Industrial Development Corporation (ICD), National Empowerment Fund (NEF), and Khula Budget and Strategic Plans 2008/09

Meeting report

Industrial Development Corporation (IDC) Briefing
Mr Geoffrey Qhena, CEO: IDC, informed Members that the IDC’s role was to support sustainable development and so IDC would invest in businesses that showed economic merit. Some businesses were not funded by the IDC because of perceived high risk that was viewed as market failure. The IDC’s aim was to play a critical role in assisting industries to develop in ways that met South Africa’s needs. The IDC also cooperated with national and provincial government as well as other Development Finance Institutions (DFIs).

The IDC’s main objectives were to support industrial development capacity and to promote entrepreneurship. Some of the outcomes of these functions were sustainable employment, regional equity, industrialisation, growing sectoral diversity and Broad-Based Black Economic Empowerment (B-BBEE). The Activities included the rest of the African continent.

Ms Neo Sowazi, Divisional Executive: Marketing & Corporate Communications, IDC, informed Members that sector development strategies were aligned with the National Industrial Policy Framework and the Industrial Policy Action Plan. With regional development, regional managers were appointed in seven provinces to allow for greater outreach and operational efficiency. Job creation was the most important target and this was reflected in funding allocations. Plans for 2008/09 would include increasing job creation, the implementation of initiatives to improve efficiencies and enable the corporation to have a larger impact, the full implementation of B-BBEE Codes of Good Practice throughout the IDC’s operations, and communication priorities.

Mr Lumkile Mondi, Chief Economist: IDC, looked at the highlighted focus areas from sectoral development strategies. Focus areas included Agriculture and Food, especially in bio fuels production and Mining and Beneficiation. Clothing and Textiles would become an important market. Other sectors of importance were Forestry, Wood and Paper; Chemicals and Non-Metallic Minerals, Infrastructure, IT and Communications and Healthcare. 

With regional development, regional offices were to be established in areas that had a high level of poverty. Regional offices would have a more operational focus and there were plans to develop four more development agencies, two of which would be based in urban areas.

The IDC’s interventions in support of Apex priorities included energy security, ICT interventions, land reform support, agrarian reform initiatives and other war on poverty and second economy interventions.

Mr Qhena concluded by saying that the IDC was very busy and that the institution was in possession of the resources needed to achieve its targets even though there was a skills shortage.

National Empowerment Fund (NEF) Presentation
Ms Philisiwe Buthelezi, CEO: NEF, informed Members that there was no need for the NEF to change their strategy or focus. The NEF aligned their objectives to the Codes of Good Practice. The NEF’s main objective was to be a catalyst in facilitating economic equality and transformation. Other key objectives were to promote and support business ventures pioneered by black people, to promote the understanding of equity ownership among black people, encourage and promote investments and savings, to ensure broad-based and sustainable empowerment and to work in partnership with both public and private sectors.

The assessment of the NEF’s impact was not only driven by financial returns but it was also measured in terms of “The Empowerment Dividend”, which was made up of B-BBEE ownership, management control, employment equity and skills, black women empowerment, job creation, growth sectors, geographic spread and investment return.

Mr Andrew Wright, COO: NEF, stated that the NEF’s Asset Management Division (AMD) helped the institution to promote the understanding of equity ownership among black people and helped to provide black people with direct and indirect opportunities to acquire shares in State-owned and private business enterprises. The AMD also encouraged and promoted investments, savings and meaningful economic participation amongst black people. The NEF Asonge Share Scheme was conceived, designed and launched to address the above objectives.

Mr Frencel Gillion, Chief Information Officer, CIO: NEF, informed Members that the Fund Management Division was one of the core divisions in the NEF. The mandate stated that its main purpose was to provide start-up capital to black-owned companies and to ensure sustainable Black Economic Empowerment (BEE).  

The Fund Management Strategy looked at the six strategic drivers. These drivers were processes, marketing, human capital, risk management, partnerships and portfolio management.

Khula Presentation  
Mr Xola Sithole, CEO: Khula, informed the Committee that economic prospects had dimmed slightly and this was presenting challenges to Small, Micro and Medium Enterprises (SMMEs). The focus in 2008/09 would be on expanding the geographic footprint, and marketing and communication activities.

The institution had a network of 13 partnerships and offered at least 25 different financing products to small and medium enterprises (SMEs). Khula recently launched a new corporate identity to increase the emotional connection with the people that they served.

Khula’s strategic objectives included growing the institution's outreach and impact as a DFI for small businesses and increasing the awareness of the institution and its products within its target market to achieve high customer satisfaction levels. Other objectives included building an effective institution that achieved its SME development mandate, investing in the development of Khula’semployees and establishing effective and efficient processes to support operational activities.

The Balanced Scorecards included in the Report focused on SME financing activities, development impact measures, and financial sustainability and other listed measures.

