ANDREW BAHLMANN: ICT investment SA’s sharpest tool against falling FDI

Fixed direct investment (FDI) in SA can have an outsize impact on our GDP. Data from the UN Conference on Trade & Development indicates that FDI inflows into SA have been on a downward trajectory since 2016, and in the past year alone fell 39% to a miserly R46bn ($3.1bn) in 2020.

Data from the SA Reserve Bank in June showed FDI inflows further slipped to R6.1bn in the first quarter of 2021 from R16bn in the fourth quarter of 2020. This hiatus in FDI has most likely been aggravated by SA’s rampant Covid-19 pandemic and July’s domestic violence.

In this context, Vantage Data Centers’ plans for a R15bn Johannesburg campus at Attacq’s Waterfall mega-development, which promises to be the largest “hyperscale” data centre in Africa, is a much-needed tonic. Vantage’s carrier‐neutral Johannesburg campus will include 60,000m² of data space across three facilities once fully developed.

This is heartening. SA desperately needs to embrace 5G and artificial intelligence (AI), not just for our own sake but also as a catalyst to rejuvenate all of Southern Africa. Given SA’s strategic position — with a long coastline, many ports and a conduit to neighbouring landlocked countries — investment in digitalisation can unblock trade flows to the immense benefit of the region.

The investment by Vantage comes in the wake of a huge investment by Chinese technology giant Huawei in its cloud computing service in SA. Huawei already has two data centres located in Johannesburg after opening the first in 2019 and the second last year. Another is planned for Cape Town and potentially a fourth in Durban.

These are signs that, notwithstanding the precipitous decline in FDI into SA, it appears to be buoyant where it is most needed, in the information & communications technology (ICT) sector. Google, for example, announced it would invest about R2bn ($140m) in a fibreoptic submarine cable to provide high-speed internet across the country. Other foreign firms such as Amazon, Procter & Gamble and Heineken have also indicated keenness to invest cash into the country. African consumers have shown a striking reliance on technology across multiple platforms.

We are fortunate to have a steady roll-call of foreign companies looking to invest into SA companies. Their view of local companies differs little from the foreign view of SA as a whole. What makes the country appealing is the same as what makes a local company appealing. If one is hoping to attract a foreign buyer, or FDI, the motivation for anyone to buy a local business or invest in our country is that it is on a growth trajectory. There has to be a good history of growth, but leaving enough future growth for the buyer/investor. For the buyer, that means the payback period will be quicker and more attractive.

FDI investors are looking for a balance of growth combined with profit so they can grow with the business and the country. If there is either low growth or low profit projected, it becomes a tough sell. We therefore need to be realistic as a country that recovering the country’s FDI to its former level may well involve a time frame of up to three years. During this period we need to be preparing ourselves in the same manner as a company owner would prepare a company to be attractive to potential suitors.

For the moment, the realisation of sizeable investment projects outside the ICT space is likely to be drawn out, due to the unfavourable investment, economic and epidemiological conditions. FDI is, of course, sought after by emerging, middle-income economies such as SA as it often results in longer-lasting growth and employment, with money channelled into building factories and infrastructure such as roads and railways.

President Cyril Ramaphosa won the election in 2018 on a promise to revive investment through his economic reconstruction and recovery plan, setting an investment target of $100bn over five years. There have been frequent announcements since then of hundreds of billions of rand to be spent on transport and energy infrastructure. In fact, data centres such as that being developed by Vantage hold the potential to sharply reduce the amount of investment required in physical assets.

Enabling interoperability through smart ICT will fuel the transformation of transport by railway, air, road and ports. A fully connected rail, road, air and port system could be achieved through unified data sharing using smart technologies such as cloud computing, big data and Internet of Things (IoT). It would improve on efficiencies, and I imagine these involve the types of apps that will be developed at data centres such as that envisioned by Vantage.

So too, the decision in late June to permit independent power producers to generate up to 100MW of their own electricity, along with a big push for renewable energy, is likely to boost FDI. A recent study by consultancy EY-Parthenon found that the development of renewable energy projects could add up to half a trillion rand to SA’s economy.

It looks like SA is heading in the right direction in terms of high-value deals in the tech sector. I expect this tech mergers & acquisitions trend to continue as the pandemic nears its conclusion.

• Bahlmann is CEO of corporate advisory firm Deal Leaders International.