Industrial Development Corporation, Khula & National Empowerment Fund 2005/6 Annual Report: briefings

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Trade and Industry

31 October 2006
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Meeting Summary

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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
1 November 2006
INDUSTRIAL DEVELOPMENT CORPORATION, KHULA & NATIONAL EMPOWERMENT FUND ANNUAL REPORT BRIEFINGS

Chairperson: Mr B Martins (ANC)

Documents handed out:
KHULA presentation
KHULA press release
KHULA access to finance
NEF presentation – Part 1 and 2
NEF Annual Report [available at www.nefcorp.co.za]

The following documents will be available soon:
Industrial Development Corporation presentation of results 2005/6
Industrial Development Corporation financial results 2005/6

SUMMARY
The Industrial Development Corporation (IDC) presented their annual report and highlighted what work they had accomplished in the last financial year. Job creation was discussed as well as competitive financing. Regional involvement was also shown and this included the projects that they were currently involved in. The financial results were presented and the strengthened financial base was emphasized. The discussion centered on the concerns about unemployment, and visibility of the IDC in rural areas and the provinces. Further questions addressed the types of jobs created, the quantification of the types of industries, specific work in the provinces, the involvement of women and IDC’s involvement in biofuels. During the discussion it was also mentioned that sustainable projects require time to achieve and that it was a challenge for this to happen.

The KHULA presentation centred on the access to funds and the key investment priorities that Khula had. It was noted that so far there had been cautious investment but this could grow. Examples were given of the type of businesses financed and the key investment priorities. The net profit was 7% higher than the previous financial year and the capital base was maintained at R1,1 million. The operations division had been also restructured to increase reach and impact and public awareness had improved. The channels for access were listed. Statistics were presented showing the impact of Khula by race, economic background and gender. Key priorities were investment in low economic areas and increasing access to women-owned businesses. The financial results were discussed. The financial results showed that the group net profit had increased by 7% to R22 million. The bad debt provision had been reduced. The Khula Direct business case would address the financing gap in the range of R10 000 – R250 000 and would utilise existing infrastructure and partnerships. He stated that the focus had been to increase outreach and impact while managing risks carefully. Questions included the reach to micro business, the amount of funding to women, mentorship programmes, the need for working relationships with the banks, the property portfolio and the involvement of municipalities.
The NEF covered their investment processes for SME’s and the time it took for the process to conclude from applications. Broad Based Black Economic Empowerment were discussed which included those businesses with regard to black leadership in companies that were funded by the NEF. The products available were mentioned and the presence in each region was discussed.

The National Empowerment Fund gave a presentation to the Committee, centreing on the operating divisions, organizational  structure, investment process and due diligence. Those deals that were disbursed (including undrawn capital) amounted to 63 deals worth R277 million. The performance criteria regarding the empowerment dividend were discussed, and broad based Black Economic Empowerment and black women’s empowerment, job creation, growth sectors, geographic spread and investment were covered. The outcomes assessment was discussed as at 30 September 2006. Figures were presented for the current black ownership levels of their funded companies and the outcomes assessment was also presented. The geographic spread extended to the Gauteng, Western Cape and the Eastern Cape regions. The Fund had approved 93 transactions worth R590 million and 76 of these, representing R424 million, had been disbursed. 78% of the portfolio by number of deals had been disbursed to black entrepreneurs who had established 60 SMEs. Transformation funding had given disbursements to facilitate the purchasing of equity of previously white owned companies. Where market failure had taken place in the BEE landscape the NEF had targeted those failures with the Fund Management Products. A number of different industries were targeted. The consolidated statement of financial performance for the financial year ended 31 March 2006 was tabled. Questions by members related to the outcomes assessment, facilitation of white owned businesses, repayments, whether banks were sticking to traditional markets and the Fund’s assistance in this regard. Increased delivery to women, the salaries of trustees and the CEO, the turnaround time and the lack of investment in some provinces were discussed.

MINUTES
Industrial Development Corporation (IDC) Briefing
Mr Geoffrey Qhena, CEO: Industrial Development Corporation (IDC) introduced the role IDC played in business and sustainable development. He explained how IDC assisted the government and other institutions in meeting the needs of South Africa. The objectives were covered with regard to social and economic needs and the need for job creation.

