IDC 2004/05 Annual Report, NEF 2004/05 Annual Report, and Khula 2004/05 Annual Report: briefings

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
26 October 2005
IDC 2004/05 ANNUAL REPORT, NEF 2004/05 ANNUAL REPORT, AND KHULA 2004/05 ANNUAL REPORT: BRIEFINGS

Chairperson:

IDC 2004/05 Annual Report PowerPoint Presentation
IDC 2004/05 Annual Report [available at www.idc.co.za]
NEF 2004/05 Annual Report PowerPoint Presentation
NEF 2004/04 Annual Report [available at www.nefcorp.co.za]
Khula 2004/05 Annual Report PowerPoint Presentation
Khula 2004/05 Annual Report [available at www.khula.org.za]

SUMMARY
The Industrial Development Corporation (IDC) delegation began by discussing the IDC’s mandate, which was to provide financing to enterprises and build competitive industries. Following this, the delegation highlighted some of the IDC’s achievements in 2004/05, which included approving R 3.8 billion in investments. Furthermore, the delegation provided an overview of the IDC’s performance from 1995 to 2005. This included highlighting the fact that the IDC had approved over 3 000 deals worth R 46 billion. The IDC had also been involved in financing large black economic empowerment deals, such as the FirstRand, the Aspen, and the Afrox deals. The delegation then outlined the priority areas that the IDC’s would be focusing on in the next few years. This included job creation and BEE support. The delegation discussed the IDC’s 2004/05 financial statements. It was noted that the IDC had received an income of R 2 806 000 000 in 2004/05. In the ensuing discussion, Members asked how many of the IDC’s loans were bad debts; why the IDC was only offering limited support to small and medium enterprises (SMMEs) in the tourism sector; whether the IDC was involved in developing new industries; whether the IDC was involved developing any non-fossil fuel industries; whether the IDC had experienced any failures during 2004/05; whether there was proper co-ordination between the IDC and other public agencies; whether the IDC’s focus was too broad; and whether the IDC worked with commercial banks.

The National Empowerment Fund (NEF) delegation outlined the NEF’s mandate, which was to provide financing to BEE enterprises and deals. Added to this, the delegation discussed the NEF’s organisational structure and operations. Following this, a description was provided of the types of products that the NEF offered. The delegation then highlighted the progress that the NEF had made towards processing financial applications from BEE entities. They then discussed the NEF’s 2004/05 financial statements. It was noted that in 2004/05, the NEF had an income R 49 221 994, which was mostly derived from grants, dividends and interest. The NEF’s total administration expenses were R 26 327 990, which meant that the NEF had a surplus of R 22 894 004 in 2004/05. The challenges that the NEF was facing during 2005/06 were also discussed. This included highlighting that the NEF needed additional staff and funding. During the discussion, Members questioned why the NEF needed greater funding when it had a surplus in 2004/05. Certain Members were also concerned that BEE deals were only benefiting a small elite and not the wider black community. Added to this, Members asked whether the NEF’s interest rate was lower than the commercial banks’ interest rate; whether the NEF was co-operating with the IDC on rural development projects; how many BEE deals the NEF had financed; and whether the NEF worked with commercial banks.

The Khula delegation outlined Khula’s mandate, which was to develop and empower small enterprises. They then discussed the profile of Khula’s beneficiaries. This included noting that approximately half of the companies that had received loans from Khula in 2004/05 were black-owned. Following this, the delegation discussed Khula’s 2005/05 financial statements and overall performance. It was noted that Khula’s net profit had declined during 2004/05 to R 20.6 million. Nonetheless, Khula’s property portfolio had grown during the year. Indeed, Khula’s capital base had reached R 1.1 billion. It was noted that Khula had increased the number of companies that it had it had financed. Indeed, it had provided R 493.7 million in financial assistance to SMMEs. The delegation also discussed Khula’s future plans, which included ensuring that women and black people were further empowered, and that certain market failures that affected SMMEs were addressed. During the discussion that followed, Members enquired whether Khula was able to measure the impact that it products had on the market; whether Khula had increased its disbursement rate in 2004/05; whether Khula planned to co-operate with the proposed co-operative banks; and how Khula planned to rebuild its public profile.

