All the above figures exclude performance by sefa - a wholly owned subsidiary of IDC - that supports mostly black owned companies
Our objective to increase and diversify industrial capacity is achieved primarily by providing businesses with funding to create new production capacity or upgrade and expand their existing capacity.
In 2014, largely as a result of global conditions, South Africa experienced economic challenges, with weak GDP growth (1.5%) and a 3.4% contraction in real private sector fixed investment. The reduction in investment levels was evident across all sectors of the economy apart from mining and the community, social and personal services sector.
IDC maintained a high level of funding approvals. These amounted to R11.5 billion in 2015 compared to R13.8 billion in the previous year. The decrease can be attributed to only R348 million approved for renewable energy projects during the reporting period compared to the R6.6 billion approved for Round 3 projects in 2014.
The number of approved transactions increased slightly to 210 (2014: 196), while disbursements for the year declined marginally to R10.9 billion compared to the previous year (2014: R11.1 billion).
The R11.5 billion approved funding went to the manufacturing (45%), mining (21%) and infrastructure development and services (34%) sectors. A small portion was approved for agriculture and forestry sectors requiring increased focus in the year ahead.
The deteriorating economic climate during 2014 resulted in low levels of business confidence, particularly among manufacturers.
Nationally, private sector fixed investment in the manufacturing industry declined by 0.5% in real terms during the 2014 calendar year. Since the manufacturing industry is core to our mandate, the sector attracted the largest portion (45%) of IDC funding for the year.
The bulk, R2.6 billion, of the approvals within the manufacturing sector went to the basic and downstream metal industries. We also approved an additional R102 million from the Department of Trade and Industry’s (the dti) Manufacturing Competitiveness Enhancement Programme (MCEP). Historically, our role in developing the manufacturing industry has been significant and we are formulating strategies currently for the future development of the broader value chain for both the upstream and downstream segments.
Government’s infrastructure programme, including projects driven by state-owned companies such as Eskom, Transnet and PRASA, coupled with localisation initiatives and products designated for public sector procurement, is crucial for the development of this industry.
This was a consideration during our purchase of a controlling stake in Scaw in 2013. The prolonged labour unrest in the mining sector, as a key user of manufactured products and subsequent strike in the metals industry, however, have been particularly challenging for the metals industry. As a result, we provided Scaw with additional funding during the year. IDC is considering strategic equity partners that will bring operational experience, technology enhancements, global market reach and presents that will contribute to developing Scaw’s business further, driving value enhancements for all stakeholders.
During the year, the development of a large steel project to provide competitively priced steel to downstream steel 32 processors moved ahead with the signing of a Memorandum of Understanding (MoU) between ourselves, the China Africa Development Fund (CADFund) and Hebei Iron and Steel, a Chinese strategic equity partner. A detailed feasibility study is currently underway.
We also supported the local manufacturing of rolling stock with a R220 million funding package for the DCD Group to manufacture 240 locomotive bodies for Transnet. The MoU we signed with Alstom to cooperate in local supplier development and the R120 million funding provided to Tubular Construction Projects to manufacture and supply air-cooled condenser systems to Eskom’s Kusile power station, currently under construction, are further examples of how our strategic partnerships in the industry are helping to increase localisation.
A large, 75-year-old foundry in the East Rand, with significant shareholding by a black industrialist, received R174 million in funding to become more competitive. The company manufactures spheroidal graphite and grey iron castings and is using the funds to replace and upgrade equipment and install backup electrical supply infrastructure to curb the effects of power outages and ensure that furnaces are shut down properly.
We also commissioned a new technology plant to produce lowcost scrap substitute from waste dumps to reduce the costs of steel for the producers who use electric arc furnace technology. The automotive industry, which contributes approximately 6% of manufacturing value-addition to the economy and employs 8% of workers in the manufacturing sector, is an important strategic industry for the IDC. The Automotive Production Development Programme (APDP) – a government- sponsored incentive programme that, with its predecessor (the Motor Industry Development Programme), has been crucial for the industry’s growth and development resulting in increased investment in the industry.
