Stimulating Economic Growth Through B-BBEE Funding
At the National Empowerment Fund (NEF) we are driven by the knowledge that if Africa had been destined for perpetual poverty she would not have been so richly endowed with her vast and varied natural resources, an illustrious history as a catalyst of human civilisation, as well as a burgeoning human capital that is becoming both younger and better educated.
As the cradle of humankind Africa is a place that is bubbling with hope, renewal, vigour and promise. With almost 200 million people aged between 15 and 24 years, Africa has the youngest population in the world today. Contrary to global trends, the number of young people in Africa will double by 2045 and if this trend continues, the Continent’s labour force will amount to 1 billion people by 2040, making it the largest in the world, surpassing both China and India. According to a recent report by the McKinsey Global Institute, “future growth is likely to be underpinned by factors including the most rapid urbanisation rate in the world and, by 2034, a larger working-age population than either China or India. Accelerating technological change is helping to unlock new opportunities for consumers and businesses, and Africa still has abundant resources”. As South Africa’s economy continues to forge ahead, contending gallantly against myriad challenges, not least a lethargic but promising growth, a dual economy with one of the highest inequality rates in the world, obstinate unemployment levels and more, we choose instead to draw inspiration from the indomitable and resolute spirit that we encounter daily through the tenacity and vision of the many black entrepreneurs who come through the doors of the NEF across the country. Like the many across our continent, they too bubble with hope, renewal, vigour and promise. It is the same promise that South Africa will pursue under the stewardship of President Cyril Ramaphosa, who declared recently that: “We must strive together to realise the demand of the Freedom Charter that the people shall share in the country’s wealth. It is this demand that stands at the center of the economic policy of every administration since 1994, to lift the majority of South Africans out of poverty by building an inclusive economy that creates jobs. It informs our focus on transformation, changing patterns of ownership, management and control to benefit black and women South Africans”.
Recapitalising the NEF
This Integrated Report 2018 is a narrative of the ebbs and flows of a Development Finance Institution that once again rose above the trials and tribulations of unrealised recapitalisation, by far the most devastating dilemma for the NEF over the past eight years. Thanks to a robust collections’ regime, since inception that NEF has harvested over R2.8 billion cumulatively from the loans that have been disbursed over the years to black entrepreneurs across the country, enabling reinvestment in new applications for business funding. The NEF was capitalised by R2.4 billion in 2005 and has been able to more than double the capital base to about R5 billion through prudence and good governance. The NEF has re-invested collections from loans and allow 927 transactions worth more than R9.3 billion to be approved and a total of R6.3 billion to be injected into the economy. In the State of the Nation Address of 21 May 2004, then President Thabo Mbeki stated as follows: “The National Empowerment Fund will announce new financial and non-financial empowerment products within the next three months. In this context, we must bear in mind that Government has provided R1 billion for black economic empowerment during the current fiscal year, with R10 billion provided for over the next five years”. We are confident that had the NEF received the full capital allocation of R10 billion as stated above, more could have been achieved in the transformation of the country and in growing the participation of black entrepreneurs in the mainstream of the economy, which is the mandate of the NEF. The NEF’s mentorship interventions, as well as successful efforts to rehabilitate businesses in distress, have been very effective in helping to stabilise the operations of investee businesses, thus improving their ability to make good on their loans. Through this pro-active monitoring, approximately 92% of jobs
(1 605) in businesses in distress that were on the verge of being lost were saved because of our early interventions. In the period under review, over 1400 black businesses approached the NEF to seek funding of over R10.6 billion for start-up, expansion and acquisition of untransformed businesses. This is double the volume of transactions the NEF had to assess in the year prior. Although over 50% of the value was declined at screening stage, transactions worth about R5 billion went further in the approval processes, and in most instances the NEF had to refer these entrepreneurs to other potential funders due to limited capital available for investment. This is an indication that black entrepreneurs are eager to play an active role in the economy and with adequate resources the NEF can make a huge difference in converting these to active participants in the economy. A properly resourced NEF, therefore, will have the necessary means and the capacity to respond to the huge demand for business funding among black people. Whilst the NEF’s actual cash as at 31 March 2018 stands at R1.1 billion, there is only R94 million uncommitted cash at hand for new transactions. In order to manage the 2017/18 strategy, approval targets were reduced following representations to the DTI. For the NEF to discharge the 2018/19 strategy, at least R680 million would be required as cash injection.
