No Reservations

2011-05-12 00:00

The Industrial Development Corporation (IDC) wants to unleash R102bn to finance industrial development over the next five years and Government has placed it at the centre of its New Growth Path. Will the IDC make a meaningful difference to job creation? Are there risks to the plan? The plans for the IDC were announced by Economic Development Minister Ebrahim Patel, who said the amount the IDC had to invest had been revised upward from R66bn in its current five-year projections. The amount represents a 160% increase over actual approvals over the past five years.

Such a huge increase in new approvals compared with past IDC practice implies a whole new way of doing business for the corporation. Projects that in the past wouldn’t have received funding will now receive it. It also implies there will be many more projects coming forward than in the past. If projects that wouldn’t have received funding previously will now get funding, it won’t always be a bad thing. The IDC has perhaps been too cautious in the past in its funding approvals. However, there’s now a chance the pressure to increase funding will see projects that aren’t really viable receive funding. There’s a chance the IDC will pour money down black holes in an effort to meet its targets.

As for there being many more projects coming forward, that’s doubtful. True, Government wants to use preferential procurement for its infrastructure spending to build SA’s industries. But many of those capital goods sectors have been depleted and are unlikely to produce companies that will step forward to take up the funding. If the IDC plans to increase investment 160% over the next five years, either there will be uptake from quite a few bad recipients or that target won’t be met.

Asked how the IDC will ensure it doesn’t throw good money after bad, it says: “The IDC takes higher risk than banks by providing funding on the expectations for a company’s success rather than looking at its historical performance. We have a very vigorous process that analyses the risks involved in each business we fund. Our strategy to deal with the increased demands for funding is twofold. The first is we’ll put a much greater focus on early stage project development, especially in those areas aligned with Government’s industrial policies and where we identify specific opportunities. The second is to have a more focused approach to which industries we support and introduce greater efficiencies in our internal processes to improve deal flow without impeding our risk assessment processes.”

It’s difficult to see how the IDC will be able to be more focused on the industries its supports, as there’s such a wide range covered by Government’s Industrial Policy Action Plan. Patel said the five-year funding would be allocated as follows: Green industries – R22,4bn; mining and beneficiation – R22,1bn; manufacturing – R20,8bn; the agriculture value chain – R7,7bn; tourism – the creative industries and high-level services – R14,8bn; funding to distressed companies – R2,5bn; strategic high impact projects – R11,1bn; and venture capital – R500m. That’s a broad spectrum to cover and suggests focus will be difficult.

A question that arises is how much of the funding will be debt and how much equity. The IDC says as it becomes more involved with funding early stage projects the share of equity finance should increase from below 30% of total funding required to more than 40%. The IDC says its recently announced R10bn scheme (the Gro-E scheme) will make finance available at prime minus three percentage points to companies creating jobs efficiently.

Despite the cheap funding, the question is whether businesses will want to take on the debt. Private sector credit extension figures show companies have been reluctant to take on new debt. It’s unclear that the constraint on growth is the cost of capital – skills are a bigger constraint.

It’s clear there are risks involved in the IDC’s new strategy.