Motherson Sumi Systems Limited (MSSL), a foreign component manufacturer that established production facilities locally, is an Indian tier 1 supplier of a wide range of automotive components. We provided the company with R85 million as a second round of funding to expand their Durban plant to manufacture components for the Toyota Hilux. The expansion will create new employment opportunities for 400 people.
R200 million was approved in 2015 for an existing independent paper producer to upgrade technology and improve efficiency to remain sustainable. Other funding beneficiaries in the wood and paper industry included funding the export of South African-made forestry equipment to Rwanda.
The textiles, clothing, footwear and leather sub-sectors are all showing varying signs of improvement. The increase in the local manufacture of clothing is being driven by demand for fast fashion, as well as macro-factors such as price pressures in the East and a weaker Rand/US Dollar exchange rate. Over the past three years, the local manufacture of footwear grew against a slow-down in imports. In total, funding of R594 million was approved in this industry in 2015, of which R67.6 million was to support seven black industrialists. This included additional funding for Chic Shoes, a black woman-managed business.
Our funding for Good Hope Textiles (Da Gama), a company that faced financial challenges, saved close to 600 jobs in the rural area of Zwelitsha, Eastern Cape. Da Gama is a large manufacturer of work wear fabric and high quality shweshwe fabric.
A substantial portion of funding approvals for the clothing and textiles sector in 2015 came from our Clothing, Textiles, Footwear and Leather competitiveness (CTFL) funding scheme. We also manage the Clothing and Textiles Competitiveness Programme (CTCP) on behalf of the dti, from which, during 2015, R618 million was disbursed to the beneficiaries of the Production Incentive Programme and R132 million to the Competitiveness Improvement Programme. These initiatives are aimed at increasing competitiveness in the industry.
An impact analysis of the CTFL scheme showed that, as a result of the CTCP, the manufacturing value-added (MVA) increase in the industry exceeded the value of CTCP disbursements by 50%. In addition, CTCP participants created employment for 6 900 workers from 2009 to 2014.
The diversified chemicals industry has some segments that are capital-intensive, while others are labour-intensive. During the reporting period, we approved funding of R483 million for companies in these industries. One of the largest single investments during the year was in a new technology in an industrial scale plant to produce solvents, waxes and oils from plastic waste materials. We also started with a feasibility study to investigate the viability of a production facility to reclaim chrome-3 waste from tannery operations with the potential to replace a portion of chrome-3 pigment imports.
In the pharmaceutical industry, we supported attempts to establish an Active Pharmaceutical Ingredient (API) industry. The initiative gained traction during 2015 when we approved funding for a start-up vaccine and biologics company to locally produce and commercialise a tuberculosis vaccine developed by the US-based Infectious Disease Research Institute (IDRI), a leading not-for-profit research and development (R&D) organisation that specialises in neglected infectious diseases.
During the past year, we also assisted a Black Economic Empowerment (BEE) consortium and management team to acquire a mid-size pharmaceutical manufacturer. In addition, we partnered with a local university to pioneer the formalisation of African traditional medicine.
Funding within the non-metallic mineral products industry declined compared to previous years. We approved additional funding for the Cimentos da Beira plant in Mozambique, which started production during the year, but contrary to 2014 and 2013, did not invest in new cement plants in the rest of the continent.
The agro-processing industry is important to the IDC because of its value chain that links into primary agriculture and its potential impact on rural development. The IDC/Agbiz confidence index, which indicates the levels of confidence in the agri-business sector, has been on an upward trend since the 2009 financial crisis. The index has flattened since 2012, indicating a decline in confidence in the sector due to depressed local consumer and major export markets, weak economic growth prospects and lacklustre fixed investments in an uncertain policy environment.
