South Africa saw a busy end of the month for June with members of parliament visiting Nkandla, the PRASA chief engineer having to resign after it emerged that he had fake qualifications, and the Transnet CEO being kicked out by the Board. A typical week in South Africa, always colourful and dramatic. In addition to these happenings, the rating agencies were threatening to downgrade South Africa to junk status. However another event, overshadowed by the more headline grabbing occurrences of the week, was the release of the OECD’s Economic Survey for South Africa of 2015. South Africa is not a member of the OECD but for a couple of years now has been included in what the grouping terms its key partners.
It is important to emphasize that the relationship between South Africa and the OECD differs from that of the Bretton Woods Institutions (the World Bank and the IMF) as the formers’ reports are mere recommendations and tend to be couched in a language that suggests a parity of relations. In the past the OECD released quite interesting, informative and compelling reports on South Africa, that, from a political economic perspective, have more currency and legitimacy within policy making circles in government. In addition, the OECD has a lot of resources to conduct its research and the reports tend to be quite detailed.
In its current report the OECD bemoaned South Africa’s sluggish economic growth, currently at 1.9%, which is lower than the projected growth of 3% and much lower than the ideal growth rate of 7% needed to grow the economy and alleviate the triple challenges of poverty, unemployment and inequality. What is fascinating however, is what the OECD suggests needs to happen in order to reach 7% economic growth. The organisation asserts that South Africa has to attract foreign direct investment and specifically commented on South Africa’s very restrictive FDI regulatory environment. This relates to a raft of instruments in areas such as investment security, property rights, competition policy, beneficiation, immigration and black economic empowerment.
South Africa has witnessed an increase in state intervention in key sectors of the economy involving foreign investment to an extent that it has a bearing on the country’s FDI attractiveness and competitiveness. In the mining sector the Minerals and Petroleum Resources Development Act has sought to introduce state intervention in the petroleum and gas sectors, in the form of an incremental acquisition by the state of 20% of share capital. The contentious Bill has been in various processes of parliament for a long time now. In addition, the government has promulgated an Expropriation Bill, which seeks to expand the meaning of expropriation with less state liability for compensation. This Bill is meant to pave the way for more state intervention in redistribution of property. Within the competition policy framework, the OECD cites the Walmart/Massmart Merger as an example of where competition law has proven to be a burden to foreign investors. South Africa is commended for having a competition policy, which is of OECD standard. However, South Africa’s competition policy is anchored on a public interest clause that mandates competition authorities, when screening foreign investments of a merger variety, to consider how the venture will contribute to employment or other industrial policy goals. As a matter of principle, this is noble, however, the competition authorities sometimes overstretch and make onerous demands on foreign investors. This was the case in the Walmart/Massmart merger. Having such an expansive public interest clause in South Africa’s competition law undermines the openness that competition policy seeks to advance. In other words, the public interest clause is antithetic to the competition spirit.
South Africa’s burdensome investment climate is further compounded by the beneficiation policy that is being read into different spheres of the economy. Beneficiation is understood to be part of the broader industrial policy going forward. The government rightly understands that beneficiation will lead to more job creation and value addition. However, the question remains whether encumbering foreign investors is the best way to achieve value addition?
The OECD also identifies the regulatory burden that is faced by, both foreign and local, SMEs. It is important for government to reduce the red tape in the SME sector. Government is however to be commended for shelving the Licensing of Businesses Bill of 2013 which would have added an even more burdensome regime to the SME sector. It is still not clear what the newly formed SME Ministry’s mandate entails and what its achievements have been thus far. One hopes that the Ministry engages robustly with the OECD report with regards to SMEs and the challenges they currently encounter. Economic history has taught us that sustainable economies are built on SMEs.
Another area affecting FDI, identified by the OECD report, is the shortage of critical skills. This is naturally linked to a poor education system disconnected from economic needs. Directly related to the skills shortage that foreign investors face, is the immigration regulatory regime that makes sourcing foreign skills difficult. South Africa has recently been tightening its immigration policy. While open borders cannot be condoned, South Africa could take a cue from a country like Japan that linked its immigration regime to economic needs. These countries ensured that they attracted the right kind of skills from abroad and coupled this with a stringent skills transfer regime. This meant that after a certain period of time, Japan had a skilled population and simply stopped renewing contracts and visas of its skilled immigrants.
Black Economic Empowerment policy in all its manifestations is listed as one of the regulatory burdens faced by foreign investors. The OECD agrees that the BEE policy is a much-needed regulatory instrument but its implementation proves quite onerous to foreign investors, especially when coupled with the stringent labour law regime. Government also recently announced new changes to the BEE policy and scorecards. Already investors are complaining that the new regulations are complex and will be difficult to implement, let alone report.
The OECD report mentions other issues that adversely impact on the investment climate in South Africa, but conspicuously leaves out the elephant in the room. This is the latest version of the Promotion and Protection of Investment Bill, which has just been approved by Cabinet and awaits the President’s signature. It has a screening mechanism based on the ‘likeness’ test that will assist in accommodating black economic empowerment policy. South Africa will therefore be able to continue offering preferential treatment to its investors based on BEE requirements. What is disturbing about the PPIB is its exclusion of investor state dispute settlement. Maybe even more discomforting is the replacement of ISDS with state-to-state dispute settlement, something akin to nineteenth century diplomatic protection.
Another Bill that reflects a narrowing of proprietary and investment rights, the Private Security Industry Regulation Amendment Bill, was not mentioned in the OECD’s report. This could be because the developments in this instrument are too recent to have been captured in the OECD research.
It is interesting to note that the South African OECD economic report could be extrapolated to Namibia, Botswana, in fact the general SADC region, and fit squarely especially with regards to the FDI regulatory policies. This means that if the region is to become more investor friendly, South Africa has to take the lead as it holds a lot of sway in the region. The inclusion of state-to-state dispute settlement now makes it clear that South Africa was instrumental in the disbandment of the SADC Tribunal and reconstituting it to only include state-to-state dispute settlement.
One potentially positive development coming from South Africa’s FDI regulation, which the OECD did not capture since it’s at an inception phase, is the planned establishment of a (long overdue) one stop shop for investments. Investors would really appreciate having to be attended to in one place and get all the information and paper work dealt with in such a place. It is hoped that the one stop shop will be for new foreign investors and that it will not be used to solve problems of already established investors. Furthermore, the envisaged one stop shop would do best if not placed within a government department.
The OECD report does not tell us anything new. Every policy maker in South Africa is familiar with the challenges that the OECD report draws attention to with regard to South Africa’s investment climate. It is hoped however, that the report will give us an opportunity to reflect on these challenges and, most importantly, act upon them. At least there is a framework domestically, within which South Africa can improve its investment climate and that is through the National Development Plan.