Why firms are hoard­ing R1.4tn

With the re­ces­sion and po­lit­i­cal un­cer­tainty fu­elling such re­serves comes the need to in­cen­tivise such com­pa­nies

CityPress - - Business - DEWALD VAN RENSBURG dewald.vrens­burg@city­press.co.za

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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PHOTO: GETTY IMAGES

FLAVOUR THE WORLD A worker pours salt on dry­ing toma­toes in Manisa, Turkey, on Thurs­day. The Aegean re­gion sup­plies 95% of Turkey’s sun-dried tomato ex­ports. Af­ter be­ing cut by work­ers, the toma­toes are laid out on care­fully cleaned nets and tar­pau­lin cov­er­ing an area of 1 000m2 in the Turgutlu district of Manisa. The salt en­sures the tons of fruit do not rot in the hot sun

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