National Empowerment Fund on its 2011 Strategic Plan

NCOP Trade & Industry, Economic Development, Small Business, Tourism, Employment & Labour

31 May 2011
Chairperson: Mr D Gamede (ANC: KwaZulu-Natal)
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Meeting Summary

The Select Committee were briefed on the following:

- The NEF Strategic Plan 2011/12- 2014
- Key Objectives of the NEF
- Products and services offered
- Its performance since inception
- Investment Portfolio

The National Empowerment Fund (NEF) presented a report on its Strategic Plan. Special attention was paid to the products and services it offered. The NEF through its various funding schemes aimed to add jobs to the South African economy. Further, the NEF aimed to increase revenue and profitability so as to reduce its reliance on the central government for funding. The NEF aimed to invest in Small and Medium enterprises (SMEs) and ensure that they received full return on investment and potentially generate income. Through its employment scheme designed specifically for Black Africans they hoped to empower the community and make them self reliant and independent. It outlined its plans for the next two years to ensure more jobs would be created and revenues for the already existing business would continue to grow.

During the discussion period the members focused primarily on the debating the risks involved in launching the ventures and running the NEF itself. The members were concerned that if the senior staff of the NEF should quit there was not a contingency plan to protect it from failing. A further concern was that not enough jobs had been created. Did the NEF require re-capitalisation to support it creating more jobs? Other questions related to NEF’s investment in mining, farming and franchising. In terms of job creation, the Committee noted that R15 billion was used to create 7 000 jobs. It said that this was not sufficient and more jobs should have been created with that money. The NEF was also told to reduce its use of consultants. 

Meeting report

National Empowerment Fund (NEF) Strategic Plan 2011/12- 2014 presentation
Mr Setlakalane Molepo (NEF Divisional Executive: SME and Rural development) providing a background of the NEF and its mandate. Established in 1998, the NEF was set up as a driver and facilitator of Black economic participation through the provision of financial and non financial support to black empowered businesses.

The key strategic objectives of the NEF were to
▪ promote and support business ventures pioneered and run by Black people;
▪ promote the understanding of equity ownership among Black people;
▪ provide Black people with direct and indirect opportunities to acquire interests in state owned and private business enterprises; and
▪ encourage and promote investments, savings and meaningful economic participation among black people.

The alignment of the NEF required it to communicate with government departments. For example, one of the objectives of the NEF Act required it to correlate its objectives with those of the DTI outputs, especially in terms of raising competitiveness and supporting for co-operatives and small business.

Mr Molepo outlined the NEF’s alignment to government objectives by stating the government’s imperatives and aligning them with the NEF’s delivery promises.

NEF Governance
Ms Barbara Lombard (NEF Corporate Services Executive) outlined the organisational structure of the NEF and its investment governance structures. There were four structures within the Investment Governance Structure: firstly, the Fund Management division investment Committee (FMD IC); the second was the Executive Investment Committee (EXCO IC) which had the authority to approve projects costing between R3 million and R10 million; the third was the Portfolio Management Committee which approved programmes under R3 million for existing clients and performed risk assessments; the fourth was the Board Investment Committee which approved projects between R10 million and R50 million and made recommendations for projects costing over R50 million to the Board of Trustees.

Product and Services
Mr Nhlanhla Nyembe (NEF iMbewu Fund Manager) outlined the products and services offered by the NEF as well as the rationale and objective of the particular product and service as per the 2011/12 strategic plan:

1. Rural and Community Development Fund (RCDF): This fund would focus on providing finance to projects that were run or owned by rural communities. The key feature of this program would be that the rural communities would own the project right from the beginning. In order to ensure that the ventures were successful the NEF would facilitate capacity building for the communities by providing them with the technical and management knowledge.
2. iMbewu Fund (Start-ups and SME Funding): This fund focused on SME funding that could cost between R250,000 to R10 million. Some of the ventures that could receive funding include franchises and entrepreneurship ventures.

3. uMnotho Fund: This fund would provide financing for those entrepreneurs who wished to buy into an already established business. This fund would aid in increasing the number of entrepreneurs in the economy. The size of funds available would range between R5 million and R50 million. The funds could be used for expansion of already established businesses and as start-up capital for new ventures.

4. Strategic Projects Funds: This fund acted to stimulate economic activity. Some of the areas where NEF had invested this funding were in renewable energy, mining and minerals beneficiation, agro-processing, tourism, business process outsourcing and infrastructure.

