The Committee received a presentation from the Industrial Development Corporation on its Annual Report. The presentation focused on general issues, the financial situation of the IDC and future plans. The IDC was at pains to make clear that it had not reached a number of its long and short term targets due to issues directly linked to the recession.
The Corporation reported that with the implementation of the new growth path the focus of the country would be increasingly on industrial development; this was largely encapsulated in the Industrial Policy Action Plan. The role of the Corporation would be to ensure that the key elements of this Policy were implemented and to achieve long-term development goals. The Corporation had begun to report to the Department of Economic Development, because the Department played a coordinating role in terms of policy. The Corporation had taken intentionally not followed the trend of a number of banks and lenders both locally and internationally and cut down on activities. The Corporation had achieved the second highest level of approvals in its history at over R9 billion. The Corporation continued to have a positive impact on the economy despite the recession. It expected to save and create 25 000 jobs. Steps were taken to lower the cost of funding to businesses by establishing a partnership with the Unemployment Insurance Fund to source funds aimed at creating jobs efficiently. The green economy had been a major driver for creating jobs as well as reducing the country’s carbon emissions. South Africa had one of the highest per capita emissions of carbon, but the Corporation had taken a lead in conferences such as the Copenhagen Conference. The Corporation had participated in a comprehensive malaria review programme in conjunction with the World Health Organisation and Department of Health to investigate innovative solutions to illness and identify industry development opportunities in this area. It had also provided funding for an additional two hospitals. The Corporation had once again received a clean audit report. The internal auditors had picked up some misstatements; these were as a result of a difference of interpretation between management and auditors. This was resolved. The external auditors had not found any control deficiencies.
Members raised a number of issues and suggested that the time allocated for the meeting was far too short for an institution with such a substantial budget as that of the Corporation.
Members queried the role of the Corporation both within the country and on the continent. They suggested that its investments in the wider continent were slightly larger than was necessary and that this did not really assist poor South African citizens. Members were clearly agitated over the electric car project - the Joule; Members questioned the Corporation’s role in the project, the amount of money invested and whether the car could be competitive with similar vehicles that countries like China and Japan might produce. Members were also interested in the demographic spread of investments, asked for more information, and wanted to know who exactly black shareholders were. Members focused on abalone farming and suggested not enough was being done to diversify this area. Lastly members also took issue with the Corporation’s failure to create more than 50% of the permanent jobs planned for the previous financial year. There were suggestions that the Corporation was not taking its cue from Government and that it was not doing enough for the poorest sectors of society.
The Committee decided that the Corporation would go away and return again with answers to the second round of questions, as it was clear that Members required much more information.
Industrial Development Corporation Annual Report 2009/10. Briefing
Mr Shakeel Meer, Divisional Executive: Industrial Sectors, Industrial Development Corporation (IDC), presented on the general issues of the Corporation. He opened by explaining that IDC's key role was in the development of industrial sectors and the industrial capacity of South Africa (SA). With the implementation of the new growth path the focus of the country would be increasingly on industrial development; this was largely encapsulated in the Industrial Policy Action Plan (IPAP2). He explained that the role of the IDC would be to ensure that the key elements of this policy were implemented and to achieve long-term development goals. He informed the Committee that the IDC had begun to report to the Department of Economic Development; because the Department played a coordinating role in terms of policy the IDC believed that their involvement with it should make it easier for the IDC to implement policy. IDC was also hopeful that the Department of Economic Development (DED) would be able to assist in removing barriers to the implementation of specific projects.
Beginning with the operating environment, Mr Meer explained that it had been a period of recession; the country was hit at the beginning of the year. This meant that there was local consumer demand for products but substantially weaker demand for the exports of South African and African products. Some sectors did start seeing recovery during the course of the year, such as commodities; this was largely driven by China, coming from a very low base and unique to specific sectors. A number of companies came under severe strain as demand for their products dropped; some companies cancelled expansion plans or put them on hold. He informed the Committee that this had an impact on the IDC particularly with regards to an increase in clients experiencing difficulty putting increasing demands on resources; and there were also delays and cancellations of previously approved projects due to uncertainties regarding economic conditions. He noted that although the IDC had received a far greater number of business applications there were fewer fundable applications, partly due to their poor quality. There was also lower than expected uptake of distressed funding, as companies were reluctant to increase their debt burden.
He explained that the IDC had taken a conscious decision to not follow the trend of a number of banks and lenders both locally and internationally and cut down on activities. He stated that IDC had achieved the second highest level of approvals in the IDC’s history at over R9 billion. Due to this the IDC continued to have a positive impact on the economy despite the recession. IDC expected to save and create 25 000 jobs; 8 800 of these were directly as a result of funding to companies in distress. He noted that the number of new jobs created had dropped but this was in favour of assisting companies to maintain their employment levels and thereby save existing jobs.
