Americans Doing Business In South Africa – Planning Investments During the Government of National Unity resulting from the 2024 national and provincial elections in which the various African National Congress (ANC) factions were very busy with infighting (allegedly real and definitely figurative) and adopted little “mass appeal” legislation hijacking several of the hottest themes from the rival Economic Freedom Fighters. Most likely nothing legislated in 2023 will have any promised social benefits for the voters prior to casting ballots. However, there will definitely be several instant and anticipatory negative effects including job losses, business retrenchment and relocations, and currency devaluations from the collapse of budget restraint as well as state owned businesses. The ruling ANC may not be able to keep electricity flowing to business 24/7 but it has demonstrated a proven competency in exercising the “power” to stifle business and crush the job creators of South Africa through regulation disconnected from the business reality. Further, there remain structural obstacles to business success beyond the power crisis, of which more is discussed (infra). Combined the legislation and the other obstacles are the threats to economic performance and the degrade the business climate in South Africa for both foreign investors and local business leaders. 2
- Water & Agriculture –
Proposed water licensing regulations gazetted by the Department of Water and Sanitation (DWS) in May 19, 2023 (No.3434) , and according to the draft regulations, certain enterprises applying for water use licenses to take or store water will, in the future, have to allocate shares of 25% (properties greater than 100ha) up to 75% (properties greater than 1,000 ha) to black South Africans for such water use licenses to be granted.
The proposed regulations arise in the context of existing Section 27 of the National Water Act, under which the DWS must consider “all relevant factors when issuing a water use license “ (it is not clear whether ‘renewal of a license’ is subject to the proposed regulations). This already includes the need to redress the results of past racial and gender discrimination. These proposals are DWS’ most sweeping effort to date toward changing the demographics concerning water use in South Africa and to reallocate water based upon race rather than productivity or contributions to the national GDP.
The Proposed water licensing regulations come from Minister Edward Senzo McHunu, https://en.wikipedia.org/wiki/Senzo_Mchunu who is an established leader of the ANC faction supporting former President Jacob Zuma but who came over to the current President Ramaphosa in 2017 when he ascend to the ANC National Executive Committee (“NEC”). He is allied to the ANC cadres pushing for “Radical Economic Transformation” (RET) which cadres make up part of the Ramaphosa coalition governing the NEC (which is the ANC’s equivalent of the “politburo.”).
The latest Food Affordability Index from the Pietermaritzburg Economic Justice & Dignity Group (PMBEJD) shows that rice prices have shot up 35% in South Africa – with warnings from analysts that more price pain could lie ahead. The PMBEJD’s May 2024 Household Affordability Index showed that the average cost of a household food basket currently sits at R5,330.30. This is a R258.70 increase from one year ago (May 2023), but a R6.01 decrease from April 2024. PMBEJD’s Household Food Affordability Index examines 44 food prices collected directly by data collectors from the shelves of 47 supermarkets and 32 butcheries that cater to the low- income market most frequented by the people in the areas where they live. Inflation data from Stats SA for April 2024 showed that sharp price increases were recorded for rice, with annual rice inflation accelerating to 26.4%— the highest reading since May 2009 when the rate was 41.9%. The May 2024 average cost of a basic nutritional food basket for a family of four persons is R3,745.15. After accounting for electricity and transport costs, 55.8% of a minimum wage worker’s salary is already spent. This sum leaves R2,046.52 for food and other necessities. If the entire R2,046.52 all went to buy food, then for a family of 4 persons, South Africans are looking at R511.63 per person per month and this sum is well below the food poverty line of R760 for 2024.
- Budget Deficits & Economic Stagnation –
The last time the country posted a budget surplus was the 2007/2008 financial year, after which the government has run 16 years of budget deficits. This trend has accelerated under President Ramaphosa despite his promises to limit government spending, tackle debt, and reinvigorate the economy. The country’s fiscal deficit will be around 6% of GDP in the current financial year. This means South Africa’s debt-to-GDP ratio will increase to over 75%. In 2008/09, gross loan debt amounted to R627 billion or 26% of GDP, with net loan debt at R526 billion or 21.8% of GDP. By June 1, 2024 the government’s gross loan debt had reached R5.21 trillion, or 73.9% of GDP. This has also seen the government’s debt servicing costs skyrocket. It is now one of the largest spending items in the budget, with the country paying over R1 billion a day in interest on its loans.
