/ 13 May 2011

Patel walks protectionist tightrope

Patel Walks Protectionist Tightrope

Minister of Economic Development Ebrahim Patel has to juggle his union support and his political portfolio deftly in his handling of the Walmart/Massmart merger. He is caught between “a rock and a hard place”, say sources close to the merger process.

On the one hand, Patel and his department are expected to promote and facilitate foreign direct investment in South Africa alongside the trade and industry department. However, on the other hand, Patel, a former union official, was appointed to his ministerial position on the back of support from his union constituency.

Sources familiar with the horse-trading that has taken place between the economic development department and the merging retail entities, who agreed to comment on condition of anonymity, said that Patel could not be seen to be ignoring the unions’ concerns as they were the people who “put him where he is”.

They argued that Patel had tried to “pass the buck” by attempting to get the Competition Commission to impose conditions on the merger that were likely to be subject to a Constitutional Court challenge. However, the Competition Commission refused to apply any conditions to the merger, realising that a successful Constitutional Court challenge would leave it with egg on its face.

Now Patel’s department — with the department of trade and industry and the agriculture, forestry and fisheries department — have intervened in the Competition Tribunal’s merger hearing. This has created the perception among some observers that the South African government is hostile to foreign direct investment.

Economic development director general Richard Levin told the Mail & Guardian this week that the reason the government departments have intervened is that they feel the merger will result in a sudden increase in imports, which will negatively affect South African manufacturers and employment in the country.

“Government has identified jobs as the main priority in the fight against poverty and inequality and it cannot countenance large job losses without fulfilling its public duty to provide the necessary information to the Competition Tribunal,” said Levin.

“Government does not wish to deter foreign investment — it needs to be emphasised that Massmart [the parent company of retail chains such as Game and Makro] is already majority foreign owned.” The sources argue that Patel is smart enough to know that he can’t keep Walmart out.

They say he is intervening in the matter to display his loyalty to the unions and if he manages to ensure that conditions are placed on the merger he will come out looking like a “hero”. However, stakeholders question the cost to South Africa’s reputation in the global investment community of Patel’s intervention.

Protectionist side of debate
The sources argue that Patel leans towards the protectionist side of the debate, but that his biggest failing is that he has not put in place measures to strengthen the industries he is trying to protect against Walmart.

“There is no plan at all and then all of a sudden, Walmart wants to come to South Africa and there are all these things that Patel wants to address,” said one of the sources. Another interesting development in the hearing is the level of cooperation that appears to be taking place between the unions’ legal teams and those of the three government departments.

The M&G first picked up on this when it noticed that Genesis Analytics’s James Hodge, who had been working for the unions when the hearing was postponed on March 22, is now appearing before the tribunal as the government’s economic expert witness.

A source who agreed to talk on condition of anonymity said the unions had been talking to Genesis to prepare their case; however, as they were an intervening party from the start of the case, they could not add Hodge as an expert witness.

However, the three government departments joined the hearing late, as interveners, and this opened up an opportunity to introduce Hodge as an expert witness, the source said. Hodge confirmed that Genesis Analytics had been consulting to the unions initially, but said that as it was an independent company providing an economic analysis it didn’t matter who introduced its report at the tribunal.

South African Commercial, Catering and Allied Workers’ Union (Saccawu) general secretary Bones Skulu denied that the unions had allowed Genesis Analytics to become the government’s economic witness.

“We sourced Genesis Analytics’s expertise in terms of the case to get certain information, while government had different issues it was looking at,” said Skulu. “Government is looking at compliance with laws and local procurement, we are looking at labour issues.”

Levin said the economic development department had appointed Hodge and Genesis Analytics after advice from their legal team. “The unions have their own witnesses in this case, including international witnesses, and their use of Genesis Analytics is for their own account,” said Levin.

Another development at the hearing this week was the fact that Massmart chief executive Grant Pattison and Walmart vice-president Andy Bond were apparently determined to downplay the cost benefits that Walmart’s global supply chain will bring to South Africa.

Bond, in particular, kept insisting under cross-examination that the scale of the Walmart business does not result in lower prices, saying that it was efficiency in supply chain management that delivered the cost savings.

The Genesis Analytics report, which has been lodged before the tribunal, argues that this argument is “inconceivable”.

“In contrast, the evidence points to the fact that Walmart will secure significantly better prices both through its bargaining power and global sourcing and distribution infrastructure,” says the Genesis report.

During cross-examination this week Pattison was accused of being an “unreliable witness” and of “fudging facts” and “being dishonest”, while Bond was slated as being “exceptionally evasive”.

Closing arguments will be made on May 16. The tribunal will have to decide whether to approve or reject the merger — and if it approves it, what conditions, if any, will be imposed.