Credit rating review impact on Industrial Development Corporation (IDC) & its 2015 Annual Report

NCOP Economic and Business Development

29 November 2016
Chairperson: Mr E Makue (ANC. Gauteng)
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Meeting Summary

Annual Reports 2015/16 

The Industrial Development Corporation briefed the Committee on its 2015/16 Annual Report, taking into account credit rating review and the implications of the Corporation’s role in the economy and employment.

It had been a challenging year for the global and South African economies but the Industrial Development Corporation remained committed to driving industrial development and contributing to the revival of the manufacturing sector.

The Corporation was in a strong liquidity position. Its profit for the 2016 financial year was R223m.Total assets sat at R 122bn and debt/equity was 33%. An overview of the operational structure of the Corporation was also provided. Detail was given on the Corporation’s listed investments, revenue and operating costs. The Corporation was credit rated: Fitch Ratings showed that currently the Corporation’s national long-term credit rating and national short-term credit rating was affirmed to be stable. Moody’s Investor Services did an international credit rating of the Industrial Development Corporation. Moody’s was reviewing the Corporation for downgrade as per press release of 14 September 2016. A decision was anticipated before the end of the 2016 calendar year.

The Industrial Development Corporation realised that it needed to be at the centre of developing SA’s most important industries. The Corporation changed to a value chain approach where it considered the entire value chain when making an investment. Performance highlights for 2015/16 included that the Corporation had approved 180 transactions with a total value R14.5bn, total funding disbursed amounted to R11.4bn and jobs expected to be created and saved totalled 15 272. The focus of the Corporation’s activities was in jobs-rich manufacturing value chains of the economy, namely the mining and metals value chain, pharmaceuticals and chemicals value chain, as well as on the agriculture and agro processing value chain. The IDC had over the last five years also funded industrial infrastructure projects with a current focus being on energy. In addition, the Corporation funded other manufacturing sectors and tourism for quick turnaround opportunities. Tourism was identified as a sector with high job creation potential. Regional equity was a key strategy focus. To this end the Committee was provided with a breakdown of a provincial distribution of funding approvals. The intention was to focus less on investments in provinces like Gauteng, Western Cape and KwaZulu-Natal, where investments had always been made. The focus would be more on those provinces that had not had much investment in the past. The Free State Province was singled out as a province which needed much attention. Job creation and preservation remained a priority especially if the latest StatsSA figures placed unemployment at 27.1% in SA. The Committee was also provided with a breakdown of jobs created and saved as per province. The Corporation assisted black businesses, black industrialists, small and medium enterprises, and women & youth owned businesses.

The Industrial Development Corporation was committed to regional integration and its footprint in the African continent covered 23 countries. A total of R255m was approved for funding in the rest of Africa in 2015/16 down from R1.7bn in the previous year. R1.3bn was disbursed from previous approvals. 

Members felt that the Committee needed additional information and asked the Corporation to provide its Annual Report and its Annual Performance Plan to the Committee. It was also felt that the inroads that the Corporation was making into provinces where they had not been so active before should be fundamental and not incidental. How aggressive were the Corporation’s strategies in these provinces? Changes to the structure of the economy should also be fundamental and not incidental. There should be less urban bias and more emphasis on rural areas. The Corporation was asked what its book value was; and was also asked to what could the R1bn plus loss of Foskor and Scaw SA for the period under review be attributed to. Of the total R14.5bn that the Corporation had disbursed for the period it came to light that 17%-20% of the total would not be recouped. This amounted to more or less a R300m loss which was a concern to Members. What plan did the Corporation have to retrieve the funds?

In as much as the efforts of the Corporation were appreciated. Members expressed concern that over the past few years the Corporation’s investment in small business had declined. So too had its job creation figures. The Corporation was asked whether the investment into renewable energy was worth it. Members noted that the problem with renewable energy was that it did not create many jobs and that it consumed large amounts of water to produce. Was the number of jobs created worth the investment made into renewable energy? On the legislative framework in place, the Corporation was asked whether there was any need to tighten legislation. Were policy gaps detrimental to economic growth? How could Members as legislators assist? The Corporation was asked whether it received cooperation from provincial legislatures. Members pointed out that all departments, including the Industrial Development Corporation, had a tendency to make allocations to provinces that were already developed. The usual ones were normally the Western Cape, Gauteng and KwaZulu-Natal Provinces. Provinces like the North West and the Northern Cape were often overlooked. Greater interventions were needed from Development Finance Institutions.  Members noted that the issue was about how to practicalise localisation and beneficiation. The Committee agreed that its next oversight visit would be to the Mpumalanga Province and the Corporation was asked to pinpoint where its projects in the Province were.

The Committee also took a decision to discuss its study tour to Cuba in its next management committee meeting on Thursday, 1 December 2016.
Outstanding minutes were also adopted.

Meeting report

During the meeting Mr E Makue (ANC) took over as Acting Chairperson after the departure of the Chairperson of the Committee.
 
