province.

Mr Mkhize responded to questions raised about Khula’s role in a developmental state. He pointed out that certain areas were targeted. While giving financial aid, Khula also ensured that more jobs were being created. Drawing attention to peri-urban areas, focus was given to the process of getting a job and getting a decent job. Khula would deal with the creation of decent jobs which were more applicable to peri-urban areas than to rural areas. With regards to enhancing service delivery, KhulaDirect would be much more detailed and work on an implementation plan had already begun with a strategy document leading into it. A final point was addressed on the recapitalisation of Khula. Without a detailed business plan, it was estimated that recapitalisation would amount to three billion Rand, but he hastened to add that this would not be required as a once-off amount but could be broken down over four years as Khula went forward. 

IDC presentation
Mr Geoffrey Qhena, CEO: IDC, presented a strategic report, outlining the IDC’s objectives and strategies. He noted that the IDC had done relatively well over the past year, but realised that there was much to be achieved. The first half of the report dealt with an economic overview and was not presented at the meeting.

The objectives which the IDC wanted to uphold were supporting industrial capital development and promoting entrepreneurship. Mr Qhena expressed the hope that the outcomes would including sustainable employment creation, regional development, environmentally sustainable growth and growth of the SME sector. The primary role of the IDC was that of a catalyst for project development which ranged over a number of sectors. Furthermore, the IDC made a point of looking at the future sustainability of the projects it undertook.

The IDC expected a total of 24 300 jobs to be created. This was a decline to their previous performance but attributed this to the current economic conditions. However the number of jobs saved, which was 2 500, was an increase. There were also schemes planned for the clothing and textiles industry, gold jewellery, and forestry and orchard industries.

Although the IDC’s capital base had decreased, it had remained financially sustainable regardless of increased investment budgets. A range of issues were addressed, with plans on how the IDC could contribute to them. These included unemployment, SME development rural and regional development, renewable energy and cleaner technologies, economic planning and industrial support and assisting companies in distress.

The IDC also intended to explore a variety of large projects which had a huge economic impact, including a platinum smelter, solar power generation, wind power generation and electricity generation in Botswana.

Mr Qhena noted that the IDC saw itself as playing a vital role in government planning and policy development and invited the Committee to attend a more in-depth presentation.

Discussion

Prof B Turok (ANC) noted with satisfaction that the IDC gave priority to large projects which had enormous downstream effects, as these large projects were fundamental to economic growth. However he asked why South Africa was not attending the meeting in Russia as this was important, and asked whether South Africa had been invited. He noted the job prospects highlighted in the presentation were a further concern as all were aware of the downturn, and asked whether the IDC could handle this in a stronger fashion. A further two points were made about the question of beneficiation, the first dealing with resource depletion, and the second about capital intensity versus downstream value addition. He asked for comments from the IDC on these two aspects. Regarding balance of payments and balance on the trading account, he asked if the Department had ever considered import controls on luxury items, and whether there was any suggestion of deliberately investing in industries for import substitution.

Mr Marais asked if the IDC got the majority of its funding from capital markets, and from where else its funding came. He asked the IDC to give an indication of the cost of funding. He worried that some of the large projects, such as electricity generation in Botswana and not in South Africa were problematic as South Africa had similar problems. He also sought comment from the IDC about job creation in relation to the President’s projection of creating 500 000 jobs by the end of the year. He asked on what basis the IDC gave assistance to companies in distress.

Ms Kotsi referred to the IDC’s medium term objectives of allocating capital to the clothing and textiles industry, asking why it was only capitalised with one percent as this was an important sector that was highly labour intensive. She asked how the IDC planned to rehabilitate mines and handle the issue of illegal mining.

Mr Njikelana noted that the IDC had signed memorandum of understanding with provincial FDIs and similar municipal agencies. He asked whether they could share some of their success stories from those MOUs, and to what degree there had been returns. He noted that the IDC could handle large projects, but was concerned about their involvement in the lower sectors, and asked whether these not be best served through FDIs and municipal agents as the IDC was expected to address these sectors as well.

Ms Fubbs noted that some policies impacted directly on decent work creation in trade and industrial areas, and such policies aim to support small businesses. She hoped these would overcome the former spatial development plans perpetuated by Apartheid.

Mr Qhena responded firstly that, on the issue of beneficiation, the IDC would continue with investments. The issues raised about funding were welcome, and despite the IDC’s decline of capital, expansion was still happening, though the funds were stretched. The funding came partly from internally generated income from the IDC’s investments, and partly from borrowing from other DFIs, largely in Europe or Asia. Cost of funding differed between institutions as it was liable based, but the cost increased two years ago. In terms of jobs created, the IDC did not believe it had made a great impact with direct numbers, but thought that taking indirect numbers into account would show the extent of what it had achieved in this area. He noted that the textile industry was an important sector, but not as labour intensive as other sectors. R1.2 billion had been given to this sector already. He mentioned various successes the IDC had had with local DFI’s and stated that they were looking to co-invest with them.

