Try the beloved country
South Africa's problems aren't over, but its business future has great potential, says David Hughes
Wednesday 15 February 1995
There is no doubt that there are still political, economic and regulatory question marks over investment in South Africa. Will the Government of National Unity be able to improve living conditions through the reconstruction and development programme (RDP) while maintaining a commitment to sound management of the economy? Will disenchantment at slow progress and the continuing preponderance of economic power in white hands create unrest? How long will President Nelson Mandela be there, and who will succeed him?
There are the economic shortcomings, many of which are listed in the RDP white paper: repressive labour practices, neglect of training, isolation from the world economy, low investment in research and development, outflows of capital and talent, low exports and high imports.
On the regulatory side, the architecture of self-protection erected during the years of isolation remains: exchange control, two-tier currency system and the debt standstill. Exchange control has the particularly pernicious effect of bottling up wealth in South Africa and leads to over-valuation of assets.
In the face of all this, when clients are looking at investing in South Africa, what do you tell them?
In the first place, there is no future in attempting to judge the country's political stability by West European standards. South Africa is, and will remain for the rest of the century, politically risky. This does not mean, however, that the coalition of interests has ceased to exist. The government is neatly poised in the middle of the political spectrum and the state president and candidates to succeed him are aware of the importance of compromise.
Historical reasons exist for the economic problems and rigid regulatory system inherited by the new government, but they would largely disappear if the country had an open international market economy There are many encouraging developments in the search for that goal; the economy is growing (forecasts of GDP growth for this year are around 4 per cent), and plans have been announced for privatisation of state-owned industries, a shake- up of civil services and an austerity drive. South Africa is a signatory to the Uruguay round of Gatt, has an independent central bank and has been granted sufficient investment grade ratings by international agencies to raise funds on the international capital markets.
On the regulatory side, signs are also encouraging. The Reserve Bank has spoken optimistically about abolishing the two-tier currency system (which in any event benefits foreign investors) and exchange controls on non-residents. Redemption of foreign loans under the 1985 debt moratorium has also been successfully renegotiated.
One of the most intractable problems is the huge amount of economic wealth remaining in the hands of a few dominant industrial groups. This acts as a disincentive to direct investors because of the high concentration of market power and the barriers to market entry it implies. However, the cross-holding structures underlying this are beginning to be dismantled. Gancor, Johannesburg, Consolidated Investments and Barlows have all recently been through unbending exercises. Unfortunately, the biggest fish of all, Anglo-American, has set its face against the process.
The well-balanced economic policy of the new government and recognition that an investor-friendly climate is essential for prosperity will run side by side with the opportunities created by the RDP. Estimates of the total RDP spend vary, but the first year's budget allocation of R2.5bn is only a fraction of what will be ploughed into the programme with the help of funding from financial institutions and soft funding from international aid agencies.
The commercial opportunities created by the RDP are plain to see. The UK lawyer will be involved in direct implantation by UK companies, in the acquisition of existing business, and in increasingly popular joint venture deals. A number of major infrastructure and other projects are under way and a continued upswing in this area is expected, using international contractors and sources of finance.
South Africa has a sophisticated legal system based on Roman Dutch law, but in the commercial arena, it is heavily influenced by English law, especially in banking, insurance and corporate areas. UK lawyers will be familiar with many of the legal concepts and structures, and there are strong local firms capable of handling complex transactions.
South Africa's relatively simple tax system should also be examined. Its comparative lack of sophistication and isolation from foreign tax planners give rise to opportunities. Some structured finance techniques used to enhance funding with a tax or accounting benefit, or minimise a tax or accounting problem, may have application in South Africa, even if the techniques have been closed off by anti-avoidance measures in the UK. One off-shoot of this is the advantage to be gained in asset financing or leasing deals using tax-efficient structures.
South Africa has already become a source of work for UK lawyers advising on acquisitions by South African companies in Britain. As they gear up to spread further their geographical risks, there will also be financing opportunities in the international equity, Eurobond, syndicated loan and other capital markets.
The writer is a solicitor with Wilde Sapte.
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