THE SOUTH AFRICAN INSTITUTE OF INTERNATIONAL AFFAIRS
SOUTH AFRICAN INVESTMENT ON THE CONTINENT: ADVANCING
SOUTH AFRICAN NATIONAL INTERESTS?
Good
morning
Honourable
members of the Portfolio Committee on Foreign Affairs,
Ladies
and Gentlemen,
I
would like to express my sincere appreciation for the invitation to address
you. It is indeed an honour to be here with you today and I hope our discussion
will lead to greater clarity about the significant role that South African
companies are playing on the continent by virtue of their investments.
The
invitation that was directed at the South African Institute of International
Affairs asked us to address two broad questions:
Firstly,
to what extent does investment by South African firms in the region advance the
foreign policy goals and objectives of South Africa’s foreign policy?
Secondly,
and related to the above, to what extent do South African businesses see
themselves as key actors in advancing South Africa’s foreign policy goals or do
they consider themselves exempt or unaffected by such a policy?
Before
I attempt to address these two questions I think it is important to unpack the
nature of South African investment in the region, to look at its socio-economic
impact on individual economies and its concomitant political fall-out or
influence. It is in this latter sphere that the interface with South African
foreign policy objectives is most obvious.
But
first it is necessary to sketch an outline of Africa’s socio-economic environment
and South Africa’s place in it.
As
this Committee knows, Africa is home to the largest proportion of the 50
countries designated by the United Nations as the world’s least-developed
countries (LDCs). This makes Africa the most underdeveloped region in the
world.
Whereas there is often a tendency
to look at Africa as one country, instead of the continent that it is, there
are several characteristics that African economies have in common. These are:
o
Firstly, the small size of individual markets both in
terms of the number of consumers and the low level of disposable income. The size
of an average sub-Saharan African economy (excluding South Africa and Nigeria)
is about $3.6 billion, equal to the economic scale of a typical American town
with a population of 60,000 inhabitants. This implies that any foreign business
activity within these economies is highly visible, the impact is immediate and
it resonates far beyond the initial entry point of investment.
o
Secondly, the dominance of the informal sector in
most African countries. Informal trading and subsistence agriculture form
the backbone of most African economies. Both sectors are also the largest
employer in the majority of states. In Mozambique for example, over 80% of the
population is employed in subsistence agriculture. Whereas informal activities
are important livelihood coping strategies, they do not contribute sufficiently
to the growth of the economic pie, thus it remains a key challenge for
governments throughout the region to develop the formal sector – from this
perspective FDI should be welcomed.
o
Thirdly, the neglect of the private sector since
independence. In sub-Saharan Africa in particular, private sector
development is in its infancy compared to other developing regions such as Asia
and Latin America. As mentioned earlier, the formal sector is small and
dominated by government. Many government officials (especially amongst the
lower ranks of bureaucracy) are deeply suspicious of the role of private
capital and there is an overhang of centralist and command-economy practices
that resonate into the present, despite the adoption of free-market policies by
a number of countries since the 1990s. These perceptions about private sector
activities continue to colour the way that foreign investors (also South
African investors) are viewed and are often out of kilter with the needs of a
modern, globally integrated economy or a modern, globally competitive
firm.
o
Fourthly, the intersection between countries’ aid
dependence, trade and investment and their impact on economic development. Trade, aid
and investment linkages with the developed North, enforced by preferential
trade agreements with some former colonial powers, determine trade and
investment flows throughout the continent. Most African economies are highly
aid dependent and up to 60% of government revenue in least developed states
comes from aid and borrowing. Aid also introduces a very particular dimension
to influence and engagement in the continent - a point to which I will return
later.
There
are other characteristics that could be drawn out, such as the reliance on the
export of primary goods, lack of skills, absence of appropriate infrastructure,
and political and regulatory uncertainty, but many countries have also worked on
improving political and economic governance. The emergence of more reformist,
technocratic political elites in conjunction with the democratic wave that has
swept across Africa since the end of the Cold War has brought about a slow, but
remarkable change. Africa achieved an average growth rate of 3.7% during
1995–2003, compared with the paltry 2.1% during the previous 10 years. In 2003,
it achieved an overall average growth rate of 4.1%, and in 2004 this improved
to 5.1%. Thus although much ground still needs to be covered in Africa, a
beginning in the right direction has been made. This brings us to South
Africa’s economic role on the continent.
This
committee is familiar with the economic dominance of South Africa in the
region, but perhaps for the purpose of this presentation it is worth repeating.
