Shattering the FDI myth

Winners, Losers | Foreign cash can be a boon or a bane — depending on how it’s managed, writes Thekiso Anthony Lefifi

MANY pundits laud foreign direct investment (FDI) as the elixir to cure all of South Africa’s woes.

It is foreign investment, the argument goes, that could provide much-needed capital to start new companies, dent the ever-swelling 24.13% unemployment rate, and spark competition.

It’s such an often repeated mantra that many people seem to ignore the flip side of this argument: that foreign behemoths invest in a country only because they expect a return — cash that then leaves the country in dividends.

Azar Jammine, Econometrix’s chief economist, said that although FDI might be good in the short term, because it brings foreign exchange into the country, it could prove counterproductive in the long run.

Jammine said that for South Africa to ensure dividends are reinvested rather than shipped out, the country needed to be more productive and attractive. Right now, foreign companies were shipping out money because “there is a lack of confidence in the longer-term future of the country”.

A more stable labour environment and favourable economic policies would bolster confidence — which would see foreign investors ploughing profits back into their operations rather than exporting them.

Nonetheless, a Business Times analysis shows that when it comes to some of the mega-deals that have taken place in South Africa in recent years the scale of benefit has tilted heavily in favour of the buyer.

This appears to be clear in at least four cases — the purchase of 56% of Absa by British bank Barclays, the takeover of Massmart by the world's largest retailer WalMart, the purchase of 20% of Standard Bank by the Industrial and Commercial Bank of China (ICBC) and Independent Newspapers’s purchase of the Argus group in 1993.

ABSA In 2004, Absa’s then CEO, Steve Booysen, trumpeted Barclays’s arrival, saying the deal would “open our country and business to the world” and, as a result, Absa would be “creating jobs, not losing them”.

Analysts suggested consumers might even benefit if bank charges were slashed.

Nearly a decade after the deal was announced, Absa’s customers are arguably in the same position they were before. Bank charges are at similar levels. The only thing that has changed is Absa’s name — now it’s Barclays Africa.

And even though Barclays paid R33-billion to get that 56%, it has since sucked out more than R21billion in dividends.

Throw in the fact that Absa paid R18.3-billion to “buy” Barclays’s African business and it’s clear that the British have banked more than they forked out.

And when it comes to jobs, the number of people employed in South Africa has declined to 31 049 from 32 515 before the deal. If you factor in the acquisition of Barclays’s Africa operations, then the job numbers swell.

Maria Ramos, Booysen’s successor as CEO, said that Barclays had been positive for the bank. Absa had been able to cut the cost of doing business, improve access to banking services across Africa and provide a bridge between local and global markets.

Ramos also argued that Barclays has injected a large amount of capital into South Africa towards job creation.

STANDARD BANK The British have clearly done better than the Chinese.

In 2008, the Chinese parted with R36.7-billion to buy 20% of Standard Bank. In the six years since, the Chinese-owned bank has taken out R7.5-billion in dividends, according to Standard Bank financial director Simon Ridley.

“[The deal provided] an invaluable ability for Standard Bank to connect Africa to China, which will be strategically important over many years,” said Ridley. The business now employs 48 808 from 51 656 in 2011 and 40 646 before the deal was done.

Ridley argued that although Standard Bank had to go through “gut-wrenching” retrenchments three years ago, the Chinese money allowed it to expand its loans and assets by about R175-billion, which helped the country.

“This undoubtedly resulted in job creation,” Ridley said.

OLD MUTUAL The life assurance giant was given permission to have a primary listing on the London Stock Exchange in 1999.

It still has a secondary listing on the JSE, but nevertheless a large chunk of cash is shipped out of South Africa every year.

Old Mutual has paid out more than R14.4-billion in dividends since 2000.

Even Old Mutual’s two moneyspinning South African assets — banking group Nedbank and insurer Mutual & Federal — were put on the auction block at one stage. As it stands now, however, both remain under the Old Mutual umbrella.

WALMART Walmart’s R16.5-billion entry into South Africa was the most recent of the big foreign deals, approved only in 2011. The deal was sanctioned only after the US retail giant fought off a bizarre, last-minute challenge from Economic Development Minister Ebrahim Patel and Trade and Industry Minister Rob Davies.

