National Empowerment Fund on its 2015/16 Annual Report

Meeting report

Briefing by the National Empowerment Fund (NEF) on its 2015/16 Annual Report
The delegation comprised of amongst others Ms Philisiwe Mthethwa, Chief Executive Officer (CEO), Mr Rakesh Garach, Chairperson of the NEF Board, Ms Innocentia Pule, Chief Financial Officer (CFO) and Mr Mziwabantu Dayimani ,General Counsel. The Department of Trade and Industry (DTI) was amongst others represented by Mr Sipho Zikode, Deputy Director General: Special Economic Zones and Economic Transformation and Ms Jodi Scholtz ,Group Chief Operating Officer (COO).

Mr Garach kicked off the briefing by providing the Committee with insight into the recapitalisation of the NEF. In order to meet the growing demand for business funding from black entrepreneurs countrywide, the NEF required an annual allocation of R2bn over the next five years. To this end it was decided that the NEF would secure bridging finance of R2bn per annum over the next five years from the Industrial Development Corporation (IDC). The decision was taken that the NEF would function as an arms length subsidiary of the IDC. The process was currently at cabinet level and once approval was obtained it would move through the requisite legal process to facilitate the business combination. The NEF was an agency of the DTI and was the only Developmental Funding Institution (DFI) exclusively mandated to grow Broad-Based Black Economic Empowerment (B-BBEE). The NEF had regional office presence in all provinces.

Ms Mthethwa continued with an overview of the work of the NEF over the last ten years. The NEF had benefitted black entrepreneurs through the approval of 839 transactions worth more than R8.5bn. Approximately R5.6bn had been disbursed to these companies since the inception of the NEF. The Committee was provided with a comprehensive breakdown of performance highlights of the NEF for 2015/16. The NEF had approved 127 deals worth R1 248b against a target of 111 deals worth R880m. On disbursements the figure sat at R819m against a target of R691m. The NEF had also supported 4 938 job opportunities (of which 3 377 were new) bringing total job opportunities geared to be supported since inception in excess of 86 859 (of which 61 231 were new). On black women empowerment, 30% of commitments made in year were towards businesses that were partially/wholly owned by women against a target of 45%.On entrepreneurial development 26 Business Today training sessions had been provided with 36 entrepreneurs having been successfully incubated. Additional performance information was provided year to date.

The Committee was also presented with milestones to date across various provinces. The information spoke to the number of beneficiaries that the NEF had targeted, the amounts that had been approved and the industry in which initiatives had taken place. Members were informed that the NEF had R260m in its kitty at the moment and it was expected to dry up by the end of March 2017. (See attachment)

Discussion
The Chairperson asked that the Committee be taken through page 37 of the briefing document which covered negotiations that were in progress.

Mr Dayimani replied that currently negotiations in provinces was taking place with stakeholders. Different stakeholders were at different stages of negotiations. The NEF required partners also to make a contribution towards the businesses. Businesses had to enter into agreements with their partners to ensure that their products were purchased.

Mr S Mthimunye (ANC, Mpumalanga) appreciated the good work that the NEF was doing. He informed the NEF that members needed Annual Performance Plans (APPs) when they read Annual Reports. The National Development Plan (NDP) had set a goal of creating 11m jobs by 2030. What would the contribution of the NEF be in relation to job creation specifically out of the black industrialists that had been created? Would the NEF achieve its targets on jobs created? He asked how the funding criteria of the NEF differed from that of commercial banks. What was the point of developmental funding if the criteria used was the same as those used by commercial banks? He commented that the NEF’s programme was almost the same as the Black Industrialist Programme of the Department of Trade and Industry (DTI). How do the programmes compare to each other? He asked how the NEF prevented double dipping. He emphasised the need for a scientific impact analysis of the NEF on the economy of SA. At present growth in SA was only 1.1%. How could it be improved? He pointed out SA had three poverty stricken provinces ie Limpopo Province, Eastern Cape Province and the KwaZulu-Natal Province. The NEF was asked what its interventions in these provinces were. On enterprise development and training he asked how were beneficiaries identified. He further asked how the NEF hoped to see people benefitting from economic activities on their doorsteps ie the opening up of supermarkets by locals. He said that places like Kwandabele needed some economic activity.

