Impact of industrial strategy on SMME development: Industrial Development Corporation briefing

Economic Development

13 March 2018
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Industrial Development Corporation briefed the Portfolio Committee on Economic Development on the impact of its programmes on the Small Medium and Micro and Enterprises, while the Committee, on the other hand, is to assess if the policies in place are directed to where they are needed most.
The entity reported government's policy approach towards Small Medium and Micro Enterprises, black industrialists, women; and youth development, and focuses on identifying bottlenecks hindering these groups' participation in the economy and developing interventions. The Industrial Policy Action Plan identifies and promotes Small Medium and Micro Enterprises’ participation in industrial sectors. It specifies local content requirements linked to government procurement and provides industrial incentives such as the film and television production incentives and Isivande Women's Fund. Government has set aside 30% of its procurement for Small Medium and Micro and Enterprises.

The entity’s funding has remained resilient and has maintained high levels of approvals despite private sector investment first stagnating and then declining. Despite the job losses reported since 2010, the entity has been able to consistently contribute to employment in SA. Current Industrial Development Corporation sectors account for 62% of all fixed investment activity in the SA economy. The largest portion of the entity’s funding is for Small Medium and Micro Enterprise capacity expansions. Funding to distressed companies increased in the last two years as a result of the poor operating environment.SA ranks better than average in terms of government policy where it comes to the priority given to entrepreneurship. When it comes to practical aspects of government interventions such as taxes, bureaucracy, and entrepreneurship programmes, SA scores lower than average. The number of businesses formally registered in SA has shown a significant increase over the last nine years, while the number of cooperatives has declined since 2012/13 period.

The Industrial Development Corporation also has funds available that address specific spatial interventions which benefit social enterprises. Over the last five years, the entity approved R223m from these funds and this created 2 350 jobs and benefited 26 000 individuals. The largest number of jobs created by the entity’s funding is in larger enterprises. The largest number of transactions for Small Medium and Micro Enterprises were done in the clothing, textile, and agro-processing and agriculture units. Overall, the levels of funding for transformation initiatives significantly increased in 2017.There is collaboration between government entities to assist black industrialists. The Industrial Development Corporation assisted the Department of Trade and Industry with the establishment of the Black Industrialist Policy and Scheme. The Industrial Development Corporation, National Empowerment Fund, Land Bank, and KZN Growth Fund are active in assisting clients to access the scheme. The state has ramped up support for black industrialists and this process is led by the Department of Economic Development and the Department of Trade and Industry.

Members wanted to know the relationship between the different departments that have funds allocated for Small Medium and Micro Enterprises; wanted to establish why the Development Finance Institutions are charging interest that competes with that of the banks yet this is government money; asked if the National Empowerment Fund is a subsidiary of Industrial Development Corporation; whether there has been any progress with regard to the R250m loan given to the Gupta’s company; asked how does IDC ensures that BBBEE efforts are not misused or used for fronting in order to benefit from the entity’s funding; asked for clarity on the rebound in the agricultural sector because the drought is not over yet; and remarked that not much has been said of any existing relationship the entity has with local municipalities.

Meeting report

Mr Geoffrey Qhena, CEO: IDC, took the Committee through the business environment, South African development finance institutions landscape, and IDC's role in advancing transformation.

He highlighted some of the challenges faced in increasing industrial development and transformation in SA. The low levels of economic growth and investor confidence are stalling new investments in SA. Government initiatives aimed at stimulating local investment and growth are not uniformly implemented and are disrupted for narrow gains. Local lenders are still more inclined to put resources in small businesses in their later stages of development and less likely to lend to start-ups and SMMEs. Shortages of skilled workers continue to reduce productivity and competitiveness. Small businesses located in rural areas are at a disadvantage compared to their urban counterparts because their small size and remote location hinder them to form collectives in order to enhance their bargaining power.

Government's policy approach towards SMMEs, black industrialists, women, and youth development focuses on identifying bottlenecks hindering these groups' participation in the economy and developing interventions. The Industrial Policy Action Plan (IPAP) is a specific intervention because it identifies and promotes SMME participation in industrial sectors. It specifies local content requirements linked to government procurement and provides industrial incentives such as the film and television production incentives and Isivande Women's Fund. The government has set aside 30% of its procurement for SMMEs.

