The Select Committee met virtually to be briefed by the Department of Tourism on the Tourism Equity Fund (TEF). The Minister of Tourism cleared the confusion between the Tourism Equity Fund and the relief fund and also addressed the notions in the public domain labeling the equity fund as racist.
Members were told the Department of Tourism (NDT) has identified the need to expand the existing funding offering in order to address some of the challenges contributing to the slow progress in Codes implementation. There is a need for a dedicated funding mechanism to support majority black ownership and control at 51%. The objective of the TEF is to accelerate the quantitative and qualitative increase in participation by black tourism industrialists in the tourism sector as reflected by their contribution to growth, investment, and employment creation. This emphasises the focus on scale in the levels of participation of black people in the sector. The fund totals about R1.2 billion comprised of grant funding and debt financing. The grants will be capped to a maximum of R20 million.
The Small Enterprise Finance Agency (SEF) report that the TEF is an equity acquisition fund that will be managed by sefa on behalf of the Department of Tourism. The Department of Tourism intends to pilot the TEF in partnership with sefa for a period of three years with a view to promote the participation of black enterprises within the tourism industry.
Members expressed concern about the court case and the impact, and some were worried that it might take time to be concluded. Some Members asked for a breakdown of applications per province but, the Department said it is unable to provide such except for the numbers alluded in the presentation. Members noted that the presentations did not have anything for people with disabilities. The 12 months payment holiday was a concern to other Members and different ideas were suggested to ensure transformation. Minutes of 1 and 8 June were considered and adopted.
The Chairperson welcomed everyone and acknowledged the presence of the Minister of Tourism, Ms Mmamoloko Kubayi-Ngubane, Mr Victor Tharage, Director-General: Department of Tourism, and the Chairperson and Chief Executive Officer of the Small Enterprise Finance Agency (Sefa). He indicated that in the previous month, when the Minister presented the Annual Performance Plan (APP) for the Department, the Committee had requested a briefing on the Tourism Equity Fund before the announcement of the pending court case. The presentation was scheduled for 15 June 2021. He told the Committee that it would be briefed by Sefa and the Department of Tourism.
Apologies were received from Mr J Londt (DA, Western Cape) and Ms M Mamaregane (ANC, Limpopo).
The Minister notified the Chairperson that she was going to leave early to fulfil her other responsibilities as Acting Minister of Health and an apology was given for the Deputy- Minister who had travelled to Namibia.
The Chairperson said an apology from the Minister for the previous and current week was received and accepted. He appreciated the presence of the Minister despite her busy schedule.
Opening remarks by the Minister
The Minister acknowledged the presence of the delegation from the Department of Tourism and Sefa and emphasised that it is important that the Committee gets briefed on the Tourism Equity Fund (TEF). The need for TEF is based on reports received and the aim is to remain firm despite the court challenge. There has been confusion between the Equity Fund and the Relief Fund. The public is constantly reminded that it is not a Relief Fund but a Tourism Relief Fund that has been implemented and concluded and has been in the pipeline for some time. The program is informed by the Tourism Transformation Report of 2015/2018. The demand for relief has been very high and this is shown by the response from the public. There were speculations when the program was started that no one would be interested.
The Minister said she had learnt of the Seven Sisters who are running a wine farm in the Western Cape when she was sitting on a BBC panel. The Seven Sisters applied for the Tourism Equity with the belief of expanding its business. There has been misinformation that the program is meant for people who are connected. She emphasised that it is a program meant for entrepreneurs that are willing to play a role in the sector. This is supported by the partnership between Sefa and the partner bank. This is also a response to the challenge facing black entrepreneurs and previously disadvantaged groups in the communities who have shown interest in the industry. The program seeks to empower people who have been running other people’s businesses for a long time, for example, hotels and have acquired the necessary experience and saved some money. The program is intended to support such people who decide to open their own businesses but lack surety and financial support from the banks. The program does not only cater for 100% black ownership but 51% black representation.
The Minister said that Afriforum and White Solidarity are spreading incorrect information and labelling the initiative as racist. The initiative is not intended to expropriate establishments from the previously advantaged groups and there has been conversations with the previously advantaged groups who want to support Government in transformation. Some have provided written testimonies saying that they want to retire but prefer not to leave the establishments in the wrong hands and would nominate one of their workers who lack financial assistance to run the establishment. The notion in the public domain that is labelling the initiative as racist is not true and the ANC believes in a non- racial society. The aim is not to leave anyone behind. Therefore, the past must be addressed and redressed. She said she hopes that all racial groups, all age groups and all genders support the initiative as it is a just cause.
