24 July 2013

Roll-out of Incentives: Funds under Management of IDC Presentation to the Portfolio Committee of Trade and Industry

Presented by:

Mrs Meryl Mamathuba

Head: Development Funds Department

IDC

011 269 3038

merylm@idc.co.za

Other members of delegation:

Mr David Jarvis

Head: Corporate Strategy and Portfolio Management

IDC

011 269 3765

davidj@idc.co.za

Mr Christo van Zyl

Senior Strategist: Corporate Strategy and Portfolio Management

IDC

011 269 3283

christov@idc.co.za

2

Introduction

• IDC has built capacity over a number of years that enables it to manage funds effectively;

• This capacity is used not only to manage special purpose funds that IDC set aside but also for government departments such as the dti and EDD;

• IDC manages those funds which has a direct relation to its objective of industrial capacity development which ensures that qualifying clients have seamless access to incentives;

• By IDC managing the funds, it allows the relevant department access to IDC’s clients and its capacity and experience to assess applicants.

IDC Government

Department

Partnership

Regular reporting on the effectiveness of funds

Fund criteria can be set based on market needs

Business

Channel funds to businesses with appropriate needs

Seamless access to incentives for businesses

IDC’s position in government and the private sector puts it in a unique position to ensure funds are

effectively channelled to target market segments

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IDC’s sectoral focus areas has been aligned to the NGP and IPAP

Green and

energy saving

industries

Bio fuels

Agro-

processing Tourism

Business process

services

Craft and film

ICT

Healthcare

Mining related

technologies

Biotechnology

Downstream mineral

beneficiation

Mining

Industrial

infrastructur

e

Logistics

Metals

fabrication,

capital and

transport

equipment

Automotives,

components, medium

and heavy commercial

vehicles

Plastics and

chemicals Clothing,

textiles,

footwear, leather

Forestry, paper

& pulp, furniture

Advanced

manufacturing

Pharmaceuti-

cals

Oil and gas

Grreen industry

components

The funds that IDC manages (both internal and

external) benefit the sectors which IDC is

targeting. These are based on priorities in the

NGP and IPAP

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Special Funding Schemes

Scheme/Fund Original Size Description Sources of Funds

Gro-E Scheme R9bn Assist companies that create jobs at < or = R500 000 per job IDC balance sheet

Gro-E – Youth Scheme R1bn Assist companies that create jobs at < or = R500 000 per job owned by youths IDC balance sheet

UIF Fund R4bn Assist companies that save and/or create jobs at < or = R450 000 IDC balance sheet –

borrowing from UIF

Women Entrepreneurial Fund R300m Assist female entrepreneurs to start or expand their businesses IDC balance sheet

People with Disability Fund R50m Assist entrepreneurs with disabilities to start or expand their businesses or to acquire

businesses

IDC balance sheet

Development Fund R350m Assist marginalised poor communities to acquire meaningful stakes in IDC funded

transactions

IDC balance sheet

Equity Contribution Fund R150m Assist new entrant black entrepreneurs with their equity contributions w.r.t. IDC funding

requirements

IDC balance sheet

Green Energy Efficiency Fund R500m Stimulate energy efficiency and renewable energy investments in the commercial and

industrial sectors

IDC balance sheet –

borrowing from KfW

Forestry Grant R20m Assist communities to develop forestry projects and business plans IDC balance sheet

Pro-forestry Scheme R200m Support new afforestation and transformation IDC balance sheet

Agro-processing Linkages

Scheme

R100m Agro-processing and rural development by linking established agro-processors with

resource poor farmers

IDC balance sheet

Clothing, Textiles, Leather and

Footwear Scheme

R500m To fund companies in the embattled clothing and textiles industries to upgrade their

plant and equipment to become globally competitive

IDC balance sheet

On-Balance Sheet Funds

R16.2 billion set aside by IDC from its own balance sheet to target specific sectors and other priorities

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Off-Balance Sheet Funds

Funds Managed on Behalf of 3rd Parties

Scheme/Fund Original Size Description Sources of

Funds

Risk Capital Facility R850m Assisting with equity funding to BEE-SMEs that create jobs the dti – EU

grant

Support Programme for Industrial

Innovation

Variable annual

budget

To fund the development of new technologies for the SA economy the dti

Technology Venture Capital R130m Commercialisation of innovative products, processes and technologies the dti

Manufacturing Competitiveness

Enhancement Program - Working

Capital Fund

R765m To assist manufacturers to access more affordable working capital facilities the dti

