Industrial Development Corporation, Khula Enterprise Finance, National Empowerment Fund, SA Micro-Finance Apex Fund & Small Ente

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
10 October 2007
INDUSTRIAL DEVELOPMENT CORPORATION, KHULA ENTERPRISE FINANCE, NATIONAL EMPOWERMENT FUND, SOUTH AFRICAN MICRO-FINANCE APEX FUND & SMALL ENTERPRISE DEVELOPMENT AGENCY 2006/7 ANNUAL REPORTS

Acting Chairperson: Mr SM Rasmeni (ANC)

Documents handed out:
PowerPoint Presentation: Industrial Development Corporation (IDC) 2006/07 Annual Report
PowerPoint Presentation: Khula Enterprise Finance 2007 Annual Financial Results
National Empowerment Fund (NEF) 2006/07 Annual Report
PowerPoint Presentation: National Empowerment Fund (NEF) 2006/07 Annual Report
PowerPoint Presentation: South African Micro-Finance Apex Fund (SAMAF) 2007 Report
PowerPoint Presentation: Small Enterprise Development Agency (SEDA) 2007 Annual Report

Audio recording of meeting

SUMMARY
The Chief Executive and Operating Officers of the IDC, Khula, NEF, SAMAF and SEDA briefed the Committee on their achievements and financial performance during the 2006/07 financial year. With the exception of SAMAF (which reported for the first time), all the organisations reported increased revenues as well as significant increases in the number of projects approved and businesses that were assisted by them. The Director-General of the Department of Trade and Industry expressed satisfaction with the performance of the agencies but felt that rural development strategies and policies needed effective leadership and a clear framework within which development could take place.

Members of the Committee were concerned that there may be duplication of effort between the agencies. Questions were raised about the impact of rural development initiatives and the unequal distribution of resources between the more developed and the poorer provinces. Members were concerned over the extent of representation and suggested that the agencies formed partnerships at municipal level. Questions were asked about the standard of intermediaries and the level of financial control exercised over intermediaries. The prevailing high interest rates were a major concern because of the detrimental effect on business development. The availability of raw materials, the low levels of education and need for skills development by both agency personnel and emerging entrepreneurs were discussed.


MINUTES
Briefing by the Industrial Development Corporation (IDC)
Mr Geoffrey Qhena (Chief Executive Officer, IDC) outlined the IDC’s mission, role and objectives and listed the achievement highlights for 2006/07 (see attached document). A total of R5.9 billion was approved for 241 enterprises, resulting in more than 33,000 jobs being created in South Africa. Details of the regional development projects, Black Economic Empowerment (BEE) transactions, support for small to medium size enterprises (SMEs) and development financing schemes were provided. Examples of high impact projects included four berry-growing projects, initiatives in the fish processing industry and a Biomass project in the Eastern Cape. Details of other investment approvals were also given and examples of the positive impact on people’s lives were cited.

Mr Qhena briefed the Committee on the IDC’s financial results for the 2006/07 financial year and submitted abridged financial reports. Revenue increased by 14% to R5.169 billion. Gross profit increased by 25% to R2.630 billion. Operating income increased by 600% to R2.645 billion. After-tax profits increased by 477% to R4.345 billion. Total assets amounted to R63.615 billion. He summarised the IDC’s role in implementing the National Industrial Policy and the support provided for the Industrial Policy Action Plan. The presentation was concluded with the envisaged prospects for the IDC.

Briefing by Khula Enterprise Finance Limited (Khula)
Mr Xola Sithole (Chief Executive Officer, Khula) briefed the Committee on the achievements and performance during 2006/07 (see attached document). Highlights included an increase of 60% in business approvals to channel partners, amounting to R746 million. Loan approvals to retail financial intermediaries amounted to R298 million and approvals through the credit indemnity product totaled R266 million. Disbursements to channel partners increased to R343 million and a R100 million investment was made in a reverse factoring product to improve the working capital needs of SMEs.

The financial performance for the 2007 financial year was summarised. Net profit increased by 41% to R31 million. The loan book grew by 22% and interest revenue from lending operations increased by 18.9%. Investment income increased by 16.5% and the property portfolio delivered an improved yield of 16%.

An outline of the delivery channels and access points, the key strategic drivers and contributing factors was given. The presentation was concluded with Khula’s focus areas for 2007/08.

Briefing by the National Empowerment Fund (NEF)
Mr Andrew Wright (Chief Operating Officer, NEF) presented the NEF’s mission statement, mandate, organizational structure and strategic initiatives to the Committee (see attached document).

Mr Moemise Motsepe (Manager - Marketing and Communications, NEF) briefed the Committee on the Fund’s Asset Management Division. The NEF’s programme to promote the understanding of equity ownership by black people was outlined. Details of the eligibility, subscription and allocation results of the Asonge Share Scheme were given. In terms of the Scheme, 12 million MTN shares to the value of R1.3 billion were offered to qualifying black investors. More than 87,000 applications were received and the scheme was oversubscribed by 13%. Subscriptions amounted to R889.2 million. 39% of the shares were allocated to female investors, 52% to male investors and 9% to group investors.

Mr Frencel Gillion (Chief Investment Officer, NEF) briefed the Committee on the NEF’s Fund Management Division. Details of the approval process and the number of deals accepted, approved and disbursed were given. An amount of R496 million was disbursed to 86 new deals during the year. Details of the invested portfolio by product, sector and region as well as the job-creation statistics, were included.

Mr Wright tabled the consolidated statements of financial position and financial performance as at 31^st March 2007. Assets amounted to R2.669 billion and capital and reserves to R3.551 billion. The NEF was funded by the Department of Trade and Industry (DTI) by means of grants for operational purposes. Total income amounted to R200.851 million and a surplus of R111.975 million was declared.

Briefing by the South African Micro-Finance Apex Fund (SAMAF)
Mr Sitembele Mase (Chief Executive Officer, SAMAF) presented the Fund’s first report to the Committee (see attached document). SAMAF’s mandate was to alleviate poverty through the provision of financial services to the working and enterprising poor. Details of the Fund’s financial performance, delivery network per province and human resources were provided. Although an amount of R65 million was budgeted for transfers, R55 million was approved and only R19.8 million was disbursed. Challenges included a qualified audit report, issues of efficiency and effectiveness and the legal stature of SAMAF. The improvement plan focused on strategy structure alignment and an improvement in the credit and risk management functions.

Briefing by the Small Enterprise Development Agency (SEDA)
Ms Wawa Damane (Chief Executive Officer, SEDA) briefed the Committee on SEDA’s background, strategic focus and its vision and mission statement (see attached document). She summarised the highlights for 2006/07 and provided details of the SEDA offices throughout the country. SEDA’s focus was in the small, medium and micro-enterprises (SMME) sector and statistics on the businesses and clients that were assisted were provided. Examples of SEDA’s impact on enterprises and two sector programmes were listed. SEDA does not lend money to SMMEs but provided support through various international and local partnerships. Two major events were hosted during the year.

Mr Charles Wyeth (Executive Manager, SEDA) briefed the Committee on the SEDA Technology Programme (STP) formed in April 2006 through the merger of the Godisa Trust, National Technology Transfer Centre and the Technology Advisory Centre. He explained the process a new concept goes through until the final product was available for commercial use. There was a low level of utilization of technology by SMMEs in South Africa and Mr Wyeth discussed the challenges faced by the STP in attempting to address the issues. Details of the economic impact on incubation and technology transfer were provided. Examples included a biofuels project in Limpopo province and the local manufacture of a stainless steel component previously imported from China by SASOL.

Ms S Rossie (Chief Financial Officer, SEDA) gave an overview of the financial results. Total revenue increased to R442 million (more than double the R200 million reported in 2006). The Agency had received its second unqualified audit opinion and undertook a major systems re-engineering programme to address key risk areas in financial and internal controls and to improve efficiency and capacity.

