Industrial Development Corporation: Green Industries and Technology briefing

NCOP Economic and Business Development

23 August 2010
Chairperson: Mr F Adams (ANC, Western Cape)
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Meeting Summary

The Industrial Development Corporation (IDC) briefed the Committee on its involvement in green industries and technology. He noted that South Africa was lagging behind both developed and developing countries in using alternative technologies, and was currently one of the highest carbon emitters, because of the continuing use of coal, although this was changing as electricity costs rose. However, it had made commitments at Copenhagen and needed to get itself into the position of front runner in Africa, make use of the opportunities to catch up in this relatively new industry, and thus become a significant market player. The IDC had a focus on job creation, which implied local manufacture, and whilst in some areas of greening this was limited, in others there would be significant opportunities. Challenges included the need for South Africa to operate in a green way in order to access certain markets, the need for long term funding, which would also take account of the lower margins for greening, and the conclusion of regulatory instruments such as power purchase agreements before the market could develop. Development finance institutions like the IDC often played a major role in the green arena, and it would be necessary for it to source different kinds of funding instruments. There was also a need for private sector involvement. IDC must play a role in developing the market in carbon credits.  The drivers and barriers for each sector of energy were set out, and IDC stressed that local manufacture would be an area to be looked at both in order to achieve more momentum and to create jobs. Public awareness would need to be raised, and more emphasis placed on regulatory interventions for new buildings. The opportunities and challenges for the solar energy field, waste-to-energy and recycling, wind power and biofuels were set out. South Africa had few opportunities for hydro-electric power, although its neighbouring countries did. IDC approved projects, and those still in the pipeline, were tabled, and IDC noted that the first South-African manufactured electrical car was at the pre-testing phase and would probably require government support. IDC had allocated R11.7 billion to investment in the green area, in debt and equity, over the next five years. It was working on integrating approaches, comments and initiatives from a variety of institutions who were working in the field. It noted the need to improve the turnaround time for environmental impact assessments, and the capacity and speed of carbon credit initiatives, as well as recognise and try to work around some of the constraints placed by the Public and Municipal Finance Management Acts on decision-making.

Members asked if the IDC would support both small domestic and larger projects, asked about its interventions in the rural areas, and questioned whether regulatory issues were causing a delay, whether environmental impact assessments were still also causing delays. Members asked about specific projects in KwaZulu Natal and Limpopo, and heard about the projects at KwaZulu Natal University in respect of waste projects. Members thought that the IDC should be concentrating on the Southern African regions, asked for examples of how the Public Finance Management Act constrained the IDC’s operations, and commented that it still seemed to take too long to get projects off the ground. Members asked what was being done about biofuels, commenting that there seemed to be a lack of political drive in that area, and asked whether it was necessary to consider re-capitalising the IDC. The IDC undertook to furnish a provincial breakdown of the R11.7 million investment to the Committee, and noted that Black Economic Empowerment activities were integrated into the IDC’s normal business, rather than a separate fund. IDC would also brief the Committee further on engagements with other stakeholders once there were clearer developments.

Meeting report

Industrial Development Corporation (IDC) Green Industries and Technology
Mr Shakeel Meer, Divisional Executive, Industrial Development Corporation, noted that South Africa was one of the highest producers of carbon equivalents, because of the use of coal. South Africa was also lagging behind the carbon credits generation. However, South Africa had made some strong commitments in Copenhagen, and now needed to lead other countries in Africa in implementation. South Africa had good solar and wind opportunities. Many countries with less sun than South Africa were already making use of solar power. There was a single electricity utility, which in theory should allow for faster and more efficient work, but in reality there was not a focus on greening but on security of supply. In addition, green technologies were relatively expensive for a developing country. Because this was a new industry internationally, there were opportunities to catch up, and it was possible for South Africa to import technologies, and have a significant market, which meant that it could then become a significant buyer. The low cost of local electricity to date had also meant that there was not a focus on greening, but this was changing as the costs rose.

Mr Meer set out the strategic focus and approach of the Industrial Development Corporation (IDC). One of its main focus areas was job creation. If there was to be an impact on job creation in some areas, then there must be local manufacture. Other areas, such as waste management, offered better opportunities for using labour-intensive technology. A key driver was security of energy supply. The Revised Industrial Policy Action Plan (IPAP2) had a focus on technology. A number of competitors were introducing measures to protect themselves, and it was necessary for South Africa to operate in a green way to make sure that it would not be prevented from accessing those markets.

