Business Maverick

DERELICTION OF DUTY

Industrialisation policy and the sad tale of Cast Products and the IDC

Industrialisation policy and the sad tale of Cast Products and the IDC

Despite its talk about supporting South Africa’s industrialisation efforts, the Industrial Development Corporation has been asleep at the wheel when it comes to Cast Products SA — and taxpayers are footing the bill.

In the past four years, Cast Products South Africa (CPSA), the foundry division of Scaw Metals, has lost its shareholders R1.6-billion — and that’s excluding the losses that accumulated after the Industrial Development Corporation (IDC) acquired Scaw Metals from Anglo American in 2010.

From 2018 to 2021, Cast Products racked up R1.5-billion in irregular expenditure. The IDC dismissed this because it had applied to the National Treasury — but was denied — for exemption from the restrictive Public Finance Management Act. But the company’s lack of financial controls means that not all of these losses can be allocated simply to a “technical categorisation”, as the IDC says.

CPSA is now in business rescue, an expensive process with an uncertain outcome. The IDC has loaned it a further R85-million in post-commencement finance to fund operations. 

Meanwhile, costs from the business rescue practitioners, Engaged Business Turnaround and Chrisyd Advisory Services, are mounting. Their combined billings amounted to R21-million over the first four months of the process.

The rescue is likely to continue until the company is stabilised and, ideally, a buyer is found — in mid to late 2023, at the earliest.

Input costs

Heavy industry in South Africa has been in decline for years. And the foundry business, in particular, is under pressure because its two main input costs — electricity and scrap metal — have escalated. 

But as the rescue practitioners point out in their turnaround plan, there is strong and increasing potential demand for Cast’s products in the mining sector, as well as in the power generation (Eskom) and rail (Transnet) sectors.

What was required, said an industry insider to whom Daily Maverick spoke, was a management team that would control costs and invest in the production department.

The IDC, as a development finance organisation, does not have the management skills to run an engineering business. But as the custodian of taxpayer-derived funding, the IDC and the five-member board of Cast (with three IDC members, including the chair) have a duty to understand the business and the risks it faces; to demand accountability from the executive, and to provide strategic direction, planning and oversight of the business.

Instead, the IDC appears to have established a pattern of making investments in this important sector while lacking the necessary supervisory expertise to demand executive accountability from its investee companies.

In 2016, Steloy Foundries, to which the IDC contributed R120-million, was placed in liquidation, and in April this year, Naledi Foundry — which the IDC acquired from Dorbyl in 2013 — was placed in business rescue. It owed creditors R1-billion, of which R100-million was paid to the Ekurhuleni Municipality.

Reasons for failure

In CPSA’s business rescue plan, the rescue practitioners list several reasons for the company’s financial distress, chiefly a “dysfunctional management team”; no internal controls, ineffective procurement processes that led to inflated prices from suppliers; a tendering system that didn’t work and ineffective security controls.

The picture is of a company whose staff and suppliers were able to enrich themselves at the expense of its financial wellbeing.

The IDC, as 85% shareholder, did not appoint the executive team managing the day-to-day operations. Its strategic equity partner, US-based Amsted Rail, which holds 15%, was running the show. 

Tshepo Ramodibe, IDC head of corporate affairs, said Amsted had a good track record of turning around distressed casting businesses. But as South Africa has learnt from previous experience, offshore companies seldom have anything but their own best interests at heart — and Amsted was no different.

Remote control

Its US-based CEO, Doug McLaren, ran the company remotely, complemented by a week to 10 days a month “in country”. This was a R1-billion turnover company with four foundries, employing more than 1,000 people. It operated in a challenging environment, characterised by uneven performance from key customers such as Telkom and Transnet, and labour volatility. Hardly an operation to run remotely.

McLaren was not supported by an executive team on the ground — there was no permanent COO and a CFO was only appointed three years later, in 2020, when the wheels were starting to come off.

The board of directors, chaired by the now retired IDC veteran William Smith, was not happy with the status quo, but they let it ride for three years. 

Matters came to a head in 2020, when Covid restrictions meant the CEO could no longer travel — losses were ratcheting up and the auditors were flagging irregularities. One wonders why the audit findings were not resolved and whether there was any consequence management.

One in particular was picked up by the rescue practitioners, concerning a subsidiary company called Crushing Equipment, in Australia. They asked why millions of rands worth of steel inventory would be written down to one-fifth of its value between 2019 and 2021. The rescue practitioners intend sending a senior person to Australia to investigate the matter.

At this point, the board began to take action. It pressed for the appointment of a CFO, and in November 2020 Fathima Gany was appointed. A year later, it pushed for the appointment of a permanent in-­country CEO. It delegated non-executive director Cordelia Mgidi, who had no previous engineering or management experience, as acting CEO on a four-month contract.

Executive clashes

However, the acting CEO clashed with the CFO, according to insiders, and by November 2021 the CFO was suspended. She has been cleared on all charges, but for reasons that remain unclear, has not been reinstated.

In the meantime, with no management team capable of leading a turnaround initiative, the board of directors took the decision to put the company into business rescue.

This is an uncertain process, but the rescue practitioners are confident that the company will be profitable within the next year. “This team is transforming a company which was losing R400-million a year into a company which will make a profit in less than a year from now,” says Refilwe Ndlovu, the founder and CEO of Chrisyd. 

“In this context, the total business rescue fees proposed by the plan are a small fraction of this value-add, yet this value-add would not be possible without the company spending the business rescue fees.”

Insiders at Cast Products SA are unconvinced that the company is not being milked all over again. With a dearth of senior financial management to oversee the billings, who is guarding the henhouse? 

It is certainly not the IDC — or the board. DM

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