Minister for Economic Development on Industrial Development Corporation (IDC) investment strategy

Economic Development

02 June 2015
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Minister Ebrahim Patel said that the role of the IDC was important. Without the IDC, the economy would be worse off as the IDC’s level of investment was significant and moreover attracted private sector investments. The IDC used its investment portfolio to generate income to pay its overheads and to have resources available for development funds that had a higher risk attached to it so it needed a balanced portfolio of development returns and investment returns. Over time it had grown its asset base. The role of the executive authority was to develop the sector policy framework and strategy and to ensure a good Board and strong management. Private sector fixed investment was unchanged in the period 2012-2014 while the fixed investment of public corporations, like Eskom and Transnet, had increased significantly and was a big driver of the economy. General government investment was equivalent to the private sector investment. He then spoke to the factors impacting on the investment spending of the public sector. The IDC aligned its strategy to the policy framework of Cabinet and identified particular sectors, new industries and potential new industries with its eye constantly on the developmental outcomes it wanted to achieve. He spoke to the funding activity over the past twenty years of democracy, the alignment of historical funding approvals, the sector distribution of the funding, the key differences between IDC funding and commercial funders and individual funding decisions. Challenges identified were that the investment portfolio needed to be focused on those areas which contributed to jobs rich industrialisation, that developmental outcomes needed to be integrated, the capacity development of its human resources and the need to optimise their processes and systems to be efficient and effective. The IDC sought to be at the centre of industrial capacity development and thus activities focused on sectors where a specific major impact could be achieved.

The Minister then spoke to investment budgets and initiatives to increase industrialisation and developmental impact. There were seven initiatives; partnering with State Owned Companies in the localisation of infrastructure; retail off-take opportunities; support for black industrialists; funding for companies in distress; African regional integration; SA spatial development and the development of new industries. There were a number of barriers for black industrialists and the IDC could not deal with all of them. A black industrialist was not the same as a black entrepreneur. A black industrialist created and owned industrial capacity, provided long-term strategic leadership and or control. They were not portfolio investors. The strategy to assist black industrialists was to assist with start-ups of new business or expansion or acquisition of existing businesses and addressing issues relating to access to capital, markets and skills. The organisation targeted investing R23b at discounted prices. Investment in infrastructure was a critical role for DFI’s in Africa. The IDC’s exposure in the continent would be broadly in sub-Saharan Africa. In developing the IDC’s investment strategy, it had recognised that the availability of funds would be critical but not the only thing. The executive authority’s job was managing the IDC to be viable, coherent and focused on its developmental goals in job creation, greening and industrialisation.

Members said there had been a significant increase in approvals over the past five years and asked what effect this had had on bad debts. Could the Department give examples of new industries the IDC were involved in, especially with regard to innovation? Why were there investments in Sudan, which was not part of sub Saharan Africa? The IDC gave assurances that the businesses it invested in were sustainable yet it bailed out companies like for example Bell of Richards Bay. How sure was the IDC that it would not go out of business again? Members supported the idea of developing black industrialists and the transfer of control to the previously marginalised, and that there could not be sustainable development without the inclusion of the SADC region and the African continent. Members asked if the Department had considered doing a study of the available national resources currently. Members said one could not industrialise without levelling the playing fields; there were huge cases of collusion in the country against companies in attempting to level the playing field. Penalties given to these companies did not put pressure on them from the point of view of the State or civil society; the penalties actually encouraged them. South Africa was not getting good quality imported products. Was there any company apart from the SABS that looked at the quality of materials produced?  What happened to the geyser programme, was it done in conjunction with the solar water heater programme? Members asked for more information on the motor vehicle body manufacturer situated in Worcester. How were black industrialists identified? What programme was there to identify and develop potential industrialists? Members queried the information in the ‘jobs lost’ column of the funds allocated for distressed companies; and asked what IDC’s exposure in Africa was to foreign companies and the exposure to South African companies operating in Africa. The Department needed to develop and improve research on the resources of the country to guide people as to the areas they should go into. There was a need to talk about the percentage allocated to women and youth in the partnerships because the presentation did not indicate who benefited. Members wanted clarity on the number of jobs created in the construction of Karoshoek Solar One. Why was the Hilton chosen when funds were given for the construction of a five star hotel in Uganda? How much interaction did the IDC have with other economic communities of the continent? How had the BNDES (Brazilian Development Bank) model challenged the IDC and helped the South African situation with regard to financing. Members wanted some of the challenges in investing in other countries highlighted, especially in recouping financing costs or the rate of return on an investment. What was women’s share of the R23b? If none, could it be looked into?

