Business Maverick

Business Maverick

Global investments: Is South Africa still on the agenda?

Global investments: Is South Africa still on the agenda?

Just the other day, J. BROOKS SPECTOR quietly obtained a transcript of the discussion in a committee of the board of directors of a major multinational high-tech manufacturing company. This committee is the one that prepares final recommendations for the topmost layer of management in that firm for its future investment decisions abroad and at home. In the interest of South Africans, we thought it would be useful to reprint the relevant portion of that discussion.

Chair: The next order of business is our consideration of a major new investment in plant expansion for our African/Indian Ocean division. The proposal (marked tab A) calls for a major cash infusion over the next five-year cycle to double our assembly plant capacity for both our current product ranges as well as to incorporate the capacity for new product lines that are now being developed and that which will come to the market by 2020. The chair assumes all members of this committee have read the evaluations of this proposal, as well as the risk analysis related to it. The chair will now entertain discussion on this proposal.

AB: This investment should be weighed against other competing opportunities in Africa and in other emerging markets, don’t members agree? Yes, Africa as a whole is scheduled to grow at up to 6% a year in the next few years, but is the South African economy going to be a part of that?

BC: Hmmm. Well, I for one have been reading about some serious difficulties with electric power generation capacity in South Africa, and I assume others have as well. Will South Africa actually be able to furnish sufficient power to us for our plant expansion – or will we have to do it on our own? In the meantime, there has been this curious news story of how they signed a secretive agreement with Russia to obtain a whole shipload of nuclear reactors – along with an enormous transfer of funds to pay for this. Say, isn’t this a country with more sunlight than it can use? What’s the problem with their energy capacity? This seems more a question of political will than capacity, but that surely affects our own plans.

DE: Say, I’ve been watching the various foreign news channels over the past several days, as well as taking a look at that political risk analysis our contractor prepared on our various options. I’m having a tough time making sense of all of this.

I was particularly startled – and appalled – to watch the recent shambles when the country’s president was about to give his speech at the opening of their parliament for the year. There were those physical attacks on opposition party members, along with the use of some sort of para-military force to drag some MPs out of the chamber. Is this the kind of society we want to embrace? How will our stockholders and our larger public respond to our working closely with this kind of political life?

FG: Well, of course, the actual bits of a country’s politics aren’t really our core problem, are they? We do, after all, have a mega-million dollar investment in China, and a growing one in Vietnam as well, for that matter, don’t we? Also, there is that portfolio investment fund we have under the capital growth wing of the firm that has made some real investments in a variety of East and West African nations – especially energy production, right? And some of those places certainly aren’t poster children for the best of democracy and freedom…

HI: Still, our core question is ensuring our investments are positioned in places that can show a stable economic and political framework. It should be one where decisions don’t seem to be made on the fly by whoever can bend the administration his way. It should be a country where the country’s economic policy making has a nice, long time horizon built in as part of its planning so that we, in turn, can ensure our investment is secure – and so we can predict costs, benefits, results and returns with some degree of certainty. That stuff must matter to us rather more than our long association with the country’s peaceful transition from that earlier, odious regime, as important as that was at the time.

I keep reading about how South African economic policy making is split between some warring camps in three different economic ministries; between the unions plus the communist party on the one hand and the official government position over a longstanding national development plan on the other; and a worrying division between government and the broader business community. These things should give us pause as we contemplate decisions – as potential investors of our own and as custodians of our pool of investors’ capital. Everyone agrees, yes?

I’m not sure how this new decision the South African government plans to take in prohibiting foreign ownership of land will affect our company, but it may well have negative impacts on senior staffers from outside South Africa who will be unable to purchase homes locally, rather than rent. It is a risk.

BC: Well, if you read the new addendum to the political risk analysis document (it was emailed to all of you yesterday), you will note that the South African government suddenly made this proposal, seemingly in response to bigger societal issues there about a continuing debate about who owns the land and who gets to own it.

Should this affect our plans? Our current plant footprint for our facility there now is too small for the entire planned investment contained in the original proposal. Maybe we can live with this leasehold thing they are discussing for the assembly facilities, but some of our subcontractors might have trouble with this if they plan to set up shop locally.

Or, maybe it will put limits on our possible expansion in the second and third phases of our expansion. My point is: no one really seems to know yet. But because of that, surely it’s going to be a problem for us in planning our tax compliance and dividends strategies, as well as any debt restructuring we may have to do in the future to cover additional expansion.

DE: I want to return to this energy problem because energy costs are so much a part of our overall calculations of product cost. As you know, our investment is really an energy-heavy production process, even if it is increasingly an automated one – or, perhaps, because of that. If we cannot predict the capability of the country to provide us with enough power from their electrical grid, it is going to push all our cost calculations into some kind of dark corner of unknowables.

HI: Yes, all of these issues are important, but we’ve managed to work around them somehow in so many other international investments over the past two decades. The thing that really worries me – and should worry all of us as well contemplate the future of any investment in South Africa – is the level of education our potential employees will have and how that will affect our investment.

