The Committee met to receive briefings from the Small Enterprises Finance Agency (SEFA) and the Industrial Development Corporation (IDC) and the and views from experts on the role of BRICS on economic development; a presentation on Set Top Boxes manufacturing sector and one on the implications of green economy on economic development. There was no time to hear the last two presentations.
SEFA was established on 1 April 2012, as a wholly owned subsidiary of the IDC, through a merger of the South African Micro-Finance Apex Fund (Samaf), Khula Enterprise Finance Ltd and the small business activities of the IDC. Although all the structures for SEFA had been set up, there were still hitches in the merger. It was established to serve Small Medium and Micro Enterprises (SMMEs) and Co-operatives. These sectors faced challenges in the development of a strong and large SMME sector, which was characterised by small and weak business performance, a poor uptake of Khula and SAMAF products, a poor state of visibility among small businesses, duplication of services among government agencies, and a high cost of delivering financial services to SMMEs.
The central issues were the strategic objectives of SEFA, which were to increase access and the provision of finance to SMEs, thereby contributing towards job creation; developing and implementing a national footprint for effective product and service (direct lending); building an effective and efficient SEFA that was a sustainable, performance-driven organisation; building a learning organisation; building a SEFA that met all legislative, regulatory and good governance requirements; and building a strong and effective SEFA brand, emphasising accessibility to SMMEs.
Problems and challenges arising from the merger were related to payroll issues, the signing of contracts, and company culture. There were people who still remained in government service while they were not willing to serve SEFA. The Committee urged the CEO to resolve the pending human resource challenges, such as recruitment, poor communication of the merger strategy and payroll matters, as soon as possible.
Committee members expressed concern at the potential for duplication with direct finance institutions, and the impact on the efficacy of SEFA and the IDC. They were also concerned that loans to small businesses were still riddled with lengthy processes and were expensive. The high expenses could be reduced by having regulations to govern the financial and operational discipline of the intermediaries. The Committee urged the CEO to report on the strategy for lowering costs, funding for people with disabilities, and encouraged wider reach through road shows and other methods.
The IDC made a presentation on the creation of jobs within the context of a green economy, based on a report produced by the IDC, the Development Bank of Southern Africa, and Trade and Industrial Policy Strategies (TIPS). The expansion of a domestic green economy was the cornerstone of economic development for the country’s New Growth Path strategy. Substantial steps had been taken by South Africa in formulating and implementing strategies aimed at adapting to the effects of climate change, and reducing its carbon emissions to a sustainable level. The green economy was considered one of the critical tools for socio-economic development. It presented opportunities for the expansion of productive capacity and service delivery, and contributing substantially to job creation. It was estimated that greening South Africa’s economy could create 460 000 new jobs by 2025. This was supported by the experience of partners from the other BRICS nations.
The Chairperson welcomed the Industrial Development Corporation (IDC) and Small Enterprises Finance Agency (SEFA) delegations to the Committee. The Committee expected that the delegations were better prepared this time to make their presentations. SEFA was a new entity and there were numerous challenges involved in integration and harmonisation following its merger with other businesses entities. She assured the delegations that the Committee’s intentions were to offer guidance and proffer workable solutions.
Apologies were received from the following members:
Mr M Oriani-Abrosini (IFP), Mr S Ngonyama (COPE), Mr N N Gcwabaza (ANC) and Mr M Hlengwa (IFP)
The Chairperson introduced Mr Geoffrey Qhena, CEO of the Industrial Development Corporation (IDC), Mr Qhena then introduced the Chief Executive Officer, Small Enterprise Finance Agency, Mr Thakhani Makhuvha and then introduced his delegation from IDC, which included Mr D Jackson, Wholesale Division, Mr A Ramavunga, Chief Financial Officer, SEFA, Mr S Meer, Corporate Strategy, and Mr F Masondo, Strategy Business Plans.
Mr Qhena said the opportunity to make the presentation was extremely important, because of the guidance and input expected from the Committee’s oversight mandate. The regulations and principles in the Public Finance Management Act (PFMA) under the National Treasury were paramount in the Corporation’s work.
Mr Qhena said the establishment of SEFA had been supported by Cabinet, to achieve a more unified approach towards SMMEs. SEFA was established on 1 April 2012, as a wholly owned subsidiary of the IDC, through a merger of the South African Micro-Finance Apex Fund (Samaf), Khula Enterprise Finance Ltd and the small business activities of the IDC. It was established under the support of the IDC Act, and was a creature of statute. There was a shareholder agreement between the IDC and the Economic Development Department (EDD) covering SEFA. SEFA’s corporate plan was informed and guided by a number of legislative and policy rules, such as the New Growth Path, Government Outcome 4 and other national laws. It was a pleasure to present SEFA before the Committee for the first time. Although all the structures for SEFA had been set up, there were still hitches in the merger.
Briefing by SEFA on its Strategic Plan for 2013/2014
Mr Makhuvha said that SEFA was established to serve Small to Medium Micro Enterprises (SMMEs) and Co-operatives. These sectors faced challenges in the development of a strong and large SMME sector, which was characterised by small and weak business performance, a poor uptake of Khula and SAMAF products, a poor state of visibility among small businesses, duplication of services among government agencies, and a high cost of delivering financial services to SMMEs.
He further clarified the mandate of SEFA and said it required support from other parts of the organisation, such as SEFA’s regional offices, retail finance intermediaries (RFIs), micro finance institutions (MFI)s, co-ops, commercial banks, specialised funds, provincial development corporations (PDCs), the post office and Post Bank.
Corporate governance structure
The vision of SEFA was to be the leading catalyst for the development of sustainable survivalist, micro, small and medium enterprises through the provision of finance. Its mission was to provide access to finance for all these businesses, throughout South Africa, by providing funds on the basis of wholesale financing and direct lending, providing credit guarantees to small businesses, supporting the institutional strengthening of financial intermediaries so that they could be effective in assisting small businesses and creating strategic partnerships for sustainable small business development and support.
