Poultry Industry: public hearings; National Empowerment Fund on its Annual Performance Plan

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Trade and Industry

09 May 2017
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

This was the third in a series of public hearings about the poultry industry which was losing jobs in that sector and it was widely believed that job losses are the result of the quantities of chicken being imported at a lower cost than its local production cost in South Africa. Submissions were made by Shoprite/Hungry Lion, Woolworths, Pick ‘n Pay, Spar and Nando’s. From the evidence presented, the Committee was puzzled as to where the imported chicken was going as most companies used only 3% imported chicken. The Committee requested the exact quantities than the 3% mentioned. The Department of Trade and Industry said it would attempt to find out where the chicken was going. It was also discovered that a percentage of chicken was imported as mechanically deboned meat (MDM) and used to make polony as MDM was not manufactured in South Africa.

The consequences of the regulations limiting the injection of brine into the chickens received attention. Generally, prices had gone up once brining had been reduced. The third concern of the Committee was the BEE status of the suppliers to the large retailers. The retailers could not point to many instances of BEE suppliers of chicken, although Woolworths bought all its eggs from a black-owned company. The Committee resolved to continue their research into the matter.

The National Empowerment Fund (NEF) presented a report on their mandate to empower black entrepreneurs and black business owners. The NEF referred to some major successes but also expressed disappointment in the decision by government, in the light of the National Health Insurance policy, not to allow black business to invest in the lucrative health care market. The ire of the Chairperson was raised when she heard that a medical supply company was struggling to survive because state entities were importing plastic syringes and not purchasing locally from Kanako Medical Supplies, an NEF-assisted black empowerment company which had US but not local clients. She called it treason when state entities did not support government policy on local procurement. The Chairperson stated that government had to set the lead and she determined that state owned entities had to be brought before the Committee and questioned about local buying.  There was also concern that government had at first encouraged the development of biofuels production, but had since called a halt to these clean energy projects thus affecting another NEF-assisted black empowerment company, Mabele Fuels.

 

Meeting report

Opening remarks
The Chairperson said Parliament was holding public hearings on the Poultry Industry as it was an important industry which affects many jobs in South Africa. Some people believe imports are negative, others disagree but it is hoped that the Committee will obtain a better understanding as a result of the previous hearings and the hearings today from the retail industry, which should offer a different perspective from that presented by the importers and the South African Poultry Association (SAPA).

Shoprite submission
Mr Jaco Brand, Deputy General Manager: Foods Buyer for Shoprite/Hungry Lion, said Shoprite enjoyed 60% of the chicken market in South Africa. 97% of chicken sold was locally produced while 3% was imported. Hungry Lion purchased only 100% locally produced chicken. The company only imported when there was a shortage of particular parts of chicken, and when cost made it effective to import. Local producers could not keep up when they had specials. They would import only when the cost was considerably cheaper than was the case with local manufacturers. Imported products were used for grilling in Shoprite delicatessens. Shoprite supported the government’s efforts to limit brining. There had been a 17% increase in local chicken products the moment that brining was reduced. However, the revised packaging from wholesalers caused confusion amongst consumers.

Chicken was the preferred source of protein amongst poorer people in the country and so it was a cornerstone of Shoprite to keep the prices of chicken low. However, recently grilled fish had become more popular than chicken due to pricing. In Europe, people preferred white chicken meat but in South Africa people preferred brown chicken meat so it should be possible to obtain alignment in the market. Pricing was a result of market reviews to remain competitive. Drought was causing pressure on prices.

In reply to the Chairperson asking for clarification about the weight of chicken and labelling, Mr Brand pointed out that the cost per kilogram was not noted on the package. The Chairperson stated that the label needed to be reviewed.

Mr Hill-Lewis asked for clarity about the 2kg versus the 1.7kg pack. Was the price of the chicken pack reduced?

Mr Brand confirmed that the price had dropped according to the new size of the packs.

The Chairperson pointed out that the Trade and Industry senior officials were in attendance, including the Director-General, Mr Lionel October, Ms Jody Scholtz, the Chief Operating Officer and Mr Garth Strachan, Deputy Director-General: Industrial Division.

Woolworths submission
Mr Julian Novack, Head of Fresh Foods, Ms Dineo Noganta, Head of Stakeholder Relations and Ms Latiefa Behardien, Head of Technology, Ms Carstensen, Legal and Compliance and Ms Goodchild-Brown represented Woolworths. The CEO and MD sent apologies. Mr Novack presented the Woolworths business footprint and showed substantial growth in jobs and people over the past five years. 95% of the food sales in Woolworths was marketed under the Woolworths private label.

Woolworths began with an introduction into the poultry industry. 8% of food in SA. 95% of chicken is locally produced. Fresh chicken was the most sold and, for Woolworths, the trim was high as customers did not want to pay for fat. Woolworths sold only grain-fed and free range chickens. They worked directly with suppliers and not through wholesalers. The company had local mitigation plans to counteract the 5% imported chicken.

