National Empowerment Fund & Export Credit Insurance Corporation on their 2012/13 Annual Reports

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Trade, Industry and Competition

09 October 2013
Chairperson: Mr B Radebe (ANC) (Acting)
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Meeting Summary

The Export Credit Insurance Corporation of South Africa informed the Committee that 2012/13 was quite successful for the organisation as it exceeded all the targets in the strategic plan. In particular, the insurance portfolio increased by 58% to R17 billion, an estimated R2.7 billion of value-adding exports were facilitated, approximately 15 327 jobs were expected to be created and sustained, and lastly, the balance sheet grew from R1 billion to R5 billion. Essentially, a clean audit was achieved by the ECIC. The work of the ECIC had a great impact on the SA economy in many different ways such as jobs, GDP and regional development. In its financial report, it noted an increase amongst all indicators except for profit after tax, which faced a 67% decrease from 2012 to 2013. ECIC experienced a 28% increase in total assets and a 20% increase in their investment portfolio. ECIC success meant that projected demand for funding was going to significantly increase over the years and that more Interest Make Up (IMU) subsidy scheme funding to support exports of South African goods and services, would be necessary. ECIC projected that it required an additional budget of at least R300 million for every year after 2015/16. It stated that it had had a fruitful meeting with National Treasury which was impressed by the significant impact of IMU on job creation. Members’ concerns included:

- High vacancy rate and staff retention policy
- Challenges resulting from political unrest within the continent
- Challenges of infrastructural backlogs
- Role of renewable energy and shipbuilding
- Role of ECIC in the development of SMMEs
- Role of ECIC with the creation of jobs
- Broad-Based Black Economic Empowerment (BBBEE) targets
- Employment equity and staff imbalances
- Focus of ECIC’s research
- Stark difference between targets and achievements
- Equal development amongst all provinces
- Stability of ECIC’s leadership.

The National Empowerment Fund cleared up some questions regarding the media reports about loans and it was noted that an investigation was currently taking place. As for the performance of the NEF, much work was done to meet the objectives of the BBBEE. The NEF met or exceeded 74% of the targets set for the year and increased its funding activity to support 135 black owned businesses. From a regional and sectorial point of view, Gauteng received the most funding. Construction and materials, services and manufacturing received the most funding as sectors. Despite the progress made by the NEF, the organisation did not have sufficient capital to continue its strategic objectives and the two key challenges that the NEF faced were a risk of recapitalisation and a sustainability risk. The NEF created a portfolio of manufacturing and industrial capacity, which had the potential to add 1% to South Africa’s GDP, if full capitalisation of R5.5 billion was received. Lastly, the Committee was strongly urged to support the recapitalisation of the NEF. Members’ concerns included:

- The possibility of using the stock market to raise funds
- The potential bankrupt state of the NEF since receiving R2.4 billion in 2005, which was nearly spent with nothing kept in reserve
- The management of funds in comparison to salaries and bonuses
- Capacity of projects to duplicate and grow the economy, jobs and sectors
- Lack of access by rural areas
- Effectiveness of the mentorship technique.

Meeting report

The Acting Chairperson welcomed the two agencies to the Committee and expressed great interest in learning about their progress.

Export Credit Insurance Corporation of South Africa (ECIC) presentation
Mr Lesego Mosupye, Chief Risk Officer, outlined to the Committee that the presentation covered until 30 June 2013 and also included the forward funding requirements for 2014/15 Medium-Term Expenditure Framework (MTEF). In an overview, he noted that 2012/13 was quite successful for the Export Credit Insurance Corporation (ECIC) as they exceeded all the targets in the strategic plan. Specifically, the insurance portfolio increased by 58% to R17 billion, an estimated R2.7 billion of value adding exports were facilitated, approximately 15 327 jobs were expected to be created and sustained, and lastly, the balance sheet grew from R1 billion to R5 billion. Essentially, a clean audit was achieved by the ECIC.

