Doing business in South Africa - a roundtable discussion at the US consulate

On Monday I attended a roundtable discussion on the topic “Doing business in South Africa: challenges and opportunities”, hosted by the US Consulate in Sandton. The occasion was organised to coincide with a visit by a group of 45 MBA students from Georgia State University in Atlanta, Georgia.

Ninety minutes of presentations and discussions left those present under no illusions about the tough journey we have travelled since 1994, and the mammoth task before us to reverse the worrying signs of decay and despondency now engulfing our nation.

The panellists’ three presentations could not have been more different, and taken together gave the bald facts, the historical context and some scenarios for our political economy which offer the doomsayers and optimists much to ponder on.

First up was Carol O’Brien, Executive Director of the American Chamber of Commerce in South Africa.  There are approximately 600 US companies doing business here (of which the Chamber’s membership is 250), generating 10% of our R3,8 trillion gross domestic product (2014 figures).

The Davis Tax Committee’s July 2014 report on SMEs estimates there are 165 481 formal registered tax-paying businesses in South Africa. The 600 US companies account for 0.36% of all registered companies yet their contribution to GDP is vastly disproportionate to their numbers.

These companies are integrated into the global economy, capital intensive and highly productive in terms of output per employee. They and their counterparts from Europe, the UK and Asia, together with our own multinationals, are the locomotive of our economy.

You could say without exaggeration that their prosperity is vital to South Africa’s continued economic health. So we should be listening to what they have to say about doing business in South Africa.

A survey conducted by the Chamber listed the five top issues US companies face. First comes complying with our BEE regulations, followed by industry regulations and red tape; policy uncertainty; reliability and cost of electricity; and lack of skills.

Foreign companies operating in South Africa have negotiated an alternative to selling equity in their local operations to black partners to comply with BEE regulations. They invest, or spend, an “equity equivalent” in other elements on the BEE scorecard. Only six US companies have so far completed an equity equivalent agreements with the DTI.

Perversely, O’Brien revealed, it makes more sense for US companies to import and re-sell than to manufacture goods in South Africa, as the latter increases the equity value of their business meaning they have to spend more on BEE activities.

Their frustrations with BEE compliance is mirrored in more and more South African companies. Shifting goalposts and ever more onerous and punitive regulations beg the question around numerous boardroom tables – are they worth the trouble in their current format?

The other issues of concern to US companies all speak to an economy with too little investment in basic infrastructure and skills and too much regulation. This should be worrying to SA policymakers.

Professor Michael Katz, doyen of the legal fraternity and long-term advisor to successive SA governments, provided some balance to O’Brien’s rather gloomy summary and outlook. He related the amazement expressed by foreigners associated with this week’s AB Inbev listing on the JSE, which took just 21 days to complete.

He boasted that SA is high on the list of emerging markets fund managers are obliged to invest in. He pointed to the creditable position SA occupies on the World Bank and World Economic Forum Doing Business indices.

And he reminded us of just what a parlous situation we found ourselves in 22 years ago when the newly elected Mandela government had to re-build the economy while overcoming decades of injustices meted out on the majority of our people. It was imperative to share the fruits of democracy and the BEE regulations are just one way government has chosen to do this, he said.

                                     

Katz referred to four sets of legislation that were particularly vital tools of redress and redistribution: the Competition Act, company law, labour relations and redistribution through the budget. All of these are informed by our Constitution, which imposes socio-economic obligations on government and civil society – including business – to actively address the wrongs of the past.  

As an example, he referred to our link between corporate law and human rights as outlined in Section 72(4) of the Companies Act making social and ethics committees compulsory for all companies. The current wrangle over the merger of Africa’s largest soft drinks manufacturers is mostly due to Minister Ebrahim Patel’s invoking of the public interest clause in the Competition Act.

The challenge South Africa  faces, Katz concluded, is maintaining  a balance between being friendly to business and foreign investors and being sensitive to the country's broader needs through enacting pioneering and progressive legislation. 

Dr Frans Cronje, CEO of the SA Institute of Race Relations, was last to present and gave us an updated precis of his Time Traveller’s Guide to Our Next Ten Years scenarios described in his 2014 book of the same name.

The past 100 years have seen three major political transitions in South Africa – the early 1900s after the formation of the Union of SA; the rise of apartheid and white nationalism in the late 1940s; and the transition to democracy in 1990-94.

In Cronje’s view, the Reserve Bank’s leading indicator is a perfect predictor of SA’s economic performance and political temperature over the past several decades. We are sitting in a very similar situation to where we found ourselves in the mid-late 1980s with sluggish growth, political tensions, rising inflation and depressed investment. As in 1990-94, the likelihood of a political transition is high.

The most likely scenarios, according to Cronje, are the Rocky Road (state intervention, reduced freedoms and investor confidence) or the Toll Road (avoidance of economic reforms, languishing growth, ANC defeat at the polls). In both cases we are in for a bumpy ride.

South Africans have got used to political freedom but economic freedom for the masses has been elusive. An increasingly threatened ANC alliance is showing signs of taking the populist – EFF route (President Zuma’s reference to taking back “stolen” land). This is dangerous and will almost certainly raise the barriers to foreign investment in SA higher.

Zuma’s surreptitious signing before Christmas of the Promotion of Investment Bill, which the American  Chamber and many  other business formations have been highly critical of, is sending the wrong signals to international investors.

The easy of doing business in South Africa, for foreign and South African investors alike, will be a critical factor in determining the trajectory of our political economy in the coming years. South Africa’s public sector is in deep trouble while business is better placed to revive growth, given the right environment and incentives.

The DA believes a new balance needs to be struck. Business’s willingness and capacity to invest, grow and create jobs has been taken too much for granted by policy and lawmakers. The IMF’s lowering of its 2016 growth forecast for SA to 0.7% is not just due to exogenous factors – sub-Sahara African countries, predominantly exporters of primary products and commodities like South Africa, will grow at roughly 4%. So why can't we?

Government has to face up to reality and accept the urgent need for reform. The DA’s five priority interventions - increased investment in infrastructure; improved educational outcomes; labour reform; incentivising job creation; and support for small business and entrepreneurship – would be a good place to start.

If we follow this route, US and other foreign investors will surely lay a long term positive bet on South Africa’s future.

If we don’t, it might turn out that the Toll Road or the Rocky Road is where we are heading. Not a pretty prospect, indeed.