The Portfolio Committee on Trade and Industry received briefings from the Industrial Development Corporation and National Empowerment Fund on their responses to the Covid-19 crisis.
The IDC’s presentation clarified the continuity of business during the national lockdown and its immediate and long term interventions. In the short term, the IDC was providing an R800 million facility for companies producing essential goods and examining payment holidays on a case-by-case basis. In the long term, R3 billion would be made available to distressed companies and emerging industries. Members’ questions focused on the IDC’s charity work, disbursement value and turnaround time, and the IDC’s BEE and transformation targets.
The NEF presentation focused on the Fund’s R200 million Covid-19 Black Business Fund, aimed at encouraging small black businesses needing working capital to produce essential goods. It also mentioned the NEF’s loan repayment holiday policy and its social response to the Covid-19 crisis. Members’ questions centred around the geographical spread of Fund distributions, turnaround times, the entity’s merger with other institutions and the possibility of the extension of repayment holidays.
Note: the meeting was only opened for public broadcast 15 minutes after its start. The opening took place in the midst of a dispute between members.
The Chairperson noted his dissatisfaction with Mr D Macpherson’s (DA) conduct and called for maintenance of good conduct.
Ms T Mantashe (ANC) apologised for her wording.
The Chairperson proceeded to the next agenda item, the briefing by the IDC. He welcomed the delegation from the IDC and NEF.
Briefing by Industrial Development Corporation (IDC)
Mr Tshokolo Nchocho, CEO, IDC, introduced Mr David Jarvis, Divisional Executive for Strategy and Corporate Affairs, IDC.
He stressed the difficulties of the moment, and would divide the presentation into short term, medium term and long-term efforts.
Immediate matters included transaction assessment & approval processes to improve turnaround times, in which the IDC was seeking a 10-day turnaround.
The IDC existed in a global context. Inasmuch as it completed its strategic plan in 2019 and a corporate plan which was on its way to the Ministry when the pandemic arrived, it was in the process of reviewing its strategic framework in a slowing global economy and a South African economy where risks were to the downside. How could the IDC support companies to survive the transition and recover in the medium term?
Major economic regions, and SA’s major trading partners, would likely fall into deep recessions in 2020. Manufacturing and mining businesses in which the IDC was invested fed into these economies – when there was a downturn in these economies, there would be a commensurate downturn in these companies. IDC forecasted a -6,3% downturn in the SA economy in 2020. Household spending would come under pressure, fixed investment would decline, government finances would worsen, and exports would suffer. This was the context in which the IDC was operating.
The first response was ensuring the safety and wellbeing of IDC staff by supplying them with technology to enable working from home, although IDC offices had continued to operate. The IDC screened employees as they arrived and provided sanitisation and protective equipment to employees. The IDC had distanced employees in its offices. Staff members would return to the office in low numbers and progressively depending on government guidance.
The IDC conducted a survey of clients – many were experiencing reductions in their revenue, except agricultural and agro-processing, infrastructural (telecoms, energy and transport) and chemical supplies sectors. The IDC allowed case-by-case deferrals of payments and did not charge additional interest in this situation.
Immediate response to Covid-19:
The IDC committed R800 million (500 from the DTIC, 300 from its own balance sheet) to fund companies providing essential goods to combat Covid-19. The IDC had also implemented immediate liquidity measures like payment deferrals.
Medium to long term
R3 billion of funding would be made available for distressed companies and to support emerging industries.
The CEO gave examples of companies the IDC had funded involved in the emergency supply-chain for Covid-19. R379 million had been devoted to these companies – this figure was intended to increase. R300m was set aside for small industry of the R3 billion.
The IDC had made a R25 million contribution to the Solidarity Fund, and initiated an internal “solidarity fund” where IDC members contributed to the national fund from their salaries – the CEO called for this to continue for at least the next 3 months. R5 million was donated to the Gift of the Givers. The IDC was also involved in development of an app to enhance contact tracing capacity for Covid-19. The CSI budget would be examined to provide relief.
As lockdown lifted, opportunities would arise to support companies. Industry masterplans were instructive in these cases, especially in the agricultural sector and poultry. The IDC wanted to do a lot more in the green industries.
In terms of revision to the strategic framework, the IDC would look at opportunities arising from the restructuring of global value chains and possible localisation. It saw a faster recovery as likely in pharmaceutical sectors.
The IDC was managing and mitigating risks as they presented themselves. Its balance sheet had to be managed carefully. There was already a downwards trend in repayments. The IDC was concerned that transformation objectives were jeopardised by financial stresses, and noted the need to balance business support with sustainability. Mr Nchocho argued that the South African development finance system would be expected to play a bigger role in economic recovery, but would have more pressure on its balance sheet.
