rethinking the role of development banks an evaluation of industrial development corporation of sa
TRANSCRIPT
Rethinking the Role of Development Banks
An Evaluation of Industrial Development Corporation of
SA
Overview
The importance of investment and the rationale for development finance institutionsSouth African industrial development and industrial policyThe performance of the IDCComparative analysis and implications for realising ‘Leadership in Development’
Investment and the rationale for development
finance institutions
Higher rates of investment mean expansion of productive capital; more rapid upgrading of machinery; higher productivity
Higher investment generally supports higher growth and employment creation
Investment rates of 25% of GDP normally believed necessary for sustained higher GDP growth (≥6%)
Investment opportunities with greatest potential are constrained by private finance as is intrinsic failure linked to information asymmetries
South Africa faces investment crisis, as growth is consumer driven
Financial system failures
Financial system should channel resources from savers to where are highest return opportunitiesBut: market failures, information asymmetries and imperfect competition, many of which are intrinsic features of financial systemAllocation of financial resources by financial system is backward looking, reflects their existing info and experience base not opportunitiesFinancial systems like SA’s tend to allocate finance to housing, motor vehicles, property and consumptionFirms forced to invest out of retained earningsInhibits investment of growing firms, in new activitiesDevelopment finance institutions needed, and have been at heart of successful late-industrialisation
Poor SA investment threatens sustainable growth and employment
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1981
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1989
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1996
1997
1998
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2004
Per
cen
t
GFCF/GDP
Real interest rate
Brazil and SA: common development challenges
Economies historically skewed towards resources, heavy industries and agricultureHeavy industries developed with support from the state, under trade protectionStrong and well established industrial development finance institutions at centre of industrialisationBoth underwent far-reaching trade liberalisation in 1990sPerformance has been poorer than expected, with little impact on high unemployment and inequalityNow exploring more constructive government policy programmes for sustainable and more equitable growth and employment creationRequiring more proactive role from DFIs
South African industrial development
and industrial policy
1994-2004: low growth but poor employment outcomes– Structure of growth?
Overall growth in manufacturing value-added of 2.5% per annum, but:– High growth sectors: heavy industry and motor vehicles
(including inputs such as leather)– Manufacturing employment falling at avge rate of 1.2% pa– Large net trade surpluses in heavy & resource-based
industries, resource-based– Despite liberalisation, has been continuity from previous
industrial development path
Continued dominance of major firms, with weak downstream linkagesPattern is reinforced by strong commodity prices and market power
Bifurcation in manufacturing: Local demand growth and strong currency
Strong local demand manufacturing growth and employment in Gauteng, led by industry in EkurhuleniStrong currency poorer performance in coastal metros
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Cape Town
eThekwini
Ekurhuleni
Johannesburg
Nelson Mandela
Tshwane
Average annual growth rate, %, 1999-2004
Employment
Value added
Industrial policy
Integrated Manufacturing Strategy of DTIAdvanced Manufacturing Technology Strategy of DST/NACIIMS identifies eight industry groupings as priorities (although these include almost all sectors)Meant to develop customised interventions for these, only now being designed as ‘Customised Sector Programmes’AMTS is focused on application of technology and higher levels of R&D, through:– Technical centres– Innovation networks
Motor Industry Development Programme combines clear set of incentives, with expectations of firms: succeeded in in its own terms
The performance of the IDC
Has been at the heart of SA’s industrial development since 1940
‘To facilitate, promote, guide and assist in the financing of – new industries– more efficient carrying out of operations in
existing industries…. to that end that the economic requirements of the
Republic may be met and industrial development within the Republic, southern Africa region and the rest of Africa may be planned, expedited and conducted on sound business principles.’
Performance?
