learning from a successful dfi model: the case of...

Learning from a Successful DFI Model: The case of IDC of South Africa

Lumkile Mondi – Chief Economist

2

Content …

• Introducing IDC

• Corporate Governance

• Funding model

• Pre and post investment process

• Concluding remarks

3

Introducing IDC Introduction …

• IDC was established in 1940 with the aim of developing South African

industry through the Industrial Development Corporation Act (No. 22 of

1940);

• The vision of the IDC is to be the primary source of commercially

sustainable industrial development and innovation to the benefit of

South Africa and the rest of the African continent;

• The IDC is a self-financing national development finance institution

whose primary objectives are to contribute to the generation of balanced,

sustainable economic growth in Africa and to the economic

empowerment of the South African population, thereby promoting the

economic prosperity of all citizens.

• The IDC achieves this by promoting entrepreneurship through the

building of competitive industries and enterprises based on sound

business principles.

• Pays income tax at corporate rates and dividends to the shareholder.

4

Growing sectoral diversity

Introducing IDC (cont.)

IDC’s Vision, Mission, objectives and outcomes …

Vis

ion

M

issio

n

Ob

jecti

ves

Ou

tco

mes

To be “the primary driving force of commercially sustainable industrial development and innovation

to the benefit of South Africa and the rest of the African continent”

The IDC is a self-financing national development finance institution whose primary objectives are

to contribute to the generation of balanced, sustainable economic growth in Africa and to the

economic empowerment of the South African population, thereby promoting the economic

prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the

building of competitive industries and enterprises based on sound business principles.

Supporting industrial capacity development

Promoting entrepreneurship

Sustainable employment

Growing SME sector Regional equity

Industrialisation in the rest of Africa

Environmentally sustainable growth

Broad-based black economic empowerment

New entrepreneurs entering the economy

5


Industrial & entrepreneurial development approach …

• IDC addresses market failures by supporting investments, which may

otherwise not happen, in partnership with private sector companies

• Our business model strives towards maximising financial /

development returns while maintaining an acceptable risk profile

• This entails taking a higher risk profile than commercial financiers in

order to support the development of sectors and new entrepreneurs

through

Diversifying the economy through supporting a range of sectors

Encouraging the introduction and development of new industries and

products

Developing internationally competitive companies

Supporting the establishment of green-fields developments

Supporting expansions of existing businesses

Facilitating the entry of new entrepreneurs and supporting their development

Supporting the growth and development of small and medium businesses

into competitive players

Encouraging regional development by supporting companies with regional

comparative advantages

6


IDC’s positioning …

• Non-commercial focus

• Fiscal transfers and grants

• Development objectives (social)

Government / NGOs

• High commercial focus

• Private sector capital

• Financial objectives

• Known risks

Commercial Financiers

• Commercial and development focus

• Sharing risk

• Internally generated funds, government funds, loans

DFIs

Greater importance on financial objectives

Greater importance on social and developmental objectives

• Industrial Development Corporation

(IDC)

• Development Bank of Southern

Africa (DBSA)

• Khula

• National Empowerment Fund (NEF)

• Etc.

• ABSA

• Standard Bank

• First National Bank

• Nedbank

• Etc.

IDC does not directly compete with any of these institutions, but encourages cooperation with a

variety of these institutions to achieve its goals

7


Changing priorities …

• World War 2 – Shortage of

industrial goods

• South African economy

largely based on

agricultural production and

gold mining

1940s

• IDC established to provide

financing for industrial

undertakings – at this stage

only in the manufacturing

industry

• South Africa facing threat

of isolation from the rest of

the world

1950s & 1960s

• Securing energy resources

for South Africa a priority

• Increasing natural resource

beneficiation

• Decentralisation policy by

government

• Increasing isolation

• Self sufficiency

• Balance of payments

1970s & 1980s

• Import replacement

• More resource intensive

industries established –

mainly to bolster export

earnings in non-gold

sectors

• Initiation of high-tech

industries

• Agriculture explored as a

foreign exchange earner

• Industrial real estate

development

• Change in government

• South Africa introduced to

a globalising world

• Addressing the disparities

created by apartheid

1990s

• Moves to encourage

regional integration

• Black economic

empowerment

• Export promotion

• Services related industries

• Investments elsewhere in

Africa

• Unemployment

• Diversification of economy

• Reducing inequalities

• Industrial policy

• Growing financial sector

liquidity

2000s

• Job creation

• Developing rural areas and

other previously

underdeveloped regions

• Downstream industries

• Entrepreneurial

development

• Sector strategies

• Food processing;

