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ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
24 February 2005
INDUSTRIAL DEVELOPMENT CORPORATION AND NATIONAL EMPOWERMENT FUND: BRIEFINGS
Chairperson: Ms N Ndalane (ANC, Western Cape)
Documents handed out:
Industrial Development Corporation briefing
National Empowerment Fund briefing
The Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF) explained their mandates and the ways they furthered government objectives such as rural development and Black Economic Empowerment (BEE). The Committee expressed concern about the disparity between the provinces in the number of IDC projects and investors, and NEF funding. Other discussed issues included investment in Africa, job creation potential and assistance to rural communities.
Industrial Development Corporation briefing
Mr G Qhena (IDC Chief Executive Officer) laid out the mandate for the IDC. This mandate included creating employment opportunities, encouraging entrepreneurs and small businesses, improving living standards, the promotion of industrial development throughout Africa, the advancement of women in business, and promoting Broad Based Black Economic Empowerment (B-BBEE). Mr Qhena explained the funding instruments for the IDC such as equity, loans, bridging and wholesale finance, and providing guarantees.
Mr Qhena stated that the IDC had created its development basket as a means to measure their progress. This development basket included job creation, exports, financing in poor Provinces, financing BEE, and financing projects in Africa.
As signs of its success, the IDC boasted that it had approved over 3 500 applications, which were valued at more than R51 billion. The impact of these 3500 approvals was that it had created 164 400 new jobs in the last decade. Mr Qhena conceded that the majority of these jobs had been created in Gauteng, but the reason they had included the financing of poor Provinces in their mandate was to attempt to correct this situation.
Mr Qhena said that the IDC was South Africa’s largest development financing institution, and that because of this it was important for the IDC to closely adhere to the national agenda. This meant that the IDC fully supported the BEE objectives, particularly equity and skills transfers. He added that the IDC used the B-BBEE rather than the narrower definition of BEE. The IDC came up with a BEE policy in order to ensure that they met the BEE standards. This policy stated that funding should create ownership for black people and that shareholding among black people should be encouraged. The policy also ensured that there was capacity for management or control by the black shareholders. Mr Qhena pointed out that the IDC had granted 870 BEE approvals since 1995. These BEE approvals amounted to R9.8 billion.
Mr Qhena talked about the IDC’s approach to Small and Medium Enterprises (SME). He said that the IDC viewed the SMEs as bridging the gap between the first and second economy. The IDC’s SME funding portfolio showed that SME transactions had added up to R12.2 billion, and that SME transactions made up 24% of the IDC’s total number of approvals. Within the different sectors of the economy, SME transactions were most prevalent in the Agriculture and Chemical sectors.
The IDC’s approach to the Provinces revolved around their mandate to improve living conditions, especially in poor Provinces, and the tenet within their development basket about financing in poor Provinces. Therefore, the IDC looked for inappropriate distribution between the Provinces, and checked for comparative advantages in different economic sectors in order to exploit these opportunities.
The amount of IDC funding to Provinces was greatest in Gauteng followed by the Western Cape. The IDC’s BEE funding to the Provinces was also greatest in Gauteng. Mr Qhena said that the IDC was working on closing the gap between the Provinces in terms of total funding and BEE funding.
The IDC had also analysed the sector competitiveness of each of the Provinces in order to exploit their specific advantages. They found that raw materials came from the rural areas and were sent to the urban areas of the Western Cape and Gauteng. This resulted in sustainable manufacturing jobs in the Western Cape and Gauteng, but erratic job creation and profitability in the rural areas. This analysis also showed that Limpopo, one of the poorer Provinces, was capable of specifically producing platinum, tea and wood plantations that could be exploited to the advantage of that Province. Likewise, each province was shown to be capable of taking advantage of specific industries that would be both profitable and sustainable.
The IDC had been developing some projects meant to exploit these particular advantages. These projects included an aluminium smelter in the Eastern Cape, and the mining of ferrochrome in the North-West Province. Mr Qhena added that the IDC was maximising effort on the priority sectors of Mining, Agriculture, and Tourism. The IDC intended to increase job creation, BEE, SME, and rural development particularly in these three sectors.
Mr Qhena said in conclusion that the IDC wanted to focus on governmental policy objectives, combine capital and knowledge in enterprises built on sound business principles, and achieve its goal of prosperity for all.
