Industrial Development Corporation 2013/14 Annual Performance Plan briefing

NCOP Economic and Business Development

12 August 2013
Chairperson: Mr F Adams (ANC, Western Cape)
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Meeting Summary

The Industrial Development Corporation (IDC) presented its corporate plan for 2013/14 to 2017/18 to the Committee, and noted that there had been few changes to the plan from the previous year, and that the IDC strove for consistency to ensure long-term development. A brief background of the functions and the structure of IDC was provided to the Committee, emphasising that the IDC was primarily a development finance institution, with the funding provided in order to achieve a difference in South Africa. Most of the funding was provided to businesses, in recognition of the fact that this sector created jobs and economic growth. IDC also assisted businesses in starting up and developing, and one of its objectives was to lead industrial capacity development. The bulk of investments were made in South Africa, but IDC also was involved in regional work across the rest of Africa. It was indicated that there was only one word changed in the objective of the IDC. It aimed to enhance transformation in communities and assist in growing black industrialists, and its industrial development plan aimed to increase the impact of industrial development, and ensure sustainability. It had managed to provide funding and increase investments made, despite the recession.

IDC had been identified as one of the main drivers for the implementation of the New Growth Path and Industrial Policy Action Plan and was aligned with them in supporting, mainly, the resources, manufacturing and services sectors. Some case studies on support currently being provided were tabled. One of the concerns related to the low rating of South Africa in mitigating environmental impacts of businesses, and so IDC was actively trying to improve environmental practices and support recycling and alternative energy initiatives. Partnerships were an important aspect of IDC’s work, as well as close cooperation with the Departments of Trade and Industry and of Economic Development. IDC was constantly working to achieve financial sustainability and improve performance, aimed to enhance management, to increase its client base and developmental impact. The majority of its portfolio was in Gauteng, particularly in the mining sector, but Free State continued to be a challenge. Although the level of investments had increased, there was also a rise in businesses in distress.

Members felt that the presentation lacked specifics around numbers, and questioned why it was so similar to the previous year’s presentation. They questioned the distribution of funds, citing some particular examples, and wanted more details on offshore engagement and investment. Several questions pertained to the relationship of IDC and the people on the ground, whether IDC was supporting cooperatives, whether it had enough offices that were accessible, particularly to those in rural areas, whether it supported sufficient micro enterprises, and cited the unhelpful attitude displayed at some offices. They questioned why Limpopo was not included, saying that it was a viable location for wind farms, wanted more details on the full potential of other projects and wondered why there was not more localisation of components for energy-intensive projects, and whether support was given to other initiatives. They questioned its alignment with the National Development Plan, the turnaround times, the composition of the Board, the sustainability of jobs created, the situation with a bakery project that had been suspended, and the relationship with Small Enterprise Funding Agency. They questioned whether IDC had its own jet, what it was doing in Africa and the region, and whether recapitalisation had been suggested or was envisaged.
 

Meeting report

Industrial Development Corporation 2012/13 Annual Performance Plan
The Chairperson welcomed the Industrial Development Corporation (IDC), and emphasised the need for the Committee and the IDC to work together to enable Members to know of its needs.

Mr Mvuleni Qhena, Chief Executive Officer, IDC, thanked the Chairperson and the Committee Members for the opportunity to speak, and noted that he was accompanied by a fairly substantial team to assist with answering questions.

Mr Shakeel Meer, Divisional Executive: Corporate Strategy, IDC, noted that in the 2012/13 financial year, the IDC had not made any drastic changes to its strategic plan. As a development finance institution, the IDC was responsible for providing funding that would make a difference in South Africa. The IDC was also involved in a range of activities in addition to funding, such as policy debates, capacity building and non-financial business support. The funds that emerged from IDC were managed not on a commercial basis, but rather in relation to assistance to government departments. IDC also tended often to manage a large sum of foreign funding, in light of its particular capacity, skills and expertise in this field.

He noted that the non-financial business support was directed towards new businesses that lacked any relevant experience or capacity. The main customers of IDC were in the business sector, since businesses created jobs and economic growth. In order to ensure the success of the funds distributed to businesses, IDC would become involved from the earliest stages of the business development. IDC was involved in a number of different sectors, ranging from tourism and cultural industries to manufacturing. There was always a focus on value-add to enhance the  economy. Most of the funding provided by IDC was long term funding, but there were a few cases where short term financing was arranged, under special circumstances. Because IDC was a South African institution, the bulk of investments were made in South Africa, although it was also involved in regional work across the rest of Africa. Regional investment would promote regional development, which was a supportive mechanism to development, industrialisation and economic growth within South Africa.