Tourism Equity Fund Presentation
Mr Tharage appreciated the platform to present and centered the presentation on access to finance and the actual state of transformation in the sector, as highlighted by the Minister. He also explained the Resolutions of the Tourism Transformation Summit, which was held in 2017, which was a reason for the establishment of the TEF. He went through the parallel between the black industrialist scheme and tourism explaining the current figures of the fund itself. Objectives and some of the updates were outlined and he said that Sefa would elaborate more on the updates. The 2011 National Tourism Sector Strategy subsequently reviewed in 2016 and currently implementing the 2016/2026 plan, is a document based on the Tourism Act which makes a strong call to ensure inclusivity which results in transformation in the tourism economy. There are codes of good practice in place for black empowerment that were approved in 2015 and the project has been very pedestrian. It has been clear that if there are no extra-ordinary steps taken, the level of transformation in the sector will not change. There have been clear indications from surveys conducted that access to finance is a challenge for black entrepreneurs be it for investment or working capital. The feedback the Department gets from financial institutions has got to do with the feasibility of the business plans, limited experience in the industry and limited equity contributions. There have been questions about the contribution of the Tourism Transformation Fund. It had fundamental limitations in terms of meaningful participation. It also could not allow for acquisition and fully blended financing. He went through the transformation targets dating back from 2012, 2017 and 2018. The Director General concluded the presentation by briefly addressing the court case against Afriforum.
[see presentation attached for details]
Sefa Presentation on the Tourism Equity Fund
Mr Martin Mahosi, Chairperson: Sefa, welcomed the opportunity to present and mentioned that his team will have a similar presentation with the Department. The relationship between the Department and Sefa has turned out quite well based on engagements that started in December 2020 and is one of the fastest growing engagements in terms of partnership with other parties. Sefa already has an existing network within the SMEs ecosystem in the banking sector. It is worth noting that this is not the first partnerships that Sefa had. The entity recently successfully completed sizeable programmes with the Department of Trade and Industry and the Department of Agriculture. He assured the Committee that the entity has capacity to implement the TEF despite the court challenges the Department is dealing with. As the Minister had indicated, Sefa has engaged with Seda to help applicants who need non-financial support. Between Sefa and Seda, there is a vast network in terms of footprint to enable those that need to physically contact the two entities for relevant support while waiting for the outcome of the court challenge. He handed over to Mr Mxolisi Matshamba, Chief Executive Officer: Sefa, to lead the presentation.
Mr Matshamba said the scheme received positive responses from the economic citizens of the country judging by the number of applications Sefa had received. He took the Committee through the objectives, purpose, focus and governance of the TEF.The Tourism Equity Fund (TEF) is an equity acquisition fund that will be managed by Sefa on behalf of the Department of Tourism. The Department of Tourism intends to pilot the TEF in partnership with Sefa for a period of three years with a view to promote the participation of black enterprises within the tourism industry. TEF will be capitalised by the Department of Tourism to the value of R540 million over three years (i.e R180 million per annum over a three year period). This funding will be utilised as a capital injection of a grant contribution in funding acquisitions to a maximum of R20 million per enterprise. This capital injection will be used to leverage at least 50% of additional funding per transaction from Sefa and the private sector.
The funding will entail grant capital injection with a maximum of R20 million as determined by the scorecard for the fund. The Sefa loan will fund of up to a maximum of R15 million per enterprise and the term of the funding will be determined by the business cash flows up to a maximum of 120 months per enterprise with a maximum moratorium of 12 months. The loan will be priced according to the Sefa pricing matrix. He went through non-financial support which includes mentorship, market access, investment monitoring and technical support to help with qualification requirements. The fund would support a registered legal entity in South Africa in terms of the Companies Act, 1973 (as amended); Close Corporations Act, 1984 (as amended); and the Cooperatives Act, 2005 (as amended). It must be 100% owned by South African citizens predominantly black-owned (51%), be registered and compliant with the South African Revenue Service (SARS), be majority black owner-managed and controlled and the entity must be operating in the qualifying sectors. He outlined the funding requirements and explained the application process. The presentation was concluded by an explanation of fund capitalisation and allocation together with the performance indicators.
