THE KZN GROWTH FUND TRUST Annual Performance Plan 2016/17

Transcription

THE KZN GROWTH FUND TRUST
Annual Performance Plan
2016/17
FOREWORD
The KZN Growth Fund (the Fund) (operated by the Trust) was established in 2008 as one of our key strategic
initiatives to foster empowerment and economic growth in the KwaZulu-Natal Province (KZN – herein also
referred to as “the Province”).
The Fund was structured as a unique public-private partnership (PPP) between EDTEA, SBSA and DBSA until
31 March 2015. The main objective of the Fund is to finance medium to large projects that create jobs and
accelerate the economic development of KwaZulu-Natal whilst at the same time promoting Broad-Based
Black Economic Empowerment (B-BBEE) and reducing inequality. In order to improve the functioning of the
Fund, we decided in December 2012, in consultation with the various stake holders, to restructure the
operating model of the Fund into a streamlined, unitary structure reporting directly to the EDTEA. The new
structure became effective in April 2014.
The significantly improved financial performance for the 2014/15 financial year is a testament of the fruits
and benefits of the restructuring process which became effective in 2014/15. The Fund has aligned its
mandate, investment policy and service delivery plan to the Provincial Growth and Development Plan (PGDP).
The Fund plays a pivotal role in providing finance to private sector projects that would create jobs and unlock
economic potential. The Fund had to commit all of its capital (R787.5m) by August 2015, which was known
as the availability period, and the EDTEA as well as the Trust had to ensure that post the availability period
the Fund does not become just a collecting agency but also expands its business. As a result, an evolution
strategy was approved that delivers a roadmap post the availability period.
The evolution strategy which commenced implementation in the 2015/16 financial year, entails the Trust
adopting an en-commandite partnership structure (also known as a limited liability partnership) as its new
funding model. In order to migrate to this new model, the Fund needed to unencumber the assets of the
Trust. This could only be done through exiting the current Lenders of the Trust (DBSA and SBSA) from the
current structure. Hence, this necessitated the early cancellation of the Lenders’ respective commitments
and settlements of their current exposure. Following the exit of the Lenders, the Trust currently offers both
debt and equity products.
The structural changes of the Fund are aimed at growing its asset base and increasing its positive impact on
job creation, B-BBEE and reducing inequality. We believe that the mandate and strategies of the Trust reflect
and encompass the current government policy priority objectives.
The Department will continue to support and guide the Trust in all its future business undertakings to ensure
its success. I would like to express my gratitude to the Lenders for partnering with the KZN government in
the space of project finance. This is testimony that in order for us to unlock the full economic potential of our
beautiful country, the public and private sector will have to join hands and work together. I look forward to
working together with all the stakeholders and partners to transform the Province into a sustainable and
liveable province.
We hereby endorse the KZN Growth Fund Trust’s strategy and delivery targets as contained in the 2016/17
Annual Performance Plan.
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It is hereby certified that this Annual Performance Plan:

Was developed by the management of KZN Growth Fund Trust under the guidance of the Board of
Trustees

Was prepared in line with the current corporate plan of the KZN Growth Fund Trust

Accurately reflects the performance targets which KZN Growth Fund will endeavour to achieve given
the resources made available in the budget for the 2016/17 financial year and within the constraints
and opportunities of the market conditions.
Mr. I Abdoola
Chief Financial Officer (CFO)
Signature: ________________________
Mr. MSA Badurally Adam
Chief Executive Officer (CEO)
Signature: ________________________
Ms. D Hlatshwayo
On behalf of the Accounting Authority
Signature: _______________________
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Table of Contents
PART A: STRATEGIC OVERVIEW
5
1.
OVERVIEW OF THE KZN GROWTH FUND TRUST
5
2.
ORGANISATIONAL ANALYSIS
7
3.
GOVERNANCE STRUCTURES AND LEGISLATIVE MANDATES
15
4.
OVERVIEW OF 2015/16 BUDGET AND EXPENDITURE ESTIMATES
17
PART B: PROGRAMME AND SUB-PROGRAMME PLANS
20
5.
PROGRAMME STRUCTURE
20
6.
PROGRAMME 2 – PROJECT FINANCE
25
PART C: LINKS TO OTHER PLANS
33
7.
33
Alignment to Provincial Growth and Development Strategy (PGDS)
ANNEXURE D:
35
8.
Vision, Mission, Mandate and Values
34
9.
Strategic Goals
34
10. Strategic Objectives
34
11. Strategic Planning Process
35
12. SWOT Analysis
36
13. Strategic Risk Analysis
37
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PART A: STRATEGIC OVERVIEW
1. OVERVIEW OF THE KZN GROWTH FUND TRUST
The KwaZulu-Natal Growth Fund Trust (KGFT – referred herein as the “Trust”) was set up in 2008 as an
initiative of the KZN Government’s Department of Economic Development, Tourism and Environmental
Affairs (EDTEA) to administer the KZN Growth Fund (“KGF Debt Fund 1”). The Fund was set up as a 15 year
R1,087.5bn closed debt fund with a commitment period of 6 years, structured as a unique public-private
partnership between the EDTEA (R362,5m), Standard Bank of South Africa (SBSA – R200m), Infrastructure
Finance Corporation (INCA – R300m) and the Development Bank of Southern Africa (DBSA – R225m). The
commitment period ended in August 2015. KGF Debt Fund 1, which became operational in 2009, financed
medium to large scale sustainable private sector projects throughout the KwaZulu-Natal (“KZN”) province.
The fund size reduced to R787.5m due to the exit of INCA from the fund in November 2013 because of a
change in its business model. This initiative was a first in South Africa, aimed at creating sustainable economic
development, job creation, broad based black economic empowerment (B-BBEE) and reducing inequality in
KZN.
The KGF Debt Fund 1 was a closed debt fund and in order to give effect to new funds and products (restricted
under KGF Debt Fund 1), the Trust unencumbered its capital from the existing security in the KGF Debt Fund
1 by prepayment of the existing exposures and cancellation of all debt facilities on 31 March 2015. The Trust
now caters for both a debt and an equity fund and is able to bring on board additional investors to participate
in either.
The evolution of KGFT over time has been characterised by a number of significant events that happened
from the date of inception in 2009 to date, both from the governance structure and the funding model. Figure
1.1 below portrays a diagrammatic view of these events.
GOVERNANCE STRUCTURE
Figure 1.1: Evolution of KGFT
PERIOD
Complex Governance Structure - Ithala,
KZN Growth Fund Managers Soc (Ltd)
(KGFM) and KZN Growth Fund Trust (KGFT).
Utitary governance structure. KGFT took over the operations of
KGFM. Reduction in cost based and more competitive pricing
resulted in increased number of projects financed.
09/10
10/11
11/12
12/13
13/14
14/15
Apr 2015 to Sep 2015
October 2015
FUNDING MODEL
IMPLEMENTATION OF THE EVOLUTION STRATEGY
Debt Fund 1 - PPP between lenders SBSA, DBSA &
EDTEA - Fund size R787,5m - closed fund with 15 year
life until 2024 and availability period until Aug 2015.
Unencumbered the Trust by
prepaying the Lenders.
Trust's assets base of R1bn.
En-commandite Partnership
Funding Model: Debt Fund 2
and Equity Fund.
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A brief explanation of the various periods of the evolution of the KGFT is presented below:
 2009/10 – 2013/14 period:
o KZN Growth Fund Trust (KGFT) was established in 2008 by KZN Provincial Government and became
operational in 2009;
o It was structured as a closed project finance debt fund with a 15 year life span until 2024; and
o It was managed by the KZN Growth Fund Managers SOC Ltd (KGFM) – a subsidiary of Ithala
Development Finance Corporation until March 2014.
 2013/14 – 2014/15 period:
o Restructured into a unitary governance structure from 1 April 2014;
o KGFT took over the operations of the KGFM through a sale of business agreement;
o The Trust developed and finalized an Evolution Strategy in February 2015; and
o MEC for EDTEA approved the Evolution Strategy and the setting up of an Equity Fund in February 2015.
 2015/16:
o Implemented the Evolution Strategy and a more attractive funding model.
o Unencumbered the assets of the Trust by prepaying the lenders and closed on Debt Fund 1 that was
within a Public Private Partnership (PPP) arrangement; and
o Set up Debt Fund 2, a new Equity Fund and a Guarantee Fund (for implementation in 2016/17).
Significant progress in the implementation of the evolution strategy has been made in the 2015/16 financial
year, and is outlined below.
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2. ORGANISATIONAL ANALYSIS
2.1.
Situational Analysis
This section provides an overview of the economic context within which the Trust conducts its business.
2.1.1.
Global Economy
The global economy is expected to expand 2.9 percent in 2016, up from 2.4 percent in 2015. This forecast by
the World Bank is informed by four key optimistic assumptions for global growth: that commodity prices will
stabilize after plummeting in 2015; continued gains in major high-income countries, a gradual tightening of
financing conditions, and that the Chinese government will keep growth in the world's second-biggest
economy from imploding as it manages a difficult transition away from fast but unsustainable growth based
on excessive investment in factories and real estate in favour of a greater focus on consumption and services.
The World Bank expects developing countries to collectively grow 4.8 percent, up from a six-year low 4.3
percent in 2015. China, the world's second-biggest economy, is expected to register 6.7 percent growth,
down from 6.9 percent in 2015 and the slowest pace since 1990.
The economic prospects of advanced economies appear to be brightening as the developing world struggles.
The World Bank expects the U.S. economy to grow 2.7 percent this year, up from 2.5 percent in 2015 and the
fastest pace since 2006.
The 19-country eurozone economy is seen expanding 1.7 percent, up from 1.5 in 2015 and fastest since 2011.
And the World Bank expects the Japanese economy, lifted by the Bank of Japan's easy-money policies, to
grow 1.3 percent, up from 0.8 percent in 2015.
The countries of sub-Saharan Africa are expected to grow 4.2 percent, up from 3.4 percent last year. But the
World Bank expects wide disparities among African countries. South Africa, for instance, is forecast to grow
just 1.4 percent, while Ethiopia is expected to expand 10.2 percent and Rwanda 7.6 percent.
The forecasts are however subject to substantial downside risks, including a sharper-than-expected
slowdown in major emerging and developing economies, financial market turmoil arising from a sudden
increase in borrowing costs that could combine with deteriorating fundamentals, lingering vulnerabilities in
some countries and heightened geopolitical tensions.
2.1.2.
SA Economy
South Africa’s growth prospects continue to deteriorate. A mix of adverse demand and supply-side factors
are taking a toll on the economy’s performance and affecting its overall expansion potential. The mining and
manufacturing sectors are under serious strain for various reasons, and their output levels are still below
those achieved before the 2008 global financial crisis. Further, the agricultural sector has been severely
affected by the worst drought in more than twenty years.
The Mid-term Budget Policy Statement (MTBPS) delivered in October 2015 revised the GDP growth trajectory
over the medium term to be more closely aligned with those of the South African Reserve Bank and
Bloomberg median forecasts. The economy is forecast to grow 1.7 percent (previously 2.4 percent) in 2016
before rising to 2.6 percent in 2017. Growth forecasts for both household spending and gross fixed capital
formation were also revised downwards.
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Therefore the outlook for 2016 and 2017 is uncertain and economic activity will likely remain subdued.
Expected increases in electricity supply from investments in generating capacity should raise supply only by
2017, easing constraints that have hindered production and increasing investor confidence. Also,
strengthening growth in major trade partners, such as Europe and the United States, should reinforce export
growth. Inflation is hovering around the upper end of the target band, driven by the depreciation of the rand
and higher electricity and food prices.
The Rand together with other emerging currencies have continued to take serious beating against major
currencies. A weaker rand will see the cost of imported goods rise, leading to imported inflation.
Households are likely to face numerous challenges in the form of higher debt financing costs and difficult
access to credit, higher personal income tax and indirect taxes, rising electricity tariffs and lower rates of
increase in disposable income.
Low commodity prices and weak global demand will exert downward pressure on South Africa’s mineral
exports. However, the balance of payments should continue to benefit from expected increases in exports
due to a weaker Rand and, on the import front, from low crude oil prices. Hence, the current account deficit
is projected to improve.
For South Africa, implementing the National Development Plan and the Medium Term Strategic Framework,
delivering social and economic programmes, reducing macroeconomic imbalances, and narrowing the
budget deficit remain a key priorities.
2.1.3.
KZN Economy
The KwaZulu-Natal economy (“KZN or the Province”) is characterised by manufacturing, agriculture, transport
and tourism. The provincial manufacturing sector is the second largest in the country, after Gauteng and is
geared for export, with nearly a third of South Africa's manufactured exports being produced in the Province.
Its diversified nature is significant in the KwaZulu-Natal's economic growth rate, and generates about 20% of
provincial employment. As a result, deterioration in the performance of these sectors is immediately felt via
slower provincial GDP growth, as was the case in 2015.
With more than 90% of Africa’s imports and exports being conducted by sea, there is potential for further
development of the maritime industry. The Port of Durban remains one of Africa’s most active general cargo
ports. This port handles an average of 60% of South Africa’s cargo in comparison to other South African ports.
The Richards Bay coal terminal is positioned as one of the world’s deep sea ports with an ability to handle
large ships and large volumes. This port currently has the capacity to export 91 million tons of coal per year.
Plans to increase the terminal’s capacity by another 19 million tons to 110 million tons augurs well for fixed
capital formation in the province, job creation and economic development. Employment in the province, still
falls short of the highest level of 2.584 million jobs recorded before the financial crisis of 2008/2009.
In 2016, the general provincial economy’s performance, like in the past, is expected to follow that of the
country. However, the Rand’s depreciation should continue to facilitate external market penetration by
KZN export-oriented enterprises
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2.1.4.
Implications for Business, Households and Infrastructure Investment
Domestically, economic growth is expected to remain subdued due to unsatisfactory demand conditions, a
weak Rand and unfavourable external conditions. Household consumption expenditure is slowing,
government spending is being constrained by fiscal limitations and fixed investment activity is at low levels.
Consumers are likely to cut back on spending in light of a worsening consumer environment, including higher
interest rates, which will raise financial distress. Business enterprises that are reliant on household
expenditure, are therefore faced with difficult trading conditions.
In view of government’s commitment to reduce spending, businesses that are reliant on governmental
procurement, may find it challenging to sustain sales. Declining infrastructure investment in real terms by
state-owned enterprises could have adverse implications for various sub-sectors of the domestic economy.
These could include construction companies, civil engineering contractors and various suppliers of materials,
including cement, steel and chemicals, as well as machinery and equipment, among others.
Prospects for private sector fixed investment in South Africa remain subdued as businesses have become
very cautious in their investment plans.
On the positive side, certain global and domestic factors could be beneficial for local business enterprises.
The anticipated stronger growth momentum in the US and UK economies, should provide increased business
opportunities for local enterprises. Further, the Rand’s depreciation should continue to facilitate external
market penetration by export-oriented enterprises. Therefore, investments in new production capacity or in
the expansion of existing capacity should be made to take advantage of potential opportunities ahead.
These developments give development finance institutions such as KGFT a ray of hope to continue to deliver
on their mandates of facilitating economic development and job creation and fighting poverty and inequality.
2.2.
Review of 2015/16 Financial Year
2.2.1.
Evolution Strategy
KGFT commenced with the implementation of the evolution strategy post the approval from the MEC: EDTEA.
The previous lenders facilities were early settled on 31 March 2015 thereby unencumbering Governments
capital. This facilitated additional funds that were received and held in a warehousing capacity to be utilised
in the expansion of products (equity, quasi-equity and guarantees) as envisaged in the evolution strategy.
The Trust Deed, policies and governance related documents were successfully updated and approved during
the period in order to facilitate the introduction of these products and the change in the funding model to an
en-commandite partnership. Additionally, the evolution strategy was presented to the Provincial cabinet and
the necessary support was obtained.
Following the development of the Private Placement Memorandums (PPM) and appointment of external
legal counsel for the development of partnership agreements and relevant opinions, the Trust commenced
engaging potential funders as Limited Partners within the new funding model. During the period, the Trust
commenced advanced discussions with a potential partner for the equity fund and the necessary due
diligence processes has commenced on the fund. The outcome of these engagements are not known at the
date of this report.
The Trust has also applied for listing in terms of the Public Finance Management Act (PFMA) following the
unencumbering of government capital. A Schedule 3D (Government Business enterprise) listing has been
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applied for to assist with the funding model requirements being embarked on. The listing application has
obtained the necessary support from EDTEA and Provincial Treasury. An initial response from National
Treasury was received in December 2015 which noted areas to be addressed by EDTEA. The Board of Trustees
are confident the listing process will be satisfactorily concluded in the 2016/17 financial year.
2.2.2.
Projects
The expanded product offering which includes equity finance has been able to unlock a wider range of
projects in the province. Major achievements during the 2015/16 financial year include:



