DTI; National Gambling Board; National Empowerment Fund on their 2nd quarter 2015/16 performance

Meeting report

dti briefing on Quarter 2 (July - September 2015) performance
Mr Lionel October, dti Director-General, briefed the Committee on its five key areas for Quarter 2 (July - September 2015): Industrial Development; Trade, Investment and Exports; Special Economic Zones and Economic Transformation; Regulation; and Administration and Coordination.

Industrial Development
With regard to localisation, three designation requests were published by National Treasury in September 2015 with an effective date of 21 October 2015 (Conveyance pipes, Transformers and Steel Sub-structures). The CIP Programme approved four projects that would leverage an investment of R12 billion including the Berekisanang Empowerment Farm in the Northern Cape and Bakubung Minerals.

The review of the Capital Projects Feasibility Programme has commenced to integrate the Regional Spatial Development Initiative Programme that is planned to be re-launched by November 2015. The Support Programme for Industrial Innovation programme has been launched and is currently open for applications. The Film and TV productions programme approved 30 local and foreign productions.

114 textile companies were audited through the South African Sustainable Textiles and Apparel Cluster to obtain accurate information to be used for resolving outstanding fabric issues and also to establish the database for the Preferential Procurement Policy Framework Act (PPPFA) to facilitate researched decisions. Through the Clothing and Textiles Competitiveness Programme, R32 billion worth of approvals of which R29 billion was disbursed with the Competitiveness Improvement Programme (CIP) which had R712 million approved with R324 million already disbursed.

R3 million has been secured from the Fibre Processing and Manufacturing Sector Education and Training Authority (SETA) for leather industry professionals to study for Masters Degrees in Leather Technology at the University of Northampton in England. The Renewable Energy Independent Power Producer (REIPP) Procurement bilateral decision-making structure was established in September 2015 to advise the government on localisation issues. The permanent members would be the dti, Department of Energy, Independent Power Producers, and National Treasury.

Volkswagen South Africa made an investment announcement of R4. 5 billion. Good Year made an investment announcement of R670 million. Pasdec Automotive Technologies was one of the companies that received the Volkswagen AG Global Award. The KwaZulu-Natal Provincial Department of Economic Development and Tourism announced the intention to establish an Automotive Supplier Park of about R8 million commencing 2018/19.

The Competition Commission approved the acquisition of the Bayside casthouse at Richards Bay in KZN by Isizinda Aluminium, and transfer of ownership took place in July 2015. The transaction is expected to support economic transformation of Richard’s Bay and the development of the downstream aluminium industry in SA.

Trade, Investment and Export
The dti facilitated the following:
- R1.443 billion of export sales
- The approval of the establishment of the Africa Export Council and the its CEO recruitment process
- South African business participation at the Business Council during the Brazil, Russia, India, China, and South Africa (BRICS) Summit in Ufa, Russia in July 2015
- An agreement between the Department of Agriculture, Forestry and Fisheries and United States Department of Agriculture to address Sanitary and Phytosanitary issues on pork, beef and poultry to ensure that the Africa Growth and Opportunities Act (AGOA) benefits are leveraged optimally

The dti finalised the legal process on the amendment of the Memorandum of Understanding with Ethiopia and exchanged the draft in September 2015. It finalised the negotiations on the SA-Liberia MoU and is awaiting the signing of the Presidential Minute. It participated in the second Congo-SA Joint Trade Committee held in Brazzaville, Republic of Congo.

The dti reached an agreement with the Department of International Relations and Cooperation to implement and disburse funds under the SA-Cuba Agreement on Economic Assistance. The dti obtained Cabinet approval to ratify an additional Protocol to the Trade, Development and Co-operation Agreement to include Croatia and this was presented to both Houses of Parliament for ratification.

Special Economic Zones and Economic Transformation
The Memorandum of Agreement between the dti and the Development Bank of Southern Africa for the implementation of revitalisation of old industrial parks was signed in September 2015. The dti facilitated a R100 billion investment pipeline in the proposed Special Economic Zones. The Draft SEZ Planning Guidelines are being reviewed and consulted on. The Draft SEZ Regulations are in place, and an external law firm has been appointed to review and finalise these. The Technical Assistance Fund for Middle Income Countries with a value of R20 million was approved by the African Development Bank.

