Industrial Development Corporation on its Annual Report 2010/11

Meeting report

Industrial Development Corporation: Financial results
Mr Ashraf Dindar, Head: Financial Management, IDC, began by highlighting the sources of income that financed IDC activities. They included dividends from both listed and unlisted companies, interest, preferential share income and other income. The abridged statement of its financial position as at 31 March 2011 was given. Under assets cash and cash equivalent had increased from R2 866 billion in 2010 to R5 828 in 2011. Investment had increased from R68 891 billion in 2010 to R81 971 billion. The deferred tax liabilities for IDC rose from R3 795 billion in 2010 to R5 011 billion. A summary of the balance sheet items for the past five years and its borrowings was given. The rand based borrowings grew to R1 978 billion in 2011 from R527 million in 2010. Foreign currency borrowings also increased from R3 709 billion in 2010 to R5 371 billion in 2011.

Mr Geoffrey Qhena, IDC Chief Executive Officer, IDC, said that on the financial side the IDC was still strong. Commitment was however to make it do more. The IDC still had the muscle and the corporation was still running prudently. Furthermore, the IDC did not get comfort in maximising profits.

Discussion
Mr S Marais (DA) said that on face value the presentation was very good. He asked why preference shares had been documented last year but had been received this year and if the re-evaluation of investments was done on shares or property and whether this was done at a specific date or a specific period.

Mr Z Ntuli (ANC) asked who was funding the installation of solar heaters and whether it was true that people in some provinces were paying for the installation of solar heaters and some were receiving the solar heaters for free. He asked if the IDC subsidised medicine manufacturers.

Mr X Mabasa (ANC) asked how the financials attempted to narrow the gap between companies that had been in the industry for a very long time and emerging companies and what caused ‘Other income’ to go up or down. To what extent did the deferred tax liabilities cost IDC and if this was a planned necessary cost. He asked for clarity in relation to Rand based and foreign currency borrowings.

Mr Qhena responded that the way IDC accounted for their finances was in line with the Companies Act and other internationally recognised regulations.

Mr Dinar responded that the IDC accounted for income at a point when they were entitled to it hence the preference shares were accounted for in the previous year. The IDC did not work on a cash basis. The re-evaluation of investments was done three or four times a year. Listed investments would be revalued on a monthly basis and unlisted investments would be done three or four times a year.

Mr Qhena responded to the question of whether the financials spoke to previously disadvantaged and emerging companies by saying that, on the size of business the IDC targeted, the financials did speak to the previously disadvantaged and marginalised. Out of the 221 loans they approved,  137 went to small, medium and micro enterprises (SMMEs) and 104 went to black empowered companies. In terms of values about 30% had gone to SMMEs.

The Chairperson asked how the IDC defined the term Black.

Mr Christo van Zyl, IDC Strategist, responded that it was defined as businesses with more than 25% Black shareholders as was defined in the relevant Acts.

The Chairperson said that the figure was supposed to be broken down into Africans, Coloureds and Indians. She asked if the term Black included Chinese.

Mr Qhena responded that the definition was taken as the Department of Trade and Industry (DTI) and government defined it. He added that he was not going to answer the question directly.

Mr Dinar said that ‘Other income’ included fee income that had increased and consolidated financials on all entities in which they controlled more than 50%. There was an entity that had an insurance claim in the previous year and there was no insurance claim in this financial year.

Mr Qhena added that ‘Other income’ was an amount that could not be predicted year on year.

Mr Dinar responded that on capital gains, there were two compulsory share buy-backs from AccelorMittal and Ashpen that resulted in R573 million in the previous year and in the current year there was a small shareholding from an unlisted investment that the IDC had disposed of.

Mr Qhena added that the IDC had investments and from time to time the IDC would sell those investments to enable them to re-invest into the economy. A capital gain was the difference between what the IDC bought the shares for and how much they sold them for if there was a profit. There was the compulsory share buy-backs which were not planned hence there was a higher value in 2010 as opposed to 2011.The capital gains figure would increase in the future.

The Chairperson asked under what circumstances would a company consider share buy-backs.

Mr Qhena responded that listed companies would look at the number of shareholders that they had and the amount of cash that they had. If the companies had a lot of money and they were of the opinion that the cash would not be used for any expansion or investments, they would buy-back shares. Another example when companies conducted share buy-backs was when they had too many shareholders and some of the shareholders would be small hence the administration would be too much. The IDC would look at the value at which the companies would buy-back. If the premium was fair then the IDC would allow a share buy-back.