A R118m approval for the development of a 70-bed and 3-theatre private hospital in Stanger. The
project comprised of R70m in senior debt and R48m equity.
An additional R100m approval and disbursement to Dark Fibre Africa to be used in its quest to lay further
fibre cables to improve interconnectivity in South Africa;
Reached financial close in the R63.4m facility to iDube Cold Storage for the development of a cold
storage facility at the Dube Trade Port;
Several other projects in need of more than R600m worth of KGFT funding are currently being assessed with
a view for funding approval. These projects require either debt or equity funding. The Trust’s reputation and
track record has been further supported by the maintenance of a 100% performing portfolio. The monitoring
and aftercare of projects continue to be a focus area within the business.
The experience of the projects team has been strengthened by the appointment of qualified employees with
equity experience. Further, the relevant project and support team members have attended the necessary
private equity training to assist with the requirements of servicing the expanded product offering and the
new funding model being embarked on.
2.2.3.
Guarantee Fund
KGFT began the process of establishing a guarantee fund in order to address market failure in the issuance
of construction performance guarantees to smaller BEE building contractors. The KGFT met with the market
leaders in the guarantee space and with the Department of Public Works and explored ways in dealing with
the operationalization of the guarantee fund. The Trust will seek to develop the Guarantee Fund policy and
obtain necessary approval from the Board of Trustees and the MEC: EDTEA. It is envisaged that the KGFT will
commence with the implementation of the Guarantee Fund during the 2016/17 financial year.
2.2.4.
Financial Report
The projected net asset value as at 31 March 2016 is estimated to amount to R1,103bn. This is made up of a
total asset base of R1,108bn against total liabilities amounting to R0,004bn. KGFT is projecting a profit of
R85.5m for the financial year ending 31 March 2016. The results reflect a positive variance of R83,4m when
compared to the budget for the financial year. This is largely attributable to the interest income of R42m
recognised on previous interest earned on other funding held in a warehousing capacity prior to the
encumbering of funds as noted above. Additionally, the repayments received from borrowers, resulted in a
positive variance in interest income of R38.7m. Operating expenses for the 2015/16 financial year is projected
to be 13% under-spent against the budget. This was attributed to an underspending on new funding model
set up costs, marketing, consulting fees and personnel costs savings from the vacant positions.
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The Trusts financial position remains sound with positive cash flows being generated from projects and
surplus funds. All funds received from Government are utilised for capital for projects and are not used for
funding of operating expenditure i.e. the Trust remains financially sustainable in the medium to long term.
2.3.
Fund Size and Assets Allocation
The Evolution Strategy had been designed to ensure the sustainability of the KGFT post the commitment
period of the KGF Debt Fund 1 (August 2015) and to make room for the establishment of a structure that
would enable the introduction of new funds and funding instruments like equity. In terms of its mandate, the
KGFT now offers the following products:
• Debt;
• Equity; and
• Guarantees.
The Trust has assets under management or a capital base of R1bn as at 31 March 2016, excluding its cash on
hand for operational expenditure. The Table 2.1 shows the Trust’s total assets under management and
sources thereof.
Table 2.1 Sources and Uses of Assets under Management
Rmillion
2015/16
2016/17
2017/18
2018/19
2019/20
Source of Capital under management by KGFT
Initial Capital contribution for Fund 1
Fund 2 Capital (as 2014/15)
Capital injection by EDTEA - INCA repayment
Annual EDTEA allocation *
Capitalised Trust earnings
1,000.0
362.5
360.0
48.0
95.0
134.5
1,114.4
362.5
360.0
48.0
159.4
184.5
1,258.8
362.5
360.0
48.0
223.8
264.5
1,408.2
362.5
360.0
48.0
258.2
379.5
1,633.2
362.5
360.0
48.0
353.2
509.5
Asset Allocation of Capital under management
Equity Fund
Guarantee Fund
Debt Fund
1,000.0
250.0
1,114.4
300.0
750.0
814.4
1,258.8
325.0
24.4
909.4
1,408.2
325.0
25.6
1,057.6
1,633.2
325.0
25.6
1,282.6
*The annual allocation from EDTEA is earmarked for project disbursements.
Reduction in annual allocation from R95m to R64.4m - resulting in reduced contributions to the Equity Fund
and delayed implementation of the Guarantee fund.
The asset allocation for the Trust capital is done taking into account the long-term sustainability of the Trust
and is reviewed regularly. All investment income of the funds (dividends and interest) may be utilised for the
operational expenditure of the Trust. It is therefore imperative that the Funds have critical mass to support
the operations of the KGFT. Equity as a portfolio tool is used to increase the return profile of the investment
portfolio and gain capital growth above inflation whereas debt is used as income generative investment.
Besides taking into account the different risk and return profiles of the assets classes, the Trust is cognisant
of expected limited partners to come on-board in a partnership with the Trust for the Equity Fund. It is
therefore important to allocate capital to these assets classes whereby the beneficiary’s capital can be
leveraged by the limited partners’ commitments. For the 2016/17 financial year, the Trust has allocated the
following amounts to the three asset classes, R795m to debt, R300m to Equity and R50m to Guarantees.
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Table 2.1 above shows the expected assets allocation of the Trust for the 2016/17 – 2019/20 period taking
all considerations into account.
2.3.1.
Funding Model
As per the approved Evolution Strategy, the Trust is currently managing a Debt Fund and an Equity Fund. The
Trust further intends on setting up a Guarantee fund. It is the intention of the Trust to run the Guarantee
Fund off the balance sheet of the Trust along with the Debt Fund.
Additional funds are however sought to accompany the Trust’s capital for the Equity Fund. The Trust has had
a number of capital raising road shows in 2015/16 in order to attract investors (limited partners) into the
Equity Fund. If an investor comes in, then an en-commandite partnership (also known as limited liability
partnership) will be set up to manage the Equity Fund. However, until such time as an investor is found, the
Equity investments will also be financed off the Trust’s balance sheet.
In the event of the Trust being successful in attracting investors, the Trust intends to set-up an encommandite (or limited liability) partnership. The Trust will act as the “General Partner” (defined below) in
an en-commandite partnership with the new investors (limited partners) being ‘silent’. In this structure, the
Trust is given the fund management mandate by each partner to manage the funds and act on behalf of the
partnership. This new funding model is presented in Figure 2.2 below and does not involve the creation of a
new Trust or a new governance structure. The structure makes use of the existing Trust as well as the existing
Board of Trustees and its Sub-Committees.
Figure 2.2: Funding Model
EDTEA
KZN GROWTH FUND TRUST
(GENERAL PARTNER & FUND MANAGER)
INVESTORS
Advisory Board
GUARANTEE
FUND
KGF DEBT FUND 2
PROJECT
PROJECT
KGF EQUITY FUND
PROJECT
PROJECT
An en-commandite partnership is an extraordinary partnership that differs from an ordinary partnership with
regards to the partner’s liability to third parties for the partnership’s debts.
The Trust’s overarching consideration in choosing this vehicle was that the Equity Fund should be established
in accordance with the generally accepted structures and methods used internationally and in South Africa.
The Trust also considered the need to have a simple and effective governance structure that is practical
together with the need to minimise the operational expenses of both the existing Debt Fund and the Equity
Fund.
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It is preferred that limited partners do not get actively involved in the day to day running of the partnership(s)
they are party to. However, they may participate in an advisory committee (as shown in grey in Figure 3.3)
which may consist of Trustees or their representatives, a representative of each investor in fund and some
external persons. An advisory committee is not a governance body and does not get involved in the
operations of the fund it oversees.
It generally meets quarterly, with the primary functions being to:
 review issues related to conflicts of interests arising from time to time:
 approve the valuation methods for the fund’s current investments; and
 review, from time to time, the funds’ adherence to its investment objectives.
It is envisaged that the partnership’s investment decisions will be taken by Investment Committee(s) at the
General Partnership (KGFT) level.
2.3.2.
Deal Approval Process
In performing its mandate, the Trust is assisted by an Investment Committee (IC) which considers investment
proposals presented by Executive Management, and recommends these to the Board of Trustees for
approval. The IC also provides oversight of the post investment management of funded projects. The IC is
guided by the Trust’s Investment, Credit and Loan Pricing policies which are regularly reviewed to ensure that
they are appropriate and aligned to best industry practices.
The IC is generally made up of academically qualified members with experience in banking, project finance,
accounting and investment banking. Three of the IC members, including the Chairman, are appointed by the
Trustees and two members are independent members.
In line with the key governing policies, the Fund finances projects up to R200m. Projects requiring amounts
