Jorge Maia

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Day Month Year
SME financing in South Africa The IDCs role,
differentiation and select success stories

• Jorge Maia
• Head IDC Research and Information Department

2008 Africa SMME Conference and Awards
Somerset-West, 23 October 2008
2
The role of development finance institutions
(DFIs)

• DFIs can be effective instruments for
  facilitating access to finance
• DFIs typically take a developmental rather than a
  financial return maximisation approach
• Identification, development and financing of
  projects leading to national objectives being met
• Encouraging private sector development
• Providing financial products not readily
  available (e.g. equity, long-term finance,
  venture capital, etc)
• Provide finance when markets are tight
• Generally prepared to take and managing a higher
  risk profile
• Often play an advisory role regarding national
  policy formulation
• In addition to financial assistance, may provide
  other forms of business support (e.g.
  hand-holding)

3
DFI positioning

• DFIs should crowd-in rather than crowd-out
  commercial financiers
• Commercial financial institutions are more
  efficient in delivering finance to businesses
  with proven financial track records
• If a DFI directly competes with commercial
  institutions
• It is inefficient
• use of unrealistic and unsustainable pricing
• risks crowding-out private sector
• Implies no value added from the state
• Role of DFIs in a market economy should be to
  address market failures /gaps
• Where a DFI is successful and proves a market,
  others will follow crowding in commercial
  financiers, and leaving the DFI having fulfilled
  its catalytic role
• Focus on addressing unmet needs, especially in
  poorer areas and riskier markets

4
South Africas national DFI landscape

• Industrial Development Corporation (IDC)
• Development Bank of Southern Africa (DBSA)
• Land and Agricultural Development Bank (Land
  Bank)
• National Housing Finance Corporation (NHFC)
• Khula Enterprise Finance (Khula)
• National Empowerment Fund (NEF)
• Independent Development Trust (IDT)
• Umsobomvu Youth Fund (UYF)
• National Urban Reconstruction and Housing Agency
  (NURCHA)
• Rural Housing Loan Fund (RHLF)
• Micro Agricultural Finance Institutions of SA
  (MAFISA)
• SA Micro Finance Apex Fund (SAMAF)

5
Provincial DFIs in South Africa
Gauteng Enterprise Propeller
Limpopo Development Corporation (LIMDEV)
Northwest Development Corporation
Mpumalanga Economic Growth Agency (MEGA)
Free State Development Corporation
Ithala Development Corporation
Western Cape Investment and Trade Promotion
Agency (WESGRO)
Eastern Cape Development Corporation
6
The IDC Corporate profile

• Established in 1940, the IDC is a self
  -financing, State-owned development finance
  institution

• Provides financing to entrepreneurs engaged in
  competitive industries and enterprises based on
  sound business principles

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

• Aims to maximise developmental and financial
  returns within an acceptable risk profile

The IDCs Head Office in Sandton (Johannesburg)
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The IDCs industrial entrepreneurial
development approach

• IDC addresses market failures by supporting
  investments, which may otherwise not happen, in
  partnership with private sector companies
• 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

Components being assembled for the Airbus A320
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The IDCs vision, mission, objectives outcomes
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
Vision
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.
Mission
Supporting industrial development capacity
Objectives
Promoting entrepreneurship
Growing sectoral diversity
Sustainable employment
Growing the SME sector
Regional equity
Broad-based black economic empowerment
Industrialisation in the rest of Africa
Outcomes
New entrepreneurs entering the economy
Environmentally sustainable growth
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Sectoral involvement

• 1997
• Agriculture
• Mining
• Manufacturing
• Property

• Now
• Agriculture
• Mining
• Manufacturing
• Services - related
• energy
• tourism
• IT
• telecoms
• motion pictures
• healthcare education
• transport storage
• venture capital
• government / corporate tenders
• franchising
• financial services
• construction
• 2010
• Other

Holiday Inn Soweto
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Financial instruments

• IDC offers a wide array of financial instruments
  to SMEs, including

• Equity
• Quasi-equity
• Commercial debt
• Wholesale bridging finance
• Share warehousing
• Export/import finance
• Short-term trade finance
• Venture capital

• These may be provided singly or in combination

Flexible deal structuring
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Financing criteria

• 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

12
The IDCs approach in developing SMEs

• Various approaches geared towards developing
  SMEs
• Normal instruments for SME financial support
• Franchising providing finance directly to
  franchisees and indirectly (wholesale) via
  franchisors
• Special schemes from time to time
• Venture capital funding
• Risk Capital Facility
• Agency Development and Support
• Non-financial forms of business support
  (entrepreneurial skills development research
  assistance)

