The Industrial Development Corporation (IDC) is a critical state-owned enterprise (SOE). It is tasked with providing industrial funding to South African and African businesses to spark the economic growth the country so desperately needs.
It also has an explicit statutory mandate to promote the economic empowerment of historically-disadvantaged communities and persons.
These are very important goals, which if achieved, will improve the lives of millions of South Africans. But to achieve this, the group needs to be financially sound and managed in accordance with the highest levels of efficiency and corporate governance principles.
Minister of Trade, Industry and Competition Ebrahim Patel said in the Minister’s Foreword of the IDC’s latest annual report that: “Going forward, the IDC will have a significant role to play in the economic recovery post Covid-19 … The opportunities that will arise from the implementation of the African Continental Free Trade [Area] Agreement (AfCFTA) will need purposive partnerships with the private sector and a focus on manufacturing.”
However, an analysis of the information the IDC published in its annual report for its financial period to the end of March 2020 suggests that the company may not necessarily be financially sound. This is due to the expected credit losses on loans and advances, the poor performance of subsidiaries, and the negative fair value adjustment on equity instruments.
The IDC suffered an operational loss of R3.8 billion (2019: profit of R720 million) and a monstrous comprehensive loss of R35.1 billion (2019: profit of R10.5 billion).
The comprehensive loss includes a negative fair value adjustment on equity instruments of R40.2 billion (2019: R10.6 billion positive fair value movement on equity instruments).
The corporation has not provided a breakdown of the negative fair value adjustment, which includes investments in listed and unlisted equities, as well as preference shares. Its major holdings include Sasol (probably the main culprit for the R40.2 billion write-down as its share price practically imploded during the period under review), Kumba Iron Ore, BHP, South32, ArcelorMittal South Africa and Sappi.
Subsidiaries include poorly-performing phosphate and phosphoric acid producer Foskor, which recorded a loss of R1.6 billion. The IDC is looking for a strategic partner to invest in Foskor.
Tshepo Ramodibe, head of corporate affairs at the IDC, said in response to questions that this process is already underway. “The IDC has issued an RFP [request for proposals] to support this process. We will communicate at an appropriate time once there are developments.”
The health of the balance sheet also took a turn for the worse as total assets dropped from R144.6 billion in 2019 to R109.6 billion. The main reason was a drop in the value of listed equities, which plunged from R54.9 billion to R23.1 billion (per note 13 to the financial statements), mostly due to Sasol.
Post balance sheet as at September 28, 2020, the directors’ report stated that the value of the portfolio of listed shares increased by R17 billion to R40.5 billion. The main driver of the increase was the growth in Kumba’s share price, which was attributed to higher iron ore prices, as well as the recovery in the Sasol share price.
Borrowings per note 19 of the financial statements
According to the financial statements, the IDC has borrowings of R41.2 billion, of which R11.1 billion will be maturing in the 2020/2021 financial year. This would require a strong cash flow to repay, as well as to service the debt.
The group’s borrowings have increased slightly:
|Foreign loans||10 370||9 840|
|Domestic loans||30 866||29 646|
|41 236||39 486|
Maturity of loans, due within one year:
|Foreign loans||5 668||2 673|
|Domestic loans||5 431||4 948|
|11 099||7 621|
When asked if the IDC is considering selling any of its listed or unlisted investments to pay off debt, Ramodibe said: “The IDC disposes equity in the normal course of its business as and when the need arises and this among other factors enables the corporation to fund new investments in line with our mandate. However, sale of equity is influenced by several factors including whether we no longer have a developmental role to play in a company or investment, or the need by the corporation to sell at an appropriate time to maximise returns.”
The cash flow statement reveals that cash interest received for the year was R2.5 billion (2019: R4.5 billion), dividend income R3.4 billion (2019: R3.4 billion), and finance costs R2.4 billion (R2.8 billion).
The group had a negative cash flow movement for the year of R1 billion (2019: positive cash flow of R3.7 billion). Total cash on hand amounted to R8.8 billion (2019: R9.8 billion). The R8.8 billion includes R4.8 billion managed on behalf of other entities such as the Small Enterprise Finance Agency (Sefa).
The author is of the view that the obligation to repay R11.1 billion of borrowings in the current financial year (2020/2021), places the IDC in a very precarious position, and may limit its ability to fully fulfil its financing responsibilities to stimulate economic growth.
Says Ramodibe: “Maturities during the current financial year amount to R6.2 billion. The amount of R11.1 billion includes R3.9 billion which IDC manages on behalf of third parties, which is not repayable, but is being disbursed in line with the criteria of the specific funds.
“Furthermore, as a result of the IDC’s ratings downgrade and its reduced debt/equity ratio as at March 2020, certain borrowings became repayable in line with covenants agreed with the lenders. IDC, however, received waivers for the covenant breaches and therefore an amount of R1 billion disclosed as repayable during the current year, will only be repayable in future years.”
Board chair Busisiwe Mabuza said that the board remains “committed to safeguarding the IDC’s balance sheet while simultaneously leveraging it to fulfil our mandate”.
“We recognise that several years of the IDC’s above-average risk appetite, in pursuit of our mandate of increasing industrialisation and preserving jobs against the backdrop of a prolonged economic downturn, has put some of the corporation’s financial risk parameters under pressure.”
When asked if the IDC is in a position to take on more debt, Ramodibe said: “IDC remains liquid and continues to conclude borrowing facilities with domestic and international lenders.
“No limitation therefore exists to fulfil the corporation’s financing responsibilities.”
Listen to Nompu Siziba’s interview with IDC CEO Ntshokolo Nchocho: