Job­less fund is sav­ing jobs

A part­ner­ship be­tween the IDC and the Unem­ploy­ment In­surance Fund is help­ing to re­tain and cre­ate em­ploy­ment

CityPress - - News - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

One has a huge and grow­ing sur­plus of funds meant to com­bat the ef­fects of un­em­ploy­ment. The other has a queue of po­ten­tially job-cre­at­ing busi­ness­peo­ple out­side its doors, clam­our­ing for cap­i­tal. The five-year ar­range­ment be­tween the Unem­ploy­ment In­surance Fund (UIF) and the In­dus­trial Devel­op­ment Cor­po­ra­tion (IDC) could mark the be­gin­nings of a new model for de­vel­op­ment fi­nance in South Africa.

Since 2010, the UIF has bought R4 bil­lion in bonds from the IDC, money the lender has loaned to busi­nesses. The money has been made avail­able to IDC-funded com­pa­nies at dis­counted in­ter­est rates with one quid pro quo: cre­ate or save jobs at less than R450 000 a head.

The idea came from Brazil, where the Brazil­ian Devel­op­ment Bank is funded by the Work­ers’ As­sis­tance Fund.

The IDC was look­ing at some­thing sim­i­lar in 2008 with the start of the eco­nomic cri­sis, mak­ing the case for new fund­ing sources more com­pelling.

Ler­ato Man­gope, head of cor­po­rate fi­nance at the IDC, says: “It was right in the mid­dle of the eco­nomic cri­sis; the cost of cap­i­tal was very high, com­pa­nies were fold­ing and huge in­dus­tries were com­ing to the IDC.”

It took two years to iron out a work­able ar­range­ment be­cause the UIF had “man­date con­straints”.

The UIF’s an­nual sur­plus usu­ally goes to the Public In­vest­ment Cor­po­ra­tion (PIC), from which it has to get a cer­tain yield in lend­ing out the money.

But the IDC ar­range­ment in­volves a con­ces­sion on in­ter­est rates.

To make up for this, the money has to make a demon­stra­ble im­pact in the UIF’s sphere of con­cern: un­em­ploy­ment.

There have al­ready been two sets of R2 bil­lion bonds, with a third in the pipe­line.

Though not over­whelm­ing in terms of the IDC’s to­tal port­fo­lio, the fund­ing has demon­strated how state en­ti­ties with rel­a­tively idle funds can chan­nel them into in­vest­ments.

This fund­ing made up 17% of the IDC’s debt fi­nanc­ing at the end of March this year.

More im­por­tantly, it plays a spe­cific role due to the low in­ter­est rate that comes with it and its very sim­ple and strin­gent cri­te­ria. The main cri­te­rion is jobs. Any ap­pli­cant for fund­ing from the UIF pool needs to show their project will cre­ate or save jobs at a cost of be­low R450 000 a head.

Prac­ti­cally, this means that very cap­i­tal-in­ten­sive bor­row­ers are ex­cluded. The ini­tial limit of R100 mil­lion a client was also re­duced to R50 mil­lion to spread the money as widely as pos­si­ble.

Nev­er­the­less, it has be­come a pow­er­ful ad­di­tion to the IDC’s ar­se­nal be­cause it al­lows the lender to give clients new con­ces­sional in­ter­est rates.

The in­ter­est rates are low, with the IDC get­ting the UIF money at about 5%. More im­por­tantly, the IDC lends it on at only 1% more, cut­ting the usual fees.

There is an un­der­stand­ing that the IDC will not profit from the con­ces­sion­ary fund­ing, but pass on the cheap fund­ing, says Man­gope.

The UIF fund­ing was es­sen­tially used to re­duce the cost of fund­ing to clients.

“If a client had to bor­row, say, R100 mil­lion, from the IDC and they qual­ify un­der the cri­te­ria, they could get R50 mil­lion from the UIF. The weighted av­er­age in­ter­est rate then falls.