[see presentation attached for details]
Ms B Mathevula (EFF, Limpopo) said the tourism sector is dominated by white people who own hotels, nature reserves, BnBs, lodges and roads. She asked if the TEF will fund heritage tourism. She also asked for a breakdown per province of the 379 applications including gender and the number of people with disabilities who applied.
Mr M Mmoiemang (ANC,Northern Cape) welcomed the two presentations but asked the Department to give the Committee a brief context of the court case against Afriforum that the presentation had referred to as Part A and B. He also asked whether the 31 enterprises on Sefa performance indicators consists of historically marginalised groups in rural areas or townships. The first phase of land redistribution and restitution spent a lot of money acquiring property from historically advantaged groups instead of revitalizing post restitution programs.
He mentioned his interest in the circulation of capital in the historically disadvantaged groups and advancement of transformation. He was happy with the outlined objectives of the scheme but of the utmost importance is to ensure that tourism enterprises are owned by the majority instead of the artificial majority. Most of the enterprises in the townships and rural areas have limitations to scale up the managerial ability. Therefore, money should go to the intended beneficiaries. He also asked if the TEF will be on hold until the court case is finalised or if there are other programs that can simultaneously continue because the court case can stetch up to two years before the final verdict. Sustainability of the TEF is very important. He asked for the long -term sustainability plans beyond Sefa especially the need to mobilise the private sector and asked if Business South Africa and the banking sector had been engaged with. He then concluded by asking if there were representatives of the Department on the EXCO of Sefa and if there are any plans for the Board to amend the Trust Deeds. This will enable Board members to accommodate new developments and ensure that the Department of Tourism does not only have representatives at EXCO but with the Board of Sefa where decisions are taken.
The Chairperson indicated that part A interdicts the entire court process and part B will deal with substantive issues raised by the applicants.
Ms H Boshoff (DA, Mpumalanga) asked if it was possible for the Committee to see the reports which formed the basis of TEF that the Minister referred to in her opening remarks. The first presentation showed 188 approved applications to the value of R4.1billion. She asked if the Committee could be given the scope of the projects including any follow up and whether investigations or monitoring has been done. She also asked for the location of the projects as well as the revitalisation of rural areas and townships so the Committee can inspect and exercise oversight. She expressed her worry because TEF has not identified people living with disabilities as they should be included because they are part of the community. She asked Mr Matshamba to explain de-risking in respect of debt repayment and to name the commercial bank Sefa has partnered with. She also said she is worried about the growth of funds if 12months moratorium is given and asked for the interest rate and the scope or criteria of the requirements of the screening process.
Mr M Dangor (ANC, Gauteng) said Mr Mmoiemang had already asked some of the questions he wanted to ask but asked about the rate of interest and the margin that is being charged by the bank and if there is a guarantee. The court case could take two to three years and the difficult question is whether development will take place from now until the case is decided. The public should be notified that TEF is not a relief fund to avoid the confusion.
The Chairperson said the Minister had clarified the difference between equity, transformation and the relief fund as the media was also confused. He asked for clarification on the role of the Tourism BBBEE Charter Council in the establishment of the TEF. The Director-General gave a report on the status of transformation and targets on ownership, management skills development, enterprise and supplier development. These were the results that led the Department to establish the TEF because targets were not met, and also enterprises are supposed to report annually to the council. He also asked the Department to explain the basis of the court challenge whether it is the principle of the affirmative action or operational challenges. The principle of affirmative action was clarified by Judge Kollapen when he considered the appeal on the case of the BBBEE relief fund. He also asked for the percentage of the racial breakdown of the applications.
Response from Sefa
Mr Mahosi requested the Committee to understand that it is unwise to discuss the court case as it might jeopardise the merits. The fund is meant to assist people to acquire equity and expand existing enterprises. Heritage tourism will be considered for funding and will not be exempted. There is going to be expansion and acquisition for tourism operators with establishments like restaurants linked to accommodation facilities. He agreed with Mr Dangor and said the Board of Sefa is seriously concerned about the extent to which the message is communicated. The tourism program was implemented as part of the communication initiative and in the past two months before the interdict, a communications company was appointed to help rollout the communication campaign. The entity has been using the network in the ecosystem and is working with commercial departments in the tourism sector to spread the information. The private sector is involved, and the entity concluded an agreement and is working with ABSA bank.
