The IDC is going to maximise its impact with existing resources it has to increasingly lead industrial capacity development.
The activities of the IDC are aligned to the programmes of the government that focus on driving increased economic activity in productive sectors and seeking to have a greater impact on job creation and provincial distribution of economic activity and regional development. To ensure further alignment with other government institutions, the IDC has signed Memoranda of Understanding with many institutions. Some of these MOUs are institution to institution while others are related to specific initiatives.
The IDC seeks to be at the centre of industrial capacity development. This would be achieved through taking greater leadership and forging strategic partnerships for developing the most important parts of the productive economy and deciding how to actively engage with the other sectors of the economy in order to drive outcomes. The IDC would be guided by Project Evolve, which focuses on five programmes: Value Chains, New Industries, Special High Impact Sectors, High Impact Sectors and Industrial Infrastructure.
The IDC is able to deliver on its mandate y working with other Development Finance Institution (DFI). For example, the establishment of the Small Enterprise Finance Agency (SEFA) as a subsidiary of the IDC has given the IDC an opportunity to improve its reach to micro and small enterprises and to assist it to incubate and mentor small enterprises for future expansion and potential future industrialists for industrial development. This has also seen the IDC collaborating with the Development Bank of Southern Africa (DBSA) on infrastructure development and when funding is required to ensure it does not compete with it and can leverage from its DBSA expertise.
The initial approach of the IDC to BEE to fund acquisitions of shares in existing companies by black shareholders has shifted to a more expansionary and inclusive approach. Between 2008 and 2010 certain factors prompted a strategy review. The review of the BEE strategy uncovered a number of factors. It noticed that acquisitions mostly resulted in narrow empowerment with very few beneficiaries. The BEE consortia were more like portfolio investors and this resulted in limited entrepreneurial development. There was a desire for quick returns and limited risk by many BEE parties, and this resulted in limited fixed investments and developments. Companies were looking for “connected” shareholders.
The entity has developed a strategy on black industrialists, which is aimed at assisting black industrialists with start-ups of new businesses and expansion of existing ones. The strategy focuses on addressing issues related to access of capital and markets, and looks at issues related to access to capacity and skills.
During the period 2015-2020 the IDC is going to expend its energies on expanding the levels of industrial funding approved and disbursed to at least R100 billion with greater emphasis on industry development goals including localisation and beneficiation; deepening the development impact of the work of the IDC including its funding of black industrialists, women and youth.
Members wanted to know about progress regarding the Grand Inga Project in the Democratic Republic of Congo; enquired if the 10% of work done by IDC outside of South Africa is spread or has a specific focus; wanted to find out if the origins of the borrowings are from the banks or equities; asked whether the entity had competitors that can ensure it grows and remains sustainable; and asked for comment on its marketing and sponsorship programme. Members also asked the IDC to explain its turnaround time of 17 days and the strategy relating to incubation; and wanted to establish if the IDC is not finding the tourism and accommodation services sector saturated when it is reviewing and analysing the funding proposals.
Briefing by Industrial Development Corporation (IDC)
Mr David Jarvis, Divisional Executive in the Corporate Strategy, IDC, informed the Committee the activities of the IDC are aligned to the programmes of government that focus on driving increased economic activity in productive sectors and seeking to have a greater impact on job creation and provincial distribution of economic activity and regional development. The IDC sectoral activities support relevant areas of the National Development Programme (NDP), New Growth Path (NGP) and Industrial Policy Action Plan (IPAP).
To ensure further alignment with other government institutions, the IDC has signed Memoranda of Understanding with many institutions. Some of these MOUs are institution to institution while others are related to specific initiatives. To mention just a few, it has partnered with the Richards Bay IDZ, Ithala Development Corporation, Department of Rural and Land Reform, Departments of Economic Development and Tourism (Western Cape and Mpumalanga), KZN Treasury and NHFC.
