Industrial Development Corporation on its Strategic Plan 2010-13 and 1st Quarter Performance

Meeting report

Industrial Development Corporation (IDC) briefing
Mr Geoffrey Qhena, IDC Chief Executive Officer, gave only a brief background as members of the Committee were by now familiar with the IDC, and he focused on the strategy and quarterly results.

The vision of the organisation was to be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent.” Its mission was to be a self-financing national development finance institution whose primary objectives were to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC would achieve this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles. Neither the vision nor the mission had changed over the years, despite the changes in government priorities, as the objectives of supporting industrial capacity development and promoting entrepreneurship were still relevant.

He described how South Africa’s priorities had changed since the 1940s to the 2000s, and said that over the decades, the IDC had adapted to the country’s changing priorities and expanded into new industries as the economy developed. He listed 15 sectors in which the IDC had invested. These were Food, Beverages and Agriculture (R4, 026 bn), Mining and Beneficiation (R24,548 bn), Forestry, Wood, Paper (R1,8 bn), Clothing, Textiles, Leather and Footwear (R1,368 bn), Chemicals and Allied (R7,924 bn), Fabricated Metals, Machinery and Transport Equipment (R2,39 bn), Construction (R1,106 bn), Public, Private Partnerships and Infrastructure (R7,119 bn), Transport, Financial and Other Services (R2,648 bn), Tourism (R3,794 bn), Franchising (R527 m), Media and Motion Pictures (R1,244 bn), Techno Industries (R2,358 bn), Venture Capital (R598 m) and Health-care (R3,083 bn). Mining was the largest sector because of South Africa’s history as a resource-rich nation.

Mr Qhena showed an organogram, headed by a board appointed by the Minister. The total staff complement was 711, but it was planned to increase this to 800 during the year to enable the organisation to become more responsive.

The IDC’s products and services fell into three categories:
• General industrial finance involved normal financing instruments, such as taking equity stakes, export-import finance, bridging finance and wholesale funding through intermediaries.
• Special purpose finance allowed the IDC to become involved in specific interventions, most of which would be subsidised because the returns would be much lower than from normal financing. One example of these interventions was the R1 billion Transformation and Entrepreneurial Scheme (TES) launched two years ago, in which 40% was specified for the development of women entrepreneurs. Other projects included the Risk Capital Facility, Isivande Women’s Fund, Support Programme for Industrial Innovation, Distressed Funding, Clothing,Textiles, Footwear and Leather Competitiveness Scheme, the Pro-Forestry and Pro-Orchards Schemes, and the Township and Rural Hospital Scheme.
•  Non-financial support and other services enabled the IDC to assist new entrepreneurs, provide policy support to different Government departments, and offer capacity building at other development finance institutions (DFIs), both inside and outside South Africa.

The IDC had improved access to its services by rolling out offices in all the provinces, and in some cases, satellite offices had been opened, most of which shared their infrastructure with other DFIs.

The funding process was two-pronged – where applications would be received from existing or prospective business, or where the IDC proactively went out to identify and develop business opportunities. There followed an assessment and decision-making process, and after approval, a client’s performance was subjected to ongoing monitoring and support, where a business was experiencing difficulties.

Mr Qhena said that the IDC had separated its strategies into what needed to be done in the short to medium term, and what needed to be addressed in the long term. In the short term, there needed to be continued funding to companies in distress, for which R6,1 billion had been committed. In both the short and medium term, the organisation would seek to ensure its development and funding projects were aligned with industrial policy. Another key area was the capacitating of other DFIs, as many financing functions were better performed by organisations such as Khula, which focussed on small and medium enterprises. This was particularly the case with franchising, where the sheer volume was too great for an organisation like the IDC to handle. The building of capacity in DFIs in other African countries was also important, as it would facilitate collaboration with them. The long-term strategy was aimed at establishing what worked best in individual countries, and how this could be leveraged for the benefit of the whole region.

The IDC needed to play a central role in the economic development of the country, with one of its guiding principles being its support for the Industrial Policy Action Plan (IPAP). It would implement its policy in partnership with other organisations, acting as funder.