Challenges in funding the different technologies included the need for long-term funding. Many banks were reluctant to lend over such a long period. In addition, the margins for greening were lower, there were limits on the markets for some products, some still required regulatory instruments such as power purchase agreements before the market developed, and there were lower levels of security, all of which impacted upon the willingness of banks to lend. Often, in the green arena, development finance institutions like the IDC played a major role. Typical funders could include commercial banks, carbon buyers and a number of intermediaries, being traders in carbon credits. It would be necessary for IDC to assist in sourcing different kinds of funding instruments.

The IDC could be a direct funder, through debt or equity, or guarantees. However, the private sector must also be involved. This could be done by developing new products in the green area, and IDC could also lead the way in demonstrating the viability of investments. Banks were often more wiling to cooperate and partner with IDC once it had certified the new products. IDC was investigating international sources of green funding. It would also have a role in developing the market in carbon credits. IDC intended to work closely with other agencies.

Mr Meer set out the drivers and barriers for each sector of energy efficiency (see slide presentation for full details). Some of the drivers included the rapid increases in electricity, various incentives, and management programmes. He reiterated that job creation depended largely on local manufacture, and some devices were not locally produced. In order to achieve more momentum, certain interventions had to be developed. He noted that other institutions were briefing the Committee, but pointed out that the perspective of IDC differed from that of, for example, the National Energy Regulator of South Africa (NERSA) because IDC approached the issues from the perspective of the investors. There were few services established to audit or advise on savings. There was a need for greater regulatory interventions for buildings, and momentum would only pick up when these were put in place. There was also limited public awareness of the opportunities for investment.

He then set out the opportunities and challenges for solar water heaters and heat pumps, improvement in industrial processes and sustainable buildings. Alternative technologies were established in other countries, but there was a need to study local conditions, to reach a balance between the interests of owners and tenants, and funding models were required. The Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA) procedures must be followed.

Mr Meer briefly set out some of the steps that had been taken. In the solar power field, IDC was in the process of doing a number of studies. It had funded some solar water heating companies to manufacture locally. It was working with established electricity supply companies to encourage retro-fitting of buildings and was working with funding institutions.

In the area of waste-to-energy, he indicated that this included animal waste, organic waste and municipal solid waste. An early project involved taking pig waste and generating methane to gain carbon credits. Often municipalities had to pay to dispose of their waste, there was a shortage of landfill sites and therefore there were opportunities. IDC was not mandated to finance municipalities, although Central Energy Fund was mandated for many of the landfill sites. There was slow progress with implementation of the Renewable Energy Feed In Tariff (REFIT). It was difficult to try to manage projects on a large scale, and many initiatives would not qualify under REFIT. If waste projects were used for electricity generation it was not possible to progress to a large scale unless there was progress on the power purchase agreements. IDC was looking at a bankable feasibility study for a Fresh produce Market to general electricity from waste organic material. It was also looking at a Compressed Natural Biogas (CNG) pilot plant and was exploring alternative fuels.

South Africa also had a number of areas that it could further investigate for recycling. There were many opportunities to save landfill space. However, it would then be necessary to look at regulations to separate at source, overcome the difficulties in attracting investors, and deal with the fact that the returns on investment were low by offering mechanisms to support recycling. This sector offered major opportunities for job creation and import replacement.

There were also job opportunities in wood biomass waste, wood pelletting, and the exchange of coal for more environmentally friendly products. Two producers were already producing wood pellets for international markets, but the major opportunities would lie rather in switching local boilers to use these pellets. On the generation side, there were significant opportunities for using wind power, once detailed assessment of the sites had been made. IDC was not waiting for this, but was currently going ahead with investigating 13 wind projects. Some examples of these projects were tabled (see attached presentation for details). Many were still in a very early stage. One of the most interesting developments was in local manufacture of wind turbines, although this was unproven so far and the manufacturer was struggling to raise finance. The first commercial stage project was situated in Kenya, because the regulatory frameworks were in place there and because IDC did invest throughout Africa. If the potential for solar and wind power could be exploited throughout Africa this would create a strong basis for exports. The opportunities for solar energy were also set out, in the areas of photovoltics, and concentrated solar power (CSP). South Africa had no major hydro-electric opportunities. In the area of biofuels, IDC was heavily involved in various technologies, and the intention was to mix biofuels with ordinary petrol.

