The Committee engaged the South African Micro-Finance Apex Fund and the Export Credit Insurance Corporation of South Africa Ltd on their Annual Reports for 2008/2009 which Members had already read. The engagement with the National Empowerment Fund did not materialise.
The South African Micro-Finance Apex Fund explained its rationale. The policy review in 2005 had indicated a financing gap for the enterprising and working poor survivalists and hard core destitute, who were nonetheless chasing opportunities. It would not be feasible for a government trading entity such as the Fund to lend directly to the enterprising poor survivalists, whose businesses were informal and had no fixed addresses. It was envisaged that other existing developmental micro-finance institutions would play the role of direct lending to the poor. The Fund was therefore established as a wholesale fund to support the development of those financial intermediaries, namely financial service co-operatives and micro-finance institutions. The Fund had a national footprint and reach with its nine satellite offices. Between 2006 and 2009 loans to the value of R96 million had been approved, but only R57.1 million had been disbursed. This was institutions experienced widespread difficulty on the implementation of proper financial reporting systems in order to draw down the funds. The Fund was obligated to help them to develop proper systems. The financial crisis especially affected poor households, which suffered from the high price of food, and the low level of remittances from the cities to households. Challenges included the issue of wholesaling, defaulting borrowers, deposit insurance schemes, and an inadequate legal-policy framework - the Fund’s board had only an advisory role, and the Public Finance Management Act did not give clear powers to the Fund to litigate loan defaulting borrowers. The Fund had received a technical qualification from the Auditor-General.
Members appreciated the South African Micro-Finance Apex Fund's focusing succinctly on some of the areas on which the Committee wanted greater clarity. The Chairperson sought clarity especially on the Fund’s role as a wholesaler. Members also asked about micro-finances, the link with micro-finances, the challenges of binding constraints, and the comparison with the co-operative banks which was considered an especially important issue, if there was a database of defaulters, if the Fund had taken legal action to ensure discipline, how the Fund ensured that borrowers did not use loans for another purpose, how the Fund countered the potential danger of writing off loans, who were the Fund’s main funders, if the Fund’s most recent report from the Auditor-General was qualified or unqualified, and how the Committee could assist the Fund in its difficulties with current legislation. The Committee had drafted the legislation on the co-operative banks and valued constructive criticism of draft legislation.
The Export Credit Insurance Corporation of South Africa, mandated by the Export Credit and Investment Guarantee Act, filled the market gap between capital goods exporters and investors and the capacity and appetite of private sector insurers to provide such insurance, especially for political risk events. The Corporation did not deal in commodities. The Insurance Regulator had approved the Corporation’s methodologies for unearned premium provision, portfolio concentration risk and reserving for annualised premiums. The Corporation had participated in the Berne Union, the Prague Club and the Organisation for Economic Co-operation and Development. The Corporation interacted on a regular basis with export councils and institutions such as Development Bank of South Africa, the University of Johannesburg, and the Electoral Institute of Southern Africa. The Insurance Regulator had prescribed that an actuarial analysis be undertaken every two years. Management had adopted that this exercise be undertaken annually. The Corporation, in order to provide effect stewardship, continually reviewed laws of the countries where it had or might incur new exposure. It was developing an in-house carbon footprint policy to induce employees to use resources responsibly. The Corporation had conducted quarterly Personal Development Planning Reviews, undertaken a detailed internal restructuring exercise, streamlined procedures, and developed a new organisational structure with down-sizing of units. Since international projects were denominated in hard currency, rand financing caused a mismatch and high interest cost because of interest differentials. The Reserve Bank allowed foreign exchange cover by the Corporation in United States dollars only. The benefits of United States dollar financing were various, including an immediate inflow on the balance of payments. Where possible, the Corporation, however, encouraged rand financing for projects within the South African Customs Union and elsewhere in the Southern African Development Community region, for example, a R500million project in Mozambique. The Corporation had performed exceptionally well over the past three years. Notwithstanding the challenges such as the downturn of the market, and the weakening of the rand dollar rate, in 2008/2009 the bottom line results exceeded the approved budget. The Corporation was worried about succession; it operated in a specialized field of business and failure to recruit and retain competent staff could have severe consequences. Other challenges were risk events and interest make-up.
