Financing project development in Africa

Day Month Year

1 September 2010

Lumkile Mondi

Chief Economist

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The IDC: actively supporting business/industries in Africa

IDC’s primary goal in the rest of the continent is to assist with industrialisation:

Leverage private sector investment for economic development throughout the continent

Play a major role in the development of industrial capacity Strengthen South Africa’s constructive role in regional economic

development Leverage foreign direct investment by bringing in foreign partners using

international networks Transfer experience and expertise to African DFIs Promote supply of goods & services from SA Establish credit lines for financially sustainable regionally-oriented

financial intermediaries Support NEPAD and regional spatial development initiatives (SDIs)

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Interventions aimed at the rest of the continent

IDC has been active in the rest of the continent since 1998 and has developed several interventions aimed at supporting development on the rest of the continent:•Project development•Project finance•Export finance•Wholesale funding to DFIs in the region•Capacity building to DFIs in the region

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• Co-sponsors feasibility studies

• Identifies project opportunities

• Provides and arranges funding

• Identifies suitable international and local DFIs, commercial and merchant banks and companies and export credit agencies as potential participants

• IDC acts as a financial adviser in partnership with other financial institutions

• Shares project risk with the sponsors and financial partners

• Identifies strong operating partners

• Off-take and supply agreements

• Assists with the early negotiations of project agreements to improve and ensure their bankability and shorten the funding schedule

• Structures appropriate limited recourse funding packages by allocating project risk to the appropriate stakeholders

• Assists with implementation via steering committee

• Serves on board of directors

• IDC does not seek shareholding control or management participation

IDC’s Role in Project Development and Project Finance

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• IDC provides funding to greenfield projects, expansions & rehabilitations

• Participate in early stage funding• Requirements for IDC participation in terms of project

funding:• SACU: Project size of R5 million• SADC: Project size of US$3 million• Rest of Africa: Project size of US$10 million

• Minimum export requirement for export finance is the US dollar equivalent of R10 million

• Projects need to demonstrate profitability & sustainability within a reasonable time frame

• The developmental impact (jobs, value addition, exports) is considered

• IDC finances fixed assets and the fixed portion of growth in working capital requirements

• Reasonable financial contribution from owners are expected

• Project has to comply with environmental standards and regulations

Funding Criteria and Financial Instruments

– Equity– Quasi-equity– Commercial debt – Guarantees– Export finance

Range of Financial Instruments Available

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Examples – Project funding

• Mozal Aluminium Smelter– 506 000 tons per annum aluminium smelter located 17 kilometers Maputo;– IDC has 24% shareholding with BHP Billiton , Mitsubishi Corporation and the Government

of Mozambique holding the remaining shares;– Mozal 1, the US$1.34 billion development which was launched in 1998, was the biggest

single project investment ever made in Mozambique;– The Mozal 2 expansion project was approved in June 2001 and expanded the output of

the smelter from 253 000 to 506 000 tpa of primary ingots.

• Cassava Starch Project– The R151 million project in Swaziland comprises the following components: Cassava

cultivation on 1 718 ha of owned and leased land; processing of ca 78 000 tons of cassava roots into ca 22 000 tons of food grade starch; and export of starch to South Africa;

– The development created a new industry in the region, as cassava has not been grown commercially in SADC. The export to South Africa is effectively an import replacement due to the SADC FTA replacing imports from Thailand and Vietnam;

– IDC funding was in the form of preference shareholding and senior debt totalling R44 million.

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Assistance to other DFIs in the region

IDC assists other DFIs in the rest of the continent in addressing capacity constraints:•Providing lines of credit for on lending to smaller enterprises:

– Lack of access to funding remains a major constraint to small and medium enterprises on the rest of the continent;

– Regional DFIs typically also face challenges in accessing capital;– IDC provides funding to these regional DFIs to assist the in fulfilling their mandates and at the

same time addressing SME development on the rest of the continent.

•Capacity building and training:– IDC has been in operation for close to 70 years and has build up a wealth of experience and

skills in the development finance arena;– IDC shares this experience with other DFIs through training focussing on specific topics or

other interventions such as secondments to assist in building capacity at these DFIs.

