Industrial Development Corporation & South African Micro-finance Apex Fund 2009/10 Annual Report: follow-up meeting

Meeting report

Opening Statement
Mr Z Ntuli (ANC) informed the Committee that the Chairperson, Ms E Coleman (ANC) would not be able to attend the meeting. He had been asked to chair the meeting in her absence. He said that both the Industrial Development Corporation (IDC) and the South African Micro-finance Apex Fund (SAMAF) had already briefed the Committee on their Annual Reports at previous meetings but Members had not been happy with their responses to questions nor their presentations, so the entities were told to return.

IDC Annual Report Discussion: Answers to Previous Questions and Follow Up Questions
The Chairperson told the IDC to start with their responses to questions posed by the Members in the previous meeting.

Mr Shakeel Meer, Divisional Executive: Industrial Sectors (IDC), said there were a large number of questions posed at the previous meeting that the IDC wanted to address:

Q: What was the Auditor-General’srole in auditing the IDC’s financial statements? Was it a clean audit?

Mr Meer replied that the IDC received an unqualified audit opinion. The financials were audited by independent auditors. The A-G indicated that he was happy with this.

Q: Members wanted clarity on why Mr M Pitse received a bonus of R1 648 000. How did he fit into the organisation?

Mr Meer answered that Mr Pitse was not an employee of the IDC. He was the Chief Executive Officer (CEO) of one of IDC’s subsidiaries, Foskor (Pty) Ltd. The bonus would have been given in this capacity. This was in line with targets set by the IDC’s board and Foskor’s performance system.

Q: How did the IDC align itself with the Industrial Policy Action Plan (IPAP2).

Mr Meer responded that the IDC did not focus on this in their presentation because it had been included in their corporate plan. The IDC worked quite closely with the Department of Trade and Industry (DTI), the Economic Development Department (EDD), and the different Ministries across the board depending on the sector they were working in. The IDC has aligned itself with IPAP2 and planned to align itself further in 2011 as they wanted to drive South Africa’s industrial policy. The IDC had developed action plan strategies for certain sectors and was working on developing certain projects in line with IPAP2 on an ongoing basis with different sectors. The IDC would also be working with various government departments to ensure its policies were aligned with IPAP2.

Q: What was the IDC’s group revenue for the last financial year?

Mr Meer replied that it was R7.8 billion.

Q: What role did the IDC play in the economic crisis in terms of job creation? How many jobs was the IDC expected to create and how many did they expect to save?

Mr Meer answered that the IDC played a significant role during the recession in terms of trying to save jobs. If the Committee looked back three or four years, the number of jobs the IDC saved through their funding came to less than 5% of the total number of jobs that they saved or created. In the last financial year, because of the financial crisis, this ratio has changed. Approximately 30 to 40% of the total amount of jobs saved and created were categorised as saved jobs and approximately 60 to 70% were jobs that were created.

Q: What was the IDC’s cost of borrowing? Were there other sources of borrowing? There was a reference in the Annual Report to an interest rate of 20%. Was this the normal rate that the IDC charged?

Mr Meer explained that this was not the normal rate IDC charged. It was at a time when interest rates in the country were fairly high. This was the exception. Most of IDC’s other rates were closer to the current prime rates.

He said that the IDC raised its funds internationally and locally. As the economic crisis kicked in, the IDC started looking for alternative sources of funding. They looked at cheaper sources of funding so they could pass on the benefits. The IDC managed to access the Unemployment Insurance Fund (UIF) where they borrowed money at a fixed rate below the prime rate and passed on the benefit to the clients. This was targeted at businesses that were efficient at either creating or saving jobs. The IDC also tried to interact with different organisations to see if there were other sources of funding that they could access.

Q: What role did the IDC play in developing Intellectual Property (IP)?

Mr Christo van Zyl, Senior Strategist: IDC, explained that the IDC had two strategies for developing intellectual property. The one was to encourage the commercialisation and development of South African IP. This was done through support programmes for industrial innovation. The second strategy was to develop IP through the IDC’s venture capital products where the IDC would fund companies that were still at an early stage in developing and commercializing their products. The IDC was also involved in the importation of IP when it came to the larger and medium-sized projects that the entity supported.

Q: What was the cost per job created?