over the upper limit are co-funded with other financial institutions.
Due to legal and governance requirements dictating the structure of the Funds being managed by the Trust,
the Trust makes provision for two ICs in the event that an en-commandite partnership structure is formed by
the Trust as the General Partner. The delegation of authority will also be amended to reflect the final decision
of approval to be that of the Investment Committee. The two ICs are critical to avoid conflicts of interest and
independent decision making for the different funds being managed and conflicts arising when doing deals
with different financing instruments being utilised e.g. Debt and Equity.
2.3.3.
Project Disbursements and Pipeline
The Trust has disbursed loans amounting to R452.8m from the Debt Fund year to date. It has approved
projects requiring loans amounting to R133.4m for debt and R48.0m in equity during the 2015/16 financial
year. It is currently appraising projects requiring debt loans amounting to R88.0m and equity investments of
R30m. The fund has also developed a project pipeline in debt and equity with deals of circa R500m which it
is currently appraising.
The pipeline below in table 2.3 is a snapshot of projects that are currently being reviewed. Projects at due
diligence stage were used to support the projections in the Fund Model for 2016/17 financial year. The Fund
Model projections for future years are based on a typical pipeline, which may not be the exact same projects
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as presented below. The table further highlights the debt and equity transactions of the Investment Team to
date together with the projects in various stages of the approval cycle.
Table 2.3 Summary of the Debt and Equity transactions
PROJECTS
DISBURSED
Dark Fibre Africa 2
Link Africa
SA Shipyards
Mpact Ltd
APPROVED
Cold Storage
Private Hospital
DUE DILIGENCE
Packaging
HealthCare
Cookware
PRE-ISR PIPELINE
Radiology
Construction
Granite
Coal terminal
Private Hospital
Mother & Child Private Hospital
Coal power generation
Footwear
Private Hospital
International School
Automotive components
PARKED
Fresh Produce
TOTAL
DESCRIPTION
Telecommunication
Telecommunication
Transport and Logistics
Manufacturing
Transport and Logistics
Health Care
Manufacturing
Manufacturing
Manufacturing
Healthcare
Manufacturing
Mining & Beneficiation
Transport & Logistics
Healthcare
Healthcare
Power & Energy
Manufacturing
Healthcare
Education
Manufacturing
Agro Processing
Debt R’m
Equity R’m
452.8
145.0
65.0
42.8
200.0
133.4
63.4
70.0
88.0
55.0
33.0
0.0
105.0
30.0
50.0
25.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
30.0
30.0
0.0
0.0
0.0
0.0
0.0
48.0
0.0
48.0
30.0
0.0
0.0
30.0
395.0
0.0
30.0
0.0
65.0
30.0
60.0
50.0
50.0
30.0
50.0
30.0
0.0
0.0
809.2
473.0
14 | P a g e
3.
GOVERNANCE STRUCTURES AND LEGISLATIVE MANDATES
3.1.
Governance Structure
The KGF Debt Fund 1 was structured as a closed fund with an availability period until August 2015 to commit
the capital and the debt facilities granted by the Lenders. Following the approval of the Evolution Strategy by
the MEC, the Trust commenced with the implementation thereof by firstly unencumbering the capital which
resulted in the Lenders being paid out in full on the 31 March 2015, 5 months prior to the end of the
availability period of the first Debt Fund.
By implementing the Evolution Strategy (since 1 April 2015), the Trust has now become a stand-alone entity
which manages its own capital. Figure 3.1 shows the governance structure of the Trust from 1 April 2015.
Figure 3.1 Governance Structure of the Trust from 1 April 2015
EDTEA
Investment Committee
KZN GROWTH FUND
BOARD OF TRUSTEES
Audit & Risk Committee
HR & Remuneration Committee
Chief Executive Officer
Chief Financial
Officer
Chief Investment
Officer
Chief Risk Officer
The Trust was formed and registered with the Master of the High Court in terms of the Trust Property Control
Act, 57 of 1988. The Trust Deed is the founding document of the Trust. The Trust is the custodian of the Fund
and its assets. The Trust Deed was amended and registered with the Master’s Office in October 2015 to cater
for the lenders’ exit from the funding model and their subsequent rights.
The Board has 7 (seven) Trustees which comprise of 6 (six) independent Trustees appointed by the MEC for
EDTEA, and the Chief Executive Officer (CEO) who is a Trustee by virtue of his position as the CEO of the Trust.
The Board of Trustees has 3 (three) sub-committees, namely, the Investment Committee (IC), the Audit and
Risk Committee (ARC) and the Human Resources and Remuneration Committee (HR&REMCO).
The CEO and his executive team run the day-to-day operation of the Trust. The team operates within the
Delegation of Authority Framework as approved by the Board of Trustees.
3.2.
Legislative and Other Mandates
The Trust is established in terms of a Trust Deed which is legally governed by the Trust Property Control Act,
57 of 1998. KGFT strives for the overarching governance principles of accountability, fairness, transparency
and responsibility. Historically, the entity was neither a Company nor a listed Public Entity in terms of the
Public Finance Management Act, 1 of 1999 (PFMA). When the Debt Fund was set up in 2008, it was deemed
not to be a PFMA entity by virtue of private sector lenders’ facilities being more than 50 per cent of the size
of the Fund as well as the fact that some of the decisions at a governance level needed to be made through
consultation between the lenders and government.
15 | P a g e
However, the Board of Trustees elected to comply with the PFMA as a schedule 3D Public Entity (government
business enterprise). In terms of the new funding model, the Trust will be deemed to be a PFMA entity and
has therefore begun the process of listing as a public entity with National Treasury. KGFT endorses King III
and has endeavoured to adhere to the recommendations thereof as far as possible.
The Trust has a duty to take effective and active measures to be financially efficient, effective, transparent
and economical. The PFMA and the prevailing Treasury Regulations regulate the Trust in terms of
procurement, financial management, internal control, risk management, budgeting and reporting, board and
audit committee structures and financing.
A Schedule 3D public entity is also subject to the Preferential Procurement Policy Framework Act, 5 of 2000
and the Broad Based Black Economic Empowerment (B-BBEE) Act, 53 of 2003 which provides for the granting
of preferences by public entities to previously disadvantaged individuals and to promote Black Economic
Empowerment and SME development, respectively.
In summary the critical legislations that govern the Trust are:
•
Trust Property Control Act, 57 of 1988;
•
Public Finance Management Act, 1 of 1999
•
Preferential Procurement Policy Framework Act, 5 of 2000;
•
B-BBEE Act, 53 of 2003
•
B-BBEE Codes of Good Practise;
•
Treasury Regulations, 2005;
•
King Report on Corporate Governance (King III); and
•
Financial Intelligence Centre Act (FICA).
16 | P a g e
4.
OVERVIEW OF 2015/16 BUDGET AND EXPENDITURE ESTIMATES
4.1.
Assumptions for financial projections
The detailed assumptions used in the financial projections are given in Table 4.1 below.
Table 4.1 Annual Budget Assumptions
KEY ASSUMPTIONS
ANNUAL COST ESCALATION
Total Value of Fund
1 000 000 000
2016-17
5.90%
- Fund I - Debt Fund
725 000 000
2017-18
5.60%
- Fund II - Equity Fund
250 000 000
2018-19
5.50%
25 000 000
2019-20
5.50%
Less: Committed Funds
586 219 000
2020-21
5.50%
Total Uncommitted Value of Fund
413 781 000
- Fund III - Guarantee Fund
Average Loan Value (Less 10% Equity)
No. of Deals to Fully Commit the Fund
Deal Conversion Ratio (On Pipeline)
Total Deal Pipeline Required
Deal Conversion Ratio (On Leads)
Total Deal Leads Required
50 000 000
8
40%
20
25%
32
ACTUAL APPROVED DEBT PROJECTS
ACTUAL APPROVED EQUITY PROJECTS
FUND ALLOCATION AND SPLIT
SA Shipyards
42 777 000
KwaDukuza Hospital
48 000 000
FYE
Dark Fibre Africa
45 000 000
Projects Committed as at 31 March 2016
48 000 000
2015/16
725 000 000
250 000 000
25 000 000
1 000 000 000
Link Africa
65 000 000
2016/17
95 000 000
20 000 000
50 000 000
25 000 000
1 095 000 000
Mpact
200 000 000
2017/18
95 000 000
70 000 000
-
25 000 000
1 190 000 000
352 777 000
2018/19
95 000 000
70 000 000
-
25 000 000
1 285 000 000
Dark Fibre Africa
100 000 000
2019/20
95 000 000
95 000 000
-
-
1 380 000 000
iDube cold storage
63 400 000
2020/21
95 000 000
95 000 000
-
-
1 475 000 000
KwaDukuza Hospital
70 042 000
TRANSFER IN
Balance C/F
TOTAL
DEBT
EQUITY
1 075 000 000
300 000 000
GUARANTEE
TOTAL
100 000 000
1 475 000 000
DEBT
EQUITY
586 219 000
FEES
PROPOSED DEBT PROJECTS
PROPOSED EQUITY PROJECTS
DESCRIPTION
Project A
40 000 000
Project C
40 000 000
RAISING FEE
1.00%
N/A
Project B
40 000 000
Project D
40 000 000
COMMITMENT FEE INCOME
0.50%
N/A
666 219 000
Project E
40 000 000
Project F
40 000 000
Project G
40 000 000
Project H
40 000 000
FYE
168 000 000
DRAWDOWN SUMMARY
DEBT
EQUITY
TOAL
746 219 000
Project I
40 000 000
2016/17
80 000 000
120 000 000
200 000 000
Project K
45 000 000
Project J
52 000 000
2017/18
80 000 000
132 000 000
212 000 000
Project L
45 000 000
300 000 000
2018/19
135 000 000
-
135 000 000
Project M
45 000 000
Nil
2019/20
100 000 000
-
100 000 000
2020/21
93 781 000
-
Project N
Project O
881 219 000
Nil
50 000 000
981 219 000
50 000 000
Project Q
43 781 000
BOARD AND SUB COMMITTEE FEES
50 000 000
Project P
300 000 000
-
TOTAL
488 781 000
252 000 000
93 781 000
740 781 000
300 000 000
Nil
-
300 000 000
1 075 000 000
Retainer
No of
Attendance
No of
meeting
Fees/day
members
days
Trust
Total fees
1 610 076
Chairperson
238 501
24 607
18
1
681 427
Deputy Chairperson
119 251
15 819
14
1
340 717
51 443
9 554
10
4
587 932
Chairperson
-
21 557
10
1
215 570
Member
-
12 003
10
4
480 120
Chairperson
-
21 557
5
1
107 785
Member
-
12 003
5
2
120 030
Chairperson
-
14 698
5
1
73 490
Member
-
8 442
5
2
84 420
Member
695 690
Audit Committee
227 815
HR Committee
4.1.1.