- Workplace Entitlements –
Proposed forced employment requirements on all businesses in South Africa (over 50 employees) is already enshrined in new laws, which were signed by President Cyril Ramaphosa in April, are not yet in effect, with the Department of Employment and Labour anticipating promulgation in September 2023.
Under the new Act, the employment minister, TW Nxesi (Thembelani Waltermade Nxesi) https://en.wikipedia.org/wiki/Thulas_Nxesi is empowered to set sector-specific numerical targets for the racial and gender makeup of designated businesses, which must be achieved over five years.
Designated businesses are all businesses in South Africa that employ more than 50 people. The laws apply to all designated businesses – even those with no intention of doing business with the state.
At heart of the issue with the laws is that, while they are being touted as targets, they could be interpreted or positioned as racial quotas (the Act sets rigid racial quotas for four different job levels across 18 economic sectors) The department has denied this, saying the targets are flexible. The official opposition party claimed that these laws violate the constitutional rights to equality, freedom of trade, occupation and profession, as well as the original Employment Equity Act’s own prohibition on quotas.
- Property Rights (Real & Personal) –
Expropriation of “property” without compensation failed in 2021 when approached as a constitutional amendment to Section 25 of the Constitution (Constitution of the Republic of South Africa, 108 of 1996).
However, as an ANC policy since first proposed in 2008 and adopted as ANC policy during the December 2012 national conference, the success or failure of the expropriation legalization efforts is commonly viewed as a proxy war for ANC factions seeking the power of the presidency of the party (and the Republic). Rebirth of the expropriation effort (after the 2021 failure) under Ramaphosa’s tenure as leader of the much divided ANC National Executive Council resulted in the “Bill” (B23-2020) which legislates the expropriation being passed by the National Assembly on September 29, 2022. The Bill moved on to the National Council of Provinces, which closed the proposed laws for public comment in the beginning of March 2023, and where it sits now. The EU took the seldom used step of having submitted, on February 11, 2021, critical comments on the Bill then under consideration. The comments highlighted European concerns that open ended circumstances when “nil compensation” (the term used to avoid amending the Constitution) can be applied to expropriation of property has the effect of causing the exact economic uncertainty that the EU warned against (NOTE: the EFF claimed that “nil” was not the same as “none” in its criticism of the Bill – for which is sought no compensation for taking of property).
Further, the EU criticized the open ended definition of the “property” may now include for expropriation more than land such as personal property such as business inventory, cash, equipment, and business fixtures. Taking property without paying compensation to the owners has been a core “revolutionary” agenda item of the ANC factions known collectively as the Radical Economic Transformation (“RET”) wing. In terms of section 25(4)(a) of the Constitution “public interest includes the nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources”. Section 25(4)(b) defines broadly the property subject to expropriation. Section 25 (8) further states that the state may take “legislative steps and other measures … in order to redress the results of past racial discrimination…” There is no effort in these legislative actions to reconcile the Bilateral Investment Treaties (BIT) that South Africa executed with a variety of EU nations expressly to protect the interests of EU citizens investing in South Africa. This is an extraordinary “self-inflicted” economic injury. Further, according to commentary, the premise of the Bill appears to be to leverage the measure of compensation concept (using “nil” rather than “none”) in order to pass South African Supreme Court muster – “Simply depriving an existing owner of his or her ownership does not amount to expropriation. This appears (consciously) to mirror the 2013 Constitutional Court judgement in Agri South Africa v Minister for Minerals and Energy, which declared this view of the deprivation of a mineral deposit.” https://www.biznews.com/sa- investing/2023/03/13/south-africas-expropriation-bill-poses-threat-property-rights
- Young Professional Flight –
The absence of opportunities for young professionals (aged 25-34 of all races and genders) has caused a significant “flight” from South Africa. https://businesstech.co.za/news/lifestyle/690029/new-type-of-emigration- hitting-south-africa-and-young-professionals-are-behind-the-drive/ The trend was noted beginning in 2019 and has grown according to press reports. https://www.news24.com/news24/opinions/analysis/analysis-young-people-are- leaving-sa-heres-why-20190428 Black South Africans are leading the exodus. https://businesstech.co.za/news/business/292626/for-every-skilled-professional-coming-to-south-africa-8-are-leaving/ The corresponding tax base erosion is being watched by the financial sector. https://www.businesslive.co.za/bd/economy/2022-09-06-emigration-weighs-on-tax-take-as-young-skilled-people- leave-sa/ The shrinking talent pool makes hiring for international companies very difficult and compels corporates to budget for in-house skills training and up-skilling programs in order to build the qualified bespoke labor pool. This time and expense can offset the market price advantage of locating within South Africa.