Mr van Zyl replied that the IDC found that the cost per job fluctuated significantly depending on the industry in which the IDC was involved. Certain industries were more labour intensive. There were industries where more jobs could be saved even with a little money injected into the industry. Other industries were more capital intensive where a larger amount of money would be needed to save a few jobs. It depended on the company as well. Some companies only required working capital and were more efficient than other companies in saving jobs.

Q: Has the IDC commenced an investigation on the state of transformation in the abalone industry?

Mr van Zyl answered that currently there were three large players in the abalone industry in the country. The IDC was involved with one of the companies. The IDC had introduced black partners into the company. Of the other two companies, one was already empowered while the other was not.

Q: Could the Committee have more clarity on whether the IDC’s funding of their beneficiaries was reflective of the demographics of the country?

Ms Lebo Bodibe, Manager: Office of the CEO (ICD), replied that approximately 70% of the IDC’s funding was targeted for Black Economic Empowerment (BEE) companies.

Q: Could the Committee have clarity on why the IDC needed the DED’s help with regards to the Public Finance Management Act (PFMA)?

Mr Meer responded that according to the Public Finance Management Act (PFMA), State Owned Entities (SOEs) needed permission from the National Treasury (NT) and their shareholders for certain types of activities. Included in these were such things as setting up companies, acquiring a majority stake in a company or taking over a company. This was a challenge for the IDC as these things were part of their normal course of business; they funded companies, bought shares, and set up companies at times. It was not the IDC’s preference; however, sometimes they needed to take a majority stake in a company. Every time the IDC performed one of these actions, they needed permission from the NT, which led to delays.

Q: Should the IDC, as a large and fairly successful Development Finance Institution (DFI), play a role in supporting and mentoring other DFIs?

Mr Meer explained that this was part of the IDC’s role. They had been working closely with a number of DFIs, particularly in South Africa but also in the African continent. The IDC helped the DFIs to put in systems and shared their knowledge with them. This was going to be important going forward because other DFIs would have to fill in the gaps as the IDC started focusing on industrial policy.

Discussion
Mr S Ngonyama (ANC) asked if the IDC offered any other services or packages to smaller DFIs in order to create a greater impact on them.

Mr Meer replied that the IDC’s main focus was in South Africa. The IDC worked with Khula, the Land Bank and a number of local development institutions. The IDC interacted with the smaller DFIs where there were areas of overlap. Khula and the IDC wanted to work together to target certain businesses.

Ms F Khumalo (ANC) asked for a broader picture of the IDC’s alignment with IPAP2. She asked why one of the abalone companies had not been assisted by the IDC in terms of funding.

Mr van Zyl answered that the one company applied for funding while the other company did not. The IDC did not need to get involved in the other company as they had found funding elsewhere.

The Chairperson clarified that Ms Khumalo actually wanted the IDC to comment on the alignment with the new growth path of the country and the IPAP2.

Mr van Zyl explained that the IDC was aligning itself with the new growth path and the IPAP2. There was a definite overlap of the IPAP2 and IDC focus areas. The IDC was, through its sectoral involvement, covering all areas of the New Growth Plan. There were certain areas such as the social economy and public sector growth that the IDC did not get involved in. the IDC was particularly involved in climate change and the green economy.

Mr N Gcwabaza (ANC) asked the IDC to expand on what Foskor was. It was the first time that the Committee was hearing about the IDC’s subsidiaries. He noted that 60% of the jobs the IDC created came from the fund that was earmarked for distressed companies. He asked them to be a little more specific in terms of actual numbers. The IDC’s presentation also spoke of funding alternative energy sources such as wind and solar power. He asked if the IDC was funding the establishment of a manufacturing plant for solar heating panels, which would also include funding for developing these skills. In order to manufacture solar energy, the country needed to train people for the next three years.  He noted that the IDC’s funding assisted companies and created jobs. He wanted the IDC to be more specific about how many jobs they had created and how many they had saved. He asked the IDC to do an audit of how many companies and SOEs they were helping. They should do this when they had time.

Mr Meer responded that Foskor was a subsidiary of the IDC that was started decades ago to mine and process phosphate rocks. The phosphorous that was produced was used as an input into fertilizer. It had operations in Phalaborwa and Richards Bay.

