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In yet another thought provoking piece, Investec’s Brian Kantor questions the motives behind the Competition Tribunal’s approval of the Gupta-owned Tegeta acquisition of the Optimum Coal mine that supplies Eskom.
The tribunal has given the deal the green light only if there are no merger-specific job losses. By making reference to the Walmart/Massmart merger, Kantor says that while saving jobs is important the public interest is in employment growth and a more productive labour force. And the current route makes for an inefficient, less competitive economy. As usual some great analysis. – Stuart Lowman
By Brian Kantor*
The controversy surrounding the purchase by Tegeta Exploration and Resources, a Gupta controlled company, of Optimum Coal Mine for R2.5bn from Glencore has been grabbing the headlines in the local media. Optimum Coal Mine supplies Eskom and enjoys a near 10% share of the Richards Bay coal export terminal.
Part of the controversy was about the alleged role of Mineral Resources Minister Mosebenzi Zwane.
According to a report in Business Day by Natasha Marrion on 23 February: “Mr Zwane said his only interest in the deal was to ensure that no jobs were lost under the new owner.”
Business Day further reported “that the Competition Tribunal has cleared the way for the Gupta-controlled Tegeta Exploration and Resources to acquire Optimum Coal, on condition there are no merger-specific job losses. The approval comes as the Treasury is reviewing all of power utility Eskom’s coal and diesel contracts.”
Read also: DA: ANC tightlipped on Gupta, Eskom coal contracts
There is heightened public interest (literally) in the terms of this deal, for many reasons. What is of interest in this instance though is that the Competition Commission and Tribunal however chose to concern themselves only in the employment implications of the deal, following their mandate to consider the public interest as well as the competition implications of any deal of this magnitude.
As the Appeal Court indicated in its precedent making judgment in 2011 on the Massmart-Walmart merger, the task of Competition Policy is to determine:
1. Whether or not the merger is likely to substantially prevent or lessen competition;
2. If the result of this inquiry is in the affirmative, whether technological, efficiency or other pro-competitive gains will trump the initial conclusion so reached in stage 1 together, with the further consideration based on substantial public interest grounds, which in turn, could justify permitting or refusing the merger; and
3. Notwithstanding the outcome of the enquiries in 1 or 2, the determination of whether the merger can or cannot be justified on substantial public interest grounds.
The legislature sets out specific public interest grounds in s 12 A (3):
“(3) When determining whether a merger can or cannot be justified on public interest grounds, the Competition Commission or the Competition Tribunal must consider the effect that the merger will have on –
(a) a particular industrial sector or region;
(b) employment;
(c) the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive;
and
(d) the ability of national industries to compete in international
markets.”
Clause 3d, “the ability of national industries to compete in international markets”, as well as clause 3b “employment” might well have also have been used to examine the contract. Clearly the competitive terms on which Eskom sources its coal will affect its costs and the prices it will ask the regulator to approve. The ability of all SA industry to compete effectively depends on the price and availability of electricity.
Read also: Nersa grants Eskom 9.4% tariff hike from 1 April
That the Treasury is apparently also investigating this Eskom contract, among other Eskom contracts, might be a reason for the competition authorities to have ignored this public interest in the terms of the contract.
Be that as it may be, the Competition Commission’s determination of the mandated public interest as in 12a clause 3 of the Act, in employment retention, following that of the Competition Appeal Court judgment in the case of the Walmart Merger, and further pursued in the Tegeta case, needs to be seriously examined.
The case of the entry of WalMart to the SA economy. The welcome mat was not laid out.
An important case for competition law in SA, resolved in 2011 on Appeal to the Competition Appeal Court headed by Judge Dennis Davis, involved the purchase of a majority stake in a local JSE-listed retailer and wholesaler, Massmart, by the largest retailer in the world, Walmart.
Approval of the deal was given by the Competition Tribunal because it was “common cause” – to quote the Judgment of the Competition Appeal Court, on the Tribunal – “that there was no threat to competition”.