Challenges were identified as part of Project Evolve. First, it has been discovered that the IDC has too many competing objectives and needs to identify areas for deeper focus. Second, the IDC is expected to be all things to all people and it is stretched in its ability to deliver. Third, its investment portfolio needs to be focused on those areas that contribute to jobs-rich industrialisation. Fourth, the entity needs to integrate developmental outcomes e.g. jobs, black industrialists and community development into its funding operations. Fifth, the organisation needs to optimise its processes and systems to be efficient in its delivery. All this means the IDC needs to change focus and prioritise and be clear on how it would implement this prioritisation.
The IDC seeks to be at the centre of industrial capacity development. This would be achieved through taking greater leadership and forging strategic partnerships for developing the most important parts of the productive economy and deciding how to actively engage with the other sectors of the economy in order to drive outcomes.
Project Evolve is said to focus on five programmes: Value Chains, New Industries, Special High Impact Sectors, High Impact Sectors and Industrial Infrastructure.
Value Chains are existing sectors with the largest opportunities within the economy and a high propensity for jobs-rich industrial development in the short and medium term. These are connected chains of industries where the IDC would take leadership for industrial capacity development. These include metals, metal products, machinery and equipment, transport equipment and mining; chemicals, plastics and pharmaceuticals; and agro-processing and agriculture.
The approach on these sectors would be on developing and implementing strategies to achieve industry development goals to guide strategies for industries; playing a proactive role to identify and develop opportunities in support of strategies; supporting mining projects that support a new mining model and substantially exceed development impact of current mines; and playing an active role in influencing policies to enhance development of the industries.
New Industries are sectors that are determined by forward-looking trends and innovation, and could develop into significant opportunities for SA. These are nascent industries or technologies the IDC would nurture to become sizeable, relevant industries of the future. The IDC would be involved in the early stage sector and technology development as well as creating an enabling environment. The entity would do regular reviews to identify new Potential Stars and those that should graduate or exit. New Industry opportunities identified are, amongst others, around additive manufacturing, electric vehicles, fuel cells, green construction, telemedicine, medical isotope, gas beneficiation and water waste recycling and desalination.
Special High Impact Sectors have a particular place of importance within the South African economy, and the current role played by the IDC suggests that the entity should continue to play a strategic role in these industries until the environment is conducive for the IDC exit or movement into High Impact. These are sectors such as the motion pictures and entertainment; and clothing, textile, footwear and leather products. They have been identified by exception, and may require sector strategies and specialist skills.
High Impact Sectors are within the IDC mandate and offer a high volume of opportunities and contribute to IDC development goals but where IDC does not foresee a proactive role. These sectors fund high volume of applications offering high impact return on effort. They create jobs and deliver against other developmental outcomes of the IDC in sectors outside the value chains. They drive the achievement of development outcomes e.g. BBBEE and black industrialists. The IDC would fund other sectors that have High Impact within the SA economy. High sectors are grouped into two units:
- Light manufacturing and tourism: accommodation services, tourist attractions, professional and scientific equipment, television, radio and communication equipment, furniture production, and other manufacturing
- Heavy manufacturing: glass production and products, pulp, paper and paper products, rubber products, wood processing and wood products, cement, lime and stone products
Industrial Infrastructure unlocks industrial development (e.g. electricity, water, telecommunications and logistics). Industrial development outcome is unlocked through playing a coordination role to ensure that requisite infrastructure is funded and developed by other funders; supporting private sector or PPP industrial infrastructure where it is necessary; and investing selectively in strategic, economy wide, large scale interventions. An example the IDC is currently considering is the Grand Inga Project in the Democratic Republic of Congo in which the IDC, as a means of sourcing renewable base load energy for SA, facilitates infrastructure development and stimulates industrial development in the region.
By working with the other Development Finance Institution (DFI), the IDC is able to deliver on its mandate. First, the establishment of the Small Enterprise Finance Agency (SEFA) as a subsidiary of IDC has given the IDC an opportunity to improve its reach to micro and small enterprises and to assist it to incubate and mentor small enterprises for future expansion and potential future industrialists for industrial development. Second, the IDC also collaborates with the Development Bank of Southern Africa (DBSA) on infrastructure development and when funding is required to ensure it does not compete with it and can leverage from its DBSA expertise.
