WCGRB on risks identified during 2018/2019; Saldanha Bay IDZ on Funding Model & Feasibility Study

Meeting report

Opening Remarks

The Chairperson welcomed everyone, including the delegations from the Western Cape Gambling and Racing Board (WCGRB) and the Saldanha Bay Industrial Development Zone (SBIDZ).

The Chairperson invited the SBIDZ delegation to introduce themselves and make a presentation.

SBIDZ Briefing

Ms Kaashifah Beukes, Chief Executive Officer: SBIDZ, introduced her team:  Mr Douglas Southgate,  Chief Operating Officer, and Ms Danielle Manuel, Executive: Stakeholder Management.

Ms Beukes spoke to a presentation document that had already been provided to the Committee. She said the SBIDZ had been asked to present on its funding model and feasibility study from its previous financial year. She noted that the presentation was in three parts. The first part would address who the SBIDZ was; the second would address the funding model and the third part would deal with an executive summary of a study into the feasibility of an innovation campus. 

In the first part of the presentation, Ms Beukes explained the mandate of the SBIDZ. She noted its mission was to foster responsible investment in the zone and act as an inclusive and sustainable economic catalyst. Its vision was to be Africa's premier oil, gas and maritime industrial and services centre, offering a world-class integrated engineering, fabrication, logistics and freeport environment to zone users and tenants. Its purpose was to build successful and responsible models of inclusive, sustainable, and thriving societies and economies for generations to come in Saldanha Bay and beyond.  

She said the SBIDZ provided unique value and spoke to the diverse investment pipeline and other advantages outlined in the accompanying presentation document. On the SBIDZ target market and opportunities, she pointed to a list of clients from different industries to which the tenants of the SBIDZ provided products and services. The document also provided a comprehensive list of the stakeholders with which the SBIDZ worked to execute their mandate. She noted the key programme partners, a multitude of government departments and agencies, private sector industry associations and agencies, Institutional Investors, and formalised labour.

On the funding model, Ms Beukes said there were four sources of income for the SBIDZ - grant funding, project specific funding, rental revenue and other revenue.

In the third part of the presentation, she addressed the reasons for the innovation campus feasibility study. Among the reasons listed in the presentation document were the role of research and innovation in driving an upstream oil gas and marine industry.  The document listed the six main areas covered by the feasibility study - stakeholder insights; the value proposition; corporate strategy development; financial strategy; operational design and implementation planning. A diagram illustrated the study process. 

Research findings outlined in the document included market insights, technology insights, best practice insights and stakeholder insights. She stated the research showed a convergence between the four areas.  

The SBIDZ had identified a strategy, which would be executed through an Innovation Centre, with a clear mission. This mission would be informed by the user needs gained from the research conducted, the short-term objectives of the centre and the anticipated impact of the centre.

In conclusion, she stated that the fundamental approach of the SBIDZ was to start small, build trust and experience, demonstrate wins and be patient, as this was an emerging industry.
Discussion
The Chairperson thanked Ms Beukes and invited questions or other inputs.

Ms M Maseko (DA) referred to the grants and subsidies received by the SBIDZ during the financial year. She enquired about the effects of the Covid-19 pandemic on the feasibility studies. Grants were listed as one source of income. Were they a guaranteed and stable source of income? Was there any other revenue generated by operations of the SBIDZ?   

Ms N Nkondlo (ANC) welcomed the presentation from the SBIDZ.  She referred to the first slide of the presentation which outlined the broad strategic issues of SBIDZ. She said the presentation highlighted responsible investment and contributing towards inclusive growth. What did this mean in simple terms? Could the SBIDZ provide indicators to show how it measured responsible investment and inclusive growth? One slide also indicated that R2.5 billion had been used for predetermined investment. Had these funds been used to enhance responsible investment and inclusive growth? Further, it was indicated that the SBIDZ was 100 percent owned by the Western Cape government. What was the role of other stakeholders? For example, the Department of Trade and Industry (DTI), was a major financial contributor to the SBIDZ. What was the governance engagement that the SBIDZ had with the DTI as policy custodians of national IDZs and the IDZ Acts?  With regard to the overall spending, could Ms Beukes indicate the core costs in expenditure of R37 million? Regarding sources of income, mention was made of Sector Education and Training Authorities (SETAs) but the amounts received from SETAs had not been quantified. Which SETAs and programmes were involved? Lastly, who funded the SME Co-Lab Centre?

