National Empowerment Fund (NEF) 2018/19 Annual Report

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Meeting Summary

Annual Reports 2018/2019

The NEF traces its mandate through the genesis of the BEE strategy that was created by the Department of Trade and Industry (DTI) in 2003. The NEF is mandated exclusively to grow black enterprise in South Africa; they provide capital ranging from R250 000 to R75 million but if the capital amount needed is more, the NEF will co-fund this business together with local and international partners.

Guiding principles of the NEF include job creation so that with every investment made the NEF looks at the prospects for job creation, the empowerment of black women in urban and rural settings, and endorsement of black owned enterprise.

In terms of re-capitalization, the NEF was originally given R2.4 billion. Government had committed to capitalize the NEF to the point of R10 billion but due to fiscal constraints and competing priorities, this was not possible. However, due to the strength of their non-financial support, and diligence when it comes to returns and investments, the NEF has been able to continue to provide financial support.

The consequences of not fully funding the NEF include a potential crisis for black entrepreneurs as the role the NEF plays in funding black enterprise and the leverage they provide is critical for black entrepreneurs, and many black owned businesses would not be in operation if not for the NEF.

The other risks that will come with the NEF not being fully capitalized are public perceptions about government commitments to BEE as the NEF has the sole and exclusive mandate to provide financial support to black business. This also puts into question the commitment to transformation, and potential strained relationships with private sector partners who may question NEF's ability to sufficiently do its part when it comes to financing.

Members asked  about the NEF's impact on job creation as unemployment keeps on growing and the NEF has raised no concerns about job creation; about the lack of coordination to ensure that certain businesses are not funded twice; how many rural black women and youth have been assisted; which villages the NEF plans to visit; if the NEF has offices in rural municipalities; how many businesses are still up and running; how many people these businesses have employed; how many of these entrepreneurs have failed and how the NEF assists these entrepreneurs if they fail in their business ventures.

Meeting report

National Empowerment Fund (NEF) 2018/19 Annual Report
Ms Philisiwe Mthethwa, NEF CEO, said the NEF traces its mandate through the genesis of the BEE strategy that was created by the Department of Trade and Industry (DTI) in 2003. The successful implementation of the BEE strategy will be evaluated against the following policy objectives:
• A substantial increase in the number of black people who own and control existing and new enterprises,
• A substantial increase in the number of black people who own and control existing and new enterprises in priority sectors of the economy that government has identified in its microeconomic reform strategy,
• A significant increase in the number of new black enterprises, black-empowered enterprises and black-engendered enterprises
• A significant increase in number of black people in executive and senior management of enterprises,
• An increasing proportion of the ownership and management of economic activities vested in community and broad-based enterprises and co-operatives,
• Increased ownership of land and other productive assets, improved access to infrastructure, increased acquisition of skills, and increased participation in productive economic activities in under-developed areas,
• Accelerated and shared economic growth,
• Increased income levels of black persons and a reduction of income inequalities between race groups.

The NEF is mandated exclusively to grow black enterprise in South Africa; they provide capital ranging from R250 000 to R75 million but if the capital amounts needed are more, the NEF will co-fund this business together with local and international partners.

Some of the guiding principles of the NEF include job creation, in every investment made the NEF looks at the prospects of job creation, the empowerment of black women in urban and rural settings, and endorsement of black owned enterprise.

The NEF has employed CAs, individuals with masters degrees and engineers. 61% of these employees are female, since female empowerment is one of the guiding principles of the NEF. The NEF has approved more than 1000 transactions, up to the value of around R10 billion around the country, the funding of which comes from raising money creatively from their other partners in the private sector. The funding is not only limited to SMEs, the NEF is interested in going through the development of companies with them so that they can become global influencers within their sectors.

At the core of the NEF mandate is the removal of challenges and obstacles faced by black entrepreneurs. These, amongst others, include market failures because it talks to the lack of access to affordable finance by black entrepreneurs as opposed to white entrepreneurs, lack of access to important information, local and international markets and low bargaining power.

The NEF provides a number of products that are in the form of non-financial support. Their Pre-Investment Unit is the first entry point to the NEF. Potential clients of the NEF do not need an appointment. They can walk in at any point and they will be assisted; nor do they need a business plan because the NEF uses a business plan tool which takes the entrepreneur through the steps of creating a business plan.

