UK: VALUE ON THE VELD. - South Africa offers British investors deep pockets of first world wealth, untapped developing markets in neighbouring lands - and headaches.

by Rhymer Rigby.
Last Updated: 31 Aug 2010

South Africa offers British investors deep pockets of first world wealth, untapped developing markets in neighbouring lands - and headaches.

South Africa is a land of buts. The country is beautiful, but the crime rate is appalling. President Mandela is probably the world's most respected statesman, but his handling of the economy isn't so hot. Labour is cheap and plentiful, but tends to be of the semi-and unskilled variety. Etcetera, etcetera. There are few things about the place that come without some caveat attached.

That said, there are compelling reasons for British business to cast its collective eye southwards to Johannesburg or Cape Town. Britain enjoys enormous goodwill in the country at large, in the right places opportunity abounds, there is considerable cultural overlap and, for anyone wishing to do business on the continent as a whole, South Africa is the most obvious base. In fact, unlike any number of emerging markets where British investors have been criticised for their reluctance to take the plunge, the UK currently leads the world in investment, with around £10 billion worth of assets in place. Not that this is all a recent development: as Roddy Drummond, the deputy British consul general in Johannesburg, points out, 'Much of this inevitably represents investment that has been here for more than five years'. Of the capital that is new,'a lot ... comes from established companies such as Shell and BP who have just announced a £200 million investment in the refinery they own'.

Although it is obviously less of a leap to invest afresh on top of existing assets - and many British companies never left during apartheid, giving them a considerable edge over foreign rivals - a number of household names have set up from scratch, usually via joint ventures with South African partners. Three years ago Vodaphone, for example, took a 31.5% stake in Vodacom, a cellular phone company which commands around 60% of the South African market; its partners are Telcom, South Africa's analogue of pre-privatisation BT, and Rembrandt, an industrial conglomerate. Explains Joan Joffee, Vodacom's group executive, corporate affairs, 'The company was formed in 1993 and the network launched in June 1994. We've grown very fast - there are tremendous opportunities in this country.' The company now has a turnover of 2.5 billion rand (£355 million) and over 400,000 subscribers, with this number expected to exceed one million by the end of next year.

Virgin is also a new-comer. This month it starts flights to Johannesburg, one of many plans the company has for the country. It hopes to set up a radio station, Virgin FM Johannesburg, which will take the form of a joint venture. Virgin will provide 20% of the equity, the maximum permitted under South African broadcasting law. The company has designs on the retail sector, too. Says Virgin's Will Whitehorn, 'There are so many opportunities in South Africa.

One reason we're especially interested is that there's considerable demand for choice; (at the moment) for example, all the cinemas are owned by one company.' Although the government has committed itself to the unbundling of monolithic companies, decades of isolation cannot be shaken off overnight and monopolies, duopolies and oligopolies are likely to be commonplace for some time yet. Explains Whitehorn, 'The whole retail market is controlled by three large groups, and when foreign companies divested (in the apartheid era), everything was snapped up by one of the three.'

As Virgin's interest would suggest, the retail sector, particularly where it concerns fast-moving consumer goods, is an area where there is great potential for development. The demand - and ability to pay - for western goods should not be underestimated: per capita disposable income rose from 6,200 rand in 1993 to 7,300 rand in 1995. What these average figures conceal, however, are the substantial pockets of first world wealth in the country. While the extent to which economic power is concentrated in the hands of the few is difficult to gauge - these are not the kind of statistics that any government particularly wants bandied around - it's generally reckoned that 90% of the country's wealth is in the hands of 10% of the population and that, for every 10 rich citizens, nine are white.

Another sector likely to witness strong growth is tourism. South Africa is a beautiful country and, along with spectacular scenery, boasts the kind of exotic fauna we Europeans wiped out at the end of the last ice age. The potential is borne out by recent increases in visitor numbers.

In 1992 there were just over half a million overseas (ie non-African) arrivals. By 1995 this figure had nearly doubled. Martin Edge, formerly a merchant banker with Hambros and now group finance director of Conservation Corporation, a company which runs eco-friendly game reserves, believes tourism's future is bright. 'South Africa's problem is that so much of the economy is based on extractive industries; there's no really well-established manufacturing base which you need to produce a stronger, value-added economy and it's hard to see where the money will come from to develop this. But tourism is showing growth and provides spin-off benefits in the service industries. Tourism is such a natural for South Africa and, with better access to markets and a less protectionist economy, we're likely to see growth in these areas first; developing manufacturing will take much longer.'