157 910
Summary of assumptions as per Table 4.1
Income in the form of raising fees will be earned at 1% of the committed amount;
Annual inflationary escalation (CPI%) for the financial years ending, 2016/17, 2017/18,
2018/19,2019/20 and 2020/21 will be, 5.9% , 5.6%, 5.5%, 5.5% and 5.5% respectively;
Staff remuneration will increase annually at an anticipated blended rate of approximately 7% per
annum. Additional increases in staff complement that may be required once a limited partner is
identified has not be factored into the budget.
17 | P a g e



4.2.
Anticipated Debt and Equity drawdowns have been forecast only to the extent of fully utilising the
available facility. The assumption of further drawdowns will be limited to the annual R64.4m (for the
first 3 years and R95m thereafter) allocation received from the EDTEA. The cash balances will
therefore accumulate demonstrating the extent of potential future drawdowns in either Debt or
Equity facilities.
Expenditure is based on current overheads incurred over the five year budget period and is based on
the assumption that the Equity Fund will be operational during this period; and
Fund Management income that will be earned once the Trust performs the function of “Fund
Manager” for funds under management in the en-commandite partnership has not been budgeted
due to the uncertainty of the value of the fund.
Summary by programme and economic classification
A summary of payments and budgeted estimates by programme and economic classification for the Fund,
for the period 2012/13 to 2020/21 are detailed below in Tables 4.2. The detailed analysis of the summary of
payments and estimates by economic classification is presented in Table 4.3 below.
Table 4.2 Summary of payments and estimates by programme
Audited Outcome
Rands
Financial Administration
Project Investments
Total Payments
Revenue
Net Surplus
2012/13
2013/14
2014/15
33 819 883 29 471 785 19 637 711
8 165 568 5 251 287 9 007 496
41 985 451 34 723 072 28 645 207
49 593 029 41 530 481 78 566 832
7 607 578 6 807 409 49 921 625
Approved
Budget
2015/16
27 626 778
13 310 313
40 937 091
41 344 307
407 216
Revised
Estimate
2015/16
Medium-term estimates
2016/17
2017/18
2018/19
2019/20
2020/21
16 665 788 19 289 592 22 385 406 21 535 360 22 294 608 23 496 149
18 562 560 26 692 464 27 149 503 28 734 431 30 424 177 32 341 949
35 228 348 45 982 056 49 534 909 50 269 791 52 718 785 55 838 098
120 013 857 100 897 511 131 749 228 154 620 408 173 371 699 189 719 831
84 785 509 54 915 455 82 214 320 104 350 618 120 652 914 133 881 733
Table 4.3 Summary of payment and estimates by economic classification
Audited Outcome
Rands
Current payments
Compensation of employees
Goods and services
Communication
Computer services
Consultants and professional services
Maintenance, repairs and running costs
Operating leases
Travel and subsistence
Advertising
Legal
Impairments
Interest and rent on Land
2012/13
2014/15
41 985 451 34 115 536 27 994 932 39 687 091
2 253 892 7 760 990 14 451 888 25 544 805
39 731 560 26 354 545 13 543 044 14 142 286
75 321
209 625
217 280
174 238
284 717
306 731
35 229 228 20 490 121 1 254 114 3 870 517
567 111 4 677 762 7 855 526 4 397 357
180 826
942 590
533 135
5 131
298 045
778 251 1 195 483
138 723 1 988 975 1 394 828
237 872
319 509
229 248 2 226 956
3 692 218
-
Transfers and subsidies
Departments
-
Payments for capital assets
Building and other fixed structures
Machinery and equipment
Software and other intangibles assets
-
Total
2013/14
Approved
Budget
2015/16
607 536
49 428
533 108
25 000
650 275
39 381
580 894
30 000
-
Revised
Estimate
2015/16
34 531 514
21 435 751
13 095 763
249 423
530 372
2 787 855
4 679 108
1 019 312
951 780
907 486
1 970 428
-
2016/17
44 892 056
28 239 582
16 652 474
264 139
561 664
5 239 001
5 379 123
1 079 451
957 935
1 141 028
2 030 134
-
2017/18
46 484 909
29 937 251
16 547 658
278 930
593 117
5 515 856
4 992 491
1 520 759
1 011 579
1 204 925
1 430 000
-
2018/19
49 319 791
31 663 667
17 656 124
294 271
625 739
6 055 361
5 164 940
1 604 400
1 067 216
1 271 196
1 573 000
-
2019/20
52 248 785
33 490 627
18 758 158
310 456
660 154
6 538 152
5 359 429
1 692 642
1 125 913
1 341 112
1 730 300
-
2020/21
55 388 098
35 424 051
19 964 047
327 531
696 463
7 062 470
5 585 804
1 785 738
1 187 838
1 414 873
1 903 330
-
-
-
1 250 000
50 000
950 000
250 000
696 834
16 906
479 928
200 000
1 090 000
20 000
370 000
700 000
3 050 000
2 000 000
850 000
200 000
950 000
300 000
450 000
200 000
470 000
50 000
220 000
200 000
450 000
50 000
200 000
200 000
41 985 451 34 723 072 28 645 207 40 937 091
35 228 348
45 982 056
49 534 909
50 269 791
52 718 785
55 838 098
The audited outcome for the 2012/13 financial year is reflective of the financial position prior to the
restructure, when the operations of the Trust were managed by KGFM in its capacity as Fund Manager and
thus all operational costs were borne by the Fund Management Company. These costs were encapsulated by
KGFT via the Fund management Fee. Further expenditure comprised costs relating to the various governance
committees.
18 | P a g e
The 2013/14 audited outcome is reflective of seven months of operations prior to the restructure in line with
the 2012/13 financial year and five months as a unitary structure post the restructure, which is evidenced by
the increase in settlement proceeds from the acquisition of the operations, remuneration and operational
expenditure. The 2014/15 financial year is the first year that fully operated under the Trust.
The 2015/16 financial year represents the first year post unencumbering from lenders and the formation of
both the debt and equity fund. This year serves as a basis for projecting the budget periods 2016/17 to
20120/21 which includes providing both debt and equity products. The effect of the provision of guarantee
products have not been forecast due to model currently being developed. The budget further does not take
into account the effect of further funds under management from any en-commandite partnership being
formed (estimated that a fund management fee income will be received that will assist with the recovery of
project specific costs).
The budget structure, which largely conforms to the uniform budget and programme structure for KGFT is
made up of two programmes, Finance and Administration and Project Investments.
4.3.
Projected Capital expenditure
The projected capital spend mainly encompasses replacement of necessary assets over forecasted period. In
2015/2016 financial year, computer equipment budget relates to the replacement of necessary assets such
as computers and software and licensing upgrades. In the 2016/17 financial year, the printers under lease
will cease and it is anticipated that 2 new printers will be purchased outright rather than entering into another
5 year lease agreement. Due to the expiry of the lease of the current office premises in 2017/18, anticipated
costs from relocation have been budgeted for. The projected capital expenditure budget is detailed in table
4.4 below.
Table 4.4 Summary of CAPEX budget
Assets component
Loan Management System
Leasehold Improvements
Computer Equipment
Office Furniture
Office Equipment
Computer Software
Total
Actual
2014/15
39 381
315 788
32 678
232 428
30 000
650 275
Approved Revised
Budget Estimate
2015/16 2015/16
50 000
50 000
16 906
100 000 173 366
50 000
20 000
800 000 286 561
200 000 200 000
1 250 000 696 834
2016/17
2017/18
20 000 2 000 000
120 000
100 000
100 000
500 000
150 000
250 000
700 000
200 000
1 090 000 3 050 000
2018/19
300 000
300 000
50 000
100 000
200 000
950 000
2019/20
50 000
100 000
20 000
100 000
200 000
470 000
2020/21
50 000
80 000
20 000
100 000
200 000
450 000
4.4.
Borrowing plan
Treasury Regulation 29.1 also stipulates that the corporate plan should include a borrowing plan. In the
2014/15 financial year, the lenders were settled early as part of the evolution strategy thereby
unencumbering the Fund. The Trust was able to unlock Fund II funds that were set aside for Equity
investments. Accordingly, the Trust is fully unencumbered and based on sustainability projections, the Trust
has not budgeted for any further external borrowings as capital injections through EDTEA capital allocations
are considered sufficient to maintain and grow the assets under management.
Based on the cash flows available from projects and government capital allocations, no external borrowings
or facilities is currently anticipated.
19 | P a g e
PART B: PROGRAMME AND SUB-PROGRAMME PLANS
5.
PROGRAMME STRUCTURE
The programmes of the Trust are structured as two main programmes, namely Finance and Administration
and Project Investments, with underlying sub-programmes as summarised in Table 5.1 below:
Table 5.1 – Programme structure
Programme
Sub-programmes per programme
1.
Finance and Administration
2.
Project Investments
5.1.
1.1
1.2
1.3
2.1
2.2
2.3
2.4
Office of the CEO
Secretariat and Governance
Financial administration
Project administration and Marketing
Project origination and appraisal
Legal, Risk and Compliance
Investment monitoring and aftercare
Programme 1 – Finance and Administration
This programme provides transversal support to the entire organisation. Table 5.2 lists the strategic
objectives for each sub-programme under Programme 1: Finance and Administration.
Table 5.2: Programme 1 – Sub-Programme Objectives
Programme 1: Finance and Administration
Sub Programme 1.1: Office
of the CEO

