4th Quarterly Report & financial and non-financial performance of Export Credit Insurance Corporation & National Metrology Institute of South Africa

Meeting report

Briefing on the 4th Quarterly Report of the Export Credit Insurance Corporation (ECIC’s) financial and non-financial performance

Mr Kutoane Kutoane, Chief Executive Officer, ECIC, said the entity provided export credit and investment insurance solutions in support of South African capital goods and services by applying best practice risk management principles. ECIC achieved 80% of its business objectives for 2014/15. The loan disbursement and investment declarations’ target exceeded 40% which also indicated the level of exports facilitated. The entity achieved its highest premium ever (R1.8 billion) and together with zero claims, said it was testimony to the financial robustness of its underwriting business.

Only 27% of the value of projects had been approved and structuring delays on a Nacala port and railway project in Mozambique and the unavailability of interest make-up (IMU) incentive funding led to pipeline cancellations. The Corporation achieved 47% against a target 50% female managers due to limited vacancies and 94.6% of creditors were paid within 30 days. The enterprise resource planning (ERP) system being implemented would assist in achieving the target going forward.

ECIC supported South African manufacturing of capital goods and services and loan disbursement and investment declarations of $920 million represented exports facilitated. A revamped bond insurance product benefited emerging exporters and small to medium transactions products supported small exporters and contractors to attract private funding. A minimum South African content of 70% was required for all supported transactions for rest of the world and projects in African countries required 50% South African content and 20% from the African region.

Key challenges included:

-Non-availability of IMU budget that presented challenges for competitive cost of funding for South African exports

-Commitments of funds for IMU incentives scheme exceeded available budget

-Slow growth of the global economy

-Continued commodity demand slowdown affecting mining projects

The ECIC Board approved a project target value of $432 million and only $116 million had been approved. The target of signing $518 million of insurance policies was exceeded with $633 million being signed. ECIC achieved its annual target of initiating five co-operation engagements in knowledge sharing with global and BRICS export credit agencies (ECAs). It also exceeded its targets of implementing marketing campaigns in six provinces (nine provinces), retaining 85% of staff and spending at least 3% of annual payroll on training. ECIC generated its highest premium of R1.8 billion and the total income exceeded the budgeted amount by 139% at R2.4 billion. Surplus for the period was R155.7 million and capital expenditure was R4.8 million, primarily driven by investment in technology to improve efficiency. IMU subsidy claims paid to financial institutions amounted to R321 million. Total assets were R7.9 billion, 44% growth from 2014, capital/equity was R4.6 billion, 24% growth from 2014 and insurance liabilities were R3.6 billion, 111% from 2014 due to the increase in exports supported. Compensation of employees represented 2% of total expenditure, 83% was insurance reserve movements, 12% was tax and 2% was other operating expenditure. As a percentage of total operating costs, compensation of employees represented 49%.

Discussion

Mr N Koornhof (ANC) asked if there were any risks in terms of the investments or loans being covered or if there were any projects that were not as successful as ECIC thought these projects should be. He asked that the big discrepancy between the actual (approximately R1.5 billion) and the budgeted (approximately RR306 million) figures on Insurance Technical Liabilities be explained.

Mr Kutoane confirmed that a copper mine in Zambia, which represented approximately $400 million, was one of the ongoing projects at risk. Since the decline in the copper price there had been a number of repeat amendments of policy and amendments to the financial structure. Current indications were that the main corporate sponsor, Vedanta Resources, would step in with an increased guarantee support. There were other smaller projects where restructuring had happened and one other major project which was a sovereign debt to the Sudan where indications were that the project would be sold to other funders. Currently, there were no indications that ECIC would be faced with a claim and the entity had a patient approach to challenging projects by either extending or restructuring the terms of the transaction to mitigate risks. The discrepancy in terms of the technical liabilities was due to big loan transactions being written and the increased reserves for upfront premiums in the beginning of a project according to ECIC’s current methods. The premiums were charged upfront and would be reserved, becoming technical liabilities and would then be released over time according to the profile of the repayment.