• Textiles

• Petroleum

• Fertilizers

• Wood processing

• Chemical beneficiation

• Mining and minerals

• Resource beneficiation

• Micro-electronics

• Tourism

• ICT

• Film

• Franchising

• Healthcare

• Education

• Financial services

• Transport

• Construction

• Alternative energy

Over the decades, IDC has adapted

to South Africa’s changing priorities

and expanded into new industries as

the economy developed

8

• General industrial finance: – Equity

– Quasi-equity

– Commercial debt

– Export/import finance

– Short-term trade finance

– Bridging finance

– Guarantees

– Venture capital

– Wholesale funding through intermediaries

• Special purpose finance: – Transformation and Entrepreneurial Scheme (TES) (R1 billion) – Risk Capital Facility (RCF) (€55 million) – Isivande Women’s Fund (R50 million)

– Support Programme for Industrial Innovation (SPII) (R75 million/year)

– Distressed funding (R6.1 billion)

– Clothing, Textiles, Footwear and Leather Competitiveness Scheme

(R250 million)

– Clothing and Textiles Competitiveness Programme (CTCP)

– Pro-Forestry Scheme (R100 million)

– Pro-Orchards Scheme (R200 million)

– Township and Rural Hospital Scheme (R500 million)

Finance is structured

according to client’s needs

– can include moratoria on

repayments to enable

business growth


IDC products and services …

Cross sectoral

schemes/funds

Sector specific

schemes/funds

9

Several non-financial

support measures to

address specific

development needs

• Non-financial support and other services:

– Pre- and post-investment business support;

– Socio-Economic Development (SED) services;

– Local Development Agencies;

– Policy and research support;

– Capacity building at other DFIs.


IDC products and services …

10

• Financial assistance is provided for the

development of new businesses, expansions

or rehabilitation of existing businesses

• Business case must exhibit economic merit

(i.e. it must be profitable)

• IDC finances fixed assets and fixed portion of

growth in working capital requirements

• Reasonable contribution expected from

promoter/s

• Minimum of R1 million

• Security

• Environmental compliance


Financing criteria …

11


Desired outcomes when evaluating the development impact of an investment …

• Job creation

• Entrepreneurial development

• Small and medium enterprise development

• Regional development

– Rural areas

– Townships

– Provincial development needs

– Development of the rest of Africa

• Priority sectors

• Black economic empowerment

• Foreign currency earnings

• Environmental sustainability

12

• IDC book value at cost = R28.2bn (excluding undrawn commitments of

R18.6bn)

• At market value = R104bn

• Number of Business Partners = 1,272

• 1,600 Loan contracts, 102 Guarantees

• Equities (18 listed, 269 private equity, 143 quasi equity)


IDC book …

13


IDC’s Portfolio – sectors …

Agriculture and Food

4%

Mining 22%

Chemicals and Petroleum

26%

Metals and Machinery

22%

Other Manufactu-

ring 4%

Trade, Catering and Accommo-

dation 4%

Transport, Communica-

tion and Utilities

7%

Finance & Insurance

4%

Other 7%

Sectors Examples • Agriculture, forestry and food – Nuts, forestry, sugar,

citrus, fruit juice.