He explained that the IDC provided funding to the necessary areas as cheaply as possible, but in the context of the economic crisis some of their traditional forms of funding had dried up. Steps were taken to lower the cost of funding to businesses by establishing a partnership with the Unemployment Insurance Fund (UIF) to source funds aimed at creating jobs efficiently. This was targeted specifically at companies that had created safe jobs at an efficient rate
As to green Industries and the green economy, Mr Meer he touched on the fact that this had been a focus area for the Corporation in previous years. In the last financial year it had started to gain momentum by participating in the early stages of development. He noted that the green economy had been a major driver for creating jobs as well as reducing the country’s carbon emissions. He highlighted that SA had one of the highest per capita emissions of carbon; the IDC had taken a lead in conferences such as the Copenhagen Conference ensuring that the country would be able to make the right moves and access the growing industry around the green economy. He stressed that this would allow even greater job creation. The IDC had taken a holistic approach focusing on alternative energy sources such as wind and solar power. It was e also looking at the demand side taking into consideration energy management including co-generation and conversion to more efficient technologies. With regards to the energy element it was were looking at resource management, incorporating improved waste management and recycling. He admitted that some of these things such as wind and solar energy created very few jobs; he stressed that if it wanted to make an impact it would need to ensure the development of industries to supply technology and components within the country. The range within this fell into the feasibility and pre-feasibility stage; some of the projects would take a number of years to roll out. He gave examples of projects such as the recycling of steel and the cleaning up of mine water wastage.
The manufacturing industry he explained that it was one of IDC’s key focuses. One of the key elements of IPAP was that Government was planning a substantial investment of capital in the next few years. He stressed again that South Africa would need to take advantage of that by manufacturing as much as possible locally, both for balance of payments and for job creation purposes. The two main areas of investment for the IDC were Eskom and rail, which included Transnet and the Passenger Rail Agency of South Africa (PRASA). He stressed that IDC was not looking at funding them directly but rather their suppliers in order to build up capacity. As examples he explained that they had been involved in the approval of R45 million to allow a women-owned business upgrading commuter rail coaches expanding to KwaZulu-Natal. This was expected to create 163 jobs. The second example was the R30 million loan to a company manufacturing ducting for the Medupi Power Station – creating 213 jobs.
Addressing Forestry he argued that wood would increasingly become a scarce resource, IDC would need to ensure that there was a steady supply of timber. He noted the importance of this sector particularly due to its location in rural areas. As one of the industries hard hit by the recession, IDC approved funding to a major forestry and sawmilling company in Mpumalanga employing more than 4 000 people. He informed the Committee that this company had started turning around and had reemployed some of those it had retrenched. The IDC had also assisted a major South African retailer with the establishment of a furniture manufacturing facility as part of a backward integration strategy by a retailer creating 207 new jobs in the manufacturing sector.
In the automotive sector in line with the Automotive Production and Development Program (APDP) that had been produced, the IDC was focusing on the development of the motor vehicle component industry through local production. During the year under review most of IDC’s activities in this sector had been aimed at assisting companies experiencing distress as a result of the recession. He stated that during 2009/10 approvals to the value of R376 million was made for motor vehicle component and transport equipment manufacturers. This was expected to save upwards of 1500 jobs. With regards to textiles and clothing, he stated that the decline in the industry had been exacerbated by the recession. The IDC attempted to assist in working against short tem job losses and worked with the industry and the individual companies to provide long-term solutions to improve the industry’s competitiveness. During the year, R292 million of funding was approved to assist companies in this industry improve their competitiveness and save and create 2 100 jobs
In rural areas the IDC’s approach to rural development had been focused on industries, which exploited the advantages of specific areas. Two of the sectors with the largest investment in rural areas were the agro-industries and minerals and beneficiations. As examples here he explained that the IDC had approved R34 million for the expansion of abalone farms in the Western Cape; this would allow black entrepreneurs to acquire a stake in the business. The second example was a citrus project with shareholding by local communities in the Northern Cape; this was expected to create 1300 jobs and the IDC had invested R200 million. The IDC had also made a substantial investment in the manganese ore mine. He explained that they wanted to make sure there was local benificiation; they were looking into a sinter complex in the Northern Cape and a ferromanganese alloy production facility at Coega. This would create almost 1 000 direct jobs, 900 contract jobs and 3 700 construction jobs. This would also provide about R10 billion per annum in foreign exchange
Mr Meer explained that the presentation could not focus on everything the IDC had done over the year; instead it would provide an overview of a variety of schemes. The IDC had participated in a comprehensive malaria review programme in conjunction with the World Health Organisation (WHO) and Department of Health to investigate innovative solutions to illness and identify industry development opportunities in this area. It had also provided funding for an additional two hospitals under the Township and Rural Hospital Scheme. These were in regions that were not necessarily well serviced by the Government sector. He stated that this was particularly positive due to the fact that the private sector was often reluctant to invest in this sector due the lack of economies of skill. He noted that IDC had also focused on the development of the local film industry; this was done through focusing on the production of low-budget films in partnership with the National Film and Video Foundation and the SABC. The IDC also provided continued support for the transport and logistics sector through wholesale funding to truck operators and addressing a need for air transport in the rest of Africa through providing funding directed at the aviation sector.
