National Lotteries Commission + National Empowerment Fund Quarter 2 performance

Meeting report

National Lotteries Commission Quarter 2 performance
Prof Alfred Nevhutanda, Board Chairperson of the National Lotteries Commission said that NLC managed to get a clean audit in its Quarter 2 of the financial year. The NLC held a meeting in September 2017 to ensure regulatory compliance by all its members. The meeting was a result of the confusion between grant funding and the regulatory mandate of NLC. The NLC’s most important role was to regulate lotteries even though it sometimes disbursed funds. The NLC had held a National Consultative Indaba 2017 which resulted in six resolutions which included the enhancement of assessments of funding impact through providing beneficiaries with feedback after site visits; the extension of capacity building initiatives for beneficiaries; to improve understanding of compliance and governance requirements; explore legislative and policy alignment for the cooling off period and strengthen NLC funded infrastructure projects.

Further to that, NLC managed to conduct 39 stakeholder engagements across all provinces to ensure education and awareness. The NLC did not have any backlog on adjudication of applications. The full time Distributing Agency for both the Charities and Arts Sectors were integrated into the Grant Funding value chain with the help of the Department of Trade and Industry (DTI). The appointment of full-time Sports & Recreation Distributing Agency was pending. The NLC adjudicated over 15 000 applications for charity projects.

He said that NLC had been working hard to close all illegal lotteries that have been stealing money and paying nothing to NLC. There were illegal lotteries that connived with people to play certain balls and when they win, they do not pay anything to NLC or the people themselves. To ensure that illegal lotteries are clamped down, a Memorandum of Understanding was reached with the National Gambling Board (NGB). The MoU was reached because of the similarities between NLC and NGB. The NLC approved pro-active funding initiatives. Of these initiatives, 7 were charity projects, 3 for Arts, Culture & National Heritage and 2 for sports and recreation.

Ms Thabang Mampane, NLC Commissioner, said that NLC intended to develop a knowledge hub/website to facilitate connection among beneficiaries, and to enable sharing of services within the network. This target was successfully achieved by performing an audit and incorporating resolutions taken from the Indaba. In terms of disbursements of grants, 40% of the applications received were disbursed and the beneficiaries received the grants. More so, NLC intended to increase returns on investments of funds to ensure sustainability of the organisation and to maximise funding available. The target for this objective was 8%, which it managed to surpass. The NLC succeeded in reaching its targets to increase localised procurement of its goods and services for its provincial offices. Further, 71% of the reported and identified illegal lotteries were investigated and closed. However, there were still some matters that were pending. The NLC staff worked with the NGB to conduct the investigations of illegal lotteries. In this regard, a feasibility study was being conducted to regulate illegal lotteries. In terms of the Lotteries Act, NLC was required in considering grant applications to ensure that not less than 5% of the total amount at the disposal of the agency for grants, shall in any financial year of the board be allocated for distribution in respect of every province. Against this regulation and its target of 2%, NLC managed to over-achieve the objective.

The NLC was involved in three litigation matters. The Afrika Freedom Climbers took NLC to court because it was not happy with how its grant application had been handled. The matter was nevertheless finalised, and the applicant lost the case. Another litigation matter was brought by Thusanang Adventures. The National Lotteries Board had withdrawn the Thusanang Adventures project based on the findings of a forensic report commissioned by the Risk and Audit Division. The matter was pending in court and NLC was defending the matter. Additionally, a declaratory and interdict order was being sought by NLC against Lotto Star. The orders sought to interdict Lotto Star from offering bets of a fixed-odds nature on the outcome of lotteries. The matter was still to be allocated a trial date.

The NLC encounter 2 labour grievances. It also encountered 3 matters that were taken to the Commission for Conciliation, Mediation and Arbitration, 1 precautionary suspension and 1 labour court. The NLC’s employment workforce consisted of 50% female and 50% male at executive level. The overall gender ratio was 43% male and 57% female. The entire staff complement indicated 3.7% of people with disabilities.