Mr Makhuvha said the target market consisted of small businesses that had not been able to access finance from banks and the finance sector. These included survivalist and micro enterprises, who possibly would require loans of between R500 and R50 000, small enterprises requiring loans of between R50 000 and R1 000 000, and medium enterprises needing loans of between R1 million and R5 million.
The strategic objectives and the goals of SEFA aimed primarily to increase access and provision of finance to small businesses, thus supporting job creation. Furthermore, it aimed to implement an effective delivery nationwide, and build itself into a sustainable and performance-driven organisation, with a strong brand, emphasizing accessibility to SMMEs.
The main aspects of SEFA’s wholesale model were defined. These included connecting with more robust financial intermediaries, such as Small Enterprise Finance (SEF) and Women’s Development Business, and the development of demand-driven products that could be distributed through intermediaries operating in line with SEFA’s developmental objectives. It wanted to increase the utilisation of the Credit Indemnity Scheme (CIS) by all registered banks and other non- bank financial intermediaries, using improved processes, and to influence interest rates charged by intermediaries to SMMEs, for instance, by the capping of rates.
The difference between the SEFA model and others was that SEFA focused on providing finance directly to SMMEs that were unable to access funding from the private sector. To this end, it would implement simpler loans and approval processes to increase its efficiency in the processing of applications. The current average turnaround time was 60 days, which would be reduced to 30 days in the next 18 months. SEFA aimed to provide affordable pricing of products as well. It located its regional offices within the IDC or other development finance institutions (DFIs) to enhance cost efficiencies. It would pro-actively target businesses in sectors identified in the New Growth Path, such as the green economy, manufacturing, agro-processing and tourism.
SEFA had announced a Co-Operatives Support Programme, and had a set target on the number of co-operatives to be supported, and the value to be circulated. It had set clear outcomes in terms of the support provided. It envisioned setting international benchmarks, including against other African states. It also envisioned providing support to co-operatives on capacity building and mentorship.
Mr Makhuvha said that 30% of the funding distributed was directed towards youth-owned enterprises, 45% towards priority rural provinces, whilst 40% of funding was aimed at businesses owned by women, gradually increasing in subsequent years, and 70% towards businesses owned by black people
The central issues were the strategic objectives of SEFA, which were to increase access and the provision of finance to SMEs, thereby contributing towards job creation; developing and implementing a national footprint for effective product and service (direct lending); building an effective and efficient SEFA that is a sustainable performance driven organisation; building a learning organisation; building a SEFA that meets all legislative, regulatory and good governance requirements; and building a strong and effective SEFA brand, emphasizing accessibility to SMMEs.
Other issues covered were products and services such as direct lending and non-financial services; - non-financial services; corporate targets; the delivery network through which SEFA distributed its services, and the resultant cost effectiveness.
Funding and pricing strategy
Mr Makhuvha said SEFA advanced between R500 and R5 million to small, micro and medium enterprises either directly to business owners, through retail finance intermediaries and through banks using credit guarantee scheme. He added SEFA planned to disburse over R737 million to more than 15 000 small firms, most of which were micro enterprises, by the end of the 2013/14 financial year.
Mr H Hoosan (ID) said he noticed the term survivalist was used widely, and asked for a definition of the term. Recognising expansion of a nationwide footprint, he asked how SEFA measured its success on the ground. Were there any programmes to expand awareness and access in the rural areas -- for instance, the use of advertisements, and other methods of publicity to encourage people to subscribe to products? He said the growth rates were ambitious, and asked how SEFA expected to meet those rates. In reference to the procurement process mentioned in the presentations, he asked if attention was being paid to local procurement. Would members of the public and intermediaries be invited to the road show? Were there any partnerships foreseen with banks to help potential clients? What contributed to the high cost on disbursements, shown on the last slide? In order to avoid of throwing money into a bottomless pit, what was the rate of success on recovery of loans? What percentage would go to women and SMMEs? Of the offices planned, how many were operational?
Mr X Mabasa (ANC), said SEFA had pleaded it did not have money to provide refreshments when holding workshops, and questioned whether there was scope for providing for refreshments in the budgeting of SEFA? He doubted the effectiveness of RFIs, and asked if the CEO could address the challenges of RFIs, with a view to marketing them. Was it making sense for development? Was it effective in a country like ours? He asked for an explanation of the percentages referring to the targeted groups of those who owned various businesses. What was the organisation’s stand on people with disabilities? Where were they in the scheme of things? Departments struggled to satisfy the integration of people with disabilities. He asked for clarity on direct funding; the development of a direct lending product with commercial banks; investigation into rural expansion in partnership with chain stores; the improvement of an IT platform; implementation of robust skills and talent management strategy; information on who was learning and how was that being measured. What was the overall goal? Taking into account the number of SMMEs financed, was SEFA duty bound to use cooperatives too? How did the SEFA arrive at the figure on the number of jobs to be created?
Ms D Tsotetsi (ANC) asked what the level of mentoring and the duration was. Did race and gender influence which groups were preferred as far as transformation was concerned? The Committee was yet to get a breakdown on the ownership of businesses by women in other significant business sectors. What was the progress in municipalities about accessing SEFA? In which provinces was SEFA currently in existence? Plenty of money was being spent on retraining skilled people within the Department, and this did not bode well.
Mr K Mubu (DA) asked how long it took to process a loan, given all the demanding paperwork and red tape. What choice did people have in choosing the RFIs, as the majority did not have good standing in society, and there were instances in which they confiscated ID documents from people. Was there regulation of RFI’s fees? What was an intermediary charged in fees? Was this cost transferred to borrowers? Who appointed the Board? How much could one borrow at one time? What was the business starting point, and at what interest rate? What support did the IDC give? On a lighter note, he asked whether the spreading out of SEFA offices included plans to start an office in Nkandla.
Mr Z Ntuli (ANC) asked for clarification on direct lending. How many survivalists were being targeted, and when. The role and function of RFIs had been questioned many times. He questioned the presence of multiple RFIs and asked what time SEFA had to coordinate and meet with them. He also asked which cities and districts SEFA had targeted for its operations. Was it not SEFA’s role to mentor? Did SEFA and higher education institutions cooperate? What was the success and failure rate? What was the turnaround time to process a loan?
