Transcript 20051201_ndb_mondi_r..

Rethinking the Role of
Development Banks
An Evaluation of Industrial
Development Corporation of
SA
Overview
The importance of investment and the
rationale for development finance
institutions
South African industrial development and
industrial policy
The performance of the IDC
Comparative analysis and implications for
realising ‘Leadership in Development’
Investment and the rationale for development
finance institutions
Higher rates of investment mean expansion of
productive capital; more rapid upgrading of
machinery; higher productivity
Higher investment generally supports higher
growth and employment creation
Investment rates of 25% of GDP normally
believed necessary for sustained higher GDP
growth (≥6%)
Investment opportunities with greatest potential
are constrained by private finance as is intrinsic
failure linked to information asymmetries
South Africa faces investment crisis, as growth
is consumer driven
Financial system failures
Financial system should channel resources from
savers to where are highest return opportunities
But: market failures, information asymmetries and
imperfect competition, many of which are intrinsic
features of financial system
Allocation of financial resources by financial system is
backward looking, reflects their existing info and
experience base not opportunities
Financial systems like SA’s tend to allocate finance to
housing, motor vehicles, property and consumption
Firms forced to invest out of retained earnings
Inhibits investment of growing firms, in new
activities
Development finance institutions needed, and have
been at heart of successful late-industrialisation
Poor SA investment threatens sustainable
growth and employment
28
26
GFCF/GDP
Real interest rate
24
22
20
18
16
12
10
8
6
4
2
-4
-6
-8
04
20
03
20
01
02
20
20
00
20
99
19
98
19
96
97
19
19
95
19
94
19
92
93
19
19
91
19
90
19
89
19
87
88
19
19
86
19
85
19
84
19
82
83
19
19
-2
81
0
19
Per cent
14
Brazil and SA:
common development challenges
Economies historically skewed towards
resources, heavy industries and agriculture
Heavy industries developed with support from
the state, under trade protection
Strong and well established industrial
development finance institutions at centre of
industrialisation
Both underwent far-reaching trade liberalisation
in 1990s
Performance has been poorer than expected,
with little impact on high unemployment and
inequality
Now exploring more constructive government
policy programmes for sustainable and more
equitable growth and employment creation
Requiring more proactive role from DFIs
South African industrial development
and industrial policy
1994-2004: low growth but poor employment
outcomes
– Structure of growth?
Overall growth in manufacturing value-added of
2.5% per annum, but:
– High growth sectors: heavy industry and motor vehicles
(including inputs such as leather)
– Manufacturing employment falling at avge rate of 1.2% pa
– Large net trade surpluses in heavy & resource-based
industries, resource-based
– Despite liberalisation, has been continuity from previous
industrial development path
Continued dominance of major firms, with weak
downstream linkages
Pattern is reinforced by strong commodity prices
and market power
Bifurcation in manufacturing:
Local demand growth and strong currency
Strong local demand  manufacturing growth and
employment in Gauteng, led by industry in Ekurhuleni
Strong currency  poorer performance in coastal metros
Tshwane
Employment
Value added
Nelson Mandela
Johannesburg
Ekurhuleni
eThekwini
Cape Town
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
Average annual growth rate, %, 1999-2004
4
5
6
7
8
Industrial policy
Integrated Manufacturing Strategy of DTI
Advanced Manufacturing Technology Strategy of
DST/NACI
IMS identifies eight industry groupings as priorities
(although these include almost all sectors)
Meant to develop customised interventions for
these, only now being designed as ‘Customised
Sector Programmes’
AMTS is focused on application of technology and
higher levels of R&D, through:
– Technical centres
– Innovation networks
Motor Industry Development Programme combines
clear set of incentives, with expectations of firms:
succeeded in in its own terms
The performance of the IDC
Has been at the heart of SA’s industrial
development since 1940
‘To facilitate, promote, guide and assist in the
financing of
– new industries
– more efficient carrying out of operations in
existing industries….
to that end that the economic requirements of the
Republic may be met and industrial
development within the Republic, southern
Africa region and the rest of Africa may be
planned, expedited and conducted on sound
business principles.’
Performance?