Mr Phillemon Letwaba, NLC Chief Operating Officer, said that the primary mandate of NLC was the regulatory function. It was through this regulatory function that NLC received money which it also disburses through grants. The lottery regulations oblige NLC to inform the beneficiaries of the outcome of their applications within 30 days. Currently, NLC managed to achieve 70% of this mandate. The 7 578 applications were adjudicated and 32% of those were approved. The reason why the percentage of approved applications seemed small, was because NLC received non-complying applications that were not aligned to the objectives of the Commission.

The NLC had been working tirelessly to monitor aged projects and it hoped that the projects older than 5 years would be finalised within 2 years. On all the projects that NLC was funding, it continued to monitor and evaluate compliance at both national and provincial level. In this regard, 623 projects approved in the current financial year were monitored and evaluated through site visits. Through the funding of NLC, temporary and permanent jobs were created in all the different provinces except in Mpumalanga were only temporary jobs were created. The NLC was further involved in legacy projects like the construction of Early Childhood Development (ECD) infrastructure in all the provinces and old age homes in six rural provinces.

In terms of its financial position, NLC reported that it had an assets value of R1.8 billion which was significantly made up of cash. The NLC’s liabilities were mostly constituted of the short term and long-term grants which amounted to R2.2 billion. The NLC experienced challenges in raising revenue because of the challenges of combating illegal lotteries. Other than the main revenue from the regulatory function of NLC, it kept a minimum of R1.5 billion as reserve revenue to assist with any unforeseen events that could disturb its operations. This reserve revenue accrued interest on investment. R96 million was received from the investment of the reserve revenue. The three main sectors that were being funded by NLC were: the arts, culture and heritage which received funding of R217 million, the charity projects which received R493 million and the education sector that received R235 million. In total, NLC disbursed grants amounting to R996 million. However, it targeted to allocate R1.5 billion by the end of the financial year.

Prof Nevhutanda stated that last year media companies wrote letters to NLC requesting information on the projects being funded by NLC. The borehole project was one of the projects that attracted a lot of investigation. This was because the NLB had taken a decision to provide funding to provinces that were having droughts. The NLC took the decision after consulting the Department of Water Affairs. The media assumed that the decision was reckless. However, the NLB gave all the information pertaining to the location of the boreholes that had been drilled. The NLB invited the author of the story which alleged that NLC was reckless with its funds. It was discovered that the writer had been promised money by someone to write a story that would damage the reputation of NLC. The NLB briefed the Minister on the issue and appointed an independent investigator to investigate. Further, NLC built 25 classrooms at a Vuwani school after the protests in the area. The construction of the infrastructure at the Vuwani school cost R25 million which was cheaper than what the Department had anticipated.

Discussion
Mr A Williams (ANC) commended NLC for getting a clean audit. He was concerned about pro-active funding. He suggested that NLC should also consider giving funding to the National Sea Rescue Institute. The institution was the only organisation that rescued water-distressed people, in land and at sea. He emphasised that the government did not have any organisation to assist people who could drown except the National Sea Rescue Institute. Should that institution become bankrupt, the South African fishers could experience huge problems. He wanted to know why that institution had not received pro-active funding.

Ms P Mantashe (ANC) stated that she wanted to know how NLC ensures that the money for pro-active funding was not abused. The allocation of funds for projects to provinces was not balanced such as for ECD projects. She asked why NLC was giving more money and support to urban provinces that are developed and neglecting the poor provinces like Eastern Cape. Education was one of the tools to alleviate poverty and that the assistance offered by NLC was not enough to facilitate development in less developed provinces. She asked if NLC could do more to assist all underdeveloped provinces. She asked if the people of Eastern Cape know how to access NLC. She wanted to know what permanent-temp meant which had been reflected on the NLC workforce.

Mr D Macpherson (DA) pointed that clean audits could hide the concerns within an entity even though the clean audit was important. He informed the members that his office continually received concerns from people whose applications had not been adjudicated for a long time. Some of the people alleged that they had submitted their applications and had not received any feedback for two years. Last year, the NLC had over 6000 applications that had not been adjudicated. While he appreciated that there was no backlog within NLC, he believed that most of the applications had been rejected without being properly reviewed. He was puzzled by how NLC had spent R800 million over 10 years which had gone to only one body which was South African Sports Confederation and Olympic Committee (SASCOC). There were other sports confederations in rural sports that were not receiving funding. He was worried that 8% of NLC disbursements went to one sports confederation while others were neglected. He said that the article on the NLC which appeared in the Sunday Times was extremely concerning. In 2015 when the regulations were drafted, he raised the same possibilities of NLB being abused by opportunistic lotto entrepreneurs. However, NLC needed to engage with applicants to ensure that the adjudication process was fair. He was of the view that the timeframe for adjudicating applications was insufficient. Additionally, he wanted to know how the backlog of applications was dealt with. He asked what percentage of applicants was told to reapply? He asked for NLC’s views on SASCOC going forward. Lastly, when should the Committee expect the report on the investigation taking place?

