24 May 2024 | 11:58 PM

Funder vs funder in R500m pots fiasco

Key Takeaways

Over half a billion rand, largely from state funders, has been squandered on an ill-conceived project to disassemble a Turkish pot factory, ship the parts to South Africa and rebuild it in Kwazulu-Natal.

Four years on, the factory’s parts have been sold in a liquidation fire-sale and several of the parties are locked in legal battles about what went wrong.

There is every indication that senior officials at state enterprises showed extraordinary laxity, failing to do basic due diligence and signing off on unenforceable contracts. Severe mismanagement did not help.

One thing is certain: taxpayers got taken for a ride.

At the centre is the KwaZulu-Natal Growth Fund Trust, a provincial development financier which championed – with an excess of enthusiasm – a bold if unlikely plan promising new jobs, localisation and a success story for the Dube Trade Port.

But much of the Turkish factory equipment allegedly turned out to be obsolete or at least massively overpriced, and the newly-built manufacturing plant was far larger and more costly than needed. Despite this, no one at the fund will take responsibility for the disastrous investment.

Today, at least three damning forensic reports and two court cases later, the Industrial Development Corporation (IDC) has taken the unprecedented step of blacklisting a fellow development finance institution and is suing to get back a R36-million loan. It is counting its luck that a further R60-million debt facility it agreed to in late 2018 was never drawn down.

In a further twist a private investor in the scheme which lost R63.5-million has requested the Turkish authorities to help recover this cash from the seller of the factory while also suing officials at the Growth Fund.

How the plan evolved

The story began in 2015 with a family-owned cookware company called IKRA. It had a pot factory in southern Turkey which needed to escape Russian sanctions and a growing threat from the civil war just across the border in Syria.

In South Africa a seasoned pot trader in Mossel Bay named Marius van Zyl was by chance trying to set up a pot factory after his company Savanna Collections struggled to make headway selling imported cookware from Europe. He partnered with Vusi Ndlovu, co-owner of a local KwaZulu-Natal company called Dymarox which dealt with import and export clearance in Durban, and set out to build a factory from scratch using new Italian machinery.

Ndlovu, an engineer, became chief executive and Van Zyl managing director of their new company, Inoxa. The name was later changed to Insa because Inoxa was too similar to the name of an Italian company.

To fund their plan they went door to door for development finance, trying the National Empowerment Fund and the Public Investment Corporation without success. Then in July 2015 they knocked at the door of the Growth Fund where they were received with open arms.

The Turks meanwhile hired a professional trader in second-hand factory machinery, a German middleman called Matthias Hau, who ultimately introduced IKRA to Inoxa/Insa. For Van Zyl and Ndlovu it was a far better prospect than their initial Italian plan, not least because it came as a neat package deal involving an entire functional factory.

The two negotiated with Turkish family representative Serdar Cicekci and on 5 February 2016, signed a purchase contract for $10.375-million. Even that figure has been the subject of later controversy: a manufacturing expert they hired, Nicolas Hamman, has told amaBhungane that $8.5-million would have been “fair”, but only for a fully functional factory that came with an ironclad offtake agreement that would guarantee a minimum level of sales.[1] This would be only one of many miscalculations that ultimately brought Insa to its knees.

The Growth Fund’s chief executive, Siddiq Adam, chief investment officer, Aubrey Shabane, and project investment officer, Vanessa Ranchhod, enthusiastically bought into the revised scheme.

The fund would not only provide millions of rands, it would take the reins and become lead arranger for the project, helping to find further funding. The Growth Fund was obliged to take control early on, says former official Dieter Kasch,[2] because Insa was a mere paper company, with not even a computer to its name.

The first task was to arrange an independent evaluation of the Turkish factory. A consulting engineer, Leo Middelberg, was flown to Turkey for a hurried three days. On 17 May 2016 he produced a report valuing the machinery at $7.5-million and the accompanying tools, jigs and dies at $4.9-million. Since that came to $12.4-million, the asking price of $10.375 seemed a bargain.[3] The project went ahead.

