National Metrology Institute & National Empowerment Fund on 3rd Quarter 2015/16 performance

Meeting report

National Metrology Institute (NMISA) 3rd quarter 2015/16 performance report briefing
Mr Ndwakhulu Mukhufhi, Chief Executive Officer, National Metrology Institute of South Africa, also introduced the Chief Financial Officer of the National Metrology Institute of South Africa (NMISA or the Institute) as Ms Phetsile Magagula, and noted that she joined the Institute in late 2015, to fill a position that had been vacant for a long time.

He described NMISA as “an Institute that measures what matters, and what can be managed”. Its role is to manage the measurements in scientific standards in terms of the BIPM (all participating metrology institutes) internationally.

Mr Mukhufhi said that the third quarter report effectively had fewer months because the industries with whom the Institute worked would close in December. The performance targets were usually taken care of in January, and so far the Institute was sitting at 71% performance against annual targets to date, or achievement of 15 of the 21 targets. The remaining six targets were on track to be achieved at the end of the year. These related in the main to matching expenditure against budget, and to maintaining or improving the percentage of vacant positions. The Institute requires high-end skills and expertise, and this makes it difficult for it to fill vacancies as there are no qualified and skilled persons in the market to fill the vacancies.

The report was tabled in December when the Institute closed, and there had been some changes to date, with the capex having been at 7% in December, but which had since improved to 26% currently. The percentage of budget spent was now at 63%, and funded vacancies are at 11% after three critical vacancies had been filled. The percentage of the completed audit plan is 33% and the Institute was comfortable that it will be able to reach all targets at the end of the year.

He proceeded to highlight the important achievements in this quarter. The Human Capital Development Programme has started yielding results. Five young scientists and engineers attained SANAS Tech and signatory status, and the period in which this was done, from six to eighteen months, had broken records internationally. These results would be presented at the BIPM Director’s meeting to be held in France in October.

An international partnership to ensure food safety was signed between NMISA and NIM China at the Asia Pacific Metrology programme meeting. The first project under the programme was the Myocotoxin reference material research project, in partnership with BIPM, which will commence in 2016. The mycotoxin is found in maize.

NMISA is implementing an African Feed and Food Reference Material Production project, which is aimed at identifying and prioritising reference measurements and reference material needed in industry for traceability in imports and exports. Representatives from commercial, government and research testing laboratories in South Africa participated.

A Recapitalisation Project Draft Feasibility Study was completed and submitted in December 2015. This was done to address ageing infrastructure within the Institute. TA 1 approval will be submitted to National Treasury for approval. The study included a needs analysis, value assessment, options analysis, economic impact, due diligence and a procurement plan.

There had been an upgrade of the scanning electron microscope for particle analysis, and the first upgrade was completed for nano-particle analysis. The method validation was in progress, with certified reference material (CRM) procured from NIST in the USA.

NMISA was now implementing a project for the synthesis-doped silicon nanowires for low cost efficient solar cells. A NMISA student at the University of the Western Cape synthesised material that will be used in nanostructured solar cells. NMISA has an interest in ensuring accurate measurement protocols and traceability to the National Measurements Standards for nanomaterials, the results of which will be important for the nano-metrology programme within the Institute.

NMISA had been working with the Western Cape government on the breathalyser tests for alcohol content in the blood. A new ethanol certified reference material that looks at other accurate measurements was tested over a thirteen month period and was found to be stable. An Institute in Germany called BAM confirmed the purity tests and values that were given.

Mr Mukhufhi said that the Institute is on track to meet its core business targets. The Institute has maintained 52 of the 53 measurement standards, and has exceeded the number of calibration and measurement capabilities published in the KCDB (key comparison database of the BIPM) at 415, with the target having been set at 411. The annual target for the number of presentations given at conferences and workshops on the improvement and development of measurements and measurement standards is 42, and 41 have been achieved to date. The percentage of complaints from customer satisfaction surveys remains below 5%. It takes about 18 months to procure equipment  and scientists need to keep engaging with the original equipment manufacturer to ensure that the specification meets the requirements for keeping and maintaining the national measurement standards.

