Development funding towards green industrialisation

– through Innovation

INDUSTRIAL EFFICIENCY CONFERENCE

Tony Nkuna

PDM: Industrial Infrastructure Unit

Industrial Efficiency Conference 2015

Durban ICC, July 22nd, 2015

The Industrial Development Corporation

o Established: 1940

o Type of organisation: Development Finance Institution (DFI)

o Ownership: South African Government

o Total assets: R123 billion ($10.08 billion) as at end March 2015

o Main business area: Providing funding for private sector projects that are contributing towards

industrialisation and job creation

o Geographic activities: South Africa and the rest of Africa

o Products: Senior and sub-ordinate debt, equity, BEE and BBBEE Preference share funding

& project development funding

o Stage of investment: Early stage (feasibility), commercialisation, expansion

o Project development: Identification and development of projects adding to the industrial base

o Sector focus: Industrial Infrastructure (Energy & Logistics), New Industries, Agro-processing,

Agriculture & Forestry, Mining & Metals Value Chain, Chemicals &

Pharmaceuticals Value Chain, High Impact Sectors (Textiles, Media, Heavy

Manufacturing, Light Manufacturing & Tourism)

Positioning of DFIs within the financial system

• Non-commercial focus

• Fiscal transfers and grants

• Development objectives (social)

Government / NGOs

• High commercial focus

• Private sector capital

• Financial objectives

• Known risks

Commercial Financiers

• Commercial and development focus

• Sharing risk

• Internally generated funds, government funds, loans

DFIs (e.g. IDC)

Greater importance on financial objectives

Greater importance on social and developmental objectives

DFIs should not compete with other institutions, but should

instead encourage cooperation to achieve its goals

Partnering for industrial development

IDC

• 75 years of experience in industrial development

• Appetite to take risk

• Early stage investment

• Financial muscle

• Targeted funding for specific interventions

Industrialists/ Entrepreneurs

• Investment plans

• Projects under development

• Technology

• Operating/management expertiseLong-term view on

investments and a

commitment for the

development of the

industry

Introducing IDCHistorical perspective

• World War 2 – Shortage

of industrial goods

• South African economy

largely based on

agricultural production

and gold mining

1940s

• IDC established to

provide financing for

industrial undertakings –

at this stage only in the

manufacturing industry

• Food processing;

• Textiles

• South Africa facing

threat of isolation from

the rest of the world

1950s & 1960s

• Securing energy

resources for South

Africa a priority

• Increasing natural

resource beneficiation

• Petroleum

• Fertilizers

• Wood processing

• Chemical beneficiation

• Mining and minerals

• Decentralisation policy

by government

• Increasing isolation

• Self sufficiency

• Balance of payments

1970s & 1980s

• Import replacement

• More resource intensive

industries established –

mainly to bolster export

earnings in non-gold

sectors

• Initiation of high-tech

industries

• Agriculture explored as

a foreign exchange

earner

• Industrial real estate

development

• Resource beneficiation

• Micro-electronics

• Change in government

• South Africa introduced

to a globalising world

• Addressing the

disparities created by

apartheid

1990s

• Moves to encourage

regional integration

• Black economic

empowerment

• Export promotion

• Services related

industries

• Investments elsewhere

in Africa

• Tourism

• ICT

• Unemployment

• Diversification of

economy

• Reducing inequalities

• Infrastructure

constraints

Early and mid 2000s

• Job creation

• Developing rural areas

and other previously

underdeveloped regions

• Downstream industries

• Entrepreneurial

development

• Sector strategies

• Film

• Franchising

• Healthcare

• Financial services

• Transport

• Construction

• Industrial infrastructure

Over its history, IDC has adapted to

South Africa’s changing priorities and

expanded into new industries as the

economy developed and policies

evolved

Late 2000s & 2010s

• Recession

• New Growth Path and

Industrial policy

• Mandate overlap of

DFIs

• Growing financial sector

liquidity

• Climate change

• Focus on NGP,IPAP2 &

NDP

• Phasing out funding to

service industries not

aligned to priorities

• Job creation through

development of key

sectors/value chains

• Expansionary and

broad-based BEE

• Funding to distressed

companies

• Green-industries

• Phasing out:

– Franchising

– Financial services

– Transport

–Construction

Introducing the UnitIndustrial Infrastructure

• Established in April 2015

• Enabling industrial development through infrastructure investments

• Mainly driven by IDC value chains

1) Energy

– Renewable energy

– Fuel based energy

– Energy efficiency

– Base load energy

– Biofuels

2) Logistics, Water and Telecoms Infrastructure

– Telecoms and broadband

– Water infrastructure

– Rail, road, warehousing

– Industrial hubs etc.

A value chain approach apply with emphasis on industrial development

(including localisation) and job creation

Role: Industrial Infrastructure

Objectives

• Support specific infrastructure that unlocks or enables industrial capacity development and economic

opportunities

• Ensure that Value Chain projects have all the necessary infrastructure requirements to achieve their

developmental outcomes

Approach

• Support private sector or PPP industrial infrastructure where it is necessary to specific projects within IDC value

chains or New Industries or targeted industrial capacity building

• Play a coordination role to ensure that requisite infrastructure is funded and developed by other funders

• Invest selectively in strategic, economy wide, large scale interventions

Measures of success

• No Core VC projects delayed by infrastructure requirements

• Total disbursement amount facilitated by actively influencing other funders

• Number of direct and indirect jobs unlocked through infrastructure investments

• Quality of portfolio

Role: Industrial Infrastructure (cont’d)

Focus Areas

• Energy: Renewable Energy, Base load (Coal and Gas), Fuel Based Energy (Waste to Energy, Cogeneration),

Energy Efficiency (Grid), Biofuels

• Logistics: Industrial Hubs, Rail, Aerial Ropeways, Port, Pipelines (excl. oil & gas), ICT Broadband, Transmission

Lines, Maritime (Operation Phakisa), Road Corridors, etc.

Proactive Strategies

• Relieve electricity demand pressure on the grid through implementation of new energy capacity

• Optimisation of Energy Efficiency interventions to reduce energy consumption and pressure on the grid

• Ensure logistics system that will allow local industries to be competitive and be able to access new markets/

suppliers in the RoA and be globally competitive

• Introduction of the biofuels sector in the RSA economy through the development and execution of the Cradock

Ethanol Plant

Reactive Strategies

• Providing strategic input to water development

• Providing Strategic & Technical input to the SIP18 projects and influencing government in policy formulation/

review

• Increase existing broadband network capacity/redundancy and extend coverage to underserved areas

9

Transition

Challenges:

Carbon intensity;Natural resource

management;Unemployment;

Economic concentration;Competitiveness;

Protectionism;Operating environment.

Current drivers:

New Growth Path;

Integrated Resource PlanIndustrial Policy Action Plan;

National Climate Change Response White Paper;

National Development Plan.

Opportunities:

Amongst best solar resources;

Wind energy potential;Biodiversity;

Economic diversification through infant industries;

Job creation;Up-skilling of workforce;First mover advantage.

Limited window of opportunity!

Drivers of Green Economy transition in SA

Green Economy: IDC Strategy

• IDC’s role in growing the green economy is through

investments in:

– Cleaner production;

– Clean and renewable energy;

– Energy efficiency;

– Demand-side management interventions;

– Emissions and pollution mitigation;

– Waste reduction; and

– Bio-fuels.

• Focus on early phase project development.

• Develop specific funding interventions (e.g. IDC/KfW Green

Energy Efficiency Fund) - Innovation.

• Support and development of emerging industries at various

levels.

• Follow a value chain approach, with emphasis on industrial

development (including localisation), job creation and the

development of long-term sustainable industries.