Mr Qhena presented a detailed plan, spelling out how the IDC intended to respond to IPAP. These were broken down into 11 sectors, each with specific IDC goals related to overall industry goals, and with key strategies and potential constraints clearly identified. The work already done in some of these sectors would be covered in the quarterly performance review.

In terms of regional integration, the IDC had identified four sectors – food, clothing and textiles, forestry and infrastructure. In the case of food, for example, it would help to establish what grew best in each country, and then embark on a long-term intervention to see whether specific products should be grown exclusively there, for the benefit of the whole region.

Based on the strategies that had been developed, scenario planning had been carried out to determine whether sufficient funds would be available to execute them. The message was that from funds that had been generated in the past, and from funds which the ICD would raise in the market, there would be sufficient. A “road show” had been presented to asset and fund managers around the country a month before, to test whether they would be willing to take up a bond which the IDC would be issuing, and the response had been very positive. Over and above that, the IDC had been talking to international players in China and the Middle East, and the appetite for funding was also there.

Mr Qhena said it was a “stretch” plan, implying that the IDC should do more, but acknowledging that it could not fulfil its objectives without the support of other players in the economy. It was important for the IDC to “step up its game” so that the current unacceptable level of unemployment could be reduced.

First Quarter Performance (April to June 2010) Review
Mr Christo van Zyl, Senior Strategist at the IDC, presented the quarterly performance review.

Giving the background to approvals in the previous budget year, he said the biggest share of funding had continued to go to the mining and mineral conversion industries, because of their capital intensive nature. Gauteng was the province with the largest number of approvals, but the Northern Cape, Eastern Cape and “rest of Africa” enjoyed the highest value of approvals.

Turning to the first quarter performance, he said the IDC had focussed on IPAP, and a big proportion of its key performance indicators had been structured around “milestones” which needed to be reached in order to achieve the long-term objectives.

In the field of green industries and energy efficiency, during the past year the IDC had approved R33 million to determine the feasibility of establishing up to 450MW of solar generating capacity in the Northern Cape, and R16,5 million for a company specialising in the production of organic composted products. The strategy of supporting clean power generation being carried through to the rest of Africa, was implemented with approval for IDC participation in a wind power generation project in Kenya. A feasibility study undertaken for the establishment of a fluorescent light bulb recycling plant was also conducted. In the review period, feasibility studies had been concluded on two scrap metal processing plants and a mine acid water recycling project, while two potential projects involving biomass to energy conversion had been identified.

Mr Van Zyl said there was a lot of activity in the energy sector. Four electricity co-generation opportunities were being investigated in the mineral processing industry, while feasibility studies on solar and wind generation projects were under way. Scoping was currently being conducted on the possible local manufacture of an integrated solar water heater, which was important from a jobs creation viewpoint.

In the automotive, component and commercial vehicle sector, the IDC was trying to combine its biofuels industry with the assembly of busses, to create the capacity to supply “green” busses to municipalities. The South African electric car, the Joule, was in production, and funding for a major vehicle assembler was under consideration. Several projects to investigate how to improve the local component industry were also receiving additional funding.

In the metal fabrication, capital and transport equipment sector, the main focus was on improving the local content for the Eskom and Transnet capital expenditure programmes, with specific emphasis on four projects aimed at reducing the price of steel for local down-stream producers.

In the clothing and textile industry, a major thrust was to try to improve the viability of several of the IDC’s existing textile clients, which made up a large proportion of its portfolio. One way under investigation was to improve the supply of raw materials to an Atlantis linen yarn manufacturer by establishing a flax-growing industry.

In chemicals, plastics and pharmaceuticals, a feasibility study for the local beneficiation of fluorspar and production of fluorine chemicals had been completed, but the project was found to be not viable owing to aluminium prices and the exchange rate. Pre-feasibility studies for a project to beneficiate titanium and zirconium were continuing, the former linking into alternative materials for the aerospace industry, and the latter linking into the green industries. The establishment of a downstream plastics fabrication industry was being discussed with Sasol, while an environmental impact assessment (EIA) had been started on Sasol’s Project Mafutha coal-to-liquid plant. The feasibility of establishing a local Anti-Retroviral (ARV) active pharmaceutical ingredient manufacturing plant was being undertaken, but a commitment from government to procure the ARVs was essential. Development of a medicinal poppy project was underway, but this would also require approval for poppies to be grown in this country.