The brining limit set in the poultry industry had had minimal impact as only 1% of the chicken had had brining. That brining had been set at 24% but has been reduced to regulation levels. Woolworths proposed an inclusive approach with Government to deal with the issues of brining.

Food prices were the result of a complex range of factors, including the price of ingredients (maize), labour and fuel.

The Chairperson asked about the pricing mark-up and labelling of chicken. Mr Novack stated that their mark-up was not as high as 44% as alleged by the European Union but implied that it was not public knowledge. Labelling indicated the price per kilogram was indicated on fresh chicken. Woolworths noted that their IT system did not allow them, at that point, to put the price per kg on frozen chicken.

Pick ‘n Pay submission
Mr Gerhard Ackermann, General Manager and Head of Fresh Foods at Pick ‘n Pay, said that the company had three guiding principles: customers, supporting local industry and supporting foreign investment rather than importing products.

Pick ‘n Pay dealt with both local producers and imported poultry wholesalers. Less than 3% of chicken was imported while 97% was local product. Local suppliers had to work hard to improve carcass utilisation whilst wholesalers could focus on offering either white or brown meat, depending on requirements. Pricing was an important factor for Pick ‘n Pay. Brining according to the new government regulations was supported. The resulting price increases meant that consumers had had to make other choices. For example, the five- piece chicken pack was a value purchase. The company had researched the shifts that customers had made following the brining regulations and chicken had remained the preferred source of protein.

Pricing on and off promotion was in line with retail prices. Frozen poultry was heavily promoted in SA market with frequent advertising of the product. The challenges included full carcass utilisation. Local producers’ employees were their customers.

The Chairperson enquired about pricing which was in line with retail markets. Was that collusion or how did they keep the price aligned?

In response, Mr Ackermann stated that Pick ‘n Pay did price surveys, checking the prices of other retailers so it was toeing the line rather than collusion.

Ms P Mantashe (ANC) asked whether Pick ‘n Pay worked with Massmart.

Mr Ackermann was adamant that he had no contact with Massmart at all.

Spar submission
Mr Graham Claassens, Group House Brand Manager, said Spar was listed on the JSE and the company sold goods to its franchisees of the 880 stores, doing R52 billion per annum. He could only speak about the Group and the products that the Group supplied. Franchisees were independent store owners and they were free to purchase additional supplies of their choice. As none of the store managers in the other large chains had that flexibility, the store managers at Spar shops were often targeted by wholesale importers of chicken. Imports of chicken had risen from 14 % to 21%. The increase was mostly in frozen chicken. Most of the imported chicken consisted of thighs and breasts which were used for cooked foods, such as chicken and chips. Spar-labelled chicken was all locally produced but the house brand had declined in sales while imported brands had increased.

The price of chicken came down with the reduction in brining. The market advertised chicken by unit price such as 1kg or 2kg pack. Some manufacturers put less than 2kg in the 2kg pack. Spar offered no promotions on imported products. Pricing was also a result of price checks across the market but gross margins had dropped because the price of chicken was forced down.

Spar agreed with brining but there had to be a check on brining. Currently there was no way of checking the level of brining and no physical audit took place. The only way to prevent illegal brining was to forbid it.

The country also needed to test incoming chicken and the standards of hygiene and labour in factories offshore, particularly South America as a lot of old sub-standard chicken was coming into the country, incorrectly packaged in 25kg packets.

The Chairperson expressed concern that the inner bags of 25 kg were clear plastic.

Nando’s submission
Mr Christo Swanepoel, Nando’s General Manager, said Nando’s chicken products are all local and mostly fresh. There were no imports. They had excellent relationships with local suppliers. The short shelf life of fresh chicken meant that they could not source from the overseas market.

Pricing was bought and sold per portion and not by weight because additional ingredients had to be factored in. The company was concerned about the health and sustainability of the South African industry as there had been consolidation. South African chicken was world class but was in distress and the company might be forced to import if the local industry did not strengthen. Local industry had many regulations to adhere to but imports came in without any regulations. A mechanism needed to be put in place to level the playing fields as imported chicken came in at below production cost.

Discussion
The Chairperson asked if the suppliers were broad-based, local black empowerment suppliers.

Mr Swanepoel replied that Nando’s was open to all suppliers but generally utilised large suppliers as consistency and high quality was imperative but they would look at others if they met the required standards.

Mr G Hill-Lewis (DA) noted that retailers were closest to the consumer. They had held three days of poultry industry hearings and there were many contradictions from the role players. The retailers had contradicted the South African Poultry Association (SAPA) who had said brining did not impact on pricing and was not important, but retailers had said that was not true. SAPA had said brine reduction will lead to higher prices, but it was better to pay a higher price for a real product, instead of water. Even though consumers were concerned about prices, at last they were getting real protein. Shoprite had noted that the courts had determined that brining had to be brought down from 30% to 15% (although it was 63% in some cases). Could other retailers talk about price increases since brining? Shoprite had said that there was a 17% increase in prices but Mr Hill-Lewis noted that that was 2% above the reduction in brining. Had wholesalers used it as an opportunity to raise prices? Secondly, the Committee had been told 20% of the chicken consumed in South Africa had been imported but each major retailer, other than Spar, stated that they only import about 3% of the chicken that they sold. Where was the rest of the imported chicken going?

