The South African economy remained strained in 2015 due to subdued demand domestically and globally, coupled with persistent supply-side challenges. This resulted in economic growth slowing to 1.3%, the lowest rate since the 2008 recession, with the weakness widespread across the economy.

It is in such conditions that the counter-cyclical role of the IDC comes to the fore. At the same time that the IDC was implementing a new, proactive industrial development strategy, to pre-empt the potential negative impact that these conditions could have on industrial capacity, we reintroduced funding to distressed companies during the year. This funding is aimed at saving jobs at companies that are facing difficulties due to the tough economic conditions.

icon la 30The approvals of R14.5 billion (2015: R11.5 billion), recorded in the 2016 financial year, are the highest level the IDC has ever achieved. This represents a year-on-year increase of 26%. A further five transactions, of which four are renewable energy projects and one a coal-fired power project, and together totalling R6.1 billion, were processed during the 2016 financial year, but as the bidding process for these transactions had not been completed, they have not been included in the value of approvals for 2016. Over the five-year period ended 31 March 2016, the IDC’s approved funding reached R66.3 billion, 53% higher than the funding approved during the preceding five years.

The number of transactions approved decreased by 14% from 210 in 2015 to 180 for the 2016 financial year.

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Disbursement levels increased from R10.9 billion in 2015 to R11.4 billion for 2016. For the five-year period ended 31 March 2016, disbursements rose to R57.8 billion from R26.0 billion for the period 2007 to 2011 representing nominal growth of 122%.

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Of the R14.5 billion, R6.5 billion was approved for businesses operating in the manufacturing of metal products and mining (45% of total), R4.7 billion (32%) for entities operating in the chemicals and pharmaceutical space and R1.7 billion (11%) for industrial infrastructure projects. The remaining R1.6 billion was approved for businesses operating in agro-processing and agriculture (R614 million) and the High Impact and New Industries (R980 million) areas.

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METAL PRODUCTS AND MINING

Throughout the year under review, manufacturing activity remained constrained by weak demand conditions, both locally and in key export markets, as well as by rising operational costs and infrastructure-related challenges, including poor security of electricity supply. The interplay of these challenges reflected in the fall in business confidence in the first quarter of the calendar year 2016. The metal products and mining industries contributed 11.5% towards South Africa’s GDP in 2014 and their employment accounted for 9.3% of all formal non-agricultural employment in Q4 2015. The importance of this value chain in South Africa’s economy is one of the main reasons why it was selected as an area for the IDC to focus its proactive industry development efforts.

The IDC’s strategies in this value chain focus on creating competitive downstream industries, such as machinery and transport equipment, supported by inputs from the basic metals and mining industries. In addition, the mining industry has linkages to several other downstream manufacturing industries and can have a positive impact on the development of communities if approached in a more sustainable way.

To that end, the largest portion of funding approved, 45%, was for basic metals, metal products and mining. Although we support companies operating throughout this value chain, including in primary activities such as mining, our ultimate objective is to support the downstream industry to beneficiate and add value to South African mineral resources. R1.5 billion of the approvals were in support of basic iron and steel facilities. This included ongoing support for Scaw Metals as well as funding that was approved for Evraz Highveld Steel and Vanadium in an attempt to assist the company with a turnaround strategy. Unfortunately, the company has ceased operations and jobs could not be saved, although we are still working closely with the company’s business rescue practitioner to find a solution for the company.

R241 million was approved for a steel mill in Gauteng to ramp up the production of its steel bar manufacturing capacity by 144 000 tonnes per annum. To assist the entry of black industrialists in the downstream industry, R137 million was approved for the acquisition of a large bore-spiral pipe manufacturing operation.

Three companies had their funding approved for the manufacture of engineered medium-steel products, pressure vessels and gas cylinders. Total funding for the three amounted to R270 million and, as these are labour-intensive processes, the funding is expected to create some 1 397 job opportunities.

