Transcript - Africagrowth Institute

The Role of the IDC in Small and
Medium Enterprise Development
Jorge Maia
Head: Economic Research and Information Department
Industrial Development Corporation of South Africa
Stellenbosch, 6 June 2006
SA economic performance
•
Average annual GDP growth rate of 3% over the period 1994-2004
and 4.7% over the last two years
•
A rapid increase in fixed investment to expand the country’s
productive capacity
•
South Africa’s general economic stability and sound macroeconomic management widely acknowledged
•
Prudent fiscal policy and continued improvements in tax
collections resulted in a substantial decrease in the budget
deficit in recent years
•
Inflation is well under control and at levels last seen in the 1960s
•
Interest rates are at a 24-year low
•
Strong inflow of foreign capital into South Africa – reflecting
increased investor confidence
Business confidence
• The SA business
community remains very
upbeat about the future of
the domestic economy
• The positive business
sentiment is echoed by the
excellent performance of
the Johannesburg
Securities Exchange (JSE)
• The JSE’s All-share index
increased by 43% during
2005
Investment environment challenges
Recent Investment Climate Survey* :
Survey revealed that overall conditions are conducive to
investment activity
However, certain obstacles remain …
– Exchange rate volatility (negative perceptions)
– Relatively high cost of skilled labour (shortage of specific skills)
– Crime (is factor, however, widely accepted that the crime rate is
declining as a result of better policing)
– Lack of competition in specific sectors of economic activity
where there are high levels of concentration and significant
barriers to entry
Commitment of SA government to engage business in
improving any element of the investment climate
* Survey conducted by Citizen Surveys, a private SA firm . 800 firms were surveyed between January
and December 2004. 75% of sample were in manufacturing sector; 14% in the construction sector and
the remaining 11% in wholesale and retail trade
Sector-specific drivers of growth
INDUSTRY
FACTORS DRIVING SECTORAL GROWTH
Agriculture, forestry
and fishing
Strong demand for agricultural products,
including an increasing demand from
neighbouring countries; reduction in agricultural
subsidies in advanced economies; conducive
and/or normal weather conditions; increase in
real disposable income and subsequent
consumer spending on fresh agricultural
produce; high and sustained global demand for
agricultural produce.
Mining and
quarrying
International demand for commodities, especially
from China and India; increased focus on
environmentally friendly automotive components
and related products (e.g. catalytic converters,
fuel cells, etc.).
Sector-specific drivers of growth
INDUSTRY
FACTORS DRIVING SECTORAL GROWTH
Manufacturing
Robust domestic consumer and investment demand.
Consumer spending should benefit sectors such as
food, beverages and tobacco, clothing, textiles and
footwear, automobiles, furniture and household
appliances.
Rapid investment spending should impact upon
sectors such as iron and steel, metal products,
machinery and equipment, electrical equipment and
machinery as well as transport equipment.
Other drivers include strong and sustained global
economic growth; sound fiscal and monetary
policies; preferential market access and free trade
agreements to allow ease of access into global
markets; increased global competitiveness through
improved productivity; and a stable but competitive
currency.
Sector-specific drivers of growth
INDUSTRY
FACTORS DRIVING SECTORAL GROWTH
Electricity, gas
and water
Government spending on service provision for the
poor; re-commissioning of mothballed power stations;
new power plants and dams; increased urbanisation.
Construction
Government’s multi-billion infrastructure programme;
SOE capex spending; Expanded Public Works
Programme; Gautrain; 2010 Soccer World Cup;
continuation of the residential property boom (based
on a continuation of the low interest rate environment
and the rising black middle class); increased demand
for non-residential buildings.
Wholesale and
retail trade, hotels
and restaurants
Increased job creation; higher disposable income
levels; rising foreign tourism; emerging black middle
class; growth supportive fiscal and monetary policies;
low interest rates and high levels of credit extension.
Sector-specific drivers of growth
INDUSTRY
FACTORS DRIVING SECTORAL GROWTH
Transport, storage Innovative products and services in
and
telecommunication; under-serviced area licences;
communication
more efficient logistics system such as an improved
rail and road network, harbour and port facilities.
Finance, real