• Mining – Platinum, copper, ferrochrome, uranium, iron

ore

• Chemicals and petroleum – Synfuels, fertiliser,

pharmaceuticals, cleaning chemicals, building materials

• Metals and machinery – Aluminium, steel, aerospace,

motor vehicles and accessories, boat building

• Other manufacturing – Sawmilling, textiles and

clothing, diamond cutting and polishing, biomass fuel

• Trade, catering and accommodation – Hotels, lodges,

food franchises, food retail franchises.

• Transport, communication and utilities – Independent

power producers, broadband communications, nuclear

power, bus transport, trucking.

• Finance and insurance – Credit lines to other DFIs,

wholesale funding to micro-enterprises,

• Other – Construction, television services, motion

pictures, hospitals.

14


IDC’s Portfolio – regions …

Regions Examples

• Eastern Cape –Pharmaceuticals, mariculture

• Free State – Game lodge, apples, cherries

• Gauteng – Telecommunications, financial services,

construction

• KwaZulu-Natal – Aluminium, textiles, wood products

• Limpopo – Phosphate, platinum mining, hospital

• Mpumalanga – Forestry, tourism, coal mining

• North West – Ferrochrome, berries, bricks

• Northern Cape – Iron ore, table grapes, goats

• Western Cape – Steel processing, tourism, boat building

• Rest of Africa – Aluminium, satellite infrastructure, pipe

manufacturing, financial services,

tourism

15


IDC involvement in Africa (outside SA): Footprint, incl. pipeline …

MOZAMBIQUE

• Mining

• Hotels and

Accommodation

• Manufacturing

(Textiles)

• Agro-processing

• Wood processing

• Energy

• Ind. Infrastructure

• Transport infra.

• Storage and

warehousing

NIGERIA

• Telecoms

CAPE VERDE

• Hotel &

Accommodation

GHANA

• Hotels &

Accommo-

dation

• ICT

TOGO


GABON

•ICT

•Transport

NAMIBIA

• Agric. / agro-processing

• Mining

BOTSWANA

• Hotel &

Accommodation

• Restaurant

MALAWI

• Food and Agriculture

• Retail infrastructure.

• Franchising (Tool

Hire)

SUDAN

• Infrastructure

(Water)

KENYA

• Sugar

UGANDA

• Hotels &

Accommo-

dation

TANZANIA

• Manufacturing

(Plastic bags)

SEYCHELLES

• Hotels &

Accommodation

MAURITIUS

• Air transport

ZAMBIA

• Storage and

warehousing

• Mining

• Healthcare

• Financial

services

SWAZILAND

• Basic chemicals

• Agro-processing


D.R. CONGO

• Energy

• Mining

• ICT

• Infrastructure

Development

EGYPT

• Agriculture/

Bio-fuels

CAMEROON

• Hotel &

Accommodation

LESOTHO

• Telecoms

• Infrastructure

LIBERIA

• Mining

GUINEA

(Conakry)

• Mining

MADAGASCAR

• Mining

•Hotels and

Accommodation

NIGER

• Abattoir

RWANDA

• Telecoms

SENEGAL

• Transport

ZIMBABWE

• Sawmilling

• Energy

• Manufacturing

CONGO

(Brazzaville)

• Transport

COMOROS

•Transport`

ERITREA

• Mining

EQUATORIAL

GUINEA

• Transport

ANGOLA

• Energy

http://upload.wikimedia.org/wikipedia/commons/2/29/Flag_of_Eritrea.svg

16

Content …

• Introducing IDC


• Funding model



17 17

Corporate governance

The changing landscape of Corporate Governance in SA ...

• Vast progress in and changes have been made to

corporate governance in SA over the past few years

• King I (1994) → PFMA (1999) → King II (2002) → Corporate

Laws Amendment Act (2007) → JSE Listing Requirements

(01/09/08) → King III and Companies Act, 2008

• SA is moving from a voluntary system of corporate

governance to a legislated or hybrid system (“apply or

explain” approach)

• At the forefront of the corporate governance agenda in

future will be: broad-based transformation; alternative

dispute resolution; business rescue; sustainable

development; accountability of BODs and resultant

personal and collective liability to the company and its

shareholders; financial reporting; functions of Audit

Committees to be broadened; etc.

