219456411480Critically examine the role of the Industrial development corporation IDC in providing finance for entrepreneurs in SAFinance Management 3AbstractWith an average growth of 1% over the last 4 years the IDC as a parastatal must show greater agency. In the words of Mcebisi Jonas countries with high initial conditions of asset inequality seemed to be slower growers than countries with high levels of equality.
Yaqoob AmlayStudent no:216144299941000Critically examine the role of the Industrial development corporation IDC in providing finance for entrepreneurs in SAFinance Management 3AbstractWith an average growth of 1% over the last 4 years the IDC as a parastatal must show greater agency. In the words of Mcebisi Jonas countries with high initial conditions of asset inequality seemed to be slower growers than countries with high levels of equality.Yaqoob AmlayStudent no:216144299Table of Contents TOC o “1-3” h z u Table of Contents PAGEREF _Toc520653202 h 1Build-up PAGEREF _Toc520653203 h 2Government responded with the establishment of the IDC Industrial development corporation PAGEREF _Toc520653204 h 3IDC Contribution and how it plays a role PAGEREF _Toc520653205 h 3Enterprise Development and Transformation –SMME & BEE PAGEREF _Toc520653206 h 4Success Story: Cotton traders is one of the success stories of the IDC in the textile industry PAGEREF _Toc520653207 h 4Black industrialist PAGEREF _Toc520653208 h 5Youth entrepreneurs PAGEREF _Toc520653209 h 5Women empowerment PAGEREF _Toc520653210 h 5IDC and how they extend their funding PAGEREF _Toc520653211 h 5PERFORMANCE OVERVIEW PAGEREF _Toc520653212 h 8Directors report PAGEREF _Toc520653213 h 8Value of funding approvals & Value of funding disbursed PAGEREF _Toc520653214 h 8Number of jobs expected to be created and saved & Funding to Black Industrialists PAGEREF _Toc520653215 h 8Utilisation of funds approved (2017) PAGEREF _Toc520653216 h 8Solutions and Rectifying Plans PAGEREF _Toc520653217 h 10Key insights & recommendations PAGEREF _Toc520653218 h 10Guidelines for effective reform PAGEREF _Toc520653219 h 11Getting SA back on track: PAGEREF _Toc520653220 h 11Conclusion PAGEREF _Toc520653221 h 11References PAGEREF _Toc520653222 h 13Build-upannexure 1(https://tradingeconomics.com/south-africa/inemployment-rate)With 26.7% (Stefanie Moya, 2018) (see Annexure 1) unemployment in SA and a huge part of the unemployed being that amongst the youth, it becomes imperative for the government to react and do so purposefully and timeously. Big corporates have had the bulk of the slice in the economy and has contributed very little with regards to alleviating unemployment amongst the youth as well as facilitating a steady growth of the economy.
The economy has grown about 1,5% in the 2017 financial year, this is hardly sufficient to justify business confidence. Speaking at The Directors Event, former finance minister Mcebisi Jonas said the South African economy has grown at an average of 1% since 1990. In contrast, China has grown 8.
5% since 2000 while India has expanded by 7%. Albeit off a low base, Africa has grown by more than 4% on average. The latter countries, China and India had concentrated their effort in manufacturing where South Africa choose to depend on unreliable sources of foreign investment.
Jonas sited this as one of the reasons South Africa was not growing like some other developing economies, despite its sophisticated infrastructure and business capability. (Inge Lamprecht,2017)Goolam Ballim, Standard Bank’s Chief Economist, discusses the year ahead (2017) for the South African economy with Stephen Gunnion. Does the risk of a credit rating downgrade to speculative status still loom heavily? And, should it occur, what will its impact be?What an interesting and positive outlook! Goolam believes, referring to the 2017 financial period, that the strong rand will pull us through even though SA is facing a credit rating downgrade.
If by June of 2017 we are downgrade to junk status we will be in recessionary times by December of that year. But until then the economy could recover in time by stabilising the labour market and drive the growth generating agenda. (The Standard Bank Group. 2017)Government responded with the establishment of the IDC Industrial development corporationThe Industrial Development Corporation (IDC) has been around since 1940 and is a national development finance institution belonging to the government and is designed to promote economic and industrial development.Projects financed and facilitated include those that are high-impact and labour intensive, leading the creation and innovation of new industries, using diverse expertise to drive growth in priority sectors, and to take on higher-risk funding projects.The IDC supports B-BBEEE and is actively involved in boosting and promoting black-owned and managed business and those with employment equity, by developing skills of black employees and business owners, by supporting government projects on local, regional, provincial and national levels, encouraging its stakeholders to comply with B-BBEEE policies, and encouraging the private sector to co-finance B-BBEEE transactions. (Entrepreneur, 2018)IDC Contribution and how it plays a roleThe IDC remains committed to promoting environmentally sustainable growth and increasing sectoral diversity to boost the local production of goods. The corporation also plays a critical role, directly and through its sefa subsidiary, in promoting entrepreneurial development and growing the SME sector.
