Trade and Investment Policy Workshop: day 1

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Trade and Industry

21 July 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Portfolio Committee’s trade and investment workshop focused on foreign direct investment, and featured presentations by the Department of Trade and Industry (DTI), the University of the Western Cape (UWC) law faculty, the Trade and Law Centre (tralac), and the South African Institute of International Affairs (SAIIA).

The DTI described the relationship between industrialisation, trade and investment policy, pointing out that manufacturing played a very important role in the development process because it had the capacity to develop new industries, generated demand for associated services, and contributed to export earnings. Foreign direct investment was seen as supplementing domestic savings for investment and promoting new technologies. Trade had the potential to promote rapid growth through specialisation and economies of scale, and generated export earnings in order to purchase the machinery needed to upgrade to a more sophisticated industrial structure.

The SAIIA, in outlining the importance of foreign direct investment, highlighted that developing countries welcomed it as a means of financing development. It had become the leading source of external financing.  It consisted of concrete and intangible assets deployed into the domestic economy by important corporate members of the global economy. It had been shown to contribute to growth and development, complementing domestic investment, and facilitating trade and technology transfers. Foreign direct investment was found to be favourable to the economic welfare of the host country only if appropriate conditions existed. This included adequate absorptive capacity (new financial capital, new technologies, and human capital). It was also important that domestic businesses were not “crowded out” and were able to face up to foreign competition. Long-term and sustainable foreign direct investment was more responsive to a positive business environment and investment climate, which emphasised the protection of private property rights, as this provided the investor with the perception of safety of invested capital.

The Law Faculty of UWC informed Members that the Promotion and Protection of Investment Bill (PPIB) (2015) should be interpreted with reference to customary international law and investment law.  At this stage, there was no international law or multilateral regulation for foreign direct investment. Foreign direct investment entailed a cross-border investment by a resident entity in one economy. This implied the existence of a long-term relationship between the direct investor and the enterprise, and a significant degree of influence by the direct investor on the management of the enterprise. According to customary international law, state sovereignty remained sacrosanct. The state retained absolute control over the admission and establishment of aliens in their territory. Each state had the right to regulate and exercise authority over foreign investment in jurisdiction, in accordance with its laws and regulations and national priorities and objectives.

The workshop was told by tralac that investment was indispensable for growth and development. Capital formation was a prerequisite for growth and development, and this meant growing the gross fixed investment (GFI)/gross domestic product (GDP) ratio. The investment function was complex, with many independent variables, and also depended on sustainable development pillars to be conducive for investment. The quality of growth would depend on the quality of an investment. Capital could be substituted for labour through mechanisation, which was not socially beneficial. Rapid urbanisation had been identified as creating a demand for mega investment in infrastructure. The investment in production structures should not underestimate the importance of the services sector, which could be tradable and support the competitiveness and trade in goods.

The Investment Promotion and Inter-Departmental Clearing House (IPICH) informed Members that it was the national investment promotion agency within the government. Its mandate was to facilitate an increase in the quality and quantum of foreign direct investment by providing an efficient and effective investment recruitment, problem solving and information service, in order to retain and expand investment in South Africa and into Africa. IPICH was the investment unit of the DTI. It was an ideal platform to be developed and serve as the inter-governmental clearing house. According to research by investment specialists, 70% of new investments were re-investments or expansions of existing companies, and this meant investor aftercare was paramount. IPICH was an investment facilitation mechanism, where relevant government agencies were combined into a single cohesive structure that coordinated and streamlined processes to provide prompt, efficient and transparent services to investors.

Meeting report

DTI Presentation:

Relationship between industrialisation, trade and investment policy

Mr Nimrod Zalk, Industrial Development Policy and Strategy Advisor, DTI, took the Committee through the importance of manufacturing and the roles trade and foreign direct investment play in development.