R550 million was funded in support of Bell Equipment to bolster their efforts to export to North American markets. Bell Equipment is a South African company with 60 years’ experience in the manufacture and distribution of materials-handling equipment. We have built a strong partnership with Bell over a number of years and are supporting their growth strategy.

Three transactions were approved for funding in the basic metals environment – R250 million and R600 million for platinum and copper respectively, and another for care and maintenance activities to preserve assets in the chrome mining sector.

The automotive and transport equipment industry was supported with funding approvals totaling R959 million, of which R145 million was approved for a new laser blanking line to promote the localisation of blanking services in the automotive sector. R195 million was approved for the manufacture of rolling stock and the localisation of train wheel forging in South Africa, with R74 million approved for new plant and equipment for the manufacture of components and the supply of services to the automotive industry, as part of the IDC’s import replacement strategy and to facilitate linkages to the government’s industrial infrastructure programme.

In further efforts to improve transport infrastructure, R170 million was approved for an innovative system to transport 100 000 tonnes of chrome ore per month via an aerial ropeway and bucket system. Previously, it was transported by road.

Advanced manufacturing also received a capital injection with funding approved for two aviation companies. The first received R50 million and will acquire the right to use intellectual property to set up a manufacturing plant locally, while the second, with R141 million, will be setting up a new plant to manufacture a South African-developed patrol aircraft.

Trading and operational conditions remained extremely challenging in the mining sector. Very low commodity prices and faltering growth in volume demand, particularly from China, continued to weigh heavily on the sector’s performance. However, the Rand’s weakness provided a degree of cushioning to local producers on the income side, while the expenditure side benefited from the impact of low oil prices on operating costs.

Following low productivity in 2014, signs of recovery were evident in 2015. Mining production rebounded as a result of strong recovery in terms of a 46% rise in the outputs of the platinum group metals (PGMs) segment. This translated in the overall mining output expanding by 3.3%. Manganese and chrome ore outputs also increased strongly. In contrast, there was a contraction in output volumes in a number of other mining sub-sectors, including iron ore, gold, coal, copper and other metallic minerals. Fixed investment contracted in real terms and the mining sector reported substantial job losses during the year. As a result, part of our efforts and focus for the 2016 financial year centred on assisting those clients in distress and developing solutions to alleviate their situations. Consequently, funding approvals for the year increased from R2.5 billion in 2015 to R2.7 billion in 2016, representing an 8.8% increase.

In line with the IDC strategy to support the thermal coal industry as an important component of South Africa’s energy industry, 62% of approvals for the mining sector went into the coal mining sub-sector. One of the large South African-based resources groups required restructuring of its existing facilities as well as additional funding of R1.5 billion to assist in increasing the current capacity of their three mines by 14.6 million tonnes per annum. An emerging mining company in Mpumalanga, with a plan to recover saleable coal from the Van Dijksdrif coal discard dump, received funding support of R215 million. The recovered coal will benefit, among others, Eskom and the City of Tshwane in alleviating coal supply constraints.

The remaining 6% approved in the mining sector, approximately R170 million, went towards the development of a new bulk tailing re-treatment plant to recover both metallurgical and chemical grade chrome ore concentrates from waste streams generated by platinum producers.

Disbursements to eight mining companies amounted to nearly R1.3 billion, with 67% of this value, R852 million, being disbursed for basic metal mining companies in manganese and chrome, R308 million for coal and R94 million for diamond mining.

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CHEMICALS AND PHARMACEUTICALS

The petroleum, chemicals, pharmaceuticals and downstream plastics industries contributed 3.2% to the South African economy in 2014 and employed just over 140 000 people in the final quarter of 2015. In this value chain, the IDC aims to improve the global competitiveness of the sectors, with basic chemicals industries playing an important role in the development of other downstream manufacturing industries. In downstream chemicals industries, the IDC’s focus is on the development of the pharmaceuticals and other consumer products sectors.

