Day Month Year
SME financing in South Africa: The IDC’s 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
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”)
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
South Africa’s 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)

Comparative information for various DFIs in South Africa
120
100
Assets per employee (R million)

Total assets indicated
by bubble size
80
60
DBSA
NEF
40
NHFC
Land
Bank
RHLF
20
Nurcha
UYF
IDT
0
0
SA Micro Finance Apex Fund (SAMAF)
IDC
100
200
300
400
-20
Staff numbers
500
600
700
800
Provincial DFIs in South Africa
Gauteng Enterprise
Propeller
Northwest Development
Corporation
Free State Development
Corporation
Western Cape
Investment and Trade
Promotion Agency
(WESGRO)
Limpopo Development
Corporation (LIMDEV)
Mpumalanga Economic Growth
Agency (MEGA)
Ithala Development
Corporation
Eastern Cape Development
Corporation
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 IDC’s Head Office in Sandton (Johannesburg)
The IDC’s 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
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.
Outcomes
Objectives
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”
Mission
The IDC’s vision, mission, objectives & outcomes
Supporting industrial development capacity
Promoting entrepreneurship
Sustainable employment
Growing sectoral diversity
Regional equity
Growing the SME sector
Industrialisation in the rest of Africa
Broad-based black economic empowerment
Environmentally sustainable growth
New entrepreneurs entering the economy
Sectoral involvement
1997




Agriculture
Mining
Manufacturing
Property
Holiday Inn Soweto
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
•
•
public private partnerships
development agencies
Other
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
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
The IDC’s 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)
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 client’s specific requirements:
• Capital and interest moratorium
• Terms of loans
• Equity investments
• Cashflow considerations
• Capital security (collateral)
• Own unencumbered cash contribution
• Pricing and fees
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
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 Africa’s
marginalised groups
TES
R 1 billion
Women Entrepreneurial Fund
People with Disabilities Fund
Equity Contribution Fund
Development Fund
Community Fund
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:
High
risk
Risk
Low
risk
Seed
Angels
Funding
sources
Start-up
Development
Expansion
Stable
IDC
VC Funds
PE Funds
Commercial Banks
Market gaps: IDC differentiation  management of external funds
Risk Capital Facility (RCF)
• 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 UD$30 mil fund for SMEs in partnership with Thales & Societe Generale
Market gaps: IDC differentiation  handling clients in distress
The IDC’s approach to clients in financial distress
• Clients with high-risk profiles are identified and given special attention to manage the IDC’s
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 IDC’s position
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 shortterm intervention is required, if it experiences financial
difficulties.
–
The funding for the business support is born partly by
IDC
• Expanding IDC’s reach into rural areas
• Support for community groups
• Encouraging investments to address certain goals
through incentives
The IDC’s recent developmental track record
Financing approvals
R billion
• More than 75% of the value of approvals
to expansions and tart-ups
Number
500
8
400
6
300
4
200
2
100
-
• Significant investment in SMEs (56% of
the total number of project funded)
0
04
05
06
07
08
Financial year
New jobs created/saved
• R3.2 billion approved for black
empowered enterprises (61% of the total)
40,000
30,000
Number
• More than 40% of jobs will be created in
South African rural areas
Value
10
20,000
10,000
04
05
06
Financial year
07
08
Number
• IDC total approval amounted to a record of
R8.5 billion
The IDC’s recent SME development track record
Approvals to SME companies (value)
• 3 300 people attended IDC sponsored
courses which focus on teaching
essential business skills.
900
30
600
20
300
10
-
0
04
05
06
07
08
Financial year
Approvals to SME companies (number)
Number
300
Number
• R3.4 million in grant funding was
committed to pre- and post-investment
business support for IDC clients
40
Share in total
90
250
75
200
60
150
45
100
30
50
15
-
0
04
05
06
Financial year
07
08
Percentage
– R904 million
R million
– 56% of the total number of projects
funded
Value
Share in total
1,200
Percentage
• Significant investment in SMEs:
Success Stories: Case Study 1
Low Cost Windows CC
Project description
Current status
• 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
• 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
Financial
Instruments
• Since the founding of the business the
IDC has approved various loan and
guarantee facilities amounting to over
R1.5 million
Success Stories: Case Study 2
Holiday Inn, Soweto
Project description
• Holiday Inn is situated in Kliptown, Soweto township
• Managed by Zuka African Tourism and Investment
Corporation, a Black-owned hotel group
Current status:
• The hotel has created 43 permanent jobs and 49
annualised construction jobs
• A community trust also holds a shareholding in the hotel
• 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
Success Stories: Case Study 3
Knysna Elephant Park Project
Project description
• Situated just 10km from Plettenberg Bay, at one of
Garden Route’s 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
Developmental Impact
• Developing poor rural communities
• Supporting eco-friendly tourism in the Eastern Cape
IDC has invested R1.9 million in the project since 2002
Financial
Instrument
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
Financial
Instruments
• Business model is able to carry 100% debt
• IDC approved an amount of R129 million
towards the conversion of 15 stores
Success Stories: Case Study 4 (cont)
Pick ‘n Pay
Current status:
Developmental Impact
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
• 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
Vereeniging store
• Improved from sales from just over R800 000 per month to
over R3.6 million per month
• Created 85 new job opportunities
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
Financial
Instrument
• 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
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
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 IDC’s 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
Day Month Year
Thank you
The Industrial Development Corporation
19 Fredman Drive, Sandown
PO Box 784055, Sandton, 2146
South Africa
Telephone (011) 269 3000
Facsimile (011) 269 2116
E-mail callcentre@idc.co.za