He said that manufacturing played a very important role in the development process because it had the capacity to develop new industries, generated demand for associated services, and generated export earnings. The 2008 Commission on Growth and Development had identified common features of countries that had achieved ‘episodes of high and sustained growth’ since the end of World War II. Such a period had been defined as being one of uninterrupted growth, in gross domestic product (GDP) per capita, in excess of 7% per annum for 25 years or more. Ten of the 13 success stories were cases of manufacturing-led growth in Brazil, China, Indonesia, Japan, Republic of Korea, Malaysia, Singapore, Taiwan and Thailand. This evidence was consistent with the view that manufacturing acted as the “engine of growth”.

Trade had the potential to promote rapid growth through specialisation and economies of scale, and generated export earnings in order to purchase machinery needed to upgrade to a more sophisticated industrial structure.

Trade liberalisation could push industries close to international competitiveness, but could damage industries which were not yet close to international competitiveness. This meant industries that were damaged would not automatically be replaced by other more competitive industries.

Foreign direct investment was seen as supplementing domestic savings for investment and promoting new technologies. In the long-term, it promoted direct investment. Portfolio flows were short-term and could be rapid and volatile. This could lead to a depreciation of the currency.

African countries had experienced growth in terms of a commodity boom, but limited diversification posed a challenge to greater industrialisation. African countries generally exported primary and semi-processed minerals and agricultural commodities, and imported final consumer goods and machinery. There was scope to lower tariffs between African countries. In order to alleviate the mismatch between exports and imports, there was a need to diversify manufacturing capabilities.

Discussion

Mr A Williams (ANC) wanted to know if an investment was always a good thing to make. Was the SA government doing enough to create a manufacturing sector? Was there a mechanism to detect what percentage of a product was produced in SA?

Mr Zalk said whether it was good to make an investment or not, all depended on a number of factors and one should consider whether it was short or long term. With regard to the creation of a manufacturing sector, he indicated that SA was doing enough to promote manufacturing. Much had been done by the Department, especially in the motor manufacturing sector and many others. Concerning the percentage of content in locally produced products, he said there was more local input in the making of local products. The rough ballpark figure was about 60% local content.

Mr D Macpherson (DA) said that the manufacturing sector had been left to fend for itself, especially small manufacturing companies, and they had to deal with an unstable currency for exporting. It seemed as if the there was no role for them to compete globally. In developed countries, governments lent support to enhance small manufacturers, and there was no reason why this could not be done in SA. There were so many contradicting policies in place that made it difficult for small players to participate globally.

Mr Zalk responded by saying the DTI was working hard to promote local manufacturing but there were constraints, like electricity.

Mr G Hill-Lewis (DA) said it appeared as if there was a missed opportunity with regard to foreign investment, because the main aim was to attract foreign companies to locate to SA. There was a need to raise the manufacturing level of the country to be globally competitive. This was a long-term project, but it was achievable.

Mr Zalk said the DTI was embarking on intensive efforts to promote foreign direct investment.

Mr N Koornhof (ANC) wanted to find out if trade agreements limited manufacturing.

Mr Zalk replied in the affirmative, and said there was a trade-off of balance of costs and benefits.

Mr B Mkongi (ANC) remarked that no one knew whether industrialisation was going to be a success or not, because some countries that implemented it were not democratic. It was a state-led process, but in SA the story was different, as it was being contested. He asked if a democratic state like SA stood a chance of successfully starting to industrialise.

Mr Zalk said that Mr Mkongi was raising a big academic question. Industrialisation was a positive force for democracy in the long-term, because it matured the engagement between the government, business and trade unions. It was encouraging to see some African countries making tremendous strides in beginning to build up an industrial base and move away from the shackles of colonialism.

South African Institute of International Affairs (SAIIA) Presentation:

Profile of SA in the regional and global investment landscape, and the importance of foreign direct investment

Ms Lesley Wentworth, Programme Manager: SAIIA, enlightened the Committee about the importance of foreign direct investment (FDI), the involvement of SA in global value chains, the role of SA in the region, and the introduction of the Promotion and Protection of Investment Bill of 2013.

In outlining the importance of FDI, she highlighted that developing countries welcomed it as a means to finance development, and it had become the leading source of external financing.  It consisted of concrete and intangible assets deployed into the domestic economy by important corporate members of the global economy. It had been shown to contribute to growth and development, complementing domestic investment, and facilitating trade and technology transfers.

