The Barclays ABSA transaction represents the single largest foreign investment in South Africa’s history. In a deal worth R33bn ($5.11bn), Barclays took formal control of ABSA in June this year. Most analysts and political commentators believe the investment represents a huge vote of confidence in South Africa’s economy and sends the message to other investors around the world that South Africa has achieved political stability and is open for business.
With Vodafone recently buying into South African GSM operator Vodacom, the second-largest investment in South Africa, analysts increasingly talk of this just being the tip of the iceberg.
ABSA, which currently has 7.5m customers, is South Africa’s 10th-largest listed company, with a market capitalisation of R62.2bn ($9.62bn). The bank is now in the process of acquiring nine of Barclays’ sub-Saharan operations as part of a strategy to move Barclays out of the limelight in order to promote the ABSA brand. This is in line with ABSA’s stated goal to become Africa’s largest bank.
From its beginning, South Africa’s drive to achieve macroeconomic stability relied heavily upon attracting foreign investors, but they have been a long time coming. President Thabo Mbeki had to face down the wrath of both the South African Communist Party (SACP) and the Congress of South African Trade Unions (Cosatu) in implementing the growth, employment and redistribution (GEAR) programme of economic reform in 1997.
GEAR largely followed liberal economic policies such as the reduction of tariffs, the privatisation of non-essential state assets, reducing public borrowing and the liberalisation of labour laws.
These reforms have not been an easy sell. Wholesale re-distribution and an increase in borrowing to alleviate some of the desperate poverty in the townships and rural areas would have been far more popular policies.
Liberalisation became increasingly difficult to justify in the face of a capital flight in the wake of the Asian crisis and rising unemployment. Despite good infrastructure, macroeconomic stability and a relatively low level of corruption, foreign direct investment (FDI) remained very weak, at about 1% of GDP.
Within this context, it becomes clear just how important the Barclays investment is to South Africa. Vivek Arora, the IMF representative in South Africa, told OBG that it could lead to more investment.
“ABSA Barclays is a huge vote of confidence in South Africa. It is a very positive step and we already seeing interest from other foreign investors teeing off from the transaction,” Arora said.
Arora added that what is significant about that particular investment is that when you have such a huge investment by a bank you are making a statement about the whole economy because anything that happens in the economy is going to affect the health of the banks.
Bertie Lombard, CEO of Barclays South Africa, told OBG that Barclays is proud of the fact they are seen as the first international bank to make such an investment.
“We are immensely pleased that we led the pack, and I think this transaction has changed a lot of the sentiment around investing into a continent where historically we have wrestled with a strong sense of Afro-pessimism,” Lombard said
However, there remain several factors, unique or not to South Africa, which are often blamed for deterring investors. General Afro-pessimism and the “Zimbabwe effect” play a part, along with the high crime rate – often the only South African story that gets covered in the foreign press. Despite this, most experts believe that the single greatest deterrent remains the policy of Black Economic Empowerment (BEE). There are very few businesses that do not agree with empowerment in principle, but there remain fears over its implementation.
Perhaps the biggest sticking point is equity distribution. Although this is not the only empowerment criteria, it carries the most weight according to the score card system. A company can become 20% empowered by giving away 25% of its equity to a black business partner. Generally a company aims for a score of around 65%, at which point the company is deemed a “good contributor to broad-based economic empowerment” by the Department of Trade and Industry. While a company can score points in other areas such as employee diversity and management diversity, these carry less weight.
Picking through these details can seem like a bureaucratic minefield for foreign companies. To make matters more complicated, many industries have devised their own BEE charters with the government, each of which differs from the other. In addition, unlike BEE proper, the charters are not enshrined in law and could, therefore, be changed at the government’s discretion. For obvious reasons, this can serve a deterrent for many potential investors.
It is clear from the latest codes of good practice that the government is trying to address some of the concerns that can limit FDI. The example Barclays and Vodafone have set will undoubtedly light the path for other foreign companies who may otherwise have seen more obstacles than opportunities.
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