Non-Financial Support
Mr Nathan Nadasan (NEF Post Investment Manager) stated that the non-financial support was organised in two separate departments: Pre-Investment Department and Post- Investment Department.

The Pre-investment Department was the first point of contact for the prospective applicant. Whether the applicant had an idea or one page business plan they would contact the Pre-investment Department to gain information about the NEF. Moreover, the Pre-investment Department had four key responsibilities: Product advisory ervices, Administration of application, identifying investment opportunities and presenting due diligence requests

The Pre-investment Department would often go and seek out potential applicants who had shown strong aptitude for business and assist them in developing a business plan.

He stated that the Post-investment Department would aim for the business to become less dependent on government funds. Instead NEF would aim to ensure that the businesses was successful and provided a full return on investment for the NEF. The NEF had instituted mentorship programs that would provide assistance to entrepreneurs in areas of business management and technical support.

Performance Reporting
Mr Nadasan stated that in 2010 the NEF invested R3,6 million in pre-mentorship programs. It experienced many success stories in terms of business venture success rates and increased revenues.

NEF was capitalised in 2005 and since then it had received 38 000 enquiries, 10 000 formal applications and had granted 270 entrepreneurs with R2.3 billion in funding.

[See presentation on funding and disbursement graphs]

He further outlined graphs showcasing sectors where NEF had invested and a breakdown of geographical areas where NEF had made most of its investments.

Strategic Plan 2011/12
Mr Molepo detailed the NEF strategic plan for the fiscal year 2011/12. He outlined the strategic themes; performance targeting including the NEF key performance areas and its targets; the key performance indicators and the planned geographic spread (GDP contribution by province).

The NEF in the future aimed to ensure that 40% of its funding would go to support businesses owned by black women. Since its inception, the NEF had created in excess of 20 000 jobs.

The NEF Imbizo campaign aimed to increase awareness of its products and services to remote areas of the country. To date it was estimated that 10 400 people had been reached within provinces.

Investment Portfolio
The RCDF focused in development in the following sectors: Leisure Tourism, Non farm activities, Livestock, Forestry and fishing. Ms Lombard outlined a breakdown of all the investments NEF had made in each province. Additionally she provided a breakdown of some of the major projects NEF had funded:

1. MGRO: This related to the acquisition of four citrus farms to supply South African and international markets.
2. Butterworth Shopping Centre: Located in Eastern Cape, the NEF invested R50 million in the project with 26% of its share owned by the local community.
3. Masiza Mussel Farm: Superior quality mussels exported all over the world. 1005 of the mussels produced were sold before even harvested. The NEF provided loans of R4.95 million over a period of 7 years.
4. Turning Rural Communities into Business Owners: The community owned 33.4% of a four star hotel in Kwa-Zulu Natal. This hotel would generate a profit by the end of 2011.
5. Amajuba Berry Farm: Supplies berries to Europe and Woolworths in South Africa.
6. Orange Farm Shopping Centre: R50 million project in Gauteng would generate 750 jobs.

Mr Nyembe outlined some of the SME projects:

1. iMbewu fund was used to purchase 9 franchised stores that would rent out building equipment.
2. The fund would also be used to fund the purchase of “My Stores” especially in townships.
3. The uMnotho Fund deal funded R44 million in chicken farms. They invited Brazilian experts to provide training to run the farms.
4. The uMnotho Fund also funded R50 million in ‘Just on Cosmetics (Pty) Ltd’
5. The uMnotho Fund funded R7.9 million to facilitate petrol suppliers in rural areas.
6. The uMnotho Fund provided financing for the production of a movie “A Million Colours”.

The Strategic Projects Fund
Mr Molepo stated the NEF had signed deals with companies in the rare metal industries. The industry was worth 15 billion and would generate 7000 jobs. Additionally NEF would be funding a coconut water project. The Project would cost approximately R6 million. The i3 Africa Broadband project, the BUSA hospital group, lemon farming, coking coal project, SA metals pig iron industry had also received funding from the NEF.

Mr A Nyambi (ANC; Mpumalanga) congratulated the NEF on a detailed presentation. He asked why the challenges that the NEF was facing in some of the poorer provinces were not mentioned in the presentation. He argued that it was important to outline the challenges being faced in 2011/12. The Committee would be able to make comparisons as to how the challenges were being overcome.