For foreign direct investment to be sustainable, international organisations had to foster responsible investor behaviour and incorporate principles of corporate social responsibility, and to ensure policy effectiveness in their design and implementation and in the institutional environment within which they operated.

Foreign direct investment was found to be favourable to the economic welfare of the host country only if appropriate conditions existed. This included adequate absorptive capacity -- new financial capital, new technologies and human capital. It was also important that domestic businesses were not “crowded out” and were able to face up to foreign competition.

Market gaps filled by foreign companies were those that could and should be filled by home producers. This meant the industrial policy should also seek to prop up infant industries to the degree that they were competitive.

Ms Wentworth indicated that South Africa was integrated into several global value chains, particularly in the automobile, mining, finance, and agriculture industries. As the second largest economy, it was also an important regional hub, and South Africa capitalised on regional value chains, especially in the retail, finance, and telecoms sectors.

South Africa would benefit from the diversification promoted by linkages and spillovers between industries. In order to increase the depth of value chains, measures that targeted skills development, expansion of technological capabilities and access to capital were essential. The evidence of positive spillovers was strongest and consistent in the case of backward linkages with local suppliers in developing countries, where multinational corporations (MNCs) could benefit the host economy through relations with local suppliers of intermediate inputs in their production processes. Backward linkages from foreign direct investments were beneficial to local suppliers in the form of increased output and employment, improved production efficiency, technological and managerial capabilities, and market diversification.

Spillover benefits could be realised through forward linkages, when MNCs operated at the upstream sector of the domestic firms, where they operated as the input suppliers of the domestic firms. Forward linkages with customers included marketing outlets, like petrol stations and restaurant chains.

Ms Wentworth identified three types of spillover effects:

  • The human capital effect. This referred to the need for developing countries to have reached a certain point of development in order to absorb new technologies. Enhancing human capital could lead to higher productivity and profitability.
  • The demonstration effect. This occurred when local firms learnt from foreign firms by simply observing and mimicking their product innovations, techniques, managerial performance or forms of organisation – with local adaptation.
  • The competition effect. This occurred as a result of competition from foreign affiliates in the sector introducing competitive pursuits from domestic firms trying to catch up with MNCs through research and development activities and reallocation of resources.

Foreign capital as a source of development financing in developing countries could exert spillovers to the host economy, provided that the MNCs effectively contributed to productive capacity and did not just participate in trade related activities that tended towards enclaves, with no real linkages to the domestic economy.

Long-term and sustainable foreign direct investment was more responsive to a positive business environment and investment climate which emphasised the protection of private property rights and provided the investor with the perception of safety of invested capital.

Ms Wentworth emphasised that it was necessary to accelerate and sustain market economic reforms alongside policies aimed at regulating foreign direct investment, because its inflow could have unintended consequences for the economy and lead to hostility between foreign and domestic firms.

The Promotion and Protection of Investment Bill (PPIB) of 2013 had been introduced to promote and protect investments in order to limit the role of international investment agreements. It emphasised the need to link foreign direct investment with beneficiation and black economic empowerment. The PPIB aimed at a balance between the rights and obligations of investors and the sovereign right of the state to regulate in the public interest; to replace international investment arbitration with domestic dispute resolution; and to afford equal treatment to foreign and domestic investors.

The Bill did away with the expropriation provisions. It was hoped that under the Expropriation Bill, there would be no substantive changes to the meaning of expropriation as had been the case with the earlier version of the PPIB.

The PPIB was unambiguous about the right of the state to regulate in the public interest to redress inequalities, foster economic development and achieve the progressive realisation of socio-economic rights.

The PPIB, the Finance and Investment Protocol (FIP) and Bilateral Investment Treaty (BIT) offered different models of dispute resolution, ranging from domestic dispute settlement to international arbitration, subject to the exhaustion of local remedies and a preference for state-to-state dispute settlement. The downside of state-to-state arbitration or diplomatic protection was that for governments to ‘take each other to court’ would inevitably harm friendly relations.