To provide strategic direction and leadership to KGFT
To secure beneficial partnerships for KGFT
Sub Programme 1.2:
Secretariat and
Governance
Sub Programme 1.3:

To promote sound corporate governance to the organisation and
the Board

To provide effective and transparent financial management systems
A brief description of each sub-programme under Programme 1: Finance and Administration is given below:
5.1.1. Sub-programme 1.1: Office of the CEO
The Office of the CEO provides strategic direction and leadership ensuring alignment across all operational
programmes. It is responsible for the effective management of the Trust and implementation of strategy,
policy and directives of the Board of Trustees. The Office is further responsible for performance monitoring
and promoting sound corporate governance.
5.1.2. Sub-programme 1.2: Secretariat and Governance
The secretariat and governance function is responsible for promoting sound corporate governance. The
function is further responsible for performance monitoring and managing all stakeholder communication of
the Board and office of the CEO.
20 | P a g e
5.1.3. Sub-programme 1.3: Financial Administration
Financial Administration provides effective, efficient and transparent systems of financial management and
internal control. Financial Administration encompasses Supply Chain Management, Credit Risk, Financial
Management and Reporting and Budgeting. It ensures that there is an appropriate procurement and
provisioning system which is fair, equitable, transparent, competitive and cost effective. The function is
responsible for providing management with financial reports that are valid, accurate and complete. It also
ensures that project risks are identified, allocated to various project participants and mitigated.
5.2.
Programme 1 - Performance Indicators and Annual Targets for 2016/17 – 2020/21
The Trust’s strategic goals have been further analysed to show the strategic objective, performance
measures/ indicators, as well as targets that the Trust has set itself for the next five years. These are
illustrated in Table 5.3 below.
Table 5.3: Programme 1 – Key Performance Indicators and Annual Targets
Objectives
Measure/
KPI
Period
To obtain and
maintain an
unqualified
audit opinion
with no
matters of
emphasis
Maintain
external
unqualified
audit opinion
with no matters
of emphasis
Annual
To remain
financially
sustainable by
growing the
assets under
management
by the Trust
% Growth in the
Fund size
(current Fund
size R1bn)
Outputs
Annual Targets
2016/17
2017/18
2018/19
2019/20
2020/21
External
Audit
reports
Achieve a
clean
audit
report for
the
2015/16
financial
year end
Achieve a
clean
audit
report for
the
2016/17
financial
year end
Achieve a
clean
audit
report for
the
2017/18
financial
year end
Achieve a
clean
audit
report for
the
2018/19
financial
year end
Achieve a
clean
audit
report for
the
2019/20
financial
year end
Annual
Annual
Performan
ce Report
Equal to
or more
than CPI
as at 31
March
2017
Equal to
or more
than CPI
as at 31
March
2018
Equal to
or more
than CPI
as at 31
March
2019
Equal to
or more
than CPI
as at 31
March
2020
Equal to
or more
than CPI
as at 31
March
2021
% procurement
spend on
targeted
B-BBEE
suppliers
(procurement
spend on
targeted
suppliers /total
procurement
spend)
Annual
Annual
Performan
ce Report
75% of
procurem
ent from
suppliers
with a
BEE level
of 4 and
below
and/or
20% of
total
spend on
entities
with
women
ownershi
p
75% of
procurem
ent from
suppliers
with a BEE
level of 4
and below
and/or
20% of
total
spend on
entities
with
women
ownership
75% of
procurem
ent from
suppliers
with a BEE
level of 4
and below
and/or
20% of
total
spend on
entities
with
women
ownership
75% of
procurem
ent from
suppliers
with a BEE
level of 4
and below
and/or
20% of
total
spend on
entities
with
women
ownership
75% of
procurem
ent from
suppliers
with a BEE
level of 4
and below
and/or
20% of
total
spend on
entities
with
women
ownership
Solvency ratios
(total
assets/total
liabilities)
Quarterly
Quarterly
performan
ce reports
1:1
1:1
1:1
1:1
1:1
Office of the CEO
To provide
effective and
transparent
financial
management
systems
21 | P a g e
Objectives
Measure/
KPI
Period
Outputs
Liquidity ratio
(current
assets/current
liabilities)
Quarterly
Quarterly
performan
ce reports
Annual Targets
2016/17
2017/18
2018/19
2019/20
2020/21
1:1
1:1
1:1
1:1
1:1
5.3.
Programme 1 - Quarterly Targets for 2016/17
Progress towards meeting these targets is monitored during the year through quarterly reports that are
circulated to the Board of Trustees as well as to EDTEA. At the end of the financial year, the performance
against predetermined targets is reported in the Trust’s annual report. The detailed quarterly targets are
presented below for Programme 1 in table 5.4 below.
Table 5.4: Programme 1 – Key Performance Indicators and Quarterly Targets
Programme
Administration
Objectives
1:
Measure/KPI
Office of the CEO
To
obtain Maintain
and maintain external
an
unqualified
unqualified
audit opinion
audit opinion with
no
with
no matters
of
matters of emphasis
emphasis
Grow
the % Growth in
assets under the Fund size
management (current Fund
by the Trust
size R1bn)
To provide %
effective and procurement
transparent
spend
on
financial
targeted
manageB-BBEE
ment
suppliers
systems
(procurement
spend
on
targeted
suppliers
/total
procurement
spend)
Solvency
ratios (total
assets/total
liabilities)
Strategic Goals:
To maintain effective corporate governance and efficient financial administration
Annual
Quarterly Targets
Targets
Period
Outputs
2016/17
Q1
Q2
Q3
Q4
Annual
External
Audit reports
Achieve
a
clean audit
report
for
the 2015/16
financial
year end
Achieve
a clean
audit
report
for the
2015/16
financial
year end
Annual
Annual
Performance
Report
Equal to or
more than
CPI as at 31
March 2017
Equal to or
more than
CPI as at 31
March 2017
Annual
Annual
Performance
Report
Quarterly
Quarterly
performance
reports
75%
of
procurement
from
suppliers
with a BEE
level of 4 and
below
and/or 20%
of
total
spend
on
entities with
women
ownership
1:1
75%
of
procurement
from
suppliers
with a BEE
level of 4 and
below
and/or 20%
of
total
spend
on
entities with
women
ownership
1:1
1:1
1:1
1:1
22 | P a g e
Programme
Administration
Objectives
1:
Measure/KPI
Liquidity ratio
(current
assets/
current
liabilities)
Strategic Goals:
To maintain effective corporate governance and efficient financial administration
Annual
Quarterly Targets
Targets
Period
Outputs
2016/17
Q1
Q2
Q3
Quarterly Quarterly
1:1
1:1
1:1
1:1
performance
reports
Q4
1:1
5.4.
Programme 1 - Reconciling performance targets with the budget and expenditure estimates
The main purpose of Programme 1 – Finance and Administration is to provide for the overall management of
KGFT and to render a support service to the Project Investment in respect of transversal functions. This
programme consists of three sub-programmes, namely Office of the CEO, Secretariat and Governance and
Financial Administration.
Tables 5.5 below illustrate the payments and forecasts of this programme over the seven year period 2012/13
to 2020/21. The detailed summary of payments and estimates by economic classification for Programme 1 is
presented in Table 5.6.
Table 5.5 Summary of payments and estimates – Programme 1: Finance and Administration
Audited Outcome
Rands
Office of the CEO
Secretariat and Governance
Total
2012/13
2013/14
2 253 892 3 095 187
180 000
190 000
31 385 992 26 186 597
33 819 883 29 471 785
2014/15
1 810 888
97 036
17 729 788
19 637 711
Approved
Budget
2015/16
9 619 307
18 007 471
27 626 778
Revised
Estimate
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
3 427 672 3 855 302 4 180 058 4 415 626 4 664 547 4 927 583
3 149 390 3 613 734 3 879 825 4 137 769 4 413 018 4 706 744
10 088 725 11 820 556 14 325 523 12 981 965 13 217 042 13 861 822
16 665 788 19 289 592 22 385 406 21 535 360 22 294 608 23 496 149
Table 5.6 Summary of payments and estimates by economic classification – Programme 1: Finance and
Administration
2014/15
Approved
Budget
2015/16
Revised
Estimate
2015/16
18 987 436
8 410 188
10 577 249
209 625
284 717
506 541
7 855 526
942 590
778 251
-
26 376 778
17 489 650
8 887 128
217 280
306 731
3 151 522
3 482 978
533 135
1 195 483
-
16 358 918 19 034 592 19 910 406 20 960 360 22 084 608 23 296 149
11 102 305 13 019 960 14 078 396 14 911 082 15 793 653 16 729 137
5 256 613 6 014 633 5 832 010 6 049 278 6 290 955 6 567 012
62 356
66 035
69 733
73 568
77 614
81 883
265 174
280 819
296 545
312 855
330 062
348 215
186 657
288 000
308 160
325 109
342 990
361 854
3 852 059 4 456 880 3 992 562 4 108 659 4 243 603 4 407 056
509 656
539 726
760 379
802 200
846 321
892 869
380 712
383 174
404 632
426 886
450 365
475 135
-
Audited Outcome
Rands
Current payments
Goods and services
Communication
Computer services
Operating leases
Advertising
Legal
Impairments
2012/13
Departments
-
-
Total
2013/14
33 819 883 28 864 248
2 253 892 4 450 990
31 565 992 24 413 258
75 321
174 238
30 993 750 19 007 067
567 111 4 677 762
180 826
5 131
298 045
-
-
-
607 536
49 428
533 108
25 000
650 275
39 381
580 894
30 000
1 250 000
50 000
950 000
250 000
33 819 883 29 471 785
19 637 711
27 626 778
306 870
16 906
239 964
50 000
2016/17
255 000
20 000
185 000
50 000
2017/18
2 475 000
2 000 000
425 000
50 000
2018/19
575 000
300 000
225 000
50 000
2019/20
2020/21
210 000
50 000
110 000
50 000
200 000
50 000
100 000
50 000
16 665 788 19 289 592 22 385 406 21 535 360 22 294 608 23 496 149
23 | P a g e
No costs were allocated to the Office of the CEO sub-programme in 2012/2013 (prior to the restructure) due
to the outsourced administration function to the Fund Manager. The expenditure during that period
consisted of various fees paid to the Board of Trustees and its sub-committees members.
Post the restructure, KGFT has incurred higher financial administration costs arising from the Human
Resources and Remuneration, CEO and Board of Trustees and sub-committee fees.
Compensation of employees has also increased in 2013/2014 in relation to prior years due to the transfer of
staff from Fund Manager to KGFT which is in line with the restructuring process. Subsequent increases in the
2015/16 financial year onwards was due to the anticipated staffing of employees at full capacity and the
implementation of employee incentive schemes.
For the 2015/16 financial year, the reduction in the anticipated overall expenditure is lower than was
originally budgeted by R6m. This is attributable to a R2.5m and R1.3m cost saving in project consultants costs
and legal fees respectively as these costs were transferred to the promoter. Additional cost savings of R2.5m
relation to compensation to employees is due to the number of vacancies as at the close of the financial year
end. The maintenance, repairs and running costs increased by R3m and this includes the general inflationary
increase of expenses. Included in this amount is the higher than initially projected expenses relating to the
operational expenses of the leased property of R0.8m, depreciation of R0.3m and interest paid on a derivative
financial instrument of R1.4m.
