Khula & National Empowerment Fund (NEF) Annual Reports 2008/9

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Trade and Industry

08 October 2009
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The NEF presented their Annual Report, which outlined investment criteria, the contribution that the NEF could make to the Preferential Procurement Act, funding and the effects of the economic crisis, market interventions, the Asonge Share Scheme, the impairment ratio and the need to source capital. The NEF had an asset value of R4.6 billion and because of the MTN share price movement in the markets it was currently in excess of R5 billion, represented by theappreciation of the share portfolio as well as the capitalisation that flowed through to the NEF as a result of the DTI and the National Treasury. The cash balances were fully committed against the investment pipeline and the NEF was working very closely with the National Treasury to secure accumulated funds for additional investment activity in the next 18 to 24 months. The NEF sustained itself last year without any funding from DTI for operations, using financing income. In 2008 an impairment ratio (bad debt provision) of 19% was reported and over the current financial year it was just short of 24%. Using various non-financial support initiatives, the NEF had monitored impairment closely and tried to actively manage it downwards, and contain it within the low 20s environment.

Members asked about the targets that were set for loan disbursements and wanted to evaluate the NEF’s performance on the loan impairment provisions. Members noted that that in terms of costing, the operation was very top heavy with a huge amount of payment in salaries and infrastructure, which was comparably higher than what one would expect from a strategic venture capital fund since the cost of administering was enormous. They asked for clarity on the percentages of black ownership on the JSE. They probed why the NEF managed their own investments as there were many professional asset management firms that competed in a highly competitive environment. Further they wanted an explanation in writing about the bonuses that had been awarded vis-à-vis the NEF’s targets and performance. A comment was made that in spite of the figures and graphs it was difficult to assess whether the NEF had a good year. The NEF conceded that the 24% loan write-offs were too high. Again the Committee were concerned that there was overlap amongst the Council of Trade and Industry Institutions (COTI) of the DTI.

Khula presented their Annual Report and discussed financing gaps in the SMME market and assistance to SMMEs, financial results, their unqualified audit report, performance, the Khula Direct lending model and recapitalisation. The highlights of 2008/9 had been an increase in the number of SMMEs helped and the total was 2829 compared with 2472 in 2007/8. Black businesses were allocated 52% of Khula funding, 36% of funding went to under-served provinces and areas, 34% to women owned businesses while 31% of loans were below R250 000.

The financial results reflect a growth in revenue for the company and once more Khula continued to show a surplus with the capital base of Khula growing from R1.2 billion the previous year to about R1.3 billion. The group surplus for 2009 was R28.1 million and decreased by R25.2 million compared to 2008. Revenue grew by R7.9 million while core revenue and business loans and activities increased by R19.7 million. Khula primarily relies on interest but it is paid on the loans that they are advancing. Although there was growth of approximately R20 million, bad debt provision increased from 9.9% in 2008 to about 17.4 % in 2009 due to the effects of the world wide economic slump.

Members debated the concept of Khula Direct and whether it had been approved by Cabinet. There was concern that Khula was talking about the need for recapitalisation to deliver its mandate. Some Members questioned whether the business model was sustainable and self-financing, and recommended that Khula go into a joint venture with the commercial sector that could offer their services and their offices. They also questioned the existence of Khula and the NEF and recommended that they merge the bulk work on SMMEs.

Meeting report

Presentation of the National Empowerment Fund Annual Report
Ms Philisiwe Buthelezi, Chief Executive Officer explained that the NEF promoted black economic participation. The objectives were to promote equity ownership, and support business ventures run by black people. To provide black people with direct and indirect opportunities, to acquire shares in state allocated assets in private business enterprises.

Referring to the Report Card she pointed out that in the financial year 2009 the Small Medium and Micro Enterprise (SMME) strategy for black enterprises was conceptualised and developed to differentiate it from the broader Department of Trade and Industry (DTI) SMME strategies. The NEF’s strategic plans were linked to government priorities and objectives. The NEF investment products and investment schemes were targeted at promoting investments in the key sectors of the economy and within the Industrial Policy Framework of the DTI. Through its investment and funding activities as at 31 March 2009 the NEF has provided financing to 160 businesses to the value of R978 million created through its investment initiatives as well as 5000 new jobs in the economy. To date, disbursements exceeded R1.5 billion, and the Sawubona shares had been issued. A Business plan tool kit was going to be launched and the mentorship programme was aimed at providing skills development and support to the SMMEs enabling them to create and grow sustainable businesses. In addition, the NEF has begun to look at infrastructure development.

