Industrial Development Corporation on its 2011/2012 performance

Economic Development

29 October 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Industrial Development Corporation briefed the Committee on its financial and non-financial performance for 2011/12. The IDC had experienced sound financial performance, with increased profitability and a strong balance sheet.  Profitability had increased by 22% to R3.3 bn.  There had been record levels of funding activity, with a sizeable number of jobs being created or saved, particularly in rural areas.

The IDC had sourced funding of R2bn from the Unemployment Insurance Fund (UIF) at low cost and launched the R500m Green Energy Efficiency Fund (GEEF), funded by KfW, a German development bank, to implement energy-saving technologies. It had collaborated with the Department of Trade and Industries in the clothing and textile sectors, and provided R500m of funds for grants and direct loans.

Investment funding of R13.5bn had been approved, of which 60% was for new start-ups. This was 32% more than the disbursements of the previous year. There had been 293 approvals, which was up from 2009/10 and also higher than the record level of 2008. This has had an impact on jobs, with 45 900 jobs expected to be created and saved in South Africa through funding approvals.  Of these jobs, 48%were based in rural areas, with the largest contributor being agriculture.

The IDC had aligned its investments with government’s New Growth Path (NGP) and Industrial Policy Action Plan (IPAP) through supporting investments in priority sectors, with 28% of funds invested in mining and beneficiation, 30% in the green economy and 25% in manufacturing.  Of all investments, 62%were outside of Gauteng, Cape Town and Durban.

Funding of R6.1bn had been made available for companies in distress, of which R5.3b had been committed to 134 finance projects, with a resultant saving of 40 000 jobs. There were still some funds available, although the situation in Europe had not assisted in improving the situation.  R6bn had been spent on regional development projects in the rest of Africa, mainly in mining and industrial infrastructure projects.

The IDC had reserves of R91.8bn, down 1% from the previous year.  Loans had increased by 49%, from R6.6bn to R9.9bn, and it intended to increase borrowings to deliver on its mandate. The group had a debt/equity ratio of 11%, up from the 7% of the previous year.

The IDC aimed to increase the level of localised manufacture of components by investing in manufacturing and getting state-owned enterprises’ capital spending to be more aligned to localisation initiatives. It would be investing in pharmaceutical production to keep health care costs down, and would increase spending on tourism and media, and work to reduce unemployment while aligning itself to the NGP

Members asked what the meaning and the impact of the revaluation of investments was. What was being done in the Free State and how could the former homelands’ infrastructure be revitalised?  What was the status of the Small Enterprise Finance Agency (SEFA)? How did the IDC relate to universities and technikons?  Were efforts being made to develop industry in industrial parks in the townships? What were the challenges that prevented greater outreach to KwaZulu-Natal? To what extent was the IDC reaching out to emerging farmers, as the largest number of unemployed was found in the homelands?  How did the current mining situation affect the IDC? Were rural schools benefiting from the IDC’s corporate social investment programmes?   

Members wanted more information on regional investments and how the IDC was engaging in the Tripartite Free Trade Agreement.  Why was no mention made of Business Process Outsourcing (BPO) and mineral beneficiation in the medium term prospects?  Would the Capital Gains Tax (CGT) increase be factored into the new budget? What was the IDC doing to keep impairments down? How much was spent on the green economy and to what extent were carbon credits processed?  How were distressed companies selected?  Members asked for comment on the structure of the IDC and about the composition of its employment equity.  What factors were impeding industrial development. What were the information and communication technology (ICT) challenges facing the IDC?  Which areas of tourism would the IDC be focussing on?

Meeting report

Briefing by the Industrial Development Corporation (IDC)
Mr Geoffrey Quena, CEO, IDC, said that 2011/12 had seen record levels of funding activity, with jobs created and saved. The jobs created or saved in rural areas were sizeable, and there had been an upward trend over the past five to six years. The IDC had sourced funding of R2bn from the Unemployment Insurance Fund (UIF) at low cost, which benefit had been passed on.

The financial sustainability of the IDC had improved on the back of profitability having increased by 22% to R3.3bn. A key sector had been the Renewable Energy Procurement Programme (REPP), where 12 bids had been approved in the first round as preferred bidders.

The IDC had launched the R500m Green Energy Efficiency Fund (GEEF). This low-cost funding came from KfW, a German development finance bank, to implement energy-saving technologies.

It had collaborated with the Department of Trade and Industries in the clothing and textile sectors and had provided R500m for grants and direct loans.  This had assisted companies to become more competitive and as a result, 2 400 jobs had been saved.