- International Financial Grey-Listing & Business Banking Restraints –
On 24 February 2023, the Financial Action Task Force (FATF) took the decision to include South Africa on its “grey list”, thereby classifying it as a jurisdiction under increased monitoring. This decision follows the mutual evaluation report published by the FATF in 2021 (2021 Report) in which South Africa’s compliance with the FATF 40 Recommendations (Recommendations) and the level of effectiveness of South Africa’s anti-money laundering (AML) and counter-terrorist financing (CTF) system were assessed. South Africa adopted some new laws in 2022. https://www.treasury.gov.za/comm_media/press/2023/2023010601%20MEDIA%20STATEMENT- ENACTMENT%20OF%20KEY%20ANTI- MONEY%20LAUNDERING%20AND%20COMBATING%20OF%20TERROR%20FINANCING%20LAWS%20.pdf .
However, according the Weber Wentzel law firm (in a contemporaneous press release) Grey-Listing will result in “[d]ecreased competitiveness of South African companies in the global economy: South African companies, due to enhanced monitoring, will face more requirements to prove sources of funding, leading to higher transaction costs and delayed execution of transactions. This will ultimately harm the competitiveness of South African companies and South Africa as a whole in the global market. Financial institutions that rely heavily on global trade in their treasury departments will be heavily impacted. Trading offshore will come with higher due diligence hoops to jump through and more red tape. Trading revenue is therefore going to decline. The South African insurance industry will particularly be impacted.”
The size of the South African economy implies that even with concerted national efforts the period before being removed from the Grey-List could be five years (if not longer). Further, South Africa has a history of resisting FATF policies such as the long delay in adopting the Financial Intelligence Centre Act (FIC) Amendments recommended in 2012, legislated in 2014, delayed in 2017 by then President Zuma https://www.news24.com/fin24/fica-bill-delay-good-news-for-criminals-20170127 and only adopted in January 2023. The Russian love affair with the ruling ANC has also contributed to an intolerant international financial system approach to South Africa. The South African Reserve Bank (SARB) has warned the country’s so-called ‘neutral’ stance on Russia’s invasion of Ukraine will have ramifications for SA’s financial standing in the global markets.
Reserve Bank governor Lesetja Kganyago appeared before Parliament’s Standing Committee on Public Accounts (Scopa) to present the Reserve Bank’s findings from its 2023 Financial Stability Review. https://www.theafricareport.com/298401/south-africa-must-decide-if-it-wants-to-get-off-grey-list-or-be-friends-with- putin/
South African registered businesses confront extraordinary obstacles to financial transactions involving overseas companies, only made more difficult by the Grey-Listing. The South African Reserve Bank (SARB) has interpreted its regulations regarding a “related party” transaction recently to restrain any overseas collaborations in which South Africans are given management authority. This restraint compels corporates to obtain prior consent of SARB before a South African may be offered any management or “control” roles in an overseas company doing business in South Africa. See., Currency and Exchanges Manual for Authorized Dealers (2023-02- 08) § Definitions. The SARB determination seems in variance with the express permission granted by the Manual for an “authorized dealer” (read here “Bank”) to approve payments to the USA based company under §B.14.T(i) without regard for the overseas company ownership or control. However, the SARB process once invoked will stall any payments to the USA company by the South African franchisee or licensee entity if there are any indicia of “related parties” involved in the control of both. No franchise or licensee can ignore this “springing” difficulty that arises after the overseas fees are due with the doors are opened and the sales light switched on in a shop.
Similarly, South African Revenue Service (SARS) refuses to issue permits for the import or export of goods unless the “responsible person” on the permit is either a South African citizen or resident alien. The result is that none of the international shipping companies (FedEx, Amazon, etc.,) will open accounts for a South African company absent such a permit number. Whether an overseas based or South African registered company the SARS requirement appears fixed, despite an absence of regulation or legal authority for same. This refusal in turn requires SA companies, even if foreign owned, to have a Director who qualifies in order to obtain the SARS permit.
