National Empowerment Fund & Industrial Development Corporation on their contribution to economic recovery plan

Meeting report

Opening remarks

The Chairperson welcomed everyone on the platform and requested the Secretary to confirm attendance.

He noted that the key issue of the day was actually the Reconstruction and Economic Recovery Plan and the meeting would be looking at the support given to this initiative by the National Empowerment Fund (NEF) and the Industrial Development Corporation (IDC).

The Chairperson welcomed the Members, and noted apologies from the Minister and Deputy Ministers of Trade, Industry and Competition as well as the DG, Lionel October. He also noted the bereavement on the side of the CEO of NEF, Ms Philisiwe Mthethwa, and accepted her apology. He welcomed the team from the Department of Trade, Industry and Competition (dtic) and the two entities.

The Chairperson presented the agenda which dealt with presentations by NEF and IDC on their contribution towards the Economic Recovery Plan. It was decided that both entities would make their presentations and thereafter Members would take discussion and ask questions of the presenters.

Presentation by the NEF on its contribution towards the Economic Recovery Plan

Mr Rakesh Garach, Chairperson, NEF, introduced the team on the platform: Ms Hlengiwe Makhathini, Divisional Executive: Venture Capital & Corporate Finance, Mr Mziwabantu Dayimani, General Counsel and Moemsie Motsepe, Marketing and Communications Manager. He informed the Committee that Ms Makhathini would make the presentation.

Ms Makhathini noted that the presentation contained over 70 slides but most were for reference and she would be referring to the key slides.

The allocations by the dtic to the NEF included R160 m for Women Empowerment Fund, R200m for NEF COVID-19, R150 m for the Economic Distress Fund.

In terms of COVID-19 interventions, the NEF had given R200m to the Black Business Fund to provide concessionary funding to black businesses to manufacture and supply healthcare products and essential foods, which had created 1 466 jobs. R150 m was given to the Economic Distress Fund to provide relief in the form of capital to financially distressed businesses as a result of the pandemic. R50 million went to covering loan repayment holidays and zero interest rates granted to existing investees during the Covid-19 pandemic. The total number of jobs sustained through NEF COVID-19 initiatives amounted to 50 836. In addition to the R400 million Covid-19 Relief packages, the NEF had approved R160 million for the Women Empowerment Fund from the dtic. That meant that a total funding of approximately R560 million would be made available to black-owned-and managed businesses. NEF also made a contribution of R895m to Affordable Social Housing and Student Accommodation.

Within the NEF’s franchise portfolio, service stations ranked as the most vibrant and successful, both

commercially and in terms of the repayment trends to the NEF. Relationships had been created with the various petroleum companies in line with the NEF SME Strategy that seeks to leverage the technical expertise provided by the oil companies for the benefit of black and women-owned enterprises.

The NEF funded various lodges and hotels within the tourism industry throughout the country. Over R372 million was approved which secured R52 million in 3rd-party funding from the Department of Tourism. Over 950 jobs were supported as a result of investments made in the sector. Young Entrepreneurs had increasingly found expression through the funding of the National Empowerment Fund. Creative industries had proven to be a factor for unlocking broad-based impact with the number of jobs created per investment proving to be a catalytic factor for the NEF. The Youth-Owned Business portfolio of R379m proved to be as diverse as it was sustainable with investments across numerous industries.

(See Presentation)

Presentation by the IDC on its contribution towards the Economic Recovery Plan

Ms Busi Mabuza, Board Chairperson, IDC, introduced her colleagues:

Mr Tshokolo Nchocho, Chief Executive Officer, IDC

Ms Joanne Bate, Chief Operations Officer, IDC

Mr David Jarvis, Strategy and Corporate Affairs, IDC

Mr Isaac Nkululeko Malevu, Chief Financial Officer, IDC

Ms Mabuza indicated that the CEO would be making the presentation and handed over to him immediately.

Mr Nchocho began his presentation with a few introductory remarks on economic conditions. He noted that China was the only country that had avoided a contraction in the economy on the back of the pandemic. For SA, there would be subdued growth after the worst recession on record.

He presented a slide on the alignment between the Plan for Economic Recovery as announced by the President. To that end, the IDC in terms of its Mandate had very clear, distinct areas in which to make its contribution:

-Industrialisation, especially localisation of manufacturing.

-Energy security.