MINUTES

Industrial Development Corporation (IDC) 2004/05 Annual Report: Briefing
Mr G Qhena (IDC Chief Executive Officer) outlined the mission of the IDC, which was to promote entrepreneurship through the building of competitive industries and enterprises based on sound business principles. Some of the IDC’s achievements of 2004/05 were highlighted. These included the creation of approximately 16 700 jobs; approval of R 3.8 billion in investments; approval of the allocation of finances for BEE; and provision of financing to more than 100 SMMEs.

Mr Qhena provided an overview of the IDC’s performance from 1995 to 2005, which included the performance of the following activities:
- Investment activities; since 1995, the IDC had approved over 3 000 deals worth R 46 billion.
- SMME development activities; 80% of financing approvals had been for SMMEs. SMMEs in the agricultural sector and the non-metallic mineral sector had received the largest portion of the IDC’s funds. Added to this, it was highlighted that the highest percentage of financing approvals had been in the Eastern Cape Province.
- Provincial engagement activities; through which the IDC had supported the Provincial Growth and Development Strategies. It had also held an investment conference in the Limpopo Province.
- Local development agencies support activities. The IDC had rolled out and supported 17 local development agencies across all provinces.
- BEE activities. The IDC had been involved in financing BEE deals since 1995. In 2004/05 there had been a significant increase in the number of BEE deals. During 2004/05, the IDC had been involved in major empowerment transactions such as the FirstRand, the Aspen, and the Afrox deals.
- Job creation activities. The number of IDC related jobs that had been created had dramatically increased over the past few years. The Northern Province had been the major beneficiary of IDC related job creation.
- African investment activities. It was highlighted that since 1995 the IDC’s approval for investments in Africa had varied according to the opportunities.

Mr Qhena sketched the IDC’s priorities for the next few years. He noted that job creation was a major priority. In order to promote job creation, the IDC would be identifying investment opportunities in target areas; implementing sector development strategies; providing targeted pricing discounts; supporting broad-based BEE; providing support for entrepreneurs; providing support for community groups; and expanding the IDC training academy. Added to this, he noted the IDC wished to contribute towards halving unemployment by 2011; to support equity by targeting the poorer provinces; to support historically disadvantaged persons; and to support Africa’s development.

Mr G Gouws (IDC Chief Financial Officer) discussed the IDC’s 2004/05 financial statements. The IDC’s 2004/05 financial year had only been nine months long, as the IDC had shifted its year end from June to March. This had been undertaken to ensure that its financial year end coincided with the governments financial year end. Mr Gouws noted that the IDC had received a total revenue of R 2 806 000 000 in 2004/05. The net income of its operations was R 1 287 000 000, while the net gains from its investments were R 1 260 000 000. Overall, the IDC net operating income, after expenses, was R 61 000 000. However, its net attributable income, after taxation, was R 1 172 000 000. Mr Gouws highlighted that the value of the IDC’s assets was R 36 593 000 000. Its total liabilities were also R 36 593 000 000.

Discussion
Mr M Stephens (DA) asked how many financing applications the IDC had declined.

Ms F Mahomed (ANC) asked whether the IDC kept a record of the people that it had declined to finance.

Mr Qhena responded that the IDC kept records of people and companies that had applied for finance. In addition, it kept statistics on how many of these requests were approved or declined. He stated that the IDC would forward this information to the Committee.

Mr Stephens asked how many bad debts the IDC had experienced over 2004/05. He enquired how the IDC’s ratio of bad debts compared to that of the commercial banks, and noted that the IDC should have a higher bad debt ratio because it was a development bank.

Mr Qhena answered that 15% of loans made by the IDC were bad debts. This was a higher percentage than the commercial banks. The IDC, as a development bank, was mandated to take a certain amount of risk. Nonetheless, the IDC also needed to be self-sustainable.

Mr Stephens noted that, over the past ten years, the IDC had approved financing for over 3 300 companies. He asked how many of these companies were still operational. It appeared as though the IDC had offered very little assistance to SMMEs in the tourism sector.

Mr Qhena responded that the IDC had provided R 1.5 billion in financing to the tourism sector.

Mr Stephens and Prof B Turok (ANC) enquired whether the IDC was involved in developing new industries in South Africa. New industries needed to be developed to expand South Africa’s economic base. Prof Turok asked whether the IDC was developing the secondary agricultural sector. South Africa should be processing the agricultural products that it produced.