- National Health Insurance –
The Parliament (National Assembly) approved sweeping legislation to nationalize healthcare in South Africa (June 13, 2023) and the bill will now be reviewed by the National Council of Provinces (before heading to the President for signature). The provision of universal access to healthcare has long been envisioned by not only the constitution, which states in section 27 that everyone has the right to access to healthcare, but also by the National Health Act, which in its preamble declares an aim of the act as providing for a framework for a structured uniform health system within the Republic. The NHI bill is the manifestation of this statement. https://www.timeslive.co.za/ideas/2023-07-05-opinion-the-pros-and-cons-of-the-national-health-insurance-bill/
The National Health Insurance (NHI) is a health financing system that is designed to pool funds to provide access to quality affordable personal health services for all South Africans based on their health needs, irrespective of their socio-economic status. NHI seeks to realise universal health coverage for all South Africans. This means that every South African will have a right to access comprehensive healthcare services free of charge at the point of use at accredited health facilities such as clinics, hospitals and private health practitioners. “NHI is being implemented in phases over a 14-year period that started in 2012. It will be established through the creation of a single fund that will buy services on behalf of the entire population, The funding for NHI will be through a combination of various mandatory pre-payment sources, primarily based on general taxes.” https://www.gov.za/about-government/government-programmes/national-health-insurance-0 .
“A central issue is the future role of private healthcare and medical schemes once the NHI is implemented. The NHI Bill states that when the NHI is ‘fully implemented”, medical schemes will not be able to provide cover for services that are paid for by the NHI. https://www.discovery.co.za/corporate/health-nhi-the-role- of-medical-schemes In a way it’s a win for reducing inequality in both directions: the poor get better healthcare, and the rich get worse. How could the healthcare of the middle-class not deteriorate? The numbers just don’t add up. Currently, 52% of the money spent on healthcare is spent by 16% of the population.” https://mg.co.za/thoughtleader/2023-06-20-national-health-insurance-south-africas-great-equaliser/ There are 83 insurance providers who would be effectively locked out of the market in a nationalized scheme – and there is no indication that the current private insurance funding when redirected to the NHI – would be enough to fund both the 16% and the newly entitled 84% of the population (which is not insured). Omitting the discussion here of “choice” in healthcare decisions the NHI as passed would impose a “cost” on the paying population of unknown dimensions without any assurance of maintaining the quality and quantity of healthcare services.
- Starlink, Internet, Data Rates –
Internet access in South Africa is more complicated as a result of regulation and redistribution policies of the national government. The neighboring countries are rapidly choosing to invite Starlink to provide its services – but – not South Africa. The Electronic Communication Act (applicable to Starlink’s use of the radio spectrum) requires individual ECS and ECNS licence applicants or licensees to have a minimum 30% equity ownership held by persons from historically disadvantaged groups, which includes black people, women, youth and people with disabilities. https://techcentral.co.za/starlink-in-south-africa-balls-not-in-our-court-icasa-says/224778/ The facts of Starlink not even bothering to file an application to the regulator in South Africa make evident that the regulatory environment is uninviting to Starlink (and any other would-be satellite internet provider). The implications on productivity and competitiveness for South African based businesses is self-evident. https://technext24.com/2023/07/06/starlink-south-africa-equity-black-women/
South Africa has done little to make the internet affordable to the population (whether on mobile platforms or wired). One gigabyte of mobile internet in South Africa cost, on average, 2.04 U.S. dollars in 2022. The country ranked 135 in 233 countries worldwide, from the cheapest to the most expensive for mobile data. Out of 57 plans measured in South Africa, the lowest price observed was 0.07 U.S. dollars per 1GB for a 30 days plan. https://www.statista.com/statistics/1274035/price-for-mobile-data-in-south- africa/#:~:text=One%20gigabyte%20of%20mobile%20internet,for%20a%2030%20days%20plan. Yet according to data published by the American virtual private network (VPN) platform “Atlas VPN,” South Africans are the most internet-addicted persons in the world, spending an average of 578 minutes (nine hours and 38 minutes) online daily last year, three hours more than the global average. Based on data provided by online media monitoring company Meltwater and global creative agency “We Are Social,” the report covered internet usage trends worldwide among internet users aged 16 to 64. According to the data, the average time spent browsing the internet in 2022 was 397 minutes (six hours and 37 minutes) per day, equating to 2,415 hours yearly. https://technext24.com/2023/03/31/south-africans-most-time-online/ Expensive internet access and data rates make South Africa less competitive among its peers without providing any assurance of higher speeds and more reliable connections. South Africa’s rates are simply just more expensive.
Regina Mundi Global Advisors 