-Infrastructure development, especially economic infrastructure such as ICT, Transportation Logistics,

-Agriculture, Agro-processing and Food security.

-Regional / Continental development

-Provincial and District development, focusing on the SME Sector, and Special Industrial Zones.

Numerous financing/co-investment and transformational opportunities were likely to emerge in areas as diverse as:

-Renewable energy generation and the localisation of related components’ manufacturing;

-Green economy opportunities such as fuel cells, battery storage and waste beneficiation/recycling;

-Agriculture and agro-processing;

-Water infrastructure;

-Telecommunications sector development;

-Digital economy and other 4IR opportunities;

-Increased integration of SA manufactured products in global supply chains;

-Advancing regional economic integration;

-Localisation - although that was dependent on public sector coordination.

The focus was on full value chain development to maximise local beneficiation and value-addition:

-Development of energy storage (battery) value chains;

-Beneficiation opportunities;

-Support projects aiming to develop domestic gas resources & local content;

-Catalysing adoption of cleaner energy generation/efficiency technologies across sectors and

industries for cost reduction, efficiency improvement and profitability;

-Funding support to black empowered, Women and Youth to ensure inclusive development and transformation.

 

The CEO noted the default rate on tourism loans stood at around 40%. However, he believed that the IDC should stay with those investments. The Corporation believed that the industry would recover, and those businesses had the advantage of being established businesses and therefore were better off than a new business would be.

SME eConnect looked to connect small businesses into the value chains or supply chains of big business that the IDC was funding or that government was supporting. In a low economic growth environment, the IDC had continued to invest significantly in new industrial capacity, creating jobs and driving transformation. The Corporation had been working with key partners, including dtic, to assess the impact of the current environment, collaborating on opportunities to mitigate the impact and developing long term interventions

There was a clear alignment of programmes with key focus areas in the Economic Reconstruction and Recovery Plan sector alignment and transformation objectives.

The CEO added that the IDC contribution went beyond financing, and offered support by value-add technical

assistance programmes to enhance reach and impact of industrial development. The IDC would play a

catalytic role in recovery based on strategic partnerships and stakeholder alignment.

(See Presentation)

The Chairperson thanked the presenters and invited the Members to comment.

Discussion

Mr Z Burns-Ncamashe (ANC) appreciated both presentations, given the challenges to the country, and the world. The pandemic had affected a number of businesses globally but if one compared the performance of SA by looking at the support given by SA institutions, things were quite promising and he congratulated the NEF and the IDC for their responses to the pandemic. He commended the leadership of the two institutions.

The presentations were very insightful.

He queried the situation regarding rural provinces. He encouraged IDC and NEF to have a more robust engagement in rural areas because he saw that both institutions looked at opportunities for optimising the value in rural spaces, including agro-processing and primary production. It was important to intensify that community outreach.

The local authorities and ward councillors, traditional leaders, etc., could share the information that would assist people. It was important to share knowledge as without it, people were disempowered, but what was important was what they did with the knowledge. The symbiotic tapestry between small business and large industries was important. How did one create a symbiotic integration so that the small businesses became fully fledged industrial institutions, be it manufacturing or agro-processing? For as long as rural provinces did not take part in the mainstream, there would be the kind of disparity where the levels of inequality would remain astronomic. He urged the entities to be inclusive in growing the economy.

Mr D Macpherson (DA) took a trip down memory lane regarding the NEF. Since 2014, the NEF had always been one more meeting or one discussion away from being fully capitalised and rehoused in IDC. That was a time period of seven years and each year it lived on grants from dtic and dispersed the money. It was simply a transactional institution. What was the point of the NEF if the IDC could do the same job, probably for a lot less than the overhead costs of the NEF? The NEF Executives were the highest paid in government: the CEO earned R6 million p.a., but it was just a form-filling entity. The time had come for the excuses to stop. When would the NEF become a fully functional arm of the IDC? He did not know the reason for the existence of the NEF when the IDC did exactly the same job.

A policy question was why the dtic allowed tax funds drawn from all taxpayers to be paid out solely on the basis of racial ownership. Tax funds received by dtic were not derived from a racial basis so how could the dtic allocate racially exclusive funding? The R150m distress fund for black-owned businesses, R160m women empowerment fund and the R260m for black-owned businesses added up to a total of R500m but had been glossed over by the presenter. The distress fund was also glossed over. He wanted a breakdown of every company that had received money from the R500m, what the company did and how much had been received. It would be valuable to understand where the money had gone and what it had been used for.

