IDC & NEF 2018/19 Annual Reports & 2019/20 Quarterly Performance Reports

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Trade, Industry and Competition

13 November 2019
Chairperson: Mr D Nkosi (ANC)
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Meeting Summary

Annual Reports 2018/2019

The Industrial Development Corporation (IDCS) and the National Empowerment Fund (NEF) briefed the Portfolio Committee on their 2018/19 Annual Reports and 2019/20 Quarter 1 and 2 performances.
 
The IDC had received an unqualified audit report, although it was in the process of the implementing of a new accounting method, the International Financial Reporting Standard 9 (IFRS).  Borrowings had been capped by the board at 60%, which it had considered more prudent than the 100% allowed in the legislation. Group revenue (normalised) increased by 2% to R17,9bn (2018: R17,6bn). The biggest drivers of the increase were higher interest income in the IDC, the effect of improved pricing strategies and higher dividend income from listed investments such as Kumba, BHP Billiton and PMC. Manufacturing, mining and other income reduced as Scaw had now been accounted for as an associate in 2019. The 2017 revenue had normalised for Grinding Media and Cast Products, which had been reported as discontinued products in that year.
 
The IDC rating was investment grade but it was linked to the sovereign rating, so if the sovereign rate declined, the cost of money for the Corporation would increase, although it was not anticipated that the supply of money would change. The performance summary showed that the Industrial Development Corporation had fallen short of various objectives. However, the investment contribution to the SA economy was still substantial. Over the past five years, the Corporation had disbursed R11 billion in support of industrial development. The funding approved in the previous financial year was expected to create and save 19 178 jobs.
 
The IDC expressed concern about the Small Enterprise Finance Agency, an agency wholly-owned by the Corporation. Its financial performance continued to be of concern with its declining revenues, high cost to income and impairment ratio The Corporation was investigating the problems and bringing in new executives. Foskor had shown improved performance but it the Industrial Development Corporation was looking closely into the very poor state of affairs in Foskor. The Scaw corporatisation process had been completed during the financial year, with Cast Products SA and Grinding Media SA divisions being carved out into separate legal entities.  Strategic equity partners had been introduced to provide the necessary technical and financial support.
 
Performance in Q2, 2019/20, although satisfactory, still reflected the strained economic environment. R 7.1 billion had been approved to date and was mainly spread over metals and mining and chemicals industrial activities. Just over 3 428 jobs would be created or saved at the back of that funding. Funding to youth had totalled R568 million, and funding to women stood at R1.8 billion.
 
Members noted that over the past four years R21.4 billion had been disbursed to Black Industrialists. What was the correlation between the investment and the economy as well as the unemployment rate? How was the Corporation leveraging the investment of R21.4 billion? How was it going to address investments in the other provinces rather than always investing in the wealthier provinces?
 
Members notes that other entities that the Corporation had invested in now needed assistance. Which entities were those others? What was being done about the write-off amount of R5.3 billion over two years? What was the Corporation‘s exposure to state-owned enterprises? Why had the Corporation given Matthew Phosa’s company R115 million to buy a company that went into liquidation? What exposure did the Corporation have to politically-exposed persons? Why there was no representation of disabled people who had received funding?
 
The National Empowerment Fund had obtained a clean audit for 15 years running. In 2018/19, the Fund had approved 61 deals worth R576 million and supported 3 713 job opportunities. The challenges included a lack of financial resources, rising unemployment and limited own capital. The government was not funding the National Empowerment Fund, which led to various risks and challenges as it might be forced to declare a moratorium on the funding of new transactions. The Fund proposed three subsidies over the current Medium-Term Expenditure Framework: R500 million from National Treasury through the dti, R500 million from the Industrial Development Corporation, and R500 million from the Public Investment Corporation or the Unemployment Insurance Fund.
 
First and Second Quarter 2019/20 performance highlights included the approval of 27 deals worth R295 million. R97 million had been disbursed and a total of 291 job opportunities had been supported.
 
Members asked whether it was worth saving a Fund in which the CEO earned more than R6 million in a year for a total of 3 700 jobs created. How did the board justify the bonus to the CEO of over R2 million when targets had declined every single year and there were write-offs of R139 million?  What measurements did the Fund put in place to ensure that those businesses it funded did not fall apart? What was the percentage of recoveries? Were the APM buses using local content? Who was verifying the local content? In terms of the partnership with Pick ‘n Pay in the townships, what impact did it have on SMMEs? Why was there such a discrepancy between approvals and disbursements? What support was offered to those whose loans had been approved?
 