Mr S Mbuyane (ANC) congratulated NLC for obtaining a clean audit. He asked how the localised procurement of goods and services was measured and if it also contributed to local manufacturing. NLC reported that it achieved 72% of its target to ensure effective communication to all applicants. He wanted to understand the reason NLC could not achieve 100%. Additionally, NLC was supposed to reflect their statistics for ticket sales and show whether there was decline or increase. Have you not received any issues of corruption by the beneficiaries who receive grants?

Ms S Van Schalkwyk (ANC) was concerned no permanent jobs were created in Mpumalanga unlike all the other provinces. Similarly, Mpumalanga and North West had the fewest temporary jobs and she asked NLC what was happening in those provinces. NLC had to explain its staff complement clearly outlining how many permanent and temporary staff members it had. She also wanted to know its vacancy rate. Lastly, NLC had to indicate how big the illegal lotteries business was in terms of numbers and not percentages.

Mr J Esterhuizen (IFP) stated that illegal lotteries were worrying because it cost the country millions of taxes in revenue. He was concerned about the number of provincial impact assessment visits which amounted to 2000 site visits.

Mr G Cachalia (DA) said that in a press statement last year, NLC had stated that its main object was to protect the vulnerable. In view of this, he wanted to know of any review by NLC to support the Society for the Prevention of Cruelty to Animal (SPCA) instead of giving R800 million to SASCOC

Ms Van Schalkwyk said that she needed to understand the proportion of the beneficiaries who were being visited for purposes of impact assessment visits.

Prof Nevhutanda thanked Mr Macpherson for raising the question of funding SASCOC projects. There was no regulation that mandated NLC to give SASCOC more money. However, SASCOC was a distributing agent of NLC and it seemed to him that SASCOC thought that because of its registration as a non-profit organisation (NPO), it could qualify for funding like other NPOs. The NLC and SASCOC had disagreements on this. The NLC had held a meeting with the SASCOC President and the Minister of Sports where NLC informed the Minister of Sports that SASCOC should be funded by the Department of Sport. The R800 million was true because NLC was still funding all projects. However, last year NLC stopped funding SASCOC.

The Chairperson asked the Prof Nevhutanda to submit a written response because the issue was serious

Prof Nevhutanda said that it had set the record straight and stopped funding SASCOC. This meant that SASCOC would qualify for funding like all the other bodies without giving it any special preference. He replied to Ms Van Schalkwyk emphasising that there were some projects in Eastern Cape which NLC had funded. For instance, NLC was building a boxing centre in Eastern Cape. It had also spent R32 million in constructing a sports centre in Eastern Cape as well a studio at the University of Fort Hare. The NLC was very critical on its pro-active funding to ensure that the money would be used for the intended project. On the investigation, NLC had given the independent investigator one month to finalise the investigation. In response to Mr Williams question of pro-active funding, he pointed that the National Sea Rescue Institute (NSRI) received funding of more than R100 million from NLC. The NLC bought boats for the NSRI and visited them to assess how they were protecting and assisting vulnerable people.

The Chairperson asked NLC to submit a written response on its funding of the NSRI

Prof Nevhutanda stated that NLC was totally against corruption and it was open for people to report any corruption cases.

Ms Thabang Mamphane replied the original report which NLC had sent to the Committee reflected all the equity and the gender and racial balance within the NLC workforce.

