Incentives Scheme: briefing by National Empowerment Fund (NEF)

Meeting report

The Chairperson welcomed all delegates and presenters from the National Empowerment Fund (NEF) and apologies were noted for other Members.

National Empowerment Fund (NEF) briefing on initiatives to drive inclusive economic growth across all provinces
Ms Philisiwe Mthethwa, Chief Executive Officer, National Empowerment Fund,  stated that this was the first time that the NEF was appearing before a parliamentary committee since democracy. She introduced the other members of the delegation: Mr Setlakalane Molepo, Divisional Executive for Rural and SMEs development; Mr Mziwabantu Dayimani, member of the General Council, Ms Zama Khanyile, Fund Manager, Mnotho Fund; and Mr Moemise Motsepe, Marketing and Communications Senior Manager.

She gave an introduction to what NEF was about, the provincial dynamics faced by the organisation, their investment philosophy and achievements, administrative and bureaucratic impediments and various investee stories. NEF was started in 2005 through the NEF Act. It was an exclusive entity mandated to provide financial support and promote a culture of saving amongst black people. She then quoted the NEF pledge (see attached document) and emphasises that the pledge specifically embodied the professionalism, the excellence and the quality of the skills and qualifications on the NEF team.

Ms Mthethwa said that the mandate of the NEF was valid because black people in the country only occupied 5% of the national economy, according to the JSE’s market capitalisation policy. She said that after 15 years on the JSE, black people still controlled less than 5% of the GDP, which indicated that the country had far to go. The NEF had managed to secure an estimate of about R6 billion held by black people, although the estimated amount that should be in black hands should be 26% of the country’s GDP or R2.6 trillion.

Ms Mthethwa moved on to the key performance milestones. NEF had managed to secure unqualified audit reports for nine years and had been consistently able to provide funding to black entrepreneurs in the rural areas. She further elaborated on the performance milestones as well as the achievements of the NEF (see attached presentation). She had heard of government’s intention of disposing of some of its non-core assets, and said that NEF would be grateful for the opportunity to acquire some of those non-core assets.

The NEF’s campaign at the moment was focused on taking the NEF to the villages and rural areas. She mentioned that the NEF had proven itself to be a sustainable investment as it had expended R 4 billion and was able to secure R1 billion back in repayments. This proved that the black nation had proven itself to be worthy of repaying monies owed.

She said that one of the most important milestones was the establishment of the Strategic Project Fund (SPF). She elaborated that the main mandate of the project fund was the creation of black industrialists by increasing the participation of black people in early stage projects that were aligned with government’s policies. This project had been the best way of locating young black entrepreneurs in rural areas, as well as to foster further job creation. Other key objectives of the project were highlighted, including the fact that the programme had a sector-targeted approach.

The main target of the SPF had been to target and create black industrialists. She described black industrialists as an entrepreneur or enterprise with a substantial equity or operational interest in the long-term ownership or control of a medium to large enterprise, with a high potential for job creation and making a meaningful contribution to growth and development. Black industrialists would be responsible for increasing the export earning potential of the country and reducing import dependency. A definition of black industrialist was included in the presentation. that she had included in her presentation. She mentioned that this was the first time that the NEF had attempted to describe a black industrialist, and would be interested to hear what the Committee had thought about the description.

Mr Suka joked that the NEF was attempting to create a “petit bourgeoisie”.

Ms Mthethwa continued  that each project would have to undergo a rigorous screening process before it was deemed eligible or viable by investors. There were typically four development phases of the project. The first phase was the scoping of the project, the second was a feasibility study of the project, the third phase was the banking feasibility study of the project and finally the fourth stage was the fund raising  stage and closure, where all project capital was raised.

Ms Mthethwa gave examples from the renewable energy space to highlight how the SPF would benefit the country’s project start up. NEF looked at the constraints of the renewable energy space and tried to figure out why black businesses were struggling to penetrate the renewable energy space and concluded that most black businesses did not have enough start-up capital to penetrate the renewable energy market. The NEF would then come in, attempt to equip black owners with the capital to venture out into these large projects and penetrate the large developing markets . Government could also gain an advantage in these projects as it would be able to control the equity distribution of the funds, and dictate which equity groups would be eligible to receive the investment. 

Another main target of the NEF would be to secure equity to be warehoused to broad-based black economic empowerment (BBBEE). The SPF had about 20 projects in the pipeline currently and required about R600 million from the NEF and had leveraged a R3.6 billion return from external investors. When the portfolio of these twenty projects reached the financial close, they were estimated to generate a return of about R30 billion. This would all be achieved through co-funding and syndicating with other external funders so as to leverage returns from the projects.