Owing to lack of time and requests for detailed information, both entities were asked to submit written responses.
 

Meeting report

Opening remarks
The Chairperson welcomed everyone and requested that the agenda be adopted. There were no objections.
 
Minutes
The minutes of 8, 9, 15, 17, 22, and 30 October 2019 were confirmed as a true reflection of the meeting, without amendments and adopted by the Committee.
 
The minutes of 16 and 29 October 2019 were confirmed as a true reflection of the meeting, with amendments and adopted by the Committee. The date on the register was changed from 16 July to 16 October 2019. Mr Mbuyane was confirmed as absent on 29 October 2019.
 
The minutes of 5 and 6 November 2019 were confirmed as a true reflection of the meeting, with amendments and adopted by the Committee.
 
Discussion
Ms Y Yako (EFF) noted that there was no detail in the minutes. She requested that a detailed report be made available on request.
 
The Chairperson agreed that a detailed report would be made available. It was not automatically distributed. Not everything was distributed, although Members would be advised that documents were available.
 
Ms Yako said that the minutes did not capture the discussions in their essence.
 
Mr D Macpherson (DA) stated that the minutes did not, in even a vague way, reflect the detailed discussion. Members needed to know the nature of an engagement. To say that the Members engaged was inadequate. He had asked the National Lottery Commission for the Beneficiaries Report. That was not recorded in the minutes. He suggested that the minutes be revised to more detail.
 
The Chairperson stated that a record should reflect the discussion but the questions would be captured in the report. It should be accessible. The nature of the discussion should be captured in the minutes without presenting the questions and answers. Minutes must say that someone requested a specific document; that had to be reflected.
 
Mr Macpherson agreed with the Chairperson but the minutes had to more accurately reflect the nature of the discussion and include requests for documents made by Committee Members. If not, Members would have no reference regarding documents requested.
 
Mr S Mbuyane (ANC) agreed with the Chairperson. It indicated that there had to be a written response by the Commission.
 
The Chairperson stated that minutes had to be properly referenced.
 
Ms T Mantashe (ANC) supported Mr Mbuyane and the Chairperson.
 
Ms J Hermans (ANC) asked that all minutes be printed on both sides of the paper as a cost saving measure.
 
The Chairperson agreed. He would have the only single-sided copy of the minutes so that he could sign the minutes.
 
Briefing by Industrial Development Corporation (IDC)
Mr Tshokolo Nchocho CEO, IDC, introduced his team: CFO Nonkululeko Dlamini, the Divisional Executive for Strategy David Jarvis, Head of Corporate Strategy Nonto Hadebe and Western Cape Regional Manager Ganief Bardien.
 
He explained that the IDC was a lender and an investor in the real economy. The operating environment was particularly important to the IDC as the impact of conditions in the economy permeated across all industries and was felt throughout the IDC investment portfolio. Large exposures in iron ore and manganese were becoming a concern as there were major changes in China where iron ore would be reduced following the slowing of the market in China. SA had inflation and interest under control but the constraints in government was a concern as government was a large player in the industrial field.
 
The IDC rating was investment grade but it was linked to the sovereign rating and if the sovereign rate declined, it would have implications for the IDC as the cost of money would increase, although it was not anticipated that the supply of money would change.
 
The performance summary showed that the IDC had fallen short of various objectives. However, the investment contribution to the SA economy was still substantial. Over the five years, IDC had disbursed R11 billion in support of industrial development. The funding approved in the previous financial year was expected to create and save 19 178 jobs.
 
The CEO expressed concern about sefa, the IDC wholly-owned agency. It had disbursed R1.2 billion which had gone to priority rural areas, women-owned and black-owned enterprises. The company recorded good performance relating to development outcomes, such as the number of SMMEs supported (72 987 - slightly above the target) and jobs facilitated (at 88 632 – 19% above the target). Its financial performance continued to be of concern with declining revenues, high cost to income and impairment ratio. There had been concerns about the high cost of lending but changes were being made in sefa, including new executives.
 
Foskor had shown improved performance but it was still not at the desired levels. The board of IDC had appointed a sub-committee to look closely into the affairs of Foskor. Proposals were expected to improve both its financial and operational performance in the next financial year.
 
