Addressing the lack of meaningful numbers of black entrepreneurs in key industrial sectors has become one of the driving forces behind the Industrial Development Corp's (IDC) lending activities. In many sectors of corporate SA black business is represented mostly as a passive shareholder in largely white managed companies. Two of these industries are the transport and machinery sectors, which should benefit significantly as SA's infrastructure drive picks up steam.
The IDC's metal, transport & machinery products (MTMP) strategic business unit (SBU) is tasked with "broadening and deepening the developmental impact of the IDC's lending in the sector", says SBU head Duncan Macleod.
It's a wide ranging portfolio that includes basic metal industries, such as steel converters, casting and forging; manufacturers of engines, machine tools and mining equipment, among others; automotive parts; and transport sectors such as ship and boat building, aviation, bikes and rolling stock for railways.
With the launch of the IDC's small business and jobs development scheme last year, the unit accelerated the drive to put development, jobs and empowerment at the forefront of new funding. This is reflected in the financing figures of the MTMP unit. Though the number and value of transactions had been dropping until the past financial year - to end-March 2005 - it has picked up since then with a focus on smaller deals and job creation. (See graph.)
Macleod says that over the past three years the unit has funded projects that have created about 2 150 jobs, of which 1 150 were established in 2005/2006 financial year.
He adds that to date the unit has funded a total of nine projects under the projobs scheme since its launch in July last year. The scheme's attraction for borrowers is an interest rate of five percentage points below the prime interest rate. The facility is only available to small and medium-sized companies (SMEs) and projects must be labour intensive by creating at least 10 jobs at a cost of no more than R150 000/job. The funding is limited to R25m/project.
Macleod stresses that the new funding policies have not led to an increase in bad debts and defaults. "All we are doing is subsidising the cost of funding. We have not compromised on our due diligence and the method of investment."
Macleod says that he expects a further increase in the amounts lent by his unit, but as yet "we have not had major funding opportunities arising out of the expected increase in the infrastructure roll-out through projects such as the railway and power generation expansions as well as the Gautrain. This will come through over the next few years from companies seeking to grow to be suppliers to the projects," Macleod says.
The automotive parts and accessories sector is the largest subsector of the SBU and this has benefited from the meteoric growth of the automotive industry over the past five years. But even there growth has been hampered. "Many of our clients ultimately or directly supply to the original equipment manufacturers (OEMs) under fixed contracts with car manufacturers. This does mean though that their fortunes are tied to those of the OEMs with little room to expand beyond that base," Macleod says.
The metal and machinery products companies, though also seeing relatively strong growth from the building boom in residential markets, would benefit more from larger infrastructural projects that use more metal products.
The SBU's focus remains mostly on companies that can be classified as genuine small to medium-sized companies. "When they grow beyond a certain size and build up their asset base they normally use commercial loan funding from banks to finance their growth," says Macleod. "We see that as part of our economic role."
The difference in the funding approach between the IDC and commercial banks is perhaps best illustrated in the relationship between the MTMP unit and its largest customer Aerosud. The Centurion-based aero-engineering contractor is a fairly well established company in the aerospace industry, but "it is a company that is still growing strongly", says Macleod.
It is thus in need of upfront investment capital to fund its new contracts. These contracts are sufficient for the IDC, with its development focus, to extend funding, but they would not be for commercial banks.
"Many of our clients simply don't have the necessary security to meet banks' risk requirements. As the IDC we are able to assess and reward future economic viability," says Macleod.
Aerosud has a number of these contracts and last month secured a strategic partnership with aircraft manufacturer Boeing for the US company's business across Africa. The company also has subcontracts with the European Airbus consortium and multinational defence contractor BAE Systems.
