Industrial Development Corporation Annual Report & film industry comment

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Trade and Industry

15 October 2009
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee received presentations from the Industrial Development Corporation and the film industry. The Industrial Development Corporation briefly covered the Annual Report 2009: “Sustainable development in extraordinary times”. It described the work of the Corporation and in particular help for distressed firms. The planned investment by the Industrial Development Corporation for the coming year was R11.4 billion, and R71 billion for the whole period 2009-2014. R6.1 billion had been set aside over two years specifically for the purpose of helping companies distressed by the economic crisis

Members asked a number of questions about the impact of the economic crisis and the sectoral focus of the Corporation’s investments. They also asked about the performance bonuses received by the board, the size of firms supported, the “I Do Care” programme, municipal development agencies and the length of the application process.

The Independent Producers’ Organisation and the South African Screen Federation gave a presentation to the Committee on behalf of the South African film industry. They outlined the structure of the industry in the country and described that this had been particularly affected by the economic crisis, problems at the South African Broadcasting Corporation, and other countries’ incentive structures. However, there was still high potential for growth in the industry. Government and the Industrial Development Corporation had provided excellent support to the industry.

Members asked questions about the definition of local content, whether this should just take account of value-added locally or local stories. They also asked about the incentive structures in South Africa in comparison to other countries and the economic impact of the meltdown of the South African Broadcasting Corporation.

Meeting report

Industrial Development Corporation (IDC) Annual Report 2009
Mr Nimrod Zalk, Deputy-Director General, Department of Trade and Industry (dti), gave some background remarks to set the presentation in context. It had been a challenging period for the IDC because it played a significant role in supporting investment and responding to the economic crisis. There were some signs of recovery in some areas, but the manufacturing sector in particular was still in deep recession. Production in August 2009 was 15% lower than a year earlier. There were also other sectors, such as the film industry, which were deeply in crisis.

Mr Geoffrey Qhena, Chief Executive Officer, IDC gave a brief presentation to the Committee on the Annual Report of the IDC for 2008/09, which he entitled “Sustainable development in extraordinary times”. The IDC’s role was to support sustainable growth and development by funding projects. The objectives were to support industrial capacity development and promote entrepreneurship. The IDC had opened offices in eight provinces in an attempt to improve the equity of regional economic activity, which so far had been largely directed to Gauteng, KwaZulu Natal and the Eastern Cape. The IDC had also been trying to support investment in rural areas and townships and to increase the diversity of sectors in which IDC approved funding. He mentioned the example of the refurbishment of Metrorail commuter coaches that was carried out by a 100% black female owned company. The IDC also invested heavily in very hi-tech areas, such as aerospace.

Mr Qhena pointed out that while the IDC supported large scale investments it also assisted 160 small and medium enterprises (SMEs) in 2009. The IDC also played a role in ensuring broad-based black economic empowerment (BBBEE), with 55% of approvals going to black empowered companies. The IDC was always looking to promote environmentally sustainable growth, for example by investing in the manufacture of battery powered vehicles.

Mr Qhena briefly presented the balance sheet for 2008/09 and said that over the next five years the IDC would invest R71 billion, of which R11.4 billion was budgeted for 2009/10. In 2008/09,  IDC funding created 24 200 jobs and saved another 2 500 jobs in South Africa, whilst also creating 5 000 jobs in the rest of Africa. Much of the IDC’s work was to help distressed companies survive the economic crisis, and for this purpose R6.1 billion had been set aside for a two-year period.

Discussion
Mr S Marais (DA) said that the economic turnaround would not be rapid, and asked for how long the R6.1 billion available for companies in distress would be available.

Mr M Oriani-Ambrosini (IFP) raised the cross-sectoral nature of the IDC’s response to the economic crisis. He argued that “bridge-financing” was for three months, but that the economic crisis required a longer term solution, and there should instead be discussions around bailing out. asked which industries would be saved. There was a need to identify those sectors that should be supported, and not keep alive sectors that were economically not viable.

Mr Shakeel Meer, Divisional Executive: Industrial Sectors, IDC, pointed out that it was not only bridging finance that was provided by the IDC, but that the majority of support was medium- and long-term funding.

Mr Oriani-Ambrosini asked how long the IDC could support distressed companies and at what point the government and South African taxpayers could expect to have to support the IDC, in which case he questioned what size that support would be.

Mr Qhena said that the R6.1 billion was over a two-year period. The IDC had carried out stress testing and concluded that approximately twice this amount could be absorbed by the IDC before taxpayers’ money would be required.