The Chairperson thanked the CEO and opened the floor for questions.
Mr Macpherson pointed out that there had been a number of statistics coming out that suggested 50% of businesses could fail as they could not afford to sustain themselves, recalling National Treasury’s projection of between 3 and 7 million job losses. In that background, what disbursements had been made by the IDC since the announcement of distress funding, and which applications were outstanding? Surely the IDC would agree that it was not only B-BBEE-aligned businesses that were at risk and that financial hardship was not a racial issue? Did the IDC believe that funding should be based on one’s BEE status, and if so, how did the IDC justify this in a crisis that all businesses faced?
Ms Y Yako (EFF) asked how much of the funding would be given to smaller businesses that would struggle to beat an economic crisis. How long did evaluations take for relief funding? Did the IDC work with the SABS in terms of making sure that protective equipment provided was of a good standard? How much donated money was being prioritised to spaces where there was not much industry or access to job opportunities, especially the more rural provinces? Were donations extending to other NGOs?
Mr W Thring (ACDP) asked whether the IDC’s 36.5% unemployment prediction was on a narrow or broad definition. As Mr Macpherson indicated, economists were predicting over 50% on a broad definition. Did the IDC have an opinion or recommendation as to when restrictions on the economy ought to be removed? As Ms Yako had said, many NGOs needed money - how could they access IDC funding?
Mr S Mbuyane (ANC) wanted to know how the review of the Strategic Framework would be impacted by the Covid-19 pandemic. How would the rebuilding of the economy be done? Regarding the intervention in terms of global value chains and localisation: how would localisation be managed? How would the B-BBEE objectives be maintained through mitigation and management of the downturn? All businesses were distressed and needed assistance.
Ms J Hermans (ANC) commended the IDC and the innovation taking place in terms of the app. If the IDC was managing with its own balance sheet – for how long would it be able to carry itself with its own funds? Eventually funds would run out.
Ms Mantashe wanted to know if there was a possibility to extend loan repayment holiday periods for the IDC’s clients. She hoped a merger of the IDC and NEF could be hastened to make it stronger. She stated her wish to support small businesses particularly.
The Chairperson raised issues relating to service provision, particularly water: it was important to understand the areas where communities would be getting support from the IDC and check if this temporary provision could be made more sustainable through collaboration with municipalities. Short term interventions were welcome but should be made more sustainable.
Mr Nchocho responded that according to his records, over the preceding month, the IDC had disbursed R733 million through various initiatives. R379 million had been approved for emergency Covid-19 funding, but only R130 million had been paid out so far. Members would appreciate that administrative tasks took some time. Many facilities provided under Covid-19 emergency funding were 3-month facilities to be drawn down within 4 weeks of approval.
On applications outstanding, an aggregate R160 million of applications were in assessment. Unfortunately, when programmes were opened up, some people applied with irrelevant applications. The IDC had received 275 enquiries which it had to process and sift for relevant applications.
On BEE, in terms of the IDC Act, the IDC had a generic mandate of advancing industrial development, but also one of seeking to promote greater inclusion and transformation of the economy. On a day to day basis, the IDC did not discriminate on BEE status, but it did promote transformation transactions. The IDC did not hold a “steadfast belief” that it should choose BEE companies over others. It gave attention to all citizens of the Republic, but it was mandated to drive transformation as well.
The IDC was setting aside R300 million to be distributed through loan programmes through regional offices located across country. This was a concessionary facility priced at prime-3%. There was an upper limit cap for this programme.
The IDC set itself a standard of 10 working days for application processing. The standard way of doing things at the IDC required due diligence. 10 days was for abnormal emergency circumstances.
Mr Nchocho took the point on CSI on other NGOs and entities in rural areas. The reason the IDC partnered with Gift of the Givers was their extensive reach throughout the country. The IDC was also gearing up to support schools it had adopted throughout country as they returned.
Mr Jarvis clarified that the IDC had an open door for additional support to other NGOs, and had approved funding to an NGO called Kids Haven which replaced school feeding programmes which children couldn’t access.
Mr Nchocho answered that the IDC forecasted 36.5% unemployment on a narrow definition, and was fearful of a dramatic increase in unemployment. This was why strengthening development finance was critical.
The IDC’s view on opening of the economy: unavoidably it thought about this all the time. There was a delicate balance between risks to life and the economy. Mr Nchocho said he was participating in sectoral forums. The nature of the conversation was what kind of safety measures could be devised to guarantee government that risks to people’s lives were minimised. In terms of Level 4, the IDC estimated that just over 55% of sectors the IDC worked in had been at least partially opened. It took a sectoral approach in this matter.