During the recession IDC’s main focus had been the provision of funding; it had provided R9 billion. In terms of distress funding it was lower than it had expected. In total the IDC had allocated R6 billion; it admitted to being unsure about the level of demand. It had been hosting a number of workshops and interacting with the media to advertise this available funding. Returning to clothing and textiles Mr Meer stated that the competitiveness scheme had been effective, and a large number of companies had upgraded their systems to improve their processes and equipment. Reiterating their involvement with the Unemployment Insurance fund (UIF); he stated that they had sourced funds. Besides companies funded through distressed funding he highlighted that a number of existing clients had been put under pressure; the IDC had spent a large amount of resources and time assisting those companies, helping them restructure their facilities, converting debt equity, delaying payments and helping them survive the period.
In summary the main impact of the IDC was its central focus, South African start ups and expansions. A quarter of investments went into the rest of the African continent focusing on infrastructure, agriculture and manufacturing. As a result of the economic crisis 15% of the funding had gone to distressed companies. By sector a large sum of money had gone into mining; this was due to the fact that mining investment tended to be larger, but the spread was quite good. Highlighting the regional spread, IDC’s traditional investments had focused on Gauteng and KwaZulu Natal; this year they had had a far better spread although. One area which was still considered to be a challenge was the Free State.
Mr Meer highlighted that the report had provided a number of case studies but that he would focus on one in the greening agriculture sector. He explained that the IDC had been involved in changing the coal boilers of a citrus operation, which were not carbon friendly or renewable to more environmentally friendly boilers. These were more efficient and allowed the company to utilise the peels of the fruit as energy. This reduced the carbon footprint and allowed the company to apply for Carbon Credits as an additional source of income. These Carbon Credits were being used to support the local community. He argued that it was in these sorts of areas that the IDC had to focus and become more inventive, providing new industries, new markets and new technologies, and ensuring that they could promote green as well as become more competitive. He informed the Committee that IDC was becoming increasingly active in venture capital; one of the projects, which they had supported, was a company, which had a new technology in terms of planting pits. He explained that it was capable of planting between two and three thousand seed per day. They were hopeful that if this project became a success it would have an impact on forestry and the creation of new exports and technology. They had also funded a clinic in Cosmo City, this company was black owned, new and an independent competitor targeting lower income and disadvantaged communities.
Mr Gerrit van Wyk, Chief Risk Officer, Industrial Development Corporation, addressed the financial results of the IDC for the year 2009/10. He explained that the IDC was broken up into a mini group, which was made up of the financing subsidiaries, other subsidiaries and associates. He explained that the group referred to everything whilst the mini group referred simply to these three areas. Addressing the Financing and Subsidiaries of IDC he explained that these were Findevco, Impofin, Kindoc Investments, Konbel and Konoil. He explained that Findevco was established many years ago and that they were in the process of phasing it out. It was an unnecessary additional-financing subsidiary, which separated the equity and the loan book. Impofin consisted of all the import finance facilities. Kindoc was explained as the IDC’s Sandton property. Konbel was also a very old financing facility, which had almost no value in it, but they were required to keep it report on it because there was R2 million in it. Konoil referred to the Sasol investment made in the 50s. He stated that it was also dormant but the share in Sasol was still alive. The other subsidiaries referred to where Foskor was currently being held, he explained that IDC currently held an 80% share in Foskor. In general other subsidiaries referred to situations where the IDC had share holdings of more than 50%. Associates referred to instances where the IDC had shareholdings of between 25 and 50%. The examples given to illustrate here included Mozal, Incwala Resources, Savannah Platinum and a number of other smaller entities, grouped as other associates.
Mr Van Wyk explained the income statement of the group as the consolidated picture of the subsidiaries and associates. He explained the need to consolidate the shareholding of the IDC; there was a drop in revenue from R15 billion to R7 billion. This was due to the weak performance of Foskor; this meant that net income dropped from R6.4 billion to R2 billion. Unpacking the sources of income he highlighted the dividends received form equity investments, interest from loans, preference shares and other which referred to fees earned. Their main source of income remained dividends from shares mainly from Kumba and Sasol. The R5.3 billion which IDC had received in the previous year was mainly due to a dividend from Foskor and Mozal; this had not happened in 2010. They also received over R770 million in interest on the loan book and R325 million as fees. This could all be understood as income for the mini group
Addressing administrative expenses in the mini group, the cost to income ration increased form 14% to 30%; this was largely due to the lowered income. Staff costs had remained constant around R500 million. Other costs had amounted to R440 million; he explained these as marketing costs, IT and travel costs.
Mr Van Wyk then followed with an explanation of the impairments of the IDC. Impairments were expressed as a percentage of cost and as a percentage of ‘at market value’. At cost impairments increased from 10-12% in 2007/8 to 16-20% this was due to the relatively high risk investments the IDC was making. At market value the percentage had remained the same at around 4.9%. Analysing the net profit of the IDC, in 2010 the operating profit was R1.4 billion and in capital gains, where shares were sold, R573 million. With regards to operations the income was R1.4 billion; this was a fall from the R3.9 billion in 2009.
