South Africa: A goldmine for British investors or too hot to handle?

South Africa: A goldmine for British investors or too hot to handle? - Shirley Skeel tests South Africa's business climate.

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Last Updated: 31 Aug 2010

Shirley Skeel tests South Africa's business climate.

A Capetown black-run taxi pulled up hastily on the Seapoint boulevard, its fare collector hanging out of the van's open door soliciting customers. Two young women tourists, each alone, clambered in taking seats with the all-black clientele. A tubby American woman dressed to kill, and seemingly wise to the local ways, followed, joking loudly. However, a middle-aged German couple, also waiting at the bus stop, held back open-eyed. They would wait for the white-owned city bus service, thank you. The door slammed shut and the van carried on.

The three white passengers made it to the downtown shops in good time and at a slight discount on the fare. It was a somewhat rocky ride, full of surprises. The German couple arrived a good 10 minutes later - in "respectable" company.

For British companies looking to invest in the now reforming Republic of South Africa, the story is much the same. Those that climb in early are in for an eventful and possibly controversial ride, though if they choose their vehicle and destination carefully, the monetary returns could well be worthwhile. Those that hold back may find on entry later that it is a more competitive, if more predictable, market, but even then the ongoing change will mean no lack of business opportunities.

In the words of UK South Africa Trade Association (UKSATA) executive director Nick Mitchell, trade missions from Asia, Europe and North America are already "falling over themselves" in their eagerness to grab this new territory. One British member of such a mission, Keith Hambleton of the nickel alloys supplier Philip Cornes International, returned reporting: "I'm sold on the place." Another says quietly: "You see rottweilers and German shepherds there like you see labradors in the UK. With a family I'd be concerned about security."

If one looks at the money that is talking, the British reaction so far is undoubtedly cautious. Mitchell says that he knows of a dozen new British investments in the past 18 months, and it is "mostly small stuff so far". The largest deal is a new 35 million rand (£7 million) catalytic converter plant to be built by Johnson Matthey to service local car makers. Executive director Gordon Thorburn says: "We wouldn't have put it there but for the fiscal incentives."

It is, of course, early days, and with 450 trade enquiries a week stuffing the mail bag at London's South African Embassy - for everything from pine bunk beds to grease guns and ostrich leather - there is obviously plenty a-boil in the entrepreneurial sector.

Britain is already the biggest investor in South Africa, accounting for over 40% or an estimated £10 billion of foreign investment. As a trade partner it has lost top position to Germany, but last year still saw £1.1 billion of goods flow each way, making the UK the only country to increase trade in 1990.

Three very large issues now bend the minds of those who are quietly dusting off the Cape of Good Hope on their boardroom wall maps: politics, economics and the risk/return of business there.

American President George Bush alone, by lifting most US sanctions, has so far changed little. More than 140 US states, counties and cities still retain their own sanctions, thereby inhibiting both US investors and British companies with sensitive American clients. (When the once-sanctioned Namibia became democratic, a US task force had to be set up to tell local bureaucrats that times had changed.)

And although the European Community, pre-empted a full 10 months by Britain, dropped its sanctions on new investment in December 1990, both the United Nations and the Commonwealth retain theirs. A meeting of the Commonwealth heads of government in October will reconsider the issue. But until the signals are clear, many companies are reluctant to start poking about in sensitive territory.

UKSATA's Mitchell argues fiercely that there is nonetheless every ethical reason to invest now. The country is desperate for new jobs. "Unless they have an economy that starts improving, there won't be a democracy, because no democracy can survive in increasing poverty," he states direly.

His old rival in polemics, Anti-Apartheid Movement executive secretary Mike Terry, counters that it is still far too early: the changes in apartheid practices so far are minimal and there is no guarantee that the "free elections" are going to mean a fair deal. "De Klerk doesn't envisage a majority-rule government without the National Party. He still talks about power sharing and protecting minority rights."

Mitchell, in turn, insists that a fair government that satisfies the blacks is President De Klerk's only option to violence now. "He has walked to the edge and looked at the abyss," he says, thumping the table. And the argument goes on.

The economics are more of a one-way street. As Jonathan Garner, a London School of Economics South African Centre researcher, says, in a country where 1,000 new people enter the labour market every day and there are only 125 new jobs in the formal sector, the picture cannot be pretty. Gross domestic product per capita has fallen in nine out of the past 11 years, despite some overall growth. As well, hit by the withdrawal of foreign capital, the country has simply not been able to finance the capital goods imports which it needs in order to grow. The large loans that could alleviate the situation are only likely to be forthcoming once Washington lifts its ban on International Monetary Fund loans. This initiative is critical for sustainable growth.