Members asked for greater clarity on ECIC’s challenges, where ECIC obtained its money, who performed its work before its establishment in 2001, about ECIC’s profit motive and if it had been motivated also by the national interest, how ECIC determined its premiums, what impact the national crisis had on ECIC, why bonuses had increased quite dramatically, about the effects of downsizing, and why certain board members’ attendance at board meetings was poor. Members said that South Africa should, instead of concentrating more on Europe, focus more on the huge market of Africa; also it was suggested that legislative changes should be considered.
The Chairperson said that questions remained unanswered and asked that written responses would be delivered in writing by Monday, 19 October 2009 at the latest in time for the Committee's next meeting.
The Committee then began a closed session on the short-listing of candidates for interviews for the position of chairperson for the National Lotteries Board.
South African Micro-Finance Apex Fund (SAMAF). Presentation
Mr Sithembele Mase, Chief Executive Officer, South African Micro-Finance Apex Fund (SAMAF), explained the rational for SAMAF. The policy review in 2005 had indicated a financing gap for the enterprising and working poor survivalists and hard core destitute, who were nonetheless chasing opportunities. These men and women wanted to sell and make money in order to put bread on the table and educate their children. The financing gap was from R100 to R10 000 loan per individual. It would not be feasible for a government trading entity such as SAMAF to lend directly to the enterprising poor survivalists, and they presented particular risks in terms of mobility, volatility, credit risks and other risks. Their businesses were informal and they had no fixed addresses. It was therefore considered that the viable method was to encourage the poor to establish their own savings and lending vehicles to deliver financial services in terms of obtaining loans and collecting deposits. It was further envisaged that other existing developmental micro-finance institutions would play the role of direct lending to the poor. SAMAF was therefore established as a wholesale fund to support the development of those financial intermediaries, namely financial service co-operatives (FSCs) and micro-finance institutions (MFIs).
SAMAF’s mandate was to contribute to Government’s poverty reduction goals by acting as a catalyst for the development of an effective micro-finance sector. This entailed supporting the establishment of sustainable micro-finance institutions that could reach more deeply and broadly to the enterprising poor. It also involved building a strong, effective, and efficient Apex fund. SAMAF’s mandate was aligned to Government policy and objectives to create decent work, eradicate poverty, reduce inequalities and expand economic opportunities for all. The financial crisis especially affected poor households, which suffered from the high price of food, and the low level of remittances from the cities to households, which reduced ability to repay loans.
SAMAF envisaged a country in which a network of sustainable micro-finance institutions broadened and deepened access for the enterprising poor to affordable financial services. It sought to do so through active and robust participation of the enterprising poor in economic activities that bore fruit, reduction of financial troughs for a better livelihood, the adoption of best practice methods, competent employees, utilisation of systems of delivery of services, and ensuring that SAMAF was financially sustainable. Since the previous year SAMAF had achieved a national footprint and reach, including the Northern Cape, with its nine satellite offices.
Between 2006 and 2009 loans to the value of R96 million had been approved. Of this R96 million, R57.1 million had been disbursed. Thus R39 million had not been disbursed. This represented the first challenge: the slow uptake of funds by the intermediary financial institutions which were unable to report adequately in terms of Section 38 (i) (d) (i) of the Public Finance Management Act (PFMA). This resulted in financial institutions becoming financially distressed and closing down. SAMAF was obligated to assist such institutions. Institutions were being assisted on the implementation of proper financial reporting systems in order to draw down the funds. It was a slow process, since institutions took time to understand the financial systems of reporting and accounting. 11 financial institutions were under liquidation because of financial mismanagement and were on the verge of closing down. They could no longer draw down the funds. Capacity building was critical.
Other challenges included 27 inherited loan agreements in 2006/2007. Those contracts had been poorly drafted and did not conform to Accounting Standard 132 and International Audit Standard 27 (IAS27). This had resulted in SAMAF’s receiving a technical qualification from the Auditor-General. Mr Mase indicated that SAMAF was never intended the control the institutions assisted, which belonged to the communities, who were expected to account for the funds that they received.
An inadequate legal-policy framework was a serious challenge. SAMAF’s board had only an advisory role. SAMAF had to refer to the accounting officer of the DTI who was managing a portfolio of billions. It was an inappropriate legal framework for an entity such as SAMAF.