Mr G Hill-Lewis (DA) asked for comment on the recent discussions among certain government officials and economists in business media where some had been calling for a fully fledged export/import bank in South Africa. He further enquired if this was a call supported by ECIC and if any such discussions were in fact taking place. 

Mr Kutoane replied that ECIC had recently received approval from the Ministers of Finance and Trade and Industry to take up shares in the regional African Export-Import Bank (Afreximbank) bank based in Cairo. The due diligence evaluation of South Africa’s intended stake in the bank was being done and an initial amount of $15 million as a strategic investment for ECIC was being considered.

Mr A Williams (ANC) referred to slide 10 that talked to the performance against targets and the annual target of $432 million for projects approved by the Board. ECIC only approved $116 million and he asked why there was such a big difference. He asked what the Corporation’s vacancy rate was and he asked what percentage of goods and ervices was spent on external consultants and why these jobs could not be done in-house.

Mr Kutoane replied that the big difference in the amounts was because there had been cancellations of projects that were already in the pipeline.

Ms Sedzani Mudau, Chief Financial Officer, ECIC, replied that the vacancy rate was around 10%. Administrative positions had been relatively easy to fill, but professional positions had been a challenge. Exact numbers would be forwarded to the Committee. Consulting was mainly limited to actuaries and it amounted to around 5% of total operating costs, excluding outsourcing related to investment fees. If the fees were included it worked out to around 12% of costs.

Mr D Macpherson (DA) asked what terms ECIC offered their clients, how those terms were calculated and what ECIC’s mark up was, offered as a percentage against however the Corporation was benchmarked against the market. He also wanted to know if the entity was focused on specific export markets, whether ECIC hedged on currencies and how long it took for a transaction to be approved. He disagreed that it was difficult for small businesses to obtain export financing and insurance, because from his own business experiences, banks were very eager to provide export financing although the rates on export financing were problematic. He also disagreed that a key challenge for ECIC was the slowdown of the global economy. It did not make sense, because the devaluation of the Rand over time meant that it was cheaper for foreign businesses to buy South African goods. It perhaps spoke to a problem of what the country’s export markets were focused on, because as the currency decreased, exports should be increasing. There should be a refocus on where the export markets were.

Mr Kutoane said terms offered to clients were based on market practices and it took into account the cost of funds, the margins the banks would want to charge and a risk premium based on an assessment of both the commercial and political risk of the destination country. There was an elaborate internal model that took the best practices from the Organisation for economic Co-operation and Development (OECD) countries, specifically on how country risk ratings were calculated. All countries were rated against a conventional internationally accepted rating standard and it also determined the premium charged in a particular country. It was an actuarial evaluation of the risks attached to a particular project. ECIC underwrote projects mostly using the US dollar and all liabilities would be dominated by the US dollar. ECIC was not allowed to change the currency back into Rands and assets matched liabilities. There were Rand liabilities for projects done in the Rand currency, but these projects were rapidly declining whilst the US dollar projects were increasing. By 2030, there was a strong possibility that no Rand liabilities would be left unless the Rand became the currency used when doing business in some African countries. Some projects were approved faster if there were already projects happening in a particular country and the information was in place. Other projects were quite complex and the process could take four to six months followed by lengthy negotiations on how the funding would be structured and conducting global marketing studies. ECIC did not offer short term insurance products and a market gap analysis showed that the shorter term market was well serviced by other banks. It was very difficult for smaller companies to find it competitive on the capital equipment side simply because of other countries that also traded in capital goods.

The Chairperson said the last time ECIC appeared before the Committee, there had been a recommendation that National Treasury should consider funding ECIC in terms of their interest make-up (IMU). He asked if there had been any discussions in that regard. He agreed that SMMEs found it difficult to get funding from banks and also found it very difficult to get involved in the export business. He asked if there was anything ECIC could do to assist, because the attitudes of banks towards small, black owned businesses had not changed. Sometimes the very same government institutions established as an alternative financing option for SMMEs did not assist small businesses as they should.

