Industrial Development Amendment Bill: Briefing

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Trade and Industry

11 June 2001
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
12 June 2001
INDUSTRIAL DEVELOPMENT AMENDMENT BILL: BRIEFING

Chairperson: Dr RH Davies

Documents handed out:
Briefing Notes on Industrial Development Amendment Bill, 2001 (See Appendix)
Industrial Development Act No. 22 of 1940
Annexure 1 Government's Mandate to the Industrial Development Corporation - 2000
Industrial Development Amendment Bill [B32 - 2001]

SUMMARY
The committee was briefed on the Industrial Development Amendment Bill. National Treasury had disapproved the IDC's approval to increase its debt equity ratio from 75 per cent to a 100 per cent based on certain reasons related to risk. The IDC nevertheless desired to incorporate this increment in the face of National Treasury's objection contending that if the ratio were increased it would enhance its flexibility in engaging in other larger business activities. The committee did not want to take any stance on this view until National Treasury makes its presentation on 26 June 2001.

MINUTES
Ms Nweti Maluleke (Trade & Industry) read through the Briefing Notes on Industrial Development Amendment Bill. She indicated that one of the purposes of the Bill is to extend the activities of the Industrial Development Corporation beyond the borders of the Republic to cover the Southern African region specifically and Africa generally.

She noted that Clause 2 (amending section 4(f) of the Act) which allows the IDC to borrow money and to move the gearing from 75% to 100% without shareholder approval had been objected to by National Treasury. Treasury believes that the Public Finance Management Act supersede other Acts. Chapter 6 of the PFMA on Public Entities requires the Minister of Finance to concur with the request of this Bill and all borrowing, and also potential risks to the country. She invited comments from the IDC with regard to this later in the presentation.

Mr Loyiso Jiya (Chief Economist: IDC) addressed the committee on the increase of IDC's debt equity ratio of 75 to 100%. He said that the process of amending the Act began in 1996. With regard to the borrowings, the IDC is putting its house in order, he said. He referred to the original Act in which reference is made to an IDC shareholders resolution passed on 27 May 1975. This resolution deals with increasing the borrowing powers of the corporation. The shareholders, therefore passed a resolution in 1975 to the effect that the shareholders can borrow up to a 100% of its assets. Thus all that the IDC is doing is moving that resolution into the Act that it may become a part of the Act itself. When one takes the consolidated IDC, it is currently sitting at 46%. When one takes the market value of the IDC assets, this ratio even decreases. In a nutshell, IDC is taking the resolution that was passed in 1975 and making it part of the Act and by this the IDC is keeping its house in order.

Discussion
The Chairperson commented that the increase of the IDC's debt equity ratio appeared to be a major issue.

Ms B Ntuli (ANC) asked about the promotion of the economy and the empowerment of historically disadvantaged communities and persons. Was this to be done directly through IDC or were other institutions to be involved?

Mr Jiya replied that the IDC had made a presentation to Parliament regarding its performance. Since 1995, the monies disbursed for the upliftment of historically disadvantaged communities and small and medium enterprises has been increasing at an annual rate of about 45 per cent. More than 30 per cent of these disbursements was for the upliftment of the historically disadvantaged. The IDC is also looking at working with other organizations within the family of the Department of Trade and Industry in order to be more effective in realizing this national objective.

Dr Davies asked for clarity on the key issue of National Treasury's objection regarding IDC's debt equity ratio being moved from 75 to 100%. He added that the committee should be getting National Treasury's opinion regarding the matter too. Secondly, he noted that a new objective had been added to section 4 (j) to "implement procurement and outsourcing policies". Although procurement is key to the development of SME's (Small and Medium Enterprises), he did not see this as falling within IDC's mandate. He asked for a comment on this and the tender procedures and how the IDC will be operating in this area.

On National Treasury's objection concerning the debt equity ratio, Mr Jiya conceded that the Committee must invite Treasury to speak on this issue so that there may be clarity about its objection to the increase.

The Chair stressed that he wanted to hear IDC's explanation for its desire to proceed to increase the ratio despite the National Treasury's objection.

Mr Jiya replied that if the ratio is increased to 100%, should a worst case scenario occur, there would be enough assets to cover the liabilities. There would not be any threat to the government in terms of risk. The IDC has been self-financed since 1954 which was the last time that it was subsidized by the government and it has been a very profitable organization. Due to the fact that it works on economic merit it does not and will not act in any irresponsible manner. The increase of the debt equity ratio to a 100 per cent gives IDC flexibility for large projects whereby timing is of the essence in terms of approving those deals because of competition with other corporations.

Mr D Locke asked why there is a necessity to increase the debt equity ratio from 75% to 100%. Surely this would expose the IDC to higher risk? Further, why should the IDC be guided by a resolution that was adopted in 1975? He said that he appreciated Mr Jiya's explanation that the IDC needed to engage itself to future projects that might be larger than those to which it has been exposed in the past.