Secondly he wanted to know what the NEF was doing to reduce the use of consultants as a cost cutting measure. Thirdly, he noted that when the NEF made visits to funded sites they would use local translators. How were the local translators, who were not employees of NEF, being used?

He asked for a breakdown of the failed business ventures and also for the NEF to elaborate on the BUSA hospital group. Finally, he wanted to know if the NEF planned to open offices in all the provinces.

Mr A Lees (DA; Kwa-Zulu Natal) wanted the NEF to produce annual reports stating how many jobs were created and how many projects succeeded and how many failed. Secondly he wanted the NEF to clarify whether the black people that the NEF was assisting were all South African citizens. He praised the mentorship programme and appreciated it being discussed in the presentation. He wanted to know how the NEF had dealt with land ownership when setting up business in rural areas. He showed his scepticism over the chicken farm project citing that this industry had not been successfully established in South Africa.

Furthermore he criticized the concept of opening shopping centres because he argued that they did not create jobs, instead they displaced jobs and stores from within the community and place them into the mall. Finally he requested a detailed financial report.

Ms Van Lingen (DA Eastern Cape) complimented the NEF on its presentation. She asked if the NEF could provide written guidelines for “fronting money” for the purposes of investment and who was NEF’s biggest client. Moreover, she wanted to know whether the pre-investment NEF looked at every document they received because there were people in her constituency who never received any help when filling out the application.

She asked if the people who sat on the board were limited to how many additional boards they could sit on. People who sat on too many boards would not be able to perform their tasks effectively. She then asked about the occupancy rates of the four star hotel and how many visitors were required in order to break even. Finally she wanted to know how the ownership of the coconut farm works and whether the NEF could provide more details on the matter.

Ms Dikgale (ANC; Limpopo) said that the budget they had for each province was different and why was it so low for Limpopo.

The NEF answered by stating that they were committed to investing more and more in each province. The slides presented did not have a budget, rather they contained the value of investment in the province to date. The members were asked to identify any projects they felt the NEF should fund.

Mr Mnguni (ANC; Free State) wanted to know whether the NEF looked only at the internal rates of return. He asked what was the maximum percentage the NEF took from the government for financing its ventures. He asked what the NEF looked at when awarding franchising contracts: whether they were willing to train an entrepreneur or did they look for people with already established business knowledge.

He then focused his questions on the mining sector and asked what were the considerations when investing in mining, as mining was a capital intensive endeavour that might not yield high levels of jobs. If some of the miners banded together and created a cooperative and wanted to invest in a mining corporation, would the NEF provide entrepreneurship finding for such a venture.

Mr K Sinclair (COPE; Northern Cape) asked about why there was a large disparity between the number of applications received and those that were finally approved. He complained that more people should have received funding and that the NEF should be doing more to train more people so that they could get funding.

He critiqued the presentation citing that too many examples of where the NEF had succeeded were given but not enough about the ventures where they had failed. He gave an example of the Paprika Project launched by the government in Northern Cape, worth approximately R140 million, which had resulted in complete failure. What had the NEF done to learn from all the mistakes in order to ensure that businesses with potential were supported?

He asked about the turnaround time when assessing the applications. Was NEF susceptible to bureaucratic breakdowns or was it able to overcome and process each application in a fast and efficient manner? He asked the NEF to outline and detail the risks involved when financing these ventures

Finally he stated that according to the NEF Strategic plan, it aimed to create 8 000 jobs while the mandate of the central government was to create 500 000 jobs. This suggested that the NEF was not successfully aiding the government in its job creation quota. Therefore he asked whether it would be necessary to re capitalise the NEF so that they could create more jobs.

The Chairperson asked the NEF whether holding active board seats was part of their employment contract and whether there was a cap on how many boards each member could sit on. He queried the Imbizo campaign and how accessible the NEF branches were in rural parts of the country. He wanted the NEF to explain how the NEF had been able to cope with the high cost of franchising fees. In terms of job creation, R15 billion was used to create 7 000 jobs. This was not sufficient and more jobs should have been created with that money. He then asked what the NEF was doing to reduce the use of consultants as there were too many consultants. He wanted to see a reduction.

