23 January 2006

South Africa’s Industrial Development Corporation (IDC) has launched new financing schemes totalling R1-billion for 2006, in support of the government’s strategy to boost the country’s economic growth rate.

The IDC is a self-financing national development finance institution, established in 1940 to promote economic growth and industrial development in South Africa.

The corporation’s new schemes are geared towards creating jobs, developing small businesses, promoting black economic empowerment, expanding franchising operations and building labour-intensive projects in South Africa’s rural areas. The investment forms part of the government’s plan to boost the country’s economic growth to a sustained 6% a year and halve unemployment by 2014.

Substantially higher levels of fixed investment are required to achieve these goals, the IDC says. Investment as a percentage of gross domestic product (GDP) must increase from the 16.5% recorded in 2004 to at least 25% of GDP.

And it is estimated that more than 400 000 new jobs must be created every year to reduce unemployment by 50% over the next decade. South Africa’s unemployment challenge has to be tackled with increased and sustained private and public sector investment.

Competitive financing
“We encourage companies to invest in labour-intensive ventures or expand their existing operations,” IDC CEO Geoffrey Qhena said at the launch of the initiative in November. “We have therefore reviewed our general pricing approach to fund investments with a high developmental impact, focusing particularly on job creation.

“Our leadership and development strategy has identified competitive financing for development as one of the key instruments to enhance investment activity and therefore contribute to elevating South Africa’s economic growth rate. Hence, we have designed customised development financing schemes to stimulate private sector investment over the medium- to long-term.

“In essence, IDC development financing … should reflect both risk and developmental returns. Financing provided to IDC’s clients with different risk profiles and development impact must be priced differently.”

Five new schemes
The R1-billion is to finance five new development schemes:

• The IDC’s Pro SME Jobs Scheme will receive R600-million, which will go towards creating jobs and developing small and medium enterprises (SMEs) by encouraging businesses to embark on labour-intensive start-ups and expansions. Loans will be available for SMEs in all economic sectors, at a rate of prime less 5%.
• The Pro Franchising Scheme is to get R100-million as capital funding for emerging entrepreneurs to establish new franchised outlets, as well as to help franchisers with at least three outlets to expand their networks through a wholesale funding facility. The loans will be priced at prime less 5%.
• Some R200-million will go to the Pro Orchards Scheme to create jobs in the horticulture sector and promote rural development. Loan funding will be priced at prime less 2.7% and the hurdle rate for equity investments is 2.5% real after-tax internal rate of return (IRR). One of the scheme’s criteria will be the participation of historically disadvantaged individuals.
• The Pro Forestry Scheme is to get R100-million for job creation, rural development, establishing new black-owned commercial forestry areas, and transferring existing forestry areas to businesses with a broad-based black shareholding. The rate of return expected by the IDC from equity investments in this type of project has been lowered under the scheme to a real after-tax IRR of 2.5%.
• The Pro BEE Expansionary Acquisitions Scheme aims to help black entrepreneurs acquire substantial shareholdings in established enterprises, and create jobs through their expansion. The transactions must encourage skills development, preferential procurement and the participation of historically disadvantaged individuals at senior decision-making levels. Loans under this scheme will be priced at prime less 2.7%, while the hurdle rate for equity investments is 5% real after-tax IRR.

“The IDC’s primary role is to provide risk capital to address market failures,” said Gerrit van Wyk, the corporation’s chief risk officer. “As South Africa’s leading development finance institution, our role is to maximise the developmental impact of our interventions, while safeguarding the IDC’s financial standing.

“Therefore, we have designed schemes that are ring-fenced, capped at the specified amounts and have a limited duration – that is, 1 December 2006.”

SouthAfrica.info reporter

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