The National Empowerment Fund (NEF) is positioned as a critical agent of Black Economic Empowerment (BEE). NEF CEO, Ms Philisiwe Mthethwa, shares her thoughts about economic transformation.
What is the role of the NEF and how does it differ from other development finance institutions (DFIs)?
The NEF is an agency of the Department of Trade and Industry and is the only development financier that is exclusively mandated by legislation to promote black economic participation in South Africa. This is done through the provision of financial and non-financial support to black enterprises through a diverse range of finance products from R250 000 up to R75 million across all sectors of the economy. The second leg speaks to promoting a culture of savings and investment among black people, which includes the investor education seminars that have reached well over 30 000 people in villages and townships countrywide, among other milestones.
To date how much has the NEF approved and how many decent jobs have been created or supported?
Since the launch of operations in 2004 the NEF has approved over R7.1 billion of funding for black entrepreneurs across virtually all sectors of the economy. This funding has benefited more than 730 black entrepreneurs nationally, in investments that have supported in excess of 84 000 jobs countrywide. In the 2015/16 financial year alone the NEF approved R1.07 billion for black entrepreneurs countrywide.
While the NEF places importance on commercial viability, our mandate also focuses on softer measures in assessing applications for funding. These include development indicators such as black ownership, job creation, skills development, community development and participation, geographical location and black women empowerment.
What is the role of the NEF within the country’s broader economic development framework?
The NEF was born out of a constitutional imperative to redress the racially-based economic imbalances caused during the apartheid era. As a direct consequence of this history, today black people own only 3% direct equity in the economy, if you use the JSE as a proxy given the availability of information published by the JSE. What is instructive about this statistic is that the NEF measures the “direct ownership” by black people, which is defined in the Codes of Good Practice as equity held directly by black companies or individuals, broad-based groups or community trusts, or by an employee share ownership scheme. The other measure of BEE transformation uses the “indirect ownership” or “Mandated Investments” principle as defined in the Codes of Good Practice, where the beneficiaries of the equity do not play any part in the voting rights attached to the equity and where the shares are managed by third parties such as asset managers or banks on behalf of pension funds, insurance policy holders and unit trusts. Our interest, therefore, in understanding the true extent of black economic participation, examines direct voting rights, the management of the company and its cash flow, by black shareholders.
Until the economy is transformed to mirror national population demographics, B-BBEE, in our view, will and must remain the strategic imperative that will guide the quest for inclusive growth.
The economic exclusion of black people, of course, limits the country’s growth potential. By mobilising black people into a productive economic force also helps to grow the country’s consumer base, which in turn benefits many business sectors, and it is for this reason that transformation is inclusive growth.
How is the NEF contributing towards the empowerment of black women and why is this an important area of focus?
Our emphasis on black women economic empowerment is informed by the understanding that black women suffered the most from the crushing force of the apartheid order and its continued legacies. It is no coincidence that black women remain at the bottom of the pyramid of economic inequality. To address this imperative we can point to the NEF’s above-target performance in terms of the disbursements to companies that are owned and managed by black women entrepreneurs having reached 60% against a target of 40% in the past year, and this amounts to R410 million. Our Women Empowerment Fund, supported by the NEF’s enterprise-wide focus on this strategic objective, has given depth and vigour to the assertion that a black woman’s place is at the forefront of the economy.
Which sectors of the economy does the NEF emphasise?
The NEF is designed to fund black entrepreneurs with viable business plans across all sectors of the economy. The NEF’s portfolio of funded enterprises shows a wide exposure that includes key sectors like manufacturing, retail, agri-processing, ICT, minerals beneficiation, energy, automotive, construction, engineering, tourism, property, media and healthcare, among others. In doing so, the NEF specifically supports the initiatives of the DTI, including the Industrial Policy Action Plan (IPAP), and more broadly the National Development Plan, by championing and funding the advancement of emerging entrepreneurs into black industrialists.
What type of BEE transaction does the NEF do?
Our funding is diverse and comprehensive because it has to respond to the needs of a complex economy and the demands of a target market that pursues different opportunities of different sizes. Inclusive growth has to be driven from all avenues of the economic spectrum. We therefore fund startups, expansion, equity transformation, capital markets, franchising, rural and community development and industrialisation, among others. The latter is particularly historic and refers to what Government calls the development of black industrialists.
The key principle permeating throughout all these is the requirement for funded enterprises to have meaningful black ownership and direct operational involvement.
The Department of Trade and Industry recently launched the Black Industrialist Programme. What is a Black Industrialist and how does the NEF contribute towards this programme?
The regulations passed by the DTI come with a formal description of a Black Industrialist, and refers to a black person directly involved in the origination, creation, significant ownership, management and operation of industrial enterprises that derive value from the manufacturing of goods and provision of services on a large scale.
The NEF is positioned as a critical delivery agent of the Black Industrialist Policy. In 2007, before the concept became policy, the NEF launched a unit we call the Strategic Projects Fund (SPF) in order to seek competitive opportunity for the South African economy and for the inclusion of black participation in big economic opportunities at the outset of projects, as opposed to doing so during equity closure. SPF supports new industrial ventures from conception through to feasibility stages and into commercial activation, and was designed to plug the venture capitalist hole within the South African industrial financing market. In partnership with local and international partners the NEF has developed 26 strategic and industrial projects worth R27 billion, with the potential to support over 80 000 new jobs. To date the NEF has approved over R860 million for these projects, which has leveraged R4 billion in external funding, and 78% of the projects are at financial close, construction or operational stages.
South Africa is going through a difficult economic phase that will squeeze many emerging enterprises. What advice would you give to entrepreneurs during these challenging economic times?
The first and most important course of action when a business is in distress is to seek relief from one’s creditors and to secure better terms from your debtors. This could include negotiating debt repayment holidays from creditors and shorter payment cycles from debtors. These are some of the innovative measures which the NEF provides to its investees.
In addition to providing entrepreneurial training and incubation support, the NEF also has a dynamic mentorship solution which helps entrepreneurs to be better prepared for downturns. Our partnership with enterprise development funders enables us to reduce the blow of increasing lending interest rates through the provision of concessionary loans, and the more businesses do this, the better for emerging enterprises.
What this calls for is a reform of South Africa’s lending culture to become more attuned with the needs of small to medium businesses that typically have to contend with challenges such as inadequate access to affordable capital, lack of access to local and international markets, limited management skills, lower bargaining power and strong competition from established businesses with entrenched market dominance, among others. For their part, commercial banks could look at extending loan tenures to SMEs in order to lessen cashflow constrains. This way the banks improve the ability to recover invested capital. I believe that it is especially important during harsh economic times for financiers in particular to take a long-term view.
Equally important, government and the private sector have to absolutely adopt a demonstrable and deliberate strategy to pay SMEs earlier for services rendered, as opposed to the trend where SMEs are paid over a period of 60 or 90 days. A rand today is better than a rand tomorrow.
What message do you have for Kagiso Trust as they celebrate their 30th anniversary?
Kagiso Trust has played a pivotal role in shaping the country’s economic transformation framework. Among other breakthroughs KTI has stood gallantly for grassroots empowerment. It is therefore an institution of exceptional esteem and importance, a pillar on whose vision and courage the transformation story is anchored. Having laid the foundations for the first wave of economic transformation, KTI could inspire South Africa’s ambition for supremacy in global commerce. They have the mettle, the merit and the pedigree.