Mr Meer indicated that there was only one word changed in the new objective of the IDC. The objective used to be: “support industrial capacity development” but had now been changed to “lead industrial capacity development.” There had been one change in the outcomes, where the outcome referring to “expansionary and/or broad-based black economic empowerment” had been reworded as “ transformational impact on communities and growing black industrialists.” One of the main objectives of IDC was to play a leading role in promoting industrial growth of South Africa, whilst emphasising the importance of sustainability and balance.

The plan for increasing South Africa’s leadership in industrial development comprised several objectives, including increasing the industrial development impact and strengthening sector development objectives and strategies. IDC must align its activities with the New Growth Path (NGP) as well as with the Industrial Policy Action Plan (IPAP). It aimed to increase its project development implementation, to provide industrial finance to further the achievement of sector development objectives, and increase regional industrial integration, as part of development of the value chain.

IDC also must ensure effective and efficient operation of the Small Enterprise Finance Agency (SEFA), and long-term sustainability overall. In order to safeguard capital, it must have sustainable plans for returns on investments and a risk profile that would ensure sufficient growth. Appropriate pricing and fee structures were necessary, and there must be proper risk management of investments, pricing and the management of the portfolio. Mr Meer mentioned that the capital comprised Human, Social, Natural and Manufactured Capital (see document for more details). Skills, capacity building and management of human resources were important, as was the relationship with stakeholders (see attached document for details). IDC must also ensure the reduction of any negative environmental impacts from IDC and the industries it supported, and use resources in efficient ways.

Mr Meer emphasised the role of financial capital. During the recession, IDC had specifically adopted the position that it would use risk management in appropriate ways rather than cutting back. Over the last two years, the level of investment had grown despite the economic decline, which meant that price and business were to be managed correctly. South Africa was not rated well on environmental impacts, as it did not use its energy resources well, and IDC wanted to set an example to the rest of the nation by lessening the negative environmental impacts.

IDC was identified as one of the main drivers for the implementation of the NGP and IPAP, and had aligned its operations to support the priority sectors identified in the two policies, which were broadly categorised into resources, manufacturing and services, with sub-categories in each (see attached document for more detail). The mining sector received the greatest allocation of R20 billion funding.

Mr Meer provided several examples of ways in which IDC was leading in industrial capacity development. One example was the local manufacturing of components for the renewable energy build programme. One case study cited was the DCD wind tower factory, which was projected to create 203 permanent jobs and increase the localisation of components for renewable energy generation projects, and another case study related to the localising of manufacture of automotive components, which housed the MSSL Global RSA Module Engineering Limited project.

Mr Noel Kamrajh, Industry Champion: Biofuels, IDC, presented more detail on the bioethanol project. IDC was the sole shareholder in a project that was developed in the Eastern Cape to produce bioethanol.  This project was currently at the early stages of construction. The first plant was set to produce 100 million litres per annum of bioethanol, using grain sorghum as feedstock. It would be the first significant production facility in South Africa, and was estimated to create 3 200 new jobs during the construction and operational phases. Since bioethanol was a fuel extender, it was hoped that this would increase South Africa’s self-sustainability in energy sources so that less fuel would have to be imported. Bioethanol was also a high protein animal feed that could go back into the animal feeding industry, lessening that industry’s current reliance also on imported feed.

Mr Meer moved on to discuss the importance of sustainability, noting that impact and sustainability went hand in hand. Increased industrial development impact led to the sustainability of jobs, environment, community and finances, and vice versa. Most of the sectors that IDC funded had a direct effect on rural areas, so the IDC was attempting to strengthen processes to maximise the effectiveness and sustainability of the projects. As part of the process enhancement, IDC had expanded to 22 offices across the country.

Mr Meer noted that Small and Medium Enterprises (SMEs) were developed to take advantage of the benefits that sector projects brought to the rural areas. SEFA would also play an important role. He gave examples of rural development projects, which included the Russellstone Soy Crushing Plant in the Bronkhorstspruit Industrial Area in Gauteng, and Coega Cheese factory in the Eastern Cape. In addition, the IDC was involved, from the early stages, with the Renewable Energy Procurement Programme and would continue strong participation to ensure that high priority was given to localisation and community development.

Mr Meer explained that a negative impact on the environment was likely to lead to a negative impact on industry, and ultimately also business. Energy and carbon emissions were not the only issues as other natural resources such as water were also placed under pressure. IDC had launched the Green Energy Efficiency Scheme in order to help businesses improve their processes and decrease their negative environmental impacts. This would, in part, be assisted with proper waste management and recycling. The IDC was approached by the Bon Accord Recycling Facility to set up a semi-automated material recycling facility at a landfill site in Pretoria, which would improve waste management, and create 33 jobs immediately, with the potential for 30 more.

