Bail-out promises for industry, whether well intentioned or politically expedient, have to be held up to the cold green light of cash. Money, or more accurately the amounts of it available along with the skills to spend it wisely, is finite.
The government can promise bailouts for businesses beset in these difficult times, but if they were not competitive during prosperous years there is little hope for them now.
The state’s budget is already stretched to full capacity — 2010 projects, infrastructure spending, social grants, supporting the laundry list of ailing state-owned enterprises — and revenue has shrunk by more than R50-billion, according Minister of Finance Pravin Gordhan.
But there is continuing pressure on the government from the ANC and its allies within the tripartite alliance to splurge its way to fixing local industry.
Where the government’s purse is stretched to the max, national development finance institutions such as the Industrial Development Corporation (IDC) and Development Bank of South Africa (DBSA) are the go-to guys for bail-outs. But despite political rhetoric, so far the IDC has presented a healthy case for pragmatism over politics. It has stood firm on its decision to offer aid only to companies that are competitive and can exhibit sound business fundamentals, rather than save companies for their own sake.
And this is plainly sensible, because, like other institutions of its ilk, the IDC is self-financing and has its limits.
In its recently released financial results, despite an increase in profits to R5.6-billion, the IDC made a fair value adjustment of R26-billion to its books — a result of substantial hits to both its listed and unlisted investments.
The losses are unlikely to be realised, given that the IDC will not divest itself of these investments in the next year or two, after which the economic outlook and conditions on the JSE, will have improved.
But the company intends to increase its budget for rescuing ailing companies from 5% to between 25% and 30% in the next two years, according to Gert Gouws, its chief financial officer. Of the R11-billion of approved funding for 2009/2010, about R3-billion will go to rescuing ailing firms.
To carry on raising capital, the company is going to borrow a lot more, chiefly through the bond market. With its strong balance sheet, the IDC has room to borrow and is willing to take its debt-to-equity ratio from the current 8% to 40%, according to Gouws.
But that is about as far as the IDC is willing to push it.
In his state of the nation address, President Jacob Zuma earmarked the clothing and textiles sector and automotive industry for aid during the crisis. But both industries struggled through good times and have Âbenefited from protective trade measures.
Gouws emphasised that the corporation will not save businesses just for the sake of saving them. In fact, some will be left to fail.
The deliberations around Frame Textiles points to this reality. Frame, a division of manufacturing and textiles group Seardel, has been a heavy lossmaker. Reports on Thursday point to its closure, despite talks between department of trade and industry and the IDC to save it. Gouws could not comment on the matter.
It may hurt to lose companies, and, yes, the jobs that go with them, but ultimately who wins by propping up inefficiency and waste?
The messy behemoths such as Eskom and SAA are a case in point.
Where companies are competitive, rather ensure that they can carry on doing what they do well.
