THE KZN GROWTH FUND TRUST 5 year Corporate Plan 2016/ /21

Transcription

1 THE KZN GROWTH FUND TRUST 5 year Corporate Plan 2016/ /21 1 P a g e

2 TABLE OF CONTENTS Table of Contents OVERVIEW OF THE KZN GROWTH FUND TRUST REVIEW OF THE 2015/16 financial YEAR STRATEGIC OVERVIEW ECONOMIC ENVIRONMENT GOVERNANCE STRUCTURE AND ORGANISATIONAL ANALYSIS PROGRAMME DESCRIPTIONS AND OBJECTIVES FINANCIAL PLAN AND EXPENDITURE ESTIMATES ORGANISATIONAL STRUCTURE RISK MANAGEMENT PLAN FRAUD PREVENTION PLAN MATERIALITY/SIGNIFICANT FRAMEWORK ANNEXURES ANNEXURE A - KEY ANNUAL BUDGET ASSUMPTIONS ANNEXURE B - ENTERPRISE RISK MANAGEMENT POLICY ANNEXURE C - ENTERPRISE RISK MANAGEMENT FRAMEWORK ANNEXURE D - RISK MANAGEMENT PLAN ANNEXURE E - FRAUD PREVENTION PLAN ANNEXURE F - MATERIALITY / SIGNIFICANT FRAMEWORK 2 P a g e

3 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 publicprivate 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 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 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. Figure 1.1: Evolution of KGFT GOVERNANCE STRUCTURE 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. PERIOD 09/10 10/11 11/12 12/13 13/14 14/15 Apr 2015 to Sep 2015 October 2015 FUNDING MODEL 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 IMPLEMENTATION OF THE EVOLUTION STRATEGY Unencumbered the Trust by prepaying the Lenders. Trust's assets base of R1bn. En-commandite Partnership Funding Model: Debt Fund 2 and Equity Fund. 3 P a g e

4 A brief explanation of the various periods of the evolution of the KGFT is presented below: 2009/ /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 / /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 /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. 4 P a g e

5 2 REVIEW OF THE 2015/16 FINANCIAL YEAR 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 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 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: An 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. 5 P a g e

6 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. 2.3 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. 2.4 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 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. 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. 6 P a g e

7 3 STRATEGIC OVERVIEW 3.1 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 3.2 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. 3.3 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. 7 P a g e

8 To achieve the strategic objectives of the Fund, the Trust has adopted the following high level initiatives: To manage 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. 3.4 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 PPP arrangement, the opening of Debt Fund 2 and setting up a new Equity Fund to operate under an encommandite 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 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. 8 P a g e

9 3.5 Alignment to Provincial Strategies Alignment to Provincial Growth and Development Strategy (PGDS) The Trust has aligned itself to the KZN 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 2.1 below shows the alignment between the PGDS goals and the Fund s activities. Table 2.1: Alignment of the Trust to PGDS Provincial Strategic Goal Objective Trust Alignment Goal 1 Job Creation 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 Enhance industrial development through trade, investment and exports. Development of ICT Infrastructure. Develop improve production supply. and energy and Advance alternative energy generation and reduce reliance on fossil fuels. Eradicate fraud and corruption in government so that it is corruption free Promote participative, facilitative accountable governance and 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 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, biodiesel, wave power and nuclear. 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. The Trust adheres to good corporate governance, PFMA and King III. The Trust strives to maintain its Clean Audit record. 9 P a g e

