The EU, as South Africa’s biggest investment partner, welcomes President Ramaphosa’s strong commitment to building a new social compact around investment. This discussion paper outlines key challenges that are of particular concern to European investors whilst outlining possible ways forward to be discussed with South Africa.

South Africa is the European Union’s only Strategic Partner in Africa. The economic dimension of such relationship is fundamental as the EU is South Africa’s first trading and investment partner, accounting for 25% of South Africa’s trade and 75% of its foreign direct investments (FDI). Direct jobs dependent on this economic relationship are well in excess of 500 000 jobs.

The strength and strategic nature of the EU-SA economic relationship is that it encompasses virtually all economic sectors of the South African economy, thus contributing to economic diversification, export-orientation and inclusive growth. Car manufacturing, citrus and wine industries are just a few notable examples in this respect.

The recently ratified SADC-EU Economic Partnership Agreement (EPA) creates a free trade area with SACU and Mozambique, multiplying opportunities for strengthening trade and investment relations with South Africa and the region. A committed and forward-looking EPA implementation is thus a promising way to ensure that EU investors maintain confidence in South Africa and the region’s investment potential.

Data shows that FDI from the EU in South Africa has proven resilient despite the deteriorating investment climate of the past years, but remains insufficient to contribute to higher GDP growth. European investors stand ready to invest in strategic and labour-intensive sectors both through greenfield and brownfield investments, in support of South Africa’s growth and transformation agenda, however, a more certain and attractive investment and business climate is needed.

The EU welcomes President Cyril Ramaphosa’s strong commitment to building a new social compact around investment, accepting that without investment – foreign and domestic – the country cannot grow above 2%, as National Treasury has systematically warned. The target to attract a minimum of $100 billion in new investment over the next five years is an encouraging statement and the EU appreciates that investment-friendly language of the new leadership has been coupled with the concrete actions. The following specific actions are acknowledged in particular:

• Appointment of experienced and well-trusted officials to key Ministerial positions;

• Appointment of President’s Economic Advisor and four Special Investment Envoys, who are trusted and respected by the local and international markets

• Appointment of credible boards at the key State-Owned Enterprises

• Signature of the 27 outstanding power purchase agreements under the Renewable Energy Power Producers Programme

• New Integrated Resource Plan

• Establishment of Invest SA One-Stop-Shops

While all these are very positive signs, European investors continue to exercise caution as these steps are insufficient to compensate for the deterioration of FDI protection and business environment that has occurred over recent years. At the moment, foreign investors continue to monitor macroeconomic stability and overall policy certainty in the country. There is hope for a clearer language on investment-led growth, which would complement redistribution-led growth, including through public investment in infrastructure, education and skills development, as well as by improving the financial health of the State Owned Enterprises.

In anticipation of South Africa’s Investment Conference planned for the 25-27 of October 2018 as well as the EU-SA Presidential Summit in November 2018, this discussion paper outlines key challenges that are of particular concern to European investors. The paper also presents proposals to be discussed with South Africa on how these challenges could be improved and/or even overcome.

Extensive consultations with the EU Member States as well as European business (EU Chamber, Bilateral Chambers, specific companies across different sectors) have identified three main constraints to potential FDI (and trade) that would benefit from the government’s urgent attention:

1. Black ownership requirements under the B-BBEE Codes of Good of Practice.

2. Localisation requirements in Public Procurement.

3. Delays in obtaining letters of authority from the National Regulator for Compulsory Specifications.

There are other issues that mark the investment environment, especially as Bilateral Investment Treaties (BITs) with EU countries have been unilaterally terminated causing a worrisome dive in the level of protection enjoyed by investors. In the absence of BITs, uncertainty around property rights is of particular concern, which has been amplified by the Parliament-led consultations on constitutional changes to land ownership rights.

Policy certainty is also pending in relation to other policy initiatives, such as the Expropriation Bill (recently withdrawn from Parliament), Regulation of Land Holdings Bill, Copyright Bill, Competition Amendment Bill, Private Security Industry Regulation Bill and Mineral and Petroleum Resources Development Amendment Bill. The new Protection of Investment Act which has just entered into force deprives investors of important guarantees contained under pre-existing BITs. While South Africa’s institutions remain robust and the policy debate is conducted within sound principles, the effects of pending proposals on prospective investors cannot be discounted.

Other pertinent issues that are having a negative impact on the investment environment include stringent visa restrictions on foreign management staff and their family members of overseas subsidiaries, requirements for short-stay visas for the citizens of eight EU Member States, corruption, serious and organised crime, rising electricity prices, port and rails costs, and challenges with the registration on the Central Supplier Database. Government’s steps towards resolving these issues would further contribute to paving the way to a more investor-friendly business climate sought by President Cyril Ramaphosa.

Conclusion

The EU, notably through its representation in South Africa, its Member States and associated entities (such as the Chambers of Commerce and Industry) remains eager to engage on all the issues highlighted above, which we believe are equally beneficial to all investors.

The establishment of a regular EU-SA forum where investment related matters could be addressed, including participation by private sector representatives, would be welcome.

Specific to the EU, the resolution of pending differences in the implementation of the SADC EU EPA should be swiftly resolved, hopefully by the time the announced EU-SA Presidential Summit takes place. Without an effectively functioning EPA, the value of the EU-SA Strategic Partnership would otherwise be seriously undermined as a platform for inviting further trade and investment.