He explained the IDC’s approach to the funding of the renewable energy sector. The IDC wanted to see as much energy as possible being manufactured locally. This was taken into consideration when the IDC funded certain projects. The IDC tried to encourage as much local investment as they could in the renewable energy sector. The IDC was in the process of looking at projects to install and roll out solar heating panels and they had already funded a business that would expand its production to manufacture heating panels. There was not enough capacity to allow the country to reach its objective of installing solar heating panels. The IDC had met with local and international manufacturers to encourage more production. One of the main challenges was the lack of skills to install the panels. The IDC thought it was possible to train people to do the installation.

Ms Bodibe addressed the question on jobs created and saved by the IDC. She said that 25 000 jobs were expected to be created through the IDC’s funding activities. Just over 8 800 of these jobs were created by funding companies that were in distress.

The Chairperson told the IDC that it was important to help developing businesses in rural areas. He asked them what they were doing for rural areas.

Ms Khumalo added that she wanted to know if there were any other rural areas besides in the Western Cape that were being assisted by the IDC.

Mr Meer replied that the IDC invested in rural areas in a number of areas, the agro-processing side in particular as well as some mining related activities. The IDC’s assistance was not restricted to one province; it cut across all provinces. The IDC funded rural areas in the Northern Cape in terms of mining. The Eastern Cape was assisted with dried fruit and nuts operations. Mpumalanga’s citrus and forestry operations were also funded by the IDC. 

Ms N Sibhida (ANC) said that she had heard from many SOEs and departments that they were having difficulties doing their work because of the PFMA. She asked the IDC to elaborate on this.

Mr Meer explained that as a DFI, the IDC had to fund new business regularly and had to set up new businesses. Sometimes, the IDC ended up taking a majority stake in these businesses. According to the PFMA, each time the IDC did this, they needed to get approval from the National Treasury and the shareholder. They saw the value of having this in the PFMA; but sometimes it made certain business transactions difficult.

Ms B Dambuza (ANC) stated that skills development in renewable energy was a major issue for the country. She asked if the IDC’s initiatives for renewable energy had already been developed or if it was going to be developed in the next financial year. There was a certain target set by the IDC for the 2009/10 financial year. She asked if this target had been met. She wanted to know if the IDC had any relationship with the Department of Human Settlements (DHS) regarding their greenfields operation.

Mr Meer replied that many government institutions were focusing on solar water geysers. The green focus was something that the IDC has taken on board as part of their response to IPAP2 and the New Growth Path. The IDC wanted to ensure that skills were developed along with these initiatives. These initiatives were not part of the objectives for the previous financial year. 

Mr Meer answered that he did not understand the Member’s question on the greenfields operation and the DHS. The IDC was trying to set up new businesses from scratch. If there was a need to interact with the different government departments, then they would do so. It just depended on the sector the business was involved in.

Ms D Dlakude (ANC) addressed the IDC’s funding of agriculture in the rural areas. There were economic farmers and small scale farmers. She asked if the IDC focused on already developed farmers or the small scale farmers. She thought the IDC had to support emerging farmers so they could be able to stand on their own. She was working with rural areas that were trying to get funding from Khula Enterprise for their businesses. What kind of business was Khula financing?

Mr Meer explained that the IDC supported both economic and small scale farmers. The IDC focused on high value crops and the agro-processing side of things. If existing farmers needed to expand then the IDC would fund them. The IDC also tried to fund entrepreneurs with new operations. They had developed a scheme that would focus on funding small scale farmers to help them move to larger operations. The scheme would help emerging small scale farmers meet their working capital needs.

Mr Meer stated that he could not answer the question on Khula Enterprises. The question had to be directed to Khula.

Ms Khumalo noted that women were being left behind in all aspects of what the IDC was involved in. She asked the IDC to focus on women and if the entity had any targets that allowed them to see if they were meeting their objectives when it came to women. 

Mr Meer replied that 25% of the businesses that the IDC funded in the last financial year were owned by women. There were specific funding schemes that the IDC used to make it easier for women to get into business and to acquire shareholding opportunities. The IDC wanted to see women actively involved in the management of business as well as developing their skills.

The Chairperson thanked the IDC for their responses.

SAMAF 2009/10 Annual Report Briefing
The Chairperson reminded the Committee that SAMAF had previously reported to the DTI but from May 2010 had been transferred to the EDD.