Mr Meer emphasized that IDC was unable to do any of the projects alone so partnerships were very important. The IDC has worked very closely with the Department of Trade and Industry (dti) in the implementation of various projects. Other partners included those involved in the school programme, various provincial governments, Association of African Development Finance Institutions, the business community and Land Bank.

IDC was also working towards financial sustainability in order to improve performance. Better management should lead to a more successful client base, more sustainable clients and a more sustainable development impact.

Mr Meer noted that the attached document outlined in full the IDC’s targets for 2013/14, and noted that the most investment was put into Gauteng. The Free State continued to be a challenge due to the structure of its economy, but IDC was working with both the government and the province for increased investments there. As to industry divisions, mining received the highest levels of investment but trends over the two to three years also noted growing investment in the green economy and manufacturing, as well as some of the service industries.

Mr Qhena concluded that IDC had experienced some substantial challenges through the recession but, despite these, remained committed to increasing investment. The level of investment had increased but so too had the number of businesses in distress. IDC was very committed to continuously supporting government objectives.

Discussion
Mr D Gamede (ANC, KwaZulu-Natal) would reserve some of his questions and comments for a later time. He wanted to query the distribution of funds. He wondered why an automotive business that only created 100 new jobs had received R100 million in funding, while an ice cream factory that was already employing 1 200 people, with the potential for another 1 000 jobs, had received R15 million. This appeared to be skewed, and he asked for an explanation. He noted that whilst there appeared to be policies in place for funding, there were challenges with the criteria and the process.

Mr Meer replied that there was a large variety of businesses funded, of which some were labour intensive and others were capital intensive. Each possessed different needs and produced different results, both negatively and positively. The IDC was funding an ice cream company in the Eastern Cape, which was perhaps the same one that Mr Gamede cited.

Mr Gamede asked how many locals were directly involved with IDC’s partner company in Spain. He asked if the IDC was truly rooted to the people, and if there were existing successful projects in the rural areas. If not, then he wanted to know the future plans and the particular challenges arising in rural areas.

Ms M Dikgale (ANC, Limpopo) asked why only the Eastern Cape was benefiting from the wind project, when Limpopo was also a viable location for similar farms. She suggested that the IDC must take its offices into rural areas.

Mr Meer acknowledged that there were difficulties around accessing the IDC offices, particularly for those in the rural areas. There was a strong effort from the IDC to set up satellite offices. IDC was trying to engage government institutions to help to improve access. However, it was difficult for it to achieve the same outreach as, for instance, post offices, because of cost.

Ms E van Lingen (DA, Eastern Cape) stated that the presentation was interesting and impressive but was far too similar to the presentation given in the previous year. She commented that it was also too generic and too few precise figures were provided.

Mr Qhena replied that performance and exact figures were not provided yet, because that report was still to be approved by Parliament at the end of August.

Mr Meer added that the presentation was not meant to be general, but other reports were still at finalisation stages. There were also several similarities between last year’s presentation and this one, because there purposely had not been much change in the strategy. Strategic plans were not meant to change often, in order to sustain long-term successes.

Ms van Lingen asked to what extent the IDC had investments offshore, and what was their rand value, what the projects were that were abroad, and what benefit these schemes had for the South African market growth plan and job creation.

She also asked the extent of the economically disadvantaged being funded and financially empowered. She posed the question whether it was enough to simply provide them with employment, or whether they would also benefit from the investments? She asked if the government was actually “practising what it preached”  or whether it was using big businesses to make rich people richer.

Mr Qhena said that in respect of offshore investments, over and above investments in Africa, IDC supported South African companies that were exporting outside of the country. The investments made with businesses who exported presented IDC with exposure to offshore markets. However, IDC only had one investment outside of Africa, which was just over a 3% stake in a company that owned over 60% of stainless steel. While imports were not always favoured, businesses were allowed to import only when it was evident that the goods were imported was to support the market.

Ms van Lingen wanted to know if the IDC had reached the full potential in the Eastern Cape with the soy project. She asked for the name of the manufacturing company of the wind farm component. She also wanted to know what sort of tourist destination was IDC looking to create in the services sector, what kind of work was done to improve community radio stations, and whether IDC was involved in the development of HIV/AIDS medication. She asked if there was a plan to reduce the costs put towards importing agricultural chemicals. Finally, she asked what parts of the National Development Plan IDC did not adopt.

Mr Meer responded on the tourist project, saying that there had been steps taken to set up the Northern Cape as a tourist destination for action sports. In KwaZulu-Natal, there were plans to set up beach resorts, and much work was put into setting up tourist destinations in undeveloped areas.

Mr Meer noted that nothing from the NDP was excluded, as the NDP was a policy adopted by the South African government that covered a wide range of issues. The IDC was not involved in certain aspects covered in the NDP, so to this extent, were not covered by IDC.