Mr Dinar responded that deferred tax was tax that the IDC would pay if they had to sell all of the assets that they had. Increase in borrowing was in anticipation of future lending activities that the IDC was going to undertake. This was split between the Rand and the foreign currency base.

Mr Qhena added that there were a number of ways that the IDC borrowed money. There were bilaterals and syndications. Bilaterals were one on one relationships and syndications were when banks came together. The dominant one was bilaterals which involved mostly Europeans and they had some facilities with South African banks and the African Development Bank. Foreign currency was helpful especially when IDC invested in Africa. The Rand one was because the IDC was issuing a bond with the Unemployment Insurance Fund (UIF) to assist companies that were in distress. They had registered the bond with the Johannesburg Securities Exchange (JSE) where they would tap into the local market as they increased the level of activity.

Mr Marais asked what the cost was of the foreign loan.

Mr Dinar responded that the cost depended on the institution from which the loan was borrowed. There were institutions that gave IDC lower interest rates but they would require the IDC to spend the money in a certain way and it would have to report back on how the money was spent.

Mr Qhena added that it was not only the cost that was an attraction but also the tenure of the facilities. The IDC received long term monies in some of the borrowings that they made.

The Chairperson asked for examples of international banks.

Mr Qhena responded that they were KFW, AFD and Propaco which were French, the EID and the African Development Bank.

The Chairperson asked if syndication occurred along the same lines.

Mr Qhena responded that bigger syndications could involve both local and foreign.

The Chairperson asked if the IDC was focusing more on real profit as opposed to assisting companies.

Mr Mabasa asked if it was more prudent for IDC to borrow money from South African banks or from banks in other countries. In terms of investing money, he asked if the IDC was satisfied that there was real investment versus investment in speculation.

Mr Marais highlighted that the question that the Chairperson had asked was realistic because traditional industrial corporations were known for developing industries whereas the new requirement from Government was for them to be involved in job creation. Large companies did not create jobs as opposed to small businesses that were less profitable. To what extent was this taking the focus away from industrial development to a more socially responsible investment?

Mr Qhena responded that the IDC had to balance everything. The main aim of IDC was not to maximise profit. The responsibility that they had was to ensure that the IDC was sustainable. If the IDC was sustainable then it would mean that the investments that they made were sustainable. Sustainability was measured by making profit. The IDC deliberately ring fenced some of the money in order to cross subsidise. This would encourage new businesses. The latest addition that the IDC had was that the President said that the IDC was supposed to establish a R10 billion fund to assist companies in creating jobs at prime less 3% over five years. The investments that the IDC made were supposed to be real investments that were supposed to help the economy. They were not supposed to be involved in speculations. What informed borrowing locally as opposed to internationally was the level of activities. The IDC balance sheet was strong as opposed to other Development Corporations. Other factors would be how long the IDC would want the money, where the investment would be and what the investment climate would be like.

The Chairperson asked if IDC was liquid.

Mr Qhena responded that the IDC was going to be around for a very long time and that was why they were increasing their level of activities.

Industrial Development Corporation: Operational Overview
Mr Qhena outlined the objectives and outcomes that the IDC aimed to achieve. By focusing on support for industrial capacity and development, the IDC would contribute to facilitating sustainable direct and indirect employment. The impact on South African job creation improved with approvals and during the year they expected to create 19 650 full time jobs and save an additional 11 650 with a combined impact on employment of 31 300. There would be an alignment of operations with New Growth Plan (NGP) and IPAP2. There would be 97% of investment approvals in priority sectors as identified in the NGP and R1.5 billion would be approved to companies through the UIF bond, creating and saving more than 17 000 jobs.

The manufacturing industry received the largest portion of funding. R1.7 billion was approved for the motor vehicle and components industry, R646 million was approved in the clothing and textiles industry to support distressed companies and assist with competitiveness improvements. Funding in the mining value chain was considerably lower than in previous years. In terms of percentages 16% was allocated to infrastructure, 7% to the agriculture value chain, 16% to the mining value chain, 27% to manufacturing, 13% to the green economy, 10% to African Development and 4% and 3% respectively to the knowledge economy and tourism and high level services.

The regional distribution of funding was also given. Western Cape had 12%, Gauteng 27%, Free State 4%, Eastern Cape 28%. Northern Cape 2%, Kwazulu Natal 12%, North West 3% and Northern Cape 2%. In addition over the past five years, 47% of IDC funding was destined for provinces that were at a lower level of industrialisation with the exception of Gauteng, Western Cape and Kwazulu Natal.