“If your loan is R25 mil­lion, you could get all of it on UIF terms,” she says. “Peo­ple tend to come in and say they want UIF and UIF only.”

The loans have ev­i­dently per­formed well.

Ac­cord­ing to Man­gope, the im­pair­ment rate on UIF fund loans is only 6%, com­pared with more than 16% for the whole IDC port­fo­lio of loans. In other words, they are paid back. The project is also de­liv­er­ing job sta­tis­tics to jus­tify the small hit on its in­come that the PIC is tak­ing.

In to­tal, as of March this year, 32 741 jobs were cre­ated and 21 644 were saved. This af­ter 258 deals were fully or par­tially funded with UIF money.

Th­ese out­comes are key to the UIF re­main­ing a fun­der, which means the job sta­tis­tics are rig­or­ously scru­ti­nised, says Man­gope.

And there is a penalty if it is found that a client has not di­closed the cor­rect in­for­ma­tion.

When clients re­port back, the jobs num­bers are au­dited. If they don’t tally, the IDC de­part­ment re­spon­si­ble for ap­prov­ing the fund­ing is also pe­nalised. The IDC’s bonus sys­tem hinges on these re­views.

Man­gope says peo­ple can be very cre­ative when try­ing to dupe the sys­tem.

If clients are found to have hood­winked the IDC and mis­rep­re­sented the jobs po­ten­tial of an in­vest­ment, they are pe­nalised.

If they have not ad­hered to the cri­te­ria, and can­not jus­tify their ac­tions, they are slapped with a puni­tive de­fault rate on their debts to the IDC.

“It is not as bad as the mi­crolen­ders – it’s not go­ing to go to 25%, but you could find that if you are pay­ing 5%, it could rise to 11%. If you are not com­pli­ant, you are in trou­ble,” says Man­gope.

This of­ten hap­pens with IDC clients, but very sel­dom with UIF-funded projects.

“The rate is so cheap and, if you are sav­ing a com­pany, there is ad­her­ence. There is very lit­tle de­vi­a­tion from the norm.” As far as the IDC is con­cerned, the ar­range­ment should con­tinue, says Man­gope. “To us as two gov­ern­ment agen­cies that drive the Na­tional Devel­op­ment Plan and the In­dus­trial Pol­icy Ac­tion Plan, it makes sense. So why not do it to­gether?

“We have achieved quite a lot. As the IDC, we would love it [if the UIF fund­ing be­came per­ma­nent], but it is not up to us.

“They have their own board and their own man­date, but we will al­ways chase them for it.”

The UIF is bound to use its funds to pro­vide the statu­tory un­em­ploy­ment in­sur­ance it was cre­ated for, with some lee­way to put, at most, 10% of its R113 bil­lion in as­sets into “de­vel­op­men­tal in­vest­ments”.

“I spoke to the com­mis­sioner [of the UIF, Boas Seruwe]. He says he likes our re­la­tion­ship,” says Man­gope.

The UIF is not the only large pot of in­sur­ance fund money con­trolled by a gov­ern­ment agency. Another pos­si­bil­ity may lie with the Com­pen­sa­tion Fund, which falls un­der the de­part­ment of labour, just like the UIF.

Man­gope says a sim­i­lar ar­range­ment with that fund could be worth ex­plor­ing.

“What is in it for them? It has to fit their man­date for com­pen­sa­tion.”

The IDC could very well chan­nel money from that fund into hos­pi­tals or med­i­cal-sup­ply man­u­fac­tur­ing that di­rectly suits their man­date, says Man­gope. This project is re­ported by City Press and spon­sored

by the IDC

PHOTO: LEON SADIKI

GOOD JOB

The UIF and IDC part­ner­ship has pro­vided and saved jobs in many sec­tors, in­clud­ing agri­cul­ture

PHOTO: ELIZ­A­BETH SE­JAKE

Ler­ato Man­gope,

IDC head of cor­po­rate fund­ing

UIF com­mis­sioner Boas Seruwe

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