Assessed in terms of:
Value and number of approvals
Profile of financing and development goals
By sector
By geographic area
SMEs
BEE
Strategic role in economy
IDC Approvals
IDC approvals: July 1995 to Mar 2005
Number
R'million
560
8000
Total value of aprovals
7000
490
Total number of approvals
6000
420
5000
350
4000
280
3000
210
2000
140
1000
70
0
0
1996
* 9 months to Mar
1997
1998
1999
2001
2000
Year
2002
2003
2004
2005*
Approvals by sector
IDC approvals by sectors:July 1995 to June 2004
0
5
10
15
20
25
30
35
40
Agriculture, hunting, forestry & fishing
Chemicals & other mineral products
Machinery & metals products
Food, beverages & tobacco
% of total value
Clothing, textiles & leather products
% of total number
Other manufacturing
Wholesale & retail trade
Wood, paper & printing
Mining & quarrying
Electrical & electronic products
Financial, insurance and business services
Community, social & personal services
Transport, storage & communication
Hotels & restaurants etc
Construction
Electricity, gas & water supply
0
5
10
15
20
% of total
25
30
35
Approvals by provinces
IDC approvals by provinces: July 1996 to Mar 2005
0
5
10
15
20
25
30
35
Gauteng
Western Cape
Kwazulu-Natal
% of total number
% of total value
Northern Cape
Eastern Cape
Mpumalanga
Limpopo
North West
Free State
Africa
0
5
10
15
20
% of total
25
30
35
Financing: trend and breakdown
Fluctuating, with declines in recent years
Concentrated in machinery & metals, mining and
chemicals, by value (largely capital-intensive)
Agriculture, hunting, forestry & fishing is largest
by number
Similar pattern in recent years, although not so
extreme bias to capital-intensive activities
African investments: large, resource based
Increasing share of finance to services
19 518 direct jobs created in 2004 (average
financing of R251th per job)
BEE and SME financing
Strong growth of BEE financing
Equal split of BEE acquisitions and expansions
BEE expansions are much more employment
creating than acquisitions and than non BEE
financing
SME financing declining in number
SME financing more widely spread across
sectors
Franchising finance
BEE Approvals
IDC BEE approvals:July 1995 to Mar 2005
R'million
3500
Number
240
Total value
Total number
3000
200
2500
160
2000
120
1500
80
1000
40
500
0
0
95/96
96/97
97/98
98/99
99/00
00/01
Year
01/02
02/03
03/04
04/05*
SME Approvals
SME approvals: July 1995 to June 2005
Number
% of total IDC number
120
600
SME number as % of total IDC number
Number of SME approvals
100
500
80
400
60
300
40
200
20
100
0
0
1996
1997
1998
1999
2000
2001
Year
2002
2003
2004
2005*
IDC’s strategic role in the economy
Anticipate key developments (e.g. SOE capex)
Redress the structural imbalances through
channelling of finance and prioritisation
Realising broad-based empowerment: financing,
best practice in management, employment equity
and training
Ensure that mega projects contribute to broader
based economic development through linkages
Act in consort with DTI, and other depts to:
– Design policies and ensure are practical
– Implement policies
– Analyse role of government and policies
Agency Support and Development: broadening
and deepening institutional structure
Research: IDC as a knowledge base on industrial
development  is this being fully used?
IDC’s role as an industrial development
finance institution
As a financial institution:
– Risk and pricing:
• IDC’s different position and appetite for risk
• IDC’s insider status: better risk evaluation and IDC
participation can lower risk in itself (e.g. in African
projects)
– Prioritisation: criteria not clearly applied at present
As a development agency:
– Centre of knowledge and information
– Incentive structure, currently:
• Short-term focus
• Large and easy projects
• Need to separate career path/performance and bonus
As an industrial policy actor - interacting with govt:
– At Minister and DG level
– At industry/sector level: knowledge and analysis;
participation
– Links with business: associations and firms
Realising ‘Leadership in Development’
Leadership:
– Proactive in anticipating development needs
– Analysis across government
– Role on the African continent
– The IDC’s unique position: knowledge and
analysis
Development:
– Understanding market failures in finance
– Finance as key lever shaping economy
Increased investment rates
More employment-creating economic growth
Way forward?
A strategic sectoral approach:
– Drawing on SBU info/knowledge together with R&I
analytical capabilities
– Linked to government’s industrial policy goals
– Alignment with incentives of IDC staff
– Deepening understanding and commitment: from ‘bottomup’
 Targeted programmes for strategic goals and
industry sectors
Monitoring pipeline, and application of criteria in line
with priorities
Ongoing evaluation of pipeline from approvals to
implementation and after, including:
– cancellations
– impact of finance on firm performance and decisions
Influencing firm behaviour, especially in large
financing deals
Industrial policy engagement: requires dedicated
capacity, and better information flow within the IDC
Issues to be taken up
SOE Capex team established: to identify and meet
investment demand from SOE Capex suppliers. Drawn
from Metals, Transport, Machinery SBU, Projects, R&I.
Review reasons for cancellations and link to
performance management process.
BEE procurement: proactive opportunities - working
capital linked to employment, and capacity expansion.
Simpler screening and prioritisation process, enabling
better monitoring of pipeline against targets.
Monitoring performance of firms receiving IDC
financing.
African infrastructure and mega projects: maximising
the development impact on South African industry and
in the host economy through increasing economic
linkages