Performance Review
Mr Mosupye said that under the objective to Facilitate Export Trade and Investment Outside South Africa, one of the targets was to achieve a value of US$600 million for export credit/insurance applications approved by the ECIC board. ECIC was able to surpass the target with 18 new projects valued at US$953 million, which indicated a constant growth since 2009. From a regional and sectorial perspective, the majority of the exposure for the approved applications was within Southern Africa with a focus in the mining industry. A second target within this objective was to sign enough export credit/investment policies to reach the value of US$200 million, which was significantly surpassed with a value of US$769 million. Moving on to the third target in the first objective, the ECIC was able to declare a significant number of loans disbursed and investment insurance exposures reaching a value of US$1 240 billion, which surpassed the target of US$180 million. He explained that export credits contributed tremendously to increased jobs in the SA economy as they touched many industries including but not limited to mining, transport, hospitality and manufacturing.

Mr Mosupye explained that the ECIC had a large impact on the SA economy in many ways. For example, over the financial period beginning in 2009/10 until 2012/13, the ECIC supported a large number of projects reaching a value of R12.8 billion. The impact of ECIC was also reaching other areas of the continent as a large amount of capital investment with mining and infrastructure projects had Zambia, Zimbabwe and Tanzania as beneficiaries. The graphs in the document indicated the extent in which mining was a very essential industry within the South African economy. In looking at the GDP impact of ECIC in the 2012/13, a total of R13.1 billion was added to the SA economy as GDP. Additionally, ECIC contributed to the creation/sustainment of approximately 84 000 job opportunities with a large majority of these jobs in the manufacturing sector benefiting all skill levels, but particularly semi-skilled labour. Furthermore, between 2012 and 2013, a 28% increase was experienced in the total number of assets. Since 2009, overall assets significantly surpassed insurance liabilities.

Mr Mosupye moved on to the second objective on Strategic Alliances. The first target was to initiate draft co-operation agreements with two of the targeted Export Credit Agencies or Development Financial Institutions (DFI). The target was achieved and co-operation agreements were initiated with the African Trade Insurance Agency (ATI) and the Export Insurance Agency of Russia (EXIAR).

The third objective was to Promote a Professional, Competitive and Customer Focused Workforce and Raise Awareness of ECIC Products. The target was to conduct 12 ECIC product presentations/awareness sessions, which was surpassed with 29 presentations made to various conferences and workshops that covered all nine provinces. The awareness raising was conducted though engaging with key structures that were able to provide ECIC with access to target markets and stakeholders. They key structures used included: export councils and profession associations; business chambers; government agencies; and provincial economic development agencies. Another target within this objective was to conduct a print media campaign in alignment with ECIC’s Marketing Plan in two provinces. ECIC was able to create a print media campaign with newspapers and magazines that included a mix of both national and international coverage. This campaign was different to ECIC’s historical practice of developing direct relationships with key clients but proved rather successful, as it resulted in a direct enquiry about the agency’s products.

Mr Mosupye stated that under the Effective Stewardship objective, one of the targets was to develop and approve a Social Responsibility Investment Plan. This target was achieved and the Board approved the Plan and implementation had already commenced. Additionally, during 2012/13, the Board established the Corporate Social Investment Policy, which was approved and implemented. Within this plan, there were three key focus areas: welfare, skills development and education; and of the three, education was the first focus with R2.3 million spent on it. Within this focus, ECIC supported students in the fields of accounting, actuarial science, engineering and economics across South Africa. ECIC also developed a partnership with a Gauteng based NGO that supported after school learning centres for approximately 300 grade 12 learners in the province. In the following year, ECIC hoped to extend this program to other provinces. Effective Stewardship included a target of 70% for the amount of ECIC procurement spent on BBBEE certified suppliers or service providers. The result was that a total of 93% was spent on BBBEE.

On the key financial highlights, Mr Mosupye noted an increase amongst all indicators except for profit after tax, which faced a 67% decrease from 2012 to 2013. ECIC experienced a 28% increase in total assets and a 20% increase in their investment portfolio (see document for details on financial outcomes).

Mr Mosupye briefly covered the forward funding requirements or realignments for the 2013/14 MTEF. He explained that National Treasury and the dti had approved a new Interest Make Up (IMU) subsidy scheme in 2012, which provided cheaper prices for loans with shorter repayment periods. This meant that smaller contracts would benefit from the cheaper interest rates and would ultimately lead to increased utilisation. As such, it was expected that the projected increase in projects would exceed the current budget allocations and an overall shortfall of roughly R371 million was anticipated by 2015/16. As such, ECIC required an additional budget of at least R300 million for every year thereafter. The increase in IMU disbursements between 2012 and 2013 was evidence of the anticipated increase in demand. In addition, the positive economic impact made by IMU demonstrated a strong justification for an increased budget allocation in the upcoming financial years, especially given ECIC’s strong emphasis on the African continent.