Addressing the balance sheet of the group under assets the major change was the growth of investments from R53 billion to R68 billion and in the reserves from R63 billion to R77 billion. The main increase was on the equity side due to the increase in the market value of the portfolio. Loans and advances had remained the same at R9.7 billion. Investments at cost had been R18 billion; there was an increase in the value of investments up from R48 billion to R60 billion.
He explained that there were two books in terms of investments - the listed and the unlisted books. On the unlisted book at market value the main investments were Mozal at R4.6 billion, Foskor at R2/3 billion, Incwala at R2 billion, and all other investment at R11 billion. Reflecting on the listed portion of the book of the IDC the big contributors had been Sasol at R16 billion, the investment in Kumba R14 billion, BHP R8.5 billion and Mital and a number of small investments which totalled to R4 billion. In summary, addressing the balance sheet of the IDC, he highlighted that IDC had looked at the capital base of the Corporation. The debt equity ratio was at 4% coming down form 8% in 2008/9. The net asset value of the IDC was at almost R80 billion for 2010. He reiterated that the increase was due to the increase in the revaluation of the IDCs assets
Mr Van Wyk then addressed issues of the audit. He explained that within the IDC there was a board audit committee which was a sub-committee of the board. It had specific objectives including ensuring that the IDC complied with the International Financial Reporting Standards (IFRS) and the Companies Act. The audit committee was also responsible for making sure that financial controls and reporting were adequate. He explained that the board was comprised of four non-executive members, two independent non-executive committee members external to the board and the Chief Executive Office (CEO). The board audit committee was chaired by an independent non-executive director. The Chief Financial Officer, Chief Risk Officer, Head Internal Audit, and the Head of Information Technology (IT) were invitees with observer status. The IDC also had an internal audit function, which reported directly to the board audit committee. They performed enterprise wide risk management of the IDC; the audit department would then use this in their audit. He stressed that there was a strong forensic capacity within the internal audit department; it also reviewed the IT system and all other systems and procedures.
Summarising the report of the external auditors, Mr Van Wyk highlighted that the IDC had once again received a clean audit report. The report highlighted that the internal auditors had picked up some misstatements; these were as a result of a difference of interpretation between management and auditors. This was resolved. The external auditors had not found any control deficiencies. The second issue in the report was around compliance with the Public Finance Management Act (PFMA). He reminded the Chair that last year IDC had been given an exemption with regards to Section 92, 51 and 54 until October 2011. These referred to the requirement that when the IDC did make investments it was required to report these to National Treasury; in 2011 IDC would apply for exemption again. Internal control received a clean sheet; Mr Van Wyk explained that the auditors looked at leadership, performance management, record keeping and governance. The IDC had achieved the required levels. He noted that there were smaller findings regarding IT issues. These were to do with user accounts, the strength of passwords and patches. There were also some non-material administrative matters. This referred to the way IDC accounted for jobs and the way it documented its correspondence.
Mr Christo van Zyl, Senior Strategist, IDC, addressed the IDC’s performance against its targets. The most important target for the IDC was the creation of 38 000 jobs; after taking into account the transactions that were cancelled, IDC had achieved 19 300 jobs. He explained that IDC’s target had not been achieved; this was due to the lower than expected uptake of the distressed funding and the higher level of cancellation of previous transactions due to economic conditions. In terms of funding approval for Small and Medium Enterprises (SMEs) the target was 145 - IDC had achieved 124. IDC had over achieved on the value of approvals benefiting the development of the rest of the continent. The goal had been R1.8 billion; IDC had achieved R2.4 billion. He stressed that the rest of the continent was important to the IDC as it offered markets.
For disbursement of funds, excluding disbursement of distressed funds, the goal had been R5.4 billion; due to delays and cancellations IDC had managed to disburse R4.8 billion. Turning to financial income Mr Van Zyl explained that IDC looked at dividend income, gross interest margin and impairments. The goal had been R530 million; in 2010 R320 million had been achieved. On the gross interest margin IDC had a target of 1.8% and had achieved a margin of 2.3%. The reason for this indicator was to ensure that the IDC lowered its cost of borrowing in the long term. Turning to impairments, bad debt write-offs and project impairments charge to income statement, the target was a limit of R1.27 million; impairments totalled at R1.2 million, which was lowered than budgeted for. Operating expenses were also lower than budgeted for. The final indicator on the short-term target was the Customer Satisfaction Index. IDC had aimed to receive customer satisfaction of 86; it had achieved 84. To rectify this decline, IDC was targeting improvement in its turn around time.
