CHIEF EXECUTIVE OFFICER’S STATEMENT

The year under review was again a challenging one for the IDC. The world economy struggled to sustain its growth momentum, while activity levels in the South African economy became more subdued. The year also witnessed significant changes in the geopolitical environment, with the rise in anti-globalisation sentiments as evidenced by the United Kingdom’s intended exit from the European Union, and the shifting economic policy in the United States.

In South Africa, the weak economic growth performance was largely due to sharply lower output in the agriculture, mining and electricity sectors, with the generalised weakness spanning across most other sectors of the economy. Higher inflationary pressures, low business and consumer confidence, the impact of the drought, as well as relatively low commodity demand and prices also contributed to the difficult operating environment. Naturally, these factors negatively influenced the IDC’s activity levels and the credit quality of our portfolio.

2017 also marked the second year of the implementation of our proactive industrial development strategy, which focuses on the development of priority industries and initiatives across the country in order to increase our impact. This has meant that we take greater ownership of and leadership in the development of sectors and industries deemed critical for the growth of our economy in line with our value chain approach.

INVESTMENT HIGHLIGHTS

Project Evolve, while a long-term strategy, is beginning to show results as seen in the improvement of our key performance indicators.

Our strategy is underpinned by increasing industrial development impact while ensuring alignment with government’s strategic priority plans.

 
 
Despite the challenging economic environment, our proactive investment approach resulted in an improvement in our overall performance. The total value of funding approvals increased to R15.3 billion, the highest level ever.
 
 

Of this amount, 69% was to the value chains with the metals and mining value chain accounting for 56%. The chemicals and pharmaceutical value chain received 13%.

Funding approvals to the mining sector amounted to R3.9 billion (2016: R2.5 billion), representing a 25% increase and further demonstrating our counter-cyclical role in the economy. A recovery in commodity prices during the year across a range of commodities, including coal, iron ore and platinum, provided some relief to the mining sector at large.

Our funding approvals to the basic metals, metal products and mining value chain continued to counter the adverse trends experienced by these industries. Although copper and aluminium prices have rebounded strongly, the platinum price has been on a declining trend after an initial surge at the beginning of the year. For the South African mining sector at large, production volumes were lower in all but one of the main sub-sectors compared to the previous year, while export volumes also tumbled. Platinum production was 4.3% lower in 2016, while copper production (-15.6%) was sharply lower.

The automotive and transport equipment industries accounted for 11% of the total funding approved (R1.7 billion). A notable investment in this case was the approval of the R1.5 billion motor vehicle assembly plant project, a joint venture between the IDC and the Beijing Automotive Industry Holding Company (BAIC). This investment aligns with the strategic intent of the Automotive Production Development Programme, which seeks to attract new and/or expand existing investments by original equipment manufacturers and suppliers in order to achieve higher domestic production volumes, in the process contributing to much needed job creation.

This is the first investment of this scale in the South African automotive industry in 40 years. More than 2 500 jobs are expected to be created during the construction of the first phase of the project, with the permanent employment at around 800 jobs. Most importantly, the project has committed to achieving at least 60% local content on all vehicle models to be manufactured locally. Plans have also been initiated to scale up the existing South African supplier base.

The chemicals and pharmaceuticals industries received 13% (R2.1 billion) of the total funding approved. Despite a very difficult operating environment for the manufacturing sector at large, the chemicals industry managed to record a fairly solid growth performance over the past year. Throughout the year, business confidence in the industry was well above that for the manufacturing sector as a whole and ranked in second place out of all sub-sectors within manufacturing.

Approvals to the agro-processing and agriculture sectors performed below expectations. Severe drought conditions continued to impact negatively on agricultural output, leading to a general lack of investment. The food processing sector, in turn, also recorded a drop in production volumes over the past year, with fixed investment declining in response to unfavourable operating conditions. Despite the challenges faced by the sector, new jobs were created.

Numerous initiatives aimed at improving opportunities for backward and forward linkages as well as leveraging external partnerships more effectively have been identified by the IDC and will be implemented in earnest in the new year. An example is the initiative being pursued in partnership with Coca-Cola Beverage South Africa to support local emerging farmers in the grape value chain.