It was not clear which forum the PPIB envisaged as the best placed to deal with state-to-state investment dispute settlement. The mandate of the Southern African Development Community (SADC) Tribunal had been reduced to deal with these kinds of disputes. The World Trade Organisation (WTO) was the most successful state-to-state dispute settlement mechanism based on the fact that the dispute settlement body did not issue rulings instructing member states to pay damages, but rather to refrain from engaging in violating provisions.

Although the International Monetary Fund (IMF) predicted sustained high short-term growth in all of sub-Saharan Africa, the dependence of SADC countries on resource-oriented exports had exposed them to the biggest slump in commodity prices in the period from 2010 to 2015.

If commodity prices remained low for the next decade, as the IMF predicted, redressing growth policies and strategies would become the single most important economic debate in the SADC region.

(Graphs were shown to illustrate world and SADC foreign direct investment inflows; South African foreign direct investment by sector in 2011; and foreign direct investment flows to Africa).

Discussion

Mr Macpherson wanted to know the effects of policy on political stability regarding foreign direct investment, and asked why so many were suspicious of foreign direct investment.

Ms Wentworth explained they had engaged with the diplomatic corps responsible for foreign direct investment in SA within the DTI. The DTI had indicated that the matter was under review. It had spoken to the representatives of the BITs in European countries for the renewal of the BITs, but the media had portrayed the matter in a bad way. On the matter of suspicion regarding foreign direct investment, she indicated that this was not necessarily the case. Foreign direct investment was not a silver bullet for the economy, especially if it was not done in a measured way. It was important to do a cost-benefit analysis ahead of the time.

Mr Hill-Lewis asked if our incentive package was good enough to make investors come to SA, because when companies made decisions regarding foreign direct investment about where to locate, most investors made decisions on the basis of costs.

Ms Wentworth said that in most business climates, investors looked at macro-economic conditions and political stability, labour costs, and the capacity of institutions. Incentive packages mattered to the investors on the margin. It would be the added inducement.

Mr Koornhof commented that SA had attracted a fair share of foreign direct investment, but there had been a slump. SA’s infrastructure was comparable to some other African countries, but investors still preferred to go where there was instability. He wanted to know if there had been any successful models in SA.

Ms Wentworth indicated that the slump had happened around 2007/08, and now it was a question of catching up. On the issue of models, she said no models had been done.

Mr Williams wanted to establish if there was any misbehaviour that had been picked up, because SAIIA aimed to foster responsible investment behaviour. He also asked who their funders were.

Ms Wentworth replied that instances of misbehaviour had not been picked up in the context of SA, but if it was picked up, it would be reported to the authorities. Concerning funding, she informed the Committee that the British High Commission and other funders funded them, and that they worked closely with the DTI to ensure their studies were independent. Many of their researchers had different views about foreign direct investment.

Mr Macpherson asked how the Promotion and Protection of Investment Bill of 2013 (PPIB) was going to protect investments in the country.

The Chairperson indicated there was no final draft per se regarding the Bill.

Ms Wentworth said that researchers had been saying the cancelled BITs had been replaced by this piece of legislation. The process was not yet complete. The interplay with the PPIB would directly match the Southern African Development Community (SADEC) model. The legal framework dealing with foreign direct investment was being looked into.

Mr Hill-Lewis remarked that if incentive packages mattered on the margins, marginal factors sometimes made a difference. Stability alone did not seal the deal. The incentive packages did play a role.

Ms Wentworth said incentives tended to matter on the margins, but when one really needed foreign direct investment, they tended to matter. There had been cases when the SA government had said that an investment would not happen if there were no incentives. Incentives should be applied in such a way that they addressed sector weaknesses over a temporary period, and should be an intervention. The rate of incentives in SA was standing at 72%.

Mr Macpherson asked if investors cared about international arbitration.

Ms Wentworth agreed in the affirmative, saying South Africa was fortunate because its domestic courts were robust. When measures had been exhausted, the matter had to be referred to a neutral appeals court.

The Chairperson wanted to know the views of Ms Wentworth regarding the idea that SA was seen as a gateway to the African continent, why the “greenfields” investment was weak in SA, and if the environment in SA was so toxic that it was difficult for the country to attract investors.