10 3.5.2 Alignment to EDTEA Strategic Goals The Trust has aligned itself to EDTEA strategic goals through its mandate, mission and investment policy as follows: Table 2.2: Alignment of the Trust to EDTEA Strategic Goals Strategic Objectives Trust Alignment Lead and Coordinate Integrated Economic Planning and Development. Facilitate sustainable and inclusive economic growth to ensure job creation. Develop and Transform the tourism sector to achieve destination competitiveness To facilitate the implementation of B-BBEE strategy and policies. To drive growth of the KZN provincial economy. To enhance sector and industrial development through Trade, Investment and Exports Logistics, ICT, Manufacturing, Green economy, agri-business, Tourism, Creative Industries, Maritime, Aerotropolis, Aviation. Development of Industrial Economic Hubs and Special Economic Zones. To investigate and develop viable alternative energy generation options. To develop and fund the implementation of tourism sector specific products. The Trust s investment mandate promotes B-BBEE by requiring a minimum of 30% BEE shareholding or level 4 B-BBEE in all projects it provides funding. The Trust was initially created to fund projects which bring economic development in the province. The Trust mandate has expanded to include investment of no more than 50% of funds under management in the rest of South Africa The Trust funds infrastructure projects in the following sectors; Manufacturing, ICT, Agro-processing Mining and Mineral Beneficiation, Energy and Transport and Logistics in support of this objective. The Trust supports projects in the Tourism sector by funding infrastructure associated with natural, cultural, man-made and business attractions. It also funds Infrastructure including accommodation facilities such as hotels, lodges and game parks. 3.6 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. 10 P a g e

11 3.6.1 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. 11 P a g e

12 3.7 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 2.3 Inherent Risk vs Residual Risk Inherent Risk vs Residual Risk The table 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. 12 P a g e

13 Table 2.4 summary of top ten strategic risks Rank Key Risk Risk Category 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 Current controls - 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 Opportunity - Expansion of product offering and mandate 2 Inadequate capital to support strategic objectives Strategic 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 - Attract new sources of capital through alternate funding structures 3 Failure to attract, retain and develop key staff 4 Credit and Investment Risk Operational Risk Credit Risk - 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 Investment Committee - 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 - Attract additional investment skills to the province - Fulfil developmental mandate in assisting ailing project companies 13 P a g e

14 Rank Key Risk Risk Category Current controls Opportunity 5 Market Risk Market Risk - 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 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 - 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 - Encouraging a forward looking and proactive culture - 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 14 P a g e

15 Rank Key Risk Risk Category Current controls Opportunity 10 Ineffective and inefficient processes and systems to effectively support the strategy of the business Operational Risk - 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 - Introduction of new technologies to streamline processes 15 P a g e

16 4 ECONOMIC ENVIRONMENT 4.1 Global Economy The global economy is expected to expand 2.9 percent in 2016, up from 2.4 percent in 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 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 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 The 19-country eurozone economy is seen expanding 1.7 percent, up from 1.5 in 2015 and fastest since 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 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. 4.2 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 Growth forecasts for both household spending and gross fixed capital formation were also revised downwards. 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 16 P a g e

17 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. 4.3 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 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 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. 17 P a g e

18 4.4 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. 18 P a g e

19 5 GOVERNANCE STRUCTURE AND ORGANISATIONAL ANALYSIS 5.1 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 Figure 3.1 Governance Structure of the Trust from 1 April 2015 EDTEA KZN GROWTH FUND BOARD OF TRUSTEES Chief Executive Officer Investment Committee Audit & Risk Committee HR & Remuneration Committee 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 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. 19 P a g e

20 5.2 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 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. 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). 5.3 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 has approval to offer the following products: Debt; Equity; and Guarantees. 20 P a g e

21 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 3.2 shows the Trust s total assets under management and sources thereof. Table 3.2 Sources and Uses of Assets Under Management Rmillion 2015/ / / / /20 Source of Capital under management by KGFT 1, , , , ,633.2 Initial Capital contribution for Fund Fund 2 Capital (as 2014/15) Capital injection by EDTEA - INCA repayment Annual EDTEA allocation * Capitalised Trust earnings Asset Allocation of Capital under management 1, , , , ,633.2 Equity Fund Guarantee Fund Debt Fund , ,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 and R290m to Equity. Table 3.2 above shows the expected assets allocation of the Trust for the 2016/ /20 period taking all considerations into account. 5.4 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 21 P a g e

