CASE STUDY

!Khi Solar One

Once completed, this concentrated solar tower power station will be one of the largest in the world. One of the benefits of this project relative to most other renewable energy projects is its ability to store energy and to deliver electricity to the grid during peak times.

Leadership commentary

Chief executive officer's statement

Chief Executive Officer’s statement

Overview

The year under review was characterised by continued fragility and uncertainty in the economic landscape locally and abroad, thereby limiting the expansion and developmental performance of the South African economy. Subdued demand in world markets, particularly due to recessionary conditions in the Eurozone, a very gradual economic recovery in the United States and decelerating growth in key emerging markets, affected the export earnings capacity of South Africa’s corporate sector, including major segments of IDC’s customer base. On the home front, socio-economic related tensions and moderating household consumption also impacted on the investment plans of South African business, whilst many economic sectors experienced surplus production capacity.

Overall, IDC’s performance in 2013 was mixed. Developing industrial capacity is a long-term process and, although some successes have been achieved, there are areas where implementation is lagging. Despite the difficult operating environment, the Corporation made further significant strides as a contributor to South Africa’s economic advancement and as a catalyst for structural transformation over the course of the year. Although the value of funding approvals was maintained at high levels, large acquisitions and capital intensive projects in key industrial sectors with a transformational intent will have a negative impact on the cost per direct job and the perceived developmental impact. A higher level of impairments was yet another challenge faced during 2013, reflecting not only the challenging operating environment for our business partners but also the IDC’s higher appetite for risk as a development financier. Although IDC remains financially strong, the focus on reducing impairments will need to continue. Managing stakeholders’ expectations and ensuring client satisfaction are being addressed through various initiatives.

Delivering on our Leadership in Industrial Development strategy

The IDC continued to implement its Leadership in Industrial Development strategy, which commenced in financial year 2012. This strategy is driven by our Corporation’s alignment to the broad sectoral priorities of the New Growth Path and successive iterations of the Industrial Policy Action Plan.

The IDC’s increased emphasis on rural development was reflected by the 30% share of the overall value of approvals benefiting businesses in rural areas of South Africa.

Of the total value of R13.1 billion in funding approved in 2013, 33% was invested in new projects and new-start-ups, whereas 25% accounted for capacity expansions. The remaining proportion was advanced to expansionary acquisitions and distressed companies. The IDC’s increased emphasis on rural development was reflected by the 30% share of the overall value of approvals benefiting businesses in rural areas of South Africa.

While our funding activity varied substantially across the various economic sectors in 2013, higher approval levels were recorded by the information and communications technology, healthcare and tourism business units.

Significantly lower approval levels for new or expanded capacity were recorded by the strategic business unit (SBU) focusing on mining and minerals beneficiation, as depressed global markets continued to put pressure on the mining sector performance largely through weaker commodity prices and subdued demand, whilst the operating environment domestically was harshly affected by industrial action. This contributed to a number of projects being postponed and/or cancelled due to concerns around sustainability.

The IDC started developing and implementing strategies to address the competitive landscape within the domestic steel industry a number of years ago. These strategies have covered areas such as the supply of iron, potential participation by smaller steel producers and investigating the viability of larger projects. Some of the vehicles that the IDC intends utilising to implement these strategies include: Scaw South Africa, in which the IDC acquired a majority stake during 2013; Palabora Mining Company, in which the Corporation obtained a 20% shareholding; Iron Mineral Beneficiation Services, which has a plant in Phalaborwa that is close to being commissioned and which will produce iron briquettes from superfine ores; as well as other investments in smaller companies. Although the impact of these strategies is not necessarily yet visible, they will progressively support the expansion of the broader manufacturing sector and the ongoing public sector infrastructure development programme.

The South African economy is amongst the most carbon-intensive from a global perspective. As early as 2007, the IDC started exploring funding opportunities in anticipation of the country adopting a greener growth trajectory. Shortly thereafter, the imperative of expanding South Africa’s electricity supply capacity became all too clear. Furthermore, the potential for introducing renewable and environmentally-friendly sources of energy as an alternative to coal-based generation became an increasingly important consideration. The NGP adopted in 2010, pointed to the opportunities in the green economy and called for South Africa to develop local capacity in this era of industrialisation. By the time government’s programme for independent renewable energy producers was implemented in 2012, the IDC had established itself as one of the preferred funders for these projects.

