Adoption of the Report on Budget Vote 31; ECIC, Khula, NEF & IDC: briefing

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Trade and Industry

07 May 2002
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PORTFOLIO COMMITTEE N TRADE AND INDUSTRY
8 May 2002
ADOPTION OF THE REPORT ON BUDGET VOTE 31; ECIC, KHULA, NEF, and IDC: BRIEFING



Chairpersons: Dr Davies (ANC)
Mr Moosa (NCOP, ANC)

Documents handed out:
Report of Portfolio Committee on Trade and Industry on Vote 31 of the 2002/2003 Budget (Appendix 1)
 

Presentation by Export Credit Insurance Corporation of South Africa (ECIC)
Presentation by the Industrial Development Corporation
The following documents are awaited.
Presentation by the NEF Corporation
Presentation by Khula

SUMMARY

The Committee was briefed by the development financial institutions: Export Credit Insurance Corporation of South Africa, the National Empowerment Fund, Khula and the Industrial Development Corporation. The presentations were on the company structure, vision and objectives and the employment composition of the companies. They also highlighted the progress that they have done. The Committee questioned the companies on their strategy to become visible in rural areas and the manner in which they co-ordinated their financing of SMMEs. The urgency of the funding needs of SMME's was emphasised.

MINUTES
Adoption of the Report on Vote 31
Dr Davies read through the changes that were made to the previous report. He asked if Members had any questions or comments before the adoption. One Member explained that he could not say anything regarding the report because he was new in the Committee. A Member asked Dr Davies to give the Committee more time to go through the report. Dr Davies declined the request due to lack to time, saying that the Committee had been given enough days to look at the report. There was uncertainty whether to adopt the report. Dr Davies insisted that there was no time and the budget had to be tabled in Parliament soon. The Committee adopted the report.

Export Credit Corporation of South Africa
Dr Kgolo explained the purpose and function of the ECIC and the target goals that they have set for themselves. He outlined the structure of the company and its staff composition and how the company had been regulated. The last part of the presentation focused on the progress that the ECIC had made as part of its functions. Please refer to the attached presentation.

Discussion
Mr Bruce (DP) commented that the new business that has been written since 2 June effectively amounts to R8.7 billion. Is that risk entirely covered, both the guarantees and the export credit insurance? Is the amount re-insured?

The second slide refers to the approval by the Reserve Bank on 22 November of exchange risk cover. How does that fit in with the reinsurance? And since they have been operating from June, have they made a profit or broken even?

Mr Bruce pointed to the staff composition which showed that sixty five percent of their staff were women. South Africa's gender composition is fifty one percent the company is way over it. How would this be addressed?

Mr Mathee responded that the R8.7 billion was in fact a re-insurance portfolio itself and that it was inherited from the DTI. On the question of profitability, he said that the ECIC had positive cash flows, R1.2b in reserves. However, he also said that the ECIC estimated underwriting a loss for the next two or three years due to large provisions for unplanned premiums.

Ms Sono asked why there were no women in the ECIC management.

Dr Kgolo said that the expertise that are needed in management were rare around the world and that it was difficult to find both women and black people with such expertise. However, he expressed the ECIC's commitment to staff training and development as the company grew.

Mr Moosa interjected that since the black population was seventy percent of the entire population, he expected the ECIC to match the demographics.

Dr Davies was wondering about the claims record in some of the areas that are generally considered to be problematic. Zimbabwe for example is eight percent of the SADC application. Are those mostly for export credit? He would imagine it was an investment. More people who are selling to Zimbabwe would probably want to have their export insured. In terms of total approval, was there any indication of those areas where payment of claims was problematic?

Mr Mathee said that this was an existing project. They have had to re-issue policies and reconsider the cover. There were problems; the export did not comply with the original conditions for cover. It turned out that they re-worked the application and it became a new application. The amount is R244m and the project is fully completed by now. The project is running at a profit. Whether there are problems areas on the new applications, the applications are always problematic but each application has gone through a very intensive assessment process and risk mitigating structuring. And they all of them to be viable.

