Investment trends: Department of Trade and Industry (DTI) briefing

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Trade and Industry

14 August 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (dti) gave a presentation to the Committee on investment trends in South Africa. Investment formed an important pillar of the President's nine-point plan to grow the economy. Investment trends provided a very reliable predictor of future growth in an economy, along with statistics on the proportion of gross domestic fixed investment, as seen in strong economies like Japan and America. The proportion of gross domestic product (GDP) for strong economies was around 30%, but South Africa was currently at around 20%, with 30% targeted for 2030. To date, investments had been driven by profit or returns, the cost structure in the economy and the domestic demand. Each investment must be assessed for its profitability. Dti also had to ensure a reduction of red tape and promotion of greater regulatory efficiencies for matters such as work permits, electricity connections and licensing, and dti had set up a special unit to deal with this.

Slides were tabled on the investment trends, showing figures and trends both prior to and after 2008. There had been an upward trend in GDFI in 2013, and 2014, with R620 billion invested overall, and R140 billion of direct foreign investment. Most foreign investors were investing in plant and machinery, and operating in the manufacturing sector, and although there was 42% foreign ownership overall, many of those foreign firms had been in the country for hundreds of years and were expanding. At the moment, about 60% of GDP was derived from the private sector, and it was important to drive private sector investment in order to boost GDFI, as well as investment by the State-owned companies. It was necessary to distinguish the different sectors of the economy and to target growth in agriculture and agro-industries. Over-reliance on the mining sector meant that other sectors, such as steel industries that supplied to mines, were also seeing problems. Government had been spending in a positive way on public infrastructure and renewables, but this was still only at 10% of GDP investment. An analysis was tabled for increases in general government expenditure, and the rate of growth of the private sector investment, which was expected to slow by 0.9% for future years.

The analysis of the FDI flows into South Africa was tabled. South Africa was a major investment destination on the Continent, and the top destination for FDI projects, and some of the reasons were outlined, as well as the split in USA, UK, German, Japanese, French and Indian companies, and a description of some of their investments. South Africa had 116 FDI projects at the moment. It was noted that a big driver of investment was the six industrial development zones (IDZs) that had attracted R10 billion. In the special economic zones (SEZs) foreigners  were still the biggest investors.

The dti described its one-stop shops or investment clearing houses that would be established to assist in fast-tracking the FDIs, and it was emphasised that whilst the operations would be centralised in the dti, there would be strong linkages with several other departments, to help to speed up, for instance, environmental certificates, visas, work permits and licences. South Africa had a high value proposition and was ranked highly on various aspects of efficiency.

Comments and questions raised by MPs revolved around the importance of private sector investment since it constituted 60% of the GDFI and the fall out of South Africa noted in a 2015 survey conducted by AT Kearney, due to lack of regulatory clarity and lack of willingness to engage in economic reform. Members questioned whether mergers and acquisition numbers were not skewing the results, and wanted different figures excluding these. They asked about the projected negative impact of having a higher FDI rate and a lower domestic investment rate on the economy. They felt that the dti should be actively communicating the positive stories of the South African economy, and asked what the dti planned to strengthen state owned companies, and how it intended to achieve coordination of approach and implementation with the provinces and municipalities. More questions addressed how dti was attempting to deal with skills needed for economic growth; the possibility of achieving NDP targets, the standards used to measure Japanese investment in the country, expectations from the SEZs in the near future; and the possibility of job creation on low, medium or large scale.

Meeting report

Up-scaling private-sector investment: Department of Trade and Industry briefing
Mr Lionel October, Director General, Department of Trade and Industry, said that the presentation by the Department of Trade and Industry (dti or the Department) would address one element of the President's Nine Point Plan to grow the economy.

He noted that watching the investment trends of an economy was the most reliable predictor of future growth in an economy. Other important statistics to consider were the proportion of gross domestic fixed investment (GDFI) as seen in strong economies like Japan and America. The proportion of gross domestic product (GDP) for strong economies had to be in the region of 30%. South Africa was currently at 20% and the national development plan (NDP) had proposed that the 30% target should be reached by 2030. South Africa was doing reasonably well but it had to reach a 25% mark in the next few years and then meet the 30% mark, in order to become a prosperous economy.