The Committee was given a number of case studies that the IDC had worked on such as the Solar Academy of Sub-Saharan Africa that was involved in the rollout of solar water heaters in the South African market. About 535 local job opportunities had been created. Other examples were Peppadew International, Grainfield Chicken which slaughtered 160 000 chickens per day, African Cellular Towers which supplied and erected lattice towers for the telecom industry and Ellen Arthur that made ladies clothing.

The IDC intended to improve stakeholder relationships by embarking on regional road shows. Lastly, the challenges that the IDC faced included fluctuations in the currency, low business confidence and fear that market demand would slow down.

Discussion
Mr Marais asked to what extent the IDC was looking at the new developments that were taking place such as the finding of oil along the Namibian coastline. The best harbour to do maintenance on oilrigs would be the Saldanha Bay. In the 2010 strategic plan, specific objectives and targets were given on clothing such as to ensure that 20% of the local consumer footwear was sourced locally and that 50% of clothing was sourced locally. He asked how IDC had performed against the targets set in the strategic plan.

Mr Ntuli asked if the IDC took into consideration the fact that imported chickens were cheaper than locally produced chickens when they funded companies. He noted that foreigners were taking over companies to the disadvantage of the local investor. He asked if anything could be done to keep South African ownership larger than foreign ownership.

Ms D Tsotetsi (ANC) asked how many jobs were decent jobs out of the jobs that had been created by the IDC and whether there were any steps taken to investigate if the funds given to companies that were in distress had been used for the intended purpose. She noted that other companies were funding green economy projects too. She stressed that there was a need to know which projects were being funded so as to prevent multiple funding in the name of green economy. It was important to monitor if people got according to needs.

Mr Mabasa asked to what degree IDC saw itself as a continental entity and if there was huge competition from other continents in trying to occupy the African space. To what degree was the IDC related to the Department of Higher Education and the Department of Science and Technology? Further, he asked if live chickens were imported into the country and whether there were conditions that were attached to loans granted to big firms such as to contribute towards growing companies.

Mr P Rabie (DA) noted that the Grainfield chicken project reported by the IDC was a very big project. He asked if the company would have an effect on other existing players in the industry and whether the IDC was subsidising companies. In addition he asked if PetroSA had approached IDC for additional funding to build a new refinery at Coega.

The Chairperson asked what impact foreign investments or funding had on local companies and how the IDC ensured that people from South Africa got jobs from the investments that the IDC made outside. In addition she asked how many jobs had been created in Africa. There were 16% investment in the mining value chain but yet the industry was shedding jobs. She asked what the challenge was because it seemed as if they were not getting any value for money, and asked whether people were being replaced with machinery. She asked why the IDC was allowing factories in the clothing industry to disappear. The Committee had visited Free State were they heard of a sandstone project. She asked if IDC was aware of the sandstone project from Lesotho.

Mr Qhena responded the IDC had reported on the targets or milestones they had achieved but they would improve on this. The targets that the IDC set were for a certain period and they were not just for one year. The IDC took a keen interest in new developments. One such area was the green side. The IDC was conscious that they had to continue to find new things. He added that most of the imported chickens came from Brazil. He was however not aware of any live chickens that were imported. He agreed that the chicken project was sizeable. However studies and an impact assessment on the project had been done and they came to the conclusion that the project would not become a dominant player in the industry. The IDC counted direct jobs as opposed to decent jobs. The 8 100 jobs were not necessarily permanent jobs. The 31 000 jobs that the IDC had mentioned were the sustainable jobs. The IDC had a unit that monitored companies that were in distress and that had been funded. The unit had mixed results from such companies. The IDC would be tightening up their processes and improve on monitoring.

The Chairperson asked how the IDC determined if companies needed assistance.

Mr Qhena clarified that when he said that the IDC would be improving monitoring, he did not mean that the IDC did not have monitoring systems in place. The IDC would make sure that the money they gave to companies in distress, was used for what it was intended.

Mr van Zyl responded that the automotive industry relied on a lot of development and research work that went in up front before a car was developed. The IDC was trying to bring in a lot more  component manufacturers into South Africa to invest locally.

Mr Lizo Ntloko, Western Cape Regional Manager, IDC, responded that the IDC had taken a keen interest in participating in the developments in Saldanha Bay. The oil and gas sector focus would be on services. The IDC were still looking for projects that they would be able to fund in order to be able to provide components for the oil and gas industry and as such there was currently one project underway which involved a Malaysian investor and it was currently at the due diligence stage.

Mr Qhena responded that the IDC was working with PetroSA with regards to Coega and they were engaging with government.

Ms Lebo Bodibe, Manager: Chief Executive's Office, responded that 2 000 jobs had been created in Africa by the IDC. In addition when the IDC went to the rest of the continent there was supposed to be some South African benefit.