Ms Hajaij (ANC) asked the ECIC to elaborate which countries in East Africa, Americas and East Asia are included in the ECIC's total approvals.

Mr Mathee said that Americas referred to Columbia and Asia referred to China.

A Member asked if the ECIC had a country-specific variable insurance premium rate or a uniform insurance premium rate across all countries.

Mr Mathee said that the rates varied.

Mr Lockey (ANC) asked Dr Kgolo to elaborate on the problems that the ECIC was facing with Cuba, Argentina and Zimbabwe. Why did the ECIC decide on a write off to one of these countries?

Mr Mathee said that Cuba was neither paying nor disputing the dept of R20m. A Member suggested that instead of Cuba paying in hard cash, they could pay through their intellectual property that could be deployed in South Africa.

A Member asked if there was a policy governing write-offs and wanted to know at what stage were write-offs permitted.

Mr Mathee said that the policy was still in progress but that every project is assessed according to thirty potential cause of concern.

Mr Moosa wanted the ECIC to comment if the establishment of the ECIC had any advantages so far compared to leaving the private sector to do the functions of the ECIC.

Mr Kgolo agreed that the was an advantage because the ECIC was accountable to Parliament and that it was in the process of taking over the powers and functions that the banks had with regard to export insurance.

Ms Hajaij asked how NEPAD fitted into the process and which East African countries were involved.

Ms Sono asked for the time frames for getting women into management structures.

Dr Kgolo said that would depend on staff training.

National Empowerment Fund (NEF)
The NEF outlined its company structure, functions and vision. The presentation focussed on how the NEF was planning to assist historically disadvantage business and what division of the company will carry out certain functions.

Khula
Mr Mbatha outlined the company structure, functions and vision. He also outlined some of the progress and operations that Khula had done. In his presentation he maintained that Khula made a huge contribution towards the employment of 788,650 and that with an assumed multiplier of 1.5, the number of jobs was just over a million.

IDC
Mr Jiya reminded the Committee that the IDC made an almost similar presentation the previous week. He only highlighted the IDC's involvement in other African countries. He also emphasised IDC's commitment to the promotion of small, medium and micro enterprises (SMME's).

Discussion
Mr Theron asked the IDC if it was concentrating on SADC countries only or other African countries too. He also asked if the IDC was investing in Angola for oil.

Mr Jiya said that currently eighty five percent of its investment was within SADC and that the rest of the continent was still new to South Africa. On the second question he said that they had not yet invested in Angola and that most of the oil from Angola was committed to the USA.

A Member wanted to have a sense of the failure and success of SMME's and also how money was recovered if a business failed. He also asked Mr Mbatha (Khula) what was happening to the R 30m fraud in Khula.

Mr Jiya said that the IDC was guiding new entrepreneurs and that their allocation of bad dept was seven percent, which was lower than that of commercial banks.

Mr Mbatha said that the prosecution for fraud was in progress.

Dr Davies (ANC) asked for Khula's time frames. Was there any co-ordination between the IDC, Khula and NEF in terms of financing SMME's?

Mr Mbatha said that the scenarios that they put forward largely depended on the DTI and he had no idea of how soon they would be realised.

Mr Jiya responded that the establishment of the risk capital fund looked at equity investment in SMME's.

Ms Ntuli (ANC) asked all the delegates to explain their strategy to make themselves visible and intensively helpful in rural areas. She insisted that she was not convinced that the development financial institutions were visible in rural areas and that they have no strategic plan towards rural development. Mr Lockey agreed with her and insisted that there was a need to develop rural areas.

Mr Jiya said that the IDC was looking into innovative ways of getting into rural areas. Mr Motshabi said that the NEF was planning a strategy that will look at development in rural areas and that it had established a development agency in the Northern Cape in order to look at opportunities for development. Mr Mbatha said that Khula had assisted one million enterprises of which seven hundred and thirty thousand were in rural areas. However, there was no policy for evaluation.