It was important to identify the fundamental forces that drove investments. So far, investments had been driven by the amount of profit or returns, the cost structure in the economy and the domestic demand. It was therefore important to consider if an investment was profitable in a country's economy. The dti must also ensure that all ‘red tape’ with regard to investment was cut out and regulatory efficiencies were put in place to assist with the turn-around times for issuing of work permits, electricity connections and water licenses. A system had been put in place, as a clearing house, with heads of unit to attend to this.

Mr October tabled slides on the investment trends. His first graph showed the GDFI (see attached document). The post-financial crisis period showed a steady growth, depicting a 20% growth. The statistics showed an upward trend in the GDFI for 2013 and 2014. The GDFI showed that R620 billion had been invested. The second graph (see attached document) showed the foreign direct investment (FDI). South Africa had showed an impressive growth in FDI. R140 billion worth of investments was attracted into the country in 2013 and 2014. There was a slight fall between 2013 and 2014, but the investments recorded in 2014 were still double the figures of 2012. Foreign investors in the country were investing in plant and machinery, and South African firms were mostly in the manufacturing sector. South Africa’s FDI stock was at 42%, which meant that 42% of the economy was owned by foreign investors. This was a high figure, even by international standards, as the average in the world was about 25%. However, many of the multi-nationals in South Africa had been in the country for hundreds of years or more. For instance, Unilever built its first factory in Port Elizabeth in the 1920s. Many of these companies were currently expanding. Another reason for the high proportion of FDI stock was because South Africa had a highly sophisticated and deep financial market which made it very easy for investors to raise capital, even domestically, for investments.

South Africa had a mixed-market economy but was fundamentally a private-sector driven economy with over 60% of its GDP derived from the private sector. In order to increase the GDFI to 30%, it was important to principally drive private sector investment, as well as investment by the State-owned companies(SOCs). It was also important to distinguish between the different sub-sectors of the economy. He noted that the economy was currently facing a massive decline in mining investment because of the drop in demand from China and the fall in commodity prices. A graph showing the three different sectors of mining, agriculture and manufacturing was tabled. Not much was expected from mining because the commodity’s super-cycle was over, and the previously high prices achieved for coal and iron ore would not continue after the post-financial crisis. The fall in the mining industry was a global trend. The economy’s growth therefore had to come from two other sectors – agriculture and agro-industries, as well as manufacturing. dti was mainly targeting an FDI growth in those two sectors. The over-reliance on the mining sector led to linkages with other sectors of the economy. For instance, a large part of the construction industry and the manufacturing industry supported and supplied the mining industry. This was a reason for the current crisis in the steel industry, because new mines were no longer built and manufacturing equipment were not being purchased. A positive trend, however, was that the manufacturing investment had become relatively strong. More work had to be done in the agricultural sector, because of the demand for food.

There was growth in the private sector but it was not yet at the desired level (30%). As mentioned earlier, the GDP was 20.3% as at 2014, which was still insufficient. Government spending had been strong because government had been spending on schools, hospitals, clinics and other public infrastructure. General government spending was positive, but it only amounted to about 10% of the GDP investment. It had also been positive because of spending on renewable energy, which had been strong, but on the other hand investment levels for finance in the system were still low.

Mr October moved to consider the future investment trends. He firstly tabled the analysis for the expected increase in general government expenditure (see slide 8). A slowing down by public corporations, by 0.9%, was projected for future years. Private sector investment had been forecast to grow at 6.3%. The private sector was indeed growing, but not growing fast enough. Graphs showing a further breakdown of the sub-components of findings from the private sector into the sub-sectors of the economy was highlighted (see slide 9).

The analysis of the FDI flows into South Africa showed that from 2003, there was a massive and consistent increase, with a pick-up on flows noticed from 2008. South Africa had been known to be the new investment destination in the African continent. It was the largest recipient of FDI on the continent, and was still being used as the basis for expansion and principal gateway on to the continent.

A survey conducted by Ernst and Young released earlier this year made reference to a fall in FDI project numbers, but a surge in capital investment and job creation surge. This meant that Africa was still attracting investment demands. South Africa remained the top destination for FDI projects in 2014, having received twice as many FDI projects as any other African country, due to its diverse economy. South Africa was the only economy on the continent that offered a diverse agricultural, agro-processing, manufacturing, mining, financial services and tourism industry mix. South Africa also had the best infrastructure on the continent, and its ease of doing business was an added advantage. The survey showed that Africa was a growing continent but South Africa was leading in investments on the continent.

