Daily Maverick
Dailymaverick logo

Business Maverick

Business Maverick, South Africa, DM168

No one guarding the henhouse at Cast as business rescue fees rack up

No one guarding the henhouse at Cast as business rescue fees rack up
Sasha Planting
By Sasha Planting
17 Jul 2022
Facebook
0
Despite its talk about supporting SA’s industrialisation efforts, the Industrial Development Corporation has been asleep at the wheel at 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 R1.6-billion for its shareholders — excluding the losses that accumulated after the Industrial Development Corporation (IDC) acquired Scaw Metals from Anglo American in 2010.

From 2018 to 2021, Cast racked up R1.5-billion in irregular expenditure. The IDC dismisses this because it 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.

Cast 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 (BRPs) — 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 — mid- to late-2023 at the earliest.

Heavy industry in South Africa has been in decline for many 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 business 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.

Wanted: Management skills


What was required, said an industry insider to whom DM168 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, but does not have 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 Naledi Foundry, which the IDC acquired from Dorbyl in 2013, was placed in business rescue in April this year. It owed creditors R1-billion, of which R100-million was to the Ekurhuleni Municipality.

In the CPSA business rescue plan, the business 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.

Hands off


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.

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.

Coming to a head


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-19 travel 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 business rescue practitioners and concerned 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 business rescue team intends 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. In November 2020, Fathima Gany was appointed. A year later, it pressed 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.

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 has not been reinstated for reasons that remain unclear.

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

Value-add rescue


This is an uncertain process, but the business rescue practitioners are confident that the company will be profitable within the next year.

“This BR team is transforming a company that was losing R400-million a year into a company that 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 the CPSA are not convinced 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, nor the board. DM168

This story first appeared in our weekly DM168 newspaper, which is available countrywide for R25.

Categories:

Tags: