Let’s not play chicken
Why jeopardise an important agreement with new foreign ownership restrictions, after extensive compromises on poultry?
After making the difficult compromise of allowing more US poultry into SA to ensure the renewal of the African Growth & Opportunity Act (Agoa), why would SA jeopardise that by introducing foreign ownership restrictions through the Private Security Industry Regulation Amendment Act?
The act, which is awaiting the signature of President Jacob Zuma, will force foreign-owned private security firms to sell at least 51% of their businesses to South Africans.
One of the elements of our recent report on the likely costs of the act is the value at risk in respect of international trade agreements, one of which is Agoa.
It has been estimated by the department of trade & industry that Agoa allows 27% of SA goods exported to the US to enter duty free, which was estimated to add 2,78% to manufacturing GDP and 11% to manufacturing employment in 2010.
Restricted access to the SA market for US poultry producers was an obstacle to Agoa’s renewal but SA compromised by allowing greater access for US chicken producers, even though an impact on local production is expected.
This may have been in vain if the issues in the security legislation are not addressed.
The current version of Agoa has a review provision, which allows the US president to terminate or suspend the Agoa membership of a country which contravenes the agreement.
The elimination of trade barriers is one of the requirements for access to Agoa, and the US has already expressed concerns about the foreign ownership restriction in the Private Security Industry Regulation Amendment Act. Enactment of the contentious clause 20(d) of this act would probably be sufficient to cause SA to fail a review, and lose access to Agoa.
The report also examined the role that foreign-owned private security firms play in the wider SA security environment, the proposed amendment’s risk to investor value and its impact on equipment manufacturers.
It found that the amendment would result in substantial risk to the value of international firms operating in SA (ADT, Chubb, G4S, Securitas) and companies that supply, manufacture, install and distribute equipment to the industry.
Where parent companies are uncomfortable with holding only a minority share, which is likely where brand identity and intellectual property are at stake, they would get rid of their entire local stake. Furthermore, foreign-owned firms would go to the market simultaneously, driving the cost of assets down.
But the greater cost is likely to come in the form of reduced incentives for international firms to invest out of fear of an increased risk of expropriation.
The report found that there may be crime-related costs as a result of the implementation of the foreign-ownership restrictions. The proposed legislation will also undermine knowledge transfer and reduce the industry’s crime-deterrence effect.
The proposed amendments to the act will include multinational companies that supply, manufacture, install and distribute equipment to the private security industry.
The report highlights the effect on foreign-owned equipment manufacturers, who are likely to disinvest rather than lose control of their brand.
This will affect the client support provided. The ability to customise equipment to suit client needs will decrease and the availability of parts may be limited. This may affect Bosch, Sony, Apple, Samsung, Panasonic and even listed local firms with majority foreign shareholding, such as Bidvest. It is hard to see how the proposed amendment could generate benefits sufficient to outweigh its costs.
The best decision would be to remove section 20(d). This would send a signal to our trading partners that SA intends to honour its commitments and remains supportive of the rights of international investors.