The SBU focusing on the development of green industries played a significant part in funding both Round 1 and Round 2 projects of the Renewable Energy Independent Power Producer Procurement programme, for which bids were awarded in 2012 and 2013, respectively. The decline in the level of financing activities recorded by this unit in 2013 was mainly due to the fact that the Round 2 projects in which it participated were closed in the new financial year.

Simultaneously, we have been promoting and contributing to the localisation of components manufacturing in support of South Africa’s burgeoning renewable energy industry. For example, during the past year the IDC funded greenfield operations that will be producing solar photovoltaic panels and wind towers in the Eastern Cape. Apart from renewable energy generation and components, the IDC remains active in other areas such as energy efficiency, co-generation, conversion of bio-waste to energy and waste management. These activities will not only ensure a less carbon-intensive economy going forward, but also contribute to the expansion of South Africa’s electricity generation capacity in support of sustainable economic growth.

The infrastructure build programmes of government and state-owned companies (SOCs) have the potential to make a large impact on our country’s industrial development. Apart from the renewable energy programme discussed earlier, entities such as Transnet and Eskom are also replacing equipment and expanding capacity. Accordingly, the IDC has been identifying and funding suppliers to such entities for a number of years. During 2013, beneficiaries of IDC financing in these areas of public sector procurement included a rolling stock manufacturer, a coach repair and refurbishment operation, a manufacturer of structural steel products, and companies supplying more specialised equipment such as stainless steel pressure vessels, amongst others.

The infrastructure build programmes of government and state-owned companies have the potential to make a large impact on our country’s industrial development; the IDC has been identifying and funding suppliers to such entities for a number of years.

In 2012, we announced our participation in the Strategic Integrated Projects (SIPs) initiative spearheaded by the Presidential Infrastructure Coordinating Commission. To date, the IDC has been co-ordinating the planning of two of the 18 identified SIPs, namely SIP 5 (Saldanha – Northern Cape development corridor) and SIP 8 (Green energy in support of the South African economy). We are also coordinating the localisation opportunities emanating from all SIPs and the identification of local manufacturing potential being unlocked by the major SOCs.

Agro-processing has a major role to play in general economic development by adding value to agricultural commodities, generating export earnings and replacing imports. More specifically, agro-processing plants provide rural areas with a more sustainable market for agricultural products, contributing in the process to the sustainability of primary producers and augmenting the job creation potential of the agricultural sector. The following two IDC-funded projects which were implemented during 2013 illustrate this point: one of the largest chicken abattoirs in the country, which is located in the Free State, not only has the capacity to slaughter 160 000 chickens per day and indirectly results in the beneficiation of 80 000 tons of maize per year, but it also sources chickens from independent farmers, thus boosting the potential for rural development; and a producer of long-life milk and other dairy products, which will enhance the demand for milk sourced from primary producers in the Eastern Cape by an estimated 18%. Moreover, the IDC contributed to the value chain’s further development by providing funding in 2013 for a project that will see a cheese production facility aimed at partially replacing imported mozzarella and cream cheese.

Employment creation and preservation are of paramount importance amongst our developmental objectives. IDC financing activity in 2013 is expected to have facilitated the creation and saving of 22 872 jobs. Although lower than the employment achievements of recent years, largely due to the fact that high levels of funding were destined for capital-intensive projects and the acquisition of stakes in existing businesses, the envisaged trade-off entails a significant enhancement of the employment creation potential in the longer term due to the strategic interventions being implemented at this point in time. On a cumulative basis, the IDC’s financing activities have facilitated the creation and saving of approximately 160 000 jobs since the 2009 recession year, of which some 38% are in rural areas.

The IDC also measures its success through its support to black-empowered business. Funding amounting to R5.6 billion was approved during the year to 88 black-empowered businesses, representing 43% of the total value of approvals.