Ms Mthethwa, on how the NEF assessed performance versus APPs, explained that targets were submitted to the DTI and the NEF reported quarterly on the performance in terms of the targets. On the NEF’s contribution to realising the NDP target of creating 11m jobs by 2030 she stated that there seemed to be a disjuncture. She had raised the matter of the 11m jobs with Minister of Trade and Industry. What the Committee had failed to ask was how to recapitalise the NEF. The NEF had been self financing itself. A proper recapitalisation of the NEF was required in order for it to try to meet job creation targets. The NEF only received R1bn per annum. On funding criteria and the NEF’s pricing policy, she clarified that the NEF wished to see that jobs were created. The NEF was after all a development funder. When the NEF made a determination it took into consideration developmental criteria like women, rural areas etc. It all depended on how much developmental impact was going to be made. Hence prices would vary. Risk factors had to be taken into account. On the Black Industrialist Programme, she stated that the NEF had started it. The NEF had been doing it for the past ten years. The DTI had developed it to what it was today. She assured members that there was no need to be concerned about double dipping. There was however a need to leverage private sector funding. Foreign direct investments required feasibility studies be done. She noted that if the NEF had the funds then it would have many projects. It also depended on partnerships that the NEF had with provinces. The NEF with its 160 staff complement was expected to cover the whole of SA. She said that the NEF had funded eight shopping malls and they were performing well. Communities would have a ownership stake in shopping malls. There were shopping malls in rural areas like Umlazi and Orange Farm.

Mr Zikode said that the idea was to enable the economy to implement the Black Industrialists Programme. The intention was for government to catalyse the Programme. Grants for the Programme were provided by the DTI that also worked with the Presidential Infrastructure Committee (PIC), the NEF and the Land Bank to mention a few. The point was to support the development of black industrialists. On non financial support, government wished to open up procurement opportunities for businesses. The DTI also looked at strengthening the Codes of Good Practise. The Codes had been amended to cover supply development and enterprise development. The Codes would be further amended to specifically support black industrialists.

Ms Scholtz, on the checking of targets and NEF performance, explained that there was a joint DTI team that looked at quarterly reports on whether targets were met. The Auditor General of SA also audited the NEF. There were thus robust processes in place.

The Chairperson confirmed that the DTI did assessments of its entities.

Ms Mthethwa continued that the NEF’s Investor Education Programme reached 30 000 black South Africans. Teaching notes were made available to persons even in villages on how business should be conducted. It amongst other things taught people how to draft a business plan. She said that if the NEF had greater capacity then it would have been able to do more. On the impact of the NEF’s work on the economy she pointed out that page 9 set out the impact that the NEF made. She added that the entire briefing was about investment. Consideration should also be given to the Gross Domestic Product (GDP) of SA.

Mr M Rayi (ANC, Eastern Cape) asked at present what the situation with the Industrial Development Corporation (IDC) was. Had the NEF merged with the IDC or was it a subsidiary of the IDC. Did the NEF’s operations and its Board remain the same? He also asked what programmes the NEF would take and which ones would be left behind with the DTI. He was particularly interested to know what was to happen with the Black Industrialist Programme. Given the affiliation with the IDC was there job security for employees of the NEF. The NEF was asked to provide greater detail on the agreements that it had with beneficiaries, especially where there was a 50/50 agreement on all parties coming to the table with funds. He was concerned about the ability of beneficiaries to pay back funds. Was Developmental Funding Institutions’ (DFI) funding developmental or commercial in its approach? How was repayments structured? He was concerned about certain construction companies using sub standard bricks as opposed to South African Bureau of Standards (SABS) approved bricks that were pricier. The NEF was asked how its Incubation Programme differed from that of the DTI. He noted that cabinet was currently discussing the matter of the NEF/IDC relationship.

Ms Mthethwa assured the Committee that requested detail would be forwarded to it. It had only been decided recently that the NEF would be an arms length subsidiary of the IDC. On the issue of DFIs she explained that commercial banks worked on Returns on Investment (RoI). The NEF however looked at the empowerment dividend in terms of perhaps how many jobs were to be created. The price was discounted to the extent of the developmental impact. She noted that a plethora of incubator programmes were needed.

Mr Dayimani, on repayments, said that the land remained the property of the state and was leased to beneficiaries for a nominal amount. The only thing that was repayable was the working capital for the business itself. Loans were interest free and the terms were structured to the benefit of workers. It had to be ensured that people worked the land. Employees were now co-owners. There was a community representative who understood business principles.