Ms Damane presented a review of the human resources and concluded the presentation with a summary of the key challenges and future focus of the Agency. The issue of funding for SEDA was under discussion with the DTI.

Discussion
Prof B Turok (ANC) related his experience during a recent stay at a hotel in Transkei. Although some jobs were provided for people from the local community, the hotel did not purchase any supplies from local producers and was an example that development did not necessarily benefit the community. He noted that the NEF only invested R1 million in a single rural community project. He congratulated the IDC on its excellent report but suggested that future reports include new issues and the problems faced by the Corporation. He remarked that little co-ordination appeared to take place between the organisations and that there was a degree of overlap between their operations. He suggested that the IDC positioned every project in the value chain and provided proof of each project’s position in the chain as well as the extent of its contribution to the development of the country as a whole. He suggested that the Committee hold public hearings or consultations with development economists to assess whether the development formula and strategies employed were effective.

Mr D Olifant (ANC) complimented the IDC on its accessibility and on the quality of its report. He remarked on the lack of emphasis placed by all the organisations on rural development and reminded the Director-General of the DTI that this issue was raised during discussions on the industrial strategy and policy. Although the IDC did a very good job with the Asonge Share Scheme, he was concerned that it did not do any branding where it was necessary. Industrial development was better served by organisations like the IDC than by the commercial banks and this view was confirmed during the Committee’s recent visit to Ireland.

Mr S Njikelana (ANC) reported that during a recent people’s assembly, it was found that SEDA was the only agency represented at a local level. He stressed the need for the presence of all the DTI agencies at district level to assist municipalities in their industrial development strategies. He remarked that the issue of co-ordination between the agencies were discussed on several occasions and suggested that the Committee make a ruling to resolve this matter. The issue of allowing Khula to make direct loans must also be decided by the DTI. He commented that the Committee also needed to ensure that the agencies have sufficient resources and that it had effective communication channels with the executives of the agencies. He reminded the NEF of a previous request by the Committee to provide details of the extent of lending operations in the rural areas and asked if any progress was made in this regard. He also wanted to know what initiatives the agencies took to promote development in the poorer provinces. Although the idea of round tables was to be commended, he wanted to know why organised business was not included as well as emerging entrepreneurs.

Dr P Rabie (DA) remarked that all the agencies appeared to service the same target market and that there was a degree of overlap and duplication taking place. He suggested that the Committee and the DTI investigate this issue. During visits to Ireland, Belgium and France, it was found that there were certain similarities between the situation in South Africa and lessons can be learned from the emerging economies now joining the European Union (EU). In Ireland it took only three days to register and company. He pointed out that high interest rates were detrimental to the development of SMMEs as it had a negative impact on cash flow and threatened the viability of the business. He requested more information on the new products referred to in the Khula report and how these could benefit SMMEs.

Prof E Chang (IFP) noted that the IDC reported that jobs were also created in the rest of Africa as a result of its operations. She stressed the important role South Africa played in the SADAC region and suggested that neighbouring countries were taken into account when formulating industrial development policies. It was mentioned to her that it took up to two years before a senior manager in the agencies became proficient and she found this length of time unacceptable as she expected a person appointed to a senior position to be capable of carrying out the required duties. She was concerned by the high interest rates mentioned in the presentations and asked whether such high rates were charged to the borrowers. She mentioned an example of a R1 million interest-free loan from the EU made to the agencies and felt that the benefit should be passed on to the small businesses. She felt that it was necessary to change the thinking when supporting small businesses to take the needs of the customers into account.

Mr Rasmeni was concerned by the mention made of the delays in payments by certain Government departments experienced by Khula. This matter was raised over the last three to five years and it was important that the culprits were identified and the matter resolved. The disparity in allocation between provinces required attention. He said that Members of Parliament could support the DTI’s outreach initiatives by ensuring that information reached marginalised people in rural areas as well. He suggested that the economic structure of an area was thoroughly investigated before conferences and discussions on development plans were held. It was necessary to follow up on the workshops that were held and to assess the work done by the DTI to promote development. He noted the delivery challenge mentioned by Khula and would like to see links between small businesses and corporate business that were not just BEE window dressing.