The launch of sefa as a subsidiary of the IDC in 2012 has paved the way for the Group to have a much more significant impact on small business development. The implementation of sefa was a key priority during the year, hence the secondment of the IDC Head of Risk Management to sefa as its CEO, as well as of other IDC staff members in the areas of internal audit, human capital, IT, procurement, and strategy. For 2013, sefa was able to approve funding of R440 million, representing a 108% increase over the combined figures that Khula and Samaf approved in the previous financial year. This was done in 38 700 transactions, including funding through intermediaries.

Building a customer-centric culture that is aligned to customer expectations is of utmost importance to the Corporation. We are pleased to announce that significant improvements have been made in our turnaround times. The measured turnaround times for non-complex transactions improved by 37% during the year under review, whilst the corresponding improvement for complex transactions measured 10%. Our continuous efforts to improve on service delivery and product offering are bearing fruit. The customer satisfaction survey undertaken in 2013 reflected a score of 86 points, placing the IDC within the “Strong Relationship” category of the index.

The measured turnaround times for non-complex transactions improved by 37% during the year under review, whilst the corresponding improvement for complex transactions measured 10%.

The IDC also measures its success through its support to black-empowered business. Funding amounting to R5.6 billion was approved during the year to 88 black-empowered businesses, representing 43% of the total value of approvals.

The IDC maintains a disciplined process of ensuring that business partners appreciate their impact on the environment and the surrounding communities. As a responsible funder, we have put in place compliance conditions with respect to legislation and industry norms, as well as monitor and assess the implementation thereof. In striving to expand and diversify South Africa’s manufacturing base, to support our country’s localisation drive and simultaneously create business opportunities for small- and medium-sized enterprises, the IDC continuously encourages its business partners to increase their value addition and to procure from local business. In a similar vein, these principles underpin our project development initiatives.

Cultivating new ideas, so as to evolve in the way in which we do our business, remained embedded in the corporate thinking throughout the year. The use of the recently launched online application platform increased significantly during the year under review. This clearly indicates our innovative efforts in improving turnaround time and efficiency. Our open innovation approach has enabled us to stimulate new ideas through our engagements with external stakeholders.

In partnership with the University of the Free State, we successfully implemented a business plan competition for students and launched a similar competition in conjunction with the Black Management Forum, its Soweto branch and our subsidiary, sefa. We are planning to rollout similar business plan competitions to other regions in forthcoming financial years. Our aim in this regard is to create a pipeline of quality business plans, whilst instilling a culture of entrepreneurship amongst our country’s youth.

Enhancing socio-economic impact

Improving the quality and reach of education is indispensable for South Africa’s future. To contribute to addressing the existing deficits, the IDC has partnered with the Department of Basic Education in launching the Whole School Development Programme, through which it adopted 20 schools across the country. This partnership is aligned with the 2011 New Growth Path Accord 2 on Basic Education and Partnership with Schools signed at NEDLAC, whereby all signatories committed to adopting poorly performing schools and implementing whole school development interventions, among other objectives. We have also provided support to 8 colleges of Further Education and Training (FET) through donations ranging from renovations of engineering workshop facilities to the purchase of equipment and leadership training.

The success of our socio-economic development is also reflected by our role in facilitating the participation of historically disadvantaged communities and workers where IDC’s investments are located. During the year under review, nine workers’ trusts and 17 community trusts were registered, compared to eight workers’ trusts and five community trusts in 2012. However, sustaining beneficiary motivation and commitment to projects remains a challenge due to long-term material benefit flow to the trust.

The IDC continues to seek innovative ways to support and grow local economies by driving “uncommon strategies for the common good”, especially in marginalised communities. Our agency development model enables us to provide such communities with the capacity to identify and drive development opportunities in their areas of operation. Of the 37 development agencies established through IDC assistance, 8 have moved to the next phase of operations, with an amount of R37.5 million having been invested in 2013.

Our newly established Social Enterprise Fund has enabled us to support seven enterprises in its first year of operation, with R16.6 million having been approved and 200 jobs expected to be created in the process. All the projects approved have a high developmental and social impact, and include projects supporting rural livelihoods and food security, waste management and recycling, as well as small community-based manufacturing.

