Industrial Development Corporation & Small Enterprise Finance Agency on their 2013/14 Annual Reports

Economic Development

21 October 2014
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Industrial Development Corporation (IDC) presented its 2013/14 Annual Report, setting out the highlights for this year but also being quite frank about areas where its performance had not been so good. The primary purpose of the IDC was to facilitate sustainable employment, but, by its own admission, it had failed to achieve this target during 2014, with the number of jobs created and saved at only 22 000. However, this was in large part due to a focus on capital intensive industries,which would yield results over the long rather than medium term. The IDC group structure included three fully owned companies, which had been used as financing vehicles and which were being wound up. Other subsidiaries were described, and IDC kept fully up to date on their performance.

In this year, income had been around R8.3 billion, and gross profit, after deducting financing costs of R1 billion, was R7.5 billion, a 17% decline from the previous year. IDC had a strong financial base, under-geared at only 20%. However its taxation had increased hugely because of changes in the taxation of preferential shares that had formerly been used to fund loans, and this would not recur in the subsequent years. Most of the income came from the dividends of listed shares, preferential share income and interest from funds in the money market. IDC did not receive any funding from the fiscus. Administration costs had increased, largely due an increase in borrowing costs and the issue of a R1.5 billion public bond, which had been very successful. The rate of loan impairment seemed to have stabilized at 18.2% over the last three years. Green industries received 40% of the funding while chemical and allied industries, mining and minerals beneficiation and metal, transport and machinery industries accounted for 13%, 12% and 11% respectively. Agro-industries accounted for a mere 1% of funding. The IDC was developing the value chain to build competitiveness for downstream beneficiation, and there was increasing focus on green industries. It had invested in sixteen countries outside South Africa, mostly in Mozambique and had spent a total of R2.3 billion on 15 projects on the rest of the continent on infrastructure, mainly for electricity generation, tourism, and credit to Development Finance Institutions (DFIs) to finance SMMEs that imported South African technology. It funded Black Economic Empowerment to the tune of R5 billion. Rural development funding totalled R6.5 billion and funding towards women empowerment was R325 million. It had established 34 agencies for the purposes of local economic development agencies at a municipal level, and had also put money into other social enterprise and intervention programmes. Youth development was mostly achieved by offering bursaries, and the adoption of 20 schools. It also did ongoing research and managed funds on behalf of government. Other highlights included the launching of a public bond, and an increase in the funding to small enterprises, through the IDC subsidiary Small Enterprise Finance Agency, of R1.1 billion.

Members commended the comprehensive presentation, asked for clarity whether IDC had a completely clean audit, and questioned whether it was funding the gas industry in Mozambique, renewable energy, and why it was involved in financial intermediaries, real estate and insurance. They asked for an indication of the challenges, and for more detail on the schools and the rural development projects. Members were interested to hear the strategy developed for lost jobs and job creation, commented that it was crucial to find sufficient funding for the agro-processing sector, and wanted to hear more about the attempts for empowerment of women. Members felt that some of the projects may not be appropriate, particularly the youth film projects and wondered about the benefits of the research, and whether it was not worth while putting more funding into textiles. They asked why so much assistance was given to Mozambique, what the impact of the global crises on its work had been, and what was done for those retrenched. Challenges in certain provinces were highlighted and Members wanted to hear more about the extent to which funding had assisted the work of municipalities. Follow up questions included the systems for assisting in the agriculture sector, and whether the IDC was doing anything to challenge the position of the major players who might be blocking smaller entrants to the markets. Members heard the IDC on the benefits of localisation but felt that more discussion was needed on the points. 

 

The Small Enterprise Finance Agency (Sefa), which provides direct and wholesale funding to small businesses in order to create jobs and address the challenges of poverty and inequality, briefed the Committee on its annual report. During 2013/14, Sefa had approved loans of R1 065m, and distributed R549m, which was more than double the amount of the previous year. R261m had been distributed as direct loans (537% more than 2012/13), and the balance of R288m had been through wholesale lending. The number of small, medium and micro enterprises (SMMEs) funded had risen from 28 362 to 46 407, while the number of jobs facilitated had increased from 19 853 to 28 362. Sefa had funded 10 291 youth-owned enterprises (value R157m), 44 302 women-owned businesses (R362m), 36 729 rural-based entrepreneurs (R429m) and 43 643 black-owned businesses (R599m). Sefa had a total of 194 employees, of whom 178 (92%) were black, and the remaining 16 were white. The gender split was 118 female and 76 male. The entity’s income statement showed that revenue was 10% down, at R132.m, while operating expenses were 10% up, at R207.4m. Personnel costs, at R98.4m, accounted for 47% of expenses. Impairments and bad debts amounted to R92.8m, and Sefa recorded a loss after tax of R247m.

 

Members asked about the role of intermediary financial institutions, the source and control of overseas funding, and the monitoring of funds disbursed. They were critical of some of the “vague” responses given to questions seeking detailed information. They asked if Sefa had been given direction regarding which sectors to target, and were told that while there were no specific target areas, emphasis was given to the construction and services sectors. They had specific guidelines from the board to direct 20% of lending to productive industrial sectors that had been identified by the National Growth Path and the Industrial Policy Action Plan.