Investment funding of R13.5bn had been approved, of which 60% was for new start-ups. This was 32% more than the disbursements of the previous year. There had been 293 approvals, which was up from 2009/10 and also higher than the record level of 2008. This has had an impact on jobs, with 45 900 jobs expected to be created and saved in South Africa through funding approvals.  Of these jobs, 48%were based in rural areas, with the largest contributor being agriculture.
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The IDC had aligned its investments with government’s New Growth Path (NGP) and Industrial Policy Action Plan (IPAP) through supporting investments in priority sectors.  28% of funds were invested in mining and beneficiation, 30% in the green economy and 25% in manufacturing.  Of all investments, 62%were outside of Gauteng, Cape Town and Durban. The provincial breakdown showed that Gauteng received R19bn, the Eastern Cape R5.8bn, Mpumalanga R2.4bn, North West R6.2bn, the Free State R374m, KwaZulu-Natal (KZN) R5.2bn and the Western Cape R5.9bn.
 
Funding of R6.1bn had been made available for companies in distress, of which R5.3b had been committed to 134 finance projects, with the resultant saving of 40 000 jobs. There were still some funds available, although the situation in Europe had not assisted in improving the situation. The IDC had made investments in the local assembly of television sets in the Eastern Cape and in auto glass production.  In a soap and detergent manufacturing concern, 915 jobs had been created.  In KZN, 650 jobs had been created through small sugar mill agro-processing.  In Limpopo, 580 jobs had been created in the citrus industry and in Mpumalanga 600 jobs had been created through a company supplying pipes to Eskom.   In the Northern Cape, 1 900 jobs had been saved through funds provided to Griekwaland-Wes Korporatief (GWK), and to the Landbank for on-lending to farmers.  R6bn had been spent on regional development projects in the rest of Africa, mainly in mining and industrial infrastructure projects.

Mr Gert Gouws, CFO, said that the abridged financial statements had been split up to reflect the IDC’s finance activities and the activities of subsidiaries, with Foskor separated from the subsidiaries because it was the largest contributor.  Profit for the year had increased from R1.7bn the previous year, to R2.9bn, through financing activities. Other subsidiaries had contributed R229m and Foskor had contributed R184m, to make an overall total of R3.3bn.

The fair value of investments had decreased by R902 million in the 2011/12 financial year due to a decline in the value of listed investments during the year, and there had been a change in the capital gains tax (CGT) rate, which had contributed to an increase in deferred tax reserves.

Dividends from unlisted investments had increased by R701m. The cost to income ratio stood at 23%. In the high-risk environment in which the IDC operated, impairments had increased from 17.3% to 18.2%, but this was partially a result of the increased financing activities it had undertaken.

The IDC had reserves of R91.8bn, down 1% from the previous year.  Loans had increased by 49%, from R6.6bn to R9.9bn, and it intended to increase borrowings to deliver on its mandate. Listed investments it held included R22bn in Kumba Iron Ore, R19.7bn in Sasol and investments in BHP Billiton and Arcelor Mittal. The group had a debt/equity ratio of 11%, up from the 7% of the previous year. The IDC had experienced sound financial performance, with increased profitability and a strong balance sheet.

Mr Quena said that the IDC aimed to increase the level of localised manufacture of components by investing in manufacturing and getting state-owned enterprises’ capital spending to be more aligned to localisation initiatives. It would be investing in pharmaceutical production to keep health care costs down, and would increase spending on tourism and media, and work to reduce unemployment while aligning itself to the NGP.
 
Discussion

Mr S Ngonyama (COPE) asked what the meaning and the impact of the revaluation of investments was. What was being done in the Free State, and how could the former homelands’ infrastructure be revitalised?

Mr X Mabasa (ANC) asked for comment on the status of the Small Enterprise Finance Agency (SEFA). He said no mention had been made of co-operatives. How did the IDC relate to universities and technikons? Were efforts being made to grow industry in industrial parks in the townships?

Mr N Gcwabaza (ANC) asked what the challenges were that prevented greater outreach to KZN. To what extent was the IDC reaching out to emerging farmers, as the largest number of unemployed was found in the homelands. What did “SHIP” stand for?

Ms D Tsotetsi (ANC) asked how the current mining situation affected the IDC. Were rural schools benefiting from the corporate social investment the IDC was making? Was there provision to absorb some of their learners after graduation?

Ms S van der Merwe (ANC) wanted more information on regional investments and how the IDC was engaging in the Tripartite Free Trade Agreement.  Why was no mention made of Business Process Outsourcing (BPO) and mineral beneficiation in the medium term prospects?  Would the CGT be factored into the new budget?  What was the IDC doing to keep impairments down?