Industrial Development Corporation (IDC) on its 2015/16 Annual Report taking into account credit rating review and the implications of the IDC’s role in the economy and employment
The delegation comprised of amongst others Mr Mvuleni Geoffrey Qhena, Chief Executive Officer; Ms Rochelle Warries, Head of Financial Management; and Mr Brian Zondo, Economic Development Policy Analyst. Mr Qhena kicked off the briefing. It was a challenging year for the global and South African economies but the IDC remained committed to driving industrial development and contributing to the revival of the manufacturing sector.

Ms Warries spoke to the financial performance of the IDC. The IDC was in a strong liquidity position. Its profit for the 2016 financial year was R223m.Total assets sat at R 122bn and its debt/equity was 33%. An overview of the operational structure of the IDC was also provided. Detail was given on the IDC’s listed investments, revenue and operating cost.

 Mr Qhena continued the briefing. Members were informed that the IDC was credit rated. Fitch did a national rating of the IDC and it showed that currently the IDC’s national long-term credit rating and national short-term credit rating was affirmed to be stable. Moody’s Investor Services did an international credit rating of the IDC. Moody’s was reviewing the IDC for downgrade as per press release of 14 September 2016. A decision was anticipated before the end of the 2016 calendar year.

On the operational performance of the IDC, it realised that it needed to be at the centre of developing SA’s most important industries. The IDC had for instance changed to a value chain approach where it considered the entire value chain when making an investment. Performance highlights for 2015/16 included that the IDC had approved 180 transactions with a total value R14.5bn, total funding disbursed amounted to R11.4bn and jobs expected to be created and saved totalled 15 272. The focus of the IDC’s activities was in jobs-rich manufacturing value chains of the economy, namely the mining and metals value chain, pharmaceuticals and chemicals value chain as well as on the agriculture and agro processing value chain. Practical examples of where investments had been made were illustrated to the Committee. The IDC had over the last five years also funded industrial infrastructure projects with a current focus being on energy. In addition, the IDC funded other manufacturing sectors and tourism for quick turnaround opportunities. Tourism was identified as a sector with high job creation potential. Regional equity was a key strategy focus for the IDC. To this end the Committee was provided with a breakdown of a provincial distribution of funding approvals. The intention was to focus less on investments in provinces like the Gauteng, Western Cape and KwaZulu-Natal where investments had always been made. The focus would be more on those provinces that had not had much investment in the past. The Free State Province was singled out as a province which needed much attention. Figures were provided on approvals and disbursements as per provinces. Job creation and preservation remained a priority especially if latest StatsSA figures placed unemployment at 27.1% in SA. The Committee was also provided with a breakdown of jobs created and saved as per province. The IDC assisted black businesses, black industrialists, small and medium enterprises (SMEs) and women & youth owned businesses. Figures as per province were provided in this regard. The IDC was committed to regional integration and its footprint in the African continent covered 23 countries. A total of R255m was approved for funding in the rest of Africa in 2015/16 down from R1.7bn in the previous year. R1.3bn was disbursed from previous approvals. 

Discussion
Mr S Mthimunye (ANC, Mpumalanga) said the Committee needed further information and that the actual Annual Report of the IDC together with its Annual Performance Plan up until April 2017 should be provided to the Committee. The inroads that the IDC was making in those provinces where they had not been so active before should be fundamental and not incidental. He asked how aggressive the IDC’s strategy in those provinces was. There should be less urban bias and more emphasis on rural areas. What was the book value of the IDC? How much of its value was public funds? He also asked what could the 1bn plus loss of Foskor and Scaw SA for the period under review be attributed to. He added that changes to the structure of the economy had to be fundamental and not incidental.

Mr Qhena said that it was clear that the IDC needed to interact more with the Committee. The Annual Report of the IDC was available and would be provided to the Committee. Its Annual Performance Plan would also be provided to the Committee. On investments in provinces there needed to be a deliberate attempt to balance investments. The IDC tried to be more proactive. In some instances, the IDC was approached by entrepreneurs. On the changes to the structure of the economy,  the IDC played a role on policies. The IDC did add value by providing policymakers with information.

Mr W Faber (DA, Northern Cape) stated that the IDC in its briefing had said that 17%-20% of its money disbursed was not recouped. If the total disbursed was R14.5bn then there was an annual loss of around R300m. What plan did the IDC have to retrieve the funds? He was concerned as it was a considerable sum of money.

Mr Qhena, on the impairments that Mr Faber referred to, gave an indication of how doubtful investments might be. Banks would be concerned if the impairment figure was a mere 3%. The IDC invested in start-ups and its accountants were never sure whether the investments would work or not. The IDC made investments in turnarounds. These could include investments in companies that were under financial strain. The idea was to also save jobs. Due to this the IDC’s risk tolerance was higher than banks. He conceded that 20% was high. If it went beyond 20% then the survival of the IDC could be threatened. The IDC tried to give new entrants a chance and built it into its risk. The IDC was not however comfortable with the figure sitting at 17%. It wished for the figure to come down to 15%. The intention was for it to be counter cyclical.

