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How does government balance regulating foreign-owned businesses with the drive for investment?

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Professor Dr Omphemetse S Sibanda is a Professor of Law and the Executive Dean of the Faculty of Management and Law at the University of Limpopo. He holds a Doctor of Laws (in International Economic Law) from North West University, a Master of Laws from Georgetown University Law Centre, US; and an LLB (Hon) and B Juris from the then Vista University, Soweto Campus.

The South African government says it is looking at legislation to regulate the conduct of foreign-owned businesses in the country. While there are already several laws in place, government would do well to look at what the rest of Africa does in this regard.

Small Business Development Minister Khumbudzo Ntshavheni’s move to set in motion legislative intervention to regulate the participation of foreign nationals in South Africa’s economy is contentious, yet a subject that cannot be avoided forever.

According to Ntshavheni, the proposed law will be based on lessons and best practices from countries such as Nigeria, Ethiopia, Tanzania, Ghana, Bangladesh, Pakistan and Botswana that have regulations specifying the sectors where foreign nationals are not allowed to participate or are restricted in their participation.

We want to strengthen the protection for the locals”, said Ntshavheni.

The minister also said South Africa has no system in place to account for the businesses conducted by foreign nationals, let alone knowing the economic impact of their participation in the South African stream of commerce. By “system” I am going to assume that the minster did not mean that there is no legislation that addresses restrictions in some form or shape for different sectors.

The minister also claimed that “we currently do not have enabling legislation that allows us to regulate participation of foreign nationals in the country”. I am deliberately being careful to state that the minister “claimed” because there are in fact laws that regulate participation of foreign nationals in the country including foreign ownership restrictions and/or conditions. The only difference is that many of these laws are not as well thought out and well developed as similar laws/regulations in comparable African countries.

As an ANC member, Ntshavheni will surely be one of the first people to remember that it is not the first time such restrictive legislation has been proposed in South Africa by her party. In 2017, then secretary-general of the ANC and now Minister of Mineral Resources Gwede Mantashe said that the party’s national lekgotla had agreed on the imposition of restrictions on the employment of foreigners in locally owned businesses, much to the delight of Cosatu and Saftu.

Both the 2017 and the 2019 ANC foreign nationals/businesses restriction proposal cannot be considered ground-breaking pronouncements, except that the reaction to this proposal is intriguing. Some have branded the proposed legislative intervention by the minister as “cheap” politicking. It is this and similar views that unfortunately will sustain the narrative that the proposed legislation by Ntshavheni is influenced by the xenophobic tendencies of South Africans. Of course, both the 2017 and 2019 proposals came with a backdrop of xenophobic violence and criminality in the country.

But it cannot be said, for instance, that the South African Immigration Act is xenophobic just because it places an obligation on all employers to act in good faith by ensuring that no undocumented person is employed. Behind the Immigration Act is the acknowledgement and appreciation of the reality that overly restrictive immigration policy in a country in dire need of scarce skills may deflect highly skilled foreign workers to destinations where restrictions are lower.

With the spotlight shining on South Africa over the plight of foreign nationals and the recent xenophobic violence, the proposed law should not be used to perpetuate the image that South Africa is xenophobic. It is hoped that Ntshavheni’s proposed legislation is not so unreasonably and irrationally restrictive that it red flags of anti-immigration prejudice and protectionism. The crowding-out effect of the proposed legislation must be carefully considered when formulating its provisions.

It is true, as the minister indicated, that there are countries with legislation restricting foreign nationals; hence the minister intends learning from these countries. What exactly these countries are doing that is worth learning, and to serve as models for the South African context, should raise everybody’s curiosity. The following are quick examples, the list of which is not exhaustive:

Botswana:

Botswana reserves certain trades and businesses only for Botswana citizens (Motswana) and/or companies that are wholly owned by Motswana.

Restrictions include, for example, ownership by Motswana only in activities such as baby shops, car washes, cellphone shops, cleaning services, commercial hardware shops, cosmetics shops, dry-cleaning stores, florists, funeral parlours, furniture shops, general clothing stores, general dealers, gymnasiums, hair or beauty salons, internet cafés or copy shops, jewellery shops, laundromats, motor dealers, petrol filling stations, pharmacies or chemist stores, restaurants, sunglass shops, supermarkets, toy shops, small-scale manufacture of school uniforms, manufacture of school furniture, baking of bread and confectionery, bottling of water and production of traditional sour milk.

When you look into the complete list of the businesses reserved for Motswana, you see some of the businesses that were looted and torched in South Africa because they belonged to foreign nationals.

A bill, the Transfer Duty (Amendment) Bill 2018, was introduced in July 2019 in Botswana’s parliament, proposing the introduction of laws that prohibit land ownership by foreign nationals except for long-term leases. Reportedly one MP (Vice President Slumber Tsogwane) warned against parliament enacting such a “bombshell piece of legislation” because of fears that it would scare away foreign investment and negatively affect tourism and the property industry.

I bring this into my discussion because of what apparently further ensued, which reminds me of the “White Monopoly Capital” argument of the EFF: Maun West MP Kgosi Tawana Moremi was reportedly displeased with how the issue of land restriction was being handled. Kgosi Moremi apparently viewed any resistance as an indication of the pervasive influence of white monopoly capital, and also expressed concerns that the important economic value sectors such as tourism were wholly controlled by foreigners.

Kenya:

The 2010 Constitution of Kenya guarantees the right of nationals and non-nationals to own property; however, non-Kenyan citizens (either individually or in association with others) are not permitted to own an interest in land longer than a leasehold term of 99 years.

Section 65(1) of the Kenyan Constitution states that:

A person who is not a citizen may hold land on the basis of leasehold tenure only, and any such lease, however granted, shall not exceed ninety-nine years.”