Mr Qhena replied that the IDC was involved in developing new industries, and was currently engaged in the development of the Pebble-Bed Nuclear Reactors. It viewed this project as one of the potential growth industries in the economy. It was also engaged in the proposed aluminium smelter at Coega. In general, the IDC was heavily involved in the agricultural sector. For example, the IDC had developed the table grape industry in the Northern Cape. In addition, the IDC was working with the Land Bank to identify other opportunities for people in the agricultural sector.

Mr Stephens enquired whether the IDC was involved in developing the non-fossil fuel industry.

Mr L Mondi (IDC Chief Economist) responded that the IDC had examined possible alternatives to fossil fuel. Brazil was producing ethanol, out of biological material, as an alternative to petrol. The IDC had examined the processes that the Brazilian’s were using to produce ethanol fuel. The IDC had met with the North West and the Mpumalanga provincial governments to identify possible ethanol fuel producing projects.

Prof Turok stated that it was important to separate capital gains/losses from operating profits/losses. Capital gains/losses were subject to the whims of the market and the exchange rate. However, operating profit/losses were a true indicator of the health of an entity. He, therefore, asked what the operating profit/loss of the IDC was.

Mr Qhena responded that the IDC was responsible for providing loan finance to entrepreneurs and companies. However, it also bought equities in certain undertakings. Hence, the IDCs sources of income were interest, dividends, or cash from the sale of equities. This accounted for the IDC’s capital gains profits. The IDC effectiveness should be measured on these capital gains profits as they were an indication of its investment success.

Mr Gouws added that in 2003/04, the IDC had experienced an R 803 million operational loss. However, in 2004/05 it had achieved a R 61 million operational profit. This was due to the fact that the IDC had implemented an effective turnaround strategy.

Prof Turok enquired whether the IDC had experienced any weaknesses or failures. It was important that the IDC was honest about its weaknesses.

Mr Qhena answered that the IDC had faced a number of challenges. The IDC had found that most entrepreneurs needed more than financing: they also required guidance to market and manage their companies effectively. In order to address this, the IDC was building partnerships with other institutions, which could assist entrepreneurs by proving them with marketing and management training.

Mr Qhena added that the IDC had faced challenges around some of the investments it had made outside South Africa. In some instances, it was not sufficient to provide only financing to foreign entities. There were some cases where the IDC would have preferred to invest directly in foreign entities.

Mr Qhena noted that it was sometimes difficult to provide support to certain sectors. For example, the IDC had attempted to provide extensive support to the tea industry. However, it had found that the tea industry, as it was currently structured, was not viable. The IDC was attempting to find a solution to this. He added that it may even be necessary to plant alternative crops on tea farms. This was due to the fact that other Southern African Development Community (SADC) countries were able to produce tea far more cheaply than was possible in South Africa. In addition, the value of the Rand had impacted negatively on some of the companies that the IDC had invested in.

Prof Turok commented that the Department of Trade and Industry (DTI) was busy formulating an industrial policy. He asked whether the IDC was involved in this process, and whether the IDC was assisting the Deputy President to develop a growth strategy.

Mr Qhena responded that the IDC had seconded one of its senior officials to the Deputy President to assist her in formulating a growth strategy.

Mr Mondi added that in order for the economy, and industrial development, to succeed there needed to be proper co-ordination between the various government entities. The DTI needed to be responsible for the overall co-ordination of South Africa’s industrial development. The IDC was working with the DTI to ensure that it effectively co-ordinated South Africa’s industrial policy. Brazil had demonstrated how effective centralised co-ordination could be for achieving the goals of economic growth and increased industrial development.

Mr Qhena added that the IDC was also working with local governments on co-ordination.

Prof Turok enquired whether there was co-ordination between the IDC, the Development Bank of South Africa (DBSA), the Human Science Research Council (HSRC), Khula, and the Umsombuvu Youth Fund. He asked if there were regular high level meetings between these organisations to formulate policies that could assist economic growth. Without co-ordination, the economy would be unable to advance.

Mr Qhena answered that the IDC did have working relationships with other government agencies.

Prof Turok enquired whether the IDC had any recommendations on how the problems in the micro-sector could be addressed.