Ms Mantashe was impressed by Spar’s commitment to use local products. Where did the imported chicken go to? Could Woolworths explain the percentages related to the private label? What was the private label? She was concerned about the rise in prices following the limitation on brining but people’s health and welfare must be prioritised rather than just considering profits. She did not see that approach in the retailers.

Mr A Williams (ANC) also wondered where the imported chicken was going. What was DTI doing to ensure that the standard of imported chicken was maintained at the same level as domestic chicken?

Mr N Koornhof (ANC) said that there were two sides to the poultry story. He had thought that SAPA had done its homework but they were getting a different picture from the retailers. The European Union claimed that South African chicken was marked up by 44%, unlike the lower mark-up in the rest of the world and he wondered what the mark-up was, in actual fact. There had been good engagement and interaction. Chicken was a drawcard but sales were dropping. Had any retailers done any research into why the buying of chicken had dropped? Did retailers know at what prices the informal sectors sold chicken and what their mark-up was? Were consumers buying chicken from the informal sector rather than from the big retailers?

Mr J Esterhuizen (ANC) noted that consumers wanted the cheapest prices, retailers wanted mark-ups and importers wanted their cut. As most of the bigger outlets did not sell imported chicken, it seemed to be that sub-standard brown meat chicken was being sold to the informal market. He had seen reports that some officials in Brazil were being paid to overlook sub-standard products going to Africa. How did government control brine injecting? The government had to intervene on policy and pricing.

Ms S van Schalkwyk (ANC) was concerned about the non-enforcement of regulations and punitive measures. There was a big fuss about certain brands that were imported and there was no regulating imported products, nor did they look at the manufacturing side. She asked the Department of Trade and Industry whether standards were specified when trade agreements were signed. Did they check health and safety standards of the factories supplying the chicken from overseas? If there was no monitoring of these factories, did they know that the chicken was safe? Where did the imported chicken go? Could DTI assist in tracing where they went?

Mr Williams noted that Shoprite had stated that if it were cheaper, then they would buy imported chicken. How often did that happen, and how much cheaper was the imported chicken and what percentage did they import?

Mr Hill-Lewis queried whether the retailers had included all outlets, especially budget stores, when they had presented their figures on imports.

The Chairperson noted that when retailers were talking of their own purchases, for example, Pick ‘n Pay had said they bought only 3% imported. What was 3%? The Chairperson did not know. It was just fancy talk. What was the figure? How many poultry sales were they talking about? Every presenter must give the exact amount of chicken imported in tonnes or kilograms. The Labelling Act was intended to assist the consumer to know exactly what product they were buying and to be able to purchase value for money. It did not help if the price per kilogram was not shown on chicken. The DTI officials should advise in that regard.

The Director-General of the Department of Trade and Industry (DTI), Lionel October, noted that the localisation model of Spar and Nando’s was appreciated. The health and safety standard of imported products was a huge concern. The Agriculture and Fisheries Department (DAFF) was responsible for the checking so it seemed that perhaps a joint committee meeting between the Portfolio Committee for Trade and Industry with the Portfolio Committee for Agriculture and Fisheries would be useful because, amongst other things, DAFF had a shortage of staff. There was no point in apportioning blame. He was fairly sure that the problem lay only in one category of chicken, i.e. the Individually Quick Frozen (IQF) category: boned chicken, brown meat. That was the reason Rainbow Chicken closed down. Local producers could meet the needs of white meat but there was a need for brown meat. The Committee and DTI needed specified amounts for the IQF imports. As with clothing, when Mr Price began importing clothes, everyone had to follow suit because of pricing. Even Woolworths was forced to buy from China. There was a need for local retailers to come to an agreement on the use of local product in the IQF category. Government was going to come to the party by offering incentives in the industry to buy locally. It was a strategic sector as it is extremely labour intensive.

Mr Garth Strachan, Deputy Director General: Industrial Development Policy Development Division (IDPDD) added that the DTI was working with poultry producers, SAPA and AMIE on exporting chicken. There were low barriers to entry into producing chicken and they could export to Africa, so DTI needed to get exports moving but tractability was not easy. Customs and SARS were responsible for tracing importers, including chicken, but DTI needed to know where the IQF products were going and who the traders were who were importing the bone-in chicken and the Mechanically Deboned Meat (MDM). They needed to trace these people but the data was not easy to come by.

Mr Claassens from Spar responded to the question of where the chicken was going. He said that the nine importers were breaking down chicken by hand and selling it to the bottom end of the market. The chicken was broken down in warehouses and factories in unhygienic, uncontrolled conditions and sold R50 a kg cheaper than the local product. It was sold to Spaza shops as consumers preferred the imported chicken because it was not brined and therefore was not mushy and full of coagulants. In theory, it was whole chicken.

The Chairperson requested the retailers respond to some of the questions.