11

Key success factors

Conducive regulatory environment

Securing resources

Generic issues Localisation

Developing skills

Taking the lead, growing demand

Su

cc

es

s fa

cto

rs

Successful implementation of the green economy

• Policy framework, pace of regulatory revision, amendment and

development.

• Stakeholder communication and co-ordination.

• Simplification and streamlining.

• Public sector playing an exemplary role.

• Gradual, effective transformation of production and consumption

patterns.

• Commitment, awareness and readiness by the private, public

and household sectors.

• Institutional capabilities.

• Funding availability, incentives, mechanisms.

• Regional coordination.

• Integration and coordination.

• Local procurement and export market penetration to develop

critical mass.

• Availability of competitively priced inputs and services.

• National industrialisation strategies.

• R&D capabilities and technology transfer.

• Address shortages of skills in certain areas.

• Re-skilling and development of specific skills capabilities.

• Availability, accessibility, quality, sustainability and pricing of

required resources.

IDC

Total Investment -

R631m

Total BW1- 3

Investment

R117bn

Total Investment –

R34bn

Total Investment –

R41bn

Total Investment –

R42bn

4%

96%

IDC

30%

70%

SOLAR PV WIND

CSP HYDRO

10%

90%

IDC

22%

78%

IDC

Renewable Energy:IDC participation in REIPPP

• 33 Projects, 1484 MW • 22 Projects, 1984 MW

• 2 Projects, 14 MW• 5 Projects, 400 MW

R3.9bn

R0.5bn

R1.4bn

IDC’s approach:

• Project developer

• Community funding (2.5%

free carry)

• BEE funding with operational

involvement

• Debt and or/sub debt

funding with a combination

of BBBEE and/or BEE

IDCs participation in debt provide:

• Bigger ZAR value participation for IDC per deal

• Duty of care to IDC from lender technical and legal consultants

• Appreciation by market that IDC shares risk

• Additional liquidity to the commercial lending pool

REIPPP:IDC Funding instruments

Senior Debt, 53%

Sub-Debt3%

Equity, 19%

BEE, 5%

BBBEE, 20%

R7.0bn

R2.7bnR0.6bn

R2.5bn

R0.5bn

Direct Equity

Min 10% with minority

protection

Max 30% (not majority)

Lending to trust or BEE shareholder to invest in

project

Repayment with dividend.

Tenor of 15 years

post COD

Interest during

construction can be

capitalised

Green FBE (WtE):

Industry structure

Municipal solid waste or

Biomass or Tyres

Grown biomass

Organic waste

Sewage sludge

Animal litter

Feedstock

Waste Gas

Pyrolysis

Sorting

Anaerobic Digestion

Combustion Incineration or

Waste heat

Gasification

Primary Process

Steam turbine or organic rankine

cycle

Electricity

Industrial fuel

On-site heating

Vehicle fuel

End Use

Recycling

Co-generationInternal gas combustion

Gas Cleaning

Liquefied Biogas (LBG)

Compressed Biogas (CBG)

Steam

Piped gas

Secondary Process

Green FBE (WtE):Attractiveness of fuel based green energy

• Storage and flexibility of dispatch, so Load Factor of 80 % and even 2x (stored biogas at night)

• Can be moved, so can be used as high value transport fuel or can enable reliable off-grid or back-up power

• Can be used as a peaking plant

• Risk – feedstock can become a commodity & increased prices.