A Member asked Khula to list the problems with the broad mandates. Secondly, did the IDC monitor the progress of companies that it funded? Have the NEF done any development work.

Mr Mbatha (Khula) said that the issue was not broad mandates but to determine the capacity that would be needed to meet the mandates.
One the second question Mr Jiya said that the IDC was not yet able to monitor progress and he agreed that there was a need for monitoring.

Ms Sono asked Khula to translate its ROE 1.5% into numbers in its tenth slide. She also wanted to know if there were NEF offices in Soweto and if the NEF had brokered any deals and if so in what industries.

Mr Moosa (ANC) asked what the relationship was between the NEF and the IDC. He also wanted to know the value of the mature assets of the IDC. How was Khula going to source more funding for micro loans?

Mr Motshabi (NEF) said that the IDC and NEF had joint ventures and investors and co-owners and also that two of the NEF Members served on the IDC board.
One the second question, Mr Jiya referred Mr Moosa to the IDC's annual report for details. One the last question, Mr Mbatha said that Khula was funded by the DTI and do not borrow funds anywhere at all.

Mr Zita (ANC) asked the nature of the relationship among development agencies set up by IDC. Mr Jiya said that developmental agencies reported to the local government and that the IDC does not monitor them yet even at provincial level.

In concluding the meeting, Dr Davies reiterated the need and urgency to fund SMME's. Mr Moosa said that the Committee would expect a more comprehensive report the next time, rather than mere examples. A Member added that support institutions for SMME's needed to be emphasised too. Ms Ntuli was emphatic that time frames should be set these issues to be discussed and realised. She observed that issues were endlessly avoided. Dr Davies suggested that it was possible for the Committee to discuss such issues during recess but he pointed out that some of the issues were at an early stage.

The meeting was adjourned.

Appendix 1:
Report of Portfolio Committee on Trade and Industry on vote 31 of the 2002/3 Budget:

The committee has examined the budget of the Department of Trade and Industry (Vote 31) for the 200213 financial year as well as the forward estimates for 2003/4 and 2004/5 included in the Estimates of National Expenditure, and reports as follows:

 

Trade and Industry
 


The main features of the 2002/3 budget are:


The Department is allocated R2.468 , 6 million for the financial year 2002/3) while forward estimates anticipate it receiving R2.627,0 million and R2.787,5 million in the years 2003/4 and 2004/5 respectively. This compares to the R2.2 14,6 million voted in last year's budget which rose to R 2.280,1 million in the Adjusted Appropriation for 2000/1. The Department's budget for 2001/2 is broadly in line with last year's forward estimate for 2001/2 (which was R2.465,l million), as is the amount anticipated for 200314. The Department's budget can thus be described as a constant budget with minor fluctuations.

The 2002/3 budget is divided into six programmes, compared to the previous five.

These are: Programme 1, Administration, (6,9 % of the total), Programme 2,

International Trade Development, (2,7%), Programme 3, Enterprise and Industry

Development, (33%), Programme 4, Consumer and Corporate Regulation (5.4%),

Programme 5, The Enterprise Organization (34%) and Programme 6, Trade and

Investment South Africa (18%). The programmes broadly correspond to the

Department's operational divisions.

After growing for several years, the budget for Programme 1 stabilizes and in fact decreases slightly from R179.5 million in the adjusted appropriation for 2001/2 to RI 69.6 million in 2002/3

The budget for activities falling under Programme 2 is stable with R65.9 million budgeted for 2002/3 compared to the R65,5 in the Adjusted appropriation for 200112. The main activities budgeted for under Programme 2 are multi-lateral and bilateral trade negotiations, the promotion of African economic integration and the activities of the Commission for International Trade Administration (previously known as the Board of Tariffs and Trade)

 

Programme 4's budget is increased from R96,8 million to R134,1 million. Some of the increase is accounted for by transfers to the Companies and Intellectual Property Office

(CIPRO).

