Investment in South Africa

Chairperson: Dr R Davies (ANC)

SUMMARY
The preliminary results of a study on investment in South Africa commissioned by the Policy Co-ordination and Advisory Services Unit for the Office of the President. This study had found that over the last two years, of large manufacturing firms, 44% invested less that R1m a year. Of small firms, 56% invested less than R100 000 a year. This represented very low levels of overall investment by firms in South Africa. Among the reasons for this was that firms did not feel that it was necessarily a profitable move to make capital investments. Interest rates and tax incentives, were considered very important issues in increasing fixed investments. Demand issues were seen as central in linking employment considerations to overall levels of fixed investment.

MINUTES
Introduction to the Study
Dr Stephen Gelb, a policy analyst from the Development Bank of Southern Africa but who is currently seconded to the Office of the President, led this study on investment in South Africa, commissioned by the Policy Co-ordination and Advisory Services Unit (PCAS) for the Office of the President

Dr Gelb stressed that his presentation was based on the very preliminary results of this study and that he would not want to be held to them at this stage. The study was requested a year ago by the Minister of Trade and Industry, Alec Erwin, specifically because of the problems of low levels of investment and job creation within South Africa. The specific types of investment that the study focused on were those of a fixed capital nature such as factories, buildings, machinery and other types of investment that lead to production.

Investment required economic growth and economic growth required investment. It had to be quality investment though, in order to increase growth effectively. The following four factors impacted on the relative levels of investment that could be expected:
- The level of demand in the economy
- The amount of uncertainty, both in terms of government policies and social and political issues
- Expected profitability in terms of the cost of capital
- Expected profitability in terms of the productivity of capital.

The goal was to try to understand the investment decisions taken by firms, therefore the study was commissioned to be a comprehensive survey of firms in South Africa. Another route that might have been taken to obtain the same results, could have been a look at historical data. The PCAS chose not to go this route though.

The survey was on a sectoral basis across two sectors, that of the manufacturing and services sectors. For the manufacturing sector, competitiveness factors included the accessibility to natural resources, the scale on which manufacturing could occur, the cost of labour and the availability of knowledge. For the services sector (which was perhaps not directly within the rubric of this committee) demand factors included the relative roles of the producers and the consumers of services.

The following five cross-cutting themes were identified:
- Private sector investment
- Public sector investment
- Foreign direct investment
- Macroeconomic dynamics: Investment, Savings, Distribution
- Investment data collection.

The questionnaire included four groups of questions, which were the following:
- The characteristics of the firm
- Behaviour
- Outlook
- Attitudes

Fieldwork began in January 1999 and the sample was divided into large firms (those with more than fifty employees) and small firms (those with between five and fifty). The total number of responses was 1425 firms, 920 being small firms and 505 being large firms. This was rather a large number of responses and it yielded a very large database of information.

Dr Gelb cautioned that the data was still in a very raw format and it needed further processing, however there were some results that could be identified at this stage. Firms were drawn evenly from across all sectors of the economy. Very small firms (those with fewer than five employees) were excluded from the study because their inclusion would have required a different set of questions and would have been beyond the capabilities of the team conducting the study. The study did ask questions about black economic empowerment and for the purposes of the study, used a minimum of 10% as the cut-off criteria for considering which firms had involved black economic empowerment to any significant extent. Taking the firms, which fell into this definition together with those which had a black CEO, accounted for 14% of all the respondents.

Results of the Study
It was determined that there were very few firms which did not invest in the last financial year; therefore one could say that most firms (especially large firms) do invest in South Africa. However, from the figures on annual investment over the last two years, it could be determined that, of the large manufacturing firms, 44% invested less that R1m a year. Of the small firms, 56% invested less than R100 000 a year. These figures showed the low levels of overall investment by firms in South Africa. There were also low overall levels of investment relative to the capital stock of firms. At the current rates of investment by small firms, they would double in size every fifteen years and large firms would double in size every six years.

The first principle source of finance for investment was retained earnings and the second source was bank loans. Of the obstacles to investment, interest rates and crime and other social issues were the two biggest. It was interesting to note that crime and social issues was perceived to be a bigger threat to small firms than to large firms. The potential growth in market demand, or sales outlook, was less of an issue for small firms than it was for large firms but the opposite was true of the perceived impact of the economic policy environment.

Included in the survey were a number of possible tax incentives and what the top preferences amongst these were. The most preferred tax incentive was a reduction in the company tax rate. The list of possible tax incentives was taken from the economic model used in Singapore. It was interesting to note that more than one third of the small companies that responded said that none of the incentives listed would encourage capital expenditure.

An ANC member asked Dr Gelb what was the significance of the large number of respondents among small firms choosing the "none of the above" option? Dr Gelb replied that he would deal with that in his conclusions.