Meeting report

Briefing by Minister for Economic Development
Minister Ebrahim Patel said the workshop was a great idea as the role of the IDC was important, being the biggest Development Finance Institution (DFI). Without the IDC, the economy would be worse off as the IDC’s level of investment was significant and moreover attracted private sector investments in the ratio of 1:2 effectively accruing three times the actual investment. It was an unusual institution because the State did not give it a grant. The IDC used its investment portfolio to generate income to pay its overheads and to have resources available for development funds, which had a higher risk attached to it. Not all countries did it in this manner, for example Brazil’s DFI was given funds on a monthly basis because it wanted the DFI to take risks. The IDC had to cover its risks, pay the fiscus a dividend and cover its overheads so it needed a balanced portfolio of development returns and investment returns. Over time it had grown its asset base. The role of the executive authority was not to look at individual applications but to develop the sector policy framework and strategy and to ensure a good Board and strong management.

Ms Busi Mabuza, IDC Board Chairperson, said the IDC was mindful of its mandate and emphasised that 75 years on, the IDC was still relevant. It had the lowest staff turnover rate because it was exciting to be working at the centre of the economy driving a jobs rich industrial growth as well as investing in the continent. She believed the IDC had the capacity to deliver on the plan to implement the strategy.

Minister Patel then looked at the investment context. Private sector fixed investment was unchanged in the period 2012-2014 while the fixed investment of public corporations, like Eskom and Transnet, had increased significantly and was a big driver of the economy. General government investment was equivalent to the private sector investment. He then spoke to the factors impacting on the investment spending of the public sector. The IDC aligned its strategy to the policy framework of Cabinet and identified particular sectors, new industries and potential new industries with its eye constantly on the developmental outcomes it wanted to achieve. He spoke to the funding activity over the past twenty years of democracy, the alignment of historical funding approvals, the sector distribution of the funding, key differences between IDC funding and commercial funders and individual funding decisions.

Challenges identified were that the investment portfolio needed to be focused on those areas that contributed to jobs rich industrialisation, that developmental outcomes needed to be integrated, the capacity development of its human resources and the need to optimise their processes and systems to be efficient and effective.

The IDC sought to be at the centre of industrial capacity development and thus activities were focused on sectors where a specific major impact could be achieved. He spoke to the investment budgets and initiatives to increase industrialisation and developmental impact. There were seven initiatives:

  • Partnering with State Owned Companies in the localisation of infrastructure
  • Retail off-take opportunities
  • Support for black industrialists
  • Funding for companies in distress
  • African regional integration
  • SA spatial development
  • The development of new industries

Mr David Jarvis, Corporate Strategy Executive, on retail off-take opportunities, said there was a growing trend where businesses preferred to look for local suppliers rather than importing because they could order just the right amount and have a greater variety of goods.

Ms Mabuza said retailers benefited because it then strengthened their own market and the Board highly supported this initiative.

Minister Patel said there were a number of barriers for black industrialists and the IDC could not deal with all of them. A black industrialist was not the same as a black entrepreneur. A black industrialist created and owned industrial capacity, provided long-term strategic leadership and or control. They were not portfolio investors. They identified opportunities, took personal risk and did business in manufacturing. The strategy to assist black industrialists was to assist with start-ups of new business or expansion or acquisition of existing businesses and addressing issues relating to access to capital, markets and skills. The corporation targeted investing R23b at discounted prices. He said investment in infrastructure was a critical role for DFI’s in Africa. The IDC’s exposure in the continent would be broadly in sub-Saharan Africa. Karoshoek Solar One was an example of investment in new industries and the Chamber of Mines had developed a new platinum based fuel cell. In developing the IDC’s investment strategy, it had recognised that the availability of funds would be critical but not the only thing. The executive authority’s job was managing the IDC to be viable, coherent and focussed on its developmental goals in job creation, greening and industrialisation.

Discussion
Mr P Atkinson (DA) said there had been a significant increase in approvals over the past five years and asked what effect this had had on bad debts. Could the Department give examples of new industries the IDC were involved in especially with regards to innovation? Why had there been investments in Sudan, which was not part of sub Saharan Africa.

Mr M Mabika (NFP) said the IDC gave assurances that the businesses it invested in were sustainable yet it bailed out companies such as Bell of Richards Bay. How sure was the IDC that it would not go out of business again?

The Chairperson said Government had responded to the global economic crises with R6.1b in support, which had started in 2009 and ended in March 2015.