On a cumulative basis, the IDC’s financing activities have facilitated the creation and saving of approximately 160 000 jobs since the 2009 recession year, of which some 38% are in rural areas.

We view the economic recovery and our country’s imperatives as providing us with opportunities to live up to the rising expectations from our stakeholders.

Financial performance

We are pleased to announce that IDC’s funding disbursements increased to R16 billion during 2013, almost doubling the amount invested in the economy over the previous financial year.

We ended the year with a revenue of R14.6 billion, which was boosted by the R2.2 billion contribution made by Scaw as a new subsidiary of the IDC. Revenue from Foskor, a further subsidiary, declined by 4% to R4.9 billion due to downward pressure on fertiliser prices.

Group profit before tax decreased from R3.4 billion in 2012 to R2 billion in 2013, largely due to a reduction in capital gains and an increased level of impairments. While reflecting the Group’s appetite for risk and increasing access to capital, impairment levels rose by R1.7 billion in the year under review. The slow economic recovery, unfavourable exchange rates and weak trading conditions experienced by many of IDC’s business partners underpinned the rise in impairments during the course of the year.

In our continuous search for new sources of funds to support financing activities, our borrowings have grown over time, increasing to R19 billion in 2013, from R9.9 billion in the previous financial year.

Future plans

Looking ahead, we view the economic recovery and our country’s imperatives as providing us with opportunities to live up to the rising expectations from our stakeholders. Furthermore, we do not underestimate the importance of ensuring the IDC’s adaptability, proactiveness and resilience so that our developmental impact on South Africa’s economy is progressively enhanced and sustained.

While we enter the new financial year with a certain degree of caution due to the prevailing uncertainties, we shall strive to enhance our relevance as a financier of and catalyst for industrial development, diversification and transformation, not only in South Africa but also in the rest of the African continent.

As encapsulated by our corporate strategy, we envision playing a leadership role in shaping our country’s industrial landscape and the development trajectory of several of its sectors. We will augment our efforts with respect to project identification and development, increase industrial financing activities and implement sector development strategies in support of the objectives of the New Growth Path and the Industrial Policy Action Plan. Our industrial capacity development activities are also aligned with the National Development Plan 2030.

Our future plans will necessitate the leveraging of our strong balance sheet through effective collaboration with commercial financiers and other development finance institutions. The successful implementation of our corporate plan will rely on a strong human capital base that is well equipped to address the requirements of a more proactive role in sector development. The attraction and retention of talented staff will remain a key priority for the Corporation in the years ahead.

Acknowledgments

I express my utmost gratitude to the IDC Executive management and all employees for their overwhelming commitment to the implementation of our developmental mandate during the challenging financial year under review. This is a testimony of the enthusiasm and willingness to embrace the values of the Corporation. I am proud to lead and be associated with a development finance institution whose employees have collectively shown notable resilience, selflessness and drive to make a difference despite the difficult operating environment.

I thank the IDC Board for their support in ensuring that we remain committed to delivering on our mandate. My gratitude also goes to our shareholder, represented by Honourable Minister Ebrahim Patel, for his guidance during these challenging times. I would like to recognise the Honourable Chairperson of the Portfolio Committee on Economic Development, Mrs Elsie Coleman, as well as the Honourable members of the committee for their appreciation and continued interest in the role and activities of the IDC.

Chief executive officer's statement

MG Qhena
Chief Executive Officer

Coega Dairy Holdings

The IDC has identified increased competition in the dairy value chain and import substitution in the cheese industry as key sector development goals. We also singled out the need for increased farmer (and specifically B-BBEE) participation in dairy value-adding initiatives.

Windtown Lagoon Resort 

The newly built Windtown Lagoon Resort and Spa reflects the IDC’s focus to funding community-based projects that have potential to create employment opportunities in far-flung regions.


APPROVALS
R13.1 billion
DISBURSEMENTS
R16.0 billion
JOBS FACILITATED
18 922
JOBS SAVED
3 950
© The IDC 2013. All rights not expressly allowed are reserved. P.O. Box 784055, Sandton, 2146, South Africa