Meeting report

Industrial Development Corporation 2013/14 Annual Report briefing
Mr Mvuleni Qhena, Chief Executive Officer, Industrial Development Corporation, presented the 2013/14 Annual Report results. He started by showing a video depicting some of the business ventures that the Industrial Development Corporation (IDC or the Corporation) had funded over the last year. IDC had received an unqualified audit report. While the primary purpose of the IDC was to facilitate sustainable employment, it had, by its own admission, failed in this. The number of jobs created and saved were around 22 000, which was the same as the previous year. In large part this failure was the result of the IDC concentrating its funding efforts on capital intensive industries, believing that, indirectly these industries could contribute to jobs down the line. The sectors benefiting from job creation the most were mining and downstream metals industries.

Achievements listed were:
- The IDC had taken some long-term views which would bear fruit in several years, as far as job creation and downstream industries were concerned
- IDC had made available a total of R13.8 billion in funding.

- IDC had launched a public bond
- There had been an increase in Small, Medium and Micro Enterprise (SMME) development funding through the IDC subsidiary, Small Enterprise Funding Agency (SEFA), of R1.1 billion.

Highlights were listed of the various businesses and black industrialists who had benefited from the funding. These included Reatile Gaz, Black Like Me, the Razco group, the plant in Phalaborwa and Kalagadi Manganese.

Activities included providing development finance, project development, fund management as well as non-financial forms of business support, from conceptual through feasibility studies, to establishment and expansion of business. IDC was involved across many sectors, but heavily so in the green industries and mining sector.

The IDC group structure included three fully owned companies: Findevco (Pty) Ltd, Impofin (pty) Ltd and Konoil (Pty) Ltd. These were mainly used as financing vehicles and were in the process of being wound up. Impofin had been useful for imports and Konoil in respect of buying a stake in Sasol.  Other subsidiaries included Foskor, SEFA, Scaw South Africa and various associates such as Phalabora Copper of which IDC owned 20%, together with other South African and Chinese entities. The IDC had appointed directors in all of its associates as well as a chairperson for Scaw South Africa. The post-Investment Monitoring Department kept abreast of each of their performances and there was oversight through the shareholders.

Gross profit, after deducting financing costs of R1 billion, was R7.5 billion, compared to the previous year of R7.6 billion. Profit had therefore declined by 17%. Most of the income came from the dividends of listed shares, preferential share income and interest from funds in the money market.

Administration had increased, largely due an increase in borrowing costs and the issue of a R1.5 billion public bond, which had been very successful.

The rate of loan impairment seemed to have stabilised at 18.2% over the last three years, although the IDC was aiming to bring this down to 15%. The IDC could not be compared to other commercial banks in this regard, since it became involved at much earlier stages of the business cycle, from pre-feasibility to expansion. Therefore there was a much higher likelihood of things not working out as planned. The IDC could not be as risk-averse as other banks.

Taxation had increased from R3 million to R560 million, largely due to changes in the taxation of preferential shares, which had been consistently used to fund loan. This would not be repeated in the coming year.

Other comprehensive income for 2014 totalled R8.3 billion, versus only R2.9 billion in the previous year. Assets grew by 9% and equity by 10%. Loans and advances totalled R22.6 billion for the year, up by R3 billion on the previous year. Commitments and advances had climbed steadily year on year to R28 996 million and draw- downs were at R11 171 million, which was down from the previous year.

The IDC had a strong financial base which was under geared at only 20%, which was much lower than the statutory requirement of 100%. Overall level of funding stood at R13.8 billion, which was higher than the previous year. Green industries had received 40% of this funding with the chemical and allied industries receiving 13%. Mining and minerals beneficiation accounted for 12% and metal, transport and machinery for 11%. Alignment with the NDP was indicated through sectoral distribution figures.

The IDC was developing the value chain to build competitiveness for downstream beneficiation and had made several inroads to increase availability of raw materials for steel making. It had also supported several small steel mills utilising scrap as an input. It had funded manufacturing industries over the last five years to the value of R15 billion, and although levels of textile industry funding were lower, the IDC had assisted the industry by improving competitiveness and thus stemming job losses.

Infrastructure inputs were in the form of funding for building and refurbishing railway equipment for Transnet,  Prasa and equipment for Eskom.

One matter that was described as "significant by its insignificance" was the 1% funding towards agro-industries, which was admitted as a serious shortcoming. Some success has been garnered through the development of a dairy industry, soy processing and processing of chickens. A lot still needed to be done to grow the agro value chain.

The IDC had started investing in green industries three and a half years ago and it had become one of the fastest growing industries in the country. In future it would shift its focus to support local manufacture of some of the components in this industry. It led the development of the industry and demonstrated its feasibility, where private sector financiers were now playing a more active role. Several of these projects were coming online, alleviating some of the pressure on electricity generating capacity. These projects had included photo voltaic, concentrated solar power, wind and hydro energy. The disbursement was not distributed across all provinces, with Free Sate and Mpumalanga lagging behind.