Ms Phetsile Magagula, Chief Financial Officer, NMISA, presented a summary of the financial information. She noted that the capital expenditure is short against the target. She noted that income is received from the rendering of calibration services and the quarter showed some non-achievement. However, there are funds sitting in the books and interest is being earned on these amounts because the debts have not yet been paid. The filling of vacancies is still under way and this is shown in the figures for the funded vacancies. The operating expenses are in line with the expenditure. The Institute aims to have completed and awarded the tenders that it is currently working on. The balance sheet is heavy on the cash flow which after commitments, is going to be spent.

Mr Mukhufhi finished the presentation by highlighting some of the risks. These included procurement challenges and exchange rate fluctuations. The current rand value has led to what has been budgeted for by the Institute being significantly lower than what will be paid. In some cases, commitments increased by over 30% against the budget. Efforts had to be made to prioritise procurements, which are aimed at maintaining the measurement standards. The other key issue faced is the human resources and shortage of key skills. The Human Capital Development programme is proving fruitful because a student funded by NMISA has just been awarded a PhD and the work that he has been doing is exciting.

Discussion
The Chairperson thanked the presenters and noted that there were concerns about the targets relating to the cost of capital goods and the risks involved. There was a need to update infrastructure, and she wanted to know how the shortfall in this regard would affect the objectives of the Institute. She said that the Committee was pleased to hear that funded vacancies were being dealt with. She asked why the annual audit plan had not been completed.

Mr Mukhufhi responded that the renewing of the infrastructure has indeed been a challenge, but there has been a balancing act between moving to the new building and keeping operations on-going. There are funds sitting on the balance sheet, currently as cash, but procurements have been done and payments will only be made on delivery  by the manufacturer according to the specifications given. The performance in respect of the regulatory compliance and annual audit plan is sitting at 33%, which is an internal audit. The three audits have been started, as the information audit is only required to be performed at the end of the year. The orange colours shown in the presentation (see attached slides) highlight the areas that need to be looked at when the audit is conducted. The issues highlighted here have since been implemented, but the results will only be seen in the new financial year. The purchase price paid will be the price committed to in the agreement of procurement, and it is agreed in the contract that it should not change.

Mr B Mkongi (ANC) asked questions relating to the differences in measurements in metres between the City of Tshwane, Johannesburg and Cape Town. He noted that people are complaining about the exorbitant amount of money being paid for municipal water and electricity rates, and the difference in calculations in the different cities. He further asked a question about the breathalysers and the court cases in which the testing methods were dismissed. He wanted to know the rationale behind continuing to place these instruments in the market when they had been proven to be unreliable. Mr Mkongi asked about the NMISA’s approach to the drought situation in South Africa and the plan for maize.

Ms P Mantashe (ANC) asked a question about the long-term plan to fill the vacant positions through the development of persons who will be skilled to occupy such positions, and any ways to encourage people in high schools to pursue careers in the field of the Institute.

Mr N Koornhof (ANC) asked a question relating to the procurement rate of equipment, and requested to know which currency is used in the contract of commitment. He also requested further information on the Public / Private Partnerships (PPP).

Mr M Kalako (ANC) requested the specifics of challenges relating to the filling of vacancies and how long it takes to fill a vacancy. He further asked why the audit plan was not completed, and how the capital underspending will be addressed in the last quarter of the financial year.

Mr J Esterhuizen (IFP) asked a question about the MOU that was signed and what the position is at present, commenting that it would make South Africa a leader in time measurement. He noted that R250 million is not a lot to be allocated to the Institute, taking into consideration the research and equipment that the Institute required.

The Chairperson requested  which of the 20 funded vacant positions are critical positions, and what the problem is in filling them.

Mr Mukhufhi responded that some of the critical posts that are funded but remain vacant are important for research projects, like the time reference research projects, whilst others are posts in photonics. These are high-end skills, and the main challenge faced is simply the unavailability of these skills in the market, either because the people with those skills are already committed to projects, or because there is a shortage of persons with these skills. The long-term plan has been to go to high schools and encourage learners to enter into the field, and also offer bursaries and programmes to “catch them while they are still young”. The funded vacancies that are rolled over, are addressed by taking the money to offer bursaries to learners before they reach Masters and PhD level, because it is difficult to attract them when they are at that level. An “Adopt- a- school” programme has been initiated, and relevant stakeholders have been approached to help deal with the skills shortage.