In agriculture, a lot of the focus was on high value products, such as additional berry projects, with California investors showing interest. The success of these labour-intensive projects had encouraged the IDC to expand into pomegranate farming in the Eastern Cape, black-spot free citrus in the Northern Cape and vineyards in the Western Cape. Another focus area was small grain mills in local areas, aimed at creating more competition in the milling industry, which would have an impact on food prices. Wholesale funding to support poorer farmers was being handled through intermediaries, who were also providing technical support and skills development. The revitalisation of the canning industry was also being discussed with the industry.

In advanced manufacturing, the IDC was involved in the restructuring of a South African supplier of aircraft components to Airbus, as well as the possible local manufacture of set-top boxes for the digital TV industry.

Two bio-fuel projects had already been approved, and the IDC was busy with a third in KwaZulu-Natal (KZN). Second generation technologies were being explored in collaboration with Stellenbosch University.

Mr Van Zyl said three forestry projects had been identified in the Eastern Cape, and one in KZN. These community-based projects were examples of the IDC structuring its funding and products to meet the industry’s needs. The organisation was also working closely with the Department of Trade and Industry (dti) to develop an action plan for the furniture industry, which was labour intensive.

In the cultural industries and tourism sector, the main focus had been on establishing a craft hub in Gauteng, while a similar hub in North West Province was close to completion. In Mpumalanga, a community-based game reserve with tourist potential had been identified, and its feasibility was being studied.

Mr Van Zyl completed the review by showing progress against key performance indicators, but pointed out that most of the strategies would take a considerable time to implement.

Mr Qhena concluded the presentation by saying the IDC accepted the challenge that its interventions needed to ensure that one of the key outcomes was the creation of decent work opportunities.

Discussion
Mr S Marais (DA) asked what the IDC’s role as a developmental financier entailed, and what outcomes were expected.
 
Mr Qhena replied the outcomes which the IDC hoped its interventions would result in, were sustainable employment, regional equity (both within and beyond South Africa), industrialisation in the rest of Africa, environmentally sustainable growth, growing sectoral diversity, growth in the SME sector, broad-based black economic empowerment (BBBEE) and new entrepreneurs entering the economy. Developmental finance talked to the level of risk taken, and because the IDC entered into a venture at an early stage, its risk was higher than an ordinary financial institution. Once it felt a project was sustainable, collateral was secondary. Sustainability was crucial, otherwise jobs that had been created would soon disappear.

Mr Marais said the IDC’s investment in Public-Private Partnerships (PPP) was quite substantial, but not much had been said about it.

Mr Van Zyl replied the PPP Business Unit was involved in general infrastructure in South Africa and Africa. Its biggest exposure locally was with independent power producers, while it provided funding for the wind farm project in Kenya and for hydro-electricity generation in the rest of Africa, in partnership with the Development Bank of Southern Africa.

Mr Marais asked how the IDC could ensure that local automotive components were 100% local, as many were imported as raw materials and merely assembled or moulded locally, and this provided no downstream beneficiation. He also asked what the IDC’s involvement was with the Motor Industry Development Programme (MIDP) and the Automotive Production and Development Programme (APDP).

Mr Van Zyl replied it was recognised at original equipment manufacturers (OEMs) that not many components were made locally. The IDC’s plan was to identify which components could be made locally, and then to support local manufacturers. There were initiatives involving the steel industry with a view to ensuring more competitive steel pricing, particularly for those involved in the stamping and pressing of components.

Mr Qhena said the IDC had a unit which provided input to the dti, but the MIDP was a policy of the dti so the IDC took its cue from the dti. The IDC had provided financing for the initial production of the Joule, and its exposure was now just under R100 million. More funds were needed to create a plant, but more importantly, all South Africans needed to play a role, with the Government setting an example by purchasing cars for its departments so that confidence would be created, particularly for export markets.
 