The PFMA was another challenge. It did not give clear powers to SAMAF to litigate loan defaulting borrowers. The Minister was expected to be the litigant. This was not politically and legally tenable. This was because of the trading entity status of SAMAF. Financial systems were inappropriate in that SAMAF operated on an accrual accounting basis, while government financial systems operated on a cash accounting basis. Thus SAMAF always had to do a manual reconciliation at the end of every year, which might not be accurate because of the human factor. This could be the cause of significant audit findings.
Micro-finance was the last challenge. The policy framework of developmental micro-finance special deposit taking and asset mobilisation for poor communities was unclear, inadequate and not supportive. For instance the Co-operative Bank Act excluded FSCs with less than R1 million and 200 members from benefiting on deposit insurance scheme indemnity cover. Co-operative banks and commercial banks with more than R1 million assets and more than 200 members did get insurance cover for deposit taking. This was a policy gap in the developmental micro-finance space.
SAMAF had embarked on a ‘three-in-one’ training programme to impart skills of financial discipline, social engineering, and developmental expertise, and required that a potential employee must also be able to link those opportunities to the people; and be able to exercise risk management skills. Potential employees must also have social and leadership skills and, not least, be activists. It was not enough be a chartered accountant only. Such a qualification would constitute only 33% of the required skills. This allowed SAMAF to meet its developmental mandate, implement appropriate training, monitor and report accordingly.
SAMAF had also embarked on the redrafting of loan agreements. Exposure had been reduced from about R15 million to R3 million, with the hope of avoiding a technical opinion in the next financial year. SAMAF had appointed independent service providers to conduct an extensive review of its three year operations. The evaluation would cover the period from April 2006 to March 2009 and would evaluate what had been done, what lessons had been learnt and what were the binding constraints legally, policy-wise and operationally, what were the solutions and how other wholesale funds were structures, funded and configured for effectiveness and efficiency. A policy paper would be developed regarding the insurance deposit cover for small FSCs with less than R1 million assets.
The Chairperson asked Mr Mase to explain SAMAF’s ‘wholesaling’ function in relation to the micro-finance and co-operative institutions, and asked about the challenges of binding constraints and the policy framework. She was interested in the comparison with the co-operative banks, which she considered an especially important issue.
Mr Mase responded that there was currently legislation under which co-operative banks constituted a third tier banking model. In the case of financial co-operatives, or indigenous savings schemes, if people wanted to mobilise deposits and there was a financial crisis resulting in the disappearance of those deposits, these poor people had no recourse. Those deposits would not be covered by any insurance. SAMAF worked with such institutions. Once such institutions achieved deposits and assets of more than R1 million, then they were insured by the Co-operative Bank Development Agency. Institutions with less than 200 members and R1 million deposits and assets were not covered by such insurance. He emphasised that point.
Ms Mandisa Manjezi, Chairperson, SAMAF, responded that the wholesale funding model provided an apex body that would be a provider for loan funds for ‘on-lenders’. This network of ‘on-lenders’ would mobilise savings as part of its function. This network would also provide credit to the end users. When there were cash flow constraints for these lenders, they would need a bank of their own; the wholesale model provided for such a bank. Such lenders would approach SAMAF, which would ensure that that they sustained their ‘lending stream’ to their end users. In terms of linkages to the financial service co-operatives and other financial intermediaries, it was important to note SAMAF was an alternative source of lending for all these institutions, from small to large, to augment their cash flow to enable them to continue lending.
The Chairperson commended Mr Mase and Ms Manjezi for focusing succinctly on some of the areas on which the Committee wanted greater clarity.
Mr A van der Westhuizen (DA) asked if there was a database of defaulters, if SAMAF recouped only 30% of the money that it loaned, if SAMAF had taken legal action to ensure discipline, and how it ensured that borrowers did not use loans for another purpose. If it was true that SAMAF wrote off such a high percentage of what it had made available, then borrowers could start abusing the situation, and SAMAF would be held accountable. He asked how SAMAF countered that dangerous situation.
Ms Nosipho Ngewu, Human Resources Executive, SAMAF, responded that SAMAF had a data base of defaulters.
