ISIQONGO BEE/AGRI PROJECT

ISIQONGO BEE/AGRI PROJECT PRESENTATION PARLIAMENTARY COMMITTEE 13 JUNE 2006

INTRODUCTION Who are we? We are the Isiqongo BEE/Agri consortium, led by our project leader Isiqongo Investments (Pty) Ltd Our mission is:To create sustainable and profitable Agri opportunities and to ensure participation by BEE farmers through our innovative model, ultimately resulting in broad based participation by farm workers and land claimants, whilst providing dedicated mentoring to the participants. Why are we here? We are here to present our BEE/Agri model and to present the opportunity for stakeholders to participate.

What do we want to achieve? 1. Acknowledgment that our model is compatible with current governmental initiatives. 2. Seek official support in identifying and funding BEE farmers (including land claimants) in the process of purchasing farmland. 3. Access appropriate funding for BEE farmers.

MEMBERS OF OUR CONSORTIUM PROJECT LEADER: Isiqongo Investments (Pty) Ltd, an investment holding company with a wide range of interests in ICT, Hotel and Leisure, management and consulting and manufacturing. The company is 100% black owned and controlled and is managed by Butityi Konki and Ntambi Ravele. Me Ravele is a board member. Millennium Group Worldwide is a faith-based USA investment group specialising in BEE investments in Africa and participates as funder and strategic investor. LDP BEE Consulting is a division of the auditing group LDP. Izak Strauss and Andre du Plessis developed the BEE/Agri model, both are chartered accountants and have been involved in various Agri/BEE projects and the structuring and funding thereof.

PROFILE OF BEE/AGRI CONSORTIUM As a result of substantial work in the Agri/BEE industry, our consortium developed an innovative model to address structural problems in the agricultural industry, whilst at the same time provide BEE farmers with an opportunity to participate in the industry. The model facilitates investment into the industry and creates the ideal environment to align the investment with the SA Government’s intention to empower previously disadvantaged individuals and groups within the agricultural sector. Our consortium : 1. Is currently involved in a number of initiatives in the Citrus- , Poultry/eggs- and Deciduous fruit industries and demonstrated the success of the model.

2. Has access to capital and existing alliances with a number of BEE funders, including major life assurances companies. • Has access to USA development funds provided by OPIC in co-operation with the Millennium Group Worldwide. • 4. Self-funding in all aspects, excluding the purchasing of farms by BEE farmers. OUR GOALS Launch a large scale BEE/Agri initiative with massive participation from BEE farmers. This initiative will be focussed on existing economically viable opportunities in order to ensure success.

The main threat to other initiatives is the fact that it is driven by land availability and not economic opportunities. Access adequate and affordable funding for the BEE farmers. It is important to note that there are funding available, but at unaffordable rates and costs. Funds are currently deployed on ad hoc basis and not related to business opportunities. Merge the interests of investors, funds, Agri business, BEE and land claims. Seek instant and en-masse access to BEE farmers. Address and include land claimants in our BEE/Agri model

PRESENTATION OBJECTIVES It is our intention to present the BEE/Agri model to Parliament and to seek Official support & assistance where possible. It is our honest opinion that investment and BEE in agriculture will not be effective unless properly focussed, driven by economics and funded at a cost affordable to BEE farmers. It is not our aim to achieve an unfair business advantage, nor do we require any funding for our own business ventures. Our model is protected as our intellectual capital and should not be shared without our permission, but we are not purporting to own all the knowledge, nor do we seek any form of monopoly or exclusivity. However, we shall not be able to fund the acquisition of farm land by BEE farmers without huge assistance from all the relevant and important stakeholders.

In order to ensure success, we require specific assistance with: • Access to governmental structures • Access to funding such as low interest funding for BEE farmers, funding for purchase of farms, land claims & funds • Explore grants & aid for BEE/Agri • Co-operate with Land Claims Commissioner • Formalising a joint structure with Landbank, IDC etc • Access to and the identification of black farmers and future black farmers • Co-operation and interaction with training facilities and institutions • Co-operation in respect of mentorship programmes.