Of the R800 million devoted to Covid funding, R300 million was already in the IDC’s coffers. R500 million was cash available at the DTIC.
As the economy reopened, the IDC was redefining how it targeted its funding to drive faster economic recovery. Slide 16 detailed the sectors in which the IDC saw opportunities for faster recovery. Localisation would be driven on these priority sectors.
Mr Jarvis answered that the IDC saw no impact of the crisis on job security at the entity. It was focusing on its cash management and was confident it had sufficient cash to operate. It was looking at opportunities to link up with governmental and private actors to provide additional funding support. The IDC was not cash constrained at the moment. It recognised the challenge of Covid-19 required crowding in of additional funds and was working to do this.
Mr Nchocho noted the IDC was engaging clients on a case-by-case basis for debt relief. Some companies were seeking working capital because they had opportunities at the moment.
He took the Chairperson’s comment on working with local government.
Ms Mantashe requested the names of the schools that the IDC was supporting and the provinces they were situated in.
Mr Thring asked for clarification on other NGOs being supported.
The CEO said he would provide a list of the schools, and reiterated the point he and Mr Jarvis had made on NGO extension. NGOs could apply for funding on the IDC’s website
Briefing by National Empowerment Fund (NEF)
Ms Philisiwe Mthethwa, CEO, NEF, stressed that the NEF was proud to be the only Development Finance Institutions (DFI) that had been given the opportunity to drive the implementation of BEE without fear or favour. It was pursuing its agenda of transforming the SA economy through financial and non-financial support.
It had approved over R10bn in funding to black entrepreneurs. The NEF had a cash balance of R1.3bn and unencumbered cash of R200m at the moment.
When lockdown started, the NEF implemented its business continuity plan and remained open for business. The NEF announced the establishment of the Covid-19 Black Business Fund of R200 million.
There were 3 key pillars of the NEF’s contribution to the Covid-19 response:
R200 million from the DTIC for the Covid-19 Black Business Fund
Portfolio Risk Analysis and R50 million set aside as relief for investees (loan and interest repayment holidays)
Covid-19 solidarity – provision of food parcels: NEF employees had contributed R1.4 million to food parcels for impoverished areas, and leveraged R2 million from BidFood.
Covid-19 Black Business Fund granted funding between R 500 000 and R10 million in concessionary loans for entrepreneurs to purchase operational inputs for essential good production. The NEF revised processes to facilitate speedier and more effective assessment of applications. Extraordinary situations required extraordinary measures: the NEF had shortened its target turnaround to 7 days.
The NEF was looking at supporting black-owned and managed companies that were involved in day-to-day operations in the essential goods sectors. Business had to have a project with R500 000 minimum in working capital requirement.
To date, the NEF had approved 12 transactions worth R78 million from 172 applications worth R725 million. The NEF would be approving an additional R25 million on Friday May 15th. It believed 12 transactions was a very good start. It had declined R400 million in transactions in the previous 4 weeks due to not meeting fund criteria.
NEF portfolio monitoring and risk analysis showed the high market risk for black entrepreneurs. NEF top active exposure was R1.4 billion. Only 25% of NEF exposure was currently operational, 16% at reduced capacity and 59% non-operational. Only 7% of loanees had adequate cash reserves to meet loan obligations, 65% needed cash relief and 28% were under an existing moratorium for repayment. The NEF adopted a number of different strategies to mitigate these risks, including financial and operational assistance, as well as facilitation of funding applications for the UIF TERS benefits or SEFA Debt Relief Fund. The NEF would grant 47% of investees a loan repayment holiday until end-June 2020. The total NEF response package was estimated at roughly R250 million.
Mr W Cuthbert (DA) asked the CEO to clarify comments on other funds providing funds in this time. B-BBEE mandate aside, did the CEO think it was conscionable that certain black workers would lose their jobs because their bosses were white? Was one able to, as a NEF beneficiary, access the SMME Relief Fund or Tourism Relief Fund?
Ms Yako had a number of areas of concern. 12 approvals with reduced turnaround time did not make sense. She was also unhappy with the geographical spread. Why were the approvals prioritised, what did they do? What was the projection on companies that might make a loss at the NEF?
Ms N Motaung (ANC) noted some companies were getting R10 million, others less. Was there no possibility to put a ceiling on the relief fund to fund more companies with less money rather than fewer companies with more money? What had the NEF put into place to fast track the application process?
Mr Mbuyane wanted to check on the possibility of consolidating SEFA, SIDA and the NEF. What was the update in this regard? He expressed concern over the geographical spread of funding.
Ms M Moatshe (ANC) asked whether there was a possibility of the extension of the payment holiday.