The IDC’s approach to sound corporate governance is governed by: IDC Act; Mandate; PFMA; King III Code;

Companies Act; Protocol on Corporate Governance in the Public Sector

18

Corporate governance (cont.)

Organisational and Governance Structures …

CEO

Geoffrey Qhena

Industrial

Sectors

Services

Sectors

Professional

Services Human Capital

Marketing, &

Corporate

Affairs

General

Counsel

Internal Audit Corporate

Secretariat

Resources

Sectors

Operational divisions

Board Board Audit

Committee

Board Risk

Management

Committee

Board Human

Capital and

Nomination

Committee

Development and

Innovation

Committee

Governance &

Ethics Committee

Finance and

funding Risk

Board Investment

Committee

19

Corporate governance (cont.) Governance Structures …

IDC Board – Non-executive chairman (different person from CEO)

– 14 board members - ratio of executive to non-executive directors (1:13)

– Individuals of a high calibre with diverse backgrounds + expertise

– Board sub-committees (6) have been formed (+ charters to govern)

– All board sub-committees are chaired by an independent non-executive director

– 8 board meetings per annum (+ strategic break-away)

– Maintain statutory records (eg. minutes, declaration of interests)

– No political interference

– Board assesses its performance (incl. induction + regular training)

– Directors are appointed on a review basis every 3 years

– Full disclosure of remuneration of all Directors and senior management

– Independence of external auditors (rotation)

“Management cannot

govern the company;

Boards cannot manage the

company”

Author Unknown

“Boards should ensure that the company is and

is seen to be a responsible corporate citizen”

20

Corporate governance (cont.) Strategic Committees …

Executive

Management

Committee

• Consists of CEO and Executive Management

• Exco (Special) authorised to approve financing between R25 million and R250 million ( +

within counterparty limit).

• Exco (Policy) considers all policy related matters.

• Meets every second week (both Special + Policy)

• Both are chaired by CEO

Credit

Committee

• Consists of 3 external members and IDC executive management.

• Chaired by a member of Exco.

• Authority to approve financing up to R25 million (+ within counterparty limit)

• Meets weekly

Procurement

All strategic

committees

undertake

self-

evaluation

exercises +

governed

through

T.O.R.

IMC IT Steering Internal Audit

ALCO Compliance Fraud and

Corruption Taxation

Business

Continuity

Occupational

Health and

Safety

Employment

Equity

Directorship

Working

21

Corporate governance (cont.) Internal Audit …

Independent Internal Audit function

– Direct line of communication to the chairman of the Board Audit Committee

– Follows risk-based audit approach

– Surprise audits

– Fraud prevention policy and response plan (awareness campaign, hotline, notification process for whistle-blowing, delinquent register, etc.)

– Code of business conduct (ethics)

– Governance audits on main investee companies

– Systems and procedures (Internal Audit ensures compliance)

– IT reviews

– Internal Forensic capacity

22

Content …

• Introducing IDC


• Funding model



23

Funding model Funding cycle …

Loan funding

Equity funding

Capital growth

Interest repayments

IDC relies on borrowings, internal profitability, capital growth and exits from mature investments to

maintain and expand its funding ability

Capital repayments

Dividend payments Exits of mature

investments

IDC Funds • Borrowings

• Balance sheet

• Mature investments

• Retained earnings

24

Funding model (cont.)