Mr Swanepoel, of Nando’s, spoke about the difference between brining and not brining chicken. Nando’s injected brine for the flavour and to improve the quality of fresh chicken. Brine was not frozen into the chicken. That was the difference between retail and food services, which bought chicken for catering purposes.

Chris Duerden, Shoprite Senior Buyer, pointed out that SAPA had never talked about the 40% of chicken in the market which was Mechanically Deboned Meat. All MDM was imported as it was not produced in the country but was required for making polony, which was a huge source of protein. Not all the poultry coming in was sold as chicken.

Ms van Schalkwyk asked about the BBE rating of the local suppliers utilised by the retailers.

Mr Novack of Woolworths said that his company would be happy to share specific tonnage and volume. All fresh and IQF sold at Woolworths was local chicken, although it was a small percent. Chicken was only imported in specific cuts for prepared meals as the local market could not meet their needs. Woolworths had only a few international few suppliers and the company checked the standards and processes of every manufacturer. At the current time, local suppliers could not provide specific cuts. Chicken that had been brined was around 10% even before the regulations as it was used to enhance the flavour but not beyond that point as it became watered down after 10%. So, they had had no issues with pricing. Woolworths’ IQF had had to reduce the brine from 24% to 15% following regulations, and the mass remained the same but the price had been put up slightly. Woolworths would be happy to support the proposal by Spar. He added that the private label was a specific Woolworths label and specified for Woolworths only by local suppliers according to their specific requirements and standards. Most products are their own label and it only a few brand names such as Coke and Skip were bought in on customers’ request.

Woolworths was on Level 4 of the transformation scale. The new challengers were around black ownership and they were working with suppliers in that regard. There were, however, new challenges around ownership of the chicken producers. However, Woolworths egg supplier was totally black-owned.

The Chairperson remarked that she saw a sea of white faces amongst the representatives from retail. There was no evidence of transformation.

Mr Ackermann from Pick ‘n Pay said that they had 3% chicken imports which translated into 3% of the total Pick ‘n Pay chicken sales. If they could have a guarantee of confidentiality, the company would willingly share with their specific figures with the Committee. Pricing was according to the packet. A 2-kg packet of IQF with a minimum of 12 portions in a packet was considered a good buy. As consumers counted the number of portions in a packet, they had changed the labelling to indicate that there were at least12 pieces of chicken in each packet. They were happy to provide the Committee with a list of their suppliers in writing, subject to the same rules of confidentiality.

Mr Hill-Lewis wanted to make an apposite point. What percentage and tonnage of IQF imports were received in the country?

Mr Brand indicated that they had included all Shoprite and other food stores in the Group. He confirmed that the 15% brine reduction had resulted in a 17% price increase. The volume had dropped by 20% immediately after the restriction on brining had become fully effective in January 2017, so it was early days to evaluate the impact. By the end of the first month of the increase in price, sales had started increasing again. Mark-up was 2% to -2%. They had nothing to hide there. When local chicken became 10% more expensive than imported chicken, Shoprite would start investigating imported chicken. When calculating the volume of chicken imports, Mr Brand had excluded chicken products such as crumbed chicken and chicken strips as these were processed products. He suggested that processed produce should be excluded from the concerns about chicken imports. No IQF was imported into South Africa as the product could not be found internationally. Fresh chicken could not be transported over any length of time. Shoprite would share its total sales in confidence.

Mr David Wolpert from the Association of Meat Importers and Exporters noted that retailers had included 3% fresh chicken in their figures, but one should bear in mind that there was no imported fresh chicken. So, they should be comparing frozen chicken only. The total import of chicken represented 14% of chicken sold in South Africa. The additional 6% of chicken product imported was MDM. South Africa imported 200 000 tons of chicken per annum. Where did it go? It did not all go to the poorer sector. A huge amount went to independent supermarkets, the catering industry and to butcheries around the country. Health and Industry was the responsibility of DAF and the standards were high. DAF had a list of overseas establishments. Six establishments from Brazil had been delisted in the past month. They would have no problem with checking standards of overseas factories. The biggest problem facing local chicken suppliers was the lack of a credible export programme, without which they could not take up excess production and they could not use all of the carcass and which was essential to running a profitable industry.

Mr Marthinus Stander, CEO at Country Birds Holding (CBH) and a member of SAPA stated that the new brining regulations were problematic as DAF did not have enough assessors or checkers. However, the poultry industry funded assessors to check on brining at one cent a bird. The problem lay in the quality of chicken imported.

Mr Claassens of Shoprite asked whether the importers ever checked on the age of imported chicken.

Mr Swanepoel from Nando’s reminded the Committee that the demands of supply to a cooked chicken business such as Nando’s was different to the needs of retailers. Nando’s required a constant supply of good quality chicken. The use of BEE suppliers was very difficult because of the high cost of entry in such a highly capital intensive business. BEE was downstream, but as chicken farmers, but not as abattoirs. Nando’s would submit details regarding their BEE status in writing. Nando’s had outlets in Africa but they could not send chicken out of the country to these outlets, not even to those in neighbouring countries in Africa.