The IDC was taking a rose-tinted view of the economy and industries that it had supported. Quite rightly, it could not just pull out of its investments, but what research studies had been done to understand debt-income ratios? What was its profitably going ahead and how was it geared? He also asked for the IDC’s bad debtors’ book, per transaction, what was considered bad debt and how much was owed. He had previously asked about the amounts owed by politically exposed individuals and the amounts were staggering. The politically connected individuals simply did not pay back.

Mr Macpherson asked for the opinion of the IDC. How did the IDC view the incorporation of the NEF and where was the logjam?

Ms N Motaung (ANC) applauded the good work being done by the NEF in transport, tourism, petroleum and women empowerment. She applauded the NEF on the online business plan that people were able to access. She was concerned about its work in the provinces as there were gaps in reaching the towns in rural areas. The entities had to improve their accessibility in rural areas.

Mr M Cuthbert (DA) asked the IDC about the work it was doing in the cannabis and medical marijuana industry and whether it was supporting any companies. He asked about the talks and the potential pipeline with Lesotho. What was the strategy for tapping into that market? Countries like Uruguay had used that industry to great benefit. Where was IDC going on that front?

Mr S Mbuyane (ANC) asked if the IDC had any partnerships regarding investment in the SEZs. What was the IDC doing in terms of alignment, transformation and provincial economic recovery? Regarding the health supply, was there a limit on funding? Did the IDC support companies making personal protective equipment (PPEs)? He noted that it seemed that IDC and NEF worked only in Johannesburg. Was there a provincial strategy for the economic recovery plan?

Mr Mbuyane asked about clothing and textile funding for take-over bids. How were people being funded? He was looking for black players in that industry.

The Chairperson said that South Africans needed a discussion on an inclusive economy as obviously the majority of SAs were black. Young people were in the majority and it would be a serious omission not to focus on the youth and the women in the economy. Their participation was very important. For example, small scale mining was not well-coordinated and one ended up with Zama-Zama and with no sense of how that part of the economy functioned. Black business, youth and women were the critical areas of the economy and the focus needed to lie in that direction.

Mr Garach responded to Mr Macpherson on the incorporation of the NEF in the IDC. He said that he could not comment as it was a shareholder matter. The NEF acted under a mandate and an Act of Parliament. That matter should be raised with the dtic.

Mr Garach promised that the NEF would provide the list, in writing, of those who had received funding.

Ms Makhathini stated that the NEF was committed to the rural provinces of Northern Cape, North West, Limpopo, Mpumalanga and the Eastern Cape. It had provincial offices and special targets for the rural provinces. The NEF engaged with traditional leadership where land was required. For example, in Jozini, the NEF had engaged with the Ingonyama Trust.

She said that the Covid Black Business Fund was fully operational. The other two funds, the R150m distress fund for black-owned businesses, and the R160m women empowerment fund, were new funds and the NEF was still working on it. She was prepared to share the list with Members who wanted it. She would not discuss why tax money was used exclusively for black people, but pointed out that the entity was just following the laws of Parliament.

Ms Makhathini assured Members that the NEF tried to ensure that new businesses were located in the Special Economic Zones (SEZs) as that was beneficial for the businesses.

Ms Mabuza stated that the matter of the merger was best left to the dtic. She added that institutional capacity was very difficult to build and whatever position government took moving forward, it should be aware of that factor.

Mr Nchocho stated that the points made by Mr Burns-Ncamashe were very sound. The IDC had a partnership with the Chris Hani Development Agency. It had a portfolio of many opportunities, particularly in agriculture and agri-processing as well as a wide array of small businesses in the towns that the Agency served in the district. Not only did the IDC provide funding instruments, it worked with partners on the ground to provide technical support and advice, while relying on the partner to do due diligence. Another example of provincial funding was where the IDC was working in the Northern Cape. The concrete examples would show tangibly what was being done in each province and the IDC could keep Members informed of developments when it presented updates. He stated that Mr Burns-Ncamashe was correct about symbiotic relationships and that was why the IDC had e-Connect. It was a very proactive programme which was literally designed to connect with people.

