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South Africa must become the entrepreneur for attracting investment

Deloitte’s Martyn Davies on how Ramaphosa’s investment summit can attract FDI.

President Cyril Ramaphosa must use his South Africa Investment Conference to demonstrate a willingness to effect structural reforms and the creation of a functional state in which competition is prioritised, says Dr Martyn Davies, MD for emerging markets and Africa at Deloitte.

“The state needs to become the entrepreneur in the same way as Asian states have underwritten the incredible economic development of their societies.”

The summit, which forms part of the president’s efforts to attract $100 billion in new investment into South Africa over the next five years, must seek to address policy uncertainty and show a commitment to explore policies that enable economic dynamism.

In South Africa’s case economic dynamism would flow from investment-induced activities, which may be labour-intensive and stimulate job creation, and which, if made in the right areas, may generate high returns and result in long-term gains in productivity.

While Ramaphosa has set a new investment target of $100 billion, Davies says the qualitative nature of investment, coupled with the efficient use of capital, is more important than the mere quantitative amount. 

The ‘quality’ of capital is measured by the incremental capital output ratio (ICOR), which is an estimate of how much investment is necessary to raise GDP growth by 1%. The higher the ICOR, the less productive the capital. Citing IMF data, he says South Africa’s ICOR was estimated at 10 between 2010 and 2017, meaning that it would take a 10% increase in investment to raise GDP growth by 1%. The data shows that South Africa’s ICOR is second highest among its BRICS peers, with that of China and India estimated at 5.8 and 4.8 respectively.

He says capital efficiency can only be enabled through the implementation of deep structural reforms, including privatisation of moribund state-owned enterprises (SOEs).

According to Davies, there is a long overdue need to allow private capital to operate better as poorly managed SOEs have had a negative effect on squeezing out private capital opportunities. “It is proven that the state cannot effectively provide governance oversight of the country’s leading SOEs. This can only come about through a private shareholding, which will force accountability.

“Consider Eskom and Transnet. These companies with their monopolistic practices mean that alternative power stations cannot be built, alternative railway links linking commodity assets to ports cannot be built, and private ports cannot be built. This has had the effect of squeezing out significant private sector opportunity and capital. The capital is not allowed to flow where it is required because of state monopoly capital.”

Privatisation, be it full or partial in the form of a true public-private partnership, will go a long way in immediately motivating significant foreign investment into the economy and putting a dent in the US$100 billion target.

He does, however, note that such reforms would be politically difficult to implement especially as the political left continues to dominate the rhetoric around economic policy. “We’ve seen in Zimbabwe and Botswana that localisation and indigenisation hampers attracting foreign capital. Local equity holding obligations and attracting foreign investment are often in contrast. It is very difficult to balance redress and foreign investment, which cares little about legacy issues – it seeks return.

“The current government must learn from recent mistakes and incentivise capital, not actively deter it. Capital must be incentivised and enabled, and countries need to compete for it – not the money, but the intellectual property that flows with it.”

Foreign direct investment (FDI) is impactful in that it comes with an inbound transfer of knowledge and skills, as demonstrated in East Asia where global companies played a pivotal role in introducing state of the art technical and management techniques and upgraded the skills and knowledge of the local workforce, he says.

FDI flows to South Africa amounted to 7.4% of total investment and averaged at 1.5% of GDP per year between 2005 and 2016, World Bank data shows. That FDI flows to emerging markets, per UNCTAD [United Nations Conference on Trade and Development] data, remained unchanged between 2016 and 2017 – compared with a contraction in flows to developed markets – shows that investors are still interested in opportunities in developing economies such as South Africa, he says.

He adds that South Africa must pull out all the stops to attract FDI and work to channel FDI to start-ups, small businesses and low-income regions with high levels of unemployment to build economic dynamism. 

“President Ramaphosa should focus on building economic dynamism in South Africa. The stakes cannot be higher and the need more urgent. The time to act is now.”

Brought to you by Deloitte.

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Unless an enabling entrepreneurial environment is created there will be little or no entrepreneurial activity taking place in South Africa.

Also, get the corrupt ANC out of the way in Local Authorities as well.

Prinesha, your 2nd paragraph is “screaming”

The East, be it the far east tiger economies, plus China or India added have corruption. So putting that aside why have they or how have they done it growing their economies since recent colonial times?

Unlike South Africa, there is a total lack of apathy and procrastination to handling problem issues that get in the way of prosperity

SA government an entrepreneur?

Asian economies compete on productivity of their labor and human resources. In African we compete on productivity of our natural resources and commodities. Apples and Oranges.

Government job in Asia is to create environments for human resources to thrive, build industrial parks and export centers. In Africa, governments need to create infrastructure and conditions for resources to move out smoothly.

Since every business venture SA gvmnt has embarked on has failed, why is Deloitte suggesting they keep heading down this path?

Its the “FREE” generation, created by the none other then the ANC that manifested into a entrepreneur-less country. The “FREE” the government should have invested in , should have been “FREE”-Trade.

Try as hard as he might, Benito Mussolini could not make a soldiering nation out of the Italians the way Hitler could with the German nation.

In the same way, Ramaphosa will not be able to make entrepreneurs out of South Africans. They are raised to think in a diametrically opposite way.

Private Capital Opportunities and racist BEE policies unfortunately are contradictory so until we rid ourselves of divisive and prohibitive BEE policies our Economy will not flourish. In my opinion.

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