Having achieved a diverse range of historic milestones since operations began in 2005, the NEF has now reached a critical point where its funding mandate requires urgent recapitalisation for the development financier to be able to implement its mandate unhindered. Since July 2014 the NEF has been in discussion with the Industrial Development Corporation (IDC) in a process supported by both the DTI and the Department of Economic Development. The objective was to find a sustainable and long-term recapitalisation solution for the NEF. On 14 February last year the Trade and Industry Minister, the Hon. Dr Rob Davies and Minister Economic Development, the Hon. Mr Ebrahim Patel, signed the Memorandum for incorporating the NEF as an IDC subsidiary. Subsequently, the Board of the IDC approved a facility of R500 million for the NEF in March 2017. The IDC’s conditions precedent before the facility may be disbursed to the NEF include Cabinet approval, which the NEF is confident will soon materialise. Secondly, disbursement will require a Section 66 approval by National Treasury in terms of the PFMA for the NEF to be accorded limited borrowing rights, which is presently precluded by the classification of the NEF under the Act.
Operational milestones during the year under review
Despite the protracted challenges to finally secure recapitalisation, the targets for approvals, commitments and disbursements were revised downwards in line with uncertainty regarding recapitalisation, and this was approved by the previous Board and the Minister of Trade and Industry and reported subsequently to Parliament’s portfolio committee on Trade and Industry.
- During the year under review the NEF approved 75 transactions worth R634 million against a target of 86 deals worth R350 million. Even though the NEF was 11 transactions shy of the volume target, we are pleased to have approved lesser rand-value transactions at an average of R8.4 million per transaction last year, versus approximately R12 million per deal in the year prior. What this means is that the NEF is stretching the rand from limited resources to reach as many entrepreneurs as possible.
- The targeted value was exceeded by R284 million essentially because of the obligation to respond to high market demand.
- Total commitments of R740 million were achieved, which includes commitments of R219 million from the partnership with the Department of Rural Development and Land Reform (DRDLR), in terms of which the NEF implemented the department’s 50-50 programme of securing co-ownership of designated farms for the benefit of farm workers and communities. For NEF-specific transactions, commitments amounted R521 million against a target of R475 million, which exceeded target by 9.7%.
- Our Annual Disbursements amounted to R683 million, which includes DRDLR disbursements of R272 million. For NEF-specific transactions disbursements met 82.2% of the target, amounting to R411 million against a target of R500 million.
- In accordance with national priorities, job-creation remains central to the NEF’s purpose, and in this regard the NEF supported 3 609 job opportunities (2 539 are new) versus a target of 3 077, outstripping target by 17%. This brings total job opportunities geared to be supported since inception to 95 798 of which 65 359 were new.
- In terms of portfolio management,
- Impairment stood at 15,4% at year-end, versus a target of 18%.
- The return on investment stands at 8.3% which is below target due to lower interest income.
- Because of robust resolve the collection ratio is at 142.5% versus a target of 80%.
- We can point to 38 successful exits at times money back (TMB) of 1.24 against the prior year TMB of 1.41.
- Through the facilitation of turnarounds, business rescues and restructures a total 1605 jobs were saved.
- In respect of the need to advance the frontiers of black women empowerment, the NEF disbursed 35% against a target of 40%. While this important target eluded us during the year under review, these outputs are higher than last years’, and represent an optimistic and determined effort to reach the 40% mark. To drive this important objective the NEF continues engaging with organisations representing women in business, to optimise deal flow.
- In respect of the commitment to developing black industrialists we saw three key investments progressing to construction phase. These are:
- the Graskop Lift Company, a majority black-owned enterprise that has received R33.4 million funding from the NEF for the purpose of driving tourism development in the Panorama Tourist Route in Mpumalanga Province. The company is behind the construction of an outdoor lift attraction into the Graskop Gorge and Retail Centre, which opened in December 2017. The outdoor lift system ferries people up and down the cliff face into the forest environment below, where about 500 meters elevated walkways and ground walkways allow visitors to explore the spectacular sights of the area. This transaction is profit led on page 68 of this Integrated Report.
- Salamax is a R10 million beneficiary of NEF funding. Located at the North West University, the company has developed a second-generation biofuel process using grass and leaves to produce ethanol and its own electricity, through a locally-developed technology invented by the project sponsor. The process offers significant advantages over conventional methods that are currently in use, and is highly cost effective, offering significant job creation potential. The Salamax project is currently at pilot plant construction phase and requires R1.3 billion in order to reach financial close.
- Jalo Renal, which operates in the manufacture of medical technology is a black-woman-owned company that will soon revolutionise the treatment of kidney disease by becoming the first South African company manufacturing dialysers to help filter the blood in the same way that kidneys do. The project seeks to establish a Hollow Fibre Dialyzer Manufacturing Plant with a capacity to produce 1 million dialysers per annum. The project will also produce other hemodialysis products such as dialysates, dialysis kits and others. The NEF has invested just under R10 million to complete the bankable feasibility study. As production begins, Jalo will service both the local and export markets in a business valued at over R160 million at financial close.