Ms Wentworth agreed that SA was a political gateway to the rest of the African continent. Important indicators taken into consideration had to show how long it took to establish a business, incentives, political stability, trade tariffs, and many other issues. There was a slow movement towards regional integration. It was difficult to address these matters, especially when one looked at the level of corruption at the borders and the time it took to cross them.

On the issue of the toxic environment and weak greenfields investment, she said that the electricity crisis had over the years been an inhibiting factor for the development of any new capacity in SA. Structural weaknesses in the economy, like unemployment, crime, and xenophobic violence, had made it difficult to join the host country. As a result, joint ventures and mergers and acquisitions had become the option. Labour wages in SA were very high.

Incentives for investors did exist, but some investors did not take them up. They were neither here nor there. There were investments that had taken place without incentives. They all depended on who one spoke to and on the sector one was dealing with.

Mr Williams commented that the economy of the country was in the hands of whites. It needed to be transformed to reflect the demographics of the country. If it did not, the country was going to be seen as a liberated colony run by whites. Whether investors said the country had cumbersome labour laws and an expensive labour force, at the end of the day the economy had to reflect the demographics of the country.

University of the Western Cape (UWC) Faculty of Law Presentation:

Understanding Investment Terminology

Professor Riekie Wandrag, Law Professor: UWC, told Members the Promotion and Protection of Investment Bill (2015) should be interpreted with reference to customary international law and investment law.  At this stage, there was no international law or multilateral regulation for foreign direct investment.

She said foreign direct investment was the “transfer of tangible or intangible assets from one country to another for the purpose of their use in that country to generate wealth under total or partial control of the investor”. This required a physical presence in the host country, longer duration and control of the investor. Foreign direct investment entailed a cross-border investment by a resident entity in one economy. This implied the existence of a long-term relationship between the direct investor and the enterprise, and a significant degree of influence by the direct investor on the management of the enterprise.

Professor Wandrag also talked about the standards of treatment of foreign investment. The Most Favoured Nation treatment (MFN) was one of the standards. It involved non-discrimination between investments from different countries. It was relevant in Bilateral Investment Treaties (BITs) because it said all investors should be treated equally.

National Treatment (NT) was a second standard. It stated there should be no discrimination between foreign investors and nationals or local investors. Foreign goods should receive treatment no less favourable than local goods. National Treatment was favoured by the Latin American countries. Aliens and their property were entitled to the same treatment accorded to nationals of the host country under its national laws. The Customary International Law established a minimum international standard of treatment to which aliens were entitled. The UN Conference on Trade and Development (UNCTAD) had interpreted National Treatment as the principle whereby the host country extended foreign investors treatment that was at least as favourable as the treatment that it accorded to national investors in like circumstances. It was aimed at achieving a degree of competitive equality between foreign and national investors.

The third standard was the principle of Fair and Equitable Treatment (FET). This principle of “equitable treatment” dated back to the 1948 Havana Charter for the International Trade Organisation (ITO). Currently, most BITs and regional agreements provided for a fair and equitable standard of treatment of investors. The problem with this principle was that it did not have a precise definition. Differences in wording and extensive interpretation of FET placed an undue burden on host states and might infringe on the right to regulate in the public interest.

The FET was often linked to National Treatment in treaty formulation. The World Bank Guidelines on the treatment of foreign direct investment stated:

  • each state would  extend fair and equitable treatment to investment;
  • with respect to the bulk of rights of investor, the treatment must be as favourable as that accorded to national investors in similar circumstances;
  • with respect to aspects not relevant to national investors, the state must not discriminate between foreign investors on the basis of nationality.

The fourth standard was Full Protection and Security (FPS). Most investment treaties required foreign investments to be given “full protection and security”. This principle was established in customary international law. It stated that failure to provide protection to an alien threatened by violence, created responsibility for the host state. This was also confirmed in investment law. In all cases, full protection and security would be accorded to the rights of ownership of the investor and control and substantial benefits over property.