Third, agro-processing and agriculture is part of the main focus areas of the value chain of the IDC. The Land Bank also focuses on agriculture, and the IDC would be looking at collaboration opportunities that would develop primary agriculture, which would be an input in agro-processing strategies. Fourth, black economic empowerment, especially the development of black industrialists, is one of the outcomes of the activities of IDC. This results in overlaps with some aspects of the National Empowerment Fund (NEF) mandate and close corporation on certain transactions with the NEF. The IDC and NEF are currently engaged in a project to investigate an option for business combination.
Fifth, the IDC has partnered with the National Youth Development Agency (NYDA) to expand its reach in terms of youth development and funding. The IDC and NYDA currently have a scheme aimed at funding transactions from the youth.
Shifting the focus
Mr Jarvis pointed out that the initial approach of IDC to BEE to fund acquisitions of shares in existing companies by black shareholders has shifted to a more expansionary and inclusive approach. Between 2008 and 2010 certain factors prompted a strategy review. Some transactions that were funded during the period up to 2008 included the acquisition of shares in Metropolitan Life, MTN, Tourvest, Protea Hotels, The Reclamation Group, KWV, First Rand Exxaro and Life Healthcare. The value of IDC funding for black enterprises has been increasing steadily over the past 20 years. The number of BEE transactions that peaked in 2002 is close to 200. Over the last 20 years, the IDC has provided R28 billion to black-owned businesses and funded over R53 billion to black empowerment in total.
The review of the BEE strategy pointed out a number of factors. It was noticed that acquisitions mostly resulted in narrow empowerment with very few beneficiaries. The BEE consortia were more like portfolio investors and this resulted in limited entrepreneurial development. There was a desire for quick returns and limited risk by many BEE parties and this resulted in limited fixed investments and developments. Companies were looking for “connected” shareholders. The funding of BEE deals by commercial banks was more competitive. Preference was more on large deals; as a result, there was low support for entrepreneurs in small to medium businesses. But now that the BBBEE codes have been promulgated, the government policy is favouring a more expansionary approach to BEE.
Some of the BEE transactions funded by IDC include, amongst others:
- Cape Town Film Studios
- Commuter Transport Engineering
- Chic Shoes
- Kalagadi Manganese Project
- MSG Afrika group
Project funded during the 2014/15 period are:
- Da Gama Textiles
- Palaborwa Mining Company
- Chamber of Mines Fuel Cell Project
- Nobomate Material Recycling Facility
- Stone River Berries
- Garner Water and Confectionary cc
- Topline Plastics
- Robertson and Caine (Pty) Ltd
- “Newco” (Pty) Ltd
The IDC has developed a strategy on black industrialists, which is aimed at assisting black industrialists with start-ups of new businesses and expansions of existing ones. The emphasis would be on business development and assistance. The strategy would allow black industrialist to acquire existing businesses. This would ensure that more than 50% of funding stays within the business for expansion and funding for strategic acquisition is more than R75 million.
The strategy focuses on addressing issues related to access to capital. It encourages more use of direct equity instruments and low own contribution from the black industrialist in exchange for tangible commitments. It is felt that the lack of track record and security can result in individuals not being able to access funding from commercial sources and that your own contribution to the business can be prohibitive.
The strategy is looking at addressing issues related to access to markets. It was discovered that black industrialists do not have long-standing relationships in businesses that facilitate access to markets, and that a lack of a track record and reputation in the market could lead to opportunities not being presented. That is why this necessitated the development of incubation strategies involving the private sector or state owned companies to support black industrialists.
Further, the strategy aims to address issues related to access to capacity and skills. It has been noticed that new businesses have a high rate of failure due to a lack of management experience and skills despite the necessary technical skills, which is why the IDC is strengthening its business support programme for black industrialists.
