Opinionista Yonela Diko 29 April 2018

SA can draw quality foreign investment – and local confidence should reflect that

We must not fool ourselves that, once we fix the political problems of previous decades, there will be a collective ‘Kumbaya’ moment for foreign investment. There won’t be – not unless our attitude is firm on presenting an honest and positive picture of our country.

The nomination of Trevor Manuel to lead a pack of the president’s Special Investment envoys has been greatly welcomed, informed as it is by Manuel’s proven track record at the helm of our finance department for over a decade. In 1996, the year Manuel became Finance Minister, Foreign Direct Investment (FDI) was sitting at $14.4-billion in nominal terms, but by 2011, it had reached a high of $17.9-billion (Jeffrey, 2016).

Despite this great success, the country was still punching way below its potential weight, partly because even then, not all of us viewed this task of putting the country’s best foot forward as a collective task. For example, in September 2004, then-president Thabo Mbeki lashed out at Tony Trahar, then Anglo American’s chief executive, on Trahar’s remarks about persistent political risk in the country – which had led Anglo American to list at the London Stock Exchange.

A year before, in 2003, Mbeki also lambasted Sasol, the fuels group, accusing them of “bad-mouthing” Black Economic Empowerment, our attempt to redress the racially skewed economy.

Five years earlier, around 1999, even Manuel had been perturbed, expressing his frustration that “sometimes [we] in government wonder whether our business people, our own people, believe enough in our country”. Part of the frustration was that, for inexplicable reasons, even when local businesses had a good time of it, they would still sit on piles of cash instead of reinvesting – something that has always been open to perverse interpretation.

Foreign firms looking to make new investments are attracted to areas where there is existing FDI, because investors want to put their money where there is a track record. South Africa is therefore likely to attract more FDIs where local companies are showing greater confidence in the country, creating a good track record. We must never be under the illusion that once we fix the political problems of previous decades, which we have been doing with great efficiency in the space of a few months, that there will be a sudden ‘Kumbaya’ moment – not unless our collective attitude is firm in presenting an honest and positive picture of our country.

We cannot deny that the last few years have left a bitter taste in many mouths, giving room to those who have always thought less of our country to feel vindicated. I can imagine, though, that even vindication has felt less satisfying. Since 2011, the country has been bleeding FDI, with investors reducing their footprint due to multiple identifiable risks and persistent structural challenges. Underlying Manuel’s nomination is therefore a deliberate intention to learn from his experience.

In 2015, world FDI flows increased by an estimated 36,5% to $1,7-trillion, according to the United Nations Conference on Trade and Development (UNCTAD). Meanwhile, FDI flows to Africa decreased by 31,4% to $38-billion in the same year, and flows into South Africa decreased by 74% to $1,5-billion (Jeffrey 2016). That is a devastating blow to a country that had been on an upward trajectory for over a decade in its ability to attract quality FDI.

As many analysts have observed, South Africa’s poor economic performance in recent years has certainly been influenced by low commodity prices, but the end of the commodity super-cycle tells only part of the story. It is a regrettable reality that resource-rich countries, particularly in Africa, have generally failed to develop much-needed infrastructure and to develop their potential downstream supply and other industries. They have also suffered the twin scourges of corruption and poor policy-making.

The first story, therefore, about South Africa, is that despite commodities still taking much of our export market, the country is heavily diversified, with mining contributing less than 10% into our GDP. The rest of the GDP is made up of finance, trade, manufacturing, and transport, and the remained further diversified into other sectors. We are therefore a fully diversified country, which has immeasurable benefits for investors.

The are many factors that attract FDI, and almost all experts agree that transparent and dependable conditions for all kinds of firms, whether foreign or domestic, are advantageous. These include ease of doing business, access to imports, relatively flexible labour markets and protection of intellectual property rights.

For Africa, the following have been the major areas influencing FDI:

  • Infrastructure and access to raw materials;
  • Communication and transport links;
  • Skills and wage costs of labour.

Low wages have been a key driver in the economic development of countries like China and India over the last decade. The wage bill turns out to be the biggest cost in many industries, especially in manufacturing, and many Western companies, looking to take advantage of the comparably cheaper labour from the abovementioned countries, have invested substantial amounts of money – in the process creating the longest and highest sustained economic growth of the last decade. Of course, a firm may be reluctant to invest in Sub-Saharan Africa, because low wages are outweighed by other drawbacks, such as lack of infrastructure and transport links. Again, South Africa fares quite well in the area of infrastructure and transport links, including sea and freight links, although there is still some work to be done on the rail front.

Low labour costs, however, remain a key attraction in emerging markets. This is what our unions continue to miss, even in their recent strike. It is not about a comparison between the salaries of CEOs and workers, or the slice of profits to workers vs. that given to shareholders: it is about wage comparisons between our country and compatible countries around the world who are competing for the same FDIs we are. Without smart labour unions, with each year, unions will lose ground and the trust of their members. Why fight for salaries if you can fight for training and education of workers, so they can improve their employability and bargaining power for higher earning jobs?

The second major investor draw card for FDI is tax competitiveness. Large multinationals always seek to invest in countries with lower corporation tax rates. Again, the complaint around VAT has been that RSA had enough room to increase corporate tax and cover the budget shortfall instead of punishing the poor. This, however, is not true. Most emerging markets have their corporate tax hovering at around 25%-28%. Ours is also 28%. However, our 15% VAT is still much lower than comparable countries – in some comparable countries, it is around 19%.

Still, we cannot deny that countries with an uncertain political situation will be a major disincentive. Related to political uncertainty is the level of corruption and trust in institutions, especially the judiciary and the extent of law and order. On these factors, any South Africans who find themselves having to sell our country to a potential investor can feel comfortable that our country is on the mend after a turbulent time of misguided and terrible choices.

Another significant factor for firms investing, especially as pointed out by economists with regards to Europe, is access to a single market, which is a free trade area, but also has very low non-tariff barriers because of harmonisation of rules, regulations and free movement of people. For example, the UK post-Brexit is likely to be less attractive to FDI, if it is outside the single market. The new talks about Africa becoming a single market should be encouraging to investors who have already been scouting Africa for good areas of investments after the Brexit fiasco.

Still, the challenge for all countries remains that of attracting ‘quality FDI’ that links foreign investors into the local host country economy – rather than the old, exploitative FDI.

Quality FDI is characterised as:

  • contributing to the creation of decent and value-adding jobs;
  • enhancing the skill base of host economies;
  • facilitating the transfer of technology, knowledge and know-how;
  • boosting competitiveness of domestic firms and enabling their access to markets; and
  • operating in a socially and environmentally responsible manner.

With the influence of globalisation, capital now moves freely around the world and seeks the highest return. South Africa is well positioned to yield higher returns for all FDIs. And that is the basis for our collective confidence. DM

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