Hlahla: The state of the IDC in 2013

Monhla Hlahla (IDC 2012/13 Chairperson Statement)

 The IDC has taken the fi rst step in the journey towards integrated reporting. The issues deemed material through stakeholder engagement are articulated in this report and we also set out salient elements of our business strategy, both financial and non-financial. Beyond the traditional performance review, we share our medium- to long-term plans with our stakeholders.

The South African economy, like many others, continued to recover from the after-shocks of the global economic and financial crises during the course of calendar year 2011. However, its goods-producing sectors reported lower output growth as global demand conditions deteriorated gradually. The intensifying sovereign debt crisis and austerity measures in a number of countries on the Eurozone’s periphery, coupled with the natural disasters in Japan early in the year, had a profound impact on economic growth in major parts of the advanced world. Emerging and developing economies were adversely impacted by falling or subdued export demand, a situation often exacerbated by weakening domestic consumption. Consequently, the rate of increase in global export trade slowed sharply, commodity prices either moderated or declined and industrial production was severely constrained in the latter part of the year.

South Africa’s manufacturing sector saw its output growth more than halved as key sub-sectors found it increasingly challenging to maintain higher production activity. In

turn, the mining sector’s output was only marginally higher than in 2010, with industrial action in the platinum industry over the final quarter of the year having had a considerable impact on overall production.

Domestic fixed investment activity rebounded after two consecutive years of contraction although still falling short of pre-crisis levels. South Africa also managed to attract a substantial inflow of foreign direct investment. Business confidence remained relatively weak throughout calendar year 2011, experiencing a sharp decline in the second half of the year but recovering in the first quarter of 2012. The low levels of confidence prevailing among manufacturers were clearly reflective of difficult trading conditions in both local and export markets. On the labour front, some encouraging signs of improvement were visible during the year, although there is still hesitant demand for higher employment in many sectors of the economy.

Notwithstanding a challenging operating environment, the IDC recorded an unprecedented level of funding activity, having approved R13.5 billion in 293 transactions over the course of the financial year. A significantly larger entrepreneurial base was served, many of whom are new clients. Our proactive efforts in support of the economic recovery and the development of industrial capacity include the offer of special schemes, catalytic financial support for participants in the nascent renewable energy segment, increased project development and the continued provision of funding to companies in distress. These eff orts have come at a cost to investment performance as reflected by the steady increase in impairment ratios. This underlines the importance of our solid due diligence and risk management practices so as to ensure the financial viability of investments and the long-term sustainability of the IDC.

Financial year 2012 was the first year we implemented our Leadership in Industrial Development strategy. This required an alignment of our operational activities with

the priority sectors and respective objectives as set out in Government’s New Growth Path (NGP) and Industrial Policy Action Plan (IPAP). We reviewed and restructured our funding divisions and established a business unit dedicated to the development of green industries.

The IDC has earmarked R25 billion over five years towards the development of green industries in South Africa, demonstrating our resolve to contribute catalytically

to our economy’s transition to a greener growth path.

The Green Industries SBU has already made significant investments in one year of existence.

We concluded the process of merging Khula, the South African Micro Finance Apex Fund (SAMAF) and the IDC’s small business funding into a single unit. As a result, in

April 2012 we launched sefa, a wholly-owned subsidiary of the IDC focused on the financing of survivalist, small, micro- and medium-sized enterprises.

The important role of the State in economic development is being increasingly recognised. Considering the societal risks of allowing unregulated market forces to guide a country’s economic trajectory, industrial policy is re-emerging as a key policy tool both in developing and developed economies. The IDC’s continued existence and impact over more than 70 years is, in itself, a manifestation of State intervention and a sustained recognition of its relevance. The Corporation continued to shape and influence national policy during the year by providing advisory and research support specifically oriented towards securing an enabling environment for industrial development and funding, as well as identifying factors impeding industry development.