Mr Mahosi said there is a standing delegation within Sefa where EXCO plays a significant role in the processing of funding applications. There is also the sub committee of the Board called the Investments Committee that processes applications above the threshold. A special provision for EXCO and the Investment Committee has been made to approve applications of up to R40million. An application above R40million will be referred to CIC to be processed and recommended to the Board for approval. He emphasised the difference between screening and approval of applications. TEF is a program of three partners; funds committed by Sefa, the Department and the partner bank. The Department has made a commitment that in order to make the program sustainable grants can be offered to a particular threshold depending on the merit of the application. The scheme is attractive because partners of the state raised a substantive amount of money which enabled the entity to reach the R1.2billion threshold and it takes away the doubt that people have, that it is subject to manipulation. This is because there is an initial approval that is done with Sefa. Once the deal has been approved it is sent to the commercial bank to be finalised and approved within the scope and structure of the deal. The State has never given banks absolute power to override decisions of the entity. The state intervenes if there are unfair rejections of applications. This allows the entity to create advantages for people at the same time making sure the risk is not too high to make the program sustainable. Sefa will not be able to provide a full applications breakdown as per the Committee’s request except numbers that were alluded to.
The Chairperson confirmed that the presentation has a slide that outlines the criteria which Ms Boshoff asked for.
Mr Matshamba said the screening process is based on the funding criteria which states that the business enterprise must be based either in peri-urban or rural areas, the company must be South African- owned and the deal must be more than R10 million. That is the initial screening, not the approval process and companies that went through the first round of screening met the screening requirements. The next step is to exercise due diligence to see if the business is viable and meet all funding criteria of Sefa, the Department and the commercial bank. When the interdict was served, the entity was still conducting the screening process and when the court ruled there were 481 applications valued at R8.2billion. These were reduced to 275 applicants valued at R6.4billion after the initial screening process and the unsuccessful were valued at R1.8billion.
Mr Matshamba said the Chairperson of Sefa explained de- risking. The grant portion for each deal from the Department reduces the gearing of the transaction. Therefore, the entity is not burdened with a huge debt and the bank will be forced to revise the interest rates. When it comes to the 12months payment holiday, the entity looks at each deal and analyses the cashflow capacity and decides if the enterprise will break even after 6months then the payment holiday of 6months will be given. Other deals might need 8 or 10 months and the same principle is applied. The payment holiday is granted on the merits of each deal depending on the cashflow capacity of the deal. The entity does not want to strangle the cashflow of the enterprises with high payments right from the start. Majority of the applicants were predominantly Black because of the 51% requirement. There were a minority of applicants that were below the 51% and were not excluded because of the law but points would be lost based on the level of ownership of the company with regards to being previously advantaged or disadvantaged.
Mr Mahosi said the 12months holiday is considered because the program was recently launched and still in the midst of COVID-19. The understanding was that the tourism sector is seriously negatively impacted hence the consideration so enterprises could recover and to promote domestic tourism.
The Chairperson said he wanted to convince Ms Mathevula about the statistics per Province and the categories she had requested. Once the court case is concluded and the Department and Sefa have processed and approved applications, the Committee will then get a report. The TEF is now part of the Departments APP, and it will be reporting to the Committee on a regular basis because it falls under Program Four which is the Tourism Sector Support Services.
Responses from the Department of Tourism
Ms Mmaditonki Setwaba, Deputy Director General: Tourism Sector Support Services, Department of Tourism, said the court order is an interim suspension to stop implementing the TEF where applicants could raise queries. The queries raised are about the constitutionality of the decision to increase black ownership target from 30% to 51%. The issues are about the rationality of that decision. The Department has been able to file the records as per the interim court order but, the contestation was that BBBEE policy should not apply for the TEF because the scheme is related to disaster management. The attitude is that there is no rationale for the BBBEE policy to apply for the scheme. The court case is a setback considering the efforts made with Sefa to get the scheme up and running.
Ms Setwaba said there are other funds in line to assist while the TEF is suspended for example the Tourism Transformation Fund but, it does not address or give the results that the TEF will do. The TEF is intended for large enterprises to increase black ownership participation and targets as mandated by BBBEE legislation. There is a gazette that was published after the launch of the TEF which has the rationale on why TEF seeks to set black ownership targets at 51%. The TEF is reckoning and bringing to par some of the recommendations that were made by the 2017 Summit.
