Industrial Development Corporation 2020/21 Annual Report

Meeting report

The Chairperson welcomed Members and held the meeting in abeyance until the Industrial Development Corporation (IDC) was able to connect to the meeting platform following a misunderstanding about the time of the presentation.

Presentation by IDC
Mr Tshokolo Nchocho, CEO, IDC, made the presentation. Using the slogan “Resilience through turbulent times”, he began with the challenges faced by the IDC in the financial year 2020/21. Covid-19 pandemic and the resultant hard lockdown impacted both production and consumption and IDC Investee companies were adversely affected across all sectors. Several project delays and cost escalations were caused by the restrictions in movement of goods and people, resulting in significant opportunity costs in terms of investment and employment, particularly in the tourism and hospitality and clothing and textiles sectors. Gross fixed capital formation declined by 19.6% in real terms during the review period to its lowest level in 14 years.

Mr Nchocho presented funding and investment activities sustained despite a difficult economic environment and he was pleased to state that the IDC had performed very well in the year under review after a difficult year previously. The primary objective of interventions during Covid was to ensure the security of supply of Covid essential supplies and to provide cashflow relief to businesses but disbursements from the Covid Disaster Fund to date was only 8% of the initial fund. The response by the IDC to the post-unrest disaster was far better and the IDC assisted 240 sites. The CEO provided details of several businesses that received assistance.

The IDC performed well financially. The entity experienced a significant turnaround in operating income, driven by improved revenues and effective reduction of impairments. The improved liquidity of the IDC was driven by well-timed cash management initiatives implemented during Covid lockdown. The healthy balance sheet was a result of increased cash driven by collections and dividends received, loans and advances were impacted by a decline in disbursements and the investment portfolio values increased driven by the rapid recovery of the listed portfolio.

The entity achieved an unqualified audit opinion.

Looking ahead, the IDC was developing projects and setting up institutional arrangements in new opportunity areas such as green hydrogen and New Energy vehicles; creating spatial Integration leveraging off balance sheet funding and corporate partnerships; supporting SA businesses to capitalise on the opportunities presented by the African Continental Free Trade Area (AfCFTA); and an increasing focus on climate change and environmental, social and governance (ESG) issues. The IDC was also targeting small business finance, relying on its SMME support programme.

(See Presentation)

Discussion
Ms N Motaung (ANC) asked what measures the IDC had put in place to facilitate the uptake of the Covid-19 Distress Fund, beyond marketing and reviewing the fund criteria, particularly for small enterprises that applied to the IDC rather than the Small Enterprise Finance Agency (SEFA).

Mr W Thring (ACDP) asked about the huge amounts of funding going to provinces like Gauteng when the highest levels of poverty were found in the Northern Cape and the Eastern Cape and so on, where less funding actually went. If the government wanted to turn that around to address areas where there were high levels of poverty and high levels of inequality, surely the trajectory should be turned around and, instead of putting more resources in the financially stable and strong provinces, like Gauteng, there needed to be an equalisation going forward. What was the plan for doing so, if that was the plan?

Mr M Cuthbert (DA) noted that whenever he raised his hand, Mr Burns-Ncamashe raised his hand. It was almost as if he were shadowing him.

Mr Cuthbert commented that all of the Committee Members had seen the feeding frenzy around personal protection equipment and other items linked to the Health budget in the past year and the criminal investigations that were being pursued. Members had seen how people in government had used funds meant for a crisis to line their pockets. There was obviously a risk that it had been wider than just the Health Department. His concern was that funds that fell under the oversight of the Trade and Industry Portfolio Committee had also been prey to that behaviour. Had any fraudulent claims been identified by the IDC and, if so, what had been done about them? What measures had been put in place to prevent such a feeding frenzy in the future and what measures had been put into place to ensure that all money disbursed from the development fund institutions went towards worthy causes and that the country could build back from the terrible devastation seen during the July unrest?

Mr S Mbuyane (ANC) asked about the challenges encountered by different sized enterprises in meeting the requirements of the IDC. How many applications had been received for funding and how many had met the criteria? The level of uptake was very low and could the IDC explain, especially in the chemical and medical sectors. Which black entrepreneurs were beneficiaries? What were the IDC’s transformation targets in terms of youth and women per province? Only Western Cape and KwaZulu-Natal had benefitted. How much funding had gone to agro-processing per province?