Addressing long-term targets, Mr Van Zyl explained that the recession had seriously impacted job creation. At least 80% of gross budgeted jobs should have been created; only 57% of jobs were created and sustained. IDC had developed the strategies for the implementation of IPAC2. He explained that it was necessary to be aware of the IDC’s long term sustainability, particularly with regards to investments. The target had been to see average annual growth in fair value of unlisted investments exceed 12.3% per annum. IDC had achieved growth of 11% per annum over the last three years. This was due to the drop in valuations of the previous year. The next long-term target was profitability, including unrealised returns. IDC had aimed to achieve 10.4% return on assets, including unrealised returns. IDC had actually achieved 17%. IDC had aimed to reduce staff turnover to 9%; it had remained constant at 10% over the last three years. Lastly one of IDC’s long-term targets was to ensure good stakeholder relations; IDC’s target was achieving a score of 51.7% in stakeholder perceptions survey. They achieved a score of 50.7%.
In closing, Mr Van Zyl highlighted prospects for the coming year. These included the implementation of IPAP2 and the new Growth Path, and the need for continuous improvement in improving turnaround times. The biggest challenge the IDC faced was to increase impact on job creation and to increase impact with regards to regional interventions.
Mr S Marais (DA) thanked the IDC for its complete report. He raised the issue of the operating environment and the fact that South Africa had become a commodity export country; he asked how it would be possible to make the country more competitive and active globally. He noted the huge difference between South Africa and global markets on the productivity scale. He raised the intended partnership with the Unemployment Insurance Fund (UIF) and stated that all the financial institutions seemed to want to access UIF funding; he questioned how sustainable this was particularly if it was being so widely accessed. He raised the involvement in the Greener Economy and the Joule project; he suggested the IDC would either need to provide a major investment here or cull it entirely in order to bring the product up to standard. Addressing maize he suggested it was largely used for human food and export; he questioned the IDC’s position on maize as bio fuel and asked whether this was still the same. Addressing Coega he suggested it was a preverbal white elephant. He asked for what the IDC’s view was on Industrial Development Zones (IDZs).
Mr Z Ntuli (ANC) asked the IDC what its percentage amount of the overall expected job allocation by the Government was. He also asked how much of the disbursement fund had been spent, on which companies and in which centres and how many jobs had been saved or created. He also asked what the interest rate applied to the funds leant to these companies was. He requested more information on what mechanisms were in place to insure that the company was benefiting from the funds and not just the owners.
Mr S Huang (ANC) asked if the IDC knew in which year its electrical car would be launched and whether it would be able to compete with cars from Japan and China. Turning to the audit report he took issue with the fact that IDC was having external audits done and had not taken part in an audit undertaken by the Auditor Generals office.
Mr S Ngonyama (COPE) raised the question of jobs; he stated that the target was 38 000 and the IDC had only managed to get 19 000. He stressed that this was critical to the mandate of the IDC, yet this was only 50%. He asked if there was a plan to improve on this issue. He highlighted that there had been an improvement with regards to the provision of funding but this did not tally with jobs created. Addressing the Free State, he noted that it was one of the poorest provinces in the country. He asked if IDC had a plan that it could provide the Committee to rectify access issues in this province. He suggested that the steel price impacted on the automotive sector; he asked how the IDC was dealing with this. He also asked for clarity on the reduction of staff costs. In referral to commodities driven by China, he asked for more information on which commodities IDC was involved in. He noted the lack of projects addressing water management. He also touched on Coega as a white elephant.
Ms D Tsotetsi (ANC) asked for information on how the IDC was holding those accessing funding accountable. She also asked where the women-owned businesses were situated. Addressing the cutting of trees, she asked who the IDC was dealing with before they felled the trees. As to abalone farming, she suggested the IDC had long been involved in its economic transformation; she wanted to know what time frame IDC was working to and when this would be completed. She raised the issue of violence in the health sector and questioned how it impacted IDC’s funding. When the Committee had done its oversight it had become clear that a number of businesses did not know about the IDC bail-out scheme; she asked what kind of marketing IDC was doing to make this scheme common knowledge
Mr P Rabie (DA) addressed the Green Economy and the Joule Project; he questioned whether it was actually a viable project, particularly since South Africa had such scarce resources in this sector. He raised the issue of bio fuels and asked whether the bio fuel industry would compete with food security, particularly in light of the current escalation in the price of basic foods
Ms P Bhengu (ANC) asked how the IDC planned for those companies struggling during the recession
Mr X Mabaso (ANC) asked for an expansion on the statement about commodities driven by China. Also addressing the Green Economy he asked if there was a plan to ensure that secondary, tertiary and training institutions created the appropriate skills to access this in the future. He requested information on the percentage of suppliers of rain equipment who were South African in origin. He raised the issue of production within the local production of parts in the automotive industry, particularly as it related to job creation. He asked if the IDC had a means of measuring the demographic economic profile, suggesting that IDC did not only have a responsibility to grow the economy but to change it from Apartheid South Africa to the New South Africa.