The Scaw corporatisation process had been completed during the financial year, with Cast Products SA and Grinding Media SA divisions being carved out into separate legal entities.  Strategic equity partners were introduced to provide the necessary technical and financial support.
 
Financial overview
Ms Dlamini presented the financial report. The IDC had received an unqualified audit report, although it was in the process of the implementing of a new accounting method, the International Financial Reporting Standard 9 (IFRS).  Borrowings had been capped by the board at 60%, which it had considered more prudent than the 100% allowed in the legislation. Group revenue (normalised) increased by 2% to R17,9bn (2018: R17,6bn). The biggest drivers of the increase were higher interest income in the IDC, the effect of improved pricing strategies and higher dividend income from listed investments such as Kumba, BHP Billiton and PMC. Manufacturing, mining and other income reduced as Scaw had now been accounted for as an associate in 2019. The 2017 revenue had normalised for Grinding Media and Cast Products, which had been reported as discontinued products in that year.
 
Disbursements into the economy resulted in the balance sheet growth despite subdued economic conditions. Disbursements were achieved through the three-pillar funding model of internally generated funds, exits from mature investments and borrowings from capital markets. IDC had maintained a strong liquidity position with the support of its partners. Borrowing capacity was within the approved thresholds which allowed IDC to continue with its fund raising programme. Operating costs of IDC were managed within inflation.
 
Performance in Quarter 2 2019/20
The CEO stated that the Corporation’s performance in Q2, 2019/20, although satisfactory, still reflected the strained economic environment. R 7.1 billion had been approved to date and was mainly spread over metals and mining and chemicals industrial activities. Just over 3 428 jobs would be created or saved at the back of IDC funding. Funding to youth totalled R568 million, and funding to women stood at R1.8 billion.
 
Discussion
Mr F Mulder (FF+) stated that, considering the conditions in the economy, everything would have an impact. He asked how many people were employed at the dti (IDC) and had the operational costs increased and, if increased, what measures would be instituted to get it under control.
 
Mr W Thring (ACDP) noted that, over the past four years, R21.4 billion was disbursed to Black Industrialists. What was the correlation between the investment and the upturn in the economy? How was the IDC leveraging the investment of R21.4 billion? What was the correlation to industry generally, the economy and employment? He had seen an article by an economist that showed the inverse correlation of Telkom to employment. When there was a decline in energy, there was a correlation with increased unemployment. What was the correlation with investment on Black Industrialists?
 
Mr Thring referred to the spatial and regional growth. There seemed to be investment in the main regions but other provinces were struggling with unemployment. How was the IDC going to address investments in the other provinces rather than always the wealthier provinces? He referred to the slide that showed a decrease in funding to women and youth for 2018/19. There was also a decrease in jobs saved/created in the empowerment categories in 2018/19: Black Industrials was minus 30 jobs, Women was minus 130 jobs, and minus 44 jobs were created for the Youth. Could the IDC explain that trend?  
 
He asked if there was there a forward success monitoring system? How did one ensure that sectors and companies in which the IDC was investing were being successful? That tied in with leveraging. How did the IDC ensure that there was the best leverage from the investments? It seemed that there had been challenges especially in Sefa that was struggling when it should be supporting SMMEs.  SMMEs were a key sector that was always growing and offering employment. Big businesses were downscaling and retrenching but SMMEs were always seeking to grow their businesses which meant creating more jobs. However, the IDC was struggling with investments, such as with the challenges on the board of Sefa. The IDC should not invest where there were such challenges.
 
He added that the CFO had indicated that other entities that the IDC had invested in now needed assistance. Which entities were those others? The write-off amount was R5.3 billion over two years. That was a significant amount. Much could be done with that amount as houses and hospitals could be built. He understood that risks had to be taken but one could not gloss over R5.3 billion. What was being done?
 
Mr Macpherson appreciated the important role of the IDC in industrial development which was why it was so important that it was done in a way that promoted development and was as scandal-free as possible. Foskor and Scaw were a waste of time, in his personal view. IDC would continue to put money in them but he did not believe that they would ever offer a substantial return. The discussion should be about limiting the substantial losses by either closing them down or finding buyers to take them in their entirety. Sefa was a tragedy because it had such an important role to play but its corporate governance was shambolic. He wondered what effort was being put into sefa’s operations. At what point would a noticeable change take place in sefa?
 