The Chairperson asked whether every person in the merged entity (SEFA) had the required working tools to carry on their work. There was a forthcoming revision on the IDC, and the presentation of a consolidated plan was expected. What governance strategies were in place to ensure people interacted with SEFA? How did SEFA communicate and obtain information from their potential targets? She observed that the strategic objectives were commendable, but questioned whether they reflected the situation on the ground. Referring to strategic objective 1 on enhanced pre-loan support programme, in partnership with SEDA, she asked why the enhancement was necessary. Were there any challenges that required the enhancement? Were those challenges related to access to loans? She wondered why, as SEDA dealt with capacity building and not speedy financing. It was observed that SEFA and IDC would enter into additional discourse for partnerships in Gauteng, Mpumalanga and KZN. Was this going to help with SEDA? How were the companies to be selected? What was foreseen as a result of these partnerships? Would the same apply to Shanduka Group’s Shanduka Black Umbrellas? Would this make a difference, given that SEFA was still at the experimental stage? She asked for an explanation of Shanduka Group’s role.
On cooperative financing structures, she said it was confusing and more explanation was required, given that the mandate for co-operatives’ development had been transferred to the DTI. Was there too much duplication of grants in capacity building?
On strategic objective 2 (wholesale lending), was identification of the market and sector needs by province and profile going to be done by listed intermediaries? Why were these intermediaries chosen? What were the criteria used to select these intermediaries, such as Cape Capital Harvest? Why would these intermediaries depend on SEFA? While some had a good footing in business, others did not. Was it because of availability of money that such organisations approached SEFA? Was it problematic to go to commercial banks for funding? To what extent had the opening of extension offices worked, considering that within municipalities there were Local Economic Development (LED) entities which usually arose within municipal boundaries, with scarcely any consultation with surrounding municipalities. The impact of LED in South Africa was a hotly debated subject, with opinions varying from success to utter failures. What was SEFA’s relationship with these and other ancillary organisations? Generally the Committee was interested in seeing synergy, integration and cooperation.
On partnerships being entered into with intermediaries, were there any service level agreements to be included as part of the relationship?
The Chairperson said the Minister of Economic Development had asked that the Committee to scrutinize the costs of lending through intermediaries
Committee members asked about the use of RFIs, indicating that they were concerned that using intermediaries drove up the costs of lending for business owners.
Mr Makhuvha responded to key issues at the strategic level. He provided the context of financing small businesses at the national level. Development finance institutions were extremely few -- the IDC, Development Bank of South Africa (DBSA), National Empowerment Fund (NEF), Micro Agricultural Finance Scheme of South Africa (MAFISA) and SEDA amongst others. There were also others at the provincial level, and it made sense to have them at this level. To avoid duplication, it was important to ensure better coordination and cooperation and ensure that finance was made available as near as possible to those on the ground. With efficiency in mind, this would naturally take time because of the logistical issues and planning. Capacity building at national and provincial level was critical to avoid duplication.
He said SEFA would be well funded and was ensured of funding. The IDC on their part had dedicated in excess of R987 million as a shareholder’s loan to the agency until the end of 2014/15. There was a possibility of a further capital injection of R400 million in two years’ time. The transaction was structured as a loan and not a grant, as there had to be an option for the IDC to recover the loan to safeguard SEFAs’ sustainability in lending.
The main reason SEFA was under the IDC was to ensure it provided the requisite assistance to those SMMEs which wanted to get involved in medium-sized projects. There was a place for small businesses within the economy. SEFA did not have the capacity to do direct lending, which was why there was KHULA DIRECT. SEFA was cognisant of time constraints in service delivery, but Members should appreciate the institution played a central role in undertaking direct funding. For that reason and because of the minimum size entities SEFA had to serve, there was a need to have intermediaries. The advantage intermediaries had was the ability to reach where SEFA could not. So it was about extending service delivery through those intermediaries. In terms of lending, SEFA ensured due diligence but sustainability was essential.
The merger process was not complete yet. There were still hitches caused as a result of normal mergers and acquisitions .
Mr Makhuvha answered the question about the board. The board was comprised of capable and experienced members drawn from a cross-section of the economy, the business sector and trade unions. It was reflective of South Africa, and focussed on development. There had been complications in the merger -- for instance Khula reported to the Department. However SEFA, which was owned 100% by IDC as a subsidiary, could get guidance from the IDC with overall oversight from the Department. As the largest shareholder, the Department should have the ability to guide SEFA’s growth. Communication was critical in this regard, and IDC was learning, as it was only a year since the organisation had been in operation. The IDC had committed R1 billion for three years to enable SEFA perform the function of assisting with funding for small scale businesses.
The Chairperson sought to understand what the allocation of the R1 billion was for, and how it was recorded and accounted for, so that the Committee could follow and monitor it.
Mr Qhena said the money was actually about R987 million. SEFA needed the money for lending, SEFA would draw on the expertise of the IDC, which had good risk management and a strong balance sheet. The IDC would monitor the lending and allow SEFA to perform the role of lending to small businesses. Before SEFA had been established, the IDC had to ensure that SEFA had the capability. The IDC was satisfied that SEFA had the ability and was strategically placed to realise potential spin-offs in the value chain. The R987 million had been given to SEFA as a shareholders’ loan, not a grant from the IDC.
Mr Makhuvha clarified that survivalists were those looking for money to bridge their working capital in their businesses in order to boost their own income generation. In this category were those people who owned shops in townships, the woman at the corner street and the range of SMMEs.
Mr Mabasa suggested the corporation should consider restructuring the mechanism of using intermediaries, because intermediaries were unjust and inequitable. They did not enable small businesses to grow.
Mr Hoosan asked if the IDC had lent R1 billion to SEFA interest free, and wanted to find out whether SEFA then loaned that money to wholesalers at the same interest rate. He doubted the efficacy of such a model, because the intention of government was that funding should reach the communities so that there was real opportunity to improve the quality of life of people in South Africa. Otherwise small and micro businesses would be paying interest rates higher than what a big business paid.