Fuel Based Energy

In SA competes with low value

coal

Best use for biogas lies in the

Transport sector in SA, in back-

up power, off-grid or for weak

grid in Africa

Green FBE (WtE):IDC Approach to WtE and Co-generation

Feedstock

(Raw material)

Offtake

(Revenue)

Process(Technology

options)

Investment decision

Feedstock (Fuel) security:

• No feedstock security, no start

• Challenge: Long term supply agreement to cover

debt tenure + 2 years

• Quality, quantity, price & period

• MFMA requirements for municipalities

Process/Investment options:

• Driven by feedstock qualities, quantities term and

off take options

• Typical cost R15-35m/MW

• High load factors (e.g. 90%)

Offtakes:

• Low O&M cost

• If Offtake/feedstock price strong

• Repay debt quickly

Energy Efficiency:Policy environment and enabling legislation

2008

2008 National

Energy Efficiency Strategy for South Africa 2005

(NEES), Revised 2012

- Targets energy intensity reduction of 12% by 2015

2009

2010

2011

2012

2012

201

3/1

4

1 million Solar Water Heater

Government Target

Announcement by Minister of

Energy 23 June 2009

Government

Objectives

>>>

Energy

Efficiency

Projects

through the

various

ESKOM

EEDSM

programmes

>>>

Energy

White

Paper of

1998

1 million

SWH

Target by

2014

(revised

to 2016)

Integrated

resource

plan (IRP)

2010

Industrial

Policy

Action

Plan

(IPAP2)

2012/2013

– 2014/15

Green

Industries

a key

sector

Building

Regulati

ons &

Building

Code

(SANS

10400-

XA:2011

) with

SANS

204

NGP

Green

Accord

0

500

1000

1500

2000

2500

3000

3500

4000

Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13

Energy Efficiency Projects (MW Savings)

Eskom Verified Savings (MW)

Income

Tax Act –

Regulation

s on tax

allowances

for Energy

Efficiency

Savings

(Section

12I and

12L)

Carbon

Taxes-at

R120 per

ton

National

develop-

ment plan

DSM 3 yr target:

To save another 1074MW

Late2010

2011

2012

2013

• Market Launch of the R500M Green Energy Efficiency Fund(GEEF)- 10% of FUND committed at launch

• Aggressive marketing with Industry Associations & Partnership with Eskom

• IDC and KFW sign loan agreement for €48M and €2. 1M Technical Assistance and Capacity Building Grant

• ESCO Market Study published-access to finance barrier to entry• R400 million AFD credit line established to finance PPA based

1MW- 10 MW and greenfields EE

• 17 companies financed at R174 million ( ca 35% of GEEF)• 69% of funds committed to SMEs• Total Energy savings of 387 GWh/yr• Carbon emission reduction – 383 KtCO2/yr• MoU with Green Fund – projects demonstrate additionality

MARKET SITUATION

Constrained

electricity

supply and high

prices

Access to

finance barrier to

EE/RE

investments

RESPONSE

Increased

demand for

ESCO services

High cost of

small scale RE

development

HIGHLIGHTS

8MW Cogen plant -45GWh/yr and 46ktCO2

Mass rollout of

310 GWh

/34MW

showerheads

60% of

committed

funding to

ESCOs

27 FREE

Walk through

audits and 4

investment

grade audits

Industrial

Energy

Efficiency

Energy Efficiency:IDC response - Innovative funding GEEF & AfD

Renewable Energy: Its role in terms of SA energy mix & economy

• Diversification of SA’s generation mix which is predominantly coal

• Emissions and pollution mitigation

• Localisation of manufacturing capacity and sourcing of local components – IDC

requires PV panels and inverters to be locally sourced

• Regional and rural development and diversification of economy (e.g. in Northern

Cape and Eastern Cape)

• Job creation during construction and operation phase (> 10 years)

• Substantial private sector expertise which has benefited skills development

objectives of the country

• Competitive industry that has benefited the country through competitive prices.

Renewable Energy:Where to from here?

• Continue to support projects that are aligned to our strategic imperatives (new

generation capacity)

• However more focus is on projects that provide a differentiated participation e.g.

supporting black developers and operators, have significant localisation

opportunities

• Support projects that have new technologies where IDC will provide a catalytic

role

• Have high appetite for projects in marginalised provinces – achieve regional

equity

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

THANK YOU