The Promotion and Protection of Investment Bill (2015) did not have a specified clause on Most Favoured Nation status. It was seen as not relevant as long as the Bill did not take nationality into consideration. The FET was not included in the Bill. It was not necessary, according to World Bank Guidelines, as long as the NT was provided for. With regard to the NT, Clause 7 of the Bill stated that the Republic must give effect to national treatment and treat foreign investors / investments no less favourably than it treated SA investors or business operations in like circumstances. There was no clause providing for FPS.

According to the customary international law, state sovereignty remained sacrosanct. The state retained absolute control over the admission and establishment of aliens in their territory. Each state had the right to regulate and exercise authority over foreign investment in jurisdiction, in accordance with laws and regulations and national priorities and objectives. Though states would encourage investment and facilitate admission, each state would maintain the right to make regulations to govern admission of foreign direct investment. The state may refuse admission to a proposed investment.

The state had absolute power to regulate, but it could not be totally prohibited from expropriating or taking property of nationals or foreigners. It was limited by standards placed on how a State may take property. According to “lawful expropriation”, the state was prohibited from directly or indirectly nationalising or expropriating investments of foreign investors except for public purpose, on a non-discriminatory basis, in accordance with due processes of law, and on payment of appropriate compensation. Appropriate compensation meant the compensation had to be adequate (market value), effective (paid in the currency of the investor), and prompt (paid without delay). Most Latin American countries favoured this kind of expropriation.

“Unlawful expropriation” stated that the state may not expropriate or otherwise take in whole or in part a foreign private investment or take measures which had similar effects, except in accordance with applicable legal procedures, in pursuance in good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation.

“Direct expropriation” dealt with nationalisation and confiscation - the outright deprivation of property rights. Indirect expropriation was a slow, incremental encroachment on the ownership rights of a foreign investor that diminished the value of its investment. Ownership remained with the foreign investor, but rights of use of the property were diminished as a result of state interference. It was difficult to interpret and classify indirect expropriation, because it did not have a uniform definition.

There was no direct provision for expropriation in the Promotion and Protection of Investment Bill (2015). Clause 10 of the Bill made provision for the transfer of funds. It was stated that a foreign investor may transfer funds subject to taxation and applicable legislation.

On matters of dispute settlement, Professor Wandrag said that the state and the investor should settle their disputes in local courts, and that all local remedies should be exhausted. Where compensation gave rise to controversy, it should be settled under the domestic law and in its tribunals, unless it was mutually agreed otherwise. The Promotion and Protection of Investment Bill (2015) made provision for dispute settlement.

Discussion

Mr Williams asked if the concept of developmental pricing fell within the PPIB or BITS, or if it was discriminatory.

Prof Wandrag said it was discriminatory if it did not fall under the National Treatment principle.

Mr Koornhof wanted to find out if the new Bill (PPIB) was going to bring legal certainty.

Prof Wandrag indicated it would bring legal certainty for the government, and it gave foreign investors a clear indication of what they could expect.

The Chairperson wanted to establish what the National Treatment meant by “competitive equality treatment,” and asked why the term “alien” was used.

Prof Wandrag explained that “competitive equality treatment” meant getting a local company and a foreign company, if they produced the same thing, to compete equally. If the local one received too much support -- to the point where its products were cheaper than the foreign company -- then that was classified as discrimination.

The term “alien” was a traditional public law concept.

The Chairperson asked why the “protection of state sovereignty” remained sacrosanct.

Prof Wandrag explained that any country that signed up with the UN or WTO gave up a little bit of its sovereignty, but it still remained sacrosanct.

Mr Macpherson remarked that local companies often abused the copyright licence of an international company. A resolution in SA would arrive after five years because of cumbersome laws. Now the PPIB took the speedy resolution away, which meant a foreign company had to know before investing that such abuses would be speedily resolved.

Prof Wandrag explained there are no guarantees that an international dispute would be resolved speedily. If you want to know if your copyright was protected, that should be done within the laws of SA. The exhaustion of local remedies was not a problem.

Trade and Law Centre (tralac) Presentation:

Investment in promoting industrialisation, trade and economic growth and development  - focus on foreign direct investment

Ms Trudi Hartzenberg, Executive Director: tralac, identified three pillars that contributed to sustainable growth and development. The first involved building a productive stock through investment. It demanded a production structure that involved capital equipment and factories. This production structure was coupled to an effective infrastructure base. The second pillar was human capital development. This involved quality investment in education and skills development and expanding domestic knowledge systems and ‘absorptive capacity’ of firms, the main emphasis being on science and technology. The third pillar was institution building. This referred to policies, laws, and implementation. These should be regulated to fit the 21st century demands.