The Chairperson explained that hundreds, if not thousands, of workers’ jobs are at risk in the poultry industry. It was DTI’s mandate to grow jobs and jobs were being lost in the poultry industry. She agreed with the Director-General that they needed to work together with the industry and might need to look at tariffs. Retailers needed to look at efficiencies that would retain labour and allow for profits. The Committee should also look at the BBEE and BBBEE status of suppliers. However, the retailers also needed to be frank so that the Committee could see how they could manage the industry and bring in profit margins. Could all suppliers provide the details of their BEE partners? Can they provide the IQF exact tonnage? Retailers should also provide average mark-up on chicken.

Mr Wolpert from AMIE was adamant that most importers of chicken had state of the art factories. He stated that expired chickens were rejected and SAPA would be providing funding to ensure that proper checking was taking place.

Mr Claassens stated that they bought from state of the art companies that imported chicken but hundreds of bad chicken factories existed. He asked how AMIE checked chicken life, not expired but very late in its shelf life.

Mr Wolpert was happy that all factories would be properly checked.

Mr Hill -Lewis asked whether AMIE confirmed that the figures regarding chicken imports were correct. If so, where was the imported product going. What was the penetration?

Mr Wolpert responded that penetration was 14% plus 6% MDF. In total, chicken imports were 20% of the South African market but 6 % was not problematic as the product was not produced in the country. Chicken was going to small businesses, supermarket and butcheries. Spar also used over 20% of imported chicken.

The Chairperson asked Mr Wolpert what percentage of importers and exporters were members of AMIE. He responded that about 80% of importers were members of the association.

The Chairperson asked the presenters that, if they thought of anything, in addition to the three details requested, they were to send such information to the Committee secretary so that the Committee’s Submissions to parliament would represent the full picture as regards the poultry industry.

Charlotte Nkuna from SAPA pointed out that separating fresh and frozen chicken in the market place would reveal that a much higher percentage of frozen chicken was coming in than had been indicated in the figures given. The percentage becomes 40% of frozen instead of 20% of all chicken.

The Chairperson did not have the same recall of SAPA’s statements at the previous hearings. She therefore asked Ms Nkuna to produce the figures in writing.

Mr Hill-Lewis asked what was SAPA’s response to the contradiction in the consequence of brining.

Ms Nkuna believed that it was difficult to say what the consequences were as the old stock had been sold until the end of January. This was what she had said at the previous meeting.

The Chairperson noted that members of the Committee were puzzled and so she wanted clarification from SAPA as to their perspective in writing. She and the Committee members had a different recollection of the previous engagement. The Committee would work with the content specialist, researchers and the economic advisor in studying the documents.

Kentucky Fried Chicken (KFC) had been invited to attend the hearing but had not as they had been on an aeroplane when they received the invitation.

Briefing by the National Empowerment Fund on Strategic and Annual Performance Plans
Ms Philisiwe Mthethwa, NEF CEO, introduced the CFO, Ms Innocentia Pule, who was a chartered accountant. The CEO explained that when she presented to the parliamentary committee, she invited staff involved in post-investment to join her. She had mentioned the professions to members of the Committee to show the level of expertise of her staff.

The NEF was the only organisation founded to promote black empowerment. The organisation supported initiatives of government in general, and especially, the DTI. NEF worked closely with the Department of Rural Development and Land Reform (DRDLR) on various programmes and projects.

Ms Mthethwa shared a video on a project that NEF was working on in Mpumalanga. It was a ground-breaking concept, although it had been started on a small scale. The site consisted of an outdoor ferry system that took tourists to ground walkways where they could follow the path to explore the beauty of the gorge in Mpumalanga. They had created 170 jobs plus a market for craft sellers which would lead to more than 500 jobs.

Challenges for NEF included market failures and limited own capital. NEF funded between R250 000 and R75 million for start-ups. As many black entrepreneurs had limited management skills, NEF had developed tools and had dedicated mentors to assist. Lack of accurate and reliable financial information, poor quality business plans, strong competition and lack of access to local and international markets were also challenges that NEF was addressing.

Addressing market failures required funding such as venture capital funding. There were no black players, even in new industries, such as the renewable energy industry, as there was no funding for black players. In these industries, they needed funding before they could even make proposals. Venture funding would assist these people. The type of funding was the problem, not funding per se.

Retailers had been successful over last 20 years because black middle class consumers were driving the growth but there were few black players. NEF provided funding solutions for BBBEE. NEF had a range of funding products.

NEF had been working with Nikki Newton-King from the Johannesburg Stock Exchange to get a better understanding of black business on the JSE. People needed to understand that black business was not just small businesses and SMME level businesses. They wanted to grow with the companies by offering expansion funding. One of their success stories was the black doctors’ hospitals in Cape Town and Bloemfontein. They had received extra funding from the Public Investment Corporation and the company would now be listed on the JSE. NEF also offered non-financial interventions. They were open to anyone who wanted information, help or funding, or even training.

