President Cyril Ramaphosa was in London in mid-October trotting out the reasons for Europeans to invest in South Africa. 

‘Since last year we have been implementing key structural reforms to address perennially weak growth, ignite economic activity, restore investor confidence and create jobs’, he said.

There was all too much that was unconvincing about Ramaphosa’s efforts. For one thing he seemed to feel compelled to sing the praises of the entire continent as an investment destination, surely an indication of a lack of focus on the issues within his control. For another, his proclaimed reforms in energy and broadband haven’t actually happened; his government is struggling to implement them and his audience knew this.

But worse, he ignored the elephant in the room, the massive disincentive that is South Africa’s rambling, fuzzy and every-changing Broad-Based Black Economic Empowerment framework. This is a subject not mentioned, either by the president or his audience. Perhaps it seemed impolite to criticise the policy before its foremost beneficiary. After all, South African business – or at least the corporate barons who interact with the president – also shies away from the topic.

But the hard-nosed money men and women who attended the Financial Times Summit at which Ramaphosa spoke, are not gullible. Much like their South African counterparts, they may not challenge Ramaphosa on the issue, but private conversations reveal that it is probably the single most pressing disincentive.

The investment community is not at all disturbed by the ‘unfairness’ of a policy which restricts local partnership to only a (racially defined) section of South Africa’s population. Nor do they care two hoots about supposed racial redress. What investors do, after calculating potential returns, is work out how to operate in sub-optimal environments. That is a core investor skill.

But what they find when they look at South Africa is not only a sub-optimal investment opportunity, with what returns there are being diverted into the pockets of the small number of black business people – who are continuously and seemingly perpetually being recycled in the BEE system – but also radical regulatory uncertainty.

Prospective investors ask what is likely to happen if they bite the bullet and invest in South Africa, with a BEE partner. If that partner should cash out, will the investor have to finance a replacement? If they invest in a sector exempt from direct BEE ownership, like automotive manufacturing, what ‘offsets’ in terms of supplier development and localisation will be imposed? Above all, what are the chances of these anti-investment regulations remaining constant over time? Will their BEE equity obligation rise from 26 percent to 30 percent over time, as has happened in mining?

If an investor cannot or will not comply with this changing landscape further down the line, what sanctions will they face? Expropriation is a fear, especially given the planned changes to Section 25 of the Constitution. South Africans often seem to forget that this will make not only expropriation of farms possible, but any sort of private property, including mines and factories. 

One of the reasons Ramaphosa is able to leave any mention of BEE out of his speeches to investors is that the subject is by its very nature an obtuse issue. When a foreigner avers the risks associated with a South African investment and chooses to put his or her money elsewhere, no one stands on a soapbox and makes a ringing address about how race-based empowerment raises the risks, not to mention the costs, to unacceptable levels. The elephant in the room goes unmentioned.

If President Ramaphosa were even slightly competent at attracting investment, he would pre-empt the issue. He might even say, as former Trade and Industry Minister Rob Davies did on similar roadshows, that BEE is an unfortunate but non-negotiable aspect of South Africa’s investment climate.

But Ramaphosa either doesn’t see it or, more likely, is too mendacious to mention it. In either case, the failure dooms his investment drive to failure.

Written by David Christianson was commissioned to write this article by the Institute of Race Relations, a liberal think tank that promotes political and economic freedom. Go to https://irr.org.za/