Conglomerates did not deliver their side of the postapartheid bargain
Private fixed investment flatlined in business-friendly climate but asset managers and BEE beneficiaries score
28 FEBRUARY 2017
ANDREW MCGREGOR AND NIMROD ZALK
(This article was first published in the Business Day)
The unbundling and reconstitution of SA’s apartheid-era conglomerates since the early 1990s is arguably the biggest restructuring of the South African economy since the discovery of diamonds in the 1880s, but it has received only limited attention. Yet, as SA grapples with its fundamental challenges of unemployment, inequality and fracturing social cohesion, it is critical to reflect on how the bargains that gave rise to this restructuring were formed, their effect on economic structure and performance and the urgent need for a new set of pragmatic bargains.
In 1990, six corporate groups controlled 84% of the JSE: Anglo American, Rembrandt, Sanlam, SA Mutual, Liberty Life/Standard Bank and Anglovaal, with Anglo alone accounting for 44.2%. The roots of SA’s current corporate landscape were established over the early 1990s as the groups sought to restore their prospects for growth and profits from the economic stagnation and political crisis of the late 1980s. Industrialisation based on mining and heavy industry had progressively run out of steam during the 1980s, with the conglomerates unable to develop competitive manufacturing outside these sectors. A major, if not overarching, objective was to free up capital "trapped" by exchange-control regulations and deploy the substantial holdings they had accrued offshore.
A beguilingly simple proposition emerged in the early 1990s, head and shoulders above piles of research, avian-themed scenarios and policy proposals on the direction of the postapartheid economy. As publicly articulated by the SA Foundation, which represented the 50 largest business groups, a private investment boom would ensue if SA implemented policies that instilled "business confidence". The foundation subsequently morphed into Business Leadership SA.
The major policy reforms identified were tight inflation and budget control, removal of capital controls, increased openness to foreign competition and investors and labour market deregulation. The last apartheid finance minister, the conservative, yet canny Derek Keys, played an instrumental role in shepherding senior ANC economic office bearers towards embracing orthodox economic policy reforms. Most of the foundation’s policy proposals were embodied in the Growth, Employment and Redistribution policy framework and largely implemented, with the major exception of de jure labour market deregulation.
However, the conglomerates realised very clearly that these policies required political legitimacy. One potential source of legitimacy was decisively rejected by the conglomerates, namely the option of forging a modus vivendi with labour to broaden and deepen industrialisation from the apartheid model of mining and heavy industry. Even Keys felt this refusal to come to terms with labour was mistaken. For Keys, "[B]usiness having got a Constitution which guaranteed property rights and a market-friendly approach … veered off into a sort of laissez-faire position where they expected government to discipline labour and resented every aspect in the economy which didn’t allow them to operate like Victorian capitalists." Echoing the accommodation of Afrikaner by English capital spawned in the 1960s, the conglomerates sought legitimacy in narrow transfers to a handful of politically connected black individuals, albeit underpinned by high levels of debt. The phenomenon of black economic empowerment (BEE), thus, emerged out of the corporate sector before becoming entrenched in government policy and taking on forms unanticipated by and ultimately beyond corporate control.
Concurrently, the conglomerates struck a bargain with an increasingly influential shareholder value movement, spurred by financial deregulation under way since the mid-1980s.
Domestically, institutional investors were leery of the diversified conglomerates in general — and pyramid shareholding control structures in particular — and sought far greater control over underlying assets than in the hands of conglomerate holding companies. Both the conglomerates and institutional investors argued that the benign disciplines of capital markets, rather than state intervention in investment decisions, would raise the efficiency of capital allocation and levels of fixed investment. Have these bargains indeed led to higher levels of private fixed investment in the economy, on which growth and employment rely? SA’s postapartheid stock market capitalisation as a proportion of GDP has roughly doubled from 122% in 1990 to 234% in 2015. Domestic currency, bond and derivatives markets have grown to among the 20 largest in the world. In the past 15 years, share capital raised on the JSE has averaged 392% of private fixed investment. Driven by a confluence of influences including the imperatives of foreign and domestic institutional investors, offshore listings and BEE, the composition of JSE corporate control, established by examining shareholding, shareholder spread and board composition, has changed immeasurably.