Mr Letwaba replied that pro-active funding was not a process where beneficiaries could apply and get funded. However, it was funding provided by NLC after conducting independent research to capacitate communities so that they could implement important projects. The legislation mandated NLC to proactively conduct research by going into a community to assist. For instance, the water crisis was one of the issues where NLC intervened after seeing the need. That was how the borehole project started in 2015. Therefore, the issue of abuse is limited since it was not the beneficiaries who apply for funding. Moreover, NLC would monitor and evaluate implementation of the funded projects.

He stated that NLC also tried to intervene to ensure skills distribution in provinces. This was because in the last three years, some provinces were benefiting more from NLC while others were left behind. To address the disparity, the percentages of skills distribution were starting to normalise in all provinces However, it was not surprising that the Gauteng and some bigger provinces had larger percentages. It was because of their bigger population, number of informal settlements and migration into the bigger provinces. The NLC was continually ensuring that it reached the minimum 5% as prescribed by the legislation. He admitted that NLC had over 6 000 applications as submitted by Mr Macpherson. Nevertheless, to address the backlog, NLC had adjudicated over all the applications.

The Chairperson asked members to raise follow-up questions. However, she pointed that NLC would respond in writing by next week. She indicated that there were improvements in grant allocations.

Mr Macpherson wanted to know the exact percentage of the 6 000 backlog which was approved. He asked whether a music festival which would have qualified for funding on an application basis would also qualify for pro-active funding. If so, would they qualify in violation of the cooling-off period? He said that there was an Eastern Cape music festival which had qualified for funding after their application and through pro-active funding within the cooling-off period. He wanted an explanation as to how that happened and why NLC approved it.

Ms Mantashe said it was worrying that NLC was taking more money to Gauteng because of its size and population and that it had many informal settlements. All provinces were experiencing informal settlements and would appreciate NLC’s written response on this.

Mr Mbuyane asked what society lotteries are and the role played by NLC in regulating those lotteries

The Chairperson thanked NLC for their presentation and stressed that the Committee would appreciate a full report to all the concerns raised by the members

National Empowerment Fund (NEF) Quarter 2 performance
Ms Philisiwe Mthethwa, NEF Chief Executive Officer  said that the NEF was the only Fund in South Africa which seeks to empower black entrepreneurs by providing financial and non-financial support as well as encourage a culture of savings and investment. The support offered by the NEF included business planning, entrepreneurial training, mentorships, turnaround workout, public share offers, investor education and BEE repository. She stated that 87 000 beneficiaries had benefited from the NEF retail offers. She appealed to the Committee and DTI to negotiate on behalf of NEF so that black owned enterprises could get preference for public share acquisition in some state-owned companies whenever they offered their shares to the public.

The NEF did not only assist the black owned companies in order to remain small but to eventually play a bigger role in South Africa so that they could be listed on the Johannesburg Stock Exchange. Due to this reason, the NEF created different funds to cater for all black businesses. These included a fund for women owned small and medium-sized enterprises (SMEs), the Rural and Community Development Fund, Strategic Projects Fund, iMbewu Fund and uMnotho Fund.

The assessment impact of empowerment dividend was not only driven by financial returns but by other factors like job creation, geographic spread and black women empowerment. The NEF endeavoured to respond to all the challenges or market failures that confronted black entrepreneurs. Some of the solutions provided were funding, development tools, collaboration with government agencies, pre and post investment support, wholesale franchisor facilities and linkages with off-takes. The NEF managed to enter into partnerships with private companies like BP, Shell, Nandos and Nissan to ensure sustainable funding. Nissan provided 20 vehicles to some SMEs. This lowered the financial burden for the black businesses that need transport for their operations.

Since the inception of NEF to date, it had approved 904 transactions worth more than R9 billion and approximately R6 billion had gone into the economy of the country. The NEF also managed to secure clean audits for the past 12 years including the period under review. In terms of job opportunities, NEF supported 93 052 jobs across South Africa of which 64 727 were new jobs that were created. The NEF also supported 26 strategic and industrial projects worth R28.6 million and these projects were at different stages. The NEF’s ability to collect cash continued to grow. Since the inception, it managed to collect over R2.5 billion cumulatively from loans disbursed to black owned and managed businesses across all sectors. NEF recycled the funds that it received from government through investments. The actual cash which the NEF had as of September 2017 was R1.3 billion and R64 million uncommitted cash at hand. However, to discharge the 2018/19 discharge, the NEF stated that it would need R540 million.