Manufacturing Competitiveness

Enhancement Program - Niche

Fund

R200m To stimulate new or underdeveloped manufacturing sectors the dti

Clothing and Textiles

Competiveness Programme

R3.8bn To improve the competitiveness of the local clothing and textiles sector the dti

Agro-processing Competitiveness

Fund

R250m Facilitate increased competition, growth and development in agro-processing sector; through

provision of finance to non-dominant players

EDD

Special Funding Schemes (continued)

More than R6 billion managed on behalf of government departments

The presentation is focussing on those funds managed on behalf of the dti

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Support Programme for Industrial Innovation (SPII)

• SPII was established in 1993;

• Designed to promote the development of innovative technologies in South Africa;

• It provides funding for the development of prototypes of innovative projects;

• Development and subsequent production must take place within South Africa;

• Overarching criteria of the scheme is commercial viability of the projects funded.

SPII IDC Venture

Capital IDC Expansion

Funding

Development of

technology

Commercialisation of

technology

Expansion of businesses

The SPII initiative has the potential to develop technologies that IDC can assist to grow into viable

businesses

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SPII – Schemes

• Product Process Development (PPD)

• Targets small and micro enterprises;

• Maximum grant of R2m on a matching basis.

• Matching Scheme

• Targets medium to large enterprises;

• Maximum grant of R5m on a matching basis.

• Partnership Scheme

• Targets large projects and is available to all companies;

• Minimum grant of R10m on a 50% matching basis with a levy repayment calculated on a

defined IRR over a fixed period.

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SPII Performance – since inception

Indicator Number Value

Total approvals 1 315 R1 077 million

SMEs supported 1 143 R826 million

Women 447 R204 million

Black owned 473 R366 million

Job creation 3 017

Total disbursements R667 million

Cost per job R357 000

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SPII – Provincial Split

Provincial Split – Value of Approvals

Gauteng62%

Western Cape22%

Eastern Cape2%

KwaZulu Natal6%

North West2%

Mpumalanga2% Free State

4%

Funding tends to be in those provinces with the largest share of economic activity

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SPII – areas of focus

• Funding of projects in poorer provinces and rural areas;

• Increased equity participation (BEE, people with disabilities, women);

• Commercialisation of SPII funded technologies;

• Increased collaboration with all stakeholders.

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• RCF was established in 2002 and has a fund size of R850m;

• Established to provide gap funding to South African black-owned SME’s;

• Supports businesses that create HDP jobs efficiently;

• It invests through two channels:

• Direct Channel – directly into enterprise;

• Niche Fund Channel – indirectly through private equity funds;

• Other focus areas of RCF:

• Women empowerment;

• Development of poorer provinces;

• Strongly encourage beneficiaries to access business support.

Risk Capital Facility Fund (RCF)

Business

RCF Funding

IDC Funding

In some instances the RCF Direct Channel

funding allows IDC to fund projects which it

might not have because of weak financial

contributions from project partners

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• Capital and interest moratoriums are offered where necessary;

• Pricing concessionary on a RBT IRR basis;

• Business Support – grant and zero rated loans;

• Repayments subject to availability of cash.

RCF – Concessionary terms

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RCF Performance

Indicator Number Value

Total approvals 145 R692 million

SMEs supported 139 R576 million

B-BBEE deals 40 R250 million

SMEs receiving business

support

27 R20 million

HDP job creation 11 823

Women 1 977

HPD managers 984

Women 96

Disbursements (RCF2 only) R588 million

Cost per job R58 000

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RCF – Provincial Split

Gauteng28%

Western Cape14%

Eastern Cape11%

Northern Cape9%

KwaZulu Natal8%

North West2%

Mpumalanga4%

Limpopo2%

Free State2%

Nationwide20%

Provincial Split – Value of Approvals

RCF has a good reach into poorer provinces

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RCF – focus going forward

• Allocation of the remaining c.a. R 150 million;

• Explore the possibility of recapitalising the fund to ensure continued support of the target market.