This prohibition was confirmed by Justice Gacheru in the case of Kunde Road Residents’ Welfare Association Versus Deshun Properties Company Limited & Four Others (ELC PETITION NO. 1433 OF 2013).

In am also bringing up the issue of land because the new law may consider restrictions in agricultural sectors and other FDI investment dependent on land. It is thus important that such law should not be rushed through Parliament merely to pacify disgruntled South Africans. Such a law will have both direct and indirect impact/consequences on other laws.

There is no equivalent provision to section 65(1) of the Kenyan Constitution as in the provisions of section 25 of the South African Constitution. But the Regulation of Land Holdings Bill that was referred to by former President Jacob Zuma in his 2015 and 2016 SONAs could bring such restrictions through prohibiting foreign acquisition of agricultural land and placing land ceilings for South Africans and existing foreign owners of agricultural land.

Nigeria:

The Nigerian Investment Promotion Commission Act 2004 (NIPC Act), for example, contains what is called the Negative List, in terms of which both Nigerians and foreign nationals cannot invest in the production of: arms and ammunition; narcotic drugs and psychotropic substances; or the production of garments and accoutrement of the police, customs, immigration, prisons, military and paramilitary services.

In terms of the Nigerian Oil and Gas Industry Content Development Act of 2010, at least 51% of the shares of a company entering the oil and gas industry in Nigeria must be owned by Nigerians. Nigerian independent operators get first consideration in respect of the award of oil blocks, oil field licences, oil lifting licences and contracts for new projects.

Worth noting on the issue of local content and indigenisation is that on 5 February 2018, President Muhammadu Buhari signed Presidential Executive Order 5 for “planning and execution of projects, promotion of Nigerian content in contracts and science, engineering and technology”. The order gives preference to Nigerian companies and firms in the awarding of contracts in line with the Public Procurement Act, 2007.

One may be tempted to argue that our BEE is one such restriction. But in reality, our BEE legislation is not aimed at restricting foreign ownership, but rather at promoting the inclusion of black South Africans in the economy. We cannot even say we have been successful in promoting and enforcing our own genuine local content. There are no real penalties for “non-compliance” with BBBEE, except for the criminal offence relating to fronting practices.

The Nigerian Content Intervention Fund was established for the “purposes of funding the implementation of Nigerian content development in the Nigeria oil and gas industry”. One percent deducted from the value of contracts awarded in the upstream sector of the oil and gas industry helps generate resources for the fund.

Companies that “default in remitting one percent of the value of their contracts to the Nigerian Content Development Fund would henceforth be blocked from participating in the industry tendering processes by the Nigerian Content Development and Monitoring Board (NCDMB). Such non-compliant companies would also be suspended from obtaining statutory clearances such as the processing of Expatriate Quota applications” said executive secretary of the board, Simbi Wabote, last week at the 2019 Nigerian Oil and Gas Conference in Abuja.

Other Nigerian restrictions include: 0nly an advertising agency in which Nigerians own not less than 74.9% of the equity can advertise to the Nigerian market and such a company is considered a national agency; and a foreign investor in the private security industry is not allowed to acquire an equity interest in or sit on the board of a Nigerian private security guard company.

On the other hand, there are no ownership restrictions in the private security industry in South Africa, but the Private Security Industry Regulation Amendment Bill (Amendment Bill) under consideration by President Cyril Ramaphosa is seeking to restrict ownership by foreign nationals. The bill, which has been in limbo since 2014, will require at least 51% of the ownership of both existing and new security service providers to be held by South African citizens.

One concern is that jobs will be lost if such a restriction is enforced, with the DA reportedly arguing that the restriction is a violation of the World Trade Organisation’s Agreement on Trade in Services (GATS).

The Nigerian pharmacy industry position is very interesting: under the Pharmacist Council of Nigeria Act 2004, a pharmacy belonging to non-Nigerian citizens may only be registered in Nigeria if the home country of the applicants also allows the registration of Nigerian citizens. An additional requirement is that a non-Nigerian applicant for a pharmacy operating licence must have been resident in Nigeria for at least 12 months before the application.

South African Small Business Development Minister Ntshavheni made reference to the African Continental Free Trade Area (AfCTA), and what sprung to mind was the hurdle that the new law must pass with regard to the requirement of national treatment of foreign-controlled companies. If the circumvention of such a requirement is not justifiable as fair discriminatory treatment, it may be argued that South Africa is engaging in unfair protectionist practices contrary to AfCTA.

Any law banning foreign ownership or restricting domestic ownership in certain sectors will, of course, bring out claims that it must be considered with due regard to South Africa’s obligations and commitments under the World Trade Organisation (WTO) and other arrangements such as AfCTA.

Thus, for every condition/restriction/prohibition considered the minister may have to ask a number of questions including: Is this constitutional? Is South Africa, by promulgating the proposed law, not violating any of its obligations or commitments under the WTO/AfCTA/or bilateral or plurilateral trade agreement?

Restrictions affecting foreign nationals may be challenged under the National Treatment principle and Market Access Commitments. But it will not be as easy as it appears to arrive at any conclusion. It may have to be determined, for example, whether South Africa’s Schedule of Specific Commitments under GATS lists private security business restrictions either horizontally or sector-specifically.

From the perspective of spurring continental economy and development, the general objectives of the AfCTA include contributing to the movement of capital and natural persons and facilitating investment building, and promoting inclusive socio-economic development, gender equality and structural transformation. The proposed law may be viewed by others as against the letter and the spirit of AfCTA.

After all, the New Dawn of the Ramaphosa administration prides itself on investment-attraction. One of the key development imperatives and drivers of development in the context of AfCTA is investment. DM

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