Mr Macpherson asked what IDC ‘s exposure was to state-owned enterprises, if any. He asked for a list of SOE’s with attached values. He noted that the impairment provisions had increased quite rapidly, although write-offs were at 5% to 6% which was largely comparable with other financial entities. In essence, it was money not available for disbursement in the system. He questioned the type of write-offs. He had written to the IDC about political-exposed persons who had received large amounts of money from the IDC for funding. The IDC had loaned Mathews Phosa R115 million in 2009 to buy shares in a JSE company that had gone into liquidation and, according to the answers supplied by the IDC, none of that money had ever been paid back and no action had been pursued against that company or any individuals. The interesting part was how the IDC had termed Mr Phosa’s involvement in the business as an indirect shareholder but he had a case to answer as to how the deal had gone sour. Why had the IDC given R115 million to buy a company that went into liquidation? It raised questions about due diligence done by the IDC. He requested a list of all outstanding loans that had been written-off over the last decade. What exposure did the IDC have to politically-exposed persons? The Minister agreed that the issue had to be investigated and he hoped the IDC did as well.
 
Ms Yako referred to the women-owned companies: what industries were they in, how many were there, who were they and what had the performance been over five years? What informed funding versus terms of job creation? Did the IDC fund on a needs base or did it fund to create jobs? She noted that some of the funding amounts did not correlate with the jobs created.
 
Ms Yako did not understand how the total assets could equal the total liabilities every year. Did the IDC make a profit or a loss? The CEO had spoken about ports. How much did the IDC contribute to the maritime space? How many jobs had been created in that space?
 
Ms Mantashe disagreed with Mr Macpherson that Foskor and Scaw should be closed. The ANC believed that transformation would thrive when those people had been lifted and given an opportunity to participate in the mainstream economy. She understood that Gauteng, Western Cape and Durban were economic nodes but that should not disadvantage the rural provinces. The Eastern Cape had no mines for industrialization but the Eastern Cape had a long coast line. The Hole in the Wall project was perfect for IDC investment. She asked for details of the forensic investigation into Foskor and the investigations into people who had done wrong.
 
Ms N Motaung (ANC) asked for an explanation of the difference between the approved funding and the disbursement and where it was allocated when the IDC closed its books. The IDC provincial offices did not touch rural areas. The communities did not understand what IDC offered. She had a concern with the conditions of the loans and the requirements standard. She had a feeling that the loans did not favour black people.
 
Mr Mbuyane asked for the cost of the losses. What about the integration of sefa and the National Empowerment Fund (NEF)? He had heard that R500 million had been approved to assist the NEF. When would it be disbursed? How did individuals apply for funding? Why did the IDC always liquidate?  Of the R7.1 billion, how much was loaned to previously disadvantaged “individuals”, since Mr Macpherson was contesting the use of “black”?
 
Mr Mbuyane asked what the staff complement was and how many black, youth and women as well as disabled were employed at the IDC? He was concerned about township and rural communities. The IDC concentrated on Gauteng, but what was happening about rural provinces?
 
Ms Moatshe asked why there was no representation of disabled people who had received funding.
 
The Chairperson informed the CEO that the Committee had found that it was helpful to follow up with feedback in writing so he and his team could answer but the Committee would also like written feedback, especially on details.
 
Response by IDC
The CEO agreed that the IDC would need to provide details in writing. He informed Mr Mbuyane that there were about 850 people in the organisation, although the structure allowed for 900 staff members. Operating costs, as the CFO had said, consisted mainly of the cost of employee as the IDC paid professionals to do the work, and paid administrative and security staff. The salary increase for 2019 was 5% for staff members and less for executives. The IDC tried to contain staff costs within inflation costs. Management accounts were reviewed on a monthly basis.
 
The CEO informed Mr Mulder that it was IDC not dti as he had erroneously referred to the organisation. The IDC did not have operating cost concerns but there were concerns about the credit costs where there had been losses. In considering the correlation between funding and the economy, he pointed out that the IDC had R150 billion in assets but the SA banks had R5 trillion in assets so it could not do it alone. An upliftment in SA would require government and the private sector spending. The IDC could not do it alone.
 