Dr Y Vawda (EFF, Mpumalanga) felt that small business investment was good. He however noticed that the IDC’s investment in small businesses had over the past few years been declining. Investment and job creation figures had also declined. These were issues that the IDC needed to address. Renewable energy was great but the only problem with it was that it did not create that many jobs. Renewable energy projects were usually in remote areas and they tended to use a great deal of water. The question could thus be asked whether renewable energy was worth it. The issue was about how much money was invested compared to jobs created.

The Acting Chairperson asked on the legislative frameworks that were in place, whether there was a need to tighten legislation. In one slide of the briefing it showed that IDC expenditure was huge, however another slide showed that job creation was not great. He asked whether it was a cyclical phenomenon. The IDC was asked whether it received cooperation from provincial legislatures.

Mr Qhena stated that there was cooperation with the provinces. The IDC did have provincial offices. There were awareness campaigns in the provinces. There was no real need to change anything legislatively. The IDC Act was considered to be fine. The IDC did pay tax and perhaps consideration could be given that the funds could rather be used to fund more entrepreneurs.

Mr B Nthebe (ANC) asked for confirmation that the IDC spent 27% of its funds on black industrialists. He pointed out that all departments’ allocations favoured already developed provinces. There was no change. The North West Province in terms of employment ratings was the hardest hit. This was due to amongst other things the job shedding that had taken place in the mining sector. The issue was about how to practicalise localisation and beneficiation. The problem was that the progress that should be seen was not seen. There needed to be interventions from Development Finance Institutions (DFIs).

Mr Qhena said the 27% for black industrialists was what had been approved for the year under consideration. It was a relatively new investment for the IDC and it was tracked. A youth conference had been held in 2016. DFIs needed to support the black industrialists. Support from the Department of Trade and Industry (DTI) was a huge help. He was encouraged that in time to come the black industrialist funding would increase as their numbers increased. There would be cross subsidisation. The IDC looked at the pricing of the investment. DFIs should encourage entrepreneurs. On observations that beneficiation in the North West was not taking place as it should there was room for improvement. There was a fuel cells project in Johannesburg. There was also a hydro energy project. The IDC had many projects that it was involved in. The IDC had offices in all provinces so as to be close to where things happened. People also needed to engage with the IDC. The IDC was by no means perfect. The IDC was working on the Special Economic Zone (SEZ) in the North West Province. The IDC did have the Small Enterprise Funding Agency (SEFA) that invested in small companies.

The Acting Chairperson said he had asked if provincial cooperation was forthcoming because sometimes things were beyond the control of the IDC. He asked whether policy gaps were detrimental to economic growth. What could Members as legislators do to address the matter?  

Mr Qhena felt that SA’s policies were good. The issue with policies lay in their implementation. There was no implementation. With all the imperfections that the DTI had, it had good incentives. The problem was that some localities did not absorb the incentives that were there. The textile industry was a difficult industry but the DTI had done some commendable work on it.

The Acting Chairperson noted that in early February 2017 the Committee was to go on oversight. He proposed that the Committee visit Mpumalanga Province. The IDC needed to inform the Committee on where most of their projects were concentrated in the Province. The Committee could visit the IDC as well.

Update on the study tour to Cuba
Ms Grace Dinizulu, Committee Secretary, said the South African embassy in Cuba could not accommodate the Committee for a study tour for when the Committee wished to undertake it due to issues relating to the death of long time Cuban President Mr Fidel Castro. The date had been changed to the 27 January 2016 – 4 February 2016.
 
The Acting Chairperson felt that the reason given by the South African embassy was not good enough for not being able to accommodate the Committee. He said that 27 January 2016 – 4 February 2016 was oversight week for Members.

Mr Mthimunye asked why the Committee could not change the oversight date. The Committee could discuss the matter in its management committee (MANCO) meeting which was scheduled for Thursday 1 December 2016. 

Mr Faber, being under the impression that the Cuban authorities and not SA’s embassy in Cuba could not accommodate the Committee, said Members would be guests of the Cuban authorities and could not expect them to change their programmes. The Committee could however change its own programme.

Mr Vawda said that the Committee should extend its condolences to the Cuban authorities on the death of President Fidel Castro. He agreed that the Committee could change its programme if the Cubans could not change theirs.

The Acting Chairperson said that the issue would be discussed in the Committee’s management meeting. He pointed out that it was the South African embassy which could not accommodate the Committee and not the Cuban authorities.

Mr Faber suggested that the study tour be undertaken in June 2016.         

Committee Minutes
Minutes dated 1 November 2016 were adopted as amended. Minutes dated 8 November 2016 were adopted unamended.

Mr Mthimunye suggested that the Committee have an agenda for each meeting so that issues on which departments had made promises could be followed up.

The Acting Chairperson agreed that the Committee should have an agenda for each meeting. The agenda should make provision for matters arising on which the Committee could make follow up.

The meeting was adjourned.  



 

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