The vast majority of SA businesses are defined as small- to medium-sized enterprises (SMEs). SMEs employ most SA workers and are responsible for a large share of entrepreneurial activity.
Yet these companies find it extremely difficult to raise bank funding for start-up capital or even to expand their operations. This is the gap identified by the Industrial Development Corporation's (IDC) transportation & financial services strategic business unit (SBU). "We asked ourselves what difference we could make in the transport sector," says head of the SBU Kugan Thaver. "We found there was a large gap in funding for SMEs, particularly those controlled by black economic empowerment (BEE) firms."
The IDC identified one sector in particular that could benefit from its involvement: road freight. The SBU has done 16 deals in the year to end-March 2006 and four so far this year. "We have already made a big difference among SME road freight groups - those with no more than five trucks," says Thaver.
Unlike banks, which normally require a deposit of up to 20% and a number of large contracts in the bag, the IDC decided to make funding a lot easier and lower the barriers to entry in the sector. It did this by teaming up with Absa vehicle and asset finance, which provided the financial muscle and balance sheet access. The IDC added funding to reduce the risk significantly.
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Since the launch of the IDC/Absa venture 20 deals to the value of R93m have been approved. The joint venture requires a minimum 2,5% deposit, a bankable contract, and some management experience. Interest rates are capped at prime plus 1%. The loan funding provided is used to finance the necessary assets and provide initial working capital.
Says Thaver: "We realised we couldn't compete head-to-head with asset financing provided by WesBank and Stanbic, for example. But we could provide the guarantee often required by large financiers." He says the IDC has also concluded a deal with WesBank, but this is more on an "ad hoc" basis.
The IDC had also been approached by other banks to enter into a similar financing arrangement for the taxi industry. "However, while government is still finalising the taxi recapitalisation programme, we'd rather be on the sidelines until more clarity is available," he says.
The involvement of the IDC is not limited to SMEs, though, and the corporation has backed a number of larger deals, including a R40m loan to bulk fuel group Lobtrans (see next page), R15m to coal transporters Sizo Supplies and R60m to Great North Transport. The latter is a Limpopo government-owned bus company, which is using the loan to upgrade its fleet with 200 new buses.
The SBU is similarly involved in a bus company in the Eastern Cape called AB 350, which is in the process of combining the business of 100 smaller operators and refinancing the group.
"These are deals we will do on our own to strengthen our balance sheet," says Thaver, who foresees a number of larger deals once the transport charter is implemented later this year or early 2007.
"The charter should provide new opportunities, as companies have to sell a minimum of 26% of their businesses to BEE partners," he says. The charter will also apply to the aviation and maritime industries, where the IDC has, to date, done no deals. "These are sectors devoid of BEE and as the charter takes effect it will become a must for the industry. They are capital intensive and will require loan and debt funding," says Thaver.
He sees strong growth opportunities in the logistics sector, where distribution, warehousing and containerisation offer opportunities for SMEs, particularly if industrial development zones such as Coega or Johannesburg's City Deep expand. Here the IDC can make use of its pro-jobs funding schemes, which offer interest rates of up to five percentage points below prime.
Thaver's SBU also covers the retail, catering and security sectors, but its involvement has been limited to a number of deals in the security industry. Once again, he foresees significant opportunities, particularly in the retail sector, when the industry adopts a BEE charter.
The financial services sector dominates the SBU's book by value, though not by the number of deals. At the end of September, the SBU's total book value was almost R449m and the client list 33.
The largest is the R300m funding of FirstRand's BEE deal, whereby the IDC provided mezzanine funding to three empowerment consortia. The companies are on track with repayments, which are done mostly through dividend receipts.
Another large deal to come on Thaver's book is a 10-year, US$50m wholesale funding facility to the Economic Community of West African States (Ecowas) Bank for Investment & Development in Togo. This will help companies in West Africa to finance goods and related services from SA firms. At least 50% of the value of the deal has to be sourced from SA with a maximum deal value of $5m.
"Once we roll it out we believe it will help SA SMEs to get into the West African market and help Ecowas-based companies to secure local procurement."
Longer-term, Thaver sees the IDC getting more heavily involved in providing wholesale lines of credit to SA's micro-finance sectors. "We want to work with banks to provide SMEs with access to affordable finance below R500 000. There is a glaring gap in that market, but banks are starting to venture there. We can help their entry into this area by providing wholesale funding," Thaver says.