Of the R4.7 billion approved in these sectors, 85% was for the fertiliser sector to maintain and upgrade existing capacity at our subsidiary, Foskor.

The South African home and personal care industry accounts for an estimated 1.4% of manufacturing output and R3.4 billion in annual sales, employing about 31 000 people of whom 10 000 are directly employed in the manufacturing value chain. The opportunity for import replacement is significant as the industry is much larger, at an estimated R23 billion in retail sales, when calculated to include imported finished products. However, the local personal and home care contract manufacturing industry, which manufactures face wash, toothpaste, perfume and detergents, is facing difficulties. To that end, funding of R158 million for a key player in the value chain was approved to ensure adequate support and the development of the value chain.

A working capital facility of R16.1 million was approved for the expansion of an automotive lubricants manufacturing plant. South Africa is a net importer of lubricant finished goods and boosting local manufacture will ease reliance on imports.

An entity that supplies gas to hospitals received R71 million in support. We continued to implement our strategy of supporting the radio-pharmaceuticals industry, with R175 million approved towards the commercial production of Molybdenum-100 isotopes, and R40 million for an innovative technology in the production of “green” biocides, which kill infectious and harmful organisms such as bacteria, fungi, viruses and microbes.

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AGRO-PROCESSING AND AGRICULTURE

Agro-processing and agriculture remains one of the largest employers in the country with 1.3 million people employed in the formal and informal sectors, as at the end of 2015. IDC’s focus on agro-processing is designed to stimulate demand for primary agricultural products and, in doing so, develop rural areas and increase employment levels.

Having faced the worst drought in more than a century, the agricultural sector saw output declining by 8.4% in 2015, the largest annual fall in agricultural production since 1995. The impact of such adverse developments in this important sector of the economy was felt by numerous suppliers of goods and services, with downstream producers also affected, and the sugar cane, maize and wheat-producing segments the hardest hit. The severity of the drought took a particularly heavy toll on rural communities and the country’s poor due to cutbacks in farming employment coupled with surging food prices.

pandi img11The food and beverage sector’s manufacturing output declined by 1.5% year-on-year, primarily in the meat, fish, fruit, dairy and beverages sub-sectors. This is indicative of softening consumer demand in the face of rising food prices and reduced disposable income. This impacted on the IDC's activity in the industry and the Corporation approved 19 transactions totaling R614 million, including R250 million to the Land and Agricultural Development Bank of South Africa, towards drought relief. We provided a sugar mill in KwaZulu-Natal with support through funding of R14 million to its outgrowers to plant about 700 hectares of new and fallow sugar cane fields, thereby contributing to the sustainability of the mill. A R22 million drought facility was also approved for the mill.

Due to its labour-intensive nature, IDC aims to increase production in horticulture as a means of increasing jobs. We will achieve this through transactions such as the one supporting the expansion of soft citrus (mandarin) farming operations by 556 hectares, near Ashton in the Western Cape. We also supported citrus farming in the Northern Cape through a R22 million approval to an existing investment to enable it to maintain operational efficiencies.

In addition, we funded two entities involved in the cultivation of blueberries in Tzaneen, Limpopo and Stutterheim, Eastern Cape, and provided funding for the growing of pecan nuts in the Northern Cape. The establishment of manufacturing facilities for the supply of various processed cheese substitutes to food manufacturers, the food service industry and pizza companies was supported with R20 million in IDC funding. Other entities supported with funding relate to agro-processing, forestry and marine aquaculture.

INDUSTRIAL INFRASTRUCTURE

The IDC’s activities in the infrastructure sector are aimed at those projects that enable the Corporation’s priority value chains and new industries and also, more broadly, to unlock the country’s industrial development potential.