estate and
business services
Sound consumption and business fundamentals;
black economic empowerment; increased public
sector activity; demand for residential buildings.
Community,
social and
personal services
Increased government spending on service
provision for the poor; increased social
responsibility focus by the private sector.
Manufacturing industry performance
Strong
domestic
demand
East Asian
crisis
and
High interest
rates (Prime
rate = 25.5% in
Aug ’98)
Substantial
strengthening of
the Rand
• Strong improvement in growth performance over past decade (2.9% p.a.
vs 0.5% in previous ten years).
• Strong rand adversely impacted on the export-oriented sector of
manufacturing, resulting in a 1.4% contraction in Manufacturing GDP in
2003.
• Domestic demand a key driver behind revival in 2004 and 2005 due to
buoyant consumer spending.
Manufacturing: Production capacity utilisation
Longest upward
phase in the
business cycle
• Highest level of production capacity utilisation in the past 35 years.
• Strong growth of domestic economy resulted in many sectors operating near
full capacity.
• Urgent investments in new productive capacity are essential to sustain higher
economic growth momentum.
• Low levels of investment in manufacturing perhaps an indication that business
did not anticipate that the strong growth in the SA economy in recent years
would be sustained over a prolonged period.
Manufacturing: Production capacity utilisation
• A number of manufacturing divisions are now operating at
more than 85% of capacity, with 85% capacity utilisation being
regarded as full capacity.
• At the sub-sectoral level, for example, the cement industry
(part of non-metallic mineral products) is operating at almost
full capacity, whilst new investment plans have been
announced to meet increased demand in future.
SA sector performance: 2003 – 2005
Manufacturing: Business confidence
• Business confidence in the manufacturing sector continued to
improve in recent quarters.
• Nevertheless, the confidence level still remains well below that of
other sectors of the economy.
• This is mainly due to a less favourable performance for exports
on the back of a strong rand.
Manufacturing industry performance
• Manufacturers switch production away from exports to the lucrative
domestic market.
• Exporters become increasingly pessimistic about export prospects
due to a strong rand reducing their export competitiveness.
• Import-competing manufacturers, on the other hand, also find it
more and more difficult to face cheaper imports flooding some
sectors in the domestic economy.
Investment opportunities
Identified via ...
A number of initiatives….
Accelerated
& Shared
Growth
Initiative
Examples of the most
viable opportunities...
- Infrastructure development
New power stations, restructuring
of ports and new cargo handling
facilities, improvement of rail
infrastructure, development of
dams and water infrastructure
projects & road projects
- Sector investment strategies
Business Process Outsourcing,
tourism, agriculture and agroprocessing, wood, pulp & paper,
chemicals, bio-fuels, downstream
minerals beneficiation, cuttingedge technologies (e.g. aerospace,
fuel-cell technology, broad-band
ICT infrastructure)
- Skills development
- etc.
Investment opportunities
A number of initiatives….
Expanded Public
Works
Programme (EPWP)
Examples of the most
viable opportunities...
-
Building materials
Construction services
Electrification
Water reticulation
Telecommunications
Transportation
etc.
Activities benefiting from:
Industrial Policy
- Locating in industrial
development zones
- Current investment incentives
(tax holiday, IDC schemes)
- Promotion of small scale
industries
- Offset programme
Investment opportunities
A number of initiatives….
Minerals Beneficiation
Strategy
Examples of the most
viable opportunities...
- Mineral sectors benefiting
Aluminium, magnesium and
titanium light metals, coating
technology, incl. paints and thin
films, platinum beneficiation,
high performance magnesium
alloys, production of titanium
sponge, jewellery manufacturing,
etc
- Industry and enterprise
competitiveness including
technology enhancement, work
reorganisation and research and
development
Privatisation
Programme
- Transnet
-
South African Airways
Alexkor
Denel
ACSA
etc.
Investment opportunities
A number of initiatives….
Examples of the most
viable opportunities...
Revival or resuscitation of previously viable
industries:
Forging and casting, boilers, tooling,
several sub-component manufacturers,
railway lines
Capex Programmes
of State-owned
Enterprises
Expansion and/or improved
competitiveness:
Locomotives (refurbishment/upgrading),
wagons & coaches, railway sleepers,
