Moneyweb: Rules for investing in SA changing too drastically and too quickly

European companies wary of investing in South Africa amid political instability and regulatory uncertainty (the full video and transcript can be found here)

The rules for investing in South Africa appear to be changing too quickly and too drastically, says Stefan Sakoschek, Executive Chairman of the EU Chamber of Commerce and Industry in Southern Africa.

According to Sakoschek, political instability and regulatory uncertainty is forcing European firms to reconsider investing in the country. Sakoschek, on behalf of the EU Chamber, represents 2 000 companies from EU member states, which make up about 77% of South Africa’s total annual foreign direct investment (FDI) stock.   

While European business keeps at arm’s length from politics, preferring to weigh investment choices in terms of €1 invested for R1 returned, regulatory changes are a cause for concern for listed foreign-owned companies, he said.

Sakoschek said the revised broad-based black economic empowerment codes of good practice – which require companies to have at least 51% of black beneficiaries in order to be classified as level two contributors and do business with government – have caused a lot of “turmoil” among European companies, many of which have invested millions in order to gain level two status.

“When you have to manufacture locally and invest locally and you have done so and all of a sudden you’re told you must give more – and more than 51% of your shareholding to a local partner in order to become a level two i.e. to be able to deal with government as a supplier – it feels as though the rules have changed too drastically and too quickly,” he said. Sakoschek said the conditions for investing in and doing business in post-Apartheid South Africa, when European businesses were welcomed, were “very different” to those being enforced now that bilateral treaties between South Africa and the EU have expired.

He said the “novelty factor” of investing in and helping to build post-Apartheid South Africa has worn off while competition for foreign direct investment has increased. “That whole Mandela era, that whole Mbeki era is long gone. South Africa needs to realise that the rainbow nation factor is not as much of a selling proposition as it used to be. It just has become one of the players in the global economy,” Sakoschek said.

While lauding the country’s road, rail and aerial infrastructure, which position it as a good regional distribution platform, he said the country is facing increasing competition for European-owned manufacturing plants from the likes of South East Asian countries, which are highly competitive in terms of labour costs, francophone countries with strong ties to Europe and proactive neighbouring countries such as Namibia, which wants to become a “mini Dubai”.

Instead of divesting, talk among some European firms is to halt further investment in South Africa, he said. “For those who are already established, it is very difficult to relocate a manufacturing facility elsewhere once you’ve got your robotics and your labour in place, trained and operating, and they’ve got their visas. Those are all the things that make them stay here. It is just inertia, I would think,” he said.

“South Africa needs to be more proactive, it needs to be more flexible, it needs to be clear as to whether to it is looking for foreign investment or not or [whether] it is more protectionist,” Sakoschek said. To re-attract FDI, he said policy makers should also consider more input from the country’s trading partners.