Ms Tsotetsi remarked that as long as small business people were encouraged to borrow, and mentored to increase their turnover, they would be encouraged to surpass the survivalists’ threshold.
Mr Ntuli said in other countries like Brazil, small businesses were mentored by people who went around riding a bicycle. He asked what the mandate was for SEFA, other than selling money. Who was targeted? Was it the RFIs or the common man?
The Chairperson observed that the Committee had advised the government that a merger between SAMAF, Khula and the small businesses entities of the IDC was critical in assisting the category of businesses known as survivalist types. The Western Cape was worse-off -- for instance, small business women in Khayelitsha in the sewing business were afraid to have a discussion. They were dejected since they had been in the same spot for years. They were not growing. They had a savings cooperative and were still dependent on the intermediaries. Consequently members should be cautious of giving the impression that they were targeting survivalists. She asked how many business people progressed to higher levels. What strategies were there to help these people? These people were socialised into poverty and it was the responsibility of government to mitigate the circumstances of poverty.
Mr Hoosan asked if there were any success stories demonstrating empowerment generally.
Mr Mabasa cautioned that the role of most RFIs should not be underestimated.
Mr Ntuli said the common view was always that SEFA would not be able to function without the involvement of RFIs.
Mr Makhuvha said he had taken note of the concerns. He suggested the way forward was headed for offerings in the wholesale lending division, with a restructuring of the offerings strategy around wholesale lending based on what had been discussed. He expected that by the end of the second quarter of this financial year, SEFA would be ready to upscale its activities and serve its client better.
The Chairperson and Members agreed.
Mr Makhuvha there was a need to increase demand for SMME goods and services. This could be done by improving and reinforcing access to public sector procurement. He said SEFA would run awareness road shows with financial intermediaries. In Gauteng, this would begin with Alexandra and Sandton from April 2013 to February 2014. Two roads shows would be held in North West. People with disabilities would be included and this would be reflected in the splits in targets after approval of the corporate plan.
Mr Mabasa said the issue of approval of the plan while not including people with disability, was unacceptable. The corporation should report to the Committee without further delay.
Mr Hoosan said he was baffled by the percentages on disbursements, and asked whether this was the plan from the IDC and whether SEFA would accept it.
Mr Makhuvha referred Members to his presentation, in which the split was provided (see page 3 of presentation): “targeted group 30% youth-owned enterprises; 45% priority rural provinces; 40%; women-owned enterprises; 70% black-owned businesses”.
The Chairperson said the Sheltered Employment Factories (SEF) were an entity of the Department of Labour (DoL) under the industrial parks. She asked how SEFA would operationalize the industrial parks, with people of disability in mind, without partnering. She urged action, because the people with disabilities were talented and skilled and were known to produce fine-looking, artistic quality furniture.
Mr Qhena said that the corporation had set aside R50 million for people with disabilities, but so far only two transactions had been utilised, to the extent of R12 million. There was a poor uptake of loans available to people with disabilities.
Mr Mabasa said that such a challenge seemed to be because of a lack of quantifiable statistics on the population of people living with disabilities in South Africa. He called for more research because of the increasing policy emphasis on mainstreaming people with disability into development. The reality was that there was still general exclusion due to social attitudes, as well as prejudice.
The Chairperson said that previously the industrial parks were a preserve whites, coloureds and Indians. She said with tim,e focus should be on incorporating black people with disability too.
Mr Makhuvha said SEFA had inherited IT systems from the two institutions merged to form SEFA. After the merger, SEFA was ready to address the challenge of implementing a single IT platform for SEFA. There was also a need to realign existing skills to focus on small and micro businesses and to retain skill sets, based on plans to incentivise and recruit the best skills. He also said SEFA could learn from the knowledge resource centre that DFIs had some useful experiences which could be emulated to benefit SEFA. For those seeking partnership with SEFA, such as the intermediaries, once approved they would grow with SEFA. To this end, SEFA, was in talks with labour unions on merger issues. It had identified a head of credit to help with risk assessment. So far, 95% of those who were earmarked for employment had signed letters of transfer.
Mr Makhuvha said there was a misunderstanding on the role of SEFA and its relationship to intermediaries. SEFA would assist with capitalisation as microfinance borrowers sought funding. The intermediaries were few and there was a move to widen the whole intermediary (specialised and retail intermediaries base) to assist in lowering the funding costs. There were MOUs between SEDA and SEFA.
In response to Mr Hoosans’ question, he said 30 days was understandable because the process of applications had to be thorough. All the paper work and other information had to be available. He reminded members that small businesses were sometimes challenged in making business plans and were also out of the formal economy. Most times clients did not have all the information, such as tax clearance documents. With regard to bridging loans, provided all information was available, it took ten days to process a loan.
The Chairperson asked whether there was an organogram agreed on, and whether the correct procedure had been employed in recruitment. Why was there disagreement on signing the contracts now? Was there coercion in signing the contracts? Were there not 25 people who were disgruntled? She said she had been involved in mergers and acquisitions before and knew from experience that assurances had to be given on various issues such as workload, salaries and other terms. She asked if was true that people who were not qualified had been employed, and if such people had then trained those unqualified people who had taken over their positions. She doubted that it could take a year to undertake the recruitment process. She asked if there was a significant merger plan.
Mr Makhuvha said the process of agreeing and eventually signing had been delayed because of some clarifications required on certain positions taken within the organisational structure. The structure had been the subject of debate at a workshop. There had been consultation and a lot of engagement between potential staff, and it had been difficult to get full agreement. There was eventually a concession reached between the bargaining council and SEFA. The bottom line was that some people wanted to remain in the public sector instead of moving to the new parastatal. Although the number was small -- about three to five members of staff -- it comprised 5% of the organisation. He said when SEFA acquired and merged with other businesses entities it took up the legacy of employees from the merged entities. They were given an opportunity to move to SEFA or stay in government. Those from government opted to stay in government because of security of tenure. This situation still prevailed, and as a result some employees were yet to be moved from the government payroll to SEFA. This was a common issue when businesses merged. He said various human resources and corporate culture issues occur. Mr Makhuvha said that usually companies that planned for these things prior to the merger worked through them more efficiently and it was expected that SEFA would work through such challenges.