Backed by our research skills and the expertise accumulated over the years in numerous industries, we have been developing and implementing, in collaboration with other stakeholders, specific development strategies in priority sectors to which IDC provides funding. In addition to the abovementioned emphasis on green industries, further examples include: expanding the fabricated metals, capital and transport equipment industries on the back of the capital expenditure programmes of State-owned companies and other public sector entities; the development of the antiretroviral (ARV) pharmaceuticals industry; the expansion of the motor vehicles and components industry; and value addition in the agricultural and mineral value chains. Some of these sector development strategies transcend national borders so as to leverage our continent’s enviable natural and human resource base and maximise the benefits associated with regional integration.

Adverse global developments, particularly the sovereign debt and banking sector crises in several industrialised economies, are constraining public sector spending and leading to a renewed liquidity squeeze in many countries, whilst impacting negatively on consumer and business sentiment. A more moderate pace of growth is expected in the United States, unless a further quantitative stimulus is forthcoming, while the anticipated slowdown in the Chinese economy is starting to materialise. Both international investment and trading activity are being detrimentally affected in the process, with the outlook for economic growth and employment creation deteriorating in many parts of the world.

Downside risks thus abound for the domestic economy. Signs of weakness are already emerging and rather modest growth is anticipated for calendar year 2012. Strong counter-cyclical action is therefore warranted.

The revised IPAP for the period 2012/13 to 2014/15 scales up interventions to retain, grow and diversify South Africa’s industrial base. The wide range of complementary and integrated measures should assist the IDC in fulfilling its mandate. These include further industry designations for local procurement; the Manufacturing Competitiveness

Enhancement Programme, which will complement and leverage off the industrial financing packages made available by IDC; the impetus provided by Special Economic Zones to the clustering and competitiveness enhancement of value-adding and labour-absorbing

manufacturing operations; and, from the broader regional perspective, a range of programmes that will assist us in promoting economic development and integration in southern Africa and further afield.

The massive infrastructure investment programme being rolled out by South Africa’s public sector will improve the competitiveness of local industry through enhanced service provision and cost effectiveness. It will also unlock the economic potential of several regions, some of which have a wealth of resources, and create numerous opportunities for localisation. The IDC is contributing considerably to the work of the Presidential Infrastructure Co-ordinating Commission (PICC) as well as to the development of the respective Strategic Integrated Projects (SIPs).

South Africa is also building strong ties with a grouping of dynamic, rapidly growing and populous emerging economies that are flexing their muscles and altering the balance of economic power globally. The IDC has been engaging constructively with key stakeholders within the BRICS, aiming to develop strong partnerships on the financing, investment and technological fronts. Closer to home, the IDC is actively pursuing its Africa-wide mandate, contributing to the development of competitive value chains, the regional integration drive, and expanding markets for local goods and services.

The IDC has been gearing itself to amplify its effectiveness as a contributor to industrial capacity development with the creation of sustainable employment opportunities as a critical outcome. We have already substantially increased the range and levels of our funding and investment activities in financial year 2012. The road ahead may be fraught with challenges and threats, but our human capital wealth, solid financial position and undeniable resolve will make an increasingly visible mark on our country’s and continent’s sustainable development trajectories.

Acknowledgements

The achievements of the past year would not have materialised without the commitment and eff orts of the IDC management and staff, who are shaping the Corporation into an indispensable agent for industrial capacity development in South Africa and the continent at large. I express my gratitude for their vital contributions, congratulating the Chief Executive Officer and his executive team for their leadership and for living up to the significant challenges faced during the year in a most

effective manner.

The strategic stewardship provided by the IDC Board has been invaluable and for this I thank my fellow directors.

During the year, we welcomed Ms Buthelezi, Mr Copelyn, Mr Dames, Mr Godsell, Ms Mabuza, Ms Rensburg and Mr Vavi as new members of the Board. Their wisdom and insights have already strengthened the collective depth and breadth of our Board. We also bid farewell to

Mr Barton, Mr Moloko, Mr Mtshali, Mr Nika, Mr Nkuhlu and Ms Nokwe, who diligently served the Board for several years and contributed to making the IDC the remarkable institution that it is.

Our utmost appreciation is extended to Minister Ebrahim Patel for his invaluable guidance, confi dence in and high regard for IDC as a key contributor to placing South Africa on a New Growth Path, and to Minister Rob Davies for making the Corporation a true partner of his department in the implementation of the Industrial Policy Action Plan.

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