Of its intended outcomes the primary being to facilitate sustainable employment and the secondary outcomes including:Improve regional equity, including the development of South Africa’s rural areas, poorer provinces and industrialisation in the rest of Africa.Promote entrepreneurial development and grow the small and medium enterprise (SME) sector.Advance environmentally sustainable growth.Grow sector diversity and increase localised production.Support the transformation of communities and development.(about-the-idc.html)For this assignment we will examine critically IDC role in providing finance for entrepreneurs in SA.
In other words, their ability to promote entrepreneurial development and grow the small and medium enterprise (SME) sector.Enterprise Development and Transformation –SMME & BEEOver the last 20 years, more than 70% of the number and 18% of the value of IDC funding approvals went to small and medium enterprises (SMEs).The IDC is keen to ensure the participation of SMEs in critical sectors of the economy which have long been dominated by very large players.
Let’s look at one of the success stories….Success Story: Cotton traders is one of the success stories of the IDC in the textile industryJob creation being one of the mandates of the IDC, their involvement and support to the textile industry has led to many jobs being created as well as stimulating economic growth and driving localisation.(https://www.idc.co.
za/in-the-media/idc-in-print.html, 2018)IDC assisted with the acquiring of plant and equipment.Scale up production capacity.Provided working capital to increase company’s efficiency.More jobs were created- from 50 to 200 jobs. The company’s factory capacity was improved to 6300 cubic meters, a further boost to the local economy. (https://www.
idc.co.za/in-the-media/idc-in-print.html, 2018)Black industrialistThe IDC assists black businesses in establishing, growing and/or diversifying their businesses. The IDC also ensures that it is at the forefront of policy developments such as the Revised B-BBEE Codes and the new Black Industrialist Framework to ensure that its funding activities are in line with evolving national policies.Results: During the reporting period, we approved 76 transactions valued at R4.9 billion for black-empowered businesses with black shareholdings in excess of 25% (excluding funding to subsidiaries).
This accounted for 35.7% of the total value of all funding approvals, in turn accounting for 7 010 jobs that are expected to be created and saved in the year under review.Youth entrepreneursYouth unemployment is one of the biggest challenges facing the country. The IDC recognises the extent of this challenge and has proactively been promoting initiatives that seek to encourage youth participation in job-creation initiatives and entrepreneurship.Results: During the reporting period, R970 million was approved for 19 transactions with youth shareholdings of more than 25%. This is a marked increase from the previous year’s performance when R159 million was approved for 11 transactions. The Corporation is targeting R4.
5 billion for the funding of youth-empowered businesses for the five years to 2020.Women empowermentEfforts to provide support to female entrepreneurs have resulted in significant improvements.The IDC has significantly increased levels of funding for women-empowered deals, indicating an increasing shift to women in larger businesses.Results: During the year under review, the IDC introduced specific targets for the funding of women, aimed at increasing the funding support for women-empowered enterprises.
This has had an immediate impact with approximately R1.2 billion being approved against a target of R600 million. This is a significant improvement compared to the R756 million approved in the previous year.
(IDC Performance & impact, 2016 Integrated Report)IDC and how they extend their fundingWith the intention to build industrial capacity in South Africa, boosting the economic growth, with has been as slow as 1.5 %, and industrial development. Funding is extended to start-up and companies looking to add to existing operations.
This is done up to a maximum of 1 billion and a consideration of debt of 1 million.IDC have a variety of funding instrumentsDebtEquity and quasi-equityGuaranteesTrade financeVenture capitalWith minimum requirements ranging from initial security to emphasis on black economic empowerment and black industrialist. (https://www.idc.co.za/home/idc-products.
html)Annexure 2Findings for the year 2017PERFORMANCE OVERVIEWDirectors report For the analysis of the performances refer to the Annexure 2Value of funding approvals & Value of funding disbursedOn most fronts, the IDC’s performance improved compared to 2016. The value of funding approvals increased to R15.3 billion, 5.7% higher than the previous high reached in 2016. This amount excludes R922 million that was approved from off-balance sheet funds (funds managed on behalf of third parties). Levels of disbursements remained flat, with R11.
0 billion disbursed in the period compared to R11.4 billion in 2016. This should be seen in relation to a downward trend in the level of fixed investment in the manufacturing sector as a whole which was experienced during the year. Disbursements of R525 million from off-balance sheet funds are not included in this total.Number of jobs expected to be created and saved ; Funding to Black IndustrialistsGood performance was recorded on all remaining development indicators. The number of jobs expected to be created from IDC’s funding approvals during the year increased by 53.9% to 18 206 while the number of jobs expected to be saved was 2 675.
