Land grab threat may deter foreign investment - Business Report

Jul 23, 2018
23 July 2018 - Throughout our time in Europe, and in different fora, with different interest groups, this issue arose time and time again.

Terence Corrigan

Despite the vocal orientation of South Africa’s foreign policy elsewhere – its peers in the Brazil-Russia-India-China-South Africa (BRICS) group, for example – relations with Europe remain of seminal importance. Policy choices need to be sensitive to this: ideology and politics notwithstanding, this is a relationship which is too valuable to be discarded.

European investment in South Africa amounted (as at the end of 2015, according SA Reserve Bank data) to some R3.4 trillion – or some 61% of the country’s total. The volume of trade is similarly impressive with merchandise exports at some R271.5 billion and imports at R359.4 billion (the vast majority of each is with member states of the European Union). Trade with Europe, at R630.9 billion accounts for some 28% of South Africa’s total trade. This is larger in value terms than the trade that South Africa does with any other region: trade with Africa amounts to R437.1 billion, and with East Asia (including China and Japan) to R470.4 billion.

Significantly, South Africa’s economic relationships are long-standing; they are an existing asset, with business people from each side having a deep and clear understanding of the other. This is no small thing, since seeking out opportunities and learning to operate in a new business environment can be the work of years if not decades. Moreover, Europe offers markets for value-added products, and innovation and technology that is of immense value to South Africa. Not only are German cars manufactured in South Africa, for example, but some are exported to Germany. This dovetails neatly with government’s own aspirations for industrialisation.

Nor are these opportunities stagnant. Innovation is key to Europe’s competitiveness. That Britain is looking to leave the European Union could potentially open doors for South Africa. Its secretary of state for international trade, Liam Fox, remarked on a visit earlier this year that a post-EU British trade policy would ‘build further on 9 billion British pounds of annual trade with South Africa, our biggest trading partner in Africa, and champion free trade to help developing countries combat poverty and grow their economies’. The possibilities that this presents have not been lost – at least in theory – on the South African government.

Against this background, the commitment to a policy of expropriation without compensation is of profound concern. In the Institute of Race Relations’ (IRR) recent round of engagements with opinion leaders in Europe, we repeatedly heard that South Africa remains an important trade and investment partner for European business. European businesspeople see profitable possibilities for expansion.

But ultimately, any decision to do so must be based on hard analyses of the risks and rewards. EWC is a measure that accentuates the former at the expense of the latter.

It is also by no means the first, nor the only concern.

South Africa sent a shockwave through the European business (and diplomatic) community when it announced that the bilateral investment treaties (BITs) it had with a number of countries were to be abandoned. This significantly downgraded the protection that foreign businesses had when operating in South Africa, offering both practical and (not to be underestimated) psychological limits to their exposure to the vagaries of the host country’s politics. Even countries that did not have such treaties with South Africa could feel a sense of security, in that they demonstrated a commitment to respecting the interests of foreign business operations.

Throughout our time in Europe, and in different fora, with different interest groups, this issue arose time and time again. And as it happens, while we were abroad – without fanfare – the Protection of Investment Act became active. This is the legislation that would effectively replace the BITs. Arguably its key takeaway was that foreign operations had the same protections as their South African counterparts, with the option of investor-state international arbitration removed.

Perhaps tellingly, it guarantees foreign investors their ‘right to property in terms of section 25 of the Constitution’, although it is precisely this constitutional protection that is at risk of being downgraded.

It is important to note that this was a cloying concern, predating the rise of EWC. And it raises questions as to the relationship between the two policies. Indeed, one of the key assurances of a BIT is to ensure a high standard of compensation in the event that investors’ property is expropriated. Cautious observers might discern a pattern – one policy change removes protections, the other introduces a means to perform actual seizures.

It also became apparent just how much hope had been invested in the accession of President Ramaphosa by South Africa watchers in Europe. After the instability and lost opportunities of the Zuma years, the promise of a ‘new dawn’ was enthusiastically welcomed. Tough talk on corruption and moves to deal with the malaise at our State-Owned Enterprises were seen as evidence that things were moving in the right direction.

Sadly, EWC has done much to undermine South Africa’s attractiveness as an investment destination. It has engendered a combination of confusion and wariness. Indeed, the contradictions in South African policy have been thrown into even sharper relief by President Ramaphosa’s investment initiative. As one of our interlocutors put it, how can South Africa expect to attract investment while simultaneously threatening it?

And in so doing, South Africa risks squandering the potential of one of its most productive and lucrative international relationships – one that is not founded merely on sentiment or ideological satisfaction, but which presents real-time, tangible benefits that sync well with official policy.

Terence Corrigan is a project manager at the Institute of Race Relations (IRR), a think tank that promotes political and economic freedom. If you agree with what you have just read then click here or SMS your name to 32823.   

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