Mr Z Burns-Ncamashe (ANC) noted that the presentation had spoken to issues of governance and prudence that would normally restore confidence in the populace, more so in the light of the serious challenges that were currently facing the state-owned enterprises and development finance institutions (DFIs). The trend was quite impressive. In the context of ensuring prudence, as the CFO was aware, in 2018, the IDC had instituted legal action to recover losses from the Shiva Gupta-linked uranium mine. What was the status of the court case? Was the R250 million recovered? It was important to report on such matters so that an entity could demonstrate prudence and accountability when resources had been trusted to it. Where wasteful, fruitless and irregular expenditure occurred one had to show that action was taken so that there was no recurrence of such practices in public institutions.

Ms Y Yako (EFF) said that it was imperative for the IDC to stimulate the economy in spaces such as the Eastern and Northern Cape. How was the recovery of investment progressing? What pitfalls did the IDC see in terms of the future and how would it recoup investments made in businesses? Was there anything that could be done better in offering true support so that the IDC was not just pumping money into businesses that were not sustainable but was promoting more job opportunities?

Ms R Moatshe (ANC) asked which areas of the criteria had been reviewed and how had they been changed. What factors had contributed to ensuring the funding was used for more sustainable investment targets?

Mr Nchocho, noted that his colleagues would assist him in responding to  the questions. He addressed the question of how the IDC had tried to improve the uptake of the available funding. The IDC had advertised and been on television and radio but, in cases of distress and difficulty, the IDC, and he, had learnt from international funding where best practice showed that funding had to be made available at best pricing, i.e., grants and so on. The first mistake made by the IDC was to price the loans in the normal way. Clients had indicated that their businesses were in distress, so they could not take on more debt when they had no income. There was reasonable prudence on the part of IDC clients. Secondly, the IDC had not adjusted its operating models sufficiently. In the post-unrest period, the IDC had streamlined its funding processes into simpler, shorter versions and the executive investments committee had sat three times a week to address the granting of loans. He believed that the IDC had learnt its lesson and had improved remarkably in the recent period. He hoped that SA society could appreciate that the IDC had learned its lessons during Covid-19 and had responded very well following the riots in KwaZulu-Natal and Gauteng, approving R2 billion in less than two and a half months.

Ms Joanne Bate, Chief Operating Officer, IDC, stated that one of the interventions was a programme called “SMME Connect “ where the IDC recognised that small businesses grew, not because they had good ideas, but because they had access to markets. So, the intention behind SMME Connect was to work with corporates and to assist the small businesses within their supply chains. That was how the IDC had identified some small businesses that it could support from the Covid-19 Distress Fund. That was a key focus area in the Northern Cape where large investments were being made for large projects, especially in the solar sector. Businesses did not work simply because a large project was happening; it needed intent to grow SMMEs and jobs on the back of those large projects. The same approach had found success in other provinces. There was greater emphasis on smaller businesses in Mpumalanga and Limpopo. Also, SMMEs was a clear priority in the Eastern Cape where partnerships were being built.

Mr Nchocho acknowledged that the IDC had considered what it, with the support of government, especially the Department of Trade, Industry and Competition (dtic), could do to assist in the less well-developed provinces as opposed to those that had the natural momentum of an already established economic base.  The Eastern Cape provided significant opportunities, firstly, in the area of agriculture. The two industrial economic zones that had been located in the Eastern Cape, in Coega and in East London, had also provided a significant opportunity because they were not yet fully occupied. The Chris Hani District Municipality had a development agency and the IDC was partnering with the agency. Several projects of an agricultural development nature would ensure financial flows in that region.

He added that in the  automotive sector, particularly the older Original Engineering Manufacturers (OEMs) had made a commitment to South Africa, through a pact with government, to expand their supply base with a stronger localisation programme where components used in the manufacturing of vehicles would be produced more and more in SA and less would be imported. The industry had set up an Automotive Industry Transformation Fund (AITF) and the IDC was working with the sector, locating industries where not only was the IDC promoting new localisation efforts, but also assisting with transformation and promoting greater inclusivity in the economy.