The total number of jobs expected to be created and saved in transactions approved during the year increased by 36.7% to 20 881, the highest number recorded in the last three years. Improved jobs numbers also resulted in the cost-per-job for funds approved decreasing from the previous year. Information gathered from clients show that employment at the IDC’s clients1 decreased by 0.
2% over the year, with more than 150 000 people employed by those clients. If the indirect impact of these jobs is included, the total impact that the IDC’s clients have on employment increased by 1.7%, slightly lower than the growth in non-government formal employment over the last year. Significant impact was made this year on the value of funding approved for Black Industrialists (63% increase to R4.
7 billion), black-empowered companies (increase of 104% to R10.1 billion), women-empowered and youth-empowered businesses (increases of 178%, and 142%, reaching R3.2 billion and R2.3 billion respectively).Utilisation of funds approved (2017)The bulk of funding approved in 2017 was for projects and start-ups (46% of total), with capacity expansions making up the second highest category (29%). Smaller amounts went to funding for distressed businesses (13%), ownership changes (10%) and expansionary acquisitions (2%)2015 is an interesting year as seen in the graphs above (annexure 2) ….Two of the 11 industries in SA was shrinking, while eight was experiencing some growth. The severe drought causes a drop-in productivity in the agricultural sector.
Other sectors contributing to the shrinkage was electricity and gas and water supply that caused a drop of 1%. (Statistics South Africa, 2016)As seen in the graph depicting jobs saved and created it is pleasing to see that even with a shrinking economy in 2015 and a 1’5% growth in the economy jobs were saved probably due to the funds distributed by the IDC.With an economy that is growing at such small margins (1.
5%) it is encouraging to see that black- owned and black-empowered business is higher than it’s been in the last two years prior to 2015.The finance industry expanded by 2,8%. As this is the largest industry, comprising 21% of the entire economy, its increase in activity was the main positive contributor to the 1,3% annual rise in GDP.(Statistics South Africa, 2016)2017 economy performance….
Despite a brief recession and bleak predictions for 2017, the South African economy pulled out some surprises and posted a higher than expected GDP growth rate for the year, Stats SA reported on Tuesday.The South African economy grew by 1.3% in 2017, exceeding National Treasury’s expectation of 1.0% growth announced during the National Budget Speech in February last year.
“After a wobbly start to 2017, which saw economic activity contract in the first quarter, the economy saw sustained growth for the remainder of the year. The fourth quarter experienced the highest growth rate of 2017, with the economy expanding by 3.1% quarter-on-quarter,” Stats SA said.The reported figures fly in the face of market expectations, which ranged from the exceptionally bearish at 0.2%, to the more generally predicted 0.8%. (BusinessTec, 2018)The Industrial development corporation being a parastatal is part of the problem.
With an economy which has grown on average by 1 % since 1990 and compared to the average of 4 % growth in the rest of Africa. Confidence in government institution like the IDC is in understandably low. South Africa’s low economic growth was not cyclical as many commentators seemed to think, but structural, former deputy finance minister Mcebisi Jonas, has argued. The former deputy minister, who was fired from the position earlier this year in a controversial cabinet reshuffle that triggered several credit rating downgrades, highlighted four reasons for South Africa’s dire economic situation.
1. Dependence on unreliable sources of foreign investment2. Insufficient investment in fixed capital3. Inherent inequality4. Inability of state to lead structural economic reform project (Inge Lamprecht.2017)Solutions and Rectifying PlansKey insights ; recommendationsThe positive implication of acknowledging our own responsibility for poor choices is that different policy choices made in South Africa could drive substantially better outcomes for all.The connection between slow growth, poor education and limited employment opportunities for low-skilled workers is the key to understanding South Africa’s triple challenge of poverty, unemployment and inequality.The connection between slow growth, poor education and limited employment opportunities for low-skilled workers is the key to understanding South Africa’s triple challenge of poverty, unemployment and inequality.
By driving up the costs and regulatory risks associated with employing people, the implementation of the decent work agenda has priced unskilled workers out of the labour market. In the eyes of our policy-makers, work that is not ‘decent’ is worse than no work. The implication is that no wage is better than a low wage.To improve the prospects of the poor, we need economic policies that create jobs for the unskilled. Redistribution, while important, is always going to be inadequate to the challenges we face; it will never achieve much more than the administration and amelioration of poverty, rather than its steady elimination.
Despite the rhetorical commitment to faster growth, taken as a whole, South Africa’s policies have reduced our growth rate. We need to put economic and employment growth at the top of our list of priorities. This means that all other policies need to be assessed in terms of their impact on the goal of achieving faster and more inclusive (i.e., more labour-intensive) growth.Without growth, South Africa’s politics will decline into a progressively disruptive, increasingly racialised and radicalised squabble over a shrinking economic pie. Guidelines for effective reformGrowth and jobs must top the agendaBuild on South Africa’s strengthsSouth Africa has a number of important advantages.