Whereas in 1987 Anglo controlled 56.1% of the JSE, with investments across 52 industries, by 1995, its share had fallen, albeit to a still colossal 37.1%. By 2017, Anglo’s share was a mere 3.3%, with Anglo restricted to a focus on three mineral commodities. Sanlam and Old Mutual also divested their diversified investments in the 1990s and returned to their finance and insurance knitting, with the former reducing control from 12.7% in 1995, to 1.2% and the latter, 11.2% to 2.1%. Prior to unbundling, Old Mutual had a large mining and industrial portfolio — through Rand Mines and the CG Smith Group — and Sanlam via Gencor, Malbak and Sankorp. Control by Remgro and the latter-day conglomerate Bidvest has remained consistent and a newcomer is the PSG Group. However, by far the most prominent big winners are local institutions (asset managers) and foreign control, with the share of institutions increasing from 1.7% in 1995 to 18.1% today and foreign control, from 4.1% to 42%. The foreign control figure is partly due to the flurry of offshore listings of large market capitalisation companies in the late 1990s and early 2000s.
Behind these numbers has been a process of profound restructuring, which, while dismantling the diversified conglomerate structure, has not necessarily reduced concentration or contributed to industrial diversification. Rather frenetic unbundling has been followed by an equally intense process of "rebundling" in which corporates have consolidated single-sector control, often through increased vertical integration. These sectors range from banking to heavy industries such as petrochemicals and steel, construction, telecommunications, bread, poultry and sugar.
Where such consolidation has not been possible or under pressure from institutional investors to focus on "core business", industrial assets have been spun off in ways that have destroyed industrial capabilities. Such destructive unbundling is evident in the manner in which Anglo and Remgro disposed of their steel and engineering holdings, irreparably damaging capabilities in companies such as Highveld, Scaw, Boart and Dorbyl.
Two groups that have benefited from large-scale financial flows linked to postapartheid corporate restructuring are institutional investors and beneficiaries of BEE deals. Stellenbosch academic Nicolene Wesson shows that R384bn flowed in dividends and share buybacks from JSE-listed firms to shareholders between 1999 and 2009, equivalent to 17% of private fixed investment.
Research house Intellidex estimates that the unencumbered financial value transferred through BEE deals by the 100 largest JSE-listed firms between 2000 and 2014 amounted to R317bn, equivalent to 8% of private fixed investment over the period. Both calculations are conservative and materially underestimate the true level of transfers involved. The dividend and share buyback numbers exclude South African-linked firms listed abroad — such as Anglo American and British American Tobacco — and returns from unlisted investments. BEE flows exclude listed companies outside the top 100, unlisted companies and the huge transfers that have been effected by state-owned enterprises.
One thing is clear, however. These large-scale transfers have done little to raise levels of private fixed investment, which have flatlined over the postapartheid period, averaging an unpropitious 13% of GDP. World Bank data show this is far lower than other middle-income comparators over the past decade, even troubled ones such as Russia (18%), the Philippines (18%), Mexico (17%), Turkey (16%), Brazil (15%) and Malaysia (15%). Levels of labour market regulation cannot explain such differences in investment rates, nor SA’s uniquely high unemployment rate. As measured by the World Bank methodology, Turkey, South Korea, Russia, Indonesia and Brazil all have similar or less flexible labour markets than SA.
Charting a way forward requires a step back from the illusion that SA’s postapartheid bargains have been good for investment. It also requires stepping back from absolutist positions in favour of crafting a new set of bargains, this time involving real compromises that prioritise above all higher levels of productive and "jobs-rich" investment in agriculture, mining, manufacturing and value-adding services.
• McGregor is MD at Who Owns Whom. Zalk, who writes in his personal capacity, is industrial development adviser at the Department of Trade and Industry.