Is the IDC ready to absorb the National Empowerment Fund?

The 2017 press release announcing the proposed merger of the National Empowerment Fund (NEF) and the Industrial Development Corporation (IDC), stated that the “IDC and the NEF have been identified by government as central in implementing radical economic transformation”. The IDC has substantial assets, and will no doubt sail through this storm, but is this a harbinger of things to come?

The IDC was established in 1940 by the government, with the objective of promoting economic growth and industrial development. Through investing in equity, and granting soft loans, it helped create many successful industries. In the 1990s, its objective was expanded to include the rest of Africa.

In 2010 the IDC had stars in its eyes. SA had emerged from the 2008/09 recession, and it was looking forward to hosting the 2010 FIFA World Cup, and enjoying all the positive returns that would emanate from that. Financing was provided to small businesses within the construction and related industries, which were directly related to the World Cup.

The Department of Trade and Industry (dti) had launched The Industrial Policy Action Plan (IPAP). The IDC operational paradigm was already becoming muddied by many other initiatives including the National Industrial Policy Framework (NIPF), which aimed to develop Black Industrialists, save jobs by bailing out failed companies with “distressed funding”, stimulate economic growth, reduce carbon emissions and invest in the green economy.

The New Growth Plan (NGP) was released in November 2010. The NGP ambitiously promised to enhance growth, create five million jobs in ten years, and further encourage Public Private Partnerships. The IDC had to add this to its growing list of projects. IPAP was further revised for the period 2012/13 to 2014/15, to “retain, grow and diversify South Africa’s industrial base”, and the IDC has to incorporate this into its plans.

By 2013 the IDC was also managing the Agro-Processing Competitiveness Fund, the Manufacturing Competitiveness Enhancement Programme (MCEP) and the Clothing and Textiles Competitiveness Programme on behalf of the dti.

By 2014 the IDC was assisting the Presidential Infrastructure Coordinating Commission in the coordination and integration of the National Infrastructure Plan (NIP) and expected to play a key role in carrying out the plan.

In the years 2015 through to 2016, the IDC was still being guided by the National Development Plan (NDP), the NGP, IPAP, the Agricultural Policy Action Plan (APAP) and NIP. The energy crisis induced the IDC to approve further funding for energy efficiency solutions.

This brief history creates a background to understanding the pressures placed on the IDC’s finances. Extracts from the annual reports 2010 to 2016 are shown below.

Details of the IDC’s shareholding in listed companies was obtained from Who Owns Whom 2017. The shareholdings include Labat Africa (4%), Basil Read Holdings (6.90% ), Merafe Resources (21.83%), Life Healthcare Group (4.99%), Sasol (7.80%), BHP Billiton (1.60%), Arcellor Mittal South Africa (7.91%), Kumba Iron Ore (12.88% ), Hulamin (29.63%), WG Wearne (15.00%), York Timber Holdings (28.72%), Chemical Specialities (13.97%) , and Oakbay Resources and Energy (3.57%). As these investments are listed on the JSE, they have an ascertainable value.These figures clearly show a deterioration over seven years. The loans and advances granted have nearly trebled, and the investments in associates, partnerships and joint ventures have nearly doubled. It should also be noted that the investments in preference shares and equity in unlisted companies is tantamount to funding. The financial liabilities, consisting of loans and bonds, is now only covered four times by total assets.

These listed investments have been valued at R38.7 billion in 2016 (R43.5 billion in 2015). However, can these investments withstand the continuous depletion caused by financial disasters? It is doubtful whether the IDC is generating enough income to be sustainable.

The unlisted investments pose a concern, not least the steel producer Scaw Metals (74% owned), and the agrochemicals group Foskor (59% owned). Scaw posted a loss of R1.1 billion in 2016, Foskor lost R568 million. They have not posted their 2017 results, but these are unlikely to have improved.

The IDC has not yet announced its 2017 results. We can expect a further drop in the value of investments. One would also expect some disclosure of the financial impact of the impending NEF merger.

It is time to take stock of whether it is feasible to continue to expect the IDC to fund all economic growth initiatives proposed by the dti and the Department of Economic Development, and whether they should cut loose some non-performing companies. After all, we do not want to eat the Golden Goose.

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