With regard to the funding model, the IDC relies on good investments and strength of its balance sheet to fund the bulk of its development activities. Funds managed on behalf of government have started to play a larger role in the past number of years. The IDC annual approvals over the past five years were 57% higher than the previous five years. Now it is targeting to maintain and grow this to more than R100 billion over the next five years.
Mr Jarvis concluded that during this period of 2015-2020 the IDC is going to focus its energies on expanding the levels of industrial funding approved and disbursed to at least R100 billion with greater emphasis on industry development goals including localisation and beneficiation; deepening the development impact of the work of the IDC including its funding of black industrialists, women and youth; improve efficiencies and effectiveness of the processes of IDC; and improving the greater coordination of work with other public agencies to improve the impact of IDC activities. In the period ahead the IDC would maximise its impact with the existing resources it has to increasingly lead industrial capacity development.
(Tables and graphs were shown to illustrate key performance indicators, investment budgets, flow of funds and budget)
Mr P Atkinson (DA) asked about progress regarding the Grand Inga Project in the Democratic Republic of Congo. He also enquired if the 10% of work done by the IDC outside of South Africa is spread or has a specific focus.
Mr Geoffrey Qhena, Chief Executive Officer: IDC, indicated that South Africa has committed to take 2000 megawatts for the first phase of the Grand Inga Project. The Congo government drives the project. There is a shortlist of three big consortiums and the Congo government still has to decide on the winner. The first part of the project is about basic infrastructure. When the project happens, the impact is going to be massive. It is still not clear, at this stage, of what is going to happen to the countries (Zambia and Zimbabwe) the energy would be passing through and how they are going to benefit from this energy. The project is going to take longer and commissioning would start around 2021.
Concerning the 10% of work done outside South Africa, the figure represents what has been exposed but it is slightly more and would increase over time because the investments they are making outside South Africa are infrastructure types like agro-processing, a cement plant and two funded hotels. Mozambique is said to be one country that is benefiting a lot.
Mr S Marais (DA), first, wanted to find out if the origins of the borrowings are from the banks or equities. Second, he enquired if the entity had competitors that can ensure it grows and remains sustainable, and asked the IDC to comment on its marketing and sponsorship programme.
Mr Qhena, pertaining to borrowings, stated money is borrowed either in the local market or in international funding markets. It does not come from equities. Locally, it is from funds such as the UIF and it gets repaid. The entity relies on borrowing. On competition levels and sponsorship, he said they do not want to compete but only to crowd the private sector to come in. In terms of awareness, the IDC advertised in regional and national newspapers but now they would consider community newspapers. Sponsorship is targeted and technical, and they do interventions in education. Sometime ago they had competitions with universities, especially those offering MBA degrees, in order to get ideas and to market IDC at the same time. The entity tries not to be everything to everybody.
Ms C Matsimbi (ANC) asked the IDC to explain its turnaround time of 17 days and the strategy relating to incubation.
Ms Naomi Mtshali, PIBC Manager: IDC, on the 17 days turnaround time, explained that applicants apply for funding and get logged. The application can be done online. After being logged, the applicant receives an acknowledgement plus a letter within 48 hours. If all the necessary information is made available and submitted, the application gets processed within two weeks. If the applicant is found not to be good with a business plan, an in-house consultant is assigned to help one.
The post-investment unit, when the application has been processed, then disburses the funds. The applicant gets informed first. Then after the disbursement, the monitoring kicks in. Regional departments visit the clients to ensure compliance. The entity is always cognisant of what is happening in the market so as to provide assistance.
The Workout and Restructuring unit also helps clients in distress and provides more funding and support to clients that show viability signs because it has programmes that help clients with necessary business skills.
The incubation strategy is about a proactive approach, not only to help clients when in distress, but also to support them to move forward in terms of accessing markets.
The Chairperson asked whether the incubation approach is working so far.