The Socio-Economic Development Unit provides corporate opportunities to rural areas, and helps them conceptualize their ideas by linking them up with larger corporate entities in mentor-mentee relationships. The NEF provides support and assesses each business they fund to see the gaps needing to be filled, and they provide them with free mentorship by way of a panel of retired businesspeople. This is because the entrepreneurs which are funded by the NEF do not always have all the necessary skills needed to optimize their business. Therefore the NEF provides support to ensure continuity and also legal compliance. The Turnaround and Restructuring Unit provides support to distressed transactions, providing turnaround conventions to businesses that may be experiencing difficulties.

As a national development finance institution (DFI) the NEF is committed to ensuring that its products and services reach the entire nation. Since the launch of the NEF Asonge Share Scheme in July 2007 the NEF has implemented various measures and interventions to strive towards an even, representative and equitable distribution of its services across the country.

As a result, the NEF’s invested presence in Gauteng has come down from above 60% of total disbursed funds in 2006, to 50% by September 2014 and 46% in September 2019. This is primarily due to NEF’s intention to increase funding in the other eight provinces because they are integral to South Africa's developmental objectives, comprising 74.2% of the population.

The NEF has a regional office presence in all provinces. This nation-wide presence ensures that the NEF reaches every area of the country including the remotest rural areas, where the poorest of the poor mostly reside. The NEF always takes part in national, provincial and local government road shows, as well as various other stakeholder events, to take its message to the people. It is as a result of this that the NEF has successfully funded business ventures through its Rural and Community Development Fund, whose objective is to unlock value in rural and township communities.

In terms of re-capitalization, the NEF was originally given R2.4 billion, Government had committed to capitalize the NEF to the point of R10 billion but due to fiscal constraints and competing priorities, this was not possible. However, due to the strength of their non-financial support, and diligence when it comes to returns and investments, the NEF has been able to continue to provide financial support.

The consequences of not funding the NEF fully include a potential crisis for black entrepreneurs. The role that the NEF plays in funding black enterprise and the leverage they provide is critical for black entrepreneurs, and many black owned businesses would not be in operation if not for the NEF.

The other risks that will come with the NEF not being fully capitalized are public perceptions about government commitments to BEE because the NEF has the sole and exclusive mandate to provide financial support to black business. This also puts into question the commitment to transformation, and potential strained relationships with private sector partners who may question the NEF's ability to sufficiently do its part when it comes to financing.

The NEF was able to approve R1.3 billion in one financial year when it was at its peak, and because of this they are able to comfortably provide financial support. However, after discussion with their partners, they do need more funding to allow the NEF to contribute to the promotion of black enterprise more efficiently and to a larger extent.

Discussion
The Chairperson said that they met with the DTI in October and they raised NEF recapitalization and they were assured that the CEO has been part of the solution. This is a matter that the Committee will keep on addressing.

Mr J Londt (DA, Western Cape) said that he is concerned with the portraying of a rosy picture but the unemployment rates keep on growing. NEF has raised no concerns about job creation. The numbers do not seem to speak to one another. He is concerned that there is no coordinated approach to ensure that certain entities are not funded twice. Nothing prevents the NEF to adopt a more streamlined approach to ensure that the money goes to people who actually need it.

Speaking to the Turnaround and Restructuring Unit, Mr Londt asked the failure rate of supported businesses, the success rate of turnaround efforts. It is concerning that entrepreneurs do not need to make appointments to see the NEF, as it does not sound efficient and structured.

Ms B Mathevula (EFF, Limpopo) asked how many rural black women and youth have been assisted. She asked which villages the NEF plans on visiting in Limpopo, as she would like to join the visit. She asked if the NEF has any offices in rural municipalities, and if they do not, if they had plans to establish these offices so that people have access to them.

Ms H Boshoff (DA, Mpumalanga) asked how many businesses are still up and running, how many people they have employed and how many of these entrepreneurs have failed. Ms Boshoff asked what the NEF does, aside from the seminar, to assist these entrepreneurs if they fail in their business ventures.

Referring to slide 15, she asked why R3.9 billion was not disbursed, and where the money is now.

Ms Boshoff asked about the returns coming from the Graskop Gorge project. There is so much more potential at the gorge, and made recommendations for the walking trails to be extended, and for the big swing to be marketed more. The restaurant at the gorge should remain open after 5pm to make more business since it is a tourist destination.

Referring to slide 46, NEF speaks about an unfinished project even though money is being spent on it. Ms Boshoff asked what the legal term for this is.

