Industrial Development Corporation 2005/06 Annual Report and Financial Statements: briefing

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
15 November 2006
INDUSTRIAL DEVELOPMENT CORPORATION 2005/06 ANNUAL REPORT AND FINANCIAL STATEMENTS: BRIEFING

Chairperson: Ms M P Temba (ANC, Mpumalanga)

Documents handed out:
Industrial Development Corporation Results 2005/06: Part1 & Part2

SUMMARY
The IDC gave a brief presentation on its achievements in 2005/06. Its role was to mainly support sustainable development and invest in business showing economic merit. The Corporation assisted businesses which would otherwise have not received any help at all from the banks and had job creation and economic development as its main objectives

Members asked questions about the Corporation’s involvement in the provinces, urban migration, job creation, financing models and the periods of time related to investments.

MINUTES

Industrial Development Corporation (IDC) presentation

Mr Greg Gouws (Chief Financial Officer) began his presentation by explaining the role of the IDC. Its role was to support sustainable development and invest in business which showed economic merit. The IDC also paid tax and dividends. Most businesses were viable but received no support from banks because of perceived high risks. This was where the IDC intervened in that it would fund investments that would not have otherwise occurred. Job creation was the most important objective of the IDC and it had ensured many transitions from the first to the second economy by investing in rural development. By the end of March 2005, the IDC had created 26 200 jobs which had been their main objective. They had had a particular focus on agriculture, mining and the service industries. R1 billion had been set aside to stimulate job creation in industries which would otherwise not have happened. R370 million was approved for investment in townships and 46 000 jobs created in the communication industries and tourist accommodation.

There was more focus on expansion and start-ups rather than large acquisitions. Also of importance was that IDC addressed inequitable social regional development and exploited comparative advantages in various sectors. Agencies had become an important initiative for the IDC. Through these agencies, the IDC worked closely with local government and municipalities and entrepreneurs from the private sector. The IDC has a total of 23 agencies approved throughout South Africa. Five have progressed to second stage and R23 million has been invested in them. Job creation has remained the main objective; especially in support of the Accelerated Shared Growth Initiative of SA (ASGISA) plans to halve unemployment by 2014.

Mr Gouws stated that their biggest investments were in Gauteng and then Africa, because it was important to support the African Union (AU) and New Partnership for Africa’s Development (NEPAD) initiatives. The most number of jobs created had been in the Northern Cape. He went on to explain that IDC had been very proactive in identifying specific sectors that it could invest in. In respect of underrepresented sectors, Mr Gouws assured the Committee that there would be significant growth in time.

Research was an important part of sector development which strengthened sector strategy development and also fed into IDC sector strategy. The IDC had identified specific projects in support of provincial and national goals. Future goals included increasing the IDC’s role in supporting Black Economic Empowerment (BEE), increasing support for entrepreneurs, especially in rural areas; identifying new industries for development and to continue to support NEPAD initiatives. Mr Gouws then went onto an analysis of Net Profit which he said was in line with previous years and that the figures were driven by capital gains. There had also been an increase in investments both listed and unlisted and increases in capital and reserves

Discussion
The Chair thanked Mr Gouws for his presentation and mentioned that in a previous meeting she had requested an organogram so that the Committee could know each person’s profile and understand what was happening in the provinces. There was a need to know the contact person in each province because their constituency work required them to know this. The Chairperson further requested a breakdown of job creation initiatives and which townships or rural areas had experienced job creation. The Chairperson requested that the IDC clarify what and how they had contributed to ASGISA in terms of halving poverty by 2014.

Mr Gouws apologised for not including the organogram and gave a brief description of it. He explained that they had only three provincial offices which were in Durban, East London and Cape Town, but decision making remains with the Johannesburg office. He said the IDC identified relevant sectors in the provinces to work with them rather than setting up offices that would duplicate infrastructure.

Mr Lumkile Mondie, IDC Chief Economist, said that although it could not be everywhere at the same time they had identified certain viable opportunities in each province; for example ship building in the Western Cape and the ship service industry. The board has also approved the rehabilitation of the old Saldanha Bay oil storage tanks. The IDC has worked with the Northern Cape Provincial Government on agricultural initiatives and has partnered with Sasol on downstream initiatives.

Mr Lizo Ntloko, Manager: IDC Western Cape Regional Office, responded that the office in the WC was a liaison office particularly between the IDC and Parliament. He explained that the IDC generated more business in terms of the Western Cape economy but it has limited capacity so there is a great need to form government partnerships

Mr D Mashile, IDC Head: Corporate Affairs, added that the IDC worked with developing financial investments in most provinces that increases outreach and gives access to more people. In respect of stakeholder relations he said they must also work with Chambers of Commerce. From a corporate social responsibility point of view the IDC focussed on development and funding was township focused.

Mr D G Mkono (ANC, Eastern Cape) asked how to circumvent the problem of migration of people from rural to urban areas. He suggested that the role of IDC was to facilitate indirect job creation and asked whether on that basis there were checks and balances in respect of the money used by the IDC. Finally he questioned whether the IDC still gave loans starting at R1 million and for more clarity on Mr Gouws’ statement that the IDC did not compete with banks. If not, was the IDC not encouraging reckless lending?

Mr Gouws responded that there are two main sectors where people can be employed in rural areas and that are agriculture and mining. This may stop rural to urban migration. There were checks and balances in place which were checked on an annual basis; for instance, interest rates went up if jobs were not created within a specific time. He emphasised once again that the IDC was not competing with banks. Banks have more money and did asset-backed funding better than the IDC. The IDC’s role would be to work with banks in equity finance and to take risks which if it were not so taken the banks would not step in as usually the bank is the lender and the IDC is the investor. Mr Gouws went on to mention that the IDC was still starting loans at R1 million and in some instances it can go below that for an existing client or franchise business. However with new business and clients, the IDC prefers to start at R1 million.

Mr Hendricks asked at what percentage interest IDC gave loans, and whether the shareholdings it had in companies was a permanent thing or whether it was to support the company until it became self sustainable. He asked the delegation to define “black” and where exactly investments in the Western Cape had been made.

Mr Gouws responded that IDC investments were not permanent, but sometimes they
need to be nurtured over a period of time before the IDC could exit. Often the IDC must sell mature investments in order to re-invest; in other words to recycle the proceeds of new opportunities, but the idea is not to keep the shares.

Ms S Chen (ANC, Gauteng) asked whether the IDC required partnerships or directorships if it financed a project.

Mr Gouws responded that when funding a project the IDC has a right to appoint directors but it does not always use this right. He explained that the IDC did not become operationally involved, but there was one wholly owned subsidiary established for tax reasons because borrowing and loans needed to be channelled through different vehicles.

The meeting was adjourned.