Khula, National Empowerment Fund, and Industrial Development Corporation: briefings

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
10 March 2006
KHULA, NATIONAL EMPOWERMENT FUND, AND INDUSTRIAL DEVELOPMENT CORPORATION: BRIEFINGS
 

Khula briefing [email protected]]
National Empowerment Fund briefing
Industrial Development Corporation briefing

SUMMARY

MINUTE
Khula briefing

Mr Xola Sithole (Managing Director, Khula) told the Committee that Khula’s mandate was to promote access to finance for Small, Medium and Micro-Enterprises (SMMEs). They wished to maximise developmental impact, while maintaining financial sustainability. Market failures continued to put pressure on financing black-owned SMMEs and start-ups that had taken out loans of less than R250 000, particularly in the poorer provinces.

He said their objective was to grow the disbursement annually; increase the facilities for smaller loans, implement a direct channel of start-up funds, find a way of working with provincial Development Corporations, and fund more women’s and Black Economic Empowerment (BEE) initiatives. They also needed to invest in their staff and their institution in order to be effective.

Banks would rather not participate in their target market of small loans.To incentivise them to do so, Khula was increasing the proportion they would cover in relation to the facilities the banks provided. The other channel to consolidate was the Retail Financial Institutions (RFIs). Khula had intended to establish a R300 million start-up fund for new enterprises, but an investor who had promised to provide R150 million, had pulled out at the last minute. In spite of this, they had made three investments of R2.6 million.

Khula wanted to start ‘KhulaDirect’ to better reach the target market. Their building blocks would be the Small Enterprise Development Agency (SEDA) network and so on. This would require funding. They would also empower tenants in their properties. They were also currently managing the Loan Reform Empowerment Facility (LREF). They were also managing UNOPS Local Economic Development (LED) funds and they hope to manage a portion of the Micro Agricultural Finance Scheme for SA (MAFISA) funds.

For four years, Khula had approved loans of up to R300 million annually, and disbursed an average of R200 million per year. They expected that, by the end of this month, their approvals would be around R500 million. The disbursements were likely to be about R384 million.

About 2 900 people have benefited from Khula’s activities last year and 15 000 jobs had been created. Women’s participation was 34%, while BEE and rural involvement was on average 40%. On a sector-by-sector basis, 65% had gone to retail, while the other had received 35%.

Khula was able to generate income, but they currently had a budgeted loss of roughly R17 million. They were funded by government through grants of R32 million. Development activity cost money, and there was a need to maximise the impact of the organisation.

Discussion
Dr M Sefularo (ANC) requested Khula to prove that their benefit to the economy at large outweighed their losses. He also asked more about the alleged ‘market failures’.

Mr Sithole felt that, left to its own devices, the market would not attend to the challenges of building the ‘second economy’. Therefore Khula filled the gap. No other financial institutions were willing to attend to SMMEs, although they felt there was a role for the private and public sector to do so. However, as long as they were in that market, they did not expect everyone to be successful, which was unfortunate.

Mr L Labuschagne (DA) said an investment of R2.6 million seemed large for three investments. Khula had reported that there were approximately 2 900 beneficiaries and R2.6 million investment. He reminded Khula of a fax he had sent pertaining to people who wanted loans but the banks wanted excessive guarantees. Khula had never responded to that fax. He had also been approached by a woman who wanted to buy a franchise and needed R125 000. He asked where people went in such cases, especially if they had no security. The losses that Khula had incurred were heavy, but delivery on the ground concerned him more. He asked for proof that there were 2 900 beneficiaries and that 15 000 had been created.

Mr Sithole responded that Khula had provided over R1.5 billion to SMMEs since its inception. Perhaps the R1.5 billion had not had the optimal impact, but Khula was working. Regarding the Member’s fax, he said he would attend to it and that the woman mentioned should be referred to them.

Mr P Nefolovhedwe (AZAPO) asked whether there were any strategies to ensure that their grants to RFIs were not "perpetual". He also queried how business people with financial setbacks could be assisted. Lastly, he questioned whether Khula would assist in funding Gauteng Enterprise Propeller, and about the goals of KhulaDirect.

Mr Sithole felt strongly that RFIs needed to be assisted. On businesses with financial setbacks, he said Khula was there to assist everyone. Lastly, Khula would never fund Gauteng Enterprise Propeller but the enterprise could refer their clientele to them. On KhulaDirect, they intended to reach the small loan businesses through such channels as SEDA at grassroots level.

