Terence Corrigan
The conclusion of a purchase deal by US-based Pepsico of Pioneer Foods is proof that the country can attract foreign investment, even while making demands on those investing. So says trade and industry minister Ebrahim Patel.
This deal showed, he asserted, that empowerment policy (‘Broad-based black economic empowerment’, B-BBEE for its full name), is no obstacle. The deal had teetered in the balance for a while as the minister objected to the empowerment terms.
And while the deal provides a welcome dose of foreign investment into our moribund economy, it is possible to read too much into it – as the minister has done.
The minister’s reaction is an illustration of what Intellidex analyst Peter Attard Montalto described in a recent contribution as ‘countability’ – the odd belief that activity here and there signifies a positive trend.
Far more indicative of South Africa’s circumstances than a single investment (however large) is the overall picture of the movement of foreign-owned capital. In 2019, South Africa saw a net sale by foreigners of R114.2 billion in equities and R22.1 billion in bonds. In 2018, the equivalent outflows were R53.0 billion and 108.6 billion respectively.
Simply put, foreigners are losing interest in South Africa. And given the lack of domestic savings, foreign investment is simply something that we can’t afford to forego.
Minister Patel is further mistaken in seeing this deal as proof that B-BBEE is not a hindrance. As a policy it raises the costs and complexity of doing business. The need to cede a portion of a firm’s equity in order to participate in value chains is a prime disincentive. A 2018 study of European businesses identified BEE as the most serious obstacle in doing business in South Africa. ‘This has compromised existing and prospective investors' ability to continue and/or expand their operations in South Africa. It has been particularly difficult for greenfield investors, for family-owned European companies as well as multinationals, who are often reluctant to dilute their control of assets,’ the report said.
A case might be made that such policies are not unique to South Africa. Or that once investors and entrepreneurs know exactly what to expect (if they have the ‘certainty’ that is so much a part of the country’s circular policy conversation), then it really doesn’t matter what the policies are. Besides, as the minister pointed out, the African market is a lucrative opportunity that the global business community is eager to service.
This is of course all partly true, but also not very relevant. Countries able to set conditions and draw in investment will tend to have some fairly impressive factors working in their favour – some unique commodity, a large market, escalating growth, proximity to key markets. This makes the costs of policy tolerable. South Africa has many factors working against it. These include electricity shortages, crime, skills deficiencies, an often sclerotic bureaucracy, large physical distances from overseas markets.
Nor is mere ‘certainty’ enough. Bad policy can be quite enough of a dissuasion on its own. Besides, B-BBEE is arguably a major contributor to uncertainty in itself, since it is an evolving policy idea, frequently accompanied by promises that it will be ‘strengthened’. In pursuit of race-based employment outcomes, government intends to be ‘very harsh’ on employers.
And while the minister is correct about the potential and appeal of Africa, firms operating in South Africa operate within the country’s actual environment – not an abstract ‘African’ one. The notion that South Africa is somehow a ‘gateway’ to the continent is less and less credible. Investors seeking opportunities on the continent have a range of destinations to choose from, and South Africa is no longer an obvious choice.
That some large firms are willing to enter the South African market should not distract the country from the reluctance of others to do so, nor the reasons for this.
The determined commitment to policies that make the country less attractive to potential investors raises a number of questions about the future of the country. Proper economic take-off is simply not going to be possible without the contribution that foreign business would make. Avoiding dealing with the disincentives that chase investment away – empowerment prominent among them – merely deepens South Africa’s economic quagmire.
Terence Corrigan is a project manager at the Institute of Race Relations. Readers are invited to join the IRR by sending an SMS to 32823 (SMSes cost R1, Ts and Cs apply).