Yes, I know that country spends a higher than average per capita share of its national budget on education (and is one of the highest on the continent) but the results are, to be blunt, disastrous. In order for our products to be manufactured effectively with the right kind of precise tolerances, we’re going to need to hire school graduates who understand math and science such that they can master our investment in technological infrastructure. Quite frankly, from what I’ve read, they just don’t measure up to what we have encountered in so many other parts of the world – even in places without the economic level of South Africa.

I’m not even sure the labour laws and the restriction in the labour market we have read about are our worst problems. My staff and I are convinced that if anything can hurt us, it will be the skills deficit that will, frankly, clobber us. Surely we shouldn’t have to create our own high school to train our would-be staff, do we?

AB: Well, education is a key problem but the country’s transport issues are worrisome too for some of us. I keep hearing about new infrastructure investments in ports, airports and transport lines, but it isn’t really being reflected in the facts on the ground yet. There are lots of plans, lots of working groups, and lots of proposals, but there is much less actual digging and building.

GH: I realise this is anecdotal, but my spouse’s cousin has a friend who lives in one Johannesburg neighbourhood. It seems they stopped waiting for the city or public utilities to put in a broadband fibre optic network so the neighbourhood contracted to do it themselves. Good for them but that’s no way to build an IT network.

Our firm will need to recognise the real IT risks in South Africa for our kind of work. Internet speeds are persistently slower there than in many other parts of the emerging nation, middle-income tier of countries – and costs are, generally speaking, much higher per unit of data moved.

While this can be worked around in a huge investment such as the one we are contemplating, it will still be a significant impediment for our firm. Moreover, it will be a real burden on senior, expatriate management and technical staffers and their families – people who have now been long accustomed to much cheaper, faster access. And these bottlenecks will also impact on our ability to transmit the massive amounts of data required for our just-in-time manufacturing and the frequent resetting the production lines to respond to market conditions.

Then, too, our risk analysis report points to a bureaucracy that, frankly, is virtually on autopilot. In low gear. Permits for all kinds of necessary things can take enormous amounts of time, and then there are those troublesome reports of growing corruption. What we don’t seem to see is decisive action on these things, besides the perfunctory incantations against these problems by senior officials.

Yes, of course we’ve dealt with corruption in various places before, but US law and regulations makes it very hard for us to deal with the costs inherent in such payments – even if we have to contract for someone to sort this kind of stuff out for us. This is besides the obvious problem of the legalities of dealing with it, of course.

I’m not going to speak about the issue of crime, we’ve dealt with that before. Our consultations with the embassy and various business groups tell me that while it is serious, it is not, by itself, a deal killer, but we do need to keep in mind that it is a cost that we must factor in, just like we do in many other parts of the world.

Chair: But, returning to dealing with government, something that is key to our expansion proposal, I like what I have seen in some other places where a new investor or investor’s expansion program gets a designated champion in a nation’s bureaucracy. The task of that office is to get things sorted out relatively quickly. Or, even where most of the documentation and permits can be done online without much difficulty or time. South Africa seems to be falling behind on all these fronts.

As a result, can I direct the committee’s attention to tab B, the section that identifies a number of alternatives on the continent, as well as several other non-African Indian Ocean littoral possibilities? Tab B points to alternative investment possibilities for our expansion, including African nations like Ghana, Kenya, Rwanda, Tanzania, and Mozambique, as well as Bangladesh, Indonesia and Malaysia in Asia.

AB: Given what we’ve heard, perhaps the committee will entertain a motion to postpone deciding on the proposed investment in South Africa? Instead, I would like to recommend we ask the political/economic risk analysis firm we’ve been using to provide the committee with a more detailed set of comparatives between South Africa and, say, six other possibles.

Specifically, I’d like to ask the risk analysis firm to tender a report to us in two weeks so that we can reassemble and then relook at alternatives. I just don’t feel like I am comfortable right now with South Africa, even if it has some really magnificent scenery and game parks.

Personally, I am favourably disposed to what I have read and seen of a place like Rwanda – they’ve been through their dreadful political fire, the leadership there is actively working to improve investment access, Internet connectivity, educational training and skills, and they are – surprisingly – close to some of the more dynamic, fastest growing parts of the African continent – even if they are also next door to the Congo and Uganda and sort of close to South Sudan and Somalia. And while they don’t have South Africa’s beaches or some of those big wildlife parks, they do have those mountain gorillas. Maybe that’s a plus if we eventually make our decision on the basis of proximity to photogenic wild animals. (Laughter)

Chair: Well, okay then. I’ve think we’ve gone through the relevant issues for this discussion so far. All those in favour of AB’s proposal to postpone any decision on South Africa off into the future, and, instead, take a closer look at a selection of African and Asian alternatives, show of hands? Good, seems unanimous. Accordingly, the secretary of the committee will contact the risk analysis firm and instruct it to provide a further spread of alternatives for us to consider recommending to the senior management executive committee….

– – – –

And so, a question for further discussion among South Africans: Is this the kind of discussion South Africans want to be taking place about their country around the conference tables of corporate board rooms of the investor community throughout the globe? If not, how should this conversation be altered? Will it be? Even, can it be? DM

Photo: A file photo dated 16 January 2013 showing a VW Phaeton being checked during the final visual inspection by an VW employee at the Transparent Factory (Glaeserne Manufaktur) in Dresden, Germany. EPA/ARNO BURGI


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