Mr Z Ntuli (ANC) asked if there was a monitoring mechanism for financial intermediaries. How much was spent on the green economy and to what extent were carbon credits processed. How were distressed companies selected?

The Chairperson asked for comment on the structure of the IDC and about the composition of its employment equity. What role did the IDC play in connection with Small Enterprise Finance Agency (SEFA)?  What were the factors impeding industrial development. What were the information and communication technology (ICT) challenges facing the IDC. Which areas of tourism would the IDC be focussing on?

Mr Quena said he noted a member’s comment on the Free State and would check on the matter. IDC was normally approached with proposals, but would make an effort to go to the Free State to find investments.

The IDC would go back to the homelands, as there was existing infrastructure. They were working with the Eastern Cape provincial development department to partner in initiatives. They were also looking at social entrepreneurship projects that were self-sustaining, even though they might not make a profit.

Co-operatives had been more challenging than initially thought, but they were working with communities. They would explore further but there had not been as much progress as had been anticipated.

TheIDC had made funds available to people with disabilities, but relied on the disabled to approach the IDC.

Venture capital funding had been used to encourage innovative business plans though a pilot competition being held with Master of Business Administration graduates of the University of the Free State. It was hoped to expand the competition nationwide in the following year.

SEFA was not covered in the Annual Report, as it had been established only this year. The board had been established and the IDC had two members on it.  The IDC had seconded a senior management official for three years to the unit. It had committed R921m of its own funds for three years and was also providing other support.  National Treasury would be providing an allocation and other assets.  SEFA would be able to lend directly to the public, which previous incarnations of it could not do.  SEFA’s setting up had progressed slower than anticipated. It would fill the gap in funding for amounts below R1m. SEFA was different from the IDC and it was expected that SEFA would later increase its lending limit to R5m.  SEFA would be successful if big projects at the outset allocated work to small entities, as small enterprises could create more jobs than big business.

Mr Gouws said that the revaluation referred to a R1bn decrease in the value of the IDC’s assets at market related prices. This was a temporary decline and would be recovered in the medium term. It was not a realised loss.  Borrowings had increased for two years in a row and would increase in the future too, as the IDC sought to fund challenges. The IDC ensured that the rates and conditions of the borrowings were attractive.

The capital gains tax rate had increased from 14% to 18.7%, but this was fully provided for.

There were high levels of impairments because of the stress in the economy and because the IDC operated in the high-risk category of loans, where funding was not adequately secured.

Mr Quena said the observation that KwaZulu-Natal was lagging, was fair. There were many coastal developments which undermined the potential of rural developments, but KZN was not neglected, as it had a fully-fledged rural office.

”SHIP” stood for Strategic High Impact Projects.  For example the IDC was looking at Saldanha Bay and KZN as ship repair centres, but there had not been significant progress.

Intermediaries like GWK provided finance to farmers on condition the farmers linked up to previously disadvantaged farmers, but this had had mixed success. Citrus farming in the Eastern Cape had been successful though.

The IDC was invested in a number of mines and when the mines were not producing, the IDC was not paid. The IDC did not have control over the mines, but as shareholder could engage on the matter of the living conditions of the workers. On the matter of the salaries, the mine company had to engage with workers.

The payment to a distressed company was to MOZAL, in which the IDC had a 24% investment. The situation had changed and reversed itself.

Ms Kesebone Maema, marketing and corporate affairs executive, said the educational investments had all been in rural schools.  It had identified additional schools and had increased the level of support. The IDC provided a significant number of bursaries. R500 000 had been allocated to further education and training (FET) colleges, the bulk of which would be for management and governance infrastructure.

Mr Quena said that the IDC had established a number of call centres, with very disappointing results.

Carbon trading in the carbon market had dried up because of Europe’s economic woes.

Distressed companies had approached the IDC for relief.

The IDC consisted of an executive of 11 members, of which three were women.  There were two white males. The levels below this were much more transformed.  The reality was that it was difficult to get women on to the executive, as they often resigned or had difficulty in relocating.

The Department had assisted the IDC in overcoming issues affecting its progress.

ICT had been highlighted as an issue that needed infrastructure.   The IDC had played a role in Broadband Infraco and Neotel.

The IDC had funded media proposals in the past. Market acceptance of local content and a weak distribution system were challenges. A strategy was needed to ensure that movies that were made locally could be shown.

The meeting adjourned.

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