Revised Policy and Procedures Manual

IMVABA CO-OPERATIVE FUND

REVISED POLICY AND PROCEDURES MANUAL

September2011

TABLE OF CONTENTS

Introduction and Purpose………………………………………………………6
Macro Structure of Imvaba…………………………………………………….6
Role of the ECDC…………………………………………………………………..7
Business Rationale of Imvaba…………………………………………………7

4.1. Vision

4.2. Objectives

4.3. Development Impact

5. Target Market……………………………………………………………………….8

5.1. Geographic Area

5.2. Distribution Channels

5.3. Targeted Economic Sectors

5.4. TargetedCo-operative Enterprises

6.Imvaba Co-operative Fund Product Mix…………………………………….9

6.1 Technical Mentorship and Capacity Building Support

6.2 Equipment and Material Finance Support (Seed Capital)

6.3 Term Loan Funding

6.4 Co-operative Governance Training Support

6.5 Disbursement of funds

7. Qualifying/Non-Qualifying Terms………………………………………….…11

7.1 Eligibility Criteria

7.2 Requirements from Applicants

7.3 Non-Eligibility Criteria

8. Risk Management…………………………………………………………………14

9. Recovery and Collections……………………………………………………..16

10. Key Policy Indicators………………………………………………………….16

10.1 Co-operative Funding Terms

10.2 Interest Rate

10.3 Fees and Charges

10.4 Investment Size

10.5 Security

10.6 Moratorium

11. Application Process……………………………………………………………17

11.1 Enquiries Stage

11.2 Interview Stage

11.3 Basic Due Diligence and Site Visit

11.4 Compile a Funding Memorandum

11.5 Funding Committee

10.6 Signing of Legal Agreements

10.7 Aftercare and Administrative Support

12. Governance and Reporting…………………………………………………21

12.1 Signing of a Service Level Agreement

12.2 Establish an Oversight Committee

13. Check List of Required Documents………………………………………22

14. Templates of Supporting Documents……………………………………23

1. Introduction and Purpose

This policy document sets out the purpose of the establishment of the Imvaba Co-operatives Fund in the Eastern Cape and it should be read in conjunction with the Imvaba Co-operatives Fund Strategy of the ECDC in order to understand the target and market choices.

This policy document particularly outlines the business rationale behind Imvaba, the target market, product definition, pricing and the proposed distribution channels. Attached to this policy document are: Imvaba application processes, access criteria, proposed business plan format and draft legal agreement template.

2.Macro Structure of Imvaba

Imvaba will be structured as part loan (repayable) and part seed capital (non-repayable). The seed capital portion is essentially structured to cover the developmental aspects and provide the capacity building aspects of the co-operatives to enable sustainability thereof. The loan part is to provide production and working capital to enable business activities of the co-operative.

Imvaba will be ring fenced within the ECDC to finance co-operatives and be treated as a revolving fund for assisting prospective co-operatives.The critical element is to develop requisite capacity for co-operative activities to be sustainable and thus, some money will be allocated for non financial support services (capacity building) and the term loans to be invested in the activities of the co-operative enterprise.

Imvaba funds from DEDEA will be allocated as follows:

Loan Funds
Technical Mentorship and Institutional Building Fund
Seed Capital Fund (Equipment and Material)
To cover Imvaba Operational Costs

3.Role of ECDC

According to the Act of 1997, the ECDC objective is to plan, finance, coordinate, market and promote the development of the people of the province in the fields of agriculture, industry, commerce, transport and finance. In a nutshell, it is an economic development agency of the province operating through oversight by DEDEA.

ECDC as the implementing organ of Provincial Government will administer the Imvaba Co-operative Fund in line with the principles outlined in this document and the sentiments of the Service Level Agreement signed between DEDEA and the ECDC

All funds apportioned to the Imvaba Co-operative Fund will be ring-fenced and managed separately from the normal ECDC balance sheet. These funds will be separately reported on and accounted for.

4. Business Rationale of Imvaba

4.1. Vision

To provide funding through loans and institutional building support to co-operatives of the Eastern Cape Province in order to:

Mainstream co-operative enterprises within the economy of the Eastern Cape;
Enhance self employment creation opportunities in the province;
Contribute to poverty relief efforts through enterprise development support.

