FIFI PETERS: The Industrial Development Corporation, the IDC, will be a key partner in funding South Africa’s Economic Reconstruction and Rebuild Programme. The development finance institution is one of the lenders where small- to medium enterprises generally go to get funding for their development projects.
We have the CEO of the IDC, TP Nchocho, joining us on the Market Update for more, just to tell us how the development objectives at the IDC are going. TP, it has been a long time. Thanks for joining the Market Update.
TP NCHOCHO: Thanks for inviting me, Fifi.
FIFI PETERS: I see that to the IDC released its [annual] results yesterday and things are looking a lot better compared to the previous year. But what stands out for me is the improvement in your annual loss from R3.7 billion to R33 million this time around. It came at a significant cost regarding how many businesses you were able to provide new funding [to] – is that a correct assessment?
TP NCHOCHO: I would say yes. We had to manage the organisation prudently in order to return to profitability. You should have seen in the results that the IDC as a company had a loss last year of about R3.1 billion and we have turned it around this year by more than 200% to a profit at the IDC company of R3.3 billion. It was only after we did the consolidations of our loss-making subsidiaries that we then narrowed at a group level, at a consolidated level, the loss to the R33 million that you’re talking about.
So the IDC itself is standing strong and we are grateful for the recovery that we have seen, but it did come at the expense of new advances. The point that we made at our results presentation was that the economy was very difficult to lend into.
The IDC invests in the real economy. It is extremely difficult to sustain high levels of investment flows into the economy when businesses themselves are pulling back. I gave the statistics as a result of that.
Over R9 billion of transactions that we had already approved the year before were cancelled during last year. Companies [were] simply saying: “No, we’re holding back our expansion plans and our growth plans.”
So largely the state of the economy, really low business confidence, low capital formation and all these factors, I would say.
FIFI PETERS: Yes. Just looking at that funding value chain, as you rightly mentioned you had to exercise prudence. I did see that funding towards black industrialists over the period was down, towards women was down, and towards youth entrepreneurs was also lower. You do mention that some of the transactions that had been approved [for] companies pulled back.
But how much of this was you as the IDC also having to show tough love and to reject proposals?
TP NCHOCHO: That came into the equation as well, let’s be honest, Fifi, because in an environment of economic decline – with more than 7% of the economy shrinking last year – there were applications that came through but, as we did our credit assessments, to be honest there were indeed a significant number of applications that we had to decline, because we believe it is only responsible lending to say if the liability prospects of a business are really, really poor in our assessment, we shouldn’t just do lending for the sake of lending. It is important that we stay with our current strategy of development finance which is sustainable in the long term. So yes, a greater selectivity in our credit granting was a factor.
FIFI PETERS: Let’s talk about the current strategy then, because the IDC is expected to play quite a big role in the rebuild programme. A big chunk of that rebuild programme is centred around infrastructure. We have heard of various deals on the table and in the pipeline. Can you just give us a sense of how much you are setting aside as the IDC, or how much you have dispersed towards the rebuild?
TP NCHOCHO: The priority sectors, Fifi, yes, infrastructure, and in the second instance energy; we are also looking as a priority sector at the chemicals and the pharmaceuticals environment, and agriculture and agro-processing are right up there in the priority list. The automotive sector as well is very high up there. There is a large ecosystem of component suppliers in South Africa that supply to the major OEMs – BMW, Ford, and Mack, all of them – but we fund mainly their component-supplier base.
You and I know that recently the European Union said by 2030 they will be stopping cars that are fuel-fired, and so there is a massive adaptation that has to happen in the automotive sector in South Africa, and this is where we see investment activity.
At the moment, Fifi, we are just over halfway in the year and we have already granted in excess of R6 billion into the economy. We have a pipeline that we are evaluating at the moment, which is just over R7 billion. But in addition to that, there are many other medium- to long-term prospects amounting to R24 billion or so that we are looking at.
In the energy sector we are seeing a completely wide spectrum of opportunities that have come out of the changing policies regarding self-generation. In that sector alone we are evaluating R8 billion worth of opportunities that will come in tranches. We will do some this year, some will mature maybe in 12 months’ time, and so on. That’s where the priority areas are.
FIFI PETERS: Lots of billions there that you’ve mentioned. I suppose the hope is that they translate into real outcomes of growing the economy and creating a jobs.
TP, we will have to leave it there. Thanks so much for joining the Market Update. That was TP Nchocho, CEO of the IDC.