EU flags outside the EU Commission headquarters in Brussels, Belgium. Picture: REUTERS/FRANÇOIS LENOIR
EU flags outside the EU Commission headquarters in Brussels, Belgium. Picture: REUTERS/FRANÇOIS LENOIR

SA’s trade relationship with the EU has blossomed significantly, with the Southern African Development Community-EU Economic Partnership Agreement (EPA) entrenching our preferential trade relationship. Not only is the EU SA’s largest investor — accounting for about 40% of total investment stock — but it is also the country’s main trading partner, accounting for almost 25% of SA’s overall trade flows.

In its efforts to strengthen this partnership, the EU’s delegation to SA continually engages with EU companies to get a sense of their experience of doing business in the country. In line with this, the delegation supports studies and workshops to identify opportunities to increase bilateral trade and investment between the EU and SA, and to deal with the main constraints to unlocking such opportunities as well as support meaningful economic transformation.

Given our extensive ties, the EU and its 27 member states have a strong interest in co-operating with the government as well as business formations and representatives to foster an investor-friendly environment, to promote SA as a preferred investment destination and to support SA’s economic recovery.

But challenges remain. Despite their interest and commitment to increase their investment in the country, EU companies highlight a number of challenges that inevitably affect investment decisions and that might well obstruct them from being able to contribute to economic transformation.

Broad-based BEE (B-BBEE) in its current form is especially challenging for most companies and investors.

The ownership target is particularly problematic, as many EU enterprises are family-owned and therefore unable or unwilling to transfer shares to external parties.

In this regard, a recent EU-funded study into the effects and costs of B-BBEE on EU companies found that while EU investors across the board were accepting and embracing of the imperatives of economic transformation, there is a level of insecurity, or angst, which can only be alleviated through a “recalibration of the current B-BBEE policy”. 

The ownership target is particularly problematic, as many EU enterprises are family-owned and therefore unable or unwilling to transfer shares to external parties.

The study recommended that this could be tackled by better rewarding skills development while reducing the emphasis on ownership, thus making SA significantly more attractive, particularly to foreign small, medium-sized and micro enterprises (SMMEs).

A second obstruction is public procurement. The SA government, as the country’s largest buyer of goods and services, greatly influences business decisions: through their procurement policies, the local authorities in a number of cases have made local production internationally uncompetitive.

Earlier in 2020 the National Treasury released a Draft Public Procurement Bill setting out a single regulatory framework for all tiers of government and state-owned enterprises. It regrettably is silent on how B-BBEE, including the preference point system, and local content regulations (notably, minimum thresholds and the sectors they will cover) will be applied. This creates uncertainty.   

Localisation requirements

Regarding the issue of localisation, the SA government has applied a wide range of localisation policies since the 1990s, largely through state-owned enterprises. While in some sectors local content policies have positive spin-offs, with EU companies able to reduce costs and export to the Southern African Development Community, in others localisation is restricted by a weak industrial base and increases the cost of sourcing inputs.

The ability of firms to meet localisation requirements in the renewable energy sector is particularly difficult due to the significant costs of establishing production facilities, the additional skills development requirements that come with renewable energy bids, and the unavailability of certain inputs, domestically. This is particularly relevant for power producers in the sector.

Employment equity also presents some hurdles. The Employment Equity (EE) Amendment Bill published in July allows the employment & labour minister to set and regulate sector-specific targets for companies with more than 50 employees and operationalises the equity compliance certificate as a prerequisite for accessing state contracts.

The penalty for noncompliance, especially for a company doing business with the state, will be absolute — it will be barred from working with the government. The bill gives the minister a very high level of discretion to define an economic sector and set targets “on the basis of any other relevant factor”. For established and potential investors, especially those wishing to participate in government infrastructure and energy investment projects, this presents a new and significant risk.

A lack of the necessary skills in-country — due to a challenged education system, labour legislation and significant challenges in obtaining visas and work permits for foreign nationals — further erodes the ability of international firms to operate competitively in SA.

To ensure that SA’s investment drive meets its objectives, it is important to tackle — in a mutually satisfactory manner — key obstacles to investment that dissuade and in effect prevent companies from contributing meaningfully to economic transformation.

For most EU investors, the overlapping and cumulative requirements of these multiple and changing policy frameworks make investment or expansion decisions particularly complex and, in some cases, prohibitive.

• Luzenberger is the EU Chargé d’Affaires.

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