The 2016 financial year saw further investments supporting the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP), with three approvals for smaller 5MW Photovoltaic PV solar installations. Funding for these smaller installations totalled R178 million. The energy constraints faced by the country gave impetus to a multitude of solutions being explored to maintain operational efficiencies. Such solutions include funding of R257 million for a waste heat recovery plant in Kimberley to co-generate 6MW of electricity, set to replace 30% of the manufacturing plant’s energy requirements. A further R101 million was provided for the installation of a 1.8MW fuel cell at a platinum refinery, and R3 million apiece was apportioned for a 105kW combined heat power plant and an anaerobic digester to harvest methane gas from manure.

Continued support for larger-scale projects included the acquisition of shares whereby a broad-based black youth-owned company acquired a 10% stake, at R360 million, in a 100MW thermal concentrated solar plant.

Fuel storage facilities in the Eastern Cape were funded with R96.9 million and will enable, at capacity, the on-selling of 63 million litres of fuel per day, while a coal export terminal with an over-riding objective of unlocking opportunities for the export market to the junior coal mining sector received approval for R115 million.

The need to support infrastructure development in the rest of Africa resulted in R170 million being approved for a gas pressure reducing station in Chokwe, Mozambique, to bring a 40MW gas power plant online.

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HIGH IMPACT INDUSTRIES

The High Impact Industries sector encompasses manufacturing industries not covered in the priority value chains identified by the IDC. New Industries are those industries that are currently non-existent, or very small in South Africa, but have the potential to grow and employ significant numbers of people in the future. Here, we play a proactive role.

For industries falling under High Impact, which include Tourism, ICT, Clothing and Textiles, Media and Motion Pictures, and Heavy and Light Manufacturing of, for example, furniture, IDC’s approach is primarily to fund projects developed and packaged by entrepreneurs with little involvement in early-stage project development.

The focus for the clothing and textiles industries during the year under review was to continue supporting existing clients, provide funding to new applicants, and participate in industry-wide cluster activities and initiatives. Although there is an overall improvement in the industry, especially in terms of increased demand for locally manufactured products, the industry continues to face challenges. The weakening of the Rand adversely impacted manufacturers who rely on imported raw materials, mostly fabrics. On a positive note, the trend towards “fast fashion” means that retailers have a preference for locally manufactured goods over imported products, given the quicker turnaround times. Fashion conscious consumers that follow global trends want modern designs soon after they appear on international catwalks – not a season later. This has resulted in a shift in buying patterns with major retailers sourcing locally.

Approved funding of R554 million went to 31 companies during the 2016 financial year, with R365 million disbursed by year end. Almost half the approved value went into the weaving sub-sector and some to companies in the Cut, Make and Trim (CMT) environment. Pure CMT businesses received 33% of the total funding approved with the balance going into the footwear, spinning and dyeing sub-sectors.

The primary focus of our newly formed Heavy Manufacturing unit is the efficient processing of developmentally impactful transactions in response to applications for funding within the industrial sectors served. These include sawmilling and wood products, the manufacturing of pulp, paper and cardboard, rubber products, glass and glass products, ceramics, cement, concrete and other cement products, stone cutting and shaping, and the recycling of all non-metal goods.

Funding to the value of R545 million was provided to new and existing business partners during the year, with R413 million disbursed. Of this, R32 million went to a paper product manufacturer, and further expansionary funding was provided to a previously funded paper mill that exceeded expectations on both turnover and net profit. A further R127 million was disbursed to a tissue manufacturer that currently produces single-ply toilet paper from recycled material. The manufacturer required funding to diversify manufacturing capabilities with a two-ply range and a new converting plant which will convert both recycled and virgin paper to toilet paper. Two buy-outs to support black industrialists, a R141 million transaction in the paper and packaging sector and R150 million for a company manufacturing reinforced concrete railway sleepers, were approved.

Despite participation in the tourism sector being capital intensive, the sector has high job-creation impact and remains an important focus area for the IDC. The tough economic conditions have, however, forced the corporate market to reduce their travel budgets, and this has led to some establishments shedding jobs to ensure sustainability. Conversely, the depreciation of the Rand bodes well for the sector as it makes South Africa cheaper for foreign tourists and thus, an attractive destination.