An opposition member asked whether the possibility that some respondents had not actually paid their tax, had been considered. If there were some that had not paid tax, that would render the results of this part of the research invalid. Dr Gelb replied that it was highly unlikely that any of these respondents had not paid their tax as the questionnaire was clearly distinguishable as one originating from the government and as a result they would surely not have responded to the survey if they had not paid their tax.

Dr Gelb proceeded by pointing out that more firms decreased their workforces than increased them. Large firms changed the levels of their workforces, especially unskilled workers, much more often than small firms did. Small firms did not change the levels of their workforces as much as they simply went under, thereby exiting the market. Of the reasons for changes in the numbers of full-time employees, market outlook was the biggest and as a result seemed to be a major driver of employment.

With respect to the figures on financial access for small firms and the reasons for their being unable to obtain credit, an ANC member said that she needed an overall picture of how many firms were refused financial access. The chairperson repeated this view. Dr Gelb acknowledged that these figures would have to be looked at again in order to provide that information.

In reply to the survey question, "How well do national government officials understand the problems of businesses?" excepting for large service firms, approximately two thirds answered "badly" or "very badly". This was a very significant finding. Big firms did seem to have increased confidence in the stability of the policy environment but that had to be viewed in contrast with the general view of large firms that the government was not investor friendly.

Conclusions
Low profitability levels taken in isolation did not seem to discourage investment. This was a very important point. However notwithstanding this, firms did not feel that it was necessarily a profitable move to increasingly make capital investments.

Interest rates were considered very important, as were tax incentives, for increasing fixed investments. Tax incentives were considered more important than incentives which lowered the cost of goods.

Demand issues were seen as central in linking employment issues to overall levels of fixed investment. They were also seen as factors that mitigated the effects of macro-economic instability.

Discussion
Mr N Bruce (DP) remarked that the South African economy had been heavily buffeted by what had happened in the global economy, especially over the last few years. Taking this into account, was two years a sufficient time-scale over which to examine investment decisions? He also added that profitability in South Africa was not up to international standards in the view of international investment bankers.

Dr Gelb responded by saying, yes and no, as to whether or not two years were sufficient. In the questionnaire, they could have asked for a much longer history of investment from each firm but then they would have had fewer firms responding. He added that he thought the survey was, on the whole a very worthwhile exercise, but that it should in fact occur more regularly. If this happened, then a clearer picture over time would emerge. With respect to the returns on capital in South Africa generally, the survey did ask about outlooks for the future although they did not ask specifically about levels of profitability since it was not expected that firms would provide exact data on this.

The Chairperson remarked that what was being considered here was essentially domestic investment. If international investment were taken into account, then a different picture would emerge. Furthermore, empowerment was one aspect of this data, which needed further extraction in order to know more clearly what its status was with respect to overall investment. Lastly, it seemed that with respect to the changing perceptions of dealing with government officials over the last five years, for large firms it seemed to have generally stayed the same or improved slightly but for small firms it seemed to have worsened more than it had improved. This was significant bearing in mind that the committee had been trying to promote small, medium and micro enterprises (SMMEs) recently.

Dr Gelb replied that with respect to foreign involvement in this survey, as with black empowerment, 158 firms or approximately 10% of respondents had some level of foreign ownership. Of these though, almost all had been in South Africa prior to 1994 so no very new firms were covered in the survey. Black empowerment was something that would still be looked at in greater depth. Dr Gelb agreed that there were different interpretations of the data and that some positive and some negative implications of the findings could be drawn.

Mr L Zita (ANC) asked how South Africa compared to other countries in similar positions? Dr Gelb said that he did not have information on any international comparisons but perhaps further down the road this would be possible.

An opposition member said that she had noted Dr Gelb's statements that historical perspectives were not taken into account and she found this extraordinary since, in South Africa especially, historical perspectives were very important.

Dr Gelb replied that he wished to clear up the issue of historical perspectives, since when he referred to it earlier, he had done so in the narrowest, strictly analytical, sense. The survey did in fact indirectly take into account historical perspectives. Not using historical data as the main source of information was a purely technical decision.

An ANC member asked if the survey was conducted nationally and if not, was it then true to say that it was not a clear picture of how things stood?

Dr Gelb replied that it was conducted more or less nationally, in that there were a small number of responses by large firms in three provinces, the Northern Cape, the Northern Province and North West. The response by small firms was across all the provinces except the Northern Cape and North West due to logistical limitations. He added that he thought that it was nevertheless a clear picture of how things stood at the moment.

The Chairperson concluded that it would be interesting to extrapolate upon various individual pieces of data from this study, for example, the data surrounding black empowerment. He thanked Dr Gelb for his presentation and closed the meeting.