Indeed it was so conceded by the counsel for the parties contesting the approval of the merger in Court, to quote a report on the proceedings: “Paul McNally, who submitted closing arguments on behalf of the union… said his clients accepted that there would be lower prices as a result of the acquisition, but that these would come at the expense of local jobs.” 1
Surely this common cause should have been sufficient to approve the merger and to extend a warm welcome to Wal-Mart, especially from SA consumers, who were bound to benefit from more competition for their spending power.
Given the importance of foreign capital for the economy and its growth prospects, a warm welcome too might have been extended in recognition of the confidence that the world’s largest retailer was expressing in the SA economy. This friendly response to an important investor in the SA economy might well have encouraged more direct foreign investment that is very obviously in the broad public interest.
The Competition Tribunal however surrounded its approval of the deal with a number of onerous and complicated conditions. Such conditions were highly sympathetic to the arguments made by the trade unions interested in the merger, but costly to Walmart and therefore its ability to compete in the market place with other retailers and wholesalers.
The conditions required of the merged entity by the Tribunal included restrictions on retrenchments, preferences for previously retrenched workers when employment opportunities presented themselves and R100m to be invested in a programme to support local business, combined with a requirement to train local South African suppliers on how to do business with the merged entity and with Wal-Mart with the programme and its administration to be “advised by a committee established by it and on which representatives of trade unions, business including SMMEs, and the government will be invited to serve”.
However the merger was taken on appeal to the Competition Appeal Court by the concerned unions and Ministers of State who sought to have the merger disallowed on public interest grounds. The Appeal Court agreed to allow the merger but decided to largely support the Tribunal by surrounding the deal with the conditions as had been recommended by the Tribunal (somewhat modified) but clearly not to the advantage of Wal-Mart as a competitor.
This seems a very unhelpful and unlikely course to take for a body designed to promote competition. Mergers and acquisitions, friendly and especially hostile ones, are among the more important ways in which businesses realise economies of scale that allow them to become more efficient more profitable and by definition more competitive in the interest of its customers of whom they wish to win more over.
Any synergies to be realised in a larger, combined entity almost inevitably involve retrenchments of staff. Indeed, the ability to avoid duplication of personnel and systems and to reduce operating costs and improve margins is often the prime motivation for any merger or acquisition.
A vibrant economy is one where, over time, workers and managers are continuously being allocated and reallocated to more efficient purposes. This requires that some firms will be reducing their complements of workers while others are increasing theirs and net employment gains are registered for a growing potential labour force.
Without job losses, there would be far fewer job gains made possible. A system that made it very difficult to retrench workers is one that discourages hiring in the first place. It makes for a stagnant economy, with a feudal style labour market that treats jobs as an entitlement, not at all easily discarded and highly discouraging to job creation.
A flexible labour market, by contrast, gives firms a high degree of freedom to hire and fire and allows workers to freely choose their employers and move easily from one job to another. The favourable outcomes of such freedoms enjoyed over time can be observed in the US or UK, with a highly productive and well paid labour force and a significant rate of turnover of jobs.
The South African labour market, or at least the labour employed in the formal sector of the economy that provides the much prized, so-called “decent jobs”, is highly inflexible. Job retention, rather than job growth, has become the primary objective of labour market regulations and it would appear also competition policy. The prospect of an extended period of unemployment is an unhappily realistic one for many of those threatened with retrenchment.
This is a weakness of the labour market that policies for competition should be addressing, not reinforcing. The competition authorities, by their rulings on job retention, have made the economy less efficient and competitive than it could be. By setting these precedents, it also makes efficiency enhancing investments and acquisitions less likely and so the efficient use of capital and labour less likely.
There is a public interest in a more competitive and efficient market for goods and services and for labour. There is only a private interest in avoiding particular retrenchments. Competition policy misuses the public interest in its focus on employment. The public interest is in employment growth and a more productive labour force to which mergers and acquisitions can make a very important contribution.
• Brian Kantor is Chief Strategist and Economist, Investec Wealth and Investment. The views expressed in this article are those of the author and may not necessarily represent those of Investec Wealth & Investment.
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