9 minute read
Identifying weaknesses
Broad-based black economic empowerment
The broad-based black economic-empowerment (BBBEE) policy, which aims to increase the participation of black people in the management, ownership and control of South Africa’s economy, is viewed by many as a barrier to entry and a disincentive to foreign investment. The Act and associated codes of good practice require levels of company ownership and participation by black South Africans, if inter alia a company is to get bidding preferences on government tenders and contracts.
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It is acknowledged that multinationals have global practices, which make it difficult for them to comply with the ownership element of BBBEE through the sale of shares to black South Africans. In this instance, the Department of Trade, Industry and Competition has created an alternative equity equivalence programme for multinational or foreign-owned companies to allow for them to score on the ownership requirements. Many, however, view the terms as onerous and restrictive. Changing of goalposts is also a concern – as it results in uncertainty among investors and potential investors. It is argued that if black economic-empowerment requirements are removed or made easier and more certain, then it is likely that poorer South Africans could benefit more by ensuring that the country achieves higher economic growth and job creation by attracting more FDI.
Corruption and declining State capacity
South Africa continues to grapple with corruption, eroding public trust and weakening of the State’s capability to deliver services. Transparency International’s Corruption Perception Index (CPI), which ranks countries and territories by their perceived levels of public-sector corruption, scores South Africa at 44 points on a scale where zero is ‘highly corrupt’ and 100 is ‘very clean’. This compares with Botswana’s CPI score of 60. In terms of the 180 countries analysed, South Africa is “State capture – systematic ranked sixty-nineth, Botswana (35), Namibia (57), political corruption in which Lesotho (83), Zambia (117), Mozambique (149) and private interests influence the Zimbabwe (157) (Transparency International, 2021). State’s decision-making” The most common types of corruption include maladministration, procurement corruption and abuse of authority (Corruption Watch, 2021). State capture – a type of systematic political corruption in which private interests influence the State’s decision-making – became synonymous with Jacob Zuma’s Presidency. President Cyril Ramaphosa has denounced corruption since assuming office in February 2018 and has vowed to tackle the scourge at all levels of government. South Africans, however, believe corruption has continued during the tenure of Ramaphosa, despite his Presidency’s anticorruption efforts. Large
Identifying weaknesses
portions of elected officials and civil servants are perceived to be involved in corrupt activities and the police are widely perceived as corrupt (Patel & Govindasamy, 2021).
Systematic corruption, poor skills at critical levels and not holding officials accountable have undermined State capacity. The World Bank’s World Development Indicators show that the South African State’s capacity has declined. It has gone backwards on indicators measuring control of corruption, rule of law, regulatory quality and government effectiveness, among others (World Bank, 2021).
Critics of the ANC’s cadre deployment policy argue that the practice, which Ramaphosa continued to defend recently at the Judicial Commission of Inquiry into Allegations of State Capture as a means of quickening transformation, has laid the foundations for corruption and inefficiencies in government and SoEs.
Corruption, fraud and bribery influence perceptions of a country and it could deter investors from investing in South Africa. The declining capacity and performance of the State were mentioned by many participants in the ISI dialogue.
Crime and security concerns
South Africa has a long history of crime and violence, including State-sponsored violence during the Apartheid era. The high levels of crime experienced in South Africa worry citizens and foreign investors alike. Business Leadership South Africa (BLSA) has warned that foreign investment will be difficult to attract if South Africa’s crime levels, particularly violent crime levels, remain high. High levels of crime may also encourage people with scarce skills to emigrate, negatively affecting the efficiency of the workforce (BLSA, 2021).
While South Africa still enjoys strong, democratic political institutions and the overall political environment is stable, the July 2021 unrest in KwaZulu-Natal and parts of Gauteng have cast a pall over the investment climate. The unrest and looting, which was triggered by the jailing of Zuma for contempt of court, may portray the country as an undesirable destination for foreign capital. The events that unfolded in July 2021 were severely damaging to South Africa’s image abroad. The images of unrest, violence and looting, which required the intervention of the South African Defence Force, caused distress among domestic and foreign investors, as well as the international community, with the potential to do long-term harm to the perception of South Africa as a stable investment destination.
High-profile crime cases, such as the murder of a senior manager of mining major Rio Tinto in May 2021, also damage investors’ perceptions. It was reported that the mining company may hold back on a R6.50-billion investment in Richards Bay, KwaZulu-Natal, owing to violence and unrest near its operations (TimesLive, 2021).
Identifying weaknesses
Exchange rate volatility
Exchange rate volatility is seen as a key deterrent to FDI. The rand is a relatively volatile currency, reflecting the extent of domestic and external shocks combined with the SARB’s floating exchange rate policy. Higher volatility generally increases uncertainty and the risk premium, discouraging firms from investing. Higher currency volatility and depreciation also have negative effects in the presence of currency mismatches in investors’ balance sheets, reducing resources available for investment (IMF, 2020).