OUR COMMITMENT We have identifed and are currently structuring a number of Agri business opportunities, suitable to the implementation of our BEE/Agri model. It is our intention to include these opportunities as pilot projects and will introduce BEE farmers and participants. The identification of economically viable Agri business opportunities and the presentation thereof to potential BEE farmers, farm workers and land claimants. Co-ordinating appropriate and affordable funding for farmland. Provision of access to traditional funding and capital and ensuring that affordable funding for farm lands are utilised in accordance with our model.

Formalise a working relationship with governmental structures, Landbank and other strategic institutions thus ensuring the proper implementation of our model. Ensure that services, training and assistance are provided in accordance with the approved mentorship programmes. DETAILED BEE/AGRI MODEL A NEW LOOK AT AGRICULTURAL STRUCTURES AND BLACK EMPOWERMENT IN AGRICULTURE The agricultural industry in South Africa is facing tremendous challenges and it is crucial for the role players in the industry to make the right strategic decisions in the next year or two in order to achieve a viable future for the industry.

The major challenges facing the industry are: • Major segments of the industry is struggling to be competitive in global terms • Profitability is declining and debt is rising • Owners/Management are struggling to cope with the rising complexities of being part of an increasing smaller and competitive world • Consolidation in markets and retail • The approach to BEE • Ownership of land in SA and BEE • A decline in research and capacity in research • The skills level and productivity of workforce • Lack of interest by institutional investors in the industry • It is imperative that solutions are found to address the problems identified above.

It is a well-known fact that institutional investors and financiers are • under direct pressure to become actively involved in the industry, but • They have not been able to understand the complexities of the industry. • The following proposal sets up a structure, which will assist in • successfully transforming agriculture businesses and in the process • Achieve important black economic empowerment (BEE) goals. • We believe this approach to the industry will lead to solutions for many of • the problems and challenges facing the industry. • The following sectors in the industry are being targeted in our current • process: • Citrus industry • Deciduous industry • Poultry industry

We believe the model should be applied to a wide variety of sectors • and can be tailored to each sector to suit the specific requirements • of that sector. • 1. STRUCTURE OF AGRICULTURAL BUSINESSES IN SOUTH AFRICA • Small units • Most agricultural businesses in South Africa are small to medium sized units. This fact makes it difficult for the businesses to grow in the current world economic climate as they struggle to compete with larger entities and also has very little negotiating power in buying their inputs or selling their products. Both the supply of inputs and the retail businesses in the world are consolidating and they are growing more powerful. The profit margins in these small production units tend to under constant pressure and ultimately resulting in loss making operations.

Management • The owner manages the typical unit in South Africa and he is challenged over a broad spectrum of disciplines, ranging from production, human resources, finance, marketing etc. It is very seldom that one person possesses the skills over such a broad spectrum of disciplines. The size of the businesses does not always justify the employment of good management in each of these disciplines. This fact also tends to make these businesses ineffective and endanger their long-term survival. • Long marketing channels • The average farmer does not have direct access to the best clients and they are exposed to the existing marketing channel and in the process value is lost.

Ownership • The ownership of these units vests almost exclusively in white hands and there is increasing pressure from socio/political view for immediate change. Many projects were initiated but the majority of them failed to deliver the expected results. • We are of the opinion that the current structures in agriculture do not provide solutions which allow effective investment whilst at the same time providing financially viable opportunities for BEE farmers. Our contention is that the basic structure of these businesses must change in order to successfully transform the industry. • Black Economic Empowerment • The following problems are experienced with most current BEE projects in the Agriculture industry:

Capital • Most possible BEE participants are currently working in that sector and do not have access to capital to invest and they access debt finance or where possible, obtain access to grants or donor funds. It is also a fact that for the majority of farms (production units) in the industry, the return on capital is very low which make the cost of capital of utmost importance to ensure the long-term sustainability of the projects. • Management Skills • Although most possible BEE participants who currently work in the industry have technical skills they lack general management and financial management skills and experience.

Marketing • The recent deregulation of the marketing structures in the Agriculture resulted in farmers struggling to come to terms with the new marketing environment and for the potential BEE participant, it is an even bigger hurdle. • Slow progress in BEE process in SA • The process of BEE in the Agriculture has been slow and frustrating. Fundamentally the reason for this is the fact that to date, most projects have been launched and implemented on an ad hoc basis, small scale and within the existing structures in the industry. • CONCEPT • Consolidation

The aim of the concept is to achieve consolidation within the industries, in order to allow the benefits listed below, but without compromising the “hands on” nature of the production side: • Economics of scale • Negotiating power • Necessary management skills • Access to capital • Logical units • It is our intention to divide the business into logical units and separating the production, value adding and facilitating (marketing, finance & corporate management). • The facilitator (which could include the value adding (packaging)), will be the basis from which to consolidate the different activities.

