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Industrial Development Corporation presentation
National Lotteries Board presentation
Khula Enterprise Finance Ltd presentation
South African Bureau of Standards presentation
National Lotteries Board Annual Report 2004
IDC Annual Financial Results 2004 (available at www.idc.co.za)
SABS Annual Report 2004 (available at www.sabs.co.za)
Khula Enterprises Finance Ltd Annual Report 2004 (not yet on website) www.khula.org.za
The South African Bureau of Standards, the Industrial Development Corporation, Khula Enterprise Finance and the National Lotteries Board gave briefings on their Annual Reports. Details of achievements were provided and the changes undertaken during the past ten years were highlighted. Members raised concerns including transformation, promotion of black economic development and SMMEs, levels of disbursement to rural areas, improved specification of targets and financial sustainability.
South African Bureau of Standards (SABS) presentation
Mr Kuscus (CEO-SABS) provided an account of the past year’s highlights describing the institution as the leading standardisation body in sub-Saharan Africa. A major goal was to improve the competitiveness of South African products and advance further surveillance techniques. Assistance had been provided to the Namibian fishing industry to gain access into lucrative EU fish markets. The commercial division was separated from the non-commercial to promote vibrant business activity and encourage sustainability. Imports of illegal products were curbed and laboratories were accredited by RVA, a credible Dutch institution. The group was committed to Black Economic Empowerment (BEE) with 56% of staff being previously disadvantaged. A BEE mining company in Kwazulu-Natal supported by SABS received an Excellence Award as the best run company. Fifty agricultural graduates were assisted to form a fruit-drying concern aimed at export. An AIDS awareness book was co-authored by a SABS employee and a diversity training programme was introduced for all staff.
842 standards were published in the fields of health, safety and the environment and R3.5 million was spent on capacity enhancement. External earnings grew by 2.8% in relation to total income and commercial revenue increased by 17% to R312.8 million. Business renewal, an active certification division and a large mining contract contributed to additional revenue. Core funding comprised only 22% of total income indicating a move away from funding. Operating profit increased by 9.4% and commercial revenue outstripped core funding. Total remuneration was reduced to acceptable levels in line with cost efficiency.
The lack of sufficient numbers of science graduates remained a challenge and human development was paramount. An aging workforce demanded revitalisation of the staff component. Service excellence and continued public confidence in the brand were key objectives and delivery would be driven in a holistic manner governed by corporate governance principles. The external business environment was increasingly competitive and the regulatory wing of SABS would exit in 2006 and be absorbed by the Department of Trade and Industry (DTI) in accordance with Trade and Industry objectives. A new business-orientated culture was being inculcated but adherence to DTI policy would remain. Development and transformation were key operating principles.
Industrial Development Corporation presentation
Mr G Qhena (Chief Financial Officer-IDC) stated that 3500 deals worth R51 billion had been approved in the last 10 years with R763 million going to the poorest provinces. Approximately 160 000 jobs had been created with 22 000 in the past financial year. 26% of approvals over 10 years had been provided to BEE and this would be improved. SMMEs had received increased attention in the last three years now comprising 25% of the total book. 20% of funds had been directed into Africa creating 3740 jobs and reserves had strengthened from R10 billion to R24 billion. Financial sustainability was necessary in order to carry out the mandate of economic growth and job-creation. Revenue increased by 4% despite a 500 basis points reduction in interest earned. Net operating income suffered a loss due to impairments caused mainly by increased costs of phosphates required by Foskor, a wholly owned subsidiary. Impairments arose from poorly performing markets or changes in currency exchange which resulted in projected losses that had to be indicated on the balance sheet. An 11% decline in net attributable income was recorded which included all income generated such as loans and investments.
Growth occurred in investments but profits declined. An empowerment fund was to be established involving other similar institutions facilitating co-financing opportunities within key markets such as SMMEs. Interaction with local development finance institutions would be encouraged to improve overall delivery. A Chief Risks Officer had been appointed to ensure adequate analysis of risk profiles. A commercial approach would continue combining capital and knowledge to raise effectiveness. Government’s policy objectives would remain relevant and a flexible response would prevail enhancing turn-around times in evaluating risk.
The Chairperson commented that the presentation was strong on figures but needed more contextual information to substantiate the results.
