Khula Enterprise Finance Ltd: 2997/08 Budget and Strategic Planning briefing

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
27 March 2007
KHULA ENTERPRISE FINANCE LTD: 2997/08 BUDGET AND STRATEGIC PLANNING BRIEFING

Chairperson: Ms D Hlengethwa (ANC)

Document handed out:
Khula Enterprise Finance Limited: PowerPoint presentation

Audio Recording of the Meeting

SUMMARY
Land Bank had been due to attend the Committee meeting, but had requested an extension of time due to its inability to finalise the strategic plan. Committee members were critical of the failure to plan properly, and asked that Land Bank should be clearly informed that its excuse was not acceptable, and that its failure to attend timeously should be mentioned in the Committee report.

Khula Enterprise Finance Limited gave an overview of its mandate to facilitate loan and equity capital to small, medium and micro enterprises and offer a range of financial resources and information to the public. The Public Sector Channel inititative was an effort to make available infrastructure, resources and skills to further SMMEs in the agricultural sector. It intended to improve its loan book by R 40m, grow its project numbers by 25%, improve its portfolio mix, and do beneficiary training and capacity building. Western Cape and KwaZulu Natal continued to receive the dominant share of investments. Khula still struggled to unlock business in Free State. The majority of funds were concentrated in the agricultural sector, with 10% in eco-tourism. A detailed breakdown of new projects was given. Khula had changed its pricing system, and had introduced a 3% cap to be applied by all funding institutions. The Khula and Mafisa partnership was detailed. Challenges included disbursement bottlenecks, the loan size per project, capacity building and the limited geographical spread. Members' questions related to the identity of mentors, the costs of compensation of mentors, the contribution of the Department and Khula to the funding pool, Khula's contribution to lessening the costs of farming, the time frames for loan repayment, and the success of the projects. Further queries were made on the financial statements, contingency plans for drought, the involvement in eco-tourism, the risk of new farms, efforts to improve the spread in the Free State. Khula invited the Committee to join it on site visits.

MINUTES
Land Bank Postponement
The Chairperson announced that the Land Bank, which was scheduled to make its presentation to the Committee today, would not do so. The Ministry had sent a message explaining that the Land Bank was still busy with its strategic planning, so that the Minister had not yet had the opportunity to comment on the plan. The Chairperson was concerned about the impact of the delay on the Committee’s schedule. She canvassed the Committee’s view whether LandBank could be seen during the upcoming constituency period.

Mr S Abram (ANC) queried whether the Land Bank knew well in advance that it had to appear before the Committee.

The Chairperson answered in the affirmative.

Mr Abram said that he would then reject the Land Bank’s excuse. Their failure to appear was viewed as a sign of contempt for a constitutionally recognised institution. The Committee was urged to send out a strong signal to all state entities that this practice was unacceptable.

The Chairperson stated that she was required to write a report on all the state entities that made presentations before the Committee. She proposed that a note expressing the Committee’s concern be attached to that report. In addition, the Committee would also send a letter to the state entity highlighting its anxieties.

Dr A Van Niekerk (DA) voiced that this was insufficient. He argued that the Land Bank should still appear before the Committee because it needed to clarify some of the allegations and controversies reported in the media.

Mr Abram agreed that it must appear.

It was agreed that the Chairperson would confer with the secretariat to arrange an appropriate date.

Khula Enterprise Finance Ltd (Khula): Strategic Plan 2007/08 Briefing
Mr Xola Sithole, Managing Director, Khula, gave an overview of the mandate and explained that Khula facilitated loan and equity capital to small, medium and micro enterprises (SMMEs). It offered a range of financial resources and information to the public.

Mr Sithole explained that today’s presentation would focus on the state entity’s Public Sector Channel (PSC) initiative. PSC was an effort by Khula to make available infrastructure, resources and skills to further SMMEs in the agricultural sector.

Mr George Mohotoa, Manager: PSC, reported that the state entity intended to improve its loan book by R 40m and grow its project numbers by 25% in the 2007/2008 financial year. It would also concentrate on improving its portfolio mix, beneficiary training and capacity building. He tabled a graph indicating the provincial spread of funds. This showed that there had been improvements in most provinces. However, the Western Cape and KwaZulu Natal continued to receive the dominant share of investments. It was highlighted that the Free State was a major concern because the state entity was struggling to unlock business in that province.

Khula’s spread of funds was disproportionate, with the majority of funds concentrated in the agricultural sector (90%) and the remainder put into eco-tourism (10%). The document provided a detailed breakdown of all the new projects that were approved. It indicated the varied activities of the enterprises, the loan amounts, the beneficiaries and the shareholding of Previously Disadvantage Individuals (PDI’s) in these enterprises.