•Through these interventions IDC strives to assist other DFI’s and related organisations to become financially sustainable, able to raise funds to finance SME’s in their countries and to enhance their capacity to deliver on their respective development mandates.

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Examples – Assistance to other DFIs

• Lines of credit for on lending to smaller enterprises:– IDC approved a R100 million credit line to the Swazi Development and Savings Bank in

January 2008. The funds had been fully disbursed by July 2009. An additional R150 million was approved for disbursement in July 2009.

– The funds are used to provide funding for projects that demonstrate strong qualities of viability and credit worthiness; contribute to job creation; and result in entrepreneurial development, wealth creation and poverty reduction.

• Capacity building and training:– Hosting the COO of the Development Bank of Namibia (DBN) at IDC to learn of IDC’s

operations and seconding an IDC employee to the DBN.– Facilitating sessions at the Infrastructure Development Bank of Zimbabwe (IDBZ)

regarding strategy development.

IDC involvement in the ROA: Footprint as at 31 March 2010

MOZAMBIQUE• Mining• Hotels and

Accommodation• Manufacturing (Textiles)• Agro-processing• Wood processing• Energy• Ind. Infrastructure• Transport infra.• Storage and warehousing

NIGERIA• Telecoms

GHANA• Hotels &

Accommodation

• ICT

TOGO• Financial services•Transport and Storage

NAMIBIA• Agric. / agro-processing• Mining•Manufacturing

BOTSWANA• Hotel &

Accommodation• Manufacturing

MALAWI• Food and

Agriculture• Retail

infrastructure.• Franchising

(Tool Hire)

SUDAN• Infrastructure (Water)

KENYA• Sugar

UGANDA• Hotels &

Accommodation

TANZANIA• Manufacturing• Sugar

MAURITIUS• Air transport

ZAMBIA• Storage and

warehousing• Mining• Healthcare• Financial

services

SWAZILAND• Basic chemicals• Agro-processing• Financial services

D.R. CONGO• Energy• Mining• ICT

LESOTHO• Telecoms• Infrastructure

ERITREA• Mining

ANGOLA• Energy

ETHIOPIA• Agro-

processing

MALI• Wood products

SENEGAL• Building Construction

ZIMBABWE• Hotels and

accommodation

Total Portfolio Size (incl. undrawn

commitments): R15.6 billion

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The future: A regionally integrated approach to economic development

• South Africa faces clear national limitations in achieving required rates of growth to suitably address its own socio-economic challenges:

– Demand constraints (e.g. limited domestic market size and income levels);– Supply constraints (e.g. cost-effective access to certain resource inputs, demand-driven economies of scale).

• Various models for south-south cooperation have been proposed or are being pursued, but most of these focus on Brazil, India and China.

• An integrated solution to economic development incorporating our neighbouring countries could be more easily achievable and complement cooperation with other southern countries.

IDC will embark on a more integrated approach to regional

development which could include multi-country projects aimed at

taking advantage of individual countries’ strengths while

integrating regional value chains and improving the

competitiveness of the continent as a whole

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• Mineral extraction• Mineral beneficiation (e.g. – Diamond cutting & polishing

– Jewellery design– Jewellery manufacture

Textiles•Cotton farming

•Spinning•Manufacturing

•Design

Tourism• Hotels

• Food and Bev• Catering• Laundry• Curios

Petrochemicals•Oil

•Paints•Plastics

•Industrial textiles•Chemicals

Food (all countries)•Agricultural inputs•Farmers/Producers

•Processing•Distribution•Wholesalers

•Retailers•Consumers

Examples of potential for an integrated value chain approach

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Concluding Remarks

• IDC’s initiatives aimed at development of the rest of the continent focuses on:– Project development and finance– Assisting regional DFIs in achieving their goals

• IDC has several financial products available for investments in the rest of the continent;• In the future, the IDC will follow a more holistic approach to projects in the rest of Africa aimed at

integrating value chains and enhancing the benefit to the region as a whole.

Day Month Year

The Industrial Development Corporation19 Fredman Drive, SandownPO Box 784055, Sandton, 2146South AfricaTelephone (011) 269 3000Facsimile (011) 269 2116E-mail callcentre@idc.co.za

Thank You