Assessed in terms of:
Value and number of approvalsProfile of financing and development goalsBy sectorBy geographic areaSMEsBEEStrategic role in economy
IDC Approvals
IDC approvals: July 1995 to Mar 2005
0
1000
2000
3000
4000
5000
6000
7000
8000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*Year
R'million
0
70
140
210
280
350
420
490
560
Total value of aprovals
Total number of approvals
Number
* 9 months to Mar
Approvals by sector
IDC approvals by sectors:July 1995 to June 2004
0 5 10 15 20 25 30 35
Electricity, gas & water supply
Construction
Hotels & restaurants etc
Transport, storage & communication
Community, social & personal services
Financial, insurance and business services
Electrical & electronic products
Mining & quarrying
Wood, paper & printing
Wholesale & retail trade
Other manufacturing
Clothing, textiles & leather products
Food, beverages & tobacco
Machinery & metals products
Chemicals & other mineral products
Agriculture, hunting, forestry & fishing
% of total
0 5 10 15 20 25 30 35 40
% of total value
% of total number
Approvals by provinces
IDC approvals by provinces: July 1996 to Mar 2005
0 5 10 15 20 25 30 35
Africa
Free State
North West
Limpopo
Mpumalanga
Eastern Cape
Northern Cape
Kwazulu-Natal
Western Cape
Gauteng
% of total
0 5 10 15 20 25 30 35
% of total number
% of total value
Financing: trend and breakdown
Fluctuating, with declines in recent yearsConcentrated in machinery & metals, mining and chemicals, by value (largely capital-intensive)Agriculture, hunting, forestry & fishing is largest by numberSimilar pattern in recent years, although not so extreme bias to capital-intensive activitiesAfrican investments: large, resource basedIncreasing share of finance to services19 518 direct jobs created in 2004 (average financing of R251th per job)
BEE and SME financing
Strong growth of BEE financing
Equal split of BEE acquisitions and expansions
BEE expansions are much more employment creating than acquisitions and than non BEE financing
SME financing declining in number
SME financing more widely spread across sectors
Franchising finance
BEE Approvals
IDC BEE approvals:July 1995 to Mar 2005
0
500
1000
1500
2000
2500
3000
3500
95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05*Year
R'million
0
40
80
120
160
200
240Total value Total number
Number
SME Approvals
SME approvals: July 1995 to June 2005
0
20
40
60
80
100
120
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*
Year
% of total IDC number
0
100
200
300
400
500
600SME number as % of total IDC number
Number of SME approvals
Number
IDC’s strategic role in the economy
Anticipate key developments (e.g. SOE capex)Redress the structural imbalances through channelling of finance and prioritisationRealising broad-based empowerment: financing, best practice in management, employment equity and training Ensure that mega projects contribute to broader based economic development through linkagesAct in consort with DTI, and other depts to:– Design policies and ensure are practical– Implement policies– Analyse role of government and policies
Agency Support and Development: broadening and deepening institutional structureResearch: IDC as a knowledge base on industrial development is this being fully used?
IDC’s role as an industrial development
finance institutionAs a financial institution:– Risk and pricing:
• IDC’s different position and appetite for risk• IDC’s insider status: better risk evaluation and IDC
participation can lower risk in itself (e.g. in African projects)
– Prioritisation: criteria not clearly applied at presentAs a development agency:– Centre of knowledge and information– Incentive structure, currently:
• Short-term focus• Large and easy projects• Need to separate career path/performance and bonus
As an industrial policy actor - interacting with govt:– At Minister and DG level– At industry/sector level: knowledge and analysis;
participation– Links with business: associations and firms
Realising ‘Leadership in Development’
Leadership: – Proactive in anticipating development needs– Analysis across government– Role on the African continent– The IDC’s unique position: knowledge and
analysis
Development:– Understanding market failures in finance– Finance as key lever shaping economyIncreased investment ratesMore employment-creating economic growth
Way forward?A strategic sectoral approach:– Drawing on SBU info/knowledge together with R&I analytical
capabilities– Linked to government’s industrial policy goals– Alignment with incentives of IDC staff– Deepening understanding and commitment: from ‘bottom-up’ Targeted programmes for strategic goals and
industry sectorsMonitoring pipeline, and application of criteria in line with prioritiesOngoing evaluation of pipeline from approvals to implementation and after, including:– cancellations– impact of finance on firm performance and decisions
Influencing firm behaviour, especially in large financing dealsIndustrial policy engagement: requires dedicated capacity, and better information flow within the IDC
Issues to be taken up
SOE Capex team established: to identify and meet investment demand from SOE Capex suppliers. Drawn from Metals, Transport, Machinery SBU, Projects, R&I.
Review reasons for cancellations and link to performance management process.
BEE procurement: proactive opportunities - working capital linked to employment, and capacity expansion.
Simpler screening and prioritisation process, enabling better monitoring of pipeline against targets.
Monitoring performance of firms receiving IDC financing.
African infrastructure and mega projects: maximising the development impact on South African industry and in the host economy through increasing economic linkages