Mr Meer said that there was no assumption that the economic crisis would end soon and a two-year period for assistance was being considered. Even after the economy began to recover there would continue to be problems for some companies and the R6.1 billion figure could be increased if necessary. All of this funding came from the IDC balance sheet; therefore the IDC carried all the risk and accounted for it when pricing investments. The IDC was not expecting to have to use government funds for distressed firms, as the funding was within the IDC’s resource capabilities. Mr Meer said that there was no preference being awarded to any sector for funding. The IDC assessed the impacts of the crisis on various sectors to estimate which of those sectors might demand support. Even in the less hard hit sectors, there were struggling firms. All applications were considered on a firm-by-firm basis.

Mr Oriani-Ambrosini said that the economic crisis should be seen as an opportunity to better plan and focus on particular sectors, avoiding those that were not economically viable. He felt that decisions should be based not on assessments of individual businesses, but on the sectors in which they operated.

Mr Meer said that the IDC was a policy-based development institution. Its focus lay where investment would produce maximum development impact, such as the Green sector. The IDC’s role in struggling sectors was not to bail out uncompetitive companies but to support the competitive niches within the sector that were economically viable.

Mr S Njikelana (ANC) asked what support the IDC had received from other institutions in the economic cluster, in particular from the Council of Trade and Industry Institutions (COTI).

Mr Zalk said that the IDC had a central role among COTI institutions in responding to the crisis. The IDC, dti and the National Empowerment Fund (NEF) all worked closely together.

Mr Marais pointed out that there were no figures for the numbers of jobs lost, and asked if figures of jobs created and figures for jobs lost had been reconciled.

Mr Njikelana said that the number of jobs created and those saved showed a difference between defensive and offensive strategies. It was important not to get locked into defending jobs alone.

Mr Qhena said that the IDC did not disclose how many jobs had been lost. This analysis could be done, but only for firms involved with the IDC, rather than for the whole country. The IDC made a conscious effort both to create and to save jobs.

Mr Zalk said that the IDC reported quite conservatively on job numbers. Because it was reporting only on direct jobs in industries with strong links and multiplier effects, much of the indirect job creation was not accounted for.

Mr Njikelana said that it would have been useful to have an impact assessment taking account of the indirect effects on employment.

Mr Qhena replied that analysis could be done to include the indirect effects.

Mr Marais asked for clarification of financing companies in which the IDC had shares, and those companies in which the IDC had no shares. He asked if there was a maturity date on the shares owned by the IDC, or if they were an infinite asset being built up.

Mr Qhena said that the IDC used a number of instruments when investing, including loans, guarantees, equity stakes and others. The IDC often took an equity stake in a company in the case of start-up projects. One way to fund projects in the future was to disinvest, or sell shares, to be able to invest elsewhere. Dividends from shareholdings were also a source of revenue for the IDC.

Mr Marais pointed out that board members of the IDC had direct interest in some companies. He asked if this was this a conflict of interest, and if there was a policy to deal with this situation.

Mr Qhena replied that there was a process whereby a committee looked at the investment in question and the IDC director involved played no part in this committee. This process was followed, regardless of the size of the investment.

The Chairperson raised the issue of IDC board members missing a large number of board meetings. She asked what the term of office was, and if there was a process to review this if meetings were not being attended. The Chairperson also asked whether companies linked to board members had easier access to loans.

Mr Zalk promised to raise both of these issues at the next meeting with the IDC board, with a view to strengthening corporate governance measures.

Mr Njikelana asked whether the IDC was working within the Industrial Policy Action Plan (IPAP).

Mr Qhena replied that IPAP coordination between the IDC and the dti was very strong and the two organisations worked very closely together.

Mr Njikelana pointed out that Gauteng still had the vast majority of investment, and asked if there were any signs of this changing.

Mr Njikelana asked about the size of the SMEs that had been helped, in terms of turnover. The IDC’s 2006 report showed approvals according to the size of companies, and he asked if this was in the latest report.

Mr Qhena said that this breakdown was on page 7 of the Annual Report.

The Chairperson asked how many municipal development agencies had been established by the IDC.

Mr Qhena replied that 32 development agencies had been established, and these were important for local government, to help identify development opportunities.

Mr Njikelana asked whether the IDC had considered supporting industrial parks in townships.

Mr Zalk pointed out that the IDC did not operate in a vacuum but worked with other development finance institutions and the dti on industrial parks and industrial development zones.

Mr B Radebe (ACDP) asked about agriculture, and why the IDC provided loans at a higher rate of interest than private banks. He also questioned the rate of default on loans.

Mr Qhena said that the IDC had a dedicated agricultural group and also worked closely with the Land Bank, and with various other groups to achieve sustainable solutions. He noted that the differential interest rates arose because the IDC did not take deposits, although it did take an equity stake.

Mr Marais referred to the financial statement, and said that if the fall in capital gains and rise in net movement in impairments became trends, this could cause problems for the financial position of the IDC.

Mr Zalk pointed out that impairments were generally rising in the economy but did not believe that this was the start of a trend.

