Will trade winds favour the Cape of Good Hope?

While President Mandela and his South African government colleagues were encountering a fairy-tale welcome last week in London, it was snowing back home in South Africa. And not just a nice dusting either. The snowfall was unseasonably heavy, accompanied by a biting wind and sub-zero temperatures.

Sadly, Mr Mandela and his entourage will bring back little from their trip to London to warm the hearts of the South African people. Beneath the pomp, the real objective of the South African government's high-profile visit was to drum up inward investment to provide jobs, proper housing and social services for the estimated 35 per cent of its citizens who currently lack all three.

If you judge the South African economy by the statistics, nothing is particularly wrong. Inflation has fallen to 6.3 per cent, its lowest level for 20 years. Economic growth this year is predicted at 3.3 per cent, a creditable - if unspectacular - performance. Even unemployment, officially documented as 37 per cent of the workforce, may be as low as 25 per cent, according to the OECD, if the "unofficial" economy is taken into account.

The short-term prognosis for the economy is indeed pretty rosy. The 12 per cent devaluation of the rand in the last year has improved the competitiveness of South African exports. And as stability finally breaks out in the sub- Saharan region with the end of the war in Angola, a wealth of economic possibilities is being opened up.

So what's the problem? Two years on from the euphoria of Mr Mandela's election, South Africa's economy stands in a curious spot as a semi-emerged market, neither Third World nor First World. It has a highly developed financial services industry, but vast tracts of the country lack basic infrastructure and social services. Behind this, there is a deep-rooted disappointment that an economic miracle has not followed the political one.

South Africa has also had an ambivalent relationship with foreign investors. For many years the members of the current government campaigned vigorously against investment. After an initial rush following the election - of firms whose links had only recently been severed, or who had retained small operations - the number of companies beating a path to South Africa's door has slowed dramatically.

"The chickens are coming home to roost," said one London-based economist. "When you've had massive disinvestment, it's hard to play catch-up. Unfortunately, the money hasn't sat around waiting for South Africa to get its house in order."

To add to foreign investors' confusion, the political climate has remained muddy. The Reconstruction and Development Plan, which started in 1994 as an ambitious social programme akin to Attlee's welfare state plan, was plagued by differing interpretations and huge gaps between its goals and the means to achieve them.

South Africa has also suffered from persistently high levels of violent crime and a large, unskilled labour force inherited from a biased education system that is proving hard to train and employ. Worse, the skilled professionals have been leaving in droves. The consequences have been a renewed uncertainty about a country that could, in the words of one South African economist, "turn ... into just another banana republic".

The man charged with the unenviable tasks of pulling in foreign investment, reforming the labour markets, and performing other assorted miracles was not Mr Mandela himself, who recently admitted to taking little part in day-to-day government. Instead it was Alec Erwin, former trade union leader, now trade and industry minister, who led the charge for more investment. He admits it will threaten South Africa's economic recovery if it does not show up soon. "I will weep if we only get pounds 20m worth of investment from this trip," he said. "I want hundreds of millions."

At first sight, Mr Erwin's choice of Britain seems an odd target for South Africa's biggest roadshow yet because it is already the largest foreign investor in South Africa, with more than pounds 12bn of assets in the country. Yet it appears to be one of the few countries with whom South Africa still has a healthy economic relationship. Lingering worries in the United States over South Africa's relationship with Cuba, and in the European Union over the monopoly arrangements that South Africa's companies have within their borders, has not deterred investment completely, just made investors from the US, France and Germany a bit more wary.

With the state visit to London, the South African government is playing its trump card - President Mandela - for perhaps the last time. In Mr Mandela they have the ultimate statesman, and a magnet for those powerful investors who need to have their ears bent and pockets emptied if South Africa is to stand a chance of becoming a developed nation. It is a transformation Mr Mandela himself is unlikely to see in his lifetime.

The South Africans arrived in town with a following wind. In a statement in June, Trevor Manuel, the finance minister, reassured foreign investors that the government had not lost its drive by outlining a package of economic growth measures and privatisations, and dropping a strong hint that the government would adopt a more aggressive stance towards the powerful trade unions.

However, potential investors were still concerned about labour problems, crime and instability, and the delegation spent most of the week playing down all three, with limited success. The easiest was the prospect of instability, which has receded into a virtual non-issue with the endorsement of the experienced diplomat and senior government figure Thabo Mbeki as likely successor to President Mandela, and the peaceful elections in KwaZulu Natal province last month.

Crime is harder to ignore. There were nearly 20,000 murders last year alone and 67,000 armed robberies, which include the notorious carjacking epidemic.

Twice as many police officers are now taking early retirement because of stress or injury than were doing so four years ago. Yet the overall crime rate actually fell from 1994, and is due to fall again this year after an aggressive police crackdown in Johannesburg.

The fear among South African businessmen now is over the emergence of organised crime syndicates. For instance, a Zairean businessman recently discovered that a container load of cobalt belonging to his business disappeared from Cape Town docks a few months ago, only to turn up in Greece.