Performance and investment criteria were based on the assessment of ownership, management control, empowerment of black women and percentage allocated to women in the transaction, job creation and the active involvement of black entrepreneurs in the projects that were supported. Also, investments in growth sectors and key drivers of the South African economy, the geographic spread of the investments and the investment return.

The key positioning objectives of the NEF are the financing of transactions seen as the key driver for the creation of Black Economic Empowerment (BEE) in the economy. In a number of transactions where black companies had bought stakes in white owned businesses and wanted to exit the transactions, there were at times no buyers in the market and the NEF would act as a warehousing conduit for the transfer of this equity. The NEF wanted to be in a position to acquire a stake of exiting black companies to maximize the empowerment dividend and to maintain and grow the capital base of the NEF. The strategic objective was to try and maintain and sustain the BEE value created in the South African economy and a time horizon ofat least ten years was needed. The NEF wanted to differentiate from existing business funding offerings, identify market failures and leverage additional BEE financing opportunities that were available within the financial services sector, in terms of their mandate and the provisions of financing solutions.

They needed to have a say on how the National Treasury should conceptualise and finalise the Draft B-BBEE Preferential Procurement Policy Framework Act and they were in the process of developing a paper for the National Treasury and DTI on the implementation of that Act. The NEF was the only gazetted BEE facilitator and managed the funds of three sectors. The iMbewu Fund promoted the creation of new businesses and aimed to cultivate a culture of entrepreneurship by offering quality debt and equity finance of between R250 000 and R20 million. The Corporate Fund facilitated the acquisition of equity interest in established businesses of black entrepreneurs and was leveraged when a white company wanted to sell an equity stake. The Strategic Projects Fund aimed to allow black ownership to be considered in strategic projects at the NEF such as the building of some aluminium smelters, to provide opportunities for black people to acquire those equity stakes.

 
The NEF aimed to align its product offerings to other government objectives and to make sure that there would be a financing instrument to support the Preferential Procurement Act. The NEF had developed a procurement funding product and a franchising financial product aimed at addressing specific market failures in the BEE environment in conjunction with the BEE scorecard. In March 2005 the NEF had concluded 11 transactions worth approximately R25 million whereas current deals in progress amounted to R1.077 billion. The approved value of transactions was approximately R1.6 billion as at 30 September 2009, invested in sectors that were the key drivers of growth.

The challenge remained in providing financial solutions for the implementation of broad based BEE. Regionally 61% of the funding had gone to Gauteng and the NEF was working on a partnership and programme of action with provincial government departments responsible for economic development to identify investment opportunities as well as partnerships in scoping and in undertaking feasibility studies on the ground. The National Footprint Strategy would be the setting up of national satellite offices in all the provinces and would include IT systems, capacity, infrastructure and services.

As a result of the current economic crisis and concerns around liquidity as well as a reluctance to extend new funding to enterprises, the NEF’s books has grown by R500 million in the first six months of 2009. The NEF is also now regarded as the preferred source of funding for SMMEs and BEE deals and wanted to partner with the commercial banks and share the risks when providing funding. The NEF had considered a number of distressed BEE transactions and had approved funding of R60 million to support a company.

NEF market interventions had been the conceptualisation of a business planning tool kit to address a number of market failures. These include bankable business plans, lack of accurate and reliable financial information, management skills, financial marketing and technical expertise, access to affordable cash as well as poor access to markets. A mentorship programme for investee companies had been set up as well as a debt-restructuring programme that restructured the investee portfolio, and addressed the market failure influenced by the macro economic crisis. Black enterprises that had been operationally involved in businesses affected by the failure of BEE investment structures had been the preferred enterprises for funding during the current economic crisis.
 
Mr Andrew Wright, Chief Financial Officer, said that the Strategic Projects Fund outlined the specific criteria and focus of the fund. The objectives explained savings and investment activity and promoting equity ownership amongst beneficiaries and the asset management division was set up specifically to target that for promoting equity ownership, and providing opportunities to participate in state owned enterprises and share allocations. The NEF had drawn upon a schedule of state owned assets with regard to targeting those for transfer to the NEF and developed retail products for distribution to the beneficiaries of the NEF. Members had been informed of the progress of the transfers and about initiatives the NEF had taken to try and complete the transfer of the remainder of the assets. Progress had been made with SAFCOL, the Hani allocation was transferred, and key information required to facilitate the Telkom transfer was in the process of being identified, and the NEF was working with the respective government departments.