Again, the promises of “benefits” were big.

In November 2010, Massmart CEO Grant Pattison vowed that the deal “promises to be very positive for the regional economy”, bolstering jobs and small business.

Pattison said: “In gaining access to Walmart’s experience and capabilities, we expect to be able to offer consumers an even wider selection of products that are competitively priced and more consistently available, delivering an improved customer experience across all our stores.”

The result? Consumers haven’t seen a sharp drop in prices, and there hasn’t been an especially steep rise in new Game or Makro stores. It’s true that Massmart has since expanded into selling food and bolstered its supply chain across Africa, but is this something it could have done only with Walmart?

Considering the deal is only two years old, Walmart has taken only R1.3-billion in dividends out of the JSE-listed retailer. But these benefits will increase over time.

Partly because of heavy pressure from the government, Walmart agreed to create a R100-million fund to “boost local suppliers”, partnering with 1 500 farmers.

The retailer has increased its staff to 30 000 from 26 500.

INDEPENDENT NEWSPAPERS Strip out the bizarre rhetoric that has accompanied the R2-billion purchase of Independent newspapers by a consortium led by Iqbal Survé’s Sekunjalo and you can see clearly that Independent’s former Irish owners stripped whatever they could out of the business during their time in charge.

In 1993, the Dublin-based Independent News and Media, which was controlled by Tony O’Reilly, paid between R560-million and R725million to get its hands on the newspapers.

However, a study published in 2011 by the Media Workers Union of SA (Mwasa) said this price “has been dwarfed by the possible outflow of much of the local operations’ profits”.

The study painted a devastating picture of how the Irish owners had “harvested” the South African assets, gorging themselves on the cash flow from South Africa.

“The cumulative operating profits which are available for repatriation [to Ireland] have been in excess of R4-billion, dwarfing the [initial] investment,” said Mwasa.

Staff numbers plummeted under the Irish, from 5 223 to about 1 500 shortly before the Sekunjalo deal.

The Sekunjalo deal has raised different fears. Staff raised the spectre of a threat to media independence after Cape Times editor Alide Dasnois was effectively sacked for running a front-page story about a shady government tender awarded to Sekunjalo. Experts say that these examples show that although foreign investment is certainly valuable in expanding an economy, it often comes with potentially damaging strings attached.

Andrew Mold, a senior economist at the Organisation for Economic Cooperation and Development, said that FDI was no panacea.

During a financial crisis, for example, it could compound problems, he said.

“It is certainly no substitute for enlarging tax bases and promoting better mobilisation of domestic resources,” Mold argued.

Other countries realise that these deals can be damaging.

Australia and Canada, for example, can block foreign takeovers if policymakers feel there is no net benefit to their country.

In November 2010, Canadian Industry Minister Tony Clement blocked BHP Billiton’s $39-billion takeover of Potash by invoking the Investment Canada Act, saying the deal did not pass the act’s “net benefit to Canada” test.

South African policymakers are faced by a dilemma.

On the one hand, foreign investment brings in cash, narrowing the gaping current account deficit.

But on the other hand, you don’t want to hand someone a licence to pillage your companies, as happened at the Independent.

The Department of Trade and Industry (DTI) opposed the takeover of JSE-listed Freeworld Coatings by Japan’s Kansai Paint, for example.

Back in 2011, DTI director-general Lionel October defended the position, saying “all we want to do is protect our capacity”.

“This is not FDI. They’re not going to build a plant here, they want to take over an existing company.”

October said that the government was right to be wary of Walmart, given its history of “displacing domestic manufacturers”.

But Standard Bank’s Ridley echoed many top businessmen when he said FDI benefited an economy.

Besides bringing in capital, argued Ridley, companies investing in a country usually brought in technology and skills that improved that country’s productivity. And economies grew over the longer term only because of improved productivity, Ridley said.

Chris Malikane, associate professor of economics at the University of the Witwatersrand and former Cosatu economist, said foreign investment was useful when it stimulated local industry, built skills and created new business.

Foreign direct investment must be managed so that the recipient country is a net winner. As the Independent’s Irish foray illustrates, we’ve had more than enough of being a net loser.