Mr Zikode, on incubation, stated that Minister Rob Davies had observed that SA’s economy was a quarter of that of Brazil. Brazil had 4000 incubators. At that point in time the Small Enterprise Development Agency (SEDA) only had 31 incubators. It was felt that in relation to Brazil, SA should have had 1000 incubators. The target was set that by 2020 there should be 400 incubators. The realisation came that SEDA would not be able to meet the target. Hence the DTI started the Incubator Support Programme. In 2014 the Department of Small Business Development (DSBD) was started and SEDA became one of its entities.

Ms Scholtz explained that SEDA supported different businesses than the NEF did. There were different strategies at play.

Mr B Nthebe pointed out that there was a lack of cohesion between departments on matters that required them to work together. He referred to page 32 of the briefing document and asked what the approved amount for the North West Province was. Was it R28m or R55m?
Mr Dayimani explained that the Louie Meyer transaction in the North West was valued at R28m. This was the value of the land. The actual value of the transaction was R55m. The balance of the funds had not yet been invested. The land had to be owned by the state. The key to the programme was security of tenure. People could not sell the land.

Mr L Magwebu (DA, Eastern Cape) noted that the NEF had in its briefing showed that billions of rands had exchanged hands. SA was losing R24.6bn in public funds per annum. A total of R700bn had been lost over the past 20 years. He asked where the lost funds had gone to. Who were the black industrialists that were being referred to? Who were the 700 companies that the NEF had made disbursements to? He referred to page 6 and asked who the 160 graduates that were being referred to were. He also referred to page 9 and asked to which companies the R5.6bn had been disbursed to. Things needed to be done in a fair and transparent way. He furthermore referred to page 11 and asked why the target on women empowerment had not been met. The Committee needed detail from the NEF on who the beneficiaries of its disbursements and programmes were. Members needed to know who the persons were to whom billions of rands were being disbursed to.

The Chairperson due to time constraints asked that the NEF respond to the present set of questions asked by members in writing. He also asked that the NEF inform the Committee of any events that it intended to have.

Mr J Londt (DA, Western Cape) asked that the Committee Staff capture all the questions asked by members.

Ms Mthethwa noted that the NEF were regularly in the past asked by the Portfolio Committee on Trade and Industry where its funds were disbursed to and to whom. As a consequence the NEF had organised site visits for the Portfolio Committee to first hand see what was happening. The NEF had a complete list of its investments. Detail was provided on the names of beneficiaries, the amounts and where investments were made etc. Site visits could also be organised for the Committee. She assured the Committee that by the following day it would have a complete list of the NEF’s investments.

Mr Londt referred to page 37 where farms that were assisted were listed. He asked that it be checked that these farms were still operational and that they had a good turnover year on year. The crux was whether the farms were making progress. He referred to page 58 which spoke about the NEF’s attempts at investor education. He was surprised that attendance only sat at 30 000 attendees over 100 events. This translated into 300 attendees per event. He asked over what period was the investor education done. If it was done over many years then the NEF’s attempts at outreach was not bearing that much fruit. He also asked for greater specifics on the successes that the NEF listed. When were things started and when were they completed? Knowing the time period would allow members to gage the extent of the success. The NEF was asked what amount of bridging funding was required by them. The NEF was also asked whether students that had been awarded bursaries were placed in jobs after completion of studies. He noted that many students tend to drop out due to a lack of support whilst they were studying. Many students who studied away from home found it difficult to cope. He asked what the completion rate of students who received bursaries was.

Mr M Chabangu (EFF, Free State) asked what criteria the NEF used in choosing students. Only students who were intelligent seemed to benefit. The NEF was asked how it empowered traditional leaders. He pointed out that black farmers in the Free State tended to lease out their farms to white farmers due to them not being able to cope with keeping the farms operational. What assistance was the NEF providing to these struggling farmers?

Ms M Dikgale (ANC, Limpopo) referred to page 49 and asked how the NEF helped people in provinces that were not doing too well. The NEF was asked whether the Limpopo Province was included in its programmes on women empowerment. She asked whether the NEF assisted the Department of Health in any way.

Mr Rayi on the issue of the recapitalization of the NEF said that the Committee needed to look into the matter.

Committee Minutes
Committee Minutes dated the 8 February 2017 was adopted as amended.

The meeting was adjourned.