The companies that had come to invest in South Africa were highlighted and it was noted that many of these companies had been in South Africa since 1994 and had continued to expand since then. The United States of America (USA), United Kingdom (UK), Germany, Japan, France, and India had 700, 600, 600, 280, 185 and 120 companies respectively who were doing business in South Africa. A very strong Japanese, Indian and Chinese investment had also been recorded as these countries were expanding their investments in South Africa.

The investment pipeline for 2014 was R43 billion. A division in the Department of Trade and Industry was responsible for monitoring every investment that came into the country and helping the investors with all the needed regulatory processes. One of the biggest investors was Unilever who had invested R4 billion and had expanded four new plants in the country over the past three years. Gestamp was a company in the renewable energy field, situated in the Western Cape, that had invested R220 million. Toyota had just completed the building of a new taxi and mini vehicle plant by which it had added over 10 000 employees to its staff. Samsung had set out roots in its first ever direct investment in the country. Big investments had also been noted in the Call Centre Industry (CCI). Other companies like Vodafone, showing substantial foreign investment in advanced manufacturing and growing services sectors, were highlighted. A breakdown of the figures and the investment trends were highlighted in graphs (see slide 13 and 14 of the attached document). A financial crisis took place in 2008 but it was noted that the investments began to pick up in the 2000s. Prior to that time, the last time the country had experienced serious investment growth was in the 1970s and early 1980s, after which there was a decline before the investment growth picked up again in the 2000s. This was mainly driven by the commodity cycle as well as by debt and consumption spending in 2000s.

Another graph showing the top ten FDI stocks in Africa was highlighted (see slide 15 of the attached document). South Africa was leading other countries by far in FDI stocks. It was noted that UK was still the biggest and oldest investor in South Africa, investing 32% in the economy. One of UK’s biggest investments was Vodafone. Unilever was originally a Dutch company but now had a majority British shareholding. USA was also a big investor at 23% through Procter and Gamble, investments in the IT and pharmaceutical sectors in USA. It was noted that these investment trends were likely to continue. In 2014, South Africa had 116 projects while the next biggest African country (Nigeria) had 43 projects.

Dti was working vigorously to implement the National Development Plan (NDP) which spoke a lot about diversification, and reaching the 30% goal of GDP. There were some legacy challenges facing dti in raising the levels of foreign investment and domestic investment. The biggest obstacle was the under-investment in energy, roads, rails, and ports, and these were the main bottlenecks to expansion. Many companies had to transport their goods by trucks instead of by rail, due to these challenges. Dealing with the infrastructural constraints would help in meeting the NDP target.

One of the biggest drivers for raising the level of FDI was the creation of industrial development zones (IDZs). South Africa currently had six IDZs and 59 investors on site producing goods and services. These investors had attracted R10 billion. The sub-sectors were also highlighted. For instance, the IDZ in Coega in the Eastern Cape had a diversified range, from business processing and call centres, to automotive works built by the Chinese, agro-processing and steel by the Indians. East London focused mainly on automotive while Saldahna majored in oil and gas services.

The profile of investment in the special economic zones (SEZs) were highlighted. The biggest investors were still the foreign investors, as they made up 50% in Coega and 37% in East London.

Progress was being made in finalising all the regulations. A board had been established for the SEZs and a supporting secretariat had been approved. Dti was close to completing the feasibility studies for the new eight SEZs. The one in Free State had gone to Cabinet and had been approved. It should be launched very soon by the President. There was also good progress noticed in the investment in Musina, as well as in Atlantis in the Western Cape zone, and in Upington. There were two big investments that had been confirmed - the Toyota expansion and the production of anti-retroviral tablets. Dti was busy with the paperwork on these.

It was decided, as part of the nine-point plan in fast-tracking the FDIs, to establish the one-stop shops or investment clearing house. A new division was created in dti to work solely on investments. This central module operation would be located in the Department but it would have very strong links to the Department of Home Affairs (DHA) to help with the easy processing of visas and work permit applications. It would also have a nodule point with the Department of Environment (DoE) to help with the speeding up of environmental certificates, as well as another nodule point with the Department of Water Affairs (DWA) to assist with the issuance of water licenses. Plans were under way to take all these processes online in order to have an e-governance system for issuing of licenses. The key point was to create regulatory efficiencies and one-stop shops, part of which would be located in the Presidency to help with getting the full cooperation of all departments. Dti also had plans to establish clear standards for investment best practices. The one-stop shops would also be working with the one-stop shops in the IDZs, and would also work with the provinces to ensure a smooth window for investors when they came into the country. There was already a Gauteng investment centre.

