The%20Role%20of%20the%20IDC%20in%20Small%20and%20Medium%20Enterprise%20Development

1
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
2
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 countrys productive capacity
• South Africas 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

3
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 JSEs All-share index increased by 43 during
  2005

4
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
5
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.).
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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.
7
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 Governments 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.
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Sector-specific drivers of growth
INDUSTRY FACTORS DRIVING SECTORAL GROWTH
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.
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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.

10
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.

11
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.

12
SA sector performance 2003 2005
13
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.

14
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.

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Investment opportunities
Identified via ...
A number of initiatives.
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
  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.

Accelerated Shared Growth Initiative
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Investment opportunities
A number of initiatives.
Examples of the most viable opportunities...
- Building materials - Construction services -
Electrification - Water reticulation -
Telecommunications - Transportation - etc.
Expanded Public Works Programme (EPWP)

• Activities benefiting from
• Locating in industrial development zones
• Current investment incentives (tax holiday, IDC
  schemes)
• Promotion of small scale industries
• - Offset programme

Industrial Policy
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Investment opportunities
A number of initiatives.
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
Minerals Beneficiation Strategy

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

Privatisation Programme
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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
• 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

Capex Programmes of State-owned Enterprises
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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.

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Investment opportunities
A number of initiatives.
Examples of the most viable opportunities...
Transport Services Logistics Road freight,
commuter bus service, port services, ship
maintenance 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
High Growth Potential Industries
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Investment opportunities
A number of initiatives.
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)

High Growth Potential Industries
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Investment opportunities
A number of initiatives.
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
High Growth Potential Industries
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Investment opportunities
A number of initiatives.
Examples of the most viable opportunities...
- 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

Provincially-led Projects
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The IDCs core strategies
Job creation
Promote entrepreneurship
Facilitate BEE
Regional development
Small and medium enterprise development
Africas development
Encourage social transformation
IDC needs to maintain its balance sheet integrity
to ensure that it can deliver the above on a
sustainable basis.
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New sectoral involvement

• 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

• 1997
• Agriculture
• Mining
• Manufacturing
• Property

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IDCs 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
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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

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• The IDCs approach to
• SME development

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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

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The role of SMEs in the SA economy
Contribution to GDP
Contribution to employment
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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

35
IDC financing of SMEs

• Definition
• IDCs 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

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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 IDCs
  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)

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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.
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IDC financing of SMEs
Pro SME Jobs Scheme (cont)

• Criteria
• The financing is available for SMEs in all
  sectors within the IDCs 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 IDCs normal funding criteria.

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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.

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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.

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IDC financing of SMEs

• 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.

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IDC financing of SMEs

• Most of the SMEs funded by the IDC are in the
  agriculture, hunting, forestry and fishing
  sectors.

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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

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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 Governments policy
  objectives

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Thank You