What happens when the IDC becomes ‘black’?
The country’s most prominent black business lobbies have criticised a plan by the Industrial Development Corporation (IDC) to get itself designated black.
At stake is the designation of about R100 billion in equity in South African companies as “black-owned” – without any black investors actually being involved.
The Black Business Council and the Black Management Forum argue that the IDC will be crowding out actual black entrepreneurs if it gets the “broad-based BEE facilitator status” it is looking for from the department of trade and industry.
A number of state entities have this status, whereby they are defined as 100% blackowned when they enter into transactions or own shares in other companies. The IDC’s application was published for comment in the Government Gazette last month.
Unlike most existing facilitators, the IDC is a nexus for state investments in a variety of companies, all of which could suddenly get big – and, arguably, undeserved – boosts to their broad-based BEE scores when the IDC becomes “black”.
On the JSE, the IDC owns 8% of Sasol, 8% of ArcelorMittal SA, 13% of Kumba Iron Ore and 5% of Life Healthcare and others.
These largely historic stakes were worth R45 billion last year.
The IDC also has a large portfolio of unlisted investments, which includes a majority stake in Scaw Metals, and between 20% and 30% of aluminium group Hulamin, timber groups York Timber and Hans Merensky, Merafe Resources, Palabora Copper, KaXu Solar One and many more.
These unlisted stakes were valued at about another R47 billion last year.
If the IDC gets designated, it would technically summon almost R100 billion of new “black” ownership into being – obviating the need for all these companies to actually get black partners.
According to the IDC, the facilitator status is meant to “improve the broad-based BEE status of qualifying companies where the IDC holds equity, thereby giving them access to markets”.
This includes new start-ups that the IDC funds, black industrialists who can get an even higher broad-based BEE score, as well as “distressed clients – thereby saving jobs and preserving industrial capacity”, the IDC said in an emailed response to questions.
The boost in “black ownership” would be particularly controversial at ArcelorMittal SA, which has been infamously slow to introduce any empowerment until this became a recent condition of state support.
According to Mohale Ralebitso, CEO of the business council, it would be “inappropriate” for the IDC to get designated. The result would be the crowding out of black entrepreneurs, given that companies seeking investors could get money and broad-based BEE status from the IDC, he told City Press.
“The IDC should rather fund black entrepreneurs to take the stakes. The funding risk remains the same, after all. Black entrepreneurs should be the facilitators.”
State-owned mining company African Exploration Mining and Finance Corporation is also in the process of getting designated. In its call for comment earlier this month, the company argued that it would use the status to enter into joint ventures with private sector mining companies – without diluting its broad-based BEE status.
“The status will enable African Exploration to access some of the funds that are held by various organisations for development purposes,” it said.
This is exactly the kind of crowding out that the business council is warning against with regard to the IDC, but the case against African Exploration getting designated is not necessarily as strong, said Ralebitso.
“There is a role for the state when there are market failures, or it is a very capital-intensive sector. There are market failures in mining ... but it cannot be a permanent arrangement,” he said.
The decline of the National Empowerment Fund provides a crucial piece of background.
The fund and its CEO Philisiwe Mthethwa have been outspoken champions of greater state support for black businesses – and have, in turn, been vocally supported by black business.
The fund has, however, been requesting large recapitalisation from the state for years. Instead of getting what it wants – the ability to issue bonds itself – the fund is now becoming an “arm’s-length subsidiary” of the IDC.
This arrangement would see the IDC allotting finances to the empowerment fund with some level of oversight – but in the main, leaving the fund to its own devices, according to a parliamentary presentation by fund executives in March.
The management forum’s arguments against the IDC’s facilitator application include the assertion that the IDC will undermine the empowerment fund.
Once given facilitator status, the IDC will “compete for funding” with the empowerment fund, it says in its submission.
The management forum also claims that “runaway contagion” will occur, whereby every other state entity will also try to get facilitator status.
Many state entities, however, already have this status. Besides the empowerment fund, the current broad-based BEE facilitators include PetroSA, Denel, the Public Investment Corporation, the Mapungubwe Institute for Strategic Reflection, the East London Industrial Development Zone and the SA National Military Veterans Association.