The audit plan that was not completed has since shown progress because there are current audits taking place to ensure that the audit targets are met. The commitments of procurements are made in rand value, but the fluctuation does affect the budget because the quote is given in dollars. The question about the differences in metres is a very difficult question for the NMISA because the Institute provides the measurement standards only, and what happens afterwards is outside the space of the Institute. The legislation governing NMISA is clear in providing that the Institute should not get involved in those kinds of measurements, because it provides the traceability and measurement standards.

The dismissal of cases in the Western Cape are being addressed through pilot projects where calibration services are being provided for the breathalyser equipment, to ensure that the situation does not repeat itself.

The question around the drought is challenging because the Institute does not take part in that space, except to provide internationally comparable standards of measurements where needed. The Department of Agriculture would better suited to respond to that question.

The Chairperson requested the time period within which the Institute planned to move to its new premises, and what plans were in place to factor in operations.

Mr Mukhufhi responded that the Institute is submitting for TA 1 approval, after which a process of procurement which will take one year will follow. It would be two to three years before the building is completed. The information regarding PPP is not yet ready to be publicly announced at this point. The rough estimation is about four years, and a movement plan is in place where labs will move at different times to avoid total operation shut down.

National Empowerment Fund (NEF) 3rd quarter financial and non-financial report briefing
Ms Philisiwe Mthethwa, Chief Executive Officer, National Empowerment Fund, noted that her presentation would focus on the financial and non-financial support that the National Empowerment Fund (NEF) provides to its investees. A brief contextual background would be provided detailing the transactions that have taken place. The NEF had done a lot to empower businesses and has become involved with the recently established Black Industrialists programme.

There are concerns and patterns that have been observed that have an impact on the level of empowerment provided. The NEF is the only Development Finance Institution (DFI) exclusively mandated to grow Broad Based Black Economic Empowerment (B-BBEE) in South Africa. Black people directly own only 3% of shares where the JSE is used as a proxy, and this is a direct result of apartheid and the injustices of the past. This is a gap that still needs to be addressed and funded, in order to reach the transformation level of up to 25%. For this, an additional R3.2 trillion will be required. She hastened to add that this did not suggest that white South Africans owned the remaining 97%, as there are foreign entities and foreign nationals to be taken into consideration also.

Figures on empowerment were often exaggerated, with many JSE-listed companies reporting black ownership as high as 40% when this was not the case. She said that a common form of fronting was the use of management contract fees by white-owned holding companies to their black-owned subsidiaries. This diverted money out of the subsidiary and deprived the black economic empowerment partners of dividends. She said that the NEF advocates direct black ownership with operational involvement as a true measure of economic transformation.

The NEF uses the Codes of Good Practice as contained in the B-BBEE Act to develop its objectives and be sector specific. These include tourism, biofuels, construction, agro-processing, transport and ICT. The NEF seeks to support the initiatives of the Department of Trade and Industry (dti), which include the acceleration of economic growth and transformation, creating decent work, infrastructure development, skills and human resource development, and improvement of public service.

The impact is assessed through the empowerment dividend which includes black women empowerment, job creation, growth sectors, geographic spread and investment return. All these factors are taken into account when considering pricing factors.

The NEF has approved 730 transactions worth R7.1 billion since its inception. An amount of approximately R4.9 billion has been disbursed to these companies since inception, and the NEF has secured an unqualified external audit opinion for ten years running. The NEF has supported more than 84  000 jobs, and 26 strategic and industrial projects worth R27 billion with the potential to support over 80  000 jobs. The Asonge Share Scheme made available more than R12 million of MTN shares to over 87  000 investors comprising of black individuals; and 49% of investors were women. The NEF reached over 30  000 people in villages and townships through 120 community seminars and provided business skills training to 3 000 potential entrepreneurs. The presence of regional offices in all provinces continues to maximise the reach of the NEF countrywide, and over R1.6 billion has been repaid by investees.