Mr J Maake (ANC) stated that certain South African companies were being sold to foreign investors. At the same time, South African companies were investing in other African countries. He asked why these South African companies were not investing in South Africa.

Mr S Rasmeni (ANC) asked for a provincial breakdown of the local development agencies, and enquired about the nature of work that these local development agencies undertook. He also enquired whether the local development agencies were successful.

Mr L Ntloko (IDC Regional Manager) replied that local governments had produced various Integrated Development Plans (IDPs), which were aimed at ensuring that there was local development. The challenge was to translate these plans and documents into actual development projects. In order to address this, the IDC had provided funding for local governments to establish local development agencies. The IDC had funded the operational costs of the local development agencies for three years. These local development agencies would be responsible for ensuring that the development plans were turned into actual development projects. He added that local development agencies had been established in all the provinces.

Mr Rasmeni enquired as to the extent that the IDC was involved in broad-based BEE. He asked how many of the broad-based BEE deals had faltered.

Mr Qhena replied that approximately 83% of the companies that it had provided financing to during 2004/05 were BEE companies. The IDC had also been involved in formulating the DTI’s broad-based BEE policy.

Prof Turok asked why the IDC had discussed BEE and not broad-based BEE.

Ms Mahomed stated that some companies were using broad-based BEE as a front.

Ms Mahomed observed that the IDC was providing support to small businesses that had entered into franchises. She asked how much support, in terms on finances, had the IDC provided to these business, and was the IDC offering these companies any form of mentorship. She wanted to know how successful these companies had been.

Dr E Nkem-Abonta (ANC) asked whether the IDC was involved in developing companies that could be sold to the private sector.

Mr Qhena responded that, in certain cases, the IDC was involved in developing enterprises. Once these were on a sound footing, the IDC would sell them to the private sector.

Dr Nkem-Abonta stated that perhaps the focus area of the IDC was too broad.

Mr Qhena replied that the IDC focus area needed to be broad. Nonetheless, the IDC faced certain constraints.

Ms B Ntuli (ANC) asked whether the IDC was assisting agricultural projects in the Northern Cape.

Mr Qhena responded that the IDC had undertaken the table grape project in the Northern Cape.

Ms Ntuli noted that the IDC was actively identifying investment opportunities in target areas. She asked which areas the IDC was targeting and what criteria were being used to identify these investment opportunities. She enquired as to the kind of support offered by the IDC to entrepreneurs and community groups.

Mr Qhena responded that the IDC had undertaken a number of joint projects with communities.

Mr L Mondi (IDC Chief Economist) added that IDC had invested in six projects, which had included community participation. The IDC had ensured that communities were involved in these projects through community foundations. Communities had benefited from the profits that were made by these projects. In addition, the IDC worked with NGO’s to capacitate communities involved in the projects, and this ensured that the communities benefited from wealth creation.

The Chairperson asked where these six projects, which involved community foundations, were situated.

Mr Mondi replied that there were three projects in the Northern Cape, two in KwaZulu-Natal, and one in Mpumalanga.

Ms Ntuli noted that the IDC planned to offer continued support to historically disadvantaged people. She questioned how the IDC planned to do this as most historically disadvantaged people did not own assets or land. As a result they had no collateral, which meant that they could not get loans from commercial banks.

National Empowerment Fund (NEF) 2004/05 Annual Report: Briefing
Ms L Buthelezi (NEF Chief Executive Officer) outlined the NEF’s mandate, which was to provide finance to BEE enterprises and deals. Following this, she discussed the NEF’s profile. The NEF structure was geared towards promoting broad-based BEE in the economy; addressing past failures of BEE structures; implementing the Broad-based Empowerment Charter; and implementing the broad-based BEE Codes of Good Practice.

Ms Buthelezi discussed the funding products offered by the NEF. These included start-up capital products; expansion capital products; buy-in/buy-out capital products; rural development products; and community development funding products. Added to this, the NEF was involved in providing underwriting for BEE initial public offerings; providing liquidity support for BEE investors; warehousing equity for BEE participation in strategic projects; investing capital to support BEE companies, and financing working capital. She, therefore, noted that the NEF was involved in loans and equity. She outlined the key criteria that were required for the NEF to provide financing to entrepreneurs, rural projects and community projects. The criteria for financing larger BEE undertakings included the participation of black women and broad-based black consortiums. In addition, she noted that, by its nature, the NEF took higher risks than the commercial banks. For example, in certain circumstances the NEF provided unsecured loans. The NEF’s interest rate was also lower than that of the commercial banks.