The NEF reported that it was involved in the recapitalisation Kopano Project which seeks to combine NEF’s business with the Industrial Development Corporation (IDC). Implementation of the project was still underway and outstanding conditions were pending for it to be finalised. The partnership was approved in March 2017 but had not received Cabinet endorsement of the merger. The IDC Board was reluctant to approve the combination of the two entities until there was Cabinet endorsement and pledging of NEF’s MTN share. On 14 February 2017, the respective Minsters of both entities signed a Memorandum of Understanding (MoU) for the incorporation of NEF as an IDC subsidiary. A Task Team was formed consisting of both entities and the DTI and National Treasury. The NEF and IDC had prepared a Transitional Arrangements document to govern the relationship of the parties during the implementation phase and two structures to oversee the process. In this regard, the IDC approved a R500 million bridging facility for the NEF. The NEF was nonetheless reluctant to pledge its MTN shares to the IDC. As such, the NEF requested the Ministers of both entities to intervene and convince IDC to remove that requirement. The merger of the two needed to be approved by the Competition Commission and Tribunal and the two entities were working to submit their filing papers together with a R350 000 fee. Additionally, the NEF concluded a MoU with the Department of Rural Development and Land Reform (DRDLR) to partner in implementing the SRR programme which would extend farm leases to new black farmers. Since the partnership began, the NEF managed to engage many farmers and many of the farming activities were already taking place.

Of all the disbursed funds, 24% benefited black women in the economy. Since the NEF aimed to maximise empowerment dividend, 34% of the disbursement target was invested in Northern Cape, Free State, Limpopo, Mpumalanga, Eastern Cape and North West. To encourage and promote savings, investment and meaningful economic participation by black people, the NEF held 19 training sessions across the country and three entrepreneurs managed to complete business incubation.

Due to time constraints she could not present all the projects and work that the NEF was involved. However, she indicated that the NEF was involved in the construction and energy sector as well as ocean economy.

Discussion
Mr Macpherson was interested in the NEF’s view on the decision taken by the DTI to allow the automobile manufacturing industry not to comply with the BEE requirements. He thought the decision of the Department would inevitably impede the work of NEF and what it was trying to create by empowering black people. He said that the decision was detrimental since it could divert opportunities for transformation in the existing motor industry. He thought the impairment level of the NEF financial books was worrying. He was interested in knowing the percentage cost structure versus the income of the NEF. The recapitalisation Kopano Project was started four years ago, and it was worrying that it had not been finalised since the merger was proposed. He asked if there was an agreed date as to when the recapitalisation would come into existence.

Mr Williams was of the view that radical economic transformation was not limited to race but should be extended to the location of the people. He pointed out that 73% of the disbursements were going to KZN, Western Cape and Gauteng. The NEF was supposed to support all the rural provinces. He wanted to know how the country was supposed to deal with inequalities created by the Apartheid regime when the NEF was also perpetrating it by its disbursements that were not distributed fairly. He strongly cautioned the NEF and stressed that he did not want to see the same happening next year since it had happened for many years.

Mr Esterhuizen pointed that the NEF presentation did not indicate any losses of money through debts that were written off and he thought the information was incomplete. He did not believe that they could achieve 100% collection rate. The interest rates were not indicated in the presentation.

Mr Mbuyane asked the NEF to stipulate whether there were any black industrial projects. He asked if the companies that the NEF had supported after the DRDLR partnership were managed and run by black people. He suggested that the NEF’s mandate had to be reviewed since many poor black people were not benefiting from the work of the NEF.

Ms Mantashe said that she was extremely disturbed by the fact that the funding extended to rich provinces was still higher. More so, she could not reconcile the fact that the NEF mandate was to assist emerging black owners yet it was supporting some white owned companies.

The Chairperson expressed her concern about the recapitalisation. She appreciated the work that had been done to implement the merger and pointed that it the Committee would appreciate if the filing fee could be waived.

