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TRADE AND INDUSTRY AD HOC COMMITTEE
28 May 2004
DEPARTMENT BUDGET: SABS, KHULA, NTSIKA, IDC
Chairperson: Dr R H Davies
TRADE AND INDUSTRY AD HOC COMMITTEE
South African Bureau of Standards presentation
Maximising Access to Finance for SMMEs - Khula Enterprise Finance Ltd
Ntsika Enterprise Promotion Agency presentation
Industrial Development Corporation presentation
Submissions were made by four agencies that make up the Council of Trade and Industry Institutions
(COTII) allied to the Department of Trade and Industry and which offer specialised services: the South African Bureau of Standards, Khula Enterprise Finance Ltd, Ntsika Enterprise Promotion Agency and the Industrial Development Corporation. Each gave a report on its objectives, strategies and challenges. Many of the Committee's questions focused on the perceived overlap amongst these institutions. They were also asked how their activities could impinge on the second economy and what were Ntsika and Khula's strategies to become more productive and foster delivery.
South African Bureau of Standards (SABS) submission
Ms Cremilde Guedes (Chief Financial Officer - Acting Chief Executive Officer) highlighted the issues facing SABS. She outlined the operations of SABS and gave a breakdown of the current standards, the challenges, commercial activities, key priorities and the budget for 2004/2005. The budget was made up of allocations from the Department of Science and Technology Vote (R98 million) and the Department of Trade and Industry Vote (see presentation).
Khula Enterprise Finance Limited submission
Mr Xola Sithole (Managing Director) presented the strategic overview of Khula and its plans to turn the tide regarding its performance. He was very clear in pointing out the strategic issues, which had an impact on growth and financial sustainability. Mr Sithole explained the vision for the new Khula through six initiatives (see presentation).
Ntsika Enterprise Promotion Agency
Mr Lefa Mallane (Chief Executive Officer) provided background on Ntsika and its mandate, structure and corporate governance. He explained the National Small Business Support Strategy. He described the activities and achievements for 2003/4 and the priorities for 2004/2005 (see presentation).
Industrial Development Corporation (IDC)
Ms Rasibe Morathi (Chief Executive Officer) presented on IDC's main objectives, its performance during this past year and challenges facing the IDC. Example of these where creating sustainable jobs, inflexible labour markets and capital bias in manufacturing. She discussed entrepreneurship in relation to migration of labour to urban areas, Black Economic Empowerment (BEE) groups owning less than 1% of the Johannesburg Stock Exchange, the need for skills, the market gap, transformation charters and the impact of legislation making the cost of doing business high (see presentation).
Dr Davies ruled that questions would be asked and responded to in clusters.
Prof B Turok (ANC) was worried about the coordination policy, activity overlap and duplication of these four institutions. He found the IDC graph difficult to grasp because there seemed to be instability in their performance. This was reflected on page 28 where the graphs were uneven. Clarity was requested and whether this was there something to worry about? Ntsika was asked how many copies of their presentation had been made because they were very fancy. He remined Ntsika that public relations was not equal to a performance. Assessment. Clarity was asked about the graphs on training because it showed that the number of courses looked minimal but conferences were maximised. The support element of Ntsika seemed skewed. The impression that Khula, and the other three, gave was that its mandate was too broad. It was suggested that they take one area and improve on that. Khula's philosophy and the range of its broad mandate was overwhelming. It was not concentrated or performance orientated enough. Had SABS established how to contribute to the national mandate of jobs and poverty? It was justified to examine what SABS was doing about poverty and employment.
Mr M Dikgwaci (ANC) asked what was in place to meet the variety of challenges. As there was some overlap, he was unable to distinguish each area. Had the four institutions met to identify their specific complexities, reduce the overlaps and identify and really say what was the 1st economy and the 2nd economy. He wanted to know what produced and entrepreneur. In relation to Khula what other departments were offering the same service. What was the rate of failure of Khula itself and the people it had assisted. In relation to Ntsika why was the 'incubation period' seemingly unsuccessful and breeding a failure (North West was used as an example). IDC was asked if their targeting of poor provinces was in line with the mapping of poverty that had been done by national government.
Ms N P Khunou (ANC) asked how many markets had SABS opened and how many of those had been BEE. She also asked why top management was made up primarily of whites. Was there a strategy to bring more blacks on board? What was the difference between Khula, Ntsika and IDC as there appeared to be a duplication of duties between the three? She asked what the shareholders were all about. She requested a document about Khula's and Ntsika's success stories because everywhere she went there were complaints. Why had informal business not been mentioned and what strategy was in place to assist this sector? Had Khula and Ntsika had any awareness campaigns or public forums to advertise their programmes?
Ms F Hajaig (ANC) asked SABS how many people they had trained and employed. She also asked what training had been given to other countries. She asked how Khula was connecting with ordinary people because the committee kept hearing complaints about Khula and Ntsika. What timeframes were in place to orientate programmes in terms of the State of Address address. She asked about the involvement of women in the IDC because the organisation had to work proactively on that. Ms Hajaig asked the IDC what they were doing about the growth of the economy. Had they written off small enterprise? She stated that there needed to be a special unit in these agencies to look at supporting small enterprises. The incubation process was not enough. IDC seemed focused in Gauteng. Were they earnestly and proactively tackling poverty in the rest of the country? They had to go out and see what was happening and what could be done in other words create economic activity.