The Chairperson observed that after a merger the attitudes of the employees could be most challenging. Depending on the effect the merger had on their jobs, employees could become anxious, disgruntled or resentful. Resentment could arise where there was uncertainty on the stability of the merger, salaries, training and about how their jobs could change. Employees at all levels could become insecure about change and whether there was continuous employment, demotions or decreased salaries. Change was a major cause of stress for most people, and job roles often changed significantly. The Chairperson blamed the CEO for not communicating such challenges to his staff. She sensed that was why they felt as if they were being frustrated. She said the Committee was not intruding in administrative matters nor protecting the right of the people, but it was keen on finding a resolution to the current situation and offering better communication channels.
Mr Hoosan said that 30 days was not a timeframe and reducing it to ten days did not make any sense. He said undoubtedly the period of loan processing should take a shorter time.
Mr Makhuvha said it was essential to promote sustainability and undertake bankable business plans. The majority of clients required guidance to be able to develop them into reliable and successful business persons, hence the need for mentoring.
The Chairperson allowed the request to return and explain the micro lending services, and how intermediaries interacted with SEFA. She gave the presenter 30-45 minutes after lunch
The collective agreement entered into with staff was that that there must not be a change to move to any other payroll system.
Mr Makhuvha said the similarity between SEFA and the Shanduka Group was that both were involved in empowering black entrepreneurs and assisting in incubating businesses. Similarly, while SEFA loaned money to small, young and disadvantaged businesses, it sought partners to train those businesses. To this end, SEFA had entered into a MOU with Shanduka Black Umbrellas (SBU) because there were areas of synergy. SBU sought to engage to promote entrepreneurship at an early stage as a desirable career choice. They also nurtured black ownership at the three year critical stage by providing entrepreneurial incubators, procurement, and finance ready businesses. Once they had nurtured these businesses, SEFA took over the clients who would then be drawn nearer to SEFA for loans.
Mr Makhuvha said other than loans; grants were advanced to clients as a vehicle to assist small businesses. SEFA also examined the potential clients’ business totally so that the grants provided through partners complemented the loan funding through partners. Direct lending was approved after a detailed needs assessment of the business was carried out, including their shortcomings, to assist acquisitions of better systems to run their businesses, as well as mentors and marketing aspects. SEFA would then pay fees for mentorship.
Mr Makhuvha said that on building a network of offices to have a nationwide footprint, SEFA took the view of starting small, instead of starting big. The focus was on building a well-trained workforce ready to receive the expected large amount of applications. This had proved successful because SEFA had nine offices. In the Western Cape, for example, it was intended to roll out nine more districts and increase to 48 districts. Priority would be given to provinces where SEFA had not been before. This would be done by communicating in radio, branding, and advertising.
Mr Hoosan asked if there was a cap on the percentage of interest charged by intermediaries.
The Chairperson replied that any rate was charged, because that area of the market was not regulated.
Mr Makhuba commented on the KHULA direct scheme. He said it was a guarantee scheme which ground to a near halt after the 2008 global financial crisis, when the number of defaults caused banks to shove clients away from the scheme. The scheme had never reached the expected 800 guarantee level ever since its launch under SEFA’s predecessor Khula, in 1996. SEFA also aimed to conclude the development of its direct lending product, currently being tested under a pilot scheme in various sites around the country, by the end of November this year. KHULA DIRECT involved three branches, with the result that R21 million had been approved for borrowing out of an allocation of R50 million from Treasury. These had little risk and were in form of bridging loans. Lessons learnt were that credit granting processes were more stringent, so there had not been any impairment and all loans had been repaid.
The Chairperson said there was a need for the Committee to be on familiar terms with the lessons learned. She doubted the reliability of some figures, and accounts which she said did not add up. For instance, the amount allocated from Treasury was R55 million not R50 million, and in this respect, a better system of accounting to the Committee was required. She reminded SEFA that the Committee had contributed to the establishment of KHULA DIRECT, and therefore the Committee owed a duty to the public to answer and be responsible. She asked the CEO to return to the Committee to report.
Mr Makhuvha said there was a report which would be made ready to the Committee without delay electronically. He said the corporation was yet to build a relationship with the Post Bank and Post Offices to assist in rolling out SEFA products and outreach. These organisations had a wide national footprint, and so SEFA would sign an MOU with the organisations. This was part of the detailed business plan.
The Chairperson thanked the presenters for the open response to the questions. It was very clear what challenges had been encountered in setting up the new organisation. The SMME sector was important within the South African economy. It was one of the very critical bases in terms of poverty alleviation and there was a huge potential if efforts were directed at it accurately. Having joined BRICS, it was necessary to shape up towards that.
Briefing by the IDC on its Strategic Plan for 2013/2014
Mr Qhena introduced the rest of the delegation from the IDC: Mr Christoff van Zyl, Strategy; Ms Sabrina Meyer, Marketing; Ms Eunice Cross, Legal and International Finance; Mr Hope Sikhone, Health Unit; Mr Shakeel Meer; Mr Nico Kelder, Senior Economist; and John Meller , Green SBU
Mr Qhena gave a setting against which the IDC’s activities, customers, business lifecycle, sectorial involvement, funding products and regional involvement were based. In South Africa, the African Development Bank (ADB) worked with the Development Bank of Southern Africa (DBSA) to provide funding for some of the important infrastructural development projects, mainly in the area of power generation.
The usual sources of funding included commercial banks, other development finance institutions and other lenders, largely from the developed world. To identify opportunities to reduce its cost of borrowings and to safeguard access to funds in the context of tighter international liquidity during the international economic crisis, the IDC had embraced a strategy of diversifying its sources of funding. Along with on-going meetings with traditional funders and exploring local funding sources, the IDC had been engaging with financial institutions in developing countries. In this regard, the closing of a funding arrangement amounting to US $100m with the China Construction Bank and a new negotiated facility with the African Development Bank amounting to US $200m were important.