22 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 3.3 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 3.3: Funding Model EDTEA KZN GROWTH FUND TRUST (GENERAL PARTNER & FUND MANAGER) INVESTORS Advisory Board GUARANTEE FUND KGF DEBT FUND 2 KGF EQUITY FUND PROJECT PROJECT 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. 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: 22 P a g e

23 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. 5.5 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. 5.6 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 3.4 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 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. 23 P a g e

24 Table 3.4 Summary of the Debt and Equity transactions PROJECTS DESCRIPTION Debt R m Equity R m DISBURSED Dark Fibre Africa 2 Telecommunication Link Africa Telecommunication SA Shipyards Transport and Logistics Mpact Ltd Manufacturing APPROVED Cold Storage Transport and Logistics Private Hospital Health Care DUE DILIGENCE Packaging Manufacturing HealthCare Manufacturing Cookware Manufacturing PRE-ISR PIPELINE Radiology Healthcare Construction Manufacturing Granite Mining & Beneficiation Coal terminal Transport & Logistics Private Hospital Healthcare Mother & Child Private Hospital Healthcare Coal power generation Power & Energy Footwear Manufacturing Private Hospital Healthcare International School Education Automotive components Manufacturing PARKED Fresh Produce Agro Processing TOTAL P a g e

25 6 PROGRAMME DESCRIPTIONS AND OBJECTIVES 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 4.1 below: 6.1 Table 4.1 Programme structure Programme 1. Finance and Administration 2. Project Investments Sub-programmes per programme 1.1 Office of the CEO 1.2 Secretariat and Governance 1.3 Financial administration 2.1 Project administration and Marketing 2.2 Project origination and appraisal 2.3 Legal, Risk and Compliance 2.4 Investment monitoring and aftercare 6.2 Programme 1 Finance and Administration This programme provides transversal support to the entire organisation. Table 4.2 lists the strategic objectives for each sub-programme under Programme 1: Administration Table 4.2: 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: Financial Administration 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: 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. 25 P a g e

26 6.2.3 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 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. 6.3 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: Investments are shown in Table 4.3 below followed by a brief description of each sub-programme Table 4.3: 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 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 26 P a g e

27 Sub programme 2.4: Post Investment monitoring and aftercare 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 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 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 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 draw-downs 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 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. 27 P a g e

28 6.4 Key Performance Targets 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 Tables 4.4 and 4.5 below Table 4.4: Programme 1 Key Performance Indicators and Annual Targets Programme 1: Finance and Administration Objectives Office of the CEO To obtain and maintain an unqualified audit opinion with no matters of emphasis To remain financially sustainable by growing the assets under management by the Trust Measure/ KPI Maintain external unqualified audit opinion with no matters of emphasis % Growth in the Fund size (current Fund size R1bn) Financial administration To provide % effective and procurement transparent spend on financial management systems targeted B-BBEE suppliers (procurement spend on targeted suppliers /total procurement spend) Solvency ratios (total assets/total liabilities) Liquidity ratio (current assets/current liabilities) Period Outputs Annual Targets Annual Annual Annual Quarterly Quarterly External Audit reports Annual Performa nce Report Annual Performa nce Report Quarterly performa nce reports Quarterly performa nce reports 2016/ / / / /21 Achieve a clean audit report for the 2015/16 financial year end Equal to or more than CPI as at 31 March 2017 Achieve a clean audit report for the 2016/17 financial year end Equal to or more than CPI as at 31 March 2018 Achieve a clean audit report for the 2017/18 financial year end Equal to or more than CPI as at 31 March 2019 Achieve a clean audit report for the 2018/19 financial year end Equal to or more than CPI as at 31 March 2020 Achieve a clean audit report for the 2019/20 financial year end Equal to or more than CPI as at 31 March % of 75% of 75% of 75% of 75% of procurem procurem procurem procurem procurem ent from ent from ent from ent from ent from suppliers with a BEE level of 4 and below and/or suppliers with a BEE level of 4 and below and/or suppliers with a BEE level of 4 and below and/or suppliers with a BEE level of 4 and below and/or suppliers with a BEE level of 4 and below and/or 20% of 20% of 20% of 20% of 20% of total total total total total spend on entities with women ownership spend on entities with women ownership spend on entities with women ownership spend on entities with women ownership spend on entities with women ownershi p 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 28 P a g e