Mr Kutoane said ECIC had been participating in the discussions and the discussions were being led by National Treasury. It focused on whether MIU financing would be feasible for ECIC given other South African institutions and Development Finance Institutions (DFIs). It was very difficult for black industrialists to access financing and it needed some sort of developmental intervention. ECIC was participating in the Black Industrialist Programme and looked at how some of the products of the entity could be customised in order to make it more accessible to emerging black industrialists. DFIs had been criticised as “not coming to the party” to assist SMMEs.

Mr Macpherson asked what ECIC’s thoughts were on the option of open credit and he asked why the entity did not propose to National Treasury that state guarantees could be used for clients to access private funding or ECIC could use the state guarantees to get funding from private institutions at a discounted rate.

Ms Mudau replied that for most of the projects specific criteria would have to apply and due to the uniqueness of every project, it required specific approval. In terms of ECIC’s mandate, guarantees were linked to insurance and not funding, because ECIC was meant to provide insurance and other DFIs were meant to provide funding.

Mr Macpherson clarified and said he meant for the state guarantee to be used against the insurance product, because government was not short of assets and cash in the bank and it could be used as an anchor on insurance products for credit insurance.

Mr Kutoane replied that ECIC was the official government credit export agency and clients regarded ECIC effectively as ‘government’. Clients used ECIC policy as a means of accessing more cost effective funding and it would be linked to the rating of the South African government. If competing with other counties such as Japan or the USA, those countries would find it easier to access cheaper funding on the capital market than a South African bank. 

Briefing on the 4th Quarterly Report of the National Metrology Institute of South Africa (NMISA’s) financial and non-financial performance

Mr Ndwakhulu Mukhufhi, Chief Executive Officer, NMISA, said NMISA showed a 99% overall performance against annual targets with 21 of the 23 targets met. It also showed a 90% and 97% performance against the two unmet targets. NMISA with the National Regulator for Compulsory Specifications (NRCS), the Western Cape Government and the breathalyser manufacturer Draëger, was preparing for the pilot project to re-introduce the breathalyser for drunk driving. The NMISA Recapitalisation Project was on track against timelines with the needs analysis completed and the options analysis being considered.

Mr Mukhufhi gave an overview of NMISA’s contribution to the Industrial Policy Action Plan (IPAP) in terms of green and energy saving industries as it related to air quality, safeguarding food and the environment, energy efficient lighting and accurate electric billing. Fibre optic power meters remained important to the ICT industry because they were used as a diagnostic tool during installation and maintenance of telecommunications networks. During 2014/15 a new traceability link was established to the National Measurement Standards for spectral responsivity at telecommunication wavelengths. Previously, fibre optic power meters were sent overseas to another National Metrology Institute (NMI) to be calibrated (following the de-commissioning of the room-temperature absolute standard radiometer). This calibration can now be done internally, reducing cost and eliminating the risk of breakage during transport. NMISA also participated in the small and medium-sized (SME) Expo and Trade Show organised by the National Small Business Chamber (NSBC) held at the Gallagher Estate Conference Centre, in Johannesburg on 12 March 2015. 

A summary of achievements on core business targets saw the maintenance of 52 National Measurement Standards, the publishing of 416 calibration and measurement capabilities (CMCs) and 71 presentations given at conferences and workshops on the improvement and development of measurements and measurement standards. However, the number of industry and/or regional metrologists trained in accurate measurement remained below 5%.

Some of the strategic objectives that achieved its annual target at 100% were:

-Maintaining the Schedule of National Measurement Standards

-Establishing confidence in the accuracy of the National Measurement Standards by suitable and documented quality management system

-Providing technical measurement expertise and support for public policy objectives, accreditation, standardisation and regulatory affairs

-Disseminating traceability, measurement expertise and services to South African public and private enterprises by means of calibration, measurement or analysis, certified reference materials

-Providing appropriate technology and skills transfer to the South African industry, especially to SMEs

Mr Mukhufhi said NMISA had 59 vacancies with 43 of those vacancies filled. The financial position as at 15 March 2015 showed current assets of R193.4 million, up from R98.6 million in 2014; Accumulated surplus at R274 million, up from R167 million in 2014 and current liabilities at R12.2 million, up from  R8.4 million.

Discussion

Mr Macpherson asked how NMISA’s assets jumped to just short of R100 million in a financial year while receivables from exchange transactions had decreased by R1 million. The total liabilities had also increased by around R4 million and he asked what those liabilities were.