This resulted in less IDC funding within the agro-processing industry, with a net amount of R86 million approved during 2015. A sizeable investment of R203 million enabled an established, vertically integrated meat processing business to extend its value chain from the livestock farmer in rural areas to a retail product available to the end-consumer. We invested in horticulture and related processing, dairy processing, animal feed, food products, beverages and aquaculture.
Globally, operating conditions in the mining industry remained difficult amidst the steep decline in commodity prices, as well as falling demand and rising input costs. In South Africa, these challenges were compounded by a debilitating labour strike, inadequate electricity supply and intermittent cuts.
In the aftermath of the five-month strike in the platinum mining industry which ended in June 2014, the period of adjustment before mining operations could return to full production resulted in a substantial drag on the national mining output for the year as a whole.
Our role in the mining industry is important, as we provide risk capital for early stage projects, an area which most funding institutions see as high-risk. During the reporting period, we approved R2.5 billion for early stage mining industry projects. The largest portion (R1.9 billion) of this funding was additional funding for the Kalagadi Manganese project in the Northern Cape.
Other funding approved during the past year within the mining sector included R200 million to extend the life of the Palabora Copper Mine by a further 20 years and R198 million for blackowned coal mines as important future sources of supply for South Africa’s energy mix.
In the platinum sector, technology replacement improvements at the Sedibelo Platinum Mine are progressing well. We approved funding for this operation in 2012 and to date the development of the Kell Technology to replace the conventional energy-intensive platinum smelting process has progressed to pilot plant stage, while a detailed feasibility study commenced.
We provided R100 million through sefa for an early-stage mining fund to address the shortage of funding for early-stage exploration projects. This is a high-risk area with very little capital and the fund will assist with project development until other financiers have the confidence to provide funding.
Infrastructure and services
South Africa’s energy landscape has changed drastically due to the continued strain on the electricity grid, with special dispensations announced by the Department of Energy (DoE). The largest impact has been on the renewable energy segment, one of the fastest-growing industries in the country and one that has contributed significantly to its transformation.
Our role in funding projects during the first three rounds of the Renewable Energy Independent Power Producer Procurement Program (REIPPPP) has contributed significantly to mitigating risk in the sector. In 2015, our role declined as other funders stepped forward to provide development funding for the industry. This was evident in our reduced participation in Round 4 of the programme. In total, our investment in the industry sector grew to approximately R14 billion.
Several of the projects supported early in the REIPPPP have started delivering electricity to the grid, which assist with easing current supply constraints. In November 2014, severe weather conditions caused the collapse of a crane at Khi Solar One in Upington, one of our largest investments in the industry. Regrettably this resulted in the death of two employees.
The IDC put in a successful bid for 14 projects in the Small Independent Power Producer Programme (SMALLS) with 14 projects. The programme is aimed at small projects with a generation capacity of between 1 megawatt (MW) and 5 MW. Our involvement in SMALLS also stimulates localisation opportunities through the enforced use of locally manufactured photovoltaic (PV) components.
Some of the funding approved during the past financial year helped to unlock an estimated 10 MW in Biomass, 100 kilowatt (kW) in fuel cells and 70 megawatt hour (MWh) per month in energy recovery from the country’s exhaust waste stream. The installation of the country’s first commercial fuel cell energy generation was one of the ground-breaking projects approved for funding in 2014. Undertaken at the Chamber of Mines’ Johannesburg offices, the project importantly demonstrates the viability of using fuel cells as a power source, which can stimulate the creation of a new industry around South Africa’s platinum resources as a key component of fuel cells.
Other funded alternative energy infrastructure projects included the Sunrise Energy project (R490 million), a liquefied petroleum gas (LPG) terminal and storage facility in Saldanha and Egoli Gas, to extend its gas pipeline. An important milestone in the Sunrise Energy project was the shareholding acquired by Mining, Oil and Gas Services (MOGS), a black-owned resources company.