Ms N Ndalane (ANC, Limpopo) asked if the IDC mandate included the promotion of development in Africa, and how many projects the IDC had outside South Africa and where they were. She also asked for a further explanation of the development basket. She inquired if the IDC was working on improving their road shows, and what they believed to be some of the faults of these shows. She asked if the IDC could link job opportunities to employment. Finally, she wondered if the IDC and BEE could target young people and the disabled.
Mr D Gamede (ANC, Kwazulu-Natal) supported the idea that a mandate was needed to include people with disabilities. Also, it would be good to know what challenges the IDC was facing. He inquired how the IDC was dealing with fronting, and how the IDC went about linking up with other agencies. Lastly, he asked if the IDC was "really on the ground besides doing the road shows".
Ms M Themba (ANC, Mpumalanga) asked what the IDC did for women after they had been hired. She agreed with Ms Ndalane and Mr Gamede on the issue of targeting the youth and disabled, and she asked what criteria were used to decide where the road shows would be held.
Mr K Sinclaire (NNP, Northern Cape) stated concern about IDC’s approach. He wanted more detail about their projects, especially the ones in the Provinces. He added that in the Northern Cape the exchange rate was causing firms and projects to struggle. Since the projects in the Northern Cape were not working, he asked "are we getting value for money" from the IDC and its projects.
Mr Qhena spoke to the issue of challenges by stating that the country’s needs were vast and the IDC had limited resources. Therefore, the IDC could only do so much. On the issue of fronting, he said that the IDC got information about the parties to the transaction prior to doing business with them. The IDC also ensured that the process of approving transactions was transparent.
He said that the IDC worked on the ground level with local governments. He added that the IDC tried not to crowd other institutions, and that they did not want their dealings to overlap with the workings of other institutions. The IDC sought to compliment other organisations rather than create overlaps.
In 2001, the IDC was given a mandate to extend projects throughout the continent. He did not have the exact data with him but was able to say that currently there were projects in Mozambique, Angola, the DRC and Nigeria. He added that the road shows focussed on poor provinces.
Ms R Morathi (IDC Chief Operating Officer) said that the road shows went to every province, and that they decided on locations by consulting with the second tier government and local people.
Mr Qhena said that the development basket awarded points to companies that involved women and local people, especially those in rural areas. The IDC did not use youth because they did not want to crowd other institutions. He added that the IDC would provide more information to the Members, and admitted to Mr Sinclaire that the Northern Cape was having difficulties, due in part, to high rent.
Ms Morathi said that they did not want to overwhelm the Members with an abundance of information about the different projects, but that the information could be made available. She added that the IDC did not have control over who bought shares in their projects, and as a result they could not prevent people in Gauteng from investing in projects in other Provinces.
Ms Themba stated that if information were sent to the different Provinces, the people in Gauteng would invest before the people in the province where the project was being established.
Ms Morathi pointed out that in Ms Themba’s province of Mpumalanga, the IDC had relied on local people since they knew what was happening on the ground better than anyone else. She added that collaboration with local government was also important.
Mr Sinclaire said that the budget had a strong emphasis on rural development, but the IDC was allowing people in Gauteng to invest in other Provinces. This undermined the point of rural development.
Mr Qhema responded that when the IDC sold their stake in a company they made sure to sell it to the people that their mandate pointed out.
Ms S Chen (DA, Gauteng) asked whether the IDC did its forecasting on the basis of job creation and development or on the basis of economic gain.
Mr D Mkono (ANC, Eastern Cape) pointed out that the IDC undertook sports development, specifically sighting golf and the Women’s World Championship that took place in George. He asked what the benefit of sports development was and suggested that the IDC promote sport at a junior level to include the youth.
Mr J Sibiya (ANC, Limpopo) asked if the IDC could give examples of the benefits reaped from training programmes and how the trainees were able to apply themselves outside of IDC projects. He also wanted more information on the economic sectors in which B-BBEE objectives were being met.
Mr Qhema said that the IDC looked at both economic and development factors for their projects since a project had to be economically sustainable if it was to accomplish its developmental goals. He added that golf had been emphasised as a good way to meet potential business partners and deepen ties with current ones. That was why they held golf days in the different Provinces.
Ms Morathi pointed out that the IDC sponsored some players and did so in sports other than golf. She added that the training projects were new, but that their goal was to empower local workers that could run the facilities themselves. The benefits of this were job creation in the project itself, but it also led to economic expansion when more and more businesses came into the area.