But according to a study from South African investment bank Nedcor, most overseas investors are not worried about crime rates when it comes to writing out cheques. Their concerns are more pragmatic: will the costs of unionised labour and exchange and tariff controls mean that they cannot make money?

This, if anything, is the main sticking point. According to Steve Oke, South Africa analyst at Merrill Lynch: "You're not going to get companies to invest in an inefficient, low return situation just because it's seen as a good cause."

The source of City worries is the high-wage, unionised labour

force that still dominates South African industrial policy. Above these workers there is a dire lack of good management, particularly in the large public sector, where a quasi-official affirmative action policy has installed capable but inexperienced non-whites in jobs they have not been trained to do. Below them lies the vast underclass, somewhere between a quarter and a third of the population, who have no formal job at all.

Mr Erwin last week tried to play down the fact that no representatives from Cosatu, the trade union movement that has a minority stake in the government coalition, accompanied the delegation in London. According to Mr Erwin, it was "the union's own wish" that they did not attend. Publicly, the trade union movement has supported the economic reform package announced last month, even its pledge to look at privatising state-owned industries. But privately, union officials are becoming more uneasy about the implications of privatisation, which they feel could cost the jobs of thousands of their members and at the very least put an end to some of the plusher employment benefits currently enjoyed by unionised workers.

Mr Erwin says the government is committed to trade union reform as part of its privatisation programme. But others close to the government believe the union issue will have to be handled carefully, and perhaps held over until the 1999 elections.

It has taken Mr Erwin, and the more pragmatic heads in the government, two years to convince their colleagues that the dream of real social change for South Africa's vast numbers of poor people is inextricably linked to the mundane reality of finding them jobs in factories, restaurants and offices owned by non-South African companies.

Some of this investment is already happening unprompted - though not without a few hiccups. McDonald's returned to find someone else using its name and golden arches logo on a fast-food restaurant, and was unable, under South African law, to enforce its patent and get the competitor to remove its logo. But the corporation has not got cold feet: McDonald's is going ahead with plans to open 90 restaurants over the next two years.

British companies such as Land Rover and Cadbury Schweppes, which remained in South Africa through the apartheid years, have had an easier time, but in both cases have just invested in existing operations (see "Land Rover", page 1). Vodafone, on the other hand, has been very successful from a standing start. Its joint venture in mobile phones now has 60 per cent of a market that has expanded sixfold to 500,000 subscribers in two years, and is estimated to top 2 million by 2005.

Not all investments are of a multinational flavour. Trevor Baylis, inventor of the "Freeplay" clockwork radio, has opened a factory in Cape Town with pounds 350,000 in a grant from the Overseas Development Office and an investment from Liberty Life, a South African insurance company. Mr Baylis's factory will make 250,000 radios this year from a factory in Cape Town, worth around R50m (pounds 7.4m), for sale within the southern African region. He says he intends to step up production as cashflow allows. He reports no production problems from his six-month-old production line, which employs 150 people, many of whom have disabilities. "It's a simple idea, which is ideal in a place where batteries are scarce," he says.

If only things were as simple. The main bait for foreign investment over the next 12 months will be the privatisation of Telkom, the telecommunications network, and the state-owned transportation and logistics business. Mr Erwin spent much of the week meeting with potential privatisation advisers, and will look for UK businesses to take strategic stakes in the privatised entities. If Cape Town's bid for the 2004 Olympics, which Britain has agreed to support, is successful, it, too, would draw in development money. Combined, privatisation and the Olympics might be just be the critical mass required to catapult South Africa out of its semi-emerged market limbo, as it did South Korea when it hosted the games in 1988.

But for now, with pounds 60m of British overseas aid for education in southern Africa and the promise that Britain will fight South Africa's corner with the EU over free trade, Mr Erwin and his colleagues will return to the snow and ice of a South African winter with more promises of jam tomorrow, but not much to show for their efforts.

For Mr Erwin, there can be no doubts. "We are facing up to some tough economic realities, but we've had an extremely good response," he says. "You shouldn't underestimate the power of fairy tales."

When South African government officials need an example of inward investment from Britain, they point to the Land Rover factory in Rosslyn Park, Pretoria, opened by the Queen on her state visit last year. At first sight it looks to be a model for inward investment in South Africa. The pounds 10m development produces around 2,000 Land Rover Defenders a year from knock-down kits, and employs 230 people.

What is less well known is that the Rosslyn Park plant merely replaced another Land Rover assembly plant near Cape Town, which had churned out about 700 vehicles a year throughout the apartheid years. The latter was closed to make way for the new Land Rover facility which, while larger, does not represent the same size of inward investment as might first appear.

Rover Group says it is very happy with the quality of vehicles being produced in its South African facility, but is even happier with the sales graph for all its vehicles in the country. The company looks on course to sell up to twice as many Land Rovers this year as it did in 1995.

Much of this growth comes from sales of the mid-range Land Rover Discovery, imported from Britain since the start of last year, which have outsold locally produced Land Rovers by a margin of two to one. The company will continue to review the situation, but says it has no plans to add to the capacity of its South African plant to meet the demand. It is clear that if there are no onerous import tariffs, it is cheaper to assemble whole vehicles in Britain.