Ms D Baartman (DA) said that Ms Beukes had spoken about offshore renewable energy possibilities, but not a lot of detail had been included. She had also referred to studies conducted about the possibilities. Could she supply more detail? If the research had not been finalised, could it be sent to the Committee once completed? One slide had spoken to things that stakeholders felt were a barrier in terms of the SBIDZ. What did this mean? Finally, there had been a dispute regarding offloading of liquid petroleum gas, and Transnet had said it hoped to have finished a hearing within a week. It was now about a week and half later. Did the SBIDZ know anything about the hearing? Had it been concluded? Had Transnet engaged the SBIDZ?

SBIDZ Responses  

In response to the query about grants being included under income, Ms Beukes said it was viewed under the broad banner of income. As an IDZ in the establishment stage, they required grant funding to fund operations of the entity while investing the capital required and establishing the investment pipeline and aligning the IDZ and Special Economic Zone (SEZ) programmes.  Members would notice in the slides that there was an end-date to the grants and that was factored into the new five year strategic plan that was tabled at the beginning of the year 2020 and in the annual corporate plan. The aim was to reach self sufficiency by 2023, but Covid-19 had had an impact on this goal. Revenue projections needed to be adjusted, because as the grant decreased, revenue from other sources needed to go up, particularly rental revenue. Financial plans had been reconfigured in light of Covid-19 and the volatility in revenue had to be addressed so that the SBIDZ could remain a going concern. As capital was invested into the IDZ, remnants needed to be served. The SBIDZ was responsible for the estate management and making sure that tenants got what they were paying for. 

Regarding the query about what "other revenue generated" meant, it referred to the levying of administration and management fees. For example, the SETAs provided project specific funding for an initiative but, as the facilitator and the central point of that project, the SBIDZ levied a fee for managing the project and reporting back to the SETAs in terms of the service level agreements concluded with the SETAs. In the accounting records, this was labelled as other revenue.

Ms Beukes asked Mr Southgate to answer the question about measuring responsible investment and to explain how a R2.5 billion public investment had been leveraged.

Mr Southgate said an economic model tracked what had been done and what future prospects were. That model tracked gross geographic product (GGP), and gross domestic product (GDP). It also measured local, provincial and national job creation and the contribution to the fiscus. Most of the R2.5 billion investment had been spent in local contracting to grow businesses in Saldanha Bay. When it came to inclusivity, the only way to measure this was by tracking the Gini coefficient and unfortunately this could not be done at a local level. Therefore, inclusivity was very difficult to measure.

Ms Beukes responded to the query about the role of the DTI and governance arrangements with the SBIDZ. There was a representative director from the DTI on the SBIDZ board of directors. There was also interaction with the national SEZ programme. There was a monthly meeting to track progress, provide updates on the investment pipeline and on issues related to tenants, among other things. Quarterly reports fed into the national reporting on the SEZ programme.

On the quantification of costs, she said the biggest cost would be lease agreements with the Transnet National Port Authority (TNPA). If the Committee wanted more detail it could be provided with a breakdown.

On funding for the SME Co-Lab, she said it was located at an old site camp built by one the SBIDZ contractors. Rather than demolish the structures it had been decided to make it a permanent site camp for administrative reasons. When the SBIDZ found it was not ready to proceed with the next round of contracting, it was decided to create this as a space for small and medium enterprises. The capital costs were paid by the DTI. The operational costs of the Co-Lab were funded by the SBIDZ through its operational income. This Co-Lab was an asset to the small business community because they did not have any other place like that on the West Coast. They used it daily as office space.