Mrs Ntuli (ANC) asked Khula to elaborate on the funds it was managing. Secondly, she asked what was meant by "development activities were eroding their capital base". Thirdly, she needed clarity on the retail: other ratio on sector. Lastly, she asked about Khula’s role in mentorship.

Mr Sithole’s response was that the sectoral split was a reflection of their current portfolio. A R1 million loan would not be likely to establish a manufacturing concern. On funds under management, he said Land Reform Empowerment Facility (LREF) had disbursed about R40 million, while UNOPS LED had disbursed about R50 million. Regarding mentorship, their role was non-financial.

Ms N Khunou (ANC) asked whether Khula was aware that some people charged exorbitant fees for writing business plans, such as R15 000. She also asked about Khula’s interest rate. Mr Sithole said that anyone charging such fees should be referred to Khula. Their interest rates varied from 5 - 13.5%.

National Empowerment Fund (NEF) briefing
Mr Andrew Wright (Manager in the CEO’s Office, NEF) said NEF’s overall mandate was the promotion and implementation of the Broad-based BEE (B-BBEE), through targeted interventions and funding, according to their Code of Good Practice. They had identified market failures for intervention, but had avoided duplicating other Development Financial Institutions (DFIs) product offerings.

NEF’s overall mandate was to look at specific financial requirements of the businesses they were trying to assist. They had done an assessment of start-up businesses, expansions, and finance for preferential procurement contracts awarded.

At the start-up level, the NEF insisted on 75% black shareholder ownership participation in order to qualify for any funding. Where existing businesses were looking to expand, NEF would insist on 50% black shareholder ownership and participation.

NEF had learned that, in the 3 200 total applications, there was a clear split at a R3 million average mark of 80: 20% rule that 80% of applications represent the range R250 000 – R3 million. On the other hand, 20% of applications represented 80% of the value of funding that NEF approved.

The question became how to address risks. NEF had structured two funds: one to deal with the high volumes of applications of simpler structure requiring low levels of funding, and another fund for the low volume of high value, more complex applications.

NEF’s performance had been assessed in terms of B-BBEE ownership and management control; the number of jobs created; the participation of black women in ownership and management structures; geographical spread, and investment return to BEE shareholders.

NEF had received 9 500 requests for funding. Of those, 1 500 had materialised into actual applications, and 1 000 had requested further information. 28 applications worth R240 million were ‘ready to go’. 30 deals were under investigation. 17 deals worth R282 million had been approved and were going through legal processes. 60 loans had been disbursed of R241 million. On a value basis, NEF was 18.8% exposed to start-ups based on 20% of their investment portfolio. This comprised 57% of the total applications. NEF had delivered what it had set out to achieve.

Victor Mabuza (Head of Asset Management, NEF) added that NEF’s post-investment objectives were to leverage partnerships with other Development Financial Institutions (DFIs) to provide non-financial services when mentoring SMMEs and start-ups. This would be done at ‘first entry’ of investment, in the hope of turning businesses around.

NEF had shares in several State Owned Commercial Enterprises (SOCE), which had been distributed to B-BBEE constituencies. The primary objective was to create innovative savings and investment products for black people to start creating wealth. This would help to unlock the listed value of these shares to transfer to black people.

Discussion
Dr M Sefularo (ANC) said NEF looked organised although they appeared to have financial constraints.

Mr Wright (NEF) acknowledged praise and criticism. He added that the ‘Empowerment Dividend’ initiative was underway. The Post-investment Monitoring Unit would focus not only on the financial performance of the portfolio, but achievements in transactions.

Mr S Njikelane (ANC) asked why co-operatives had been categorised as rural/community organisations.

Mr Wright said co-operatives best cater for initiatives associated with rural and community development programmes. The emphasis was on funding initiatives that became sustainable economic assets to communities.

Ms NP Khunou (ANC) was disturbed about NEF’s ‘provincial spread’ and was not clear about NEF’s financial statement. Mr Wright responded that they had realised that they should rely on partner organisations such as Small Enterprise Development Agency (SEDA) to help them realise the geographical spread, among other initiatives. He apologised for any unclear financial reporting and promised to redo the report.