Mr L Mondi, Chief Economist: IDC, pointed out that South Africa was a resource endowed country, however there had been a failure to fully exploit this over the last four years. As a development finance institution (DFI) it was important not to export raw commodities but to process them in the country, and the IDC was at the forefront of this. However, because many markets had shrunk, there had been a particular focus on platinum to ensure that a smelter was built, as South Africa had 75% of platinum reserves. A fund had also been established in the jewellery sector to ensure locally made products were available.

Mr Qhena said that in terms of the project in Botswana, the IDC saw power as having no boundaries, citing as proof of this, South Africa’s import of electricity from Mozambique. Assurances were then given to the Committee that the IDC were exploring a few independent projects in South Africa.

Ms Neo Sowazi, Divisional Executive: Marketing & Corporate Communications, IDC, explained that the rehabilitation of mining towns to unlock investment potential seemed to have worked. A new strategy of partnering with mining houses was being explored where diversification away from mining would occur, thereby ensuring that smaller towns were not solely reliant on mining. In terms of the rehabilitation of townships, the IDC had partnered with Johannesburg for the rehabilitation of Soweto, and they were also exploring other options in Pretoria.

Mr Tshediso Matona, Director General of the DTI, briefly stated that South Africa had unfortunately not been invited to attend the summit in Russia.

The Department’s second Deputy Minister, Ms Thandi Tobias, pointed out that in the following week the Minister and herself would be taking part in an Organisation for Economic Cooperation and Development (OECD) forum. She noted that the government intended to build a state-owned mine to ensure that mining did not deteriorate. Concerns were raised in regards to the challenges with the Free State Development Corporation (FDC), and it was said that more interaction with it would be required to review its objectives. Finally a skills shortage had been identified, and inputs from the Committee on this issue would be helpful.

Department of Trade and Industry (DTI) Medium Term Strategic Framework 2009-2012
Mr Tshediso Matona, Director General: DTI, addressed the Committee and hoped that all were familiar with the documentation, and expressed his intention of focussing at a high level on the strategic framework in the period ahead. He pointed out to the Committee that there might be some changes in regards to the relationship with the new department of Economic Planning.

Mr Matona outlined the vision, mission and strategic objectives of the DTI. Following this he gave an overview of the economy, stating that as a result of the economic crisis SA was in a recession with job losses continuing and every sector experiencing massive decreases in production. In response the government agreed on a document entitled ‘Framework for SA’s response to the international crisis’, which outlined the necessary interventions which needed to be taken which included scaling up social interventions, improving competitiveness of local industries, and promoting diversification of South Africa’s export markets amongst a host of others.

The key interventions of the DTI in particular was organised under the following themes: industrial development; trade, investments and exports; broadening participation; regulation; and administration and co-ordination. Each of these was thoroughly explored during the presentation.

The budget for the DTI was scrutinised, with the majority of 61% going into incentive payments. The methods of monitoring, evaluating and reporting were also discussed. It was hoped that a cooperative relationship could be had with Parliament. Special mention was made of improving service delivery, and that this would be explained during the discussion.

The main challenges highlighted were:
▪ ensuring effective programme and project performance,
▪ ensuring stronger strategic and operational management,
▪ ensuring a greater integration of work,
▪ ensuring adequate financial resources were available,
▪ the HR challenge of recruitment, retention and development, and
▪ improved cluster co-ordination.

Discussion
Prof Turok asked if the document highlighted in the presentation could be distributed nationwide as they were of particular importance. Also, he asked for more information on the procurement policy and tender policy. In terms of BEE, the DTI needed to be far more critical, as this had been a failure, and as such needed to be totally reviewed.

Mr Marais asked firstly for comments on the new Industrial Development Policy. It was also noted that neighbouring countries were entering into a separate custom mediation agreement with European countries. This had implications for illegal goods and undervalued goods, any comments would be appreciated. He agreed with Prof Turok that BEE needs to be revisited. He asked for clarification on how the 61 percent of the budget going to incentive payments would be utilised.

Mr Njikelana raised concerns about a refined trade policy that was to be presented, dating back to 2007. He also asked to be updated on the coordinating role of the DTI, and furthermore stated that it was necessary to comment on and monitor the regulatory role component of the DTI more closely.

Mr Matona agreed with Prof Turok that the document needed to be publicised.

Prof Turok interjected, stating that this would be included in the next issue of the New Agenda.

Mr Matona welcomed that news, and stated that the DTI had already factored in many of the plans put forth. He suggested that it be placed on the Department’s website. He made reference to the tender process, about which the Department would be glad to share with the Committee at another time. He felt that this was an area governed by the Treasury and if there were problems with the process the Department would get an audit qualification, which it had not received since Mr Matona held the position.

Mr Matona responded to Prof Turok’s comment on trade policy. The issue related to the current commitment that the DTI undertook with the World Trade Organisation (WTO) before 1994, when South Africa was still classified as a developed country, and did need to be reviewed. Further queries would be addressed by Mr X Carim, the Deputy Director General (DDG) responsible for International Trade and Economic Development.