Programme 5's budget increases from R628,1 million to R840,2 million. 97% of the expenditure under this programme consists of transfers under various business support programmes. The increase is largely accounted for by anticipated better take up of improved support programmes, and expenditure is expected to rise further to R963,8 and R 1.021 million in 2003/4 and 2004/5.

The budget for programme 6 is stable being R455,8 million in the Adjusted appropriation for 2001/2 and R443 , 6 million in 2002/3.

Transfer payments account for approximately 82% of the total budget. A significant part of these transfer payments are made to associated DTI "family institutions". There are 17 public entities and 3 other bodies that report to the Minister of Trade and Industry. These now participate in regular meetings of the Council of Trade and Industry Institutions.

The budget for 2002/3 can also be divided into the following functional categories:

The budget for Programme 3 is reduced slightly from R 854,3 million in the Adjusted appropriation for 2001/2 to R815,l million in 2002/3. Programme 3 is the Department's largest programme and includes mostly transfer payments to associated Council of Trade & Industry (COTTI) institutions. The decrease in expenditure in the present and previous budget year reflects the normalization of expenditure following significant one off transfer payments to re-capitalize Khula, initial start up contributions to the National Empowerment Fund and increased contributions to Namac, Proudly South Africa and THRIP.

Transfer to associated COTI R690m 28%

Institutions

Incentives and Offerings to

Business R1.320m 53%

Human Resources R290m 12%

Operations Rl70m 7%

The amount for incentives and offerings to firms is up from the approximately R1 billion in

2001/2.

The Director General indicated that new systems were being put in place to promote greater efficiency in the use of resources. Although these appeared to focus on minor house keeping" matters, they were part of a process of getting the Department to operate faster, smarter and quicker in delivering services. For example, an investigation by the Department found that in the recent past 48% of incoming telephone calls were not answered. This has now been reduced to 29%

The Department also reported further significant improvements in organizational efficiency during 2001/2. For example, the average time to register companies or close corporations at the Companies and Intellectual Property Office (CIPRO) has been reduced from 21 to 3 days.

Once again, this year's budget includes in the Estimates of National Expenditure a table of "output indicators" and "targets" for Programmes 2-6. A feature of the Committee's interaction with the Department this year was that we were provided at our request,

with a detailed Report on the extent to which output and service delivery targets identified in the 2001/2 budget were delivered upon.

The latter report, which the Committee regards as a major step forward in its budgetary oversight, indicates that by and large the Department attained most of the output targets identified in 2001/2. The report also indicates that there were improvements in organizational efficiency, corporate governance and work environment.

In terms of employment equity, the Department reported that it had enhanced the Public Service Commission's targets of achieving 50% equity by race and 30% by gender and set itself a target of 80% equity by race and 50% by gender. We were told that it had surpassed the latter targets, although there is still a need to address the issue of gender equity in the more senior grades.

The improvement in the Department's record on spending observed in 2000/i was continued in 2001/2. There is now a reasonable alignment of budgeted and actual expenditure with underspending anticipated to be la little over 10% in 2001/2 (excluding some reductions and anticipated commitments to be rolled over) compared to the more than 30% recorded before 1999.

 

The Estimates of National Expenditure 2002 do not sufficiently address the financial and resource transfers to provinces, neither do they adequately reflect the impact of the Department's spending in the various provinces. The Department through a range of economic development agencies currently funds and coordinates various economic programmes in the provinces and local municipalities.

The Committee also had an opportunity, as in previous years, to engage on budgetary issues with four of the DTI's associated institutions- the Industrial Development Corporation, the Council for Scientific and Industrial Research, Ntsika and Khula. Highlights of these discussions included:

The Industrial Development Corporation (IDC)

 

The IDC is also extensively involved in projects elsewhere in Africa. Over the past year it increased its African portfolio from 30 projects in 9 countries to 47 projects in 16 countries. Approvals in other African countries total almost R 7,6 billion since 1998.

 

taken some steps to make its facilities available to smaller enterprises. 68% by value of its portfolio is with clients with an asset base below R120 million.