Mr Nchocho told Mr Macpherson that his view on the economy was aligned to that of the Reserve Bank and economists from the World Bank and the International Monetary Fund. The IDC looked at that entire spectrum of information before taking a view. Regarding studies, in mid-2020, a formal survey was undertaken to discover the extent to which the clients were extended and struggling to service debts. Consequently, a fund had been set up to support businesses that needed funding and R800m in concessionary deferments were offered, i.e. interest payments were re-scheduled to give the businesses breathing space. Details were available if the IDC was required to provide them.

He agreed that impairments had increased to unprecedented levels. The policy was not to go above 20% with impairments but they were touching the 30% levels. However, that was in the context of the environment of the pandemic. The rest of the portfolio remained robust and generated a good cash inflow from the client base. The IDC had a programme of managing down the bad debt losses and intervened in businesses in distress, negotiated with other banks, negotiated with clients and suppliers, etc. The IDC had a specialist team in the Post-Investment Unit to do such work.

Mr Nchocho informed Ms Motaung that her advice on the rural provinces was well taken. He accepted that despite the provincial offices and the presence of officials on the ground, the reach of the IDC was not adequate. While the structures were there, the IDC was not visible on the ground. That would be attended to and he would report back to the Committee.

He told Mr Mbuyane that all SEZs were supported and the strategy was about industry planning and working with the provinces to determine the best possible industry for each SEZ that would be viable and relevant to the environment of that SEZ. Secondly, top-structure infrastructure development was funded by the fiscus while the IDC funded infrastructure for businesses in the SEZs. Thirdly, the IDC scouted for investment and industries that could be located in the various SEZs. The fourth area was industrial financing. The IDC had secured major funding for the SEZs, especially in Coega and Richards Bay. In November 2020, a unit had been established at the IDC that would be the primary support mechanism for SEZs.

Working with Aspen and other medical suppliers to manufacture chemicals in SA was a key focus in the IDC’s response to Covid-19. He pointed out that many regulatory issues had to be addressed before the manufacturing of medical supplies could begin, but it was an active stream of work.

Mr Nchocho stated that the prudential limit for a single counterpart that the IDC could invest in was quite high because the IDC had such a large balance sheet. R1.2 billion was the single upper limit investment that IDC could make, but the average transaction was in the range of R300m to R500m.

He informed the Chairperson that there were specific strategies and a capital commitment to the inclusive economy, including Black, Youth and Women businesses. Could the IDC do more? He agreed that more could be done but there was both a strategic and capital commitment to the inclusive economy as well as a commitment of skills because the IDC had been following that path for many years.

Ms Bate said that the IDC was pursuing the marijuana industry as there was potential for the country and for job creation. It was managed by the Bio Team that focussed on growing materials and the Chemical Team whose focus was on the medical aspect. However, that industry was subject to significant regulatory considerations. The IDC was working with government and looking at the necessary regulations to enable the industry to flourish in SA. The entity was actively involved in projects in Lesotho, some of which were undergoing equity restructuring by their global counterparts which was delaying transactions. The entity was testing its feet in the water in Lesotho whilst building the regulatory environment in SA. A key priority was keeping value-add on the continent, and, ideally, in SA. Many partners wanted marijuana growth in SA but extraction offshore and that was not what the IDC was aiming for. It wanted the beneficiation to remain in SA.

Mr Burns-Ncamashe started with a rider on cannabis. It was historically known that Pondoland in the Eastern Cape had traditionally grown prime cannabis. He asked which area had been incorporated into the strategy. Cannabis was an asset of rural communities.

He added, as an afterthought, that the President would be officially opening the National House of Traditional Leaders the following day, which he did every year after SONA. He wondered whether it would be helpful to incorporate some of the key strategic industrial opportunities that spoke to rural communities into what the President said to that constitutional body. Perhaps, going forward, the NEF and IDC should arrange presentations to the National House of Traditional Leaders and the Provincial Houses of Traditional Leaders as that would assist in disseminating information.

Mr Macpherson asked why there had been no further discussion on the incorporation of the NEF. Was the Committee going through another meeting without an update on the NEF-IDC merger? Not even the dtic was responding. Maybe there were people who did not want it to happen for personal reasons, financial reasons or whatever. Maybe either the IDC or the NEF, or both, did not want it to happen as there was just no enthusiasm to get it done, despite it being spoken about for years. Could someone tell him where things were in terms of finalising the incorporation of the NEF in the IDC?