The Chairperson noted the lack of discussion over capacity building and the fact that Members had complained previously about the monitoring and evaluating of projects. She asked for an indication of the IDC’s borrowing. She requested cases addressing waste management and recycling, particularly ones which provided clarity on partnerships and the fruits of this initiative. The funding in the malaria project and the cost of it was also raised, suggesting that such initiatives could possibly have been undertaken with the Human Resource Council of South Africa (HRCOSA). She noted that the move towards the health sector and questioned how this was going to help. She also touched on the overspend with regards to development projects in Africa
Mr Meer replied that people were reluctant to invest in businesses during the recession; this was unfortunate and they were encouraging this to change. If the country wanted to be competitive, it would need to invest focusing on best practice and best processes. Labour productivity was about getting the most out of people; this needed optimal management styles. He noted that the IDC needed to borrow internationally and locally; this was not a risk as long as the investments were well handed. The UIF allowed the IDC to borrow from them as opposed to lending from the markets. The rate that IDC was paying with relation to these loans was lower than the markets.
Mr Meer explained that IDC was still in the development phase of the Joule project; the prototype had been produced. The manufacturing and marketing plans were still being refined. IDC had not as yet made a decision to invest on a commercial scale. The IDC was still in the process of assessing this risk and exploring possibilities of partnership particularly with the South African Government. He stressed that there intention was not to try and fund all of it through the IDC; there would be a search for other investors. He suggested local manufacturing of these vehicles could form a base for the future; noting that this was high risk.
Turning to biofuel, Mr Meer explained that the approach was one that underlined a non-competitiveness with the food industry. He suggested that there was room for food production and bio fuel. When the IDC targeted bio fuels it looked for areas that were under utilised and struggled with regards to soil use.
In the last financial year, the main focus on components was around survival. Mr Meer highlighted that they were seeing positive signs in terms of motor assembly plants up tuning themselves for local and international markets. The IDC was in the process of funding a number of local manufacturers in this area. Addressing Coega he agreed that it had not developed as expected. He explained that the IDC did not deal with industrial development zones (IDZs) and suggested it would be premature for him to comment on them. One of the core projects of Coega was meant to be an Aluminium Smelter; due to the electricity crisis this project had been canned. The IDC was now looking for alternative investments in the region. He acknowledged that Coega would need critical mass in order to be successful as an IDZ.
The IDC had supported 28 companies for about R1.4 billion; this had saved 8/9000 direct jobs and a number of indirect jobs. The main sectors by value were the mining sector but by number the motor, clothing and forestry benefited substantially. The IDC considered the risk and development impact of businesses, particularly in terms of jobs created or saved before investing.
Addressing issues of oversight, Mr Meer explained that part of the IDC involvement was the setting of certain conditions. He clarified that a number of businesses, which had been rejected, had been due to shareholders requesting the IDC to buy the current shareholders out. In these cases the IDC did not provide funding. Economic recession did bring challenges to companies; the IDC did provide business support and it implemented certain constraints on bonuses. He stated that IDC engaged with the Auditor-General (AG) regularly. The AG had stated that it was pleased with the IDC books and processes and agreed with the external auditing of the IDC.
The IDC was involved in being more proactive and working with local government. The challenge of the Free State was that it was largely an agricultural province, which was not the IDCs cores focus. He explained that IDC was concerned and involved in diversifying the economic focus of the province and helping them to identify value added crops for agriculture. The investments in provinces had been relatively low and this was a national challenge. Provincial offices were working closely with local entrepreneurs and municipalities. In some of the provinces, local development agencies had been set up to focus on economic development at a local level. The IDC worked as an entity to help set up new agencies focused on economic development because municipalities often did not have the capabilities to focus in this area. The IDC was involved in setting them up, and leveraging local resources with the intention that these entities would fall under the local municipalities’ governance and corporate guidance. Their job would be to identify new opportunities and assist the private sector in development
In terms of commodity recovery, Mr Meer explained that one of the first impacts of the recession was the drop in the price of commodities with the exception of gold. There was a reaction to the fact that manufacturing companies were in decline. There was also a feeling that there had been an over supply of resources and resources prices had fallen substantially. During the course of the last financial year as China kept growing, and as investors and speculators began to take a longer-term view, there was a growing confidence that there would be a recovery and demand for commodities. With the exception of gold most commodities were affected, but most of them had recovered.
Addressing issues of water management, he clarified that the IDC did not directly fund municipalities; this was the job of the Development Bank of South Africa. He acknowledged the growing national crisis around water and explained that IDC was exploring ways in which it could be involved in water with the private sector. One exampled provided was the current work around recycling mine water.
Addressing the rail business, he answered that it was operating in the Western Cape currently and would be expanding into Kwazulu-Natal as a new wing of that business. This would be a totally new operation established to support that market
Trees that were cut down tended to be pine and eucalyptus; these were not indigenous trees and businesses receiving IDC funding were encouraged to be Business Council Certified thus suggesting that they were following internationally forestry stewardship practices. Turning to abalone he explained that the business mentioned was an example of one abalone company; there were others which they had funded. Some businesses were empowered and others had not been empowered as yet. The business in which IDC became involved was one that was not empowered; IDC had brought in new entrepreneurs and provided funding for it to expand. IDC finding had gone into companies with black shareholders. He stated that IDC had not looked at the abalone industry as a whole because IDC relied on companies that required finance. Where IDC had provided funding IDC had attempted to bring in the workers and the local community. Part of the funding went into the business as equity and was channelled through the workers and the local community.
