Rethinking the Role of Development Banks

1. Rethinking the Role of Development Banks An Evaluation of Industrial Development Corporation of SA

2. Overview • The importance of investment and the rationale for development finance institutions • South African industrial development and industrial policy • The performance of the IDC • Comparative analysis and implications for realising ‘Leadership in Development’

3. 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

4. Financial system failures • Financial system should channel resources from savers to where are highest return opportunities • But: market failures, information asymmetries and imperfect competition, many of which are intrinsic features of financial system • Allocation of financial resources by financial system is backward looking, reflects their existing info and experience base not opportunities • Financial systems like SA’s tend to allocate finance to housing, motor vehicles, property and consumption Firms forced to invest out of retained earnings Inhibits investment of growing firms, in new activities • Development finance institutions needed, and have been at heart of successful late-industrialisation

5. Poor SA investment threatens sustainable growth and employment

6. Brazil and SA: common development challenges • Economies historically skewed towards resources, heavy industries and agriculture • Heavy industries developed with support from the state, under trade protection • Strong and well established industrial development finance institutions at centre of industrialisation • Both underwent far-reaching trade liberalisation in 1990s • Performance has been poorer than expected, with little impact on high unemployment and inequality • Now exploring more constructive government policy programmes for sustainable and more equitable growth and employment creation • Requiring more proactive role from DFIs

7. 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 linkages • Pattern is reinforced by strong commodity prices and market power

8. Bifurcation in manufacturing: Local demand growth and strong currency • Strong local demand  manufacturing growth and employment in Gauteng, led by industry in Ekurhuleni • Strong currency  poorer performance in coastal metros

9. Industrial policy • Integrated Manufacturing Strategy of DTI • Advanced Manufacturing Technology Strategy of DST/NACI • IMS 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

10. 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.’

11. Performance? Assessed in terms of: • Value and number of approvals • Profile of financing and development goals • By sector • By geographic area • SMEs • BEE • Strategic role in economy

12. IDC Approvals

13. Approvals by sector

14. Approvals by provinces

15. Financing: trend and breakdown • Fluctuating, with declines in recent years • Concentrated in machinery & metals, mining and chemicals, by value (largely capital-intensive) • Agriculture, hunting, forestry & fishing is largest by number • Similar pattern in recent years, although not so extreme bias to capital-intensive activities • African investments: large, resource based • Increasing share of finance to services • 19 518 direct jobs created in 2004 (average financing of R251th per job)

16. 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

17. BEE Approvals

18. SME Approvals

19. IDC’s strategic role in the economy • Anticipate key developments (e.g. SOE capex) • Redress the structural imbalances through channelling of finance and prioritisation • Realising broad-based empowerment: financing, best practice in management, employment equity and training • Ensure that mega projects contribute to broader based economic development through linkages • Act 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 structure • Research: IDC as a knowledge base on industrial development  is this being fully used?

20. IDC’s role as an industrial development finance institution • As 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 present • As 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

21. 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 economy • Increased investment rates • More employment-creating economic growth

22. 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 sectors • Monitoring pipeline, and application of criteria in line with priorities • Ongoing 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 deals • Industrial policy engagement: requires dedicated capacity, and better information flow within the IDC

23. 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