The progress made by the NEF in processing financing applications was discussed. Approximately half of the financing applications that the NEF had received were from the Gauteng province. In total, the NEF had received 2 552 applications for financial assistance. Of these, 987 had met the criteria for assistance. The NEF had approved 25 deals worth approximately R 110 million and had disbursed funding for an additional 29 deals worth R 47 million.

Mr R Mokgalagadi (NEF Chief Financial Officer) discussed the NEF’s 2004/05 financial statements. He noted that the NEF had R 1 272 421 728 in assets and R 1 272 421 728 in equity and liabilities. In 2004/05, the NEF had a total revenue of R 49 221 994. This was mainly derived from grants, dividends and interest. The NEF’s total administration expenses were R 26 327 990, which meant that the NEF had a surplus of R 22 894 004 in 2004/05. Compared with 2003/04, the NEF had achieved a 47% saving in its annual operational budget. However, he added that 17.6% of the NEF’s loans had been provisionally written off.

Ms Buthelezi highlighted some of the challenges that the NEF was experiencing in 2005/06. These included the need to recruit additional staff; the need for greater collaboration with commercial banks on funding products; the need for greater funding to ensure that it could meet all the eligible applications; and the need for a framework to facilitate the transfer of the remaining shares that were set aside for mass retail purposes.

Discussion
Ms Mahomed noted that, under certain circumstances, the NEF provided unsecured loans. She asked about the criteria used by the NEF to decide whether to provide an unsecured loan. Providing unsecured loans had the potential to enable poor people to gain access to finance.

Ms Buthelezi replied that the NEF examined the commercial viability of a business. If the NEF believed that the business was viable, it would provide that business with an unsecured loan. The NEF would then tie the loan to the company’s future cash flows.

Ms Mahomed observed that the NEF was requesting greater funding but had, in 2004/05, had a surplus of R 22 894 004. In the light of this, she enquired why the NEF required greater funding.

Ms Buthelezi acknowledged that NEF had experienced a surplus in 2004/05. However, the NEF had a large number of demands that would have to be met in the next few years. In order to meet these demands, it needed a funding increase.

Mr Stephens enquired about the NEF’s interest rate and if it was similar to the commercial banks’ interest rate. If the NEF was charging normal interest rates, then it was not decreasing the borrower’s risk. In order to empower people, the NEF needed to keep the cost of capital as low as possible.

Ms Buthelezi replied that the NEF assumed a higher level of risk than commercial banks. This meant that there was less risk for borrowers. In certain cases, the NEF provided unsecured loans to BEE entities. If a company needed a large amount of start-up capital, the NEF would take equity in that company. Added to this, the NEF offered loan financing at very favourable rates.

Mr Stephens commented that many of the land-claims in South Africa had been finalised. However, not all the land was suitable for agricultural ventures or community settlement. For example, redistributed land in the Kruger Park could not be used for agricultural purposes. He enquired whether the NEF had offered assistance to these communities to develop tourism infrastructure on such land. He asked how the NEF would ensure that all the members of the community benefited from such undertakings. In some of the land restitution deals, the chiefs of traditional communities came to view the restored land as their personal possessions. This meant that not all the members of these communities were benefiting from the land restitution process.

Ms Ntuli asked the delegation to explain the past failures of the BEE structures.

Ms Buthelezi replied that the old BEE financing model had been linked to share prices. This model was not sustainable because a drop in share prices scuttled many BEE transactions. The IDC was addressing this problem. Future loans from the IDC would be linked to the assets of the company that the BEE entity was buying. In addition, the loans would be linked to the company’s future cash flows.

Ms Ntuli enquired whether the NEF had a partnership with the IDC around funding rural community projects.

Ms Buthelezi responded the NEF was facing certain challenges around financing rural community projects. It was difficult for the NEF to identify rural community development projects. Nonetheless, the NEF was working with the CPPP and the Small Enterprises Development Agency (SEDA) to identify rural community development projects. The CPPP would conceptualise and develop such projects. In addition, the NEF had worked with agricultural specialists from the IDC, the Agricultural Research Council, and HSRC on a cherry project in the Free State. She added that if a project was identified, the NEF would try its utmost to ensure that the project was implemented.