Dr P Rabie (DA) asked how far the viability studies on the capital-intensive liquid fuels projects at Coega and Waterberg (Mafutha) had progressed. He had read that there were concerns about an adequate supply of water for the Waterberg project.

Mr Qhena replied that the IDC was in discussions with its partners, Sasol and PetroSA, and because of the high capital costs involved, a decision would have to be made on which project was affordable. Studies were still being conducted on the Mafutha feasibility, but it was important for the IDC to “get comfort” that the Government would back these projects going forward, as they were “big ticket” items which would have a far-reaching impact on the South African landscape.

Dr Rabie asked about progress on the Kenya wind power generation project, and whether the technology could be used in South Africa to produce electricity locally.

Mr Qhena replied the project, in which the IDC had invested nearly R800 million, was going ahead. Because the technology employed was advanced, it was hoped it could be used back in South Africa, which was interested in wind-generated power.

Mr Z Ntuli (ANC) asked who funded the IDC, as the International Monetary Fund (IMF) and the World Bank imposed numerous conditions when they allocated funds.

Mr Qhena replied the IDC did not receive funding from either the IMF or World Bank, but raised its money from other development finance institutions (DFIs), largely through bilateral agreements with DFIs in Europe. However, the organisation continually made a conscious effort to find cheaper sources of funding, so that the benefit could be passed on.

Mr K Manamela (ANC) asked about the status of the IDC board, which currently had an acting chairperson..

Mr Qhena replied the previous chairperson’s term of office had ended in October last year, and the Minister was currently considering who was best suited to fill the position. In the meantime, the board was fully functional.

Mr Manamela said there was growing discussion and criticism about the way BEE was being implemented. The National Empowerment Fund had said we need to provide more direct support to the initiation of black companies, rather than assist black people to become shareholders in existing companies.

Mr Qhena replied the IDC had reflected on its interventions two years ago, aware that many of its transactions were simple share swaps – the IDC would put in money, white shareholders would exit and black shareholders would move in. It had become obvious that new jobs were not being created in the process, so when the IDC now assisted black entrepreneurs to buy into existing companies, it insisted that at least half of the money was invested in the company. The rationale was that the extra investment should create new jobs, or save existing ones. It would also put pressure on the black entrepreneurs to ensure the businesses performed. There was a conscious effort on the part of the IDC to broaden the BEE pool, with the main focus on job creation. He added that some of the applicants for funding did not like this new direction, and the IDC was not too popular as a result, but it would take responsibility for ensuring it made a contribution to job creation.

Mr Manamela said young black people experienced difficulty in securing the required seed capital to enter the franchise sector, and asked how the IDC could assist.

Mr Qhena agreed that the franchise agreements were too onerous for black entrepreneurs. However, with the right product and a tested model, this was a suitable vehicle for providing opportunities for their entry into business. So the IDC had allocated 75% of its franchise support budget to black entrepreneurs, and had experienced some successes, and some failures. The IDC still supported the concept and would not abandon it, although other organisations, such as Khula, had a role to play in this area.

Mr Manamela asked if the IDC could provide any updated information on the ArcelorMittal-Kumba dispute, and also indicate the extent of its interest in the mining sector.

Mr Qhena replied that the IDC, as a shareholder in ArcelorMittal, was aware from media reports of transactions that had been supported, but until they had been voted upon, it could not comment. The IDC had a 14,4% stake in Kumba, and 7,9% in ArcelorMittal. IDC was very active in the mining sector, and would provide a written breakdown to the Committee of its investment in both listed and unlisted mining companies.

Mr Marais asked what Broad-Based Black Economic Empowerment (BBBEE) criteria were used when considering a project, to ensure it was not “narrow-based.”

Mr Qhena replied when the IDC financed a project itself, it was relatively easy because it set parameters which were reflected in the pricing. Risk assessment and the cost of funding were considered, and a price set. A benefit was then passed on to the applicant, depending on how broad-based the project was, in terms of the parameters. The average cost of financing was prime less 1,25%, but this could drop to prime less 2% if the project was considered very broad-based, or created more jobs than other projects.

Mr Marais asked whether the IDC would approach the Government Treasury for developmental funding, apart from its current local and overseas sources.