Mr Gillion replied to the questions directed at the NEF. He said that rural and community development was a key focus area for the NEF and there was a dedicated team responsible for this. The information provided was as at the end of March 2007 and subsequent to this date a further R19 million was disbursed to the Amajuba project. The NEF was also considering a dairy farm project at Muldersdrift in the Eastern Cape as well as a citrus farm project in Mpumalanga. Investment in these rural projects amounted to R50 million, which was 10% of the NEF portfolio. A key feature was that these projects did not take a long time to mature. The NEF also assisted with access to markets, obtaining technical partners and getting other funding sources involved in the projects. The NEF was under-represented in some provinces and regarded the provincial round tables as a key initiative to address this concern. Discussions were held with the MECs to hold localised workshops to introduce the NEF’s products and services to local communities.

Mr Wright replied that, as a young organisation, the NEF played a low profile on branding whilst it concentrated on building its systems and understanding its market. The Asonge Share Scheme was the first major branding exercise. The NEF was formulating its rural and provincial development strategies and the round tables held at provincial level will determine future initiatives and opportunities for branding. The NEF had appointed a leading agency to assist them in this regard.

In response to the concerns raised about high interest rates, Mr Sithole explained that Khula invested cash funds in the money market and therefore earned more revenue when interest rates rose. He agreed that high interest rates were bad for small business and explained that Khula generally lent money below prime rates. In the case of certain rural development projects, the rate charged was prime less 5%. He pointed out that Khula needed to be fundamentally sustainable in the long term and make enough profit to support initiatives in future. With regard to the concerns about duplication, he said that the agencies were constantly evaluated and the issue was raised at the DTI review. Khula’s core focus was on small businesses and it wanted to strengthen its mandate in this sector. Khula provided support at all levels of the small business sector. New products introduced during the previous year included investments in enterprise development and start-up funds, providing portfolio indemnities for a Daimler-Chrysler small business initiative and loans to emerging farmers.

Mr Qhena replied to the questions directed at the IDC. He said that the IDC was exposed to a wide range of sectors and challenges included the need for staff to develop the necessary skills. The IDC dealt with a number of Government Departments and there was a need for better co-ordination amongst the Departments as well. The IDC attempted to balance issues around land and limited natural resources with the need for development. With regard to the potential for overlapping with the other Agencies, he said the IDC co-operated with them and avoided duplication as this led to a waste of resources. Although the IDC also provided services to small businesses, he did not believe that this was at the expense of the other agencies. The challenge was to ensure that there was no gap in the support and services available to entrepreneurs. The IDC divided operations into sectors to address the specific requirements of each and considered the impact projects may have on the value chain. He said that most of the projects reported on were located in rural areas and development nodes. During the last three years, the IDC had engaged with the Department of Provincial and Local Government (DPLG) in all the provinces in order to assess the extent of and need for regional development projects. The IDC considered its impact on the country’s industrial development to be of prime importance and must ensure that it remained sustainable in order to play its role. Given the economic situation and lack of infrastructure in some of the neighbouring countries, it was not easy to play an active role there. Nevertheless, the IDC had a degree of impact in neighbouring countries as well.