The IDC had invested in sixteen countries outside South Africa, mostly in Mozambique and had spent a total of R2.3 billion on 15 projects on the rest of the continent on infrastructure, mainly for electricity generation, tourism, lines of credit to Development Finance Institutions (DFIs) to finance SMMEs that imported South African technology, healthcare facilities, textile and clothing and media.

Black economic empowerment was funded to the tune of  R5 billion, including black industrialists such as Amka Products, Chic Shoes and Umzungulu Windows. The IDC portfolio was 24% black owned, 34% black empowered and 42% with at least 25% black shareholding. The highest sectoral distribution was in mining and quarrying at 29% and the lowest in transport, storage and communication, with 2%.

Rural development funding totalled R6.5 billion and funding towards women empowerment was R325 million. He explained that projects with women as large stakeholders were smaller in size, resulting in a lower overall investment value for women-empowered companies.

The IDC had established 34 agencies for the purposes of local economic development agencies at a municipal level, to introduce capacity and resources into municipalities to support and implement economic and job creation projects. No more agencies would be established but IDC continued to support those established with R35.8 million approved to assist seven of those agencies. Other social enterprises and intervention programmes have been established. These included such projects as the Goedgedacht Community trust, the Chris Hani Mechanisation Unit and the NMMU Propella Incubator. Youth development was mostly approached through an internal initiative where bursaries were provided, and an 18 month internships for school leavers. IDC  had adopted 20 schools to provide appropriate interventions, spending R20 million over the last three years on these initiatives.

The IDC engaged in ongoing research and managed various funds on behalf of the government, such as the Agro-processing Competitiveness Fund.

Discussion

The Chairperson thanked Mr Qhena for a professional and comprehensive presentation, indicating that he clearly displayed understanding for the kind of information the Committee needed, not only for oversight purposes but to be able to share.

Mr P Atkinson (DA) asked whether the unqualified audit by the Auditor-General (AG) had been unqualified, but with findings or recommendations. He asked what the source was of the other comprehensive income, which was even higher than the gross profit after financing costs. He queried whether there was a mistake on slide 18, which referred to the disbursement of R11.2 billion during 2014/15, asking if it should not refer to the previous financial year. He asked which green industries had been funded by the IDC.  He queried whether there had been any funding of gas industry in Mozambique and how much had been invested in renewable energies. He wondered why the IDC should be involved with financial intermediation, real estate and insurance, which was indicated by the Slide on “Sectoral composition of the IDC’s portfolio compared to sectoral contribution to GDP”. He said that while jobs and beneficiation were important goals, a focus on downstream issues, like the sustained production of electricity and infrastructure, was just as crucial in order to facilitate the upstream aspects of the economy.

Ms D Rantho (ANC) asked for more information on the challenges, since the Committee was also there to assist and needed to know where plans had not worked out as well as expected. She understood that the A-G had made recommendations and asked what those were. She asked where the twenty schools were located that were referred to in the presentation. She asked whether there was a plan for rural development and outreach and whether there was an actual plan for job creation. She asked how the tax bill had increased from R3 million to R560 million, as shown on slide 8.

Mr S Marais (DA) asked what strategy was being used to deal with lost jobs and job creation, especially in the jobs-driving sectors like manufacturing, agriculture and mining. He noted that most of the funding which had been earmarked for agri-processing had been used, and wondered then how any additional projects were going to be funded in this sector, which was so crucial. He asked whether the financing costs referred to in slide 7 were from external institutions. He asked why Mozambique was being targeted for funding such as the 24% equity in Mozal SARL.

Ms C Matsimbi (ANC) asked what the IDC was doing with regard to women empowerment and transformation, especially in the clothing and manufacturing industry.

Mr S Tleane (ANC) said the IDC existed to address the legacies of the past and to help the previously disadvantaged. This angle had to be kept in mind and in focus through all its funding. He referred to the video which had shown how the IDC had funded an action movie. He questioned whether this was appropriate and whether the IDC funded arts and culture projects that re-educated the youth about the history of South Africa. He asked whether some of the research that the IDC engaged in was related to providing entrepreneurs with support and information, apart from financial support. He referred in particular to the example of the brewery being funded by the IDC, Soweto Gold. Companies like SAB held the monopoly in this industry and partly because they controlled distribution, which was an important part of the business. He was glad to see that the IDC had appointed one of their directors in SCAW, but also wanted to know how the labour relationship was.

Mr Tleane asked why the IDC made use of funding intermediaries, as this practice seemed to create challenges.

She asked why 100% owned companies like Findevco and Impofin were even being mentioned in the results. Referring to disbursements, he questioned why more funding had not been invested in the clothing and textile  industry, since many of South Africa’s people did not have university education, but were skilled in this area.

Mr Tleane further questioned why the IDC was spending so much in Mozambique. Referring to Chic Shoes, as one of the projects mentioned in the report and the video, he asked whether the funding included prospects of expanding such businesses, since South Africa imported most of its shoes.

Mr I Pikinini (ANC) asked for some insight into the projects that had not fared well.