Dr E Nkem-Abonta (DA) suggested that specific targets should be provided to the Committee to assist in its oversight role and help to monitor progress achieved. Performance was difficult to determine without benchmarks. Clarity was sought on the reasons for impairment and whether management failure occurred in IDC or assisted companies. He asked what models were used to determine risk.
Ms N Khunou (ANC) requested further information on transformation within SABS stating that percentages did not specify positions occupied by beneficiaries such as management or line functionaries. Transformation had to focus on management.
Mr L Laubschangne (DA) asked whether the SABS possessed a follow-up mechanism after the initiation of a project to evaluate performance. Continued spending on training was questioned as other priorities also existed such as improved salaries to attract skills. Improved revenue was welcomed indicating a move away from the need for government support. Further detail was sought on the salary differentiation between administration staff such as managers and the professional component such as the scientists. He seemed to think that managers received excessive remuneration.
Mr S Rasmeni (ANC) asked how many blacks were assisted within the SMME initiative and in which provinces and whether co-operation was occurring with the SMME directorate. He asked if small black-owned mining concerns were benefited by the consultancy service and if disabled people were included.
Ms F Mahomed (ANC) inquired how rural people were reached by advocacy initiatives and what percentage were women.
Mr Kuscus replied that the SABS Annual Report provided a breakdown of BEE targets but reporting to the Committee would improve in future. Constraints existed in terms of scientific graduates and educational legacies but bursaries and internship programmes would provide relief. Follow-up mechanisms were in place to monitor the effectiveness of SMMEs. Continued staff training was necessary due to technological advances that occurred on a regular basis. Continued finance was the prerogative of Parliament but ad-hoc travel and training requirements necessitated continued government funding. Good managers were needed within the organisation as many scientists did not make sound managers and adequate remuneration was important to facilitate this.
He continued that 264 Black SMME people were assisted within the provinces during the past financial year. Mining consultancy work involved technology upgrades with a limited black market at this juncture. Four per cent of the staff component was disabled. Improved public awareness of product quality was a priority and co-operation was occurring with the Consumer’s Union. Breakdowns on the agricultural graduates assisted would be provided.
Ms Khunou requested more clarity on the breakdown of staff profiles.
The Chair agreed that more detail should be provided in future on staff composition to assist Members in oversight.
Ms D Ramodibe (ANC) asked how current computer control weakness would be improved in future.
Mr Kuscus referred to a 1 November meeting involving other DTI institutions where co-ordination and synergies would be discussed to assist with overall objectives. A new model for computer control was being devised involving a total revamp of the system promoting tighter financial control.
Ms Khunou requested a simpler presentation from IDC in future to identify key issues. She asked which provinces were the poorest and how this was determined. R4 billion approved in the past financial year seemed inadequate and environmental weaknesses at Foskor were highlighted. Deferment of taxes needed further explanation.
Ms Mahomed stated that 26% BEE was insufficient. She said that the measurement of cumulative exports required clarity. The decline of net attributable income was problematic including the situation with Hulett.
Ms Chen (DA) asked why a loss in net operating income occurred despite an increase in revenue. He also asked the cause of reduced taxation.
Mr Laubschangne asked that the BEE situation be better defined in future meetings to dispel confusion. More jobs were required within the poorer provinces and the decline in approvals was a concern. He asked which Development Finance Institutions (DFIs) were involved in partnerships.
Mr Rasmeni asked what percentage of activity was local and whether infrastructural development took place.
Dr M Sefularo (ANC) asked for benchmarks to help identify IDC's progress. He also asked about what IDC activities occurred in the rest of Africa. Greater clarity on interest charged was requested as well.
Ms Ramodibe asked what participation by host countries occurred in Africa and whether the IDC controlled the operation or a joint-venture prevailed. She asked what percentage of previously disadvantaged people were involved in export initiatives. She also asked for clarity on IDC's financial involvement within rural areas.
Dr Nkem-Abonta suggested that accounting officers should be present at these Annual Report meetings to provide meaningful responses in accordance with Public Finance Management Act directives.
The Chairperson agreed and also recommended that the Director-General of DTI be present in future.