No increase in employee head count has been budgeted for which may arise from the successful conclusion
of an en-commandite partnerships. Expenses have been reviewed and budgeted for based on anticipated
increases. Utilities such as water and electricity, lease rentals etc. have a slightly higher than inflationary
increase as per market norms. Depreciation and amortisation have taken into account the addition of assets
and the growth of the organisation.
24 | P a g e
6.
PROGRAMME 2 – PROJECT INVESTMENTS
6.1.
Programme 2 – Project Investments
Project Investments is the core function of the organisation. The programme originates and assesses the
viability of the projects by performing due diligences and thereafter presenting the proposals to relevant
committees for approval. The programme is responsible for negotiating the legal terms with the promoter
and facilitating financial close as well as providing general legal counsel. The programme is further
responsible for marketing and promoting the Trust.
Another facet of the programme is the function of Risk and Compliance which co-ordinates the risk
management and compliance activities of the Trust. The role of this function is to assist management in
discharging their responsibilities to comply with applicable legislative and regulatory requirements. This
function further assists through the identification, assessment, management, monitoring and reporting of
the risks faced by the Trust.
The strategic objectives per sub-programme under Programme 2: Project Investments are shown in Table 6.1
below followed by a brief description of each sub-programme
Table 6.1: Programme 2 – Sub-Programme Objectives
Programme 2: Project Investments
Sub programme 2.1:
Project Administration and
Marketing
Sub programme 2.2:
Project origination and
appraisal
Sub programme 2.3: Legal,
Risk and Compliance
Sub programme 2.4: Post
Investment monitoring
and aftercare
 To promote the brand of the fund and to support the investment team in
delivering on its mandate.
 To ensure that the Trusts fully disburses available funds into viable
projects.
 To ensure that the Trust approves to viable projects that meet the Trust’s
mandate.
 To manage and co-ordinate the risk management and compliance
activities of the Trust
 To ensure that the Trust’s interests are protected through legal structuring
 To effectively manage the investment portfolio to ensure the fund
remains financially sustainable;
 To ensure the investments perform in line with approved covenants; and
 Where equity is held, to give strategic guidance and management
direction to project companies.
6.1.1. Sub-programme 2.1: Project Administration and Marketing
The Project Administration function is a support function and is responsible for the administration matters
of the investments division. The main functions include maintaining the projects register, compiling monthly
and quarterly reports on the activities of the investments division as well as screening projects at initial stages
so as to ensure that such projects meet with the fundamental criteria of the fund.
Additional functions include marketing the fund’s product offering to prospective promoters and financial
intermediaries, performing preliminary reviews of proposals, conducting project due diligences, compiling
and presenting investment recommendations to the Investment Committee and the Board of Trustees for
approval as well as overseeing financial close and disbursement.
25 | P a g e
6.1.2. Sub-programme 2.2: Project origination and appraisal
The main purpose of this sub programme is to source viable investments through performing preliminary
reviews of proposals, conducting project due diligences, compiling and presenting investment
recommendations to the Investment Committee and the Board of Trustees for approval as well as overseeing
financial close and disbursement.
6.1.3. Sub-programme 2.3: Legal, Risk and Compliance
The main purpose of this sub programme is to ensure that the approved funds are fully disbursed into viable
projects within the availability period. The programme is responsible for negotiating the legal terms with the
promoter and facilitating financial close which requires ensuring that the conditions precedent to loan drawdowns have been met by the borrower and disbursements are made in line with the signed legal agreements.
Another facet of programme is the function of Risk and Compliance which co-ordinates the risk management
and compliance activities of the Trust. The role of this function is to assist management in discharging their
responsibilities to comply with applicable legislative and regulatory requirements. This function further
assists through the identification, assessment, management, monitoring and reporting of the risks faced by
the Trust.
6.1.4. Sub-programme 2.4: Post Investment monitoring and Aftercare
The Post Investment function is responsible for monitoring investments post disbursement. This entails
amongst others the analysis of management reports and annual financial statements, monitoring exits,
repayments and adherence to loan covenants. As a value add, the function provides strategic guidance and
management direction to project companies where an equity investment is held.
6.2.
Programme 2 - Performance Indicators and Annual Targets for 2016/17 – 2020/21
The Trust’s strategic goals have been further analysed to show the strategic objective, performance
measures/ indicators, as well as targets that the Trust has set itself for the next five years. These are
illustrated in Table 6.2 below.
26 | P a g e
Table 6.2: Programme 2 – Key Performance Indicators and Annual Targets
Programme 2: Project Investments
Objectives
Measure/
KPI
Project Origination and appraisal
Contributio
Estimated (direct/
n to socioindirect) job
economic
opportunities to be
developmen supported or
t
created1
% of disbursed
projects meeting
B-BBEE Investment
policy criteria
(no of projects
meeting the B-BBEE
criteria/total no of
projects disbursed)
Project Disbursements
Fully
commit all
available
funds to
viable
projects
Rand value of
projects disbursed
in
Period
Outputs
2016/1
7
Annual Targets
2017/18 2018/19 2019/20
2020/21
Annual
Annual
performa
nce
reports
170
182
105
100
94
Quarterly
Quarterly
performa
nce
reports
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
Annual
Annual
performance
reports
Disburse
ment of
30% of
available
capital
during
the year
Disburse
ment of
30% of
available
capital
during
the year
Disburse
ment of
30% of
available
capital
during the
year
Disburse
ment of
30% of
available
capital
during the
year
Disburse
ment of
30% of
available
capital
during the
year
Quarterly
performance
reports
At least
90%
perform
ance
loans
within
the total
loan
portfolio
At least
65% of
the total
cost of
the
investment
portfolio
to be
maintain
ed based
on
annual
valuation
s and
provision
At least
90%
performa
nce loans
within
the total
loan
portfolio
At least
90%
performa
nce loans
within the
total loan
portfolio
At least
90%
performa
nce loans
within the
total loan
portfolio
At least
90%
performa
nce loans
within the
total loan
portfolio
At least
65% of
the total
cost of
the
investment
portfolio
to be
maintain
ed based
on annual
valuation
s and
provision
s
At least
65% of
the total
cost of
the
investment
portfolio
to be
maintaine
d based
on annual
valuations
and
provisions
At least
65% of
the total
cost of
the
investment
portfolio
to be
maintaine
d based
on annual
valuations
and
provisions
At least
65% of
the total
cost of
the
investment
portfolio
to be
maintaine
d based
on annual
valuations
and
provision
Post Investment monitoring and aftercare
To ensure
To maintain at least Quarterly
appropriate 90% of performing
portfolio
loans in the
manageportfolio
ment and
(No. of loans
aftercare is
performing/ total
being
no. of loans)
performed
[Debt]
so as to
strive
At the time of
Quarterly
toward
valuation of the
good asset
investment
quality and
portfolio, the value
long term
should not be less
sustainable
than or equal to
growth of
35% of its cost
the Trust.
[equity]
Quarterly
performance and
valuation
reports
1
The number of jobs created is an estimated number derived through the use of project specific funding models requirements, automation level
conditions and general internally accepted guidelines and principles at the time of project funding approvals by the KGFT Board of Trustees.
27 | P a g e
Progress towards meeting the above targets is monitored during the year through quarterly reports that are
against predetermined targets is reported in the Trust’s integrated annual report.
6.3.
Programme 2 - Quarterly Targets for 2016/17
Progress towards meeting these targets is monitored during the year through quarterly reports that are
against predetermined targets is reported in the Trust’s annual report. The detailed quarterly targets are
presented below for Programme 2 in table 6.3 below.
Programme
Investments
2:
Objectives
Project
Measure/
KPI
Project Administration
Contribution
Estimated
to
socio- (direct/
economic
indirect) job
development
opportunities
to
be
supported or
created2
% of disbursed
projects
meeting
B-BBEE
Investment
policy criteria
(no of projects
meeting the BBBEE
criteria/total
no of projects
disbursed)
Project Disbursements
Fully commit
all available
funds
to
viable
projects
Post Investment
To
ensure
appropriate
portfolio
management
and aftercare
is
being
Strategic Goals:
Unlock KZN Province economic growth; create permanent jobs; and Facilitate BBBEE
Annual
Quarterly Targets
Targets
Period
Outputs
2016/17
Q1
Q2
Q3
Q4
Annual
Annual
performance
reports
170
Quarterly
Quarterly
performance
reports
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
Rand value of
projects
disbursed
Annual
Annual
performance
reports
Disburse
ment of
30% of
available
capital
during
the year
To maintain at
least 90% of
performing
loans in the
portfolio
(No. of loans
performing/
Quarterly
Quarterly
performance
reports
At least
90%
performa
nce loans
within
the total
170
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
100% of
projects
meeting
B-BBEE
Investment
policy
criteria
Disburse
ment of
30% of
available
capital
during
the year
At least
90%
performa
nce loans
within
the total
At least
90%
perform
ance
loans
within
the total
At least
90%
perform
ance
loans
within
the total
At
least
90%
performan
ce loans
within the
total loan
portfolio
2
The number of jobs created is an estimated number derived through the use of project specific funding models requirements, automation level
conditions and general internally accepted guidelines and principles at the time of project funding approvals by the KGFT Board of Trustees.
28 | P a g e
Programme
Investments
Objectives
performed so
as to strive
toward good
asset quality
and long term
sustainable
growth of the
Trust
2:
Project
Measure/
KPI
total no. of
loans)
[Debt]
At the time of
valuation of
the investment
portfolio, the
value should
not be less
than or equal
to 35% of its
cost [equity]
Strategic Goals:
Unlock KZN Province economic growth; create permanent jobs; and Facilitate BBBEE
Annual
Quarterly Targets
Targets
Period
Outputs
2016/17
Q1
Q2
Q3
Q4
loan
loan
loan
loan
portfolio
portfolio
