Catfight over Wal-Mart deal

In March this year, the competition appeal court (CAC) ruled that the merger should go ahead with the proviso that the three protagonists - government, labour and the merging firms - find three experts to determine how to structure a fund to assist small Massmart suppliers directly affected by the merger.

This was asking for trouble. The three experts were never all going to be completely neutral or even experts in global supply chain management - the crux of the report they were required to write. Instead of three wise men, the court may at first glance feel it has been presented with the work of three blind mice.

Two reports

Predictably, they couldn't agree and last week issued two separate reports. They differ on their terms of reference, the structure of the fund and how much money is needed for it to do a reasonable job.

Two of the experts, Columbia University economics professor and Nobel laureate Joseph Stiglitz and Genesis Analytics economist James Hodge - appointed by government and labour respectively (both of which opposed the merger) - banded together and wrote a report fundamentally at odds with the report of the third expert, University of Cape Town economics professor Mike Morris, who was appointed by Wal-Mart/Massmart.

Morris was a shoo-in for the role after CAC president Judge Dennis Davis cited 'A Handbook for Value Chain Research' in his judgment. Morris is a co-author of the work. Understanding global value chains, said Davis, was key.

Hodge was the economic expert witness for government during the tribunal hearing and Stiglitz, an internationally renowned development economist, sits on economic development minister Ebrahim Patel's economic advisory panel.

"It was always going to be two against one," says Morris. "When Wal-Mart/Massmart approached me I said: 'I'm interested but get one thing straight - I'm not your representative, you're not going to be telling me what to do'. And they never did."

Difference of opinion

So how come Morris finds that a fund of R100m, the amount initially proffered by Wal-Mart/Massmart in the competition tribunal hearings, is good enough? And is it pure coincidence that the other camp says no less than R500m is needed - the same amount demanded by government during appeal proceedings?

This leaves the court in a quandary. The reason it requested expert advice was that it was unable to judge whether a R100m fund would be sufficient to satisfy the public interest concerns raised by the merger.

So which camp is the most convincing? Morris costed actual examples of local supplier development programmes. The amount of R100m, he finds, is enough to run three highly focused capacity-building cluster programmes over three years. It would constitute the largest retailer-based supply chain development programme in SA.

But it is impossible, he says, to determine how much should be set aside in a fund to ameliorate the harm that could result to any of Massmart's local suppliers from being displaced by imports once it has access to Wal-Mart's global supply chain.

Firstly, it's impossible to know how many firms may be affected. Moreover, the attractiveness of imports over local procurement fluctuates along with the rand exchange rate.

This didn't stop the Stiglitz-Hodge camp from coming up with a figure of R500m-R2bn.

They argue that R100m is "plainly too little" partly by comparing it to funds administered by the Industrial Development Corp (IDC), which are generally not below R300m and usually run to billions of rand. But the fact that these funds typically have access to taxpayers' money seems lost on the authors.

'Discriminatory'

They pay no attention whatsoever to competition issues. "A large fund required of one firm is clearly discriminatory, giving competitors a significant advantage and so rendering their proposal for the fund anticompetitive," says UCT economist David Kaplan. "This is particularly so given that Massmart's major competitors are large and well-established companies."

He also believes such a large fund confined to only one foreign-owned firm might not accord with SA's World Trade Organisation obligations governing equality of treatment. For Kaplan, "the absence of such considerations in a report to a court concerned with issues of competition and SA's international obligations is, to put it mildly, highly problematic".

Stiglitz and Hodge are primarily concerned about the harm the merger may do and believe that since the harm will be widespread, the fund should be large. They also say that unless the fund is large there will be no incentive for Massmart to make real efforts at integrating local producers into its supply chain.

Small, focused

Morris's starting point is the antithesis. He notes that Wal-Mart intends to use SA as a springboard to escalate its reach into African markets. This holds big opportunities for local suppliers.

His contention is that only if the fund's programmes demonstrate to Wal-Mart that SA suppliers can be upgraded into being globally competitive will it get management's buy-in and have a chance at transforming Wal-Mart's procurement behaviour. This is why he argues for small, focused pilots rather than a large, scattershot approach. R100m is enough to produce a good demonstration effect.

"Value chains are driven by the lead firm, not by klapping them on the head but by demonstrating that it's in their own best interests," says Morris. "If the fund's framework and operations are not seen to be in Wal-Mart/Massmart's business interests, they will regard the fund as a penalty tax. Management will not buy into it. It will simply be a waste of resources and energy."

Fund board

Stiglitz and Hodge propose a top-down, prescriptive structure that relegates Wal-Mart/Massmart to being the junior partner in its own fund.

Final oversight and strategic direction would rest with a fund board. They suggest Wal-Mart/Massmart be allowed one representative on a nine-member board against six posts held jointly by government and labour. Decisions would be taken by majority vote.

Fund administration would lie outside Wal-Mart/Massmart with an independent administrator appointed by the board, preferably the IDC (which falls under Patel's ministerial authority). Crucially, the administrator would decide whether to disburse funds against the projects brought to it by the firm.

"They want the fund administrator to be able to decide on milk versus hammers, but where does it get the knowledge to determine where the firm should be putting its money?" asks Morris. "They're arrogating power to a board stacked with government, union and outside business people."

'Plain daft'

Supply chain expert Justin Barnes of BM Analysts says whether a supplier development programme will work at Massmart/Wal-Mart will depend not on how much money is spent but how strategically aligned it is with the firm's core business.

"Given that strategy deployment is a private, confidential process that sits at the heart of how firms (and their supply chains) compete with one another, the idea of guiding supplier development on behalf of Wal-Mart through a public body of some kind is just plain daft," he says. "Unless the supplier development programme meets the commercial interests of Massmart/Wal-Mart it will fail."

If faced with the Stiglitz-Hodge option, the most likely consequence is that Wal-Mart/Massmart will take the matter to the supreme court of appeal. Hopefully the CAC will prevent this with a sensible ruling. Its judges have enough experience to know a shakedown when they see one.

The parties have a month to respond to the two reports before they are submitted to the CAC for evaluation. A date for the court's decision has not yet been set.

Source: Financial Mail