Ms Mthethwa spoke about a new project to do with construction of hospitals. A group of black surgeons and doctors had started a broad based group for the construction of hospitals. The government was not willing to fund these projects, and the doctors looked to the NEF for assistance. The NEF invested R100 million in this project and was able to leverage R2.6 billion from the private sector. This group was targeted at being the fourth largest healthcare group in the country. The project had to date had created three hospitals in Gauteng, Western Cape and Free State.

Ms Mthethwa said that the NEF had now been in operation for 11 years. Its main presence was dominantly in the Gauteng projects, and yet it had since made an attempt to disperse into all the other eight provinces. The NEF had been actively involved in a number of ventures such as the visits to about 12 destinations in each of the provinces, so as to host workshops and educate the villages and townships countrywide.  Other reasons for growth in the provinces could also be attributed to ventures such as the NEF Asonge Share Scheme, Strategic Project Fund and various other projects. She specifically elaborated on the Business Plan and Mentorship launch, which was a project in which NEF would assist black entrepreneurs with the creation of their balance sheet, by creating a business plan toolkit. This business plan toolkit prompted a person to fill in various projections such as  budgets, financial statements and so forth, in their preferred language. By the end of the prompts the business plan would have been created.

Ms Mthethwa acknowledged that NEF was also making great strides in narrowing the gap in the geographic footprint but it had a long way to go so as to restore the economic citizenship of those South Africans previously excluded from the economic mainstream. The main goal would be exceeding the current GDP status in each of the provinces.

Ms Mthethwa outlined some of the successful projects that the NEF had funded. Mabele Fuels in the Free State was the first success story in the renewable energy space. The project had managed to secure 15 000 jobs indirectly and about 636 jobs directly. This would include the employment of small scale farmers who would also had equity in the projects. The project, at the moment, was worth about R2.5 billion which would not have been possible if the NEF had not offered to provide the project with the initial funding.

Great strides had also been made in the rural and community and development funding of projects. There was massive development in the tourism sector, where the NEF had funded many projects to start up hotels all over the country. She gave an example of a community who had received land from the Land Restitution process, but did not know what to do with it. NEF actively intervened and sourced and sent retired engineers to help the people drive projects how the community should use that land. With another rural community who owned cattle, NEF assisted the community to link up with large companies such as Parmalat and Clover, who would then source out milk from that community. Another community had a piece of land that it was unsure how to use, but NEF saw the opportunity to create accommodation for the many tourists, and a four star hotel was built, owned and controlled by the community. NEF also drove initiatives to create malls in Qumbu in the Eastern Cape, and had been partnering with Woolworths and Pick ‘n Pay in that regard.

Mr Molepo, Divisional Executive for Rural and SMEs Development, NEF, continued with the presentation. He spoke about some challenges and impediments that had been faced by the NEF, most to do with bureaucratic and administrative processes. There had been reluctance from the government to provide the NEF with direct cession of the proceeds earned from the projects. There were businesses facing financial difficulty who were undergoing business rescue proceedings. The NEF would be able to assist by providing procurement services to the Small and Micro Enterprises (SMEs)

Mr Molepo added that there were rigid terms of contracts, with no waiver allowed even if they were not viable. One example was a 36 month contract on waste disposal that was entered into, but delays in the contracting process left the contractor with only 30 months to perform, and the city was not willing to extend the contract so as to allow the project some flexibility in paying some of the money owed by the contractor.

Mr Molepo also said that another challenge was that people entered into contracts that were not viable, out of desperation - and that late payments would result, with workers not being given what they were promised. One example was a project where the Department of Agriculture, Forestry and Fishers promised to provide day old chicks, but simply failed to do so.

Mr Mziwabantu Dayimani, member of the General Council, spoke to some other challenges. The NEF faced problems in regard to loan repayments where it entered into contracts with clients, and agreed on a bank account from which the clients would make their payments, but the clients might then go behind NEF's back and change banking details. It then became difficult to collect loan repayments.

Another challenge was the problem with delays in the issue of licences. Some projects and businesses required licences in order to operate. Another problem could arise from delays in the payment of suppliers. Franchises could also run into difficulties. Sometimes, franchisors at some point became petty, and attempted to remove the franchise licenses. It seemed that they were using the franchisee to test the market, and if the franchise was proved successful, they would then try to recall it, but on the other hand would also not give  much assistance  if the franchise was not successful.