She said that investment was indispensable for growth and development. Capital formation was a prerequisite for growth and development, and this meant growing the Gross Fixed Investment (GFI):GDP ratio. The investment function was complex, with many independent variables, and also depended on the other two pillars being conducive to investment.

The quality of growth would depend on the quality of an investment. The capital could be substituted for labour through mechanisation, which was not socially beneficial. Rapid urbanisation had been identified as creating a demand for mega investment in infrastructure. The investment in production structures should not underestimate the importance of the services sector, which could be tradable and support competitiveness and trade in goods.

Since the mid-1990s, foreign direct investment, as a share of capital formation, had been increasing in Africa. Investment in Africa was attracted mostly into isolated enclaves of primary production, with limited linkages to the rest of the economy. 

Incentives had a role to play, but there were costs associated with them. There had to be a clear distinction between incentives for foreign and domestic investors. In most cases, foreign investors received more incentives than domestic ones. Developing countries had to be careful about incentives, especially if they were dependent on foreign direct investment.

Location was another determinant for foreign direct investment, as it served as a motivation for FDI. Investors were able to deal with risk, but uncertainty resulted in perverse behaviour. Policy certainty should be part of good governance.

Between 1999 and 2003, Angola and South Africa were consistently among the top ten recipients of foreign direct investment in sub-Saharan Africa. South Africa was a prominent recipient, but was also a major origin of foreign direct investment in the region and the rest of the continent.

Discussion

Mr Williams wanted to establish who funded tralac. He also asked for clarity on the assertion that the investment that had arrived in SA had not closed the gap between the rich and poor, and that this was unsustainable.

Ms Hartzenberg said tralac was a non-profit organisation funded by donors. Sweden was the major donor, and the organisation received commissioned work from government departments. With regard to the quality of investment the country had attracted, she had been referring to the kind of investment that addressed the challenges besetting SA, like unemployment and job creation. There was a mismatch between foreign direct investment and local skills. That was why work permits to import foreign skills were in existence. This meant SA needed the kind of investment that would address education matters in order to get the skills that were required to meet the demands of foreign direct investment. For instance, South Africa was slipping back when compared to the education standards of its neighbours. There was a need to invest in human capital, and education needed a long-term view.

Mr Macpherson commented there was no reason to look for an answer when firms were not investing in human capital, because they knew the labour laws of the country were cumbersome and that they made the firms uncompetitive.

Ms Hartzenberg noted that investors were mobile. The government might be making long-term goals only to discover that the investor was going to leave after three years.

Mr Hill-Lewis, with regard to investment and incentives, pointed out that there was no government that would offer incentives to an investment that was going to be detrimental to it. Governments had to take a long-term view when it came to incentive packages, and there had to be a way of doing a cost-benefit analysis.

Ms Hartzeberg indicated that incentives had to be time-bound and linked to performance.

The Chairperson remarked that when one was faced with volatile socio-economic problems, one needed to take a long-term view. However, that had to be underpinned by a short-term view.

Mr Hill-Lewis wanted to know the perception of Ms Hartzenberg regarding some economies within the WTO that were pursuing multi-lateral trading regimes.

Ms Hartzenberg said a discussion would be held with the US regarding the matter.

Investment Promotion and Inter-Departmental Clearing House (IPICH) Presentation

Mr Yunus Hoosen, Acting Head: IPICH, informed members that IPICH was the national investment promotion agency within the government. Its mandate was to facilitate an increase in the quality and quantum of foreign direct investment by providing an efficient and effective investment recruitment, problem solving and information service, in order to retain and expand investment in South Africa and into Africa.

IPICH was the investment unit of the DTI. It was an ideal platform to be developed and serve as the inter-governmental clearing house. According to research by investment specialists, 70% of new investments were re-investments or expansions of existing companies, and this meant investor aftercare was paramount.