Mr Thring thanked the NEF for the clarity of its presentation. In light of the opening statement of the Freedom Charter – could the CEO justify or clarify how the R200 million for the Black Business Fund supported the opening statement? Slide 19 showed differing figures of geographical spread between the chart and table – which are correct? Noting NEF’s R1.4bn exposure and the low number of operative businesses, what was the NEF’s view on the lifting of lockdown restrictions?
Ms Mantashe endorsed the NEF sticking to its mandate of transformation of the economy. Members should read the Freedom Charter in totality should they wish to understand what it says. Was there some kind of geographical balance built in, as money could not only be given to the largest provinces?
The NEF defended its approval of 12 applications, proposing that this was actually a quick response
The CEO repeated it was in a privileged position in that it was the only DFI to have the exclusive responsibility of supporting black people. Its mandate was making sure that black people benefit from the South African economy. Of course, it was worried about black workers losing jobs. If there was anything it could do as the NEF to stop the retrenchment of black people, it would do it.
Companies benefitting from NEF relief could also access funding from other relief funding sources due to the different purposes of funding. The NEF provided financial and non-financial support across the short, medium and long-term.
In rural areas, people did not have anything to eat. The need was urgent. Food packages were an essential at the current moment.
Immediate relief measures were for 3-6 months. National Treasury had asked DFIs to submit on their immediate financial needs. The NEF’s submission had been sent to the DTIC and Treasury.
On Ms Motaung’s question on providing less to more companies, Ms Mthethwa had a different view: the NEF should be saying – why was the ceiling for black companies R10m? Why not more? It should not be thinking small all the time. The NEF would like to see a black company the size of Bidvest.
The main merger proposed was between the NEF and IDC. The Committee had done a lot of work on how this would pan out and what it would mean. The NEF was only hearing about other consolidation proposed by the Department of Small Business Development from the corridors, not formally. The NEF was as confused as members were.
Regarding geographic spread: what the NEF had done so far, because of the huge demand, was a demand-driven approach. It looked at transactions presented to the NEF. If no one submitted requests, it could not provide funding.
When Ms Mthethwa looked at the Freedom Charter and the rationale for the NEF, she thought they were very much aligned. She wondered how one could merge an entity that was exclusively for black economic empowerment with others. There was a potential legal risk for other funds in exclusive funding of black businesses.
While she noted all DFIs were obviously concerned by the possibility of lifting restrictions, members were better placed to respond to this issue.
Mr Rakesh Garach, Board Chairperson, NEF, noted that as much as the NEF would like to extend relief beyond 3 months, reality did not allow this. It did not want its investees to collapse but it did not have unlimited funds. It was encouraging investees to work with their primary banker in the financial services industry to see if they could access the recently announced loan guarantee scheme.
Ms Hlengiwe Makhathini, Divisional Executive for Venture Capital and Coporate Finance, NEF, addressed Ms Yako’s question on approval rate and turnaround time. Although the NEF had set turnaround times for itself, there was the caveat that clients gave all the information it needed. When clients came with incomplete dossiers, the NEF did not turn them away, it guided and helped them. The NEF was working hard to achieve good turnaround times. Of the R78 million approved, over R60 million had been disbursed already. The NEF had assessed over 300 applications, many of these were invalid.
Mr Mziwabantu Dayimani, General Counsel, NEF, stressed the commitment to finding transactions across the country. He was from the Eastern Cape and it was hard to find transactions in many more rural provinces. Because the Black Business Fund focused on manufacturing, approvals had been chiefly in the three largest provinces.
The CEO thanked the Committee.
The Chairperson noted the importance of food parcels and finding balance in the geographical spread of assistance. Maybe having a few large companies and a number of small businesses was a good idea, they were not mutually exclusive. However, if one grew the local economy and there were a lot of successful small businesses, this might have a greater developmental impact. He was not against big businesses being supported but some local, small businesses had a bigger impact on rural development and growth.
Ms Yako said that the CEO was coming off as defensive and ignoring parliament’s oversight mandate. The food parcels were a noble intervention – she was proposing looking at other ways to give back to the people, not implying the NEF was neglecting its duties. She welcomed Ms Makhathini’s response on the number of applications assessed.
The Chairperson noted her agreement that food parcels were an essential intervention.
The CEO apologised to Ms Yako if she seemed defensive as this was not her intention. The NEF was looking into designing interventions for black industrialists aiming at producing health materials. It was the nature of the healthcare sector that fixed costs were high and so R10 million was inevitably required to bring production online. In the food supply area, the requirements are not quite as high. She thanked the Committee for its input.
The meeting was adjourned.
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