From BEE to FDI

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South Africa's Department of Trade and Industry (DTI) released the long awaited second phase of its Black Economic Empowerment (BEE) codes of good practice in mid-December. Judging by the response from the business community, it would appear the government is finally getting right when it comes to a broader based BEE.

The codes have drawn particular criticism for being a deterrent to foreign investment. This criticism has been levelled by business people, commentators and opposition parties alike.

Therefore, perhaps the most interesting aspect of the new codes is that foreign-based multinationals will be exempt from selling an equity stake to a black partner.

The new codes place more weight on preferential procurement, skills development and small business development as areas where multinationals can score points. In order to do so, however, the companies will have to perform more aggressively in these areas.

In addition, foreign companies will also have the option to engage in public programmes as a substitute for an equity deal, but this would have to amount to 25% of their business in order to make up the 20% weighting on the scorecard.

Previously, if a company did not make an equity deal, it automatically lost 20% of their BEE score, leaving them with the other 80% to work with. The remainder was divided into areas such as training, preferential procurement and equity of management personal. The new codes enable a company to exchange the 20% attached to equity for other BEE programmes.

BEE only applies to companies that bid for government tenders. Companies that fall into this category generally aim for a score of 65% - at which point they are deemed by the DTI to be a "good contributor to broad-based economic empowerment".

The release of the new codes has been welcomed by foreign companies operating in South Africa. Mike Springer, CEO of Pitney Bowes SA, told OBG last week that had their shareholders known when they re-invested in South Africa back in 1994 - they boycotted the country in the 1980s - that they would have to give away 26% of their South Africa operation to a BEE partner, they would simply have stayed away.

Springer also cited the case of recent negotiations with a prospective BEE partner who made an eleventh-hour demand for a large discount on the offering. This proved to be a deal breaker. This is a common complaint for businesses in South Africa; many BEE partners simply do not have adequate financing or business experience and those who do, know that they are in high demand.

Along with other frequently cited deterrents to doing business in South Africa, including security concerns and foreign exchange controls, the former BEE regulations have been high on the list.

Many analysts would argue that foreign companies do not understand why they should be forced to give away a significant part of their business to a local partner when they have had nothing to do with South Africa's past.

Meanwhile, with competition for foreign direct investment (FDI) in the developing world cut throat, companies will generally go to the easiest and cheapest place to do business with the most tax incentives.

In a recent interview with OBG, Leon Lowe, from the Free Market Foundation in Johannesburg, said that companies' resistance to BEE had nothing to do with the past, or with foreign companies having to choose a "black partner". It is simply that they are forced to find a partner. "It wouldn't matter what colour they were," he said, "it would still have the same effect."

The counter argument to this logic is that despite a distinct lack of tax breaks and all the red tape and confusion surrounding BEE, South Africa has still been relatively successful in attracting foreign investment.

Indeed, 2005 has been a particularly successful year for FDI in South Africa, with the Barclays buyout of ABSA and the Vodaphone-Venfin deal propelling the Johannesburg Stock Exchange to record highs.

South Africa undoubtedly has an advantage as a strategic base and CEOs often cite this as the principle reason for investing there. South Africa has the reputation internationally as being one of the few countries in Africa that can offer a fully functioning business infrastructure. It has a solid legal code and a banking system that ranks among the most sophisticated in the world. South Africa is therefore often seen as the logical launching pad from which companies can take on the rest of the continent.

The new codes signal a victory for pragmatism over idealism. Trade and Industry Minister Mandici Maphala was recently quoted in the newspaper Business Day as saying that South Africa was trying to attract FDI and prescribing strict equity requirements would not help.

However, most analysts agree that South Africa needs to do better if it is to compete for FDI with the likes of India and China. The new BEE codes will certainly go a long way towards making South Africa look a better bet.

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