Dr W James (DA) noted that given the small size of the agency, a vacancy rate of 8% amounted to roughly 10 individuals. Was there a policy directed towards staff retention and if so, how was the policy implemented?

Mr Mosupye replied that ECIC did in fact have a retention strategy that was based on a performance and reward strategy. ECIC developed a very extensive performance assessment and provided rewards based on achievements. ECIC ensured that staff were paid equitably according to market levels. As for the vacancy rate, the reason for the high number of vacancies was because they were new positions that were created over the past year and were currently in the process of being filled. Some of the positions were challenging due to limited skills in South Africa.

Mr Z Wayile (ANC) asked what lessons or challenges the organisation faced as a result of the current political situation within the continent. Agencies often struggled with infrastructural backlogs. Was that identified as a challenge for the ECIC? Was renewable energy not a key industry given today’s developments? South Africa was in an advantageous position with its coastal lines; as such, was ship building an option for investment? He also asked what role ECIC played with SMMEs.

Mr Mosupye replied that ECIC did not identify the ongoing politics within the continent as a major risk because it was taken as part of the business of the ECIC. Political risk was part of the speciality of the agency and ECIC was able to absorb the risk. Furthermore, ECIC looked past the political conflict that was at the surface and dug deeper to retrieve potential business opportunities in those countries. An example of such was the work of the ECIC in Mali in the previous year. As for infrastructure backlogs, ECIC had participated in several forums and workshops that looked at infrastructure perspectives in the continent to avoid backlogs. On the question on renewable energy, ECIC did not have a specific policy that spoke to this topic but it was willing to support any entity that exported in this area. There were not many exporters in South Africa that participated in the renewable energy sector but ECIC was investing in a project in Kenya working on wind energy, which was only an investment as wind energy was not an export of South Africa. As for shipbuilding, there were other agencies in that field but ECIC was available for support.

With regards to SMMEs, Mr Mosupye replied that ECIC was also concerned with the success and growth of small enterprises. A key challenge faced by ECIC was that SMMEs were not often exporters into the offshore as these exports were often dominated by large contractors. However, it was recently observed that large contractors often subcontracted SMMEs to do some of the work. As such, there was an indirect relationship between ECIC and SMMEs. There was also a research initiative underway to look at how best to support SMMEs.

Mr G McIntosh (COPE) noted that the organisational structure slightly differed from what was outlined in the presentation to that of the Annual Report. He said the Committee should congratulate the organisation on all their work, particularly on their expansions into the continent.

Mr G Selau (ANC) observed that in many areas, achievements surpassed targets, which was highly commendable. With regards to job creation, what role did the ECIC play with the creation of the 15 327 jobs referenced in the report? Did the ECIC directly or indirectly create those jobs? As for the percentage spent in alignment with the BBBEE, how was the target decided upon? Was the percentage achieved 93% of the 70% target or was it 93% of 100%? In looking at the employment equity achievements, he observed a questionable imbalance between staff and operational managers, which required an explanation. What was the focus of the ECIC’s research?

Mr Mosupye explained how the percentage for BBBEE was achieved. The 93% achievement was based on total procurement and was calculated through a score card system. As for employment equity, the numbers achieved were those based on the targets provided by the Department of Labour and were added there to demonstrate the racial composition of the company, which reflected the demographics of South Africa. As for operational managers, the graph in question presented the exact numbers of the employees and not the percentages. In the organisation, there were four executive managers and nine operational managers. In essence, the point of that graph was to demonstrate that there were more females than males employed. In terms of research, the focus was to identify what still needed to be invested in within South Africa.

The Acting Chairperson was concerned that perhaps the targets were too low and asked why there was such a stark difference between the targets and the achievements. With regards to corporate social responsibility and the three focus areas, did ECIC intend to achieve the targets in all the provinces?

Mr Mosupye replied that ECIC came from a very low base as an organisation and there were still some struggle to identify what would be the appropriate level of sustainable growth for the organisation. Overall, ECIC continued to be surprised by achievements but that was directly the result of the constant performance drive amongst ECIC to drive the economy.