Sources of borrowings …

Total Borrowings as at 31 March 2010: R4 156 million

• 47% of borrowings are sourced from other DFIs including:

o African Development Bank

o European Investment Bank

o Nordic Investment Bank

o PROPARCO

o KfW

• 74% of borrowings sourced offshore;

Split between Sources of Borrowings:

Commercial and DFIs

25


Sources of income (past 5 years) …

Caa2

Caa1

B3

B2

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

A3

A2

A1

Aa2

Aaa

IDC

Inve

stm

en

t g

rad

e

de

cre

as

ing

risk

Caa2

Caa1

B3

B2

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

A3

A2

A1

Aa2

Aaa

South Africa

‘ 03

‘ 06

‘ 05

‘ 95

Caa2

Caa1

B3

B2

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

A3

A2

A1

Aa2

Aaa

IDC

Inve

stm

en

t g

rad

e

de

cre

as

ing

risk

Caa2

Caa1

B3

B2

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

A3

A2

A1

Aa2

Aaa

South Africa

‘ 03

‘09 ‘09

‘ 95 Credit strengths of IDC:

• Close link to the government, which maintains 100%

ownership

• Close monitoring of both strategic and financial

developments by the shareholder

• Sound financials

• Fast-growing assets provide sizeable capital cushion

• Credit rating is A3 (on par with sovereign)

26


What makes our funding structure so unique …

Product offering

IDC puts together the most appropriate financial package for the client, taking into account the IDC

guidelines and the client’s requirements by means of, among others:

• Capital and interest moratorium: IDC will allow start-up business or expansion of existing

businesses a grace period during which capital is not payable, generally one year, but can be up to

5 years e.g. pro-orchards scheme . In certain instances, even interest payments are capitalised for

an average period of 18 months

• Terms of loans : IDC matches the repayment term of the loan with the cash flow generated by the

asset acquired or expense incurred. Average term of loans is between 3 and 7 years, but can be up

to 15 years (e.g. pro-orchard scheme) or even 25 years (pro-forestry scheme)

• Equity investments: In certain instances, mostly new projects IDC will share the responsibility for a

venture by taking up equity in the business to ensure that it is adequately financed.

IDC does not normally seek control in an undertaking but determines the level of participation on an

individual basis. It is the IDC's policy to provide the entrepreneur with a buy back option on a

mutually acceptable commercial basis.

27

Special development oriented pricing schemes

• From time to time (as the need is identified), IDC develops specific

pricing schemes aimed at addressing market failures and the

achievement of strategic objectives such as:

– SME development

– sector development

– exceptional impact on job creation

– Broad-base Black Economic Empowerment (BBBEE)

– Industrial development zones

– Rural development.

• These pricing schemes have a pre-determined validity period and

budget

• Typically involve lower interest rates / required internal rates of

return (IRR) and different conditions such as

– lower collateral requirements

– longer-term financing

– lower contribution from promoters

– longer repayment holidays than other financing



28

The IDC’s approach to clients in financial distress

• Clients with high-risk profiles are identified and given special

attention to manage the IDC’s exposure, minimise potential

losses and maximise sustainable development returns

• The IDC assists companies in recovering from difficulties in

order to limit any losses in jobs due to business closures

• One of the main objectives is preventing financial failure of

identified high risk clients who are unable to meet their

financial commitments:

by initiating the restructuring and turnaround of such

client (subject to the client displaying potential

economic viability)

to ensure that the clients are able to continue with their

normal business operations and thereby prevent the

loss of job opportunities, technology, exports, etc.

safeguard IDC’s position



Some restrictions attached to approvals for distressed funding (done on a case-by-case basis):

– Management remuneration;

– Payment of dividends;

– Repayment of shareholders loans;

– Existing shareholders disposing of their shareholding;

– Payments to creditors;

– Capital repayment of bank loans;

– Job losses.

29

Business support to entrepreneurs: IDC Business Support Programme

was established to assist where appropriate:

• potential clients in preparing a business plan; and

• existing clients where e.g. shortcomings in the management

capacity has been identified, if a short-term intervention is

required, if it experiences financial difficulties.

• The funding for the business support is born partly by IDC

Training Funding Business

support

Entrepreneurial

Development

Approach to entrepreneurial development

Monitoring

developmental

impact and financial

performance

Business Support



Training

IDC offers and sponsors customized demand driven courses

to empower current and prospective clients.

The courses are aimed at prospective and current clients.

Examples of courses offered:

• Basic Business Skills for SMEs

• Building Contractors workshop

• Transport owner driver seminar

• Franchisors Training

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