13
Market gaps IDC differentiation ? funding
approach

• Product offering
• IDC puts together the most appropriate financial
  package for the client, taking into account the
  IDC guidelines and the clients specific
  requirements
• Capital and interest moratorium
• Terms of loans
• Equity investments
• Cashflow considerations
• Capital security (collateral)
• Own unencumbered cash contribution
• Pricing and fees

14
Market gaps IDC differentiation ? development
schemes

• Special Development Orientated 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

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Market gaps IDC differentiation ? development
schemes
IDC recently approved the following special
schemes

• Gold loan fund (R34 m)
• Social Development Scheme (R1 billion)
• Township and Rural Hospital Scheme (R500 m)
• R1 billion Transformation and Entrepreneurial
  Scheme (TES) aimed at serving the financing and
  entrepreneurial needs of South Africas
  marginalised groups

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Market gaps IDC differentiation ? venture
capital funding
Foray into Venture Capital market, initially
through a wholesale facility, but more recently
in a direct manner angel investments
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Market gaps IDC differentiation ? venture
capital funding (cont.)
Foray into Venture Capital market, initially
through a wholesale facility, but more recently
in a direct manner angel investments

• Seed
• Research Development
• proof of concept
• product development
• market research
• business plan refinement
• Start-up
• Completion of development before market
  traction, e.g.
• initial marketing
• assembly of management
• finalisation and testing of prototypes
• initial scale-up from prototype to production
  models

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Risk Capital Facility (RCF)
Market gaps IDC differentiation ? management of
external funds

• IDC manages funds on behalf of the European
  Investment Bank (EIB)
• RCF biased towards SMEs and Black Economic
  Empowerment (BEE) enterprises
• RCF offers a mix of concessionary funding (with
  an equity bias) and business support grants
• Facilitates suitable capitalisation of projects
  and also provides the required training and
  assistance for emerging entrepreneurs
• Use of RCF funding effectively lowers the average
  cost of funding to a project as required returns
  are generally lower than that of typical PE/VC
  funds
• Funds are generally invested on a co-financing
  basis with IDC, thereby ensuring that due
  attention to risk assessment is given
• RCF investment criteria are aligned with that of
  IDC to ensure that the focus remains on BBBEE,
  sustainable job creation, and both regional and
  rural development

The IDC recently unveiled a UD30 mil fund for
SMEs in partnership with Thales Societe Generale
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Market gaps IDC differentiation ? handling
clients in distress

• The IDCs approach to clients in financial
  distress

• Clients with high-risk profiles are identified
  and given special attention to manage the IDCs
  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 IDCs position

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Market gaps IDC differentiation ? other forms of
support

• Training of entrepreneurs
• 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
• Expanding IDCs reach into rural areas
• Support for community groups
• Encouraging investments to address certain goals
  through incentives

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The IDCs recent developmental track record

• IDC total approval amounted to a record of R8.5
  billion
• More than 75 of the value of approvals to
  expansions and tart-ups
• Significant investment in SMEs (56 of the total
  number of project funded)
• R3.2 billion approved for black empowered
  enterprises (61 of the total)
• More than 40 of jobs will be created in South
  African rural areas

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The IDCs recent SME development track record

• Significant investment in SMEs
• 56 of the total number of projects funded
• R904 million
• 3 300 people attended IDC sponsored courses which
  focus on teaching essential business skills.
• R3.4 million in grant funding was committed to
  pre- and post-investment business support for IDC
  clients

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Success Stories Case Study 1
Low Cost Windows CC

• Project description
• Started by a Black entrepreneur manufacturing
  steel windows in his backyard (Tsakane township,
  East Rand)
• Since the founding of business in 2002, the IDC
  has approved various loans and guarantee
  facilities
• The business generates an annual turnover of
  R10.8 million last year
• It currently employs 39 people

• Current status
• It retains its township manufacturing base
• It has broadened its production line to include
  sheet steel doors, windows and door frames
• Planned expansion programme in the pipeline
• Suspensive sale and revolving credit facilities
  to be provided
• 11 new jobs to be created

• Since the founding of the business the IDC has
  approved various loan and guarantee facilities
  amounting to over R1.5 million