Mr Mase responded that in the current financial year recovery had decreased to 40% for every rand loaned. This represented a portfolio at risk. For the 60% that was not being recovered, SAMAF had embarked upon a debt collection strategy, firstly by mediation, then by arbitration, then by legal action. As a result some defaulters were beginning to pay. The 40% was therefore expected to improve. SAMAF could provide further detail. SAMAF had a robust monitoring programme supported by reports on how the funds disbursed had been used. This was one of the reasons why disbursement of funds was slow, since, in the absence of satisfactory reports, SAMAF withheld disbursements.
Mr Z Ntuli (ANC) asked who were SAMAF's main funders, about SAMAF’s handling that area of potential conflict between its aim to make a profit and help people, if SAMAF's most recent report from the Auditor-General was qualified or unqualified, and how the Committee could assist SAMAF in its difficulties with current legislation.
Mr Mase responded that the National Treasury was SAMAF’s only source of funding. The PFMA forbade SAMAF from raising capital; it was not allowed to ‘leverage’. Since SAMAF obtained its funding from Government it charged only 6% interest. So it did not expect to be financially sustainable in the sense of making money from the poor. The intention was to obtain that money from Government and try to ‘leverage’ and obtain other funding from donors. The other aspect of sustainability was to build the skills and competencies of the people in the institutions themselves. Audit reports examined only financial aspects, not qualitative aspects.
The Auditor-General’s opinion remained a general one. It was not about misuse of funds. It was about the structures of the agreements between SAMAF and the institutions which it had funded. SAMAF had successfully renegotiated some of its agreements to reduce its exposure to a total of R3 million. Some institutions had closed down, so SAMAF could not negotiate with them. SAMAF was still negotiating with some other institutions, and expected the R3 million to decrease further. It was necessary to obtain a court order in order to cancel a loan agreement with institutions that had been closed down or liquidated. It expected that process to be finished by the end of December 2009, since the process was already quite advanced. By 01 April 2010 that control element would not be there because some institutions would be liquidated or agreements renegotiated.
Ms Manjezi responded that the establishment of SAMAF happened as a precursor to the establishment of the Financial Services Co-operative Development Agency. At that time SAMAF was still a very young institution. SAMAF’s own submissions at the time did not the substantial backing of empirical evidence. SAMAF wanted to ensure that in both processes the National Treasury participated actively. However, now that SAMAF had acquired a body of empirical evidence, it was able to assess the achievements of SAMAF and see how these lessons could be applied to the Financial Services Co-operative Development Agency. SAMAF needed time to engage with the Portfolio Committee as soon as it received its draft evaluation report, as referred to by Mr Mase. That evaluation report would examine how best to align SAMAF and the Financial Services Co-operative Development Agency.
Mr Mase said that SAMAF was a trading entity of the DTI, and as such not deemed to have a legal status. A court would rule that the Minister as the executive authority was the one that must sue; that meant a labyrinth of legal channels. It was this challenge that SAMAF especially was tabling.
Mr X Mabaso (ANC)'s first question had been anticipated by Mr Ntuli. Secondly Mr Mabaso asked why approvals were declining (slide 10). He would have expected them to increase in number. He asked if SAMAF assisted in agricultural space in the rural areas under chiefs as well as in the informal settlements (slide 9), how many co-operatives SAMAF supported in the nine provinces, and, in particular, how many were successful, and how SAMAF required organisations that it sought to empower to demand competences in their officials similar to those specified by SAMAF for its own officials.
Mr S J Njikelana (ANC) asked what remedial action had been taken about loans that had not been disbursed (slide 11) and if it was SAMAF’s strategy to establish financial institutions (FIs). He asked, further to Mr Mabaso’s question, about the increase in end-borrowers (slide 13). Linked to that, he asked about the average size of loan. Did this increase? He observed that there was no apparent growth in the number of savers (slide 14) and asked why. With reference to Mr Ntuli’s question, he asked for a subsequent more detailed presentation on the six challenges and constraints. He commented on the possible difficulty in recruiting the kind of staff that SAMAF required.
Mr Mase responded that the average size for a loan to an end-borrower was about R900. The input costs of such end-borrowers was quite low, since they were quite survivalist and hardcore. However, they achieved much on the basis on these loans. This was the essence of the micro-finance clientele.
