Established in 1940, the State-owned Industrial Development Corporation (IDC) provides something of a mirror image of South Africa’s recent economic and industrial past, as well as the prominent role played by the minerals and energy complex within that history.
Its funding has supported ‘old economy’ and energy-hungry mainstays, such as miners and steelmakers, fertiliser and aluminium manufacturers, and even an unlikely coal-to-fuels success story.
Now, CEO Geoffrey Qhena has been directed to increasingly turn to green industries to replenish the development finance institution’s (DFI’s) listed and unlisted asset base, which remains a key source of income, as well as its balance sheet stability.
Such ‘sustainable’ investments are set to absorb the largest single share of the group’s R102-billion funding plan for the coming five years, with R22.4-billion having been set aside for so-called ‘green economy’ projects and enterprises. In addition, ‘green industry components’ could also benefit from the R20.8-billion set aside for the support of manufacturing activities over the period.
For the balance, the IDC will continue to distribute funds into more traditional areas of focus, including mining and minerals beneficiation, where some R22.1-billion has been set aside. The rest of the available funding should be directed towards agroprocessing (R7.7-billion), logistics and industrial infrastructure (R11.1-billion) and to the tourism, creative industries and services sectors (R14.8-billion).
But in an interview, Qhena tells Engineering News that it is in the green-economy milieu where he expects the next big prospects and enterprises to arise – hopefully to eventually rival IDC holdings in companies such as Sasol, Kumba Iron Ore, BHP Billiton, ArcelorMittal South Africa and unlisted Foskor.
Such success will be critical to the institution’s own future sustainability, particularly if it is to remain self-funding. Although, there is much talk about unearthing new direct sources of funding so as to increase the impact of the IDC and other DFIs in dealing with South Africa’s growth and employment underperformance.
Until such a change is made, however, dividends from unlisted and listed entities will remain critical income sources. In 2010/11, the listed entities alone contributed R2.2-billion to the IDC’s coffers, while the total value of its investments in these groups was recorded at R60-billion at the end of March 2011.
Funding versus Projects
Qhena is sanguine about the immediate funding challenge, which if realised, would involve a two-and-a-half-times scale up from the loans approved and distributed in the prior five-year period to 2010.
“We are not saying we have R102-billion in the bank, but we have the ability to raise it,” he says, noting that the IDC asset base stands at R100-billion, while it has registered a R15-billion domestic medium term note programme with the JSE and it still has access to development finance from abroad.
The IDC is also considering tapping other sources, as it did recently with the R2-billion Unemployment Insurance Fund (UIF), of which R1.5-billion has been approved for job-generating ventures. In fact, in the year to March 31, 2011, it approve a total of R8.7-billion, with many of the 33 000 jobs likely to be created aligned specifically to the R1.5-billion set aside from the UIF funding. Therefore, a second UIF round is also under consideration.
He is more concerned, however, about the state of the project pipeline, which draws on projects scoped and developed in-house, as well as ideas arising from the private sector. “The pipeline is healthy but needs to be supplemented,” Qhena avers.
The group’s new green industries business unit has been created specifically to facilitate new projects, as well as to canvass existing opportunities to improve the overall choices. The impetus is being provided by the New Growth Path (NGP) and the Industrial Policy Action Plan (Ipap), which place much store on the growth and employment creation potential of the green economy.
In fact, in the NGP, Economic Development Minister Ebrahim Patel argues that there is potential to generate 300 000 additional direct jobs in the green economy by 2020, with 80 000 of those in manufacturing and the balance in construction. This is calibrated with the integrated resource plan for electricity, which was promulgated in April, and which calls for the addition of 17.8 GW of new renewable energy capacity by 2030.
Meanwhile, the Ipap is seeking to extract specific manufacturing and industrialisation spinoffs from the country’s renewable energy thrust, as well as to leverage new industries around solar water heating and energy efficiency.
The IDC, for its part, is seen as a core implementation agent to ensure that the policy aspirations are backed by financial and practical project commitments. But to achieve the desired manufacturing spinoffs requires policy certainty and scale.
Seeking Critical Mass
Qhena acknowledges that the recent uncertainty created around the tender for the first round of renewable energy projects has been problematic. But he is also keen to see that a “critical mass” in renewables emerges once these policy and procurement hurdles have been cleared.
The South African Renewables Initiative has been established to catalyse the potential industrial benefits from a large-scale renewables roll-out so as to crowd-in potential ‘green investment’ of about $55-billion over the coming 15 years.
It is this desire for scale that has arguably led to the partial abandonment of the renewable energy feed-in tariffs (Refit) ahead of the first procurement round for 1 025 MW of wind, solar, mini-hydro and biomass capacity.
Trade and Industry Minister Dr Rob Davies tells Engineering News the idea is to facilitate a 23-GW renewables deployment, which would provide the economies required for large-scale domestic manufacturing of systems and components.
“In order for us to do that without a huge imposition on the electricity tariff, we need to access international finance sources, both in the form of loans at low rates and also some of the climate change facilities . . . to come up with a blend of financing instruments to lower the overall costs,” Davies explains.
The Minister has met with German and European Investment Bank officials in a bid to firm up these partnerships, which could be announced in the run up to the 17th Conference of Parties, or COP17, of the United Nations Framework Convention on Climate Change, which will take place in Durban from November 28 to December 9.
It is possible that the IDC will be the conduit through which these competitively priced instruments could flow.
Either way, Qhena is growing increasingly convinced that the green economy could provide both a growth impetus for the economy as a whole, while providing the new suite of evergreen assets and dividend flows that will underpin future rounds of growth at the IDC itself.
“We have set aside 25% of our budget for the coming five years for green investments. We believe areas such as solar remain an untapped opportunity. So for us, the green economy is the next big driver,” he says.
But he stresses that the group also sees big job potential arising from agroprocessing and that it is keen to participate actively to support further industrialisation around the country’s R860-billion-plus infrastructure push, as well as the State desire to add greater value to minerals ahead of export.
“But the big sector for us is the opportunities arising from the green industries”.