Suitable BEE candidate will be identified as future entrepreneur farmers. Finance in the form of debt, equity and grants will be employed to purchase suitable and strategic farms. Large investments in farms (e.g R100m) will present a volume base that will achieve the advantages envisaged. The production units will be owned (80% - 100%) by BEE management and employees, and will, through the facilitator achieve the economics of scale of the consolidation. Land claimants may be included in the ownership structure. In some instances production units may be consolidated in order to form viable production units. All the different units will, through agreements with facilitators in each sector, market their products at market related prices through the facilitator.

In return for committing their product they will acquire an interest in the facilitator through a trust and will directly share in the value of the distribution chain according to their contribution in product. • The facilitator forms the basis for the proposed consolidation and will provide the negotiating power and supply the necessary management skills and mentoring to the production units. • Any one company may not always provide the value adding and marketing and in these sectors the logical structures will be retained within our model. In certain cases, more than one facilitator will be included in the model and will be merged over a period of time. • Upward Integration • The owners of the production units will participate in the ownership of the facilitator and they will thus share in the value adding in the distribution channel.

Mentoring and management • The facilitator, in conjunction with existing farmers, will participate in a mentoring program with the new BEE farmers to ensure their sustainability and long-term success. These mentor farmers will be remunerated and may acquire an equity stake in the production units they mentor. Each mentor farmer will be selected on a basis of a successful track record and will manage a number of units where mentoring will be implemented. • The BEE participants will be allowed to buy the shareholding of the mentor farmers at an agreed method of valuation. • The facilitator will, as a result of the consolidation, be in the position to employ management at the right level and will thus be able to provide corporate management and mentoring to the value adding and production units.

The Facilitators will be managed by adequately qualified managers and BEE and employment equity will be addressed in the management structures. • The Investment Company and the Facilitator will ensure that good corporate governance practices are be employed through shareholders’ agreements and the composition of the boards of directors. • BEE • In accessing the black economic empowerment goals the following is identified: • Land reform – transfer of agricultural land to previous disadvantaged persons (PDP) • The participation of PDP in the economic activities and wealth creation in agriculture through ownership.

The transfer of skills in agricultural industry and mentoring of management in the process. • The achievement of access to the agricultural business by the funders/markets, but within the right BEE structures. • The black economic empowerment goals are achieved at two levels in the concept: • Facilitator • BEE at this level will be built around a strategic BEE investor, obtaining an equity stake through an investment company. The BEE Investment Group at this level will co-ordinate the whole process and implement the model by identifying the right Facilitators in each sector. In return they will acquire a significant interest in the facilitator.

The acquisition of suitable and successful Facilitators • will achieve the transfer of knowledge and management skills. • The BEE investment group will ensure that the BEE profile of the Facilitator is secured and will provide the required • credentials and opportunities in the market. • The existing owners of the production units may retain a shareholding in the Facilitator and could thus share in the profits thereof. • Production Units • Management (BEE) and the employees of each production unit will own up to 80% - 100% of the ownership of these units. The Facilitator and /or previous owners may acquire or retain 20% of the ownership. • The Facilitator will provide certain management skills on a

contract basis and provide mentoring for the new BEE managers/owners. • Our proposed ownership structure will ensure a change of ownership of the land, a transfer of skills and a broad participation in the economic ownership. • 3. PROPOSED STRUCTURE • The proposed structure is attached as schedule A and B. • Schedule A presents the corporate/investment structure and schedule B the detail structure at facilitator level. • BEE Shareholding • It is clear from the structure that there is a significant BEE shareholding in the Facilitator.

The percentage that the Investment company initially holds will probably reduce as the bigger strategy is rolled out depending on how the roll out is financed; through equity or loan capital. • The BEE shareholding in the production unit (farm) is split between management and employees. These parties will also participate in the shareholding of the Facilitator as indicated. It is our intention to accommodate land claimants in the shareholding structure. • The BEE Trust is the investment vehicle through which management and employees of the different production units will participate.

