The Industrial Development Corporation (IDC), South Africa’s government-owned development financing institution focused on providing funding for a broad range of projects including small and medium-sized enterprises (SMEs) and black economic empowerment (BEE) initiatives, has approved funding for new projects totalling R6,2-billion in its financial year to the end of June 2003, a 26% increase from R4,9-billion the previous year.
According to its recently released 2003 annual report, the IDC had a net operating income of R240-million for 2003, down from R1,08-billion in 2002, while its net attributable income totalled R787-million, versus R1,83-billion a year earlier.
The group said the high interest rate environment has created tough economic conditions, which has had a negative effect on new business as companies abstain from borrowing and postpone planned investments. This is why the number of enterprises financed has fallen to 345 from 516 in 2002.
The appreciation of the rand has also had a negative impact on income.
The IDC’s total assets were reported at R29,8-billion, compared with R36,6-billion in 2002, and its total equity and liabilities stood at R29,8-billion, down from R36,6-billion previously.
The balance sheet remained strong despite a R4,18-billion decline in its capital and reserves, to R22,06-billion from R26,24-billion a year earlier, due mainly to a downward revaluation following the adjustment of the group’s equity investments to fair value after providing for deferred capital gains tax. This is a reflection of the weaker equity market during the year.
Subsequent to year-end, the share market has improved so that the value of the group’s listed share portfolio has improved by R2-billion to R13,2-billion.
The IDC has made an impairment provision totalling 12,2% of the cost of its advances and investments, compared with an average of 3% by South Africa’s commercial banks. This additional 9,2%, or R1,51-billion, impairment underscores the nature of its development financing activities and the group’s appetite for risk.
Impairments have risen in 2003 due to a higher level of specific impairments provided against clients facing financial difficulty and an unusually low charge to the income statement in the 2002 financial year, the group said.
CEO Khaya Ngqula said 74% of the IDC’s new financing approvals went to SMEs. The group’s financing, net of cancellations, amounted to approximately 3,2% of total national investment activity during the period, has facilitated the creation of more than 17 000 new job opportunities, and has contributed to the expansion of exports by more than R3,8-billion.
Meanwhile, 46% of the number and 33% of the value of new financing approvals have been allocated to historically disadvantaged persons, Ngqula added. The group’s new collaboration with the European Union and the European Investment Bank on the Risk Capital Facility has enabled it to reach more black-empowered SMEs, being used in 15% of the IDC’s BEE deals.
The IDC’s portfolio of African projects under consideration or implementation has risen to 72 projects in 19 countries. By the end of June, IDC funding had been approved for 30 projects in 12 countries, nine of which are members of the Southern African Development Community.
Ngqula added that the IDC has received a credit rating of “Baa2” during the year, in line with South Africa’s sovereign rating, which will help the group raise debt at more cost-effective rates in the international markets. This is essential for its growth and liquidity requirements.
On empowerment, the CEO said the IDC has financed 802 empowerment deals since 1990 worth more than R7,7-billion, with the number and value of BEE deals improving as a percentage of total financing every year, with the exception of 2003. The drop in the number of BEE approvals to 156 in 2003 can be ascribed mainly to the decline in business confidence precipitated by high interest rates.
Ngqula said the IDC is determined to stay at the forefront of BEE financing, and is consequently increasing the group’s focus on the support of entrepreneurs through the funding of expansions and new projects where shareholders and management are historically disadvantaged persons. The IDC has also been increasingly supporting the formation of foundations and workers’ trusts to facilitate shareholding by historically disadvantaged persons.
Despite this considerable success, certain challenges remain. These include management experience in the marketing, financial and technical fields; lack of adequate collateral, which presents a drawback in dealing with potential firms; the need to assist BEE firms in being more focused and committed to a specific business strategy rather than rushing towards multiple investment strategies; inadequate infrastructure, especially for BEE startups; the lack of suitable funding partners to act as catalysts in co-financing BEE deals; the need for empowerment companies to be guided towards and become more involved in economic growth sectors; and the high expectations for the IDC to conform to the various aspects/pillars of different empowerment charters, such as the Mining Charter. — I-Net Bridge