Elsewhere on the continent, we approved funding for a 330 MW coal-fired power plant near Maamba in Zambia. This plant will assist in mitigating energy constraints in the region.
South Africa has made good progress in the information and communication technology (ICT) arena, but still faces a number of key challenges. These include a shortage of skilled resources and a lack of competition, despite strong growth in the telecommunications sector. We are funding projects to accelerate access to ICT infrastructure, including establishing wireless and broadband infrastructure in Soweto.
The South African motion pictures industry has seen significant progress during the past two decades, yet in television and feature films it remains underdeveloped. During the past financial year, we approved funding of R150 million for companies in the media, motion pictures and related industries. We continued to support production infrastructure with funding for Cape Town Film Studios to construct a new, flexible, double stage that can be divided into two parts for television use and feature film production.
We also launched the Emerging Black Filmmakers Transformation Fund at the Durban International Film Festival in July 2014. The Fund is a partnership between the IDC, the dti and the National Film and Video Foundation to develop black producers and directors.
In addition, radio broadcasting is being taken to a new level with funding of R46.1 million to establish a new commercial radio station for the black middle class in seven of South Africa’s provinces. The funding supports the establishment of black industrialists in the commercial radio broadcasting sector.
Selected IDC projects and investments of more than R50 million are reflected
Truly African, not South African only
Over the past years, our approach to funding projects in the rest of Africa has changed. In 2012, we adopted an approach to fund projects of mutual benefit to South Africa and the host country. Recently IDC’s investments into Africa reached nearly R4 billion cumulatively (2015: R1.8 billion and 2014: R2.0 billion) to companies promoting services and products from South Africa. These African development finance institutions also received R490.8 million to lend to businesses in African countries to stimulate development in those economies, which, ultimately, will benefit the South African economy.
Funding approved for the tourism and hospitality industry in Africa, in order to alleviate accommodation constrains and expedite the completion of previously approved projects, amounted to R160.5 million in 2015. In addition, the production and distribution of electricity in the region was boosted with funding of R535 million to mitigate energy supply constraints, which is a common challenge on the continent.
Refer to the graph below on IDC’s investments in the rest of Africa (2011 to 2015).
Our vision for the future development of industrial capacity is to reposition the IDC from reacting to market and environmental forces to being at the centre of the industrialisation paradigm. Our Project Evolve differentiates between the IDC’s proactive and reactive roles and the sectors to which these roles apply. We have identified five different groups of industries:
Value chains – industries in which our development activities are proactive:
- Metals, metal products, machinery and equipment, transport equipment and mining
- Chemicals, plastics and pharmaceuticals
- Agro-processing and agriculture
These industries play a significant role in the South African economy and we plan to increase their competitiveness and the economic impact by using a variety of tools including investment, influencing policy, creating an enabling environment and facilitating access to new sources of demand.
New industries – nascent industries or technologies that we nurture to become sizeable, relevant industries of the future by engaging in activities that increase their likelihood of success. These industries are critical as creators of sustainable jobs in South Africa.
Special high impact opportunities – industries that are too small to qualify as value chain industries where we play a critical support role and will continue to do so, specifically in the media and motion pictures and clothing, textiles, leather and footwear industries. Our strategic interventions in these industries will continue going forward given their high job intensity.
High impact opportunities – these include manufacturing industries not covered elsewhere as well as the tourism industry. The IDC will provide funding to these industries, but will not take a proactive approach to developing the sectors.
Industrial infrastructure – the constraints that infrastructure bottlenecks place on the development of industry resulted in IDC reviewing its role in the development and funding of infrastructure projects. In this regard, IDC will play the following role for infrastructure that can unlock industrial development (e.g. electricity, water, telecommunications and logistics). In these areas, IDC will be playing a coordination role to ensure that requisite infrastructure is funded and developed by other funders; supporting private sector or Public-Private Partnerships (PPP) industrial infrastructure where it is necessary; and invest selectively in strategic, economy wide, large scale interventions.