Mr October highlighted the value proposition that South Africa had for foreign investors. On the rankings of the World Economic Investors’ Forum, South Africa was ranked number 1 in the world for its auditing and reporting standards, number 1 in the efficacy of its corporate boards and strong corporate governance structures,  number 1 in terms of the Companies Act revisions that were passed recently for the protection of minority shareholders, number 1 in the regulation of its stock exchange; and number 1 in the legal rights index. South Africa ranked number 2 for the availability of financial services; number 3 for the soundness of its banks; number 10 for the strength of investor protection; and number 11 for the quality of air transport infrastructure. Dti would be going on a reinvigorated marketing drive. As was indicated at the launch of the SEZs and the new SEZ Act, dti would be combining the marketing operations of all economic zones in order to present one value proposition for the country.

One of the biggest challenges facing the Department in reaching the 30% target was that regulatory inefficiencies cut across many provinces, and differing time scales applied in different provinces for things like getting electricity connections. Dti had plans to standardise these regulatory issues across the country in order to have one compelling regulation across the board for all investors. Another challenge was the need to stabilise the demand conditions for companies to sell their products in the country. The other biggest challenge was the infrastructure constraint. There was a need to get a strong plan for rail, like the one already in existence for energy. The upgrading of the ports had started in Saldahna and Richard’s Bay. It was also important to increase the localisation opportunities. Mr October used the automobile industry as an example, simply because many of the automobile companies were already in the country because of the South African development, and said it would be important to ensure that, by way of crafting incentives carefully, these companies localised not just the assembly of these cars but the making of the components as well. It was, however, important to first attract foreign investors that may start with basic assembly, before expanding the investment to component manufacturing.

Dti was working with businesses in areas such as regulations, education and skills, and in stabilising the laboring relations environment.

Discussion
Mr N Koornhof (ANC) said that the Institute for Security Studies Africa (ISSA) recently had a seminar and produced an interesting paper on South Africa that said that the perennial source of crisis in the media was not supported by the deeper analysis of the economy. The presentation did show that the private sector was far more important, since 60% of the GDFI came from the private sector, which would thus be the most important partner for growth and employment in South Africa. The ISSA paper also noted that without a new revolution in policy coherence and efficiency, South Africa would face a lot of problems. The one-stop shop was a good idea, but it would be good to see the Department focus on getting out of the silo mentality, and to establish policy coherence that would cut across all departments. It was suggested that ISSA be invited to engage with the Committee.

Mr G Hill-Lewis (DA) appreciated the honesty of the presentation, in terms of identifying the challenges or obstacles to investment in South Africa, as well as its assessment of the value of private sector investment. He recommended that this presentation be made at the next Cabinet meeting. It was noted that South Africa had dropped off completely, from the 2015 survey conducted by AT Kearney on the top 25 most attractive investment destinations in the world, although it had been ranked thirteenth in 2014.  This was a point of serious concern and the reasons for the fallout should be closely examined. The AT Kearney report referred to a lack of regulatory clarity as one of the reasons for South Africa’s fallout. This was an area that was known to the Department, and mentioned in the presentation as one of the areas that needed more work. The report also mentioned the lack of willingness to engage in economic reform. The concerns raised in that report should be examined, carefully considered and responded to appropriately.

The Chairperson asked that details of the report be circulated to the dti and Members.

Mr Koornhof took issue with some of the numbers quoted, saying that the GDFI numbers included the mergers and acquisitions (M&A), and these were not  job creating investments. The Department was asked to produce investment numbers that excluded M&A activities in order to get a sense of the real investment numbers in the country.

Mr B Mkongi (ANC) wanted to know what future negative implication could arise from having an FDI rate of 42% while the domestic investment of the country was 20%. He asked if there was an aggressive plan within the Department to establish a dedicated unit that would communicate the positive stories of the country’s economy to the public, since it often seemed that dti was "under siege" from the media, which mostly published negative news about the Department. He asked what dti aimed to do to encourage small and medium scale enterprises and cooperatives in South Africa’s mixed-market economy dominated by private sector investment; and what the inherent challenge was to the development of strong State-Owned Companies that could also drive economic growth.