Mr T Matona (Director-General, DTI) fully supported the responses from the agencies and welcomed the constructive comments made by the Members. He said that the DTI was keen to accept new challenges and recognised the need for the department to evolve. The Department was pleased with the stability and leadership of the agencies and was happy with the overall alignment of their operations. The challenges were being addressed and the DTI promoted co-operation between the organisations. He was impressed by the level of co-operation and sharing of knowledge that was already taking place and commended the IDC for the manner in which it made resources available to the other agencies. The Department accepted that the various levels of businesses had different needs but there was good collaboration to ensure applicants were referred to the correct agency for assistance. It was important that outcomes were regularly evaluated to ensure that the outcomes were in line with the priorities. The DTI expected to see more projects in the areas that were identified as priority developments. He agreed that rural development was a major challenge and the DTI was not the only player in this field. The policies and strategies around rural development needed effective leadership and development should take place within a clear strategic framework. The DTI was involved with the DPLG in development at the district level and was instructed by the President to form a development agency for a specific rural area. The DTI did not have much experience in dealing with the private sector and he commended Khula for breaking ground in this direction. The DTI review process was lead by the Treasury but the Department was concerned that too much emphasis on financial controls could divert it from its role. The Department’s objectives were to improve its effectiveness and the impact of development projects.

Mr Rasmeni remarked that the President was asked a question about the funding for SEDA and the Committee was attending to some of the issues raised in the presentations.

Mr Olifant reported that he had received good reports about the involvement of SEDA in his constituency and was impressed by the level of interaction and professionalism displayed by the SEDA representatives. During a recent study tour to Belgium, he was informed that SEDA was held in high regard by the United Nations agency UNISO.

Prof Chang complimented SEDA for doing a good job and suggested that all the resources and requirements for building a good business (e.g. financial, managerial, etc.) was documented. She said that access to raw materials was limited and resulted in finished products that were more expensive and uncompetitive. Although not the responsibility of the DTI, the level of education in South Africa was lacking and it was important that people were educated to the requirements of the market. She said that there was a R1 billion grant available for small business development and suggested that the grant was allocated to Khula.

Mr Njikelana asked to what extent SAMAF met the delivery expectations of financial performance and governance. He remarked that the number of intermediaries was expected to increase as SAMAF grew and wanted to know what financial control mechanisms were in place for intermediaries. The development of skills and capacity was important but use can also be made of technology to monitor intermediaries. He asked to what extent SAMAF took advantage of municipalities’ eagerness to introduce development projects in their areas. He asked for further details of the reported intervention by the Director-General in SAMAF’s affairs. He asked what the profile of the intermediaries was in terms of their focus, size of operations, etc.

Mr Njikelana noted that SEDA was the only agency active in the Gizana and Oliver Tambo districts. He asked if SEDA took into account the need to communicate with those who were literacy challenged. The leadership role highlighted by SEDA was significant and it had a responsibility to implement Government policy. In terms of performance, he asked what SEDA’s targets were and whether the targets were achieved. He was wary of the risk of SEDA becoming a private sector-type organisation where the bottom line and profits were the main objective. He asked what the strategy focus of the STP project was. He wanted to know to what extent all the agencies implemented the National Industrial Development Framework (NIDF)

Mr L Labuschagne (DA) asked for details of the discrepancy between the SAMAF budgeted and actual figures. He repeated the concerns that were raised by other Members over the overlapping and potential duplication of operations between the agencies and asked if a bigger footprint will not be achieved if there was one large organisation instead of many smaller ones. With regard to building capacity, he asked whether personnel was appointed without the required skills and therefore required training yet were being paid the salary of a skilled person. He requested details of links with the commercial banks.

Mr Rasmeni welcomed Mr Martin Feinstein, Chairman of the SEDA Board. He raised the issue of capacity and the financial accountability of intermediaries and asked SAMAF what arrangements were in place to ensure that intermediaries were credible and can be held accountable for the money that was spent. He suggested that local SEDA representatives attended meetings held by the Committee during oversight visits. He was satisfied with the progress made by SEDA and the assistance provided to walk-ins at their premises. He asked for further details of the penalties charged to Government Departments who pay late. He commended SEDA for addressing its reliance on funding from a single source and the attempts made to obtain sustainable funding from multiple sources. He said that other sources of funding and resources were available. He asked whether the business plans developed by contracted service providers were acceptable to lending institutions and if mechanisms were in place to assess the performance of these service providers.