She also clarified that the feasibility study was not for the IDZ. It was for the new innovation campus project initiated by the SBIDZ. It assessed what this campus needed to do to be successful.

On the query about offshore renewable energy possibilities, she said she was not an expert in this field and hesitated to respond. She would give the Committee a written reply once she had consulted the relevant team.

On political volatility mentioned in the stakeholder insights, she said this was not at the local or regional level, but at the national level. Political volatility at the national level affected certainty about policies.

The Chairperson thanked Ms Beukes and asked if Members had further inputs. 

Ms Nkondlo said that she would appreciate it if the SBIDZ provided the Committee with their responsible investment metrics.  Ms Beukes agreed to do so.

Gambling Board Briefing

Mr David Lakay, Chairperson,: Western Cape Gambling and Racing Board (WCGRB) introduced the delegation: Mr RG Nicholls, Member of the Board; Mr Primo Abrahams, Chief Executive Officer; Ms Zoe Siwa, Chief Financial Officer; Ms Yvonne Skepu, Manager, Legal Services; Mr Robin Bennett, Head of Department, Regulatory Compliance; Ms Megan Basson, Head of Department, Licensing; Mr Alvin Matthews, Head of Department, Information and Communication Technology; and Ms Sweetness Sixubane, Head of Department, Human Resources.

Ms Siwa spoke on the key risks considered during the 2018/2019 financial year. These included the risk of a lack of a quorum at board meetings. Only five members were appointed to the board during this financial year, instead of the seven members required. This meant that all five members were required to attend board meetings and if that was not possible, board meetings were cancelled. Ensuring there was a quorum had brought about an escalation of travel costs, particularly in the case of a member that lived in Gauteng. Since the board comprised only five members, the board committees had to be restructured. Steps to mitigate the risks included scheduling meetings at the beginning of the year to ensure early awareness of meeting dates.  Urgent matters were resolved via round robin resolutions. To deal with escalating travel costs, funds for travel and subsistence had to be allocated from other departments.

Another risk was that of litigation in terms of the expiration of limited payout machines operators’ fees. At the end of March 2017 the board had a contingent liability of R17.6 million and at the end of March 2019 the board had the liability to pay R6.5 million to route operators because some of the fees were prescribed in that year in terms of the Prescription Act. The board also received a settlement discount to the amount of R1 Million from one of the operators and the remaining amount was paid in April 2019. Regarding the increased litigation consuming board resources, the board decisions and actions were often challenged based on the recent economic interests of licence holders and other role players, so the board tried to have discussions and negotiate with licensees before reaching a point where the matter had to be settled in court.

The next risk dealt with the sustained funding of the board's activities, with the loss of major revenue streams. The board received substantial amounts of funding in the terms of a government grant. The board no longer received the operator fees and the casino exclusivity fee. There were still gaps in the legislation and the Provincial Treasury was in the process of addressing those legislative amendments.

Another risk was the loss of stakeholder trust in the board's ability to perform its legislative mandate. This was the result of a delay in implementing a board resolution because the board had to conclude engagements with the Provincial Treasury and the Minister of Finance on this matter.  To mitigate this risk, the chairperson of the board engaged with the Minister of Finance on a regular basis and kept the stakeholders abreast of the situation. This was also on the agenda in a meeting between the board and the Provincial Treasury.

While there had been a delay in finalising accommodation for the board, the board had now moved to Parow and this risk no longer existed. 

There was a lack of cooperation from enforcement agencies as a result of illegal gambling not being considered a priority crime. This resulted in a backlog of cases and increased storage costs. The mitigation for this was engaging with law enforcement units. The compliance department had built meaningful relationships with the South African Police Service (SAPS) to assist the board in closing illegal operations or confiscating illegal machines.

It was difficult to enforce compliance by licence holders in respect of excluded persons. A lack of clear legislation resulted in problem gamblers still accessing casinos. Mitigation efforts included engagement with licence holders to prevent access by such persons and a quarterly meeting with licence holders to monitor the situation.