The Growth Fund’s first success was finding a willing private investor to fill a R60-million funding gap. Brand Investments was a company owned by a Durban business family, the Patels. The Patel family claim they were lured by an optimistic financial forecast which predicted almost immediate profit.

Years later, it is the disgruntled Patels, suing executives of the Growth Fund for their money back, whose court papers provide key details of how the pots affair evolved.

Included in the Patel court papers was a “teaser” presentation prepared for them and signed off by the Growth Fund’s Ranchhod in May 2016, pitching the Insa project.

According to Brand, they were told that not only had the Growth Fund examined the deal closely, the international auditing firm PwC had done a “due diligence exercise on the viability of the investment”.[4]

The Turks themselves would invest and they would buy enough pots for the international market to make the project viable. The department of trade and industry offered a Black Industrialist scheme from which it would be possible to claim back R50-million.[5] On top of that there was already a perfect site in the Dube Trade Port.

The Growth Fund contributed R104.5-million in equity and another R77.5-million in debt finance. Brand Investments put in R63.25-million more. In December 2018 the IDC would be persuaded to put in R36-million for preference shares and an additional R60-million debt facility. The project was taking shape … but not quite as expected.

In January 2017, some 46 giant shipping containers packed with factory parts arrived as promised at Durban harbour. A dispute quickly flared. The Cicekci family refused to hand over the original waybills unless Insa paid “rent” for failing to remove the factory on time. The containers remained at Durban harbour clocking up additional storage fees.

Meanwhile, building new premises was also way behind schedule. The containers were ultimately stored for 21 months at the harbour and then at onshore sites before being opened. The factory should have been completed by the end of 2016, but delays led to escalating costs. It was discovered that the initial site for housing the factory was unsuitable, and a special bespoke plant would be needed.

Shree Property Holdings was commissioned to build custom-made premises at Shakaskraal, a small town 75 km north of Durban, for a price of R230-million. The local KwaDukuza municipality, which stood to benefit from a major source of employment within its territory, gave funding and rebates worth over R80-million.

Meanwhile Insa was descending into chaos with constant shareholder infighting about the purchase price, the distribution deal with the Turks and even the relative shareholding of the parties in Insa.

In early 2018 the Growth Fund appointed turnaround specialist Chris O’Neill, first as a consultant, then as “chief restructuring officer”. O’Neill has told amaBhungane that he arrived to discover a disaster. The site in Shakaskraal was twice as large as required, and included an office block which offered 90% more space than needed.

O’Neill was blunt in his assessment. “The Insa people handling this were completely incompetent… Between this and other factors, Ndlovu overspent by nearly R50m and without Insa board or shareholder approval… There was no more cash and all they had was an incomplete building … and a staff complement of seven.”[6]

When O’Neill finally got to unpack the shipping containers in August 2018, “I soon realised that we had a serious problem … many of the containers simply had scrap and other useless pieces of equipment. The value was nowhere near the R153m [$10.375-million] paid.”

O’Neill appointed Accountants@Law to conduct the first forensic investigation into Insa’s affairs and brought in outside valuers to look at the machines. They came back with a value of R14.4-million which O’Neill says he argued up to R45-million – to limit the growing hole in Insa’s books. Another R30-million had to be spent on local equipment to set the factory up.

As for the Turks, they have been accused by Brand and the Growth Fund’s former executive Shabane of ripping off the South African investors but also sabotaging the project when their further demands were not met.

Central to the project’s feasibility was an offtake deal whereby IKRA would buy a third of all the pots produced. According to former Growth Fund executive Kasch, all agreements with IKRA were drafted under the jurisdiction of Turkish law, poorly written and unenforceable in South Africa.

This key deal subsequently fell by the wayside, upending the financial model and viability of the project.

