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The “new dawn” under President Cyril Ramaphosa cannot simply rely on restoring business confidence and believing business will act in the country’s best interests, says
department of trade and industry adviser and Industrial Development Corporation (IDC) board member Nimrod Zalk.
History shows that this can be disastrous due to foreign and local investors chasing short-term profit in the name of “shareholder value”, he said at a talk based on his PhD thesis at the University of the Witwatersrand this week.
Large parts of South Africa’s steel and engineering industry were sucked dry and dismantled in the early 2000s by major local and multinational companies, who were given a free hand by post-apartheid policymakers who hoped they would inject new technology and investment, said Zalk.
Instead, he claimed, a pattern of maximum capital extraction and limited investment set in, destroying hard-won industrial capabilities.
Zalk’s thesis details what he calls an episode of “destructive unbundling” involving major South African corporations.
“I think we are at a point where it is safe to say that no one has covered themselves in glory in the post-apartheid era,” Zalk told City Press.
“There has been a lot of focus on state capture, but there is a deeper problem of a pattern of unproductive economic activity.”
In the 1990s, an uncritical belief in the virtues of foreign investment and freer capital markets was triumphant and policymakers cleared the path for South Africa’s conglomerates to engage in massive restructurings.
The results were disappointing and, in the case of steel, disastrous, argued Zalk.
By 2004, the formerly state-owned enterprise Iscor had become part of the emerging global steel giant that would later be called ArcelorMittal.
“You need to understand the role of the South African operations inside ArcelorMittal,” said Zalk.
The company rapidly grew into the world’s largest steel group through a debt-fuelled acquisition spree that saw it buy up many old steel mills in former communist and other developing countries.
“The approach towards these developing world assets was to invest as little as possible and extract as much as possible for the parent company to service the debt of acquisition – and invest and upgrade plants in North American and Europe,” said Zalk.
“The logic of foreign investment is that it should bring in net capital inflows; it should bring expertise and skills transfer. What we see is actually a pattern of quite extensive capital extraction through a variety of mechanisms,” he said.
These include high dividends up to the economic crisis, followed by multibillion-rand share buybacks and then a series of fees paid to the parent company, as well as purchases from the group totalling billions every year that “suggest the opportunity for capital extraction through transfer pricing”.
“I’m not saying foreign investors are bad, just that they are not automatically good,” said Zalk.
Kobus Verster, the CEO of ArcelorMittal SA, said the company was “concerned about the damaging and misleading statements, which clearly indicate a lack of understanding of the current environment in which South African steel producers are operating, as well as the challenges that have seriously impacted steelmakers over the past decade”.
He listed large-scale investments made by ArcelorMittal SA over the past few years, recently aided by the parent company fully underwriting a R4.5 billion rights offer in 2016.
Zalk said: “I’m not saying foreign investors are bad, just that they are not automatically good. You see abundant evidence of ArcelorMittal SA’s impact in under-investment, rising inefficiencies and net capital extraction.”
Zalk provided an equally unflattering analysis of Anglo American’s unbundling of its steel and engineering assets from 2002 onwards. These included Highveld Steel and Vanadium, which was acquired by multinational mining company Evraz – a company that was even more debt-laden than ArcelorMittal at the time.
“All profits generated by the company were paid out as dividends with virtually no investment,” said Zalk.
Highveld ultimately went into business rescue in 2015.
Scaw Metals was another one of Anglo’s subsidiaries. According to Zalk, it was “loaded” with debt between 2007 and 2009 by its parent company to the tune of R6.3 billion. Its most valuable division, the US-based Moly-Cop, was then sold off in 2011 for R7.3 billion and the remains of Scaw Metals were sold to the IDC in 2012 for R3.5 billion.
That puts the “value extracted” from Scaw by Anglo at R17.1 billion.
“The IDC does get placed in this position of either saving a failing enterprise or losing the capability.”
“There is a legacy of weak investment that saw conglomerates fail to make these companies successful. When they failed, there was a destructive unbundling.”
The context of this corporate behaviour was a set of “bargains” struck after the end of apartheid predicated on maximum freedom for companies, he said. In return, South Africa got BEE.
“I am not suggesting South Africa should not be doing BEE – it is necessary to create a vast productive black capitalist class in South Africa. Part of the problem is that we don’t have such a productive white capitalist class. There is a possibility under the new administration to forge new bargains between the state and the private sector,” he said.
“Any prospect of moving into a position with higher investment was impossible until the beginning of this year. There are some initial positive steps, but we need a deeper and more strategic approach. Within the constraints we face, there has got to be a mechanism to reorientate investment behaviour towards fixed investment in these kinds of tradable sectors.”