NEF had approved R1.3 billion for black business in 2012/13 but since the moratorium in 2013 NEF had not received additional funding so they had not been able to assist all applicants. The investments were small and so the R1.3 billion had supported many black business people. The targeted number jobs for 2017/18 was 4 000 but, in fact, NEF had the capacity to create 100 000 jobs if they had funding available. The moratorium on additional funding had therefore had an extremely negative impact on the ability of NEF to create jobs.

NEF had a special focus on women-funded businesses. They were also targeting investments across all provinces. Savings was a key focus.

At the World Economic Forum in Durban, everyone had wanted to know where the CEO had got her spectacle case with beads. The case had been made by rural women. She had referred people to a shop that sold the cases. However, if there had been some real out-of-the box thinking, they could have set up rural women and their products outside of the Forum and that would have made great sales.

NEF enjoyed 81% brand awareness in a recent survey.

NEF had not received the funding that had been promised. However, NEF and IDC were looking to merge and would work together. The legal work had to be completed as NEF was set up as a trust. Due diligence on NEF had taken place. The Minister of Labour was impressed with work done in the Marikana area and she asked NEF to apply for UIF funding for projects. The Department of Rural Development and Land Reform had seen the value-add of NEF and so they had requested to work with them.

The Mabele Fuels company had the potential to create 16 300 jobs in the Free State. It was relatively cheap to create those jobs. Sorghum was used because it was a drought-resistance product which also provided fuel security. Unfortunately, the government had decided to shelve that initiative. That was poor policy as the private sector would lose faith in government. The CEO would like to know why government had canned the project, especially because the Committee had supported the project five years ago.

Another case study was Kanako Medical Supplies. There was no one in SADC producing medical syringes and other healthcare products so they had started a project, Kanako Medical Supplies. Currently only USA was procuring from the company, while state-owned medical institutions in South Africa purchased imported.

Other rural projects had benefited farm workers. Land had been acquired by the state and leased back to the businesses. NEF was assisting in implementing 30 projects.

Discussion
The Chairperson asked about the game farms and nut farms in Limpopo.

The CEO explained that the Department of Agriculture had invited farmers to participate in game, cashew, and pecan nut farms which could bring in a lot of foreign capital. In the Western Cape farm workers were getting involved in a wine farm. The total value of the property involved in that project was R1 billion.

NEF reported to DTI and had 157 staff members. Radical economic transformation would mean supporting a lot of the projects that NEF had been looking at over the years. It was necessary to look at things differently.

Mr Williams remarked that the NEF needed to talk regularly about the fact that the economy was controlled by white men. Were there cooperatives amongst the NEF projects? Had there been a follow-up by NEF on the companies visited during Portfolio Committee oversight visits?

Ms Mantashe wanted to encourage the NEF to say loudly and clearly that the economy was controlled by white males. She noted that richer provinces benefited most from their efforts. She was glad to see a shift towards the poorer provinces and hoped that the situation could be turned around to uplift the poorer provinces.

Ms van Schalkwyk wanted to know what initiatives were taking place to ensure that skills were being transferred to ensure success. She requested more details on the audit of brand recognition. She asked Ms Mthethwa to provide clarity about the “Once empowered, always empowered” slogan.

The Chairperson noted that NEF had offices in all provinces and the value was obvious. Mabele Fuels was a difficult issue and was no longer supported by the government’s biofuel sector funding. The Chairperson needed some clarification on the Mabele matter. Was it the view of the new Minister to halt the biofuel industry? Was it temporary? Kanako Medical Supplies arose as a company because six years ago the issue of plastic syringes not being manufactured in South Africa was raised but it appeared that they were not effective at getting buyers from government and parastatals. They were selling outside the country. Why were they struggling to get buyers within the country? The Chairperson believed that the CEO’s conceptualisation of the empowerment dividend was very important. It was not only a financial benefit but important for the radical transformation of the economy.

Ms Mantashe asked about BUSAMed, the black-owned hospital, and whether it was contradicting the vision of the National Health Insurance. It was important not to contradict policies. Government itself was funding private medical institutes, but there were attempts to move to the national health fund.

Response
Ms Seje Kekana, NEF Fund Manager: Strategic Projects, informed the Committee that NEF had played a role in supporting cooperatives in the country, not only in the field of agriculture but also in other fields.

Ms Hlengiwe Makhathini, Divisional Executive: Venture Capital and Corporate Finance, reported that NEF had given feedback on the Unique Engineering and Smith Capital oversight visits. NEF had addressed the problems that they had found and had assisted Smith Capital to find additional funding.

Ms Mantashe noted that the Naledi company in Limpopo was given contracts by government entities but they did not come to fruition. However, when they came to Parliament, they contradicted everything that they had said. They said everything was fine and she had been shocked as it meant that the Committee had presented an incorrect report to Parliament.

The Chairperson pointed out that that was a different company to the ones under discussion.