The delays in the signing of the power purchase agreements for the projects awarded the preferred bidder status in the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), had a negative impact on the level of our approvals and the levels of disbursements thus affecting the execution of new projects. We have, however, begun to diversify our involvement in the renewable energy sector by identifying alternative market opportunities, especially with regard to embedded generation, off-grid solutions and supporting South African developers in taking advantage of opportunities in other African markets.

As a result of the economic environment, the total funding disbursed during the year decreased marginally to R11.0 billion (2016: R11.4 billion), as clients held back on their investment plans. We continue to strive to ensure timeous investment flows into the economy in order to expedite developmental impact.

ADVANCING TRANSFORMATIVE INDUSTRIALISATION

A large part of our focus is on developing the industries of the future, particularly game-changing opportunities in response to the demands of the “Fourth Industrial Revolution”. We recognise that this is a new and fast-evolving territory, and hence continue to refine and adapt our strategies to respond appropriately to rapidly changing market conditions.

One of the key focus areas in the year under review was increasing specific development outcomes, notably the creation of jobs, funding to Black Industrialists, as well as women-, youth- and black-empowered businesses in order to support transformation objectives. Building on the previous year’s performance, I am particularly pleased to announce that we recorded significant improvements in all of these development indicators as envisaged in our Corporate targets. More specifically, we facilitated the creation of 18 206 new jobs (2016: 11 833 jobs) and saved 2 675 existing jobs (2016: 3 439), representing a 37% increase overall. Our investment in Oiltanking MOGS Saldanha, for example, is expected to contribute toward the creation of 720 construction jobs, while the Wagienience investment will create 463 jobs.

 
 
During the year we approved R4.7 billion in 83 transactions for Black Industrialists, representing a 63% increase on the previous year’s approvals. This reflects a concerted effort on our part to support economic transformation in South Africa and also indicates that our targeted stakeholder efforts are bearing fruit.
 
 

The funding approved for youth-empowered businesses increased to R2.3 billion in 52 transactions (2016: R970 million, 19 transactions) during the year under review. This marked improvement follows the commitment by the Corporation to support youth enterprises to the value of R4.5 billion from 2016 to 2020. For example, we provided funding to Maneli Pets to buy machinery and equipment to convert the factory into an export-grade facility. The investment is expected to create 40 new jobs. In addition, the IDC’s offerings to youth were reviewed to provide greater accessibility and dedicated support. A deliberate and targeted marketing campaign culminated in our first National Youth Enterprise conference, which we hosted in October 2016.

Similarly, we recorded a significant improvement in approvals for women-empowered businesses at R3.2 billion, triple the R1.1 billion approved in 2016. Approvals to black-empowered businesses recorded a 103% increase at R10.1 billion against R4.9 billion in the previous year. Supporting black business to grow, including women and youth entrepreneurs, is viewed as a lever for the increased participation of Black Industrialists in the economy, thus contributing to its transformation.

To ensure the Corporation delivers effectively on its mandate, we continued to effect efficiency improvement measures to simplify our business processes, making them more client-centric and responsive. Consequently, the time taken from approval to first draw-down has been reduced by 55%. We have also committed to delivering on what matters to our clients on a consistent and integrated basis. To do this we have also simplified the assessment process for non-complex transactions, empowered front line staff to make relevant decisions faster, and introduced automation platforms that enable our clients to engage IDC with greater ease.

During the financial year, a total of R58 million funding support was provided towards social enterprise initiatives and R24 million towards education and skills development. A further R3.5 million was provided for entrepreneurship and job creation initiatives as part of our Corporate Social Investment programme. The involvement in these areas is in line with the linkage of the future development of the pipeline for the value chain. We are also co-funding the PICC programme as the source of developing the localisation pipeline.