There has been talk of getting the Turkish authorities involved. Neven Hendricks, a representative of Brand Investments on the Insa board, has written to the Turkish ambassador in South Africa accusing Cickeci of fraud and requesting assistance to recover some of the losses.

Hendricks told amaBhungane that IKRA had essentially “done nothing” it was supposed to.

Serdar Cicekci, IKRA chief executive, disputes this version of events. He told amaBhungane he is also suing and blames corruption and racism on the part of the South Africans for the failure of the project. Ironically, he has in his corner none other than Van Zyl, whose company Savanna was to be the vehicle through which the Insa pots got sold.

Cicekci claims the offtake deal was invalidated when Insa failed to start production on time. A new deal was allegedly rejected because the Insa board wanted to find a route to market that cut out IKRA as well as Van Zyl, who had been at loggerheads with Ndlovu.

Cicekci also claims to have taken a significant personal financial blow to aid the project.  He says he agreed with the Growth Fund to lower the R153-million cash consideration by R20-million, for which he instead took a shareholding in Insa. But then, he claims, “The board of Insa Company, as well as KZNGF was trying to steal the shares of mine.”

“Therefore they lie about [overstating the] assets’ sales price … [a] package deal was agreed with offtake in [the] purchase agreement which never happened… but their lies will be shown to [the] public in legal proceedings via courts soon.”

The delay in setting up the factory also translated directly into lost sales for IKRA, he added.

Fast forward: the collapse

Back in Shakaskraal, the pot factory was finally up and running in April 2019 – three years late and massively overcapitalised. It hired 104 people. But by now Insa was saddled with debt, unrealistic overheads and no anchor client to ensure sales. In October 2019, the company was handed over to business rescue practitioner Sipho Sono. A few months later he threw in the towel and had Insa liquidated.

Sono says that he initially thought the company needed only working capital and it would then be possible to “commence trade and to supply sufficient product to render the business profitable … [but] my subsequent investigation of the business model … has shown otherwise.”[7]

When Sono held a first meeting of creditors they expressed shock at the level of debt accumulated by the company in a very short space of time: “I was equally puzzled at the amounts spent, although at that point my investigations were ongoing and had not been able to verify whether the amounts spent were justified or not.”

Sono quickly made discoveries of the kind the funders might easily have made, just by asking around the local industry. On 29 January 2020 a potential buyer called Anyview Technologies, which had been given an asset register to inspect, came back with an unequivocal “no way”.

Anyview managing director Jaime Vilela wrote: “We have analysed the information and afraid to say that the supplier [IKRA] has taken lnsa for a huge ride. 50% or more of the machines are too old 10 to 20 years old or older and obsolete and high maintenance.”

Insa was losing R320 on every set of six pots it made, he observed.

On Sono’s instruction, a valuation was carried out by Peter Maskell Auctioneers. The IKRA plant was worth no more than R12.7-million to R17.7-million, they reported. Another potential investor told him that all the components could be bought, brand new, for R30-million, a fifth of what Insa paid, “as technology has improved significantly”.

Sono liquidated the company in February 2020. It owed shareholders and funders R396.4-million. The major creditors are the KZN Growth Fund with a claim of R237.2-million and Brand with a R95.6-million claim, interest included, according to Sono.

According to O’Neil there is also Shree Properties’ “water-tight” ten-year lease deal with Insa worth over R200-million. It is unclear how Shree will try to recover this amount.

The total asset base that could be sold to repay that debt is in the region of R20-million, Sono said. All of that would go to the Growth Fund as its debt was secured and ranked above everyone else’s.

Pointing fingers: whose fault?

The fallout has been acrimonious and all have been pointing fingers at one another.

The first question is: how was the deal allowed to happen? Why, for example, did the consulting engineer Middelberg not raise the alarm right at the start? He wrote to amaBhungane that his trip to Turkey was far too short to do in-depth analysis. “My brief was to do a high level evaluation of the plant – it was definitely not an in depth evaluation and or valuation. (I was allowed 3 days!).