Regulations
On Liquor Policy, public comments from consultations held with stakeholders as well as interviews and those on national radio were received and analysed for finalisation of the Policy before adoption by the Policy Council and Cabinet. Regarding the Gambling Policy, public comments from consultations held with stakeholders as well as interviews on SABC and national radio were received and analysed for finalisation of the Policy before adoption by the Policy Council and Cabinet. Concerning the Copyright Amendment Bill, public comments from consultations held with stakeholders as well as interviews on national radio and TV were received for analysis. Clauses for the office functions of the BBBEE Commissioner were incorporated into the BBBEE Regulations.

Administration and Co-ordination
The dti has resolved that payments to all creditors would be settled within 30 days. The vacancy rate is at 7.4% against the quarterly target of 6.2%. Its disability status is standing at 2.9% against the quarterly target of 2.9%. The status of women in SMS is at 47% against the quarterly target of 48%.

Challenges:
- Funding pressures are due to high uptake in some incentive programmes such as MCEP, Film and TV, EMIA, and AIS
- Developing countries are experiencing a downward pressure on capital flows and currencies continue to weaken
- Commodity prices continue to decline
- Competitiveness of the metals/mining industry cluster is under serious pressure mainly due to a glut in global steel markets; rising imports; and electricity challenges and other utility price hikes

Financial report:
Graphs and tables were shown to illustrate Departmental expenditure versus budget (see document)

National Gambling Board (NGB) briefing on Quarter 2 (July - September 2015) performance
Ms Caroline Kongwa, Accounting Authority/Administrator: NGB, reported that 100% of the 17 targets of its Annual Performance Plan 2015/16 for Quarter 2 were achieved. The NGB continues to play an important role in the curbing of unlicensed gambling activities, particularly online gambling. Through the use of its register for illegal gambling operatives, the NGB in collaboration with law enforcement agencies has identified online gambling syndicates in Gauteng and arrests are to be made soon.

The NGB has successfully performed evaluations and compliance monitoring of four Provincial Licensing Authorities (PLAs): Gauteng, KwaZulu-Natal, Northern Cape and North West. The NGB has gathered national gambling statistics and information about the performance of the South African legalised gambling industry from all the PLAs. Casinos account for the highest percentage contribution of total gross gambling revenue (GGR) at 72.1% followed by betting at 14.5% and then limited pay-out machine (LPMs) at 8.7%. Gauteng is the highest contributor to GGR at 42.4%.followed by KZN at 18% and Western Cape at 15.8%.

When it comes to the LPM sector performance, Limpopo is closest to reaching 50% of its total allocation and is followed by the Eastern Cape at 28%. The total national rollout stands at 22%. The NGB, in terms of Regulation 13 of the National Gambling Regulations of 2004, is required to conduct a social economic impact study for consideration by the Minister prior to Phase 2 rollout.

The NGB has conducted research called the Khayabus on the prevalence of gambling and problem gambling. This is a follow-up study that was conducted to determine and track gambling behaviour over time from April 2011 to April 2015. Those who participated in the gambling activities between April 2014 and April 2015 were more likely to be males than females, aged between 35 to 49 years old, and regionally they appeared to be more prevalent in Gauteng and belonged to the highest income groups. Participation in the national lottery remained the most popular choice in terms of gambling. Illegal gambling accounts for 17.5% of gambling activities.

Gambling participation has increased from 14.3% to 15.3%. National lottery participation has increased from 77.0% to 78.9%. Illegal gambling has seen a significant decrease from 41.0% to 17.5%. 9,9% of gamblers may be regarded as “problem gamblers” This is down from 20.2%. More coloured South Africans are participating in gambling. There is an increase from 11,3% to 19.8%. Problem gambling has decreased from 3.1% to 1.8% for those gamblers earning R1 000 to R2 999. 93% of the SA population is at no risk with regard to gambling compared to just over half of South African gamblers who are at no risk with regard to their participation in gambling activities. Incidents of under-age gambling (15 – 17 year olds) remain low although the data shows a slight increase from 2% to 4% since November 2012. Gambling activity that this age group is most likely to take part in is the buying of lottery tickets.

Concerning audit findings, of the 134 findings received during the 2013/14, 131 have been resolved. Three were in the process of being resolved as at 30 September 2015. For 2014/15, 34 audit findings were received. Of these, 24 were resolved while 10 are in the process of being resolved as at 30 September 2015.

