Merging for all the wrong reasons

Politicians love power. In fact, they thrive on amassing more power. 

Whenever politicians amalgamate bureaucratic institutions, the motive behind such a move is usually to consolidate and amass political power rather than to improve the efficiencies of the institutions that are being merged.

This is why mergers that are driven by politicians raise eyebrows, especially when they are often not supported by solid business rationale, but by hidden political agendas.

The recent announcement of a merger between state-owned funding agencies the Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF) is one such unpopular merger that has been forced down the throats of black business lobby organisations despite their protestations about the potential negative impact it might have on black economic empowerment (BEE).

The Black Management Forum (BMF), the Progressive Professionals Forum (PPF), and as far as I understand also the Black Business Council (BBC), are vigorously opposed to the consolidation of the NEF into the IDC. These groups perceive the merger as senseless, driven by politics rather than business sense. 

But first, some background. For some time, the NEF has been severely under-capitalised and it required an R1bn capital injection to continue fulfilling its mandate. Its role is to fund black entrepreneurs and business owners, who require specialised financial support to fund their start-ups, existing businesses, and acquisitions of stakes in established companies. 

Like many state-owned finance institutions, the NEF is plagued by bad debts because its mandate is developmental in nature, rather than profit-driven. Even though of late it has bolstered its efforts to collect loans and chase defaulters, it needed to be recapitalised to boost its seriously stretched capital reserves.

In May 2013, the NEF was compelled to place a moratorium on financing new applications after its recapitalisation initiatives came to naught. The NEF’s shareholder at the time, the department of trade and industry (dti), could not reach an agreement with National Treasury to supply the NEF with more capital. 

Lending moratorium lifted 

The lending moratorium was lifted in May 2014 and the NEF resumed accepting new loan requests. Interestingly, no public explanation has ever been given as to why Treasury did not support the recapitalisation. Did Treasury look at the NEF’s books, see something it did not like and decide to walk away? This is a possibility.

After the recapitalisation talks between the dti and Treasury collapsed, a second source of funds to recapitalise the NEF was pursued. Enter the IDC, which falls under the political supervision of the Economic Development Department (EDD). These discussions moved from recapitalisation to full consolidation of the NEF into the IDC.

In February, trade and industry minister Rob Davies and economic development minister Ebrahim Patel announced that the NEF will become a wholly-owned subsidiary of the IDC. The statement said the decision is in line with government’s policy of consolidating South Africa’s development finance institutions to provide effective support to emerging and existing black entrepreneurs, thereby enhancing efficient service delivery.

Interestingly, the statement said nothing about the recapitalisation of the NEF. With a stroke of a pen, Davies washed his hands of the NEF and instead handed it over to Patel, who has now consolidated his institutional power with key agencies such as the NEF, IDC, and the competition authorities under his supervision.

Black business lobbyists are of the view that the NEF should have been recapitalised and allowed to remain a stand-alone financial institution. They had engaged the politicians to persuade them not to go ahead with the merger, as they fear that NEF’s mandate will be diluted under the thumb of the IDC, whose mandate is to finance large-scale industrial projects.

It is clear that there have been political turf wars around the NEF and the merger will lead to an even more disjointed BEE policy, which has failed to give black people a meaningful slice of the South African economy more than 20 years after the end of apartheid. 

The NEF was promoted as a key institution in implementing BEE policy, which is the responsibility of the dti. By transferring the NEF to the EDD, the implication is that BEE implementation will be split between the two government departments.

Going forward, the dti will continue driving BEE policy formulation, but will have no direct oversight over the NEF. In future, this could potentially lead to lack of accountability on policy failures as the dti officials could lay the blame for lacklustre policy implementation elsewhere.

The best thing to do, under these circumstances, is to move the entire BEE policy decision-making and implementation function to the EDD to avoid turf wars between the EDD and the dti.

At this stage, it appears that there is very little that the likes of the BMF, PPF and BBC can do about the merger. The decision has been made and the only thing they can do is to hope that Patel, a former trade unionist, will be sympathetic to the recapitalisation of the NEF and the interests of the black business community. 

Andile Ntingi is CEO and co-founder of GetBiz, an e-procurement and tender notification service.

This article originally appeared in the 23 March edition of finweek. Buy and download the magazine here.