One of Khula’s key initiatives for 2008/09 was KhulaDirect. The business plan was presented to the Department of Trade and Industry (dti) and was being processed.

Discussion
Prof B Turok (ANC) informed the Committee that new statistics on inequality had recently been released. According to the report, South Africa had the highest inequality in the world. He stated that the interventions that were mentioned in all the reports had to be multiplied. There was a feeling that the institutions were being too cautious and needed to be bolder. The Committee was not interested in how much profit the institutions made; they were to spend their money, as there were many problems that needed attention. He believed that all the institutions had too many targets and this caused them to lose focus of their major priorities. The Committee would assess the Key Performance Indicators (KPI) because the outcomes were what mattered. The Industrial Policy and the Action Plans were a mismatch; one did not follow the other. Regarding the NEF, the main objective was to be a catalyst in facilitating economic equality and transformation. The Gini Co-efficient showed that this was not true. The NEF Report showed a surplus brought forward of over R1 billion. He urged the NEF to spend the money, as the large amount indicated too much caution. The Report showed that the rand per job was R53 060. If this statistic was correct, then he asked what prospects there were for employment.

Mr Qhena stated that having too many targets did not mean that the IDC lost its focus. It was an indication of the number of challenges that were to be faced in the country. The IDC developed strategies that were to be embarked on and did more than what was highlighted in the Industrial Policy Framework.

Ms Buthelezi from the NEF focused on Mr Turok’s statement concerning the Gini-coefficient. She stated that the issue was to be addressed by the FDIs as well as the private sector and the Government. There was a concerted effort from all the players in the economy to address the challenge. The NEF was making a small contribution to helping with the inequality issue in South Africa.

The NEF surplus was reflected as an extra-ordinary figure on the financial statement due to proceeds that were received because of accounting standards that could not be changed.

Mr Gillion told the Committee that the cost per job included the cost for creating an employment opportunity. Costs looked at capital equipment, the working capital and related costs – such as all costs incurred from creating a specific job. 

Mr L Labuschagne (DA) wondered whether the IDC’s work was proactive or reactive. There were many problems in the textile industry. He asked if the IDC waited for those in the industry to approach them, or if the IDC took the initiative and approached industry. He also asked about anti-dumping measures that could impact on many corporate companies. There were challenges in infrastructure in terms of roads, water and sewerage. He asked if the institution waited for the Government to do something about it or if their resources were somehow linked to the Government in the appropriate areas. Work was being done outside the country, but there were many challenges to focus on in South Africa. He wanted to know if there was a balance between attending to local issues and attending to issues outside the country. Mr Labuschagne also asked if the IDC was aware that there was going to be an energy crisis, and asked what they were doing about the situation.

Mr Qhena told Members about the collaboration with Eskom. The intention was not to duplicate what they did. The IDC assisted them in certain areas to ensure further effectiveness. Mr Qhena said that capacity was needed to ensure that there was enough electricity in the country. The IDC collaborated with the Department of Public Service and Administration (DPSA) as well but also did not want to replace the role they played.

In regard to the NEF, Mr Labuschagne noted that they were in the business of empowering and spreading Broad-Based Black Economic Empowerment (B-BBEE). He wanted to know if assistance was spread equitably. The Report showed many values and money that was spent. It seemed to be a “values versus employment” type of situation.

Ms F Mahomed (ANC) was concerned that the institutions were duplicating activities to a great extent. She asked for further comment on this point. She also asked if there was any merit in consolidating efforts to avoid any duplication. None of the Reports showed rollovers in their balance sheets. She asked for an indication of staff turnover in the institutions and information on job creation.

Mr Qhena addressed the issue of staff turnover and empowerment of women. The statistics were not provided in the presentation. The information would be incorporated in the next report. Part of the budget was being set aside for the further development of women.

Mr David Lewis, Deputy Chairperson: IDC Board of Directors, stated that the IDC did not have information on staff turnover on hand but it was his understanding that turnover had been slightly lower than other institutions in the industry. He stated that it was important to pay salaries that were broadly competitive. Most senior executives could move away to other institutions, but did not because of the high morale at the IDC. Most of the people at the IDC knew that they were making a contribution to the development of the country.

Ms Mahomed addressed the NEF. She was concerned that approved projects amounted to half of what was spent on due diligence. She asked for clarification as well as the balance sheet and information on the amount of women who were empowered.
 
Ms Buthelezi noted that in respect of the amount allocated for due diligence, not all the money was being spent.

In terms of Khula, Ms Mahomed thought that more information was needed concerning Human Capital Development.

Ms M Ntuli (ANC) addressed the NEF. She noted that their mission statement and objectives were the same as the previous years. She could not make sense of this and asked for clarification. She expressed concern over the B-BBEE issue and wanted to know how many B-BBEE initiatives the NEF assisted in rural areas. The aim was to close the inequality gap between rural and urban areas. She also asked how many people were the NEF able to train to become empowered.