The Chairperson asked how many people had been taken from South Africa.

Ms Bodibe responded that the number had not been calculated. Some of the figures given included the jobs that the IDC had created on the African continent.

Mr Qhena added that the relationship they had with the Department of Science and Technology was that they provided bursaries. There was no specific intervention with the Department of Higher Education. In relation to the mining sector losing jobs, it was dependent on the minerals that were mined. The deeper they mined, the more dangerous and costly it would become. Another factor was that of demand. The IDC would continue to invest in mining because they wanted to beneficiate. He pointed out that he did not have an answer to the question on sandstone products.

The Chairperson highlighted that the Free State MEC was of the opinion that there was no proper relationship with the IDC with regards to the sandstone project.

Mr Qhena added that he would follow up on the issue of sandstone with the MEC for Economic Affairs. The IDC was not subsidising companies. He was not aware of any subsidies that were being given to companies. Furthermore he would investigate the issue of solar heaters that had been raised.

Ms Tsotsetsi highlighted that her question on the green economy had not been answered.

Mr Qhena gave an example of the Solar Academy of Sub-Saharan Africa and the SA Calcium Carbide.

Mr Ntuli asked if the IDC had met the target of 25 000 jobs that were supposed to have been created.

Mr Mabasa asked to what degree the ICD helped in carrying out feasibility studies throughout South Africa especially in rural areas. He highlighted that BBBEE in the hotel and hospitality areas was going down. He asked if the IDC looked at the criteria of people with disabilities when they issued loans. Was the IDC satisfied that it was making adequate investments in the Orlando East / Dobsonville industrial areas? Was the IDC satisfied that all live chickens were a product of South Africa and if this was so, it was supposed to be an area where job creation was supposed to be enhanced.

Mr Ntuli asked how much had the IDC done in terms of feasibility studies for the green economy and why was it expensive to do business in South Africa.

Mr Marais asked to what extent had the IDC discounted a lower return on the investments in the Mozal smelter in Mozambique based on the electricity costs.

The Chairperson asked what the ICD was doing to help the previously disadvantaged in relation to the motion picture unit.

Mr Qhena responded that the IDC had met its job target. In terms of feasibility studies there were interactions with the provinces and entrepreneurs. With regards to BBBEE, the IDC asked all of the companies it funded that they respect the laws of the land and they were supposed to increase the level of BBBEE. One of the ways that enabled companies to increase compliance on BBBEE was to increase enterprise development. In relation to people with disabilities, the IDC placed R50 million to encourage people with disabilities. Not much progress had been made.

Mr Ntuli asked if the Mokena Chemicals issue had been addressed.

Mr Ntloko replied that Mr Mokena alleged that the IDC had given him a wrong facility. The facility that had been given to Mr Mokena at that time was the most appropriate one. The reason why his business battled was because Mr Mokena lost his main contract with the Department of Correctional Services. There was a lot of communication between the IDC and Mr Mokena but there had been a lot of non-performance from Mr Mokena in not fulfilling promises. Mr Mokena was asked to make an offer for a settlement that he made. He was asked to review the settlement that he had made but Mr Mokena had not done so.

Ms Kesebone Maema, Head: Corporate Communications, responded that it was true that the local clothing and textile industry was under pressure in terms of being uncompetitive. This was because of the cost of doing business was very high as compared to their counterparts who had hidden subsidies such as the Chinese.

Mr Ntuli asked how the IDC helped industries to prevent an influx of foreign subsidized goods.

The Chairperson responded that this question should be responded to by the regulators. She asked to what extent the IDC was working with the regulators.

Mr Qhena responded that the IDC have engaged with SARS to try and prevent illegal imports. The clothing and textile unit was trying to assist retailers in procuring textiles from South African companies. A lot of effort was being put into it.

The Chairperson urged the IDC to include a condition that related to machinery when the IDC issued grants.

Mr Qhena responded that this was the approach that they were using.

Ms Tsotsetsi asked what the marketing and corporate managers were doing to discourage the practice of subsidies that enabled imported products to be sold at a cheaper price than local products.

Ms Bodibe responded that none of the IDC clients were either dumping or importing such products.

Mr Qhena responded that the IDC was trying to reduce the importation of chickens by establishing chicken projects. The Mozal Smelter business case took into account an electricity price increase. As long as the increases were in line with what had been agreed upon, there would be no problems.

The Chairperson thanked the IDC for the way they prepared their documents and they way they responded to the questions that had been raised by Members. The outcomes of the interaction between the Committee and the IDC would be considered and implemented. Through the IDC, Africa was supposed to compete with the European Union.

The meeting was adjourned.