Mr Nchocho stated that the same scenario applied in the Northern Cape, which was also an interesting growth sector, although it was driven by resources. There were opportunities in the IDC partnership with Transnet and Eskom, as well as the building of renewable energy facilities. SMME Connect was a big project in which SMMEs were suppliers in the big projects.                                                                                                                                                                                         

In response to the question about a feeding frenzy, Mr Nchocho told Mr Cuthbert that the IDC was not aware of any fraudulent activities or malfeasance of a financial nature that had happened in relation to the Covid funds or the post-riot support funds. The IDC ran parallel audits and it worked with the South African Special Risk Insurance Association (SASRIA), informing the insurer which businesses the IDC had assisted. The IDC was uncompromising when it came to FICA regulations. All compliances were checked and had to be in order before funds would be disbursed. The decision to make an investment was never an individual decision. The decision-making team consisted of executives, lawyers, risk specialists, etc. Applications were presented to the executive committee of the IDC and no single person determined which business was to be funded, not even the CEO. The control environment at the IDC did not allow financial misconduct or fraud. It could be held up for scrutiny. There were, naturally, those who would take chances but those who performed acts of financial misconduct were held accountable. It was a culture in the IDC. In the three years that he had been at the IDC, not a single person had been allowed to get away with financial misconduct. People had been made to walk in such cases.

The challenge and approach for the IDC was different depending on the size of the business and the required loan. Mr Nchocho requested Mr Demana to respond to the question.

Mr Reginald Demana, Mining, Metals, Infrastructure and Energy Executive, IDC, explained how the different processes were used. As a result of the Covid-19 and post-unrest experiences, the IDC had streamlined its processes, using the scorecard approach and with the executive credit committee and a smaller committee for smaller loans sitting three times a week, financial aid was disbursed within a week for small loans and under a month for regular loans. However, when the loan ran into hundreds of millions of Rand, there was a detailed due diligence process, including legal and risk professionals, site visits and management presentations. The board investment committee sat at least once a month for large loans and the process was completed in under three months. The organisation was agile and responsive and looked beyond the current scope on a regular basis in response to the needs and the requirements of the economy and the country.

Mr Nchocho responded to the question relating to the Shiva uranium mine. It was a hugely complicated dual process of legal action and a business rescue process. The litigation process was going ahead and the IDC was awaiting a trial date. That was after the IDC had obtained information about the family’s financial affairs through the courts in the USA. There was also a Business Rescue Process. The Business Rescue Practitioner (BRP) had been appointed by the board of the company and the practitioner had taken the IDC to court where the BRP was duly recognised so the IDC was attempting to sell the assets to the best possible bidder and then to settle the debts. The IDC was the single largest creditor. The IDC was confident that its case would prevail.

Regarding the strategic question asked by Ms Yako as to what agencies of government should do beyond just providing money to reduce the failure rate of businesses and the wastage of funds, the CEO said that was a question that occupied the IDC on a daily basis. Experience had taught the entity that businesses performed best where a business had good access to market and off-take agreements worked best. The automotive industry offered good commitments to buying product, as  did pharmaceutical companies, etc. which allowed for long-term commitments, but it was a more difficult scenario in the tourism industry where one could not pre-determine occupancy rates and therefore could not make long-term commitments.

Secondly, businesses needed ongoing management support from business advisors to advise on strategy, marketing, etc. Mr Nchocho stated that big corporations could afford to pay for such support and advice from one of the big consulting firms. Medium and small businesses did not have the money to buy that advice, so the IDC had made business expertise available to its clients, either through officials of IDC or by procuring private service providers for a panel and making the expertise available to advise on strategy, staffing, etc.

Thirdly, was the importance of a sound financial structure between a business’s own capital and borrowed funds so that the business was not hamstrung and did not suffocate under debt. He added that the grant programmes provided by dtic worked extremely well as they complemented the loans made by the IDC. A business might make a loan of R20 million and receive a grant of R10 million.  One example was the programme in Agriculture with Minister Thokozile Didiza which had worked extremely well. Half of the R200 million in funding in the Agricultural Programme had been utilised.

