Industrial Development Corporation (IDC) Annual Report 2008/9

Meeting report

Briefing by the IDC on the Annual Report
Mr Geoffrey Qhena, CEO of the IDC, was invited to address the Committee but, with the approval of all concerned Mr Nimrod Zalk, Deputy Director General: Industrial Development, then explained that the DTI had ultimate oversight over the IDC and he wished to place on record, and set in context, that the current economic climate period, which was extremely challenging, perhaps on a par with what historians term the Great Depression of 1929 had created challenges in retaining employment, or reducing unemployment. He added that statistically there were indications of “green shoots” in economic activity but he cautioned that these might be premature, or still fall prey to the icier winds of a yet colder economic climate. He conceded that it was extremely difficult, in the midst of the events, to produce any satisfactory prognostic conclusions. Suffice to say that those engaged in economic activity faced challenges. There had been policy statements from the very utmost political levels and both the DTI and the IDC were attempting to work in line with such Policy statements but it must also be remembered that the IDC had a mandate to operate in a responsible manner and not be a charity, but also, taking into account the broader considerations to operate responsibly both to the mandate of the IDC and the requirements of policy.

Mr Geoffrey Qhena, CEO of the IDC, proceeded with an oral synopsis of his report about the activities of the IDC for the year 2008/09. He explained to the Committee that the IDC had embarked upon a publicity campaign, which he suggested might be termed, “Getting to Know the IDC” and that he would be showing two clips form the current IDC advertisement on the SABC television services. He further reminded the members that the IDC’s role was to support sustainable economic growth and development by way of identifying and funding projects through partnerships, focussing and promoting and investing in viable new industries. The IDC differentiated itself from other financiers through risk taking and flexibility in structuring and that the IDC’s industry development role took into account the specific needs of the country such as employment, development of rural areas, beneficiation, stimulation of exports etc. Further, the IDC’s objectives were support of industrial capacity development and the promotion of entrepreneurship with the objective of achieving the following outcomes: creating sustainable employment opportunities; increasing sectoral diversity in the economy, achieving more equitable regional economic activity within the country; assisting small and medium enterprises, and new entrepreneurs entering the economy; ensuring broad based black economic empowerment; contributing to the industrialization of the rest of Africa and promoting environmentally sustainable growth; all while ensuring that the IDC remained financially sustainable. In the creating of sustainable employment opportunities the biggest challenge was the high levels of unemployment and resulting poverty. However, funding during the financial year 2009 expected facilitation of the creation of 24 200 direct new jobs and the saving of 2 500 jobs. The IDC expected to create 5000 new jobs in rest of Africa. Such lower levels of job creation were indicative of tougher economic conditions experienced throughout the world.

