EDITORIAL: A tale of two countries
India summit exposes why SA needs a solid economic plan to attract meaningful investments
In a world of mounting global economic headwinds, how do you convince a potential investor to pick your country ahead of nearly 200 others?
Ultimately the decision will boil down to one key consideration: the investor’s expected return on capital. The higher that number — taking into account the risks associated with the investment — the easier the decision.
Two ways to improve the odds are therefore to lower the costs and risks of doing business. In SA, discussions around investor sentiment centre mainly on the risks of doing business.
This is arguably a hangover from the Jacob Zuma era, when a finance minister could unceremoniously be dismissed and a mines minister could publish key policy documents with hardly any consultation with stakeholders.
Land expropriation without compensation and the debate around the Reserve Bank also remain red flags. At the weekend’s India/SA Business Summit held in New Delhi, it was the cost discussion that dominated. The reality is that SA is a small market. Its population of just over 50-million is barely a blip on the radar when compared to India’s of more than 1.2-billion.
This is partly why it will be important to implement the African continental free trade agreement as quickly as possible — it would, in theory at least — put the market size in terms of population size in the leagues of China, India and trading blocks like the EU.
One technology investor explains it like this: to get a start-up off the ground in SA is similar to trying to take off with an overloaded plane. You’re out of runway before lift-off. In markets with a billion-plus people, the runway is somewhat longer. The trick is to get the plane as light as possible by bringing costs down.
SA ‘will become a market where everyone will end up just dumping their product’.
SA, however, has been doing the opposite. For various reasons we have increasingly priced ourselves out of the market. Fuel, tax and electricity price rises to record levels are often framed in public discussions from a consumer viewpoint.
The reality is that it leaves the entire economy less competitive. At the weekend’s summit, one Indian businessman who has been doing (declining) business in SA for the past 12 years, lamented the seeming lack of an economic plan. He supplies to the foundry industry and has seen his SA customers going steadily out of business.
Citing high energy costs, a drastically weaker rand and a lack of government support for the manufacturing industry, he warned that SA “will become a market where everyone will end up just dumping their product”. A weaker currency has often been touted as a way to help improve the sector’s competitiveness; his testimony served as a handy reminder that a weaker rand actually leaves manufacturers who rely on imports in their processes at a disadvantage. “Why is your government allowing the manufacturing sector to perish?” he asked, exasperated.
Other costs were also highlighted. One multinational warned that it has been forced to downscale operations in SA as “demands” placed on them when tendering for parastatal projects raise legal and ethical concerns. One coal trader, who is shifting his focus to Indonesia, euphemistically described the problem as “leakages” in the system. “You see all these added ‘costs’ that you don’t know if it’s real or not,” he said.
SAA came under fire for its 2015 decision to cancel the hugely popular direct flight between Johannesburg and Mumbai. CEO Vuyani Jarana admitted that the route offers a potentially lucrative opportunity but said SAA’s cost base has grown so out of control that it simply cannot launch any new long-haul flights profitably without getting its costs under control first.
Add to this very low economic growth in SA and a population that has steadily been getting poorer on a GDP per capita basis, and one can understand why news of the talks between President Cyril Ramaphosa and Indian Prime Minister Nahendra Modi only made it to page 11 of the local Hindustan Times.
With a domestic market that is expected remain the fastest-growing major global economy for the foreseeable future, based in a region with huge, high-growth markets, Indian business people are spoilt for choice.