Why firms are hoarding R1.4tn
With the recession and political uncertainty fuelling such reserves comes the need to incentivise such companies
New research suggests that there is lots of investable money on the table to fund growth and development in South Africa, but large companies are not spending it here. About R1.4 trillion is sitting in the reserves of large JSElisted companies, according to the University of Johannesburg’s Centre for Competition, Regulation and Economic Development (CCRED). Clearly, the figure is growing, having totalled only R242 billion in 2005. This is after you exclude another R1.6 trillion in reserves from major multinationals on the JSE which have little real presence in South Africa.
The surprising thing is that the major cash hoarders, apart from banks, are the rapidly growing listed property investment firms, said Thando Vilakazi, a senior researcher at the centre.
He said banks arguably had good reason to keep reserves above and beyond those they had to keep at the SA Reserve Bank, but the conspicuous reserves of the property sector were “surprising”.
“You have property firms that have very few operations in the South African market,” he said.
“In those cases, the JSE is being used as a source of capital to fund investments elsewhere in the UK and eastern Europe.”
Is that a problem?
“When you have open capital markets, that is how it works,” said Vilakazi. “Capital has chosen to give the money to highly profitable property enterprises rather than to other firms that are investing here in production assets.
“It comes back to the issue of the opportunity cost for the local economy and how you may be able to redirect some of that in this direction.
“Saying that the property sector has grown does not mean you have large investment here,” said Vilakazi.
IS IT A STRIKE?
Corporate South Africa has been accused of staging an investment “strike” by retaining its earnings as cash instead of putting it to use in local investments.
Vilikazi said he preferred not to call it a strike as doing so would imply that companies got together and planned it.
“Clearly, there is stagnation of investment. The last time we saw growth in investment was from 2000 onwards, when there was a commodities boom and a pending soccer World Cup. We need to understand what is causing the low levels of investment and the low levels of dynamism,” said Vilakazi.
“If there is an investment problem in South Africa, it is certainly not because of a lack of funds. In effect, you have a pool of what you might call ‘savings’ that could fund investment here.
“Are there ways in which we can tap into those resources with policy measures?” he asked.
“Relative to other sources of capital, retained earnings are cheap and can be readily invested.
“Of course, there might be important reasons why firms may not be investing here currently; reasons to do with saturation of the market.
“Beyond the political uncertainty, there is the low demand cycle. You don’t go and build a new factory if you don’t expect future profits.”
This week, the CCRED released a set of research papers tracking the investment behaviour of major JSE-listed companies.
The major food firms it studied showed a distinct tendency to put money into new projects outside South Africa.
“Their growth in South Africa has, in essence, been growth by acquisition,” said Vilakazi.
“Is there a way we can incentivise those greenfields projects that have gone to Uganda and other countries? I think what is important is this pattern of consolidation and diversification through acquisition.
“The choice is to grow value in the entity, as opposed to new investment and capacity.
“To the extent that these mergers continue to increase their concentration, we are going to be facing a far bigger challenge in a few years’ time. The potential maverick rivals are getting bought out, and that is problematic.”
THE UP SIDE OF MONOPOLY CAPITAL
With South Africans increasingly talking about the unhealthy concentration of wealth and corporate control in the hands of a few, it becomes important to ask what very large firms are good for.
What does the CCRED want major companies to do, apart from being broken up?
“Can we afford to be shaping policy for the development of South Africa in the long term without engaging with the highly concentrated large firms?” asks Vilakazi.
“Can we afford to let the R1.4 trillion sit on the table, when that is money that can be funnelled back into the economy?
“This is not to make a case for patriotic capitalism – there is no such thing. Rather, one asks: How do we shape economic incentives so that those outcomes arise?”
Vilakazi points out that big business has been integral to industrialisation worldwide.
“If you look at the history of countries that industrialised late, the classic example is South East Asia. Even if you look further back to the development of the US and European countries, they were built by giant monopolies – because movements and decisions in large firms have a big impact.
“If your large firms are investing … that is likely to have spillovers into the economy. The existence of engineering services in South Africa is due to the mining industry.”
In identifying large firms to study, the CCRED team excluded several giants on the grounds of being multinationals, with very little of their operations being concentrated in South Africa.
This should inform the recurring fights about black ownership in South Africa, Vilakazi added.
“Our contribution to this discussion is to say that what matters is black ownership and the strategic direction of productive assets in South Africa.
“What does it matter what the black ownership is of a JSE that is not largely South African in terms of its value?”
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