portfolio portfolio
Quarterly
Quarterly
performance
and valuation
reports
At least
65% of
the total
cost of
the
investme
nt
portfolio
to
be
maintain
ed based
on
annual
valuation
s
and
provision
s raised
At least
65% of
the total
cost of
the
investme
nt
portfolio
to
be
maintain
ed based
on
annual
valuation
s
and
provision
s raised
At least
65% of
the total
cost of
the
investm
ent
portfolio
to
be
maintain
ed based
on
annual
valuatio
ns and
provisio
ns raised
At least
65% of
the total
cost of
the
investm
ent
portfolio
to
be
maintain
ed based
on
annual
valuatio
ns and
provisio
ns raised
At
least
65% of the
total cost
of
the
investmen
t portfolio
to
be
maintaine
d based on
annual
valuations
and
provisions
raised
6.4.
Programme 2 - Reconciling performance targets with the budget and expenditure estimates
The main purpose of this programme is to originate and assess the viability of the projects by performing due
diligence and thereafter presenting proposals to relevant committees for approval. This programme consists
of five sub-programmes, namely Project Administration and marketing, Project Origination and Appraisal,
Legal, Risk and Compliance and Post investment monitoring and Aftercare.
Table 6.4 illustrates the payments and estimates of this programme over the seven year period from
2012/2013 to 2020/2021. The detailed summary of payments and estimates by economic classification for
Programme 2 is presented in Table 6.5 below:
Table 6.4 Summary of payment and estimates – Programme 2: Project Investments
Audited Outcome
Rands
Project administration and Marketing
Project origination and appraisal
Project Legal, Risk and Compliance
Post Investment, Monitoring and Aftercare
Total
2012/13
3 692 218
4 235 478
237 872
8 165 568
2013/14
2 898 723
887 398
319 509
1 145 657
5 251 287
2014/15
7 442 175
435 295
229 248
900 778
9 007 496
Approved
Budget
2015/16
9 449 983
718 995
2 226 956
914 379
13 310 313
Revised
Estimate
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
12 525 900 16 265 128 16 128 047 16 897 414 17 706 071 18 671 575
660 032 2 341 065 3 025 171 3 327 688 3 660 457 4 026 503
4 549 579 7 164 029 6 996 355 7 453 048 7 941 823 8 465 123
827 049
922 243
999 930 1 056 281 1 115 826 1 178 748
18 562 560 26 692 464 27 149 503 28 734 431 30 424 177 32 341 949
29 | P a g e
Table 6.5 Summary of payment and estimates by economic classification – Programme 2: Project Investments
Audited Outcome
Rands
Current payments
Goods and services
Communication
Computer services
Operating leases
Advertising
Legal
Impairments
2012/13
8 165 568
8 165 568
4 235 478
237 872
3 692 218
-
2013/14
5 251 287
3 310 000
1 941 287
1 483 055
138 723
319 509
-
2014/15
9 007 496
6 041 700
2 965 796
747 573
1 988 975
229 248
-
Approved
Budget
2015/16
13 310 313
8 055 155
5 255 158
718 995
914 379
1 394 828
2 226 956
-
Departments
-
-
-
-
-
-
-
-
Total
8 165 568
5 251 287
9 007 496 13 310 313
Revised
Estimate
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
18 172 597 25 857 464 26 574 503 28 359 431 30 164 177 32 091 949
10 333 447 15 219 623 15 858 855 16 752 585 17 696 974 18 694 914
7 839 150 10 637 841 10 715 648 11 606 846 12 467 203 13 397 035
187 067
198 104
209 198
220 704
232 842
245 649
265 198
280 845
296 572
312 884
330 092
348 247
2 601 198 4 951 001 5 207 696 5 730 252 6 195 162 6 700 616
827 049
922 243
999 930 1 056 281 1 115 826 1 178 748
509 656
539 726
760 379
802 200
846 321
892 869
571 068
574 761
606 947
640 329
675 548
712 703
907 486 1 141 028 1 204 925 1 271 196 1 341 112 1 414 873
1 970 428 2 030 134 1 430 000 1 573 000 1 730 300 1 903 330
389 964
239 964
150 000
835 000
185 000
650 000
575 000
425 000
150 000
375 000
225 000
150 000
260 000
110 000
150 000
250 000
100 000
150 000
18 562 560 26 692 464 27 149 503 28 734 431 30 424 177 32 341 949
The substantial decrease in Project Administration in the 2013/2014 Actual audited outcome is mainly due
to restructuring and re allocation of cost to other sub-programme such as Project Legal, Project Disbursement
and Aftercare. The Compensation of employees increased substantially in 2013/2014, this is due to the Sub
Programme being used for the first time during the financial year.
The allocation to the Legal, Risk and Compliance sub-programme only commenced in 2013/2014, the costs
are forecasted to increase due to the establishment and set up of the en-commandite partnership including
the reviews and drafting of legal agreements for projects. The review of legal documents are outsourced to
legal external counsel.
During the 2015/16 year, Project origination and appraisals were low as there were few projects that reached
final appraisal and disbursement stage due to project promoter’s inability to obtain sufficient equity, this
resulted in projects being parked.
This was necessary in order to ensure a healthy pipeline of projects that will reach Final Appraisal and
disbursement stage prior to the close of the debt fund availability period in August 2015, thus ensuring that
KGFT delivers on its mandate, as well the necessary resources to facilitate the fund management of the funds
under the en-commandite partnership.
The key variable cost drivers relate to project origination, project appraisal and the impairments. These costs
vary in line with the investment activity undertaken by the fund. It is envisaged that over the next 5 years
that on a year on year basis the number of deals executed should be consistent and in line with cash facilities
available for drawdowns. This is based on number of investment officers and the funding available for
disbursement.
The compensation of employees has increased during 2015/2016 and 2020/2021 due to the appointments
of additional employees as required and detailed in the HR strategy and organogram. Subsequent increases
in the 2015/2016 financial year onwards is due to the proposed introduction of employee bonus incentives
and the projected growth in employees with higher retention periods.
30 | P a g e
Project impairments have not been budgeted due to its inherent uncertainties. Further, no signs of distress
has been noted within the current portfolio that may provide indications of provisions that may be required.
Table 5.5. below presents the sensitivity impact to the profitability of the business from a deterioration in
the book (debt and equity):
Table 6.6: Sensitivity Analysis of Impairments from Book deterioration
Debt Fund
Debt funds to viable projects
Provision at 10% of debt Portfolio Value
Equity Fund
Equity funds to viable projects
Provision at 20% of equity Portfolio Value
2016/17
Annual Targets
2017/18 2018/19 2019/20
2020/21
R621.1m
R62.1m
R746.2m
R74.6m
R881.2m
R88.1m
R981.2m
R98.1m
R1,075m
R107.5m
R137m
R 27.4m
R300m
R60m
R300m
R60m
R300m
R60m
R300m
R60m
A sensitivity impact of a 10 % provision has been presented for the debt portfolio. It is noted that a 10%
provisioning impact on the Debt portfolio is considered aggressive in light of the current performing portfolio.
A sensitivity impact of a 20 % provision has been presented for the equity portfolio. Variations in the portfolio
are expected to temporarily occur due to the projects not gaining significant value in the initial phases of the
project. It is anticipated that the portfolio will on average retain at least 80% of its market value within the
first 5 years of the investment period based on review of similar investment portfolios within a private equity
fund.
In the 2014/15 financial year, marketing costs increased due to the brand re-launch and new marketing
strategy that has been adopted by KGFT which will result in increased brand awareness as compared to
preceding years. The actual costs during 2013/14 for Risk and Compliance sub-programme is attributable to
the legal costs incurred on restructuring.
Some of the Marketing initiatives that were previously budgeted for in 2016/17 financial year, will be carried
forward into the next financial year and has therefore been included in the budget for the 2016/2017. The
Marketing initiatives in 2016/2017 will include brand mobilisation through the activation campaigns, media
events and print advertising thereby giving traction to the existing equity investment pipeline.
Forecast beyond 2016/2017 is based on an inflationary increase relative to the 2016/2017 year. This is
considered appropriate as we anticipate the momentum to continue as there is increase in deal pipeline and
product enhancements.
Overall during the 2016/17 financial year costs were marginally higher than budget with the main driver being
project related costs.
 Project Administration Costs
Total costs relative to budget remained fairly flat however it should be noted that employee compensation
did fall below budget mainly due to movement in staff together with positions that were budgeted to be
filled and which were not. These positions are expected to be filled during 2016/2017 and has therefore been
budgeted as such.
31 | P a g e
 Origination and Appraisal and Legal
Costs associated with the above sub-programmes is mainly driven by deal activity with the type of deal i.e.
Debt vs Equity contributing significantly to the nature of costs.
The costs relative to debt and equity differ in that in the debt deals most of the costs relating to deal appraisal,
due diligence and legal is born by the promoter versus equity transaction where cost are born by the equity
investors themselves, being KGFT.
To this end given that we were introducing equity deals to the fund during 2015/2016 the cost incurred were
higher than anticipated. Given that we forecast on executing more equity deals going forward the cost that
have been budgeted has increased on this basis.
The expenditure projection for 2016/2017 to 2020/2021 is expected to increase due to the anticipated
increase in projects deal flow arising from the brand re-launch and marketing strategy including the change
in the project pricing model and the establishment of the Equity fund through the en-commandite
partnership.
32 | P a g e
PART C: LINKS TO OTHER PLANS
7.
Alignment to Provincial Growth and Development Strategy (PGDS)
The Trust has aligned itself to the KZN 2012-2030 PGDS through its mandate, mission and investment policy.
The Trust is set up to provide Project Finance to projects within specific target sectors, in areas where gaps
or backlogs in economic development and job creation have not been adequately addressed by traditional
financial institutions. The Trust seeks to align itself to 4 of the 7 strategic goals identified in the KZN PGDS,
namely job creation, strategic infrastructure development, environmental sustainability, governance and
policy.
Table 7.1 below shows the alignment between the PGDS goals and the Fund’s activities.
Table 7.1: Alignment of the Trust to PGDS
Provincial Strategic Goal
Objective
Trust Alignment
Goal 1 – Job Creation
 Enhance industrial
development
through
trade,
investment
and
exports.
 The Trust invests in projects with a high potential of
creating sustainable jobs in major economic sectors
i.e. Manufacturing, Tourism , Mining and Mineral
Beneficiation, Agro-processing and Transport and
Logistics