Mr Marais said that he did not think that this was a satisfactory answer. He wanted more than a “belief” in a trend, and questioned what information was leading Mr Zalk to this belief.

Mr Qhena replied that the capital gains amounted reflected was an erratic figure. The IDC only disposed of an investment in order to reinvest. The capital gains figure depended on the timing of big investment projects.

Mr Marais noted that the increase in remuneration of 5.7% was fair. However, the increase in performance bonuses of 55.9% (page 144 of the Annual Report) did not correlate with what had happened in the economy. He asked what the justification for this increase was.

Mr Zalk felt it would be inappropriate for Mr Qhena to comment on his own remuneration and that of the IDC board. He said that the IDC was a development bank, but had to compete with the private financial sector for skills. There must be a balance on remuneration and there had been a modest increase in salaries. The appropriate comparison was what people could earn in a similar role in the private sector. The dti did not believe that the IDC performance bonuses were excessive, as they were linked to the financial performance of the IDC, which had been good.

Mr Marais felt this answer was unacceptable. The fact that the private sector paid high bonuses was not, to his mind, justification for the IDC’s performance bonuses. He requested a clearer explanation of the criteria for the performance bonuses.

The Chairperson asked about the “I Do Care” programme. She asked which disabled charities had been supported, how much had been given and how the charities had been chosen.

Mr Marais asked what was defined as disability, who adjudicated on this, and how much had been invested.

Mr Qhena replied that the “I Do Care” programme was driven by the IDC staff. This year they had decided to support charities for the disabled with their contributions, through this corporate social investment project. The R50 million fund had been approved and ring fenced, but withdrawals would depend on applications received. The fund was set up and had been publicised. As yet, there had been no uptake and no funds had been used. The description was in line with national guidelines on disability.

The Chairperson asked about the length of the application process, as she noted that the time between approval and the funds actually being delivered to the company was often delayed by more than six months. She requested an explanation as to why this was the case.

Mr Qhena explained that the IDC received applications of different sizes and types. A basic assessment was followed by an interaction with the applicant, which could involve some time in the process. He said that if all the required information was submitted straight away, then an application moved quickly. The length of time depended largely on the amount of the investment. Any investment of R250 million or more would go to the IDC board. Once approval was given, agreements had to be drawn up concerning payments. Mr Qhena recognised that the system was not perfect and the IDC was trying to develop a system where applications could be tracked on line. The IDC realised that this was a sensitive issue, particularly for SMEs.

Mr Njikelana asked what lessons had been learned from the applications that had been rejected.

Mr Meer said that there were many lessons to be learned from rejected applications. Often, companies had misguided expectations that the IDC would help them continue to operate or bail them out.

The Chairperson thanked all the presenters and said that the Committee would submit unanswered questions to the IDC and the dti in writing, and expected written answers by Wednesday 21 October.

Independent Producers’ Organisation (IPO) and the South African Screen Federation (SASFED) submissions
Mr Tumelo Chipfupa, Deputy-Director General, dti, said that the dti had not traditionally worked with the film industry but had begun to do so in 2005, along with the IDC. The industry had opportunities for job creation. The dti had developed an incentive scheme to encourage foreign film makers to come to South Africa and the programme was altered in 2008 to better cater to local film makers. There were a number of government departments responsible for working closely with the film industry.

Mr Tendeka Matatu, IPO/SASFED representative, gave a presentation describing the film industry in South Africa, its interaction with government and how it had been affected by the economic crisis. The industry was unusual, owing to its cultural and social impact and its high profile. He pointed out that the industry was facing a crisis, despite significant growth potential.

Mr Matatu said that the industry comprised film, television, commercials, corporate work, documentaries and wildlife. It had been a high growth industry and had been included in the Accelerated and Shared Growth Initiative for South Africa (ASGISA). Direct employment in the industry comprised 25 000 people, indirect employment was 100 000 and much of this employment was freelance. The industry had an estimated turnover of R8 billion per annum.

Mr Kevin Fleischer, IPO representative, described the value chain of the industry. The stages were creative, production, post-production and distribution. The skills used in each stage were distinct from each other. The majority of costs (60%) occurred in the production stage. Revenue for the industry came primarily from TV (70%). He pointed out that the DVD market was small, only accounting for 7% of revenue, which gave it potential for growth.

Mr Matatu described the “triple-whammy” facing the film industry. The recession had reduced investment, the “meltdown” of the South African Broadcasting Corporation (SABC) had frozen funds, and there had been increased competition from other destinations. The sector had been scaling down and firms had closed down, resulting in a brain drain as skilled people left South Africa. However there was potential for growth in the industry by using both local and international models.

Mr Matatu described that the government supported the film industry in a number of different ways, especially through the dti and IDC. The Section 24(f) tax incentive was in place for the industry, although it had not been utilised to its full potential. He said that the IPO and SASFED were involved in the restructuring of SABC and that the copyright laws and intellectual property rights were crucial to the industry.

