Why does it cost the IDC so much to create one job

Alec Hogg asks why it costs the IDC a quarter million for every job that its loans create.

ALEC HOGG:  In this Boardroom Talk podcast, Geoffrey Qhena, the chief executive of the Industrial Development Corporation (IDC) joins us.  Geoff good to have you on our programme.  It’s an interesting set of financial results that have come out from the IDC for the year to end March.  First off, you made a profit of nearly R3billion.  Why is it important that the IDC in fact makes profit every year?

GEOFFREY QHENA:  Thanks – what is important is that we ensure that we’re sustainable.  Also it’s a measure to say the investments that we make, are in themselves, sustainable.  It further gives us a platform to ensure that we can come up with schemes where we would be able to cross-subsidise those where we stimulate defined initiatives like the Gro-e Scheme where we’re making available R10billion at prime less three.  We’d only be able to do that if we are able to generate sufficient monies from other investments.

ALEC HOGG:  That’s probably maybe the flagship scheme of the moment – the Gro-e Scheme.  Where did the idea come from?

GEOFFREY QHENA:  The idea was responding to what government was saying – lets come up with ways of ensuring that we stimulate the economy, encourage business to create jobs.  On the back of that we also looked back into the past – where we had some similar types of schemes when they’ve been successful to some degree.  Then we said one of the things is the cost of financing – business wants to create jobs but the costs might sometimes be prohibitive – so we said let’s make available a facility where we can give them prime less three.

ALEC HOGG:  That’s a fantastic facility to be able to borrow so cheaply, but is it only limited to big businesses?

GEOFFREY QHENA:  No, the minimum size of the loan is R1million so anywhere from R1million to about R1billion – we don’t want to go beyond R1billion because we would otherwise only have two or three of those – we really want to ensure that we reach out to as many as possible.

ALEC HOGG:  And how successful has it been so far?

GEOFFREY QHENA:  To date we launched this sometime towards the end of February – we’ve approved just shy of R600million and we think from the numbers that we have, that has created just under 3,000 jobs to date.

ALEC HOGG:  And the kind of businesses that have been lining up for these loans?

GEOFFREY QHENA:  It’s been a mixed … but I don’t want to use that as a measure yet because it’s still too early.  When we announce the results next year I will then have a good sense or even by December we’d have a good sense because I’ve been spending a lot of time going around the country making businesses aware of this intervention.

ALEC HOGG:  The thing that is always raised as a flag of criticism against the IDC is that it costs you so much to create each job and that we’ve got so many jobs to create – perhaps you could just give us a better understanding of your mandate.

GEOFFREY QHENA:  Our mandate is to ensure that we help stimulate, create capacity and help stimulate the economy and in the process, then jobs are created – this is one of our key outcomes.  But what is important is that those jobs are sustainable in South Africa and in the rest of the African continent.  Also we in the IDC have a resource which would provide good input, particularly in terms of when government looks at the policy.  For example if you look at the Industrial Policy Action Plan where our resource was playing a big role in terms of doing the research, giving input to that policy as its being developed.  We don’t write policy but we give input.  Equally so, in some aspects of the New Growth Path (NGP) – that path does not necessarily translate into the actual funding of the business.  Then we have the part that talks about us going and doing due diligence.  It’s also one area where we look at – if you look at our administrative costs year-on-year, they’ve only increased by about 6% and we’re very sensitive that we don’t become too expensive to really be able to provide the funding that we have.

ALEC HOGG:  So the idea is, make a profit and that shows that you are sustainable, and then keep your costs growth down to show the efficiency.

GEOFFREY QHENA:  Absolutely.

ALEC HOGG:  You created nearly 20,000 jobs in the past year with your funding of R8.5billion – but when I worked the numbers out if was about R256,000 per job that you created or saved.  You saved nearly 12,000 jobs.  With the millions of people that are unemployed in South Africa, is there another initiative – is there not any way that you could invest the money in jobs being created more cheaply?

GEOFFREY QHENA:  Well if we look at the sectors – the problem is averages.  You’re taking sectors that have high impact in terms of creating jobs and the others are down, because by their nature, those will be less intensive in terms of creating jobs.  But if you look at the sectors that we have – look at the agro-processing – this is for us one sector that, rand-for-rand, will create more.  However, if there are people with other ideas in terms of how best we should be able to do that, we will welcome that.  The Gro-e Scheme – the R10billion at prime less three is just one attempt where we are saying that the cost per job for … should be less than R500,000 and we think that should be able to ensure that it creates more jobs.  But I’m open for any other suggestions to say how best we can stretch the rands that we have.

ALEC HOGG:  I’m thinking about mining for instance, which is one of your focus areas.  Isn’t there the potential to say, guys we will lend you money but you need to employ more people.  In other words buy less of the huge mining equipment and try and get more labour people – even if it’s just for short term issue to try and get more people employed.