With regard to challenges, capacity constraints impact on the ability of NGB to effectively reach out to the broader sections of communities when doing public awareness and education. It is proposed that it is better to collaborate with the dti when it is doing its public outreach initiatives. The legal skills in the NGB are scarce and this presents a major challenge in the regulatory environment within which NGB operates. It is further proposed that the organisation needs to be capacitated in critical areas such as compliance, prevention and detection of illegal gambling as well as enforcement.

The NGB Trust which existed as a separate entity was de-registered and all confiscated winnings were transferred into an NGB-owned separate bank account. The NGB is experiencing challenges in allocating the confiscated winnings due to inadequate documentation. It is proposed NGB should continue to liaise with the banks in an attempt to obtain source documents for the confiscated suspected unlawful winnings.

Graphs and tables were shown to illustrate NGB expenditure versus budget (see document)

Ms Kongwa, in her conclusion, stated that the balancing of the socio-economic impact of gambling versus growth in the gambling industry through effective compliance monitoring of PLAs continues to be a priority. The NGB would continue to double its efforts with regard to curbing illegal gambling. The illegal operatives register has been formulated. The financial position of the NGB has been stabilised and 32% of the budget has been reported as spent with plans to spend the full allocation of the NGB by year-end.

National Empowerment Fund  (NEF) briefing on Quarter 2 (July - September 2015) performance
Ms Philisiwe Mthethwa, NEF Chief Executive Officer, stated that in order to meet the growing demand for business funding from black entrepreneurs countrywide, the NEF requires an annual allocation of R2 billion over the next five years. She said there is a strategic need for BBBEE. Direct black equity control over the average market capitalisation of R12.2 trillion of the JSE is standing at 3% (R365 billion) for shares directly held by black South Africans.

To reach 25% of black control, it requires an additional 22% worth of the R2.7 trillion current estimated market capitalisation of the JSE. This is a gap that needs to be addressed and funded in order to achieve transformation of up to 25% of JSE market capitalisation.

On 2014/15 performance highlights, NEF has approved 94 deals worth R895 million against a target of 96 deals worth R718 million. R879 million has been committed against a target of R619 million, with 75 deals against a target of 80. R562 million has been disbursed against a target of R650 million. 33 763 job opportunities were created. This brings total job opportunities geared to be supported since inception to in excess of 81 000. 47% of commitments made during this period were towards businesses partially/wholly owned by women. Cash available to the NEF for new approvals is R735 million.

Portfolio collections for the year are at R440 million and are above 25% above 2014 receipts. Over R1.5 billion has been collected cumulatively from loans disbursed across the country in black-owned and managed businesses across virtually all sectors of the economy. Collections of over R280 million are anticipated from three deals (Link Africa, Busa Med and Sizovuna) by the end of the 2016 financial year.

On industrialisation, five projects have been progressed to the pilot, financial close and commercialisation stages in the portfolio. These projects are: BusaMed Hospitals, Auto-Disposable Syringes, Tyre Energy Extraction, KC Energy, and African Silica Holdings. On Active Portfolio Management, the portfolio impairment improved by 18%. The ROI is at 9.14% and it is within the targeted rate of 8-10%. The collection ratio is at 84% versus the target of 75%.

The IST governance framework continues to be entrenched through the steering committee as well as policy and Standard Operating Procedures (SOP) formulation. Two cost saving initiatives have been implemented. There have been improvements in procurement from black-owned entities by 62% compared to the 49.8% of 2013/14. 39 investor education interventions including five industrial theatre programmes were done in eight provinces and they reached 6 000 people. Seven social plans have been implemented.

She mentioned that the economic climate calls for heightened post-investment monitoring. The Post-Investment Unit (POIU) reports indicate that investee companies are requesting moratoria, reduced instalments, and extension of loan structures. Five of the seven companies transferred to the Turnaround, Workouts and Restructuring Unit are in the manufacturing and construction sectors which have experienced the knock-on effects of the decline in the steel manufacturing and mining sectors.

The NEF proposes a hybrid model of post-investment monitoring. The funds have to work hand-in-hand with the POIU in a monitoring capacity shortly after funds have been disbursed. It also proposes to provide training in the form of investor education, entrepreneurial training, and business planning to support the anticipated wide-spread retrenchments.

The NEF currently, has working relationships with three business incubation centres across the country. These centres provide in-depth business support, training, and assistance with access to markets across the various sectors of the economy. To date, over 2 500 businesses have been referred to these centres for incubation and entrepreneurship training to help them reach the operational stage. Seminars were held in rural and township areas, and the centres were supported through direct government help.