The National Westminster Bank, reflecting a widespread bank view, says that it still has no intention of making new loans to South Africa. A spokesman says that clients trading there will, as before, be serviced, while new project finance - whereby a loan is paid out of a large project's revenue - could become attractive. Standard Chartered Bank is opening a representative office in Johannesburg as a "trade finance outpost", but will not make new loans.

The Governor of the South African Reserve Bank, Dr Chris Stals, acknowledges gloomily that the drop in GDP by 1% last year, the 40% unemployment among the economically active and the continuing high inflation at over 14% are serious problems. But he points with hope to the first net capital inflow seen for six years: R 800 million in the first quarter of 1991. In contrast, from 1985 to 1989 some R 5 billion a year was bled from the country. There are other small positives - rise in foreign exchange reserves, a six-year current account surplus and a more stable rand - but Dr Stals intends to keep money tight. This longer-term, no-nonsense approach suggests future stability and falling inflation, but it requires new money to kick-start the economy to the degree needed.

Will it come? Looked at in one light, the prospects for an enquiring business look tantalising. For more than a decade South Africa has practised the art of self-reliance. It has built up a protected and diversified, though stifled, industrial base, backed by exports of gold, diamonds, coal, steel, uranium, rare metals and food. Suddenly, now that the international gates are opening, the country's whole economy must convulse into an export-oriented, specialised, competitive base that adds value to its rich raw resources and serves not only its own expanding (and hopefully better off) population but also that of much of Africa. Opportunities for enterprise, it seems, abound.

Or, as the South African Embassy's golden-tongued trade minister, Peter Pullen, puts it: "It will be like Aladdin's cave. Someone will say the magic word and the rock will roll away." That someone may have to be President De Klerk himself, and the words be along the lines of: peace, stability, training and incentives.

For British companies already operating in South Africa - there are nearly 100 with controlling stakes, including names like RTZ, ICI, Lonrho, BP, Glaxo and BTR - the attractions of the country are clear. It has a good infrastructure, sophisticated finance, growing markets, relatively cheap land, abundant raw materials, wonderful climate and the important incentive of the financial rand that allows investing foreigners to stretch their currency further.

One duly impressed importer, Tenmat Ltd, a subsidiary of automotive and engineering group T and N plc, is now looking at the possibility of expanding sales in South Africa by setting up a factory locally, rather than shipping in British-made goods. Sales manager Brian Lowrey says that the availability of cheap local materials make the prospects for expanding trade into Africa attractive.

Another British exporter points out that one of the great attractions of entering South Africa by way of a joint venture is that a local partner's knowledge of both the Republic itself and of the vast mass of Africa to the north is invaluable. Most importantly, says Paul Hayball, director of horticultural supplier Export Market Development, when they deal with Africa "the South Africans get paid". For large companies, joint ventures also remove the health hazard of trying to break into a country virtually owned and controlled by five conglomerates. Says a former South African banker: "They will fight you if you try and take them on in their backyard."

Africa, as a continent, is potentially a jewel in commercial terms. There is the gold, oil, diamonds and agricultural wealth of Angola and, to a lesser extent, Namibia; the rising wealth in Zimbabwe, Malawi and Botswana; and the prospect of returning Mozambique to its former glory as a tourist resort, once peace is fully restored. The obstinate poverty and debt remain major problems, but slowly African politicians are reforming and establishing longer-term fiscal and economic policies that make investment more attractive.

The South African Embassy's trade minister, Peter Pullen, cites quite a list of businesses offering fresh investment possibilities. Capital equipment is an obvious one. Visitors report seeing factories equipped with 1950s and '60s machinery. Government incentives encouraging exports will provide the spark to update, while internal and external sources provide the funds.

Computer software is one area where South Africa had to land on its feet after the major US companies pulled out. It too is now ripe for new input. Telecommunications is similar. "Britain has technology we don't have yet," Pullen says. "These telephone cards and cellular phones - it's very untapped. Car phones likewise, they're very limited." Power generation, in contrast, is one of the country's strong points: it generates 70% of the continent's electricity. However, the prospect of a revival of industry and in rural living standards means that help will be needed with power distribution. The same is true for the distribution of the large gas reserves found at Mossel Bay.