alloys, transformers, pumps, valves, taps,
cables, overhead transmission lines,
conductors
Partnerships with global suppliers so as to
set-up local subsidiaries to:
• Produce components of turbines
• Assemble turbines
• Produce components of engines (electrical
as well as diesel)
• Produce components of switchgears
• Build locomotives, wagons & coaches
Investment opportunities
A number of initiatives….
Examples of the most
viable opportunities...
- Soccer World Cup 2010
Infrastructure upgrades in
meeting the objectives of the
2010 Soccer World Cup,
including:
- Stadium upgrades and new
stadiums,
- Airport upgrades,
- Road upgrades
- Accommodation
- etc.
Investment opportunities
A number of initiatives….
Examples of the most
viable opportunities...
Transport Services & Logistics
Road freight, commuter bus service,
port services, ship maintenance
High
Growth
Potential
Industries
Chemicals Industries
Bio-fuels, man-made fibres, tubes and
pipes, composites, soaps and other
cleaning products, plastics for
automotive industry
Wholesale & Retail Trade
Shopping centre development in
townships and rural areas, convenience
stores, franchising investments,
warehousing facilities
Investment opportunities
A number of initiatives….
High
Growth
Potential
Industries
Examples of the most
viable opportunities...
- Construction
Construction project development
(Soccer World Cup 2010, Eskom &
Transnet capital expenditure
programmes, Power generation
projects, Gautrain Project, etc),
building materials (cement plants,
concrete making, concrete recycling);
mobile brick plants; construction
services
- Mining and Mineral Beneficiation
Platinum group metals, iron ore,
coal, diamond cutting and polishing,
jewellery manufacturing
- Waste Management
waste treatment, waste recycling
(paper and board, plastics, metal &
glass)
Investment opportunities
A number of initiatives….
High
Growth
Potential
Industries
Examples of the most
viable opportunities...
- Wood and Paper Industries
forestry products, furniture,
packaging, paper recycling
- Services Sectors
Tourism (eco, accommodation,
conference facilities), health and
educational services, information
technology, business process
outsourcing
Investment opportunities
A number of initiatives….
Examples of the most
viable opportunities...
- Free State: logistics, biofuels, knowledge-based
-
•
Provinciallyled Projects
-
-
industries
Gauteng: logistics, commuter passenger
transport
KwaZulu-Natal: ethanol, agriculture, water,
sanitation, energy
Mpumalanga: rail infrastructure
Limpopo: infrastructure development, cultural
and recreational facilities, logistics
North West: logistics, bio-diesel, livestock,
infrastructure development, warehousing
facilities
Eastern Cape: forestry, agriculture, livestock,
infrastructure development
Northern Cape: diamond cutting & polishing,
jewellery manufacturing, iron ore and
manganese mining, logistics, infrastructure,
radio telescope project
Western Cape: oil & gas hub, steel beneficiation
cluster, infrastructure development
The IDC: Corporate profile
Established in 1940, the IDC is a selffinancing, state-owned development
finance institution
Provides financing to entrepreneurs
engaged in competitive industries
Follows normal company policy and
procedures in its operations
Pays income tax at corporate rates and
dividends to the shareholder
Independent Board of Directors
Reports on a fully consolidated basis,
with its Annual Report freely available to
the public
IDC Head Office
in Sandton,
South Africa
Vision and mission
“To
be the primary driving force
of commercially sustainable
industrial development and
innovation to the benefit of
South and the rest of Africa”
Contribute to the generation of
balanced, sustainable economic
growth in South Africa and Africa
Economically empower the South
African and African population
Promote entrepreneurship through
the building of competitive
industries and enterprises based on
sound business principles
The IDC’s core strategies
Job creation
Promote
entrepreneurship
Small and medium
enterprise development
Encourage social
transformation
Facilitate BEE
Regional
development
Africa’s
development
IDC needs to maintain its balance sheet integrity to ensure
that it can deliver the above on a sustainable basis.
New sectoral involvement
1997
 Agriculture
 Mining
 Manufacturing
 Property
Now
 Agriculture
 Mining
 Manufacturing
 Services - related
• energy
• tourism
• IT
• telecoms
• motion pictures
• healthcare & education
• transport & storage
• venture capital
• government / corporate tenders
• franchising
• financial services
 Other
• public private partnerships
• development agencies
IDC’s financial instruments
• IDC offers a wide array of financial
instruments, including :