GEOFFREY QHENA:  That’s the thinking behind this Gro-e Scheme – what we’ve done is we’ve gone back and done some numbers and that’s where we got this cost per job of R500,000 because this Gro-e Scheme cuts across all sectors.  It could be mining, it could be agriculture, it could be textiles, it could be chemicals – you name it.  That’s the whole idea.  We’re saying if we reduced the cost to about R500,000 we think, from the experience that we have, we can be able to ensure that we really stretch the rands that we have.

ALEC HOGG:  The trouble is that if you take that R500,000 per job and you work out how many people we need to employ, you’re going to need more than South Africa’s GDP injected into the economy to try and mop up the unemployment that is reported.

GEOFFREY QHENA:  I do understand that – the R500,000 for us is the upper limit but we know in other sectors – there are examples in the agricultural sector where they’ve created jobs at a cost of around R14,000 or so.

ALEC HOGG:  I tell you where I’m going – there’s been a lot of research into unemployment, and of course a lot of research into the fact that because of apartheid and because of the awful education system that we have in South Africa – we’ve got many people who just haven’t had the privilege of a decent education.  Isn’t there something that the IDC can do to try and address that?  As they say, we can’t give people an education overnight, but surely we can give the people who haven’t had that benefit a job to do – a job of work that is possible for them, if not something that is terribly sophisticated.

GEOFFREY QHENA:  This year we had a very good example which might talk to that – there’s a transaction that we had – a company where we’ve invested money – it’s into recycling and that intervention has the potential of creating about 8,100 jobs, which is what we’re saying is our linkage to the second economy – where we advanced money to a company but we know that the company will need recycled materials and people will go out and collect them.  That intervention will be able to create that and to some extent it’s talking to – we’re trying to find ways in which will give people opportunities to have a job.

ALEC HOGG:  That’s brilliant – and if we could just think perhaps more laterally as a nation, I’m sure we would be able to get to that position.

GEOFFREY QHENA:  Yes…

ALEC HOGG:  You talk about high impact manufacturing capacity as being one of the areas – have you made any significant investments or lending’s in that sector in the past year?

GEOFFREY QHENA:  It’s a start – what we refer there is for us, a shift really to ensure that we don’t only look at the mining itself, but to look at the beneficiation.  So if we continue to go down into the beneficiation side, that will be able to give us a sense, then even the quality of the jobs will be jobs that people can be – it can be exportable in the long term.

ALEC HOGG:  Then you also say that roughly half of the loans that you’ve granted are outside Gauteng, KZN and Western Cape – what’s your thinking there?

GEOFFREY QHENA:  The thinking is we know our country is very skewed.  There are certainly provinces that really find it difficult to have some meaningful economic activity and we cannot just sit and do nothing, otherwise the resources and the infrastructure in those three provinces will find it difficult to bear.  So there is a conscious effort to say let’s also increase our activity in those other provinces where the economic activity is less than it should be.

ALEC HOGG:  That’s kind of one step at a time, but really trying to make an effort in rebalancing.

GEOFFREY QHENA:  You’re absolutely right – it is one step at a time, and if you look at our portfolio we are not where we want to be but in this year that we’re reporting, we were in the right step, yes.

ALEC HOGG:  Without getting into politics, would there be a bigger potential for you if businesses were able to go into those high employment areas like textiles, etcetera where, if they were allowed to pay people below the current minimums, or perhaps even un-unionised people – because that certainly is an argument that seems to be gathering quite a lot of momentum.

GEOFFREY QHENA:  My take on this is that what we should really be focusing on is how we can increase productivity.  Because if you can increase productivity then it would be easier to pay people.  It’s also important that we don’t encourage situations where people are exploited – if you look at some of the instances where people are exploited – if people just wake up, work and all they work for is transport, I don’t think its sustainable.  Therefore we have to strike that balance where people need to have a job, but at the same time it should not be an expensive job because of the challenges that we have – but at the same time, we should not exploit people so we have to strike that balance.  I would say the focus should be, how do we encourage people to ensure that there are high levels of productivity because as you know, if you can produce more than you spend, then you’re in a good game.

ALEC HOGG:  The Chinese have got it right – they open the market to everybody and once you get in and you become more productive and you work harder, at least you’ve got an upward trajectory.  Unfortunately it seems as though many people just can’t get into the game here.

GEOFFREY QHENA:  Yes – when we looked at the textile industry in particular, previously we’ve seen Chinese playing that but I’ve been engaging with a number of business people and what they’ve said to me, and we’ve also tried to follow is that in the textile industry they always follow the lowest cost producers and we’re seeing more and more of that, going into other countries.  We know there are pressures in China – in terms of them continuing to be providing labour at relatively cheap prices – it will continue to create pressures.  Maybe for us we should take some of the lessons from them where they’ve excelled and see how we best do that, without necessarily exploiting the people.  Let’s face it in some areas, the cost of living is just difficult for people who are really paid so little that they would find it difficult for them to continue.  Also when people are paid too little, bad tendencies tend to happen because that money will then not be enough to supplement them and then they will end up in other practices – maybe even stealing in some of these companies which is not something you want to have…

ALEC HOGG:  Fascinating discourse…

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