A bonus share offer and release went out to the NEF Asonge shareholders who received in excess of 60% return on their investment over the two years. Over 82 000 members of the Asonge share scheme received additional bonus shares on 29 September 2009. New offers would be made accessible to all geographical regions so that potential beneficiaries could subscribe. Over the next twelve months, an education campaign would be targeting all the provinces and 74 investor workshops would take place around the country. Research was being commissioned and an enterprise development fund with the potential to unlock private sector capital was being established. A product was being developed for consideration in the retail sector to assist with equity participation in the retail chain and store ownership scheme.

The NEF had an asset value of R4.6 billion and because of the MTN share price movement in the markets it was currently in excess of R5 billion, represented by theappreciation of the share portfolio as well as the capitalisation that flowed through to the NEF as a result of the DTI and the National Treasury. The cash balances were fully committed against the investment pipeline and the NEF was working very closely with the National Treasury to secure accumulated funds for additional investment activity in the next 18 to 24 months. The NEF sustained itself last year without any funding from DTI for operations, using financing income. In 2008 an impairment ratio (bad debt provision) of 19% was reported and over the current financial year it was just short of 24%. Using various non-financial support initiatives the NEF had monitored impairment closely and tried to actively manage it downwards, and contain it within the low 20s environment. A key indicator was how disbursements and investment portfolios performed in the economic downturn. Based on the capitalisation on the current balance sheet, the NEF as a fund based on investment targets, would be fully invested in the next 18 to 24 months. Investment activities beyond 18 to 24 months had to be increased since new lines and access points to capital had been considered, to continue the sustainability of the organisation. The NEF was working closely with DTI and National Treasury to secure adequate new sources of capital to remain well positioned.

Discussion
Mr S Marias (DA) asked of the money that flowed into the economy and stimulated BEE, what objectives and targets were set for loan disbursements and wanted to evaluate the NEF’s performance on the loan impairment provisions. He stated that the NEF had spent a considerable amount of money on staff and referred to the salary and bonus earned by the CEO. He stressed that bonuses had to be related to performance, which had to take into consideration the objectives, targets, performance and the loan impairment provision and disbursements and asked for clarity.

Ms Buthelezi responded that there were a number of objectives when considering and assessing the performance of the NEF, and the loan impairment provision was just one of them. Another was whether or not a credible private equity or venture capital black-owned private equity fund had been created as well as setting up systems, infrastructure and the calibre of employees. Remuneration packages were in line with the type of businesses that the NEF operated amongst such as the private equity funds from which professional staff was recruited. The types of instruments that the NEF was looking at required the hiring of chartered accountants with lots of corporate finance experience, and they were being drawn from the commercial banks and from other private equity funds. Moreover, there was a shortage of these particular skills in the economy at the moment, and the NEF had to align itself with what other players in the market were doing. The shareholder compact with the DTI would highlight and set out the expected objectives and targets for the particular year. By volume it would determine how many projects the NEF would approve, disburse and conclude by a certain time as well as other non-financial support initiatives.

Mr Wright said that from a performance perspective impairments were 19% in 2008 and 24% for 2009 and in trying to anticipate what the total effect of the economic downturn would be on overall performance from an impairment perspective the NEF looked at other internal indicators namely operational indicators such as loan repayments against installments which was a key red flag that contributed to year end provisions of impairment. The impairment provision was monitored year on year and benchmarked against peers in the environment and the private sector and there was a trend in upward movement of impairments being reported in the Development Finance Institution (DFI) and the private banking sector. Indicators inside the organisation were demonstrating that there were distressed companies in the portfolio and the NEF was taking on various debts to try and mitigate the effect of distressed companies, to try and rescue those organisations in trouble and turn around those companies. There was also an indication that the impairment provision would increase towards the March 2010 reporting time.

Mr G Oriani-Ambrosini (IFP)stated, that in terms of costing, the operation was very top heavy with a huge amount of payment in salaries and infrastructure, which was comparably higher than what one would expect from a strategic venture capital fund since the cost of administering it was enormous. He suggested that entities, which were dealing with the funding of non-commercial transactions, be aggregated into one entity, and merged because it was costing a lot. He was concerned about the cost to the government since the NEF was in the business of taking risks, particularly with the increase in bad debt over the past nine months.

Ms Buthelezi responded that the black SMME sector was just one of the areas that the NEF serviced, besides the broad based BEE landscape and that there were very clear differentiators between what the NEF was seeking to achieve, and what Khula did. If the NEF was merged with another organisation it would dilute or negate some of the broad-based black economic empowerment objectives.