The revision of SA immigration regulations has restored confidence in the stability of the sector, although a lack of transformation remains a key challenge. The Tourism Charter, which was promulgated in November 2015, requires black and women ownership of 30% and 15%, respectively. However, the high development costs for new establishments present a high barrier to entry, rendering it difficult for black entrepreneurs to enter the sector because of a lack of equity to invest in such projects. There are ongoing discussions with the National Department of Tourism (NDT) to explore ways in which financial assistance and support could be offered to qualifying entities.

Five transactions with a value of R222 million were approved to support the tourism industry, with 223 jobs created. A private game reserve experiencing capacity limitations in attempting to host larger conferences at their facilities received funding, with R17 million approved for an additional 24 rooms which are set to alleviate this constraint.

Expansionary funding to the value of R62 million for a hotel dating back to 1958 will be used to completely overhaul the rooms and conference facilities, allowing for the reconfiguration of 47 cottages into 55 rooms, as well as the addition of 35 new garden cottages. In supporting the need for local tourist attractions, we approved R1.3 million for the development of a toboggan track near Sabie, Mpumalanga.

The South African furniture industry is under threat from increased international competition as a result of lack of investment in upgrades of machinery and equipment, investment design skills and research and development. Given the labour intensity of the sector and job creation opportunities, the IDC is pursuing development of the industry, especially in light of the designation of certain furniture products for government procurement. Of the transactions approved, one was for a youth-owned business.

The IDC’s focus on ICT largely revolves around the manufacturing of radio, television and communication equipment, a key driver of localisation. The sector is largely driven by procurement from government for products such as smart meters, set-top boxes and tablets for e-learning. For these products, local manufacturing content is a requisite and this presents opportunities for emerging entrepreneurs to enter the sector. The bulk of raw materials used in the manufacturing processes are, however, imported which makes the sector susceptible to foreign exchange losses. On the ICT services side, the sector lends itself well to the participation of youth who have a predisposition towards coding and software development.

Approvals of R204 million went to existing 100% black-owned companies in ICT services. Of the three transactions that supported black industrialists, two of these are fully owned by women.

Still within light manufacturing, one transaction, in support of a black female industrialist, was approved for the jewellery sector. There has not been any uptake on the R1 billion Gold Loan Schemes approved in 2014 due mainly to the criteria of the schemes not being in line with the requirements of the manufacturers. Wholesale funding, to a refinery, for on-lending to manufacturers is being explored to enable access to funding.

In continuing our support to the local film industry, we disbursed R71 million, as a co-funder, for a number of features:

  • Four 15-minute short films aimed at the 2016 Cannes Directors’ Fortnight opening day, were combined into a feature-length film by our emerging South African directors
  • Various romantic comedies and a comedy drama feature film about a journey of self-discovery
  • A courtroom drama
  • A six-part television mini-series based on the life of President Nelson Mandela

To expand the capacity for South African content in the media sector, R181 million was approved for the development of a television studio in Johannesburg.

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REST OF AFRICA

For the year under review, new funding approvals for projects in the rest of Africa were much lower than in the previous year with gross approvals of R255 million (R70 million after cancellations). The approvals were directed at four projects – two in Mozambique and one each in Nigeria and Zambia, to support forestry development, power generation, ICT and the basic chemicals industries.

Disbursements into the rest of Africa amounted to R106 million, benefiting mining operations in the North Kivu province of the Democratic Republic of Congo. Our approach to funding projects in the rest of Africa changed in 2012. Where we fund projects in the region, we ensure the flow of benefits to South Africa. These include direct benefits such as exports from South Africa and other benefits such as the strengthening of regional value chains that will contribute to the development of South African industries. This approach, we believe will be more beneficial for both South African companies and host countries as it supports our industrial development objectives and furthers the regional integration agenda.

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