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RCF : Case Study (Successful Exit)

o 100% BEE business

o Based in an industrial area of Pretoria East

o Manufacture of tins and lids for the paste polish industry

o Turnover: R4 million (Total assets: R8.5 million)

o RCF investment: R1.5 million

o 18 jobs for HDP expected to be created

At Exit

o Had successfully upgraded its manufacturing capacity

o Had introduce a number of complimentary product lines namely, incl. paint can, metal closures, as well as the

manufacture of aerosol can bodies.

o Turnover: >R20 million (Total assets: >R11 million)

o 53 actual jobs created for HDPs

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The programme aims to grow South African-based clothing, textiles, leather and footwear manufacturers to be globally competitive. It consists of the following four schemes:

The Capital and Technology Upgrading Programme;

• Part of the Enterprise Investment Programme (EIP) in support of the manufacturing sector and administered

by the dti

The Preferential Financing Scheme

• Provided directly by the IDC and managed by the Textile and Clothing Strategic Business Unit - Prime less

5%, Capex scheme.

The Competitiveness Improvement Programme (CIP)

• Managed by the CTCP Desk at the IDC

The Production Incentive Programme (PIP)

• Managed by the CTCP Desk at the IDC

Clothing Textiles Competitiveness Programme (CTCP)

IDC complemented funding from the dti by creating its own on-balance sheet scheme aimed at improving

competitiveness in the industry

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CTCP (continued)

The Competitiveness Improvement Programme (CIP)

– Cluster level intervention at regional and national level.

– 75:25 cost sharing grants: 75% from the CTCP grant and the rest from the cluster

– Project costs up to a maximum of R25 million over the five year period of the programme implementation

The Production Incentive Programme (PIP)

– The PIP supports CAPEX, process improvement and skills development interventions targeted at:

– Clothing manufacturers;

– Textiles manufacturers;

– Cut, Make and Trim (CMT) operators;

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CTCP (continued)

• Footwear manufacturers;

• Leather goods manufacturers (excluding leather goods for the automotive sector) and

• Leather processors (Specifically for Leather Goods and Footwear industries).

The grant offered to each participant is equivalent to 7.5% of the applicant’s MVA (Manufacturing Value Add = Revenue less Raw Material Cost less value of Bought In Finished Goods less Cut Make and Trim Costs)

20

CIP and PI Performance

Indicator Number Value

Total approvals 360 R2.2 billion

SMEs supported 240 R1.27 billion

Number of jobs created 7 890

Number of jobs saved 62 085

Total disbursements R1.224 billion

Cost per job saved R35 000

Cost per job created R279 000

21

CTCP – Provincial Split

Gauteng9%

Western Cape42%

Eastern Cape10%

Northern Cape<1%

KwaZulu Natal38%

Mpumalanga1%

Limpopo<1%

Free State<1%

Provincial Split – Value of Approvals

CTCP has predominantly been utilised in those provinces with a large concentration of clothing and textiles

companies

22

CTCP – focus going forward

• Further enhance job sustainability and creation in the sector;

• Technological improvements;

• Global competitiveness.

23

CTCP – Case Study: Eddels Shoes

• Eddels Shoes (Eddels) was established in

1904 and is a footwear manufacturer based in

Pietermaritzburg, Kwa-Zulu Natal. In 2011 the

company was bought by management, staff and

workforce.

• Eddels has to date received R 8 820 404 over

the last three years from Production Incentive

Programme (PIP) and has made extensive use of the provided incentives towards improving productivity and

service to preserve employment and suppliers in the industry.

• Eddels has invested in a new production line for the manufacture of fashion footwear made of synthetic (non-

leather) materials and has developed a unique quick response manufacturing and merchandise replenishment

systems, in order to foster greater Retail support for local production by reducing pipeline and value chain costs.

• The results of these investments are best shown in pairage increases bearing in mind that there is a difference in

Summer ( sandals) and Winter ( boots)

• Winter 2011 showed a pairage increase of 15% on Winter 2010 and Summer 2011 pairs grew by 48% on Winter

2010 and 35% on Summer 2010.

• This increased pairage thus generated by the “Synthetic Line” has seen 5 new permanent and 25 contract jobs

created directly at Eddels, 25 contract and 74 down stream ( value chain) jobs.

• Cost per job of R682,000.

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• Starting capital of ca R30 million provided by the dti.

• Additional R100 million secured via RCF reflows.

• Objective is to assist small enterprises who develop low/marginal innovation products.

• Investment criteria and terms of the fund:

• Projects to fall within the sectoral focus areas of IDC within South Africa;

• Pricing -IRR;

• Minimum funding amount of R1 million (exceptional R250k), Maximum R5 million;

• Financing instruments: debt, equity, quasi equity, hybrid instruments;

• Flexible facility terms based on cash flow profiles;

• No fees;

• Significant focus on coaching and mentoring of beneficiaries.