Ms Buthelezi informed the Committee that the objectives and mandate for the NEF would remain the same. The NEF was trying to reinforce their activities and wanted to link strategies and activities to the mandate so that they were positioned to deal with B-BBEE in South Africa.

Ms Ntuli noted that the IDC wanted to differentiate themselves from commercial banks and other financial institutions. She was worried about the IDC wholesaling to these banks. She wanted to know how the IDC would differ from other financial institutions. Some businesses were not funded because of perceived high risk, but she asked how did the institution deal with small businesses. With regard to agriculture funding, work was also being done with commercial banks. She asked if the work was being coordinated, or if there was duplication because there were other institutions doing the same thing.

Mr Qhena from the IDC looked at high-risk projects. Most development agencies made long term investments and high-risk investments. Projects were assessed to get a sense of the kind of risk that was being taken.

Ms Ntuli wanted to know why Khula offered so many financing products to SMEs and what they aimed to achieve by it. She asked if there was a way of monitoring whether the people who received loans were able to change their lives. She asked if Khula’s geographic spread had a negative or positive impact. People complained that they did not see much of Khula; and this indicated that Khula awareness campaigns were not succeeding. She asked, in relation to the restructuring of regional offices, what was the problem and what were the objectives. Ms Ntuli wondered how new partnerships would assist in the development of previously disadvantaged communities, and how many of the new partnerships were in rural areas.

Mr Sithole said that there was not sufficient time in which to discuss the issue concerning the financing products.

Dr P Rabie (DA) focused on the NEF. He noted that financial services represented 1.1% of the sector by value. This was a sector that was able to initiate profits. He asked why financial services were only given 1.1% of the portfolio spread.

In relation to sectoral focus, Ms Buthelezi stated that the NEF looked at the Department of Trade and Industry’s policy and objectives and this had showed that financial services was not one of the key drivers of economic growth in industrial policy.

Ms D Ramodibe (ANC) proposed that the IDC and the NEF collaborate. She wondered if the institutions were looking into a linkage with local government. She suggested that the Reports should reflect the previous year’s budget so that comparisons could be made. 

Ms Ramodibe asked the NEF if the textile industry was going to grow and if they were providing the industry with assistance. She asked what impact the vacancies had on the institution, why the positions were not filled and the number of applications that were rejected.

Mr Wright informed Members that the NEF doubled in size and tried to create more capacity. The recruitment process had improved and the institution was almost at full capacity.

Mr D Dlali (ANC) stated that he hoped that the IDC would return to inform the Committee that targets for job creation were achieved. He addressed the bio fuels production as a focus area in the Agriculture and Food Sectoral Development Strategies. Bio fuels were a contentious area in relation to food security. He raised the issue because food prices were increasing every day. He also asked how the IDC would assist in electricity production and what projects they were involved in. The IDC planned to develop four more development agencies. He was worried that there were too many agencies that performed the same functions. Mr Dlali linked energy security with land and agrarian reform, and asked how the IDC would intervene and deal with the problems encountered in that area. He also wanted to know how the institution was going to assist and support the land bank.

Mr Mondi informed the Committee that the region failed to come up with an intervention for bio fuel. He agreed there was an issue with food security due to people switching industries because of the profits that could be made.

Ms Sowazi stated that there was a misunderstanding of what the agencies actually were. She defined the agencies as legal entities that were facilitated by the IDC. They were not owned by the IDC but they were subject to governance by the municipalities. There were twenty-two development agencies in the country, largely in rural areas. There were also projects concerning urban regeneration and small town revitalisation.

Ms Rentia Van Tonder, Head: Wood, Paper and Other; IDC, looked at biomass. Biomass fuel pallets were a product generated by waste. The IDC financed two of the projects and aimed to export the pallets. The next step would be to focus on using the biomass for go-generation. This was linked to recycling, to waste management and land fill sites. Biomass was a waste-type solution that the IDC was trying to facilitate.

Mr Mondi addressed the issue of Land Reform in the IDC. The focus was not specifically on cash crops; it was on horticulture. Some of the land was taken forcefully but was now being redistributed back to the people. The community participated in harvesting the land and entrepreneurs in the areas received assistance from the IDC. Waste from the projects was used for energy. It was important for the IDC to work with cooperatives like Khula who was engaged in projects in the rural areas and villages so that the institutions could assist in giving people loans.

Mr Dlali addressed Khula, saying that according to research that was conducted, the institution was not known. He himself did not know what Khula was doing and asked for an assessment of the institution’s progress so far.
 
Mr Sithole stated that Khula looked for new, sustainable partnerships every year for the purpose of continuous improvement. They needed partnerships in businesses that had an appetite for the same level of work. Although there were new partnerships, there was still a finance gap that needed attendance. The Balanced Scorecard looked at Khula’s abilities, its impacts, sustainability and ability to retain skills.