Mr Tharage said the role of the BBBEE Council is to monitor transformation in the sector through surveys among other ways. Once the state of transformation report is concluded, a recommendation to the Minister is made. The Council convened the 2017 Summit to make sure there is a dialogue on transformation issues and specific recommendations that could be forwarded to the Minister. The Council is independent and does not have an active role in the operations but exercises oversight on the Government and the private sector. He said there are projects that focuses on heritage tourism but, resources are limited. There are no current sustainability engagements about the TEF until the court case is settled but, there are ideas in place be it philanthropic or any other forms of financing that could assist beyond three years. There are reports that were presented in Parliament by the BBBEE Council that shows the consistent need for inclusivity in the tourism sector. The Committee could benefit a lot if it requests the BBBEE Council to present the reports because the Council has more information compared to the Department.
Mr T Brauteseth (DA, KZN) said all tourism ventures are businesses and the primary focus of a business is to make profit. He asked for the level of engagement that the Department is having with private investors to support existing and prospective tourism entrepreneurs rather that being the sole provider of grants. The money will eventually run out so self- sustenance is highly recommended. The presentation said nothing about the digital financing space that a lot of people are not aware of. There are companies that are now offering financing on a digital platform. This means that the companies remove the physical analogue infrastructure that exists in the banking sphere. Banks spend over a R1billion every year on paperwork, manual transactions, staff and massive banking offices. The model of these companies is that they do not charge interest on the loans they give to businesses but charge a certain percentage on the turnover of the business. That is how they get their money back but, most importantly they work with viable businesses. He said he once raised the issue of digital finance in a previous meeting with the Minister of Small Businesses Development and she was amenable to the idea. He said he is raising the same issue so the digital space could be explored, and it would be great for tourism entrepreneurs across the border. The Minister said this is not a racist endeavor because all citizens should be empowered. He then asked the Department if it would like to engage with companies like that.
The Chairperson said he agrees with Mr Brauteseth and the TEF is addressing the legacy of being involved in business and obviously profit making. The TEF would not exist if everyone had the same opportunities to venture into business.
Mr Mahosi welcomed the recommendation by Mr Brauteseth.
Mr Tharage said the Department has not looked at digital financing because the departure point was something more accessible and less sophisticated. There is a different programme that packages opportunities that would attract international and domestic investors into specific tourism initiatives. The Department also hosts all kinds of investors from different parts of the world to showcase what is available. Multiplicity of initiatives will probably yield better results. The Department welcomes all sorts of initiatives and is mindful that there are discussions from the SARS point of view about bringing such platforms on board. The biggest platform being discussed was Bitcoin and it is not necessarily a legal tender in the South African economy context, that is not yet regulated but the Department is open to recommendations and suggestions.
Mr Brauteseth said he was not talking about Bitcoin and electric currency but usual banking systems which are cheaper and digital. He said for the past six months he has been approached by some of the companies that come up with such innovation and are willing to help entrepreneurs especially those in the tourism sector. He agreed with the Chairperson that the primary focus is to eradicate the legacy of apartheid and if more citizens are economically productive, the more tax the country gets. He asked the Chairperson if he could do a presentation on one of the oversight visits to fully explain the idea to the Committee and that can be a learning opportunity for everyone.
Mr Tharage appreciated the opportunity to present and respond and said that he would welcome the presentation from Mr Brauteseth. He is aware of the banking system and currently there is only one bank with such services. The Department is dealing with blended financing and if such a bank is willing to give part of the loan to the individual or enterprise that wants support from TEF that would be appreciated. An unfavorable situation would be where the businesses that the Department is helping to ensure inclusivity are unable to rise above their debt to operate self sustainably, and hence an emphasis of ensuring the grant component which will soften the blow. He welcomed all the guidance and recommendations by the Committee.
The Chairperson thanked all attendees with a special mention to the Department and Sefa. The Committee need to consider getting a presentation on the BBBEE. There is a Department that reports to the Committee, perhaps that Department could be invited to outline the strategy that was developed in 2003 on the BBBEE Act which was also promulgated in the same year together with generic and sector codes that have been adopted by different sectors. This is because the Department is the custodian of the Act and issuing of sector codes.
Adoption of Minutes
The Committee considered and adopted its minutes of 1 and 8 June 2021.
Meeting was adjourned.
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