Financial Instruments
24
Success Stories Case Study 2
Holiday Inn, Soweto

• Current status
• The hotel has created 43 permanent jobs and 49
  annualised construction jobs
• A community trust also holds a shareholding in
  the hotel

• Project description
• Holiday Inn is situated in Kliptown, Soweto
  township
• Managed by Zuka African Tourism and Investment
  Corporation, a Black-owned hotel group
• First 4-star boutique hotel in Soweto (located in
  Freedom Square), with 48 rooms catering for
  business and leisure tourism
• The project benefited a local construction
  company - Cholane - which employs 12 people

• IDC has invested R20.7 million
• Loan and equity facility

Holiday Inn Soweto
Financial Instrument
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Success Stories Case Study 3
Knysna Elephant Park Project

• Developmental Impact
• Developing poor rural communities
• Supporting eco-friendly tourism in the Eastern
  Cape

• Project description
• Situated just 10km from Plettenberg Bay, at one
  of Garden Routes premier eco-tourism sites
• Started by adopting 2 elephants and has now grown
  to housing x number of elephants that roam freely
  across a 100 hectares farm
• Over 70 000 tourists now visit the park annually.
• Park has a restaurant, curio shop, budget
  accommodation, elephant back safaris and an
  interactive elephant education centre.
• The park employs about 60 people

IDC has invested R1.9 million in the project
since 2002
Financial Instrument
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Success Stories Case Study 4
Pick n Pay

• Project description
• Project of converting 15 Score stores into Pick
  n Pay branded stores
• The IDC has funded two Score conversion in Ulundi
  (2005) and Vereeniging (2006)
• Facility approved without contribution from the
  franchisees
• Identified franchisees have undergone two-year
  training programme (1 year of theoretical
  training and 2nd year spent on new Pick n Pay
  franchised outlet

• Business model is able to carry 100 debt
• IDC approved an amount of R129 million towards
  the conversion of 15 stores

Financial Instruments
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Success Stories Case Study 4 (cont)
Pick n Pay

• Developmental Impact
• Empowering local farmers by providing seedlings,
  boreholes and land to grow fresh produce which
  they in turn supply to the stores
• Training of landowners in land preparation and
  small scale agricultural farming
• Fresh produce from training garden is then
  donated to crèches and pensioners

• Current status
• Ulundi store
• Since the conversion, it has increased revenues
  six-fold from R1 million per month to over R6.5
  million per month,
• Increased employment from 35 to 140
• Vereeniging store
• Improved from sales from just over R800 000 per
  month to over R3.6 million per month
• Created 85 new job opportunities

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Success Stories Case Study 5
Bliss Chemicals

• Project description
• Bliss Chemicals is the manufacturer of washing
  powder under the MAQ brand
• It entered the SA detergent market as start-up in
  2002, with its first production in September 2003
• It has now become one of the major players, with
  a substantial market share
• Now exports to Angola, Botswana, Swaziland,
  Lesotho and Namibia
• Currently employs 1000 people

• Initial financing second round R12.5m working
  capital
• Third round R52.5m for building plant and
  equipment
• Fourth round ( in the pipeline) building
  expansion and new product line equipment

Financial Instrument
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Success Stories Case Study 5 (cont)
Bliss Chemicals

• Current status
• Current project annual turnover is R1 billion
• Expansion is expected to create additional 300
  jobs
• Successful entrant in washing power market as
  well as competing with multinationals
• The new product line will have similar uptake as
  Bliss establish itself as an alternative provider

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Concluding remarks

• International experience has shown that the SME
  sector is one of the main stimulants for economic
  growth
• SME development leads to redistribution of wealth
  and contributes towards job creation
• In South Africa, SMEs have become very important
  vehicles for economic development due to their
• Higher degree of labour intensiveness
• Lower average capital cost requirements
• Ability to stimulate more competitive markets
• Ability adapt to rapidly to changing market
  conditions
• Ability to provide opportunities for aspiring
  entrepreneurs
• A myriad of institutions serving mostly SMEs
  (i.e. non-micro), yet the sector continues to
  face inadequate access to finance
• SME development forms one of the main pillars of
  IDCs strategies for fulfilling its mission
• As a catalyst for sustainable industrial
  development, the IDC has been at the forefront of
  enterprise development since its inception

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Day Month Year
Thank you
The Industrial Development Corporation 19 Fredman
Drive, Sandown PO Box 784055, Sandton, 2146 South
Africa Telephone [phone] Facsimile (011)
269 2116 E-mail callcentre_at_idc.co.za