In total the NEF can point to 27 strategic and industrial projects worth R27 billion, with the potential to support over 85 000 jobs. The NEF is exceedingly proud of the work accomplished in this space because it supports the rise of black industrialists, directly.
- Portfolio collections for the year stand at R469 million compared against R427m the year prior, registering an increase of 9.8%.
- Active portfolio management by the regional offices helped in the total collection of R63 million, which represents a 106% collection rate.
- In relation to geographic activity the NEF can report that in the current year, Gauteng comprised 41% of the disbursements, which is a great improvement from years prior when the disbursements in Gauteng were accounted for at 60% in 2008/9.
Accordingly, the NEF has now achieved significant funds disbursements in the Northern Cape, Free State, Limpopo, Mpumalanga, Eastern Cape and the North West, which represents 36% versus a target of 25%, amounting to R162 million. An important indicator that the NEF constantly measures its performance against is the contribution to GDP by the respective provinces, with the ideal being to match regional approvals to GDP contributions per province.
- Rural and Community Development remains a cornerstone of the NEF’s development and funding philosophy, and we are pleased that since inception, rural deals are geared to empower 33 communities and over 1.9 million individuals. Since inception, this fund has spearheaded the investment of over R238 million in seven rural and township shopping centers. This leveraged an additional R662 million co-investment by the private sector. A total 9,859 jobs were created with 5,087 of those being direct jobs and the balance indirect during construction
- Another important area of work where the NEF has recorded a significant improvement is in Internal Audit. The Auditor General’s dashboard indicates that the NEF control environment is fully compliant. We have not only been able to implement controls, but we have also ensured that such controls are adequately designed and that they operate effectively. At last year-end 23 audit findings were outstanding, and only 1 of these findings was significant and past the due date. This highlights Management’s commitment to resolving audit findings.
- The IST governance framework continues to be entrenched through the steering committee as well as policy and Standard Operating Procedures. The Approved Governance Framework has continued to be entrenched and improved, while IT security enhancements are also best of breed.
- In terms of Preferential procurement from black women-owned businesses it gives us pleasure to report on at 30.3% achieved versus a target of 20%. Procurement from black businesses stands at 69.6% versus a target of 65%, and is higher than last year’s showing of 64.8%, while 39% was procured from Exempted Micro Enterprises compared to 32% in 2017.
- Entrepreneurial Development has continued to gain momentum, with 19 Business Today training sessions having been provided countrywide against a target of 18 training sessions with a total 376 delegates, the majority of them being women in disadvantaged areas, attending the sessions.
The NEF referred 101 entrepreneurs for business incubation and 13 entrepreneurs were successfully incubated against the target of 75 referrals and 15 entrepreneurs in the final incubation stage.
- On the socio-economic development front, we completed 58 sessions comprising 49 investor education seminars and 9 industrial theatre performances to drive home the message of saving and investments among black people, especially in rural and peri-urban communities. In the last year alone, this important campaign reached 12 548 people in total.
Since inception in 2007 the Investor Education drive has reached over 40 000 people in villages and townships through 200 community seminars. Social facilitation was extended to 49 NEF and DRDLR transactions. These transactions will benefit over 2 million lives.
- Enterprise and supplier development inroads have seen the NEF attract contributions of R85 million raised in the current year versus a target of R75 million. Our partners are:
- The Western Cape Department of Economic Development,
- The Department of Tourism,
- The Department of Arts and Culture, and
Human Capital – the jewel in the crown of the NEF
The achievements outlined above have been made possible by the fact that the NEF is an academy of excellence. Below is a breakdown of the NEF’s professional core:
- 17 Chartered Accountants together commanding over 134 years of experience.
- From a compliment of 161 staff members, 11 hold Masters’ degrees.
- The NEF employs 4 Engineers, together with over 60 years’ experience.
- 20 employees hold Honours degrees and 46 hold Bachelors’ degrees.
- The NEF employs 9 Admitted Attorneys,
- And as a learning organisation the NEF is committed to driving the advancement of support and entry-level staff, and over the years many have acquired their matriculation, and have acquired a range of additional qualifications.
As an organisation with a future, the average age of the NEF is 38 years, placing the development financier in step with age and educational trends across the continent
The one challenge that the NEF has faced over the years has been aggressive poaching by organisations with deeper pockets, and indeed delays in securing recapitalisation have presented challenges in the retention of professionals who possess rare and much-sought-after skills in the financial services sector.