The IDC approved projects and pipeline projects were tabled. Mr Meer noted that IDC was also looking at a South African-manufactured electrical car, which was currently in the pre-manufactured testing stage. Government support would probably be required to get this project off the ground. IDC had allocated R11.7 billion to investment in the green area, in debt and equity, over the next five years.

IDC needed to integrate the approaches, comments and initiatives, and to ensure that best practices were applied inside IDC and in other organisations with whom it interacted. Mr Meer said that this applied in particular to the regulatory environment. IDC was eagerly awaiting the co-generation premium tariff to allow industries to generate their own power. The framework for independent power producers, regulation on buildings, and clarity on the role of carbon taxes were all required. Environmental Impact Assessments (EIAs) often took too long. One of the constraints currently was the need to improve the capacity and speed of carbon credit initiatives. The PFMA and MFMA also placed constraints on making key decisions.

A wide range of institutions were involved, including Khula, Eskom, and the competition authorities. While each had its own role, it was necessary to ensure that they did not work at cross purposes and did utilise the opportunities. IDC had to mobilise funding, and wanted to work closely with the other agencies, commencing with workshops, to ensure strong alignment. IDC also wanted to lead from the front through example, and assist in clarifying relationships and roles.

Discussion
Mr A Lees (DA, Kwazulu Natal) asked whether the IDC would support both small domestic and larger projects. He had only noted one small waste project, and he wondered if smaller projects could not be used as stepping stones to proliferate more projects, particularly in the rural areas. 

Mr Meer responded that IDC did not look at smaller investments, as that was done by Khula and similar organisations, although it did look at some projects like biomass out of waste, below one megawatt. Solar water heaters were being done on a house-by-house basis. Some banks were funding this as part of their bonds, although this initiative had not really taken off. IDC could not lend to a single consumer, but was trying to work with electricity supply companies to install on a larger scale in a municipality, thereby indirectly affecting domestic production. Many of the projects were in rural areas, because they were often best suited to places where land was relatively cheap.

Mr D Gumede (ANC, KwaZulu Natal) noted that IDC was still waiting on regulatory issues from NERSA. He wondered if this meant that the projects would take longer.

Mr Meer hoped that there would not be too many delays, He hoped that Eskom and NERSA would come to the table quickly on the power purchase agreements, hopefully within the next few months. IDC, however, was going ahead to develop projects in the meantime, and was not waiting for everything to be finalised first, hoping that everything would be in place before the time came for the large scale developing.

Mr Gumede said that sugar was available in KwaZulu Natal, and he therefore asked for details about the sugar to ethanol project. He also enquired about the waste projects in that province.

Mr Meer noted that there was a waste project. There was also a project concerning biofuels.

Ms Rentia van Tonder, Head: Wood, Paper and Strategic Business Unit, IDC, said that KwaZulu Natal University had a waste project, limited to about 2 Megawatts, but it was looking at combining various projects together.

Mr Gumede felt that the priority of IDC should be in Southern Africa, not Kenya, and he asked what the challenges were.

Mr Meer said that IDC saw Southern African Development Community (SADC) countries as a main focus area. In the green arena, IDC had only been active in the last year or two, but was currently looking at engaging with a Namibian company on wind generation.

Mr Gumede noted the remark that the PFMA posed certain constraints to doing business, and asked for examples.

Mr Meer said that IDC could not take a controlling stake in a project without permission from National Treasury and this gave rise to time delays. While he could understand the reasoning for this, it made things ,difficult for IDC as investment was its core business.

Mr Gumede asked if the environmental impact assessment turnaround times were still problematic.

Mr Meer said that EIAs were still a challenge, and some time was needed to work through the process. He could not comment from the regulatory point of view, but from the investor point of view. Long lead times and uncertainties made it difficult to put investments together, and this applied not only to the greening arena.

Mr K Sinclair (COPE) said that it seemed to take too long to get projects off the ground. He also noted that the EIAs were haunting many developmental initiatives. In Free State, the EIA for the Heritage Resource Agency project was to be done by one individual, yet the relevant person had not been able to attend to this for five months, which meant that all potential developments had been halted, basically because of an administrative blunder. He noted that IDC was not in the political sphere, but these kinds of challenges had to be overcome in order to invest and engage in the opportunities.

Mr Sinclair noted that government had been making inconsistent statements for some time with regard to biofuels, and there seemed to be a lack of strategic and political drive. The Minister of Economic Development had attended a meeting with the Committee a few days ago, and had informed the Committee that he had engaged with the IDC leadership. Mr Sinclair  asked when the rollout of the plans would take place.