Equity
Quasi-equity
Commercial debt
Wholesale & bridging finance
Share warehousing
Guarantees
Export/import finance
Short-term trade finance
Wholesale venture capital
• These may be provided singly or in
combination
Flexible Deal Structuring
Financing criteria
Project/business must exhibit economic merit in
terms of profitability & sustainability
Fixed assets & working capital for new start-up
ventures or expansion of existing businesses
R1 million minimum
Owners/shareholders contribution 40% of funding
is normally a requirement
Equity participation: Considered as an alternative
if loan finance inappropriate; minority
investments; IDC exit within reasonable period
Some developmental impact such as: value
addition; job creation; export earnings;
expanding industrial base; poverty reduction;
empowerment
Environmental compliance
IDC may require security, the form and nature
relating to clients circumstance
Seek no shareholding control or management
participation
Appraisal process
Initial Screening
Basic Assessment
Feasibility Completed
Feasibility not fully investigated
MOU/Co-operation Agreement
Term Sheet
Due Diligence
Feasibility Study
Decision-making (Investment Committee)
Legal Agreements
Disbursement
Post-investment Management
The IDC’s approach to
SME development
The role of SMEs in the SA economy
SME development: a national priority
– The National Small Business Act was promulgated in 1996
– Numerous policies were adopted and programmes to implement
these policies were introduced
SMEs play a vital role in stimulating economic development
– Higher degree of labour intensiveness
– Lower average capital cost than large-sized enterprises
– Often use local recycled resources
– Provide opportunities for aspiring entrepreneurs ( especially the
unemployed)
– Vital role in technical and other innovations
– SMEs are viewed as bridging gap between the first and the
second economy
The role of SMEs in the SA economy
Micro
10%
Very Small
12%
Contribution to
GDP
Small
16%
Medium and Large
62%
Medium to Large
26%
Unspecified
2%
Micro
33%
Contribution to
employment
Small
16%
Source: the DTI(Ann Rev of Small business in SA 2003)
Very Small
23%
The role of SMEs in the SA economy
Challenges
– Access to finance
– Little or no entrepreneurial experience
– Lack of technical and financial skills
– Low survival rate of new businesses
IDC financing of SMEs
Definition
IDC’s focus of the definition is on small to
medium enterprises (excluding the micro
enterprise segment)
A business is classified as small medium
enterprise (SME) if it fits any two of the
following criteria:
– Less than 100 employees
– Less than R50 million annual turnover
– Less than R30 million total assets
value
IDC financing of SMEs
Various approaches geared towards
developing SMEs:
– Franchising (providing finance to franchisor and franchisee)
– Agency Development and Support (serves as a support and
resource facility to fulfill IDC’s developmental role through the
establishment of agencies -particularly in rural areas)
– Risk Capital Facility (targets private SME sector through BEE)
– Special development financing schemes (Pro-SME Jobs
Scheme)
IDC financing of SMEs
Pro SME Jobs Scheme …
Capital allocation: R600 million.
Key objectives:
To promote employment creation and SME
development by encouraging businesses to
embark on labour intensive start-ups / expansions.
Pricing and individual loan limits:
Interest rate of prime less 5% applicable for the
full period of the loan (max. 7 years). This period
includes any grace period for capital
repayments.
The low interest rate finance will be limited to
R25 million per project.
IDC financing of SMEs
Pro SME Jobs Scheme (cont) …
Criteria:
• The financing is available for SMEs in all sectors within the
