IDC ramps up spending and risk
The Industrial Development Corporation (IDC) is the agency that bankrolls the state's new growth path and industrial policy action plan. But its latest results show that ramped-up spending has come hand in hand with increased risk and steadily rising impairment levels, despite increases in revenues.
Impairments jumped to 18.2% of total financing this year, up from last year's 17.2%, according to the IDC's annual report released this week.
Bad debts amounted to R171-million, down from R697-million the previous year.
But the decline was mainly owed to the winding up of the Pebble Bed Modular Reactor, which cost the IDC R453-million to write off in 2011.
Excluding this, there had been little overall improvement in write-offs year on year, said IDC chief executive Geoffrey Qhena.
These numbers reflected the increased risk the IDC was taking on, particularly for investments in start-up businesses, the expansion of existing businesses, as well as the impact of a poor economic climate on the IDC's already mature investments, said Qhena.
The company has ramped up its funding activity by 55% to R13.5-billion, with funding approvals increasing 33% to 293 approvals in the financial year.
However, Qhena said the risk of getting involved with early-stage business ventures was not entirely negative, because this was where opportunities were created.
Impairment levels were being monitored because they might undermine the sustainability of the business, said Qhena. "But it should not be a number that discourages us from investing in new industries, as long as we are comfortable that these levels are because of the start-up risks involved."
The IDC's business unit noted that the greatest difficulties were experienced in textiles and clothing, for which impairments rose to 59% from 44% in 2011, as well as mining and minerals, where impairments rose from 14% to 17%. The clothing and textile sector's difficulty was well documented, Qhena said, and there was particularly fierce competition from imports.
The IDC has approved R500-million for the clothing and textile competiveness-improvement programme it administers on behalf of the department of trade and industry. This is aimed at helping manufacturers to acquire new or modernise old equipment and re-engineer their businesses to run more efficiently. The IDC is also involved in initiatives to negotiate with large retailers and get a better understanding of their needs, helping to reduce the impact of increased foreign competition on the sector.
These initiatives, together with investments the IDC makes, will hopefully go toward supporting a sector that is an important employer.
Qhena said that in terms of writing off bad debt the IDC, unlike many commercial banks, took a longer-term view.
Overall, the IDC's revenue, a large portion of which is generated by long-standing investments in large listed entities such as BHP Billiton, Sasol and Kumba Iron Ore, increased to just less than R11-billion. Profit rose by 22% to R3.3-billion.
However, the IDC will need every cent it can get, given the R102-billion it will invest over the next five years to finance its share of the state's infrastructure roll-out plans. It is working closely with the presidential infrastructure co-ordinating committee, run by Economic Development Minister Ebrahim Patel.
To achieve this, it be seek to raise further debt. Following the issuing of a R2-billion bond taken up by the Unemployment Insurance Fund in 2010, the IDC raised a further R2-billion during the course of the year, bringing the fund to R4-billion.
The company is also waiting for the final nod for the issuing of a green bond of R5-billion, announced earlier this year, which the Public Investment Corporation will take up.
Qhena said the company wants to increase its gearing to between 36% and 40% in the next five years, from about 12% at present. Although the Industrial Development Corporation Act allows the company to gear up to 100% of its capital, this level was not prudent, he said.
Earlier this year, the IDC indicated that it would divest from some of its listed assets, to the tune of R15-billion, to meet funding requirements. But it would not do this "at all costs" and at this stage it appeared unlikely that such divestment would happen in the next 12 to 18 months, Qhena said, owing to a number of projects taking a little longer to get up and running and the healthy uptick in revenue from investments.
"It allows us to take some of that income and put it back into projects," he said, without having to raise cash by selling off shares. "We want to time [any divestment] correctly".
In addition, the IDC's balance sheet is relatively strong, allowing it to borrow for some of its loan financing.
Investment in both listed and unlisted shares stood at just less than R70-billion as of March this year.
A number of factors will constrain the extent to which the IDC can increase its financing activities, not least the economic gloom emanating chiefly from Europe.
"It has a bearing on the speed with which new projects come to fruition and it has a bearing on whether any new expansion from our investments will occur," Qhena said. The pace at which the government's infrastructure-build programme is rolled out will also have an impact on the IDC's funding plans.
Qhena conceded that the IDC's resources were fairly modest in the grand scheme of things. "But we are going to concentrate on the sectors we know," he said, namely manufacturing, industrial development and beneficiation.
Fellow development finance institutions such as the Development Bank of Southern Africa were better at bulk infrastructure and the private sector also had an important role to play, he added.