Discussion
Mr W Faber (DA, Free State) asked how much of the long-term loans provided by the NEF were paid back, also what write-offs were at present, and what was being done to try to recover. He also wanted to know the outcomes on the R34 million loan that was granted to open a business in Hyde Park, as well as R9.8 million that was given as a loan to Mr Nkanyiso Buthelezi and was apparently not repaid.

Ms Mthethwa stressed that a point not made in the presentation was that white-owned companies tended to lose  just as much money as the black entities, despite the fact that they were usually larger businesses.

Mr Faber interjected and said that his question was not about other companies who were losing money, but specifically about the NEF losing money.

The Chairperson said that the CEO was merely trying to place the response in context.

Ms Mthethwa responded to Mr Faber that the NEF impairments were about 19%. NEF had done an analysis by comparing its write offs to other development finance institutions (DFIs) and had found that it was on par. She cited that in relation to one R34 million investment, to fund a woman-owned business, it was found to be a  legitimate investment and the woman had paid the money back. The statement that R9.8 million given to Mr Buthelezi was incorrect. Mr Buthelezi was granted R200 000 as a loan, which was all paid back to the NEF. She mentioned that Mr Buthelezi was now running a successful shipping business, and was doing well in his business.

Mr Dayimani responded to the question about long-term loans and said that the NEF issued about R4 billion in loans, of which R1 billion had been paid back. The capital amounts that were issued in loans were paid back. He further clarified that the write offs were largely in relation to the interest on the loans.

Mr Molepo said that 19% write offs, compared to R4 billion capital amounts, would indicate that the NEF was actually performing well in this regard.

The Chairperson said that he would like to give other members an opportunity to ask questions.

Mr Faber said that he would like to ask that, in future, more attention and time be paid to questions that were asked by the Committee. He felt that these questions were pertinent and more should be done to detail full answers.

The Chairperson said that in the presentation, the NEF had mentioned that it sometimes did not get the necessary cooperation from various government departments in various provinces. He pointed out that the Members of this Committee were representatives from various provinces and parties, and could perhaps raise some of the concerns raised by the NEF to the various departments. The Chairperson asked Members to be cognisant of the fact that this was the first presentation of this nature done by the NEF, and that questions and criticism should be constructive.

Mr L Suka (ANC, Eastern Cape) said he found the presentation useful. He suggested that the curriculum in schools should perhaps be reviewed to bring key subjects that would develop entrepreneurs to the fore. He said that the market strategy of the NEF had great room for improvement, and he suggested that it must expand the scope to many other different communities, where it should give similar presentations. He invited NEF to his constituency to make such a presentation. He also suggested that NEF consider targeting the ‘ghost towns’ and retirement towns to promote a culture of entrepreneurship.

Mr Suka asked about the memorandum of understanding entered into between NEF and clients, and specifically in relation to those clients changing their banking details; perhaps the contract should set out the consequences more specifically.

Mr Suka asked .the NEF to further highlight any gaps, from the governments’ side, where the law hindered the NEF from further developing and what it would like to see happening. He appreciated that it faced challenges as a DFI.

Mr Londt said that the NEF had a critical role to play in the upliftment of the country, and politicians took the criticism when such entities did not succeed.  NEF, from its side, must ensure that it did not misuse any funding provided. The CEO had a very important position and was possibly earning  more than the President, and it was important that funds were used for the purposes allocated.

Mr Suka interjected and said that he felt that it was not appropriate or necessary to state that the CEO earned more than the President. How much the CEO earned was a personal issue and was not relevant for the particular mandate that the NEF was here for today.

Mr Londt apologised and said that officials were well remunerated for their positions and should ensure that they functioned efficiently and would be held accountable if this was not the case.

Mr Londt suggested that the NEF be reclassified under the Public Finance Management Act as a venture capital company, so as to empower the NEF to have borrowing rights to be able to further its work. He asked if the NEF was aware of this proposal and what the progress was on it. He wished the NEF success and further implored it to use the money wisely.

The Chairperson responded that the status of the NEF was not determined by the people who were representing it today, and if they did not feel they could respond, they must indicate this.

Mr L Mokoena (EFF Free State) said that he felt the presentation was too broad and tried to cover too much ground with insufficient detail. He would have preferred that NEF streamline the presentation and hone in on specific issues. He would like to hear more about the challenges that the NEF faced as he felt that this would help in assisting the NEF. Lastly, he would have liked to see the NEF’s mandate be directed more towards job creation. He felt that its current structure was targeted at creating a certain class of people which he referred to as a “black bourgeoisie”.  He had a problem with the National Development Plan (NDP) as a whole, but supported its mission of creating mass industrialisation, as opposed to what most DFIs, such as the NEF, did - namely to empower a few people who indirectly went on to create more jobs for other people but on a smaller scale. He said that he would like to see the NEF have a different mission, but this was a "philosophical point" and the NEF did not have to respond on that.