The Chairperson asked how the global crises had affected the work of the IDC and whether it had a response plan, in this regard, for businesses in South Africa, especially for those in financial distress. She asked what the IDC would be doing to re-train those retrenched and to what extent the IDC was involved in this? She asked for more clarity on the Medium Term Note Programme and to what extent the IDC was involved in growing companies after financing them.

The Chairperson noted that the IDC had admitted its shortcoming in terms of women empowerment, and asked then if there was anything the Committee could provided with to assist in improving this situation, especially in the agro-processing industry, where many women worked. The other industry women were largely involved in was clothing and textiles. She pointed out that many of them lacked a tertiary education and were intimidated by authority, so it was necessary to empower them to become aware of the opportunities available to them. She asked if the number of black industrialists was growing and, if not, what the challenges were in this regard. She had been impressed by the increase in disbursement and the approval rating.

The Chairperson asked why there were significant differences between the provinces in term of disbursements and why Free State and Mpumalanga were so challenging, asking for a summary of some of the issues here, and whether they were related to the lack of arable land? She asked for impact studies on the work being done with local municipalities and to what extent this funding had contributed to GDP and job creation.  She asked why the IDC was not adding new areas. She questioned whether the sudden increase in tax had an impact on investors.  She asked whether the interventions on the rest of the African continent were in line with government policy. While recognising that South Africa had a responsibility towards growing the Continent, it was also necessary to consider whether there was any value added to South African GDP as a result of these investments, for there had to be a two-way street. She wanted to know what the IDC was doing about breaking the stranglehold of monopolies.

Mr Qhena confirmed that there was a mistake on slide 18 and that indeed the R11.2 billion was disbursed during 2012/13. The instrument used to prove loans was a preferential share, which was previously categorised as a quasi-equity and consequently generated dividends, which were previously non-taxable. This had changed in the last tax year, resulting in tax implications for all those preferential shares issued. This instrument was particularly used for BEE shareholdings, whereby the recipient could then repay the loan through the dividends generated. This also secured the repayment of the loan, almost ring-fencing it. The new tax laws had turned out to be quite punitive in this respect, especially since they acted retrospectively and had not been anticipated. The National Treasury would be engaged on the matter of vesting.  However, a different instrument would be used in the future, in order to avoid such high taxes. Alternatively, some arrangement needed to be made with National Treasury and the Receiver.

Ms Rochelle Warries, Finance Manager, IDC said there had been a small movement from last year to the current year. The amount labelled as “Other Income” in the Statement of Comprehensive Income (slides 7 & 8), referred  to a market-to-market valuation of the listed as well as unlisted shares. There had been a big increase in the Sasol share price from R400 per share to R600 per share, which accounted for the large increase, despite the decrease in other shares.

Mr Qhena said that while this could not be referred to as profit, since these shares were not sold, it was simply an indication of the value of their portfolio as at the end of March 2014, and was in accordance with international financial reporting standards, and gave a sense of how the IDC investments had grown. He said that the companies listed as being 100% owned by the IDC were a little bit different to SEFA, and were vehicles which had been used in the past to invest in certain projects, These vehicles were not being used any more and had been used simply to reduce costs. There were no further activities in Konoil, which had been used to invest in Sasol. These companies were all in the process of being wound down.

Mr Modise Musi, Post Investment Manager at IDC, confirmed that the IDC went to some lengths to monitor and provide support and assistance wherever it could, having invested in a business. It monitored performance and adherence to the agreement made between itself and the recipients. IDC assessed job creation and retention through monitoring the pay roll and if necessary would provide assistance through measures such as restructuring. It also provided financial ongoing support through extending payment terms or providing payment holidays and even charging no interest. These needs and requirements were closely monitored, on an ongoing basis, by the IDC’s Post Investment Monitoring Department.

Mr Qhena said this department operated to assist a business in need or in trouble. He said the IDC was never quick to give up on a business, although it did sometimes have to make a decision in some cases not to throw good money after bad. It was sometimes a difficult, and not always the right decision to make.

Mr Qhena confirmed that the IDC received a clean audit. However, the AG had not done the audit as a body, since the IDC had two sets of auditors. These were KPMG and Kubota auditors.

Mr Qhena noted that the IDC had invested in 22 green projects, of which eight involved photo voltaic projects, four were concentrated solar power projects, nine wind power and one small hydro project in the Northern Cape. It had spent R1.6 billion in the Western Cape, R100 million in the North West province, and R11 billion in the Northern Cape.    

Mr Rian Coetzee, Head of Direct Lending, SEFA, explained the use of financial intermediaries. Big industry players such as the sugar mills and soya processes had been seconded to become financial intermediaries, whereby they were given a 50/50 stake in the loan provided to them. This was on-loaned to the black farmers for working capital. This method had several advantages. The farmers became part of the formal and already established value chain, the intermediary carried 50% of the risk for the loan and therefore had a stake in the success of the farmer’s business. An example of such an intermediary was Tiger Foods. They were involved in developing a programme pro-actively for the coming year, since there were structural challenges involved and the system had to be fully integrated into the whole value chain. There had been some challenges in the previous year with certain commodities, like poultry being imported and sold at low prices, but tariffs had now been levied on imported poultry in protection of the local supply. Imports subsidised from overseas competed with local products. Citrus Black Spot disease had been another issue and water rights were an ongoing stumbling block that needed to be addressed. It would be necessary to align the relationship between the big commercial concerns, the small holder farmers and government. An MOU had been drawn with the Department of Rural Development and Land Reform, involving the macadamia industry. 

