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Can the IDC finance SA’s economic recovery?

Mounting debt puts it in a precarious position and may limit its ability to stimulate growth.
Its major holdings include Sasol, probably the main culprit for the R40bn write-down. Image: Bloomberg

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.

Read: Some clarity from the IDC would be nice

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.

Operational performance

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.”

Balance sheet

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:

R million 2020 2019
Foreign loans 10 370 9 840
Domestic loans 30 866 29 646
41 236 39 486

Maturity of loans, due within one year:

R million 2020 2019
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.”

Cash position

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).

Going concern

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.”

Going forward

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:

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IDC….Government Run….finance our economic recovery….. Ha,Ha,Ha,Ha,Ha,Ha,Ha…Please stop i am getting stomach cramps…….

I don’t think so. The ANC stole all the money and made black holes of the SOEs, municipalities and 8 of the provinces.

Should the IDC have a developmental mandate, would it not be prudent, iso fair value adjustment to sell the shares when the price favours and upward adjustment? Invest the cash and nanny support these businesses when they are in need of support, not necessarily by way of equity only.

Can the IDC finance SA’s economic recovery? NO !

The payment default at the Land Bank has shown us what happens when politicians forces an institution to use public funds to buy votes via a process of donations dressed as loans to “new farmers” or “new industrialists”. The drive for economic transformation is a drive towards bankruptcy and bad debt.

If the commercial banks don’t want to finance the project, taxpayer money should not be thown into the bottomless pit either.

Democratic socialism, is not a road designed to protect the liberal values of individualism, autonomy, and one’s own path that people on the left value to some sort of degree. It is, on the contrary, a doctrine that is imposed on us who cherish those liberal values onto a slippery slope toward tyranny.

The IDC ANC and all the other acronyms cannot plan and nor manage us out of this Self Made Crisis.

Divide and Conquer is an age old game, even if the winner loses everything as long as he has more than his opponents he is still a winner.

The IDC took a loss of R1.3 billion from Foskor according to it latest results. They sent a previous MD of the IDC to try and turn Foskor around and he failed. Why because of zero accountability in the pursuit of the ANC’s political agenda. Foskor had a strike for 46 days. 46 days!! No heads rolled. No reasons are given for the strike. No indications of what will be done to avoid this in future. In fact management is congratulated for the calm manner that the strike was handed – or if you read between the lines – placating the unions and doing nothing.

So the IDC will not be able to finance SA’s recovery. It may very well not be able to survive itself…

In reality, the economic country should not need to be funded by government. Accessing pension fund and Reserve Bank money is just an excuse for the ANC to continue looting.

If they were truly serious about getting the economy going, they would drop the abhorrent disaster that is BEE that has been enabling and promoting corruption since inception.

Get rid of BEE and half of South Africa’s problems will disappear.

That would, of course, need to be followed by fixing the police force to catch criminals and streamlining the courts to prosecute and jail them.

Minister Patel – the IDC is crucial in the need to turn the economy around – we have world class managers, except not on the IDC board.

IDC does not have the knowledge to invest properly! knowledge of finance is poor … investment decisions based on political muscle!

The corrupt led ANC Government, the cause of the country’s turmoil!

How on earth can they possibly be the solution to anything?

What a joke!

Just for the record I truly hope South Africa’s economy not only recovers but booms. BUT this being said the investor in me have lost all faith in the future of this economy. In my opinion funding is not the core issue, the only time funding is an issue is if the fundamentals of the economy is broken making it undesirable for investors.

We need urgent and large scale structural reforms in our economy and then for the government to take a backseat and stop meddling. If the environment is conducive investors will flock to invest because the potential opportunities are many in South Africa. But as long the government want to control the levers of the economy and intrude on business with the myriad of regulation and legislation coupled with the unproductive workforce and almost mandatory BEE losses and government bribes. Its no wonder investors are leaving instead of investing.

Can the IDC finances SA’s recovery?

Well, you’d have to ask Winston Churchill:

“…it will be like standing in a bucket and lifting yourself into the air by pulling on the bucket’s handle”

The Idc is too small for the task.

Why must government always be involved?

Just introduce good laws, apply them, make people accused of corruption and theft accountable.

The rest will run by itself.

Pls no not IDC we don’t want additional fraudulent loans being dished out to more politically linked people as well as one one section of the population.

End of comments.

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