There was a lack of resources and human capital to deal with changes in the gambling environment which could result in non-achievement of strategic objectives. There was not a lot of training available for gambling in South Africa and with the rapid changes of training due to technology advancements there was also a risk that the board would fall behind. The mitigation for this was prioritisation of relevant training and continual monitoring of new innovations. It was also important for the board to attend conferences where these new issues were being discussed so that they could keep abreast of new developments.

The board’s building had uninterrupted power supply and its work was not impacted by electricity load shedding as it had been previously.

On the Stakeholder Trust Plan, Ms Siwa referred to slides nine and ten of the presentation document. These described the way in which gambling licence holders and applicants were required to pay funds into trust accounts to offset the cost of probity investigations and to ensure punter payouts.

Ms Basson briefed the Committee on questions raised by it on credit risk management in dealing with licence applications. All applications for a gambling licence had to be accompanied by supporting documentation for verification of identity and suitability. A list of documents was set out in slide 12. In addition, the applicants also had to deposit a statutory amount with the board. These amounts were then placed in a trust account for the license applicants. Once licensed, a new set of licence conditions were imposed on the licence holder. These were both generic and specific according to the findings made during the investigation.

Discussion

The Chairperson invited questions or inputs.

Ms Baartman asked how, in the light of Covid-19, online platforms were assisting the board in mitigating some of the risks they had indicated in the presentation? Also, would the next report show a mitigation of funds that would have been used for in-person meetings? 

Mr Lakay replied that the board was using Zoom and MS Teams as online platforms, with preference given to Zoom. The board ensured that the necessary security was in place. Since the advent of the lockdown, all board meetings had been conducted on Zoom. Guests, such as licensees, also attended when needed. Similarly, the sub-committees of the board were utilising the platform of Zoom and there no site visits were taking place. On the operations side, there were limited site visits which are necessary for conducting business operations. Members were not receiving the payments they would have received for travelling to meetings.  However, the board did pay members an amount not exceeding R500 a month for data costs.  The board used MS Teams mostly when it interacted with members from the Western Cape Government. Staff members were working from home via online platforms.

Ms Maseko raised an issue of communities benefiting from the Stakeholder Trust Plan. What were the communities with whom the board was working?

Ms Siwa said she was not sure if she understood the question as the trust was not for the benefit of the community.  Licence applicants of licence holders deposited funds into the trust accounts in order for the board to use those funds in the execution of its duties. The funds were not for communities. The issue of communities arose in considering how licence holders made corporate social investment in their communities. Ms Maseko said that her question had been answered, but it was more of a principle question.

Ms Siwa said there were no trust funds for the board itself. The trust funds were in the names of the different licence holders. When the board performed work funds were then charged on the relevant person’s trust account and funds transferred into the board's primary bank account. The board did not have a trust account in its own name.

Ms Maseko interjected and referred Ms Siwa to slide 8 of her presentation which referred to a recommendation by SCOPA that the WCGRB should include various communities and stakeholders in its Trust Plan. 

Ms Siwa said the board could not include them in its Trust Plan. The aim of the plan was only to make funds available for work to be performed.

The Chairperson said the Trust Plan had nothing to do with social responsibility and had more to do with the operational activities of the board. He asked Mr Abrahams or Mr Lakay to give clarity.

Mr Lakay said the trust accounts as incorporated in the annual financial statements related to trust accounts established for the board to recoup costs. It was not a trust to be used for communities. It was called a trust because the funds remained in the name of the applicant and not the board. They were held on behalf of the applicant so that the activities of the board cou;ld be charged against such an account to replenish the costs incurred.

Mr Abrahams said the trust account was the same as those opened by a law firm. A trust would be opened for each applicant and money deposited against such an account as and when the board performed work for the relevant applicant. Money left in such trust was then deposited back to the applicant. The board was not authorized in terms of its mandate to have a trust account established on behalf and for the benefit of the communities. The licence holders, in terms of the corporate social responsibility requirements, had trust accounts in which they set money aside for the benefit of communities. These accounts were often overseen by the board to ensure that those funds were used for the benefit of the community.