4.2. Objectives

The establishment of Imvaba seeks to achieve the following objectives:

Leveraging the Imvaba Funds through partnerships;
Provide institutional support and capacity building support to co-operatives in order to enhance the sustainability of their businesses;
Provide loan funding to co-operatives for commercialisation purposes;
Enhance knowledge management about co-operatives in the province through effective Monitoring and Evaluation.

4.3. Development Impact

The following development impact is anticipated with the establishment of Imvaba:

Entrepreneurial enhancement and development;
Creation of self employment opportunities (job creation);
Contribution to poverty relief and alleviation efforts;
Track the contribution of co-operatives to the provincial economy.

5. Target Market

5.1. Geographic Area

Imvaba fund will be available to co-operatives in the Eastern Cape Province, specifically with the District Municipal boundaries of:

Chris Hani District Municipality;
Joe Gqabi District Municipality;
Amathole District Municipality;
Alfred Nzo District Municipality;
OR Tambo District Municipality;
Cacadu District Municipality; and
Nelson Mandela Metropolitan.

ECDC shall advance funding to co-operatives whose head offices fall within the provincial boundaries of the Eastern Cape; and/or the majority of the jobs created directly as a result of the funding and not indirectly as a spin off thereof falls within the provincial boundaries of the Eastern Cape. The co-operative must create direct new decent jobs, and/or must save existing jobs.

5.2.Distribution Channels

Information about the criteria, application and feedback will be distributed through the ECDC Regional Offices situated in all the District Municipalities listed above.

5.3 Targeted Economic Sectors

The economic sectors to be targeted will be guided by the Provincial Industrial Development Strategy of 2009, viz:

Agriculture (linked to an agro-processing activity, beneficiation and value addition activities from primary production);
Retail (linked to the priority growing economic sector);
Manufacturing (timber industry, textiles, chemicals, automotive activities, metal processing);
Tourism activities (Setting up a B&B, shuttle service, entertainment centres, accommodation establishment and tourism adventure) ;
Transport;
Creative Industry;
ICT and Film Production;
Green Economy (bio-fuels, renewable energy, etc)
Business Process Outsourcing (telecoms, etc)
Textiles and Craft (job creation and protection)

5.4Targeted Co-operative Enterprises

In line with the socio-economic challenges of the province (poverty and unemployment), the types of co-operative to be targeted by the Imvaba Co-operatives Fund are (see definitions of all types of co-operatives to understand the logic behind the choice):

Worker co-operatives (in line with the above sectors)
Agricultural co-operatives
Primary Co-operatives (dominant level)

6. Imvaba Co-operative Fund Product Mix

A Co-operative approved for funding qualify for the following services under Imvaba Fund:

6.1 Technical Mentorship and Capacity Building Support

Purpose: Provide co-operatives with technical support in line with the business activities co-operatives are involved in
Terms: Non-repayable, provided by contracted service providers
Objective: enhance product quality for better market access and retention.

6.2 Seed Capital Funding

Purpose: To discount the approved amount by 30% incentive in order to reduce the cost of capital for the co-operative
Terms: Non-repayable fundsAmount: 30% incentive of the required capital to finance ECDC management fees, lawyers’ fees and the balance to finance product quality and capacity building activities
Objective: To be used as security for the term loan, where applicable

6.3 Term Loan Funding

Purpose: Financingcommercialisationactivities
Loan Terms: Repayable over 3 to 5 years, for a maximum of 12 months;
Security: Fixed Assets of the co-operative;
Amount: Minimum R10 000 to Maximum R1400 000;
Cost of Capital: Linked to prime
Disbursements: Drawdowns directly to co-operativesinformed by a thorough due diligence process;
Moratorium: 6 months moratorium after the firstdrawdown. Final drawdown should not be more than 3 months from the first drawdown.

