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South Africa: Clear Signal Needed To Keep Investment Gateway Open – Analysis

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Recent events confirm that South Africa’s perceived receptiveness towards foreign direct investment (FDI) is declining. Consequently some foreigners are disillusioned, and look to better growth prospects elsewhere in Africa.

The case of EU investors – our single largest source of investment by far – confirms this: aggregate EU FDI stocks in South Africa declined by 23 percent between 2010 and 2012, at a time when their global FDI stocks increased. And that was before the legislative barrage unleashed before our 2014 national elections.

Since our economy is plagued by high unemployment, social discord, low growth, and rising political populism, the signal failure to retain, let alone ignite, foreign investor interest from our major source is disturbing.

But why is this the case? And will the Promotion and Protection of Investment Bill, shortly to be presented to Cabinet, change this dynamic?

Click here for a package of SAIIA materials related to foreign direct investment.

Our politics have changed sharply in recent months. The ANC, harried by the populist EFF, is struggling to respond. Unfortunately, sensible, orthodox economic policies don’t buy votes.

But the ANC is also responding to its own constituencies, large parts of which seek redistribution of current wealth, or favour inward-looking, state-driven industrial policies. Substantial segments of the formal business community, hit by rising costs and regulatory uncertainty, also seek to keep the South African market as closed as possible. The trade unions, notably COSATU but particularly the emerging ‘United Front’ led by NUMSA, are ideologically committed to inward-looking policy approaches. The mood in many townships seems to have turned decisively against foreign immigrants, and this is reinforced politically by the approach of next year’s municipal elections.

Consequently, advocates of liberal economic policy approaches are in an increasingly small minority. The legislative results are rapidly mounting up: a minerals bill rewrite generating huge uncertainty in our core economic sector; announcements concerning land ownership and reform that have the same effect in the agriculture sector; foreign private security providers (a term so expansive it could include the entire electronics industry) may shortly be obliged to sell off 51 percent of their assets to locals; proposals to oblige foreign shop owners to transfer their proprietary secrets to locals; a revised BBBEE act that will make it more difficult and punitive for established businesses (local and foreign) to operate a business; an expropriation bill whose outcome is currently uncertain; increasing hurdles for skilled foreigners to acquire work permits; and increasing tariff barriers.

The cumulative impact of this non-exhaustive list is breath-taking. The South African ‘gateway to Africa’ is becoming the gatekeeper.

Strategically this is a dangerous drift since, without our gateway status, it is not at all clear what our role in the regional and global economies would be. Furthermore, how will our economy be affected if our African trading partners implement similar policies, or our global trading partners retaliate?

To round it off our political elite has almost overnight taken on predatory dimensions, threatening core institutions, cementing investors’ worst fears about the legislative barrage, and inviting comparisons to oligarchical Russia. Are any assets safe in this legislative and political environment? Would you invest your money in a country in such circumstances? Foreign investors, who have many other options, are now openly asking this question.

We are not China; our market is not large enough to turn a blind eye to foreign investors’ concerns. We are at the cusp of a crucial turning point.

Enter the Promotion and Protection of Investment Bill. The first version, released for public comment in November last year, confirmed some investors’ worst fears. Expropriation was redefined in order to allow the state to effectively transfer custody of seized assets to deserving beneficiaries (the ‘custodial clause’), thereby avoiding the need to pay compensation since the state would not own the assets.

This clause has reportedly been removed, but the overall treatment of expropriation remains uncertain.

The draft bill provided for foreigners to be subjected to an undefined ‘screening’ test to ensure their investments would not violate economic or social policy goals (think Walmart).

Several countries operate screening systems, a growing practice in light of the global expansion of many state-owned enterprises. Australia’s, for example, gives wide discretion to the Treasurer (Finance Minister) to block incoming investments if they are deemed not to be in the national interest.

More thought needs to be given to such comparisons. Australia remains open to FDI, and has strong domestic institutions anchored in democratic norms. The Australian state is not about to become predatory; hopefully South Africa’s will not either but its future is far less certain. Therefore different approaches are required here.

On the plus side the bill would entrench dispute settlement with foreign investors in the South African legal system. This would bring the long-running bilateral investment treaty saga to a close, and end the questionable circumstance in which they enjoyed more rights than domestic investors through their recourse to international arbitration panels.

South Africa’s legal system and judiciary have proved their independence and durability. However, if a predatory elite does capture South Africa’s democracy, the consequences for the judiciary will be uncertain. The bill could then be a pyrrhic victory.

The bill has since been thoroughly debated behind closed doors in NEDLAC. The resulting version is reportedly on its way to cabinet. How should cabinet respond?

First, it should engage in a thorough reflection on whether South Africa truly requires FDI, and in what quantities, in relation to our economic and social challenges.

Second, and assuming it does the right thing by concluding that the country must remain open to FDI in order to cement our gateway status, the next debate should be over what safeguards really need to be in the bill in order to prevent egregious abuses by foreigners. Screening should be contemplated but must be narrowly construed and subject to checks and balances in order to minimise ministerial discretion and over-politicisation. This power, should it be established, should reside in the Finance Ministry; the only one with an economy-wide view as opposed to narrower, sectoral approaches more prone to special interest group capture.

Third, this debate should be predicated on a fundamental principle: foreigners should be subject to the same laws as domestic investors; in other words the playing field should be level. Therefore, we should not single foreigners out for ‘special treatment’, such as technology transfer conditions or performance requirements. The World Trade Organization (WTO) legality of such provisions is questionable, but the principle is surely wrong, and wrong-headed if we truly want to attract FDI.

Different government departments are experimenting with expropriation provisions in their own regulatory patches, generating considerable uncertainty. So, finally, cabinet needs to send clear signals about how expropriation will be treated in the Expropriation Bill, and in the plethora of legislative actions underway.

The conversation needs to take place now, and a clear signal must be sent. Foreign investors are typically risk averse with their money, and signalling is a key confidence-building measure.

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SAIIA

SAIIA

The South African Institute of International Affairs (SAIIA) has a long and proud record as South Africa’s premier research institute on international issues. It is an independent, non-government think-tank whose purpose is to encourage wider and more informed awareness of the importance of international affairs. It is both a centre for research excellence and a home for stimulating public debate.

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