Ntsha Technology Venture Capital (TVC)

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TVC Performance

Indicator Number Value

Total approvals 10 R31.5 million

SMMEs supported 10 R31.5 million

Women owned 2 R5.5 million

BEE owned 8 R25.5 million

Number of jobs expected to be

created

47

Total disbursements R9.3 million

Cost per job R670 000

Of the 10 clients supported, two are at an advanced stage of implementation, with their products being sold at

major retails stores and pharmacies

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TVC – Provincial Split

Gauteng53%

Western Cape10%

KwaZulu Natal10%

North West9%

Mpumalanga9%

Limpopo9%

Provincial Split – Value of Approvals

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TVC – focus going forward

• Capacitate the programme financially to better support the needs of the target market;

• Strengthen business /post investment support of businesses under the portfolio so as to ensure success.

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TVC – Case Study: Toy Set

• Client is a 100% black-owned SMME; 30% Women owned

• Development of a Construction Toy Set, with the help of SPII, which not only renders hours of fun, but also assists in early childhood development

• After the development phase, Client had attempted to commercialise with little success due to the lack of funding for this phase of his project

• TVC funded the commercialisation phase – R 4,5m

• Both asset finance and working capital was injected into the business including Business Support funding to assist with non-financial gaps that were apparent in the business

• The construction toy set can use the used toilet paper cores in the building process

• Client has partnered with a leading toilet paper manufacturer for a marketing campaign where the manufacturer has gone as far as colouring the cores of their toilet papers to render them more appealing in the use with client’s product and have run advertising campaigns including the product.

• The project is at advanced stages of implementation with the product available in selected Pick n Pay stores already

• This phase will create 2 new jobs within the client and at least 8 jobs within the company contracted to manufacture the Product

• In addition toilet roll cores usually disposed of will be recycled in the use of the Toy Set

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Manufacturing Competitiveness Enhancement Programme (MCEP)

• Capital of R1 billion provided by the dti.

• Three sub-programmes:

• Working Capital Facility of R750m.

• Niche Fund Programme of R265m

• Business Support of R35m

• Objectives: To assist companies in the manufacturing sector to access more affordable working

capital facilities as well as to stimulate new or underdeveloped manufacturing sectors through

funding targeted projects

MCEP is being used to effectively co-finance with IDC to reduce the overall cost of funding to the manufacturing

industry

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MCEP – Investment Criteria and Terms

• Projects to fall within the sectoral focus areas of IDC within South Africa;

• Pricing - loans at a fixed interest rate of 4%, other instruments to be determined;

• Minimum funding amount of R1 million, maximum R50 million;

• Financing instruments: debt, equity, quasi equity, hybrid instruments;

• Flexible facility terms based on cash flow profiles;

• No fees.

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MCEP Performance

Indicator Number Value

Total approvals 27 R405 million

SMEs supported 18 R99.5 million

Women owned 8 R65 million

BEE owned 11 R216 million

Number of jobs expected to be

created

3 618

Total disbursements R82 million

Cost per job R112 000

40% of allocated funds committed in first 9 months

32

MCEP Performance

Gauteng61%

Western Cape26%

Eastern Cape4%

North West1%

Mpumalanga8%

Provincial Split – Value of Approvals

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MCEP – focus going forward

• Improve resourcing of the fund, including the under resourced Niche Fund to ensure continued support of the target market.

• Accelerate the implementation of the Niche fund portion of the fund, in order to stimulate new and emerging sectors.

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MCEP – Case Study: Unica Iron and Steel

• Client: UNICA Iron & Steel (Pty) Ltd

• Location: Babelegi, North West Province

• Product: Light construction structures, including window and door frames

• MCEP Facility: R5m Working Capital Term Loan over 48 months

• BEE Status: 100% BEE-owned, Level 4 contributor

• Jobs created: 218

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Conclusion

• Given its role as a funder to develop industrial capacity, its skills base as well as well developed systems and processes, IDC is in a good position to manage relevant incentives on behalf of government departments;

• Most of the funds under IDC management has been having a good impact;

• Priority areas continue to be ensuring a more equitable distribution of funds to ensure development of industry in poorer provinces as well as black economic empowerment.

Industrial Development Corporation

19 Fredman Drive, Sandown

PO Box 784055, Sandton, 2146

South Africa

Telephone (011) 269 3000

Facsimile (011) 269 2116

E-mail callcentre@idc.co.za

Thank you