Mr Qhena also enlightened the Committee about the SA economic environment. The higher than expected economic growth was largely driven by increased household consumption expenditure. This was unexpected given the low consumer confidence during the year. There is a rebound in the agricultural sector and this elevated the overall GDP growth to 1, 7%. Efficiency driven economies have, on average, higher levels of entrepreneurial activity compared to more developed, innovation driven economies. South Africa ranks fairly low when comparing its levels of entrepreneurial activity among its peers. With regard to entrepreneurial conditions, SA ranks better than average in terms of government policy where it comes to the priority given to entrepreneurship. But when it comes to practical aspects of government interventions such as taxes, bureaucracy, and entrepreneurship programmes, SA scores lower than average. The number of businesses formally registered in SA has shown a significant increase over the last nine years, while the number of cooperatives has declined since the 2012/13 period.

The IDC has refocused its strategy to allow for prioritisation and jobs-rich industrial development in line with government projects. The prioritisation strategy and operating model were built around achieving their objective and primary outcome. The IDC and Land Bank provide funding on specific sectors, while the Small Enterprise Finance Agency (sefa) and NEF provide funding across all sectors of the economy. Overlaps exist across all Development Finance Institutions (DFIs) and that allows for synergies. No DFI is tasked with developing the mining industry. However, the IDC has included it as a focus area. Currently, the IDC has a comprehensive strategy framework that is guiding transformation. The IDC is working towards the creation of an equitable society by focusing on the role that it could play by implementing its mandate of industrial development and through internal transformation.

The IDC's funding is reported to have remained resilient. The entity has maintained high levels of approvals despite private sector investment first stagnating and then declining. Despite job losses reported since 2010, the IDC has been able to consistently contribute to employment in SA. Current IDC sectors account for 62% of all fixed investment activity in the SA economy. The largest portion of IDC funding towards SMMEs is for capacity expansions. Funding to distressed companies increased in the last two years as a result of the poor operating environment. Funding for start-ups make up about a quarter of IDC's total funding to SMMEs. The impact of IDC's support for specific projects extends beyond the project itself, but also includes the impact these projects have on the rest of the economy. The IDC's Economy-wide Impact Model assesses the potential economic impact of catalytic projects and further depicts the inter-industry relationships that exist between the various economic sectors in the domestic economy.

There is collaboration between government entities to assist black industrialists. The IDC assisted the Department of Trade and Industry (dti) with the establishment of the Black Industrialist Policy and Scheme. The IDC, NEF, Land Bank, and KZN Growth Fund are active in assisting clients to access the scheme. The state has ramped up support for black industrialists and the Department of Economic Development and dti lead this process.

In addition to IDC's normal funding activities, it has funds available that focus on interventions that address specific spatial interventions which benefit social enterprises. Over the last five years, the IDC approved R223m from these funds and this created 2 350 jobs and benefited 26 000 individuals.  The largest number of jobs created by IDC funding is in larger enterprises. The largest number of transactions for SMMEs were done in the clothing, textile, and agro-processing and agriculture units. Overall, the levels of funding for transformation initiatives have significantly increased in 2017.

The IDC subsidiaries within the DFI space allow for a more efficient and effective service-offering. When sefa was established, the IDC was of the view that close cooperation between IDC and sefa would result in increased SMME development around larger projects being established by IDC, and that there would be less confusion in the market about which DFI would be able to assist with providing funding. Since its inception, sefa disbursed R4.3 billion into the economy to 241 537 SMMEs and cooperatives, and facilitated job opportunities to the tune of 258, 091. R. 7 billion was disbursed to women-owned businesses. R943m has been disbursed to youth-owned businesses, while R2 billion went to businesses based in priority rural provinces. Recently, sefa created the Amavulandlela Funding Scheme for entrepreneurs with disability. R24m has been approved and R14m disbursed.

In his concluding remarks, Mr Qhena said small and medium enterprises play an important role in the development of an economy as efficient job creators and sources for innovation, and they remain a fertile ground for financial and non-financial support. The economic conditions have not been supportive of industrial development, but there are some improvements that are seen in the economy which should help efforts in balancing countercyclical role and investing strategically for future long-term gains. Lastly, the IDC's current mandate complements other DFIs and ensures that it covers segments of the economy most relevant to industrial capacity development.

