The Role of the IDC in Small and Medium Enterprise Development Jorge Maia Head: Economic Research...

The Role of the IDC in Small and

Medium Enterprise Development

Jorge MaiaHead: 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 macro-economic 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

Recent Investment Climate Survey* :

Commitment of SA government to engage Commitment of SA government to engage business in improving any element of the business in improving any element of the investment climate 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

Survey revealed that overall conditions are conducive to investment activityHowever, 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

Investment environment challenges

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.).



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.



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.



Transport, storage and communication

Innovative products and services in telecommunication; under-serviced area licences; 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 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.

East Asian crisisand

High interest rates (Prime

rate = 25.5% in Aug ’98)

Substantial strengthening of

the Rand

Strong domestic demand

Manufacturing: Production capacity utilisation

• 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.

Longest upward phase in the

business cycle

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….A number of initiatives…. Examples of the most Examples of the most viable opportunities...viable opportunities...

- Infrastructure developmentNew 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 agro-processing, wood, pulp & paper, chemicals, bio-fuels, downstream minerals beneficiation, cutting- edge technologies (e.g. aerospace, fuel-cell technology, broad-band ICT infrastructure)

- Skills development- etc.

AccelerateAccelerated & d &

Shared Shared Growth Growth

InitiativeInitiative

AccelerateAccelerated & d &

Shared Shared Growth Growth

InitiativeInitiative


- Building materials- Construction services - Electrification - Water reticulation- Telecommunications- Transportation- etc.

Expanded Public Works

Programme (EPWP)

Industrial Policy

Activities benefiting from: - Locating in industrial development zones

- Current investment incentives (tax holiday, IDC schemes)

- Promotion of small scale industries

- Offset programme



- 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

PrivatisationProgramme

- Transnet- South African Airways- Alexkor- Denel- ACSA- etc.

Minerals BeneficiationStrategy




Capex Programmesof State-owned

Enterprises

Revival or resuscitation of previously viable industries:

Forging and casting, boilers, tooling, several sub-component manufacturers, railway lines

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


- Soccer World Cup 2010Infrastructure upgrades in meeting the objectives of the 2010 Soccer World Cup, including:

- Stadium upgrades and new stadiums,

- Airport upgrades, - Road upgrades - Accommodation- etc.



Transport Services & LogisticsRoad freight, commuter bus service, port services, ship maintenance

Chemicals IndustriesBio-fuels, man-made fibres, tubes and pipes, composites, soaps and other cleaning products, plastics for automotive industry

Wholesale & Retail TradeShopping centre development in townships and rural areas, convenience stores, franchising investments, warehousing facilities

A number of initiatives….A number of initiatives….

High Growth

Potential Industries

High Growth


Examples of the most Examples of the most viable opportunities...viable opportunities...


- ConstructionConstruction 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

BeneficiationPlatinum group metals, iron ore, coal, diamond cutting and polishing, jewellery manufacturing

- Waste Managementwaste treatment, waste recycling (paper and board, plastics, metal & glass)


High Growth


High Growth



- Wood and Paper Industriesforestry products, furniture,packaging, paper recycling

- Services SectorsTourism (eco, accommodation, conference facilities), health and educational services, information technology, business process outsourcing

High Growth


High Growth




•

Provincially-led ProjectsProvincially-led Projects

- Free State: logistics, biofuels, knowledge-based 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 self-

financing, 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

“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

Vision and mission

Job creation

Facilitate BEEPromote entrepreneurship

Small and medium enterprise development

Regional

development

The IDC’s core strategies

Encourage social transformation

Africa’s development

IDC needs to maintain its balance sheet integrity to ensure that it can deliver the above on a sustainable basis.

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

New sectoral involvement

Flexible Deal Structuring

IDC’s financial instruments

Equity Quasi-equity Commercial debt Wholesale & bridging finance Share warehousing Guarantees Export/import finance Short-term trade finance Wholesale venture capital

• IDC offers a wide array of financial instruments, including :

• These may be provided singly or in combination

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

Basic Assessment

Due Diligence Feasibility Study

Decision-making (Investment Committee)

Legal Agreements

Disbursement

Post-investment Management

Initial Screening

Term Sheet MOU/Co-operation Agreement

Feasibility Completed

Feasibility not fully investigated

The IDC’s approach to

SME development

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

Micro10%

Very Small12%

Small16%

Medium and Large62%

Contribution to GDP

Micro33%

Very Small 23%

Small16%

Unspecified2%Medium to Large

26%

Source: the DTI(Ann Rev of Small business in SA 2003)

Contribution to employment


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


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)


Pro SME Jobs Scheme …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.


Pro SME Jobs Scheme (cont) …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.


Pro SME Jobs Scheme (cont) …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.

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.

Development Financing Schemes (cont.)


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.

SME Approvals by Province: July 1995 to Mar 2005

0 5 10 15 20 25 30 35

Free State

North West

Limpopo

Mpumalanga

Eastern Cape

Northern Cape

Kwazulu-Natal

Western Cape

Gauteng

% of total

0 5 10 15 20 25 30 35 40

% of total SME number

% of total SME value


Most of the SMEs funded by the IDC are in the agriculture,

hunting, forestry and fishing sectors.

SME approvals by sectors: July 1995 to June 2004

0 2 4 6 8 10 12 14 16 18 20

Electricity, gas & water supply

Construction

Hotels & restaurants etc

Transport, storage & communication

Community, social & personal services

Electrical & electronic products

Financial, insurance and business services

Mining & quarrying

Wood, paper & printing

Other manufacturing

Wholesale & retail trade

Clothing, textiles & leather products

Machinery & metals products

Food, beverages & tobacco

Chemicals & other mineral products

Agriculture, hunting, forestry & fishing

% of total

0 2 4 6 8 10 12 14 16 18 20

% of total SME number

% of total SME value

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

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 women 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 balanced development and

spread job creation across regions

(including rural areas, various provinces,

townships)

Emphasis on expansionary BEE projects

Continue to focus on Government’s

policy objectives

Thank YouThank You

The Role of the IDC in Small and Medium Enterprise Development Jorge Maia Head: Economic Research...

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