Mr Isaac Malevu, CFO, IDC, added that business partners were supported in terms of working capital as it was in the initial stages that businesses struggled to make repayments and the IDC often allowed a breather before the business had to begin paying back its capital loans. Concessionary funding from the dtic certainly supported the structure of working capital. Deferment and payment holidays were, importantly, provided to assist businesses to find stability.

Mr Thring asked about the policies of beneficiation and localisation. To what extent was the IDC involved in the policies and, if so, what were the plans to extend that involvement? Minister Patel had stated that SA was too dependent on imported goods and South Africans were consumers of goods manufactured outside of the country. He agreed. Localisation and beneficiation could help to turnaround the challenges in SA, particularly the challenge of unemployment. How was the IDC looking to pursue and expand those policies?

Mr Burns-Ncamashe stated that while the responses were appreciated, he saw a need for the feasibility of the IDC provincial offices to be improved. Advertisements could be done through media, radio and television. However, in largely rural provinces, it was important to engage institutions. He would be interested, in the next presentation that the IDC made to the Committee, to hear that, for example, in the Eastern Cape, the IDC had visited a particular local municipality and had met with the king and traditional leaders and had told the king of opportunities available. The same applied in, for example, Limpopo. The IDC could say, for example that it had been to Louis Trichardt (he could not recall the new name of the area), and had visited the tribal leader. He did not expect people to come to the IDC offices - it was much more impactful for the IDC to go to the people. Unless, or until, there were uptake agreements, the IDC needed to ensure the involvement of people in the value chain so that they could be brought into the mainstream of the economy. That was what he wanted to see. 

Mr Nchocho, stated that he and his team valued the insights and the strategic outlook of the Committee and he was taking counsel from the Members.

He stated that the IDC was right at the centre of localisation across all sectors, working with dtic and making input into policy-making processes through the IDC research and information economics department which informed and advised the policy-making process. The second bucket of work was the heavy lifting of industry planning and programming. The IDC had literally to decide to build a new factory or to expand an existing one and indicate the lines of products that would no longer be imported but manufactured in SA.

His earlier point about the automotive industry was a case in point. State-owned enterprises, such as Transnet and Eskom, were working with the IDC. They determined which supply products could be built or manufactured in SA and they told the IDC to make it happen because the IDC had the knowledge of where the manufacturing could take place in SA, could find the industries, bring in black people, building inclusion and empowerment into the project. Finally, was the funding part where the IDC could also play its part through loans and facilitation of grants.  Policy, project development and planning, and funding formed a three-pronged approach in the IDC. There was a great deal of low hanging fruit in the automotive industry and also in the steel industry where a lot of steel products continued to be imported. The clothing and textile industry was very difficult and complicated as there were many challenges, but the IDC continued to try. The Special Economic Zones (SEZ’s) programme had been reconfigured and was being promoted by the former DG of dtic, Mr Lionel October, who was working from the IDC offices. 

 Ms Bate explained that the green hydrogen economy created a significant opportunity for localisation and had a large capacity for creating jobs to support the hydrogen economy. The IDC was looking at regional development and how the manufacture of the renewal energy components and electrolyzers were developed for beneficiation in SA.  Electrolyzers largely compromised platinum and SA had plentiful reserves of platinum. The IDC was also looking at the components necessary for electric vehicle batteries. Those were two very real beneficiation opportunities that the IDC was actively pursuing. In terms of clothing and textiles, localisation had to fill the right pieces of the value chain to benefit the industry locally. Those were three very active focuses of the IDC currently, in conjunction with the dtic.

Mr Nchocho thanked the Committee for the opportunity for engagement with the Committee. He requested that the Chairperson of the board be given an opportunity to speak if she had managed to connect to the meeting platform.

Ms Busi Mabuza, Board Chairperson, IDC, (who was on an international business trip), appreciated the support and guidance of the Committee and thanked the management team for its presentation.

Mr Burns-Ncamashe said that the IDC had to make reflections on a practical portfolio of evidence of engagement in rural provinces and present that at its next meeting with the Portfolio Committee.

The Chairperson noted that the Committee accepted the IDC 2020/21 Annual Report.

Closing remarks
The Secretary informed the Committee that, on the following day, the Committee would consider the wording in clauses in the Remitted Bills that had to be advertised.

The Chairperson thanked Members for their participation.

The meeting was adjourned.