29 6.4.2 Table 4.5: Programme 2 Key Performance Indicators and Annual Targets Programme 2: Project Investments Objectives Measure/ KPI Project Origination and appraisal Contribution to socio-economic development Project Disbursements Fully commit all available funds to viable projects Estimated (direct/ indirect) job opportunities to be supported or created 1 % of disbursed projects meeting B-BBEE Investment policy criteria (no of projects meeting the B-BBEE criteria/total no of projects disbursed) Rand value of projects disbursed in Period Outputs Annual Targets Annual Quarterly Annual Post Investment monitoring and aftercare To ensure To maintain Quarterly at least 90% of performing loans in the portfolio (No. of loans performing/ total no. of loans) [Debt] appropriate portfolio management and aftercare is being performed so as to strive toward good asset quality and long term sustainable growth of the Trust. At the time of valuation of the Quarterly Annual performa nce reports Quarterly performa nce reports Annual performa nce reports Quarterly performa nce reports Quarterly performa nce and 2016/ / / / / % of projects meeting B- BBEE Investment policy criteria Disbursem ent of 30% of available capital during the year At least 90% performan ce loans within the total loan portfolio At least 65% of the total cost 100% of projects meeting B-BBEE Investme nt policy criteria Disburse ment of 30% of available capital during the year At least 90% performa nce loans within the total loan portfolio At least 65% of the total 100% of projects meeting B-BBEE Investmen t policy criteria Disburse ment of 30% of available capital during the year At least 90% performa nce loans within the total loan portfolio At least 65% of the total 100% of projects meeting B-BBEE Investmen t policy criteria Disbursem ent of 30% of available capital during the year At least 90% performa nce loans within the total loan portfolio At least 65% of the total 100% of projects meeting B-BBEE Investmen t policy criteria Disburse ment of 30% of available capital during the year At least 90% performa nce loans within the total loan portfolio At least 65% of the total 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. 29 P a g e

30 6.4.2 Table 4.5: Programme 2 Key Performance Indicators and Annual Targets Programme 2: Project Investments Objectives Measure/ KPI investment portfolio, the value should not be less than or equal to 35% of its cost [equity] Period Outputs Annual Targets valuation reports 2016/ / / / /21 of the investment portfolio to be maintained based on annual valuations and provisions. cost of the investme nt portfolio to be maintain ed based on annual valuation s and provision s. cost of the investmen t portfolio to be maintaine d based on annual valuations and provision. cost of the investmen t portfolio to be maintaine d based on annual valuations and provision. cost of the investmen t portfolio to be maintaine d based on annual valuations and provision. Progress towards meeting the above 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 integrated annual report. 30 P a g e

31 7 FINANCIAL PLAN AND EXPENDITURE ESTIMATES The projected Statement of Comprehensive Income, Statement of Financial Position and Statement of Cash Flows have been prepared using the Financial Fund Model for the Fund. Summary of assumptions (refer to Annexure A for detailed assumptions) 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. Anticipated Debt and Equity drawdowns have been forecast only to the extent of fully utilising the available fund allocations. Fund sizes increase based on an estimated split of the annual R64.4m (for the first 3 years and R95m thereafter) allocation received from the EDTEA. No capitalisations from surplus cash balances generated from project returns are modelled and represent an opportunity for the entity to grow funds under management further. 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. 7.1 Summary of Revenue and Expenditure by programme and economic classification A summary of revenue, 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 5.1, and 5.2. The detailed analysis of the summary of payments and estimates by economic classification is presented in Table 5.3 below. Table 5.1 Summary of Revenues Audited Outcome Approved Revised Budget Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 Net interest earned on projects Interest on surplus funds Commitment fee income Raising Fee Grant from KGF Operational Expenses Fund Reversal of impairment provision Other Sundry Income Total Revenue Table 5.2 Summary of payments and estimates by programme Audited Outcome Approved Budget Revised Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 Financial Administration Project Investments Total Payments Revenue Net Surplus P a g e