Mr A Van Der Westhuizen (DA)asked Ms Buthelezi for clarity on the percentages of black ownership on the JSE. He asked why the NEF managed their own investments since there were many professional asset management firms that competed in a highly competitive environment. He wanted information about the 24% loan write-offs and said that in spite of the figures and graphs it was difficult to assess whether the NEF had a good year. He wanted an idea of the successes and failures of the year, quality of the management, the performance of the NEF and asked how he would be able to measure that. How did the NEF view themselves and how they differed from other institutions in the type of financing they made available?

Ms Buthelezi responded that if the total value of BEE transactions were assessed by market cap on the Johannesburg Stock Exchange (JSE), black ownership was approximately 3% and had been affected by the current economic situation, which resulted in the shedding of value in which BEE companies had invested. The volume and value of investments, the creation of jobs as well as the involvement of black women in BEE transactions assessed performance. The NEF was different since it was the only gazetted Development Finance Institution in the country given BEE facilitator status and focused exclusively on the provision of financing solutions to black enterprises.

Mr Wright responded that the performance of the organisation at year-end focused on segmental reporting and the evaluation of four key segments operationally. The Fund Management segment looked at qualitative targets that impacted on the economy and financing within the BEE sector. Asset Management consisted of a shared portfolio that was transferred to the NEF by the State and the NEF was the custodian monitoring, managing and developing retail products. The Cash Portfolio explained the Treasury operations environment, and the Operational Environment was about overheads versus budgets versus other income sources that were generated. These were viewed in a disaggregated way as well as in an aggregate way. The NEF had looked at the relative performance of each contributing to the whole and whether the whole was able to sustain itself, and the NEF had developed the ability to sustain itself on the basis of an aggregate approach. In developing that financial measure, the NEF had had to consider whether it continually had the ability to take on risk in the Treasury environment.

He conceded that 24% was too high a provision for the fund management division segment and not sustainable from a private sector perspective which tended to operate in the 2% to 3% environment. A key exercise was to continually monitor at a monthly value the ability of the organisation to take on risk in terms of Rand value against its operational financial performance. From a treasury operations perspective, the NEF did not try and do it all in house. It gave opportunities to professional asset management entities in the market, especially black owned and managed asset management entities. A tender was being developed and would be distributed once approval was received from the National Treasury and part of the Cash Portfolio might be offered to external asset management entities.

The Chairperson said there were a number of tool kits in the DTI and asked why they developed a new one and how it was going to be different to the IDC tool kit. He asked for more clarity about the loan write-offs.

Ms Buthelezi responded that a lot of black people were struggling with some initiatives since they had never been exposed to owning and managing enterprises, and did not have the type of skills that were required to put up bankable businesses. Financial institutions rejected most black business plans and the business plan toolkit was also being used toassist in leveraging additional funding from financial institutions.

Mr Moemise Motsepe(NEF Marketing & Communications Manager)said the NEF had received a phenomenal public response and demand to usage of the business plan tool kit and in the two months since its launch in August, there had been over 3000 registered users on the website who wanted to use the business plan tool kit.

Mr Wright reported that from an Asset Management segment perspective one of the biggest contributors towards the NEF capitalisation till now had been the performance of the Asonge Share Scheme Offer that was offered into the market and recovered a significant windfall return for the NEF albeit R1.2 billion worth of shares were essentially transferred to 83 000 investors. Of the R1.2 billion, it appreciated by more than 60% over two years and more than R140 million in bonus shares were awarded to these investors. From a performance perspective Asset Management had yielded not only internal performance but also a significant external performance to the beneficiaries and investors within the Asonge shares. At a treasury operations level, actively managing the Cash Portfolio within the constraints of the Public Finance Management Act (PFMA) led to an effective investment return just short of 12% for the end of March 2009.

Operations referred to the relative size of operations and overheads versus the type of organisation that the NEF was and from a cost to asset base perspective, the NEF was operating in a 2% environment of overheads versus cost of funds under management and well within industry norms. From an operation overheads perspective the Asonge funds under management were performing. On the other hand the NEF spent more time and money on overheads in evaluating transactions because of the risk environment they faced. For the first time the NEF did not provide for any transfers from the DTI to cover its overheads and covered its overheads from the financing income out of its loans book as well as treasury operations.


Mr Frencel Gillion (NEF Chief Investment Officer) explained that the NEF had a very specific mandate and that the target market for risk finance relationships were not purely commercial and looked at the strategic objectives of the country and how the NEF could make a difference and a contribution. Essentially the South African model allowed for the raising of funds on behalf of investors, to invest in specific types of opportunities for a fee and a portion of profits and focused on the economic and development impact. There was a tendency towards less risk investment as well as having a safe portfolio and for the NEF it was important to have internal capacity to be able to manage the funds in the private equity industry. The NEF assessed approximately 100 applications a month and invested funds of between R250 000 to R100 million and in contrast to the private equity model, the NEF looked at lower risk transactions which tried to link developmental objectives with commercial objectives.