The Chairperson said that the Committee had drafted the legislation on the co-operative banks. She did not recall that SAMAF had raised concerns at that time, and asked if those concerns had arisen since the passing of the legislation and why. The Committee needed constructive criticism of draft legislation in order to ensure that the result was robust. There remained the issue of wholesaling on which she still sought a clear understanding. When the Committee had visited Atlantis, it had never occurred to her that SAMAF was a wholesaler. She had been informed by a DTI official that SAMAF did deal directly with individuals. So she was surprised to learn that it was involved in wholesaling. She was concerned because so many of these agencies were wholesalers. She wanted a clear picture of SAMAF's position by the end of the meeting. She asked what SAMAF could do to get the inherited loan agreements off its books. There must be something that SAMAF could do. The Committee wanted to close the matter and include it in a legacy document. She asked about the employee competencies needed by an upmarket wholesaler for the micro-finance institutions. She saw SAMAF as the ‘coalface’ for the DTI in its relationship with micro-lenders. Some of the countries that had embarked on similar schemes had used what she called 'imperts'. She asked if SAMAF had heard of that word. Experts were the ones outside. The ‘imperts’ were the ones in the community, and who knew what was happening locally. Such ‘imperts’ might need SAMAF to train them in workshops. She asked where SAMAF was pitching itself, for she still lacked a clear understanding. She knew that SAMAF wanted to be financially sustainable. This worried her. The Committee had heard from SAMAF's colleagues from the DTI, who had stressed the importance of the balance sheet. She asked if SAMAF’s aim was to make a profit on the side to make it financially sustainable, and, if so, how. Lastly she asked about SAMAF's satellite offices. She had gained the impression that they were to address the remote areas, yet she did not see one in the Northern Cape. She asked SAMAF to please explain how the satellites worked in the Northern Cape, or explain their non-existence. She also asked about the absence of satellites in the North West. She asked who had influence in Limpopo that had brought SAMAF to that province with two satellites.
Mr Mase responded that SAMAF had a specific target market, like the Women's Development Bank, and new entities that had been established. Thus clients approached SAMAF not as individuals but as entities. These entities borrowed from SAMAF to loan to their own members. Ms Manjezi responded that SAMAF’s presence was needed to nurture savings mobilisation at community level, where the commercial banking sector lacked a visible outreach. SAMAF was more a wholesale than direct lending institution. SAMAF worked with local non-branded institutions, financial service co-operatives which used the SAMAF brand to acquire legitimacy. This promoted the SAMAF brand rather than their own identities. This created the perception that SAMAF loaned directly to end-borrowers rather than operated as a wholesaler.
Ms Nosipho Ngewu responded that SAMAF required its staff to be competent to assess the capabilities of client institutions. SAMAF dealt with developmental microfinance, as so needed ‘three-in-one’ employees at all levels of its workforce. The enterprising poor lacked the required skills, so needed help to develop that skill. Therefore SAMAF required its own staff to have the required skills.
Ms C Kotsi (COPE) asked if salaries for SAMAF staff came from profits, or if SAMAF staff were DTI employees. He asked how SAMAF dealt with the issues of litigation. South African data suffered from ambiguities in defining employment and unemployment because there were inadequacies in collecting data. Identifying the unemployed and the employed was difficult. She asked what the overall contribution of micro-finance institutions to South Africa’s Gross Domestic Product (GDP) was.
The Chairperson, referring to the performance review on pages 74 and onwards in the Annual Report, said that averages were very misleading. In fact they camouflaged the results. She required exact figures and facts. She accused SAMAF of setting itself outrageous targets which it could not meet even to the extent of 10%. Who drew up these targets?
Ms F Khumalo (ANC) asked about monitoring of the borrowers, and the intention of the monitoring process.
Mr Njikelana asked to what extent SAMAF was ensuring preference to the poor provinces. Mpumalanga appeared to be favoured. He asked why there was no growth in the number of savers. SAMAF must have been doing must research; he asked it to share with the Committee its experience with micro-financing.
The Chairperson said that the Committee had barely ‘scratched the surface’ in its consideration of micro-finance. Because of time constraints, she concluded the discussion and asked that written responses to outstanding questions be delivered to the Committee by Friday, 16 October 2009 - by Monday, 19 October 2009 at the latest. The information required was of critical importance to enable the Committee to complete its work on the annual report. The extra issues raised by Mr Njikelana would require another morning's discussion.
