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BLSA’s CEO’s Weekly Newsletter – Foreign investors vote with their feet if we don’t create an attractive environment

12/05/2024 | By Busiswe Mavuso

You can expect that foreign investors will come and go from South Africa, depending on many things including global strategies and our links to the rest of the world. But while decisions are inevitably going to happen both ways, the more attractive our country is, the more often you can expect investment to be made than withdrawn.

It feels now that the withdrawal of investment is dominating. The announcement last week that Shell will exit its downstream business in SA, mostly its 600 petrol stations, was driven by many factors. It has shifted global strategy away from downstream, but if South Africa offered a predictable regulatory environment and stronger economic growth outlook, such a decision could have gone the other way. Coming weeks after news that BHP is keen to buy Anglo American, provided it first unbundles most of its South African assets,  it is clear that global giants have lost appetite. People vote with their feet, capital has many addresses, and if we’re not going to make it easy to invest here it is going to land somewhere else.

What is it about South Africa that makes global boardrooms decide it is not worth the effort? It has been interesting to see the political response to both companies’ decisions. Mineral resources and energy minister Gwede Mantashe last week threatened Shell over future exploration licenses for its upstream business saying “we should be more reluctant” to grant permits and licenses to the company because of its decision. The same minister also described BHP as “not positive” for South Africa and that he would vote against its bid for Anglo if he could.

This kind of rhetoric is obviously going to be noticed in global boardrooms. It says the SA government is not one to respect the business decisions of companies. While it may legally have little discretion to intervene on companies’ licenses and to block transactions, that doesn’t mean it doesn’t want to. Any company must pause and consider whether the legal position may change in the future, given that the government seems to be signalling that it is not so keen on companies acting in their own commercial interests.

Of course, some companies do choose to invest. Amazon Web Services last year committed to invest R30bn in South Africa over the next 10 years, having already invested R15.6bn and created 5,700 jobs. It is also building a R4.5bn head office in Cape Town. It does so in a welcoming environment that includes various incentives that support call centre employment, among other benefits for the company.

The background reality is that our mining and manufacturing sectors have been shrinking while services have been growing. This has held true for the last 20 years, reflecting global conditions and the rise of cheaper manufacturing bases, but also the impact of policy uncertainty and the collapse of important economic infrastructure, particularly electricity supply and logistics. Services companies are less exposed to the efficient working of ports, and many can create their own power sources given they are not particularly power intensive. There is less regulatory risk, given it is hard to threaten services companies over licenses and other bureaucratic interventions on their businesses.

If we want to attract companies that must make big long-term investments in fixed infrastructure, like miners and manufacturers, we must create an investor-friendly environment. Investors are aiming to maximise their returns, full stop. If we make clear that South Africa is a good place to be able to do that, companies will come. But we have to instil confidence that South Africa is a business-friendly environment with a government that respects the commercial realities facing companies. I can tell you that having a minister who loudly proclaims displeasure and threatens investors with consequences, is only going to confirm what investors fear. The better approach is to signal regret, but respect commercial decisions, and redouble efforts to make South Africa attractive to investors so that next time the decision is different.

I hear from some commentators that it is fine, local investors or other foreign investors will step in. But that is not true. Even domestic investors will keep their money on the sidelines if they perceive the potential returns to be low relative to the risks. Foreign investors are also important in bringing international expertise to our economy, driving competition and ultimately improving the quality of service that end-consumers receive. Thanks to our low domestic savings rate, there is simply too little domestic capital to be able to provide all the investment that the economy needs. The fewer foreign investors that come, the poorer we are.

President Cyril Ramaphosa has consistently signalled the country’s eagerness to attract investors and his annual investment summits are a visible effort to promote the country. But if we are to win over global boardrooms, we must follow the sentiment with action, eliminating policy uncertainty, signalling our respect for corporate decisions, and of course delivering the structural reforms that will enable the economy to lift all boats. BLSA works hard to enable a conducive environment for business in South Africa and I know many in government do too. We need, however, to be consistent and to follow through with policy decisions.

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BLSA is a business organisation that believes in South Africa’s future and shares the values set out in the Constitution. BLSA is committed to playing its part in creating a South Africa of increasing prosperity for all by harnessing the resources and capabilities of business in partnership with government and civil society to deliver economic growth, transformation and inclusion.