Mr Meer reiterated that the IDC funded mostly small to medium enterprises and, as such, was not working to make the rich any richer. In fact, part of IDC’s role was to help create vibrant sectors, and often those funded were first-time business owners.

Mr Meer noted that DCD was the supplier of the wind tunnels for the wind farms.

Ms B Abrahams (DA, Gauteng) asked how many of the jobs created by the new projects such as biofuel were sustainable. She asked about the possibility of rolling out the recycling plan throughout South Africa.

Mr K Sinclair (COPE, Northern Cape) commended the IDC on its work, saying that he had personally seen results in the Northern Cape mining sector.

Mr Sinclair asked about the composition of the IDC board at the moment.

Mr Qhena indicated that the list of Board members could be accessed at: http://idc.co.za/about-idc/board-of-directors

Mr Sinclair raised the issue of turnaround time and asked why it took so long to establish a business in South Africa.

Mr Sinclair referred to a recent massive case of fraud in the corporate world and wondered if the IDC had any risk exposure on that.

Mr Qhena assured members that IDC had strict due diligence processes that were analysed several time to ensure that nothing was missed.

Mr Sinclair asked why there were issues with the funding of the bakery project.

Mr Mahomed Vawda, Acting Deputy Director General: Economic Planning and Coordination, Department of Economic Development (EDD), provided a response on the bakery. He stated that initially, it took a long time to get the project together, due to issues between the EDD and the dti. Once the questions were finalised, and the project was assessed, there was a conclusion reached that the project was not financially sustainable. There were hidden costs, costs that were understated, no provision had been made for repairs and maintenance, which was one aspect that, as a capital-intensive business, the bakery would have needed. In addition, the commissions that were required by the franchiser were quite high, leaving the corporate owners’ salaries below minimum wage. The liability of the business was not covered properly.

Mr Sinclair noted the many complaints and negative feedback about the regional offices, related to rudeness of staff and their lack of help.

Mr Qhena replied that the IDC had taken note of the unpleasant experiences of the Members during visits to regional offices. He agreed that the regional offices were the first point of contact between IDC and the public and that better attitudes and treatment were required. There was a meeting to be held between the IDC and the managers of the regional offices later in the month, and this issue was to be addressed then.

Mr Sinclair asked if there were some success stories of what was being done in the rest of Africa.

Mr Meer described that there were various projects across the African continent, and there were a number of investments made. The biggest project was currently running in Mozambique, in the coal industry. Other regional projects covered sectors such as mining and forestry. During its next presentation, IDC would set out more detailed examples of regional projects.

Mr Sinclair noted that he had seen a plane at the airport with the IDC logo on it and asked if IDC did in fact have a plane and, if so, what were the associated costs.

Mr Qhena answered that IDC indeed did have a jet, because it was very convenient for the IDC to be able to travel to the various areas around South Africa as well as the region. It was emphasised, however, that the jet was not a toy, and that when it was not in use by IDC, it was chartered out.

Mr Sinclair asked about the current linkage and status of the IDC and SEFA.

Mr Qhena replied that SEFA was involved with IDC to deal with smaller, micro enterprises. As such, SEFA was able to target areas that IDC was unable to reach.

Mr Meer said that perhaps SEFA could attend the next meeting with the Committee.

Mr Vawda of EDD added that the IDC was to provide guidance but SEFA was responsible for implementation.

Mr Sinclair was worried that not one of the components required for the wind farm was manufactured in South Africa, because all were imported, and said that localisation on this was not evident.

Mr Sinclair asked if it was likely that IDC would run out of money at some stage, and whether there was any intention of recapitalising it.

Mr Qhena responded that if everyone who requested funding from the IDC was provided with money, then there was a high chance that the funding would dry up at some point. However, based on the five year stress testing that was conducted, this did not appear to be the case at present. If the current policies and criteria measures were to be continued strictly, then funding should be sustainable. IDC had been highly diligent in applying its mandate with regards to fund distribution.  

The Chairperson stated that he still had some questions, but would send them through for a written response.

The Chairperson agreed with Mr Sinclair’s concerns regarding the lack of help experienced from the regional offices. He asked about IDC’s interest in cooperatives, given its relationship with the dti, who was specifically working with cooperatives.

Mr Qhena replied, in general, that examples of successful projects in rural areas would be provided, along with a list of challenges. However, he did ask that the lists he would provide should remain confidential as some of the businesses that received funds did so on a confidential basis.

Mr Meer assured Members that the IDC did in fact support cooperatives.

The Chairperson reminded Members and the IDC that they could follow up on any matters if they felt their questions had not been fully answered.

The meeting was adjourned.
 

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