ANDREW BAHLMANN: SA’s competition legislation is crippling foreign investment

In the fiercely competitive global landscape, nations across the globe are actively seeking to attract foreign direct investment (FDI) to ignite their economic growth, with a clear understanding that international capital acts as a catalyst for development.

Locally, SA’s discouraging competition legislation is characterised by intrusiveness and politics, representing the opposite of what the rest of the world is doing. It represents a formidable deterrent to FDI and foreign involvement in our ailing economy — unnecessarily complex, burdensome and stifling.

Under the guise of inclusivity it has become common for transactions in SA to have unnecessary conditions imposed to increase ownership by historically disadvantaged persons (HDPs), even when the transaction has no negative effect on such ownership.

We appear locked in a perilous spiral of missed opportunities and unrealised potential, and it is high time to address this issue and analyse the adverse consequences of SA’s competition legislation.

One possible solution could involve prioritising over all else the urgent need for FDI in SA, and only thereafter address issues related to ownership. By changing the focus it is possible to avoid the situation where we seem to be rearranging the deck chairs on the Titanic, with policies enacted without addressing the root problems of the country: low economic growth and consequent unemployment.

We operate in the FDI sector, finding local investment opportunities for mainly foreign acquirers. It is crucial to acknowledge that this activity is a key driver of growth and employment in SA. Therefore, implementing punitive measures that force ownership changes will result in job losses and hinder further economic development. The potential negative consequences of turning away FDI should be top of mind when discussing ownership and regulatory measures.

Government regulations have a significant effect on mergers & acquisitions (M&A), particularly the involvement of the Competition Commission. We recently had a deal imperilled by the commission forcing a broad-based BEE agenda that should not be its mandate. Instead of stimulating FDI and growth, the commission’s emphasis on promoting HDPs and black-owned businesses is turning away foreign investors.

The commission recently released revised draft merger assessment public interest guidelines, which has raised concerns among black-owned businesses and private equity firms alike. One of the most controversial provisions in the guidelines is section 12A (3)(e) of the Competition Act. This mandates promoting a greater share of ownership for HDPs and workers in the market. Mergers that do not advance the spread of ownership to HDPs may be deemed cause enough to render the merger unjustifiable. This requirement applies to all SA mergers, including foreign-to-foreign mergers.

This raises concerns about how foreign investors will respond to these requirements and whether the commission can impose stricter conditions than what is already stipulated by BEE legislation. The impact of these guidelines on businesses, investment and economic growth raises important questions.

The Competition Act requires the competition authorities to consider the impact of a merger on the public interest, and conditions imposed will often take the effect on the national interest into consideration. For instance, in March onerous public interest conditions were imposed on the Heineken-Distell merger.

These conditions included various financial commitments, investments in local production and manufacturing operations, contributions to support small and medium-sized enterprises (SMEs) and HDPs, and the establishment of funding initiatives and development programmes. Though on a larger scale, such conditions are similar to what we experience in concluding M&A deals involving inward investment by foreign investors.

It also provides insight into the objectives of the competition authorities regarding “public interest”. The Competition Amendment Act allows for greater participation by the minister for economic development through potential intervention in mergers on public interest grounds, the ability to appeal merger decisions, and the ability to initiate market inquiries. The minister is also given extensive opportunity to direct the enforcement of provisions by publishing regulations on issues such as the factors for determining if a dominant firm’s pricing impedes the participation of SMEs or HDPs.

Starting from December 1 2022 the Revised Small Merger Guideline ensures mergers that may have slipped through the cracks due to not reaching the turnover or asset thresholds can still face scrutiny. The guideline classifies mergers into three categories: large, intermediate and small. Under this classification large and intermediate merger transactions are subject to mandatory notification and subsequent approval from the competition authorities.

However, a key provision allows the Competition Commission to require notification and approval for small mergers within six months of their implementation if they potentially prevent or lessen competition or cannot be justified based on public interest considerations.

SA’s low position in investment attractiveness rankings raises concerns about the impact of the legislative framework. If business owners who have invested significantly into the economy are unable to sell their successful businesses due to regulatory constraints they may be forced to liquidate and retrench employees. This raises practical concerns about the sustainability and viability of the system.

The issue of the Competition Commission’s powers should be considered within the broader context of the challenges faced by businesses in SA, including factors such as load-shedding and rail incapacity. Adding another regulatory obstacle to doing business in the country is likely to further throttle growth and deter potential investors.

• Bahlmann is CEO: corporate & advisory at Deal Leaders International.