Chief amongst these are:The size and strength of the country’s firms, which, measured on a per worker basis, are more productive than in most of the developing world. Our constitution and the high level of independence and legitimacy of our justice system. The credibility and integrity of some of the key public institutions involved in the management of the economy.
We have several large cities, not just one overwhelmingly dominant capital city as in many other developing countries, and our cities are not yet choked by unmanaged construction. South Africa is a very attractive destination for foreign skills and investors, who look for desirable countries and cities in which to locate their families.Getting SA back on track: Transformation and growth must work together for all South Africans to benefit and not just an elite; The country needs a credible new strategy for inclusive growth;South Africa needs jobs for the workforce that we have not the one we wish we had;The country will not succeed if government is pro-growth but antibusiness; Business must also get its own house in order; • Skills are vital at every point in the growth agenda; and South Africa’s future is urban, so policies, power and resources must catch up with this reality (A Bernstein, A Altbeker, Prof A Johnston, April 2016)ConclusionThe solution to the slow growing economy and the high unemployment rate lies in addressing and not just sugar coating the inequalities within education. Universities and other tertiary institutions have lost confidence in the education system. A system that is continuously failing a robbing our youth from a future that equates to riches, both in wealth and standard of living.
One that produce high pass rates with low passing requirements and of low quality. Learners get through the education system with inadequate skill levels in numeracy, language and life science. Parents have to foot the bill unfortunate.
Parents that can afford spend money of tutors to supplement teaching and universities require entry exams like NBT’s to screen prospective students.Education know has becomes an institution for the privilege, those who have access to additional fund, which does not necessarily come from saving, in most cases financed through loans and bonds. A vicious cycle indeed, parents spend more money on education that is supposed to be a human right provided by the state to tax payers. IDC, being a parastatal has a greater responsibility, as this problem require much more money than the commitment they are claiming as substantial.
Ironic, with a failing education system that attracts low earning families and is criminally under resourced, the IDC support the above-mentioned schools with R100 000 for the next three year and providing bursaries in maths and science at a tertiary level only. In there lies the audacity of inequality. Learner dropout rate of on average 40%, for reasons other than affordability is much more prevalent. Learners don’t do well in maths and science because of much more factors than finance. Social inequalities of lack of housing, access to basic amenities and wide spread corruption within municipalities and government. The amount of money, they are making available schools to school are limiting the progress and true transformation.Addressing these inequalities will unfortunately not be easy but the necessary foresight and commitment to address them is key to the development of a stable economy and adequately addressing unemployment.
“The bottom line is this: South Africa needs accelerated growth that is urban-led, private sector-driven, enabled by a smart state, and targeted at mass employment.” …Ann BernsteinReferencesInge Lamprecht.2017. 4 Reasons Behind SA’s Low Growth.
“The problem is structural, not cyclical”-;https://www.moneyweb.co.za/news/economy/4-reasons-behind-sas-low-growth/;.The Standard Bank Group,2017, South Africa economic outlook for 2017, video recording, You Tube, South Africa economic outlook for 2017, Published on Feb 20, 2017, ;https://www.youtube.com/watch?v=XWq2vkR21Ls;feature=youtu.be;Entrepreneur, 2018, IDC Funding, ;https://www.
entrepreneurmag.co.za/advice/funding/government-funding-funding/idc-funding/;Stefanie Moya (2018) South Africa Jobless Rate Steady at 26.7% in Q1. Statistics South Africa, graph. ;https://tradingeconomics.
com/south-africa/unemployment-rate;A Who we are, ;https://www.idc.co.za/about-the-idc.html;;https://www.
idc.co.za/in-the-media/idc-in-print.html. (2018);IDC, Contributing to socio-economic development, 2016 Integrated Report, ;https://www.idc.co.za/ir2016/performance-and-impact/contributing-to-socio-economic-development;IDC-products, ;https://www.idc.co.za/home/idc-products.html;Industrial Development Corporation, 2018, 2017 Annual Financial Report, page 18, ;https://www.idc.co.za/ir2017/pdfs/Financial%20statements-%20single%20format.pdf;Statistics South Africa, 2016, The economy: winners and losers of 2015, ;http://www.statssa.gov.za/?p=6233;;https://businesstech.co.za/news/finance/229655/south-africas-economy-grew-more-than-expected-in-2017/;BusinessTec, 2018, South Africa’s economy grew more than expected in 2017, <https://businesstech.co.za/news/author/staff-writer/” o> “Posts by Staff Writer”A Bernstein, A Altbeker, Prof A Johnston, Published in April 2016, Centre of Development And Enterprise, CDE Growth series, Key insights and recommendations, <http://www.cde.org.za/>