Mr Jiya replied that the IDC stands at 40 per cent in terms of the projects. There are issues surrounding Saldanha Steel and there is pressure from national government that a resolution must be made in that regard. Therefore there is a potential for IDC's debt ratio to increase up to 75 per cent immediately. If this ratio is allowed to stand at 75 per cen, the IDC might not be able to fulfill its primary objective to create industrial development in the country.

Ms Ntuli asked why the increase in debt equity ratio does not have to be approved by the shareholders.

Mr Jiya replied that the original Act provides that up to 75 per cent was without the approval of the shareholders. So the provision has merely been extended to a 100 per cent.

Ms F George asked about the new additional objects to section 3, particularly the economic empowerment of historically disadvantaged communities. What projects had been undertaken between 1994 and 2000 to ensure economic empowerment of the historically disadvantaged? She asked if there were additional measures to ensure that IDC was accountable to government other than provision of annual reports to Parliament.

Mr Jiya replied that there are many projects with which the IDC has been involved since 1995. It disbursed about R 2.2 billion rands in 2000, 32 per cent of which was used for small and medium enterprises and other projects (companies of Historically Disadvantaged Persons). He promised to provide a descriptive list in this regard.

On accountability, from the shareholders perspective, decisions regarding approvals of investments up to a certain amount were made by the executive committee. For significant amounts, the IDC Board of Directors makes the decision. These board members are appointed by government and are largely composed of government officials and business people. Board meetings occur on a regular basis. If the government or shareholders wants the corporation to follow a certain direction it can implement that instruction through the Board. So this is the way that the government ensures accountability of this corporation at an operational level.

Mr Bruce (DP) asked a question on competitiveness.

Mr Jiya replied that the emphasis is on flexibility rather than competitiveness. The IDC has a very good reputation nationally and abroad. It raises funds at very competitive rates due to its track record. It is an organization that is largely driven by economic merit. It is not a corporation that runs its business in an irresponsible manner. Its track record will persevere well into the future having regard for its involvement in important projects such as the development of small and medium business enterprises.

Ms September (ANC) asked if the Department of Trade and Industry had any comments regarding the 75 to 100 per cent debt equity ratio increase.

Dr Davies asked the IDC delegation to provide the rand amount for both 75 and a 100% borrowing which is not only issued capital but also reserves. This question was not answered.

Mr Andile Reve (Executive Vice-Preisident: IDC) commented on the debt equity ratio issue saying he was a bit worried that the risk issue seemed to have formed the thrust of the questions from the Committee. He said that the fact that IDC wanted to increase its debt equity ratio to a 100 per cent implied that it had sufficient assets to satisfy its liabilities. He said that in terms of IDC's lending criteria, the equity ratio of two to one is still a very good ratio. The tax laws of this country allow a ratio of three to one. The context and the background from which the IDC comes should also be taken into account. The IDC has only been able to address certain major issues and still has a long way to go to address issues relating to empowerment and development. Hence its desire to be involved with other countries within the SADC region. Since the IDC has transformed some of its internal structures, it has managed to double the volume of business that it does. This shows that there is much scope that had not been exploited before and in order to proceed, the organization needs capacity and funds. Therefore, it would be healthy for the organization to increase its debt equity ratio. He did not understand what National Treasury was worried about. The proposed equity ratio was a healthy one and the IDC has a healthy relationship with international banks such as the European Investment Bank and the African Development Bank.

He also addressed the issue of procurement saying that IDC has a procurement policy and an established procurement department with a procurement committee that is chaired by one of the Board of Directors to make the process more independent and accountable. The IDC currently supports black business through procurement at 60 per cent. It is anticipated that this will increase.

He also addressed the question relating to other development projects and the SMEs. He said that the IDC continues to apply itself in these projects. However, it has a tendency to fund medium-sized companies for they are the ones who exports on a wider scale rather than any small-sized businesses.

The Chairperson said he appreciated Mr Reve's comments but the Committee was in a difficult situation regarding National Treasury's objection to the equity ratio moving to 100%. The Committee could not make a decision as they had not heard National Treasury on the Bill. National Treasury would be invited to make a presentation on their objections so that a decision could be made in a later meeting. There was also the possibility of IDC resolving this issue with Treasury. The matter could then be finalized at a meeting on 26 June.

Ms Ntuli asked how the IDC plans to uplift the historically disadvantaged communities especially by uplifting smaller businesses.

The Chair asked how the IDC plans to enhance corporate governance to achieve business excellence.