Mr Mohotoa said that Khula had changed its pricing system, having converted to prime-linked rates. Its former JIBAR system was considered cumbersome and the latter more simple. It had ty also introduced a 3% margin cap which meant that the end user could not be charged more than a 3% margin by the retail financial intermediaries. Khula employed the black economic empowerment scorecard that was derived from the Department of Trade and Industry (dti). This scorecard assessed matters of gender equity, compliance with wage legislation, black ownership, participation of PDI’s in decision making and other factors. Once this had been properly evaluated, a project score would be determined to establish how the deal would be priced.

The financial review showed that Khula’s total net income was twice that budgeted for, having reached R12.61 million. The budgeted income for 2007/08 was R12.56 million and the operating expenses were budgeted at R4.64 million.

The final portion of the briefing dealt with the MAFISA / Khula partnership, and set out the criteria that had been set. The qualifying criteria included an off-take agreement, insurance on crops, a limitation of interest to prime rates, an assistance package, and project management and farmer mentorship. Khula, TSB and Absa had entered initiatives to create a fund. Khula was in negotiation with dti to contine funding eco-tourism projects.

Khula's challenges included disbursement bottlenecks, the loan size per project, capacity building and the fact that most applicants were from Western Cape and Kwazulu Natal.

Discussion
Mr P Ditshitelo (UCDP) asked if there was a danger that Khula's lack of self contribution could result in a lack of commitment.

Mr Mohotoa responded that Khula was created to facilitate funding for PDI’s who did not have adequate assets. This meant that they were unable to contribute to their enterprises initially and therefore received the loan facility and mentorship aid. The beneficiaries needed to work hard to make their enterprise succeed.

Ms M Nkompe-Ngwenya (ANC) asked about the identity of the mentors. She also sought to establish how they would be compensated.

Mr Mohotoa answered that the Banks would identify the mentors. They would probably be white commercial farmers. The costs of compensation had already been factored as part of the loan facility.

Ms Thompson enquired about the contributions that Khula and the Department made to the funding pool.

Mr Mohotoa confirmed that both the state entity and the Department contributed R75 million each.

Mr Ditshitelo was unhappy with Mr Mohotoa’s claim that the mentors would probably be white.

Mr Mohotoa clarified that this would be decided on merit. White commercial farmers were the most likely candidates because of their vast experience in the sector.

Mr Sithole asserted that black farmers would not be excluded from being mentors, but that the reality was that most did not have the level of experience of their white counterparts.

Ms B Ntuli (ANC) claimed that farming was expensive. Government wanted to make it cheaper to enable farmers to produce enough food for the country, to run sustainable enterprises and to export. In light of this, she asked whether Khula was implementing the principles of making it cheaper for people to farm.

Mr Mohotoa answered that the cap Khula had negotiated with retail financing institutions would assist in making farms more profitable and sustainable. Khula’s pricing projects were below prime rate and hence enabled farmers to be more successful.

Ms C Nkuna (ANC) queried about the time frames for repaying loans.

Mr Mohotoa replied that there was no standard repayment schedule. The type of enterprise would determine the pattern of repayment. A dairy farm and an orchid farm would follow separate repayment schedules. Lastly, the time frames could also be negotiated between the end user and the lender.

Mr Ditshitelo asked whether Khula had achieved success with its projects.

Mr Mohotoa replied that there had been relative success with the exception of two projects. These failures were attributable to drought and exchange rate problems.

Mr Abram complained that the report did not contain a proper financial statement.

Mr Mohotoa noted the Member’s concern and promised to rectify this in future.

Mr Abram wanted to establish whether Khula had a contingency plan during periods of drought.
Mr Mohotoa replied that the current funding was aimed at purchasing fixed land and did not provide for such contingencies. However, the Mafisa initiative would cater for such instances because it provided funds for livelihood and insurance.

Mr Abram wanted to ascertain Khula's involvement in eco-tourism.

Mr Mohotoa proffered that Khula’s eco-tourism projects were targeted at the international market. Khula had financed bed and breakfast concerns with the Department of Environmental Affairs and Tourism and the Department of Trade and Industry.

Ms Nkompe-Ngwenya was worried about Khula's inability to unlock business in the Free State. She wanted to know how it intended to address this matter.

Mr Mohotoa admitted that it would take a lot of hard work. Khula was willing to listen to the Committee’s suggestions and would appreciate any contacts that the Committee could supply.

Dr Van Niekerk commented that there was a lot of risk attached to creating new farms and developing existing ones.

Mr Mohotoa countered that the risk was limited because Khula provided funding for a diverse range of projects.

The Chairperson expressed a desire to visit some of these projects. This was an imperative oversight function of parliament.

Mr Mohotoa extended an invitation to the Committee to join Khula on its site visits.

The Chairperson thanked Khula and hoped that they would be able to attend to the concerns raised by the Committee.

The meeting was adjourned.