6.4 Co-operative Governance Training Support

Purpose: Provide needed Governance Training and Auditing Support in order to improve compliance with the co-operative constitutions and the Co-operatives Act of 2005;
Terms: Non- repayable, provided by independent service providers funded by the ECDC under Imvaba;
Disbursements: Paid directly to contracted service providers after the service has been conducted on approval of invoices by fund Manager.

6.5Disbursement of funds

The following principles will be applied by the ECDC when disbursing Imvaba funds:

Funds will only be disbursed by ECDC to co-operatives whose applications have been subjected to the Funding Committee scrutiny and approval;
Institutional and Capacity Building Funds will be disbursed only to accredited service providers of the ECDC that have been vetted and approved to provide such services to the co-operatives approved by the Funding Committee;
Loan disbursements shall be disbursed to co-operatives in tranches and on proof that the co-operative has systems in place and that funds cannot be easily misused;
Equipment finance can only be disbursed directly to suppliers on receipt of original invoices from the manufacturer/supplier of the equipment.

7. Qualifying/Non-Qualifying Terms

7.1 Eligibility Criteria

A co-operative wishing to apply for the Imvaba Co-operative Fund will need to comply with the following criteria:

The Co-operative must be registered at Companies Intellectual Property Registration Office (CIPRO) or its successor, under the Co-operatives Act No.14 of 2005;
The Registration Certificate of the Co-operative must be signed by the Registrar of Co-operatives or any other Official of the Office of the Registrar officially delegated to doing so;
The co-operative must have a signed resolution by all the members that they should apply for the Imvaba Co-operative Fund and state reasons for the application, such a resolution must also explicitly provide names of designated members to conclude all the relevant documentation in respect of Imvaba Fund;
The co-operative must have in place a Constitution, in line with the provisions of the Co-operatives Act No14 of 2005;
A business plana fully completed and/or application form signed by the designated members of the co-operative should be submitted;
The co-operative should have secured a market for their product or service;
The Co-operative should have secured at least quotations from different suppliers in relation to the equipment and material it requires;
The establishment of the co-operative must comply with the requirements of the Co-operative Act of 2005 all in all respects;
Members of the co-operative must be willing to make themselves available to workshops and training to be provided through the Institutional and Capacity Building Fund;

The ECDC commits to funding co-operatives that show the following significant development impact indicators:

Job creation/retention potential;
Empowerment of women and youth;
Largely based in rural areas;
Community development
Potential for sustainability

7.2 Requirements from Applicants

Over and above the eligibility criteria listed in number 7 above, the following will also be relevant:

own contribution is required from the co-operative and its members, it could be in the form of sweat capital or own capital to show commitment to the co-operative;
Members of the co-operative must demonstrate 100% commitment to the activities of the co-operative;
It is a requirement of the ECDC that the members of the co-operative must be actively involved in the activities of the co-operative. Active involvement requires full time participation by members in the activities of the co-operative;
Members of the co-operative must display some technical expertise in the activities of the proposed business, should this not be the case, the members should make themselves available to support through the Institutional and Capacity Building Fund;
The members of the Co-operative must have clean credit records, and/or provide ECDC with written proof of arrangements made to clear any existing debts. Failing which, the ECDC shall not provide funding.
Co-operatives or its individual members with outstanding loans or debts with the ECDC shall not obtain funding until they settle their debts with the ECDC.

7.3Non-Eligibility Criteria

The Imvaba Co-operative Fund will not finance co-operatives that have been proven to have the following:

All activities related to gambling, alcohol, tobacco, drugs;

Costs associated with preparing and submitting tender documents;
Any development investment which might be offensive to the community directly affected by such Co-operatives Investment;
Any Co-operative whose activities might be offensive to the community at large;
Any Co-operativewhich might seek finance in the form of a loan to finance an acquisition of shares from another company;
Co-operative which might seek finance with the purpose to acquire property (land and buildings), of which the property will be receiving its income from lease rentals only and the loan proceeds will be used for the acquisition of the property only;
A co-operative whose members are not going to be directly involved in the daily activities of the co-operative and also not be able to create jobs for either members or non-members;
A co-operative, whose members are owners of individual businesses (cc, pty ltd) which have loans or debts with the ECDC;
Any co-operative requiring funds to purchase another development investment from ECDC (ECDC does not lend money to a buyer to fund the purchase of a sale of its existing development investments).
The member(s) of the co-operative who holds existing accounts with ECDC (including rental accounts) must not be in arrears;
Where an existing co-operative is in default, it could only be considered for further investment based on an appropriate recovery and collection strategy and only after an appropriate due diligence has been conducted by the ECDC to justify the proposed recovery and collection strategy referred to paragraph 9 below.
Any co-operative whose members are employees or immediate family / board members or immediate family / stakeholders of ECDC and DEDEA;