32 Table 5.3 Summary of payments and estimates by economic classification Audited Outcome Approved Budget Revised Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 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 Transfers and subsidies Departments Payments for capital assets Building and other fixed structures Machinery and equipment Software and other intangibles assets Total 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. 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. 7.2 Programme Description The revenue, payments and budgeted estimates for each programme are summarised in terms of subprogrammes and economic classification, details of which are given in the tables below. 32 P a g e

33 7.2.1 Programme 1 Administration 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 Approved Budget Revised Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 Office of the CEO Secretariat and Governance Financial Administration Total Table 5.6 Summary of payments and estimates by economic classification Programme 1: Finance and Administration Rands Audited Outcome Approved Budget Revised Estimate Medium-term estimates 2012/ / / / / / / / / /21 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 Transfers and subsidies Departments Payments for capital assets Building and other fixed structures Machinery and equipment Software and other intangibles assets Total 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. 33 P a g e

34 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 partnership. 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 Programme 2 Project Investments 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 5.7 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 5.8 below: Table 5.7 Summary of payments and estimates Programme 2: Project Investments Audited Outcome Approved Budget Revised Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 Project administration and Marketing Project origination and appraisal Project Legal, Risk and Compliance Post Investment, Monitoring and Aftercare Total P a g e

35 Table 5.8 Summary of payments and estimates by economic classification Programme 2: Investments Audited Outcome Approved Revised Budget Estimate Medium-term estimates Rands 2012/ / / / / / / / / /21 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 Transfers and subsidies Departments Payments for capital assets Building and other fixed structures Machinery and equipment Software and other intangibles assets Total 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 current financial 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. 35 P a g e

36 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. 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 5.9. below presents the sensitivity impact to the profitability of the business from a deterioration in the book (debt and equity): Table 5.9: Sensitivity Analysis of Impairments from Book deterioration Objectives Debt Fund Annual Targets 2016/ / / / /21 Debt funds to viable projects R621.1m R746.2m R881.2m R981.2m R1,075m Provision at 10% of debt Portfolio Value Equity Fund R62.1m R74.6m R88.1m R98.1m R107.5m Equity funds to viable projects R137m R300m R300m R300m R300m Provision at 20% of equity Portfolio Value R 27.4m R60m R60m R60m 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. 36 P a g e

37 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. The marketing budget for 2015/2016 financial year included costs to be incurred for the branding and marketing of the new equity investment product. KGFT successfully introduced the equity investment product in 2015/16 financial year through refinement of the brand messaging and active participation in private equity networking events and private equity conference attendance. 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. 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. 7.3 Other Financial Reports Treasury Regulation 29.1 also stipulates that the corporate plan should include a financial plan that addresses the following, if applicable: Projection of revenue, expenditure and borrowings (Projected Income Statement) Assets and liabilities management (Projected Balance Sheet) Cash flow management (Projected Cash flow Statement) Capital expenditure programme Dividend policies (not applicable) Capital recapitalisation 37 P a g e