Dr E Nkem-Abonta (DA) asked if the lack of focus was caused by the mandates. It was good that Khula was getting more focused. Ntsika's wholesale strategy was based on a strong network. Was there a strategy to make LBSCs (Local Business Service Centres) into self sustaining, strong viable institutions? Would fees be allowed to be charged? Did Ntsika have the capacity to help LBSCs with skills and was there a budget for it? He also asked what the failure rate was of small businesses. The member asked IDC about the identified market failures. What had been identified and what was being done to address them.
Dr Davies asked what barriers did standards create for the products of developing SADC countries if any. Standards could be protectionist devices. He asked SABS what they read into foreign agencies coming into South Africa and applying standards. It was critical to have a local one - what was there thinking on that? He asked Khula to look at the terminology of their Act and answer the question: were they connecting to micro and small enterprises? Would they acknowledge that it was the case that they touched the 1st economy and not the 2nd one? Would they be able to extend their product to the 2nd economy and did they accept a failure rate? He asked Ntsika about their visit to the small business support body, SEBRAE, in Brazil and if their way forward was not merely financial support but diagnostic support as well, which also mentioned an incubation period. Would it not be possible to merge NAMAC (National Manufacturing Advisory Centre), Khula and Ntsika to get the diagnostic support? He also asked why there was a discrepancy In their training figures. He asked IDC why they used the phrase Small Medium Enterprise. It appeared that IDC did get the best finance and used the best terms. IDC had a particular niche. He asked them the same question - were they unable to deal with the 2nd economy and would it be better if someone else did else.
Mr S J Njikela (ANC) wanted to know from SABS to what extent standardisation was being used as a protectionist measure against SADC? To what extent had SABS had assisted the 2nd economy and to what extent had SABS been advertised. To Khula he asked in relation to their RFIs (Retail Financing Intermediaries). Ntsika was looking at capacitating service providers so what were they doing in this regard. He asked why the IDC were export orientated.
Dr M Sefularo (ANC) asked Khula and Ntsika if they were not just two sides of the same coin. He asked for clarity on their roles because as he understood it Khula provided finance and Ntsika capacitated. Secondly he asked if these entities had shared information with each other of what they had monitored and evaluated. Thirdly he asked why no one had picked up on the term co-operatives because they should be considered.
Ms E Cheng (IFP) asked what 'small business' meant.
Mr M Stephens (UDM) asked Khula why there were no transparent guidelines because banks had no idea what their guidelines were. He asked why 20% of applications to Khula were rejected. He pointed out that there was the danger of fragmentation. Too much duplication was a problem because they were in grave danger of not delivering their specific product. He asked what was being done about the cost of capital. Khula was lending at the bank rate or higher. This meant that they were lending but it was very expensive. There was a great need to address the interest regime and make the rate more favourable than the ordinary bank rate.
Ms L Mabe (ANC) asked why credit guarantees and investments remained flat. What plans and strategies where in place to become more productive and foster delivery? She pointed out that the SABS employment equity record was disappointing. What targets had been put in place to include women and blacks? What skills training had been put in place. She asked about IDC's export earnings and requested a racial breakdown of export earnings. She referred to the graph on page 23, which showed high performances in the Western Cape, Gauteng, KwaZulu Natal and Mpumalanga. What was being done to stimulate economic growth in other provinces?
Ms C Guedes responded to the SABS questions. She said that SABS was aware of their employment record in relation to the national mandate of poverty and growth. She explained that standards were a tool for technology transfer because as more standards were being aligned around the world the expertise was being shared. Adopting international ones meant job creation and economic development. In the last two years there had been some bridging standards put in place for SMMEs and this had lead to successful tendering for government tenders and accreditation. The markets that had been opened were linked to the development of East London, which had opened an export industry. She said that SABS was considered one of the most transformed. They had 60 persons from previously disadvantaged communities, 48 women and three disabled persons. At top management level, black people where leaving for the private sector where remuneration was much higher. In terms of development there were currently six black engineers who were passing on skills through training of others who were coming in. Senior management was also being trained to take over. There was a development programme for young technicians. They received good training in SABS but usually left for open market salaries. She noted that it took two years to train people who then left to work for private enterprise. That was their contribution to training. They were actively involved in the global debate on social responsibility.
The main assistance to SADC countries was to Tanzania, Mozambique, Angola, Uganda, Lesotho, Swaziland and Botswana. People from those countries were being trained in South Africa. They were starting to harmonise standards in preparation for the opening of borders. Last year 728 persons were trained from industries ranging from electrical to textile areas. They were specifically targeted for transfer. At this stage SABS could not say anything about the 2nd economy but they would be looking at the issue. Lastly the role of the design institute was a form of development in the region. She used the example of Korea where the development of the industry was a consequence of their design institute.