Mr Bahle Sibisi (DTI Enterprise & Industry Development) replied that IDC has already started activities in the tourism sector. Traditionally IDC would not have operated in this area. It now also functions in high value agriculture and in the contribution of services and information and communication technology. The Department of Trade & Industry does not anticipate that the enabling Act will spontaneously create a situation where the IDC becomes involved in very small micro enterprises.

Ms Ntuli was very concerned about the upliftment of small micro enterprises, particularly those that are in the townships. She wanted to know the ceiling, at the very least, at which the IDC would contribute or contributes to small business development.

Mr Reve was not explicit in answering this question but he did refer to past presentations that the IDC has made to Parliament about the projects it has been engaged in to improve small business enterprises. This was consistent with realizing the goal of black economic empowerment. He said that there are small and medium-sized companies that the IDC has financed from the years 1995 to this current year. The IDC portfolio of developing small to medium enterprises has improved from 6 per cent to 30 per cent. He said that the question of where the limit or cap is, is a very difficult one. The IDC takes its guidance from what the DTI prescribes. The average loan that the IDC provides is between R 3-4 million. The IDC has assisted small businesses, like the textile industry, with small loans. The IDC does render help where it can.

The meeting was adjourned.

Appendix
INTRODUCTION
PURPOSE OF THE BILL
· TO AMEND THE INDUSTRIAL DEVELOPMENT ACT, 1940, SO AS TO ADJUST AND ADD TO THE OBJECTS AND POWERS OF THE IDC
· TO EXTEND THE ACTIVITIES OF THE CORPORATION BEYOND THE BORDERS OF THE
REPUBLIC TO COVER SOUTHERN AFRICAN REGION SPECIFICALLY AND AFRICA
GENERALLY
· TO EMPOWER THE MANAGING DIRECTOR TO DELEGATE HIS OR HER POWERS TO OTHER STRUCTURES OF THE CORPORATION
· TO REPEAL OBSOLETE PROVISIONS
· TO PROVIDE FOR MATTERS CONNECTED THEREWITH
· REDRESS ALL DISCRIMINATORY LAWS

CLAUSE 6
· SECTION 12(3) (a) OBSOLETE AND HAD TO BE REPEALED
· SECTION 12(10) OBSOLETE AND HAD TO DELETED
· SECTION 13 REPEALED

CLAUSE 7
SECTION 16. SUBSTITUTION
· DECLARATION OF DIVIDENDS -SUBSTITUTE APPROPRIATION OF
PROFITS
NEW PROVISION ADDED-DIVIDENDS
MAY FROM TIME TO TIME BE DECLARED BY THE BOARD WITH THE
APPROVAL OF THE MINISTER

CLAUSE 8
· SECTION 18 REPEALED
· SECTION 19 SUBSTITUTION [LAY]- CHANGES TO TABLE ~UPON THE TABLES OF BOTH HOUSES TO BE OMITTED AND IN TO BE ADDED TO COMPLETE THE SENTENCE [IN ORDINARY SESSION] CHANGES TO SITTING OF PARLIAMENT
· SECTION 21. SUBSTITUTION
· COMPANIES ACT, [1926] CHANGES TO 1973 (ACT NO.61 OF 1973)
SHORTENED TITLE ADDED IN PARAGRAPH

SECTION 22. SUBSTITUTION
· COMPANIES ACT, [l926 (ACT NO.46 OF 1926)]
CHANGES TO 1973 (ACT NO.61 OF l973) [WITH SUCH MODIFICATIONS AS HE MAY
THINK FIT, AND MAY WITHDRAW OR AMEND ANY SUCH NOTICE] DELETED FROM
PARAGRAPH
REASON-" AMOUNT TO AN UNCONSTITUTIONAL DELEGATION TO THE
EXECUTIVE TO AMEND THE COMPANIES ACT".

CLAUSE 9
· SECTION 23. SHORT TITLE
THIS ACT SHALL BE CALLED THE INDUSTRIAL DEVELOPMENT ACT, 1940

CHANGES TO:
THIS ACT SHALL BE CALLED THE INDUSTRIAL DEVELOPMENT CORPORATION ACT, 1940.

CLAUSE 10
THE PRINCIPAL ACT IS AMENDED BY WORDS 'HE', 'HIM', 'HIS' AND CHAIRMAN', WHEREVER THEY OCCUR BY HE OR SHE, HIM OR HER, AND CHAIRPERSON RESPECTIVELY TO PROVIDE FOR GENDER SENSITIVITY TO THE ACT

NEW ADDITIONAL OBJECTS TO SECTION 3
c) Economic empowerment of historically disadvantaged communities
d) Foster entrepreneurship in SMEs

e)Invest in employment-creating activities in underdeveloped areas
f) leverage FDIs in South Africa, Souththern African region and Africa through international
network
g) Encourage creation of knowledge-based industries and new technology-based firms
h) Enhance corporate governance

AMENDMENTS
· AMENDMENTS OR CHANGES MADE TO THE PRINCIPAL ACT ARE IN THE FORM
OF ADDITIONS/SUBSTITUTIONS TO/OF CLAUSES, REPEAL OF OBSOLETE
PROVISIONS AND REDRESS OF GENDER INSENSITIVE REFERENCES

CLAUSE 1
SECTION 3. OBJECTS OF CORPORATION SUBSECTIONS b (i) and (ii) SUBSTITUTED
· PARAGRAPHS TO INCLUDE INDUSTRIAL, OR ANCILLARY OR RELATED ECONOMIC, UNDERTAKINGS INSTEAD OF ONLY INDUSTRIAL UNDERTAKINGS.

