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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-6

-4

-2

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

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