Mr Mukhufhi said the R100 million related to the funds for the recapitalisation programme, because the funds could not be spent whilst the equipment was still under development. The R4 million increase in assets signaled the equipment that had been delivered. A detailed breakdown of the liabilities would be provided to the Committee in writing.

Mr Williams asked whether the measures that had been put in place to deal with the vacancy rate were working. He asked how much emphasis was being put on the vacancy rate, because eventually it would affect the organisation’s performance.

Mr Mukhufhi replied that the measures were working to an extent NMISA was working on strengthening and enhancing relationships with universities to ensure that there were metrology-related qualifications that were given at universities. The challenge was that a basic scientist was needed to be developed into a metrologist and this was not offered by classical academic programmes. NMISA organisation started working with the University of Johannesburg in 2014 to offer an honours degree in metrology, focusing mainly in analysing radiation. Where NMISA staff gave lectures on relevant modules.

Adv A Alberts (FF+) asked how the items that needed to be calibrated, measured and certified were sourced and how NMISA controlled the standard throughout the industry.

Mr Mukhufhi replied that it was a quality infrastructure that had four legs. Scientific metrology contributed as a base towards the operations of the other three legs. Accreditation was handled by SANAS that ensured that the laboratories that did the testing and calibration were accredited. Standards were being done by the SABS and the NRCS was responsible for legal metrology that looked at compulsory specifications. NMISA ensured that the National Measurement Standards were kept and also ensured that there was traceability to the National Measurement Standards on all the calibrations done by SANAS. NMISA also maintained the National Measurement Standards in areas where there was no capability to do the calibration.

Prof C Msimang (IFP) said NMISA was using people with very specialised and rare skills. South Africa was fairly well developed compared to other African counties and he asked what the organisation’s retention rate was and if NMISA was comfortable with the rate of salaries being paid. The targets to a large extent have been met and he asked if positions of staff being sent for training for long periods were being filled temporarily.  

Mr Mukhufhi replied that it was a difficult challenge, because personnel were being trained to very high competencies in rare skills. NMISA had a workforce that was very committed to what they did, but it took rewards to keep people in their jobs. Remuneration levels comparable to other countries showed that South Africa was lower by far, but a benchmark study had been conducted in 2014 that looked at improving salaries. The benchmark study was done against schedule 3A entities within government and within industry and the Board approved the implementation of a process that would improve salaries of especially technical staff. There was a process underway to move towards the 50th percentile of indicated markets. It was only in special cases that people were allowed to go for training on extended periods, because research work done overseas needed to relate to measurement standards in South Africa. The aim was to create a critical mass of skills and the organisation was working on a strategy to create such a skills pool. NMISA had restructured its research and technology division to have a section specifically dedicated to human capital development

Mr Hill-Lewis asked for a little more detail on the work being done to resolve the legal impediments to the use of the Draëger breathalyser, because one of the most important things to be done in South Africa was to allow traffic officers to arrest drunk drivers on the spot.

Mr Mukhufhi replied that NMISA was not at the coalface of contributing to ensuring that breathalysers were reintroduced. There had been work done by Draëger themselves to ask PTB (Germany’s National Metrology Institute) to do tests that would assure comfort in relation to the standard that had been published. Those results had been analysed by SABS experts and it would be followed by an application to the NRCS for the reintroduction of the breathalyser manufactured by Draëger. NMISA needed to provide the infrastructure for calibration to ensure that the tests were reliable. There was a regulation that stipulated that the acceptable alcohol limit would be decreased and NMISA had subsequently developed an ‘alcohol in water’ standard that would be used as certified reference material that met the levels required by the regulation. NMISA’s ethanol in water standard was 0.001% and the organisation was currently building the infrastructure that would calibrate the Draëger equipment once it was reintroduced. NMISA had a very strong partnership with PTB who had done the initial testing. A memorandum of understanding had been renewed in May 2014 with PTB in terms of collaborations on projects such as this to ensure a shorter learning curve in introducing new measuring capabilities in the country.

The Chairperson thanked everyone and the meeting was adjourned.