With regard to more equitable regional economic activity, Mr Qhena illustrated by way of example:
▪ Eastern Cape: support for an additional 8 emerging citrus and pomegranate farmers in the Kat River valley, (R28 million) funding for a textile company specializing in specialty plastic coated textiles (R29 million) the construction for a black owned 5 star hotel in Port Elizabeth (R157 million), the expansion of a an East London based manufacturer of flat based television screens (R64 million) a Kob (Kabeljou) programme in the East London Industrial Development Zone (IDZ) and pioneering the hatchery / spawning technology and land based recirculation systems for the sustainable production of indigenous marine finfish (R20 million).
▪ Free State; wholesale funding of emerging farmers (R3 million); a manufacturer of concrete products in Botshabelo (R1.3 million); additional funding for nut farms and assisting a black entrepreneur to acquire a petrol station in Kroonstad (R2.4 million).
▪ Gauteng: expansion for a successful washing powder competitor with the multi nationals through out Africa, funding an emerging construction company assisting with stadium upgrades for the 2010 Soccer World Cup Competition (R20 million) and also several other construction companies completing contracts for the government, manufacture of plastic products (R6.5 million), an enterprise that produces zircon sand and beneficiates it into specialty chemicals with applications in high value added products (R40 million) and the local aerospace cluster through support for one of the leading partners in the industry (20 million).
▪ Kwa Zulu Natal: working capital for a manufacturer and exporter of earth moving equipment, a bio-ethanol based cooking gel in Pinetown (R1.4 million) support for the manufacturer of date juices (R17 million); a project in rural Winterton for Kenal fibre in the construction industry (15 million) and further funding for a raspberry project in Charlestown (R11 million).
▪ Limpopo: establishment of a private hospital for the rural community at Lebowakgomo (R35 million), a black empowerment in the Atchar industry (R23 million) platinum mining near Lebowakgomo (R142 million), a cultural tourism lodge in Modjadjiskloof (R3.5 million 0 and a guest house in Polokwane (R4 million).
▪ Mpumalanga: brick making near Malelane (R3 million) construction company building houses (R2 million), plastic product manufacturer Nelspruit (R11 million) processing vegetable oils Delmas (R47 million), black entrepreneurs entering the macadamia and pecan nut industry (R3.3 million) support for a platinum mine (R136 million) manufacture of wood pellets for electricity generation (R10 million).
▪ North West: a berry project close to Hartebeestpoort (R10 million), support for emerging farmers near Brits (R100 million) support for a groundnut processing plant (R7 million), a game lodge near Bakubung Dam (R33 million).
▪ Northern Cape: two parties exploring for further iron ore mines (R266 million) mining and oppressing manganese (260 million).
▪ Western Cape: a berry project close to George (R14 million) franchised supermarkets in townships (R 104 million), a manufacturer of household textiles (R29 million) saving 500 jobs, domestic boat building Atlantis (R48 million) the fishing industry Hawston (R3 million) manufacturer of veneer products in Brackenfell (R10 million). In addition there were 44 approvals in rural areas value R1.1 billion and 27 approvals in townships encompassing franchised retailers, construction companies, concrete products. Sectoral diversity, a 100 % black female owned company refurbishing metro rail commuter carriages, (R6 million), 204 permanent jobs in Touws River, funding a distressed company involved in high pressure and gravity die casting of zinc and aluminum automobile components, Neotel’s fibre optic cable project, Scania financial services jointly providing funding to bus operators, assistance to a film animation studio (R7 million) and a full length animated film (R17 million).

▪ Assisting with Venture Capital (early stage): composite industrial fans, improved aerodynamic efficiency, improved wear characteristics and power efficiency, with reduced weight, maintenance and noise levels (R7 million), portable wound management system (R2.5 million), disposable nerve stimulator (R11 million) technology preserving cut roses extending vase life for up to 12 months, robotic gaming platform (R17 million) 270 MW waste coal fired independent power project, a Coal to Liquids plant, new technology to use gypsum for building panels for a variety of uses, advanced batteries for use in electric motor cars, sisal industry development initiative as fibre and mucilage for production of bio gas and ethanol, new technology to produce titanium powder and a national pre clinical drug trial facility.

▪ Assisting small and medium enterprises: 160 SMEs funded in financial year 2009 and Transformation and Entrepreneurship Scheme women entrepreneurs R400 million) people with disability (50 million) equity contribution fund (R150 million) Equity contribution fund (R150 million) Development Fund (R250 million) Community Fund (R150, million) while business supports received R8.9 million and several other wholesale facilities to enable IDC to reach very small enterprises in franchising, agriculture, transport, and micro enterprises.

▪ Assisting Broad Based Black Economic Empowerment: R5.8 billion was approved for 127 companies, which represents 55% of the total number and value of funding approvals, a focus on BBBEE to include communities and employees and a major transaction to introduce black shareholding to FOSKOR.

▪ Assisting the rest of Africa: R6.4 billion approved to develop industry in the rest of Africa such as cassava cultivation and starch processing in Swaziland, (R41 million); a chipboard facility in Mali using rice straw as the basic ingredient (R100 million), a plastic pipe manufacturer in Botswana (R166 million) and positioning of a telecommunications satellite to improve the quality of telecommunication services on the continent (R783 million).

▪ Promoting sustainable growth: a project to capture methane gas at one of the largest pig farms in the country (Mpumalanga) with the use of carbon credits as an income stream (R5 million); a photovoltaic polysilicon module assembly plant in Cape Town assembling solar panels for the export market (R35 million); a plug in battery electric vehicle (R30 million), a 10 000 hectare sugar cane estate with a processing plant that would produce 150 million kl of bio ethanol; 100 MW concentrated solar energy projects as a pilot for the roll out of similar plants in the country; a wind farm, initial phase 50mw subsequent to be 300mw peak electrical energy.

