Tourism is at the forefront of SA's gradual economic revival, and what makes the sector such an attractive proposition is that it is job-intensive and semi-skilled.
Tourism has thus been a key focus area of the state-owned Industrial Development Corp (IDC). As a percentage of total IDC funding, the R1,1bn current exposure to projects appears small, but the tourism strategic business unit at the IDC is one of the most active.
The unit has 120 clients on its books, which is a higher client-to-funding ratio than many other units. Of the client list, more than half are small to medium-sized businesses (SMEs), many of them black economic empowerment (BEE) ventures. With these numbers, the tourism unit is closer to the kind of profile new IDC CEO Geoff Qhena has in mind for the future of the corporation.
The growth of the unit's book is evident in the fact that its present R1,1bn exposure is half of the total funding it has offered since it was first launched 13 years ago. Similarly, its 120-client list makes up just less than half of the total 265 customers the unit has supported since 1992.
But for the unit's head, Katinka Schumann-Bester, it's not the financial numbers that matter most. She is looking for a developmental return.
That makes her performance bonus a bit harder to define, but she believes that this is how executives at a development finance institution like the IDC should be rewarded. "Developmental return starts with the number of jobs created but also looks at the area where you've created employment.
"I want to have the greatest impact with the least amount of finances," she says, adding that in the 2005/2006 financial year she is hoping to create 1 000 jobs with her R200m loan funding. This would be in line with last year's job-to-investment ratio.
In the IDC's latest annual report, chairman Wendy Luhabe stresses that job creation will be the overarching objective of the IDC's intervention.
"The IDC can play a catalytic role by channelling resources to stimulate and support an emerging entrepreneurial class within SA's formal economy, particularly through support for SMEs . . . and the promotion of sustainable, broad-based BEE transactions."
This approach to funding has been gradually adopted by the IDC over the past few years, but represents a considerable break from its strategy just over a decade ago when its focus was almost exclusively and unashamedly on funding the big projects, particularly industry and mining.
"We need to continuously reassess our role in the financing space and always be more willing to take risks than the commercial banks," says Schumann-Bester, pointing out that banks are gradually moving into the venture capital arena, which for many years was the almost exclusive domain of the IDC.
Outlining the IDC's risk strategy, she says that it's the group's responsibility to take greater risks. "We are going to make mistakes but that is what our mandate says we must do on occasion. We must believe that the project is financially viable, but there undoubtedly could be market failures." She stresses though that her unit's impairment (bad debt) provision is still slightly below that of the IDC's 12%.
And though she says commercial banks should not be crowded out by organisations such as the IDC, she explains that many of her clients approached the IDC only after failing to "even get a look-in at the banks".
One reason for the banks' conservative approach is that tourism creates a lot of greenfields ventures, which are riskier than backing takeovers or trade deals. "Almost 80% of our investment by value goes into new greenfields projects," Schumann-Bester comments.
Another reason for the banks' scepticism is that tourism is a long-term business, where investors often don't see a return or dividend for two to three years. Loan terms also range from 10 to 14 years, and even longer for hotel investments.
The IDC has accepted these risks and still charges interest rates that are comparable to bank charges. "They range from half a percentage point below prime to prime plus one," says Schumann-Bester.
But even the IDC couldn't have foreseen the drastic change in the SA tourism industry after the weak-rand-induced boom from 1999 to 2002. A lot of money was ploughed into expensive, foreign market-focused, ecotourism lodges during that period in the belief that the waves of foreign visitors would continue unabated.
Many of the IDC's investments in luxury game lodges in the Kruger National Park are still not financially sound, and Schumann-Bester admits that "we've had to become a lot more disciplined after the boom years".
It has changed the client portfolio, she adds, with more customers and potential customers looking at the domestic and, to some extent, African tourism market.
As a result, though there are still the larger hotels and game lodges on its books, the number of SME businesses has risen sharply over the years.
This has brought about a shift in the funding emphasis. Previously, the unit used loan or debt funding almost exclusively and it still accounts for about three-quarters of its funding exposure.
"The emphasis there is on extensive due-diligence studies, recommending changes to business plans and other strategies, signing the cheque and sitting back and waiting for the interest payments to come in," says Schumann-Bester.
With the emergence of SME and BEE players in the tourism market, the tourism unit has changed its strategy and now emphasises taking an equity stake in the venture.
"It means that we stay involved for longer, mostly through our presence on the board, and can suggest strategic business and management changes if the venture doesn't work," says Schumann-Bester. "Only if we found that the operators or managers of a company did not want to co-operate would we move to close or liquidate a business."
One case of successful restructuring is the Lapeng conference facility in the south of Johannesburg. It was not doing well until the IDC suggested teaming it up with one of its other clients, Planet Hotel, which runs The Castle among others. Lapeng is now viable and its owner has acquired some solid hospitality skills.
The average BEE deal size by the tourism unit ranges from R1m to R4m, and, once again, the unit steps in only after the banks refuse funding.
"We recently backed a lodge in a Kimberley township to the tune of R3,5m. No-one would touch the venture, but we believe the owner has the right entrepreneurial approach," says Schumann-Bester.
An exception to its BEE-only equity policy has been the Protea Wanderers hotel, in which the IDC has a 48% equity stake and board representation.
The main reason for this approach, says Schumann-Bester, was that there were some concerns about its viability when the R100m hotel was launched in 2000. The IDC took an initial R13m equity stake but also backed the Ebhuhlanti BEE partner, a group in which former Eskom chairman Reuel Khoza is involved, with a R5m loan.
The Ebhuhlanti group subsequently raised its equity stake when the founding partners left two years ago.
"The hotel is now performing well and has paid its first dividend," says Schumann-Bester. The improved financial performance has allowed the IDC to exercise its call options and reduce its stake in favour of Ebhuhlanti and another BEE company.
Schumann-Bester says the IDC will be involved for another three to four years, "by which time the dividend flow would have repaid our investment".
Other large projects backed by the IDC include:
- The R330m debt funding of two Arabella Sheraton projects - a Cape Town hotel and a golf estate near Klein mond. Though this was a venture that could have been funded by banks, Schumann-Bester says the Arabella group wanted IDC involvement. The IDC also felt that, given the Cape Town hotel's proximity to the International Convention Centre, it would be appropriate to back the project.
- The IDC backed the Village of Spier wine and cultural estate near Stellenbosch to the tune of R50m, "because of its significant socioeconomic impact, its good community participation and its environmentally sound business practices", says Schumann-Bester.
- The provision of R107m in funding last year to a BEE consortium to buy a 37% equity stake in Protea Hotels, the largest hotel operating company in Africa and with whom the IDC has entered into a number of projects.