He asked why the shopping centres were not being built in townships to improve the township’s economy. He asked whether the people who were awarded the contracts were from a particular province where they would be setting up the business and what was stopping them from moving to another province and taking the money to that province. Finally he asked about the NEF’s risk assessment strategies, especially if there was a large employee turnover.

Mr Molepo explained that all the risks identified in the strategic plans had a contingency attached to them. While many of the stated risks might not occur, however, if some did then the NEF already had a series of steps it would take to ensure that the effect of the damage was minimised. For example, if the entire staff of the NEF quit, then the NEF had a strategic document to assist them in such a crisis. He invited the Committee to visit the NEF office and sit with the risk assessment officer to go over the agency’s risk management plan.

Mr Molepo said that they would be working on the poorer provinces to help them improve their GDP and the data provided in the presentation was merely a snapshot that was bound to change.

Mr Nadasan explained that when a loan had been approved, the daily operational management driver where revenue was more than the expenses, was the key component. That was to say, they wanted to ensure the business made money on a daily basis. Further, they often phoned the client at odd hours to ensure that the client was at his/her business location. As such the entrepreneur had to be in the province in order to be able to carry out the business.

Mr Molepo stated that the local people used during the field visits were there only as translators and facilitators. Until now they had not had the need to use facilitators as they had been able to find people within their regional offices who spoke the local language. The BUSA Hospital Group project emanated from the notion that the black community should be granted access into the medical industry which until now had been dominated by white South Africans.

Mr Molepo noted that the NEF had enquired about establishing offices in provinces where they had no presence. In reply to Mr Lees question, he said that the black people supported by the NEF were all citizens of South Africa and did not belong to any other country.

In terms of the i3 Fibre optic project, the NEF promised to provide a full written account of the project’s details. On the chicken farm that had had to over come logistical and other challenges, NEF had received technological and other expertise from the Brazilians who were the second largest producers of chickens in the world and experts in the sector.

The advantage of opening regional shopping centre had been that for the first time those who were unable to establish businesses in black areas during apartheid, could establish businesses in black areas that thrived. Moreover, the NEF had ensured that smaller entities were encouraged to join the larger stores within the shopping centre, ensuring that the businesses established prior to the opening of the mall, were all maintained.

Mr Nadasan explained that the rural clients who applied for funding were generally unsophisticated. Since the NEF had been burdened with 98% of the financial risk and given the small size of its staff, it would be impossible for the NEF to cope with training and ensuring that all the ventures were successful. Further, the NEF had placed a ceiling that only 10% of the entire fund could be spent on mentorship and consultants. They had informed all the mentors and consultants that they could not rely on the NEF to sustain their consulting businesses.

He noted that no one within the senior staff sat on more than eight boards. Since the staff would not get directors fees they usually sat on four to six boards. All staff members who sat on boards had to undergo directorship training. Eventually the NEF would prefer that several of the mentors would sit on the board which would free up a lot of time for the senior staff.

In terms of unsuccessful ventures, the NEF claimed that they would only close down a business as a last resort. They would first attempt to restructure the projects and intervene to prevent the business folding.

The hotels required an occupancy rate of 40% to break even. The NEF would invest in marketing initiatives to make sure visitors kept coming and the hotel would be able to generate a profit by December 2011.

The NEF could not own more that 49% of the stake in the business. However, the average stake tended to be 35%

With respect to mining, the NEF stated that its aim was to service the mining sector and not get directly involved. Mining would require expertise which the NEF did not have. However, it could set up ventures that would supply critical resources to the mining industry. Moreover the NEF would entertain funding the cooperative to help it purchase a stake in the mine. However, that would be contingent upon the stipulation that the cooperative must have operational involvement in the mine and it not be for passive investment.

The NEF agreed that franchising fees had been high. However, the NEF had been able to negotiate a discount in the prices and create a partnership with the business. This partnership would benefit both the franchise and the NEF in increased revenue and expansion of the business.

Finally the Mr Molepo responded to the Chairperson’s critique stating that the investment of R15 billion to generate 7000 was sufficient. They urged the Committee to look at the investment as a profit generating venture as well. Instead of importing the ore to other countries and buying back the purified metal, South Africa would be able to quadruple its income if it produced the metals itself. The ore would be made into pure metal such as titanium and zirconium. Therefore, this should be looked at as a profit generating venture which would ease the reliance on foreign imports in the future.

The meeting was adjourned.


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