The highlights for the year 2005/6 included the fact that more jobs would still be created, and he gave the regional breakdown of the current jobs that were created. Competitive financing development was also discussed. Other highlights included the investments in enterprises around townships and for expansions and start-up businesses that were black owned, including small and medium enterprises (SMEs)

Mr Qhena showed that IDC’s focus was on job creation and halving unemployment and poverty by 2014. A graph was shown of the investment activity and the development of SMEs and Black Economic Empowerment (BEE) businesses. The regional involvement of IDC was summarised. Job creation was broken down by province and the portfolio of companies was covered. Sectoral involvement was also shown with regard to gross approvals.

Other developments in 2005/6 included the co-operational agreements with various provincial governments and other institutions and the strong growth in equity investments. The sectoral development included research conducted in various industries, the support for government policy initiatives and a start in identifying key projects in support of national and provincial priorities.

Goals for the future included contributing to job creation to halve unemployment. Other goals were to increase the role of facilitating broad-based black economic employment, continued support of NEPAD’s objectives, increase in support given to new entrepreneurs and identifying new industries for development.

Mr G Gouws, Chief Financial Officer, IDC, tabled the abridged group income statement for the year ending 31 March 2006. Revenue, operating expenses and net operating income were further analysed and explained. There was an analysis of the net profit over a seven year period on a bar chart, showing that the net profit was down from the last financial year. Debt and equity ratios were compared to the previous financial year. The dividends that were paid had increased by five million from the previous year.  The last slide showed the strengthened financial base of the IDC with regard to fair value revalution.

Discussion
Prof B Turok (ANC) commented that the IDC was a major force that was contributing to the economy of the country. He also commented that as a state corporation the IDC was doing good work. However, there was a huge disquiet with regard to performance in unemployment and he a feeling that agencies needed to co-ordinate among themselves. He stated that on the World Bank indicators South Africa is not very high. IDC had stated that 26 000 jobs were created but more detail was required, particularly whether those jobs were outsourced or casual jobs. He further questioned why the IDC was not seen in the township areas and the rural areas including Transkei. The IDC needed to be more visible in those areas. The objectives had changed and so it needed to be seen on the ground.

The Chairperson replied that he appreciated the difficulties that were faced and stated that although the questions might be perceived as uncomfortable, they must be asked. Closer co-operation was needed in the cluster approach. Issues were highlighted as the Committee was concerned to assist.

Mr Qhena welcomed the questions and replied that it was a challenge with regard to what information to give out in the discussion. The overriding principal that IDC strove to achieve was to look for opportunities for investment that had economic merit and that were sustainable. He replied that IDC were trying much harder to begin projects in the different provinces, however these took time, and investments that are in the process of being finalized have been in the process for a year or two. The co-ordination between the institutions did not seem to be evident;  however there were strategic projects that were taking place. The IDC were also speaking to all role players.

Mr D Olifant (ANC) mentioned that the IDC had visited Atlantis that there was improvement but that not enough had been done in the broad industrial development spectrum. He mentioned that the IDC was too focused on profit making and that economic development was also important. He wanted to know what type of jobs were created, and considered that the IDC could do much more. Their focus in the Cape Town area was extremely limited and they needed to focus on development in that area. He mentioned that the townships were going to remain and that acceptable economic development needed to take place around those areas.

Mr Qhena said that the kind of jobs that were being created were direct and sustainable, and ran across the board, including tourism, McDonald’s franchises and bed and breakfasts, as well as a farm for table grapes. In answer to the question about the townships and rural areas Mr Qhena commenting that IDC was there, but they should probably say that projects were “funded by the IDC”. It was becoming more established in the townships, and Gauteng was ahead of schedule, but the process was not an easy process.

Dr P Rabie (DA) asked if Mr Gouws could clarify the projected loss of Foscor and clarification was also needed with regard to the income for the last financial year. In discussing their goals for the future IDC needed to clarify and quantify the type of new industries.

Mr Qhena replied that industry development must be seen in the long term. Large projects took a long time. Some were mining but with regard to the projects a lot had been done outside South Africa and in the resources sector. Challenges had been reported.