Ms Sedzani Muda, ECIC  CEO, replied with regards to expanding within the provinces. She noted that overall, Gauteng had the most resources and as such received the most attention. However, the intention was to expand the work done on the three focus areas into all the provinces.

Mr McIntosh asked what plans were in place to stabilise the leadership at ECIC given that the CEO was still acting.

Mr Mosupye replied that the CEO had been officially appointed and was highly qualified with an extensive background.

The Acting Chairperson requested that each political party submit any recommendations for the ECIC.

National Empowerment Fund (NEF) presentation on 2013 Annual Report
Mr Thando Mhlambiso, NEF Chairman of the Board, began by providing the Committee with a brief update on the happenings at the National Empowerment Fund (NEF). He explained that there were recent allegations made towards the CEO of the NEF that were currently undergoing investigation. He noted that in the meantime, the CEO was to carry on with the responsibilities of the position and that no suspensions had been made until the results of the investigation were complete. In the meantime, he requested that the Committee accept updates made only by the NEF itself and not by the media.

Ms Philisiwe Mthethwa, CEO, introduced the delegation by name and ethnic background in an attempt to prove the media allegations wrong by showing that she did not employ only Zulus. She then moved on to present the contents of the report to the Committee. She outlined that the NEF had evolved steadily into a leading Development Financial Institution and had approved over R5 billion in BBBEE transactions. The work of the NEF towards driving BBBEE included the financing of 391 black South African projects, 55% of which were women owned. Furthermore, NEF’s Asonge Share Scheme dedicated R1.3 billion towards helping 87 000 black South Africans to become owners of MTN. NEF also developed a team of investment and business professionals that operated in all nine provinces and was comprised of 168 experienced individuals who were mostly black South Africans. Despite such progress, many of major financiers for BBBEE were no longer involved, leaving the NEF as the only major DFI that funded black South African entrepreneurs. Ms Mthethwa went on to provide the Committee with details regarding the strategic planning framework; the organisational structure and examples of some of the businesses that NEF had funded and their economic impact (see document).

Moving on to the performance review, Ms Mthethwa noted that the NEF had met or exceeded 74% of the targets set for the year. The NEF also increased its funding activity and was able to support 135 black owned businesses. Diagrams indicated that the NEF invested in a large variety of sectors with construction & materials, services and manufacturing at the forefront. Gauteng received the most investment amounting to 34.5% in 2011. Since inception until March 2013, Gauteng had received 50% of investments. As part of the performance highlights for the financial year in question, the NEF approved 135 deals worth R1.33 billion, which was an increase from the 98 deals made in 2012. She highlighted that 15 555 jobs were supported during 2012/13 and 11 408 of these jobs were new which allowed the NEF to exceed its job support targets.

Despite the progress made by the NEF, Ms Mthethwa informed the Committee that the organisation did not have sufficient capital to continue its strategic objectives. In addition, there was a risk that the NEF, based on the current capital and internally generated cash, would not be able to sustain itself over the strategic planning period. As such, the NEF was requesting recapitalisation. Therefore, the two key challenges that the NEF faced were a risk of recapitalisation and a sustainability risk. In 2013, the NEF had a net asset value of R5.4 billion and a cash balance of R1.6 billion. The overall surplus for the year was R114 million. Ms Mthethwa emphasised the fact that the NEF consistently secured an unqualified external audit opinion.

As an overview, Ms Mthethwa stated that the NEF created a portfolio of manufacturing and industrial capacity, which had the potential to add 1% to South Africa’s GDP, if full capitalisation of R5.5 billion was received. If the targets of the NEF continued to be met, then 100 000 decent jobs could be created through the black-owned companies supported by the organisation. In conclusion, she urged the Committee to support the recapitalisation of the NEF. Due to a lack of time, the performance results of each strategic objective were not presented but were made available in the presentation document.

Mr McIntosh noted that he was very reassured by the update on the investigation. He asked if NEF would consider reaching out to the stock market to raise the necessary funds to run the organisation. He complimented the NEF on a well-done report and supported their need for more funding. He commended the NEF on working towards transforming the economy and that they should continue to do so.