The CEO stated that NEF had made a significant improvement in shifting to provinces outside of Gauteng. Provincial projects were still mostly in Gauteng but the percentage of projects in Gauteng had moved from 64% to 44%, so they were making progress in moving the focus to poorer provinces. They wanted to do more but they only had 157 employees and could not do more. Personnel was constant but the work was expanding. More resources needed to be allocated to the NEF. Although they had opened provincial offices, there were only about three people in each provincial office.

The NEF board chairman, Rakesh Garach, stated his support for the CEO. He had taken Ms Mantashe’s concerns to heart. Currently the NEF had only targeted six provinces. The Gauteng share had decreased as they moved into other provinces.

The CEO always told MECs that NEF would be pleased to work with provincial departments in their initiatives to promote black business. The Department of Rural Development and Land Reform had so many projects but they did not have sufficient staff to manage them. NEF had only three people to cover the whole of the Western Cape. The emphasis is on Gauteng had occurred because of their limited staffing. The Board supported the CEO and he supported the movement of the target to assist the provinces. It was important to note that efforts in Gauteng had not been reduced, but the other provinces had been grown.

The CEO pointed out that if the Committee looked at allocations given to white-owned businesses, R50 billion was pumped into white businesses. Only R1 billion was given for the promotion of black companies and NEF was told to stretch it. Black owned businesses had to split the crumb as business in South Africa was worth billions.

As far as going against policy regarding the National Health Insurance, the CEO admitted that that investment had ignored that policy but it had been a very good investment. They had started working on it about six years ago and it was only three years ago that government decided that state institutions would not support private companies in the health sphere. This ban locked black people out of private health care, which was one of the fastest growing sectors in the South African economy. It was shutting them out although the health care company had shown the highest return on investment. Going forward, NEF would not support such businesses. The CEO respected the decision by the government but believed that government would regret that decision. They had engaged with some of the policy decisions taken in the past and NEF had been vindicated in quite a number of the cases. If the national health policy did not succeed, it could be an opportunity cost to black entrepreneurs. That arena was for white businesses only. Black entrepreneurs had to find other sectors, despite that the returns on this investment was the highest they had experienced. She respected the laws but they could not stop black professionals from saying that their Parliament and government was perhaps making a mistake.

Ms Mantashe said she had asked because the matter would be discussed at the policy conference in June. It was policy makers’ job to make policy. She understood the business version of the CEO but she would appreciate a good debate. Nevertheless, Parliament was the watchdog of its policies.

The Chairperson felt that the CEO had attempted to reply that the business space should be open to all investors, especially given the distorted economy in the country, keeping in mind the National Health Insurance policy. However, at present, there was no law preventing investment in the private health care sector as this, in fact, relieved the pressure on the government health care institutions. The ANC is going to a policy conference and these issues would be debated.

The CEO informed the Committee that black entrepreneurs could not operate unless they had been issued the necessary licences and those licences had been issued. It was the NEF’s role to support them once they received the licences. It was heartening for them to welcome the Minister of Labour and the Deputy Minister of Health to the opening of the hospital. The Chairperson of the Portfolio Committee had also attended the opening.

There was continual training across the country and they reported to their Board on the numbers trained. Entrepreneurs could not access funding unless they came up with a business plan and for that reason NEF had developed a business toolkit that assisted in cash flow analysis and other facets of the business plan. They had demystified the business plan by creating a toolkit which explained every aspect of the business plan. This could be accessed on the NEF website by anyone who needed such assistance. Members of the Committee could log onto the toolkit on the NEF website to check it out. Business plans were important tools in the access of any funds. NEF also offered post-launch support to assist entrepreneurs, especially farm workers, to run their businesses. If businesses were not doing well, they could have engagement when NEF officials.

The slogan “Once empowered, always empowered” policy meant that the NEF opposed the practice that had seen BEE partners lose their empowerment status. For example, for a mining company with a net asset value of R1 billion, the BEE partner had to raise R100 million from the capital and financial markets. The way some of the partnerships had been structured over the last ten or 15 years had been that the black business person would depend on the dividends that would flow from the mining company to repay the R100 million loan. In most cases, especially in mining, people came in as black equity partners and borrowed money to acquire their stake in the company on the understanding that the dividend payments would be sufficient to cover the loan, but that has not happened in 70% of the cases. So, at the end of ten years, the black beneficiaries who had provided the broad-based black component, had not received a cent and by then the loan had ballooned. They had not received a cent and then owed about R250 million. During the ten years, the mining company would have converted the old mining rights into the new mining rights as per the policy of parliament. So, these companies had full mining rights on the back of partners who had got nothing out of the deal. In the past, white businesses were BBE-empowered, but the black investor was not empowered. NEF needed to unpack the funding packages because even when the black partner left, the company retained the black empowerment status and mining rights. With NEF, only when a black person had received the dividend, was he empowered and only the money that a black person had received counted as empowerment. The CEO was not taking a position but that was government to deal with it.

On the companies visited during Committee oversight visits, Ms Makhathini noted that the NEF was informed that in March the Board had approved another R8 million to Smith Capital and they were engaging with Erkurhuleni to get land. Unique Engineering needed an additional business funding allocation.

