Although they attracted a lot of attention, there was nothing original about Richard Quest’s comments on South Africa in Davos.

In conversation with financial journalist Bruce Whitfield, the CNN anchor remarked that South Africa did not enjoy the profile it had in previous years, and waxed voluble about the damage that the country had suffered over the past decade. He indicated that South Africa’s government had little credibility left. The self-same people who now stump for investment were sitting in cabinet as the ‘state capture’ plunder went ahead. Besides, ‘how many people have gone to prison so far?’

Well, this is standard material for South Africans. But there is something jarring when an outsider – a familiar, trusted, well-informed outsider, and in a venue as significant as Davos during the World Economic Forum to boot – put this view out there.

South Africa is in trouble, and it’s not just about state capture. Quest put this succinctly: ‘There’s no point in coming here and saying invest in me if you haven’t got the policies worthy of it.’

Correct, there.

Where a country’s environment for business or for investment is poor, where the legal or regulatory environment makes running an enterprise hard, or so undermines potential profitability that doing business is a gamble rather than a calculated risk, there is precious little to recommend it to businesspeople or investors.

And with some irony, the government itself accepts this. In his State of the Nation Address in February last year, President Ramaphosa set the challenge of moving South Africa up the World Bank’s Ease of Doing Business index, from 82nd position – as it stood then – to the ‘top 50’ within three years. Currently, South Africa sits at 84.

Policy is of course important here, and, again, it’s not as if government denies this. But it invariably puts this down to ‘policy uncertainty’. It’s a comforting perspective, in its own way. Investors are primed and ready, and only need to be sure of just how the environment will be structured before they roll in. So, really, it’s largely a question of defining what those policies will look like. Maybe only putting on a few finishing touches.

This is delusional. Policy uncertainty is a significant disincentive to investors and businesspeople, and there is no question about its doing damage to South Africa’s fortunes – Professor Raymond Parsons of North West University once called it ‘a tax on SA’s economic performance’.

Yet it’s unlikely to be as dissuasive as bad policy. Where government erects barriers to entry, or to profit, or encourages rent-seeking, and where this is predictable, business is likely to stay away. And where such a policy is constant and predictable, expect only that it will weigh more heavily on investment decisions. It will be seen less in the concerns of those who invest than in those who choose not to do so.

The obvious example here is racially preferential policies. These have become intrinsic to pretty much the entire state system, and those seeking to do business with it. In particular, the flagship initiative, Black Economic Empowerment (BEE, or the rebranded variant, Broad-Based Black Economic Empowerment, B-BBEE) has imposed steep costs on the economy. Not compulsory, perhaps, but necessary to join many value chains, operate in heavily regulated sectors and bid for government tenders.

As the country reels from the debacle at Eskom, for example, it is salutary to remember that a major contributor to this was reconfiguration of its coal supplies in order to facilitate BEE transactions through short-term contracts. This meant not only higher prices, bit less reliable coal. And as Jeff Rudin of the left-leaning Alternative Information and Development Centre has pointed out, this has made Eskom hostile to renewable energy.

More generally, it should not be surprising that the need to part with a cut of one’s equity, or otherwise to engage in expensive compensatory activities, is seen by foreign investors, in particular, as a cost that they are not prepared to pay. No less surprising is that a 2018 study of firms operating in South Africa and based in the European Union identified BEE as the most important impediment to European investments in South Africa.

As the report said: ‘This has compromised existing and prospective investors’ ability to continue and/or expand their operations in South Africa. It has been particularly difficult for greenfield investors, for family-owned European companies as well as multinationals, who are often reluctant to dilute their control of assets.’

Perhaps the greatest indictment of BEE is that it has done little to expand the country’s small business community – even though doing so has been a nominal priority for South Africa since at least the 1980s, and even though BEE is at times hailed as a means of doing so.

Hardly. Information on this may not be comprehensive, but BEE has had little to offer small firms. Business environment specialists SBP found little endorsement for BEE among a 500-strong panel of small business owners, irrespective of race or their BEE rating. An interesting study by a trio of academics from the University of Fort Hare, published in 2018 and based on interviews with small business owners, was if anything more despairing: ‘The results illustrated that BBBEE was contributing towards economic strain and an increase in tender corruption.’

This is not unique to South Africa. International experience suggests that such policies are often abused by connected and influential members of the beneficiary group. And it is no great stretch to argue that in a highly politicised and often corrupt environment, such policies offer a veneer of legitimacy for some dreadful abuses. (These may even be manipulated to the advantage of those for whom they were not officially intended, as has been argued in the case of Bosasa.)

‘Rethinking’ BEE is long overdue. Long indeed, since, as far back as 2007, a paper by Daron Acemoglu, Stephen Gelb, and James Robinson argued that on the basis of available evidence, it needed ‘to be changed to de-emphasize ownership and increase the focus on aspects of it more clearly linked to increased productivity and the broader transformation of the economy.’

We at the Institute of Race Relations have been arguing for a change along these lines for years. This would deemphasise race and stress actual deprivation as the focus of policy. It would provide incentives for firms to take meaningful action to go above their legal minima to assist. The aim would be to encourage investment and spending on social upliftment, education, healthcare, enterprise development and so on. This is captured in the name Economic Empowerment for the Disadvantaged (EED).

Unfortunately, for the present, one might be tempted to throw up one’s hands in exasperation and appropriate Richard Quest’s remarks about bringing about proper reforms at South African Airways: ‘I’m telling you that will never happen. I’m telling you the government can’t keep its hands off it.’ Perhaps be had in mind former trade and industry minister Rob Davies’ response to the EU study. Saying that he wanted to understand the concerns, he ruled meaningful action impossible. South Africa would not ‘be able to renounce BEE’. As long as this perspective holds sway, South Africa will see its opportunities ebb.

But ‘never’ is a long time, and BEE would not be the first bad idea that South Africa embraced and discarded…

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Terence Corrigan
Terence Corrigan is the Project Manager at the Institute, where he specialises in work on property rights, as well as land and mining policy. A native of KwaZulu-Natal, he is a graduate of the University of KwaZulu-Natal (Pietermaritzburg). He has held various positions at the IRR, South African Institute of International Affairs, SBP (formerly the Small Business Project) and the Gauteng Legislature – as well as having taught English in Taiwan. He is a regular commentator in the South African media and his interests include African governance, land and agrarian issues, political culture and political thought, corporate governance, enterprise and business policy.

1 COMMENT

  1. Capital goes to where it is welcomed, not to where it is needed!
    Low risk-adjusted returns and policy uncertainty don’t welcome capital – time to be clear on the cause for reduced investment.

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