Edcon’s "capital restructuring" provides another reminder that we should be more fussy about what investment we allow into this country. No doubt there are some people, perhaps many, who reckon there’s no such thing as unacceptable foreign investment. And that might be the case, if there were disciplines and controls
in place to ensure that once an investment comes into the country it is managed in a way that doesn’t leave the country much worse off.
Bain Capital’s high-profile US$3.5bn buyout of Edcon has been an unmitigated disaster for SA. It’s difficult to imagine one single benefit the deal brought to the country. (Creating more employment for overpaid investment bankers does not count as a benefit.)
But back in 2007 there was huge excitement about the biggest private equity deal SA had seen. It was deemed evidence we were a central part of the global investment community.
It’s not just the realisation that, nine years later, we’re left with a shell of the old Edcon. This country has been deprived (some, who do not understand the nuances of financial engineering, might say robbed) of billions of rand of income tax. By converting equity into debt, Bain-controlled Edcon managed to avoid paying most of the tax due on the billions of rand of turnover generated by SA’s largest nonfood retailer.
So Bain’s investment in SA is right up there with disasters unleashed by the likes of Tony O’Reilly in 1994 and Lakshmi Mittal in 2002.
It now appears that, between pension fund holidays and murky intercompany loans, O’Reilly’s Irish Independent Group didn’t actually pay anything to take control of the largest English-speaking print media group in the country. For the best part of 20 years the Irish owners sucked money and initiative out of an SA company that desperately needed investment and leadership. It repatriated billions of rand to help fund its own generous dividend policy, paid minimal tax and finally added huge insult to the injury by demanding R2bn before it would hand back the carcass to a Public Investment Corp-funded consortium.
While most of the damage wreaked by Bain and O’Reilly was limited to their respective sectors, the same cannot be said about Mittal’s acquisition of Iscor. Helped by a "business assistance agreement", Mittal managed to pick up the dominant steel producer for a veritable song. The transaction benefited from the backing of government, which believed it had extracted an undertaking from Mittal to provide the local industry with "developmental pricing" for its steel requirements.
Things didn’t go quite according to government’s plan. Instead of developmental prices, a concept never clearly defined, local steel consumers faced price gouging that was given a sophisticated spin by describing it as import parity pricing.
During the Chinese boom years, Mittal’s pricing strategy paid off handsomely for the shareholders of ArcelorMittal while helping to cripple SA industry. But by 2014 it was apparent the good times were over. It was also apparent that ArcelorMittal had done very little to upgrade its SA asset base.
Anyone who thinks that foreign investors are a benign force intent only on growing their host economy should consider the chilling input the US Chamber of Commerce provided to the Chinese government’s consideration of new labour laws back in 2007.
The chamber urged the government to reconsider changes that would have made illegal the appalling, near-slave conditions Chinese workers had been forced to tolerate. The chamber was concerned the changes would increase its members’ labour costs.
The reality is that foreign investors, like locals, demand returns and generally demand them in the not-too-distant future. But, unlike locals, they don’t have to live with the consequences of their demands.