The Chairperson explained that because time was running out any further questions could be put in writing and that only follow up questions would be allowed.

Mr Marais asked whether the NEF could respond now or send the Committee more qualitative responses. He asked for the targets set by the NEF and how they decided upon those targets, how the NEF arrived at those targets and compared them to performance as well as the justification of the bonuses. He requested clarity on the bonuses and performance payments and said that increases of 19.2% and 23% were quite excessive, without knowing the targets that had been set.

Mr Oriani-Ambrosini said that he wanted the argument given by Ms Buthelezi in writing because he was unable to follow it. His question was; why not a merger? The second question related to salaries paid in accordance with established management funds and he requested a comparison with First Rand Merchant Bank, ABSA and Mutual to ensure due diligence on the issue. 

Mr Ronnie Ntuli (NEF Board Chair) responded that the NEF Board had interrogated salaries in the context of what they were trying to achieve as an organization. The level of remuneration was prudent and he would personally respond in writing about the objectives, what the targets had been and how the NEF was performing with regard to those targets in the context of what the NEF was mandated to do.

The Chairperson responded that 99.9% of the entities within Council of Trade and Industry Institutions (COTI) were legislated and that parliamentarians were responsible for that legislation. They were aware of the overlaps with Khula and wanted to see a very strong intra COTI correlation to partly address the over laps. The Committee expected to hear whether to shift overlaps to Khula or to the IDC and expected it as part of the reporting within this term. COTI members had to report the overlaps and give an account of what had been done. Salary packages had to be dealt with in a holistic manner, as it was a sensitive issue. He said the NEF had not been clear about what they had to do and how performance was measured even though achievements were beginning to emerge.

Khula Enterprise Finance Ltd Annual Report 2008/2009
Mr Setlakalane Molepo (CEO) explained that Khula bridged financing gaps that were not addressed by other financial institutions, especially in the private sector. The target market was the under-served segments of the SMME market, the aspiring SMMEs that lacked the required start-up collateral or equity as well as black owned and owner managed formal SMMEs, as well as expansionary projects in the SMME sector. Support was biased towards under-served provinces, the rural areas and the townships which had been impacted by Khula funding. However, Khula was visible in the Western Cape, Kwa Zulu Natal and Gauteng. Khula provided funding of between R10 000 and R3 million but they needed to give more support to investments under R1 million and especially below R250 000.

Khula had an unqualified audit for 2008/9. The approvals and disbursements were affected by the poor economic climate and the strict implementation of the National Credit Act. Constraints were once more experienced with the Wholesale Model and there was a need for recapitalisation to effectively deliver the Khula mandate. Since 2002 Khula had been utilising the returns received on investments and no major shareholder capitalisation had happened since then. Since the end of the 31 March 2009 reporting period, Khula’s strategy had been to the restructuring of the regional offices to ensure that they were no longer just call centres but that they can also help in deal origination to address the needs of SMMEs. Progress had been made on the development of the Khula Direct business model and the implementation of the marketing strategy had commenced.

The highlights of 2008/9 had been an increase in the number of SMMEs helped and the total was 2829 compared with 2472 in 2007/8. Black businesses were allocated 52% of Khula funding and 36% of funding went to underserved provinces and areas, 34% to women owned businesses while 31% of loans were below R250 000. Khula was dependent on third parties to make loans to businesses and less loans had been approved by the private sector due to the squeeze and their appetite for risk.

The credit indemnity book that Khula handled through the commercial banks was on a decline since it was dependent on the lending policies of banks, which focused on the higher less risky end of the SMME market. Khula funding had increased to people who wanted to utilise the Khula indemnity guarantee and therefore the growth prospect in that particular channel was limited. The cumulative book for business loans to Retail Financial Intermediaries (RFIs) had grown and to sustain that book growth required more direct involvement by Khula. Khula had put measures in place during this challenging period to ensure aftercare for the RFIs.

