Is there any true public interest in maintaining employment at the Optimum Coal Mine or elsewhere in the economy?
The controversy surrounding the purchase of the Optimum coal mine by Gupta-controlled company Tegeta Exploration and Resources from Glencore for R2.5 billion is making headlines in the local media. The Optimum coal mine supplies Eskom and has about a 10% stake in the Richards Bay coal export terminal.
Part of the controversy was over the alleged role of Mineral Resources Minister Mosebenzi Zwane. According to a report day trading By Natasha Marion on 23 February: “Mr Zwane said his only interest in the deal was to ensure no jobs were lost under the new owner.”
day trading It is further reported that “The Competition Tribunal has cleared the way for Gupta-controlled Tegeta Exploration & Resources to acquire Optimum Coal, provided there are no merger-specific job losses. The approval comes as Treasury reviews all power utility Eskom's coal and diesel contracts.”
For a number of reasons, public interest in the terms of this deal has increased (literally). However, what is interesting in this instance is that the Competition Commission and the Tribunal, following their mandate to consider it, decided to worry only about the employment implications of the deal. public interest As well as the competition implications of any deal of this magnitude. As the Court of Appeal indicated in its earlier ruling in 2011 on the Massmart-Walmart merger, the function of competition policy is to determine:
1. Whether or not the merger is likely to substantially prevent or lessen competition;
2. If the outcome of this investigation is positive, whether the technical, efficiency or other pro-competition benefits would outweigh the preliminary conclusion reached in step 1, with further consideration based on substantial public interest which, in turn, could justify granting or refusing permission to the merger; And
3. Regardless of the outcome of investigations 1 or 2, the decision whether the merger can be justified on the basis of substantial public interest.
The legislature sets out the specific public interest grounds in section 12A(3):
“(3) When determining whether a merger can be justified on grounds of public interest, the Competition Commission or the Competition Tribunal must consider the effect of the merger –
(a) a special industrial area or area;
(b) employment;
(c) the ability of small businesses, or firms controlled or owned by historically disadvantaged individuals, to become competitive;
And
(d) Ability of national industries to compete internationally
market.”
Section 3D, “Ability of national industries to compete in international markets”, as well as Section 3B, “Employment”, would also have been used to examine the contract. Obviously the competitive terms on which Eskom receives its coal will affect its costs and prices, for which it will seek approval from the regulator. The ability of all SA industries to compete effectively depends on the price and availability of electricity.
With Treasury apparently also investigating this Eskom contract among other Eskom contracts, there may be a reason for competition authorities to ignore this public interest in the terms of the contract.
Be that as it may, following the Competition Appeal Court's decision in the Walmart merger case, there is a need to seriously examine the Competition Commission's determination of the mandatory public interest as per section 12A section 3 of the Act in employment retention and the further action taken in the Tegeta case.
The case of Walmart's entry into the SA economy. The welcome mat was not laid.
A significant case for competition law in SA, resolved on appeal in the Competition Appeal Court presided over by Judge Dennis Davis in 2011, involved the purchase of a majority stake in local JSE-listed retailer and wholesaler, Masmart, by the world's largest retailer, Walmart. The deal was approved by the Competition Tribunal because it was “common cause” – to quote the tribunal's decision of the Competition Appeal Court – “that there was no threat to competition”.
In fact, the counsel for the parties opposing the approval of the merger had accepted it in the court, citing a report On the proceedings: “Paul McNally, who presented closing arguments on behalf of the union…said that his clients accepted that prices would be lower as a result of the takeover, but that these would come at the expense of local jobs.” 1
Surely this common cause should have been enough to approve the merger and give Wal-Mart a warm welcome, especially from SA consumers, who were bound to benefit from greater competition given their spending power.
Given the importance of foreign capital to the economy and its growth prospects, it could also have been a warm welcome in recognition of the confidence the world's largest retailer was expressing in the SA economy. This friendly response from an important investor in the SA economy would have encouraged more foreign direct investment which is clearly in the wider public interest.
However, the Competition Tribunal surrounded the approval of the deal with a number of difficult and complex conditions. Such conditions were highly sympathetic to the arguments made by trade unions interested in the merger, but were costly to Walmart and therefore its ability to compete in the market with other retailers and wholesalers.
Conditions required by the tribunal for the merged entity included restrictions on retrenchment, preferences for previously retrenched workers when employment opportunities arose and R100m to be invested in a program to support local business, along with a requirement to train local South African suppliers on how to do business with the merged entity and with Wal-Mart. The program and its administration “shall be advised by a committee established by it and on which trade unions, Representatives from business including SMMEs and government will be invited to the service”.
However, the merger was taken up on appeal to the Competition Appeal Court by the relevant unions and Ministers of State, who sought to reject the merger on public interest grounds. The Court of Appeal agreed to allow the merger, but decided to largely support the Tribunal by surrounding the deal with the terms (somewhat modified) recommended by the Tribunal, but clearly not to the benefit of Wal-Mart as a competitor.
This seems a very inappropriate and unlikely move for an institution designed to promote competition. Mergers and acquisitions, friendly and especially hostile, are one of the more important ways in which businesses realize economies of scale that allow them to become more efficient and more profitable and by definition more competitive, in the interest of their customers whom they seek to win over.
Any adjustment within a larger, combined entity almost inevitably involves laying off employees. Indeed, the ability to avoid duplication of personnel and systems and to reduce operating costs and improve margins is often the main motivation for any merger or acquisition.
A vibrant economy is one where, over time, workers and managers are constantly allocated and reallocated for more efficient purposes. This requires that some companies are reducing their number of workers while others are increasing their numbers and a net employment gain is recorded for the increasing potential labor force.
Without job losses, very little job gain would be possible. A system that makes it very difficult to lay off workers discourages hiring in the first place. This creates a stagnant economy, with a feudal-style labor market that treats jobs as a right, which is not easily dismissed and highly discourages job creation.
In contrast, a flexible labor market gives companies a high degree of freedom in hiring and firing and allows workers to freely choose their employers and move freely from one job to another. The favorable results of such freedoms gained over time can be seen in the US or UK, where there is a highly productive and well-paid labor force and a significant rate of job turnover.
The South African labor market, or at least workers employed in the formal sector of the economy that provides highly prized, so-called “decent jobs”, is highly inflexible. Job retention, rather than job growth, has become the primary objective of labor market regulations and also appears to be competition policy. The prospect of extended periods of unemployment is an unpleasant realistic for many of those at risk of layoff.
It is labor market weaknesses that policies for competitiveness should address, not reinforce. Competition authorities, by their decisions on job retention, have made the economy less efficient and competitive than it could have been. By setting these precedents, the possibility of efficiency-enhancing investments and acquisitions and hence the efficient use of capital and labor is also reduced.
The public has an interest in more competitive and efficient markets for goods and services and labor. There is only a personal interest in avoiding specific layoffs. Competition policy abuses the public interest by focusing on employment. The public interest is in employment growth and a more productive labor force to which mergers and acquisitions can make a very significant contribution.
Brian Kantor is chief strategist and economist at Investec Wealth & Investment. The views expressed in this article are those of the author and do not necessarily represent the views of Investec Wealth & Investment.