The NEF has regional office presence in all provinces except in the Northern Cape where it is envisaged it would be operational during Quarter 4. It is as a result of this that the NEF has successfully funded business ventures through its Rural and Community Development Fund whose objective is to unlock value in rural and township economies.

The NEF and IDC have been engaged in a process to find sustainable and long-term recapitalisation for the NEF. This project is called Project Kopano. It assesses various structural options to coordinate and strengthen the investment programmes of the two DFIs. The options that were considered for the business combination are the following:
- Continue as is: NEF remains a separate entity but products and services of the NEF and IDC are rationalised to eliminate overlaps. The NEF remains a trust and the IDC advances a facility to the NEF
- Arms length subsidiary: NEF assets and business are transferred to a company which is a subsidiary of the IDC. NEF has a separate board, management and support structures. This option has various advantages including the fact that the NEF continues as an independent entity focussing on BEE.
- Closely managed subsidiary: NEF is re-established as an IDC subsidiary. IDC Exco becomes the NEF Board. NEF management and support integrated into IDC. In this model, IDC manages the NEF and drives its strategic direction. This poses a risk of the IDC strategy trumping the NEF BEE mandate.
- NEF as a division of IDC: NEF ceases to exist and IDC takes over NEF business. IDC suggests that it creates a ‘targeted mandate’ with its own brand. This would result in dilution of the BEE mandate and termination of some NEF BEE products.
- Complete merger into IDC: NEF is terminated and IDC fulfils the BEE mandate. The focus on BEE as sole mandate falls away.

The NEF and the dti have recommended the Arms length subsidiary option. In this option, the NEF remains focused on BBBEE and has an opportunity of increasing developmental impact as a result of recapitalisation from IDC. The board would provide guidance to the NEF on direction and the IDC would focus on its mandate of industrial development. The dti, as custodian of BBBEE legislation and policy in the country, would continue to maintain oversight over NEF as the implementation agent of such policies. The mandate of the NEF would continue as it is, undiluted.

Ms Mthethwa indicated that challenges and market failures were around:
- limited own capital
- limited management skills including financial, marketing, and technical skills
- lack of accurate and reliable financial information
- poor quality of business plans
- lower bargaining power and strong competition from established businesses with entrenched market dominance
- inadequate access to affordable capital
- lack of access to local / international markets.

Graphs and tables were shown to illustrate funding across the economic spectrum, beneficiation project life cycle, NEF equity rights, budget vs expenditure, approvals and disbursements by value, NEF investment by sector, geographic spread of investments, incubation and entrepreneurship training, and a sample of NEF investees.

Discussion
Questions to the dti
Mr D Macpherson (DA) commented that the Committee knew that the Manufacturing Competitiveness Enhancement Programme (MCEP) problems were going to happen. The programme is over-subscribed. The Department did not come back to the Committee to let it know that Treasury has refused the approvals. The Committee and the Department need to sit down and ensure all applications are funded. Concerning the textile industry, he commended the fact that there is now success in the sector and the government helped to resuscitate it. This needs to be rolled out to other industries. Major retailers and unions bought into this idea. He asked how human rights reform is linked to bilateral trade. Is there any discussion with DIRCO or the Presidency regarding this issue?

The Director-General, on MCEP, indicated that an extensive engagement with stakeholders has been made. The Committee just needs to be updated on the incentive programme that has been discussed with Treasury. There is a juggling exercise that is happening – budgetary allocations are going to be increased to allocations. Concerning the textile industry, he said success is there because of collaboration between all role players. It is a story that is going to be rolled out to other sectors. Regarding international trade, he stated that South Africa is an international community that is following UN policies to the letter. When it comes to human rights, SA has clear guidelines and policies. For example, the dti office in Iran has been closed because of sanctions but now it has been opened because the UN has cleared Iran.

Mr N Koornhof (ANC) asked if there is a future for the platinum industry in SA. He asked for the view of the dti on the current drought.

The Director-General, on the future of platinum, reported there is a drop in demand for platinum. Role players are working on a strategy to revive platinum. It is highly likely that by 2050 most cars would not be made from platinum as they would be electrified. On the drought, he said emergency teams have been dispatched to the drought stricken areas. The issue is getting the full attention of the affected Ministers.

