Presented by:Mr Ashley PetersenSenior Business Development ManagerAfrica UnitIDCIAD SUMMIT 2015

Funding Broadband infrastructure in the rest of Africa – The IDC

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Introducing the IDC …

o Established: 1940

o Type of organisation: Development Finance Institution (DFI)

o Ownership: State owned company, 100% owned by the SA government

o Total assets: ±USD12 billion

o Total liabilities: ± USD2 billion

o Funding status: Self financing, pays dividends and income tax

o Main business area: Industry development through the provision of funding resulting in job creation

o Geographic activities: South Africa and the rest of Africa

o Products: Custom financial products to suit a project’s needs including debt, equity, guarantees or a combination of these

o Stage of investment: Project identification and development, feasibility, commercialisation, expansion, modernisation

o Number of employees: 834

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• Non-commercial focus• Fiscal transfers and grants• Development objectives (social)

Government / NGOs

• High commercial focus• Private sector capital• Financial objectives• Known risks

Commercial Financiers

• Developmental and commercial focus

• Sharing risk• Internally generated funds,

government funds, loans

DFIs

Greater importance on financial objectives

Greater importance on social and developmental objectives

• Industrial Development Corporation (IDC)• Development Bank of Southern Africa

(DBSA)• National Empowerment Fund (NEF)• Etc.

• ABSA• Standard Bank• First National Bank• Nedbank• Etc.

IDC does not directly compete with any of these institutions, but encourages cooperation with a variety of these institutions to achieve its goals

IDC’s positioning in the financial industry

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Equity funding

Loan funding

Funding model

Capital growth

Interest repayments

IDC relies on borrowings, internal profitability, capital growth and exits from mature investments to maintain and expand its funding ability

Capital repayments

Dividend payments Exits of mature investments

IDC Funds• Borrowings• Balance sheet• Mature investments• Retained earnings

The balance between the corporation’s developmental role and financial performance is maintained by relying on proceeds from mature equity investments (both dividends and capital growth) to cross-subsidise

higher risk activities.

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What we do…

• Co-sponsors feasibility studies

• Identifies project opportunities

• Provides and arranges funding (e.g. exportand import finance, equity and loan funding)

• Identifies suitable international and localDFIs, commercial and merchant banks andcompanies and export credit agencies aspotential participants

• IDC acts as a financial adviser in partnershipwith other financial institutions

• Shares project risk with the sponsors andfinancial partners

• Identifies strong operating partners

• Off-take and supply agreements

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• Funding can be structured utilising a wide array of instruments including:• Debt;• Equity;• Quasi-equity;• Guarantees;• Trade finance;• Bridging finance;• Venture capital.

• The funding will be structured in a way that will suit the business’ needs most appropriately. Structuring options include:

• Term of the funding: Short, medium and long-term loans are available;• Grace periods for repayment : Repayments can be structured to suit cash flows and allow for

periods where no payments need to be made on either capital or interest;• Special funding schemes are available that offer more attractive terms and targets cross sectoral

issues such as job creation or development of specific sectors. Also include funds managed on behalf of other organisations, largely the dti;

• IDC’s business support programme addresses non-financial support to entrepreneurs.

IDC’s funding products …

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• 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 and Corporate Governance compliance

Financing criteria …

Funding Broadband infrastructure in the rest of Africa

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• dictatorial or undemocratic regimes

• political instability& wars

• absence of rule of law

• economic mismanagement and

corruption

• economic depression

• starvation

• deadly diseases

Africa is often associated with images of …

Africa’s unfavourable image

… but a different picture is emerging.

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What has changed…

• 54 countries, 42 democracies

• many countries have improved their business

environment:

• greater predictability & increased reliability of policy &

regulatory framework

• increased transparency and improved decision-making

• reduced corruption

• investment protection & promotion

• intra and inter-regional initiatives

• restored and maintained macro-economic stability

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Challenges remain…

• Political instability

• Investment environment

• Governance

• Infrastructure

• Skills shortages

• Cost of doing business

• Corruption

• Poor project preparation

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Why Broadband infrastructure in the RoA…

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• The telecoms industry in the sub-Sahara African

region is said to be growing at a faster pace than

other industries

• A World Bank report estimated that it will cost over

USD15.5 billion over the next 10 years to expand

basic GSM network coverage to Africa’s entire

population.

• Africa’s population is expected to double to 2.4

billion people by 2050.

• Access to broadband services is essential for the

adoption of technologies.

Reducing broadband costs is a key driver for the IDC

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Funding Broadband infrastructure in the RoA…

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Sources of funding

• only 40% of funding is for commercially viable

projects with the balance of 60% focusing on rural

network expansion (mainly led by governments)

• Over 50% of the debt financing for telecoms is

sourced from Europe and North America - 20% from

the Middle East and the remaining 20% is split

between local funding, China and India.

• Mainly, international banks, fund managers, export

credit facilities.

Policy makers are however beginning to realise the role private operators may play in national broadband plans.

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Funding Broadband infrastructure in the RoA…

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The role of DFIs

• DFIs are increasingly investing in broadband

infrastructure.

The International Finance Corporation (IFC) loaned

USD400 million to MTN Nigeria.

The IDC also contributed USD90 million to MTN

Nigeria.

• Other DFIs that have invested in the telecoms sector

include the Export-Import Bank of the United States

(ECA financing), the African Development Bank (AfDB),

and the Development Bank of Southern Africa (DBSA).

DFIs have the potential to facilitate public and private sector objectives and ensure commercially viable broadband expansions on the continent

Concluding remarks

“Every morning in Africa, a springbok wakes up. It

knows it must run faster than the fastest lion or it will be

killed. Every morning a lion wakes up. It knows it must

outrun the slowest springbok or it will starve to death. It

doesn’t matter whether you are a lion or a springbok.