Mr S Rasmeni (ANC) commented that the work done needed to be overseen on local levels, in the provinces and townships, and operational issues needed to be discussed. The job creation needed to be empowering broad based black economic empowerment (BBBEE). IDC also needed to say what was achieved and what was not achieved. He asked how the IDC was involved in all the provinces. The district offices and councils also needed to know what was happening. He stated that the IDC needed to identify things and needed to be doing them, not just on paper. Some small businesses had applied to the IDC after advertisements for SMME’s to apply had appeared, but those advertisements had cost a lot of money. Although there had clearly been a response, he asked how many of the applications were successful. He also enquired as to how many people or companies had tendered to the IDC. Job creation had not been seen around the provinces. He also enquired as to the rural poor and investment in cattle in those areas.

Mr Gert Gouws, Chief Financial Officer, (CFO), IDC replied that many of the projects had been cross-subsidised, since their returns were low, with more profitable projects. The R1 billion was to cross-subsidise and those projects were offered at prime less 5%. IDC must ensure that the jobs that were created were sustainable and the project, whether funded by loan or equity, was sustainable.

Mr Qhena commented that as new industries took off it was a challenge to make them sustainable,  and cited the movie industry as an example.

Ms N Sowazi, Executive Vice-President Marketing & Corporate Affairs, IDC, commented that the local office had much strength and that the capacity of the officers was a supporting role. All the regions had developing agencies and the processes been worked through HR agencies and the municipalities. Those regional offices that had low capacity but high potential for growth were also being looked at.

Mr Qhena continued that the sectors were moving forward. These included bio-fuels and sub-sectors in certain industries, and when they had been quantified IDC would be able to move forward. The presentation contained only the highlights but if more detail was needed this was in the Annual Report. He commented that the IDC had made a commitment to the townships and that was part of the process. With regard to investment in provinces he stated that Gauteng was still the largest but IDC was making an impact through road shows.
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In answer to the question on how many approvals had been made, he stated that the statistics would be made available once the questions had been addressed

Ms Sowazi replied that IDC was currently working in the Limpopo province, North-West province and the Western Cape, with the government and universities. It planned to extend to the Free State.

Mr G Gouws added that in the financial services sector needed to be addressed and that BEE groups needed to be assisted in buying into that sector. Sharing risk in the SME sector between the banks and the IDC needed to be addressed and the model needed to be developed further. A large part of the population was not in the banking sector, and sustainable business units were a growth sector that also needed to be developed.

Ms F Mahomed (ANC) questioned how many women were recipients of IDC funding.

Mr Qhena stated that women’s involvement was funded, as noted in the Annual Report and 20% of funding went to women-owned businesses.

Ms Mahomed also questioned where the IDC stood with regard to biofuels for the future economy and why the operating costs were so high for Foscor.

Mr Qhena replied that he had gone to Brazil to learn more about how they were dealing with biofuels. Insofar as the operating costs of Foscor were concerned, these stood at R744 million but these must be seen in proportion to the revenue line. The operating expenses were high and that was agreed. The other costs included the mine and the major portion that was high related to the transport costs.

Prof Turok (ANC) sought evidence for the 17 agencies and details of those agencies. He enquired what criteria were used for allocations to the rural areas.

Mr Qhena replied that the allocation of funds between rural and urban areas was still modest but what also needed to be borne in mind was that fact that IDC had to seek and be sure about sustainable development.

Prof Turok also questioned what the IDC saw as the way forward. He wanted to see the IDC more pro-active in development. He asked if the mandate for these agencies included looking for opportunities for businesses.

Mr Qhena (CEO: IDC) replied that the statistics were used as a management tool. The projects were looked at with regard to funding and the initiative was taken instead of waiting. There was a strong research department and therefore different opportunities are found and expansions done.

The Chair replied that he thought that it would be more helpful if there were a follow on from this meeting that occurred every year and that it must be put into the schedule for the new year. Information on the details for work done in respective provinces was needed.

Mr Rasmeni (ANC) commented that people had responded to the advertisements that were done by the IDC. The projects that were funded and those that were turned down needed to be addressed. The IDC stated that they worked through the district councils but he would also like to have more details about what was really being done. A working relationship needed to be formed with the IDC so that the projects would be more visible in the different provinces.