Ms Ndalane asked that the NEF begin its briefing.
National Empowerment Fund briefing
Mr N Molo (Acting CEO) stated that the NEF’s main objective was to be a catalyst for economic equity. He explained the funding mechanism for the NEF, which included the NEF Trust and NEF ventures. The NEF Trust was a part of the National Treasury, while the NEF ventures were a joint fund between the NEF and IDC.
The NEF product offerings were aligned with government objectives. The organisational structure of the NEF included an Advisory Service that helped businesses in the transition to B-BBEE compliance. The products that the NEF developed were meant to address specific market failures and shortcomings.
The NEF differentiated itself from other governmental organisations in that it was an exclusive generalist funding body for BEE. Mr Molo pointed to this as the key feature of the NEF. The NEF was not focussed on personal credit or security. Instead, it was focussed on the "Hurt Factor", which was livelihood dependant. This meant that the NEF was not providing grant funding, but instead was looking at how much an entrepreneur could "put on the table." So, the amount of money an individual had to put in depended on how much that individual could afford to put in. This emphasised the fact that the NEF had an appetite for high-risk investments with a developmental focus.
The key qualifying criteria for the NEF included that companies had to be involved with BEE. Also, the business had to be sustainable and the NEF looked for strong social benefits prior to investing. The NEF’s evaluation programme applied a robust analysis to everyone they dealt with, which ensured that social benefits were reaped and that BEE standards were met.
He added that the NEF was receiving a lot of applications, and that they were working to transform those applications into projects. The majority of these applications were coming from Gauteng and the Western Cape. The NEF was trying to spread its message to other Provinces by making information more widespread.
The primary challenge thus far had been financing NEF. The government had granted the NEF shares in government owned business, but only two of those businesses had actually transferred the shares to them. He then turned the presentation over to Mr Wright for an explanation of NEF financing.
Mr A Wright (NEF CFO) said that the NEF wanted to create confidence that would allow for further funding for the NEF. He stated that NEF products were launched last May and applications started coming in that June. The NEF website was among the most active in all of South Africa. The NEF was also spread across a broad range of sectors of the economy.
Capitalisation had been the hardest part of the NEF thus far. He said that the NEF had acquired shares in MTN and when that stock rose, the NEF made a lot of money. However, MTN is one of only two companies to have transferred shares to the NEF, so their funding was not what it could be. He added that despite this limited funding, the NEF was ahead of their budget for this year. Mr Wright conceded that this was partly due to slow hiring caused by appointments to the NEF being held up.
Some of the milestones for the NEF included 20 deals or more in the range of R2 million to R3 million, rural community development, and market making. He added that the NEF had a healthy relationship with the Department of Trade and Industry and re-emphasised the NEF’s commitment to government objectives.
Mr Molo said that the NEF was established by the NEF Act in 1998, and that they started trading in 2002. Since then they had launched new products in June 2004 and their first product distribution took place in November 2004. All this was to show that the NEF was making progress in achieving their objectives.
Mr Sinclaire asked if the purpose of the investment committee was to determine if the NEF would be profitable in the businesses they undertook. He pointed out that South Africa was not in the top 30 countries in the world when it came to getting this process of investment done quickly, and asked how the process could be expedited.
Mr Molo said that the NEF did not disqualify people with applications that were not done properly. Banks would reject an individual’s application if it was not done correctly, but the NEF accepted these people and helped them to create a business plan that met the normal standards. However, the NEF wanted a pre-investment plan that would cancel out those people with sub-standard business plans; and while the NEF helped those people, it would fast tract individuals that already had a well-put together business plan. He added that the NEF was meant to attract people that would normally get rejected by banks, so the NEF had to include a process to help these people even if it meant that the process would take longer.
Mr Ndalane asked about the bias toward Gauteng and inquired about the challenges that the NEF had faced.
Mr Molo said that the challenges to the NEF included getting their shares and capitalisation. The NEF also needed to finalise all of its internal processes. Lastly, the issue of staffing had posed a challenge, but as appointments were being made that issue would soon be resolved.
Mr Wright added that the NEF was now able to look at the statistics pertaining to the applications, and they were now seeing which Provinces needed to be targeted by the NEF. He said that turnaround time would be shorter if the NEF was focussed on personal credit, but that would not have served the purpose of the NEF. The process was slow because the investment committee must examine the nature of the deal and how it related to the nature of the NEF mandate.
The meeting was adjourned.
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