Mr Kumaran Naidoo, Acting Chief Executive Officer: SAMAF, briefed the Committee on SAMAF’s mandate, vision, mission and objectives. SAMAF offered three main services: financial services where the entity could provide loans to a maximum of R10 million to its financial intermediaries (FIs), technical support such as the development of operational policy documents, and Financial Services Co-operative (FSC) supervision.

SAMAF discussed its financial performance for 2009/10. The entity exceeded its target for setting up FIs; however, they failed to meet their target for setting up FSCs. The number of end users supported by FIs amounted to 6 170, which exceeded the target of 3 120. The number of end-users that were women was 86%, which exceeded the target of 67%. Rural areas received 75% of the funding while semi-urban areas received 25% of the funding. In terms of the development impact, the actual FI loan repayment rate was 92% compared with a 50% target. Overall, end-user satisfaction as well as stakeholder satisfaction was achieved. Loans made up 68% of the total funding, which exceeded the target of 40%. However, funding for capacity building amounted to 31%, which did not meet the target of 50%, and savings mobilisation amounted to 1%, which did not meet the target. In this respect, FIs did not meet their requirements.

SAMAF’s aim was to disburse R20 million in loans and R10 million in grants. Instead, they disbursed R13.1 million in loans and R6.3 million in grants. They showed a 40% improvement in FI service delivery. 30% of SAMAF’s services were delivered within their turnaround times, which did not meet their target of 60%. SAMAF showed a 61% compliance with performance management. Regarding attendance at advisory board meetings, quorum was not achieved due to resignations of members.

An analysis of SAMAF’s performance by province showed that they did not disburse or disbursed very few loans and funding for capacity building to the Eastern Cape, the Northern Cape, the North West, Kwazulu-Natal and Free State provinces.   

SAMAF received a qualified opinion from the Auditor-General due to the fact that management failed to provide sufficient and appropriate explanation to substantiate the entity’s journals. Disciplinary action was being taken against one official. There were also emphasis of matters on the restatement of corresponding figures, irregular expenditure, material impairments, and the non-consolidation of controlled FIs. The Auditor-General found that there was non-compliance with regulatory and reporting requirements, there was a lack of effective and transparent systems and internal controls regarding performance management. The Auditor-General questioned the usefulness and reliability of the reported information, changes to the planned performance information had not been approved, performance targets were not verifiable, and reported targets were not valid or complete as inadequate source information was provided.

Corrective actions were taken by SAMAF. Monthly verification systems were implemented to prevent restatement of figures. Disciplinary action was taken against two staff members that were involved in irregular expenditure. Improved controls were implemented in both disbursement and the monitoring of FIs to curtail impairments. Processes were implemented to manage performance information by collectively setting targets. A mid-term review would be conducted by the internal auditors to confirm that the performance adhered to required standards. Any changes to the targets would follow the required approval processes. The non-consolidation of FIs was resolved by amending the contracts.

Discussion
Ms Dambuza thanked SAMAF for their honest presentation. She asked Members to understand that the entity was new to the Committee. The current acting CEO was also new. He had only been the CEO for the past four months and still had to prove himself. She asked if the financial intermediaries (FIs) had a monitoring mechanism to ensure that the loans were being used for their intended purposes.

Mr Naidoo answered that the more established institutions that SAMAF funded had good monitoring systems in place. SAMAF was working with developing and emerging institutions to put together monitoring mechanisms and to improve reporting systems. This was one of the issues that the Auditor-General reported on in his report when he said that some of the targets could not be verified. Quarterly forum meetings and capacity building training sessions were being held and SAMAF was looking at what the gaps were in the institutions. SAMAF worked very closely with institutions to ensure that their reports were up to standard. Improvements would not happen overnight; it would take a while.