38 KGFT has developed a 10 year Fund Financial Model which it uses as a tool to manage the financial sustainability of the Funds. The Model uses the same assumptions as those highlighted in Annexures A to project the results of the Fund over the 10 year period. Accordingly, the detailed reports shown above are extracted from the respective Models and are presented in tables 5.10 to 5.12 below Projected Income Statement The Income Statement provides a summary of Income and Expenses. The figures are based on audited financial statements of KGFT for the 2014/15 year, revised projected actuals of the 2015/16 financial year and the forecast projections are for the financial years 2016/2017 to 2020/2021 the amounts are based on key assumptions used (refer to Annexure A). The resultant income statements over the period are shown below in Table Table 5.10 Financial Model Income Statement Actuals/Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Financial Year 2015/ / / / / /21 Interest Income Interest income - Debt Interest income - Shareholders Loans Interest Expense Net Operating Income Other Income Income From Capital Providers Interest received on Current and Investment Accounts Commitment Fee Income Raising Fee Other Miscellaneous Income Fund 1 Administration Expenses Project appraisal costs Project origination costs Staff remuneration Main Trust board expenditure Investment Committee expenditure Audit Committee expenditure HR Committee expenditure Depreciation Rent Paid Travel Expenses Consulting Expenses Other administration costs Project impairment costs Loan Write-Offs Miscellaneous Costs Operating Surplus/(Loss) P a g e

39 7.3.2 Projected Balance Sheet The Balance Sheet provides a summary of Assets, Liabilities, Capital and Reserve. The figures are based on audited financial statements of KGFT for 2014/15 year, revised projected actuals of the 2015/16 financial year and the forecast projections are for the financial years 2016/2017 to 2020/2021, the amounts are based on key assumptions used (refer to Annexure A) as indicated below in Table Table 5.11 Financial Model Balance Sheet Actuals/Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Financial Year 2015/ / / / / /21 ASSETS Loans and Advances Fixed Assets Fixed Assets at Cost Accumulated Depreciation and Amortisation ( ) ( ) ( ) ( ) ( ) ( ) Trade and Other Receivables Cash and Cash Equivalents Opex Account Debt and Equity Capital (incl capitalised funds) Guarantee Fund Total Assets CAPITAL AND RESERVES Trust Capital - Drawn Initial Capital Fund 1 - Debt Fund Fund 11 - Equity Fund Trust Capital - Undrawn Accumulated Surplus/(Deficit) Total Capital and Reserves LIABILITIES Trade and Other Payables Total Liabilities Total Capital, Reserves and Liabilities Cash Flow Statement The Cash Flow Statement provides a summary of Cash flows from operating activities, Cash flows from financing activities and Cash flows from investing activities. The figures are based on audited financial statements of KGFT for the 2014/15 year, revised projected actuals of the 2015/16 financial year and the forecast projections are for the financial years 2016/2017 to 2020/2021, the amounts are based on key assumptions used (refer to Annexure A) as indicated in Table 5.12 below: 39 P a g e

40 Table 5.12 Financial Model Cash Flow Statement Actuals/Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Forecasts Month 2015/ / / / / /21 CASH FLOWS FROM OPERATING ACTIVITIES Cash Generated From Operations ( ) ( ) ( ) ( ) ( ) Surplus (deficit) before taxation Adjustments for: Interest received ( ) ( ) ( ) ( ) ( ) ( ) Interest expense Depreciation and Amortisation Changes in working capital: Trade and other receivables ( ) Trade and other payables Interest Received Interest Paid Net Cash From Operating Activities CASH FLOWS FROM FINANCING ACTIVITIES Capital Contribution Received Increase/(Decrease) in Capital Fund ( ) ( ) ( ) ( ) Non-Income Statement Changes in Retained Earnings ( ) Net Cash From Financing Activities CASH FLOWS FROM INVESTMENT ACTIVITIES (Increase)/Decrease In Loans And Advances ( ) ( ) ( ) ( ) ( ) (Increase)/Decrease In Short Term Investments ( ) (Increase)/Decrease In Fixed Assets ( ) ( ) ( ) ( ) ( ) ( ) Net Cash From Investment Activities ( ) ( ) ( ) ( ) ( ) Total Cash Movement For The Period ( ) ( ) Cash At The Beginning Of The Period Total Cash At End Of The Period Cash & Cash Equivalents As Per Balance Sheet P a g e