Mr S Tleane (ANC) supported the idea of developing black industrialists and the transfer of control to the previously marginalised. The presentation showed the IDC’s partnerships with Eskom and the like and one got an idea of the complete strategy of Government to address poverty and unemployment. There could not be sustainable development without the inclusion of the SADC region and the African continent. Taking into account that the population of Africa was young, was there opportunity where the Department and Government was bringing industrialists up to university level.

Mr M Mbatha (EFF) asked if the Department had considered doing a study of available national resources currently. One could not industrialise without levelling the playing fields. There were cases of collusion in the country against companies in attempting to level the playing fields; penalties given to these companies did not put pressure on them from the point of view of the State or civil society, the penalties actually encouraged them. In South Africa it was not offensive for a Board to be told its CEO was involved in these activities so the Board took a decision. In this country Boards did not even take decisions, only external parties took decisions against the CEOs, which tells one about the prevailing psyche and how deeply entrenched it was in the economy.

Ms D Rantho (ANC) said the minister spoke about localisation and used the example of a person having a bed and breakfast (B&B) in a rural area. There were B&Bs in Sterkspruit or Bela Gardens but for rural areas to develop the infrastructure needed development and relevant stakeholders needed to be involved. Most of the people doing business on the Port Elizabeth beachfront were from African countries. This type of entrepreneurial skills was lacking by South Africans and should be part of the economic development programme. What was the relationship with educational institutions that developed economic skills because South Africa lacked those types of skills? Regarding State Owned Companies and localisation, she was concerned that the presentation did not say the period it would take to get tenders and opportunities. When would this start? South Africa was not getting good quality imported products. Was there any company apart from the SABS that looked at the quality of materials produced?  What happened to the geyser programme, was it done in conjunction with the solar water heater program?

Mr S Marais (DA) asked for more information on the motor vehicle body manufacturer situated in Worcester. How were black industrialists identified? Did they search for them? What programme was there to identify and develop potential industrialists? He queried the information in the ‘jobs lost’ column of the funds allocated for distressed companies. What were IDC’s exposure in Africa to foreign companies and the exposure to South African companies operating in Africa?

Mr I Pikanini (ANC) said that the Department was the glue to other departments and needed to develop and improve research on the resources of the country to guide people as to which areas they should go into. One needed to change the dependence mentality of people. Other countries empowered their people to develop their own means of providing for themselves; the Department should broaden its scope to include this matter.

Mr M Cele (ANC) said there was a need to talk about the percentage allocated to women and youth in the partnerships because the presentation did not indicate who benefited. He asked for clarity on the number of jobs created in the construction of Karoshoek Solar One. Why was the Hilton chosen when funds were given for the construction of a five star hotel in Uganda? How many jobs would be created in the plant that would be opening in PE?

The Chairperson asked how much interaction there was with the other economic communities of the continent. How had the BNDES (Brazilian Development Bank) model challenged the IDC and helped the South African situation with regard to financing. She wanted some of the challenges in investing in other countries highlighted especially in recouping financing costs or the rate of return on an investment. What was women’s share of the R23b? If none, could that be looked into.

Minister Patel said he appreciated the appreciative comments on the IDC.

In response to Mr Atkinson’s questions, one of the investments in Sudan was for the treatment of water and in a number of African countries the investments were in infrastructure because this was a critical means of unlocking economic activity. The IDC was investing in airports, ports, broadband, energy and cement manufacturing.

He agreed that innovation was a driver of economic activity. The IDC had an interesting portfolio with innovation at the centre of some companies. It had a programme that supported innovation but there was a higher risk to this investment. In Gauteng, for example, a company had an innovative project to prevent theft of electricity cables. A company in Stellenbosch was working on thin film solar power to provide hot water to households. The IDC was working with Wits University to develop an IT hub, so it sometimes has to step away from pure project funding to the promotion of innovation. The Department was encouraging the IDC to work with the Technology Innovation Agency (TIA) of the dti.

Regarding bad debts, the IDC measured the success of its investments by the impairments ratio, being investments that could not be repaid. It set prudent limits of 20% at cost. This was a conservative measure and the IDC operated within this measure.

Ms Mabuza said the present level of impairments had declined from 19% at cost the previous year to under 17% this year. This was attributed to a technical decline. The Board watched this measure like a hawk.

Minister Patel, in response to Mr Mabika’s questions, said one could never guarantee that there would be no losses but one could reduce the risk. The IDC portfolio should be a risk-balanced portfolio.

In response to Mr Tleane’s questions, the Department was looking at black South Africans creating wealth and jobs. The money was being offered at a discount so that the full entrepreneurial energy in the whole of society was brought into the economy, which would sustain growth and create jobs. It was a long-term project.

