S.Africa’s Patel now gatekeeper for foreign investment

By Marius Bosch

JOHANNESBURG, May 31 (Reuters) – The South African government’s backing of trade unions opposed to Wal-Mart’s $2.4 billion bid for retailer Massmart signals that future foreign investment will have to fit in with labour’s interests.

While conditions imposed on the deal by competition authorities are not onerous, they are the first clear signs of Economic Development Minister Ebrahmim Patel exerting influence over foreign direct investment in Africa’s biggest economy.

The former trade unionist was appointed in 2009 and charged with tackling chronic unemployment, but his ideas — particularly that of government-driven growth under the banner of the ‘developmental state’ — have struggled to gain traction.

The admittedly small concessions he wrung out of U.S. retail giant Wal-Mart show the concept has sprouted roots.

“Whilst South Africa is open for business, the costs and difficulties of investing are great with Minister Patel pushing the developmental state agenda,” said Peter Attard Montalto, emerging markets economist at Nomura International.

“Power seems to have shifted very much to his Economic Development Department and away from National Treasury.”

The deal, Wal-Mart’s biggest foreign acquisition since it bought Britain’s ASDA in 1999, is seen as a test case for foreign investment in South Africa, where trade unions wield enormous political clout.

South Africa’s Competition Tribunal on Tuesday approved the deal which would see Wal-Mart acquire 51 percent of Massmart but said the merged entity must agree not to fire any workers for two years, and set up a 100 million rand ($14.5 million) “development programme” for local suppliers.

A decision to impose local supply targets would have violated international trade rules and opened the way for Wal-Mart to apply for relief at the World Trade Organisation through the U.S. government.

 

INVESTORS EDGY

Government intervention on the Wal-Mart/Massmart transaction has put foreign investors on edge, especially after the tribunal earlier this month set conditions on a takeover by Japan’s Kansai Paint of local firm Freeworld Coatings.

“It is not fair to say Patel is anti-investment — that is far from the truth. He is, however, trying to balance investment with the developmental state,” Attard Montalto said. “Only time will tell however if he has got the right balance here.” In 2009, South Africa’s government torpedoed a $24 billion tie-up between local telecom MTN Group and India’s Bharti Airtel , over concern that MTN could lose its national character.

The Bharti/MTN transaction would have created the world’s third-largest mobile group by subscribers.

Independent political analyst Nic Borain said President Jacob Zuma’s government was using the country’s competition authorities “for purposes for which they were not intended”, throwing up another layer of uncertainty for outside business.

“It is not the job of the Competition Commission to act as a vetting agency for the total social good of particular inward investments,” Borain said.

The government and unions were concerned about Wal-Mart’s global supply network which, they said, might lead to a flood of cheap imports, sparking job losses and squeezing local suppliers.

They had asked for targets on using local suppliers and a freeze on job cuts.

Their action has further dented South Africa’s image as a investment destination, some critics say.

“You’d think an investment such as this would be welcome, but the government and its trade union allies have given Massmart and Wal-Mart a torrid time,” Peter Bruce, editor of financial daily Business Day, wrote in a blog posting.

“Essentially, the Americans have been told to go away, but in the most sordid, underhand and creepy way,” Bruce said. (Editing by Giles Elgood)