The Chairperson said the board had no corporate social responsibility trust of its own but relied on the licence holders to have those trusts for the benefit of the community.

Ms Maseko said she had received the clarity she needed.

Ms Baartman said Ms Maseko had covered what she wanted to say. Slide eight was misleading as trust plans could not implement long term sustainability plans as each trust account was for each licence applicant and operated similarly to a law firm in terms of which funds would be charged against such an account if work was performed by the board. 

Ms Nkondlo said she appreciated the explanation about the trust accounts. She asked if there were standard fees for work performed by the board. She also asked for a spreadsheet showing monies charged against each trust account in order to have a visual representation of the explanation given. The board said that they oversaw social responsibilities of the licence holders. How was this done in practical terms? The board could provide a written response as needed.

Mr Lakay said there were different categories of licensees, such as casinos, pay-out machines, horse racing and betting sectors and so on. Licences in the different sectors required different levels of achievement in terms of their Broad Based Black Economic Empowerment (BBBEE) status. Based also on the licence conditions, there were certain amounts that they had to contribute to corporate social responsibility. For example, casinos would set aside a percentage of their profits after tax. All such conditions were stipulated in each licence as were the amounts they needed to contribute. Each licence applicant had a committee that handled the funds set aside for social investing. At quarterly meetings, they were expected to report to the communities on such social investment activities. When the committee met, they would be taken to the communities of the social investment projects and engage with them.

Ms Skepu said the bookmakers had a different BBBEE scorecard. Most bookmakers would be regarded as exempt enterprises in terms of the thresholds in the relevant BBBEE codes, one being a turnover below R10 million. However, the horseracing committee of the board had commenced a dialogue with the bookmakers to look at measures they could implement from a corporate social investment perspective to target vulnerable communities. The bookmakers that did not fall under the exemption, still needed to comply with BBBEE in terms of the licence conditions. The conditions also imposed an obligation on all operators to submit their evaluation certificate annually as part of their renewal application to the board so that the board could see their level of compliance. Where licence holders did not meet the imposed level they must include, a plan stating where the shortfall occurred and what measures they would implement to achieve the compliance level imposed.

Mr Abrahams said there were standard fees for each activity which the board needed to perform. There were also hourly rates charged for research work. As investigations were carried out, further areas would be identified and would usually have an impact on standard fees.

Ms Siwa said monthly reconciliations of the trust accounts were performed. If the Committee wanted  a spreadsheet of these accounts, it could be provided.

There being no further questions, the Chairperson thanked the WCGRB and excused them from the meeting. Mr Lakay said if any further information was required, the Gambling Board was at the disposal of the Committee.

The Chairperson asked for proposals for resolutions on the presentations. On the SBIDZ, he noted the issue of the quantification of the SETA funding, the issue of the investment metrics as well as the economic model..

Ms Baartman said she believed that information on the economic model and SETA funding had already been sent to Parliament. The Committee should ask for information on the possibilities of offshore renewable energy that had been referred to. She suggested that the Committee should phrase its resolutions with clarity when it called entities to appear before it.

Ms Nkondlo said entities were not challenged. If there were issues that required clarity, the Committee should continue probing even if this meant requesting information numerous times. There was a question on the operating expense (opex) cost centers which Ms Beukes had said they could provide to the Committee. Could they please provide information on whether they had realised any revenue since their establishment?

On the WCGRB presentation, the Chairperson said one of the requests was for a spreadsheet on the use of the trust accounts. Further, they had made it clear that the board did not have direct engagement regarding social responsibility but that such endeavors were pursued by the licensees and overseen by the board. It would be helpful to have a report from the board on the social responsibilities from licensees’ perspective.

Ms Maseko said the Committee could ask for a report about the licensees' social investment from the board rather than to engage with them.

Ms Nkondlo said the oversight of the social responsibility of licensees must also be included in the report as it would help the Committee to identify the role of the board. The board should be asked to attach examples of licence conditions and a non-compliance case so that the Committee could see how such cases were dealt with.
The meeting was adjourned.