For companies setting up in South Africa, be it in tourism or elsewhere, 100% equity is generally permitted yet joint ventures are very much the order of the day and government plays an important part for companies deciding who to jump into bed with. While well-connected white partners are easier to come by, the prevailing wisdom is that with the black economic empowerment programme, investors are usually better off teaming up with a credible black partner. Comments one businessman, 'For the entrepreneur, this is definitely the way to go - you'll get preferential treatment to the point where you can charge more for your products and any number of funds are available'.

Yet, for all the optimism, there are also good reasons to be wary of investing in South Africa. For one, the economy's recent performance has hardly been stellar. Following a contraction between 1990 and 1992, growth has been modest, ranging from 1.3% in 1993 to 3.5% in 1995. This is not bad by European standards, but it is not with the mature western economies that South Africa competes: in the first quarter of this year, Indonesia's economy grew by an annualised 8.1% and Turkey's by 8.2%. South Africa meanwhile managed a paltry 2.8%.

Many of the difficulties of setting up stem from the country's schizophrenic nature. South Africa is not really an undeveloped country, but it isn't a developed one either. On the one hand, there are Johannesburg's financial service industries which, while they may be unsophisticated by the standards of, say, London or Tokyo, easily cater for most business needs. In the absence of any real competition the city is the financial centre of Africa and the Johannesburg Stock Exchange, with a market capitalisation of 1,200 billion rand, is the tenth largest in the world. The flip side of this is the rest of the country, much of which serves to remind that South Africa is very much a part of Africa: GDP averages out at under $3000 (£2,000) a head. Vast tracts lack even the most basic infrastructure, in urban as well as rural areas. Klip Town, for instance, a squatter camp of some 3,000 people built on marshy land near Soweto is a dense community of squalid shacks built of corrugated iron and whatever else happened to be around.

The geographic distribution of the country's wealth is similarly uneven.

Most investors head straight for the Gauteng province, and with good reason.

Within its boundaries lie Johannesburg and Pretoria and, despite covering only 1.5% of the country's surface area, it generates around 60% of GDP and houses the majority of the nation's industry. Bryan Webb, the British expatriate managing director of Cabletech, a company which imports machinery for the plastics industry, says, 'Most companies have their headquarters here. There's a business environment here and industry can grow. There are other important areas but companies tend to have satellite branches there.' Gauteng is also well-placed to export to the rest of Africa, though the markets are tiny in comparison. Notes Webb, 'Zimbabwe has a strong manufacturing base and we do business as far up as Kenya and Namibia; South Africa is seen as a base for supplying other markets. A lot of nearby countries are heavily dependent on foreign aid, though, and this distorts the picture: a lot of what they buy has to be purchased from the donor country.'

Given the gap between South Africa's haves and have nots, it is hardly surprising that one of the country's most serious deterrents for any potential investor is crime: 1995 saw just under 20,000 murders and 67,000 armed robberies. The extent of the problem is immediately apparent to anyone walking around one of Johannesburg's affluent white suburbs. The gracious, vaguely Mediterranean houses sit behind eight foot walls topped with razor wire while numerous signs advertise the speed and efficiency of the local security firm and its '24-hour armed response units'. On the business side of things, the police are currently monitoring 481 crime syndicates of which 187 are thought to have international connections. An indication of the seriousness of the problem is that troops have recently been drafted in to tackle crime.

Add to this exchange controls, a less than robust currency and concern that the government's commitment to and understanding of the business community is not all it might be and the reasons for some investor caution are pretty understandable. While the government has said it will lift exchange controls, exactly when it plans to do so remains unclear. Until it does, foreigners are still bound to ask permission whenever they want to take more than 500 rand out of the country.

Such fears and operating irritations all mean that for any potential investor, South Africa, like any emerging market, will represent a gamble for the foreseeable future. However, for any business wishing to establish a presence in Africa - arguably the last significant unexplored market on earth - it may well be a gamble worth taking.

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