Mr Jarvis explained that the bulk of the investments went into start-ups and expansions so the focus there was on expanding the industrial economy. The IDC also focused was on small businesses so they looked at economy-wide benefits. Investment in mines was largely about downstream impacts. The IDC had a post-investment capacity. The IDC followed up with a monitoring process so that it ensured that promised jobs were created. Partners had to be B-BBEE rating of Level 4, although they sometimes started with a much lower BEE level and IDC supported and monitored the B-BBEE rating. Job performance looked only at direct newly created and not jobs sustained or even indirect jobs. IDC had a very conservative approach to counting jobs created.
 
Mr Jarvis added that if one looked at the proportion of jobs, there had been a decline from the previous year in the overall approvals and disbursements but the funding was consistent. There had been an improvement in funding of black-empowered companies which had improved year-on-year and between half to two-thirds of the funding went to black businesses, but there had been a rand-for-rand drop because of the state of the economy.
 
The CEO explained that the IDC used economic modelling for each sector. For example, in the tourism sector, for every R1 million invested XX was the job creation estimate and when funding dropped, job estimates dropped. He heard the point that the Committee had made about spatial equity.
 
Ms Yako asked if the IDC counted the number of jobs estimated or jobs created.
 
The CEO explained that the IDC looked at estimated jobs at the time of signing agreements and financing but the IDC followed up to ensure that job creation had happened. For example, when a new factory was built, the IDC would follow up on the building and when the factory went into operation, the IDC would go in and compare the number of jobs to those estimated at the time of making the decision. Job estimates could be used because they had the models. He emphasised that the IDC reconciled jobs estimated and jobs created every year.
 
Ms Yako asked for a written report on how job estimates were made and whether there was a report of jobs actually created.
 
The CEO agreed to provide the report as the IDC reconciled all job estimates with actual jobs created. Companies that had been funded had to file the number and details of jobs regularly.
 
He continued his comments regarding spatial equity and less-developed provinces. The IDC would need a special initiative to do that because currently the IDC followed the market as money had to follow the market, and the natural attraction was to the commercial provinces. However, each province had its own unique strengths. For example, the Free State was a largely agricultural province where the mining industry had disappeared. Investment in the Free State had to be in agriculture, agro-processing or the new Special Industrial Zones created by dti. The IDC would up its game by looking at industrial areas that had been created and agro-processing.
 
He added that the IDC had a system of forward monitoring. It had an investment team that went out to find opportunities, evaluated the transactions and made investments. Then there was the sizable post investment management team that on a day-to-day basis travelled to the funded, tracked performance, and tracked industry performance to assist the businesses to respond to the situation.  That team provided the IDC with full details of what was happening in each portfolio. Who was in distress? Who was having difficulties and why?
 
The CEO recognised that the R11 billion invested in the economy did not shift the dial but the IDC had to mobilise other grants. It supported government investments, e.g. in the textile industry, downstream steel sector, etc. The IDC needed to do better in originating opportunities and leveraging the private sector. The IDC was currently leveraging government programmes, but it needed to extend that approach to the private sector.
 
The CEO explained that Sefa fell under the Portfolio Committee of Small Business Development. He believed that there needed to be a little more detail regarding Sefa’s status and what was going on there. He did not know how parliamentary committees worked and whether there could be a joint committee meeting to get finer insights. That would be his recommendation.
 
Mr Mbuyane retorted that Sefa was in the report and therefore the Committee had a right to ask questions about Sefa. He did not have to be told to have extended meetings with other Committees. He needed the details in response to his questions.
 
The Chairperson told Mr Mbuyane that he understood what he was saying but it had only been a suggestion and he thanked the CEO for the suggestion.
 
The CEO addressed the issue of the companies that were in turn-around processes and the R5.3 billion write-offs. He asked to submit a supplementary document. The IDC board and the Minister agreed that that level of credit losses was heavy and they had to manage their creditors and investments better. The IDC was absolutely certain that the entities under Scaw were on a recovery trajectory. There were major concerns about Foskor and it was not yet on a safe recovery trajectory.
 
Ms Hermans noted that it was historic that losses took place. If there were measures in place, she required a written report with timelines so that the Committee could follow up and monitor the entity.
 
