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16-05-2024 Daily Investor

Foreign companies leaving South Africa - and government is to blame

Foreign companies are leaving South Africa due to a hostile business environment, and the government’s response to recent departures discourages future investment.

This is according to Business Leadership South Africa CEO Busi Mavuso, who explained in her most recent newsletter that the more attractive a country is, the more often you can expect investment to be made than withdrawn.

“You can expect that foreign investors will come and go from South Africa, depending on many things, including global strategies and our links to the rest of the world,” she said.

“But while decisions are inevitably going to happen both ways, the more attractive our country is, the more often you can expect investment to be made than withdrawn.”

She said it feels now that the withdrawal of investment from South Africa is dominating. Shell announced last week that it will exit its downstream business in South Africa, mostly its 600 petrol stations.

Mavuso said this decision was made based on various factors, including Shell shifting away from downstream.

However, if South Africa had offered a predictable regulatory environment and stronger economic growth outlook, the decision could have been different.

Shell’s decision came weeks after mining giant BHP announced it was interested in buying Anglo American, provided it first unbundles most of its South African assets.

Mavuso said these two instances make it clear that global giants have lost appetite.

“People vote with their feet, capital has many addresses, and if we’re not going to make it easy to invest here, it is going to land somewhere else,” she warned.

Mavuso highlighted the political response to both companies’ decisions. She pointed to Mineral Resources and Energy Minister Gwede Mantashe, who last week threatened Shell over future exploration licenses for its upstream business.

The minister said South Africa “should be more reluctant” to grant permits and licenses to the company because of its decision.

Mantashe also described BHP as “not positive” for South Africa and said he would vote against its bid for Anglo if he could.

“This kind of rhetoric is obviously going to be noticed in global boardrooms. It says the South African government is not one to respect the business decisions of companies,” Mavuso said.

“While it may legally have little discretion to intervene on companies’ licenses and to block transactions, that doesn’t mean it doesn’t want to.”

“Any company must pause and consider whether the legal position may change in the future, given that the government seems to be signalling that it is not so keen on companies acting in their own commercial interests.”

She explained the background reality is that South Africa’s mining and manufacturing sectors have been shrinking while services have been growing.

While this has been true for the last 20 years and reflects global conditions and the rise of cheaper manufacturing bases, it is also due to the impact of policy uncertainty and the collapse of important economic infrastructure, particularly electricity supply and logistics.

“If we want to attract companies that must make big long-term investments in fixed infrastructure, like miners and manufacturers, we must create an investor-friendly environment,” she explained.

“Investors are aiming to maximise their returns, full stop. If we make clear that South Africa is a good place to be able to do that, companies will come.”

However, she said South Africa has to instil confidence that the country is a business-friendly environment with a government that respects the commercial realities facing companies.

“I can tell you that having a minister who loudly proclaims displeasure and threatens investors with consequences is only going to confirm what investors fear,” she warned.

“The better approach is to signal regret but respect commercial decisions and redouble efforts to make South Africa attractive to investors so that next time the decision is different.”

Some have argued that foreign companies disinvesting from South Africa are not a major problem, as local investors or other foreign investors will step in.

However, she said that is not true, as even domestic investors will keep their money on the sidelines if they perceive the potential returns to be low relative to the risks.

Foreign investors are also important in bringing international expertise to South Africa’s economy, driving competition and ultimately improving the quality of service that end-consumers receive.

“Thanks to our low domestic savings rate, there is simply too little domestic capital to be able to provide all the investment that the economy needs,” Mavuso said. “The fewer foreign investors that come, the poorer we are.”

Mavuso highlighted that some foreign companies do choose to invest in South Africa.

For example, Amazon Web Services last year committed to invest R30 billion in South Africa over the next 10 years, having already invested R15.6 billion and created 5,700 jobs. It is also building a R4.5 billion head office in Cape Town.

“It does so in a welcoming environment that includes various incentives that support call centre employment, among other benefits for the company,” Mavuso said.

She explained that services companies are less exposed to the efficient working of ports, and many can create their own power sources given they are not particularly power intensive.

“There is less regulatory risk, given it is hard to threaten services companies over licenses and other bureaucratic interventions on their businesses,” she said.

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