The promise of a swing in Government objectives towards the social issues of housing, education and health will also demand private involvement. "Billions of rand are being put aside for socio-economic uplift and a lot of that is housing," Pullen says. Large corporations are expected to assist by providing finance for their staff to buy new houses. Educational aids for schools and most certainly new private training programmes and schools - for example, secretarial colleges and computer courses - will be in demand as progress is made.

Consumer goods are an obvious market. "The GNP of the black population of South Africa is growing year by year," says UKSATA's Mitchell. "And it's also a market where conspicuous expenditure is quite attractive. They're not a property-owning culture yet and pay low rent, often with multiple wage earners in a family." White goods, electronics and, in a gold-rich country, jewellery for export are some of the ideas offered. For anyone who has visited South Africa, tourism, too, occurs as an area with potential for good returns - the country is stunning.

To brighten the package the South African Government has come up with several schemes. Export incentives, regional development grants, special electronics, chemicals, television, jewellery, vehicle and motor components support schemes, tax incentives, tariff protection and duty rebates are all on offer. Company tax, cut in the latest budget from 50% to 48%, is still high but is targeted for further cuts. An import surcharge, which has put a 50% total duty on items such as televisions, is to be lowered further, and for capital goods it is to be totally phased out. Under the TechniFin programme certain joint venture technology projects will be underwritten.

On the downside, the most cited problem is the enduring violence. South African Foreign Affairs Minister Pik Botha himself, in an honest if undiplomatic moment, admitted: "We all know investors do not easily invest in a situation where people are killing each other on such a scale in this bloodthirsty manner."

Undoubtedly media coverage of violent events has a negative effect, but it is not only personal security that worries investors. Stability of the Government, of whatever colour, is paramount too. The African National Congress, although it suspended the armed struggle a year ago, has not helped with its foggy aims. Says Mark Foster, group director of household products group Reckitt and Colman, which has a presence there: "It's not very clear yet what the ANC stands for. There are different views, though it's certainly not hostile to private enterprise."

Cadbury Schweppes, another company which has been in South Africa for a few years, says that the fluctuating fortunes of the economy present the biggest problem. "That influences demand and productivity, and planning for it long term has been most difficult," comments managing director David Wellings.

A more immediate and constant complaint is the desperate shortage of skills. This is hardly surprising, as one executive observed, in a country with a deliberately poor education system. But on top of this, the labour cannot be called cheap by world standards. It costs perhaps $500 a month for a semi-skilled worker. Strong unions have won these deals in recent years, and, if anything, higher expectations could continue the upward push.

For a company's finance department, inflation and exchange rate losses are the biggest headache. The 600 Group, which makes and distributes machine tools in South Africa, has found exchange losses on overseas loans eating up its capital, while the 14%-plus inflation has demanded more and more working capital, according to finance director Simon Powell. Local interest rates of 20% and strict borrowing requirements discourage that route of avoiding foreign exchange losses. Nonetheless, demand for The 600 Group's product is growing, and with the rand stabilising, the company is now considering setting up its main African distribution base in South Africa rather than Botswana.

No one expects the next five years to be easy. Assuming that an acceptable constitution is worked out before the next election - due by early 1995 - it will be a massive programme to educate, train and uplift the black and coloured population, which makes up 84% of the near 40 million residents. The initial attraction for outsiders is more likely to be in low capital cost services and businesses and in the exchange of trade, rather than in large-scale projects.

Nonetheless, the fleet-footed Asians have already shown the latter to be feasible. While Europe, the US and Japan were shunning the apartheid-ridden country, many Asians did not. Some 300 Taiwanese factories now dot the region. The embassy's Peter Pullen points out anxiously, however, that this has done nothing to shift South Africa's historical respect for Britain. Certainly Mrs Thatcher's own form of rebel sport, single-handedly batting against sanctions, did much to sustain the old ties.

There is no doubt many British companies are looking curiously back down the old sea route. The more daring are loading up crew. Standard Chartered Bank and merchant banker Robert Fleming Holdings are opening offices, while Smith New Court is launching the first specialist South African investment fund. Financiers like Hambros and SG Warburg are "watching with interest", BP and Shell are expanding a Durban refinery, while Guinness is quietly investigating its African brewing options.

A large company with its toes already well wet, Reckitt and Colman has a more cautious view on taking a fresh plunge. "We want to see the outcome of the (Government-ANC) negotiations. We would look for a peaceful outcome," says director Mark Foster. "I think it will be a difficult period through the '90s until the constitutional question is solved."

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