Ms Mtshali elaborated that the initial approach has been to provide support before and after investment. It is only now that it is being referred to as incubation. A diagnosis is done to see what the client needs. The bulk of the clients are in the textile industry and most of them have taken a knock from the Asian imports. With regard to the youth, the numbers are small since they have started working with the NYDA. They encourage the young to partner with established clients while they also avoid being bullied by them.
Mr S Tleane (ANC) wanted to establish if IDC has ever thought of partnering with other local DFIs and other countries within SADC to ensure more energy output is produced. He further asked if the support the entity is providing to the film industry is improving local content and contributing to the culture of South Africa.
Mr Qhena, on the issue of infrastructure development, informed the Committee the IDC has approved a coalmine project in Zambia to provide electricity. This would help Eskom not to export electricity. The entity is already looking at a number of projects for infrastructure especially for agriculture because the continent is not producing as much as it is supposed to. Concerning the film issue, he said funding was provided but the results they received were mixed. Some films were successful while others failed. Local producers were funded as well as overseas companies that wanted to film in the country.
The Chairperson enquired if the entity is making a concerted effort to fund stories about SA and asked if the IDC worked with the National Film and Video Foundation (NFVF) and Department of Arts and Culture.
Mr Qhena enlightened the Committee that they do partner with the Department of Trade and Industry (dti) and NFVF. The dti pays the filmmaker when the job is done and the IDC finances that part while the NFVF would look at the script. The IDC has come up with schemes but later discovered there is a shortage of black producers. The country is doing fairly well on the animation side. But now the entity is insisting on having a local leading actor if it is a SA story, not an international actor as has happened in the past.
The Chairperson wanted to find out how much has been set aside for this period.
Mr Qhena said there is a capital allocation of R1, 6 billion. There are schemes that have been prepared especially for black producers.
Mr A Cele (ANC) enquired if the IDC uses consultants and asked about the demographics of the employees of the entity.
Mr Qhena said they are making use of consultants for specific projects and interventions because they have specific expertise. They are not used for running the entity. On the demographics, the male / female split is sitting at 50%. The entity is low on disability and he does not know the statistics on youth.
Ms D Rantho (ANC) asked whether the entity had a way of getting around the duplicity of resources and what its approach is to localisation.
Mr Jarvis pointed out that the space they are looking at is in desalination, for example. The entity is focusing on the opportunities that come out of those processes. The entity is not trying to encroach on what the local government is doing.
The Chairperson wanted to establish if the IDC is not finding the tourism and accommodation services sector saturated when it is reviewing and analysing the funding proposals. She further wanted to know how far the hotel industry is with regard to transformation; asked for clarity on the medicine area, and enquired if the IDC is supporting companies to produce local herbs. Lastly, she asked if, when it comes to investing in Africa, they expand what already exists in SA or not, and how do they ensure about the entrants of Blacks in those countries.
Mr Qhena, pertaining to saturation in the tourism and accommodation sector, reported there is an element of saturation. During the 2010 World Cup some companies in that sector did not make money. But outside of SA there are opportunities in the brick and mortar sector. Regarding transformation, the IDC is not at the level it is supposed to be especially in the boutique sector and this is an opportunity that needs to be explored in the tourism industry. The entity likes the industry because it provides employment.
The IDC is involved in medicines and has a unit called Pharmaceuticals, which is part of the value chain, and a number of projects have been funded. Concerning expansion to Africa, he stated the entity has been reactive in this area. Entrepreneurs from other countries have approached the IDC for funding and would procure from SA. They prefer big names when it comes to procurement. Now the entity is thinking of changing that way of doing business and starting to be proactive.
The Chairperson asked what the role of the IDC is in supporting B&Bs in terms of knowledge and skill for those who are lacking in these departments but have a passion for it.
Mr Qhena found it difficult to come up with a comprehensive answer. In such cases, the IDC partners them with other established businesses but are always careful of the clash of personalities and fights over territory. The ICU unit of IDC is there to look after such things.
The meeting was adjourned.
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