Mr Qhena noted that funding of white conglomerates was mostly in the area of ensuring that they were compliant with the Charter although some was for expansion.

Briefing by Khula
Mr Xola Sithole, Managing Director, Khula, briefed the Committee on the highlights of KHULA with regard to business approvals, disbursements, the KHULA Start-up Fund and the fact that the bad debt provision was down to 2% of the loan book. Mr Sisa Njikelana (ANC) stated that SETA was one of the building blocks in KHULADirect.

The net profit was also 7% higher than the previous financial year and the capital base was maintained at R1,1 million. The operations division was also restructured to increase reach and impact and public awareness of the company in partnership with SABC through E-zone was also mentioned.

He covered the operational results, including the Khula target market, and business approvals over a five year period. The approvals were down by 6%. Disbursements were marginally increased from the previous year.

The channels with which to access Khula funds were discussed. This included the Credit Indemnity Scheme, wholesale funding through RFI’s, Public Sector Funds, Corporate Sector Funds, Thuso Mentorship Scheme and the Property Portfolio. The impact of Khula in the financial year of 2006 was represented by graphs depicting the ratios of female to male; white to black and those represented in the low economic areas as compared to Gauteng, KwaZulu Natal and the Western Cape. The key priorities were investment in low economic areas and increasing access to women-owned businesses. Factors that influenced the performance for the year were shown.

The financial results were discussed. Key points that were noted included the liquid investments over the last five years. The income statement and risk management were discussed, and the bad debt provision as a percentage of the total loan book was highlighted, with the remark that this had steadily decreased since 2002. The financial results showed that the group net profit had increased by 7% to R22 million. The pricing for development was also pointed out, covering the indemnity fees, interest charged and the property return.

The status report on strategy implementation showed that approvals and disbursements had grown, loan advances had increased, three new funds had been launched and bad debt provision had been reduced. The overheads had also been kept in check.

Mr Sithole mentioned the Khula Direct business case that would address the financing gap in the range of R10 000 – R250 000 and would utilise existing infrastructure and partnerships. Khula was in the advanced stages of the process of developing a business case and the approval from the Board, the Department of Trade and Industry (dti) and Cabinet was being sought. In conclusion he stated that the focus had been to increase outreach and impact while managing risks carefully. A bolder investment was required to sustain momentum and a strong delivery platform was built to increase access to finance. The balance sheet was weak to enable support of the growth strategy.

Discussion
Mr L Labuschagne (DA) asked hat was done to access KHULA and how they dealt with the public. Clarification was needed. There also seemed to be some doubt about dealings with the banks.

Mr Sithole replied that the resources were needed to make an impact and that there was a close association with the IDC although a final structural arrangement needed to be struck. Khula Direct had a call center, which assisted with access, and a concept document could be submitted and would then be assessed according to the different products available.

Mr Labuschagne queried the Director’s remuneration. This question did not appear to have been answered.

Mr Rasmeni believed it would be important for Khula to attend indabas when these occurred. He noted that Khula wanted to reach out to micro businesses, but the question was how and when this could occur. dti had a strategic vision and Khula was changing its structure to include the retail arm. Financial management needed to be managed within the company. He also asked how assistance was given on business plans of micro businesses.

Mr Sithole replied that the bulk of business plan assistance was done by accredited consultants, and Khula would determine the hours that were needed for a particular business plan. Micro businesses were assisted in individual and group learning and an individual would need a business plan. Pre-business plans were also implemented and assisted.

Ms Mahomed (ANC) congratulated KHULA on 68% funding for women but the concern was raised as to the amount involved. Ms Mahomed asked whether there were mentorship programmes. She was sceptical as to why they needed to directly lend to the clients when other institutions were doing this already.

Mr Sithole replied that no targets had been set with regard to other groups such as those with disabilities and this was not measured sufficiently enough. The rural areas were also a focus but were limited. He noted that there was a partnership with the sector training authority that was in the process of development in the North West.

Prof Turok (ANC) stated that he would support the proposal for Khula to direct lend and he also stated that clarification was needed with regard to the bottom end of the market and which institution would cover what areas.  He felt that an organogram would be helpful in this regard). A working relationship and understanding should be developed with regard to the banks and the banks should be invited to parliament for an explanation on this issue.

