Industrial Development Corporation on its 2014/15 Annual Report

Meeting report

Industrial Development Corporation (IDC) on its 2014/15 Annual Report

Mr Geoffrey Qhena, Chief Executive Officer: IDC, said that one of the IDC’s subsidiaries, Foskor, was currently on strike. He said the IDC was operating in a challenging environment in South Africa and globally but that it had achieved to a greater extent what it had set out to achieve. However, he warned that the next report would reflect the tougher trading conditions currently being experienced. Mining investment and manufacturing were finding it difficult and currencies were under pressure. A lower oil price meant Sasol was experiencing difficulties. Lonmin was in a very difficult position and the IDC needed to find other uses for platinum. The entity’s vision, mission and main activities had not changed since the previous year under review.

Mr Ashraf Dindar, Financial Manager: IDC, presented the financials and said that two of its wholly owned subsidiaries, Findevco and Impofin, were dormant, while Konoil held IDC’s Sasol shares. Financial costs had increased and profit had been R2.8b. The share price value of Sasol and Kumba had decreased by R9b each and the net loss of value of shares had been R16.6b. Foskor had suffered because of unfavourable commodity prices and Scaw had also suffered a loss. The Small Enterprise Finance Agency (SEFA) had suffered a R299m loss but this had been offset by a grant it had received of R284m. Revenue was down two per cent, while cost of sales had increased by 10% because of an increase in raw material prices. Borrowing costs had been 37%. Reserves had decreased by R18.7m. The dividend from Kumba was expected to be substantially less in the next financial year. He then spoke to sources of income, impairments, loans and advances, commitments and advances and listed investments.

Mr Qhena said Foskor had suffered because of an increase in the price of magnetite, a raw material used in its production processes and because the Richards Bay plant was not very efficient. The IDC was looking at diversification. At this point, questions were taken on the financials.

Discussion

Mr P Atkinson (DA) said that lending had almost doubled over the last five years. He wanted to know about the quality of the IDC loans and if there had been an increase in write offs. SEFA had had losses of R300m. What were the bad debt levels of SEFA? Were the loans being serviced, or were there problems in repaying loans? Given that the shareholder had given a grant of R284m, was the structure of SEFA being looked at by the IDC?

Mr S Tleane (ANC) said that given the plummeting prices for steel, what were the IDC’s plans under consideration relating to Kumba and other companies in the steel industry in which it had interests?

The Chairperson asked what the impact of companies providing dividend income to the IDC would be on the IDC’s performance. She wanted clarification on the distinction between group and company shares.

Mr Qhena replied that when referring to the company or a mini group, it referred to its financing activities. When looking at the group, it referred to the IDC’s investments in other companies like Foskor or Mozal.

He said the uptake in lending had increased, but the quality of the loans was improving from a sustainability perspective. It would continue to fund textile companies, but these did not generate big dividend income. Regarding the growth of the lending book, he said a large chunk was for renewable energy, so the quality of the loans had improved. The IDC did try to recover loans and the trend was positive. It was monitoring impairments, but for the coming financial year ending March 2016, he anticipated that impairments would increase.

SEFA had received an amount of R284m to cushion the cost of funding. This money had gone through the IDC to control and build capacity in SEFA. The IDC was looking at SEFA’s ability to collect loans. SEFA had a 22% level of impairments.

The Chairperson asked if the people SEFA dealt with were able to repay the loans.

Mr Qhena said the role of the intermediary was one aspect that had been looked at in a strategy meeting.

Regarding interventions, he said that the problem at Foskor was that there was a need to modernise the Richards Bay plant. Foskor provided 55% of South Africa’s fertilizer requirements. There was not much intervention it could do for Kumba, because its value was commodity share price dependant. However, it was a strategic company providing for the iron and steel requirements of the country, so the IDC would ride out the fluctuations in price.

The Chairperson asked about the Coromandel shares.

Mr Qhena said that six years ago, it had bought the Coromandel shares to strengthen its relationship with the Indian company. Foskor had now sold its three per cent stake in Coromandel. Coromandel still had a 14% share of Foskor and provided technical support. Two South Africans had been sent to India to learn, but upon return had been snapped up by other companies. Currently two people were understudying the head of Foskor, who had 30 years of experience. The Foskor plant was producing at only approximately 50% of its capacity.

The Chairperson asked if those understudying the Foskor manager were pinned to a contract, because this concerned the overall transformation agenda.

IDC briefing (continued)

Mr Qhena then continued with the IDC briefing.

He said overall funding approvals totalled R11.5b, of which R10.9b had been disbursed. R1.8b of the approved investments had been in 10 African countries. The investments would lead to the creation of 20 388 jobs. R5.9b had been approved for black-empowered and black-owned companies. R756m had been approved for businesses with a female ownership of more than 25%. R159m had been approved for businesses with a youth ownership of more than 25%. R2b had been approved for 111 small and medium enterprises (SMEs). R5.2b had been approved for the manufacturing sector. R943m of additional funds had been disbursed by SEFA to 1 246 small, medium and micro enterprises (SMMEs).

Funding had shifted from the Renewable Energy Independent Power Producer (REIPP) sector to manufacturing, which had seen a 51% increase in approvals and had attracted the largest portion of funding. Mining had attracted 21% of approvals, while infrastructure and services had attracted 34%.

He then spoke to a number of case studies of particular companies, amongst them the DCD group, which manufactured wind farm towers and would fabricate locomotive car body structures for Transnet and Bussmark, a bus manufacturing company. In the mining sector, he spoke about the Palabora Mining Company. The highlight of the IDC’s corporate social investment had been the construction of a secondary school in Willowvale, the improvement of infrastructure at schools and teacher development workshops for maths, science and accounting subjects.