Mr Matona addressed the concerns raised about BEE, saying that there was a need to gain empirical evidence in order to decide how to review BEE. The government itself needed to address this issue and what role it played in it. He pointed out that the integrity of the South African Customs Union (SACU) had been compromised and it may fall on the Cabinet to decide on a response. He returned to the issue of properly implementing the broadness of BEE, and said that this should be prioritised to ensure BEE was realised.

Mr Xavier Carim, International Trade And Economic Development Deputy Director-General, reported on the current state of the trade policy document, assuring the Committee that it was near completion and hoped to have it finished by the end of the month. This document would be an overview of South Africa’s trade performance over the last 15 years. It reviewed the change of tariff regime, the new issues which had emerged at an international level and gave an outline of the trade strategy with respect to the engagement agreed upon at the WTO.

The DDG responsible for incentives then addressed the Committee. He said that the DTI had a number of grant programmes that it provides for SMEs, mostly in manufacturing and tourism, although there were also sector-specific grants programmes as well. The size of the grant was up to 30 percent of the capital invested in the project. Conditionalities would also normally apply in regards to employment creation, location in a depressed area and alignment with the DTI’s sectoral strategies.

The Minister of Trade and Industry, Mr Rob Davies, then addressed the Committee, raising a variety of key challenges that lie ahead. These include drastically up-scaling industrial policy, where already an industrial policy framework had been developed which would continue to be utilised as a broad guide. The first industrial policy action plan, developed in 2007/8 set out to implement projects within easy reach, and as such focussed on capital goods, automotives, forestry projects and chemicals, among others. Here there were some important achievements made, such as the automotive industry’s development plan, and the beginning of designs for new programmes in the textile industry. He pointed out that there was a need to move forward from this, and not only implement programmes that were easily within reach, but to did things which were necessary. There was an aim to produce, by the beginning of 2010, a three year rolling industrial policy plan, which would be a much higher impact programme.

The Minister at this point stressed that even with these goals they were currently engaged in numerous activities. Amoung others, these include addressing human resources, entering into mentorship and training programmes with higher education institutions, and capitalising institutions which were able to give support to industrial policy. There was a need for greater cooperation with state-owned enterprises to reduce import leakage from 40 to 30 percent. There were also plans to include pharmaceuticals, where tenders would be leveraged in an attempt to encourage the production of active pharmaceuticals for major medicines. These activities would all happen in the next six months.

Mr Davies discussed the plans for the trade policy front, stating that they had been engaged in a number of trade negotiations with other offensive players, such as the WTO. It was indicated that a new course of action for trade negotiations needed to be implemented in order for less defensive tactics to be taken. This would preferably take the form of trade related cooperative arrangements between the bigger South-South economies. In order to achieve this, a concerted effort would be made to diversify away from traditional trading patterns.

The Minister replied to the questions raised on SACU. Their concerns stemmed from a number of clauses in the signed interim Economic Partnership Agreement (EPA) with the European Union (EU) which, if implemented, could create incoherence within SACU. He emphasised that concerns were raised from the start, but that these were effectively ignored by the EU. Given this context, the minister informed the Committee that a strategic session was going to be held with SACU, rather than a general meeting.

The Minister noted that BEE had sparked a number of debates. However he pointed out that in the BEE act there was an institution that still needs to be set up, namely the BEE Advisory Council, which was appointed by the President. It was indicated that such debates would be better served through that council.

Mr Matona indicated that he wished to deal with an outstanding question posed by Mr Njikelana about coordination challenges, noting that this was an important area. Both the DTI and the Department of Economic Development would be new coordinators of the economic cluster.

Mr Njikelana commented that the issue of intra and inter coordination was still fundamental and noted that the extent to which Council of Trade and Industry Institutions (COTII) worked together would be interesting to follow. The interaction of municipalities with local economic developments would also be worth pursuing as these formed an integral part of the overall economy and therefore there cannot be a barrier between national and local levels. There had been allegations that the industrial policy mentioned by Mr Davies had been scattered and at times hidden. In light of this, concerns were raised as to how the DTI intended to coordinate the industrial policy to address these allegations.

Mr Davies responded by saying that one of the biggest problems in delivering services was that of coordination, and there was a need to address cadre development, coordination, ongoing consultation and resourcing. It was critical that these points and coordination amongst government departments were addressed. The Industrial Policy was not the sole responsibility of the DTI, but rather the responsibility stretches across government departments, as it should not be confined to manufacturing. Strategic engagements, rather than general meetings, were wanted with COTII institutions. The senior appointment of a new Chief Operating Officer for the DTI was underway. Finally he responded to the question of the divide between local and regional development. The DTI had done some work, but there was a need to see how this would be divided between the DTI and Economic Development. He assured that something should be done.

The meeting was adjourned.

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