In response to the question on involvement with SOEs, the CEO explained that the IDC was basically a private sector financier. It had exposure to SOEs in that it had invested in Broadband Infraco but it had no ties to SOEs such as Transnet, Eskom or SAA. The closest the IDC came to Eskom was to finance the Independent Power Projects (IPPs) that supplied power to Eskom but there was no direct exposure to Eskom. IDC would itemize the SOEs for the Committee. He accepted the well-made observation around the levels of provisioning and the extent to which the IDC effected write-offs. Even the auditors of the IDC had advised that the IDC should relook that policy so that it did not under account for losses. The IDC made adequate provisions but did not write off transactions where the business had really, really gone under as much as it should.
 
Regarding the request for the names of politically exposed persons, the CEO explained that the IDC provided a full list of all enterprises where there were politically exposed people in the Annual Report, as required by law, but they could go back a couple of years and send the lists. He could easily provide details of women empowerment. The IDC did not have much involvement in the maritime industry but was currently looking at investing in a business that would recycle and re-process scrap metal from old sea vessels that had completed their sea life. But he took that as a challenge.
 
The CEO added that there was a team at the IDC that was working with the Department of Tourism on the Hole in the Wall project. The IDC had allocated R5 million for an assessment report. He would send an update report. He had a forensic report on Foskor as the IDC board had commissioned a forensic report. He would provide a report on the issue.
 
The Chairperson said that IDC could account for Sefa, Foskor and Scaw. The CEO should explain what he could on the issues but the Committee could speak to the Department of Trade and Industry.
 
The CEO explained the difference between approval and disbursement. Disbursement happened over a number of years and those figures were reported as the disbursements were made at the end of a year.
Some transactions were approved but, for a number of reasons, they were not signed off and consummated. Those approvals did not find their way into the disbursement figures. For example, two coal-fired power stations had been approved two years earlier but because of changes at the level of the banking sector, they had not gone ahead. The financial accounts only showed the actual disbursed amounts because that was where the financial transactions had happened.
 
He accepted the point that the provincial offices should extend the service profile to touch every part of the province. Regarding Black or historically disadvantaged people, 65% of the total loans had gone to black-owned companies over the past year. The IDC made loans but also equity investments where it shared the risk with the investor. Substantial amounts of money were lent to black entrepreneurs. The CEO could provide those details because he had done an analysis of the business in January when he had arrived at the Corporation. He also realized that the IDC had not done itself a favour by neglecting to highlight that point to the Committee.
 
The CFO was requested to reiterate what had driven the operating loss of R4.97 million.
 
The CFO responded firstly to the question about balancing assets and liabilities. She referred Members to slide 30 which was a summary of the financials and showed an asset base of R145 billion. In accounting, every debit had to equal a credit and the assets were the debit side and on the credit side was the funding of the assets. Although it appeared equal, it was split into two parts: one part was where one financed the assets through the owner’s money, which was the reserves of R95 billion or the equity. The remaining R39 billion was the money raised from the markets to fund the assets. Therefore the R145 billion on the asset side equalled the R145 billion on the liability side.
 
The CEO explained how the IDC was funded. In any given year, it got money from internally generated cash from maturing loans. Secondly, it sold a portion of matured assets from, e.g. R10 from internal assets and R2 from sales and it then borrowed R3 from the capital markets. That R15 was used to create assets by making loans, so money it had went out in loans.
 
The CFO said that in 2018 and again in 2019, the IDC would have had to raise money from its own investments for R2.3 billion. The operating loss line in 2019 excluded profits from selling assets. The loss represented the revenue from the dividend income, the interest income and other expenses but, because the IDC had to make higher provisions for some of its investments that might not be paid back, it had resulted in additional expenses being put through the financial statements. The new accounting standard required the IDC to make provision for the amount that it was likely to lose over the lifespan of the loan it had made. That had affected the profit and loss statement because it ate away some of the money that they had made. The loss related more to provisions made than an actual loss. In future, the IDC might be able to reverse some of those provisions but it was prudent to put such money aside so that if they did not perform, the balance sheet would not suffer. When one made a provision, it was not a real loss but putting money aside. The IDC had actually made a profit of R741 million when everything was taken into account. The IDC stripped its numbers to see the whole picture.
 
The Chairperson asked the CEO to indicate how many more responses he had.
 
The CEO replied that he needed one minute. He responded to the questions about criteria for funding saying that businesses were evaluated on the basis of the market, the management of the entrepreneurs, the technology, the state of the economy and the legislative framework. The IDC also had a risk management framework so the IDC did not lend beyond a maximum quantum of R1.7 billion but the board could decide to exceed that limit if the nature of the project justified it. Why liquidate? Sometimes businesses failed.  The IDC did a lot of restructuring work. The IDC invested, followed up by monitoring and support. But businesses sometimes failed. IDC then did a work-out and restructuring. Only if the business continued to fail, might it be necessary to liquidate.
 