The IDC remains financially strong with capital and reserves of R24,4 billion (Larger than any bank in the country). Its involvement in two poorly performing steel projects-Columbus and Saldanha- did, however, involve it in a capital loss. R5,5 billion was injected into the restructuring of Saldanha and its incorporation into Iscor. This restructuring is now complete and Saldanha is now debt free, selling its products on the domestic as well as export markets.

The Corporation reported further progress in its efforts to promote Small and Medium Enterprise development as well as Black Economic Empowerment. The proportion of approvals going to empowerment companies was 33 % in 2001 compared to 27% the previous year. By value, this represents around 16% of total approvals. Although the Corporation does not directly service the micro or very small business sector, it has
The IDC made 515 investment approvals worth R 9,3 billion during 2001, more than double the amount in the previous year. These assisted in the creation or sustaining of 20 000 job opportunities and generated R10,5 billion in additional export earnings.

The Council for Scientific and Industrial Research

The CSIR's annual turnover is R810 million, of which 60% emanates from clients and contracts. The Council will receive just over R300 million from government this year, approximately the same as in the previous budget year.

The CSIR participates in the COTII. The Council indicated that together with the DTI a number of medium term objectives had been agreed, including enhancing science and technology contributions to industrial technology policy development, raising awareness in industry of technological development, contributing to development of SMMEs, BEE and access by women to technology through its Technology for Women in Business project. It also has 60 rural development projects, many in poverty nodes identified by government.

The CSIR is also involved in initiatives, projects and contracts in 17 other African countries and is contributing both to NEPAD and preparations for the World Summit on Sustainable Development. It has also been awarded contracts by major International Firms including Rolls Royce, Boeing, Daimler Chrysler and the European Commission for two food related projects.

The CSIR confirmed that the trend identified last year of declining private sector involvement in Research and Development (R & D) continues to be a cause for concern. We were told that South Africa spends around 0,7% of its GDP on R & D, much less than successful industrializing countries. Less than half this comes from the private sector: Reasons which the Council said were cited for this included:

Less attractive tax incentives for R & D in South Africa than other jurisdictions,

The fact that incentive schemes such as SPII were based on the matching grant principle meant that there was no real incentive to begin completely new projects,

An environment that did not sufficiently encourage university-based researchers to develop commercial applications of their research.

Ntsika Enterprise Promotion Agency

 

Ntsika is also carrying out a review of service provider intermediaries it has worked with, and will be dis-accrediting those that have not met defined performance criteria.

 

 

Ntsika is allocated R 40 million in the current budget, an increase from the R35 million it received in 2001/2. It is anticipated that it will receive R50 million in the 2003/4 and R60 million in the 2004/5 budgets. The agency expects, however, to receive a substantial increase of donor funding -rising to R 35,1 million in 2002/3 compared to R12 million in 2001/2. We were told that this money was confirmed. Including other smaller allocations, Ntsika would spend R85,1 million in 2002/3 compared to R64,4 million in 2001/2

In 2002/3 Ntsika plans to support 280 service providers, train 1.050 staff of service providers and develop 1.120 business links. It expects service providers to train or assist 60.900 entrepreneurs in 81.500 SMME's, thereby assisting in creating or sustaining 40.000 jobs.
Ntsika reported that from the time of its inception in 1996 until the end of 2001, it had supported 349 service providers, trained 2.435 employees of service providers and developed 2.310 business links. Service providers trained or assisted over 100.000 entrepreneurs in over 79.000 enterprises. Jobs created or sustained over this period are estimated at over 98.000.
Ntsika is continuing to re-focus its activities away from its previous main activity of accrediting service providers to a demand driven provision of particular services to small business. Its focuses will be on information provision, training and advisory services.

Khula Enterprise Finance

An impact assessment study on Khula's products between 1996 and March 2001 carried out by UMSA's Market Research Bureau found that these had contributed to the creation and sustaining of 788.650 jobs over this period. 70% of these were in survivalist enterprises, with a high attrition rate.