Mr Tleane asked why the IDC did not rather use government agencies to provide loans to the small farmers and then provide assistance through this means.

Ms Coleman agreed that this system seemed to extend the legacy of the past, as these intermediaries could block and create dependence on them. She felt that perhaps IDC was not doing enough to change the status quo, and wondered whether these big players were being challenged in any way.

Mr Qhena said this should not raise concerns as these intermediaries offered vital know-how to the farmers, the farmers together had a pooling effect and it was in the intermediaries’ direct interest that the farmers succeed since they had lent them money and they therefore had to procure from them. The system had worked well thus far, and the use of intermediaries also made sense because it created a localised set up where an intermediary dealt with small farmers in the surrounding areas, which was more feasible and effective than working with a centralised government institution, This system was not affecting pricing negatively.

Mr Coetzee said the 50/50% loans ensured that the intermediary carried 50% of the loss if the farmer defaulted.

The Chairperson still questioned this system and asked why this had to be through the private sector.

Mr Coetzee again mentioned localisation being advantageous to the efficacy of then system, in that it optimised the value chain, but said that IDC could always explore other alternatives in the government sphere.

Mr Qhena said the IDC did not simply provide the financial means to build a business but that technical skill and knowledge was vital to the success of the business. Through this means, this technical experience could be passed on to the farmers.

Mr Tleane said he did understand this, but that monopolies in this country needed to be confronted and defeated and this system did not seem to address this issue.

The Chairperson said that the Committee would be keeping an eye on developments in this field, but that through her own observations of people’s experiences in the past, the system had weaknesses. She could provide practical examples of where it had failed. Transformation of the system was needed and if this necessitated taking risks then so be it. Government should then take the necessary risks, instead of leaving it up to the private sector.

Mr Qhena agreed to monitor and agreed that empowerment was important.

Mr Qhena continued with his answers. The 31% IDC exposure in Mozambique referred to an investment made in the past. The regional exposure included infrastructure, forestry, tourism, healthcare facilities and textiles and clothing. The reason there was a larger focus on Mozambique was purely because of its proximity to South Africa and the fact that South African entrepreneurs benefited from the exposure. The IDC did not invest in exploration and had not specifically invested in gas in Mozambique. The Reatile Gaz project referred to in the video involved selling Liquid Petroleum Gas to wholesalers. Another  project IDC was looking at was involved providing gas for taxis and as an alternative source of fuel in industrial use.

The IDC was certainly concerned about supporting so-called downstream industries, as the investment in green industries evidenced. These industries were helping to create sustainable and viable alternative and complementary sources of electricity needed by business in the country. Another way of approaching the energy shortage was through energy efficiency, and the IDC was working in conjunction with a partner from Germany and the Department of Trade and Industry, at such a project in the Western Cape. The IDC was also heavily invested in solar equipment as well as the mining of manganese, which was an essential product needed in steel manufacturing.

Ms Josephine Gaveni, Head: Marketing, IDC, explained that the schools programme was an initiative in partnership with the Department of Basic Education, whereby two schools from every province - apart from Eastern Cape and Limpopo, in which three schools had been chosen - to benefit from this programme. The schools were mainly located in rural areas. The initiative was meant to create a holistic approach to the challenges faced by these schools. It was a five year programme, currently in its third year and was considered to be very successful. Specifically, there had been a focus on encouraging and developing Maths and Physical Science as strong subjects in these schools.

Mr Qhena responded on the comments on the admitted failures, and reiterated that IDC had failed to create sufficient jobs, and that this was certainly a shortcoming in their endeavours which needed urgent attention. The IDC did need to address this more pro-actively. It had established offices and satellite offices in every province. There were always ways of accessing more funds if necessary, so if an opportunity for job creation was presented, the necessary funding could be made available. It tried to access funding that was cheap and tried to offer interest free loans or less than prime interest rates. The funding model was based on low interest rates, but was ring fenced in such a way to make the funding sustainable. It received no funding from government.

Ms  Warries explained that the financing costs referred to in the Statement of Comprehensive Income as R1 billion were costs incurred from borrowing from such funds as the Unemployment Insurance Fund (UIF) and the Public Investment Corporation (PIC). IDC borrowed money at the cheapest rate, whether foreign or local, and as its debt had increased significantly over the last year so had its financing costs from R689 million in 2013 to R1 billion in the current year.

Mr Qhena said IDC  had borrowed R4 billion from the UIF and R5 billion from the PIC; both at low interest rates. This facilitated lending on for early start-up projects. It had paid R450 000 per job created and worked on the basis of a Brazilian model in the endeavours to create more jobs.