Mr Maake was worried that most of the NEF financing deals had benefited BEE initiatives in the Gauteng province. He felt that the NEF needed to focus on reaching the other provinces. The NEF could not only be demand driven; it needed to actively identify opportunities in the other provinces.

Ms Buthelezi acknowledged that the NEF received most of its applications from Gauteng. Nonetheless, it was not the sole responsibility of the NEF to identify possible opportunities in the other provinces. Indeed, the NEF had a staff complement of only 56 people. Provincial governments and local governments also needed to identify possible opportunities. They would know more about the circumstances surrounding possible opportunities in the provinces.

Prof Turok observed that when Telkom was listed, it had promised to set aside shares for the mass market. However, this had not happened. Indeed, most of these BEE type of deals had only enriched a minority of people. One needed to ensure that the broader black community benefited from empowerment deals. He added that there were various interpretations of what constituted broad-based BEE. None of the current BEE deals were truly broad-based. He noted that perhaps the Committee needed to undertake a study on the role that government was playing to ensure that truly broad-based BEE was implemented.

Ms Buthelezi replied that Telkom had set aside shares for the mass market. However, these shares were currently being warehoused by the National Treasury. Perhaps the Committee could assist the NEF to access these shares.

Prof Turok commented that the Committee needed to consider whether the NEF, Khula, the IDC, and other public agencies were increasing South Africa’s industrial base. He recalled that a DTI official had stated that South Africa had reached the limit of its industrial/manufacturing capacity. He questioned whether the public agencies were just deal-making; or if they were adding to the countries manufacturing capacity.

Ms Buthelezi responded that most of the funding enquiries that the NEF received were related to the service sector. Indeed, it did not receive many enquiries from entities that wished to start a manufacturing plant. In fact, very few BEE entities were entering into the manufacturing sector.

Mr Rasmeni asked how many BEE companies the NEF had funded. He enquired what the total value of these deals had been.

Ms Buthelezi replied that the NEF had received 14 777 enquiries about financing. Of these enquiries, 80% were from black-owned start-up and expanding companies. The remaining enquiries had been received from partially black-owned consortiums that wished to buy into or buy out a white-owned company.

Mr Rasmeni enquired whether the NEF was working with the commercial banks, which were hesitant to assist historically disadvantaged people.

Ms Buthelezi acknowledged that most commercial banks were risk averse. However, the NEF was negotiating with the commercial banks to provide opportunities to black-owned start-up businesses. Added to this, the financial sector had pledged to provide R 123 billion in financing to BEE companies. The challenge was to ensure that the banks provided this R 123 billion to BEE companies at favourable rates.

Khula 2004/05 Annual Report: Briefing
Mr S Luthuli (Khula General Manager) began by outlining Khula’s mandate, which was to develop and empower small enterprises. In order to do this, Khula provided small-scale entrepreneurs with loan finance. Indeed, Khula was aiming at increasing the number of black-owned SMMEs; rural based SMMEs; and women-owned SMMEs that it funded. Presently, 49% of the SMMEs that Khula funded were owned by women, and 51% were black-owned.

Mr Luthuli discussed Khula’s 2004/05 financial statements and overall performance. He noted that Khula’s net profits had declined during 2004/05 to R 20.6 million. Nonetheless, Khula property portfolio had shown continued growth. This had allowed it to maintain its capital base at R 1.1 billion. In 2004/05, Khula had increased the number of companies that it provided financial assistance/loans to. It had provided R 493.7 million in financial assistance to SMMEs, which had been disbursed through business loans and credit indemnities. Khula had also increased the number of Land Reform Empowerment Facility and the Thuso Mentorship Programme beneficiaries.

Mr Luthuli outlined Khula’s future strategic direction. Khula needed to ensure that black people and women were economically empowered. This could take place through an increased creation of SMMEs. In addition, Khula needed to be involved in addressing certain market failures, focusing on economic growth sectors to ensure there was employment creation, and measuring its performance. In order to achieve these goals, Khula would be working closely with SEDA. This would allow it to impact directly on the lives on entrepreneurs. Khula had also considered implementing a direct retail outlet, such as a small business bank. This would allow it to reach entrepreneurs directly. Hence, Khula would be restructuring its relationship with its Retail Finance Intermediaries.