Export Credit Insurance Corporation of South Africa (ECIC). Presentation
Dr Patrick C Kohlo, Chief Executive Officer, Export Credit Insurance Corporation of South Africa (ECIC), described ECIC’s vision to be at the leading edge of the medium/long term export credit and investment insurance business, with specific focus on project finance underwriting, customer needs, and prudent portfolio and risk management. Its mission was to facilitate and encourage South African export trade by underwriting export credit loans and investments outside the country in order to enable South African contractors to win capital goods and services contracts in other countries.
To support this mission the ECIC evaluated export credit and foreign investment risks and provided export credit and foreign investment insurance cover on behalf of the Government. It focused on underwriting of medium and long-term loans and equity investments for the export of capital goods and services from South Africa.
ECIC’s mandate in terms of the Export Credit and Investment Guarantee Act was the provision of insurance on behalf of Government, on contracts in connection with export transactions, foreign investments and loans, or similar facilities relating to the capital goods and services market. The essence of ECIC’s mandate was to fill the market gap between the requirements of capital goods exporters and investors and the capacity and appetite of private sector insurers to provide such insurance, especially in respect of medium/long term political risk events up to 15 years or even longer. ECIC did not deal in commodities.
ECIC’s strategic goals were described in the Annual Report and included focusing on customers, providing high quality service to all clients including manufacturing exporters, export contractors, financial institutions, investors, host country authorities and buyers. Fostering risk orientation, creating enterprise wide risk awareness and the application of effective risk management techniques, providing effective stewardship, consistently utilising sound business, environmental and social principles, and applying international best practice were emphasised.
Achievements included ECIC’s focus on customers. ECIC had conducted a comprehensive review of insurance policies and conditions which involved major and potential customers, and held an annual client indaba. ECIC continued to create awareness of products through workshops. It had participated in the Annual Mining Indaba in Cape Town as an exhibitor. ECIC had also achieved enhanced performance. Its unearned premium provision (UPP) methodology had been approved by insurance regulator. Methodologies for portfolio concentration risk and reserving for annualised premiums had been reviewed and approved by insurance regulator.
A further achievement was engaging in strategic alliances. ECIC had actively participated in the Berne Union Committees dealing with Investment Insurance and Medium-Long Term Credit Insurance. ECIC had signed a cooperation agreement with Atradius, Netherlands, and hosted a Berne Union Seminar entitled ‘Doing Business in Africa’ attended by representatives from 15 countries. As a member of the Prague Club, ECIC had attended two meetings during the year. ECIC continued to participate in the deliberations of the Organisation for Economic Co-operation and Development (OECD); it had participated as observers at the working committee on Exports Credits and Credit Guarantees and in the Premium Group. ECIC interacted on a regular basis with export councils and relevant institutions such as Development Bank of South Africa (DBSA), Nepad Business Council, the University of Johannesburg, and the Electoral Institute of Southern Africa.
A further achievement was to foster risk orientation Nine high level risks had been identified and monitored monthly and reported to ECIC’s board quarterly. ECIC focused on the credit default risk in the wake of the international financial crisis, and placed increased emphasis on credit default management. Credit default risk was managed through a three tier process, namely, evaluation, risk pricing, and reserving. The Insurance Regulator prescribed that an actuarial analysis be undertaken every two years. Management adopted that this exercise be undertaken annually to improve reliability on the adequacy of reserves. The highest single exposure in the portfolio, Mozambique, declined by 6.36% from 38.4% at the beginning of the year to 32.04% at the end of the year.
A further achievement was providing effect stewardship. ECIC embarked on a continual legal review exercise of the laws in the countries where ECIC had or might incur new exposure. ECIC had begun developing an in-house carbon footprint policy to encourage employees to make responsible use of resources. As ECIC participated in the move towards a low-carbon future, the 2009 annual report was printed on Sappi Triple Green paper produced at Sappi Stanger mill. ECIC had employed resources effectively through enhanced asset management, procurement practices and competitive sourcing, linking strategic planning to budgeting and performance. ECIC had conducted quarterly Personal Development Planning Reviews, undertaken a detailed internal restructuring exercise, streamlined procedures, and developed a new organisational structure with three operational units downsized to sub-units to improve operational efficiencies.