Mr M Kalako (ANC) wanted to know if there was proper coordination between the programmes set up by dti and government policies, to ensure that they were also implemented and followed by provinces and if the appropriate time had come for the ANC Council to begin to consider a centralized programme for all provinces to ensure uniformity in projects. This might lead to a constitutional issue due to the splitting of powers between municipalities and provinces. However, the trends in the programmes of the Department showed that the programmes were geared towards attracting the private sector, which made the private sector benefit more from dti’s programmes and incentives. The element of coordination and centralisation was important in dealing with red-tape, efficiency of regulations, making prompt investment decisions, and implementing policies. He also wanted to know how the relevant unit in dti would invest in skills needed by the economy. He called for comment on the comparison between the good state of the economy as highlighted in the presentation, and the current level of unemployment.

Mr J Esterhuizen (IFP) wanted to know if the NDP targets would materialise. He highlighted the challenges facing government investment as traceable to the fiscal consolidation path that government was following. He noted that this would mean limited spending, reduction of budget spending, and setting a ceiling for the next financial year at about R101.1 trillion, while the inflation rate was 7% for the 20 million public servants. He questioned what money would go back to support new initiatives and how policies would be diverted to job creation, as well as the implementation of FDI.

The Chairperson wanted to know about the new unit that was set up in dti. She asked what base was being used by dti to measure Japanese investment in South Africa and what the Japanese invested in. She wanted comment on  the effect of the instability of the economy on job losses. She asked what the SEZs were expected to achieve, especially since the primary purpose of SEZs was not job creation. She asked when it could be expected that a significant number of jobs would be created and if these jobs would be created on a low scale, medium scale or across the board.

Mr October said that the importance of the ISSA paper was the distinction that was drawn between the structural factors in the economy and the political opinions. The study also concurred with the view that the fundamental forces were in favour of the country, and it gave two reasons for that. One was that South Africa was part of a growing continent and South Africa could be the major supplier of agro-processed products and manufacturing products in the continent, which was the source of the economic growth. The second reason was the favourable demography of the country, in terms of its population, and the size of its business class. This could be seen from South Africa’s substantial foreign investment and strong domestic private sector, which no other country on the continent showed so strongly.

The Department was focusing on the red-tape and the one-stop shop. The Minister of Trade and Industry had made a presentation on the one-stop shops to the Cabinet. The reason for creating the one-stop shops was necessitated by a need to move away from a silo-approach. It did not mean that the activities would be centralised, but it did require an increase in coordination, as well as setting common norms and standards for provinces.

Mr October said that the issues raised by Mr Hill-Lewis further showed the gap between perception and reality. There was a common perception about the fundamental weakness of South Africa’s economy. This perception gap could be linked to surveys conducted on people who had already invested on the African continent and those who had not. For instance, one survey showed that 30% of non-investors believed that things would not improve on the African continent, while 81% of foreign investors on the continent strongly believed that things would improve. Those investors who were already on the continent could tell for themselves that the consumer market was growing, but the media would not project this. The perception gap and the change in methodology were reasons for the drop in world ranking.

It was important to note that any FDI in the productive sectors of the economy was positive. There could be no bad FDI in the manufacturing, agriculture and mining industry of a country. The FDI could only go bad if there was a greater use of the local supply chain, and if companies wanted to make use of the intellectual property alone. All the FDIs in South Africa had been positive, including the positive role played by Walmart in the supply and development, by taking black suppliers into its supply chain and exporting South African wines to stores in the US. There had also been access to global supply chain. 60% of world trade was amongst multi-nationals. South Africa’s 42% FDI rate was therefore a positive one.

There was a need for South Africans to deal with the perceptions they had about their own economy, especially through the media publications. A common message should be adopted and projected on the state of the economy. The fundamental structure of the economy should not be confused with debates on the macroeconomic policies.

Mr October asserted that South Africa had a 25% unemployment rate that was not changing. Six million jobs had been created since 1994, but the workforce had expanded to about seven or eight million. More people were coming into the labour market and creating jobs. It was pointed out that the problem of unemployment could not be fully solved in a few years. If focus was placed on changing the structure of the economy, and a shift was made into the consistent growth of the agriculture and manufacturing sectors over the next 10 or 20 years, the unemployment rate would reduce. It was therefore important that a common message was passed across on the state of the economy.

He confirmed that a new division had been set up in dti since the adoption of the nine-point plan. A lot of the work had been done by the Chief Director for Investment Promotion, who was now working on behalf of the economic cluster.

The SEZs were currently moving at a faster pace. In the past two years, there had been the Saldahna, Dube and the Harry-Smith investments. Plans were under way to visit two or three other IDZs in the next six months.

The meeting was adjourned.
 

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