IDC’s development mandate.
• Applicants must be independent companies or groups
complying with at least 2 of the following 3 parameters:
less than 200 employees; or less than R35 million turnover;
or less than R40 million in total assets at application date or after the 1st year of full production in the case of start-ups.
• The business must have economic merit, i.e. have prospects
of acceptable profitability, and must comply with the IDC’s
normal funding criteria.
IDC financing of SMEs
Pro SME Jobs Scheme (cont) …
Criteria (cont.):
• At least 10, direct, permanent new jobs
must be created.
•
The total capital cost of the new or
additional assets (buildings, machinery
and working capital) must not exceed
R150 000 per job opportunity (calculated
at peak funding requirement). The new
or additional assets are the total assets
involved in the start-up or expansion –
not only the portion to be financed by
IDC.
Development Financing Schemes (cont.)
Generic issues
•
All schemes are effective as from 10 November 2005, and will be
on offer until 1 December 2006 or earlier if the R1 billion capital
allocation is depleted.
•
In cases where the results of the financing provided under the
schemes are not in line with the set objectives, IDC has the right
to increase the interest rate to a “prime based risk adjusted rate”.
•
All the normal IDC fees (including the breakage/cancellation fee)
will be applicable except for the Pro Franchising and Pro
Orchards schemes.
•
The minimum IDC facility is R1 million (except for franchising).
•
Only direct, permanent new jobs will be taken into account for the
purposes of qualifying for finance, with the cost per job calculated
at peak.
IDC financing of SMEs
0
SME Approvals by Province: July 1995 to Mar 2005
5
10
15
20
25
30
35
40
Gauteng
Western Cape
Kwazulu-Natal
% of total SME number
Northern Cape
% of total SME value
Eastern Cape
Mpumalanga
Limpopo
North West
Free State
0
5
10
15
% of total
20
25
30
35
Since 1995, the IDC has funded over 3600 SMEs with a total value of
R13.5 billion
In 2004/05 financial year (9 months), over 70% of the number approvals
pertained to SMEs.
IDC financing of SMEs
SME approvals by sectors: July 1995 to June 2004
0
2
4
6
8
10
12
14
16
18
20
Agriculture, hunting, forestry & fishing
Chemicals & other mineral products
Food, beverages & tobacco
Machinery & metals products
Clothing, textiles & leather products
Wholesale & retail trade
Other manufacturing
Wood, paper & printing
% of total SME number
Mining & quarrying
% of total SME value
Financial, insurance and business services
Electrical & electronic products
Community, social & personal services
Transport, storage & communication
Hotels & restaurants etc
Construction
Electricity, gas & water supply
0
2
4
6
8
10
12
14
16
18
% of total
Most of the SMEs funded by the IDC are in the agriculture,
hunting, forestry and fishing sectors.
20
IDC business support in SME sector
Entrepreneur development assistance will include:

Providing greater pre-investment support for high potential /
high impact investments




Closer monitoring of clients


Encouraging the development of women entrepreneurs
Providing technical support post investment
Focused training to meet needs of specific entrepreneurs
Providing generic training and systems to support new
entrepreneurs
Encouraging the development of disabled entrepreneurs
Concluding remarks

Job creation is overarching objective of
IDC financing

Increase focus on the development of
entrepreneurs

Intensify
spread
balanced
job
development
creation
across
and
regions
(including rural areas, various provinces,
townships)

Emphasis on expansionary BEE projects

Continue to focus on Government’s
policy objectives
Thank You