Ms Sedzani Mudau, Chief Financial Officer, ECIC, explained the need for US Dollar financing. International projects were denominated in hard currency. Rand financing caused a mismatch and high interest cost because of interest differentials. The Reserve Bank allowed foreign exchange cover by ECIC in US dollars only. US Dollar financing had the following implications: ECIC had to provide US dollar insurance cover; required US dollar denominated premiums; and incurred liability in US dollars. In 2003 the Minister of Finance had approved US Dollar financing/insurance, and in the same year the Reserve Bank had approved a US Dollar CFC (Customer Foreign Currency) account for ECIC.
The benefits of US dollar financing were: an immediate inflow on the balance of payments; the US dollar loan was raised and paid to the exporter; the foreign buyer repaid the dollar term loan; ECIC guaranteed the buyer’s performance; and ECIC retained US dollar premiums to cover its US dollar contingent liability, since reserves and liabilities were US dollar denominated). The impact of US dollar insurance cover on financial accounts was indicated. ECIC insured projects were primarily priced in US dollars and the corresponding securities for the project were also in US dollars. International Accounting Standards 21 (IAS21) defined functional currency as the currency of the principal economic environment in which the entity traded. At the end of the last financial year significant premiums, provisions and investment were in US dollars, the functional currency of ECIC. However, as a state-owned South African company, with DTI being the shareholder, ECIC’s presentational currency remained the rand. Hence the functional currency had to be changed as prescribed by International Financial Reporting Standards (IFRS).
ECIC encouraged, where possible, rand financing for projects within the South African Customs Union and elsewhere in the SADC region. For example, a R500million project in Mozambique was funded recently through rand financing.
Financial Highlights were indicated. The corporation had performed exceptionally well over the past three years. However, its overall financial performance during the current financial year was somewhat disappointing, as evidenced by the following indicators: decrease in gross premium income of 21% (from R215.6 million to R170.3 million); increase in claims paid of 104% (from R22.1 million to R45.1 million); decrease in salvages of 90% (from R311.4 million to R30.9 million); increase in the insurance portfolio of 12,4% (from R11.3 billion to R12.7 billion); and decrease in underwriting profit of 75% (from R327.8 million to R82.9 million).
Actual versus budget highlights were indicated. Notwithstanding the challenges such as the downturn of the market, the claims presented, and the weakening of the rand dollar rate, in 2008/2009 the bottom line results exceeded the approved budget. Financial performance was summarised (slide 19).
Lastly challenges, firstly the succession rate, were indicated. Given that ECIC was operating in a specialized field of business where required skills were scarce and the ability to break even remained a challenge all over the world, the failure to recruit and retain competent staff could have had severe consequences. Secondly the concentration risk was an unenviable situation for all insurance companies: a risk event in a particular country or region might have devastating consequences to the ECIC. Thirdly there was a risk associated with interest make-up (IMU). Interest make-up (IMU) was important to the business of ECIC as it facilitated export credit finance at internationally competitive rates. Lack of interest make-up (IMU) could seriously impede growth in the insurance portfolio as the cost of finance might be too high for contractors to win tenders for projects.
The Chairperson asked Dr Kohlo to explain ECIC’s challenges in greater detail.
Dr Kohlo responded. The succession risk was that ECIC was a specialised organisation. It was the only one of its kind in the country. So it was required to train whomsoever it recruited in the various skills. This took a minimum of three years. Thereafter the banks lured them by offering them double what they earned at ECIC. The transition risk was that it was very difficult for ECIC to choose operating environment. There was already a problem in Iran. There would be one in Zimbabwe soon. Its portfolio in Africa would be too high. Legislation did not allow SAMAF to conduct short term business, only medium to long term. It sought a special mechanism to do so, when it was in the national interest, for example, in Zimbabwe. Foreign countries would not be willing to do business in Zimbabwe until South Africa had demonstrated the confidence to do so.
Mr Mabaso asked to what extent ECIC related to the bilateral investment treaty policy framework within Africa and internationally, and how aware national stakeholders were aware of ECIC.
Dr Kohlo responded that ECIC’s Credit Insurance Committee included representation from the Department of International Relations and Co-operation. He felt that ECIC could do more to promote itself.
Ms Kotsi asked from where ECIC obtained its money, and who performed its work before its establishment in 2001. South Africa should, instead of concentrating more on Europe, should focus more on the huge market of Africa and thereby avoid the problems of tariffs.