Mr Dlali asked the NEF what it was doing to avoid duplication. He wanted to know what the challenges there were that stopped the institution from achieving its goals.

Ms Buthelezi responded that the issue of duplication between the NEF and other DFIs was an issue that needed multiplication of interventions. Ms Buthelezi stated that the more people involved the better chance they had of addressing the challenges.

Mr J Maake (ANC) informed Khula that the Committee was interested in KhulaDirect and wanted to know how far they were in terms of progress. He asked NEF for clarification on what the institution meant by saying it wanted to promote the understanding of equity ownership among black people, and how this would be achieved. In terms of the IDC, he wanted to know what advanced manufacturing meant.

Mr Setlakalane Molepo, Head: Metal, Transport and Machinery Products; IDC, focused on advanced manufacturing. He stated that with areas like nuclear power generation, South Africa, in order to ensure that it was in line with the Industrial Policy Action Plan, should localise as much as possible. IDC felt it was important to support as many entrepreneurs as possible, so that they could be involved in advanced methods of manufacturing.

Prof E Chang (IFP) agreed that institutions should not be making large amounts of profit. She suggested that they start being more aggressive with moderating the economic growth. She complained that the Committee often spoke about rural areas but the institutions were not doing anything about the situation. Prof Chang was not surprised that Khula was unknown. If Khula was not going to direct, then people were not going to approach them. She hoped that they would pay closer attention to the textile industry.

Mr Qhena noted that the IDC was one of the biggest investors in the textile industry. It was to develop interventions in this area, as it was discovered that it played an important role in terms of employment creation. Profit was not the main aim, but it was important to show that it was sustainable, and that there could be some profit, otherwise this was just a waste of resources.

Mr S Njikelana (ANC) stated that the institutions and the Committee would have to evaluate aspects of “business unusual” meticulously. He urged the Committee to work out a reporting framework so that Members could get the information that they required. He formally proposed that as soon as the Committee received the schedules, there should be an opportunity for Members to discuss with the Directors General or Chief Executive Officers the issues that should be raised in the meetings. It was suggested that the reporting process be linked to oversight visits. It would be helpful if each institution looked at the cost of creating employment.

Mr Sithole addressed the issue concerning KhulaDirect and Business Unusual. KhulaDirect’s aim was to increase the scale of impact substantially. There were 247 branches at present. Many people received benefits for sustainable businesses but they did not let others know about it. Branches were located across the provinces. Khula had partnerships with people in important areas and challenges were being addressed.

Ms Buthelezi from the NEF agreed that a better reporting framework was needed so that key issues could be highlighted and the presentation could be aligned to issues that were to be discussed in the Committee.  

Mr Njikelana wondered when KhulaDirect was going to make a more visible impact. As long as Khula was reliant on intermediary banks, then they would not be effective. He formally proposed that they hold discussions, where executives could clearly state what they were doing to ensure that KhulaDirect was in place and had resources.

Mr Njikelana agreed that there was a food security issue where production of bio fuel was concerned. There were reports that challenged the cleanliness of bio fuel. He wanted more information on the development of the four agencies and proposed that at least two of the agencies be located in rural areas. He also asked the IDC if they were going to take the Khula experience into account.

Mr Qhena noted that in terms of collaborations with commercial banks, the IDC had learnt from Khula. The IDC was forcing commercial banks to take in more; they were being crowded in instead of crowded out.

Mr Njikelana noted that the NEF should make a conscious effort with B-BBEE to ensure that objectives resulted in a change in ownership. He emphasised the importance of monitoring and evaluating the objectives. He proposed that the Committee assess the outstanding amounts in leadership funds. This was linked to success benchmarks. He asked why the institution spent a large sum of money on acquisition funding and whether it was a demand or supply factor. Ideally, he would have liked to see more funding in the procurement sector.

Mr Gillion noted that procurement was a key focus for the NEF. There was a dedicated procurement finance product that spoke to the codes of practice when spending on targets. The financial sector may have been under represented because the NEF funded companies directly. Rural areas were also an important issue for the NEF. A number of projects were being looked at and R20 million had already been invested.

Mr D Olifant (ANC) believed that the Committee would have to hold a workshop that detailed the objectives and needs of the institutions. Members had to look at whether there was a need for the NEF and Khula. He thought that the manner in which the reports were written was long and drawn out and agreed that the Committee should be able to tell the institutions what the important issues were and what they were to discuss in the meetings.

Mr Qhena from the IDC commented that it would be useful to have a session to refresh the Committee’s knowledge around the purpose of the IDC. They were involved in a number of projects and collaborations with other institutions. Each institution had its own place in society. The IDC established a way of cooperating with other institutions.

The meeting was adjourned.