The financial results reflect a growth in revenue for the company and once more Khula continued to show a surplus with the capital base of Khula growing from R1.2 billion the previous year to about R1.3 billion. The group surplus for 2009 was R28.1 million and decreased by R25.2 million compared to 2008. Revenue grew by R7.9 million while core revenue and business loans and activities increased by R19.7 million. Khula primarily relied on interest but it was paid on the loans that they were advancing. Although there was growth of approximately R20 million, bad debt provision increased from 9.9% in 2008 to about 17.4 % in 2009 due to the effects of the world wide economic slump. The Khula advances and investments were primarily structured around interest bearing debt, which was linked to and influenced by the prime lending rate. The 68% growth in interest revenue was directly attributed to loan books accumulatively over the year plus a growth of 61%. The group total loan, indemnity and equity increased by 12%. The general funding requirements for the for the year amounted to approximately R272 million and would be used to fund core business activities of around R238 million. The capital expenditure and operational needs were R33 million and potential commitments in respect of core business activities to be funded amounted to roughly R130 million.

Shareholders determined Khula’s performance requirements and the corporate performance indicators reflected its strategic goals. The key performance areas set for the past financial year were SMME financing activities, brand value, human capital, reduction of the attrition rate, financial sustainability and process optimisation to ensure turn-around time. During the year under review Khula exceeded all its key performance targets apart from the SMME financing activities. Khula needed to be capitalised for what it was expected to do.

The Khula Direct lending model had been updated and a full report would be given in the future. Khula needed a deep penetration model at community level as entrepreneurs were asking for accessibility and Khula needed to penetrate the rural areas because many people were not able to come into the cities. There was also a need for face-to-face interaction with people so that Khula could engage with them. Khula needed to use its regional infrastructure for speedier transactions, it had to be effectively marketed, and deal origination and assessment needed to be quicker. Post investment monitoring and collections were key for what Khula intended doing. Ease of use and the fast turn-around time was important to Khula to give entrepreneurs an indication as quickly as possible on what was done.

The model should have short sustainable operations and Khula had a fully operational project team for Khula Direct, which was dependent on recapitalisation. The project plan and direction would include elements of local research and information would enable benchmarking and the design of products. Khula products needed development according to the clients that were being serviced and benchmarked with similar models across the world operationally and during implementation. The building of a financial model was important in securing finance and credit risk modelling was important. Khula needed focus groups in most of the provinces to fully understand what clients were looking for as the challenges of servicing the market below R250 000 was not well catered for. Stakeholder engagement was important and Khula needed to engage with their COTI members to make sure that duplicates were removed and JSE partners had to be engaged with. International study tours for benchmarking and the RFI strategy were also important. The Khula branch model for distribution was going to be important so that distribution networks were available at levels where beneficiaries could access them. State owned partnerships had to be closely partnered and collaborated with to ensure procurement opportunities that would be made available and achievable for SMMEs.

Discussion
Mr Oriani-Ambrosini stressed that a Committee Report had required Khula to present a report on the founding option of Khula Direct before it approved Khula Direct, and that Khula was supposed to submit a business plan. The report also questioned whether the business model was sustainable and self-financing, and recommended that Khula go into a joint venture with the commercial sector that could offer their services and their offices, and Khula responded that they could do it. Khula had now requested recapitalisation of R1.7 billion while there were also international finance operations such as the World Bank and some options needed exploring before going forward. He questioned the existence of Khula and the NEF and recommended that they merge the bulk work on SMMEs. He said that although the Annual Report was beautiful, it could have been condensed to about 20 pages and asked how many copies were printed and what the costs were to the taxpayer.

Mr Molepo responded that Khula would like to return so that the Committee could interrogate the business plan for Khula Direct in order to get meaningful input to improve the plan. Khula currently operated a Wholesale Model that was becoming difficult to continue committing to, since the cash at hand did not allow Khula to honour its commitments and therefore recapitalisation was necessary. Parliament requested the printing of 600 copies of the Annual Report as well as additional copies that were acquired by Khula shareholders, DTI and National Treasury. The report would be condensed in the future and it would be ensured that costs were kept within what was budgeted.


Khula’s Deputy Board Chairperson, Mr Mthembeni Mkhize, responded that the business plan presentation, which took place in June, was to enable engagement with the Committee about options going forward. He was not opposed to alternative options of finance. The project and business plan went through a procurement process and was done in an interrogative manner and now had a dedicated team

The Chairperson asked to which Committee Report was Mr Oriani Ambrosini referring regarding Khula Direct. Cabinet, the Executive, had approved the concept of Khula Direct and thereafter it was brought to Parliament as a matter of practice for input and the concept was endorsed. Khula under the auspices of the DTI started looking at strategy and the business plan and the concept of Khula Direct had been approved.

Mr Oriani-Ambrosini said that the Chairperson’s statement did not reflect the records and requested that the report be brought to the floor.

