ISIQONGO BEE/AGRI PROJECT

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ISIQONGO BEE/AGRI PROJECT

• PRESENTATION PARLIAMENTARY COMMITTEE
• 13 JUNE 2006

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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.

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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.
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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.

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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 Governments 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.

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• 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.
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• 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

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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.

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• 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.

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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.

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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.
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• 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.

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• 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

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• 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.

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• 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.

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• 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

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• 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.

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• 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

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• 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.

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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.
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• 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.

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• 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.

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• 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.

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• 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.

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• 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

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• 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.

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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.
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• 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.

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• 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.

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• 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.

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• 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.

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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.
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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.
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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
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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 D1 (value adding, marketing , etc)
Facilitator C1 (Value adding, Marketing etc)
Facilitator P2
Facilitator P1 (Value adding , Marketing etc)
10 15
0 20
BEE Trust All prod units Facilitator P1
Production Unit P1 A
Production Unit P1 B
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AGRICULTURE PROJECT - FACILITATOR STRUCTURE
Poultry Holding Company
Current Shareholder
0 - 50
35 90
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,
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Production Unit B
Production Unit C
Production Unit A
BEE Management Trust Unit A
10 - 20
Mentor Farmer Unit A,B C