Mr Mase replied to the questions directed at SAMAF. He explained that an amount of R65 million was budgeted for transfers but only R55 million was allocated. The executive management was appointed mid-year and the low quality of the intermediaries resulted in only R19 million being paid out as they had to be held accountable for the funds. He noted the suggestion to utilise available capacity in the municipalities and reported that discussions were in progress in the Northern Cape in this regard. He said that SAMAF was also linking with the other agencies, in particular with SEDA for the provision of non-financial assistance to the intermediaries. The Director-General attached conditions to the irregular expenditure of R980,000 of which R500,000 had been recovered. He will report to the DG on the remaining R480,000. 27 of the 31 intermediaries were inherited and most were weak. A Regulator was appointed by the Treasury to assess the intermediaries. SAMAF was a wholesale funder and its mandate was to fund intermediaries that lend below the R10,000 level. SAMAF therefore did not overlap with either the IDC or Khula. He agreed that capacity was a challenge and SAMAF was building identification of capacity gaps at the initial proposal level, had appointed a service provider to assist them with building capacity, formed a relationship with the bank SETA, was working with SACOR on the setting up of co-operatives, signed a memorandum of understanding with the International Finance Corporation, signed an agreement with the Mafisa agricultural fund and appointed Mr David Deon as the internal Regulator.

Ms Damane responded to the questions directed at SEDA. She said that the issues around raw materials and education referred to by Prof Chang were not new. SEDA concentrated on improving the production capacity of small businesses so that they were able to satisfy market demands. SEDA made its report more user-friendly by including excerpts of the actual experiences of clients and will be publishing the report as required by law. SEDA sees its leadership role in terms of service delivery and interventions and acknowledged the role played by the DTI in terms of matters of policy. SEDA provided support to other entities by sharing its experiences, working models and the tools it had developed. SEDA set infrastructure targets and measured its performance against target on a regular basis. The concerns about the risk of working with private enterprises were noted but it was found that the commercial banks had good resources and facilities available that could be utilised by SEDA. The agency was clear about its own role, was conscious about branding and formed partnerships with other institutions after due deliberation. The strategy focus of the STP was to establish a national footprint of facilities to provide technical solutions to small businesses that would allow them to increase their productive capacity. SEDA’s implementation of the NIDF was from a small business perspective. Although district municipalities were the entry point for SEDA, districts were large. The agency was involved in developing partnerships with municipalities and other organisations and worked closely with them through the enterprise information centres. SEDA promoted the concept of imposing penalties if small businesses were not paid within 30 days, similar to the small business development frameworks devised by India and Brazil. She said it was important that business plans were developed by the entrepreneurs themselves and they must be able to articulate their business funding needs to the financial institutions when applying for loans. There was a limit to the number of people that can be assisted by SEDA personnel and accredited service providers were used. It was a policy of the agency to resolve any complaints from the SMMEs with the service provider concerned. SEDA strived to ensure that small businesses had easier access to financial institutions and were more effective in their dealings with them.

Mr T Gubevu (Executive Manager, SEDA) explained the service level agreements between SEDA and the commercial banks. SEDA did not provide finance but assisted entrepreneurs and small businesses with access to financial institutions and ensured that clients were adequately prepared before approaching the institution. He gave an example of a mutually beneficial arrangement between SEDA and ABSA Bank in Soweto. If successful, it was planned to expand similar partnerships to other cities. In North-West Province, the municipalities provided infrastructure in the form of office space and furniture, which allowed SEDA to reach small businesses in those areas.

Mr Martin Feinstein (Chairman of the Board, SEDA) explained that the role of the Board was to set the strategic direction, support, monitor and work with management and ensure that the right skills were in the right place. He had no doubt that the people at SEDA worked hard and were committed to the goals of the organisation. Although SEDA had standardised its seven basic products, more work was being done to become more sophisticated in a very complex operation. He said that there was no shortage of business plans and available risk capital. The problem was that funders needed to understand and be able to mitigate the risks involved. SEDA played a key role in facilitating an understanding of the risks by the funders and access to capital by small business entrepreneurs.

The meeting was adjourned.