Mr Qhena submitted that the balance sheet of the IDC, which showed a 105% increase in revenue and an increase in the gross profit of 130%, was in a healthy state especially as the debt equity ratio remained 8% and this was against the approval of R485 million for distressed companies which was expected to save 5 400 jobs. He asked members to bear in mind that 13 funding applications had been rejected because there were no indications that the companies concerned could be sustainable in the long term. At the same time Mr Qhena reported that there had been an increased demand for funding from the IDC but many of such applicants had little understanding of the mandate of the IDC. By way of illustration in the year under review there had been 231 applications for funding, which was statistically a 39% increase and the increase in applications for funding in the non South Africa part of Africa had increased by 38% and approval given to an amount in Rand terms to R.9 billion. The recession had led to funding of about R500 million for distressed companies being approved whereby 2 500 jobs had been saved. R6.1 billion had been earmarked for funding distressed companies over the next 2 years.

Mr Qhena said that the estimation was that IDC funding would facilitate the creation of 24 200 new direct jobs in South Africa and 5 000 in the rest of Africa. Broken down this reflected as R1 billion for transformation and entrepreneurial schemes, R250 million for the textiles, clothing, leather and footwear competitiveness scheme, R100 million for a Pro-Forestry scheme and R200 million for the Pro Orchards 11 scheme. In short the total of business support grants approved increased by 270% to R8.9 million and the regional split thereof reflected: Eastern Cape, aluminum, pharmaceuticals and mariculture; Free State, game lodges, apples and cherries; Gauteng, telecommunications, financial services and construction; Kwa Zulu Natal, aluminum, textiles and wood products; Limpopo Phosphates, platinum mining and hospital; Mpumalanga forestry, tourism and coal mining; North West, ferrochrome, berries and bricks; Northern Cape, iron ore, table grapes and goats; Western Cape, steel processing, tourism and boat building and Rest of Africa, aluminium, satellite infrastructure, pipe manufacturing, financial services and tourism.

Mr Qhena continued that the outline estimated for 2009/10 would be the creation of 26 000 jobs and 13 000 jobs saved through funding to distressed companies; R11.4 billion budgeted for overall investment approvals and R1.5 billion budgeted for investment in the rest of Africa.

Discussion
Mr F Adams (ANC) referred to the recent statement by the Auditor-General on the unsatisfactory state of government departmental spending and auditing. He sought an assurance from the IDC CEO that the IDC was complying with all legislative requirements, both in keeping track of the spending and the purity of the contracts entered into and that the IDC remained on the right side of the law as espoused by the Auditor-General. He commented that the major examples of the use of the loan money was very persuasive.

Ms M Dikgale (ANC) said that in her constituency there were buildings which were standing derelict or not utilised to the full and asked if the IDC could not embark on activity in such buildings. She suggested that the Nelspruit plastics project could be transferred to her constituency in Limpopo.

The Chairperson stated that property was not an issue.

Mr J Nyambi (ANC) stated that he welcomed the presentation, which he conceded had provided him with a better understanding of the role and purpose of the IDC. With regard to the Nelspruit project, he wondered whether the people involved with it actually came form Nelspruit or were migrants, irrespective of internal migrant or aliens. He asked if the IDC could clarify the origins of the people involved in, and benefiting from, the Nelspruit project. Further, with regard to publicity of the IDC, he pointed out that Coca Cola embarked on a lot of unmistakable advertising and in his constituency had boards placed at taxi ranks and other places where people were known to congregate and he wondered if the IDC could not employ similar advertising campaigns. He asked if those serving on the internal Audit Committee within the IDC did not have a conflict of interest. For him internal auditors and Internal Audit Committees were a very serious problem and he wondered why the AG did not simply do the whole job. Finally he urged the IDC to assist the people.

The Chairperson expressed concern that more was not being done to assist companies in distress and he wondered why. With regard to job creation, he asked why the IDC report seemed concerned with companies and not people and jobs. He added that in his constituency, the City of Umhlathuze, there was a huge gypsum waste deposit site and he wondered why the gypsum project had not started there where there was a waste site.

