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Brics wall

May 05 2011 00:00 Troye Lund

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Credit to President Jacob Zuma’s Government, South Africa’s Brics membership has catapulted it into the premier league of emerging markets. But if SA is going to leverage off that involvement to accelerate foreign investment, it’s going to have to project a far less conflicted image about what SA Inc is about and what it needs.

Trade & Industry Minister Rob Davies is upbeat, especially about the potential that will arise from South-South trade with other first-tier emerging market Brics members – Brazil, Russia, China and India – which make up a quarter of the world’s GDP and are home to more than a third of the world’s population and foreign exchange reserves. By 2020 it’s expected those countries will be contributing 50% of all global growth.

SA’s Government aims to increase its overall fixed investment from the current 20% of GDP to 25%, which is the level some industrialising countries have reached. Of that fixed investment, foreign direct investment makes up 3% to 5%. In the performance contract Davies has signed with Zuma he’s undertaken to secure R115bn in foreign investment over the next three years. And Davies says he’s on track to meet that target, which is based on “targeted initiatives with China, India, Russia, Brazil, Japan, Spain, Germany, France, Britain, the United States and countries of the Middle East”.

Frontier Advisory CEO Martyn Davies cautions investment targets are notoriously difficult to forecast, because they’re often closely aligned to unpredictable financial and political external factors that affect countries’ economies and politics. For example, will political change in China later this year influence the “going global” investment foray of its state-owned enterprises?

Nevertheless, the strategy of focusing on first-tier developing markets is clearly a prudent one. However, if SA is serious about maximising investment potentials that exist in newly bolstered South-South relations, Frontier’s Davies says it’s critical to shift SA’s participation in Brics from the political realm to a more commercial one, which means Government and business have to get on to the same policy page.

“There’s a disconnect between Government and the private sector. SA can be characterised as a low trust political economy that hampers our ability to project the interests of SA Inc. We’ll never be internationally competitive if we’re so internally divided,” says Davies.

Complicating that division is the ideological divide that exists in the ANC alliance itself, where Cosatu holds very different views on what policy should be compared to the ANC.

Investment Solutions’ Chris Hart says SA is more than capable of achieving – if not exceeding – those foreign investment targets Minister Davies is aiming at. But there’s a caveat: Government has to dramatically improve the conditions in doing business in SA – especially conditions for starting and running small businesses. “Unfortunately the conditions are becoming more, not less difficult for big business and the conditions for small business are impossibly harsh,” says Hart, referring particularly to the high tax burden, labour costs and an increasingly onerous and expensive regulatory environment.

Government recognises improving the conditions for doing and starting a business is key to growing an economy and creating jobs. But Hart says the fact it continues to impose regulatory and tax burdens has exactly the opposite effect and is an “anathema”. “SA is losing ground and making it very difficult for local businesses to start and/or expand. I don’t think there’s any small business that can operate within the law. There’s always something they’re not doing – even if they’re trying their best to comply,” says Hart, who is adamant about household savings being absolutely critical for small businesses to start and flourish. He says the sector has the most potential when it comes to increasing employment and yet the tax burden on households is such that there’s little chance for capital formation required to start small businesses.

Aside from household tax burdens – which include taxes on interest, capital gains and death – Adcorp labour market analysis cautions proposed legal changes, such as the suite of labour Bills, don’t make sense either if Government is serious about job creation. While the Bills aim to impose more stringent regulations on employers – and, consequently, hold significant job-shedding potential – organised business has managed to get the Bills withdrawn from the National Economic Development and Labour Council (Nedlac) process. The jury is out as to what a set of compromise amendments will look like, especially as Zuma is under pressure to secure labour’s support in the run-up to the ANC’s 2012 elective conference.

While Economic Development Minister Ebrahim Patel says he’s confident labour and business will find each other in labour market negotiations, the ANC Youth League-driven debate on nationalising SA’s mines is a further example of the contradiction and confusion that underpins what the ANC-led Government has set out as its priority for growing the economy and creating jobs. Although Government ministers have repeatedly stated nationalising SA’s mines isn’t ANC policy, it’s unclear how a general consensus about the country’s mineral wealth having to benefit all its citizens will play itself out. But given that SA has dropped six places since 2008 (now 67th of 79 countries) in the highly regarded Fraser Institute survey – which measures the attractiveness of governments’ mining policies – it’s apparent the persistent and militant nature of the nationalisation debate has done everything except pique investors’ interests.

Improving mining regulations and infrastructure is key. For example, the proposed amendments to the Mineral and Petroleum Resources Development Act offer an opportunity for Government to enable investment. Webber Wentzel’s Peter Leon says those changes must introduce objective criteria for the granting of rights. He says strict time limits must also be introduced on the model used in the Competition Act, where consent is deemed to be granted if a decision isn’t made within the prescribed period.

“SA could well learn from Brazil, where mining companies are allowed to build and own their own infrastructure – railways and ports.

Brics countries China and Brazil have grown so profitably precisely because of the way they’ve projected what’s essentially a clear state capitalist position. They agree on what they want and how to get it in that they’ll engage bilaterally with SA to their own advantage, especially when it comes to obtaining access and rights to Africa’s vast raw materials.
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