South Africa is Africa’s largest, most developed and most diversified economy.
Our GDP of $160bn is 80 times larger than the average African economy,
representing 19% of the total African economy, and contributing one-third to
Sub-Saharan Africa’s economy and almost two-thirds of SADC’s GDP.
Our economic dominance in the
region is most graphically illustrated by the substantial trade surplus that we
enjoyed with the rest of the continent bar two countries, Nigeria and Gabon in
2005. The aggressive entry of South African retailers in the region, combined
with the significant influx of South African products in Africa as primary
inputs into some of the large South African investments has led to accusations of
South African displacement and undermining of local manufacturing capability.
However, the skewed terms of trade with the region have improved somewhat from
4:1 (SA: Africa, R39bn:R8bn) in 2003 to 3:1 (SA: Africa, R46bn:R16bn) in 2005.
The correction in the trade imbalance is also reflection of increasing
competition in African markets which is partly related to the rising value of
the rand combined with the penetration of goods from Asia, in particular
Chinese products.
This brings us to the nature of South
African investment in the region. Three points are worth considering:
·
the size of SA investment,
·
the sectors attracting the investment, and
·
determining who are the key investors.
South Africa is today counted
amongst the top five investors in Africa along with France, the Netherlands,
the United Kingdom and the United States. In 2004, these five countries
accounted for over half of total investment flows into Africa of $18bn. Indeed
the growth of South African investment into the region has been impressive from
around R6 billion in 1994 to R24 billion in 2004 according to UNCTAD. The
increase of South African investment, albeit from a low base and small if
measured against total South African investment into Europe, does run counter
to the global decline in investment flows into Africa. Africa (South Africa
included) received less than 3% of global FDI in 2004.
Another area where South African
investors are distinguishing themselves is their willingness to invest in areas
beyond the extractive sector. 80% of total investment into Africa is
traditionally located around energy and mining, because of a variety of risk
factors. However, unlike other foreign investors, South African companies are
also investing in retail, banking, telecommunications, franchising, tourism,
construction, manufacturing and agro-processing.
The third point to be made is that
South Africa’s investment push is largely private sector-driven and led. South
African investment has not been led by our parastatals,[1]
but by small, medium-sized and large South African companies expanding into the
region who have largely carried the burden of risk themselves and who have, not
surprisingly for the private sector, been motivated by opportunities for
profit.
Because of the particular nature
of the African economic environment as explained earlier - the impact of the
entry of South African investors in the region has been significant and highly
visible. The question is whether the entry of South African business in the
rest of Africa has been good for the region, for sustainable wealth creation,
and for Africa’s attempts to overcome its marginalisation and underdevelopment?
The short economic answer is a
resounding yes. But life is rarely that simple and clear-cut. An assessment of
the social impact of the entry of South African companies into the region
elicits a more mixed response – especially in the short term.
The positive impacts are clearly
measurable in economic terms.
South African investment is having
a positive impact on the trade balance, revenue generation and economic growth
in many countries. For example, in Mozambique the entry of SABMiller into that
market ensured that revenue generated by breweries increased by 700% - and the
breweries operated by SABMiller represented 5% of total government revenue in
that year.
South African firms have also
contributed to the reindustrialisation of certain markets, the transfer of
technology and the diversification of economies. If we use the example of
Mozambique again, where South Africa is recognised as the largest investor, the
contribution of industry to GDP grew from 16% in 1996 to 30.9% in 2002, largely
flowing from investments such as the building of the Mozal Smelter, in
construction, the breweries and others.
The entry of South African
retailers has led to the greater formalisation of the market, and has created
more price stability and pricing discipline because of more secure supply
lines. This has also led to more satisfied consumers, greater consumer
awareness, better quality and choice.
South African investment has also
had a very important demonstration effect. On the one hand it has lead to the
crowding in of other foreign investors, especially in weak governance zones. On
the other hand, their entry has forced local firms to become more efficient.
This was especially the case in Africa’s larger economies such as Kenya and
Nigeria.
The entry of South African
business has also had a positive impact on the labour market, more specifically
on wage and safety levels, productivity and training. It has also led to the
introduction of good corporate practice in many markets. For example, South
African firms created over 24,000 jobs in Mozambique between 1998-2002, no mean
feat, considering that only 12% of the workforce was employed in the formal
sector at that time.
Of course, the entry of South
African firms is also associated with same negative impacts. The most important
of these is the limited linkages with local business because of the
capital-intensive and knowledge-specificity of South African business.