Mr Mhlambiso replied that currently the timing was not perfect for NEF to participate in the stock market simply because NEF’s investments were still very young. Baby steps were required in order to achieve success at the NEF and it was currently in the second step, which was to raise third party capital. DFIs were the first to be approached, as they understood the work of the NEF. For the time being, the stock market was a long way off.

Dr James explained that part of the responsibility of an MP was to conduct oversight and reviews and as such, a big issue was that the NEF received R2.4 billion in 2005, which was completely spent with nothing kept in reserve. He explained that the NEF was now an organisation with no money whatsoever who had already suspended any investment decisions several months back and was now searching for recapitalisation. This raised fundamental questions about the management of the funds. What kind of organisation was the NEF that it was able to reach such a state? In particular, it was taxpayers’ money that was being spent and that meant that the salaries provided were in the hands of the public domain. So, how was it that the CEO could earn her salary plus a bonus of R1.5 million? An explanation was required for the management of money as well the management of bonuses given that the organisation was now essentially bankrupt.

Mr Mhlambiso replied it was important at the outset to make perfectly clear that the NEF was not bankrupt or liquid. For years, the CEO had been pointing out that the NEF would eventually run out of capital and that alternatives were needed. After several engagements with government, the Board and the Executive decided that it was clear that more time was needed to raise funds from the government. This decision led to the agreement that it was necessary to pause investments but that did not mean that there was no capital remaining. There was enough capital remaining to go through the recapitalisation question for at least another year, if not longer. As for whether or not the CEO’s remuneration was deserved, he reminded the Committee that only a few weeks ago, the CEO was receiving a standing ovation for her work. Furthermore, the results from the organisation’s performance as well the CEO’s performance greatly justified the salary as well as the bonuses paid out to employees of the NEF.

Ms S van der Merwe (ANC) agreed with Mr McIntosh that it was a good and impressive presentation with very good work being done. She had particular interest in the question of leveraging the investments put towards various projects such as solar technologies and SA metals. There was a new word called ‘gazelles’, which were small companies with the potential to grow jobs and the economy at a faster rate than other businesses. The following question thus emerged: was capacity to duplicate and grow the economy, jobs and the sector, one of the criteria for the selection of projects for funding?

Ms Mthethwa, on the topic of gazelles, replied that this was the rationale behind setting up the strategic projects fund. The job creation potential of the entities in the strategic projects fund was well over 100 000. It was also these entities that were working closely with the BRICS countries.

Mr Wayile wanted to highlight the issue of rural areas. The strategic bias towards Johannesburg was understood, as it was the economic hub of the country but he wanted to emphasise the legacies that apartheid had left in the rural areas of the provinces. What was then being done to reach the rural areas? There were provinces like Northern Cape, Eastern Cape and others that were supplying the migration of the rural citizens to the cities. However, urban migration was not a sustainable solution and more work was needed to create a balance between urban and rural development. Given Brazil’s success in improving SMMEs, was there a relationship between the work of the NEF and that of Brazil’s when it comes to these enterprises. Was there a working relationship within the context of intergovernmental bodies?

Mr Setlakalane Molepo, NEF Divisional Executive: SME & Rural Development, replied that there was a rural and community development fund, which looked at how to unlock value in rural areas by not encouraging the status quo. Currently, with all the regional offices, more than 30% of the volumes done in the past financial year were by the regional offices. There was also more co-operatives funded currently in the rural areas in many different forms from shopping centres to dairy. 

Mr Selau commended the work of the NEF as outlined in the report. He asked for clarity on who was responsible for the lack of access within rural areas to the work of the NEF. Was it the organisation’s fault or was it the fault of the people?

Ms Mthethwa replied that one of the challenges faced was to actually go to the provinces, identify, conceptualise and develop the projects without getting the necessary help from the provincial governments. As such, a partnership model was needed between the NEF and provincial governments where the governments guide the NEF towards the investments in each of the regions. She encouraged Members of Parliament to inform the NEF of any investments that they were aware of in the provinces.

The Acting Chairperson asked if the mentoring technique of the NEF was effective?

Mr Molepo replied that the NEF had taken a deliberate strategy that stated that every SME project automatically received a mentor because otherwise, the work of the NEF would be defeated. The mentor was provided to the enterprises at no expense whatsoever and much improvement was experienced as a result of this technique.

The Acting Chairperson noted that any follow up questions could be made in writing.

The meeting was adjourned.


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