By reducing the rand’s volatility to that of developing country peers, South Africa could boost FDI inflows by a potential 0.25 percentage points of GDP (Hanusch, Nguyen & Algu, 2018).
Market concentration
A concerning structural feature of the South African economy is the high level of market concentration and low levels of competition. Market concentration can be beneficial in terms of economies of scale and keeping down inflation in certain sectors. The large players, mostly in banking and retail, also managed to weather the Covid-19 epidemic and the recent social unrest better than smaller participants. However, a lack of competition holds back innovation, keeps prices high and denies many people access to services and opportunities to start businesses. Competition is good for an economy and South Africa does not have enough of it.
Quality of infrastructure
The quantity and quality of infrastructure have an impact on economic growth and investment inflows. The World Economic Forum’s (WEF’s) 2019 Global Competitiveness Index (GCI) views South Africa’s transport infrastructure as one of its established strengths. The GCI ranks South Africa sixty-nineth out of 141 countries for infrastructure (WEF, 2019). However, while the quality of road and air transport infrastructure ranked well, rail and power capacity shortages are a severe constraint on trade. The performance of South Africa’s ports, for instance, has substantially declined and the country’s container ports are rated among the world’s worst performers (Maleke, 2021). Electricity and water supply issues also weaken the country’s overall infrastructure performance.
South Africa’s electricity supply constraints are well documented. A continuing decline in the performance of State-owned power utility Eskom’s coal fleet has been driving intensive periods
Identifying weaknesses
of load-shedding. In the first six months of 2021, rotational power cuts were implemented for 650 hours, or 15% of the time (Calitz & Wright, 2021). Government has announced plans for 11 813 MW of new power capacity from various sources, has eased licensing regulations for self-generation for projects of up to 100 MW and is unbundling Eskom into three separate entities to address its significant debt levels.
Skills and education
Despite a population of nearly 60-million, South Africa continues to experience a shortage of human capital, meaning companies find it difficult to fill key positions to conduct their business. The skills most in demand, but hardest to source locally, are: engineering; information, communication and technology specialists; foreign language speakers; media and marketing specialists; artisans; C-suite executives; senior financial executives; healthcare specialists; science professionals and accounting professionals. According to XpatWeb’s ‘2021 Critical Skills Survey’, 77% of organisations report that they struggle to source critical skills in South Africa for local and cross-border operations (XpatWeb, 2021). Although unemployment is high, employers argue that they cannot risk the integrity of their operations by hiring inexperienced employees (XpatWeb, 2021). Companies say that a lack of required skills is a major obstacle to growing their investments in South Africa. Getting the basics of schooling and tertiary education right could assist in narrowing the skills gap. Currently, South Africa’s education system – in which expenditure on primary, secondary, and post-secondary nontertiary education is relatively high when compared with Organisation for Economic Cooperation and Development countries (Education GPS, 2021) – is not delivering the desired outcomes. South African learners, for example, are among the world’s worst performers in mathematics and science (Reddy et al, 2020). Young people who exit the schooling system are not appropriately skilled for employment. The same can be said for tertiary education, with a gap between what higher education institutions produce in their graduates and what employers require (Bernstein & Osman, 2012). South Africa’s businesses also struggle to fill the void left by emigration, with a steady exodus of professionals leaving for other countries. It is essential South Africa attract and secure critically skilled workers. However, skilled foreign workers find the work permit and visa application process cumbersome (Matthes & Bisseker, 2021.) South Africa needs to ensure that it creates, attracts and retains the skills that are needed to reindustrialise the economy.
Identifying weaknesses
Strategic planning
South Africa has a multitude of development plans and policies, but these policies fail to be properly implemented and often lack coordination. Government often has many conflicting interests and tries to be all things to all people, leaving its economic planning without a clear focus. Government should be more selective about what investments it wants to attract and must be more realistic about the sectors that it targets for investment. Its focus should be where the country has a competitive advantage.
South Africa’s governance style also lacks coordination, with various offices and agencies operating in silos. A recent example of this uncoordinated approach is the Social Development Department’s Green Paper on Comprehensive Social Security and Retirement Reform. The paper triggered outrage among taxpayers and the business sector, as it proposed that all South African earners pay up to 12% of their income into a new government-managed investment fund. The Green Paper was gazetted without approval from Cabinet and ultimately National Treasury settled the matter clarifying that it was not official government policy. The Green Paper was withdrawn (Fin24, 2021).
South Africa could learn from the experiences of Singapore, a small nation State with about 5.70-million people and no natural resources. Singapore has experienced an impressive economic transformation over the past 50 years, producing rapid economic growth and delivering extraordinary improvements in social welfare. Singapore’s economic model is characterised by superior organisation ability, pragmatism and deep-seated values, such as meritocracy, multiracialism, and dedication to ordinary people. These principles have provided the foundation for a set of interlinked polices that have served Singapore since its independence (Bhaskaran, 2018). Singapore conducts deep-rooted strategic planning with a long-term perspective, and executes it impressively. Investors are also held accountable and must prove that the subsidies received have been spent.