The presentation covered IDC financing, also non-financing aspecst, research and policy inputs and project development, which he said was largely unnoticed. The research and development aspect of IDC was not well known, but was very robust.
He added that IDC also dabbled in fund management, in partnership with the Department of Trade and Industry (DTI). There were also partnerships with Land Affairs, where the IDC managed and disbursed funds from the European Union (EU) through the European Investment Bank (EIB). The IDC also puts in its own funds in numerous viable investments as well.
Changes to objectives and outcomes to reflect changing priorities and expectations
Mr Qhena discussed the IDC vision, mission and objectives. The IDC objectives were to support and lead industrial capacity development. This would be achieved through increasing industrial development impact, finance capital and human social, natural and manufactured capital. The IDC had incrementally re-orientated towards industrial development objectives to this end. R102bn had been set aside by the IDC at concessionary rates for various sectors. To date R26bn had been utilised.
Mr Qhena said the IDC had led in securing a competitive steel sector deal with a foreign investor on the basis of secure iron ore supply. New technology and conditionalities had been put in place to ensure that developmental ore prices were passed through as discounted steel prices.
He gave an overview and detailed analysis of IDC’s strategy in the context of the New Growth Path (NGP) and Industrial Policy Action Plan (IPAP). Over the past two years, the IDC had been aligning its operations to support the priority sectors identified by these policies, namely the Green economy; logistics, infrastructure and cross sector principles, tourism, creative industries and high-level services; agricultural value chain; manufacturing activities; and the mining value chain.
The value chains were planned to leverage South Africa’s vast endowment with natural resources and enhance the beneficiation effort so that it could turn around the economy’s current dependence on the unsustainable export of unprocessed commodities, whilst providing a competitive advantage to domestic manufacturing in the form of developmental commodity prices.
Mr Qhena spoke to sustainability in balancing the impact of increased investments considering that they were generating jobs within the communities where such developments were taking place.
At the end, Mr Qhena also addressed the IDC targets for 2013/14.
The Chairperson thanked the CEO for his presentation and invited Members to ask questions:
Mr Hoosan expressed profound appreciation for the work the IDC had done. After 70 years it could be said that the IDC was the goose that laid the golden egg. Part of the work the IDC did was partnerships, and he wondered whether it could partner with smaller businesses to enhance their capacity and standing. The textile industry received a very small allocation, while it was expected that a greater investment would be made. He praised the IDC’s innovation towards the promotion of inspiring Nguni cattle. He said he had raised the issue of a construction company with the Minister concerned. He said the company was allegedly assisted with a loan twice, and it was now in liquidation. A Deputy Minister was being pointed to, for weighing in favourably on the matter. Was such assistance provided through the IDC distress fund?
Another Member also applauded the presentation. She said she would have wanted to see more participation and possibly impact on black enterprise, and wondered how this would be done and what plans were in place for such implementation. The IDC had indicated that to truly lead industrial capacity development it had to be proactive. What approach would be used to identify projects? What plans were in the pipeline and what was being done to ensure the development of SMMEs and ooperatives? Regarding the sectoral focus areas, with the establishment of new industries, 3 200 people in Eastern Cape had been earmarked for jobs in construction. Would they be permanent? What would happen after the construction was over?
MsTsotetsi asked, in reference to preferential procurement, how the IDC was going to assess real and fraudulent businesses. She also sought to know how communities in which people lived hand to mouth could be assisted towards becoming owners in waste management businesses.
Mr Mabasa questioned the extent to which the IDC related to the SA Bureau of Standards (SABS) because SABS ought to raise the standards of South African products and had the mechanisms of helping SMEs and cooperatives to export internationally. If this was not addressed in rural areas it could create inequality. How was this being sorted out? Did we have quantifiable information about the population of rural folk who owned small businesses?
Mr Ntuli lauded Mr Qhena’s presentation. He asked what role the IDC could play in alleviating the monopolistic tendencies of companies like Eskom. He asked if the IDC could fund businesses which could challenge the monopolistic tendencies. He also asked why there were DFIs competing with those under government at the provincial level? He asked whether the IDC participated in the Grand Inga project, proposed for the Congo River.
The Chairperson asked for clarification on the revised strategy. She said she was unconvinced about what the IDC was seeking in regional states. What contribution was made by those regional states and were South African companies partnering in those companies? How was repayment going, what were the challenges? She said some investments were in areas where there was no political or economic stability -- why were such risks being taken to invest in those countries? She asked the CEO to clarify what was meant by green transport and to explain what the nickel project was about. On the utilization of the EU funds, she questioned how South Africa ended up with EU funds. She said there were special funds for women -- how available and substantial were they, and what was being done to help develop women and integrate them into the mainstream economy? Was the availability of funds well broadcast, so that women could access the fund? She said women were often desperate because of a lack of knowledge, yet there were funds for them to develop. What and did women businesses get from the IDC?
She said the IDC was well suited to develop industries in the rural areas, but she failed to understand why it was not more involved. She was dissatisfied with the rate of uptake and growth of businesses. Some went to great lengths to relearn and re-educate themselves, and such people needed support. An enquiry by a company producing partitioning boards to the IDC had gone unattended -- could the IDC give the businessmen a hearing? Did IDC receive the complaints? Had anyone dealt with that matter? What were the challenges in getting financing for such people?
Mt Qhena responded that obtaining data for businesses was a problematic issue. So was the issue of supporting businesses to compete with Eskom. He requested that the question of Eskom be answered comprehensively during the discussion on green jobs.
Mr Qhen said allocation of funds to the textile industry was complicated because of the cost of production which in turn determined price. Nevertheless textiles were working with buyers. The DTI was also devoting additional money to this sector to enable them to be more competitive. Compliance in the textile industry was a critical issue; companies which did not comply with basic laws were not in consonance with IDC’s viewpoint. When IDC invested in companies, the companies had to comply with the law of the land.