South African companies also
procure very little locally; especially during the start-up phase of their
businesses leading to allegations that South African firms are undermining the
manufacturing base of African economies. However, this could be a short-term
phenomenon.
There are also allegations of
dominance and displacement of local companies because of the relative strength
of South African firms.
Lastly, South African firms are
accused of distorting local economies. For example, the average per capita
income in Maputo, which has received the highest volume and value of South
African investment is 8 times higher than in the rest of the country.
These negative outcomes in the
short term have given rise to the depiction of South Africa as the big brother
in the region.
However, it is important not to
focus on a snapshot – this is a moving picture which is much more nuanced than
the above assessment. The reception of South African investment in the region
is very sector, and sometimes, even very firm-specific.
Investment in finance and banking
is almost universally welcomed, as is investment in strategic sectors such as
mining (in terms of its contribution to the bottom-line) and agriculture
(because of job creation). Investment in retail is the least positively viewed
whereas franchising is regarded as important because of the business skills
that are transferred. Investments in telecommunications have been a runaway
success and have fundamentally changed the way in which African societies have
communicated and conducted business for centuries.
The question is now whether South
African investment is advancing South Africa’s foreign policy goals, and
secondly whether business see themselves as key actors in this process.
Much is made of the profit motive
of private company expansion but to quote from a keynote address by Mr Lesetja
Kganyago, DG of National Treasury, at a conference earlier this year at SAIIA
looking at private sector development in Africa and addressing Government’s
view of South African corporate expansion into the region:
“… my view is that we should not
be surprised when we hear that our private sector cares most of all about
maximising profit… The South African Government’s approach to the rest of
Africa is not entirely altruistic either. We have a vision of an Africa which
is united and strong. We seek to promote peace, security and stability on the
continent, to accelerate political and socio-economic integration, and to
achieve greater unity between African countries… we have committed substantial
resources over the past decade to assisting the continent. But we are also not
investing our time and resources in Africa for charitable purposes only – we
are keenly aware that South Africa’s economic and political future is
inextricably linked with that of the entire continent.
At the National treasury, our
efforts have been concentrated on promoting economic and financial integration
in Africa, However, we must admit that for all our efforts, it is the private
sector which up to now has been the main driver of integration.”
South African investors are
changing the face and the fate of the African continent. They could and should
be key actors in the achievement of our foreign policy objectives. But the link
is not automatic. Furthermore, if we are serious about a closer alignment
between our foreign policy goals and South African corporate activities we need
to address the following issues as a matter of priority:
·
First, a much closer and ongoing dialogue is necessary
between government and our private sector;
·
Second, we need to ensure that we follow best global
practice in the way that our diplomats conduct our economic engagement on the
continent (to ensure this we need a much closer alignment of activities between
the Departments of Trade and Industry and Foreign Affairs, and we need to
ensure that our diplomats are adequately versed in economic and business issues
to provide the necessary assistance to companies and to grasp opportunities)
·
Third, we need to invest more effort into public-private
partnerships in the region – this has worked very well in Mozambique and we
need to see where we can emulate those success stories;
·
Fourth, we need to insist on good corporate practice by
South African companies, the behaviour of one firm in the highly visible
African market place colours not only the way that companies are perceived, but
also the way that the South African government is perceived;
·
Fifth, we need to consider whether South Africa should
become a development partner or donor in the region, given that this is part
and parcel of the economic environment in Africa and that business confidence
is often lacking if government does not provide the necessary finance and
securities;
·
Sixth, we need to encourage our corporates to identify and
work with reliable local partners and to explore other ways to ensure real
partnership with our economic counter-parts in the region;
·
Seventh, we also need to investigate whether a unilateral
liberalisation of our market (after thorough investigation) to products from
Africa is necessary to begin the redirection of trade and investment flows on
our continent and to ensure that our sentiments of greater partnership with our
region is cemented in actions;
·
Eighth, related to the above we need to give attention to
those practical steps that facilitate greater convergence in economic, fiscal
and industrialisation policies across the region and which makes it easier for
companies to do business with each other.
In most of the above areas,
government has to take the lead. However, business can be the catalyst for our
continent to cast off its shackles of underdevelopment. There is a role for
multiple payers in ensuring that Africa meets its true potential and that we realise
our aspiration of a better life for all Africans.
Thank you.
[1] Parastatal investment is not insignificant. Eskom is involved in 33 African countries, making it the largest power utility in Africa and Transnet has managing contracts in 20 African countries.