As to hospitals during the strike there had been an increased reliance on private sector hospitals. Since the hospitals the IDC funded were situated in the private sector, Mr Meer suggested that this had not necessarily had a negative effect; sustainability had not been threatened. He stated it was clear that the role the IDC had played would need to be developed further, particularly in supporting the private sector to meet the public sector to service the demand in the country. This was particularly relevant in terms of the roll out of national health insurance
In terms of awareness of funding he explained that IDC had approached this on several different fronts. IDC had had a number of interviews in a variety of media; it had also had a number of targeted workshops, and over 20 of these had been held with the relevant sectors. IDC had also released a press statement and been involved with the relevant trade unions in terms of asking them identify people to invite to workshops. IDC had also been reviewing cases that had applied for the Training Lay Off Scheme checking if those that had applied could apply to the IDC. IDC was also in the process of trying to develop a secondary and tertiary industry to build the value chain. Mr Meer explained that this was where jobs would be created. He stressed that if IDC wanted to get to the stage where it was a world leader, or at the very least keeping pace with the rest of the world, there was a definite need to ensure that it was developing its capacities as much as possible locally. As an example he alluded to the plan to roll out solar water heaters in South Africa. The IDC was in the process of engaging with companies and funding them to manufacture solar water heaters locally. One of the challenges was skills in terms of manufacturing and installation. He noted that although this did not fall directly under the IDC’s scope it was something it was engaging in. Whenever it worked on a project as a standard it tried to implement a training element.
Some of the rail equipment refurbishment and upgrades had happened locally. For major tenders which required more capital intensive work, the bulk of the tenders had come from international as opposed to local companies; both Transnet and the Department of Public Enterprises were well aware of these issues and were working on ensuring that more of the procurement was done locally. This required companies like Transnet to give security of order and give indications of what they would be buying over what period. He explained that it was difficult for a company to invest in expensive heavy machinery when they would receive a tender once and the following year the tender would go to an international company. Once-off tenders were extremely problematic as they represented a loss of investment and a loss of IDC money
Mr Meer argued that the demographic profile and general statistics were kept by Stats South Africa; he noted that there were changes in the country but not as large as necessary. The majority of the IDC’s funding went to black shareholdings and there was an increasing number of women entrepreneurs and businesses. They had not reached a stage that was proportional to the demographics of the country. An area the IDC was performing poorly in was disabilities; very few investments had been made to companies run by disabled people. There had been a few investments to companies run by blind people but he admitted IDC needed to do more work. He explained that the real challenge for IDC was not only getting disabled people to have a shareholding in businesses, but IDC needed to create black entrepreneurs with the rights skills and opportunities.
Turning to the IDC itself he stated that IDC was dedicated to its duties and wanted to maintain its clean Audits. He stated that IDC had a strong financial management department and that it worked closely with the auditors, ensuring that IDC was following best practice. Addressing Malaria he answered that IDC had provided money to the World Health Organisation (WHO); he stated that IDC was very conscious of the fact that it was not the Health Department. Rather its role was industrial development; the IDC would work closely with the Health Department to ensure that industrial development was supporting their objectives. The IDC would look at things like the manufacturing of vaccines and pharmaceuticals, and chemicals to prevent the spread of malaria. IDC was not competing with the Department; rather it was trying to build industrial capacity.
The Chairperson clarified her question on the WHO and the IDC
Mr Meer stated that IDC was working with the WHO to identify where gaps were and then move to vaccine production.
The Chairperson asked what the cost implication of this was.
Mr Meer answered that it was internal resources
Ms Lebo Bodibe, Manager: Office of the Chief Executive Officer, addressed the over spend of IDC funding in Africa. She explained that there was an increased demand and the target was exceeded due to the projects, which required large capital investment, such as the Sugar Plant in Tanzania.
Mr Van Zyl explained that the President had stated that the target was the creation of 500 000 jobs; the IDC was responsible for 8% of this. Within this number IDC had only focused on long term employment; any short term employment was not reflected in the numbers as IDC was of the opinion that this was not relevant. The change in the IDC was in areas of pro-activeness particularly in terms of projects created and developed. In the long run the IDC saw its role as a catalyst for the development of industries. Addressing actual jobs created versus the target, he reiterated that this was largely due to the economic conditions and that the IDC had never had this issue previously. The customer satisfaction index was an annual survey of IDC clients covering all aspects of IDC operation. There had been a slight decline in responses on the satisfaction index; he highlighted that over the past four/five years the index had improved considerably. IDC was, however, addressing the drop particularly with regards to the complaints over turn around times.