 

 

 

Recapitalisation remains an issue for Khula, and we were told that Khula will not be able to achieve its targets unless further capital is obtained- We were told that of the R 200 million requested from DTI two years ago, Khula received R81 million in 2000/1 and R30 million in 2001/2- Of the funding requested within the framework of its current five-year projection, we were told that Khula had received R70 million from the DTI and that the re-valuation of some properties in its portfolio would add a further RI 20 million. No further commitments have been made by the DTI
Khula welcomed the fact that DTI plans to hive off funding of survivalist enterprises to a new fund, saying this will help Khula to refocus its activities.
Khula plans to approve loans of R106 million and guarantees of R406 million during the current financial year, leading to the creation or sustaining of 124.498 jobs. It aims to ensure that administrative expenses do not exceed 8% of the value of its activities and that a return is secured on its capital not less than the rate of inflation.

Comments

The committee is pleased to report continued progress in the management, presentation, and reporting on the DTI's budget. In our last year' 5 report, we noted that programmes were more closely aligned to the major activities of the Department, that there was more effective financial reporting that better control systems were in place and that the trend evident in previous years of significant understanding was being corrected. All these achievements have been carried over into this year's budget. In addition, we now have the Department reporting to the Committee on the extent to which it has delivered on output targets.

In our view the latter represents an important step forward for our Committee in terms of its monitoring and oversight of the Department's work, as well as an important step towards effective outcomes based budgeting. The next challenges to take this process further are, in our view:

To find a mechanism to present and discuss with the Committee proposed output targets ahead of their presentation in documents tabled at the time of the budget speech.

To develop a coherent and convincing methodology to indicate the extent to which the output targets have impacted on the identified outcome targets viz. " lead and facilitate access to sustainable economic activity and empowerment for all South Africans through higher level of investment and increased access to international markets for South African products, and to create a fair, competitive and efficient market place for domestic and foreign enterprises as well for consumers". We were told that during the course of this year, the Department hoped to put in place reporting systems that would at least enable it to identify more clearly what proportion of its total funding was being deployed to support SMME's.

As indicated above, the Committee found that in general there was improved delivery in 2001/2 on the output targets identified. A few matters of concern were however, identified BV the committee these included

Whether sufficient resources are being allocated to support our team involved in the WTO negotiations. This is not a simple matter. The cost of maintaining one person in Geneva is equal to employing 6 persons at director level. and the Department has already deployed the previous Deputy Director General of International Trade to head the team in Geneva, while establishing a dedicated team led by the former Minister-Counselor in Geneva in Pretoria. The Committee is nevertheless of the view that the WTO negotiations are of critical importance and pose many challenges. We look forward to engaging further with the Department on how these efforts can be re-inforced in' including ways in which Parliament and our Committee can assist in this regard.

 

 

It is our earnest hope that the recently established Cooperatives division will be in the near future in consultation with stakeholders; devise an effective support programme for cooperatives.
The time it is taking for the National Empowerment Fund to become operative. After many years, the NEF has at last received some funding from the Department and IDC to cover operational expenses and to launch its venture capital fund, but transfers of funds from restructuring of State Owned Enterprises have yet to be approved by the National Treasury.

The Provinces and Local Authorities

The Department will be requested to comment on the issue of provincial transfers indicated above, including possibly extrapolating some figures in respect of individual provinces by the time the Budget Vote debate takes place in the NC OP With the objective of strengthening the relationships between the various economic development role players, nationally, provincially and locally, we would also be interested in receiving reports quantitatively measuring the employment, investment and economic empowerment impact, as well as indicating successes and challenges in the various provinces and municipalities. We are aware that some of this information can only be supplied by MECs with regard to funds generated from provincial revenue. In this respect, we call on the Minister to request these inputs from MECs via the Min-MEC process. MECs could also be instrumental in generating an economic status report from local authorities in their respective provinces. It is envisaged that the NCOP debate will provide a useful forum for MECs to deliver initial reports this year, and more comprehensive reports in coming years within the MTEF framework.

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