Discussion
Ms Ntuli, Mr Maake and Dr Nkem-Abonta asked the delegation to explain the market failures that it had referred to in its presentation.

Mr Luthuli responded that there were various market failures that impacted on SMMES. These included:
- the exclusion of certain sectors of the population from economic activities. This partially related to the commercial banks aversion to risk. As a result, they would refuse to provide loans to people that did not have collateral.
- an increase in corporate shrinkages. Many companies were retrenching their staff members, which was resulting in increased unemployment. SMMEs were one way in which this could be addressed. However, many corporate banks were unwilling to provided loans to start-up SMMEs.
- a lack of targeted interventions to assist SMMEs to effectively exploit opportunities.

Ms Ntuli commented that Khula needed to fast track the implementation of its turnaround strategy.

Mr L Zita (ANC) asked whether Khula had concrete timeframes for the implementation of its turnaround strategy.

Mr Luthuli replied that Khula was reviewing the progress that it had made towards meeting the turnaround strategy targets. He added that the findings of this review process would be provided to the Committee.

Mr Stephens commented that Khula offered a wide variety of products. He asked whether Khula was able to analyse the performance of each of these products, and what impact these products were having on the market

Mr Luthuli responded that it was difficult to scientifically measure the impact that Khula’s products were having on the market. This was due to the fact that Khula worked through intermediaries. Khula needed to have direct contact with beneficiaries to measure the impact that its products were having on the market.

Mr Rasmeni asked whether Khula had increased its disbursement rate in 2004/05.

Mr Luthuli responded that Khula had increased its disbursement rate by 15% in 2004/05. Disbursements had increased from approximately R 210 million in 2002/03 to R 323 million in 2004/05.

Mr Rasmeni stated that it could take a number of years to establish a small business bank. In the light of which, he enquired whether Khula had considered becoming involved with the proposed co-operative banks.

Mr Luthuli responded that the DTI’s South African Micro-Finance Apex Fund would be using co-operative banks to roll-out financing services to micro-enterprises. Khula, however, was considering the possibility of using PostBank to directly reach its beneficiaries.

Ms Mohamed asked how Khula planned to re-build and improve its public profile.

Mr Luthuli replied that Khula needed to increase its advocacy work to improve its public profile.

Ms Mohamed asked whether Khula’s proposed co-operation with SEDA would impact positively on its service delivery.

Mr Luthuli noted that Khula and SEDA had the same target market. The non-financial support that SEDA provided to entrepreneurs complemented the financial support that Khula provided to entrepreneurs. These two institutions, therefore, needed to work closely.

Ms Mohamed noted that many white businesses were using black people as fronts. She asked how Khula was addressing this problem. She also asked for more detail on the Thuso Mentorship Programme.

Mr Luthuli responded that the Thuso Mentorship Programme assisted entrepreneurs to transform their ideas into workable business plans. In addition, it assisted entrepreneurs to negotiate with financial institutions.

Mr Maake observed that the delegation had noted that Khula’s impact was still limited, and asked why this was so.

Mr Luthuli replied that there was a huge demand for financial assistance. Added to this, only 38% of Khula’s interventions had benefited SMMEs outside of the Gauteng, KwaZulu-Natal, and the Western Cape provinces. Khula needed to reverse this situation. In order to do this, Khula would need to form partnerships with commercial institutions. Another problem was that 60% of Khula’s interventions had benefited white-owned businesses. Khula needed to ensure that more black people benefited from its initiatives.

Mr Zita enquired whether Khula was co-operating with the South African Women’s Entrepreneurship Network (SAWEN) around gender equity.

Mr Luthuli answered that Khula was responsible for managing the resources that government had allocated to SAWEN.

Mr Zita noted that it was difficult for small businesses to hire premises.He asked if Khula was addressing this issue through its property portfolio.

Ms T McDonald (Khula Chief Financial Officer) responded that Khula had made premises available to a number of SMMEs in the buildings that it owned.

The Chairperson noted that the IDC, the NEF and Khula would be invited back to Parliament to provide in depth briefings to the Committee in the near future. This would allow the Committee to thoroughly engage with these entities.

The meeting was adjourned.