In the first 15 years of our democracy the economy grew an average 3.6% a year and unemployment ended at 23%. In the second 15 years the economy grew an average 1.1% and unemployment ended up at 33%.
S&P Global’s economists have pointed too to a dramatic drop in SA’s productivity growth, from 3% a year in the decade before the 2008-09 global financial crisis, to just 0.2% in the decade after that crisis.
State capture and the end of the commodities boom of the 2000s, and more recently the crises at Eskom and Transnet, had a lot to do with the decline. But another factor was a shift in the direction of policy that was not necessarily obvious at the time. Essentially, the focus tilted from freeing up the economy and opening it to the world to a more inward-looking, interventionist approach.
In 2007 the government published its first Industrial Policy Action Plan. In 2009 newly elected president Jacob Zuma appointed Rob Davies to be the trade & industry ministry and Ebrahim Patel to the newly created economic development ministry, which had been spun out of Davies’ portfolio. Both appointments were intended to placate the trade unions that had helped to bring Zuma to power. Much later, in 2019, President Cyril Ramaphosa put Patel in charge of a reunified department that brought trade, industry and competition back together, under the banner of a “Reimagined industrial policy”.
The shift in the past 15 years is not about Patel alone. But he has made an art of using the levers of trade policy, and particularly of competition policy, to extract broader industrial policy and black empowerment concessions. Instead of improving consumer welfare and making the economy more competitive and better able to attract investment, this extractive approach may well have done the opposite.
Take tariffs. SA had removed apartheid era controls and cut import duties and tariffs significantly from the mid-1990s. But that reversed after 2009. Food is one example: tariffs on basic foods fell sharply between 2000 and 2013, but then climbed more sharply than other tariffs, to 62% in the case of the chicken imports that are a staple for poor households. Instead of helping “infant industries”, SA has used tariff protection to help elderly, inefficient industries with loud voices.
Patel’s particular twist since he took over responsibility has been to grant tariff protection in return for “reciprocal agreements” by companies on investment and employment. That has seen waiting times at the supposedly independent International Trade Administration Commission (Itac) grow ever longer as tariff investigations become subject to all sorts of other objectives.
But that’s nothing compared with the complexity and extractive nature of SA’s competition regulation. It’s been in the spotlight lately, and not in a good way, with BHP’s unsuccessful bid for Anglo American. SA’s competition regime was one of the poison pills Anglo invoked in its defence, arguing the structure of BHP’s bid would be hugely costly and risky for shareholders.
BHP wanted two demergers (of Anglo Platinum and Kumba Iron Ore) before the takeover by BHP of Anglo. Each of those transactions would have required competition approval. Each of the companies could have been required to give 5% or more of their shares to workers and black owners even if they already had BEE and employee stock ownership plan (ESOP) deals in place.
They would have been required to commit to employment, investment and localisation targets in SA. They would probably have spent upwards of 18 months negotiating with Patel and the Competition Commission over these public interest conditions, which have now become routine.
BHP belatedly made a string of such commitments in a vain effort to clinch the deal. But the tart comment from within the BHP camp was that the “poison pill” sent a terrible message to international investors about just how difficult it was to do a deal in SA — making companies all but takeover-proof, even if their managements are inefficient.
It all started with Patel’s intervention in the Walmart-Massmart merger in 2010. It has culminated in a new set of public interest guidelines, gazetted in March, that codify just how far the minister has pushed the competition envelope.
He had already formalised his ministerial power to intervene in mergers in the public interest in 2019 legislative amendments that also added “broadening the spread of ownership” to historically disadvantaged people and workers to the public interest conditions for merger approval.
The new guidelines formalise conditions that Patel and the commission had increasingly insisted on. Mergers can be prohibited on public interest grounds even if there are no competition issues. The rules apply to foreign companies buying other foreign companies if the merger has an effect in SA — even if the companies have no presence here.
Companies now not only have to commit to maintaining employment but often to increasing it, with local procurement and support for small and medium enterprises, as well as big chunks of capital investment, if they want their mergers approved.
But the tart comment from within the BHP camp was that the “poison pill” sent a terrible message to international investors about just how difficult it was to do a deal in SA.
And the guidelines have now made it clear in writing that mergers must increase, not just maintain, BEE and worker ownership, by 5%-10% in the case of employee share ownership schemes and 5%-25% in the case of black ownership. For free.
“It’s an insane list — but at least it surfaces the craziness,” says one competition lawyer.
If foreign investors come looking to take over SA companies, they need just look at the list to see what will be required — and whether they want to add the billions of dollars it will cost to the purchase price, or simply walk away.
Several large foreign companies that were keen to buy into SA and willing to pay the price have done it. But we don’t know how many have walked away.
SA is not alone in using public interest criteria in merger regulation, but Patel’s innovation is to use it to try to force companies to contract to meet government’s social and economic objectives.
The one big risk is that in the hands of a new minister with less integrity, the extractive powers he has amassed to the ministry could be a dangerous breeding ground for corruption. The other is that all this extraction and regulation is yet another deterrent to potential investors.
It is also in stark contrast to the other big thrust of Ramaphosa-era economic policy: Operation Vulindlela. The operation is pressing ahead with reforms that are fundamentally about opening up key network sectors to private competition and market forces, in a belated but urgent effort to unlock and unblock the economy and boost growth and investment and exports.
It’s about creating the enabling conditions for businesses to do business — not about imposing ever more conditions on how and even whether they can do it.
The Bureau for Economic Research estimates Operation Vulindlela reforms could lift SA’s growth rate to 3.5%. The new government has a crucial opportunity to decide which way to go. It can’t afford another 15 lost years.
• Joffe is editor-at-large.
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