Mr Cuthbert noted that the information on cannabis provided by the IDC was extremely scanty and asked for much more detailed information in writing. Perhaps there was something in writing, including some research?

Mr Sipho Szikode, Deputy Director-General: Special Economic Zones and Economic Transformation Division, dtic, responded to Mr Macpherson. He stated that the mandates of the two entities overlapped but the NEF drew its mandate from the National Empowerment Fund Act which was in line with the Constitution and it had been established to assist those who had been disadvantaged by apartheid.

He explained that the NEF was playing a role in assisting clients whom many DFIs considered too risky. The delays had been caused by the difficulty of trying to merge two different mandates. The IDC had a long-standing mandate of resourcing the industrial base of the country including, but not only, black people. As part of the report by IDC, the information on women, youth and black people was highlighted, but the NEF funded those that would not qualify for funding by any other institution. The NEF clients were considered unbankable. That was the reason for the NEF. The NEF had wanted re-capitalisation as it had not been receiving funds from the fiscus and so it had needed re-capitalisation.

Mr Szikode stated that the merger had only been a reaction to difficult economic times in SA, but the NEF had continued and it had survived. Now that the fiscus could provide some money, there was no longer a need for the merger. There was a fear that the specific mandate of empowerment might be lost if it were merged with the IDC.

The whole process was with the Minister of Trade, Industry and Competition and the Deputy Ministers who had been engaging with it. He added that it was not about trying to keep the people in the NEF in employment, but about the mandate of the NEF.

Mr Macpherson responded that Mr Szikode was becoming more revealing in his answers each time. It was clear that there was no appetite for a merger; it was not credible to believe that the fiscus was in a better place. Education, Health and social grants were being heavily cut. How could the fiscus sustain the NEF? Mr Szikode should read the budget. It was even more important than ever to have a discussion about whether the NEF should even exist. It was disrespectful to Ms Mabuza to state that the IDC could not sustain the NEF mandate. He was convinced that it was about protecting people who were earning millions of Rand and people were receiving grants from the dtic when, in fact, funds with the dtic should be leveraged to develop the economy. He had not heard any compelling reasons as to why the process was dragging. The only way to get it done was to repeal the NEF Act and that would allow the IDC to do perfectly what the NEF was doing.

The Chairperson asked who should give feedback on the matter - the entities, the dtic or the ministry.

Mr Macpherson lamented that that was exactly the problem, but it seemed that the matter currently was with the Minister. The Committee needed a briefing on where the process was. It was untenable. The discussion even pre-dated the Chairperson’s tenure. The fiscus could not fund the NEF when funds were being cut. A CEO who earned R6 million a year was unacceptable. The Committee was owed an explanation from the Minister.

The Chairperson understood that the dtic had to have the discussion with the Committee but that the question be referred to the Minister.

Mr Macpherson said that if the Chairperson could facilitate a meeting with the Minister on the matter, it would be a huge step forward.

Mr Burns-Ncamashe said his sense was that it would be unfair to ask the institutions that question. As the Chairperson had already said, it was in the purview of the shareholder. It would be unfair to ask the entities. As much as the Committee should be prudent in exercising oversight, it also had to balance that with key transformation imperatives. The Committee could not be apologetic in advancing black empowerment as that was at the heart of the matter and should be an overarching imperative embraced by all who were aspiring to achieve a democratic SA.

Mr Mbuyane suggested that the Committee should not ask to do away with the NEF and come up with a 1940 arrangement.

The Chairperson noted that there had been some discussion. The discussion was based on B-BBEE which was one area that was quite important in the Committee’s engagements. The economy was in a very few white hands but the economy should include the majority of the people in the country, and women and youth. There were still issues of fronting in relation to B-BBEE and they had to be resolved but one could not say B-BBEE was the problem. The issue of the IDC and NEF was actually historic and the Committee might have to look at the issue. He did note that the issue of Cannabis and the Zama Zama had been an issue for years.

Mr Szikode assured Members that he was not trying to say that the fiscus was in a better position, but that the NEF had managed to improve its financial position. He knew that the fiscus was bad.

Closing remarks.

The Chairperson reminded Members that the following meeting would be in-person in Cape Town.

Members were requested to complete health certificates so that they could travel to Parliament for the interviews of candidates for the position of Chairperson of the NLC.

The meeting was adjourned.