Recession may lead to a fall in IDC funding
Disbursement of funds by the Industrial Development Corporation might decline if the economy remained in recession for a protracted period, CEO Geoffrey Qhena said this week.
The state-owned development finance institution bankrolled fewer projects over the past year, it revealed in its annual results presentation this week, as total funding disbursed declined by 3% to R11-billion.
"It's evidence that some projects are not happening as quickly as we thought," Qhena said.
He told Business Times in an interview on Wednesday: "If we stay in recession longer, it is fair to assume that the disbursement level will be hard to meet.
"We need to ensure that we really apply our minds [to what we fund]. The state of the economy will impact on that."
He said the IDC was not in favour of disbursing funds for the sake of meeting its disbursement targets, only to discover that companies it had funded did not have a market to sustain them.
"Then the company is not going to perform."
Similarly, the IDC's borrowing is affected by the level of activity in the economy.
Its funding sources are largely local, through public and private bonds, but also include raising finance in international markets.
The organisation met funders on Wednesday to explain the IDC's results - a routine meeting.
While Qhena declined to comment on the amount required to fund new projects, he said the IDC had facilities of R6-billion currently that either needed to be rolled over or repaid to lenders in the remaining nine months of the current financial year, to the end of March 2018.
But dividends from its established investments may mean it has less need to borrow.
The outlook is unclear for both the IDC's clients and the organisation itself.
"If we were to go into a downgrade as a country, and the national scale were to go into sub-investment grade, we know the cost of funding is going to be more," Qhena said.
The IDC's borrowing terms were not yet affected by the downgrade of the sovereign credit rating to junk in April.
Fitch Ratings and S&P Global Ratings had downgraded the country's foreign currency credit rating to junk following the cabinet reshuffle at the end of March. But Moody's, which is the only credit rating agency that rates the IDC, still has the sovereign foreign and local currency ratings on investment grade for now.
The IDC's revenue declined 10% to R17.3-billion in the year to March 2017, although profit jumped 887% to R2.2-billion from the sale of its stake in mining firm Exxaro.
The balance sheet was strong with asset growth to R129.8-billion, mainly due to improvements in its portfolio of listed investments that include Kumba Iron Ore and BHP Billiton.
Chief financial officer Nonkululeko Dlamini said impairments were R772-million, from R1.6-billion previously.
Write-offs as a result of companies funded that had to go into liquidation improved to R1.3-billion, from R2-billion previously.
The IDC's debt-to-equity ratio was 34.5%.
"This is significant for us. We want to balance our own cash reserves with borrowing from market," Dlamini said. The board allowed for a ratio of up to 60% whereas the IDC Act allowed for 100%.
Dlamini said that as of March 31 2017, the IDC had disbursement commitments of R31-billion in total. Of this, R10.9-billion was allocated to disbursements in the near future.
She said R9.4-billion would be dedicated to industrial infrastructure, of which a significant proportion was for independent power producers and mining and metals projects.
The IDC has been mooted as a potential source of funding to bail out struggling state institutions.
But Qhena said IDC resources were best placed to ensure it increased the level of industrialisation in the country.
"If we were not stimulating the economy then I would say, rightfully so, let's redirect that [to state owned enterprises]."
But "if you only channel your money just to keep some of the entities at a standstill ... how do you reduce unemployment?"
Qhena said this was the third time "this thing [of helping to bail out SOEs] has been raised. Sometimes when we face short-term pressure there is always a temptation to do a quick fix."
He said if the IDC did help fund ailing parastatals, entrepreneurs could suffer.
For example, the IDC had earmarked R2.3-billion to fund businesses run by young people.
He said the IDC was in a tricky space because it had to provide finance without returning to the government for a handout. "You can try and take a quick fix and say give me all your capital, but once we run out of money, who are we going to go?"
He said lenders had the comfort that the IDC had shown discipline in ensuring that it was self-sustaining and had continued to be prudent while not being risk-averse.
"The problems government is facing, we can give them the whole balance sheet of the IDC but the problems won't go away."
Former IDC employee and a founder of FirstRand, Laurie Dippenaar, said: "In my era it was encouraging industrialisation when they financed Sasol and Iscor. It's similar now by financing BEE deals. It's a good role."
Asked if the IDC could do more to stimulate the economy, he said: "I don't think that's their prime objective. It's a consequence. Financing BEE deals creates enterprises, and through the creation of enterprises you stimulate growth."
The IDC is earmarking further investment in agroprocessing, where it has not invested significantly in the past.
"The sector we'll drive hard is agroprocessing ... it means in the agricultural side there'll be employment."
It also aims to enhance trade between South Africa and other countries on the continent by financing activities in manufacturing to meet the demands of a growing African middle class.
Qhena said new industries that were being funded included technology, such as businesses manufacturing TV decoders, smart meters, renewable energy battery storage and 3D printing.
The IDC's biggest growth sector in the past four years was in renewable energy, where it has disbursed more than R15-billion after jumping headfirst into bankrolling projects in the first three phases of the independent power producers programme.
Now the IDC is sitting back and waiting for returns.
"It's new but relatively stable because once you've derisked the projects they produce, there's very little maintenance going forward. We need that steady income that will ensure we are able to take risk."