Discussion

Dr M Cardo (DA) said that taking into account that the IDC had a 74% stake in Scaw, which had made a loss of R1.1b and taking into account the glut of steel globally, he want to know about plans to construct a $5b steel plant in collaboration with Chinese steelmaker Hebei. In September 2015 there had been an announcement of a Memorandum of Understanding with Hebei. Had a proper feasibility study been done? Would the project go ahead? What had the recommendations of the feasibility study been? How would the $5b deal be financed? What would the IDC’s financial commitments be? How many jobs would be created?

Mr I Pikanini (ANC) asked how the IDC was dealing with the challenges in the steel industry. Were there any challenges facing entrepreneurs in accessing finance to run long-term businesses?

Mr Atkinson asked if the IDC was involved in hydro electric power generation, especially in the Grand Inga Project.

Mr Tleane said R1.8b in investments had been made on the African continent. What kind of opportunities had been created for local businesses? R756m had been invested in women-owned companies -- what had been the earlier investments, since 2010, so that a comparison could be made as to whether there had been an improvement?

Ms C Matsimbi (ANC) said that the IDC had said that Bussmark was expected to create 1 000 jobs. Had this been realised? Did the IDC have the figures for all jobs created through its funding activities? Nothing had been mentioned of Soweto Gold in the presentation. On an oversight visit, it had been realised that a lot of jobs could be created if the R3m Soweto Gold had requested for a conveyor belt were granted. Was Soweto Gold funded by the IDC?

Mr M Cele (ANC) said that it would be proper for the IDC to provide full details of its corporate social investment (CSI) programme. Which school had been built in the current year? Where were the schools to which teachers were going for maths and science tuition located, and in which provinces?

The Chairperson asked what the turnaround time was between the approval and disbursement of funds, and what factors could be cited as impediments? She said the IDC continued to finance DCD. There had been complaints regarding the Eastern Cape wind farm -- that the mast towers had not been manufactured locally and had robbed South Africa of an opportunity to create jobs. What was happening in this regard? The Committee’s main area of focus was job creation. Was there a balance in funding approvals between capital intensive and job creation projects? The IDC had started on its publicity and marketing campaign during the previous month. How sustainable was this initiative going to be?

Mr Qhena responded that the IDC had started a study of the steel industry in 2010, and had wanted to use a different technology. It had invited people to partner in the work and searched around the world. It had ended up with Hebei, who showed a sustainable interest, but their technology was not suitable. The choice of site was still between Richards Bay and Mpumalanga. Once the site was decided, then the Environmental Impact Assessments (EIAs) could be done, and that was the current status of the project. The IDC was looking at bringing in new technology and would not take a decision without consideration of what was happening currently. In sub-Saharan Africa, South Africa produced steel, and Egypt produced a little steel. Africa was where the growth in the use of iron and steel would be. In the short term, steel did face a dire situation.

The IDC was not at the stage where it could say it was going to carry out the project, but it had done a lot of work and nothing had indicated that it could not be done. The IDC was still convinced of the long-term prospects for the project. The IDC was doing the feasibility study as a team, in conjunction with Hebei. It was a long-term project and the IDC was taking into account the state of the steel industry currently, but it did not want to do nothing and then be five years behind. It was not building the plant to supply South Africa only -- it was for the continent as well. Nor was the plant being built to kill other steel plants in South Africa.

There were Development Finance Institutions (DFIs) which were showing interest in financing the project. Preliminary indications were not to stop the project. Steel companies in South Africa should be more competitive. The last time the IDC had done something of some scale had been its investment in Saldanha Steel.

The IDC would not be reckless. It wanted to change the technology formerly used to that of blast furnace technology, to be more environmentally friendly.

The IDC had funded a 10MW hydro scheme near Kakamas. The Inga Dam process was being driven by entities in the Democratic Republic of Congo (DRC), and South Africa had commitments to take 2 500 MW. The project was moving, but not at the best pace.

Regarding investments outside of South Africa, there were benefits to local companies and the IDC was sensitive to this.

Regarding the allocations to women-owned businesses, the IDC had not gone back into its history. It had allocated 60% of a R1b Transformational Enterprise Fund to women, but the uptake had been very slow. In the next five years, R4.5b each had been committed by the IDC for women and youth.

He said every year an audit was undertaken on how many jobs had been created by IDC investments. 922 jobs had been verified for Bussmark.

The IDC would respond in writing on the Soweto Gold question, but the IDC was supporting Soweto Gold.

The school that had been built was in Willowvale and had been opened by the Minister of Basic Education. The IDC was now adding a library to the school. The IDC had adopted 20 high schools with at least two schools in every province, and 10 feeder primary schools. The schools were in either rural or poor areas.

Regarding access to long-term funding, he said there was always room for the IDC to improve. The time lag between approvals and disbursements could be because of the time needed to get municipal approvals. In one case, this had taken two years. Sometimes the IDC’s legal conditions could slow the process down.

He said DCD had the ability to create jobs while supporting capital intensive projects. There were benefits priced into the pricing structure if the job creation aspect in the project was increased. The partnership with the DCD was good, because it was doing localisation. Another similar partner was Naledi Rail.

In terms of outreach to ordinary people, the IDC was trying to step up by partnering with Business Day, City Press and the Financial Mail in telling the IDC’s stories. In the past week, it had highlighted the textile industry and would also be rolling out the campaign to radio and then to local media.

The Chairperson said the question on DCD related to the supply of the towers for wind farms being imported from China, whereas they could have been manufactured locally.

The meeting was adjourned.