FINANCIAL PERFORMANCE

Despite the difficult environment we posted a group profit of R2.2 billion, a significant increase from the previous year’s profit of R223 million. This was as a result of a concerted effort to closely monitor the performance of our investments which resulted in the reversal of some impairments. The impairment charge decreased from R3.7 billion to R2.1 billion in the current year with the impairment ratio improving from 16.9% in the previous year to 16.7%. Revenue improvement combined with close monitoring of operating expenditure also had a positive impact on the bottom line. The conclusion of the first phase of the Exxaro empowerment structure resulted in capital gains of R1.7 billion. The equity

accounted investments continued to perform well, recording an 73% increase in profit, driven primarily by the recent recovery in commodity prices, contributing R963 million to the profits in 2017.

Our material subsidiaries performed below expectation, with Foskor recording a loss of R902 million (2016: R568 million) largely due to a lower than forecasted phosphate price, and the stronger exchange rate which had a significant impact on revenue and profit generation.

Foskor continues to implement identified performance improvements and initiatives to optimise current operations. Scaw recorded a loss of R787 million in the year under review (2016: R1 074 million). The process to conclude the restructuring of the Scaw group is being finalised and is expected to result in the introduction of Strategic Equity Partners for its main operating divisions.

The IDC balance sheet has continued to strengthen with an asset base of R129.8 billion, mainly driven by stronger commodity prices as seen in the 12% improvement in the listed portfolio as well as new approvals. The diversification of our assets remains part of our strategy to mitigate the concentration risk. The debt to equity ratio recorded a marginal increase from 36% to 37% as a result of increased borrowings to support our funding activities.

The improvement in reserves had a positive impact on the debt-to-equity ratio which is still well within our internal threshold of 60% and our statutory limit of 100%. Financial sustainability remains a critical focus area, more especially in the current operating environment.

LOOKING AHEAD

The economic recovery anticipated in 2017 may be delayed by recent developments, including the downgrades of South Africa’s sovereign credit ratings. Business and investor confidence has been negatively affected, which does not bode well for fixed investment spending.Operating conditions remain largely unsatisfactory in the manufacturing sector. Manufacturers are expected to hold back on investments in productive capacity in anticipation of an improvement in demand conditions, both domestically and in key global markets. As a result, investment activity in the sector is likely to remain subdued for some time.

We are continually evaluating how we can best fulfil our countercyclical role in the current environment. We expect our clients to remain under pressure in the short term, possibly resulting in an increased demand for distress funding. The ability of many businesses to raise debt in this environment is likely to be more challenging, with borrowing costs on the rise. Through our capital raising efforts we will look for opportunities to leverage outside funds more effectively.

Growth prospects look set to improve in several other African economies as export demand and commodity prices recover. A weaker exchange rate of the rand may, if sustained, lead to opportunities for the export of South African products as well as for import replacement. We also believe that there are opportunities to extend our support to the economy by integrating value chains from a regional perspective.

Investing in our people is key to our vision and delivery on our strategies. We will continue to ensure that our staff is appropriately skilled and capacitated in order to improve the support provided to our clients. We have raised the profile of subsidiaries' management, especially in light of their poor financial performance in the previous financial years, and will continue to look for ways in which to improve their operating efficiencies.

We intend to intensify the level of regional integration by exploring different financial ways of investing in the rest of the continent through partnerships with established financial institutions in the efforts of enhancing the value chain approach, since this is one area in which we have performed poorly in the previous years.

ACKNOWLEDGEMENTS

I am most appreciative of the enormous efforts and commitment from the management team and staff in ensuring that we increase the IDC’s role in the economy. The development outcomes of the past year are notable given the difficult market conditions.

I also wish to extend my gratitude to the Chairperson and the Board of Directors for their continued support and guidance, as well as for challenging the Corporation to do more.

A special word of thanks to the Honourable Minister of Economic Development and his team for their unwavering support and contributions in ensuring that the IDC continues to deliver on its mandate. I also express my gratitude to the Honourable Chairpersons of the Portfolio Committee on Economic Development and Select Committee on Economic and Business Development as well as the Honourable members of the committees for their continued support.

Last but not least, I would like to extend my appreciation to our clients and other stakeholders who choose us as their development finance partner.

MG Qhena
Chief Executive Officer

28 June 2017