The Chair agreed that it would be helpful to acquire information about the lending institutions.

Mr S Njikelana (ANC) stated that he needed much more information than contained in the presentation. He questioned the property portfolio, and its focus and the expansion. He also questioned the impact that Khula had on low economic areas and the feasibility of those areas. He also questioned whether the existing partnerships around KhulaDirect were utilized and why the municipalities were not being utilised.

Mr Sithole replied that there were many opportunities to begin new projects. These could be found in projects as in the Guguletu example. However, in order to begin new projects in rural areas more finance was needed.

Dr M Sefularo (ANC) questioned the policy of Khula. He wondered if Khula was encroaching on other areas already covered.

Mr Sithole stated that Khula was not encroaching as there were many areas that still needed to be covered. The institutions needed to avoid playing against each other. There was a huge demand and the more supply areas there were the better for everybody. Meetings were being arranged with the banks and some adjustments needed to be made. The key issues with the banks related to training on Khula in the banking institutions.

Mr Sithole added that the reputation of KHULA needed to be changed and delivery on the ground needed to have an impact. KHULA had limited resources in this regard. He stressed that there was a natural progression with regard to the different types of funding that was needed and communication was maintained between the organisations.

The Chairperson commented that this process needed to be engaged in further.

Briefing by National Empowerment Fund
Ms Philisiwe Buthelezi, CEO of the National Empowerment Fund (NEF) briefed the Committee on the operating divisions with regard to the NEF Corporate fund, BEE retail investments and the NEF Imbewu fund. The organizational structure was discussed. She discussed the investment process with regard to enquiries, applications and those that were held back pending more information. The process was also discussed with regard to new data that was accepted for the deals and the due diligence that was done. There had been 14 deals worth R215 million approved since inception. Those deals that were disbursed (including undrawn capital) amounted to 63 deals worth R277 million.

The performance criteria regarding the empowerment dividend were discussed, and broad based Black Economic Empowerment and black women’s empowerment, job creation, growth sectors, geographic spread and investment were covered. The outcomes assessment was discussed as at 30 September 2006. The current black ownership levels of NEF’s funded companies were discussed and a comparison was made between BEE Male and BEE female. A summary was given of the funding for start up, expansion, transformation contracts and rural and community, capital market, liquidity and warehousing.

The outcomes assessment as at 30 September 2006 was discussed, covering senior management positions and the spread of black males and females in those positions. Through NEF’s financing activities new job opportunities had been created, SMEs had been financed and large entities financed to create jobs. The geographic spread extended to the Gauteng, Western Cape and the Eastern Cape regions.

The NEF had approved 93 transactions worth R590 million and 76 of these, representing R424 million, had been disbursed. With regard to the SMEs 78% of the portfolio by number of deals had been disbursed to black entrepreneurs who had established 60 SMEs. Transformation funding had given disbursements to facilitate the purchasing of equity of previously white owned companies. NEF also compared the funds invested by region and it was shown that there was a decrease in Gauteng and an increase in the Western Cape and the remaining provinces as compared to 2005. Current regional partnerships were discussed.

The leveraged funding for different types of businesses was discussed. Where market failure had taken place in the BEE landscape the NEF had targeted those failures with the Fund Management Products. A number of different industries were targeted including ICT and media, the creative industries, clothing and textiles, agri-processing, wood and paper and tourism. The retail products available were discussed with regard to investment. Broader participation ownership and empowerment as well as education and promotion of equity investment were covered.

The consolidated statement of financial performance for the financial year ended 31 March 2006 was tabled. Key points highlighted were the investment income from fund management, dividends from state allocated investments, the fair value gain fund management, the impairment of investments with regard to fund management and the surplus for the year.

Discussion
Mr L Labuschagne questioned the outcomes assessment, asking about how it facilitated white owned businesses. He also asked what the repayment situation was.

Mr A Wright, Chief Operations Officer, NEF, stated that repayment structures within the investments were structured commercially. The NEF was able to be self-sustainable because of those revenues that were earned. In regard to transformation the principles dealt with all aspects together with the business plan. Access to funding for SMEs was still hard to get to. The R43 surplus rollover was seen as an additional capital line item for further capitalisation.