41 7.4 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 5.13 below. Table 5.13 Summary of CAPEX budget Approved Revised Actual Assets component Budget Estimate Medium-term estimates 2014/ / / / / / / /21 Loan Management System Leasehold Improvements Computer Equipment Office Furniture Office Equipment Computer Software Total 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. 41 P a g e

42 8 ORGANISATIONAL STRUCTURE 8.1 Organogram The organogram below was approved by the Board of Trustees in their meeting held on 4 November It is made up of three functions, namely Investment; Risk; and Finance & Corporate Services. The organogram is made up of a total of (26) posts. As at 31 January 2016, a total of 9 vacancies exist within the Trust. Recruitment for the vacant posts is ongoing and is expected to be filled during the first quarter of the 2016/17 financial year. Figure 6.1 Current Structure of KGFT Chief Executive Officer: Mr Siddiq Adam Trust Secretary: Vacant Executive Assistant: Mrs Ayesha Asmal Secretariat and Governance, Stakeholder Communication, Brand Awareness /Marketing Chief Investment Officer: Mr Aubrey Shabane Chief Financial Officer: Mr Ismail Abdoola Chief Risk Officer: Vacant Projects, Legal Finance, Admin, IT & HR (outsourced) Enterprise Risk, Credit Risk, ESG, Compliance Principal Inv Officer: Vacant 4 x Investment Officers: Mr Dieter Kasch Mrs Nelavani Ranchhod Mrs Khwezi Mnguni Mr Bruce Ndidi Finance Manager: Mr Lwazi Zondi Financial Accountant: Mrs Lulu Ndlovu Management Accountant: Ms Nerisha Haricharan Accounts Assistant: Mrs Portia Gumede Credit Risk Analyst: Vacant Acting: Ms S Ndandani Compliance / Enterprise Risk Analyst: Mrs Kerry Murray Legal IO: Vacant Investment Monitoring Officer: Ms Sibulele Ndandani Personal Assistant to Executives: Ms Megan-Lee Wilson ESG Analyst: Vacant 2 x Investment Analysts: Vacant Project Administrator: Vacant Receptionist: Miss Precious Mbambo General Assistant: Mrs Hilda Masuku 42 P a g e

43 LEGEND: Executive No of Functions No of Employees CEO 4 3 CFO 4 8 CIO 2 11 CRO 4 4 Total Vacant Filled Function Proposed Structure (post partnership with Limited Liability partners) KGFT has commenced engaging with Limited partners to enter into a partnership arrangement for equity investments with KGFT through the formation of an en-commandite partnership model. KGFT s assets under management will increase as a result of such partnership and will require additional capacity within the investments team to assist with the origination, appraisal and monitoring of investments. The additional capacity required will be influenced by the value of funds attracted from external parties. It is envisaged that a maximum of two (2) additional investment staff consisting of investment analysts will be required based on the value of funds requiring disbursement and management. The inclusion of investment analysts will assist with the development of investment officer skills internally for succession planning within the function. Further, the investment team will required to be split between each of the respective funds under management. The revised investment team is reflected in figure 6.2 below: Figure 6.2 Investment team in an En-Commandite Partnership Funding Model Chief Investment Officer Projects Administrator Debt & Guarantee Funds Equity Fund Legal IO Investment Monitoring Officer Investment Officer 4 x Investment Officers 2x Investment Analysts 43 P a g e 2 x Investment Analysts