Mr Mokoena asked what would have to be done to capitalise the R2.6 trillion that the NEF had said needed to be put in black hands, and how they would secure that money. He also asked for more information about the 12 million jobs that were to be created through the making of the movie Long Walk to Freedom.

Mr Londt clarified that he had no problem with people earning good money so long as those people were being held accountable for earning that money.

Mr S Mthimunye (ANC, Mpumalanga) said that it was impossible to address issues of economic transformation without referring to black and white, because the nation was characterised by its legacy of "two nations". He commented that he felt it unfair for Mr Faber to have attacked the CEO. He would have liked to see the strategic plan accompany the presentation. He was concerned that he had the perception that the “richer” provinces were continuing to get richer where the “poor” ones remained poor. He would like to know what the NEF’s rationale was in this regard. He also agreed with Mr Mokoena on the need to be revolutionary in that it must create more jobs and this would be targeting the rural areas. He would also like to know if the NEF was incorporating the Inter Governmental Relations (IGR) ideals.

Mr Y Vawda (EFF Mpumalanga) commented on the salaries and said that how much a person earned was irrelevant as long as that person was doing what s/he had been assigned to do.

Ms M Dikgale (ANC Limpopo) commented that Members should do their best to arrive on time, and specifically said that she was directing this comment to Mr Vawda. People who did not have constructive questions should reserve their comments to themselves and not attack presenters.

Mr Londt was preparing to leave, at this point.

Ms Mthethwa commented that she thought it unfair that he should leave without her having received the opportunity to respond to his questions. She said that the NEF placed a very strong emphasis on integrity and for nine years had been receiving unqualified audit reports. She said that the NEF had sound corporate government structures, and had been commended on its clean record. She said that she did feel that sometimes members of committees were very quick to attack delegates without studying the full scope of the state of affairs in the entities.

Ms Mthethwa responded to Mr Suka and said that she felt that his criticism was very constructive and would like to sit with him and engage further about the points that he raised.

Ms Mthethwa responded to Mr Mokoena's comments, by indicating that in her mind having a bourgeoisie and massive industrialisation were not mutually exclusive. Job creation could be achieved by the bourgeoisie as well, as seen by the Oppenheimers. She would have no problem with giving the opportunity to people to start with jobs.  The R2.6 trillion would not be raised solely by the NEF but there would be other entities similar to the NEF. The NEF, in particular, would need R10 billion to do this and this would further leverage further funding. She said that it was an honour to drive the creation of the Long Walk to Freedom Movie.

Ms Mthethwa responded to Mr Vawda that she was convinced that the NEF had excelled as an entity and had achieved beyond its scope and expectations. The calibre of the employees of the NEF was high; it employed highly skilled and qualified professionals and therefore need to have a remuneration policy that reflected that so that they were also in line with their peers.

Ms Mthethwa thanked Ms Dikgale for her comments, and would like to sit with her and discuss issues further after the meeting.

Ms Mthethwa responds to Mr Mthimunye and agreed that the NEF too was asking questions why wealth distribution in the country remained so skewed in the provinces. The provinces that were willing to work with the NEF in identifying investment opportunities and projects did a lot better, and she asked that government should assist the NEF in developing, as far as possible.

The Chairperson asked Mr Suka to mention some other entities that were likely to be able to assist the NEF, at the end of the session.

Mr Dayimani noted the comment on changing bank accounts and confirmed that when the contract was entered into, a bank account was named and agreed upon, with the NEF representative being a joint signatory to that account. However, clients could go behind their backs, and make alternative arrangements on that account, with money being distributed to other accounts. Banks had been notified and the NEF now had an agreement with the banks  to notify the NEF of any requests to change the bank account, by a client.

Mr Dayimani responded to Mr Mokoena's question about the movie by saying that the job creation figures were modelled against a similar movie that NEF had done.

Mr Motsepe confirmed that the job creation estimates were usually guided by the directors and producers of movies. He said that NEF had expanded its marketing by running different projects in the different provinces.

Mr Molepo responded to Mr Mokoena's question about cooperatives by mentioning the different projects that NEF was running in the rural areas, and said that cooperatives played a very important role.

The Chairperson concluded by suggesting that it might be useful for NEF to present to the Select Committee on Economic Affairs, with a focus on what it was doing on marketing.

Minutes
The minutes of 18 February were considered and adopted.

The meeting was adjourned.