Mr E Landsman (ANC, North West) congratulated the NEF on the work they are doing, their audit report and the improvements they have made in terms of employing young, black qualified professionals. As South Africa is the second worst country, after Namibia, in terms of inequality, the NEF needs to expand its scope and improve job creation. Although the NEF is not getting enough funds, they need to continue to look at ways to improve.

Mr M Mmoiemang (ANC, Northern Cape) expressed his appreciation for the work that NEF has done. He is most concerned about the two conditions that were not met, and that the commitments made by government have not been met. He asked what could be done by the Committee to assist with this.

Mr Mmoiemang referred to slide 31 on the provincial spread of the NEF and raised concern about the concentration in Gauteng. He asked why the NEF is not as well spread in the more rural areas.

Responses
Ms Mthethwa replied that the issues raised are ones which the NEF has been grappling with for a long time. The NEF does small investments because they want to focus on taking SMEs and moving them towards medium sized businesses, but they are limited because businesses can only grow so much. Even if the investments made by the NEF are small, it is still making a contribution to decreasing the unemployment rate, be it however small. The NEF has been lucky in that in some projects, there have been up to 16 000 indirect jobs and 200 direct jobs created.

Ms Mthethwa replied the NEF is defined as being easily accessible and that the culture they try to create is one of encouragement, and that is why they do not necessarily require any appointments, in order to avoid a rigid structure. This approach is also justified when one considers the fact that many potential entrepreneurs lack the full skills set they need, and they need help and guidance. The culture that the NEF tries to create gives those black entrepreneurs, who have these limitations, hope and assurance that the NEF will help them.

Ms Hlengiwe Makhathini, NEF Divisional Executive: Venture Capital and Corporate Finance, said that in general, the NEF faces challenges with businesses that have construction contracts. They have tried different models to get their money repaid. Some challenges come from entrepreneurs who change their bank details, so they do not pay, but most of the challenges stem from very late payments.

The Turnaround and Restructuring Unit is there because the NEF knows that sometimes businesses fall into difficulties, and this unit deals with these strained transactions. When the NEF is faced with one of these transactions they first assess if it is possible to turn the business around and they come up with a turnaround plan. The NEF pays a turnaround expert to actually help the business as it is often the case that these businesses cannot afford to use these experts themselves. She noted that these turnarounds take time, and it is not something that can be done in six months. There have been businesses that the NEF has helped that have paid the money back in full, and they have become profitable and self-sustainable. There are of course some businesses where turnaround strategies are not successful, but in these instances, the NEF is comfortable that it has tried everything to help this business, but it just did not work out.

The NEF would like to have a presence in rural municipalities but settings up offices are extremely difficult due to the lack of human resources. However, should the NEF recapitalization take place successfully, this would be possible. Currently, although there are not offices in the rural municipalities, the NEF does monitor progress and continues to provide support by way of mentorship relationships as previously mentioned.

The Graskop Gorge is something that the NEF is very excited about. They have partnered with the Department of Tourism who has donated funds towards this project. Currently they are constructing floating bridges to the big swing, and they are also planning to extend the walkways and keep the restaurant open. The medium to long term plan is to establish a hotel there as well, that will be linked to the Gorge.

The NEF has achieved a lot with very few resources and is committed to undoing inequality; however, the strange thing about the NEF situation is that the private sector sees a lot of value in the NEF. It has been difficult to proceed and decide between the relationship with the private sector, and a business combination with the support of Government. The NEF does not have all of the requisite capital, so they have to wait for the provinces to approach them and say that they have set aside funds which will allow the NEF to work with the province and make investments. This speaks to the concern about why the NEF has a stronger presence in certain provinces. However, the NEF has come a long way in working with more provinces, even though this may be difficult. The NEF has not received any funding over the last ten years. If you look at the business model of the NEF, it operates like a bank. You must have money to invest in new loans, advances and equity instruments so you can deploy those funds into the economy which are supposed to generate income for you. So if the NEF lowers their disbursement levels, it will be lowering its income as well.

The Chairperson suggested that if there are further questions, Members should pose them and then the NEF can forward their responses in writing.

Ms Boshoff wanted the name of the co-op that the NEF worked with on the project which generated 16 000 indirect jobs and 200 direct jobs. She asked if the NEF employees that are sent out to assist with turnaround strategies, are from the area in which the business is or if they have to travel. If they do travel, what are the costs involved.

The Chairperson thanked the NEF and the meeting was adjourned.
 

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