Each production unit will participate in the profit and capital growth of the trust based on a formulae, taking into account the volume and value of the product that they supply to the Facilitator. • Current shareholders • Current shareholders in any of the targeted businesses in terms of our model, may be retained, provided that they are able to add value to the model. The existing shareholders could be instrumental in the creation of value, transfer of skills, providing the required management and mentoring. Existing shareholders could thus participate in the consolidation strategy to unlock value in their businesses.

INVESTMENT PARTNER • Our BEE/Agri consortium is in the process of formalising an alliance with a strategic investment partner. The investment partner will consist of a single investor, USA funds and participation by investment funds. • The opportunity for an investment partner can be summarized as follows: • Agriculture/BEE Investment • The proposed strategy creates an opportunity through which investors will be able to gain substantial recognition in terms of the BEE charter in the financial sector. • It also creates a structure in which the risks of investments in agriculture are addressed to great extent with regard to management, transfer of skills, diversification and corporate governance.

Investment in Holding company of sector (or facilitator). • The investor has the opportunity to invest in the value adding component and more risk averse part of the value chain in the agricultural industry. • The need for investment will be to acquire value-adding facilities and/or to buy out current shareholders in the facilitator. • The shares in facilitators will be bought at current values and this is usually a low value and often at a discount. The investor will share in the increased value as a result of the consolidation and added volume through the facilitator. • The financing at this level will probably be a mix of general equity shares and preference shares. Investment levels may be from R5m – R30m per sector. Each sector will be viewed as a separate investment.

Black Empowerment group • It may be necessary for this group to acquire finance for their stake in the holding company as the strategy unfolds. • It may be an opportunity for the investment partner to finance these participants. • Broad based BEE participants • The participants will mainly invest in the farm land and they should be funded through appropriate and low cost funds. The Landbank should co-ordinate this function on behalf of the Government and providers of funds, grants and aid funds. • It may be possible to attract formal funds and investors to co-fund the acquisition of farms land. A managed fund could be established.

New Farmers Development Company This company holds a diverse range of assets and it is considered to have been a failure by its investors which include a number of financial institutions. This is a good example of the failures to invest in BEE/Agri. We believe that we can assist in finding a long term solution for the investors in the company. The company may be incorporated in the development of the strategy as per this document and could form the basis for the “rescuing” of a number of similar ventures.

5. SUMMARY The proposal presents a new approach to establish a base from which to build substantial groups in the agricultural industry and in the process create and unlock value in the value chain. It also presents an excellent opportunity to achieve very important BEE goals, give the BEE process and land ownership new impetus and momentum and in the process allows its participants to share in the wealth creation by participating in the establishment of stronger groups in each sector in agriculture. Most white producers/farmers are eager to identify sustainable solutions for their industries with regards to black economic empowerment. It is now possible and opportune to acquire production units in some sectors of the industry at substantial discounts to replacement value.

The active support of investors, financiers, donor funds and government is needed to get these projects going and to achieve the transformation objectives in the agriculture sector, which is desired. Izak Strauss For: LDP CONSULTING (PTY) LTD Stellenbosch

AGRICULTURE PROJECT - CORPORATE STRUCTURE Isiqongo Investments (Black owned company) Investment Partner (Fund or company) 50 – 100% 0 – 50% Poultry Holding Co Citrus Holding Co Deciduous Holding Co Current Shareholder 35 – 90% 0 – 50% Facilitator C1 (Value adding, Marketing etc) Facilitator D1 (value adding, marketing , etc) Facilitator P1 (Value adding , Marketing etc) Facilitator P2 10 – 15% 0 – 20% BEE Trust All prod units Facilitator P1 Production Unit P1 A Production Unit P1 B

AGRICULTURE PROJECT - FACILITATOR STRUCTURE Poultry Holding Company Current Shareholder 35 – 90% 0 - 50% Facilitator (value adding, marketing , etc) BEE Trust All Units 10 - 15% BEE Employees Trust Unit A Volume Participation 30 – 40% 0 – 20% FINANCIERS Government Landbank, IDC, Grants Donors, 40% Production Unit A Production Unit B Production Unit C BEE Management Trust Unit A Mentor Farmer Unit A,B & C 10 - 20%

ISIQONGO BEE/AGRI PROJECT