FIRST MEETING OF THE INTERNATIONAL INVESTMENT COUNCIL

Issued by: Office of the Presidency

22 June 2000

24-25 June 2000

BACKGROUND BRIEFING

President Thabo Mbeki officially announced the establishment of the International Investment Council in his State of the Nation address to Parliament on 2nd March this year. By drawing on the insights and wisdom of distinguished international business leaders who comprise its membership, the Council is intended to provide guidance to the President on how the economy of the country could meet the challenges of economic development through the attraction of foreign direct investment (FDI).

The members, amongst the most influential business leaders operating in the global economy, have committed themselves to participating in the council to assist in finding solutions to spearhead South Africa’s economic growth.

Key focus of the first meeting of the Council

A specific focus of the first official meeting of the International Investment Council to be held from 24-25 June 2000 will be the reasons why South Africa has failed to attract FDI. The Council will examine inter alia the following critical factors influencing the inflow of FDI to South Africa.

• Macroeconomic Indicators
  
• Investment Trends in South Africa
  
• Challenges Facing Developing Economies such as South Africa in attracting FDI
  
• Facilitating FDI Generally and Ways of Promoting Investment in South Africa

Attendees

The first meeting of the Council will be attended by all the members of the Council. They are:

Mr William R Rhodes, Vice Chairperson,
Citigroup/Citicorp/Citibank
Mr Frank Savage, Chairperson, Alliance Capital Management International
Mr Niall FitzGerald, Co-Chairperson, British-Dutch Unilever
Mr Minoru Makihara, Chairperson, Mitsubishi Corporation of Japan
Dr Sam Jonah, CEO and Group Managing Director, Ashanti Goldfields of Ghana
Mr Ratan N Tata, Group Chairperson, Tata Enterprises
Mr Tan Sri Dato’Mohd Hassan Marican, President and CEO, Petronas of Malaysia
Dr Martin Kohlhaussen, Chairperson, Commerzbank AG and President, Association German Banks
Mr Jurgen Schrempp, CEO, DaimlerChrysler
Lieutenant General Sir Robin Ross KCB OBE, SSAFA FORCES Help

The meeting of the Council will also be attended by the following Ministers:

Deputy Minister of Finance, Mr M B Mphalwa
Minister in the Office of the Presdient, Dr E G Pahad
Minister for Public Enterprises, Mr J T Radebe
Minister of Public Works, Ms S N Sigcau
Minister of Trade and Industry, Mr A Erwin
Minister of Communications, Dr I F Matsepe-Casaburri
Minister of Minerals and Energy, Ms P Mlambo-Ngcuka
Minister of Foreign Affairs, Dr N C Dlamini-Zuma
Minister of Environmental Affairs and Tourism, Mr. M V Moosa

FDI in South African

FDI is particularly significant for sustainable economic growth and development in South Africa. It serves to catalyse economic competitiveness through regional differentiation and specialisation. It frequently entails the transfer of much-needed technological and managerial skills, thereby bettering local enterprises and enhancing local human capital. And in a virtuous cycle, this in turn improves the investment environment.

According to the 1999 World Investment Report, FDI inflows to Africa amounted to US$8.3 bn in 1998, down from US$9.4 bn in 1997.

This was largely accounted for by a decrease of flows into South Africa where privatisation-related foreign direct investment fell back in 1998 from a peak in 1997. The rest of Africa registered a modest increase. Overall, Africa has benefited from a rise in inward FDI since the early 1990s, but growth in FDI flows to the region has been far less than that in relation to other developing regions and countries.

Much of Africa's FDI potential remains non- or under-utilised. The 1999 World Investment Report show that South Africa's share in world FDI inflows increased to 0.1% in 1999 from 0.05% in 1998.

This is, however, a decline from South Africa’s share of 0.36% in 1997. The decline in FDI inflows into South Africa in 1998 can largely be attributed to lower privatisation-related FDI, and to a lesser extent, by the Asian markets’ crisis of 1998. FDI though has remained at low levels. In 1998, such investments, excluding mergers and acquisitions (M&A’s) which do not result in new productive capacity or job creation, amounted to only about R693m. The average figure for the last three years was about R 1700m.