When the sun comes up, you better start running.”

Thank you!

Additional information: Process and Product offering

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Deal origination, assessment and post-investment …

Applications from existing/

prospective businesses

Proactive identification and development of

projects

Pipeline Assessment and decision

Detailed due-diligence/feasibility study assessing development impact and sustainability of

opportunities:• Development outcomes• Market for products/services• Technical viability and

competitiveness• Financial viability• Management• Legal• Environmental impact• Etc.

Implementation and monitoring

Structuring of funding depending on client’s needs

Approval of viable transactions at appropriate committee

Ongoing monitoring of client performance after funding is

disbursed

Interventions in businesses experiencing difficulties

• Business support• Restructuring of facilities• Etc.

Legal agreements

Meeting conditions

Disbursement

Screening

Basic assessment

Pre-feasibility

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Financial structuring and assistance…

Product offering

• IDC puts together the most appropriate financial package for the client, taking into account the IDCguidelines and the client’s requirements by means of, among others:

• Capital and interest moratorium: IDC will allow start-up business or expansion of existingbusinesses a grace period during which capital is not payable, generally one year, but can be up to5 years e.g. pro-orchards scheme . In certain instances, even interest payments are capitalised foran average period of 18 months

• Terms of loans : IDC matches the repayment term of the loan with the cash flow generated by theasset acquired or expense incurred. Average term of loans is between 3 and 7 years, but can be upto 15 years (e.g. pro-orchard scheme) or even 25 years (pro-forestry scheme)

• Equity investments: In certain instances, on mostly new projects IDC will share the responsibilityfor a venture by taking up equity in the business to ensure that it is adequately financed.

IDC does not normally seek control in an undertaking but determines the level of participation on anindividual basis. It is the IDC's policy to provide the entrepreneur with a buy back option on amutually acceptable commercial basis.

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Cash flow:

• The IDC considers the cash flow of a company and thefinancial forecasts to demonstrate economic viability andprofitability within a reasonable period and sufficient cashflows to repay the investment over a reasonable period oftime

• The cash flows are often weak due to start-up nature of mostof the projects

Capital security (collateral):

• Is generally low in comparison with other financialinstitutions

• Lack of security does not preclude approval

• Security by way of underlying assets and/or sureties may berequired with the exception of non-profit entities such asworkers’ trust

Financial structuring and assistance…

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Own unencumbered cash contribution:

• Is determined based on shareholding, capacity to invest,size and assessed risk of the venture and it may be as alow as 2.5% of the transaction value for the BBBEEcomponent of an acquisition transaction

• Is required from clients to demonstrate commitment toproject or venture

Pricing and fees:

• Pricing is based on risk and discounted for developmentimpact (i.e. the higher the developmental impact the lowerthe price would be).

• The IDC’s fees are generally lower than those of otherfinancial institutions (commitment fee an drawing fee, nofee charged for investigation)

Financial structuring and assistance…

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Special development oriented pricing schemes• From time to time (as the need is identified), IDC develops

specific pricing schemes aimed at addressing marketfailures and the achievement of strategic objectives suchas: SME development sector development exceptional impact on job creation Broad-base Black Economic Empowerment

(BBBEE) Industrial development zones Young entrepreneurs campaign Rural development.

• These pricing schemes have a pre-determined validityperiod and budget

• Typically involve lower interest rates / required internalrates of return (IRR) and different conditions such as lower collateral requirements longer-term financing lower contribution from promoters longer repayment holidays than other financing

Financial structuring and assistance…

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Business support to entrepreneurs: IDC Business Support Programme was established to assist where appropriate:

• Potential clients in preparing a business plan • Existing clients where e.g. shortcomings in the management

capacity has been identified, if a short-term intervention is required, if it experiences financial difficulties

• The funding for the business support is born partly by IDC

TrainingFunding Business support

Entrepreneurial Development

Approach to entrepreneurial development

Monitoring developmental impact

and financial performance

Business Support to assist…

TrainingIDC offers and sponsors customized demand driven coursesto empower current and prospective clientsThe courses are aimed at prospective and current clients.Examples of courses offered:• Basic Business Skills for SMEs• Building Contractors workshop• Transport owner driver seminar• Distressed SMEs Training

Financial structuring and assistance…

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• The loan currency should be the same as the income currency of the project / company

• If the loan currently and the income currency differ, IDC should insist on forward cover and the

project should be able to carry the cost of the forward cover

• Budgets and forecasts should be in the loan currency

• Debit orders are not reliable and the contracts should make provision for specific collection

mechanisms

• Travelling in Africa is time consuming and expensive and should be allowed for in terms of

planning and loan size

• Bureaucratic processes tends to impair the free movement of goods and additional time should be

planed for the customs clearing of imported goods

• Supply chains are very weak and sufficient funding for working capital should be allowed for to

ensure the availability of critical spares

• Infrastructure is weak and care should be taken to ensure that goods and services can be delivered

to the construction site

Key lessons learnt for doing business in the RoA

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• Successful investors take advantage of local knowledge,

experience and expertise.

This includes engaging experts with the requisite local

knowledge and setting up in-house research units to

constantly seek and gather relevant market information.

Businesses are also attracting and retaining top local

talent.

Partner with local businesses.

• Take a Long-term view.

• Consider taking PRI where appropriate.

• Understand currency transfer mechanisms and rules.

• Involve local and SA financial institutions

Critical Success factors for doing business in the RoA…

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Section IV : The IDC’s rest of Africa portfolio

The IDC’s rest of Africa Portfolio as at December 2013

Thank you!