“What I think you need to take into consideration is that the value was given for the plant as it stood – in working order. From this value you would have had to subtract the disassembly costs, the transport cost and the re-erection cost. In addition if there was any cost to prepare a site (like the foundations required for the press and other big machines) those costs should also be subtracted – else you would be over capitalising!”[8]

What about the Growth Fund’s chief executive, Adam, who pushed for the project to happen? The argument he put to amaBhungane is that the project was viable, and that he could not be expected to interrogate the numbers.

“As head of an organisation you have to place reliance on your executives and senior investment officers who are experts in their field. They [Shabane and Ranchhod] did an extensive due diligence and appointed an expert engineer to get a valuation done. At no given point in time was I given any reason to doubt either the valuation of the plant or the viability of the project as a whole.”

Adam also blames his successors at the fund for Insa failing.

“For me, this project came to this disastrous end not because of the initial feasibility, but because of the mismanagement of the project by KGF [the Growth Fund] after I left the fund in March 2017…

“The promoters were deemed to be knowledgeable in the field. Vusi [Ndlovu] is an engineer, Marius [van Zyl] was a seasoned cookware marketing person and the main technical person Nic Hamman was the ex-general manager of AMC.”

Shabane himself, who took over as Growth Fund chief executive when Adam left, claims that ample due diligence took place.

A market study had been procured from Who Owns Whom, a well-known local research outfit. Shabane also claims that the Patels were unequivocally told that they should do their own due diligence – and in fact did so.

There were however red flags. An attempt was made to establish whether IKRA would be able to afford the offtake agreement it had committed to (and which later fell by the wayside). For this the Growth Fund asked for annual financial statements and a list of IKRA’s supposed customers – a very fundamental basis for evaluating the transaction.

“However, IKRA invoking its right as a private company refused to share its financial statements with Insa promoters and also refused to share its list of customers fearing that once INSA had the list, they would bypass IKRA and approach its customers directly,” Shabane told amaBhungane.

To get around this “stalemate” the Turks allowed an “in situ” inspection of its books without giving Insa or the Growth Fund copies.

In the end a Turkish auditor provided an “independent declaration”. It was IKRA’s own auditor, a choice the Growth Fund was happy with because there would be “recourse in terms of accounting bodies”.

The declaration listed sales per year which had grown to 3.9-million units in 2014 before dropping to three million in 2015. This was nonetheless deemed satisfactory.

According to Shabane it may very well have been his team that pushed the deal in the Growth Fund, but the responsibility for actually going ahead with it lies with the “credit team and chief risk officer”.

“It is an industry norm that the Investment Team, as deal-makers, tend to be optimistic in their approach concentrating on the positives of the project, e.g. jobs to be created, returns to be made, economic transformation to be achieved, etc. It is for this reason that financiers have credit risk teams that act as ‘policemen’ to contain the investment team’s optimism.”

According to him the failure of Insa stemmed largely from the actions of IKRA.

They demanded the unbudgeted extra “rent” of R13-million and refused to come to South Africa to help commission the plant as promised. Then they threatened to cancel the offtake deal unless “their ridiculous demands were met”, Shabane said in a written response to questions.

The Turkish representative Cicekci responded by blaming Insa. He says the company acted in bad faith regarding the offtake deal, was not “fully funded” and lied about their ability to get the factory going in the agreed timeframe – not least due to the premises not being ready.

The additional “rent” was levied in terms of a signed agreement that stipulated the timeframes for relocating the factory, he said. “From 2016 [to the] end of 2017, I was in Africa many times to work on the project and was willing to bring staff to Africa, Unfortunately [the] factory … was not completed by the contractor at [that] time.”

He claims that Ndlovu and Shabane want to blame him for everything because “I am white and foreigner investor in South Africa”.