He mentioned that the portfolio had now been changed as more investments were included. In the North West Province there were a host of applications collected and details would be made available. Empowerment delivered to black and disabled people would be made available.

Dr M Sefularo (ANC) questioned the area of outcomes assessments and how the transformation in regard to the banks was been managed as they appeared still to be sticking to their traditional ways. He also questioned whether the targets were met.

Mr Ntuli, Chairman: NEF, assured Members that the NEF was aligned with government policy and there was a framework which guided how the NEF operated with regard to BEE. The NEF was created for BBBEE. State owned enterprises were being made available to the average person in the street. Transfer of ownership from state owned and other companies was being achieved. However, new enterprises were also being created and this assisted in closing the gap between the first and third world within the country.

Ms P Buthelezi addressed the question of the outcomes assessments and the beneficiaries of equity owned companies. With the funds that had been allocated to the NEF BBBEE transactions were preferred to make an impact in that area. The people that had been dealt with were not the usual empowerment people but were rather the ordinary people that needed to start SME's. Enterprises were being empowered and procurement of contracts was assisted.

In the investment pipeline other agencies were involved and 300 applications were dealt with every month. At a pre-investment level the good proposals were looked at and referred to SEDA. When the NEF was not able to provide the right kind of funding the applicants would be referred to the right organisations.

The number of jobs created in the SME sector was interpreted as a small investment. The statistics did not quite reflect the correct position, as in the future those SMEs would be able to expand and also increase their production capacities. More jobs would be created and market access could be increased with assistance of the dti, and links were also created with international buyers.

The answer to the question on whether banks were sticking to their traditional markets related to the leverage effect that the NEF was achieving by investments. These banks, without the seed capital, would not invest but additional funding could be raised with the assistance of the NEF.
The NEF would also accompany the applicant to the banks.

Ms F Mahomed (ANC) questioned what interventions could be made to increase the delivery to women. Another MP asked about interventions for the disabled.

Ms Buthelezi said that women initiatives and increased women participation had increased and decisions had been influenced in their favour. This percentage was low, but it was rare to find companies that were 100% owned by women.

Ms Mahomed expressed concern about the R43 million surplus and the funds invested in regions and that there were not such an impact in certain provinces.

Ms Mahomed questioned a trustee’s salary.

Mr Olifant asked how the income of the CEO was set and how it was achieved.

Ms Buthelezi replied that Dr A Richards was no longer a trustee. She said that the previous CEOs had been paid a salary the same as the current one.
 
Mr Rasmeni and Ms Mahomed also questioned the outcomes assessment and the reasons why certain provinces were not touched on at all. The job creation also needed to be explained around the other provinces and the investment processes.

Mr Olifant also raised the point of why only three provinces were targeted for investment and asked what was the main focus.

Ms Buthelezi replied that in the area of regional spread there had been progress made. However if no applications were made no empowerment could take place. The NEF needed to be pro-active in empowerment, and government departments also needed to be proactive in this area.

Mr Rasmeni asked what were the turnaround times for investment strategies and processes.

Ms Buthelezi replied that the lead-time for an applicant’s communication back from NEF was three weeks. The staff complement of the NEF was about 71 people and the capitalisation was taking place.

Mr Olifant (ANC) said that the banks needed an understanding of the NEF and the NEF was to fulfill the need that the banks did not fulfill. Interventions needed to be done in rural areas and leverage funding needed to be done. He believed that the focus needed to be shifted to the rural areas.

Mr Olifant commented that the specific examples and further details were needed to explain what was happening.

Ms Zwane (Post Investment Manager: NEF) stated that there were investments that were occurring and that there was an oyster farm in Port Nolloth that was being developed. There were also investments in the semi-rural areas.

The Chairperson stated that it was not correct that the Committee hear from these organisations only once a year. The process methodology should be followed and continued interaction needed to happen. Specific aspects needed to be addressed with regard to the provinces. The role of the dti was to do the best for the people of the country.

Mr Ntuli concluded that the NEF was still under construction and that it had faced many challenges. It was important to acknowledge what already had been done with, the executive officers’ good work and the credibility of the organization. 

The meeting was adjourned.

 

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