Mr Sithole from Khula responded that their mandate focuses and performance were directed by the shareholder management, which was currently under review. He agreed that black owned SMMEs did not have access to finance and that there were overlaps. Their performance was being turned around by the strategy to restructure the organisation. He agreed that the public perception was not a good one. They had created 1 million jobs in 8 years and they had created knowledge in the sector. He explained that their administrative role had made them intensely inward-looking. They were currently trying to open themselves up to see what was wrong. They were doing road shows to get feedback. They had put in timeframes and they were looking to implement their Turning the Tide strategy by September 2004.
He said that Khula had failed firstly in the context of 1st and 2nd economy, secondly in Khula's relationship with micro finance and its relationship to APEX. The creation of the Apex fund would be specific to the 2nd economy and it would be a dedicated institution for that. In what was left for Khula to deal with there was still a large scope for failure. Khula needed to move away from being product focused and provide for the need to access finance quickly. He did point out that the view was incorrect that Khula was only relevant to the 1st economy. He explained that there was a grey area between the 1st and 2nd economy and Khula did have a role to play for both.
With regard to Khula focusing on commercial or development activities Mr Sithole said that regardless of the focus, Khula should have a portfolio approach. The IDC had done it. He admitted that it was challenging but it could be done. On the issue of failure rates, a strategy to deal with this was to engender a culture of success because entrepreneurs wanted to make money. The relationship between Khula and those needing the service had to improve. Apex had asked Khula to work with them and provide manuals thus they would be working closely but it would not be the responsibility of Khula to service the 2nd economy. Regarding RFIs they did provide loan officer training and board training and they had been given money to run these. However the private sector was poaching these. Mr Sithole agreed that restructuring could lead to fragmentation but it was a risk that Khula had to take. He said that a balanced approach to the problem could work. The process just had to be managed and the balance of performance and incentives would ensure cooperation.
Mr Mallane of Ntsika agreed that there were challenges facing the small development agency. There was a broad management attempt to focus and get a clearly aligned mandate to reduce duplication. They were working with India and Ireland to assist with these challenges. The new phase of service delivery would bring to South Africa assistance that would flow nationally, provincially and locally. He explained that the definition of small business was based on the Act so was medium and micro. The acknowledgment of the 1st and 2nd economy brought more attention to the challenges. He admitted that they had not engaged with co-operatives at all. They were currently following the debate.
He agreed that Khula and Ntsika were the same side of the coin. Entrepreneurs wanted to make money and they did not care whether it was Khula or Ntsika who assisted them. The needs were both financial and non financial. A package of support and finance needed to be given. On Ntsika's level of performance, Mr Mallane said that their interventions had been more generic. Basically their track record had been bad and there was room for improvement. The failure rate was a challenge, which had not been paid too much attention up until now. External agencies dealt with that. The approach had to change and they had three assumptions in their new strategy. Ntsika should not create service providers - they had to provide services on their own behalf and evaluate them. They also had to evaluate the numbers and they had to systematically engage with users. The restructuring would also cause challenges, which would be monitored. They would also publicise their work through road shows and service providers, improve their relationships with stakeholders, encourage the 1st and 2nd economy to become part of collectives because it was hard to deal with individuals. A proper record of work being done would now be kept.
Ms Morathi of IDC explained that the graphs did not reflect instability. She pointed out that the IDC's operating profit had increased in the last five years. In 2001/2 Saldana Steel write-offs were very big which explained the dip in the graph. She agreed that there was duplication but the market was very big. She pointed out that one institution could not deal with the entire market. She said that the 1st and 2nd economy and rural development should be looked at from different angles because they were providing funds and a market immediately for the industries that they invested in. She said that the creation of the 2nd economy created other avenues for markets such as the creation of schools, roads and the like.
She explained that in terms of bridging finance the IDC was assisting because the contract was usually viewed as security. Ms Morathi repeated that they were doing work with highlighted poverty areas. She explained that the concentration in Gauteng was because there was more investment and industries in Gauteng. They were supporting rural areas because it was easier for entrepreneurs to reinvest in their own communities, which was why this sector was so important. In relation to exports, South Africa was an export economy. South Africa needed to create a consumer economy. There were only a small percentage of consumers so currently the strategy was to invest in the continent. In relation to women, 33% made up the board, 22% senior management and 26% were professional women. Although there was growth, there was room for improvement. They had also financed over 50 businesses that were run by women. She explained that market failures were part of the challenges being faced. IDC did not have all the answers. One of the assistance strategies was to promote partnerships. The SMMEs incubation period was not part of their scope. She said that in general people had to start accepting that businesses did fail because 8 out of 10 SMMEs did fail.
Ms B M Ntuli (ANC) asked about the financing of agricultural production. She also asked what the relationship between IDC and the Land Bank was.
Ms Morathi explained that the Land Bank was doing loans. In the last few years there had been an overlap. The IDC had high value items, which they co-financed with the Land Bank. IDC was continental whilst the Land Bank was local.
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