CLAUSE 2
SECTION 4. POWERS OF CORPORATION SUBSECTIONS a) and b) SUBSTITUTED
· PARAGRAPH (a)TO INCLUDE SOUTHERN AFRICAN REGION AND REST OF AFRICA
· PARAGRAPH (b)TO SUBSTITUTE INDUSTRIAL UNDERTAKING BY ACTIVITY

PARAGRAPH (f) PROPOSED AMENDMENTS
· PROPOSAL WAS TO ALLOW IDC TO
BORROW MONEY/MOVE GEARING FROM 75% TO 100% WITHOUT APPROVAL BY SHAREHOLDER
· APPROVAL TO BE SOUGHT ONLY AT100% AND ABOVE OF THE ISSUED CAPITAL AND RESERVES (NET ASSET VALUE) BY SHAREHOLDER

OBJECTION BY TREASURY
· THE PUBLIC FINANCE MANAGEMENT ACT (PFMA) SUPERSEDE OTHER ACTS · CHAPTER 6 OF PFMA REQUIRE NATIONAL TREASURY MINISTER TO CONCUR WITH REQUEST OF BILL AND ALL BORROWING

-COUNTRY RISK
· EVERY DEBT RAISED BY AN ENTITY IN A COUNTRY, CREATES CONTINGENT LIABILITY FOR THE GOVERNMENT OF THAT COUNTRY
· LARGE AMOUNT OF CONTINGENT LIABILITY DENIES HIGH CREDIT RATING BY RATING AGENCIES
· POOR CREDIT RATING INCREASES INTEREST RATES AND DAMPEN ECONOMIC GROWTH

FURTHER COMMENTS
· IDC AS PUBLIC ENTITY CAN MOTIVATE WHY THEY WANT TO BORROW ABOVE 100% OF THEIR ISSUED SHARE CAPITAL AND RESERVES
· IF AGREED WITH NATIONAL TREASURY, PMFA RULES AND MINISTER'S CONCURRENCE OF THEIR BORROWING TO BE ADHERED TO
· IF ALREADY ABOVE THEIR BORROWING LEVEL, THIS NEED TO BE FURTHER DISCUSSED STATUS REMAINS AT 75% WITH NEW REGULATIONS

ADDITIONAL POWERS TO SECTION 4
j) Implement procurement and outsourcing policies
k) Investment proposal in large beneficiation projects
I) Appraise large investment projects and secure foreign partners to co-invest
m) Promote investment in SDIs and IDZs as part of integrated Rural Development Strategy
· Provide venture capital finance and related services
· Provide export and import financing

CLAUSE 3
SECTION 5. SUBSECTIONS b) AND c) SUBSTITUTED
· INDUSTRY OR INDUSTRIAL
UNDERTAKING TO BE SUBSTITUTED BY ACTIVITIES CONTEMPLATED IN SECTION 3
· INDUSTRIAL UNDERTAKING WITH ADDITIONS OF ANCILLARY OR RELATED ECONOMIC, UNDERTAKING

· SECTION 5quat REPEALED
BECAUSE IT DEALS WITH OBJECTS OF CORPORATION WHICH IS ALREADY ADEQUATELY COVERED BY SECTION 3 AS REPEALED BY ACT NO.9 OF 1995.

CLAUSE 4
· SECTION 8.
MEMBERS OF PARLIAMENT, PROVINCIAL LEGISLATURE OR MUNICIPAL COUNCIL NOT TO BE DIRECTORS CHANGES MEMBERS OF PARLIAMENT AND PROVINCIAL COUNCILLORS NOT TO BE DIRECTORS

CLAUSE 5
SECTION 11. SUBSECTIONS 1- AND 2-SUBSTITUTED
· CHAIRPERSON SHALL BE A NON-EXECUTIVE DIRECTOR AND MAY NOT,
CHANGES CHAIRMAN OR ANY OTHER DIRECTOR
-THIS PROVIDE FOR GENDER SENSITIVITY AND DELEGATION OF POWER BY MD
· PROVISION FOR CHAIRPERSON TO BE NON-EXECUTIVE

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