Merg­ing for all the wrong rea­sons

Black busi­ness or­gan­i­sa­tions seem to sus­pect that political rather than eco­nomic con­sid­er­a­tions led to re­cent con­sol­i­da­tions, such as that of the merger be­tween the In­dus­trial De­vel­op­ment Cor­po­ra­tion and the Na­tional Em­pow­er­ment Fund.

Finweek English Edition - - OPINION - Editorial@fin­ Andile Ntingi is CEO and co-founder of GetBiz, an e-pro­cure­ment and ten­der no­ti­fi­ca­tion ser­vice.

politi­cianslove 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 Min­is­ter of trade and in­dus­try 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.

Did Trea­sury look at the NEF’s books, see some­thing it did not like and walk away?

Rob Davies

Ebrahim Pa­tel Min­is­ter of eco­nomic de­vel­op­ment

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