Mr Qhena stated that the request for targets versus budgets was noted and would be provided at the next meeting. The Annual Report to be presented in November to Parliament included details of targets for next year to assist in future oversight responsibilities. Management failures related to assisted companies and not to IDC. Many start-up companies had excessive risk attached which IDC catered for and a fund was available to assist start-up management with technical assistance. Many companies were supported on a 5-to-7 year timeframe allowing significant unforeseen problems to arise. The presentation would be simplified in future to include fewer numbers and more context. The three poorest provinces were Limpopo, Northern Cape and Eastern Cape and new opportunities would be identified to improve success. The research and information department had been strengthened to identify appropriate projects and understand local issues. Co-operation with stakeholders would be increased.
Foskor was a wholly owned subsidiary of the IDC and recent added raw materials costs had impacted negatively on revenue. All investments undertaken by the IDC had to comply with environmental legislation. Deferred taxation was an accounting requirement to indicate expected losses accrued and involved no refunds from the Receiver of Revenue. IDC adhered to the standard BEE definition as advocated by DTI. Worker’s Trusts were also being established to improve worker participation. Hulett was currently enjoying a recovery and the Annual Report would specify all investments held. The loss of attributable income was due to the increased costs incurred by Foskor. Net operating income did not include taxation while revenue included tax. Capital gains referred to gains achieved through disposal of shares after a company listed or maturity was attained. Approvals were not undergoing a trend of decline and more business was being sought to amend the problem. The priority remained South Africa but NEPAD initiatives would not be ignored.
IDC did not focus on infrastructure as organisations such as the Development Bank of South Africa covered this aspect of development. Partnership with other bodies was encouraged on major projects. Opportunities within Public Works were being investigated and statistics on blacks within SMMEs would be provided. Interest charged varied from project to project in accordance with the risk profile. BEE buy-ins would only be supported if the BEE component remained after the IDC exited. Local companies would be included in activities within host countries but the IDC would retain a strong operating role. Agencies would be established within townships and rural areas to identify needs and arrange involvement.
Ms Chen asked why net profit had dropped while revenue increased and whether deferred taxation indicated accumulated loss.
Ms Khunou asked that specific figures on BEE be provided to assist in monitoring duties.
Mr Qhena replied that operating loss was due to impairments and Foskor. Deferred taxation was an accounting procedure to account for a loss which would be recovered over time. The Annual Report indicated the nature of involvement in Africa.
Khula Enterprises presentation
Mr X Sithole (MD- Khula) provided an overview of the past year’s activities. Disbursements had increased by 40% and a property portfolio had been acquired from DTI to assist with capitalisation. Currently 70% of loans were to black South Africans and the objective was to reduce operating loss and increase the volume of business at competitive prices. The balance sheet reflected an increase of R300 million due to the capitalisation initiative. An increase in advances and improved financial management were positive developments. Claims were increasing as a result of higher volumes but bad debt was decreasing The credit guarantee scheme involving loans to SMMEs improved and a 45% increase in retail financial support to BEE was a highlight. Equity funds empowering black entrepreneurs increased by 53% with a R40 million total disbursement. The micro-finance sector saw a 40% increase in disbursement.
Total disbursement rose by 40% and the number of beneficiaries increased. In the last five years, R1 billion was disbursed creating 100 000 jobs. Developments were occurring within property portfolios. Specific core sectors were being identified involving other finance providers to avoid duplication. The newly identified target market were black-owned owner-managed SMMEs and approximately two-thirds of current business was in this range incorporating loans between R250 000 and R3 million. Future strategy would revolve around easier access, affordability, improved communication and partnerships with similar organisations. Products would be devised in accordance with locally acquired knowledge resulting in market-responsive products. The company would be driven by the goal of broadening empowerment and creating relevant responses to society’s challenges.
Ms Chen asserted that charging interest and service fees would prove too onerous for poor start-up businesses and prevent success. Alternatives such as short-term interest-free loans and subsidised assistance were suggested.
Dr Nkem-Abonta commented on increasing operating losses which was a concern as recovery would be difficult over time.
Ms Mahomed asked for more detail on debts written off and success around job creation.
Mr Laubschangne asked why operating expenditure had increased dramatically recently and whether small white business people would receive support in future.
Ms Khunou recounted how debt recovery was being conducted in an arbitrary manner causing confusion amongst debtors. She asked whether hawkers would receive assistance.
Mr S Njikelane (ANC) requested more information on the property portfolio and what plans were envisaged for expansion.