Cicekci further claims he offered to buy back the factory on at least two occasions. Shabane says that he had “ranted” about this but never made a formal offer while Hendricks denies this ever happened.

Two other figures at the centre of the fiasco, Insa managing director Ndlovu and the Growth Fund investment officer Ranchhod, declined to comment.

Ndlovu referred amaBhungane to Insa’s liquidator, who has ignored messages.

Van Zyl, meanwhile, has vociferously denied any wrongdoing on his part, especially related to the alleged inflation of the purchase price for the equipment. He has sided with Cicekci in the saga because the original offtake plan would have utilised his company Savanna as an intermediary. “I deny that there was ever any collaboration between myself and Serdar [Cicekci] to inflate the purchase price”, he said in an affidavit prepared for investigators.

He echoed Cickeci’s version that the reduction of the purchase price was to fund the Turks’ shareholding and ensure their continued involvement, to save the deal, he said.

In the same affidavit he complained that he had been rapidly sidelined as the Insa project took shape because of the shareholding that had to be ceded to Ndlovu for empowerment purposes and the Growth Fund taking up shares.

The blacklist

The most ferocious reaction has come from the IDC, whose own involvement in the fiasco has compromised its reputation, suggesting that it is unable to do proper due diligence before committing almost R100-million to a project that was plainly set up to fail.

Before committing to the project in late 2018 the funder did in fact conduct a “thorough due diligence process that valued the plant and equipment at R103m”, the IDC said in a written response to questions.

On 17 February this year the IDC’s lawyers sent letters to almost everyone involved informing them that they have been placed on the funder’s “delinquency register”.

This is an internal blacklist that disqualifies a company from funding by the IDC if anyone named on the list is involved “in any way” in that company. The disqualification lasts for 10 years.

Those affected include the directors of Brand Investments, who consider themselves to have been duped by the Growth Fund and who are also suing.

The IDC explains its action by saying Insa never once informed it that there had already been a forensic investigation done at the company. “The IDC would not have agreed to this investment into Insa, had the governance issues within Insa and the forensic investigation been disclosed to the IDC.”

The turnaround specialist O’Neill, who ordered the first forensic investigation, says his lawyers are responding to the blacklist on which he, Brands Investments’ Hendricks and the Patels, Ndlovu, Van Zyl, Shabane and the Growth Fund itself appear.

“The argument that the IDC is using is that we never advised them of the governance issues nor the forensic audit, and this is absolute nonsense. I specifically told them about this.”

The IDC for its part has stressed that “listing on the register is subject to final representations by all affected parties”.

The unprecedented step of putting a fellow state-owned development financier on its blacklist has put the IDC on the spot. When asked whether this is the first time it has done so, the IDC responded in a roundabout way:

“The sanction of listing a company or an individual on the register is only activated when there is proof that a company or an individual has been involved in unethical practices… There is no exception to this rule.”

[1] Van Zyl disputes the claim that the price was inflated by $2-million.

[2] In a scathing affidavit he gave to the forensic investigators. Kasch was a former acting chief investment officer of the Growth Fund, who blames Adam, Shabane and Ranchhod for the disaster. He succeeded Shabane for an acting period and took it upon himself to revisit the Insa transaction, he said.

[3] Middelberg says his report was misunderstood, a topic we return to lower down.

[4] Kasch says he was unable to find evidence of a PwC due diligence exercise.

[5] Black Industrialist funding applies only to new equipment and was therefore not an option. A later forensic investigation discovered several abortive attempts by Insa to raise Black Industrialist funding, some allegedly based on highly questionable claims.

[6] Email correspondence.

[7] In an affidavit to liquidate the company, February 2020.

[8] Middelberg also noted that he was not alone on the trip. The Growth Fund’s investment officer, Vanessa Ranchhod, was also sent to Turkey, to do financial due diligence. But according to Middelberg, she spent less than a day at the factory.


Dewald van Rensburg and Sam Sole

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