NEW RULES TO GOVERN SECURITY
Thanks to a new bill, four major international companies will likely have to sell some of the firms they have just bought
The imminent new law banning foreign control of security companies would substantially affect the four major international security companies operating in South Africa.
The available annual reports from these companies show at least two of them are in the middle of an acquisition-led growth plan in South Africa. Under the new law, they will in effect be forced to sell companies they have just bought.
Securitas, a Swedish multinational, made its entry into the local market in 2009 by buying MKB Tactical, a security company with 280 employees.
Since then, it has spent several million rands buying up more South African security companies.
It took over Claw Protection Services as well as Piranha Security in 2010. In 2011, it acquired Orbis Security Solutions and in 2012 it in effect took over 50% of Top Security.
Last year it bought Rentsec and Vamsa, two related local companies in the “remote surveillance” business.
All of these subsidiaries are majority owned, meaning Securitas would likely have to sell parts of everything it has acquired in South Africa in the past five years.
The UK’s G4S has also been expanding in South Africa through acquisitions since 2007, when it bought half of Fidelity Cash Management for £18 million (R325 million). In 2008, it bought Warrior Alarms, Ahead Security Services and Coastal Security. It bought Skycom and Impro Distribution and Support in 2010. Last year, it acquired Deposita Systems for R144 million.
Security, but also transformation
Although the official reason for the 51% law is to protect national security, the opportunity for South African companies to buy the offending “excess” foreign shareholdings is very much part of the picture.
In the heated parliamentary debate on the bill in February, ANC MP Annelize van Wyk, chairperson of the portfolio committee on police, said: “What is wrong if South Africa wants to open up this industry for its own people?”
ANC MP John Kabelo Moepeng echoed that, saying: “Let us assist South Africans to be part of this industry so that in the process we can assist in putting them in the mainstream of economic activity, through the security industry.”
No one really knows how much of the sector is foreign owned. The industry lobby group, Security Industry Alliance, has repeatedly used the figure of 10%, which has been repeated by various opponents of the 51% law. The figure is, however, highly misleading. The 10% refers to the number of registered guards employed mostly by the big four international companies operating in South Africa.
These are London-listed G4S, ADT from the US, Securitas and Chubb, a subsidiary of United Technologies Corporation in the US.
These companies’ local subsidiaries are, however, heavily invested in the higher end of the sector, which is more capital and technology intensive.
Their headcount of guards does not really reflect their size and value in the local industry.
They will, however, all be forced to sell down parts of their South African businesses if the bill is signed into law.
Security Industry Alliance said the bill, specifically the 51% rule, would cause catastrophic job losses, wholesale divestment and costly retaliation in terms of trade agreements.
This week, it said the bill was a threat to the African Growth and Opportunity Act, which was a hot topic at the summit of African leaders held in Washington this week.
Everybody’s doing it
Former police minister Nathi Mthethwa’s reasoning for the 51% law included that it reflected a general international trend.
The argument around national security also hinges on the ownership of more specialised and hi-tech security industries, not the placement of security guards.
In speeches as well as a briefing note prepared for Parliament earlier this year, Mthethwa listed numerous countries that restrict foreign ownership of private security companies.
Many of the countries he listed, however, don’t prohibit foreign ownership at all. Instead, they have laws, like South Africa already has, that ban foreigners from managing security firms or acting as security officers.
There are, however, several examples of ownership limits. The proposed limit in South Africa is identical to that in India, where foreign ownership of security firms has been limited to 49% since 2005.
That limit is, however, part of India’s large and complicated foreign direct investment regime that places various ownership limits on foreigners in a variety of sectors. The cap has not deterred companies like Securitas, which bought 49% of a major Indian security group in 2007.
Other countries that specifically limit foreign ownership of security firms include the Philippines, where foreign companies cannot own any equity at all. Like India, this prohibition is part of a general regime of limitations on foreign ownership in many sectors.
The same goes for Saudi Arabia, Malaysia, Colombia and Nigeria. Kenya insists Kenyans own 26% of any security firm. The government has never denied that the bill sits uneasily under South Africa’s commitments under the World Trade Organisation’s General Agreement on Trade in Services (Gats).
According to Mthethwa, the transition provision written into the bill is a response to that.
In a briefing note prepared for parliamentarians early this year, his department noted that South Africa would have to modify its Gats commitments. Any other country can then request negotiations or arbitration on a tit for tat adjustment on other commitments as compensation.
If no one specifically requests it, the modification goes ahead.
The government has, however, indicated that “national security” is a sound basis for changes, suggesting other countries will be hard-pressed to push for compensation.