In reply Mr Qhena explained that representations had been made from the province concerned about using gypsum in the building of houses and factories and that the IDC had acted in response to such ideas. He explained that the IDC was a reactive institution and if the communities, or someone in the community, saw an opportunity and approached the IDC with a complete business plan and a request for funding, the IDC then considered such idea and business plan and might approve funding, on commercial conditions or semi commercial conditions. In this instance the gypsum proposal had been received, considered, compared with similar projects in Australia and Brazil, and since it seemed viable, funding had been approved. It was not the mandate or function of the IDC to go out proactively seeking commercial opportunities.

The Chairman queried this explanation because the gypsum dump he referred to was right next to Foskor, which was already, an IDC project.

In reply Mr Qhena submitted that a project needed to be identified, by someone not in the IDC, and the proposal submitted to the IDC for evaluation and then a decision could be made.

With regard to auditing Mr Qhena explained that the IDC had an internal audit department constantly at work, because by the very nature of its operations, it had long been recognized that the IDC was open to fraudulent activities, either from its own staff, or from those submitting proposals or those who had had proposals approved. He stated that fraud, like all other crime, was a fact of life and precaution must be taken against falling prey to it. Thus, the IDC had an internal audit department, with rigorously imposed procedures to detect fraud, and other crime, for the criminal was very ingenious, seeing opportunities which the law abiding do not see as threats.

He stated that, without wishing to disclose the details, such procedures had detected fraud, and other crimes, which had led to the conviction and dismissal of IDC staff and applicants for and holders of IDC funding being prosecuted after having funding by the IDC withdrawn. In addition to the internal audit department, in compliance with the requirements of good corporate governance the IDC had an (independent) Audit Committee supervising the Board of Directors and the IDC. Then, in addition, the IDC employed two independent professional firms of auditors who audited the IDC regularly, quarterly and then the IDC acted appropriately on whatever recommendations and suggestions for improving the system of controls the independent auditors recommended.

The Auditor-General worked in conjunction with the external independent auditors supervising their work. If the Auditor-General was concerned about whatever the external independent auditors had discovered or raised concerns about, then this might require deeper work by the staff of the Auditor-General. He assured the Members that accounting was not a dead subject but dynamic and constantly changing, hopefully for the better, and improved the financial disclosure and standing of the audited entity. He was pleased to be able to state that the IDC had received no adverse comment from the Auditor-General for several years and he intended to continue in this vein.

However, he noted that either the internal auditors, the independent external auditors or the Auditor-General had expressed concerns about various aspects of the management of the IDC. He stated that such concerns were attended to, but the very nature of GAAP gave rise to interpretation or differing opinions, and in his understanding would always do so. However, he assured the Committee that criminality especially fraud, was always regarded by the IDC as an ever present threat and the requisite steps taken to guard against it, even although criminal were very ingenious and always devising new schemes of criminality. He suggested that the values of the IDC as set out in the Code of Conduct were opposed to criminality and that in addition the IDC encouraged “whistle blowers” among the staff of the IDC or the staff of applicants or recipients.

Turning to publicity and the role of the IDC he stated that this had, and was changing and the intention was to get closer to the ground problems and be more proactive. Then, referring back to auditing he stated that the audits and the activity of the IDC were both to be within the constraints of the provisions of the Public Finance Management Act with which the IDC complied.

At this point, Mr Shakeel Meer, Divisional Executive: Industrial Sectors, IDC, explained that the IDC had devoted a great deal of time and attention to Tourism, especially in light of the forthcoming 2010 tournament but already the IDC was looking beyond 2010 for future opportunities to exploit.

Mr Christo van Zyl, Strategist: IDC, explained that although the government’s object was 500 000 jobs by the end of 2009, the mandate of the IDC was ‘sustainable’ jobs, not those of the Expanded Public Works Department category. So although the IDC was referring to 24 000 jobs, this was because there was always a time lag, especially if such jobs were agricultural. One created jobs and these in turn, or down stream, created other jobs. The IDC was aware of the Presidential requirement but the jobs created had to be sustainable on commercial lines.

Mr Qhena, the CEO, concurred with these views and explanations.