Mr Meer said that IDC was quite positive about this aspect. IDC had always maintained a consistent approach to biofuels, and had thus started engaging with local communities to grow the crops, and had consulted with Brazil, who had experience in the area, and some projects were already quite well developed. There was active engagement with government and IDC was positive that it would arrive at suitable mechanisms with the necessary agreements quite soon.

Mr Sinclair felt that if South Africa wanted to be a front runner in Africa, government perhaps needed to recapitalise the IDC to give it a major boost and financial investment to enable it to do many of the things it wanted. He pointed out that this was done in China. South Africa had many resources – including rivers – to do more, and he could not understand why there were complaints about lack of water in some provinces. He believed that it was necessary to think laterally, in order to push ahead in terms of the green economy.

Mr Meer said that the recapitalisation of IDC had been debated in the press and Parliament. Currently, IDC was sufficiently capitalised. It was making investments, which were growing annually. He explained that IDC took a five to ten year view for different sectors, and looked at what it could develop, what would be areas of future demand, where could jobs be created, and where regional impact would be realised. A large portion of the R11.7 billion allocated for greening would be realised if these projects went through to a commercial stage. IDC also hoped to develop a number of other things, not all of which were mentioned in the presentation. If every project materialised, then it was possible that IDC could run short of funding in the medium term, which might then require another re-think on capitalisation, but this was not necessary at the moment.

Ms M Dikgale (ANC, Limpopo) noted that pit toilets were being used in Limpopo. These were simply moved when full. She asked what IDC could do to assist with organic waste.

Ms E van Lingen (DA, Eastern Cape) noted that every municipality had sewage. She asked how costly it would be to create a project to deal with municipal sewage, and asked about a project that Wits University was running.

Mr Meer said that there was potential to use the waste, to generate methane gas and carbon credits. However, IDC did not operate on the small scale. Thus it would not be able to intervene directly in the Limpopo case, but if a commercial entity could come up with a viable approach to collect waste and operate a commercial size plant, then IDC could assist.

Mr Meer confirmed that there was a pilot project running in KwaZulu Natal, at the university premises, where the university attended to collection of waste from the surrounding rural areas. If the pilot worked out and seemed commercially viable it could be rolled out across the country. IDC had not engaged with Wits University specifically, but this was useful information, and IDC could follow up on this.

Ms van Lingen asked to what extent the contractual framework of power purchase agreements (PPAs) would limit the development, and what budget there was to back this up.

Mr Meer said that this was a critical area. IDC was not waiting for the PPAs to be put in place. Before the projects could be viable, the contractual framework must be appropriate. There was engagement on the consultation processes, and there was now a need to engage with project partners. IDC sat on the opposite side of Eskom and NERSA in the discussions, for the reasons he had already outlined, and would have to ensure that the needs of IDC and private sector investors were met. One of the opportunities for IDC was that it was a government institution, which existed to implement government policy, yet it also operated in the commercial development sector. This allowed it to see both sides of the picture and make inputs on both sides of the debate.

The Chairperson noted that the IDC had also committed itself to R11.7 billion for the next five years. He asked how this would be done, and what the provincial breakdown would be.

Mr Meer said that he did not have this information with him, but would send through information on greening and general investments.

Ms van Lingen asked if this could also be divided into the various sectors. She also requested information on the Black Economic Empowerment (BEE) fund.

Mr Meer noted that although IDC did play a role when the BEE initiatives were first developing, was now not necessarily funding new BEE businesses, but was rather encouraging the expansion of BEE entrepreneurs. BEE activities were integrated into IDC’s normal business. The majority of the job-creating investments were in empowered businesses, but there was no separate activity out of a separate fund.

Ms van Tonder added that one of the challenges related to the fact that the IDC did not always have project developers who were prepared to put in funding and take a risk. Many came with an idea, but wanted the IDC to assist them and develop the project. Although IDC assisted the people to participate, it had limited ownership in many projects.

Mr A Nyambe (ANC, Mpumalanga) thanked the IDC for an informative presentation. He noted that workshops would be held with stakeholders, and wondered whether the Committee could be included.

Mr Meer noted that these workshops focused on ensuring that the various roleplayers in the green arena were talking to each other and pursuing the same aims. This was the first stage of what would be a long process. IDC would be happy to brief the Committee further when the picture was clearer.

The meeting was adjourned.


 

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