John Endres
South Africa’s investment drive, with its executive sponsorship by the president himself, is among the nation’s most important initiatives in getting the economy back on the growth track.
Investments help create jobs, grow the stock of value-producing infrastructure, and are an expression of confidence in an economy.
Clearly the government is aware of this. It has created a dedicated entity, InvestSA, as a one-stop shop to provide potential investors with information and help them set up and maintain their investments. It is also this week hosting its third annual investment conference, where investors can learn about “bold reforms to improve the ease of doing business”, discover future growth opportunities and find out about “bankable projects” that they can invest in.
The conference website highlights some of South Africa’s competitive advantages: a sophisticated first-world economy combined with a vibrant emerging market economy; one of the largest economies on the African continent; a favourable cost of living and an attractive place to visit and stay.
This all sounds very positive, but is it true?
Look closer and cracks begin to appear in the shiny façade. South Africa is hardly a “vibrant” economy. The economy has shrunk in seven of the ten quarters since President Ramaphosa took office at the beginning of 2018. Even before the Covid-19 crisis, this has been an ailing economy – not precisely an attractive prospect for investors comparing it with other emerging markets, whose growth rates were decidedly higher over the same period.
South Africa is indeed one of the largest economies on the African continent, but it is falling further behind its competitors from year to year – an inevitable result of low growth in South Africa and higher growth in rising economies such as Nigeria and Egypt in particular.
For visitors and immigrants, South Africa remains an attractive destination on the whole, particularly because of factors beyond the government’s control: the weather, the country’s landscapes and wildlife, and its highly professional hospitality sector.
On the downside, the government is unable to ensure the personal safety of its own citizens, never mind foreigners, cannot guarantee a stable electricity supply and is allowing its rail network to be dismantled and sold for scrap by criminals. Trucks transporting valuable goods are regularly set on fire on the highways, their contents looted; cash transports get blown up with explosives; and construction projects are halted by criminal mafias leveraging the government’s indigenisation policy as a crowbar to extort kickbacks out of developers.
As if that were not enough, the government is now actively pursuing policies that further undermine South Africa’s attractiveness as an investment destination. If there is one thing that investors really care about, it is property rights. Property rights are what guarantee that investors will be able to retain ownership, both of their assets and of any returns they generate.
In the past, foreign investors’ investments were protected under so-called Bilateral Investment Treaties or BITs. However, over the past decade the South African government cancelled these treaties with its most important economic partners, or let them lapse. These BITs provided protection against the expropriation of investor property without compensation. Under the Protection of Investment Act of 2015, by contrast, foreign investors today have only the protection of the South African Constitution and national legislation.
And now, the government is doggedly pursuing a constitutional change that would legalise expropriation without compensation or EWC. The initiative is presented as a land reform measure, but in fact the draft legislation accompanying the proposed constitutional change would allow the government to seize property of any kind, including land, buildings, factories, shares and intellectual property, such as patents or licences, for no or very little compensation. The list of circumstances under which no compensation may be paid is open-ended, meaning that other circumstances could be added ad libitum.
The proposed law is also procedurally weighted to favour the state and make it harder for property owners to defend their assets against seizure. For instance, it would allow state organs to expropriate property before a court has pronounced on the validity of the expropriation or the amount of compensation offered, and would allow the state to take possession and ownership before paying whatever compensation has been agreed. The potential for abuse can easily be imagined.
The EWC initiative should be seen in the context of other state-led initiatives to hollow out property rights and augment the power of the state. These include a proposal to eviscerate the private health sector by bringing it under the state’s control in a National Health Insurance scheme, the NHI; discussions around compelling pension fund managers to invest a portion of their clients’ savings in state projects, almost all of which are run at a loss (prescribed assets); and a push to nationalise the South African Reserve Bank, which currently has several hundred private shareholders.
These are factors that investors should be aware of when making their investment decisions. Yes, the government talks a good talk and the weather in South Africa is nice; but ultimately what matters is the actual investment environment. Investors are well advised to observe the government’s actions, and not let themselves be fooled by its pretty words.
John Endres is the Chief of Staff at the Institute of Race Relations (IRR), a liberal think tank that promotes political and economic freedom