Dr Kohlo explained that SAMAF was a self-sustaining profit making company with its own funds generated from premiums and investments. However, it was not supposed to create jobs ‘on the backs of other poor countries’. ECIC had ‘never asked a cent from Government’, and had not received money from Government except the sum that it received in 2000. He explained IMU on which ECIC gave quarterly reports to the DTI. ECIC’s portfolio was audited by the Auditor-General, and ECIC also had its own auditors. He said that ECIC favoured concentration in Africa, and could not foresee having most of its contracts in the United Kingdom.
Mr Van der Westhuizen asked what influenced ECIC’s decision-making as an entity: was it the profit motive, the national interest, political pressure, or anything else? Secondly, he asked if ECIC, like any other insurance company based its premiums on the premise that the higher the risk the higher the premium. He said that the ECIC and its predecessors had been in existence for 50 years. However, he understood that there had been some recent changes that had changed ECIC’s landscape. He asked what challenges these changes presented.
Dr Kohlo responded that ECIC was filling a market gap in the provision of medium to long-term insurance. ECIC needed to make a profit. The higher the risk, the higher the premium was. ECIC would not do business in a country if it felt that to do so would increase that country’s debt burden. ECIC could not divorce itself from politics. ECIC was now selective as to which projects it adopted and had changed its mechanism. When ECIC began, project financing was favoured, whereby everything depended on funding from the project; but more recently, but more recently sponsors had been unwilling to put enough money into projects. Nowadays, it was increasingly a country’s government that was expected to fund banks. This meant a move away from capitalism and could be construed as political interference. The Americans also were doing it. ECIC was working to find the best way of promoting capital goods exports from South Africa. There was no perfect answer.
Mr Njikelana asked if ECIC conducted financial intelligence activities in other countries to evaluate investment risks, what impact the national crisis had on ECIC’s work, and about ECIC’s response to the challenges arising thence. He thought that legislative changes should be considered. He understood that Dr Kohlo was considering the need for possible legislative changes to improve the working environment of ECIC. This would need a more elaborate motivation.
Dr Kohlo responded that ECIC had a special financial intelligence unit for country risk analysis. It was for this reason that ECIC had a strategic alliance with the Electoral Institute of Southern Africa. Despite the global financial crisis, ECIC was still receiving new projects, most of them in Africa. Development had not stopped. If a country was in turmoil, the first step was to examine its infrastructure. Hotels had to be built to attract tourists.
The Chairperson asked why bonuses had increased quite dramatically from the previous year (page 67 of the Annual Report). She asked about the effects of ECIC’s downsizing, and if any units were negatively affected. She observed that ECIC’s audit report was unqualified (Annual Report, page 24), and that board meetings were relatively speaking well attended. However, she asked why certain board members’ attendance at board meetings was poor, and for reasons for absence at financial meetings.
Dr Kohlo explained that in the restructuring ECIC had dismissed no one; instead it had called upon staff to be multi-skilled and to accept a reshuffling of duties, while accepting work previously done by others. Salaries remained unchanged.
Dr Kohlo explained the composition of the board, which included an official from the DTI who examined budget matters, Dr Kohlo himself from the company on an operational basis, while the National Treasury examined asset management perspectives. If the DTI official was unable to attend, a deputy was requested. There was a Credit Insurance Committee which reviewed assets. This had representatives from International Relations and Co-operation who handled bilateral treaties, from the National Treasury, and from the Reserve Bank. It was audited by the Auditor-General, except the money given in 2000.
The Chairperson said that questions remained unanswered. The dollar issue was not clear to her. The Committee would send outstanding questions to Dr Kohlo, who should respond in writing by Monday at the latest in time for the Committee's next meeting on Tuesday, 20 October 2009.
National Lotteries Board short-listing
Thereafter, the Committee then began a closed session on the short-listing of candidates for interviews for the position of chairperson for the National Lotteries Board.
The Chairperson thanked Mr Ntuli, the Committee Whip, for chairing the Committee during her absence in Korea to attend the 60th global aeronautical conference, which was of especial importance since it was linked to climate change and development issues.
The Chairperson put on record that the administration of Parliament was currently working unilaterally. It was a policy that chairpersons be informed of redeployment of committee staff. If Committee staff members found themselves redeployed, they were instructed to tell their managers to follow Parliament's policy. She ruled that she would not accept redeployment of Committee staff without first informing her in writing. She would not tolerate disruption of the Committee’s work.
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