The NEF invests significant time, energy and intellectual capital in seeking to understand and impact on the various sinews of its mandate, including clinical analysis of the different sectors of the economy, macroeconomic fundamentals, corporate behaviour in implementing the black economic empowerment project as well as the broader policy spectrum affecting the transformation milieu. That is why together with fraternal bodies such as Association of Black Securities and Investment Professionals (Absip) and the Black Business Council, the NEF has been vocal in respect of the need to establish a black-owned bank. We believe the prospect of a black-owned bank is important in order to address the market failures encountered by black entrepreneurs in working with commercial banks.
- In general, the banks will not provide term loans without physical security that gives the bank the cover of at least 100%. There has to be collateral in equal value to the loan. Banks are reluctant to provide loans to start-up businesses even when SMMEs have obtained Government contracts, especially if they do not have the necessary track record. Banks rely on how their clients have been conducting their bank accounts and other credit lines.
- In many instances small businesses, especially at start-up stage, require equity capital, however, banks only provide secured loans on the back of a strong track record. Owing to the fact that banks do not provide equity, it means that there is a shortage of this form of financing for small businesses that require patient and innovative capital.
- The above exclusions also apply to existing businesses, especially SMMEs that require equity capital to grow. Debt provided by commercial banks is exceptionally restrictive and imposes onerous obligations on SMMEs that require capital and hence this stifles growth.
- Banks have also in the past engaged in practices that undermine Government funding initiatives on SMMEs. For example, the unsuccessful Khula guarantee scheme that was aimed at encouraging banks to lend money to high-risk SMME clients did not work because banks only funded high-risk SMMEs if their debt is guaranteed. All good low-risk SMMEs were funded using their normal instruments and channeling the high-risk SMMEs through the guarantee scheme with Khula.
- Banks do not provide non-financial support such as business-planning support or mentorship. They rely on the security in a form of collateral. Even in instances where SMMEs have a guaranteed contract, banks are unlikely to provide funding unless a client provides collateral, and we believe that a black-owned bank, mindful of the economic history of black people, would assume a more patriotic posture by being more sympathetic to the aspirations of inclusive growth.
In the NEF’s submission to Parliament’s Standing Committee on Finance’s (SCOF) public hearings on the Transformation of the Financial Sector in March 2017, the NEF recommended various options in establishing the black-owned bank. Among these was for the Government to identify one of the existing smaller banks and to introduce products and services that meet the needs of black people, and to enhance competition and further complement current market offerings. Mercantile Bank was identified as an example of a Bank that could be targeted for acquisition and scaled up to provide services to the target market as a black owned bank. Alternatively, the Government could start a new bank from scratch which would provide affordable products and services that meet the needs of the target market such as business finance, home loans and savings products, amongst others. Regrettably, a range of local and international private sector contenders may be in the process of acquiring the bank, with several non-binding offers having been received by the bank. For the NEF this may be a lost opportunity for the country to establish a black owned bank with a national infrastructure
Overall, the NEF’s recommendations provided the potential to enable the financial sector to drive the 3%+ in economic growth, and therefore to propel the country closer to fulfilling the vision of B-BBEE policy and the National Development Plan.
Through empowerment financing and ensuring that women financing is equally prioritised, the financial sector, alongside the black bank, can assist in the reduction of poverty and inequality, job creation and restoring dignity to the majority of South Africans.
We believe there is still strong and legitimate rationale to support the idea of a bank that is owned, managed and controlled by black people with the primary intention and focus to develop and provide financing and a hybrid between a formal bank and a DFI with a clearly articulated developmental mandate.
Management is grateful to the staff of the NEF for the results reported herein, and values the continued partnership of the transformation fraternity, which has continued not only to lobby for the recapitalisation of the NEF, but indeed to strive indefatigably for inclusive growth.
The development outcomes of the year under review are also attributable in large measure to the wisdom of the Chairman, Mr Rakesh Garach, as well as the Board of Trustees, for their support and guidance. We look forward to the counsel and leadership of the newly-appointed Board of Trustees, which comprises men and women with reputable track-records.
The NEF and its family of investees are especially thankful to Minister Rob Davies and the DTI for consistent and unwavering support in guiding the NEF continue delivering on its mandate, and for keeping hopes for recapitalisation alive.
We express our immense gratitude to the Honorable Chairpersons and Honorable members of the Portfolio Committee on Trade and Industry as well as the Select Committee on Trade and International Relations for their valuable oversight on the implementation of the mandate of the NEF.
The NEF also values the many black entrepreneurs and co-funders who have continued to choose the NEF as their preferred partner in economic development and transformation. It is through you that the NEF stimulates economic growth through B-BBEE funding