The CEO informed the Committee that 57% of the IDC staff complement were Black women and 40%, or four out of ten, at executive level were women and there were about 40 women middle managers. He would provide details.
 
Regarding townships, the CEO said that the point had been made. The IDC was not specifically doing business with persons with a disability. 2% of the staff were in the disability category, but it was a take-away to look at disabled businesses.
 
The Chairperson stated that the parliamentary liaison officers and the secretariat would be following up on the outstanding questions.
 
Briefing by the National Empowerment Fund (NEF)
Ms Philisiwe Mthethwa, CEO, NEF, invited the Committee to select a province that it would like to visit to see the work of the organisation. She also presented the Committee with a basket of products made by companies that the NEF supported.
 
The CEO introduced her team: General Counsel Mr Mzi Dayimani, CFO and IT Manager Mr Lebogang Serithi, Senior Investment Associate Ms Olebogeng Marakalla, and Mr Motsepe from the Communications Division.
 
The CEO noted that the NEF Act referred to Black so she would use that term and not previously disadvantaged people. The NEF supported black-owned and managed enterprises because it was about black people who wanted to roll up their sleeves and run their own businesses.
 
The CEO presented milestones of the performance of the NEF in its life to date. The entity had obtained a clean audit for 15 years running. R6.8 billion had been dispersed over the years despite the fact that government had only ever funded the NEF with an initial R2.47 billion. No further monies had been disbursed to NEF by government. 25 industrial projects worth R13.2 billion with the potential to support over 55 000 jobs had been funded. Over R3.5 billion had been repaid by investees to date.  Actual cash to date at 30 September 2019 stood at R1.25 billion. R480 million in uncommitted cash was on hand as at 30 September 2019 and projected an uncommitted cash of R240 million at year end. In 2018/19, approvals had amounted to R9.15 billion, commitments were at R7.17 billion and disbursements had amounted to R5.58 billion.
 
In a transaction worth over R1 billion, the NEF Asonge Share Scheme had made available more than 12 million MTN shares to over 87 000 investors comprising black individuals and groups. 49% of investors were women. The NEF had reached approximately 87 632 people in villages and townships through 322 community seminars on how to save and invest, personal ļ¬nancial discipline, shares, dividends, bonds, the property and money markets. Since inception, the NEF had supported 99 736 job opportunities of which 68 482 were new jobs.
 
Achievements in 2018/19
-  Approved 61 deals worth R576 million against a target of 56 deals worth R471 million
- Total commitments of R513 million against a target of R387 million
- Total disbursements of R437 million against a target of R422 million
- Secured clean external audit opinions for 15 years running
- Supported 3 713 job opportunities (3 432 new) against a target of  2 597
- 32% disbursed to businesses that have black women ownership vs. target of 40%
- 27 strategic industrial projects worth R27 billion, with the potential of 85 000 jobs (3 600 created to date)
- Portfolio collections of R414 million.
 
Challenges and market failures:
-lack of financial resources
-high resignation rate
-rising unemployment
-limited own capital
-lack of accurate and reliable financial information
-poor quality of business plans
-lower bargaining power from dominant businesses
-inadequate access to affordable capital, and
-lack of access to local and international markets.
 
The CEO stated that government was not funding the NEF, which led to various risks and challenges as the NEF might be forced to declare a moratorium on the funding of new transactions. The NEF proposed three subsidies over the current Medium-Term Expenditure Framework: R500 million from National Treasury through the dti, R500 million from the IDC, and R500 million from the Public Investment Corporation or the Unemployment Insurance Fund.
 
Key Risks of not capitalising the NEF:
- A funding crisis for black entrepreneurs who had very few alternatives for funding.
- Placing a break on the entry of new black entrepreneurs into the economy and placing jobs on the line.
- Weakening of public trust in Government’s commitment to B-BBEE.
- The potential collapse and closure of a high-performing organisation.
- Undermining of commitment to economic transformation.
- Possibly emboldening the private sector’s disregard for the transformation imperative.
 