Mr Qhena said the construction company in question was Bonelena Construction Enterprise and Projects, and the allegation was that the IDC had come to its rescue, to the tune of a loan for R10 million. The loan was approved on the basis of guarantees of business activities it was expecting. The IDC conducts thorough due diligence investigations, and if they were negative, it does not invest. The decision had been made way before the Minister approached the IDC. They had asked the IDC to give them a loan in exchange for guarantees based on performance of certain receipts. The IDC had approved the loan, but had not disbursed the R10 million and were yet to look at the execution. The IDC worked on the basis of due diligence, not pressure from politicians. Bonelena was not in distress because the guarantee had been converted to loans.
On black industrialists and businesses, Mr Qhena said IDC funded people who wanted to get involved in learning and running businesses. People had to get involved in the businesses and those businesses had to be sustainable. The IDC was involved with start-ups from the conceptual or at an early stage. SEFA had a ceiling of R5 million and took care of SMEs, while the IDC would play above the R5 Million ceiling and above. That should solve the duplication of service delivery. Some of IDC’s money had gone to help communities to be shareholders in businesses organisations
Mr Mabasa followed up and said that cooperatives could include a team of doctors, pharmacists, etc. not only smaller and conventional businesses. As such, these businesses also needed help extended to them as cooperatives. He also cited instance of cooperatives in hotels, mining, ranches, farms etc
The Chairperson asked how many people wouldl get jobs on the Northern Cape energy project, and what did 150 megawatts mean to electrification. Should cooperatives participate in industry?
Mr Mabasa said cooperatives cut across all sectors in trade and industry. Accordingly SEFA and IDC should help them grow and identify opportunities.
Mr Qhena said the question on CSP and monopolistic tendencies could be answered when the presentation on green jobs was made. Corporate social investment (CSI) and sponsorship of waste management was a good idea, but usually there had to a champion to drive the project because of the coordination required. IDC was not well placed to champion it but would focus on education and industrial development.
IDC could only get involved with due diligence, and it was up to the South African Bureau of Standards (SABS) to engage with the businesses to maintain and improve the standard of goods and services offered. On development financial institutions (DFIs), while there was need for the IDC to compete, Mr Qhena suggested healthy complementary, cooperative and value addition towards each other’s work.
The IDC was involved in South Africa and outside in strategic high impact projects. Some were private sector companies from South Africa going into outside countries to invest and IDC went along as a partner. It was unlikely that IDC would go on its own to a foreign country because of the risks involved and due to other risks, such as lack of adequate knowledge of the lie of the land.
The Chairperson asked what the current standpoint on job creation was, what the roles of those going in were. She said PICC and regional integration initiatives had not been good in mobilising and directing leaders’ work on the overarching issues. The details were left to implementers, but it was important to work with communities and local people.
Mr Qhena said recently the IDC had become involved in a project that would lead to the building of a Marriott hotel in Ghana. It had also got involved in a road toll project in DRC. There was a strong business case with added local economic development, SMME development in the DRC toll road project. This was a PPP arrangement which was essential in making certain success of this project.
Mr Qhena explained the context of the EU funds and IDCs role. He said the DTI had signed an agreement with the European Union which saw the EU donating R550m to start a risk capital fund for SMMEs. DTI had given the funds to the IDC through the European Investment Bank for the benefit of several enterprises. Non-governmental organisations also benefited, including the Small Enterprise Foundation, which had a microcredit programme aimed at micro-enterprises, and the Tshomisano credit programme, targeting women. The EU EIB fund was an old fund. The EU had approached the IDC to help the communities, using a revolving fund made available to the DTI as a grant by EIB.
The nickel beneficiation project was a long term project still in its early stages. However, the IDC had a Mining and Minerals Beneficiation Strategic Business Unit which offered finance and, where appropriate, technical assistance to a range of mining-related enterprises, with a focus on operations which had a noteworthy developmental element.
Mr Qhena said a R2-billion biofuel plant outside Cradock would start this year. It would open up thousands of new direct and indirect jobs in the area. He clarified that there were 3 200 jobs in biofuels jobs: 180 directly in the plant, 300 in logistics, 2 200 upstream in agriculture, and 600 in construction. He said it would certainly enhance job creation.
Mr Qhen said the IDC had launched a R1 billion Transformation and Entrepreneurship Scheme (TES) to serve the financing and entrepreneurial needs of South Africa's marginalised groups. The initiative was an umbrella scheme incorporating five funds which included the Women's Entrepreneurial Fund (R400 million). So far R65 million had been used; in addition the DTI had added R50 million. He said the Chairperson’s observation was spot on -- uptake was slow, and the process of identifying partners who understand women was critical in catalysing the disbursement of loans.
The Chairperson thanked Mr Qhena, and the IDC delegation for the response. He had a hands on approach which was useful in answering many issues. The outstanding issues noted should be sent to the Committee Secretary.
Presentation on Green jobs: Estimates of the potential and realised direct employment of a greening South African economy
Mr Nico Kelder, Senior Economist, Research and Information, IDC, made a presentation based on a report produced by the IDC, DBSA and the Trade and Industrial Policy Strategies (Tips).. He said the expansion of a domestic green economy was the cornerstone of economic development for the country’s New Growth Path economic strategy. Substantial steps had been taken by South Africa in formulating and implementing strategies aimed at adapting to the effects of climate change; and reducing its carbon emissions to a sustainable level. The green economy was considered one of the critical tools for sustainable development, presenting opportunities for expansion of productive capacity and service delivery, and contributing substantially to job creation.
The IDC had allocated R25 billion over five years towards development of green industries in South Africa, further demonstrating the resolution to contribute to our economy’s transition to a greener growth path. The Green Industries SBU had already made significant investments in one year of existence
South Africa had developed good policies and laws to boost its green economic initiatives, but implementation and enforcement was wanting. An accord had been signed binding government, organised business and organised labour to find ways to ensure the country as a whole became more energy-efficient, and to manufacture, for domestic use and export markets, renewable energy technologies.
Mr Kelder said many other countries were rushing to pass legislation and create incentives to encourage the growth of their own green industries and so time was limited for South Africa. He said these were exciting times for renewable energy projects in South Africa and throughout Africa, and investor interest was clearly evident.