The IDC is in partnership with other State Owned Companies but also with other agencies. The IDC would strengthen the PICC unit to address broader developmental constraints like for example Sterkspruit.

The IDC entered into partnerships on the continent. While universities could play a useful role, many of the best entrepreneurs never went to university or started university and dropped out. It was an attitude of mind.

In response to Mr Mbatha’s questions, natural resources included agriculture. Agro processing like the Coega dairy in the Eastern Cape was an example. Cattle farming in the area would not survive without markets but farmers could not afford to have a dairy, so building a dairy assisted cattle farmers.  The Chamber of Mines was using platinum to develop fuel cells to assist with their energy needs. Sun and wind were natural resources and Karoshoek Solar One was an example of using solar power. Scaw Metals recycled scrap metal.

In response to Ms Rantho’s questions, places like Sterkspruit and Port St Johns were not attractive to tourists because of energy constraints and the condition of roads, yet had lots of tourism potential. Localisation depended on contracts by Eskom, Transnet etc. Together with Trade and Industry Minister Davies, he was looking at the SABS and why there were not adequate standards for goods and why foreign standards were used without consultation with the SABS. Solar water heaters had to have a certain percentage of localisation and the SABS had to certify the technical quality. A geyser used either a flat panel or tubes to generate the energy. The Department of Energy was looking at a new policy framework that was going through the Cabinet process.

In response to Mr Marais’ questions, the company was GRW Engineering, which employed 570 people manufacturing road tankers in Worcester. The IDC wanted to attract black industrialists through incentives as people responded to incentives. Increasingly IPAP was about aligning incentives. The second part was to hold road shows to highlight the programmes of the IDC. Government wanted to create a localised market for Government purchases, which should be done by black South Africans.

Mr Jarvis responded on the question on job losses. The column did not reflect job losses, but rather that when contracts were cancelled; the jobs of that contract were cancelled so it reflected jobs the IDC would have counted.

Minister Patel said the IDC would compile the figures regarding how many South African and foreign companies the IDC was exposed to in Africa.

In response to Mr Pikanini’s questions, the IDC looked for comparative advantages and tried to support those initiatives if there were a comparative advantage.

In response to Mr Cele’s questions, the IDC was sensitive to and measured the support it gave to women and youth. A minimum of R4.5b over five years had to be spent on women and a further R4.5b on youth.

Ms Mabuza added that the matter was taken seriously and the Board had said that management would be penalised if these targets were not achieved.

Minister Patel said that Karoshoek Solar One would commence in 2015 and 1000 jobs had been created for the construction phase and a further 80 permanent jobs were created.  It needed only a small workforce to maintain the plant. Government had to balance the development needs of the country. It needed clean, green energy but it needed the dirty, coal industry for power stations because there were much more jobs created in that endeavour. In the case of the Hilton hotel, the hotel owner needed an international operator to attract foreign tourists and the Hilton brought its marketing machine along with it.

Mr Jarvis said the operating company had come to the IDC with an operating partner already in place. It was not the case that the IDC had decided to establish a hotel; the IDC had not decided that.

The Chairperson asked if the IDC had a say in identifying an operating partner.

Mr Jarvis said the IDC limited itself to identifying whether the operator would deliver on marketing and brand awareness for example. 

Mr Mazwi Tunyiswa, IDC Head: Metal, Transport and Machinery Products, said the official operator would be aware that the IDC would be more positive towards a proposal if it came with a reputable operating partner.

Minister Patel said it was judged on a case-by-case basis.

In response to the Chairperson’s questions, the Tripartite Free Trade area would be significant for the IDC, as factories that the IDC had an interest in would be exposed to a market of 600m people. Companies would be more competitive if they had a bigger market. Information was shared and he had recently been to Tanzania where experiences were shared. In the area of entrepreneurship there were examples of success stories in the entry level, the informal sector. This area was one where South Africa could learn more.

On Brazil’s BNDES model, the most important lesson was that Brazil made a monthly fiscal transfer that allowed them to increase their risk profile or bring down the cost of capital. He had told the IDC to stretch their balance sheet within prudence before approaching Treasury for money, as currently it was not the best time to ask for fiscal injections. 

On the rates of return for the IDC’s external investment portfolio, it was not unprofitable. The IDC did more in its due diligence and it went through more approval processes for external investments than the internal ones and the external investments also had to pass Treasury’s scrutiny, so the IDC had processes in place to reduce risk. Generally in the past the IDC did not speak too much about projects that it supported three to four years previously. Big infrastructure investments generally took five or six years before a return was seen on the investment.

The meeting was adjourned.

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