The NEF’s strategic objectives are to advance BEE and to growing black industrialists, maximise the empowerment dividend, and optimise non-financial support and financial efficiency and sustainability. In terms of providing finance to business ventures established and managed by black people, the NEF has to date approved projects to the value of R592 million, which equates to 97% of quarter 3 targets. As at 22 February 2016, the performance against annual targets stands at R880 million, or 80% of the annual targets. The NEF is quite comfortable that it will reach the annual targets at the end of the year.

The NEF’s objective to invest in black empowered businesses that have high employment-creating opportunities resulted in  2 099 jobs created, seen against an annual target of 2 213 jobs. The number of jobs created in the third quarter alone amounted to 1 039 jobs, with 583 of these being new jobs. There is an above target performance with regards to disbursements to companies that are owned and managed by women, having reached a target of 54% against a target of 40%. Investment targets in the Free State, Northern Cape, Eastern Cape, North West, Mpumalanga and Limpopo reached a target of 51% through 43 deals that are valued at R245 million.

The third objective relates to the need to advance BEE through commercially sustainable enterprises. The provision of non-financial training and support for black owned businesses has continued to gain momentum, with 19 training sessions provided, and 82 referrals to various incubation centres and 11 have progressed to final incubation stage. A total of 30 social facilitation session (against a target of 15) was reached where training was offered to community cooperatives and rural communities.

The final objective is about ensuring that the NEF is a sustainable DFI. The NEF has for ten years running received external unqualified audit reports, and has complied fully with international codes of best practice.

There are constraints that need to be taken into consideration in providing industrial financing, with particular reference to the black industrialist programme.  There are few angel investors, venture capitalists or private equity in South Africa, there is a high risk aversion regarding investment in early stage and high risk projects such as mining exploration, there is an expectation gap of returns between providers of capital and funders, and investors and funders have difficulty in valuing projects and agreeing on project valuations.

For those first-entering of novel markets, or to pioneer new projects developments or business ideas in a market lacking investment appetite, many promoters are unable to raise their own equity. Many industrial projects have a long-term investment horizon. Projects face high financial risks due to implementation delays and cost overruns and there is a low risk appetite of third party investors restricted by prudential limits and investment mandates. The NEF has done well to provide funding within these constraints.

The Strategic Projects Fund (SPF) is aimed at creating new jobs as opposed to replacement capital finance, investment of new fixed capital into economically depressed areas, creation of an inclusive economy by increasing South African participation, increasing export earning potential and reducing import dependency, and increasing co-investment and linkage with foreign direct investment. The NEF has developed 26 strategic and industrial projects worth R27 billion, with the potential to support over 80  000 jobs. The NEF’s future equity rights will total R4, 7 billion at financial close.

Ms Mthethwa noted that slide 21 shows the development cycle of projects. It could take two years to move a project through the different stages. Slide 22 shows a comprehensive list of projects and sectors in which the NEF has invested, in the black industrialist programme. The NEF is the only DFI with fully venture-capital capability offering focused participation of black people in project development. The equity investments have a 7 to 10 years investment horizon, and over R860 million had been approved to date. This in turn had leveraged R4 billion in external funding. 78% of projects are at financial close, construction or operational stage. 3  600 actual jobs were created, and 80  000 direct and downstream jobs will be created by the SPF Portfolio.

An example of these projects include Kenako Medical, which intends to develop the sole manufacturing plant of normal and safety syringes in the SADC region. The plant will initially produce a total of 250 million syringes and 200 million hypodermic needles per annum. The NEF commenced with a feasibility study funding of R7.2 million in 2013, and in 2015 made a further commitment towards the construction of the plant, bringing the total investment to R75 million.

Mr Setlakalane Molepo, Divisional Executive, SME & Rural Development, National Empowerment Fund, continued the presentation by speaking about the aim of the Fund. He said that the NEF aims to provide funding to aspiring rural entrepreneurs, and to facilitate skills transfer and operational involvement by community groups, thereby promoting social and economic upliftment in pursuit of the NEF mandate. The fund targets transactions that are rural based and have an element of community participation. The target market is black people who do not have access to funding via normal banking channels.

