SA needs to right wrong in its country investment strategy
In May, the presidency presented an inaugural draft country investment strategy (CIS) that aims “to position South Africa as a key preferred African investment destination by attracting and facilitating quality foreign and domestic direct investment into the country in a well co-ordinated manner, anchored by quality institutions and robust economic infrastructure networks”.
Logically, the CIS is supposed to analyse economic indicators and give direction on strategic and tactical resource allocations. It typically should assess the portfolio of competencies (and capabilities), review and (re)position investment strategies, and give guidance on what the country should focus on. A quality CIS anchors a country’s priority investment and economic development sectors, including the desired level of investment. Hence, South Africa’s CIS proclaims the country’s “important endeavour of advancing its National Development Plan target of 30% of gross fixed capital formation to gross domestic product (GDP) by 2030”.
Fundamentally, gross fixed capital formation is investment ploughed into the economy in plants, machinery, equipment and buildings specifically. Consequently, it is essential the CIS spells out goals and objectives on desired investment, oversight and risk management, as these elements provoke and beget an effective investment policy and, ultimately, socioeconomic sustainability.
Interestingly, the gross fixed capital formation to GDP ratio has been deteriorating for more than 40 years, having reached a peak of 32% in 1976, a far cry from 2021’s 15%. The highest percentage in democratic South Africa was in 2008 (23.5%), influenced by the prolonged upswing in business. Since then the proportion has been on a slippery slope due to slower pace in investment by the private business sector, public corporations and government departments.
Observers rightly feel the crafting of the CIS was belated given President Cyril Ramaphosa always put investment at the centre of the country’s socioeconomic revival. Having ascended as president, Ramaphosa said South Africa intended to attract $100bn (R1.2-trillion at the then exchange rate) between 2018 and 2022.
Envoys traversed the globe to galvanise investment as a cornerstone of economic growth. Annual conferences, at which companies pledge the sizeable investments they intend to make in South Africa, have become part of the mobilisation agenda.
Initially it appeared the emphasis was on foreign direct investment (FDI), prompting some to caution on the necessary conditionalities thereof. With prescient knowledge of CISs, a seminal contribution was presented to the investment conversation, including the provision of guidance on the prerequisites of FDI and what type South Africa should focus on.
It was noted that “simply to pump a country full of FDI will not catapult it to a higher stage of development”. In the submission “Beware of the FDI trap”, policymakers and strategists were advised that South Africa should assess three conditionalities for the benefits of FDI:
● Do the types of FDI being attracted generate significant spillovers?;
● Do domestic sectors have the capacity to absorb these spillovers? In the case of developing countries such as South Africa, there needs to be a domestic sector to take advantage of the spillovers; and
● Is the FDI being attracted a substitute or complementary to domestic industries?
A lot has happened since 2018 and the agenda on attracting investment has been refined to differentiate between domestic investment mobilisation and FDI, with greater emphasis on attracting, facilitating and retaining the latter. This is commendable, as we have witnessed events that show domestic investment mobilisation is more resistant to black swans, solidifying patriotism and, more importantly, empirical studies indicate there is no evidence of “escape FDI” from South African multinationals.
It was intriguing that finance minister Enoch Godongwana made no mention of CIS in his medium-term budget policy statement, raising the question: will South Africa attract the “right” investment?
Instead, there was the tired platitude that “leveraging fixed investments is a critical part of achieving sustainable and inclusive growth. [It] supports economic recovery, raises the economic potential and creates jobs.” One would have expected more substance, given Godongwana observed that our gross fixed capital formation contracted, on average, 4.4% annually between 2016 and 2020. The seemingly forgotten CIS is likely to yield a scenario in which the country runs the risk of attracting the “wrong” investment, which is like capital infusion at a higher cost.
Mobilising investment also requires a business case and evangelising about CIS. It requires government departments to put their shoulders to the wheel to attract investment and retain it.
I sought and gained insights from business leaders on investment mobilisation efforts as a contribution to formulating guidelines for this country’s investment strategy. The solutions lie in what business leaders see as critical and could come in handy as Godongwana acknowledged that though the contraction has been broad-based, private sector investment, which accounts for nearly twothirds of fixed investment, as well as that in the public sector, have declined.
Reversing the trend and improving investment standing requires sharp focus on understanding the pros and cons of FDI and domestic investment mobilisation, and what decision makers (business leaders) say about a credible CIS. The trend is unlikely to be reversed unless there is alignment among the presidency, Treasury and relevant departments, which should take cognisance of what business leaders say and what they consider impediments to investment.
On the CIS, strategists do not want a scintilla of doubt that there might be lack of co-ordination among policymakers. The aspiration is to find a subtle economic alchemy between and among departments.
In our view the presidency and Treasury are on different flight paths, each facing headwinds, and the South African economy looks set for a hard landing. In an environment in which there is a general lack of co-ordination and a deficiency of investment optionalities, how does one expect effective collaboration and harmony that is conducive to yielding socioeconomic development among critical stakeholders?