Prof B Turok (ANC) said that for some years the Committee was in favour of Khula Direct and that initially there was resistance from the Cabinet for a long time, but the situation changed more than a year ago. Over the past few years Khula was very frustrated by the Wholesale Model because the banks were not cooperating enough and therefore they wanted to go direct but there was resistance from Cabinet. He suggested that it would be a good idea for someone to look at the record because there could be confusion over time, and to see exactly what Cabinet resolved, and what the Committee finally recorded in its findings in its report for clarity. 


The Chairperson requested DTI’s Parliamentary Liaison Officer to get the issues on Cabinet about Khula Direct and that the Committee Secretary draw the records of what was decided about Khula Direct.

Mr Marais stressed that the concept of Khula Direct had to be agreed upon before the business plan could be proceeded with. A final business plan was needed to identify what was needed, what the costs were, how the money was going to be invested, what the returns would be and what sustainable jobs and entrepreneurship would be generated. He hoped Khula would generate economic growth but the business sector and the private sector would oppose anything that was unsustainable. On salaries he asked what the other executive staff were earning as the report did not reflect it. He was dissatisfied that only one disabled person was employed and asked what Khula intended doing about this.

Ms Tracy McDonald (CFO, Khula) stated that executive salaries could be reviewed on page 117 of the Annual Report and more details could be supplied on executive salaries. Khula made no excuses for not employing disabled people and she acknowledged that disabled people were part of employment equity. Khula was totally committed to employing more people with disabilities. Khula continued to endeavour to find people in technical areas with a disability rather than in an administrative position.


Mr X Mabasa (ANC) agreed with Prof Turok’s view. He also pointed out that Khula’s concluding remarks stated that progress had been made with the development of the Khula Direct business model, which meant that Khula was reporting about progress made and that they were still in the process of developing or finalising the business model. Where SMME numbers had increased, as was reported, that should be seen as a success, but what were the outcomes, and how was that success measured for Khula to say it was a success, and he wanted it substantiated. Of the people that were assisted, he asked for the percentage or quantity of cooperatives and what role Khula was playing in funding agriculture. Where enterprises were started with the help of Khula, what support systems and structures did Khula have because agriculture needed the most support, and what was the cost of support. He asked Khula to explain what they had done to assist the rural areas.

Mr Mkhululi Mazibuko (Khula Chief Operations Office) explained that the success of funded SMMEs was measured by the number of SMMEs created as well as the distribution of disbursements to various sectors of the economy. The challenge was to go back to previous years and do additional research to look at the impact and Khula did a study in 2007. A study was also undertaken in Gauteng, which showed that Khula had created 8000 jobs over the last five years. It indicated the growth in revenue of those businesses, and that for every R100 000, one job was created. During the current year Khula would replicate and view the evidence in terms of impact. Khula had a land reformempowerment facility aimed at emerging farmers to participate in through acquisition of land and production inputs. An agreement was reached with an intermediary through the MAFISA programme to assist with providing input especially for emerging farmers. Post investment support and credit endemnity products were provided since banks felt the need for some level of intervention because of the high-risk nature of the business.

Khula used advisors for its mentorship programme, monitored the process and then paid for the mentorship service. The cost was dependent on the nature of the work and the length, as well as the complexity of that particular SMME and regional offices were also able to do that. Khula had set up a fund with SEDA called the Mpumalanga Economic Development Growth Agency (MEGA) and the total fund was approximately R16 million. In the Eastern Cape, Khula had a partnership with the Dept of Public Works to build schools, clinics and housing and give financial support to contractors.

Mr Mkhize stated that Khula had been involved in the rural areas for a long time and cooperatives were being serviced through the emerging contractors to access finance. The previous presentation highlighted Khula institutional support, which supported and followed up the projects funded. The report also outlined agricultural activity by emerging black farmers and he conceded that Khula needed to focus more on the rural areas.

Ms H Line (ANC)asked whether Project Plan (High Level) meant going towards the implemenation stage or whether highly skilled personnel were required, and if so whether Khula outsourced those skills. She also enquired whether there were any evaluation mechanisms in place to ensure the progress of the Khula Direct business model from phase to phase.

Mr Mkhize explained that the High Level business plans were not weighted and was a projection that indicated what was happening in 2009 such as looking at other cases as well as worldwide options of finance. It was linked to project plans that were part of the business plan and was an engaging process, which indicated timeframes for local research and stakeholder engagement for example.