Development of ICT
Infrastructure.

Develop
improve
production
supply.
 The Trust funds projects which are infrastructure in
nature i.e. ICT, Telecoms, Transport & Logistics and
Healthcare infrastructure. It also seeks to improve
energy production by funding projects which seek to
generate, transmit and distribute energy sources such
as coal, hydro, wind, solar, gas, steam, bio-diesel,
wave power and nuclear.
To expand Provincial
economic output and
employment
Goal 4 – Strategic
Infrastructure development
To provide Infrastructure for
the social and economic
growth and development
needs of KZN.
Goal 5 - Environmental
Sustainability
To reduce global greenhouse
gas emissions and create a
social-ecological capacity to
adapt to climate change
Goal 6 - Governance and
Policy
The population of KZN
is satisfied with the levels of
government service delivery
and
energy
and
 Advance alternative
energy generation
and reduce reliance
on fossil fuels.
 The Trust aligns itself by ensuring that projects being
funded adhere to Equator Principles (the principles
adopted by the financial industry as a benchmark for
determining, assessing and managing social and
environmental risk in project financing). The Trust
ensures that all projects funded are in compliance with
environmental regulations as per EDTEA. The fund also
supports alternative energy generation projects.
 Eradicate fraud and
corruption
in
government so that
it is corruption free
 Promote
participative,
facilitative
and
accountable
governance
 The Trust adheres to good corporate governance,
PFMA and King III.
 The Trust strives to maintain its Clean Audit record.
33 | P a g e
ANNEXURE D:
8. Vision, Mission, Mandate and Values
Vision
To be KZN’s leading Development Financier and Impact Investor
Mission
To provide competitive and innovative financing solutions to private sector investments that propel socioeconomic growth for a better future.
Mandate
To support sustainable growth by financing private sector projects that drive economic success, stimulate job
creation, promote broad based black economic empowerment (B-BBEE) and reduce inequality.
Values
The Trust’s values are:





Respect;
Accountability;
Integrity;
Stewardship; and
Enterprising.
“RAISE”
9. Strategic Goals
The Trust’s strategic goals are as follows:


To manage the Trust’s resources efficiently and effectively so as to remain financially sustainable;
To be a catalyst investor by utilising government capital to leverage off private / institutional sector
funding and to maximise the development impact.
10. Strategic Objectives
The strategic objectives of the Trust are:




To maintain sound corporate governance and an unqualified audit opinion;
To utilise government capital to leverage off institutional/private investor’s capital so as to grow the
assets under management;
To identify and finance viable private sector projects which demonstrate beneficial, measurable socio
economic impact whilst being environmentally sustainable and maximises the developmental impact
of the Trust’s investments;
To remain financially sustainable by fully committing available funds under management and
ensuring appropriate post investment management.
34 | P a g e
To achieve the strategic objectives of the Fund, the Trust has adopted the following high level initiatives:





To manage new funds that can offer competitive financing products to attract private participation;
To build long term relationships with other Development Finance Institutions (DFIs) and lending
institutions to cross-refer and co-finance projects and build on the public private partnership (PPP)
model;
To further implement the comprehensive marketing strategy;
To adequately resource and retain the necessary human capital and skills in the Trust; and
To implement and maintain sound policies, procedures, and systems of internal controls to ensure
good corporate governance.
By implementing the above strategies, the Trust will be able to achieve its strategic objectives, hence
establishing a successful track record and a reputation for effective delivery. The strategy of the Trust will be
driven by a single minded goal of developmental finance and growing the assets under management.
11. Strategic Planning Process
During the course of financial year 2014/15, the MEC approved the KZN Growth Fund Trust’s Evolution
Strategy. This was designed to ensure the sustainability of the Trust post the exit of Lenders and has also
received full support of the KZN Cabinet. The implementation of the Evolution Strategy started in the current
financial year 2015/16; this largely entailed the closing of Debt Fund 1 that was within a Public Private
Partnership (PPP) arrangement, the opening of Debt Fund 2 and setting up a new Equity Fund to operate
under an en-commandite partnership model (further detail in section 5.5 below). The new model and
governance structure enables implementation of separate funds and introduction of new funding
instruments as and when deemed necessary by the Trust’s beneficiary. The Trust’s investment strategy is
informed by and aligned with the EDTEA Departmental Strategy and the Provincial Growth and Development
Strategy (PGDS).
At the request of the beneficiary, the Trust is investigating and preparing for setting up a new Guarantee
Fund to assist construction companies owned by previously disadvantaged individuals with performance
guarantees. The policy and fund model will be presented to the Board of Trustees for approval. The Trust is
also working together with the provincial EDTEA and national DTI in the development of a strategy to fast
track the development of Black Industrialists in the province.
Fund raising roadshows for the Equity Fund targeted at local and international DFI’s as well as other financial
institutions and investors with a developmental mandate and aligned investment strategy have commenced
during the 2015/16 financial year. Lessons learnt from the Trust’s first experience continue to be
incorporated into the planning for the near to medium term.
The review of the strategy and lessons learnt were discussed by the Board of Trustees during meetings held
in August and September 2015. The five year corporate plan has been prepared on the basis of the above
whilst incorporating the key learnings from the fundraising activities as well as seeking to stay aligned to the
Trust beneficiary’s strategy and priorities.
35 | P a g e
12. SWOT Analysis
The Trust has identified the following strengths, weaknesses, opportunities and threats in order to formulate
an effective strategy to deliver on its mandate.
Strengths
 Financial backing from KZN Provincial Government;
 Experienced and highly skilled Board of Trustees to provide oversight;
 The ability to attract and retain experienced and skilled personnel;
 KZN Provincial Governments’ contribution is provided at no expected rate of return hence lower cost
of capital;
 Expanded product offering to include equity and guarantee instruments; and
 Self-sustaining entity that is able to fund operating expenditure from internally generated funds.
Weaknesses
 The Trust has recently established the Equity Fund, therefore it lacks presence within the Private
Equity market;
 The current investment team and investment committee has limited experience across the full
Private Equity value chain;
 No previous track record or experience in fund raising due to first equity fund being established.
Opportunities
 Funding of spin-off projects from major infrastructure projects identified by government in the
Strategic Infrastructure Programme (SIP);
 Opportunity to co-fund or partner with traditional financiers and DFI’s thereby creating valuable
alliances and synergies;
 Global liquidity challenges present financing opportunities for the Trust to fill the gap that will exist
as a result of regulatory measures, such as Basel III capital adequacy requirements on commercial
banks; and
 Further marketing in order to increase awareness of the Fund and improve quantity and quality of
assets.
Threats
 Adverse changes in macroeconomic environment may cause approved projects to fail, thus resulting
in the erosion of capital invested by KZN Provincial Government;
 Projects competing with experienced and established competitors in the market who own a large
proportion of the market share of the industry;
 Political and strategic changes in the KZN Provincial Government can adversely impact on the Fund;
 Reputational risk due to perceived negative history; and
 Competition from other development finance institutions such as NEF, IDC and DBSA, as well as
commercial banks.
The Trust will utilise its strengths and exploit all opportunities while combating any threats and improving on
its weaknesses in its efforts to deliver on its mandate. Accordingly, the Trust will continually assess and
improve its competitive position in the market.
36 | P a g e
13. Strategic Risk Analysis
The Trust faces a number of strategic risks that could affect its business operations and ultimately its ability
to create value in the long term. A strategic risk assessment workshop was facilitated in January 2016 with
the objective of identifying the top ten strategic risks that could prevent the Trust from achieving its strategic
objectives. Changes to the Trust’s operating environment and the change in funding model were taken into
account when identifying the strategic risks. The graph below reflects the Inherent risk of each strategic risk
as well as the residual risk after taking existing controls into account.
Table 8.1 – Inherent Risk vs Residual Risk
Inherent Risk vs Residual Risk
100
90
80
70
60
50
40
30
20
10
0
The table 8.2 below provides an analysis of the top ten strategic risks affecting the Trust, the current controls
in place to mitigate those risks and the opportunities presented.
Table 8.2 – Summary of top ten strategic risks
Rank
Key Risk
Risk
Category
Current controls
Opportunity
1
Inability of the
fund to source
deals that fulfil its
investment
strategy to deliver
on the mandate
(job creation and
B-BBEE)
Strategic
Risk
- Implementation of strategy, Corporate plan
and Annual Performance Plan which is
aligned with the provincial government
strategies of EDTEA
- Marketing and Branding the Fund
- Strategic partnerships, relationships with
Banks and stakeholder e.g. TIKZN
- Introduction of equity finance and
diversity in product range enabling more
promoters to access funding
- Expansion of
product offering
and mandate
37 | P a g e
2
Inadequate capital
to support
strategic
objectives
Strategic
risk
3
Failure to attract,
retain and develop
key staff
Operational
Risk
4
Credit and
Investment Risk
Credit Risk
5
Market Risk
Market Risk
- Mechanisms in place to ensure relevance continuous reporting to EDTEA and
delivery of mandate
- Manage relationships with all critical
stakeholders.
- Proactive restructuring of loans and
investments
- Efficient diversification of assets and
sectors
- Proactive review, monitoring and
reporting on portfolio including
independent monitoring of value add and
exit thesis
- Training and development framework and
plans
- Employee wellness scheme in place
- Benchmarking of salaries and Employee
Incentive scheme in place
- Succession planning
- Employee climate survey performed
resulting in action plan
- Policies and Procedures which are
reviewed on a regular basis
- Key criteria of Investment and Credit policy
is captured in submissions made.
- Proactive review, monitoring and reporting
on portfolio including independent
monitoring of value add and exit thesis
- Project subject to comprehensive due
diligence which is reviewed by the
- Formulation of separate debt and equity
investment teams and committees to
address potential conflict of interest
- Implementation of findings of due
diligence reports to prepare project
company for exit
- Proactive review, monitoring and reporting
on portfolio including independent
monitoring and implementation of value
add and exit strategies
- Proactive restructuring of loans and
investments
- Efficient diversification of assets and
sectors
- Sensitivity and scenario analysis on each
project's financial model prior to approval
at FAR stage
- Project team ensures that legal
agreements makes provision for adequate
restructuring in the event of adverse
changes in macro and micro economic
environment
- Implementation of Bloomberg as a
research tool
- Establishment of in-house views and
forecasts
- Attract new
sources of capital
through alternate
funding structures
- Attract additional
investment skills to
the province
- Fulfil
developmental
mandate in
assisting ailing
project companies
- Encouraging a
forward looking
and proactive
culture
38 | P a g e
6
Governance,
Regulatory, Legal
and Compliance
Regulatory
Risk
7
Geo-political Risk
Political Risk
8
Reputation Risk
Operational
Risk
9
Failure to remain
financially
sustainable
Financial
Risk
10
Ineffective and
inefficient
processes and
systems to
effectively support
the strategy of the
business
Operational
Risk
- Policies and Procedures which are
reviewed on a regular basis.
- Monitoring and reporting of compliance
and risk via independent function to
relevant committees
- Communication, Training and roll out of
policies and procedures
- Implementation of combined assurance
model framework
- Monitor political landscape by constant
engagement /lobbing with key
stakeholders and managing key
relationships.
- Continuous reporting to EDTEA and
delivery of mandate
- EDTEA's representation at key KGFT
meetings
- Adherence to policies such as Politically
Exposed People policy and Communication
& media policies
- Upfront communication with regards to
financing with promoters
- Adequate staff complement with the right
skills
- Background checks and due diligence
performed
- Effective annual budgeting process
including monthly monitoring of Actual vs
Budget variances
- Cost cutting measures are implemented
- Deals are priced according to loan pricing
policy approved by the Trust
- Effective due diligence and post
investment monitoring of projects by the
projects team
- Maintaining a diversified portfolio
- Proactive Cash flow management
- Policies, Procedures and Delegation of
Authority in place and reviewed annually
- Update of Fund Financial model quarterly
- Quarterly solvency and liquidity testing
- Policies and procedures in place and
reviewed regularly
- BCP and DRP approved by Board of
Trustees and tested
- Risk assessment undertaken to determine
high risk threats to KGFT
- External tip-off line for reporting and
identification of fraud
- Maintain good
governance
- Encouraging a
forward looking
and proactive
culture
- Building an ethical
company culture
- Turn employees
into brand
ambassadors
- Cost saving
initiatives
- Better financial
control
- Introduction of
new technologies
to streamline
processes
39 | P a g e

THE KZN GROWTH FUND TRUST Annual Performance Plan 2016/17

Transcription

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