Questions to the NGB
Mr A Williams (ANC) asked why 9.9% of gamblers are classified as ‘problem gamblers’. He wanted a justification for the figures.

Ms Kongwa replied that the whole thing is based on sampling and on the interviews conducted. That is from where the figures come. The total sample included the adult population of all racial groups from all provinces. 3 551 interviews were conducted.

Mr G Hill-Lewis (DA) asked if the Committee could have access to the raw report regarding the figures.

Ms Kongwa assured him the written report would be sent to the Committee through the Parliamentary Liaison Officer.

Mr Macpherson, first, asked at which point is the NGB going to engage the Minister on socio-economic impact assessments regarding the KwaZulu-Natal Province. Second, he wanted to find out what vigorous measures are going to be taken to make sure provincial licences comply with the requirements of NGB. Third, he wanted to establish how far the NGB is regarding the tender for electronic monitoring system.

Ms Kongwa, on socio-economic impact assessments, explained they have met the CEO of the KZN Gambling Board. The NGB needs to identify funding and publicise the tender for a service provider that is going to conduct the socio-economic impact assessment studies. On measures for non-compliance, she said that inspections and evaluations are done. Self-evaluations are done and the NGB would send a questionnaire to the provinces. The NGB has recently introduced on-site visits. Concerning the electronic monitoring tender, she indicated the NGB is engaging with the dti. An adjudication committee has been put together. Funding has been identified from NGB savings and soon a service provider would be appointed to undertake the project.

Mr M Kalako (ANC) asked if online gambling is part of legal gambling.

Ms Kongwa replied it is a combination of gambling activities. The NGB regulates the provinces.

Questions to the NEF
Mr Hill-Lewis asked for clarity on the number of direct jobs created. He asked if the 9.14% achieved on ROI came before or after impairments. He said it is not true to say 97% of JSE shares are owned by Whites and that Black ownership is standing at 3%. He said that to achieve the set target of 25% ownership on the JSE would require the squeezing of pension funds.

Ms Philisiwe Mthethwa, on jobs created, explained that the 81 000 figure refers to cumulative job opportunities created overall. An additional 80 000 would come from the strategic funds. This is not going to be done within a year. It is going to be a gradual process. If the Mabele Fuels Project approvals are granted, 50 000 jobs would be created. The Mabele Fuels Project uses raw material that has got to be produced locally, and not to be imported. The total investment is R2.6 billion. Concerning JSE ownership, she explained that the issue goes back to the BEE policies created by the Committee that set the target of 25% of the economy to be in black hands by 2014. The 25% is based on 100% of JSE ownership. 40% is owned by foreigners and the remaining 60% by companies. Then 17% of this mix (40% and 60%) is owned by individuals.

Mr Rakesh Garach, NEF board chairperson, said with regard to the ROI, that the achieved figure of 9.14% came before impairments. The strategy is to crowd-in and not be the sole funder.

Mr Williams asked what the attitude is towards transforming the white owned economy.

Ms Philisiwe Mthethwa indicated that deals between white and black companies are signed every day but the problem is that it is not known or stated from where the funding for these acquisitions and mergers is coming in order to help the black companies.

Mr Macpherson remarked that the ballooning salaries of NEF could not be justified especially when you look at an entity that is not fulfilling its mandate.

Mr Garach elaborated that the NEF competes with other Developmental Financial Institutions (DFIs) or investment banks. The NEF has to pay market related salaries. There are mechanisms in place for individual and organisation performance. Everything is benchmarked against DFIs and the private sector. The NEF has to retain and maintain scarce skills.

Mr Macpherson asked how did Ms Mthethwa, as a CEO, justify her salary.

Mr Kalako said Mr Macpherson is out of order because the NEF Chairperson has answered that question.

Mr Macpherson said he is not out of order when he wants to know the justification of her salary.

The Chairperson told Members to adopt an approach of constructive engagement and not run the Committee like courts. The CEO had the right to refer the issue of salaries to the members of her team.

Mr Koornhof said it is unfair to ask a person about her salary and also to justify it. There is a remuneration committee that has considered the CEO salary. There are better ways of discussing this, in a good way.

The Director-General explained that some DFIs are old while others are new but they all receive substantial financial resources from government. The Board determines the salary of the CEO. The DFIs have specialist scarce skills that they have to retain. That is why they have to pay for those scarce skills.

The meeting was adjourned.