Mr Qhena replied that if growth continued as projected in the strategic plan, the IDC might have to approach the Treasury in seven years’ time, and this had been communicated to the Ministry.

Mr Marais said bio-fuels was a sensitive subject, and the development of varietals of agricultural products were not always ideal for food products. He asked if the IDC laid down conditions in respect of these varietals.

Mr Qhena replied the IDC would not get involved with anything that was food related, such as maize, which jeopardised food security.

Mr Marais said the local textile and footwear industries were very uncompetitive, and supporting them only in the area of raw materials would not be sufficient to make them competitive. He asked what the IDC plans were in this regard.

Mr Qhena agreed that the problem went beyond raw material costs. In many cases, production equipment was outdated, and the IDC was working with the dti to make funds available for the modernisation of equipment and improvement in efficiencies. Niche markets also needed to be developed.

Dr Rabie said he foresaw a brilliant future for a pharmaceutical industry in South Africa, because it was capital and labour intensive, but he wanted more clarity on the proposed medicinal poppy project.

Mr Van Zyl replied that if one wanted to start a pharmaceutical industry, one had to begin with the raw materials, and a big proportion – opiates – came from poppies. However, very tight security in a regulated environment was required, because of the risk of establishing a heroin industry.

Dr Rabie asked for the IDC’s view on fish farming, in the light of depleted marine stocks.

Mr Lizo Ntloko, the IDC’s regional manager in the Western Cape, said that consideration was being given to cob farming, as this had a shorter harvesting period and was a simpler operation than abalone farming.

Dr Rabie asked which sectors of the canning industry did the IDC intend revitalising, as spokesmen for the industry had said there was a worldwide decline in demand, and canning was now a “sunset industry.”

Mr Van Zyl said the IDC was looking specifically at fruit canning in the Western Cape, and was aware of the problem of raw material input costs. It was working with the dti to find ways to save what was left of the industry.

The Chairperson commended the IDC on its presentation. She asked whether its programme of wholesale funding through intermediaries involved it in areas which should rather be handled by Khula.

Mr Qhena replied the IDC’s wholesale funding was very targeted, and the IDC did not compete with Khula – nor with the Land Bank in the agricultural sector.

The Chairperson asked if the public sector could access the IDC’s township and rural hospital scheme.

Mr Qhena replied the scheme was earmarked for the private sector, and was aimed at taking the pressure off the public hospitals. Because they were “small bed” facilities, no major players were involved.

The Chairperson asked how the IDC supported municipalities in their efforts to develop local industries.

Mr Qhena replied the IDC helped to establish development agencies which, in the long run, were taken over by local governments. Experience had shown that local governments often had land and funds, but lacked the capacity to determine what projects should be embarked on. The IDC was targeting poorer municipalities in order to assist in their development projects.

The Chairperson commented that the IDC appeared to be struggling with its decentralisation programme, with the exception of North West Province, and asked why it did not work with development and financing institutions who were servicing the same people.

Mr Qhena replied the approach was always not to duplicate facilities. Where there were Khula or Small Development Enterprise Agency (SEDA) offices, it was not only cost-effective to share, but sometimes it brought them into contact with aspiring entrepreneurs.

The Chairperson said that during a visit to companies in distress, the lack of monitoring had been identified as a weakness. She wanted to know how the IDC could ensure monitoring actually took place.

Mr Qhena said the IDC was supposed to follow up on all approved projects, and urged members to assist the IDC to fulfil this role by reporting on instances where monitoring was not taking place.

The Chairperson asked how long it took the IDC to implement projects involving partner organisations.

Mr Qhena said it was impossible to provide a definitive answer, as a wide range of factors were involved.

The Chairperson asked whether the IDC was identifying indigenous crops which could be grown to support development in the rural areas.

Mr Qhena replied the IDC was not ignoring indigenous crops, but the basic principle was to decide what worked best in a particular area, and to focus attention to ensure plans were developed to capitalise on this. For instance, the North West Province was considered the best for solar power projects, wind generation was best suited for the Eastern and Western Cape, and table grapes grew well in the Northern Cape.

The Chairperson thanked the presenters and adjourned the meeting.