8. Risk Management

8.1 Despite the not so ideal profile of co-operatives targeted by the Imvaba Fund, DEDEA expects the ECDC to ensure broader access of the fund. Section 5.6 of the MOU clearly states:

“The ECDC shall not carry any risk for the loan portfolio created for the Eastern Cape Provincial Co-operatives Development Fund (ECPCDF) and any losses due to failure of the co-operatives to repay their loans shall be for the account of the ECPCDF”

The ECDC has identified the following as risk areas:

ECDC staff’s lack of understanding of how co-operatives operate;
Lack of business experience of members of co-operatives;
Low levels of literacy amongst members of co-operatives;
Lack of understanding of the application process by co-operatives;
Lack of access to markets for co-operatives;
Listing of members in credit bureau;
Some members of co-operatives misusing Imvaba Funds for personal purposes.
Market access risk;
Over-inflation of cash-flow figures in business plans submitted

8.2 In order to mitigate the potential risk areas and also implement the objective of the MOU signed by DEDEA and ECDC, the ECDC is putting in place the following to mitigate the risk:

A separate Funding Committee, with officials that are developmental in their approach will be established within the ECDC to evaluate Imvaba applications specifically;
Exposure visit to the dti Enterprise Organisation for members of the new Funding Committee will be arranged in order to expose the members on how the CIS Funding Committee deliberate on applications from co-operatives;
Thorough workshops and training of the ECDC Regional Officials on the revised Imvaba Policies, Processes and Application Forms will be undertaken;
Each and every approved application will be attached a service provider that will provide Technical Mentorship Support, paid for by Imvaba for a maximum period of 6 months;
Imvaba will insist on a market for products of the co-operatives because that will create a cash flow for co-operatives and also ensure income for members and employees;
Members of co-operatives will sign personnel suretiship to mitigate risk of deliberate misuse of Imvaba Funds.

8.3 Therefore, investing in co-operatives will require a bigger risk appetite than currently is the practice within the ECDC. The following is highlighted:

Funding does not require 100% security cover;
ECDC to secure all possible and available security from the co-operative on the Loan Portion of all Co-operatives through the fixed capital that the co-operative has.
Where a co-operative holds more than one business interest, ECDC should insist on registering cross guarantees in its favour from all these business interests;
Mortgage bonds to be registered over all immovable property purchased;
Suspense sale agreements to be registered on all relevant fixed assets;
General Notarial Bonds (GNB) to be registered on all investments for the full value of the loan amount. Such GNB to include all moveable assets, including receivables and stock

8.4 Over and above the technical mentorship support, aftercare service to mitigate risk required. The following shall therefore apply:

Account Managers are responsible for each investment made in each co-operative from inception right through to receipt of last payment;
Monthly management accounts shall be collected and quarterly progress reports submitted by the Account Managers in the prescribed format as approved by the ECDCfrom time to time;
Recovery and/or turn-around strategy should be followed where a loan is considered to be viable before any provision and collection action taken, except where it is suspected that ECDC is deliberately defrauded and it elects not to do any further business with the Co-operative invested in. The latter decision should be taken by the relevant development investment committee.

9. Recovery and Collections

All Co-operatives in default of their loan portion of the funds will be notified in writing of such default and given an opportunity to remedy the defaultIn the event that the co-operative is not able to remedy the default, the ECDC shall notify DEDEA accordingly in line with section 5.6 of the signed SLA in order to get a policy directive.

The collections unit must inform the relevant account managers immediately when the co-operative falls into arrears. The account manager must then immediately visit the Co-operative and compile a quality review report.

10. Key Policy Indicators