Figures quoted in the World Investment Report were US$ 370m in 1998 and averaged about US$950m for the last 3 years, though these figures would also include those mergers and acquisitions where the foreign investor has a controlling interest.

According to Business Map figures (1994 to 1999) the United States of America has been the largest investor in South Africa, followed by Malaysia and the United Kingdom. In 1999, South Africa saw an increase in FDI from Germany, Japan and Italy.

During this period, the information technology and telecommunications sector has received the largest share of FDI into South Africa, driven primarily by the Government’s privatisation efforts. This was followed by the energy and oil sector, whose inflows have come as a result of an international repositioning strategy. The third sector beneficiary is that of food and beverages, an indication of available resources and local competitive advantage. Another sector beneficiary was the motor and components sector. We set out the top 10 single FD Investments for the period 1994-99.

• The corporate tax rate has been reduced.
• The costs of raw materials have been reduced. The introduction of extensive tariff reform policies has stimulated a reduction in the cost of imported inputs to production. A reduction in raw material costs can also be attributed to better operating practices such as more efficient production technology.
• Transport and electricity costs have been stabilised or have fallen.
• Real unit labour costs have been relatively stable. During the fourth quarter of 1999, the growth in unit labour costs was negative. This is possibly the first time in decades that a negative growth in labour costs has been recorded and is largely a function of improved productivity and competitiveness.
• There has been diminished strike activity in the in the private sector in recent years and a reduction in the duration of strikes.
• Increased advantages are perceptible at the level of senior managerial competence and corporate marketing.
• Ongoing infrastructural development programmes have contributed significantly to a high standard of physical and information infrastructure in the country. Infrastructure has an aggregating effect on modern production processes that rely heavily on logistical efficiencies.

Afro-pessimism

Over the last six months leading international investors selected South Africa as their most favoured emerging market. This comes in the wake of the recent upgrade of the country’s standing to an investment grade rating by international rating agencies including Standard & Poor’s, Moody’s and Duff & Phelps. Yet the re-rating of South Africa has yet to yield tangible investment results: it has not yet enjoyed a significant inflow of FDI since 1994.

A fundamental problem facing emerging economies generally is the tendency of FDI to flow to regions or countries that are already developed. This tendency is exacerbated by the process of globalisation in which investment decisions are made within the ambit of prevailing global market conditions. Where particular markets are seen as not providing hospitable conditions for FDI, where they are perceived as costly or risky, they are progressively marginalised as investment destinations. And in the era of globalisation, capital is particularly mobile. As an economy becomes marginalised, the supportive environment for investment in these markets deteriorates.

What has become clear is that South Africa’s image abroad has become a key factor in determining foreign investor behaviour. The positive images emerging out of the political settlement in 1994 - of hope and peace, of the political miracle that transformed a country from a racist oligarchy to a constitutional state and the promise of a rainbow nation - have largely dissipated. The investor goodwill towards the new democracy has been replaced by a kind of ‘negative branding’. This gives rise to perceptions which leads potential foreign investors to avoid committing capital to South Africa following political eruptions in other African countries. South Africa has by association, become viewed as part of the ‘hopeless’ continent as the Economist recently dubbed Africa. Africa is simplistically portrayed as a continent ravaged by violence, disease, corruption, instability and economic backwardness.

The South African Government is therefore determined to market the country positively both locally and abroad. Without the perception of a favourable environment, all attempts to promote FDI will be ineffective.

Conclusion

South Africa has survived the volatility in the global financial markets well, which underscore the resilience of its economy in relation to other developing countries. While the effect of the Asian financial crisis was significant in that it resulted in a set back of the achievement of national targets by 18 to 24 months, it was by no means as severe as experienced by other countries like Malaysia, Thailand and Russia.

Within the context of sound macro-economic policy and improving micro-economic fundamentals, South Africa is poised to enter a new phase of its investment promotion strategy.

The deliberations and recommendations of the International Investment Council, it is hoped, together with the South African Government’s substantial efforts will have the desired effect of dramatically increased FDI into the country.

For more information contact Tasneem Carrim at 083-650-7119