Industrial Development Corporation briefing
Mr S Meer (Manager: Business planning and strategy, IDC) said the role of the IDC was promoting sustainable development, and they invested in companies with economic merit, particularly those that would not otherwise get finding. They supported the Accelerated Shared Growth Initiative for SA (ASGISA) as well as industrial development. One of their key plans was to increase ‘downstream beneficiation’. They worked with the private sector, co-operated with the national and provincial governments, as well as DFIs and Department of Trade and Industry institutions. The IDC studied provincial inequalities, rural versus urban areas, township industry, and exports, but their main focus was job creation. Their role was also to help workers move from the second economy to the first economy. They also supported the New African Partnership for African Development (NEPAD).

Mr Gouws (CFO, IDC) said their emphasis on job creation was in line with government, and specifically ASGISA’s goals to half unemployment in eight years. In this financial year, their target was to create 19 000 jobs. They thus needed to develop entrepreneurs because SMMEs created more jobs than large projects. To achieve those goals, the IDC would have to remain financially sustainable.

Their main focus had previously been on BEE acquisitions, but now the focus was on start-ups and expansionary finance. The IDC was committed to the Coega Harbour developments and other projects, as well as downstream beneficiation. The IDC was also involved in the film industry. For instance, the film "Tsotsi" had been funded by them.

In the nine months to December 2005, the IDC had:
- worked in all provinces;
- launched a R1 billion initiative to finance five schemes;
- been involved in the Nguni Cattle Project;
- provided assistance to municipalities of poor rural communities;
- made inputs on government initiatives such as ASGISA;
- contributed to the industrial policy of the country;
- supported national initiatives on international economic relations; and
- co-operated with other DFIs in the country and in Africa.

In the future, the IDC intended to create 21 000 jobs from their activities, and had allocated R6.2 million to this. They also intended to regularly visit provinces to inform the public about their work. They would also focus on training SMMEs in conjunction with other DFIs.

Discussion
Professor E Chang (IFP) touched on the approvals that the IDC had made. What percentage of businesses were labour-intensive and what percentage was capital-intensive.

Mr Qhena (CEO, IDC) said it was to a country’s advantage to have projects that were both capital- and labour-intensive. Big projects create linkages between themselves and SMMEs. The two complimented each other.

Ms N Khunou (ANC) asked more on efforts to bridge the gap between the first and the second economies. Secondly, as part of the Nguni Cattle Project, how was the IDC helping retrenched farmworkers? How many women had been targeted for the 21 000 jobs that the IDC intended to create?

Mr Meer said bridging the gap meant developing entrepreneurs. The IDC had identified skills development and training to assist with applications. The IDC was trying to broaden its reach by identifying organisations that could market the IDC’s activities, and pass referrals. On the farmworkers issue, he said the IDC was trying to get them into shareholdings and was also encouraging them to form co-operatives. There should be a minimum of 15% ownership participation by women. A R20 million fund was dedicated to encouraging women entrepreneurs.

Mr J Maake (ANC) asked how the IDC financed municipalities.

Ms N Sowazi (Executive Vice-President: Corporate Affairs and Marketing, IDC) said the Finance Management Act precluded the IDC from financing municipalities. However, through a Section 21 Company formed by the IDC and a municipality, it could provide finance and management to that company for five years, in so-called ‘grant funding’.

Mr S Njikelane (ANC) asked what percentage of approvals went to manufacturing, versus services. He also asked if the IDC’s strategy was demand- or supply-driven.

Mr G Qhena said the split was 50: 50 and that the IDC was driven by both supply and demand.

Dr M Sefularo (ANC) asked if the IDC experienced financial problems, how government could bail them out. What were Strategic High Impact Projects (SHIP), and why was the private sector not involved in it? How did the IDC encourage beneficiation?

Mr Qhena said that the government could bail the IDC out, but he did not see that happening under his leadership. SHIP was a new initiative that tried to find opportunities in the likes of Sasol. The IDC would invest responsibly and was aware of the risks involved.

On beneficiation, the challenge faced by the manufacturing sector was cost of input. For instance, steel manufacturing was charging import prices and that discouraged entrepreneurs downstream. The beneficiation strategy was to address upstream prices. If that were done, the IDC believed it would open opportunities for entrepreneurs who wanted to beneficiate.

The meeting was adjourned.