An example was the electricity sector. In 17 years’ time, the country needed to be able to generate 56 000MW, of which 20 000MW was needed to come from renewable sources and technologies. The five-phase bid programme for independent power producers, which would use renewable energy sources, has ked qualification criteria such as economic development, job creation and local content.
Mr Kelder said the country, had learnt a lot from the first two phases that were implemented in December 2011 and in April 2012, and these were forecast to create 21 214 jobs. Another scheme was installing solar water heaters, which had created about 20 000 jobs.
Last year 150 000 solar water heaters were installed through the Eskom rebate programme, but if the country wanted to increase the number of jobs, then the rate of installation had to increase. The solar water heaters were not actually saving electricity being consumed, as many were being installed in new buildings or in dwellings that never had geysers previously.
The IDC had the collaborated with KfW, a German development bank. to secure R500 million in low-cost funding to encourage and promote investments in both energy efficiency and renewable energy in South Africa. The loans’ repayments were structured to efficiently match the savings profile of the technology installed, so there were no out-of-pocket expenses for the company.
Mr Kelder said other government initiatives that had created jobs in the green economy were through the Expanded Public Works Programme, where the Working for Water, Working on Fire and Working for Forests projects had created 23 074 full-time job equivalents in 2011-12. This was expected to grow to 38 644 job equivalents in this financial year
Mr Kelder answered some of the questions asked prior to his presentation, but relating to his presentation. He said that 150 megawatts would cover about 50 000 households. Solar power could be harnessed and stored for long.
Local content and procurement would be encouraged so that small and local businesses were able to supply up to 50% of the content required at power generation plants. For instance, photo-voltaic power stations needed mirrors which could be procured locally.
Green transport referred to the use of biofuels in motorised transport. There was currently a project to supply gas to locally assembled vehicles -- for instance, the minibus taxi assembly plant in the Springs area of Gauteng. The plant would generate 470 jobs in the first phase, with a new investment of R200 million.
Mr Mabasa asked to what extent the IDC synchronised with the post graduate technikons and universities. For green energy to succeed, it had to reach communities on a large scale so that even rural people viewed themselves as part of the solution.
Ms M Mpane-Mohorosi (ANC) asked what measures were being employed to ensure that the green campaign became a mass driven campaign. She said solar heaters as an alternative were not working efficiently because there were no reliable locations for service.
Ms Tsotetsi asked whether there were strategies to reduce emissions to sustainable levels in fast growing and informal settlements. She also asked how SASOL were handled considering they were large contributors to green house gases and were therefore a major polluter.
Mr Ntuli asked why existing agricultural land could not be used to produce biofuels. He also asked why prices for solar energy panels were expensive, and whether there was compensation for ensuring that there was a cleaner environment.
Mr Hoosan said he recognised the significance of the study and its impact on jobs. However, he was unsure on what impact a greener environment would have if there was no coordination and significant investments. He asked whether SEFA on its part was ensuring that there were investments for green jobs in smaller businesses.
The Chairperson asked what purpose LED lights played in reducing energy consumption. She asked whether it was a suitable alternative, and what role government could play in engaging rural people to save on wastage. Were there gains being made on waste management in cleaner air, especially in towns? What could be done to have cleaner environments in cities and towns as part of social responsibility? All municipalities should have bins to distinguish waste, and it should be made compulsory because it could offer opportunities for work for bin manufacturers, creation of land fill sites, recycling plants, and the processing of hazardous products, etc.
Mr Qhena said that the technologies were expensive but a study had been commissioned to show where the opportunities were and show how the jobs could be created. There were significant challenges workers faced in South Africa, with high levels of unemployment and a significant difference in income and welfare between highly paid and skilled workers and low-skill low-wage workers. When these were put side by side against the environmental challenges as well, such as greenhouse gas emissions and water scarcity, South Africa faced a huge challenge.
Mr Qhena said Eskom was doing a lot of work on the Concentrated Solar Power (CSP) project. Eskom had built a wind power plant in the Western Cape and the Concentrated Solar Power Plant in Upington (Northern Cape). Each of the plants would generate 100 MW of power. Eskom would continue to play a role in power generation. It encouraged the lower consumption of power by promoting the use of LED lights, which it had been fitting for free.
John Meller, IDC, Green Industries Strategic Business Unit, said there were challenges in implementing solar heaters. The IDC funded installers of water heaters, while Eskom rolled out low pressure systems for houses. The IDC helped those who were tapping into the tenders as well.
Land use was driven by Environmental Affairs. Land could not be used for producing fuels when it was already assigned for and used for agriculture; other land should be found for renewable energy purposes, rather than risk losing agricultural land. There was a major constraint to the development of a viable biofuels industry in South Africa because there was no biofuels industrial strategy. South Africa was a net exporter of food and had enough land to provide for both food and fuel but the lack of a policy and the threat to food security left the use of biofuels in confusion.
Renewable energy was more expensive than traditional coal fired and gas fired electricity generation. The latter were well known and energy efficient. The former were still in their experimental and trial phases and had many inefficiencies. This led to high costs, making them more expensive.
Eskom had initiated a LED replacement fund to replace current lights with LED lights which were more expensive but very efficient.
With the spread of electricity, studies had shown that opportunities for smaller businesses arose. Local businesses grow and benefit from activities in greening the economy. The Green economy movement had not reached far flung areas. Small hydro projects for electricity generation could improve economic potential in those areas. There was evidence in Africa that economic empowerment was beneficial when electricity was made available. SMMEs would grow and more companies would get established in the area.
There was a need for compliance with the environmental law and regulatory regime if people were to use renewable energy technologies. The Green Energy Efficiency Fund (GEEF) would assist other businesses to reduce their impact on the environment and in so doing, make a real difference in lowering the local economy’s carbon footprint. It was uncertain whether a fund to compensate compliance had been setup yet.
The Chairperson thanked Mr Qhena and the delegation from the IDC for very helpful research.
Briefing on the role of BRICS on economic development; the Set Top Boxes manufacturing sector; and why special Economic Zones (SEZs) and Industrial Development Zones (IDZs) were important infrastructure vehicles for driving South Africa’s economic development, were postponed because there was no time.
The meeting was adjourned.
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