Ms Warries said that that IDC had borrowed R3.5 billion from the UIF by March 2014, after which it had borrowed a further R500 million. It had also borrowed R5 billion from the PIC, of which R4 billion had not been used so far. It had borrowed from local banks such as ABSA and Investec, as well as foreign institutions like the China Construction Bank.

Mr Qhena explained that the Medium Term Note was a public bond issued by the IDC of R1.5 billion. This was a local bond. 

Ms Lorraine Chemaly, Strategist, IDC, explained that the IDC’s rural development programme had a rural development scorecard against which developmental impact was assessed, according to specific criteria such as community development and ownership across the country. Free State scored the highest.

Mr Qhena added that through its agency development unit IDC did a lot of rural development work and requested to schedule a time with the Committee to share some of the achievements and work in the rural areas. Often good results in this area depended on the cooperation of a local municipality that was functioning well. 

The Chairperson agreed to this and said she was particularly interested in what the impact of these projects had been. She asked how the IDC was addressing the issue of the displacement of companies in the clothing and textile industry as a result of the Chinese imports.

Mr Qhena said that while the local industry had suffered greatly in past years, the situation was now changing, as the exchange rate became more unfavourable to the Chinese and as competitiveness started to affect the viability of these imports as well. The IDC had tried to address the problem through improving aspects of local clothing and textile businesses such as factory layout, through restructuring and modernisation. The industry still remained tough and highly competitive. He said another challenge remained with the lack of sufficient input in the provinces of Free State and Mpumalanga. IDC would continue and renew its efforts in this regard.

Mr Qhena commented, in regard to the funding for the filming, that IDC was also involved in more educational and content substantial media projects. One of them was an upcoming documentary film feature , “Mandela’s Gun”, which was referred to in the presentation,

Mr Qhena clarified that Soweto Gold, the brewery that had been funded, was run by a man who had consulted for SAB for many years and therefore had vital experience to bring to his new business. It was absolutely vital that those running the business had the necessary knowledge and skills to carry the business forward and the IDC took this into account as well as doing whatever it could to assist in this aspect of making the business a success.

Ms Gaveni said that SCAW employees were part of the sector bargaining council and that Strategic Infrastructure Projects helped ensure relative labour peace, and expediency was used to influence negotiations.

Mr Qhena reminded Members that the global slowdown had started in 2008. Recovery had been slow and the Chinese economy was currently experiencing a slowdown. Industry in South Africa had certainly felt the impact of these trends and the current trend in China had affected some sectors. The IDC subsidiary Foskor had been affected by the slow recovery. The IDC was involved with the recovery efforts, showing some good results as well as bad. Some businesses had simply not made it through this downturn, despite their concerted efforts and funding aid. Some R6.8 billion had been advanced to this end, of which R5.8 had been used. The International Monetary Fund (IMF) had recently issued a statement that global growth would be only 3.8% for the year. If  China and Africa were excluded from this equation, this left Europe, which was the recipient of the bulk of South Africa’s exports. This did not bode well for the South African economy.

Mr Marais asked whether the economic downturn was affecting the impairment rate of loans.

Mr Qhena said this seemed to have stabilised around 18.2%, which was still too high as IDC was aiming for an impairment rate of about 15%. He said it would all depend on how long the China slow down would last, and also on the recession in Europe, since this had resulted in protectionist mechanisms.

Mr Qhena suggested that he should return with the response and recommendations for projects that would increase women empowerment and said that while R300 million had been spent to promote this, there remained some R200 million to be allocated. Black industrialists were receiving the support from the IDC in the form of skills and finance. The rest of the continent still held massive opportunity. Plastic recycling was also a green industry that IDC needed to expand.

Mr Tleane asked whether the IDC’s support in the scrap metal industry was not playing unwittingly into the hands of the criminals who were engaged in the theft of cabling, which was affected not only electricity supply but also water supply in the country.

Mr Qhena said that by supporting the local scrap metal industry IDC was in fact minimizing the export of scrap metal. It was these exports that were in large part to blame for the increase in cable theft during the last few months. IDC had formed a joint intervention with ITEC to expand this industry.

Mr Tleane said that the likes of SAB were still too big and that something needed to be done to start allowing other entrants to the industry.

Mr Qhena agreed and also pointed out that Soweto Gold was a business that did not seek to go head to head with such a massive company, but sought to become successful on its own terms. 

Small Enterprise Finance Agency (Sefa) 2013/14 annual report briefing

Mr Thakani Makhuvha, CEO: Sefa, said the organization was moving from the crawling stage, and was starting to develop its footprint to ensure it delivered on its mandate since its establishment two years ago. Their mandate was to assist small businesses in order to create jobs and address the challenges of poverty and inequality.