Since its inception, the Fund has approved 31 transactions and disbursed an amount of R501 million. The total value of projects is R1.3 billion and receipts received amounted to R100 million. In Limpopo an example of entities funded included the Ga-Matlala Brick and Tile manufacturer, The Bakwena ba Mokgopa is another example of an entity that is mining granite. Jobs are created through these initiatives, and economic activity will be created within these communities.

The NEF funds across the economic spectrum. The NEF does not equate black business with small business, and that is why  big businesses that meet the requirements are also funded. The NEF funded 209 franchise opportunities from 2005 to date, valued at R709 million.

B-BBEE faces “daylight robbery” through equity calls, and fronting remains a stumbling block in the transformation process.

Finally, he noted that the  NEF would requires an annual allocation of R2 billion over the next five years in order to meet the growing demand for business funding for black entrepreneurs.

Discussion
Mr D Macpherson (DA) said that he felt the NEF is going around in circles at the moment because it did not know where it should be headed. The number of jobs provided seemed to be declining, and the ability to fund projects seemed also to be declining. He said that there was a repetition and exaggeration of figures, and he asked how many black people actually own direct shares in the JSE. He further requested  what the problem was with the question that he asked about the salary increases from 2013.

Mr Mkongi  wanted to understand what government could do to deal with the fronting complexities that are impacting on the transformation process.

Mr Koornhof  asked if there was synergy between the NEF and the recently announced black industrialist programme.

Mr Esterhuizen said that if government is really serious about transformation, then it is sad that organisations like the NEF are not properly funded. He noted that there are differences between the Industrial Development Corporation (IDC) and the NEF in relation to Project Kopano. The NEF’s successes in the medical field augured well, but the problem is that the NEF was funding well-off and established businesses. He wanted to know how much of this money actually benefited previously disadvantaged persons, and reaches them in one way or the other.

Mr G Hill-Lewis (DA) said that he had previously requested that a breakdown of the JSE ownership and its context be given, so that a clear picture can be put on the table. He asked how the NEF fits into the black industrialist programme, and what percentage of the funding will be given to the NEF in that respect.

Ms Mantashe asked for the number of black owned of businesses that have been funded by the NEF.

The Chairperson noted that the Northern Cape was not mentioned amongst the list of projects in the provinces. She wanted to know what the  private sector is doing to address the lack of financing and capital. She said she had requested a written response about the private sector investment.

Ms Mthethwa firstly spoke to the synergies between the black industrialist programme and the NEF, saying that their objectives are similar, between the dti and the NEF, since both were aimed at transformation and increasing black economic participation, and the creation of an inclusive economy.

She noted that the private sector had always wanted to know how much the government is committing to the projects before it was asked to commit funds into the projects. The private sector funds had been tapped into on a project by project basis.

She noted that the NEF has met its targets and the performance reports have shown that it is a high-performing organisation, and it has been doing extremely well. The black industrialists programme was started eight years ago by the NEF of its own volition, without receiving a mandate from either parliament or the dti. The NEF currently had assets to the value of R27 billion, which served to further prove its productivity as an organisation.

She noted that the calculation of shares directly owned by black people was done on the basis of the B-BBEE policies and the Codes of good practice, which give the definition of what is meant by black ownership and the way in which it is measured.

The MTN Asonge and MTN Zakhele share schemes are examples of how black people have been empowered, as well as the Sasol Indzalo share scheme, all of which ensure that black people are diversifying their investments. She thought that the fronting practices could be dealt with through extra time being committed by procurement managers to unpack the data presented to them in relation to B-BBEE deals.

Whilst there are differences between the NEF and IDC, she said that the proposal of Project Kopano is aimed at allowing extra provision of funding for the NEF, through the IDC.

Ms Mthethwa reported that the NEF has not been able to fund projects in the Northern Cape because of a lack of funding opportunities that have been brought from that province, and the NEF thus  requested help in identifying any projects that the NEF can be involved in within the province. 

The Chairperson thanked the Members for their questions and the responses. She noted that media statements of any kind will not be entertained in the Committee meetings, as there are other forums where they can be addressed.

The meeting was adjourned.