Ms Chen asked whether Khula was profitable as it was difficult to provide money lending to the poor.
Mr Sithole replied that the intention of Khula was to be self-sustainable in the long-term by creating new volume and increasing loans. Knowledge of the market was key in assessing risk and identifying potential success. The intention was to provide cheaper products and capping of fees could occur in certain cases to encourage development. Deferred payment schemes are available to particular recipients. Increased payment of claims was due to an increase in volumes.
Dr Nkem-Abonta recommended that a more effective measure be introduced to determine the number of claims per guarantee provided.
Mr Sithole agreed with the idea as it would indicate the percentage of claims decreasing as the volumes increased. Approximately 130 000 jobs had been created since the inception of the company. Operating expenditure had risen as a result of added staff members and consolidation. Rentals from the property portfolio had improved revenue. 100% empowerment would only exist for the credit guarantee component which would be designed specifically for black business.
Mr Laubschangne reiterated whether whites would be excluded in future and where current white beneficiaries could go.
Mr Sithole stated that Khula had identified a key need to assist black SMMEs.
Mr Laubschangne repeated whether no whites would be assisted in future as the stated target was 100% black.
Mr Sithole replied that empowered businesses would be considered which could involve white business people in joint ventures. Loans could be provided to companies or individuals with empowerment credentials.
Mr Laubschangne asked whether informal traders would qualify for loans and whether more properties would be acquired.
Dr Sefularo asked for clarity on the deferment of capital and net assets.
Mr Sithole stated that bad debts were reducing and the repayment of loans or interest payments could be deferred for a period of time. Net assets referred to value not present in cash but in items such as property.
National Lotteries Board (NLB) presentation
Professor V Ram (CEO) stated that the NLB was the regulator of the Lottery and fulfilled this mandate in accordance with the provisions of the National Lotteries Act. The Board advised the Minister of future licence applications, percentages of beneficiaries and causes to be supported. Uthingo operated the lottery while the Board managed the central application office. The National Lotteries Board and the National Lotteries Distribution Trust Fund prepared two separate financial statements with the NLB reflecting the payment amounts. The cost-disbursement ratio was below international standards utilising only 2% of the fund. The Board had to manage the distribution of funds from the Trust Fund and the availability of retail outlets. 43 million prize winners were created last year with 89 millionaires and R4 billion total sales. 50% of total sales went to prizes and 30% to the Fund. Money was distributed to charities, arts, culture and heritage and sports.
NLDTF disbursements total R1 billion and approximately 4000 charities received support. The social responsibility component includes assisting black SMMEs in an increasing manner. Road shows would be conducted in provinces explaining how applications could be processed. Gambling research had identified the lottery as a mild form of gambling with R5 per R1000 disposable income spent on the lottery. 0.8% of the population suffered from pathological gambling which did not impact on the lottery. Research had highlighted a lack of understanding of randomness and probability theory.
Dr Sefularo asked whether part of the responsibility of the Board was educating the public on the dangers of gambling and the percentage used to administer the lottery seemed noteworthy as cost-effectiveness prevailed.
Ms Ramodibe claimed that large amounts of monthly income was being spent on tickets as people assumed that the more one spent, the greater the chance of success.
Prof. Ram stated that the Board had a legal obligation to protect the identity of winners if they so wished. The salaries of the Board were determined by government regulation with the Chairperson receiving a Director-General’s salary. An awareness campaign did exist but human nature was difficult to control. The Board intended to increase the proportion of income allocated to administrative costs to assist in disbursement. A help desk had been established to deal with enquiries and a mobile unit operated in rural areas. A new television campaign had been produced with an innovative approach to education. Only registered NGOs were funded and the Board had identified a need to broaden assistance to other groups. Proposed amendments to the Act were receiving attention from the Department.
The Chairperson stated that the meetings were crucial in improving contact with all components of DTI and channeling pertinent information into legislative circles. Such interactions would continue to receive support from the Committee.
The meeting was adjourned.
TRADE AND INDUSTRY PORTFOLIO COMMITTEE
29 October 2004
INDUSTRIAL DEVELOPMENT CORPORATION, NATIONAL LOTTERIES BOARD, KHULA, SA BUREAU OF STANDARDS: ANNUAL REPORTS
Chairperson: Mr B Martins (ANC)
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