During the 2013/14 financial year, Sefa had approved loans of R1 065m, and distributed R549m, which was more than double the amount of the previous year. R261m had been distributed as direct loans (537% more than 2012/13), and the balance of R288m had been through wholesale lending. The number of small, medium and micro enterprises (SMMEs) funded had risen from 28 362 to 46 407, while the number of jobs facilitated had increased from 19 853 to 28 362. Sefa had funded 10 291 youth-owned enterprises (value R157m), 44 302 women-owned businesses (R362m), 36 729 rural-based entrepreneurs (R429m) and 43 643 black-owned businesses (R599m). Sefa had a total of 194 employees, of whom 178 (92%) were black, and the remaining 16 were white. The gender split was 118 female and 76 male. The entity’s income statement showed that revenue was 10% down, at R132.m, while operating expenses were 10% up, at R207.4m. Personnel costs, at R98.4m, accounted for 47% of expenses. Impairments and bad debts amounted to R92.8m, and Sefa recorded a loss after tax of R247m.

Discussion
The Chairperson gave credit for Sefa receiving an unqualified audit from the Auditor General, but said she was concerned about those issues preventing it being a clean audit. She recognized the influence of the IDC on Sefa, because they were now able to make information available, but she was concerned about full disclosure.

Mr P Atkinson (DA) asked if Sefa was looking for examples of international best practices, specifically in Asia. Were there any other businesses in the pipeline?

Mr S Tleane (ANC) expressed his appreciation for work that Sefa was doing, even though they were still at the crawling stage. He wanted to know whether Sefa was able to monitor where the money was going. What barometer did they use to assess the impact it was making on the community? He also wanted to know about duplications in the group structure, and if Sefa could reduce the other entities -- buy them out to micro-manage them and ensure their productivity. He asked about the Identity Development Fund, which deals with issues of youth and women, and as Sefa was doing exactly the same, he wanted to know the advantage of having them separately.

He asked about the mechanisms Sefa used to monitor its partners like the Small Enterprise Development Agency (Seda) to ensure they lived up to the commitment they had signed. Another question was about intermediaries who fund SMMEs from their own sources, with five-year loans -- he had the impression that the intermediaries paid back the loans, but he wanted to know the nature of the agreement. He questioned the logic of lending to small organizations, when they created limited employment opportunities, citing the example of Khanyile Solutions, which had borrowed R400 000 but had created employment for only two people. He also wanted to know how a credit guarantee worked,

The Chairperson asked how Sefa managed other funds, such as those that came from the Norwegian Fund and the European Union, and asked about why they had been excluded from the presentation. She also asked about the 1:1 job creation ratio, which meant a R1 loan created one job – was this a true reflection? She needed clarity on issues around bad debt, which had increased from 25% to 31%. She asked about what prescripts Sefa needed to comply with. She had noticed that Sefa had no sector target for SME funding – it was all over the place, while it seemed the government had targeted them in a particular direction. She asked about the committee which was supposed to approve the funding, and whether this did not have an impact on the delay in issuing funds.

Mr Tleane asked how Sefa planned to build internal capacity, and whether they were currently feeling a lack of capacity.

Mr Makhuvha responded that Sefa tried to follow international best practices for lending, which meant they did not lend recklessly. They looked at the sustainability of a business and its ability to pay back a loan. They were using methodologies that were used by certain countries in Asia, such as Bangladesh.

With regards to similar funds in the SMME pipeline, he said he was unable to respond to that at the moment. With regard to monitoring the funding impact, he said Sefa had post-investment monitoring for both direct and wholesale lending activities. They did not have accurate data for youth and women, but were working on being able to include that as part of their monitoring strategy. On the question of investing on business partnerships, he said that was an investment by default, because they received a shareholding when those business partnerships acquired certain properties. With regard to intermediary loans, he said those intermediaries were continuing to pay back their loans.

Mr Makhuvha was interrupted by Mr Tleane, who wanted him to elaborate on the loan arrangements that Sefa debtors enter into on agreements with third parties. What was the impact of those third party arrangements with Sefa?

Mr Makhuvha said intermediaries had to report their activities, including agreements with third parties. On question of loans to small entities that create a small number of jobs, he said sometimes those small entities had a contract to execute, and Sefa regarded funding them as another way of encouraging economic growth.

The Chairperson said she was concerned about how vague Mr Makhuvha was about giving accurate figures, and insisted that when she asks about jobs that have been created, he must give accurate numbers and give a breakdown on sectors and SMMEs.

Mr Makhuvha referred other questions to his colleagues.

Alroy Dirks, Head of Strategy, SEFA: said Sefa lends in the context of the National Small Business Act, which classifies businesses in terms of factors such as size, class, number of the people employed and assets. The small businesses are classified in different sectors, according to those values. Sefa lends in terms of intermediaries’ activities, particularly in rural areas, where it uses intermediary finance.

The Chairperson asked Mr Dirks to explain the numbers that they had presented to the Committee, and the logic behind them.

Mr Dirks said Sefa had loaned money to 21 businesses that had created 84 jobs. In direct lending, he said 2 700 jobs were created. Sefa supported ten financial cooperatives.

The Chairperson asked for more clarity.

Ms Vuyelwa Matsiliza, Executive Manager: Wholesale Lending, said Sefa was still operating under the Cooperative Amendment Act of 2013. The regulation and registration of financial service cooperatives still resided with the Cooperative Bank Development Agency (CBDA). The CBDA offered regulatory support and resided under the authority of the National Treasury. Financial institutions were operating optimally within the regulations, and that enabled Sefa to lend up to 15% of the assets of a cooperative financial institution.