Ms Philisiwe Mthethwa replied to Mr William’s question emphasising that the NEF followed a demand driven model. This meant that people would present their projects to the NEF. The NEF would then assist them to conceptualise them so that they become commercially viable. However, in some provinces, there were government departments that drive the projects and design them for black owned companies. Therefore, the provinces actively create the opportunities for broad based black empowerment, and when the company has been assisted by the provincial government, it would approach the NEF for funding. The private partnership projects seemed to be concentrated in rich or developed provinces because the NEF partners like BP and Shell identify the provinces as having more traffic which would result in more fuel being bought. She suggested that the Committee had to engage the provincial governments so that they assist their people to come up with commercially viable projects. She indicated that it was difficult for the NEF to operate alone without an initiative from people or their respective provincial governments. The NEF had limited labour capacity and she appealed to Members to engage provincial governments. Some provinces like Western Cape provincial government had also allocated a dedicated fund to empower black owned companies. This would lessen the NEF’s burden and it may allocate the funds in equity grants. Furthermore, the investments in KZN were working well because the provincial government officials were fully involved in the process of empowering black owned enterprises. The NEF also had an engagement with the Eastern Cape government to allow them to receive certain construction services from NEF funded companies. However, the Eastern Cape government was not willing to pay the black owned enterprises in the construction sector.

Ms Mantashe asked her to specify the provincial governments that were refusing to pay the SMEs.

The Chairperson cautioned members to avoid entering a dialogue.

Ms Mthethwa pointed that the NEF was creating industrial capacity for black owned companies. In addition to creating industrial capacity, the NEF wished that black owned companies could be involved in provision of services in manufacturing, tourism, petroleum industry. She replied to Ms Mantashe indicating that the NEF did not support any white owned companies. However, it supported partnerships of white and black companies for black companies to acquire shares in the white owned companies. The companies that had been indicated in the presentation were examples of partnerships between white and black owned companies.

She replied to Mr Mbuyane’s question emphasising that all the companies funded by the NEF were run and managed by blacks. If a company did not have a black management, it would not qualify for NEF funding. She reiterated that for the NEF to fund black owned companies and projects, black people themselves had to be innovative and come up with ideas. The NEF would not know how to assist the people if they are reluctant to start businesses or conceptualize ideas for projects.

In reply to Mr Esterhuizen’s question on collection ratio, she said that the collection ratio referred to the active portfolio of investments. When the NEF invests money, it may have different portfolios. She stated that there were eight sectors within the automotive industry plus the introduction of the bicycle sector. The DTI was advised that it would not be ideal for the OEM to sell equity to black people. This was because the automotive companies had threatened to disinvest if they were required to comply with the BEE requirements. Due to this reason, the DTI saw it fit not to subject the automotive industry to the BEE requirements. However, the NEF was assisting black owned companies who were involved in the manufacturing industry of some automotive parts like convertors which they supplied to motor vehicle manufacturers.

The Chairperson asked members to raise follow up questions which the NEF would respond to in writing.

Mr Williams was concerned why annual disbursements to the rural provinces had decreased. Within the DTI, it seemed development was taking place only in rich and urban provinces like Gauteng, KZN and Western Cape and wanted to know why all the black industrialists were situated in those provinces.

Ms Mantashe asked how NEF assisted SMEs that may not have security for loans when they apply for funding.

The Chairperson asked Ms Mthethwa to look into the black industrialisation projects and the importance of development finance institutions. She asked if NEF funded municipal projects such as renewable energy. She also wanted to know if the NEF was involved in the protection of the rights of workers in farms or mines. The Committee was interested in understanding the geographic spread of the NEF. The issue of recapitalisation had been going on for three years and that was why Committee was concerned about its progress. She said it was critical to look at the recapitalisation project since it had prolonged. Moreover, the NEF must respond in writing to all the questions raised by Members. However, the NEF could arrange to have another meeting with the Committee where all the issues raised would be discussed. She would appreciate it if the DTI and Department of Economic Development would be present in that meeting. In conclusion, she thanked the NEF for its presentation.

The Chairperson expressed her discomfort with Members who did not attend meetings due to attending to party business without a further explanation. She indicated that the matter had been addressed with the Chief Whip of the EFF, IFP and ANC to ensure that members do not absent themselves unnecessarily. The Committee should know whether the members absent are on party business within their provinces, constituencies or regions.

The meeting was adjourned.