The Inter-Departmental Clearing House was an investment facilitation mechanism where relevant government agencies were combined in a single cohesive structure that coordinated and streamlined processes to provide prompt, efficient and transparent services to investors.

IPICH would to provide the following services:

  • facilitation of the entire investment value chain;
  • advisory services to investors;
  • communicate its offerings to potential investors;
  • single-window clearance for registration, licensing, and permits.

IPICH intended to set up an inter-governmental structure that would serve as the Inter-Departmental Clearing House. It plans to coordinate the relevant government departments involved in regulatory, registration, permits, and licensing. It would be set up and championed by the Director-General of the DTI and would be operationalised by the Deputy Director-General (DDG) of Investments within the DTI. Each department would identify a DDG that would serve on the secretariat. The role of the DDGs would be to coordinate the government units within their respective departments and facilitate and fast-track matters of the clearing house. The DG Forum would serve as the investment council and would include CEOs of state-owned enterprises (SOEs) and Special Economic Zones (SEZs). Investment planning, roll-out, monitoring and evaluation, and the investment climate would be discussed, and these would be operationalised by the clearing house.

So far, the Inter-Departmental Clearing House had:

  • piloted a one-stop shop with the Gauteng Growth and Development Agency (GGDA) at the Gauteng Investment Centre;
  • facilitated an energy connection for TEGA Industries with Ekurhuleni Municipality, allowing them to expand a second plant;
  • facilitated for Samsung with the National Regulator for Compulsory Specifications (NRCS) for letters of authority, and with SARS on customs;
  • facilitated energy constraints at Nestle plants in Harrismith, Babelegi, Estcourt, and East London.

With regard to investment recruitment, the organisation would promote investment opportunities, market investment projects, provide guidance about plant/site locations, package investment projects and provide input into policy formulation. Pertaining to investment information, the organisation would provide information on the local economy and various investment opportunities within SA sectors and industries, on incentive packages, the  regulatory and legal environment, the trade and investment policy of SA, and government policy in strategic sectors.

The organisation would facilitate investment missions, introduce investors to key stakeholders in private and public sectors, and to potential joint venture partners and black economic partnerships, facilitate finance and incentives and provide logistical support for relocation. It would also conduct aftercare forums, workshops and investor surveys, as well as aftercare meetings and site visits to retain and expand investments.

(Graphs were shown to illustrate an analysis of investment trends, investment cycles, and economy rankings)

Discussion

The Chairperson asked for clarity on the ranking of economies.

Mr Hoosen explained that rankings indicated how the business was done. South Africa had implemented a lot of reforms. The rankings indicated that SA could do better in some areas, such as construction permits, getting credit, enforcing contracts, and especially on water licensing, which took too long. Another issue to be taken up with the DTI was the Companies and Intellectual Property Commission (CIPC), to ensure that the registration of companies took one to three days. The services had to be automated.

Mr Macpherson commented that the presentation mads them wonder why the country was not doing better, if it had the chance to adopt the Singapore system of automating everything to eliminate bureaucracy and red tape. There was scope for improving the way SA attracted investors. He was encouraged by the steps taken by the Department of International Relations and Cooperation (DIRCO) to use embassies as places for conducting business to attract investment.

Mr Williams asked if the DTI was looking at a long-term view of developing a skilled workforce so as to provide technical assistance to investors that brought business to SA.

Mr Hoosen said a new and different set of skills was needed so that they could attract a new kind of investment. In the past five years, they had created a new investment – the green economy – which had created jobs. It was a different type of investment.

Ms Wentworth wanted to know about the level of coordination that was going to exist, if this was going to be rolled out to the provinces.

Mr Hoosen said there was going to be a forum of district municipalities, where these municipalities would be part of the one-stop shop.

He told Members that investment was a long-term process and it was driven by a number of cycles. There were two growth paths that needed to be considered -- the foreign direct investment commodity and the consumption growth path. There was a lot of data which pointed to the downturns and upturns. The entity was competing with investment agencies all over the world and had won numerous awards. South Africa was one of the best destination points for investment in the world.

The meeting was adjourned.

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