Mr Van Der Westhuizen noted that some Director Committee and Board meetings were poorly attended and that there was a resignation from the Board. He asked who was responsible for the directors fulfilling their duties and whether the directors received any emoluments for the year ending March 2009. He asked whether the book growth referred to the loan book and if it did, he requested clarity in relation to the figures of the annual statement. He was unable to find a link between the two because he wanted to link it to the 17% provision for bad debt. Was Khula satisfied with the provision of 17% and whether the figure was realistic as small enterprises were closing at a rate of 50% according to the NEF? Or should the 17% be seen against the smaller amounts that were made available in the previous years?

Ms McDonald stated that the book growth of 51% and 71% did not relate to the Khula loan book and that the business loan book was towards the RFIs, which was on page 74 of the Annual Report as well as in the Director’s report. Currently Khula’s provisions were adequate and nothing indicated that they had to increase them, but things were not as good as before. Systems for monitoring and ensuring that Khula was managing the risk was strengthened knowing that things could still get worse and at this stage it was believed to be adequate. Indications were that the type of customers Khula was servicing would suffer longer than most of the bigger companies and that it would take longer for them to recover and to come out of the economic slump.

Khula’s Board Chairperson, Ms Nomonde Mapetla, stated that the Khula Board had written to members who were not attending meetings and they had later resigned. Action was taken against other members who did not participate or attend meetings and they received no remuneration.

Prof Turok emphasised that decisions by the Committee in the past were unanimous and there were no differences on the stance the Committee took on the question of Khula Direct. There was now international recognition that small enterprises were needed in developing countries badly, because that was where there was income generation, job creation and training. The bookkeeping of Khula needed to be supervised and examined and Khula had to be held accountable for what they were doing. He agreed with Mr Oriani-Ambrosini to look for support worldwide for financing Khula.

The Chairperson asked whether there were there any adjustments that had to be done before Khula could get the financials rolling. Khula should in future also include businesses owned by disabled persons, the percentage of loans below R250 000 was low at 31% and more detailed information was needed about the credit indemnity book. Rural and township success stories could go a long way and more information around Khula partnerships would be helpful and some SMMEs needed more technological support. There were expectations about the property sector and it was necessary to see business thriving in townships. Industrial parks were a challenge that required the communities’ involvement and innovation was required particularly in transport nodes and more details were needed on the strategy Khula had adopted in the property section.

Ms McDonald replied that no adjustments were made for the audit.

Mr Ismail Tayob (Khula Board) responded that a good gauge of how the financial department performed was the letter from the auditors this year and from that point of view, Khula was doing a good job.


Mr Mabasa said that he understood Khula was not directly responsible for the mentorship programme and hoped that this did not consume money intended to help recipients. Most industrial business areas in the townships and rural areas looked like squatter camps and it was possible for Khula to work with municipalities to meet infrastructure needs. Mr Mazibuko said that Khula had debated whether to outsource the mentorship programme or to do it themselves. The view was that they did not want so many permanent people on the payroll that were not utilised sufficiently. Outsourcing made sense as the service was used when needed and no other benefits were associated with keeping those people on the payroll. Through the regional offices the services that were provide were managed, and payment was scaled according to the services provided and approved by the financial institution. .

Mr Mkhize agreed that Khula could provide more support and examine industrial business areas. Khula wanted to work with other departments in an effort to grow its customer base and work with the Department of Rural Community Development and particularly with the municipalities. Most of the properties that Khula was managing in the property portfolio fell within the previously disadvantaged urban areas. Khula’s efforts had been directed at making an impact to remove the perceptions of squalor where government had made a contribution in the property industry, and Gugulethu was one of the schemes that was doing exactly that. Khula planned to create opportunities for people to get engaged in creating economy and dealing with the transport nodes in a different way. Khula had also improved the industrial development between the areas of Pietermaritzburg and Durban and Pinetown and contributed to the success of some big names such as Stoned Cherie started by entrepreneurs, whose fashion products were being distributed internationally.

Mr Molepo said that Khula was partnering with the regional DFIs for local economic activities and to date Limpopo and Mpumalanga had been earmarked. The fund totaled R16 million, which included R4 million each from Khula, DFI, Unoch and SEDA, whose contribution was for non-financial support.

Mr Mazibuko said that in Mpumalanga the fund targeted the major sugar cane growers in the area so that they could supply their products to the market.

The Chairperson emphasised that by the time an unqualified audit was seen there would have been numerous adjustments and no financial report exposed the adjustments because it had an impact on delivery and was a practice the Committee should look into. He congratulated Khula for the unqualified audit report. He said that the Disabled People of SA was an institution that could be worked with and they had a database, and could help in conjunction with the new ministry.

[Mr S Njikelana was acting Chair as the Chairperson could not attend the meeting as she had been delegated by Parliament to lead the delegation to South Korea.]

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