44 8.2 Human Resource Strategy The Trust s Human Resources (HR) strategic objective is to attract, retain and develop talented individuals to reach their full potential by creating an innovative working environment which ultimately leads to the achievement of the Trust s strategic goals whilst supporting economic development, as well as social development. The HR function of the Trust is currently managed internally under the responsibility of the Chief Financial Officer. Specialist service providers are utilised as and when required to assist with tasks requiring specialist HR skills and expertise. The following critical activities within the HR function form the basis on which activities are focused: Recruitment and succession planning; Talent management Leadership development; Performance management; Employee engagement; Employee value proposition and Employment equity. As noted above, the successful implementation and ongoing focus on the above activities is critical to ensure that employees are managed in order to align with the strategic objectives of the Trust. The HR strategy was approved by the BoT at the meeting in December The following represents the HR strategy at a high level together with their respective objectives HR Vision, Mission and Strategic Objectives The aims of the HR Strategy are to ensure that KGFT s vision and strategy are delivered through the staff within a framework of best practice people management. The HR Strategic direction comprising of the HR vision, mission and strategic objectives as informed by the KGFT strategic drives and the situatinal analysis report: HR vision Talented, inspired and an engaged workforce HR Mission To attract, retain and develop talented individuals to reach their full potential by creating a high performance working environment which ultimately leads to the achievement of the Trust s strategic goals whilst supporting economic development, as well as social development HR Strategic Objectives a. Attract and build talent at all levels, with appropriate succession planning; interventions to ensure continuity and succession of critical roles; b. Develop and implement a compelling Employee Value Proposition (EVP); c. Enable HRM infrastructure to support business; d. Drive a high performance culture; e. Build a culture that enables diversified workforce. 44 P a g e

45 Strategic Alignment The alignment of strategies is critical for the achievement of a common goal: Strategic Objective Initiatives Strategic Outcomes HR Response 1. Open up and /or manage new funds that can offer competitive financing products to attract private participation 2. Build long term relationships with other Development Finance Institutions (DFIs) and lending institutions to cross-refer and co-finance projects and build on the PPP model 3. Further implement the comprehensive marketing strategy 4. Adequately resource and retain the necessary human capital and skills in the Trust by offering market related benefits 5. Implement and maintain sound policies, procedures, and systems of internal controls to ensure good corporate governance The establishment of KZN Equity Fund and of Fund Management service by KGFT A strong leadership collective Best people (employees) in terms of skills and attributes Clear direction to increase strategy awareness, clarity and branding Best environment and culture for employees Promoting employment equity in the KGFT environment Best processes and procedures to deliver services Monitoring and measurement systems in place Promoting employment equity in the KGFT environment Design and implementation of new HR structure Development of incumbents in their current roles Recruiting the right skills at the right time Maintain an integrated and flexible Succession Plan Develop a Talent Management Framework / Model Develop a high performance culture HR (internal branding) and Marketing to create synergies Recruit the right skills to represent the brand and drive marketing Develop an integrated HR Strategy Develop and implement an improved Employee Value Proposition. Recruitment of the right people with the rights skills and attitudes HR portal or intranet Deliver integrated consistent and value adding HR services Improve and implement an HR operating model that supports business effectively Compliance with the Employment Equity Act, BCEA, etc Promotion of employment equity through employee development and succession planning 8.3 Achieving the HR objectives The Trust will achieve its HR strategic objectives through an integrated Talent Management approach. Talent Management is a set of integrated organisational HR processes designed to attract, develop, motivate, and retain productive and engaged employees. 45 P a g e

46 Talent management components are comprised of key HR functions necessary to achieve the overall objective of each component. Figure 6.3 Integrated Talent Management Framework Integrated Talent Management framework Strategic Recruitment & Retention HR service delivery Learning & Development TALENT MANAGEMENT Employment Equity & Diversity Performance and Reward Employee Relations and Diversity Based on the HR Strategy, KGFT is currently developing an implementation plan in line with the HR strategy that will guide management in achieving the vision of KGFT. Strategic HR planning predicts the future HR management needs of the entity after analysing the Trust s current human resources, the external labour market and the future HR environment that the Trust will be operating in. Strategic HR planning is also important from a budgetary point of view so that the costs of recruitment, training, and so forth can be factored into the Trust's operating budget. The strategic HR planning process will incorporate the following four steps: Assessing the current HR capacity; Forecasting HR requirements; Gap analysis; and Developing HR strategy to support KGFT s overall vision and mandate. The ongoing monitoring and adherence to the above, in addition to the various key activities resulting from the above, is reported to and monitored by the Human Resources and Remuneration Committee. 46 P a g e