The Chairperson turned his attention to the question of the accessibility of the IDC. He explained that in his constituency, persons wishing to deal with the IDC had been telephoned and asked to present themselves for a meeting. They had travelled 75 kilometres by taxi, which was expensive in time and money, and then at the expected meeting an official had stated that he was pleased that the aspirant had attended and wished to confirm a meeting in the future. He said that the officials of the IDC had no imagination about their dealings with the public. In the incident described the official could merely have phoned and advised of the date and time of the meeting and the requirements and the aspirant would have had one journey. He then referred to the tea company, an IDC project in Nkandla, which despite seeming viability had been left by the IDC to waste away. He wondered why the IDC had not visited this tea project to ensure its viability as it had at one time exported tea.

Mr Qhena explained that in the past the IDC had operated from Pretoria but that the new approach was to have, not only delegated offices in the provinces, but satellite offices as well, and making arrangements with the municipalities to be service points. He was of the opinion that such an extension of facilities would obviate the description made by the Chairperson. He accepted that the Chairperson’s example had revealed time wasting, but on the other side of the coin, arrangements for meetings were made and the IDC staff travelled to the expected meeting and then the applicants did not arrive or arrived without all the necessary documentation. He submitted that human error meant that the IDC and those wishing to utilize its services both had a lot to learn. He added that after approval or cancellation of a project the trade unions made an appearance with demands. He explained that there was a misconception - the IDC does not contract or negotiate with the unions but with the utiliser of the IDC’s services, who then as employer negotiated with the unions. The IDC was neither in favour of or “bashing” unions but its mandate did not envisage negotiations with unions.

Mr J Nyambi asked that pamphlets be prepared in all official languages, and distributed in order to carry the message of the IDC and its services to the rural communities. Additionally referring to the funds earmarked for women and persons with disabilities, he wondered if these were sufficient for the purpose.

Mr Adams asked how the IDC slotted in to the Minister of Economic Development’s plans as set out in the Green Paper. He asked for an explanation of the role of the IDC. Addressing the assistance given to companies in distress, he pointed out that in his constituency there were many persons who formerly had had jobs with the clothing companies such as Rex Trueform, Monatic etc who had been persuaded to take packages on the understanding, if not promises, that with those packages they would purchase the necessary machinery to open their own Cut Make and Trim (CMT) operations. Now these people found that those very companies which had given the understanding that they would source from the CMTs operated by their former employees were not doing so. The former employees were totally unemployed, with nowhere to turn to for assistance for they had no recourse upon the UIF and often had loans to meet for the machinery now standing idle. He asked if the IDC could not step in and assist these people from the money set aside for company recovery.

Mr Qhena stated that although the IDC was active in the clothing industry it was not a charity and had a mandated obligation to assist sustainable operations and these CMTs did not seem to be sustainable, as they had neither the management skills nor the training to operate successfully. He added that the bursary schemes operated by the IDC were doing a lot to alleviate the situation.

Mr Meer stated that although the IDC operated in the range where the commercial banks did not operate it nevertheless had a responsibility to be commercially astute and not throw good money after bad schemes.

Mr Zalk confirmed this and said that the DTI was working in conjunction with other role players, especially SARS to ensure that there was compliance with South African laws and that illegal and under the counter imports do not exacerbate the financial downturn and the position of the CMTs

Mr Adams repeated his request for an explanation of the role of the IDC in the Economic development scenario and asked for it to be spelt out.

Both Mr Zalk and Mr Qhena assured the members that the IDC was talking and co-operating with a range of other departments.

The Chairperson then asked if the gap between incomes and opportunities was closing or widening for he was concerned about the law of unintended consequences prevailing. As an example of the inconvenience to the rural communities, in his constituency there was no hospital closer to Melmoth, which was a large town, than Ngwelezane. When emergency medical treatment was required, frequently the patient was dead by the time he or she was conveyed from Nkandla through Melmoth to Ngwelezane. Persons requiring less urgent treatment had to travel by taxi from Nkandla to Ngwelezane which was not direct and almost 200 kilometres one way. Then there was the time spent at the hospital waiting attention and all the incidental costs associated with the travel, and yet the IDC claimed to have built a hospital in its report. If there, why not elsewhere?

Mr Qhena stated that the IDC had not built the hospital referred to, but merely provided the funding for a hospital, which private entrepreneurs had ascertained, was needed and in conjunction with the IDC had been determined to be viable.

Adoption of Committee Programme
The Committee adopted it programme until the end of November 2009.

The meeting was adjourned.