Mr S Njikelana (ANC) asked how SAMAF’s report correlated to their “pilot period” now that they were a fully fledged entity. He recently came across a survey that looked at a number of aspects of financing Small, Medium and Micro Enterprises (SMMEs). He asked how SAMAF related to the survey and what lessons they had drawn from it. The survey showed that the percentage of support that was given small businesses was approximately 60%. This was a shockingly high figure. He hoped that the Economic Development and Trade and Industry Portfolio Committees could get access to the survey. SAMAF also wanted to support distressed businesses but the IDC already had a similar programme. Why should SAMAF have a programme as well? He noted that Limpopo Province had quite a high number of intermediaries that were used by SAMAF. He asked if there was anything that SAMAF could do to ensure that the needy and deserving provinces had an appropriate amount of FIs that could focus on the needs of those provinces. The Eastern Cape, Northern Cape, KZN, the North West and Free State did not receive or received very little disbursements for capacity building. He asked SAMAF to elaborate on this. Mpumalanga and KZN received disbursements on capacity building that were higher than the loans they received. He asked for clarity.

Mr Naidoo explained that there was a “pilot” report that talked to tweaking some of SAMAF’s processes, systems and products. There was a huge need for SAMAF because of the mandate it was given.  

Mr Naidoo addressed the question on the support to distressed businesses. He said that the programme dealt with institutions that were directly funded by SAMAF that were in distress and could not pay back loans to the FIs. SAMAF wanted to ensure that these businesses did not collapse.

He noted that there were no disbursements for the Northern Cape and Eastern Cape. There was no mechanism in place to show the funds given to certain institutions by SAMAF. SAMAF usually gave the money through FIs or other such institutions in the provinces.

Mr Naidoo answered that municipalities had to play a key role in ensuring that FIs played a key role in the provinces. He already had written letters to municipalities asking them to invite SAMAF to their facilities so that the entity could present to them their services. SAMAF also worked with other stakeholders such as banks and universities as well as foreign donors.

He addressed the issue of the survey. It was his opinion that there were too many bureaucratic processes and too much red tape when it came to funding institutions. SAMAF wanted to focus on how they could simplify this process without being reckless and negligent with public funds.

Ms Nosipho Ngewu, Human Resources Executive: SAMAF, added that SAMAF was using a benchmarking process to pick up gaps that were in the FIs. They found that the developing FIs had challenges with reporting because they lacked capacity. Benchmarking workshops were used to identify where there were weak areas and what interventions could be used. This benefited them because it allowed them to interact with other FIs. Some provinces were not performing well because they did not know what they were capable of doing. They lacked the presence of FIs. This was why SAMAF’s disbursements did not reach some provinces.

Ms Thobeka Njozela, Chief Financial Officer: SAMAF, addressed the question on why some provinces received larger disbursements for capacity building than the amounts they received for loans. She used the example of Mpumalanga that had been given a certain amount of money for capacity building in the previous financial year but did not use it all. The province had also been given a certain amount during the financial year under review and decided to take more than what they were allocated. This was why Mpumalanga’s capacity building disbursement was higher than their loans.

Ms P Bhengu (ANC) asked what requirements were not met by FIs during the disbursement of loans and grants. How did SAMAF align itself with the New Growth Plan in terms of job creation?

Mr Njozela replied that for each proposal that was submitted by FIs, there were criteria that was used to determine if the institution deserved the support and the extent of the support. The criteria looked at whether the institution should receive a loan or a grant for capacity building. The criteria were linked to the requirements of the PFMA. If the requirements were not met, it did not mean that the institution would be rejected outright. An official would be sent to capacitate that institution. There were few institutions that were rejected. SAMAF worked very closely with the EDD earlier in the year to align its strategy with EDD’s strategy. SAMAF’s strategy was also being aligned with the New Growth Path.

Mr Njikelana hoped that at some stage SAMAF would propose a developmental strategy on how to ensure there were adequate FIs in needy provinces. It was fundamental that all provinces had FIs. He wondered why SAMAF should have its own fund for distressed businesses when the IDC had one as well. He asked if SAMAF could link its fund with the IDC’s.

Mr Naidoo explained that SAMAF only funded certain institutions, and these institutions were funded to a certain value. The IDC did not provide funding below a certain value. SAMAF funded institutions that it had a direct interest in. If SAMAF found that one of its institutions was in distress and needed R1 million, then they could provide the funding.

The Chairperson asked Mr K Manamela (ANC) to do the closing remarks.

Mr Manamela noted that SAMAF’s presentation showed a marked improvement since the 19 October report. Many Members had started to question the necessity of SAMAF but the Committee was now hopeful that the entity would contribute to the tasks that government faced such as service delivery and assisting the people of the country. The Committee appreciated SAMAF’s highly improved report.

The meeting was adjourned.