Cosatu vs. Vodacom: Setting the [wrong] economic tone?
A South African court ruled late on Sunday night that Vodacom, South African’s largest mobile phone operator could proceed with its listing on the Johannesburg Stock Exchange. In November last year, Vodafone announced a £1.4billion deal to secure control of Vodacom by buying another 15% from Telkom (Telkom shared ownership of Vodacom with Vodafone). The court ruling came as a result of planned protests and objections against the listing of Vodacom, by union members (Cosatu) who claimed that jobs would be lost and that the state was giving away a significant asset to foreign ownership. The court ruled against the union’s objections and the listing of Vodacom continued as planned. According to the FT, the episode caused increased investor concerns as they feared that newly elected President, Jacob Zuma’s union supporters could cause some problems with regards to economic policy. While Zuma promised that there will be no change in economic policy, it is clear that the unions are pushing ahead with their “leftist” agenda and whether Zuma will be able to “control” it or not, remains to be seen and is of great importance to investors and to overall economic prosperity. Unions and Cosatu in particular have always protested, even during the Mbeki era, however, what makes this particular protest different and alarming, is the time at which they chose to do it. With over six months since the deal‘s announcement; why protest 1 business day before the listing? Do they see opportunity to do as they will in the current presidency and if so, what role does government have to play in order to make sure that economic policy remains in tact?
On the 18th of May, at 7am in the morning, the Rand started showing some signs of recovery from its R8.7492 New York close on Friday as it slowly moved towards the R8.6 level. A calmness had overtaken the markets after the currency nose dived on Friday afternoon from R8.5 level to almost R8.8; a 3.5% depreciation in just a matter of minutes. The catalyst? Cosatu had just issued a statement, along with ICASA opposing the biggest deal on the Johannesburg Stock Exchange in 2009; the Listing of Vodacom. Both Cosatu and Icasa statements came as a shock to the market, as the deal was a business day away from being finalised. While unions are generally expected to protest any major asset disposal to private or international hands, the timing of their protest was disturbing. What was even more alarming however, was ICASA’s sudden objection to the deal when it had first said that was in support. Based on a report issued by ICASA on its website, no groundbreaking reason was given for its decision to object the deal. It is market practice that every regulatory authority concerned, upon the announcement of a deal is given time to evaluate and express its objections or approval of the deal, with detailed reasons. The Competition Commission, the Competition Tribunal and ICASA itself were given ample time to analyse the dynamics of the deal and give feedback to the entities concerned. This is common market practice, done in order to make sure that potential deals are not a threat to competition or to regulatory authority. It comes as a shock therefore; that Icasa, a regulatory body, would overlook the potential damage to the markets and to South Africa’s business standing by taking back its decision with no substantial reason. Personally, I imagined that there would be some new discovery that had contributed to such. Upon visiting the ICASA website however, I was quite alarmed to realise that the following statement was provided for the objection:
- “In April 2009, the authority decided that the transaction did not require prior approval.
- The authority took its decision in light of the provisions of the existing Regulations in Respect of the Limitation of Ownership and Control of 2003.
- In early May 2009, COSATU filed court papers asking for the decision of the Authority to be set aside
- Whereas the Authority awaits the Court outcome on its decision, it is concerned that the Court proceedings will only commence long after the transaction has taken place
- The Authority believes that the transaction of this nature should take place in an environment conducive to regulatory certainty
- In view of clause 4 and 5 above, and after careful consideration thereof, the Authority has decided to rescind its previous decision” 1
The aforementioned reasons for the objection of the deal do not make sense at all and are cause for concern with regards to regulatory independence in this country as well as the over all influence of unions in the economy. I find ICASA’s actions very risky because they are supposed to be independent. Neither government, nor the unions are supposed to have power over regulatory authorities.
COSATU‘s reasons to object, on the other hand, were expected of them. Their role is after all, to protect the interests of South African workers and to make sure that their rights in the work place are not violated by any means. Startling however, is the timing in which they chose to put this forward, surely the analysis of job losses could have been done on the onset of the deal being announced. Why wait so long?
Furthermore, if indeed an analysis was done, COSATU would understand that their cry for jobs is, as the court ruled out today, not very legitimate because of the nature of the deal.
While there exists a chance that through the restructuring of the different companies as they gain new management, some jobs would be lost, it is important to remember that other jobs will also be created. Telkom is planning on embarking on a restructuring programme that entails the construction of data centres and the creation of Telkom Mobile. These services will require new expertise and new skills in order to be successful, thus leading to the creation of jobs.
Most important to this deal however, is the national benefit that comes with this deal. While jobs are certainly part of the agenda, it is important to remember that South Africa relies on capital flows in order to manage it current account deficit which currently stands at 7.8% of GDP. Lately, the nation’s accounts have come under threat owing to the global financial crisis and increased risk aversion, raising concerns about South Africa’s need to tap into IMF funds. The economy is slowing and the impact that that will have on budgeted revenues will play a huge role. The less funds that government is able to collect, the less able it will be to sustain foreign debt. The value of the 1.4billion pounds injected into the financial system by Vodafone as it purchases the 15% stake should by no means be underestimated. We have seen over the months, countries like Ukraine, Bulgaria and Mexico knock at the doors of the IMF in order to finance their respective debts. South Africa is expected to go to the IMF for funding soon. While tapping on the IMF’s funds would has lost the stigma that it used to have, it will increase our debt. Long term, government spending more money financing debt that focussing on domestic investment will not bode well for the growth that we are trying to achieve. Indeed, £1.5billion pounds will not cover our funding needs, however, it is long term investment finance that will have multiplier effects as it goes into the economy. It is therefore up to us to make sure that we support deals that bring money into the country, especially from a long term basis as opposed to short term capital in/outflows through the equities market.
Finally, COSATU’s reason of being concerned about Vodacom being foreign owned is misaligned, as it ignores the fact that South African companies also invest abroad. This “protectionist” idea is very dangerous and if applied in reverse, could lead to domestic companies being unable to invest abroad and more jobs being lost than would be lost in the current transaction.
South Africa? Moving left?
An article on he Business Day, reported on the Vodacom deal, alluding to the successful offer and the high price that at which Vodacom managed to list. The article stressed the investor sentiment that erupted in the past few days, with investors demanding clarity from Jacob Zuma on SA’s stance with regards to foreign investment, warning that union activism could herald the start of an investor deterring trend. I believe that this is in important point. Due to the nature of the organisation, I expect COSATU to every now and again, stamp its feet and throw a tantrum over potential job losses and employee wages. What is important however, is for our government and the judiciary to be able to monitor and control the outbursts of COSATU, so as to ensure that our economic policy remains intact. While Zuma may not be able to stop the unions from their strike actions, it is important for him to tell investors that economic policy will not be swayed by the picketing of the unions. This, I believe, remains one of the biggest challenges that Zuma faces. If investor confidence was important a few years ago, it is even more important now and the strength of our economic landscape hangs on how we deal with this issue. Unlike China, South Africa does not have a large domestic market on which it can leverage for growth to take place. Our large current account deficit reminds us everyday of the need to be “nice” to foreigners as they are the ones who are currently financing it. It is not a position that we’d like to see ourselves in, but we are in it and our economic future depends on how we manage it. It is not that we should not speak for the workers at the grass root levels, however, it is to say that we need to delineate between populist economics and economics that serve the people. This instance had very little, if any benefit, for the long term benefit of the SA worker. The Rand appreciated to R8.4, a 4% gain from its Friday weakness. Hopefully, we will use the opportunity to boost our reserves.