Mr Setlakalane Malepo, NEF Divisional Executive of SMME and Rural Development, the NEF had rural and community development funds to unlock economic value to the communities in rural areas. They had lots of examples of how they had done that. They had moved beyond cooperatives. Trusts had been established with broad-based involvement, such as “Imbasa” which was a cooperative that collected black mussels and sold to La Vie. The lodge in Mpumalanga was another example of a successful trust.

The DRDLR involved NEF as in the beginning farm workers were not organised and were evicted from their homes on farms when the farms were sold, sometimes after three generations on the farm. Government had implemented the 50-50 programme, saying that over and above providing labour, they had to become owners. But these were not homogenous communities. The NEF went into the community and assisted them to organise themselves and to set up a community trust, etc. Social empowerment went into the community and taught them how to be an owner which helped the Divisional Executive of DRDLR. They taught people how to be equal partners with the baas. They taught them about governance.

On the NEF brand analysis, NEF Mr Moemi Motsepe, Head of Marketing and Communications, stated that an 81% of brand awareness was shown in a survey of a sample of the broader spectrum of people across the country who have contacted NEF via media or as an entrepreneur. The survey measured spontaneous recall and understanding of products. A more recent survey showed 86% brand awareness and they were looking for a 90% target. NEF efficiencies rated at 62.4% and they would want to do better and reach 80%. Brand empathy was 59% and that was a problem for the NEF Board. Brand Trust was 59.1%. The overall Brand Strength was 60.5%. That was above industry standard but NEF wished to grow above that.

The DTI Director General, Lionel October, spoke about Mabele Fuels and Kanako invested in by NEF in the early days. Both black-owned companies had been frustrated on the demand side. Distributors had no obligations to buy value-added fuel. Kanako needed buyers. The biggest buyers of medical equipment were Treasury and National Health but they were not buying from local producers. It was necessary to get a “buy local” policy. It should be a government-wide approach. A joint meeting with the Health and the Finance Portfolio Committees was needed to reach an agreement on the “buy local” policy. As with the food industry, the factories were not running at full capacity until they got an order from a retailer like Shoprite or Woolworths. Black companies needed, firstly, the finance and, secondly, the market. Just as retailers had been asked about their suppliers so state institutions needed to buy from black businesses. Other countries did not give incentives to local companies, but they did buy local which gave local businesses the market they needed. Other countries did not concern themselves with the supply side, but only the demand side. For example, Siemens and Boeing did not need support because they received huge orders from the government.

The Chairperson was adamant that the situation had to stop. She noted that the Committee did not want to contradict the WTO but the big issue was that state-owned entities did not buy local. Where were they buying? The state-owned entities had to be brought in and grilled. She was sure that Mr Hill-Lewis would support the move. Was there something wrong with the products? No! NEF indicated that they had been able to find a market in the United States. The NEF confirmed that the South African syringes were bought by export agencies in the USA as soon as they got FDA clearance.

The Chairperson stated that government had to set the lead and she determined that the state entities had to be brought in to the Committee and questioned about local buying. Even Mr Trump, despite his unacceptable ideologies, had the correct approach when he told Americans to buy local. They did not want people to break the law with impunity. The matter should be raised in the budget and all over the show. They were undermining the country. They did not want that approach! It bordered on treason to ignore policy and buy internationally.

Mr Hill-Lewis noted that the new BBE policy allowed unencumbered funds as many black people did not have the funds for the R10 million required and so on. Black entrepreneurs now had to have 10% unencumbered funds, although it might not be progress. However, it had to be remembered that dividends depended on the dividends of the company but some companies had poorer dividends than others, especially the mining companies that had done very badly. There had been excellent success by black investors in the Spar Group where they had received excellent returns, so the NEF CEO must not see the BBBEE schemes as always having been failures.

Ms Mantashe pointed out that the lack of black empowerment by companies and BBBEE had been abused since before the financial crash in 2008.

Mr Hill-Lewis replied that he was not defending companies. He did not approve of abuse of dividends but there needed to be an understanding of the dividend pay-out and how it depended on company earnings.

The CEO agreed with Mr Hill-Lewis noting that in many cases the companies did not issue dividends as the company had not performed but in some other cases, there was abuse. Companies, particularly mining companies, would not declare dividends but set up management companies so some of the funds would have left the companies through management fees before the profit was shown. It was also about pricing transfers which the leaders had spoken about. The Committee needed to get closer to the pricing transfers to understand how some of the companies hid money in this way. NEF was looking for better results which would close the gap in the economy.

The Chairperson said that, in principle, they would not tolerate abuse of the BBBEE initiatives. Parliament was extremely powerful and had to use that power to transform the economy. One of the retailers had objected to appearing before the Committee but when reminded of the constitutional powers of Parliament, they had agreed to appear. She recognised that NEF was an important fund and had been successful in leveraging its capital. She would not like to see any way of impeding the sector. The Cabinet was committed to the empowerment of black business. The Committee Bill dealing with debt had to be resuscitated and the Committee had to get moving on the matter.

Meeting was adjourned.

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