Mr Matatu said that agencies were moving in the right direction and urged the Committee to continue to support these agencies. The film industry could become a strong growth sector in South Africa.

Discussion
Mr Marais asked what incentives the dti had to attract film makers to South Africa and why South Africa was falling behind.

Mr Njikelana said that comparative analysis was needed to see how South Africa’s incentive schemes compared to those in other countries.

Ms Karin Liebenberg, Director: TV and Film Incentives, dti, said that originally the South African incentive scheme had been aimed at productions with large budgets (R25 million threshold). Under this, 49 films had been supported, of which 16 had been South African. The dti introduced a new scheme in 2008 with lower budgets (R2.5 million threshold), which attracted more South African productions. She said that the incentive was very competitive internationally. However, the incentive was capped at R10 million, whereas other countries such as Australia had uncapped incentive schemes.

The Chairperson was alarmed at the distress in the film industry and was concerned at the loss of skills from the country, saying that much responsibility rested with the IDC as it had more money available for support than the dti.

Mr Basil Ford, Head: Media and Motion Pictures, IDC, said that the IDC investment in the industry had been R111 million in the previous year, and that there were currently a number of films in the pipeline. The IDC was trying to achieve a sustainable film industry; and this required a certain number of productions every year to maintain skills in South Africa. In order to do this it was necessary to have local consumption of local production.

Mr Oriani-Ambrosini said that in the past, there had been a bias within government against the film industry, particularly within the Department of Home Affairs. He said that this bias remained in the South African Revenue Service (SARS). He pleaded with the dti to interact with other organs of state to change this situation.

Mr Njikelana countered that any bias in the Department of Home Affairs and SARS would be in terms of regulation, and pointed out that the support and development from government had been very good in recent years.

Mr Njikelana asked whether films were being made about the struggle for liberation in South Africa.

Mr Ford said that the IDC was investing in films called “Long Walk to Freedom” and “Winnie” about this issue.

Mr Oriani-Ambrosini referred to previous discussions to set up a film studio in Cape Town. He believed that the sector should be supported to produce global products using hi-tech equipment. Local content was not the same as local situations, and the focus should have been on value added locally.

Mr Fleischer replied that there were some privately funded ventures in Cape Town and Johannesburg, which focused on hi-tech media work, but that these were funded by foreign investments. South Africa was working at the cutting edge of film making

Mr Njikelana said that it must be made clear what was being discussed when local content was mentioned. He asked what other countries, such as India, Brazil and Nigeria, were doing with regard to local content.

Mr Marais asked how much funding would be needed to produce the required amount of local content for television.

Mr Matatu said that many productions (such as District 9) were considered local content, as the actors, director and setting were all South African, apart from some or all of the funding. From a creative point of view, local content referred to having a South African story, and also related to where the ownership and intellectual property rights lay in South Africa. The dti and SARS had a definition of a South African film which covered intellectual property ownership, creative control and sources of finance.

Mr Fleischer pointed out the distinction between local content and local demand. Some content was aimed at the South African market, some at the international market and some would appeal to both markets. When differentiating between local and international models, it was important to consider the market where content would appeal, rather than the source of the financing or production.

Mr Oriani-Ambrosini expressed horror at the wide meaning of local content. He felt very strongly that the Committee should only be concerned with jobs, money and exports, and that locally-added value was crucial. He felt that the Committee and government should not be saying anything about content.

The Chairperson said that the dti was not involved in decisions on content. She said that the Committee would discuss this and invite relevant people to a future Committee meeting on the issue.

Mr Z Ntuli (ANC) asked about post-production equipment moving overseas, and whether government could do anything to prevent this.

Mr Fleischer replied that equipment moved abroad when it was no longer worthwhile to leave it in South Africa. He said that government could not address this directly, but that government should be supporting demand in the industry in general.

Mr Radebe asked why marketing sales were so low. He also asked why DVD revenue was so low. He questioned whether this was due to piracy and, if so, asked how this could be overcome.

Mr Radebe asked how new entrants to the industry could be encouraged and whether there were schemes in place at universities and schools.

Mr Ford replied that the IDC wanted to take a “value-chain” approach to the industry, and this included distribution. The DVD market only raised a small amount of revenue because it was uncoordinated. It was important to ensure that what was produced actually reached people.

Mr Marais asked whether the dti had calculated the economic impact of the meltdown of SABC.

The Chairperson said that the Committee was also considering the criteria used by the National Lottery when distributing funds.

Mr Zalk set out a way forward for the dti in quantifying the impact on the industry in general and the problems at SABC in particular. He pointed out that the IDC distressed-funding facility was available to companies in the film industry. The dti could also help with access to lottery funds and with tackling problems of piracy.

The meeting was adjourned.

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