(Tables and graphs were shown to illustrate entrepreneurial activity for different countries; sector coverage, market segments, and geographic reach of various DFIs; sectoral distribution of IDC funding; jobs created by sectors from IDC funding; IDC funding to SMMEs; impact for some IDC funded projects; and sefa funding activities)

Discussion
Ms A Mfulo (ANC), first, wanted to know the relationship between the different departments that have got funds allocated for SMMEs. Second, she wanted to establish why the development finance institutions (DFIs) are charging interest that competes with that of the banks yet this is government money. Third, she remarked South Africa does not invest in its own people when it comes to mining because individuals have mineral rights, but do not have money to start mining or operating. Fourth, she asked how many people know about IPAP. Fifth, she remarked there are companies that get funds from the government and give BBBEE certificates to small companies yet these small companies do not take decisions, but only get money at the end of the year. Sixth, whether there is a plan to ensure black disabled people are going to benefit from the Amavulandlela Funding Scheme because it is whites mostly who benefit from these programmes and already R14m has been disbursed.

Mr Thakhani Makhuvha, CEO, sefa, on departments having a variety of support services for small businesses, explained the Department has entered into transversal agreements with other agencies or entities to support beneficiaries in terms of receiving working capital, machinery, etc. The 30% set aside for small businesses from government procurement is still in place. A meeting is planned with the CEOs of SOEs to discuss the issue of giving work to small businesses in order to support cash-flow challenges.

Mr Qhena added they are trying to work with other funders like the National Youth Development Agency (NYDA), sefa, NEF, etc. when they do roadshows. They have identified a need for a one-stop shop. These roadshows have helped communities, key role players in various sectors, and local business chambers to share their concerns on matters of getting funds and to understand how they could be helped. The 30% set aside refers to government procurement where state entities and departments have to give work to small businesses and help them to get funding through sefa and IDC.

Mr Makhuvha, on interests charged by DFIs, stated their price is discounted, especially when you look at the work they are doing. Beneficiaries require no collaterals or do not have to put money down. Their interest is only 14% while banks charge 50% or put down money or a collateral. Concerning the mining space, there is a partnership in place with Zimele Anglo Fund for those with mineral rights. It is for exploration. The fund is to be brought in-house and is for building the necessary capability and support individuals in mining. 

About Amavulandlela Funding Scheme, R30m was set aside during the 2016/17 period to identify entrepreneurs with disabilities. The challenges are in the removal of stigma because people with disabilities see themselves as normal people and the DFIs have not done well on addressing the matter. The funding has a concessional rate. 24 applications have been approved to the tune of R14m. They need to develop promotional marketing material that would cater for the disabled and target the media space.

Mr Qhena added that the issue of targeting people with disabilities is tricky to a certain extent.  As IDC, they do not want to be seen to be discriminating while trying to help. There is a programme in place that is being run by people with hearing disabilities in Cape Town. IPAP is a dti programme that deals with some of the incentives that are on offer and has success stories.

Dr J Cardo (DA) asked if the National Empowerment Fund (NEF) is a subsidiary of IDC; and if there has been any progress with regard to the R250m loan given to the Gupta’s company.

Mr Qhena indicated the NEF is not yet a subsidiary of the IDC though there are teams discussing matters of collaboration. Oakbay is complying with their payment in terms of their loan agreement. R37.5 million against the R250 million loan is still to be paid. The IDC is awaiting the court date because the company has to be de-listed. The IDC did not fund Tegeta, but only Chiva and the IDC has perfected its security around the issue.

Mr I Pikinini (ANC) wanted to establish if there is a monitoring mechanism in place to look at the role the IDC is playing in Africa. He also remarked junior miners are helped with start-up funds, but the country is unable to start with manufacturing. Raw material is taken outside the country. The IDC needs to start thinking about starting manufacturing.

Ms Ntokozo Hadebe, Head of Strategy: IDC, elaborated they have not been doing well when it comes to investment in Africa. There is a lot of leverage that needs to be done between SA and African markets. They are working with dti on some projects they are resuscitating in some African countries. The whole thing is being integrated in to the IDC strategy.

Mr Qhena informed the Committee that when the time comes to look at funding mines, they would consider beneficiation. In everything they do, there is a concerted effort to see what the value is for the IDC because the mines also dig out the material and send it outside for refinement.

Ms Mfulo indicated if as a country they want to win in terms of manufacturing, they need to go out and look for innovation. People need to be encouraged to be innovative, especially those who have been working in companies that have collapsed.

Mr Qhena said they have a unit for new industries, for people who have fresh ideas. They only need to go out and unearth innovative people.

Mr M Mabika (NFP) asked if the IDC has mechanisms in place to ensure BBBEE efforts are not misused or used for fronting in order to benefit from the IDC funding. 

Mr Lizo Ntloko, Western Cape Regional Manager: IDC, replied they are cautious of fronting. When the applicant comes, the applicant should be at Level 4. The IDC looks at who occupies key positions like CEO, CFO, and COO. The IDC insists on operational development where black people are involved in the day-to-day running of the business.