Mr van Wyk addressed the staff costs and explained that the bonus offered to staff costs in 2009/10 was much lower and this affected the figures. In terms of development finance institutions (DFIs) IDC had signed a number of agreements dealing with Africa and Southern Africa specifically. Under capacity building IDC had been providing credit lines where necessary at low interest rates. In terms of business support IDC focused on up-skilling management and improvement of management skills. The minimum amount provided for this was R10 00 as a grant and another R10 000 could be provided as a loan, depending on the complications the loans would be adjusted as needed. He stated that there were a number of conditions in place to ensure that owners did not simply benefit from the involvement from the IDC. During the life of the investment there were clear rules around how much could be used for the withdrawing of shareholders funds and the reimbursement of management. He explained that when money was approved the applicant would have to go through what the IDC referred to as ‘Draw Down Conditions’, there were also milestones set for the project. Most important was the conveyance within the agreement; this meant that during the life of the IDC’s investment only a certain amount was allowed to go towards salaries, specifically management salaries. He noted that IDC would only provide if the probability of failure was low.
The Chairperson suggested the IDC was quite tight and questioned what would bring businesses to them
Mr Meer noted this but stated that the accounting standards were a necessity. He explained that it was done case by case and that it depended on the size and needs of the company. The IDC also considered what type of companies these were.
Mr Marais reiterated his questions. He also highlighted that a number of the companies the IDC funded were considered to be high-risk businesses. About two thirds of the companies funded were SMEs. A large proportion of the funding went to start ups often with new technologies; the amount of risk involved meant that there was a high chance that businesses would fail. If they did not fail there was a chance that they would go through a difficult period. In terms of accounting standards IDC needed to make provision in case the business failed.
Mr Haung stated that the IDC was a Government entity and asked if it had received an AG report since its establishment. He questioned a bonus of R1.6 million which was a greater bonus than that of the CEO. He returned to the electrical car and stated that Japan and China would sell this car far more cheaply; he questioned the IDC's investment when it was obvious that the project would not work
Mr Mabaso requested that the demographic investment of the IDC be sent to the Committee in a written form. He stressed it was in the interest of Government to monitor this. He argued that the IDC needed to be more involved in pulling the poorest of the poor up and that IDC should be involved in working with cooperatives, ensuring that it was not the rich who simply got richer but that people on the ground benefited from its existence
Ms Tsotetsi returned to the abalone issue and transformation. She stated that black economic empowerment (BEE) ownership was not enough; she requested a break down of race and gender. She also requested a target and time frame for narrowing the gap of inequality. Addressing the R2 billion fund available from the IDC she noted obvious access issues and questioned these. She also asked for clarity on how the PFMA became a barrier as suggested in the slides. She asked about World Cup expenditure and those that had benefited.
Mr Ngonyama raised IPAP issues around job creation, manufacturing and a sustained economy. He argued that in the future the IPAP objective would need to be analysed for the Committee. Realignment with IPAP meant the sustaining of jobs created and contribution to the economy. He suggested there was a need to increase the percentage of ownership in light of its relation to transformation. He argued that there was overkill in the expansion in Africa and instead ownership and focus should be placed in South Africa, particularly around issues of integration. The South African starts ups and expansions of 51% were something to be celebrated but he concurred with the IDC that the expansion within the rest of Africa and ownership in South Africa was a bit lopsided. He stressed that issues of integration were crucial; investing in sustainable businesses in Africa did not solve issues of growth in South Africa and traditionally disadvantaged people. He asked for a break down of the 3% ownership and which sectors it applied to. Automotive manufacturing remained a thorny issue as far as growth was concerned. He argued that when IDC spoke of manufacturing and sustainable growth it was talking about steel. He explained that he understood the point that the IDC was a minority shareholder but argued that any company, which invested in South Africa, had to contribute to the objectives of the country. The IDC would need to use its influence with those shareholders; he argued it was not a passive shareholder but an active shareholder and it would have to sue its position in discussions about steel. He requested a total commitment from the IDC that this aspect would be dealt with.
Mr Ngonyama suggested IDC was the biggest institution and Foreign Direct Investment (FDI) in South Africa; its coordination and mentoring with other FDIs was therefore important. He asked for the bigger picture of IDC in terms of pulling closer and working with smaller FDIs. Lastly he addressed intellectual property. He suggested countries like India owned drugs and China owned textiles. He argued that South Africa was leading on the continent in terms of scientific discoveries and intellectual property. He explained that these countries had bought the licences from other countries and created a technology transfer. He asked if there was a similar strategy for South Africa.
The Chairperson asked what the comprehensive income of the IDC was and whether it was supporting Government or implementing Government policies. Her impression was that the IDC was not taking its cue from Government. She raised the issue of interest rates and asked at what point was the prime rate defective and what loans required the types of interest rate suggested. She asked for clarity over the jobs created versus job saved. She suggested it did not make economic sense to bail out companies in distress, which had only created temporary jobs. She stated that she was well aware that they did not have time to address all these issue. There was a need for a follow up meeting where all these questions would be answered.
The meeting was adjourned
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