First and Second Quarter 2019/20
Performance highlights included:
27 deals worth R295 million had been approved against a target of R263 million. R97 million had been disbursed against a target of R172 million. A total of 291 job opportunities had been supported, of which 130 were new jobs. R14 million or 14% of year to date approvals had been made to provinces outside Gauteng.
The return on investment (before impairments) was at 9%. Collections were at 211.7% against a target of 80% while the impairment portfolio to book was at a ratio of 23%.
 
The NEF was supporting the SA Economic Stimulus and Recovery Plan with specific projects across all sectors.
 
The Chairperson stated that he could only give each Member two minutes as the room was booked and the Committee had overrun its time.
 
Discussion
Mr Macpherson said that since 2014, he had been a supporter of the NEF but the business case for the NEF as a standalone organisation was rapidly diminishing and the Committee had had extensive discussions regarding an amalgamation with the IDC. There seemed to be fewer and fewer outcomes each year, except an increase in salaries. If he looked at salaries on page 147 of the audited results, the NEF had a CEO who earned more than R6 million in a year for a total of 3 700 jobs created. How did the board justify the bonus of over R2 million when targets had declined every single year? The business case was disappearing and it seemed that the purpose of the NEF was to pay salaries to highly overpaid people. For the record, he objected to the gifts, probably couriered at great expense. He wondered whether it was appropriate for a Committee to receive gifts from an entity that it was overseeing. The DA would not be accepting the gifts because it was inappropriate on so many levels. The Committee needed to review the NEF and was taking so long to incorporate the NEF in the IDC.
 
Ms Yako was impressed by the model of black empowerment. She had heard that the NEF was mostly self-funded. The information had been received very late and it had been difficult to prepare. She saw write-offs of R139 million.  What measurements did NEF put in place to ensure that those businesses did not fall apart. What was the percentage of recoveries?
 
Mr Mbuyane said that the NEF spoke to the policy and mandate of changing the lives of the poor people outside there and the NEF had changed life out there. Were the APM buses using local content? Who was verifying the local content? In terms of the partnership with Pick ‘n Pay in the townships, what impact did it have on SMMEs?
 
Mr Kwankwa looked at the role of the Competition Commission where it tried to deal with restrictive market practices and, because SA had high concentration, one needed entities like the NEF and once the barriers to trade had been eliminated, institutions like the NEF were required. That was what would be missing if the NEC was not there. He was not opposed to the merger but it had to be done in a manner that did not dilute the mandate of the NEF. The challenge was that institutions like the NEF lent a pittance compared with the money ordinarily lent by the IDC. It was like the focus on SAA was such that one forgot that Mango was profitable and was doing very well and one never got the opportunity to focus on the strategic objectives of Mango.
 
He assured the NEF that it should not be afraid to refer to “black” whatever because race was still a proxy for disadvantage in SA. Who was previously disadvantaged? It was black people. There should be a focus on rural provinces because that was where disadvantage existed and yet they received very little of the funding.
The CEO highlighted a lack of access to foreign markets. How did one ensure that? Should there not be a discussion at strategic and policy level about how all the funded institutions could take advantage of the African Continental Free Trade Agreement. It was a pity that the presentation had lasted an hour and now Members had to sum it up in two minutes but he understood the Chairperson’s predicament. The last point, somewhat operational, was about the discrepancy between approvals and disbursements. Why was that so? Was it a lack of documents? What support was offered to those whose loans had been approved?
 
Ms Mantashe appreciated that work done by the NEF in supporting black people. Black people should not be ashamed of their black skin. They were not as exposed as those with white skins before the dawn of democracy so they were not ashamed of being black and they needed to be empowered. Mr Macpherson was jealous because his father was a businessman and black people wanted to get where the white business people were. The NEF had struggled to get funding but the Committee was pleased with the return of R3.5 billion. The Committee had a duty to facilitate funding for the NEF. Her friends on the left were opposed to B-BBEE but it was there to stay so they should just drink water and relax. The Cabinet had to decide what had to be done and the Committee had to give input.
 
Closing remarks
The Chairperson thanked Mr Kwankwa for his contribution. He said that the Committee had to adjourn as the room had been booked for another meeting and the Committee had run out of time. The parliamentary liaison officers and the Committee secretariat would liaise with the NEF regarding the responses.
 
He thanked everyone for their contribution in what was quite a sensitive matter.
 
The meeting was adjourned.

 

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