Ms C Matsimbi (ANC) asked for clarity on the MOU with the Russian Bank.

Mr Makhuvha explained the MOU was signed at the sefa office during the BRICS summit. It is a collaboration between the DBSA, dti, SA Chamber of Commerce, and other entities. It is about learning how to support small businesses involved in various commodities. It is a fact-finding mission on support to be given to small businesses. There are things Russians want to learn about SA and what SA could learn from Russia. They have also visited Kenya for the same exercise and looked at the regulatory regime. In Rwanda they take one hour to register a business whereas in SA it takes a long time.

Mr S Tleane (ANC) asked for clarity on the rebound in the agricultural sector because the drought is not over yet; and wanted to know how companies falling by the wayside are being assisted. He also asked for clarity on challenges facing Foskor and wanted to know why sefa is written in lower cases.

Mr Makhuvha said the reason why sefa is written in lower cases it is because it is a small enterprise with a big impact. It supports big businesses. The letters are in lower cases but bold and bright. There is a bit of a creative licence there.

Mr Qhena stated the rebound in agriculture refers to agro-processing. There are no job figures mentioned. Agro-processing does not give you a lot of numbers. It is the primary agriculture that provides figures. Drought visited certain provinces, but now rain has replaced it. For distressed companies, he indicated they have a unit called WorkOut which is like an ICU. They look at a number of issues like management, partnership, technical matters, expertise, etc when helping these distressed companies.

 Regarding Foskor, a special board meeting was held recently to see how best to save it. It is experiencing serious challenges. It is finding it difficult to trade at this time of the year, especially when you look at the Rand exchange rate. Foskor is the only company that provides phosphate-based fertiliser in the SADC.

The Chairperson commented it is important to be given specifics on the challenges. The real challenges should be included in the Annual Performance Plans (APPs) in order to come with solutions. Foskor is at a disadvantage to other companies because it has to drill and blast in order to get the product and that the mine is far from the plant. Transport costs are a contributing factor.

Mr A Cele (ANC) asked if there are mechanisms or plans in place to ensure small businesses do not decline in rural areas.

Mr Qhena said they use a scorecard to show where the business is and this helps them when doing allocations. He admitted they are not doing enough to support them and this matter has come to the attention of the board.

The Chairperson remarked not much has been said of any existing relationship the IDC has with local municipalities. She further noted a story of empowerment needs to be narrated in the country. The IDC needs to tell South Africa about its involvement in making it possible for beneficiaries to get government funding and educate people about the services it is offering. For example, the IDC has all the information about the Kalagadi Manganese, a consortium led by women though it is not 100% owned by blacks. The country needs to know its socio-economic impact and the role it played in introducing women to a field previously dominated by men. She said if Members of Parliament do not know what the IDC is doing, then somebody is not doing his or her work yet money is being allocated for marketing. Currently, it looks like the IDC is not making any dent in the space it is given. It really needs to look at how it sells and opens itself up so that people could access it better.

She is happy that disbursements are increasing but does not know whether that is happening quantitatively or qualitatively. It looks like nothing has improved. Things have rather gone down because there are lots of malls yet locals are not the owners of the businesses inside these malls. The Committee now has a clue of what is happening in the sector. It has become clear the IDC’s funding goes to larger enterprises, but there must be value to SA. The country needs to develop its own people. For example, Coega is letting the local people down. Some companies are complaining they cannot source material from SA. General Motors left the country. The country is losing instead of gaining. There is a need to invest more on local people.

Mr Qhena indicated General Motors left the country and the IDC is talking with other players in the field on how to make use of that capacity to ensure it is not lost. The interaction with the Committee is a reflection of where to improve. Last year, the IDC had a partnership with City Press newspaper where they highlighted where the most investments were made in the country, looking at the size of the investment, transformation, provinces they have presence in, commodities, etc. The IDC has the collection of that data from all the provinces they operate in. That was its attempt to make people aware of what they are doing. That collection would be forwarded to the Committee and Members’ input would be appreciated.
 On companies that are majority owned outside SA, there is a need to see how best the country benefits from that and then maximise on shareholding and localisation.

The Chairperson said the challenge on foreign owned investments is when the company was local and later got taken over by foreigners. Most of the time, foreign investors come to take away what is ours and leave.
Lastly, she indicated there is a need to understand where we stand as a country in terms of the Isivande Women’s Fund. Women in other areas need to benefit from this scheme.

The meeting was adjourned.

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