Mr Dirks said joint venture funds supported over 315 small businesses, and 300 jobs had been created. Under the micro finance institution, 44 151 enterprises had benefited and a total 40 579 jobs were sustained. Through retail financing intermediaries, 272 SMEs had benefited from the lending programme and 2 800 jobs had been created, bring the total up to 46 407.

Ms Matsiliza responded to the question of compliance posed earlier by the Chairperson. She said Khula Credit Guarantee (KCG) was registered in 1998 under the Short Term Insurance Act. It had a license to provide credit guarantees or indemnities, and had been working with the big four commercial banks -- ABSA, FNB, Standard Bank and Ned Bank. They had been advised by FNB not to put all their money in a single financial institution, which was to manage the credit risk. They had diversified the portfolio and would still have cash reserves if one of the commercial institutions collapsed. Diversifying their financial portfolio rendered them compliant with the Act.

Ms Carol van Deventer, Acting Head of Financial Accounting: Sefa, said that before the South African Micro Apex Fund and Khula Enterprise Finance were merged with the small business activities of the IDC to form Sefa, they were held in Treasury and the reason that they were not compliant yet was that they had two bank accounts, but other two had been opened by the end of the year. They had submitted a letter to the Financial Services Board to explain their situation.

The Chairperson said this had not been clear, as they had been told that Khula and Sefa were managed by the IDC Act, but kept hearing contradictory information on the issue. She criticized the lack of openness in this regard, saying it had made it difficult to cross-reference with the act or policies that they followed. Their non-disclosure made the Committee appear stupid because they were not well prepared due to the lack of information needed when Sefa presented its report to them.

Mr Makhuvha said they had not withheld any information knowingly. Their presentation had been tailor-made to focus more on the Sefa operations, and not on individual enterprises like Khula Credit Guarantee.

Ms Matsiliza said Sefa had noted the transformation winds of change in the country and the development of black-owned businesses, particularly by young people. She spoke about Sefa’s partnership with the Identity Development Fund, which focused on black women and young people. Sefa fully supported this arrangement. There was also the Awethu Youth Fund, where seed funding had been provided by the Jobs Fund and the private sector. Sefa controlled this funding, and were considering taking some members to add to their operations. Awethu helped in leveling the playing fields by closing the gap between big and small businesses, because it was made up of entrepreneurs who came up with ideas, intellectual property and invaluable stock, which added value to the Sefa portfolio.

Mr Dirks spoke about Credit Guarantee, a pilot programme aimed at reducing the cost of credit to micro enterprises and spreading the footprint of Sefa. Sefa had reached an agreement with a supplier of goods to a small business. Their intention during the pilot period was to learn about the behaviour of the entrepreneur and the supplier of the goods. The agreement was with Tshwane Fresh Produce and Cashbuild Stores, and Sefa was in the process of negotiating with Penny Pitchers to do the supply in the Eastern Cape.

Ms Van Deventer gave an explanation on managed sub-companies, which was a legacy they had inherited from Khula. She said there were three funds. The Norwegian Fund was an agreement that they had with the Norwegian government, but they did not have sufficient information about the nature of the agreement. Regarding the European Union Fund, she said the agreement was signed in 1996 between EU Community and Government of SA, and they were in the process of establishing the people that were involved in the initial agreement, and to alert them about its current status.

Ms Matsiliza said the Department of Trade and Industry (DTI) was responsible for this fund. Sefa would continue to retain it for if they had a special programme that would require funding. The EU was no longer interested on how the fund was spent, but the DTI wanted it to be used prudently.

Mr Dirks tried to explain how the funds ended up in the books of Sefa.

The Chairperson demanded accountability for the funds.

Mr Dirks asked the Portfolio Committee to give them a month. They would arrange a meeting with the DTI and would present a response to the Committee after that.

Mr Makhuvha said they had been engaging the DTI regarding this fund, as it had come up during the audit. They were also engaging with the provinces for which this money had been allocated.

The Chairperson stressed the need for accountability, saying that they were governed by regulations, laws and policies, emphasising to the Members and delegates from Sefa that this was a serious matter.

Mr Riaan Coetzee, Executive: Direct Lending, said Sefa had not been given a specific mandate on targeting certain sectors, but there had been emphasis on the construction and services sectors. They had specific guidelines from the board to direct 20% of lending to productive industrial sectors that had been identified by the National Growth Path and the Industrial Policy Action Plan.

The Chairperson asked about how the R15-Million had been utilized, and to which sectors it had gone.

Mr Makhuvha said they had used it to buffer the pricing to SMEs.

The Chairperson asked why Treasury had cut the funding for Sefa.

Mr Dirks provided more clarity on the figures, and said the reduction in funding by Treasury could have been part of the MTEF allocation.

Ms Van Deventer said R11m had been set aside for bonuses, but because the targets had not been met, they had not been paid and Sefa had reversed the funds.

Chairperson thanked the Sefa team for the presentation and the meeting was adjourned.
 

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